Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Time to test your fifth-grade science knowledge: What comes after the mesosphere? 

You might want to know because just six weeks ago Kite Pharma Inc.'s valuation was described by one analyst as "already in the mesosphere" when the stock was trading for around $100. Now the maker of cancer therapies has scored a takeover offer from biotech giant Gilead Sciences Inc. worth $180 a share in all cash, which to put things in perspective, is quadruple Kite's share price from the start of the year. The deal works out to $11.9 billion, taking Kite all the way to the thermosphere (yes, that's what comes after the mesosphere).

High as a Kite
Kite Pharma has soard as Gilead Sciences looks to expand beyond hepatitis C medicines into novel cancer treatments
Source: Bloomberg

At first glance, it would seem like an outlandish price to pay for a company that has generated only $32 million of revenue in the past 12 months and posted a $359 million net loss. That means Gilead is technically paying a revenue multiple of 372!

But Gilead is looking ahead to much larger figures. Kite is one of those drug developers working in the CAR-T space, the treatments that use a patient's own immune system to fight tumors. The company said recently that one of its new therapies awaiting FDA approval could be ready for launch as soon as September.

After years of its own attractive growth, Gilead's core hepatitis-C franchise has gone into decline as it sits on a big pile of cash. It's under-leveraged, under-delivering and in need of a deal, hence Gilead's stock rising modestly in early trading Monday. 

Deal-Ready
Gilead's finally using some of its cash to restock its drug pipeline amid its own disappointing growth prospects
Source: Bloomberg

Has Gilead overpaid? Jason Kolbert and Jason McCarthy -- the Maxim Group analysts who made the probably wise but inopportune decision to cut Kite to a "hold" rating last month on its high valuation -- said at the time that while Kite and other CAR-T first movers have "revolutionized the oncology space," so far its success is baked into the stock price. 

Still, analysts' average projections call for Kite's revenue to reach almost $500 million in 2019, before jumping to above $1 billion starting in 2021. I'll leave the expert strategic insights to my colleague Max Nisen, but perhaps a powerhouse like Gilead can get Kite there even faster and justify this price tag.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net