What happened
Gilead Sciences (GILD 0.38%) is reportedly in buyout, or possible licensing, talks with the clinical-stage cancer company Forty Seven (FTSV +0.00%), according to Bloomberg. Forty Seven's lead drug candidate, magrolimab, targets a fairly unique therapeutic pathway named CD47. By inhibiting this cell-signaling pathway, magrolimab allows the immune system to better recognize tumor cells, while triggering a potent therapeutic response (phagocytosis by macrophages).
In response to this buyout rumor, Forty Seven's shares jumped by 32.7% in pre-market action Friday morning. Rival drugmaker Trillium Therapeutics Inc. (TRIL +0.00%) is also getting a nice boost on the heels of this news. Specifically, Trillium's stock is up by a hefty 43% in pre-market trading today.
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Trillium is developing two CD47-based therapies, TTI-621 and TTI-622, for a wide range of blood cancers and disorders. However, Forty Seven's magrolimab is significantly further along in the development process. As a result, the market has awarded Forty Seven a demonstrably higher market cap than rival Trillium (about 10 times higher, to be exact). Investors seem intrigued by this massive valuation gap, given their overwhelmingly positive response to Trillium's stock this morning.
So what
While no details have been released yet, Gilead can certainly afford to pay top dollar for Forty Seven. The biotech exited the most recent quarter with close to $26 billion in cash and cash equivalents, so this could be a sizable deal. Keeping with this theme, Forty Seven reportedly had multiple buyout offers on the table, a fact that should give the drugmaker an enormous amount of leverage during these ongoing talks.
On the Trillium side of the equation, investors seem to think that this biotech's tiny market cap might attract a suitor as well. Unfortunately, the reality of the situation is that suitors tend to pursue drugs with a clear first-mover advantage, like magrolimab. So there's no overarching reason to believe that Gilead's interest in Forty Seven will bleed through to Trillium. These two companies sport markedly different value propositions for potential suitors, after all.
Now what
Within the next few days, the magnitude of Gilead's interest in Forty Seven should become clear. The long and short of it is that Gilead needs to beef up its oncology pipeline. The potential tie-up with Forty Seven would go a long way toward achieving this key operational goal. What's more, Gilead should have plenty of ammunition left over following any deal with Forty Seven. Gilead, in fact, seems destined to pursue a so-called "bolt-on" acquisition in addition to these pipeline-building efforts.
Should investors buy Forty Seven or Trillium's stocks on this buyout rumor? Forty Seven appears to be the real deal. If Gilead doesn't pull the trigger, someone else likely will. So investors may indeed want to pounce on this mid-cap biotech stock soon.
Trillium's story, on the other hand, is a bit more complicated. The company could turn out to be grossly undervalued if its pipeline hits pay dirt. But it's also a long way from any needle-moving clinical milestones. As such, investors might want to take a wait-and-see approach with this pre-revenue biotech stock for the moment.
