In a bid to expand its pipeline, Gilead Sciences Inc. (GILD) has inked a deal to purchase privately-held biotechnology firm Calistoga Pharmaceuticals, Inc. for $375 million. Gilead intends to finance the transaction with its current cash balance. Calistoga Pharma focuses on developing therapies to combat cancer and inflammatory diseases.
Under the terms of the deal, which is expected to close in the second quarter of 2011, Gilead will have to pay up to an additional $225 million to Calistoga Pharma on the event of achieving certain milestones.
Gilead, which boasts of an impressive portfolio especially in HIV, is aiming to broaden its expertise in the fields of oncology and inflammatory diseases. The acquisition will add CAL-101, Calistoga Pharma’s lead pipeline candidate, to Gilead’s pipeline among other candidates.
CAL-101, currently undergoing mid-stage studies, is being developed to treat patients suffering from refractory indolent non-Hodgkin’s lymphoma. Moreover, the candidate is also being developed as a combination therapy — in conjunction with Roche’s (RHHBY) Rituxan (rituximab) — for treatment-naive elderly patients suffering from chronic lymphocytic leukemia.
Merger a Move to Counter Genericization of Key Drugs
We note that Gilead’s key HIV drugs are facing patent challenges from companies seeking to launch generic versions of the drugs. The entry of generic versions of the company’s HIV drugs would be a major blow to Gilead and cause substantial revenue loss.
Gilead is looking to counter the loss of revenues through acquisitions. Apart from the recently announced deal to buy Calistoga Pharma, Gilead has made many other acquisitions in the recent past which have strengthened its pipeline.
In December 2010, Gilead acquired Arresto Biosciences, a biotechnology firm focused on developing therapies for treating fibrotic diseases and cancer. Moreover, in July 2010, Gilead acquired CGI Pharmaceuticals, Inc., which added CGI’s proprietary small molecule kinase inhibitors to Gilead’s pipeline.
Furthermore, the purchase of CV Therapeutics in April 2009 brought cardiovascular drug Ranexa to Gilead’s portfolio. These acquisitions not only strengthen Gilead’s pipeline but also help in combating the threat imposed by the genericization of key drugs at Gilead.
Our Recommendation
Currently, we have a Neutral recommendation on Gilead, which is supported by a Zacks #3 Rank (short-term Hold). We remain optimistic on the growth potential of Gilead’s HIV franchise drugs, Truvada and Atripla, and the company’s overall progress with its pipeline, both HIV and others. However, the potential delay for the Truvada/TMC 278 combo pill is a major setback for the company.
In addition to the threat of generics, referred to earlier, the unfavorable impact of pricing pressures in Europe and currency fluctuation on Gilead’s revenues continue to bother us.
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