1. What major capital allocation decisions did Gilead make between 2014 and 2020? Do you believe these were wise decisions? If so, why? If you believe that they were unwise, what other options would you have recommended to management?
2. Kontopoulos in particular would like an evaluation of the Immunomedics acquisition. Was this a good decision? How would it create value for Gilead's shareholders? (I have included a shell model that you can use to think about this acquisition, but you do not need to submit any model).
3. From 2010 - 2021, Gilead made 3 acquisitions of more than $10 billion. Compare and contrast the sources of value creation from these mergers.

Gilead Sciences: Developing a Biopharmaceutical Pipeline Through M&A

Fidelity Investments, the third largest asset manager in the world, managed an extensive family of mutual funds and, by the end of 2020, had reached a record of $4.8 trillion in total discretionary assets.¹ Eirene Kontopoulos, the portfolio manager of the Fidelity Advisor Biotechnology Fund (FABF), spent her days evaluating both established and up-and-coming biotech companies to determine their likelihood of success. In late 2020, Kontopoulos's eyes widened when she read that pharmaceutical giant Gilead Sciences, a company with a proven track record of making strategic acquisitions, had acquired Immunomedics, a biotech focused on developing cancer treatments, for $21 billion.²

While not the biggest acquisition of 2020, due to a late deal by AstraZeneca to buy Alexion for $39 billion, Gilead's move attracted great attention from investors like Kontopoulos. Only recently had Gilead cemented itself in the cancer arena? with its purchase of Kite Pharma for $11.9 billion? and now it was paying almost double that price for Immunomedics. Kontopoulos, who had taken a sizeable investment in Immunomedics less than six months earlier, was more than pleased with the outcome. At the same time, the acquisition and its price might reveal deeper forces at work in the industry, which could influence where she should invest next. Her team immediately began their own analysis of Gilead's acquisition of Immunomedics.

Fidelity Investments

Originally established in 1946 as a mutual fund company, Fidelity Investments had become one of the premier financial services and investment management corporations in the world. Based in Boston, Fidelity offered a wide range of products and services such as financial planning, wealth management, retirement services, life insurance, and investment advice. By the end of 2020, Fidelity served more than 32 million individual investors and the firm's assets under administration totaled $9.8 trillion.^1,3

HBS Professor Amitabh Chandra, Paul Clancy (Executive Fellow), and Professor Craig Garthwaite (Northwestern University) prepared this case. It was reviewed and approved before publication by a Fidelity designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright 2022 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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Eirene Kontopoulos's Path to Fidelity

While interested in finance, Eirene's first love had always been biology. After completing her bachelor's in molecular biology at Haverford College, she enrolled as a PhD student in Neuroscience at Harvard Medical School. Midway down a career path which seemed destined towards academic research, Kontopoulos realized she could not see herself doing bench work in a laboratory for the rest of her life. After completing her PhD in 2007, she joined Fidelity, working first in energy investments until an opening for a spot in the healthcare sector arose. In addition to managing the $2.5 billion Fidelity Advisor Biotechnology Fund, she also co-managed the $5.7 billion Fidelity Series Small Cap Opportunities fund and the $1.1 billion Fidelity Stock Selector Small Cap fund.⁴

Biotech Investment Landscape

Biotech investments were notorious for being particularly risky. With long timelines, untested products, expensive research and development processes, and the need for regulatory approval, there was no guarantee that any particular biotech firm would generate an effective and profitable drug. Governments were often paying for medicines, especially outside the US. Patent considerations, inconclusive results, and stiff competition could eliminate a company's worth. Even for companies with tractable strategies backed by well-studied science and teams consisting of experts with decades of knowledge and experience, the probability of failure was high. However, when successful, biopharmaceutical medicines were often associated with meaningful revenue and exceptionally strong profit margins because intellectual property protection limited the ability of competitors to quickly bring alternative medicines to market.

