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.

There's a price tag on everything, possibly even happiness. For Gilead Sciences Inc. shareholders irate over the company's multi-year case of the deal yips as its growth stagnates, happiness apparently costs about $12 billion. 

That's what Gilead is paying for Kite Pharma Inc., which is developing a therapy that modifies immune cells to fight blood cancer. Gilead's shares rose more than two percent on the news Monday, as investors cheered the end of its inaction. 

But $12 billion is what my colleague Tara Lachapelle deemed a thermospheric price for a company that was worth closer to $2 billion about a year ago. Back then, Gilead's CEO told Bloomberg News that cost issues surrounding cell therapies like Kite's made him nervous. Those concerns should remain; the only thing that has really changed is that Kite got more expensive and Gilead's need for a deal grew. Gilead, which cited discipline to justify sitting on its $30 billion cash pile, appears to have thrown discipline to the wind.

On the plus side, this is a more interesting use of Gilead's cash than more underwater buybacks -- the company has spent more than $20 billion repurchasing shares since 2014, and the stock price has largely declined. It makes Gilead a leader in one of the most exciting areas in cancer research. Kite's medicine offers a potential one-time cure for patients otherwise likely to die. It also bolsters Gilead's somewhat bare and snakebit drug pipeline.

Gilead needs new sources of revenue. The decline of its blockbuster hepatitis C franchise will be accelerated by an aggressively priced new AbbVie Inc. medicine. Kite's cell therapy, which will likely be approved by the FDA later this year, is the closest to market after one from Novartis AG. The medicine may do better with the backing of Gilead's formidable commercial team and oceans of cash. And Gilead's last expensive deal was its $11 billion purchase of Pharmasset Inc. and its hepatitis C treatment candidates in 2011. That deal worked out. 

This Cost $11 Billion
Gilead's purchase of Pharmasset gave it access to medicines that have generated billions in revenue
Source: Bloomberg

But this isn't the Pharmasset deal. That was for a set of drugs in a treatment area that Gilead understood -- small molecules that treat a viral disease. This is a brand new type of drug for the whole medical world, let alone Gilead, with unique issues. The first generation of these medicines is wildly complex and costly to manufacture and must be made to order for each patient. 

While these medicines may offer a cure, they have potentially fatal side effects that may limit their use to very sick patients and specialized hospitals. If Kite's drugs can't be expanded to a broader set of patients, then Gilead will have a hard time seeing a return on its investment. Even if the medicine achieves high-end estimates of $1.8 billion in sales in 2023, it will fill only a fraction of the sales hole created by the decline of the HCV franchise.  

Nonstandard Deviation
The novelty of cell therapy means analysts are deeply divided about the sales potential of Kite's lead medicine
Source: Bloomberg

There are also competitive risks. Novartis will likely be the first firm to have a cell therapy approved by the FDA. It is initially targeting a different set of patients, but Novartis is chasing Kite's market as well. Novartis matches Gilead's financial heft and has more cancer expertise. Other firms are working on cell therapies that seek to improve on the safety, efficacy, and cost of Kite's medicine.

This deal also launches Gilead -- notorious for the high price of its hepatitis drugs -- back into the drug-pricing debate. These one-shot potential cures are likely to cost hundreds of thousands of dollars before accounting for the expense of treating side effects. That creates a difficult path to broad adoption.

Such risks make paying quadruple Kite's share price earlier this year year even more suspect. 

So is Gilead's timing. By waiting until after Kite's FDA approval was likely assured, but before the many risks dented the hype over these medicines, the firm effectively locked itself into paying tip-top dollar. 

While the excitement around the launch of Kite's drug may hold off investor criticism for a while, peace and quiet is not worth $12 billion. This deal shouldn't alleviate concerns about the longer-term prospects of Gilead's business and the value-eroding decisions it has made over the past few years.

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