Gilead Sciences (NASDAQ:GILD)
has a well-deserved reputation as an excellent business purchaser. Its
$11 billion Pharmasset acquisition in 2012 enabled Gilead to seize 90%
market share in Hepatitis C, to the tune of more than $10 billion in
Hepatitis C revenue in 2014 -- and more than $14 billion in Hep C
revenue in just the first nine months of 2015. Its acquisition of
Triangle Therapeutics has also paid off handsomely for Gilead's HIV franchise.
That's why its recent deal with the Belgian biotech
Galapagos NV (NASDAQ:GLPG)
for the autoimmune disease drug filgotinib raised my eyebrows. The deal
wasn't in Gilead's usual style, because it involved Gilead taking an
equity stake in Galapagos. Usually (and this was true in the case of
both Triangle and Pharmasset), Gilead doesn't bother with equity and
either licenses the precise drug it wants or just buys the whole
company. The "we like you and are interested enough that we want to stay
close, but not enough to buy you right now" strategy of buying up
equity in a company is more what you'd expect out of
Celgene (NASDAQ:CELG).
Does this signal a change in Gilead's methods? And perhaps more importantly, which style of growth is better for shareholders?
Breaking it downThe Galapagos deal works like
this: Gilead is paying Galapagos $725 million upfront to license
filgotinib -- including a $425 million equity investment in Galapagos,
which means Gilead will own around 15% of the company. Galapagos can
earn another $1.35 billion in milestone payments, as well as tiered
royalties starting at 20% of eventual sales.
The companies will share the cost of phase 3 trials in rheumatoid
arthritis, and Galapagos is responsible for 20% of global development
activities' costs. Gilead is responsible for the remainder, as well as
marketing, sales, and manufacturing expenses. Galapagos gets an option
to co-market filgotinib -- assuming it makes it to market -- in certain
European countries.
All well and good -- and, for the record, I've argued that the $725 million is a very good price
for what Gilead's getting (to summarize the linked article: The drug
could be worth as much as $2 billion in annual peak sales, and because
Gilead will also own 15% of Galapagos, that means additional possible
upside for Gilead because of Galapagos' other growth
opportunities). It's just not typical of what you'd expect Gilead to do.
Gilead usually aims to either license a drug or suite of drugs, or buy
the company outright. An equity investment in a smaller competitor just
isn't really Gilead's style.
Well, sort of...That's not to say that it hasn't
happened. I spent some time last weekend looking through every press
release on Gilead's corporate website dating back to 1996 (weekends are a
rockin' good time at the Douglass household), and there are a few
instances of Gilead purchasing stock or warrants in competitors as part
of a license agreement.
In April 2006, Gilead invested $25 million in Corus Pharma to gain
access to its cystic fibrosis treatment Cayston -- and then bought the
rest of the company that July. In November 2004, Gilead made a $5
million equity investment in Hepatitis C competitor
Achillion Pharmaceuticals
as part of a broader Hepatitis C collaboration. Gilead also structured a
pair of deals in 2001 to gain equity or warrants in a pair of other
companies -- OSI Pharmaceuticals and Archemix -- as it out-licensed or
offloaded assets to improve its focus on core areas of expertise.
But really, it's mostly a Celgene thing -- and it's great for CelgeneCelgene
is much better known for making these kinds of deals. I'll let Celgene
CFO Peter Kellogg explain the company's modus operandi. The following is
from his remarks at the Credit Suisse Healthcare Conference last
November (quote courtesy of S&P Capital IQ).
I mean, the companies that we have invested in, a number of them have
gone from being private companies to -- through IPO, to being very
valuable public companies today. We do have small equity stakes in a lot
of these companies, most of them in fact. Usually, it's in the 5% to
15% range.
Celgene gets in early -- often pre-IPO. As such, it is usually able
to pay a relatively small amount for a lot of access early on.