The sector had struggled with the declining productivity of R&D investments, defined by the number of medicines produced for each dollar of R&D. As a result, companies had tried a variety of strategies to boost research productivity, including academic partnerships or by acquiring R&D from other companies through mergers and acquisitions. Of note was Bristol Myers Squibb's $73 billion purchase of Celgene in 2019 and Abbvie's $63 billion acquisition of Allergen in 2020. A meaningful portion of the M&A activity was related to a reorganization of how early-stage research was conducted. Historically, large pharmaceutical firms prioritized products that were developed internally. Now, more early-stage research has been conducted by small biotechnology firms, often backed by venture capital. This division of labor would make sense if larger biopharma firms bought successful earlystage firms and continued development on the product, such as by conducting human trials and undertaking regulatory and commercialization activities. According to one study, over 80 percent of the leading products for Pfizer and Johnson and Johnson were initially discovered at another firm.⁵

Early-stage firms were acquired at different stages of R&D, where the stages often corresponded to milestones related to clinical trial development. Potential innovations advanced to market through a well-regulated process that often began with pre-clinical work in animals or computationally, and then moved into trials involving human subjects through phases 1, 2, and 3. Each step of this process required increased investments and provided information about the likelihood of success for the products (see Exhibit 1forthe probability of success for pharmaceutical products by clinical trial phase).

Kontopoulos noted the concern with averages:

Averages mask a great deal of heterogeneity in the likelihood of a trial succeeding. For example, firms may have private information that a product is more likely to succeed based on additional, and at times unpublished, information that they learned in the product development process.Furthermore, a product seeking an additional indication (i.e. the ability to use an approved oncology product for an additional type of cancer) may have higher probabilities of success.

She went on to explain the linkages between R&D and business strategy:

It isn't right to determine how much R&D the industry does by only looking at the R&D done at large firms. A large part of R&D is done in smaller companies, many of whom are privately held, and some is done in publicly traded companies with no commercial operations. In both these cases, the entire operations of the firm are R&D. Some of these companies will fail, while others will merge with, or be acquired by, others. This is more efficient than every company doing everything from early-stage research to commercialization, because these are highly specialized functions. The M&A decision, therefore, is a strategic decision and part of the R&D process.

Gilead's Virology Therapeutics

Founded in 1987, Gilead Sciences initially focused most of its efforts on antiviral therapeutic development.^6,7 While an acquisition in 1999 provided the company with some oncology drug assets, after the launch of Gilead's human immunodeficiency virus (HIV) treatment, Viread, in 2001, Gilead modified its corporate strategy to specialize solely in antiviral drug creation, with strategic acquisitions playing a key role in its strategy (see Exhibit 2for select Gilead Acquisitions). Over the next decade and a half, Gilead became known for antiviral treatments.

HIV

Gilead's success in HIV came as the result of combining drugs developed internally with those developed at other firms. Perhaps the clearest example of this was the 2003 acquisition of Triangle Pharmaceuticals for $464 million, which represented a 33 percent premium over Triangle's preacquisition price.⁸ Triangle's primary product was Coviracil, which was a nucleoside reversetranscriptase inhibitor (NRTI) or a "nuke." This product was similar to Gilead's existing product, Viread, in that both inhibited the reverse-transcriptase enzyme that HIV requires for replication in the body.Viruses like HIV store their genetic information as RNA. Upon infection, a reverse transcriptase enzyme can synthesize DNA from the viral RNA. That DNA can then integrate into the host's DNA and replicate using normal cellular machinery. Inhibiting replication in this way allows an antiviral product to slow, or ultimately halt, the ability of the virus to survive in the body. In July 2003, Emtriva was approved by the Food and Drug Administration (FDA).

At the time, there was increasing evidence that a combination of "nukes" was more effective at halting the replication of HIV than any single approach. Just one year later, the FDA approved Truvada, a cocktail drug which combined Emtriva and Viread into a single pill. While combining molecules into a single product was viewed as trivial by some, combination therapies were more effective and helped improve patient compliance and adherence to treatment plans, as patients no longer had to take multiple pills at different times of day.⁹ This was particularly true in the case of antiviral products, such as those for treating HIV, where strict adherence to treatments was necessary for reduction in viral load.¹⁰

However, while Truvada reduced the number of pills, it fell short of achieving a single-pill regimen that combined all components of a highly active antiretroviral therapy treatment (HAART) cocktail for the treatment of HIV in a single product. For that, Gilead would need to find a way to combine its NRTI

treatments with a non-nucleoside reverse transcriptase inhibitor (NNRTI). To accomplish this goal, Gilead partnered with Bristol Meyers Squibb, which had a successful NNRTI in the form of Sustiva.

