Gilead makes breakout M&A move; buys CAR-T wunderkind Kite Pharma for $12 billion.

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The News:

Gilead Sciences Inc. (Foster City CA) announced it would buy cancer-immune therapy company Kite Pharma Inc. (Santa Monica CA) for about $11.9 billion to bolster its hugely successful but aging portfolio with an up-and-coming cancer treatment.

The acquisition, Gilead’s first major deal since 2011, is a departure from the path followed by the wider pharmaceutical industry, where–apart from Johnson & Johnson’s $30 billion takeover of the Swiss biotechnology company Actelion–the rate of acquisitions had largely slackened this year. Many drugmakers that had been busy with takeover activity in recent years have since been at work integrating their assets.

Under the terms of the buyout, Gilead will pay $180 a share in cash, a 29% premium to Kite’s closing price prior to news of the deal. With the transaction, Gilead would acquire Kite’s new cancer-fighting process, which harnesses the body’s immune system to attack malignant cells. Kite’s most promising treatment, for non-Hodgkin lymphoma, is expected to receive FDA approval within the next year.

“The acquisition of Kite establishes Gilead as a leader in cellular therapy and provides a foundation from which to drive continued innovation for people with advanced cancers,” John F. Milligan, Gilead’s CEO, said in a statement, according to The New York Times.

Large pharmaceutical companies have traditionally made a substantial impact on deal-making activity in the wider health care sector, using acquisitions of smaller drugmakers with promising treatments rather than spending billions of dollars on research and development.

Gilead, which became a pharma bigwig selling treatments for HIV and hepatitis C, has seen its revenue from sales of those drugs drop in the second quarter this year to $2.9 billion, versus $4 billion a year ago.

Steve’s Take:

Finally. After watching Gilead shares slide 8% in the 12 months that ended last week, I was wondering if the company would ever find an exceptional new addition to its maturing product portfolio. For going on six years, Gilead shareholders have appealed (and I have wondered when) for the drug giant to jump back into the M&A arena.

Since its revolutionary hep C treatments hit the market in 2013, the company has been amassing a stunning war chest. Business Insider notes that the company ended fiscal 2016 with an eye-popping $32 billion in cash on its balance sheet, up from $2.6 billion at the end of fiscal 2013.

But aside from a few smallish deals, such as poaching a top cancer specialist from Swiss drugmaker Novartis AG,Gilead’s last major transaction was the genius one six years ago for hepatitis drugmaker Pharmasset.  After that, the company seemed content to sit back and watch hep C treatments Sovaldi and Harvoni generate tens of billions in revenue. In a survey by Mizuho Securities on Monday (September 28, 2017) of 112 investors, 59% thought Gilead overpaid. Only 40% said they liked the deal.

Many of us writers as well as its shareholders are wondering: what finally motivated Gilead to take action?

According to several people familiar with the transaction, Gilead became convinced after extensive due diligence that Kite’s personalized cancer treatment–a therapy called CAR-T that harnesses the body’s immune system to attack cancer cells–would not just gain approval from the FDA, but become “transformative.” The powerful trial data it’s delivered in the past year were crucial.

While larger than the $1 billion to $5 billion purchase range that Gilead management has guided to consistently in recent years, the Kite deal finally did expand the company into one of its key focus areas: oncology. Kite has a solid pipeline of promising candidates. The most advanced of which is KTE-C19 (axicabtagene ciloleucel) which is the company’s lead CAR-T candidate and is being evaluated in a series of clinical trials (ZUMA) in the treatment of different types of lymphoma

The FDA is expected to decide on whether to approve Kite’s CAR-T therapy for Refractory Non-Hodgkin’s Lymphoma (NHL)–cancer in November, says Business Insider.

Brett Jensen for Seeking Alpha says that based on trial data, Gilead must be, “mighty confident of getting the green light from the FDA to enter into this purchase prior to this decision. Reading through management’s conference call transcript on the purchase, that is more than evident as well.”

