Gilead facing doubts on Wall Street a year after $12 billion Kite deal

In this photo taken July 9, 2015, a man cycles near the headquarters of Gilead Sciences in Foster City, Calif. A bipartisan investigation by U.S. senators finds that the makers of a breakthrough drug for hepatitis C infection put profits before patients in pricing the $1,000-per-pill cure. The report released Tuesday by the Senate Finance Committee concludes that California-based Gilead Sciences was focused on maximizing revenue even as its own analysis showed a lower price would allow more patients to be treated for the liver-wasting disease. (AP Photo/Eric Risberg) less In this photo taken July 9, 2015, a man cycles near the headquarters of Gilead Sciences in Foster City, Calif. A bipartisan investigation by U.S. senators finds that the makers of a breakthrough drug for ... more Photo: Eric Risberg, Associated Press Photo: Eric Risberg, Associated Press Image 1 of / 1 Caption Close Gilead facing doubts on Wall Street a year after $12 billion Kite deal 1 / 1 Back to Gallery

Investors in Gilead Sciences are still waiting for the company to prove the value of last year’s purchase of Kite Pharma, and time may be running out.

The Foster City biotech firm’s shares have traded sideways since the Kite deal was announced in late August of last year. Sales of Kite’s first treatment, Yescarta, failed to impress in its first two full quarters on the market, and competition is looming. Adding to concerns, Gilead’s longtime chairman, chief executive officer and chief medical officer have all recently stepped down.

Robert W. Baird & Co. analyst Brian Skorney says Gilead may have to write down the Kite deal, which the company values at $11.9 billion. That means lowering the projections on its balance sheet, if the multibillion-dollar sales that Wall Street expects don’t materialize. The longtime bull cut his rating on the stock to neutral in July, after the management exodus.

“A lot of people take a bearish view, myself included, that they are not going to get that return” that the company expected, Skorney said. Gilead’s most recent filing with the Securities and Exchange Commission says the fair value of Kite’s assets is about $9 billion, based on lower cash flows of future sales.

Gilead doesn’t comment on speculation, a company representative said in an email.

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The next year will be critical for Gilead to prove it can turn things around, according to Piper Jaffray analyst Tyler Van Buren. He expects that the cancer drugs acquired from Kite, known as CAR-T therapies, will bring in $2.8 billion in sales for Gilead by 2025. Analysts, on average, estimate that Yescarta sales will be $2.3 billion in 2025.

“People need to see some sort of inflection,” Van Buren said.

Even Wall Street’s biggest bull says it could take a decade or more for Gilead to prove that the acquisition was worth it.

“I don’t think there will ever be a scenario in the next five years where you will be able to crunch the numbers and say they got back their investment in Kite,” said Raymond James analyst Steven Seedhouse. “It’s just way more long-term of a vision.”

Seedhouse holds the highest price target on Gilead shares at $97, based on a bullish outlook for new drugs to treat HIV.

To be sure, Gilead has told investors to be patient. Last year, the company said it will take at least three years for the Kite deal to add to earnings. The problem is that the competitive landscape for cancer immunotherapy is changing fast.

Just last week, Allogene Therapeutics — run by Kite’s former management team — filed for an initial public offering after raising more than $400 million to advance off-the-shelf CAR-T therapies. These new products could threaten drugs like Yescarta because they don’t need to be personalized for each patient and could cost much less.

The increasing competition in cellular therapies makes it unlikely that Gilead’s CAR-T platform will be the “winning technology,” Skorney said.

Bloomberg Intelligence analyst Asthika Goonewardene cautions that it’s premature to draw conclusions, because the industry is still in its infancy.

“Consensus is all over the place, and rightfully so,” Goonewardene said. “What we know is that cell therapy is giving us amazing response rates, and in some cases, functional cures. There is so much more work to be done.”

Tatiana Darie is a Bloomberg writer. Email: tdarie1@bloomberg.net