Combining these molecules into a single tablet was not an easy scientific innovation, as the combined pill needed to demonstrate bioequivalence with each product individually. Gilead experienced several failures in combining these products before its ultimate success in the form of Atripla in 2006.¹¹ This offered the first true single pill treatment for HIV, an accomplishment that increased compliance and contributed to the transformation of HIV from a death sentence to a relatively easy to manage, chronic condition.¹² Gilead would go on continue to exploit its knowledge of "nukes," NNRTIs, and the science of combination theory to develop other successful cocktail therapies for HIV, including Genvoya and Biktarvy (see Exhibit 3for Gilead product sales).¹¹Hepatitis C

HIV was not the only virus for which Gilead sought to develop treatments. In 2002, Hepsera, a drug initially developed as a treatment for HIV, was approved for patients with hepatitis B (HBV). In 2008, Viread's label would later expand to include HBV as well. Although these HBV therapeutics were moderately successful, Gilead would soon pivot a majority of their focus towards hepatitis C (HCV) drug creation.

Partly built on a broader understanding of HCV as a virus and of antivirals as a class, there was a growing belief that HCV could also be treated or cured far more effectively than the existing treatment regimen that used interferon in combination with other products. These existing treatments had relatively low success rates and debilitating side effects profiles that were primarily related to interferon. Meaningful adverse events reduced adherence to the existing treatments, further reducing their efficacy.¹³

The first significant progress in the treatment of HCV was made almost simultaneously in 2011 by Merck and Vertex in the form of their respective products Victrelis (boceprevir) and Incivek (telaprevir). These products were used in combination with interferon and increased the effectiveness of treatments, albeit without eliminating the side effects.³⁹ However, there was hope that a noninterferon based treatment could emerge as a cocktail treatment for HCV; the question was how long such an innovation would take. Commenting on this progress, Genentech's Vice President of virology said: "In HIV it took over ten years ... I'd like to think there are some learnings that will allow that to happen more rapidly [in HCV]."¹⁴

Later in 2011, Gilead moved aggressively into this space with the purchase of Pharmasset, a biotechnology firm with three late-stage HCV candidate compounds, for $11 billion? approximately one third of the market value of Gilead.¹⁵ This purchase valued Pharmasset at 89 percent above its previous day's closing price. At the time of the acquisition, data were available on two small phase II studies of Pharmasset's primary asset, PSI 7977 (i.e. sofosbuvir, which would eventually be sold under the brand name Sovaldi). In regulatory filings related to the merger, Pharmasset estimated that if its products successfully completed clinical trials, peak sales from Pharmasset would be approximately $8 billion in 2017. However, unlike pharmaceutical products for chronic conditions, sales for an HCV cure were expected to decay relatively quickly? falling to less than $5 billion per year by 2023 (see Exhibit 4).

An ISI survey immediately after the acquisition revealed that 82 percent of respondents believe that Gilead had overpaid for Pharmasset. This belief was reflected in the market outcomes as well, with Gilead shares dropping 9.1% upon news of the deal.¹⁶ Gilead's acquisition of Pharmasset was based on its scientists' belief that curing HCV would require deploying a "nuke" in combination with other products, ideally in a single daily pill. This was similar to the antiviral strategy the firm used to transform the treatment of HIV. Pharmasset was one of at least three potential early-stage "nukes" Gilead evaluated at the time. The other two candidates were owned by Idenix and Inhibitex.

