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Gilead pays 108% premium for commercial cancer foothold with $21B deal

Gilead Sciences Inc.'s planned $21 billion acquisition of cancer-drug maker Immunomedics Inc. — the largest healthcare deal announced in 2020 so far — comes with a 108% premium that underscores the perceived value of a medicine already approved by regulators.

"The two immediate things that jump out here are the perhaps larger than expected dollar price tag and the percent premium," Mizuho Senior Biotech Analyst Salim Syed said in a Sept. 14 note. "However, the acquisition also gives Gilead the chance to increase its top-line in a meaningful way, and this is likely what the stock eventually needs to work."

Some investors may dismiss the news due to the price, but "the numbers to make this deal work seem feasible," Syed said. According to S&P Global Market Intelligence data, the deal has a reported value of $21 billion with a total transaction value of $19.9 billion to account for assumed liabilities.

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Immunomedics in April received accelerated approval from the U.S. Food and Drug Administration for triple-negative breast cancer treatment Trodelvy. Analysts expect further late-stage data from the company at the European Society for Medical Oncology, or ESMO, Virtual Congress taking place Sept. 19-21.

The premium Gilead is offering for Immunomedics is designed to get ahead of the competition based on that anticipated data for Trodelvy, Cantor Fitzgerald analyst Alethia Young said in a Sept. 14 note.

"Gilead has been working on the Immunomedics deal for about six months," Young said. "Management indicated that the premium will seem less robust after seeing data at ESMO, and they wanted to get in front of that readout and likely other competitive bidders."

Young noted that Gilead executives looked at Trodelvy as a commercial-stage asset, which brought about the higher premium than a treatment that has not yet been approved by regulators.

In the first two months of sales, Evercore analyst Umer Raffat said Trodelvy pulled in $20 million and called that a "solid start." Trodelvy also has the FDA's fast-track designation to treat urothelial cancer.

"Gilead is clearly excited about the strength of Immunomedics' clinical data and a possible multi-billion-dollar opportunity across indications," Raffat said on a Sept. 14 call. But Raffat added that Immunomedics traded at less than $20 per share for most of 2019 while the $21 billion price tag valued each share at $88 — in response to the Trodelvy approval, shares have been valued at about $50, still under Gilead's offer.

Shares of Immunomedics shot up just over 100% to $84.62 per share as of 11:57 a.m. ET Sept. 14. Gilead's stock was up 2.79% to $66.71 per share.

"This is a question that will continue to come up over and over from a Gilead perspective, especially from a capital allocation discipline perspective," Raffat said.

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Young said at the time that Gilead was expected to continue to add late-stage assets in hematology and oncology, which carried through into the Immunomedics acquisition. The Immunomedics deal marks Gilead's increasing focus on cancer, one of the core business development areas for the Menlo Park, Calif.-based company, as pointed out in March by CEO Daniel O'Day, a veteran of oncology drug giant Roche Holding AG. At the time, Gilead had just announced the acquisition of blood-cancer-drug maker Forty Seven.

"We believe [Gilead] views this deal as an anchor to all the oncology deals that they have done since the new management joined," Young said Sept. 14. "Our thesis is based on Gilead adding near-term revenues and diversifying its business, so we think that this deal is a big step toward establishing a growth business in hematology/oncology."

The takeover bid is the latest multi-billion-dollar deal to be announced in the healthcare industry following a dry spell in the second quarter of 2020.

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