Gilead Sciences (GILD) is attempting to alter its fortunes through the $4.9 billion acquisition of immuno-oncology biotech company Forty Seven (FTSV).
XBut analysts are split on whether the massive effort will be enough to outstrip an ongoing decline in Gilead sales over the past half-decade. The company has yet to reverse a steady decline in Gilead stock, though investors have shown an interest in the biotech giant again in recent days.
The Forty Seven buyout expands Gilead's efforts in immuno-oncology. Drugs in this class harness the immune system to battle cancer. Gilead shares jumped in heavy volume as word of the deal surfaced.
But Credit Suisse analyst Evan Seigerman says Gilead needs to do a larger, more transformative deal.
"Forty Seven's portfolio fits within Gilead's oncology platform, however (it) is unlikely to address broader growth concerns," he said in a note to clients. "While we view the transaction as a step in the right direction, we still believe that Gilead needs to undergo late-stage transformative M&A (mergers and acquisitions) to return the company to growth."
Gilead's Post hepatitis C Fortunes
Gilead fortunes started fading as sales declined for the likes of Sovaldi and Harvoni, its two lucrative hepatitis C treatments. The price of those drugs was more than $1,000 a pill in some cases, boosting Gilead's fortunes to stratospheric levels. Annual revenue growth peaked at 122% in 2014.
But in 2016-18, Gilead's sales tumbled as its medicine cured hepatitis C, leading to a dwindling number of patients. Last year, total revenue crept up just 1% as Gilead focused on HIV drugs. Now it's moving into cancer-fighting medicines, including the immuno-oncology segment.
Gilead first delved into this area of medicine with its $11.9 billion takeover of Kite Pharma in 2017. Kite makes Yescarta, another immuno-oncology drug. Sales of Yescarta grew nearly 73% in 2019, to $456 million.
Sequential growth has been muted. In the last three quarters of 2019, Yescarta sales generated $120 million, $118 million and $122 million, respectively.
Investors met the March 2 announcement with enthusiasm. Shares of Gilead jumped almost 9% in strong volume. Forty Seven stock rocketed nearly 62% on the news. Gilead will pay $95.50 in cash per share of Forty Seven stock.
Immuno-Oncology Drug Blocks A Protein
Forty Seven's key drug is immuno-oncology medicine magrolimab. Magrolimab targets a protein called CD47. Chief Executive Mark McCamish describes CD47 as a "do not eat me" signal. The presence of that protein tells the immune system — specifically cells called macrophages — that everything is normal.
Tumor cells use CD47 to camouflage themselves from macrophages, McCamish said in an interview.
"Cancer evolves in a way that it escapes from attack by our own immune system by hiding its abnormality behind this shield of normality," he said. "So, even though cancer cells are abnormal, and they express signals of abnormality on the cell surface, they also over-express CD47."
The immuno-oncology drug magrolimab blocks CD47. This allows the macrophages to spot the cancer.
But what prevents the immune system from also attacking normal cells?
"A normal cell doesn't express these signals of abnormality," McCamish said. "So, even when you block CD47, the normal cell doesn't have these additional pro-phagocytic signals — or 'eat me' signals — and therefore the immune system doesn't attack that normal cell."
Blood Cancers Promising For Immuno-Oncology
Magrolimab would fit into Gilead's strategy, analysts say. Last year, Forty Seven unveiled promising results for the immuno-oncology drug in patients with myelodysplastic syndromes and acute myeloid leukemia, both forms of blood cancer.
Objectively, 92% of patients with untreated myelodysplastic syndromes, or MDS, responded to a regimen of magrolimab and a drug called azacitidine, Needham analyst Alan Carr said in a report to clients. In patients with acute myeloid leukemia, or AML, the objective response rate was 64%.
After unveiling that data, McCamish said Forty Seven received some takeover interest. But "it wasn't our goal to get acquired," he said. The biotech company simply wanted to expand magrolimab to a large pool of patients. That started the takeover process.
Gilead Chief Executive Daniel O'Day sees magrolimab as a potential "first-in-class" immuno-oncology drug. Patients with MDS and AML are in urgent need of new treatment options, he said in a blog post. Now, Gilead hopes to introduce 10 new transformative therapies over the next decade.
"We believe (Monday's) news is an important step toward achieving that ambition," he said.
Will Forty Seven Move Gilead's Needle?
The immuno-oncology market was valued at roughly $56.7 billion in 2018, according to a January 2019 report from market researcher Coherent Market Insights. Analysts expect it to reach $172.7 billion by 2026. Key players include Merck (MRK), Bristol-Myers Squibb (BMY) and Novartis (NVS).
Credit Suisse's Seigerman sees magrolimab as having a $1 billion-plus opportunity in MDS. But other areas of cancer, like AML and non-Hodgkin lymphoma, could be trickier due to a high number of rivals. He kept his underperform rating on Gilead stock.
After the Forty Seven takeover, Gilead could remain acquisitive, Needham's Carr said. The biotech company guided to additional small- and medium-sized transactions, as well as a potential large collaboration in 2020. Notably, Gilead already has a large partnership with Galapagos (GLPG).
Analyst Calls For More Deal Activity
Still, that might not be enough, SVB Leerink analyst Geoffrey Porges said in his note to clients.
"Gilead needs to be doing deals this size or larger to move the needle on their outlook, and company statements imply that future transactions (other than major collaborations) are likely to be smaller, rather than larger than Forty Seven."
The biotech company defended its pipeline in an email to IBD. Gilead also expects to continue looking at business development opportunities in antivirals and immuno-modulation.
"With respect to Forty Seven, this is the kind of deal we have said we would pursue — and will continue to pursue — in our efforts to ensure that we have access to the best scientific innovation available, as well as the best talent," Gilead said in its emailed statement.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
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