In January 2012, Inhibitex would be purchased by Bristol Meyers Squibb for $2.5 billion.¹⁷ This represented a 163 percent premium on its price. Describing the acquisition, BMS R&D head Elliott Sigal said, "We felt we needed a nucleotide ... in combination with some of our drugs, we think this could be a very powerful regimen" Yet by August 2012, BMS would write off the entire value of this transaction due to adverse events in the clinical trial.¹⁸

In June 2014, Merck announced its acquisition of Idenix for $3.5 billion, a deal that valued the firm at 3 times the previous day's closing price.¹⁹ Yet in 2017, Merck recorded a $2.9 billion impairment charge related to this acquisition? a move that appeared to be driven by the declining overall value of the HCV market.²⁰

Part of the reason for this declining value was the success of products developed by Gilead. In 2013, Gilead's Sovaldi would be approved by the FDA and would soon become the backbone of the next generation of HCV combination treatments. The product was recommended as the first line of treatment for all forms of HCV. Gilead would combine sofosbuvir with a number of other HCV compounds to create blockbuster drugs such as Harvoni, Epclusa, and Vosevi (see Exhibit 3for Gilead sales by product from 2014-2020), which cured HCV in under 12 weeks. Harvoni alone achieved a cure rate of nearly 100 percent for HCV genotype 1, the most common form of HCV in the United States. The success of Gilead's HCV drugs helped increase its market cap from $30 billion before the Pharmasset purchase, to $100 billion.²¹

Fidelity was an early investor in Pharmasset and earned a large return on its acquisition by Gilead. Kontopoulos was also an investor in Idenix and profited from its acquisition by Merck.²²

Capital Allocation

Gilead's success in HCV resulted in a large increase in cash flow. That said, the HCV franchise was beginning to exhibit declining revenues. A combination of price competition from other curative treatments sold by AbbVie and Merck and a declining market size because the treatments were curative reduced revenues from Gilead's HCV franchise (see Exhibits 5 and 6for select financials about Gilead.)

Given the meaningful revenues from HCV and their impending decline, Gilead's leadership faced questions about the firm's future strategy. In considering potential options, its leadership considered both the future strategic direction of the firm and its existing financial options. Like all firms, Gilead's management faced a choice between using cash for internal R&D, business development efforts, issuing a dividend, or repurchasing shares. On February 3, 2015, Gilead announced that its Board of Directors had authorized a dividend program under which the company would pay a quarterly dividend of $0.43 per share, subject to quarterly declarations by the Board of Directors.²³ Gilead was one of only two biotech companies paying a dividend.

On the same day, the Board also approved the repurchase of up to an additional $15.0 billion of the company's common stock. The press release stated that "today's announcement reflects the Board of Director's and senior management's confidence in Gilead's future." Between 2014 and 2016, Gilead would repurchase over $25 billion in company stock.

Gilead's Expansion Out of Virology

Although Gilead had achieved much of its success in the antiviral market, it was not long before the firm began attempting to branch out into other therapeutic areas. In fact, despite its declaration in 2002 to specialize in antiviral medications, just 4 years later, Gilead acquired Myogen (a cardiovascular disease company) for $2.5 billion and Corus Pharma (a respiratory disease company) for $365 million.^24,25 With these respective purchases, Gilead sold Letairis, a treatment for pulmonary hypertension, and a pipeline drug that would later be marketed as Cayston, an inhaled antibiotic for cystic fibrosis patients with respiratory infections. Gilead also purchased CV Therapeutics in 2009 for $1.4 billion, acquiring Lexiscan, a stress test used to image the heart, and Ranexa, a treatment for chronic angina, marking its entrance into the cardiovascular arena.²⁶

Oncology

In oncology, drug sales had increased markedly from 2009 to 2019 (see Exhibit 7 for drug sales by therapeutic class).Motivated by this opportunity,Gilead purchased Calistoga Pharmaceuticals in 2011 for $375 million.²⁷ This acquisition would eventually lead to Gilead's first cancer drug in 2014, Zydelig, a treatment for some forms of blood cancer. In 2017, Gilead confirmed its commitment to pursuing cancer medications with its purchase of Kite Pharma.²⁸ The $11.7 billion acquisition was Gilead's largest at the time.

Kite's potential products were a type of cell-mediated gene therapy (immunotherapy) that required immune cells from a patient's body be removed, genetically modified, and then injected back into the patient's body. Unlike traditional treatments such as radiation and chemotherapy, these modified immune cells were programmed to specifically attack cancerous cells, leaving healthy cells untouched. At a technical level, they were quite different from the small molecule products that were Gilead's traditional focus. Instead, these products were a "biologic" product that required different expertise in production, distribution, and marketing.

