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Tortoise vs. hare

15 July 2019 By Robert Cyran

Gilead Sciences’ $5.1 billion investment in rival Galapagos is a shrewd salve to biotech risk. The $86 billion U.S. outfit hopes to harvest multiple therapies by injecting cash into the Belgian firm. Gilead almost doubles its stake while pledging to keep the Belgian firm independent, limiting its downside exposure. History suggests it’s a smart way to create drugs and wealth.

Gilead is in a rut. The firm’s cures for hepatitis C brought in over $19 billion a year of revenue at its 2015 peak, but fewer patients and competing therapies mean that may drop to just $3 billion this year, extrapolating from first-quarter sales. Hefty share buybacks haven’t helped, and the $12 billion it shelled out to acquire cancer specialist Kite Pharma in 2017 may never generate a sufficient return on capital.

New Chief Executive Daniel O’Day, though, appears to have been browsing the right volumes in the biotech self-help section. It is buying $1.1 billion of stock in Galapagos at a premium, taking its share up to 22%, and giving the company $3.95 billion to expand R&D. In exchange, it gets rights – outside Europe – to six drugs the company has in clinical trials, and many more that have yet to enter testing.

Spending so much and walking away without control may appear at first glance that the seller is getting the better end of the deal. But two of the best partnerships in the annals of biotech argue otherwise.

Roche owned a majority of Genentech, but left the company’s unsurpassed scientific culture alone for years. The tail eventually wagged the dog, with Genentech drugs providing most of the parent’s profits. Sanofi did something similar with Regeneron Pharmaceuticals, injecting cash for a non-controlling equity stake over a decade ago. Regeneron’s stock has risen more than 10-fold since, and Sanofi has landed rights to sell several drugs along the way.

The market is betting the firms are onto something. Both companies’ stocks rose on news of the deal. There’s no assurance Galapagos will yield anywhere near as many drugs as those earlier examples. But few things kill scientific productivity more than taking researchers from a small startup and putting them in a large bureaucratic organization. Gilead is, at least, on the right path.


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