Many investors have long hoped that Gilead Sciences (GILD -0.19%) would use its massive cash stockpile to fund a major acquisition. That hope is now being fulfilled.
Gilead announced on Sunday that it plans to acquire Immunomedics (IMMU) for around $21 billion. At nearly twice the size of its $11.9 billion purchase of Kite Pharma in 2017, it's by far the biggest deal in the company's history. Should you buy the biotech stock now that it's acquiring Immunomedics?
What changes for Gilead
Make no mistake: The Immunomedics deal changes the dynamics for Gilead considerably. Unlike the company's previous acquisitions, this one gives Gilead a product that's already on the market.
Immunomedics won accelerated approval from the Food and Drug Administration for Trodelvy in April 2020 as a third-line treatment for metastatic triple-negative breast cancer (TNBC). Trodelvy is a trophoblast cell-surface antigen 2 (Trop-2) directed antibody-drug conjugate (ADC) -- an especially promising drug class that delivers chemotherapies directly to cancerous tumors with fewer side effects than normal treatments.
Analysts think Trodelvy is likely to become a blockbuster commercial success, with peak annual sales estimates as high as $3 billion. The drug also has potential to treat earlier stages of TNBC and other solid tumors.
The acquisition of Immunomedics will expand Gilead's presence in the oncology market. The company currently has two approved cancer cell therapies, Yescarta and Tecartus, both of which target blood cancers rather than solid tumors. It should also eventually boost the biotech's financial performance. Gilead anticipates a significant positive impact to earnings after 2023.
Gilead's cash position will take a big hit, though: The company plans to use around $15 billion in cash to fund the purchase of Immunomedics. It will also add close to $6 billion in new debt.
What doesn't change
The good news for investors is that Gilead's Immunomedics acquisition shouldn't impact its dividend payout. Gilead remains committed "to maintain[ing] and grow[ing] its dividend over time."
But the big buyout doesn't change some of the challenges Gilead faces. Arguably the greatest issue for the company is that the prospects for filgotinib are up in the air. The FDA issued a complete response letter (CRL) responding to Gilead's filing for approval of the drug in treating rheumatoid arthritis. Gilead had hoped filgotinib would win approval and become a megablockbuster. That might still happen, but it's also possible that the drug will be a bust.
Meanwhile, sales for Gilead's hepatitis C virus (HCV) franchise continue to fall despite the company's projection that HCV sales would stabilize. Sales for pulmonary arterial hypertension drug Letairis and angina drug Ranexa are sinking after the drugs lost patent exclusivity in 2019. While Biktarvy is a monster success, it's cannibalizing market share from some of Gilead's older HIV drugs.
On the other hand, Gilead's COVID-19 therapy Veklury (remdesivir) should be a big winner for the company -- especially if an inhaled version of the drug proves successful in clinical testing. Gilead's pipeline also has a lot of potential, particularly long-acting HIV candidate lenacapavir.
Buy on the buyout?
The immediate reaction to Gilead's acquisition of Immunomedics was positive, with shares of the biotech rising on Monday. Is the big biotech stock a smart pick to buy on this buyout? Count me as a skeptic, at least for now.
Gilead's history of acquisitions has been spotty at best, with only its 2009 purchase of CV Therapeutics and its 2012 buyout of Pharmasset clearly paying off. Some investors are no doubt wondering if Gilead is overpaying for Immunomedics, with the $21 billion price tag more than double the smaller biotech's market cap at the end of last week.
It's going to take at least a few years before the Immunomedics acquisition begins to positively impact Gilead's bottom line. There could be other developments during that period that will help determine whether Gilead has what it takes to deliver market-beating returns. Regulatory approval for filgotinib is at the top of the list. In the meantime, I plan to remain on the sidelines, hoping that Gilead's latest big deal proves to be a wise move for the company.