Commercializing a product such as chimeric antigen receptor T-cell (CAR-T) immunotherapy required working with a variety of new actors and processes. Each dose of Kite's Yescarta was personalized to the patient because it was developed from the patient's own cells. This resulted in a remarkably effective product, but required working with hospitals to collect samples and administer the manufactured product. Developing a payment model for hospitals to administer the product proved difficult? particularly for hospitals treating individuals on an inpatient basis, where Medicare could reimburse well below the costs of this innovative treatment. Success in CAR-T also required different kinds of manufacturing expertise than were central to the combination therapies to target HIV and HCV, both of which were addressed with small molecule rather than biologic products. Kite faced competition in this area from other firms such as Bristol Myers Squibb, Novartis, and Bluebird.

Gilead acquired Kite Pharma believing that its portfolio of late-stage candidate compounds would revolutionize cancer treatment. At the time of the acquisition, it was believed that its first product, Yescarta, would be approved within the year, and that its second product, Tecartus, would be approved by 2020. Both of these products were approved for specific lymphomas (also described as blood cancers), but there was a belief that they could ultimately be used for other blood cancers and potentially solid tumors. At that time of the acquisition, analysts at Mizhuo Securities USA LLC estimated that sales for Yescarta's intended indication could peak at $1.5 billion, though there was some uncertainty about the market's comfort with the intended $373,000 price tag per treatment.²⁹ In contrast, Kite predicted peak sales of approximately $6 billion. These peak sales, however, would not be achieved until 2031 and were based, at least in part, on moving Kite's technology into other indications that were not yet in clinical trials (see Exhibit 4).

As Kite completed its integration into Gilead, several former executives left for other pursuits. In 2018, two executives, including Kite's founder, announced a $300 million series A funding round for a new CAR-T firm named Allogene Therapeutics. Unlike Kite's product, which required cells from each patient to create the treatment, Allogene's goal was to create an allogenic CAR-T product that would use donor cells and could be administered "off the shelf" to patients. The firm started its effort with a series of cell therapies that had been previously owned by Pfizer (with Pfizer taking at 25 percent stake in Allogene).³⁰

In 2019, Gilead responded to these challenges by restructuring its leadership to include those with experience in oncology.³¹ Reflecting the firm's increased focus on oncology, in March 2019 Gilead hired Daniel O'Day, former chief executive officer (CEO) at Roche Pharmaceuticals, as CEO. By the end of the year Gilead had hired Johanna Mercier, former President of the Large Markets division at Bristol Myers Squibb, as Chief Commercial Officer; Merdad Parsey, former Senior Vice President of Genetech's Early Clinical Development group, as Chief Medical Officer; and Christi Shaw, former head of the Bio-Medicines group at Eli Lilly, as CEO of Kite. Andy Dickinson, Senior Vice President of corporate development at Gilead, was also promoted to Chief Financial Officer.

Despite these expansions and the transformation of the expertise of many of the firm's leaders, in 2020, Gilead's antiviral products remained its most profitable drugs, with nearly half of the firm's sales coming from just three of its HIV products.

In early 2020, Gilead presented its company strategy and outlook at the 38th Annual JP Morgan Healthcare Conference.³² This annual gathering for the biopharmaceutical industry was closely followed by investors and company officials. Kontopoulos was always interested in attending various company presentations and meeting with management teams. CEO Daniel O'Day outlined his strategy for Gilead, which focused on broadening from the company's core area of strength in antivirals to other disease areas including oncology. He described a "New Strategy to Drive Future Growth." O'Day highlighted three pillars which would make up Gilead's next chapter: ensuring a durable core business, focusing on executing against existing pipeline opportunities, and pursuing tailored transactions to drive strategic value. O'Day outlined his guiding principles for future deals including focusing on high-quality science and prioritizing clinical and commercial opportunities. He further shared that he anticipated partnerships and bolt-on acquisitions from small to medium in size.

