San Francisco Chronicle - September 2, 2008
Bernadette Tansey, Chronicle Staff Writer

Soon, Gilead Sciences of Foster City may be the last one still standing as an independent big-cap biotech company that has not been swallowed by a bigger pharma fish. And some wonder whether Gilead, founded in 1987, will also be gobbled up.

Big drug companies, hungry for the new products developed by innovative biomedical outfits, have escalated their acquisitions. For years they've been purchasing small biotech outfits, but now they're moving up the food chain to the industry's large fry. Chiron Corp. of Emeryville, founded in 1981, was snapped up by Novartis in 2006. And the oldest and biggest of the Bay area's three star firms, Genentech Inc. of South San Francisco, may bow to a takeover offer from another Swiss drugmaker, Roche, this year.

Meanwhile, Gilead has been shooting up the biotech ranks through steady growth of its HIV drugs. With a market capitalization of $48 billion, it's nipping at the heels of biotech giant Amgen Inc., which ranks second in the world to Genentech. Gilead plans to double its floor space through a construction boom at its Foster City headquarters, and more than double its workforce of 3,200 by 2017. The company is charging ahead as though no outside buyer is going to chart its destiny.

But after Roche stunned Genentech with a purchase offer last month, no biotech company of any size has been considered safe from a takeover bid. Gilead could be seen as a tempting morsel, said John McCamant, editor of the Medical Technology Stock Letter in Berkeley.

Experimental remedies

"I believe certainly, Gilead is a target also," McCamant said. Not only are Gilead's HIV drugs increasingly dominating the market, but the company has also branched out into experimental heart and lung disease remedies to nurture its future revenues.

But Gilead, unlike its two older peers, has followed a growth strategy that may make it harder for a big drugmaker to devour, said John Milligan, Gilead's chief operating officer.

"Our focus has always been on building a very strong independent company," said Milligan. Over the years when Novartis was gaining a large stake in Chiron, and Roche was securing the majority of Genentech's shares, Gilead avoided such influential holdings by a powerful pharmaceutical partner. Although big partners benefit biotech companies with funding and help with marketing new products, the large drug firms are also better positioned to buy their biotech protegees outright when they have already gained part ownership.

Milligan said Gilead consciously laid the foundations for its future independence as far back as 1997, well before its most important product, the HIV drug Viread, was approved in 2001. Gilead wanted to market Viread itself, so it shopped for a company to acquire with an international sales force that could stand ready to sell HIV medicines.

"We felt confident we could do this on our own," said Milligan.

With Gilead's purchase in 1999 of Boulder, Colo., company NeXstar Pharmaceuticals, it gained a sales organization and the revenue stream that came with NeXstar's drug AmBisome, a treatment for serious fungal infections.

Since then, Gilead has built the fastest-growing HIV franchise in the world, grabbing market share from the two big drugmakers that once dominated HIV drug sales, GlaxoSmithKline and Bristol-Myers Squibb. Gilead's market capitalization is nearly six times its value of about $8 billion in 2003.

Drug combinations

The mainstay of its $4.2 billion in revenue is Viread, which is sold singly and in two combination pills, Truvada and Atripla. Atripla is a complete HIV treatment regimen in a single pill taken once a day. It combines Viread and Gilead's drug Emtriva with Bristol-Myers' Sustiva.

Truvada, which contains Viread and Emtriva, is the backbone of novel HIV regimens whose third drug is a protease inhibitor or one of a new class of HIV drugs called integrase inhibitors, such as Merck's Isentress. Gilead is developing its own integrase inhibitor, elvitegravir.

In addition, Viread has just been approved to treat hepatitis B. Kevin Young, executive vice president of commercial operations, said Viread is more effective than Gilead's existing hepatitis B drug, Hepsera.

Focus diversified

While Gilead continues to develop follow-on HIV drugs, it has diversified its focus into heart and lung maladies through a series of acquisitions. One of the drugs it acquired, Letairis, was approved for the treatment of pulmonary arterial hypertension last year. Gilead expects an FDA decision by September on an inhaled experimental drug, aztreonam lysine, for cystic fibrosis. "I have never seen us as busy as we are right now," said Young.

All of this may increase the allure for potential Gilead suitors, McCamant said. The dollar's weak value relative to other currencies is making acquisitions cheaper for overseas companies. Add that to the continuing dilemma of big drug firms whose patents are expiring on their blockbuster medicines, and whose in-house research has produced few breakthrough treatments, he said.

Bidding war could erupt

But an independent company Gilead's size might be harder to acquire than Chiron or Genentech, Milligan said. If an outsider made a bid to buy all its shares, Gilead's board would probably seek rival offers and set off an expensive bidding war. "The shareholders, of course, would demand a premium," he said. "It would be a hefty premium, I would imagine."

The same argument could be made with regard to Amgen Inc. of Thousand Oaks (Ventura County), an independent company that leads the biotech industry in sales, and whose market cap is nearly $68 billion.

McCamant, however, points to Pfizer's history of acquiring other very large pharmaceutical companies as it became the world's largest drugmaker. Giant drug firms may not be daunted by a big biotech price tag, he said.

"Given how crappy the pipelines and the patent expirations are at big pharma companies, there could be a bit of a feeding frenzy," he said. "I think the appetite's out there."

As more biotech standouts disappear under the pharma umbrella, experts wonder whether their new owners will be as productive. For example, Genentech fans worry that its scientific culture will be diminished in a Roche takeover.

Milligan said Gilead has always been a hybrid between a pharmaceutical company and a biotech firm. Like a traditional drugmaker, Gilead makes small-molecule drugs taken as pills, rather than the proteins and other biologic drugs made by many biotechnology companies such as Genentech. But Gilead was classed in the biotech camp because it was fast-growing and grounded in rapidly advancing science, he said.

'Dedication to patients'

Like Genentech, Milligan said, Gilead has a business culture worth preserving. Its success came through canny acquisitions, cost-conscious management, and "our focus, single-mindedness and dedication to patients," he said.

"We're not a flashy company," he said.

While productive biotech companies are often seen as science-driven success stories, McCamant said, their growth is often based on fundamental management skill. For example, both Gilead and Genentech have gained some of their biggest products by wily acquisitions rather than in-house inventions. Gilead has "shown a capacity to be flexible," McCamant said. "They know how to create value."

E-mail Bernadette Tansey at btansey@sfchronicle.com.

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