Take its recently signed collaboration deal with
Juno Therapeutics (NASDAQ:JUNO) as
a good example: Celgene paid $1 billion upfront to get a 10% stake in
the biotech, a seat on its board, and access to its CAR-T
cancer-fighting drugs for potential commercialization.
Juno's pipeline is phase 2 or earlier, which undoubtedly helped hold
down the cost of the collaboration for Celgene because it increases both
the length of time until potential commercialization, and the potential
risks -- after all, 90% of the drugs that make it to phase 1 never make
it to market, and the odds are still well under 50% at phase 2. It also
allows Celgene to participate in a still-young company's potentially
meteoric growth, particularly because the agreement gives Celgene the
option of owning up to 30% of Juno in the coming years.
I had to dig back into the mid 2000s for examples of Gilead taking equity in other companies without just buying them outright.
It didn't take nearly that much effort to find additional Celgene
equity infusions in various biotechs over the last two years. In January
2014, Celgene paid $75 million for an equity stake in NantBioScience
and greater exposure to its work in personalized medicine. In Feburary
2014, Celgene coughed up $50 million for equity in Abide Therapeutics
and access to two incoming drug candidates targeting inflammation and
immunological disorders. Celgene paid an unspecified amount in October
2014 for equity in Sequenta and access to its ClonoSIGHT cancer test
based on gene sequencing. In September 2015, Celgene paid $150 million,
including an equity infusion, for Nurix to focus on early production of
two drugs targeting inflammation and immunological disorders. The list
goes on, and on, and on.
If it's so great for Celgene, why doesn't Gilead do it more?Celgene's
interest in these companies is usually pretty different from Gilead's.
Celgene is often interested in a whole platform and its opportunity --
see CAR-T with Juno above -- as opposed to a single, specific drug. And
because it's not just a "one and done" kind of deal, purchasing a small
stake in the outside company makes sense for Celgene as it looks to
understand the company over a longer time period, and retain
optionality in it.
Additionally, letting the company remain independent -- as opposed
to, say, buying it -- gives Celgene two additional benefits. First off,
it's cheaper to buy part of a company than the whole company, which lets
Celgene spread its bets out among relatively risky companies instead of
concentrating its risk in a few. Keeping the smaller biotech
independent also leaves the scientists that company employs free to do
drug discovery their own way instead of bringing them into the Celgene
way of doing things.
I suspect the latter reason is the more attractive one for Celgene,
as it leaves the smaller biotech better able to do what it's already
proven it can do: discover drugs that Celgene hasn't. With more
resources at their disposal, and with the freedom and nimbleness that
remaining small and independent allows, those biotechs may have a
greater opportunity of driving value for Celgene shareholders than they
would as a part of Celgene.
By contrast, Gilead's management usually seems to know exactly what
drug they're looking for in a few large deals, and plunks down the big
bucks on something that's ready for phase 3 or commercialization --
whether that means licensing a drug, or just buying the company
outright.
What about Galapagos?It seems like Gilead wanted
the Galapagos drug -- minus royalties, of course -- and didn't want to
pay the premium for the rest of the company. I suspect that
Gilead's analysis of the price for the entire company precluded a full
buyout given the revenue Galapagos could expect from the rest of its
pipeline.
Gilead seems to be trying to beef up its autoimmune pipeline and
better understand its opportunity and potential niche in that disease
space before committing huge resources to it. If so, this might be a
dress rehearsal of sorts before Gilead throws some big money into
snapping up more assets -- including, perhaps, the rest of Galapagos.
It is also distinctly possible that this signals a shift in Gilead's
M&A strategy toward licensing and diversifying the pots it has its
fingers in without making big bets on any one space (or, put another
way, the Celgene model). This would indicate that Gilead plans to try
and carve out niches in a number of spaces -- most likely
cardiovascular, cancer, and autoimmune diseases, as management has
hinted at over the past year -- while it continues to deliver on its
core liver and HIV competencies.
