Bulls Triumph as Kite Pharma Punishes Skeptics With Takeover
Epic Win for Bulls as Kite Pharma Punishes Skeptics With Buyout
(Bloomberg) -- Bears who went into the weekend incredulous that shares of Kite Pharma Inc. had soared 200 percent in 2017 awoke Monday to learn the gain is now 300 percent.
One of the medical industry’s biggest battlefield stocks is resolving resoundingly in favor of the bulls with news that Kite agreed to be bought by Gilead Sciences Inc. for $11.9 billion, or $180 a share. The price represents a 29 percent premium over the last closing price for a stock whose precipitous climb had drawn caution from analysts long before Monday’s news.
Among biotechs, a group not exactly known for restrained valuations, Kite was already trading higher than any peer relative to analyst price forecasts -- $27 higher -- as of Friday. Its new blood cancer therapy, axi-cel, faces a litany of questions about competition, the complexity of its manufacturing process and how it will be paid for by insurers.
Real as those concerns may have been, they are no longer a problem for shareholders. Kite jumped to $179.69, a price that represents the addition of about $8 billion in market value for the erstwhile small cap since the start of the year. At its price now, Kite is bigger than 89 constituents of the S&P 500.
"A lot of people were too cautious about how big it was going to be out of the gate," said Corey Davis, an analyst at H.C. Wainwright & Co. who had the the highest price target on Kite shares, in a phone interview. "It’s a completely fair price. They probably didn’t haggle a lot and Gilead offered them what was appropriate.”
Axi-cel is awaiting a U.S. regulatory decision in non-Hodgkin lymphoma by Nov. 29. The issue has never been approval -- that’s expected, and the market could be billions. Less clear was whether Kite could capitalize on the treatment fast enough to justify a stock that traded for 39 times estimated 2018 sales.
Bearish bets were substantial. As of mid-August, short interest amounted to about eight days worth of Kite’s average trading volume, a days-to-cover ratio in the upper third of 2,500 Nasdaq-traded companies, according to exchange data compiled by Bloomberg.
Axi-cel is part of a new class of cancer treatments known as chimeric antigen receptor T-cell (CAR-T) therapies, which work by extracting immune cells, re-engineering them to attack a tumor, and then infusing them back into the body. Estimating the cost of care is challenging because patients can only be treated in a limited number of medical centers and must be monitored for potentially deadly side effects.
"The mechanics of selling a process versus a pill -- that’s inherently more complicated," said David Nierengarten, an analyst at Wedbush Securities Inc., in a phone interview before the Gilead deal was announced. "How is it going to be reimbursed? Will it be a flat fee, will it encompass supportive care? It’s never been adequately explained or worked out."
Nierengarten, who gave Kite its first sell rating in May, said competition may emerge quickly. Swiss giant Novartis AG and smaller peers such as Juno Therapeutics Inc. are also developing CAR-Ts. Novartis is on the brink of approval for its therapy in pediatric leukemia and will seek approval by year end for adults with an aggressive type of non-Hodgkin lymphoma. Juno is chasing a regulatory submission in the same indication in 2018.
Reni Benjamin, an analyst at Raymond James & Associates Inc., downgraded Kite to hold on May 8, saying the commercial prospects for axi-cel in non-Hodgkin lymphoma had been largely priced into the stock. When Maxim Group LLC analyst Jason McCarthy cut his recommendation to hold last month, he warned that Kite’s valuation was "already in the mesosphere."
But neither investors nor, apparently, Gilead have been deterred. Before today Kite shares had risen almost 30 percent in August through Friday, compared to a 3 percent decline in the Nasdaq Biotechnology Index and 1 percent drop in the S&P 500.
John Schroer, a portfolio manager at Allianz Global Investors, was betting on more upside for Kite as of last week.
“We still like the shares heading into the end of the year,” said Schroer, whose firm holds about 118,000 shares, by phone. “The revenue opportunity is very attractive,” given the multi-billion opportunity for CAR-T therapies and Kite’s likely first-mover advantage in non-Hodgkin lymphoma, he said.
Schroer said he was “very comfortable” that Kite had the ability to meet its goals for the axi-cel launch and then expand use of the treatment to less sick patients or those with other diseases.
And now he doesn’t have to worry about the soaring stock price, which has added another 29 percent in the wake of the Gilead news.
To contact the reporter on this story: Tatiana Darie in New York at tdarie1@bloomberg.net.
To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Catherine Larkin, Jeremy Herron