It Looks Like Gilead is About to Merge with Roche
Disclaimer: This post does not constitute financial advice. Author has a long position in Gilead. Do your own due diligence before making an investment.
(This is Part 1 of an investigation into the manipulation of Gilead’s stock price. Click here for all the articles.)
If you’ve only just heard about Gilead Sciences in the past year, then it’s probably due to remdesivir. But this isn’t a story about remdesivir. It’s a story about cancer.
In January, I was on vacation in the Dominican Republic. It rained for several days, and I was stuck inside browsing Twitter. This strange new illness in China was gaining traction on various news accounts.
I watched what was unfolding in China and concluded that the coronavirus was a lot worse than they were letting on.
For example, you don’t quarantine a city of 20 million people because of the flu. You don’t seal people inside apartment buildings. You don’t block the roads in and out of a city with bulldozers. While it was still too early to know how bad Covid-19 was going to spread, China’s was behavior inconsistent with their official statements, and the statements coming out of the World Health Organization.
It quickly became obvious to me that this was going to be really bad. It would have broader implications for the market and the economy.
So, I bought a bunch of puts and started shorting the market…
…and got totally wrecked. (I wasn’t wrong, I was just early.)
The market kept going up while the situation in China kept deteriorating. I knew this didn’t make sense, but it was getting too expensive to keep buying short-dated puts on the broader indexes.
I closed my short position with significant losses and decided to focus on treatments. In hindsight, I should have gone with vaccines, but I didn’t think they could manufacture one so quickly. Although it remains to be seen how long the immunity lasts. If the virus mutates in a way that renders the vaccines ineffective, then only approved treatments are remdesivir and dexamethasone. By then maybe Gilead will have finally figured out how to administer remdesivir earlier. They’re working on a nebulized version of it, but like I said. This isn’t a story about remdesivir. It’s a story about cancer. It just happens to start with remdesivir.
In February 2020 I came across a tweet that suggested a failed Ebola drug might work against Covid-19. Having just gotten sick after returning from the Dominican Republic, I had some time off work to do some research into it.
Remdesivir was a drug originally designed to treat Ebola patients. It worked, but not as well as a drug made by Regeneron, so remdesivir was shelved. Some doctors I followed on Twitter seemed to suggest it could be repurposed to fight the novel coronavirus.
Having just gotten burned by my short position in the markets, I was hesitant to pull the trigger on Gilead. But then people started talking about this idea and the stock jumped a few points, so I went deep.
I bought a bunch of stock and stock options with a May expiration. I flipped about $50,000 into $1,500,000.
Meanwhile, the entire market was crashing. Everything was off about 30%. Businesses specifically affected by Covid-19 were cratering hard. (If you’re reading this in the future and there’s another global pandemic, the best short positions to take are against businesses affected by lockdowns or travel restrictions. Cruise lines, air lines, movie theaters, etc.)
It was looking like a great trade, until it wasn’t.
Things started to go sideways in April. Someone at the World Health Organization (WHO) “accidently” uploaded an article saying remdesivir didn’t work. The stock quickly dropped 8% and was halted. The article was removed.
I decided I didn’t want to get involved in a political fight between the WHO, Gilead, and America, so I largely sold out of all my holdings.
But I kept my eye on Gilead.
Remdesivir is an antiviral. If you get sick, antivirals are more effective the sooner you take them. Remdesivir’s biggest problem is that it’s administered intravenously. This means you need to be hospitalized to get remdesivir. But by the time you’ve been admitted to the hospital, it’s probably too late for remdesivir to be effective.
A double-blinded randomized controlled study showed that remdesivir reduced hospital stay by about 5 days. That’s still pretty good. Especially if your hospital is overwhelmed by Covid-19 patients. You want to free up as many beds as possible. So, the IV version of remdesivir is still useful, it just isn’t a miracle drug. However, Oral or nebulized remdesivir still might be because they could be given an out-patient setting. But that’s a post-merger story.
This article is about a possible upcoming merger between Roche, “the global leader in cancer treatments” and Gilead, a stock that’s sitting at a seven-year-low.
Remember this isn’t a remdesivir story, it’s a cancer story.
I can hear you muttering, “So why does guy keep talking about it?”
Because even though the intravenous version of it isn’t ideal, remdesivir is still selling.
