Gilead Sciences' Acquisition Of Forty Seven Was A Wise Move, CD47 Space Is Key Future Cancer Target
Summary
- Gilead Sciences paid $4.8 billion to acquire Forty Seven for its anti-CD47 drug magrolimab.
- Magrolimab is an anti-CD47 drug and is responsible for eliminating the CD47 "don't eat me" signal that cancer cells have to avoid detection from macrophages.
- HIV sales continue to climb, especially with Biktarvy as volume continues to build and is helping Gilead's revenue grow.
- A potential readout of data for remdesivir against COVID-19 this month could be a major catalyst for the stock.
- I do much more than just articles at Biotech Analysis Central: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
Gilead Sciences (NASDAQ:GILD) acquired Forty Seven Inc. (FTSV) and paid a total of $4.8 billion to do so. Gilead has continued to do well when it comes to its HIV franchise, but faced significant challenges in other areas like its NASH pipeline. I believe that buying Forty Seven was a smart move that will definitely drive growth for the company. That's because the CD47 "don't eat me" space is starting to heat up with several biotechs exploring the very same space. The best part of all is that Forty Seven was the most advanced in terms of being close to late-stage studies with its CD47 drug magrolimab. The acquisition should eventually pay off and that's why I believe that Gilead is a good buy.
Acquisition Looks To Add Significant Value In Cancer Treatment Space
Gilead Sciences paid $4.9 billion or $95.50 per share in cash to acquire Forty Seven. This deal was unanimously approved by the boards of both companies and is expected to close during Q2 of 2020. Why was it a good idea for Gilead to buy Forty Seven? It all boils down to the CD47 "Don't eat me" inhibitor cancer space. Forty Seven was working with its key drug magrolimab, which is an anti-CD47 monoclonal antibody. The thing is that cancer cells have a CD47 "Don't eat me" signal on them. That allows them to avoid the immune system and not be detected. Cancer cells also have an "eat me" signal on their surface. However, the "don't eat me" signal overshadows the "eat me" signal and thus cancer cells avoid detection.
This is where magrolimab comes in and inhibits the CD47 "don't eat me" signal. When that happens, cancer cells can't avoid the macrophages roaming about. In turn, macrophages perform phagocytosis (swallowing of the cancer cells whole) to eliminate them. Having said that, Forty seven posted positive clinical data from its Phase 1b study using magrolimab to treat patients with myelodysplastic syndrome (MDS) and acute myeloid leukemia (AML).
It's important to note that because magrolimab uses IgG4 isotopes that it has a mediocre effect as a CD47 drug. This IgG4 isotope has to be explored in combinations with other therapeutic drugs. Magrolimab has shown better to work in combinations, rather than alone as a monotherapy. That's why for this Phase 1b study, Forty Seven used magrolimab in combination with a chemotherapeutic drug known as azacitidine.
Earnings Still Growing In Main Business Segment
One area that didn't need improving for Gilead Sciences was its HIV business segment. That's because the volume of sales for Biktarvy continues to grow. This is translating to increased revenue, both in terms of during the most recent quarter and overall for 2019. For instance, HIV sales during Q4 2019 were $4.6 billion, compared to the prior year during the same period where sales were $4.1 billion. For all of 2019, sales of HIV products were $16.4 billion compared to $14.6 billion in 2018.
As you can see, sales for the HIV business segment have continued to climb. Where Gilead had an issue to resolve, in terms of revenue being generated, was its oncology business. That's because a few years ago, it spent $12 billion to acquire Kite for its CAR-T programs. However, since then sales haven't been groundbreaking. They haven't been awful, but at the same time nowhere near where Gilead expected them to be. During Q4 of 2019, sales of Yescarta reached $122 million. Not only that, but sales the last 3 quarters have been somewhat flat quarter over quarter.
There are still some studies that could help expand the market for Yescarta, but for the time being, it has not lived up to expectations. This is why I believe the acquisition of Forty Seven was a good move. It allows it to advance magrolimab against several blood cancer indications. Especially, where CD47 IgG4 isotopes have been superior in terms of combinations. For instance, magrolimab isn't ideal at all as a monotherapy. When it is combined with other therapies like azacitidine, Vidaza, and immunotherapies the opportunity is endless.
I believe that Gilead will do so much better with its Forty Seven acquisition. The other need to pull the trigger is the falling Hepatitis C business unit. This is evidenced by declining sales year over year. In 2018, sales of HCV products were $3.7 billion. On the other hand, sales of HCV products in 2019 were $2.9 billion. Based on a declining population, along with competitors like AbbVie (ABBV), the HCV business unit will continue to suffer.
Risks To Business
The first big risk is magrolimab itself. That's because before Forty Seven was acquired, it was ready to start a Phase 3 study in the coming months. That means the final step in the process is to see if magrolimab can achieve similar or superior outcomes for blood cancer patients in larger studies. There is no guarantee that the larger pool of patients will yield similar data. HIV sales have been increasing thanks to greater uptake of Biktarvy.
A risk here is that the HIV franchise may not always be there to save Gilead from lower than expected earnings. That's why it needed to acquire Forty Seven. In my opinion, this will help with respect to growth in the coming years. I believe the HIV business unit will be stable for now with Biktarvy. The most risk is where it has always been and that's the hepatitis C business. Sales of the company's hepatitis C drugs have been falling for years now.
Conclusion
Gilead Sciences made the right move to acquire Forty Seven. That's because the CD47 checkpoint space is becoming a very important cancer target. The ability to shut down CD47 on cancer cells eliminates the "don't eat me" signal. This allows macrophages to perform their ability of phagocytosis, thereby eliminating cancer cells. That is why Forty Seven has seen such remarkable progress in many of the studies it has completed thus far.
Another short-term boost for Gilead could potentially be the situation with the coronavirus (COVID-19). That's because its drug remdesivir is being explored in patients with this virus in China. This study is expected to potentially be reported this month, which may provide for further upside in the stock. The stock has already climbed based on the potential of remdesivir. The risk here is if the antiviral doesn't perform as well as expected. That's because there is no guarantee that the antiviral will end up working well to help patients with COVID-19. If that happens, it could cause the stock to trade much lower.
There were other studies that were initiated. Specifically, these were two Phase 3 studies to test out remdesivir in patients with COVID-19. These studies were initiated on February 26, 2020. Many patients will be recruited and it will be a while before data from these studies is available. Data from the Chinese study with remdesivir will come first in the coming month. Before this particular study is read out, I expect Gilead's stock to continue to climb in the meantime as COVID-19 continues to spread.
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This article was written by
Terry Chrisomalis is a private investor in the Biotech sector with years of experience utilizing his Applied Science background to generate long term value from Healthcare.
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