Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

When you win the lottery, advice flows along with the money, usually carrying ulterior motives. 

Gilead hit a unique jackpot with its $11 billion purchase of Pharmasset in 2011. The resulting Hepatitis C (HCV) drugs are historic bestsellers, reaching nearly $20 billion in sales last year. But those sales may have peaked, and investors (and some analysts) have been pounding the table for the company to spend some of its $26 billion in cash on a flashy, near-term growth asset that could boost the stock price.

Gilead has something different in mind. The company is paying $400 million up front to closely held Nimbus Therapeutics (and as much as $800 million in milestone payments) for a Phase 1 drug candidate for non-alcoholic steatohepatitis (NASH), a liver condition that affects millions, and other similar drugs. The deal won't move the needle on sales any time soon. It had little impact on Gilead's share price on Monday.

The deal reinforces Gilead's preference for early-stage drugs, on which the company can make its mark, over paying extra for late-stage or marketed assets to which it can't add value. This certainly doesn't preclude a "transformational" deal in another area of focus. But going for yet another small, early-stage deal doesn't point that way. The company is asking an impatient market to abide by a decidedly slower and less sexy strategy. If it makes a big deal at all, it will be on its own time, not anybody else's. 

Trust Us.
With its M&A strategy, Gilead is asking investors to trust its ability to play the long game.
Source: Bloomberg

This is not Gilead's only shot at what analysts think might be a $35 billion market for NASH drugs. It has two other treatments in development, giving it more ways to succeed and the possibility of creating a combination treatment, as it has done for HCV and its industry-leading HIV franchise.  

There are clear benefits to playing small ball, as Gilead has consistently done recently (according to Bloomberg data, the company has made seven deals worth $1.7 billion since its Pharmasset acquisition). It keeps its powder dry for another Pharmasset-like opportunity. It is less likely to pay big premiums or get into bidding wars for more mature assets and companies. It reaps more of the rewards of any success. It's more a stylistic choice than a forced one; the biotech sits on a throne of cash, and its HCV franchise is raining more from above. 

Its reluctance might be prudent, but it could also be costly in terms of investor sentiment as the company's growth begins to slow. Gilead has by far the strongest position of any HCV drugmaker, but Merck is trying to undercut it aggressively on price, and Gilead has already treated a lot of the easiest-to-reach and best-insured hepatitis patients out there. Analysts predict sales in 2016 will be more than $1 billion lower than in 2015.  

Shooting Star
Gilead's Hepatitis C franchise is historically profitable, but sales may begin to fall as soon as this year.
Source: Bloomberg

Gilead's pipeline may end up being great, but it's risky and unlikely to add much to sales any time soon. Gilead went from $9.7 billion in revenue in 2012 to $32.6 billion last year. Now investors doubt its ability to keep growing, leaving Gilead with by far the lowest P/E ratio of any big biotech: 

Get Low
The incredibly rapid and now potentially slowing growth of Gilead's Hepatitis C leaves it with the lowest P/E ratio of any of its peers.
Source: Bloomberg
Ratio based on Bloomberg estimates of forward earnings per share.

Chasing momentum or doing a big deal just because it's there isn't a great idea. But Gilead's conviction on that front is likely to be tested. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net