Biotech investing is generally cyclic in nature. The interplay between innovation and patent expirations makes many of these companies prone to enormous swings in revenue every couple of years. To smooth out the edges, biotechs must continually restock the cupboard through a mix of organic pipeline development and business development activities, such as external licensing deals or acquisitions.
Unfortunately, the vast majority of clinical-stage assets fail to evolve into commercial-stage products. So, despite management's best efforts to offset the eventual decline of top-selling medicines through aggressive clinical or business development activities, prolonged lean periods are still commonplace throughout the biotech industry.
American biotech giant Gilead Sciences (NASDAQ: GILD) encapsulates this narrative almost to a T. During the company's formative years, it built a market-leading HIV franchise, which provided the capital necessary to take on larger acquisitions. In 2011, for instance, the biotech purchased Pharmasset for approximately $11 billion. This seminal transaction would form the backbone of Gilead's game-changing hepatitis C franchise. At its peak, Gilead's hep-C drug sales hit a whopping $19.1 billion in 2015.