March 3, 2020

Breakingviews: Gilead’s $4.9 bln deal shows regular death goes on

by Breakingviews.

While the world is riveted by the rapid spread of Covid-19, Gilead Sciences’ $4.9 billion deal for cancer startup Forty Seven shows that regular death goes on. The roughly $90 billion biotechnology giant has seen its market value rise nearly 15% since the start of February thanks to an experimental antiviral treatment which is being tested against the coronavirus that causes the Covid-19 disease. But the hefty 96% premium Gilead is paying for Forty Seven is a reminder that the fight against the grim reaper is a long-term affair.

The price is reasonable enough for a deal of this kind. A rule of thumb in biotech is a valuation of 5 times peak sales for a drug with long-term patent protection. Forty Seven’s lead drug is being tested and has shown early signs of efficacy against multiple cancers of the blood. Notable success against any one of them would probably make it a blockbuster, informally meaning $1 billion or more annual sales.

In a sense, the purchase is a hedge. Antiviral success would overshadow Gilead’s growing business of treating cancer, at least in the short term. But in the high-risk world of drug development, it’s always nice to have other options.

Meanwhile, the coronavirus came up multiple times during Gilead’s conference call on Monday to discuss the deal. There are now nearly 90,000 confirmed cases of Covid-19, according to researchers at Johns Hopkins University, and the number outside China is more than doubling weekly. Even modest success treating it would surely bring warp-speed regulatory approval, as there are currently no alternatives.

Yet it can be hard to profit from epidemics because they are often short-lived and always politically fraught. More broadly, while the biotech sector isn’t immune to the market selloff, the premium price for Forty Seven shows companies with potentially viable drugs won’t sell themselves cheaply. It’s also evidence that Gilead knows the battle with life-threatening disease has many fronts.

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