Shortly after JP Morgan, in March 2020, O'Day moved forward with another step in this strategy when Gilead announced that it would purchase the oncology firm Forty Seven for $4.9 billion.Another immunotherapy acquisition, Forty Seven's primary product, Magrolimab, was a biologic that inhibited CD47, a protein on the surface of cancer cells that allows them to evade the body's immune system. At the time of the merger, the product had delivered promising phase 2 data and was expected to be approved by late 2022. Peak sales were estimated at $2.96 billion.³³

Immunomedics

Immunomedics was founded in 1982 and focused on developing cancer treatments. While the company had a portfolio of different classes of drugs in its pipeline, its most interesting drugs were known as antibody-drug conjugates (ADCs). Much like immunotherapy, the goal of ADCs was to attack cancerous cells without harming normal ones. ADCs were composed of an anticancer drug linked to a specific antibody. Like a specific receptor, antibodies chosen for ADCs would ideally only bind to signals (antigens) found on tumor cells. If an antibody encountered a tumor antigen, the tumor cell would initiate a process of engulfing the antibody and thus bring the anticancer drug along with it. Once inside the tumor cell, the anticancer drug could destroy the tumor cell and mitigate damage done to healthy tissues. In late 2019, Immunomedics employed 366 full-time employees, 71 of whom were in R&D, 182 in operations and manufacturing, and 113 involved in finance, administration and sales & marketing.³⁴

Immunomedics's lead molecule, sacituzumab govitecan, being studied for third-line patients with metastatic triple-negative breast cancer (mTNBC), was a challenge to bring to market. In July 2018, two months after Immunomedics submitted a Biologics License Application (BLA) to the United States Food and Drug Administration (FDA), the BLA was accepted for review and granted Priority Review.³⁵

However, in January 2019, just before the anticipated approval date, the FDA issued a Complete Response Letter (CRL), a letter indicating its inability to approve the medicine, to Immunomedics, raising some issues. Immunomedics subsequently met with the FDA and shared a detailed plan to address the chemistry, manufacturing, and controls (CMC) matters raised in the CRL.

Immunomedics continued to develop sacituzumab govitecan in a number of other disease indications, including another type of breast cancer (HR+/HER2-), urothelial cancer, and in non-small cell lung cancer, head and neck cancer, and endometrial cancer through a basket study.

In early 2019, Andrew Dickinson, then Executive Vice President of Corporate Development and Strategy for Gilead, met with Immunomedics to learn more about the company and discuss a potential collaboration. Soon after, Gilead entered into a Confidentiality Agreement. In late 2019, Immunomedics began having confidential discussions with other biopharmaceutical companies with an original plan for licensing and collaborations.

In April 2020, Immunomedics received FDA approval for sacituzumab govitecan for mTNBC. In the drug's first two months on the market, it earned $20 million in sales.³⁶ The brand name for the medicine became Trodelvy. Throughout 2019 and through the first quarter of 2020, Immunomedics's share price hovered between $10 per share to $18 per share.

It was around this time that Kontopoulos became interested in Immunomedics. She was well aware of the company's challenges over the prior couple of years. At this time, Kontopoulos and her partner, George Armstrong, felt it was time to take another look at the stock for investment after it had sluggish share price performance. Kontopoulos and Armstrong pored over the clinical data and developed a valuation for the company, including estimating peak sales and probabilities for each indication and cross-comparing to other historical launches as a sanity check. This was the typical process Kontopoulos and Armstrong deployed? start with the clinical data, align on expectations regarding the inputs and assumptions for the financial model, and then discuss intrinsic value from an investment perspective. Kontopoulos and Armstrong decided to take a meaningful position in Immunomedics and conveyed this to other portfolio managers at Fidelity, who also invested.

The weighted average cost of capital for Immunomedics was estimated to be 9.7 percent (see Exhibit 8for a financial model for Immunomedics).

Other investors became more enthused about the company as well, and the share price passed $40 per share in early September 2020. Phil Nadeau, PhD, the well-regarded biopharmaceutical analyst at Cowen Equity Research became very bullish in summer of 2020. Phil felt Trodelvy would become standard of care for treatment of mTNBC and felt there was potential in other tumor types, including ER+/HER2-metastatic breast cancer, lung cancer, and metastatic urothelial cancer. Nadeau projected peak sales for Trodelvy to reach $4.6 billion in 2034.

