Gilead’s String of Busts Presents Opportunity

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Drug discovery is a risky business, and some acquisitions will inevitably fail in big pharma’s quest for the next blockbuster treatment.

But biotechnology giant

Gilead

GILD -2.65%

Sciences has had a truly awful string of bad luck, spending over $40 billion in the past five years with little to show for it thus far. None of the deals has delivered the blockbuster in cancer that management has vowed to find as it seeks to pivot away from HIV. The upshot is that the stock is one of the cheapest in the large-cap biotech and pharma sector.

Gilead’s boldest move—a $21 billion purchase of New Jersey-based Immunomedics in 2020—is now looking like a flop after results of breast-cancer drug Trodelvy fell short of analyst expectations. The drug was upstaged by

AstraZeneca

and

Daiichi Sankyo’s

Enhertu. Its results drew a standing ovation at a key cancer conference in Chicago earlier this month.

Trodelvy sale estimates for 2024 have been slashed from as high as $2.2 billion earlier this year to $1.7 billion in recent months, according to data compiled by

FactSet.

More cuts are likely on the way. Further data on blood-cancer treatment Magrolimab—which Gilead got in a $4.9 billion acquisition of biotech Forty Seven—looked “equally unimpressive,’’ wrote Brian Skorney, an analyst at Baird.

Yet the stream of disappointments doesn’t mean it is time to dump Gilead’s shares. Now that its oncology portfolio has been partly written off by investors, there is very little to lose by sticking around.

Gilead’s stock price is down 7.8% to $59.15 over the past five years, compared with a 54% gain for the S&P 500. While that has been painful for investors, Gilead offers a haven in the current bear market thanks to its stable HIV business, which allows the company to pay a hefty dividend. Its yield of nearly 5% effectively creates a floor for the shares, which aren’t likely to dip below the low $50s, says Evan Seigerman, an analyst at BMO.

There are also some signs that at least some of Gilead’s deals are starting to pay off. While the $12 billion purchase of cell therapy company Kite Pharma in 2017 was pricey, the business is gradually starting to turn around. Sales from that unit are now set to comfortably exceed $1 billion this year.

The series of missteps have hurt investor confidence in Chief Executive Officer

Daniel O’Day,

the former head of pharma giant

Roche Holding,

who was brought in in 2018 to steer Gilead’s pivot into oncology.

Enhertu, a cancer drug from AstraZeneca and Daiichi Sankyo, got a standing ovation at an oncology conference this month.



Photo:

Associated Press

A Gilead spokesperson wrote the company remains confident in its “corporate development activities, which have enabled us to build breadth into our portfolio and extend into oncology.” With more than 50 active or planned trials by the end of next year, the company expects its oncology revenue to represent more than one third of total revenue by 2030, the spokesperson added.

Beyond advancing current trials, Gilead’s management shouldn’t shy away from further acquisitions, but it needs to think small. Megadeals aren’t necessary for great drug discoveries. Take Opdivo, the blockbuster cancer drug.

Bristol Myers

got the technology from a $2.4 billion acquisition of Medarex in 2009, the kind of “bolt-on’’ deal Gilead should continue to seek.

Gilead’s management has vowed to keep future sticker prices low. In a recent conference,

Merdad Parsey,

the company’s chief medical officer, told Michael Yee from Jefferies that future deals “will not come with an enormous price tag.’’

Investors should cheer that approach.

Write to David Wainer at [email protected]

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