Biotech ETFs Soar on Gilead-Immunomedics Deal

The merger & acquisition activity has heated up this week with a flurry of deals. In the biotech space, Gilead Sciences GILD has agreed to buy cancer treatments’ specialist Immunomedics IMMU for $21 billion. The deal, if approved, would be Gilead’s largest acquisition ever.

Per the terms of the deal, Gilead will pay $88 per share to Immunomedics in an all-cash transaction by issuing a tender offer. The price per share represents a 108% premium over IMMU’s closing price of $42.25 as of Sep 11. The deal will be funded $15 billion in cash on hand and roughly $6 billion in newly issued debt.

The acquisition will expand Gilead’s portfolio of treatments for various types of cancer. In particular, it would bolster Gilead’s cancer portfolio by gaining access to a promising breast cancer treatment drug Trodelvy for metastatic triple-negative breast cancer, which was granted an accelerated FDA approval in April (read: How Will Biotech ETFs React to Vaccine Makers’ Safety Pledge?).

Immunomedics is planning to submit a supplemental Biologics License Application (BLA) for the full approval of the drug in the United States in the fourth quarter of 2020 and is on track to file for regulatory approval for Trodelvy in Europe in the first half of 2021. Per the sources, Trodelvy is expected to generate approximately $2.3 billion in sales for its initial indication by the middle of the decade.

The deal comes as Gilead has been struggling with the declining sales of its blockbuster hepatitis C treatments in recent years and is making efforts to expand in oncology for several years. It has taken over Kite Pharma, the maker of CAR-T cancer therapy Yescarta, for $11.9 billion in 2017. Then the biotech firm acquired drugmaker Forty Seven in March for $4.9 billion in an all-cash deal. In all, it has spent a whopping $25.9 billion this year to bolster its cancer portfolio, including the Immunomedics deal.

The deal, which is approved by both company’s boards, is expected to close in the fourth quarter of 2020. The transaction is expected to be neutral to accretive to Gilead’s non-GAAP EPS in 2023 and significantly accretive thereafter. It is also expected to accelerate Gilead’s revenue growth immediately (read: ETFs to Gain as AstraZeneca Resumes Coronavirus Vaccine Trial).

Market Impact

Following the news, shares of Immunomedics soared 98% to close the day and crushed its average volume as nearly 79.8 million shares moved hands compared with 3.7 million, on average. Meanwhile, shares of GILD were up 2.2%.

The solid trading in these stocks has pushed biotech ETFs in green. Invesco DWA Healthcare Momentum ETF PTH has been the biggest winner having gained 8%. Virtus LifeSci Biotech Clinical Trials ETF BBC, SPDR S&P Biotech ETF XBI, ALPS Medical Breakthroughs ETF (SBIO) and The Cancer Immunotherapy ETF CNCR gained at least 6% each. These funds could be the best ways for investors to tap the opportunity arising from the Gilead-Immunomedics buyout deal and will likely see smooth trading in the months to come:

PTH

This fund follows the DWA Healthcare Technical Leaders Index and holds a basket of 51 stocks. The product has AUM of $440.6 million and charges 60 bps in annual fees. Biotechnology takes the largest share at 41.7% while healthcare equipment and supplies, and healthcare providers and services round off the next two with a double-digit exposure each. PTH has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

BBC

This fund has a novel approach to biotechnology investing with exposure to companies that are in the clinical-trial stage. This can easily be done by tracking the LifeSci Biotechnology Clinical Trials Index. BBC has amassed $36.3 million in its asset base and charges 79 bps in fees per year from investors. It trades in a lower average daily volume of around 25,000 shares and holds 132 securities in its basket. The product carries a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Why Small-Cap Biotech ETFs Are Good Long-Term Bets).

XBI

With AUM of $5.2 billion, XBI provides equal-weight exposure of around 2% across 132 biotechnology stocks by tracking the S&P Biotechnology Select Industry Index. It has 0.35% in expense ratio and trades in an average daily volume of 4.6 million shares. The fund has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.

SBIO

This fund provides exposure to companies with one or more drugs in Phase II or Phase III FDA clinical trials by tracking S-Network Medical Breakthroughs Index. It holds 91 securities in its basket. The product charges 50 basis points in fees per year from its investors and trades in a moderate average daily volume of about 24,000 shares. It has AUM of $167.1 million in its asset base and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

CNCR

This ETF offers exposure to a basket of companies that develop therapies to treat cancer by harnessing the body’s own immune system. Holding 30 stocks in its basket, it has AUM of $39.3 million and trades in an average daily volume of 9,000 shares. The product charges 79 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook (read: 6 Sector ETFs Surviving the Market Rout).