Nothing about YM BioSciences (YMI) was ever easy or entirely normal, so I suppose it's no great surprise that this company's final story is a more than a little bit out of the norm. Although it was not surprising to see that YM BioSciences got a buyout bid, the fact that it is Gilead Sciences (NASDAQ:GILD) stepping up for the deal certainly surprises me.
The Deal To Be
Assuming that the deal goes through as announced, Gilead will be acquiring YM BioSciences for $2.95 per share in case. That's a bill of about $510 million for Gilead, though YMI's cash on hand of about $125 million offsets the net price by a meaningful amount. As a development-stage biotech, YMI has no revenue or profits, though I would think Gilead should be able to make use of at least some of YMI's accumulated tax losses.
What Is Gilead Doing Here?
I suspect that I am not the only observer who was surprised to see Gilead come in to acquire YM BioSciences. That YMI might look to sell itself was not surprising in the least, but Gilead is generally only talked of in terms of its virology assets (HIV and hepatitis). Nevertheless, Gilead has been developing an oncology pipeline, with a Phase 3 candidate (idelalisib) for chronic lymphocytic leukemia (CLL), and two compounds in Phase 2 studies, one of which (simtuzumab) is also in testing for myelofibrosis.
The key asset to YMI is CYT387 - the company's oral JAK inhibitor for myelofibrosis, a proliferative disease that is quite similar to cancer in many respects (and usually included in oncology pipelines). Clinical data to date has shown that CYT387 may actually reduce anemia (a major consequence of myelofibrosis) and reduce or eliminate the need of patients to undergo blood transfusions. If that data can hold up through pivotal testing, CYT387 would appear to be a very competitive drug to Incyte's (NASDAQ:INCY) Jakafi.
Ample Doubts, And Plenty Of Missteps, Likely Reduce The Price
To a certain extent, I see Gilead's $3 offer (I'm rounding up) as a little unsatisfying. On the basis of an estimated 40% share of the U.S. market and about one-third of the European market, I had projected YMI's current fair value at around $4, and I thought a strong marketing partner could possibly make that number conservative.
And yet, I understand why YM BioSciecnes is not getting what I think is full value in this deal. For starters, there was a great deal of doubt in the clinical community as to whether the company really can reproduce those powerful anemia benefits in a pivotal study - and without that sort of labeling, the prospects for the drug going up against Jakafi are considerably less compelling.
What's more, management credibility has been an issue here for some time. The company has been sitting on apparently strong CYT387 data for almost a year, with no announcement of a Phase 3 study start date, nor any partnerships. Couple that with a history of dilutive financings and the perception of bait-and-switch management guidance (with respect to trial start dates and partnerships), and it's not hard to see how the company has alienated some investors and analysts.
It's also worth noting that the deal is not exactly unfair to YM BioSciences shareholders. When Sanofi (NYSE:SNY) acquired TargeGen (and its JAK-2 myelofibrosis drug) in 2010, Sanofi paid $75 million upfront, with a series of milestones that could take the deal value up to $560 million. Given that YMI is getting about $500 million upfront and with no conditions, it's hard to say that shareholders are getting cheated on a relative basis.
Execution Should Now Be Off The Table
With CYT387 in the hands of Gilead (at least prospectively), the execution risk tied to this drug should largely evaporate. I have little doubt that Gilead will move quickly to get this drug into a pivotal Phase 3 study, and I don't think the company will take any shortcuts when it comes to endpoints or trial design. While recruitment could be challenging (there aren't that many myelofibrosis patients, after all), I think data could be available in mid-to-late 2014, with an NDA filing shortly thereafter, and a potential launch in 2015.
I also believe that Gilead will be able to effectively market this drug, provided the data comes through. That's a negative development for Incyte, and likewise a potential challenge for Sanofi assuming that they get their myelofibrosis (SAR302503) drug to market.
The Bottom Line
I don't doubt that some, if not many, YM BioSciences shareholders will not like this deal and will think that the company's management has sold the company far too cheaply. While I can appreciate that view (as I said, I thought the stock could be worth $4), the reality is that YM BioSciences has been shopping this drug to Big Pharma for a year or more. Consequently, it's hard to imagine that this wasn't the best offer on the table and I don't believe a better bid is likely to materialize.
As for Gilead, I think this is a worthwhile risk to take. CYT387 complements what Gilead is trying to do in its hematology/oncology program, and if that anemia benefit holds up I think Gilead will earn a very compelling return on this deal.