This past Monday, September 14, Turnaround Letter recommended Gilead Sciences (GILD) announced that it will acquire Immunomedics (IMMU) in a $21 billion all-cash deal. The $88/share price is just over a 100% premium to Immunomedics’ pre-announcement price. If analysts’ estimates that its Trodelvy treatment revenue potential of $3 billion prove correct, the deal values the company at about 7x those revenues.
Trodelvy is a high-potential treatment for a rare form of cancer, which may also be applicable to a broader range of other types of cancer. Trodelvy was granted an accelerated approval by the U.S. Food and Drug Administration (FDA), and will file for full approval in the U.S. and Europe over the next nine months.
We view this deal as a game-changer for Gilead, but not in the right direction. Gilead is paying a very high price for a company with only perhaps $120 million in revenues and that will likely produce a $(200) million operating loss this year. The Immunomedics operations have produced large losses for years.
To finance the deal, Gilead will draw down $15 billion of its $21 billion cash hoard, and borrow an additional $6 billion. Gilead’s balance sheet will move from a $5 billion net debt position to a $25 billion net debt position (allowing for the $1 billion in net cash on Immunomedic’s balance sheet).
The Trodelvy franchise may become a huge new profit stream for Gilead down the road. But, from our perspective, it almost has to be very successful, given the large risks that Gilead is underwriting by making this acquisition. Further, Gilead intends to make further acquisitions - thus levering the company even more based on the future success of other treatments.
The Gilead story changes from a cash-laden and cash-flow rich, undervalued company that could grind its way to better growth through organic and small-ish acquisitions, that also pays a rich 4% dividend yield, to a cash-poor and leveraged company pinning its hopes on early-stage and early-commercial products. While the company remains committed to the dividend, we wonder if even that would be sacrified to fund future deals.
Given this change, we are moving Gilead Sciences to a Sell, with an approximately 6% total return from our initial recommendation price.
We are moving Gilead Sciences (GILD) to a Sell.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.