In early summer of 2020, the Board of Immunomedics decided to contact a number of pharmaceutical companies to evaluate interest in a collaboration agreement for Trodelvy. By July of 2020, four biopharmaceutical companies, including Gilead, received access to due diligence materials and participated in management presentations.³⁷ As part of the due diligence materials, the biopharmaceutical companies received confidential data, including clinical trial data which was to be presented at an upcoming medical meeting (see also Exhibit 4). On September 7, 2020, one of the companies other than Gilead made an offer to acquire Immunomedics at a price of approximately $55 per share.³⁸ This began a bidding war for a full acquisition of Immunomedics. On September 9, Gilead stepped forward with an offer of $82 per share. After the first bidder was informed that its offer was well below Gilead's, the first bidder responded it would be willing to increase its offer to an amount that valued Immunomedics at a share price in the "mid-to-high 60s range." In describing the next sequence of events, Max Gelman of Endpoints News wrote, "Later on Sept. 10, [Immunomedics CEO] Aghazadeh told O'Day he would give Gilead a 72-hour exclusivity window to negotiate a deal and countered O'Day's $82 per share offer with one that would have valued Immunomedics at $90 per share. After a quick back-and-forth, the two men settled on $88 per share, which would end up being the final price tag."³⁹

Making Sense of the Deal

On September 13, 2020, Gilead announced they had entered into a merger agreement to purchase Immunomedics for approximately $21 billion. Gilead's previous acquisitions in the oncology space had focused on blood cancers as opposed to solid tumors. Trodelvy marked Gilead's first foray into solid tumor drugs. Gilead stated that it intended to fund the acquisition with approximately $15 billion of existing cash and $6 billion in newly-issued debt. Gilead also committed to maintain and grow its dividend. The firm stated that the transaction would provide immediate revenue diversification and would significantly improve growth prospects.⁴⁰

On the conference call announcing the transaction, Daniel O'Day stated: "...we are following our strategy...we want to build on the scientific base we have ... and this gives us a third leg in oncology."

The purchase price for Immunomedics was notably more than double its market value from the week before. Gilead's share price closed relatively unchanged on the first day of trading after the announcement. Analysts were less enthusiastic. Matthew Harrison, the well-respected sell-side analyst at Morgan Stanley, commented in a note to his clients in early November 2020:

Immunomedics provides much needed oncology growth, but at what cost? The acquisition of the oncology-focused Immunomedics helps Gilead continue to pivot its pipeline from HIV/HCV treatments and towards oncology. ...We think Troveldy has the potential to be a product within a pipeline. ... Unfortunately, and perhaps importantly, most investors see expanded indications as necessary to justify the purchase price of Immunomedics.⁴¹

Andrew Dickinson, Gilead's Chief Financial Officer, remarked on the conference call announcing the transaction, "...we look at our cost of capital, which hovers around 6 percent..." (see Exhibit 9forselect quotes from the investor conference call regarding Gilead's acquisition of Immunomedics). Dickinson remarked in November 2020, "Gilead had a very clear ambition to move into oncology. And what you saw in 2020 was a culmination of that work."⁴² He additionally remarked on the Immunomedics transaction, "we expected it to turn from partnering discussions to an M&A transaction, but we didn't think it was likely that someone would try to do that a week before the company's key data was going to be publicly disclosed."

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Kontopoulos had a fundamental belief that "you create alpha by beating your cost of capital, otherwise you lose value." To gain insight into Gilead's strategy, she carefully reviewed the management team's description of the deal from the investor call that announced the deal.

Investors often would start with a relative valuation analysis to get a back-of-the-envelope estimate of the value of a biopharmaceutical firm. A general rule of thumb in the industry was that a biopharmaceutical firm, which often had no existing profits at the time of acquisition, could simplistically be valued around three to four times peak sales projection. A multiple-based valuation was faster than an intrinsic valuation, which required projecting free-cash-flow (FCF).

