RPT-BREAKINGVIEWS-An $8 bln pharma deal prices patent fears

By Robert Cyran

NEW YORK, Feb 23 (Reuters Breakingviews) - Pharmaceutical giants want to buy novel drug developers. The question is how much they’re willing to pay. Gilead Sciences’ GILD.O $7.8 billion purchase of biotechnology startup Arcellx ACLX.O, announced Monday at a 79% premium, indicates that it might be a lot. With Pfizer PFE.N, Merck MRK.N and even large biotech rivals scrambling to offset incoming competition for their branded therapies, expect bigger price tags yet.

Gilead is a good illustration of the pressures facing pharma giants. About half of revenue comes from HIV treatment Biktarvy, which has about a decade of patent protection ahead of it. That’s about the time it takes for a drug to go from discovery in a lab to hitting the market, meaning the clock is ticking for scientific breakthroughs to replace future revenue that will be lost to new competitors.

Buying partner Arcellx is a way to jump ahead. The deal only fully pays out if the seller’s under-development drug for treating multiple myeloma hits $6 billion in cumulative sales through 2029. Assume that this involves hitting a run-rate of $3 billion annually by that time. Put it on Gilead’s current revenue multiple of six times, discount it back by 20% to account for the time value of money and regulatory risk, and it’s worth well more than the purchase price. Still, that’s an optimistic estimate of the difficulty of turning the still-unapproved drug into a commercial blockbuster.

Others face similar pressure. Merck’s cancer treatment Keytruda, for instance, accounts for nearly half of revenue and might face competition in 2028. Only 10% of drug revenue among 20 leading firms in 2024 will still have patent protection in a decade’s time, according to the Boston Consulting Group.

Granted, a series of deals between Big Pharma and the Trump administration has at least reduced the threat of the U.S. government cracking down on prices or imposing steep tariffs. Meanwhile, industry giants have increased their own research spending. The patent cliff, however, still looms, and buying smaller rivals without the capacity to roll out drugs themselves is the quickest fix. Worse, if interest rates fall under new Federal Reserve leadership, that would almost automatically raise the valuation of biotech companies, which are all valued on expectations of hefty future profit that will face a lower modeled discount rate. As the cliff draws ever closer, it’s a good time to be selling a bridge over the chasm.

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CONTEXT NEWS

Gilead Sciences said on February 23 that it had agreed to buy Arcellx for $115 a share in cash, as well as a contingent value right worth $5 a share if the seller's lead therapy for multiple myeloma reaches cumulative sales of $6 billion by the end of 2029. The implied equity value is $7.8 billion at closing.

Bank of America and Morgan Stanley served as financial advisors to Gilead. Centerview Partners advised Arcellx.