Gilead Sciences on Sunday looked to another firm to rejuvenate its research capabilities, agreeing to put more than $5 billion in cash into Galapagos NV and get access to a slew of experimental drugs in return.
Gilead (NASDAQ: GILD) will pay Galapagos (NASDAQ: GLPG) a whopping $3.95 billion in cash and make a $1.1 billion equity investment in the Belgian firm at €140.59 per share ($158.62 per share). The 10-year collaboration gives Gilead rights or options to six drugs in human trials and 20 more in preclinical testing.
For each of those drugs, Gilead will have an option to commercial rights everywhere outside of Europe. Galapagos will lead clinical development through Phase 2 testing, and then co-run late-stage studies with Gilead. Galapagos would then get downstream payments and ultimately royalties if those drugs succeed.
Gilead and Galapagos have already been working on the rheumatoid arhtirits drug filgotinib, which could head for a regulatory review later this year. They’ll amend that agreement as part of the new alliance, with Galapagos getting more financial upside in Europe than it had before. Gilead will also boost its stake in Galapagos from about 12.3 percent to 22 percent. The deal gives Gilead warrants to boost that stake as high as 29.9 percent, but bars the company from acquiring more than that.
The move represents the biggest gamble thus far by Gilead CEO Daniel O’Day, the former head of Roche’s pharmaceutical division who took over the Foster City, CA, firm in March. Gilead is betting on Galapagos’s ability to discover and develop a pipeline of drugs—which includes experimental treatments for idiopathic pulmonary fibrosis, osteoarthritis, atopic dermatitis and more—-and its own ability to sell those medicines once they get to market.
Gilead is “basically offshoring R&D to Galapagos at a big price tag,” wrote Raymond James analyst Steven Seedhouse, in a research note. The investment “has a rich price target for relatively limited tangible value,” added SVB Leerink analyst Geoffrey Porges.
Galapagos shares climbed about 16 percent, to $168.77 apiece, in pre-market trading. Gilead shares ticked down slightly to $65.90 apiece.
Gilead rose to prominence as a developer of HIV medicines, and later hepatitis C therapies through its acquisition of Pharmasset in November 2011.
But the market dried up quickly for Gilead’s hepatitis C business. Competition emerged, the available patient pool shrank, and Gilead’s share price and hep C sales began to plunge. Gilead has struggled with other efforts to diversify beyond its core HIV franchise, which has begun facing more competition. It has used deals to amass a pipeline of drug candidates for the fatty liver disease nonalcoholic steatohepatitis (NASH). But Gilead faces a ton of competition, including programs at large companies like Bristol-Myers Squibb (NYSE: BMY) and Allergan (NYSE: AGN) and smaller firms like Intercept Pharmaceuticals (NASDAQ: ICPT) and Genfit (NASDAQ: GNFT). And Gilead has already suffered clinical setbacks. Gilead’s oncology business, which it has spent years trying to build, has yet to take off.
The company has bet big on the future of CAR-T cellular immunotherapy, a cutting-edge form of cancer treatment, and has rounded out that transaction with other investments in the field. But CAR-T faces logistical and commercial hurdles and has yet to prove it’ll be more than a last-ditch treatment for cancer patients who have run out of options.
Yet Gilead’s existing alliance with Galapagos has borne fruit. A rheumatoid arthritis drug, filgotinib, has succeeded in Phase 3 studies and could head to an FDA review later this year—faster than previously expected. RBC Capital Markets analyst Brian Abrahams has estimated that the drug could generate more than $3 billion in sales, despite looming competition with other so-called JAK inhibitors for RA.
Gilead believes there is more to come from Galapagos. It now has rights to an idiopathic pulmonary fibrosis drug in Phase 3 testing, and an option to a second drug for osteoarthritis in Phase 2. Another anti-inflammatory drug that has yet to start human testing, known as “Toledo,” has shown promise in various different disease settings. The two companies aim to accelerate development of the drug, potentially starting as many as eight Phase 2 trials in different indications.
Still, analysts were lukewarm on the deal. While Gilead provides Galapagos with a “huge commercial partner and a ton of cash,” wrote Seedhouse, “it is more challenging to see what Galapagos provides that Gilead couldn’t have theoretically generated over the next 10 years” by investing in its own R&D capabilities “if it believed in them more than Galapagos’s.”
“For that reason, we think Gilead may not prioritize investing internally in R&D outside of HIV and may in fact look for cost saving measures,” Seedhouse wrote.
“Critics will rightfully cite the high risk inherent to the two latest-stage IPF and OA programs, the safety unknowns” for the Toledo program, and the “somewhat ‘me, too’ nature of earlier inflammation targets” in Galapagos’s pipeline, wrote Abrahams. Still, the alliance has “a logical rationale,” Gilead took on “reasonable cost and risk,” and has the flexibility to do other deals, he wrote.
Since O’Day started in March, Gilead has announced plans to separate the CAR-T division, Kite Pharma—which the company acquired for $12 billion in 2017—into an independent business unit. It has also inked a string of smaller deals with privately held biotechs like Insitro, Goldfinch Bio, Nurix, and Carna Biosciences. O’Day has been “prioritizing [business development]” over share buybacks, wrote Abrahams. “We believe this provides a framework” for the future, he wrote in a research note a few weeks before the Galapagos deal was announced.
“The collaboration reflects Gilead’s intent to grow our innovation network through diverse and creative partnerships,” O’Day said in a statement Sunday.