Gilead and Kite: "A Game-Changer"

09/13/2017 2:54 am EST


David Toung

Senior Analyst: Medical Devices & Healthcare Services, Argus Research Corporation

We are raising our rating on Gilead Sciences (GILD) to buy from hold and setting a price target of $100. In our view, the company’s plan to acquire Kite Pharma (KITE) is a game-changer, explains David Toung, editor of Argus Research.

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After accumulating substantial cash without pursuing acquisitions, Gilead is making a bold step through its purchase of Kite Pharma, which focuses on reprogramming patients’ own cells to attack cancer.

The recent acquisition announcement changes our view of Gilead and its long-term growth prospects, and underscores the company’s ability to expand outside its core area of antiviral drugs.


With Kite, Gilead will gain a leading-edge cell therapy technology and a new oncology drug that appears on track for approval by late November.

In addition, it will acquire a platform for developing new oncology treatments for blood cancers and solid tumors. The Kite platform will also provide a base for collaborative or in licensing agreements, and help to fill an important gap as Gilead works to offset declining revenue from its hep C drugs.

Gilead will pay $11.9 billion in cash for Kite. The deal, which is expected to close in the 4th quarter of 2017, will be funded through a combination of cash, bank debt and senior unsecured notes.

Kite’s lead product candidate, called axicabtagene ciloleucel (axi-cel) is under FDA priority review with a decision date of November 29th; European approval is expected in 2018.

Axi-cell could be the first approved cell therapy drug for refractory aggressive non-Hodgkin’s lymphoma. Axi-cel works by genetically reengineering a patient’s T-cells (a type of white blood cell that is a key part of the immune system) to recognize and kill cancer.

The reengineered T-cells are then infused back into the patient. The process is very expensive because treatment is essentially customized for each patient. In clinical trials, axi-cel has shown much higher response rates and longer patient survival periods than standard-of-care chemotherapy.

Kite also has other drugs in its pipeline based on similar technology, including treatments for multiple myeloma, mantle cell lymphoma, and solid tumors.

We do not expect the Kite deal to have an impact on earnings in 2017 or 2018, and are reaffirming our current EPS estimates of $8.60 for 2017 and $7.50 for 2018.

Although Kite may add modestly to revenue in 2018, it will also have significant R&D costs. GILD trades at 10.8-times our 2018 EPS estimate, below the mean of 14.3 for our coverage universe of peer pharmaceutical stocks.

We see this as an attractive valuation given Gilead’s strong cash flow from its hep C and HIV products and the upside potential of the Kite oncology platform.

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