The reaction by the market to this purchase so far is mildly positive; definitely not delirious. Gilead’s shares are trading up about 10% since the announcement. While the purchase price appears sizable, it amounts to approximately three quarters of the company’s operational cash flow.

Credit Suisse, while surprised Kite Pharma was the target, reiterated its Outperform rating Monday on Gilead and has now raised its price target from $79 to $85. It believes Gilead is done making large acquisitions, but thinks it could make “bolt-on” purchases to expand its presence in the emerging CAR-T. Berenberg Bank initiated the shares as a Buy with a $86 price target.

Bottom Line:

As I recently wrote, Novartis allayed some of Gilead investors’ anxiety that CAR-T pricing may be an issue. The Swiss giant announced that its just-approved Kymriah (tisagenlecleucel) will cost $475,000 per treatment, toward the low end of analysts’ projected range of $400,000 to $750,000.

In a conference call, the company said Kymriah will be available in 20 centers within a month and 35 soon after. It also said that it is working with the Centers for Medicare and Medicaid Services on an outcomes-based approach to reimbursement that will allow payment for only those Acute Lymphoblastic Leukemia (ALL) patients that respond to treatment by the end of one month.

If CMS agrees and implements the outcomes stratagem, the price should be substantially higher than $475,000, considering the “life value” of young patients who respond.

What do the analysts think?

According to the Financial Times, as of August 29, 2017, the consensus forecast among 24 polled analysts covering Gilead Sciences advises that the company will Outperform the market. This has been the consensus forecast since the sentiment deteriorated on October 21, 2009. The previous consensus forecast advised investors to Buy Gilead.

Recommendations 1yr ago Latest
Buy 6 3
Outperform 8 8
Hold 11 13
Underperform 0 0
Sell 0 0

Share price forecast

1-year share price change: +4.25%.

The 18 analysts offering 12-month price targets for Gilead have a median target of $82.00, with a high estimate of $90.00 and a low estimate of $61.00. The median estimate represents a 0.95% increase from the last price of $81.73 Wednesday, August 30.

Final thoughts:

As I’ve written in the past, most of us want to live longer with a good quality of life. To achieve this, scientists at Novartis, Kite and other leading drug developers have sailed into uncharted waters in understanding the cause or mechanism of action of diseases, which is not a simple achievement to say the least.

In order to accomplish this, drug development takes increasingly longer and, therefore, is becoming more and more costly. On average, according to a 2014 study published by Tuft’s Center for the Study of Drug Development, it takes 11 years (range 10–15) to develop a drug from research to approval with a cost of $2.6 billion.

This is the dilemma. Society wants personalized medicine yet who is going to pay for the cost of it? Insurance providers will not pay for CAR-T therapy because it presently is unproven by regulatory standards as well as their own company standards; the side effect profile is risky even though it can be managed, and it is very expensive. Today, most insurance companies will only pay for the standard treatments and it’s only when all other therapies fail will they consider cellular therapy.

It’s ideal if we can use our own immune system to fight cancer, and the therapy would be a one-event cure as opposed to traditional treatments including checkpoint inhibitors, where the patient takes the med for a specific period of time and hopes the cancer is eradicated.

The actual answer to who gets access to these extremely costly “wonder drugs” relies on the payer, notes Regina Au at BioMarketing Insight. That’s because an insurance company will not pay for a new therapy unless it is proven that CAR-T therapy, for example, works and is a cure, by their standards (not just the FDA’s), it is safe, and it saves the insurance company money.

Steve's Take: @GileadScience decision to acquire @KitePharma is rooted in the long term Click To Tweet

Gilead’s decision to acquire Kite is clearly rooted in the long term. That’s definitely the consensus of the analyst crowd. With les than a 1% upside forecast for its shares, yes, by all means Hold your position. But Buy the name now?

I agree with those who think a few higher-priced acquisitions are in the cards and Gilead is going to be shunned until its $12-billion investment in Kite starts to pay off, big time. And that will be down the road.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure polic