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Gilead’s $20 billion gamble


A big premium for cancer drug company Immunomedics could pay off, but shareholders of slumping Gilead might be in no rush to act that way

Photo: ReutersPremium
Photo: Reuters

A big splash from Gilead Sciences will spark a celebration among biotech investors. It is far from clear whether Gilead shareholders themselves will be feeling festive.

Gilead Sciences said on Sunday that it has agreed to buy Immunomedics for $21 billion. The price of $88 a share in cash is 108% more than Friday’s closing market value for the biotechnology firm. The significant premium paid suggests that Immunomedics might have had multiple suitors.

The deal, should it reach the finish line, certainly is a slam dunk for Immunomedics shareholders. Those who have owned the shares since 2016 will have made roughly 40 times their initial investment. News of the deal will likely spur a rally in small and midsize biotech shares when trading opens on Monday.

The deal is far riskier for Gilead, which is paying top dollar for promising drugs with uncertain commercial potential. Immunomedics’s breast cancer drug Trodelvy reached the market in April and generated $20 million in its first two months. That is a promising start, but the hefty deal price cranks up expectations significantly.

It is clear why Gilead is willing to take a chance. Its share price is down by 40% over the past five years despite relentless share buybacks. Its hepatitis C franchise, once the envy of the industry, is in decline, and its portfolio of HIV drugs is only growing modestly. Total revenue fell about 10% in the second quarter from a year ago.

Recent Gilead purchases, such as the $11 billion it paid for Kite Pharma in 2017, have so far failed to diversify the company’s revenue sources. And investor enthusiasm for the Covid-19 treatment remdesivir has all but vanished after a brief period of euphoria. Gilead’s shares trade at about nine times adjusted earnings and yield more than 4%. While attractive on paper, biotech investors almost always prefer growth opportunities over current income. Meanwhile, Gilead certainly can afford to splash out: It had more than $21 billion in cash on its balance sheet at the end of June.

There is a clear, albeit difficult, path for the deal to be successful. Trodelvy could become a blockbuster treatment over time, and backing the drug with the marketing muscle of a large drugmaker should boost its long-run sales prospects. But promising signs that Trodelvy can be effective in highly lucrative categories like lung cancer will need to translate into real sales. Cancer is a highly competitive therapeutic category, and the industry is littered with also-ran products that were once thought to be future cash cows.

The bull case will take time to materialize in the best case scenario. Meanwhile, there is no rush for investors to bet that Gilead’s shiny new asset has already turned its fortunes around.

Write to Charley Grant at charles.grant@wsj.com

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