Gilead To Fly High With Kite Pharma Acquisition For $11.9B

Biotech giant Gilead Sciences, Inc. (NASDAQ:GILD) announced that it will buy Kite Pharma, Inc. (NASDAQ:KITE) to foray into the emerging field of cell therapy.

Terms of the Agreement

As per the agreement, Gilead will pay $180.00 per share in cash at a transaction valued at approximately $11.9 billion. The price represents a 28% premium over the closing share price of Kite as of Aug 25, 2017.

The transaction was approved by shareholders of both companies and is expected to close by the fourth quarter of 2017. The acquisition is expected to be neutral to the bottom line by the third year and accretive thereafter.

Strategic Benefit

We note that Kite is a pioneer in cell therapy having developed engineered cell therapies that express either a chimeric antigen receptor (CAR) or an engineered T cell receptor (TCR), depending on the type of cancer. The most advanced therapy candidate in Kite’s pipeline is axicabtagene ciloleucel (axi-cel) which is being developed for the treatment of refractory aggressive non-Hodgkin lymphoma, which includes diffuse large B-cell lymphoma (DLBCL), transformed follicular lymphoma (TFL) and primary mediastinal B-cell lymphoma (PMBCL). The Biologics License Application (BLA) for the candidate was submitted in Mar 2017.

This CAR T therapy is currently under priority review in the United States and the FDA is expected to give a decision on Nov 29, 2017. The candidate is also under review in the EU with a tentative approval expected in 2018. While Kite is prepared for a commercial launch in the United States as manufacturing preparation are complete, the company is currently building infrastructure in Europe. We remind investors that another pipeline candidate in clinical trials in both hematologic cancers and solid tumors is KITE-585, a CAR T therapy candidate that targets BCMA expressed in multiple myeloma.

Our Take

The acquisition will diversify Gilead’s portfolio and position the company in a dominant position in cellular therapy space.

We note that investors were expecting Gilead to announce an acquisition in the near term given the decline in the once lucrative hepatitis C (HCV) market due to competitive pressure. Gilead is known for its presence in the HCV market because of its blockbuster HCV drugs, Sovaldi and Harvoni. However, the HCV franchise is under pressure because of competition and pricing issues.

We note that Harvoni, Sovaldi and Epclusa face competition from AbbVie’s (NYSE:ABBV) Viekira Pak and Viekira XR, among others. Moreover, Gilead was sitting on $21.1 billion of cash and short-term marketable securities. Hence, an acquisition announcement was lurking.

CAR T is manufactured for each individual patient using their own cells thereby making it different from typical small molecule or biologic therapies. During the treatment process, T cells are drawn from a patient's blood. These cells are then reprogrammed in the manufacturing facility to create T cells that are genetically coded to express a chimeric antigen receptor to recognize and fight cancer cells and other Bcells expressing a specific antigen.

While the deal might look expensive given the premium Gilead paid for Kite, the CAR T space is expected to be revolutionary in treatments for cancer. The CAR T space represents immense potential at this juncture and a potential approval of axi-cell will be a significant boost for Gilead’s prospects which has dampened of late.

Gilead’s stock has declined 4.3% in the year so far, against the industry’s 9.3%.

Apart from Kite, Novartis AG (NYSE:NVS) is another company that is focussed on CAR T treatments. In July, the FDA Oncologic Drugs Advisory Committee (ODAC) unanimously recommended the approval of immunocellular therapy candidate CTL019 (tisagenlecleucel) and a decision is expected shortly (September-October).

CTL019 could become the first CAR T cell therapy if approved. CTL019, an investigational CAR-T therapy, is being evaluated for the treatment of relapsed or refractory (r/r) pediatric and young adult patients with B-cell acute lymphoblastic leukemia (ALL). A potential approval will also open new frontiers in the treatment of cancer by advancing immunocellular therapy for children and young adults with r/r B-cell ALL.

On the other hand, shares of Kite were up 28% on the news as the company will immensely benefit from Gilead’s dominant position in the biotech space upon an anticipated approval for its lead candidate. In fact, this year so far, Kite Pharma’s stock is up 297.1%, which compares favorably with a 9.3% increase registered by the industry.

Zacks Rank

Gilead currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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