By Jinghan Jennifer, Sanjana Ramaswamy, William Zhang (St Andrews), Mariana Velasco, Anthony Borgese, Mustafa Bayramli, Susan Xiao & Zen Suzuki (Wharton)
Overview of the deal
Acquirer: Gilead Sciences Inc.
Target: Immunomedics Inc.
Implied Equity Value: $4.30 x 231.16M = $9.78B
Total Transaction Value: $21 Billion
Close Date: Fourth Quarter of 2020
Target Advisor: Lazard and Morgan Stanley & Co. LLC are acting as financial advisors to Gilead. Centerview Partners LLC and BofA Securities are acting as financial advisors to Immunomedics
On September 13th, 2020, Gilead Sciences, Inc. announced its acquisition of Immunomedics for $21 billion in cash. With a focus on transforming care for patients with life-threatening illnesses, the bio-pharmaceutical research-based company Gilead Sciences has previously advanced Hepatitis C medication and HIV treatment therapy. Now with its acquisition of Immunomedics, a leader in the production of antibody-drug conjugate technology for hard-to-treat cancers, Gilead Sciences can utilize its commercial, medical, regulatory and manufacturing expertise, as well as its infrastructure in Europe and Japan to advance the drug Trodelvy: an FDA-approved antibody-drug conjugate that treats adult patients with metastatic triple-negative breast cancer.
Gilead will issue a tender offer to acquire Immunomedics’ outstanding common stock at $88.00 per share, $15 billion of which will be funded by cash on hand and $6 billion by newly issued debt. The $88.00 per share acquisition price comes at a 108% premium to Immunomedics’ closing price on September 11, 2020. The transaction follows several large deals in the pharmaceutical industry in August of this year, including Johnson & Johnson’s acquisition of Momenta Pharmaceuticals for $6.5 billion and Sanofi’s $3.7 billion for Principia Biopharma.
Company Details: Gilead
Chairman & CEO: Daniel O'Day
Number of Employees: 11,800
Market Cap: $81.55 bn (as of 14/09/2020)
EV: $80.86 bn
LTM Revenue: $22, 449 mil
LTM EBITDA: $12, 939 mil LTM EV/Revenue: 377.3
LTM EV/EBITDA: 65.45
Company Details: Immunomedics Inc.
Immunomedics Inc. is a clinical-stage biopharmaceutical company developing diagnostic imaging and therapeutic products used in the treatment of cancer and infectious diseases. They have subsidiaries in the Netherlands and Germany to manage sales and clinical trials in Europe.
Founded in 1982, headquartered in Morris Plains, New Jersey Exec. Chairman: Dr. Behzad Aghazadeh
Number of Employees: 366
Market Cap: $19.73 bn (as of 9/20/2020)
EV: $19.23 bn
2019 Revenue: $295K
LTM EBITDA: loss of $321 mil LTM EV/Revenue: 65186.4x
LTM EV/EBITDA: N/A
In the short-term, Gilead anticipates a limited number of key synergies and upsides from the deal. For one, Immunomedics offers a promising portfolio of antibodies and antibody-drug conjugates (ADC). In the case of this acquisition, the drug of interest is Trodelvy, an ADC used to treat triple-negative breast cancer and bladder cancer. Recent medical experiments show promising data points that prove effectiveness in treating both forms of cancer.
In addition to the benefits of portfolio diversification, entering the oncology space allows for Gilead to combat downward pricing pressure within the United States. Cancer treatments, perceived to be more innovative and cutting edge, are generally authorized to command higher pricing premiums than other forms of pharmaceuticals.
The deal will help expand the reach of Trodelvy globally. Gilead's experience with manufacturing and regulation can accelerate the development and distribution of Trodelvy. If approved, Gilead will launch Trodelvy in Europe and Japan.
In Immunomedics second-quarter earnings report, Trodelvy had earnings of $20.1 million. Following Gilead’s public announcement of the $21 billion deal, optimism quickly spread in the markets and Immunomedics saw its shares jump as much as 106% on September 14, 2020.
Gilead anticipates the deal to be neutral to accretive to adjusted EPS around 2023. However, their primary justification for executing the deal lies within a ‘good scenario’ in the long-term (post-2023), in which Gilead believes the deal will be ‘significantly accretive’ to their non-GAAP EPS.
Gilead’s acquisition of Immunomedics is not a deal that is predicated upon short-term synergies. It will take several years before Gilead can reap the benefits of this acquisition, and success is contingent upon strong sales performance of Trodelvy. It is clear that Gilead’s management is not focused on boosting short-term revenues, nor are they preoccupied with offsetting poor-sales performance from their existing line of hepatitis C pharmaceuticals (10% aggregate fall in 2020 sales in the second quarter). Instead, they are boldly attempting to capture a foothold in the immuno-oncology space, where they hope to reinvigorate shareholder confidence and build a brand new oncology franchise.
In a good scenario, Gilead will be able to grow sales over the next couple of years. According to an article by Bloomberg, analysts expect Trodelvy to pass $750 million in sales in 2023. Nevertheless, the acquisition cost of $88 per share represents more than 100% premium – the drug will have to surpass that number for several years to justify the investment.
This acquisition will reinforce Gilead’s oncology portfolio. Trodelvy was approved by the US FDA earlier this year and will potentially seek EU approval during the first half of 2021. In the future, Gilead will continue to explore Trodelvy’s potential to treat various other types of cancer, both as a monotherapy as well as in combination with other treatments. However, some potential challenges include the emergence of competitors and increased M&A activity in the space.
Risks and Uncertainties
As we have seen, it is easy for the acquisition narrative to be conveyed as a surefire success story. Gilead has fulfilled its investors’ desires of putting its large cash stock to use, and its diversification beyond antivirals and into oncology seems like an effective way to grow company revenues. However, Biomedtracker’s breakdown of the total transaction value of biopharma acquisitions in 2019 shows that less than 10% of biopharma deals exceeded $10bn in transaction value. Therefore, the key risks and uncertainties are centered around whether or not the $21 billion price-tag and massive premium for the Immunomedics acquisition are justified.
For one, analysts have questioned the profitability that Immunomedics’ Trodelvy purportedly will deliver to Gilead. Although recently proven to be effective for treating triple-negative breast cancer (TNBC) and bladder cancer, the sales generated from these two usages may not be enough to justify the $21 billion price tag. Trodelvy sales from TNBC and bladder cancer usage are currently projected to stand at $1.5 billion. Assuming a solid (P/S) revenue multiple of 5x, Gilead would require Trodelvy sales to rise to $4 billion to break even on their deal. This $2.5 billion increase would need to be made up via newfound usage streams for the drug - whether through Trodelvy’s tandem usage with other drugs, or capitalizing on a rise in revenues from other existing drugs within Immunomedics’ portfolio. In simpler terms, Gilead’s acquisition of Immunomedics appears to be a bet on the effectiveness of Trodelvy, with risks and uncertainties arising from the versatility of the drug for treating other forms of cancer.