Gilead sold $873 million of remdesivir in Q3 2020. It’s unclear how much they’re going to sell in Q4, or in 2021, but it’s going to be something. Countries are re-drawing their pandemic plans. Trillions of dollars in financial aid was given to people that lost their jobs. That must be avoided next time. Countries will stockpile remdesivir, even if the vaccine appears effective.
This is important to the merger story because sales = revenue.
The more revenue a company has, the more valuable it is.
Here are some stats on 10 large biotechs and Gilead. I’ve noted their 2019 full-year revenue, current market capitalization, and revenue to market cap percentage (referred to henceforth as R to MC.) Numbers are in US billions.
The lower the R to MC%, the longer it takes for a company to earn their total market cap in revenue. The lower the number, the more overvalued the company, or the more growth is expected of them.
The higher the %, the more undervalued the company. Higher % of R to MC could also indicate an expectation that sales will deteriorate in the future.
Market Cap: 406
Revenue: 82
R to MC: 20%
Market Cap: 300
Revenue: 61.5
R to MC: 20%
Market Cap: 207
Revenue: 48.5
R to MC: 23%
Market Cap: 201
Revenue: 47
R to MC: 23.3%
Market Cap: 210
Revenue: 52
R to MC: 24.7%
Market Cap: 193
Revenue: 32
R to MC: 16.5%
Market Cap: 133
Revenue: 23
R to MC: 17.2%
Market Cap: 184
Revenue: 33
R to MC: 18%
Market Cap: 133.7
Revenue: 24.4
R to MC: 20.5%
Market Cap: 163
Revenue: 22.3
R to MC: 13.7%
Market Cap: 74
Revenue: 22.5
R to MC: 30.4%
Here is all that info expressed in a graph.
Note that only Gilead’s R to MC bar is higher than its revenue.
large biotechs
Eli Lilly is the most overvalued relative to its peers.
Gilead is the most undervalued.
But it’s crazier than the numbers let on. Those percentages are for 2019 revenues.
Gilead’s Q1, Q2, and Q3 total revenue is 17.27B.
Even if all Gilead does is match last year’s Q4 of 5.88B, then their sales will be 23.15B.
That increases their R to MC percentage to 31.3. Even more undervalued than it was with last year’s numbers.
Next year’s sales of Tecartus, Yescarta, and Trodelvy are estimated to go up. This would push the R to MC% even higher. The higher it gets, the more likely a company is to being bought out.
Any company whose R to MC% approaches 40% is an easy buyout target with a 100% premium. If you think their cashflow is stable for at least 5 years, then you have nothing to lose (except for opportunity cost.)
Gilead has a fat pipeline via Kite, Forty Seven, Arcus, and Immunomedics purchases. It has reorganized itself as a growth company. But isn’t getting any respect as one. Sometime over the summer, Gilead stopped reacting to positive news. It didn’t matter what the headline was, Gilead would drop in price. This was confusing until a colleague mentioned that maybe it was investment bankers playing games. Perhaps they were preparing the stock for a merger.
It did seem like someone was trying to keep a lid on Gilead’s share price. Investment banks can earn hundreds of millions of dollars when they organize a merger between giant companies. Gilead’s potential merger might be the largest merger in biotech history. There’s a lot of money at stake.
Keeping the price suppressed makes the buyout more palpable. It creates a higher premium headline. “Company A Offers to Buy Gilead at 100% Premium” is a lot easier to sell to a board of directors than “Company A Offers to Buy Gilead at 20% Premium.”
It’s unclear who is keeping a lid on Gilead’s stock price. But it’s probably a bank. Banks have been involved in numerous scandals. Like this one:
Scotiabank to pay $127M in fines for traders’ price fixing of precious metals.
So, while I think it’s probable that someone is manipulating the stock price of Gilead to make a buyout more likely, that’s just speculation.
Here are some facts.
