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Gilead Sciences (NASDAQ: GILD) announced on Monday that it was acquiring Kite Pharma (NASDAQ: KITE) for $11.9 billion. Investors had long waited for the big biotech to make a deal. One analyst even wrote a letter to the company earlier this year urging it to move forward quickly with an acquisition.
Kite's shareholders have a lot to like about the deal, since the price tag represents a premium of nearly 30% to the small biotech's previous close. But what about Gilead's shareholders? Here are three reasons for investors to cheer Gilead's acquisition of Kite.
1. Huge boost to Gilead's oncology franchise
Gilead Sciences' management has said all along that they really wanted to add to the company's oncology assets. However, Gilead CEO John Milligan recently told an analyst that the biotech was having a hard time finding the right candidate and "might end up doing nothing in oncology." While there were some valid reasons Milligan's comments could have been accurate, I speculated at the time that his statement could be a head fake. It was.
The reality is that Gilead needed an oncology acquisition if it wanted to be relevant in the lucrative space. Its only current cancer drug, Zydelig, has been a huge disappointment. Buying Kite makes Gilead immediately relevant in oncology.
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Kite is a leader in cell therapy, which uses a patient's own immune cells to fight cancer. The biotech's axicabtagene ciloleucel (axi-cel) awaits U.S. regulatory approval by Nov. 29, 2017, under the FDA's priority review process, with European approval anticipated in 2018. If approved, axi-cel would be the first treatment for refractory aggressive non-Hodgkin lymphoma (NHL). It would also be the first chimeric antigen receptor T cell (CAR T) therapy approved in Europe and only the second CAR T therapy approved in the U.S. (assuming Novartis (NYSE: NVS) wins approval for its CAR T therapy CTL019 as expected).
Axi-cel is also being evaluated in a couple of other phase 2/3 clinical studies as well as an early stage study for other NHL indications. In addition, Kite claims three other CAR T clinical programs plus two pre-clinical programs, four early stage T cell receptor (TCR) candidates, and four pre-clinical TCR programs.
2. Great timing
In some respects, Gilead timed the acquisition almost perfectly. Novartis recently received a unanimous recommendation for approval from an FDA advisory panel for its CAR T therapy in treating relapsed or refractory (r/r) B-cell acute lymphoblastic leukemia (ALL). That vote was encouraging for Kite's chances for approval of axi-cel. Buying Kite before its lead candidate is approved but with the risk of rejection possibly lowered was smart.
Also, there are other big biopharmaceutical companies that appear to be holding off on making any acquisitions while they wait and see what happens with potential corporate tax reform in the U.S. Gilead's decision to buy Kite while there is something of a lull in mergers and acquisitions activity reduced the chances of a bidding war that could have driven the price tag much higher.
In my view, Kite would have been one of the top takeover candidates in 2018 regardless of what happens with corporate tax reform. Gilead's move now takes an attractive smaller biotech off the market.
3. There's still money in the bank
I don't second-guess Gilead's $11.9 billion offer for Kite at all. The bottom line is that Gilead paid a premium for one of the best up-and-coming biotechs around -- and that premium is in line with what others have done in the past. If Kite's CAR T and TCR candidates come even close to delivering on their potential, Gilead's acquisition will prove to be money well spent.
More important, though, is that the deal leaves Gilead with plenty of money in the bank for other transactions. At the end of June, Gilead's cash stockpile totaled $36.6 billion, including cash, cash equivalents and marketable securities. Taking the Kite price tag out of that amount leaves the big biotech with $24.7 billion. And Gilead will have more than that going into 2018 -- the company's cash flow remains very strong despite declining hepatitis C sales.
Don't be surprised if Kite is just the beginning of deal-making for Gilead Sciences.
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