Gilead Sciences (GILD) continued its transformation under new CEO Dan O’Day on Sunday with the acquisition of Immunomedics (IMMU) for $21 billion. The key asset Gilead was after is Trodelvy (sacituzumab govitecan-hziy), a cancer medicine in the antibody-drug conjugate (ADC) class that is already approved for late stage triple-negative breast cancer and is being further tested in many other tumor types.
The drug works by linking an antibody that seeks out Trop-2, a glycoprotein that is upregulated on many types of cancers, to a chemotherapy payload called SN-38 (the active metabolite of irinotecan). SN-38 is too toxic to be used as a medicine on its own, but the idea here is that by linking it to the Trop-2 seeking antibody, it can be delivered directly to the cancer while avoiding systemic harm to the body. The term we use for this is precision medicine.
$21 billion is a big bet for any company, including Gilead. It has already completed a string of deals this year, including the $4.9 billion acquisition of Forty Seven Inc, but this dwarfs those and will likely be the benchmark for how the initial direction of the Dan O’Day era is judged. It means that Gilead believes Trodelvy will not only succeed commercially in triple-negative breast cancer, but also more widely as a foundation of care for other cancers.
Whenever deals of this size happen, they are often defining moments that send important messages to investors we can learn from. Use this one as an opportunity to take a step back and analyze what it means for the overall investment landscape of biotech. Whether the outcome challenges or reinforces your view of where the industry is headed, smart investors will make adjustments and leverage learnings for future success. With that in mind, here are five takeaways that I see.
1. After a long road, anti-body drug conjugate science is coming of age.
Today’s deal sends an important message to investors about what a sophisticated company like Gilead believes is the future direction of cancer care and the expanded role that ADCs might play. I think this is the biggest takeaway for investors from the news: that more big companies believe the class is ready for primetime. The future of cancer is all about using drugs in combination. In order to succeed in that environment, a drug needs to be both efficacious and tolerable enough that it can play well with others. ADCs might finally be there.
ADCs have been in development for decades and some companies (most notably Roche and Seattle Genetics) have had success with drugs reaching the market. However, it has been a long road and the class has largely not met the high expectations placed on it in the past. Efficacy had been moderate and many ADCs were plagued with toxicity issues. However, the science has improved significantly and now we are seeing the money follow. For example, one of the most valuable deals for a new cancer medicine before Trodelvy was AstraZeneca partnering with Daiichi Sankyo on its ADC Enhertu.
I think there are three things behind the resurgence in ADCs. First, companies are doing a good job of using novel targets like Trop-2 and Nectin4 that are less likely to cause off target toxicity. Second, linker technology has improved significantly, such as allowing the use of cleavable linkers. Trodelvy has a pH-sensitive linker that triggers its cytotoxic payload to cleave from the antibody near the tumor. Finally, improvements in ADC science also allow for a higher payload-to-antibody ratio than in the past. These advances are adding up to stronger and more tolerable drugs that can play well in combos.
Other antibody-drug conjugate companies include: ADC Therapeutics (ADCT), ImmunoGen (IMGN), Mersana Therapeutics (MRSN), Seattle Genetics (SGEN), Sutro Biopharma (STRO), and Zymeworks (ZYME).
2. Gilead is looking beyond COVID-19 and investors should too.
Pockets of biotech this year have been carried by the general public throwing money at COVID related headlines, which is neither realistic nor sustainable. Gilead has been a model for this. The valuation surged in March and April when a flood of money followed remdesivir being in the news, but reality eventually set in when Gilead made it clear that the drug would not be financially significant. The takeaway is that companies should be valued realistically and based on their core businesses. For those investors who have been focused on COVID headlines, now might be a good time to start thinking about planning for a more sustainable future like Gilead has done.
The good news is that there has never been a more exciting time to invest in science. The area that Gilead invested in today, oncology, is an obvious standout. New tools such as genomic sequencing, precision medicine therapies, and immuno-oncology are producing true advances for patients. Gilead itself has been widely active on this front lately, as have other large companies like Glaxo and Sanofi. Additional areas with interesting science that have seen recent deals are gene therapy and some pockets of neurology. The key to success in biotech investing is being able to identify where scientific advances are having the biggest impact on patients’ lives. It is time to get back to basics and start valuing the sector in this way.
3. Seattle Genetics has earned a place in the top echelon of biotech companies.
Anyone who follows the antibody-drug conjugate space knows that the category leader is Seattle Genetics. The 22-year old company has been commercializing its first ADC, Adcetris, for types of lymphoma since 2011. Sales of the drug in the U.S. and Canada over the previous four quarters were $665 million. More recently, Seattle Genetics had its second ADC, Padcev, approved by FDA at the end of last year for advanced urothelial carcinoma (bladder cancer). As an example of how today’s ADCs are showing utility in combinations, SGEN also posted strong data when combined with Merck’s Keytruda in first line bladder cancer earlier this year (this just earned them a new partnership with Merck today). A third drug, Tukysa, is approved for HER2+ breast cancer, but is not an ADC. There is a very strong pipeline behind all of this.
