Shares of Incyte Corp. (INCY) are up nearly 50% so far in 2017. The stock was up almost 12% last week alone, when rumors started swirling that Gilead Sciences (GILD) was looking to acquire INCY.

Incyte's lead drug is Jakafi, which is used to treat patients with intermediate or high risk of myelofibrosis. According to the latest 10-K on file with the SEC in 2016, INCY had total revenue of $1.1 billion, up from $753.7 billion in 2015. The stock currently trades at $150.20 per share, and the company has a market cap of $28.5 billion, certainly not cheap based on valuation. 

Would GILD as a potential suitor make sense, and why would it target INCY? GILD has been in need of a new drug that could help boost growth once again, as did GILD's acquisition of Pharmasset back in November of 2011. At the time, GILD paid $11 billion to acquire Pharmasset, which brought the Hepatitis C virus suite of drugs to GILD.  Analysts have begun to turn bearish on GILD, as sales have slowed and expectations are now slowing for future EPS growth. 

GILD Chart

GILD data by YCharts

Gilead could stand to benefit by acquiring a drug company that has nearly $1 billion in sales and solid growth rate, such as Incyte. Additionally, it could help diversify GILD's portfolio of drugs from predominately HIV and Hepatitis C. (See also: Gilead’s HIV Drug Reports Positive Data.)

Things are getting interesting, though, which is one reason why rumors of an INCY sale keep coming up. The Baker Brothers are the largest shareholders in INCY, and Julian Baker sits on Incyte's board of directors.  According to the Bakers' latest 13-F filing for the quarter ended December 31, 2016, the Bakers owned about 23.5 million shares of INCY, or roughly 13% of the company.

On February 17th, the Bakers filed a 13-D/A that they had upped their stake in the company to 34.3 million shares, or 16.9% of the company. The large purchase of additional shares could be what got some investors thinking something might be up with INCY. In fact, one can easily see the rapid rise in the price of the stock following the 13D filing at the end of February. 

INCY Chart

INCY data by YCharts

On March 10th, the Bakers filed a prospectus supplement indicating they may sell up to 34.0 million shares of INCY. In this prospectus, it states Section 203 defines an interested stockholder as an entity or person beneficially owning 15% or more of the outstanding vote stock. This little blurb in the middle of the prospectus indicates the Bakers are an interested party of INCY. However, this does not tip a clue necessarily that INCY is for sale, because of this filing. 

In fact, in October of 2016, the Bakers filed the same type of prospectus supplement for Seattle Genetics (SGEN), of which they own 31.4%, or 44,209,554 shares. The Bakers also filed an automatic shelf registration statement for its holding of Acadia Pharmaceuticals in April of 2016, of which it owns nearly 22%.

INCY may or may not be sold, but certainly, there is nothing to indicate at present other than rumors of a sale. The filing of the prospectus last Friday seems pretty standard for the Bakers. It will certainly be interesting to see if a deal gets done, and the valuation on a such a deal. If the deal does come, one thing is for sure: It won't be cheap.

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Michael Kramer and the clients of Mott Capital Management, LLC own shares of ACAD. Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.

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