Cancer Drug Maker Arcus Surges as Street Touts $10 Billion Opportunity With Gilead

(Bloomberg) -- Arcus Biosciences Inc., which is working in a category of new cancer medicines estimated to be worth as much $10 billion, nearly doubled after Bloomberg reported that Gilead Sciences Inc. is in talks to buy a stake in the drug developer.

An experimental therapy from Arcus known as AB154 is the likely target of Gilead’s interest, Citigroup Inc. analysts led by Mohit Bansal said. The immune checkpoint inhibitor belongs to a category of medicines known as Tigit that target T-cell immunoreceptors; the class could be a $10 billion annual sales opportunity at peak, according to Citi.

Tigit medicines are viewed as “the sequel to the PD-1 blockbuster,” Citi’s analysts said in a research note, alluding to Merck & Co. and Bristol-Myers Squibb Co.’s cancer drugs. Merck’s Keytruda generated over $11 billion in revenue last year.

Gilead “still has to prove its strength in the oncology space, investors may like this aggressive approach, especially from a company that has long been criticized for lack of deals,” the analysts said. In March, Gilead agreed to acquire cancer drug developer Forty Seven in a $4.9 billion transaction.

Analysts also pointed out the upcoming release of data from Roche Holding AG for the Swiss company’s anti-Tigit agent at ASCO, a key cancer meeting in June, as a catalyst for Arcus. BTIG increased its price target to a Wall Street high of $34 after adding AB154 to its model, saying “Gilead interest seems long overdue.”

Arcus shares jumped as much as 99% to a record $31. The company’s market value is now about $1.25 billion. Shares of a peer working on similar cancer drugs, Compugen Ltd, surged as much as 24% to a six-year high.

Here’s what analysts are saying:

Citi, Mohit Bansal

“This field has been heating up with Roche in the lead.”

Arcus “is not too big for an outright acquisition.” For Gilead, Arcus “would also fit well with the strategy to fill early stage pipeline. Citi expects to see more potential deals in the near- to mid-term, given Gilead’s balance sheet and “deal appetite.”

Tigit inhibitors may work well with other immunotherapies known as PD-1/L1 inhibitors. High levels of Tigit are found in certain lung, kidney, skin, colon and blood cancers.

Cantor Fitzgerald, Alethia Young

Arcus may be worth $33 to as much as $45 per share in a takeout scenario.

“The bigger question is whether it’s a stake or an acquisition that Gilead might pursue, and we would guess acquisition is likely being entertained,” Young wrote, other companies might also be interested she said.

Cantor is modeling unadjusted sales of $1.6 billion for Arcus Bio’s experimental medicine, AB928, with a 15%-20% probability of success in prostate and colorectal cancer. Young models similar sales and shot at success for AB154 in lung cancer.

Rates Arcus overweight.

SunTrust, Robyn Karnauskas

SunTrust analysts are modeling peak annual unadjusted sales of $3.3 billion for Arcus, but “this could be an underestimation of the potential value of the platform,” and excludes at least $1.5 billion in peak sales in first-line lung cancer.

Arcus is viewed as “having enough data from multiple ongoing combination trials to provide a clear pathway to registration in at least one or more programs.”

Karnauskas expects clarity on a potential registration pathway by the end of this year and models potential drug launches in 2023.

Rates Gilead a hold, Arcus a buy.

BTIG, Thomas Shrader

“Gilead interest seems long overdue.”

During an investor call, Arcus management “discussed the extremely careful development” of another experimental medicine, AB928 as well as AB154. “For AB928, success of this molecule still seems likely to be based on patient selection – a process the company has been painstakingly working through with significant data expected throughout 2020 (activity seems clear).”

Rates Arcus a buy, increasing price target to a Street high of $34 from $20.

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