Since its bombshell hepatitis C treatments hit the market in 2013, the company has been amassing a staggering war chest. The company ended fiscal 2016 with $32 billion in cash on its balance sheet, up from $2.6 billion at the end of fiscal 2013.
But aside from a few small deals, Gilead's (NASDAQ:GILD) last major transaction was the one that fueled its current cash bonanza: the 2011 acquisition of hepatitis drugmaker Pharmasset for $11 billion.
After several quiet years of watching hepatitis C treatments Sovaldi and Harvoni generate tens of billions in revenue, Gilead made a splashy return to M&A Monday, buying cancer-immunotherapy firm Kite Pharma (NASDAQ:KITE) for $11.9 billion in cash, a 29% premium.
Gilead shares traded up just over 1% Monday, but Wall Street wasn't uniformly impressed. In a survey by Mizuho Securities on Monday of 112 investors, 59% thought Gilead overpaid. Only 40% said they liked the deal.
Many investors are wondering: Why did Gilead finally decide to strike?
According to several people familiar with the transaction, Gilead became convinced after extensive due diligence that Kite's personalized cancer treatment — a therapy called CAR-T that harnesses the body's immune system to attack cancer cells — would not just gain approval from the Food and Drug Administration, but become transformative.
The powerful trial data it's delivered in the past year was crucial.
"Gilead is a very patient, diligent party when it comes to looking at strategic transactions," said one person familiar with the matter. "The primary thing was just the clinical data and the success that Kite has had developing the program."
"There just aren't a lot of assets out there like Kite that have the kind of data they've been able to deliver," they continued.
In data Kite released in February, the company found that out of 101 patients, 36% had a complete response to the treatment after six months.
The FDA is expected to decide on whether to approve Kite's CAR-T therapy in November.
Some have suggested that Gilead could have waited till after Kite's treatment — which has competition from Novartis, Juno Therapeutics, and Bluebird Bio — had been approved, priced, and launched, hedging against some of the risks.
But after a lengthy due diligence process, and the revelation of the promising trial data, Gilead believed Kite's program had too much upside, and that if they waited, competition for the target would soar — along with Kite's valuation.
"Quite frankly, they thought strategically [Kite] had an edge on other companies," another person familiar with the transaction said.
By acquiring now, the people also noted, Gilead is in position to exert its financial muscle in marketing and shaping the eventual launch of the therapy, which is expected to cost hundreds of thousands per patient.