Though it may be overshadowed by the Immunomedics news, Seattle Genetics signed its own nice deal on Monday morning as well. It announced that Merck will pay SGEN $600 million up front and take a $1 billion equity stake in the company (at $200 per share) to help co-develop and co-commercialize an ADC that targets Liv-1. Merck will also pay $125 million up front to license and co-develop the non-ADC drug Tukysa to accelerate its reach for HER2+ cancers outside of the U.S., Canada, and Europe. With the Keytruda and Lynparza franchises under its belt, Merck is the undisputed king of oncology today. It is not surprising to see that it wants to buy into this ADC leader to get greater exposure now that the company's ADCs are proving their mettle in combination with Keytruda in important indications.
Seattle Genetics was the first name I thought of when I saw Gilead’s news (even before the Merck announcement). If Immunomedics is worth $21 billion, then what does that make the more advanced and diversified category leader worth? As of Friday’s close, the market cap of Seattle Genetics was around $26 billion. Immunomedics is a good company, but SGEN should be worth a lot more relatively speaking, as justified by the Merck equity stake at a $200 valuation (approximately $34 billion). Seattle Genetics is also frequently mentioned as a leading takeover candidate itself, but I personally think a sale is unlikely because I have seen CEO Clay Siegal speak about his strong preference to be Seattle's anchor biotech company for a long time. This is one reason why they have simply partnered today.
One thing is for sure, given with the way ADCs have arrived scientifically and the financial validation by recent deals, it is time to crown Seattle Genetics among our industry’s top tier of biotech companies. This is an exclusive club with the likes of Amgen, Gilead, AbbVie, Biogen, and Regeneron. Seattle Genetics deserves a place on the list. I hope I am not mistaken about it staying independent, because I think the biotech industry is stronger when there is broad leadership. This group was recently narrowed when Celgene was acquired last year. The biggest pressure on Seattle Genetics to sell could be from long-time investors with sizable positions that might not be easy to monetize one day. Credit to these investors for being patient supporters of the company over the years.
4. Asia deals just got a lot more expensive.
One of the under-the-radar winners of the Trodelvy deal is a private China-focused biotech company called Everest Medicines. In April of 2019, Everest signed a license for Trodelvy (sacituzumab govitecan) for Greater China and other parts of Asia. It agreed to pay Immunomedics $65 million up front, an additional $60 million upon U.S. FDA approval of the drug, potential development, regulatory, and sales milestones of $710 million, and additional tiered royalties that begin in the mid-teens. These terms set a record for a single-asset licensing agreement for Greater China that stands to this day. I can tell you that the financials turned a lot of heads at the time. Many people privately wondered if it will be possible for Everest to make money.
While the jury is still out on Everest’s ultimate success, without a doubt Gilead paying $21 billion to scoop up the drug is a huge validation for them. If you could go back in time and pay what Everest did for China rights on a $21 billion asset, anyone would do that deal in a heartbeat today. This goes to show that while many observers feel as if deals for China rights are getting too competitive (I have heard stories of 35+ bidders for quality assets) and expensive, I think we are still in the early stages of deal making and that records will keep falling. China is currently the second largest pharmaceutical market in the world and has been embracing innovative medicine. As government reimbursement of new drugs keeps increasing, so will licensing deal terms.
5. Activism in investing works well when done right.
Those who have been following Immunomedics over time know that it has been quite a saga. Much of the credit for today’s $21 billion deal goes to Avoro Capital Advisers. Avoro (previously called VenBio) went activist against Immunomedics in the fall of 2016, saying that it was not focused on advancing sacituzumab govitecan quickly enough for triple negative breast cancer. Fireworks really went off when Immunomedics agreed to a licensing deal with Seattle Genetics in early 2017, which would have given it $250 million up front. VenBio revolted, believing this wasn’t the right plan for the drug. The deal was scuttled, the leadership team was removed, and Avoro Managing Director Dr. Behzad Aghazadeh has been actively overseeing the company as Executive Chairman ever since.
It reminds me of another activist inspired deal in biotech from this time last year: The Medicines Company going to Novartis for $9.7 billion. That one was made possible by Sarissa Capital Management’s Alex Denner. These two deals have a few key similarities. First, both activists had a laser focus on getting each company’s key asset developed quickly. It is easy for biotech companies to get bogged down in other less important projects, so focus is necessary. Second, both investors took a hands-on role in putting the right people in place and helping run the business. Third, both understood how to create maximum value by moving the assets through the proof of concept stage by themselves. These are two great examples of how, when done right, activism can work well in biotech.
Last year’s Medicines Company deal set off a huge rally in biotech stocks through the end of the year. Let’s hope history repeats itself with this one.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.