(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Gilead Sciences Inc. (GILD) finally pulled the trigger everyone has been waiting for. It took the plunge by announcing it would acquire Kite Pharma Inc. (KITE) for $11.9 billion, or $180 per share. That's a 29 percent premium from Kite's August 25 closing price.

But the deal probably won't start paying off for Gilead for three years, as it noted that the transaction will become accretive only after the third year. The lead drug Gilead has its sights on is Kite's axicabtagene ciloleucel (axi-cel), an immuno-therapy treatment for certain types of cancer.


The first hurdle for Gilead's acquisition will be receiving Food and Drug Administration approval for axi-cel, which should come around November 29, 2017. Approval by the European Medicines Agency will probably come sometime in 2018. According to the Wall Street Journal, analysts are looking for the drug to generate sales of $1.7 billion by 2022. But will the new revenue be enough for Gilead, considering the amount has fallen and is projected to continue falling?

Offsetting Falling Revenue

Last week, we noted that analysts are expecting Gilead's revenue to decline by 21 percent in 2017 from its peak of $32.64 billion in 2015. The company's revenues are projected to decline to $22.15 billion by 2019.

Will the potential $1.7 billion in added revenue from axi-cel sales be enough over the next few years to offset the steep declines in Gilead's total revenue? (See: Gilead Shares Are Just Too Expensive.)

GILD Revenue (Annual) Chart

GILD Revenue (Annual) data by YCharts

Not The Deal Investors Were Looking For

The Kite Pharma acquisition was certainly not the deal the street had been looking for, as rumors had swirled that Gilead would acquire much larger targets such as Incyte Corp. (INCY) and Vertex Pharmaceuticals Inc. (VRTX). We noted in mid-July that neither deal was likely to happen given the differing focus on therapies and the steep price tags likely associated with the companies. (See also: Why Gilead Won't Buy Incyte and Vertex.)

Perhaps Monday's acquisition announcement from Gilead is just the first step in what could be a series of acquisitions that will enable it to build up its drug portfolio at a much faster pace. After all, the nearly $12 billion deal only uses about one-third of Gilead's $34 billion cash pile, giving it plenty of money to acquire another drug maker of similar size.

GILD Cash and Short Term Investments (Quarterly) Chart

GILD Cash and Short Term Investments (Quarterly) data by YCharts

It seems obvious that the Kite Pharma deal is a step toward reviving Gilead's growth prospects. But it likely will not be enough to get investors excited again, and may just be the first in a series of strategic moves.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. 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 recommendations made during the past twelve months. Past performance is not indicative of future performance.

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