Kontopoulos wanted to understand how Gilead was thinking about creating value for its shareholders through diversification, acquiring new revenue streams, and capital allocation like share buybacks. She wondered about the likelihood of Gilead having success with label expansions in an environment with rapidly expanding oncology products, and how this acquisition should influence her investments in Gilead and other companies like Immnunomedics?

Exhibit 1 Probablility of Success for Pharmaceutical Products by Clinical Trial Phase

See Figures 1 and 2, Takebe et. al. "The Current Status of Drug Discovery and Development as Originated in United States Academia: The Influence of Industrial and Academic Collaboration on Drug Discovery and Development," Clinical and Translational Science, 2018, doi:10/1111/cts.12577

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Exhibit 2 Gilead Sciences Notable Acquisitions

Company	Date Value Therapeutic Arena	Drugs Obtained
NeXstar Pharmaceuticals	Mar 1999 $130 million Fungal Infections	AmBisome
Triangle Pharmaceuticals	Dec 2002 $464 million Viral Infections (HIV)	Compound that would become Emtriva
Corus Pharma	Aug 2006 $365 million Respiratory	Compound that would become Cayston
Raylo Chemicals	Jun 2006 $133.3 million N/A	Active pharma compound manufacturing facilities
Myogen	Oct 2006	$2.5 billion Cardiovascular/respiratory	Compound that would become Letairis and phase III compound for hypertension
CV Therapeutics	Mar 2009	$1.4 billion Cardiovascular	Ranexa and Lexiscan
CGI Pharmaceuticals	Jun 2010	$120 million Inflammatory diseases	Portfolio of preclinical stage compounds
Arresto Biosciences	Dec 2010	$225 million Fibrotic diseases & Immunoncology	Portfolio of preclinical stage compounds
Calistoga Pharmaceuticals	Feb 2011	$375 million Oncology & Inflammation	Compound that would become Zydelig
Pharmasset Inc.	Nov 2011	$10.4 billion Viral Infections (HCV)	Compound that would become Solvaldi
YM Biosciences	Dec 2012	$510 million Oncology & Inflammation	Portfolio of clinical and preclinical stage compounds.
Phenex Pharmaceuticals	Jan 2015	$470 million	Liver Diseases/Nonalcoholic steatohepatitis (NASH)	Portfolio of clinical and preclinical stage compounds
EpiTherapeutics	May 2015	$65 million	Oncology	Preclinical stage compounds
Galapagos NV (collaboration)	Dec 2015	$725 million	Inflammatory diseases	Partnership to develop Filgotnib. Approved in Japan as Jyseleca, failed in the US.
Nimbus Apollo, Inc	May 2016	$400 million	NASH & Oncology	Portfolio of clinical and preclinical stage compounds.
Kite Pharma	Aug 2017	$11.9 billion	Immuno-oncology	Portfolio of clinical and preclinical stage compounds
Galapagos NV (collaboration)	Jul 2019	$5.1 billion	Inflammatory/respiratory	Portfolio of clinical and preclinical stage compounds, option rights on all Galapagos' current and future trials outside of Europe. Lead compound later failed in Phase III.
Forty Seven	Mar 2020	$4.9 billion	Immuno-oncology	Portfolio of clinical and preclinical stage compounds
Pionyr Immunotherapeutics (49.9% stake)	Jun 2020	$275 million	Immuno-oncology	Portfolio of preclinical stage compounds
Immunomedics	Sep 2020	$21 billion	Immuno-oncology	Trodelvy and immuno-oncology drug
Jounce Therapeutics (licensing agreement)	Sep 2020	$120 million	Immuno-oncology	Exclusive license agreement to develop therapeutic candidate JTX-1811

Source: Capital IQ data compiled by case author.

2009 2019 Oncologics Diabetes Autoimmune Respiratory Agents HIV Antivirals Anticoagulants Central Nervous System Multiple Sclerosis Mental Health Pain Vaccines ADHD GI Products Dermatologics Antihypertensives Viral Hepatitis Ophthalmology Hormonal Contraception Sex Hormones 10 20 30 40 50 60 70