1. The current CEO of Gilead worked for 30+ years at Roche. [Source]
2. The current Chief Medical Officer of Gilead worked for 8+ years at Genentech (a company bought by Roche.) [Source]
3. Gilead has been on a spree of acquisitions in the last few years. Mostly cancer companies. [Source] (click “show”)
4. Roche is the world’s leader in cancer treatments. [Source]
5. Roche did a hostile bid for Genentech in 2009 in order to reinforce its position in cancer. “You go deep rather than broad,” said Bill Burns, the then head of Roche’s pharmaceutical business. [Source]
6. March 18, 2016: Roche and Kite form a partnership to test Roche's atezolizumab with Kite's KTE-C19 therapy. [Source]
7. August 28, 2017: Gilead buys out Kite. [Source]
8. January 11, 2018: Forty Seven announces partnership with Genentech (owned by Roche) CD47 antibody to be evaluated in combination with PD-L1 antibody with the aim of engaging both T-cell and macrophage components of the immune system against acute myeloid leukemia and bladder cancer. [Source]
9. March 2, 2020: Gilead buys out Forty Seven. [Source]
10. December 19, 2019: Arcus Biosciences and Genentech partner on two clinical trials for colorectal and pancreatic cancer. [Source]
11. May 27, 2020: Gilead takes a large stake in Arcus. [Source]
12. June 7, 2020: Gilead is approached by AstraZeneca about a potential merger. Share price of Gilead is around $76. Gilead says they’re not interested. It’s unknown what the AZN offer was. [Source]
(Did Gilead turn down AstraZeneca because they were planning to merge with Roche?)
13. Fall of 2019: Immunomedics partners with Roche to test out Trodelvy in combination with Roche’s drug Tecentriq. [Source]
14. July 13, 2020: Immunomedics and Roche collaboration is expanded. [Source]
15. August 6, 2020: Roche’s drug Tecentriq fails to show clinical benefit for preventing triple negative breast cancer. [Source]
16. August 7, 2020: Gilead files for a mixed shelf offering. [Source] (Perhaps part of the merger plan. Additional shares might be needed to allow buyer to take a larger stake. )
17. September 13, 2020: Gilead buys out Immunomedics for an headline-grabbing 108% premium. [Source]
18. September 21, 2020: Immunomedics presents data at ESMO showing Trodelvy has the potential to become a blockbuster drug in not just TNBC, but also metastatic urothelial cancer. Data shows why Gilead paid such a huge premium. [Source]
19. December 15, 2020: Gilead and Galapagos amend their partnership agreement, effectively abandoning the US market for Filgotinib, a rheumatoid arthritis drug. [Source]
20. Roche’s fifth most top-selling drug in 2019: Actemra, a treatment for rheumatoid arthritis. [Source]
UPDATE: January 10th, 2021. Here are eight additional facts that support the Gilead/Roche merger thesis. There is probably more evidence, but I’m tired of looking for it and the facts seem overwhelming.
21. Trodelvy is an ADC (Antibody-drug Conjugate). Roche is one the only companies (along with Seattle Genetics) to have had success bringing an ADC to market. [Source]
22. October 31, 2018 - Gilead Sciences and Tango Therapeutics Announce Strategic Collaboration to Develop Next-Generation Targeted Immuno-Oncology Therapies. [Source]
23. One of the founders of Tango is Levi Garraway – Bio states: Levi Garraway is the Chief Medical Officer and head of global development at Genentech, a member of the Roche Group. (He seems to be both the CMO of Genentech and Roche.) [Both sources in links]
24. June 4th, 2018 - Gilead Sciences Announces Leadership Changes in Corporate Development and Strategy. They promoted Andrew Dickinson to Executive Vice President, Corporate Development and Strategy. He led the acquisitions of Kite and Cell Design. Before working at Gilead, he was the Global Co-Head of Healthcare Investment Banking for Lazard. [Source]
25. In their website’s Google excerpt, it says: “Lazard, the world's leading financial advisory and asset management firm, advises on mergers, acquisitions, restructuring, capital structure and strategy.” [Source]
26. Jounce Therapeutics’ Chief Medical Officer is Elizabeth Trehu. In her Jounce bio it states: Dr. Trehu joined Jounce from Promedior, Inc., where she served as the chief medical officer. In this role, she led the creation and implementation of clinical development plans for Promedior’s lead macrophage product candidate, PRM-151, which led to the acquisition of Promedior by Roche in 2020. [Source]
27. September 1st, 2020 - Gilead Sciences and Jounce Therapeutics Announce Exclusive License Agreement for Novel Immunotherapy Program. [Source]
28. January 30th, 2020 - Sandra Horning, MD, Joins Gilead Sciences’ Board of Directors. Dr. Horning was the former Chief Medical Officer and Global Head of Product Development for Roche. “Prior to her career at Roche, Dr. Horning spent 25 years as a practicing oncologist, investigator and tenured professor at Stanford University School of Medicine.” [Source]
[End of January 10th, 2021 update.]
