On March 3, Gilead Sciences (GILD 0.07%) announced it had reached an agreement to buy Forty Seven (FTSV) for approximately $4.9 billion in cash. The deal, approved by the boards of both companies, is expected to close in the second quarter. The question remains whether it makes sense for biotech investors to own shares of Forty Seven before the acquisition is completed.
Forty Seven, an up-and-coming immuno-oncology drug developer, provides a clinical-stage cancer drug and a pipeline of other earlier-stage therapies for Gilead. This adds to Gilead's relatively recent expansion into immuno-oncology, which began with its 2017 buyout of Kite Pharma for $11.9 billion. Kite is focused on cell therapy approaches that use the body's own immune system to fight cancers.
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Does strategic fit matter?
Simply put, no. The science and the way Forty Seven will fit into Gilead's strategy are basically irrelevant at this point. The more critical factors in deciding whether to invest are where we are in the cycle of the transaction (somewhere between the initial announcement and an unknown closing date this quarter), and the current stock price.
Forty Seven stockholders will receive $95.50 in cash for each share. Therefore, an investor only needs to know the current price to see the potential amount that could be earned. Forty Seven's stock trades at $95.46 as of Friday afternoon. This translates into a meager potential gain of $0.04 per share. A return of 0.04% just does not seem compelling.
What's an investor to do?
Monitor the stock. On March 18 and 19, Forty Seven's stock dipped below $90 per share. Volatility in the markets, coupled with the possibility of one or more investment funds needing to sell its positions indiscriminately, likely drove this blip. Savvy investors jumped on the opportunity to grab discounted shares, which could later produce returns in the range of 6%. Now that's a more attractive proposition in exchange for owning a safe-haven stock for less than 90 days.
Confidence in closing
The biggest risks to the transaction involve Gilead backing out, or delays emerging for some reason. Gilead has recently become one of the most newsworthy drug developers thanks to the potential for its repurposed Ebola drug, Remdesivir, to treat COVID-19. With trials started in the U.S. and the U.K., will Gilead get distracted from the acquisition?
Probably not. Here's why I have confidence in the deal closing: First, Gilead has ample cash -- $28.5 billion as of Dec. 31, to be exact -- to move ahead. The transaction is not subject to financing conditions.
Second, Gilead's recently appointed CFO, Andrew Dickinson, is a seasoned dealmaker. He formerly held the role of executive vice president of corporate development and strategy. In the press release announcing his move to CFO, Gilead touted him as the "architect of the company's 2017 acquisition of Kite Pharma, Inc. and of the 10-year, global research collaboration with Galapagos [a developer of small-molecule medicines]." As CFO, Dickinson is responsible for corporate development and strategy, and I have a high degree of confidence that he will complete the transaction.
Third, Forty Seven's management will reap a fortune with the acquisition and are thus incentivized to do everything possible to achieve the goal. CEO Mark McCamish owns 2.6% of the company, with stock and options totaling 850,170 shares. The option prices range from $4.88 to $8.76. He could see a windfall close to $100 million. The CFO and chief medical officer could see eight-digit gains in their equity positions. That's in addition to change-of-control payments (which incentivize employees to stay) for the company's officers.
The outcome
Watch the stock for any dips in price over the coming days and weeks. The acquisition, which I believe has a strong likelihood of closing, is slated to be completed this quarter. That means time is short. Biotech investors need to be rewarded more than a fraction of a percent to make it worthwhile to take on the outside chance that the deal does not close. Keep Forty Seven on the radar, and strongly consider buying on those dips.
