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For the last year Gilead Sciences (NASDAQ:GILD) has been one of the best performing large-cap stocks in the market. The company has continued to grow year-after-year while enjoying industry-leading margins. The company has made few mistakes and has enjoyed a 95% return over the last year in the process. So if the company is so efficient and mistake free, then why do so many people doubt its recent acquisition of YM Bioscience (YMI)? And what is the potential upside to this acquisition?

By now everyone's heard about Gilead's $510 million acquisition of YM Bioscience. Gilead making an acquisition is nothing new, but for the company to spend such a large amount of cash outside its virology specialty is a bit odd. Perhaps the company is just looking to expand its horizon and become a more well-rounded biotechnology company, or maybe it saw something special in this company. Either way, the purpose behind the acquisition remains a mystery.

A Look at YM Bioscience

YM Bioscience is not a common acquisition in biotechnology. It is not a safe bet, has tons of questions surrounding it, and at first glance Gilead appears to have paid too large of a premium. However, looking at the potential "whys" for the purchase, YM Bioscience does have a promising late-phase product with the potential for big revenue.

In a Phase II study, YM Bioscience showed that its lead product, a JAK inhibitor, CYT387, had an anemia resolution effect in myelofibrosis. Its results were very similar to Jakafi, demonstrating a 49% reduction in spleen size in 50% of the patients. But, the excitement came after the company showed that 54% of patients were transfusion-independent after three months, which Jakafi did not achieve. However, there were a lot of concerns surrounding the study, and investors have often wondered if the company could replicate such results. Then, as the company continued to delay it Phase III trial with no news of a potential partner, investors began to lose faith in the product and the company.

The Potential Benefits to the Acquisition

Now that YM Bioscience has been acquired does this change the landscape and the perception of the company? Gilead has hit mostly homeruns in the past and has been primarily a company that focuses on viruses, such as HIV and hepatitis. Therefore, its decision to acquire YM Bioscience, in a different industry, must indicate good faith or a strong level of confidence in the company's pipeline.

As a Gilead investor, I feel good about this acquisition, while others have been mostly negative. I trust that the management and clinical team properly assessed the data and see that YM Bioscience was a mismanaged company with a good product that could bring significant value to its top-line.

Aside from potentially entering a new segment of development, Gilead will also obtain all of YM Bioscience's many patents and will be able to profit from the high revenue potential that a JAK product brings to the table. If we look at the landscape for JAK inhibitor compounds, other large pharma companies have taken on the marketing responsibilities and large upfront payments to smaller developmental companies. We have seen both Novartis and Eli Lilly follow this path, but apparently Gilead believes the upside and initial data is promising enough to acquire the entire company and take on a larger role.

One positive about this acquisition is that there will be no more delays in advancing trials; Gilead will progress fairly quickly. If CY387 is proven to be affective, then the revenue potential is in excess of $1 billion annually, and possibly more depending on the competition. Hence, upon considering Gilead's $9.3 billion in revenue over the last 12 months, the short period of time it could take to develop CYT387, and the gains in value that would come with an additional $1 billion on its top line, it does appear that Gilead made a good investment; that is, of course, if the product is successful in Phase III trials. I guess we shall just hope that Gilead's good fortune continues.

Source: A Not-So-Bad Acquisition By Gilead