Gilead-Kite: A New Transformative Deal For Biotech

8.30.17 | Forbes

By Steve Brozak

To read the entire article on Forbes, please click here.

After years of anticipation, the world learned on Monday that Gilead Sciences Inc. will acquire Kite Pharma Inc. for almost $12 billion in cash. It’s an answer to the loud chorus of investors, analysts and pundits demanding that Gilead do something with its cash hoard and add more to its pipeline.

From a capital markets perspective, the announcement couldn’t have been better timed to help activate M&A activity and continue to spur a biotech bull market.

A healthy M&A market helps to keep the engines of the capital markets firing. Takeouts are the ultimate exit opportunities for biotech investors, and an exit like Kite’s will only invite further investment into the sector.

Up till now, the M&A market of 2017 has been notably weak, as highlighted by PWC in this report. Deal volume is noticeably lower, which is unusual during a bull market. Access to cash and high stock values in a bull market usually drive biopharmaceutical M&A.

There has been some speculation that big pharma and biotech have been sitting on the sidelines as they await clarity over tax reform. Specifically, there’s some anticipation that rules may change over repatriation of overseas cash, which could drive unprecedented M&A and growth in the U.S. However, it’s become apparent that gridlock in DC will continue in the fall as even greater uncertainty descends over the legislative agenda in the face of so many national priorities. It is more likely that the failed merger between Pfizer Inc. and Allergan PLC in 2016 has more to do with the stalled M&A markets than tax policy.

The Pfizer-Allergan deal would have entered the pantheon of transformative mega-mergers, like Pfizer’s acquisition of Wyeth for $68 billion, Roche’s acquisition of Genentech for $46 billion and the combination of Merck and Schering-Plough for $47 billion. The Pfizer-Allergan transaction would have been the largest deal in the history of pharma and biotech at $160 billion. Yet the government targeted the transaction because Pfizer would have pulled off an inversion through its merger with Allergan, and the parties abandoned the deal when a last-minute rule change by the Obama administration would have prevented any of the tax benefits.

While Johnson & Johnson did acquire Actelion Ltd. for a hefty $30 billion this year, the deal failed to become transcendent in the way Gilead’s acquisition of Kite might. And consider this: Without the Johnson & Johnson-Actelion deal, the 2017 M&A season would be anemic.

Still, the lack of varied M&A in the sector has led to other forms of rather unconventional behavior. Last week, Bloomberg reported that Paratek Pharmaceuticals Inc. might be for sale. This is a company with a very clear near-term catalyst, omadacycline, an oral antibiotic for bacterial skin infections, that in July released promising Phase III data meeting all endpoints required by the FDA and EMA for review. Granted the market for antibiotic companies has been rocked by a string of regulatory setbacks over the last year, Paratek’s shares soared more than 30% solely upon publication of the news.

Gilead’s move to acquire Kite has changed the M&A equation for the year in a way Johnson & Johnson’s acquisition of Actelion could not. Gilead has made a big bet on new technology in Kite’s immunotherapy platforms and has reduced the number of credible large players in the space.

With a reputation for intense diligence and dynamism in its business development efforts, Gilead’s management team will only bolster the immunotherapy field as it prepares to face off with Novartis, its immediate competitor, and enters squarely in the province of Merck and Bristol Myers Squibb, two of the leaders in immuno-oncology.

Gilead’s acquisition of Kite has not only spurred on the current biotech bull market, but it should also beget other M&A activity as immunotherapy enters hyper-drive, animating companies like Celgene, Johnson & Johnson and others to take notice and make more pronounced entries into the field.

While the mega-mergers of yesteryear are long from returning, for now Gilead has reinvented the transformative transaction for the sector.