The speculation fairy just gave Gilead (GILD) a punch in the gut Monday. The hepatitis C and HIV drug giant took an $820 impairment hit on its balance sheet, not at all what the company needed as it tries to shore up its hemorrhaging sales in its hepatitis C product line, down a dizzying 50% year-over-year according to its latest earnings release.
The impairment came from the failure of one of its pipeline assets, KITE-585, which came from its $11.9 billion acquisition of CAR-T darling Kite Pharma in October 2017. KITE-585 is one of four CAR-T assets in Kite’s pipeline that was undergoing a Phase I trial for multiple myeloma, but Gilead just chose to discontinue development due to sub-par efficacy data so far.
The discontinuation itself wasn’t a surprise. Back on Jan. 7 at the annual J.P. Morgan Healthcare Conference, Gilead’s chief medical officer had already indicated that development would probably be discontinued due to lack of response durability. The surprise was in the magnitude of the impairment charge -- about 1% of the biotech’s market cap. A Gilead earnings blurb from Bloomberg cited analysts concerned that Gilead may have to write down the entire value of the Kite deal, which would be a huge blow to Gilead and could shake the CAR-T biotech subsector to its foundations.
Why a potential total write down? Because sales of Kite’s flagship CAR-T product Yescarta for the treatment of non-Hodgkin lymphoma are lagging, and the exorbitant price tag of $373,000 doesn’t help. The extremely high cost Gilead has said is necessary to begin to recoup the costs of development, which it absorbed secondhand through its acquisition of Kite. But just because it’s necessary doesn’t mean it will sell well. Take Yescarta’s recent situation with the U.K.’s state-run NHS England, which initially shot down coverage for the drug not because it wasn’t efficacious, but simply because it was deemed too expensive for the state to cover.
Then, last October, NHS worked out a deal with Gilead to cover the treatment, but for only 200 patients a year, essentially rationing Yescarta and putting a maximum limit on Gilead’s annual revenue from the life-saving drug. On the one hand, the U.K. is just one country. On the other hand, if the U.K. can ration medication, so can any other, potentially. Even in the U.S. there is rationing of a sort. The Centers for Medicare & Medicaid Services, for example, requires a copay around $79,000 per patient, which many people simply cannot afford.
The larger lesson here is that even the most successful of biotechs can err in speculative fervor, and CAR-T has certainly been that since its introduction to public markets. Just look at one of the few CAR-T companies that hasn’t been acquired yet, bluebird bio (BLUE), whose stock price is volatile enough to make even the most seasoned biotech investor nauseated. Let’s not forget that in the case of Gilead and Kite specifically, the premium paid for KITE-585 was past the stratosphere. An $820 billion write-down for a preclinical drug that had data only on mice backing it up at the time of acquisition is quite the risky and expensive bet.
A nearly $12 billion error though is in a different ballpark, if Gilead indeed does have to write down the entire Kite acquisition at some point. Investors sometimes have the erroneous idea that if a multibillion-dollar company makes a move, then that itself is market validation. It isn’t. Just because Gilead pays billions for something doesn’t mean the market will agree with that valuation.
Economics is still the study of scarcity and choice, and drug prices can go only so high before they simply cannot succeed in the market, no matter how solid the science is behind them, or how beneficial they may be.
Disclosure: No positions.