Here is some more speculation:
Roche wants Gilead’s oncology pipeline.
Roche doesn’t need Filgotinib because they have Actemra, which is possibly why Gilead has abandoned Filgotinib. The FDA bounced Filgotinib for sperm count reasons, but Filgotinib was approved in Europe and Japan. Probably because women over 55 don’t often have sperm count issues..
The star of Gilead’s cancer pipeline is Trodelvy. A drug developed by Immunomedics. It is approved for triple-negative breast cancer. It’s estimated to have peak sales of close to 5B.
This puts Gilead’s R to MC% at closer to 38.
Gilead didn’t buy Trodelvy just to treat breast cancer. They’re doing research on a broad number of tumors. Trodelvy could become the best-selling cancer drug of all time.
Even if it’s approved for just one more tumor, Gilead’s R to MC% goes to 45. Two more tumors? 50%. More tumors, more money.
Within three years, Gilead could be be generating revenues north of 30 billion.
But that’s later.
What should Gilead be trading at if their stock was valued similar to their peers?
At an R to MC of 20%, Gilead market cap would be at 115.75B.
This means Gilead’s stock price TODAY (December 20th, 2020) should be closer to $91.50. And that’s just treating it equally to its peers. That’s not pricing in any growth from remdesivir, growing Kite sales, and growing Trodelvy sales.
Why might this happen soon?
Gilead can’t fly under the radar forever. More than 80% of the stock is owned by institutions. There isn’t much stock available for anyone else to take a sizeable position. When it starts to fly, it will fly hard. Gilead might even be a candidate for an infinity squeeze.
Also, there has recently been a notable uptick recently in trollish/bear posts, claiming a great entry point is under 50. Someone is trying to create fear that Gilead is bleeding to death, when it’s really the opposite. Both sales and growth prospects are up. (The people who make these posts will often delete them the next day. A clear indication that they are trying to manipulate sentiment without leaving a trace.)
Will it be hostile takeover?
Unlikely. Mergers can take six months, or even years to finalize. If anything, the purchaser (probably Roche) is pulling the strings behind the scenes. The CEO of Gilead went hard for Immunomedics. Did Roche tell him to acquire it at any cost? Was their merger dependent on that deal finalizing?
Gilead abandoned Filgotinib without much of a fight. Did they come to that decision themselves, or was Roche involved?
How soon could this happen?
Today? Tomorrow? The first trading day of January? There’s precedent in the merger department for companies closing deals in the new year for tax purposes.
What is the likelihood of Gilead being bought out?
If the broader market continues to advance and Gilead stays flat, 100%.
Eventually it becomes trivial to print some shares and gobble up Gilead.
The longer Gilead stays flat, the more annoyed investors get, and are more prone to a buyout.
Gilead is trading at 7-year-lows.
Most of its competitors are trading at all-time highs.
It’s the perfect storm for a large acquisition.
Why didn’t Roche buy Kite, Forty Seven, Arcus, and Immunomedics themselves?
This is definitely speculation, but maybe it’s because they’re the world’s leader in cancer. They would have paid more. Gilead looks like a floundering company that’s desperate to make deals. They can negotiation a cheaper price.
Imagine you want to build a highway and you need to buy all the land in an area. You don’t do the deal yourself because everyone knows you’re the richest developer around. You send intermediaries. Gilead might be acting as Roche’s intermediary in the purchase of cancer companies.
Don’t forget, Roche did drug trials with all the companies Gilead bought out. They have more access to data than other suitors.
Cancer treatments are more important now than ever before
Here’s a scary article:
https://www.cbc.ca/news/health/cancer-tsunami-screening-delays-covid-1.5844708
Covid-19 kept people at home. So less people went to see the doctor. Cancer is still occurring at the same rate as before, but doctors aren’t catching it as early. Which means in the next few years we’ll need to pump out some revolutionary cancer treatments just to undo the damage Covid-19 has caused.
Gilead and Roche are extremely well positioned to help with this.
In summary: Gilead is worth at least $91.50/share today. A merger could happen at any minute. Any offer north of $120/share would probably be accepted.
Good luck and have a nice day. (Part 2 now live.)
Also, to whoever is manipulating this stock:
