Only days after the announcement of the Adamas FDA break-through, the news is out concerning the takeover of one of Arctic Aurora LifeScience largest investments, Kite Pharma. 2017 was said to be the big M&A year, and the story continues as the California based biotech company working with cutting edge cancer immunotherapy is to be bought for USD 11,9 bn. "Kite has been our premier conviction case since the very start of the fund," says portfolio manager Ulrica Bjerke.
A new transaction within innovative cancer treatment
Gilead Sciences and Kite Pharma today announced that Gilead acquires Kite in an all-cash transaction amounting to USD 11.9 billion or USD 180 per share. This corresponds to a premium of nearly 30% compared to Friday’s close.
Kite has been AALS’ premier ‘conviction case’ and the fund has been invested in Kite since the fund’s start in 2016. Since then the share price has risen around 180% before Gilead’s tender offer. Based on Kite’s excellent technology within the CAR-T field and exceptional treatment results, the fund management team has previously identified the company as a clear take-out candidate with a continuously lowered risk profile.
We have followed Kite through its progress and increased our position through the positive clinical trial data that emerged. At the time of the acquisition announcement AALS had 4.5% portfolio weight in Kite. The company also has a very experienced management team that has planned for the regulatory approval, manufacturing and distribution processes in an impressive manner.
Gilead’s offer is of course very positive for the investors in AALS. An important part of AALS’ investment strategy is to seek alpha return by identifying companies that are M&A candidates. The ecosystem of the global pharmaceutical industry is based on larger companies’ insourcing or acquisition of innovative technologies from the small biotech companies. During 2017, the M&A activity has been limited due to the political turbulence in the US. However, we see this transaction as a positive for the whole biotech sector as it indicates that technologies and innovative projects have a considerable high value and a given place among the larger corporations. This could be a trigger for more M&A transactions during the fall.
For Gilead, the deal could mean the start for a new exciting future. The company’s previous transaction in the size of Kite had a much better outcome (within viral infections) than the market at that time could imagine and we are hoping for a new success creating a strong player within the cancer field – not least for the affected patients.
In CAR-T treatments, cancer patients’ own T-cells are utilized to identify and attack cancer cells. T-cells, a type of white blood cells, are an essential part of the immune system that eliminates foreign disease causing cells. With this treatment, T-cells are manipulated to specifically hone in on cancer cells.
In this treatment process, T-cells to are extracted from the blood of the cancer patients and sent to state-of-the-art manufacturing labs. Here, the T-cells are genetically transformed by essentially injecting DNA into the cells through special man-made viruses. The new DNA codes for special recognition receptors that makes the T-cells able to identify and attack cancerous cells. The T-cells are then allowed to multiply before being re-injected into the patient.
The front-running companies within this technology, Kite, Juno and pharma giants Novartis has primarily focused on certain blood cancers as their initial disease targets. Juno were the leaders in adult patients suffering from ALL or acute lymphoblastic leukemia whereas Novartis had a timing advantage in the pediatric ALL population. However, last year Juno fell behind due to safety concerns. CAR-T treatments are highly potent and therefore also potentially dangerous for patients as the re-introduced T-cells proliferate very quickly and sometimes causing severe immunological adverse reactions. After a number of severe adverse events, Juno had to pull the emergency brakes on its most advanced program, thereby falling behind the other two.
Kite on the other hand, primarily focused on patients suffering from specific types of non-Hodgkin’s lymphoma. In a ground-braking study, Kite’s CAR-T treatment led to disease responses after 6 months post-treatment in one third to more than half of the patients (depending on the precise cancer type) which is an astounding results considering that the patients included in the study were very advanced and heavily pre-treated after having failed several attempts of standard-of-care chemotherapy. Importantly, Kite’s more cautious development approach has meant that their program did not have the severe safety concerns Juno experienced, and Kite also noticed considerably better safety as the study included more and more patients while Kite and caregivers became more accustomed to the treatment method and its potential risks.
Novartis have moved on rapidly with a regulatory submission early this year to the US FDA in order to gain approval to commercial market their CAR-T treatment with Kite following close thereafter. In July an FDA appointed expert committee conducted a public hearing with Novartis regarding their ALL application after which the panel unanimously recommended FDA to approve the Swiss company’s application. FDA later announced that Kite will not have to show up for such a meeting – clear signal that approvals for both Novartis and Kite before year’s end is all but a formality at this point.
Arctic Aurora LifeScience is an equity fund investing in global biotechnology and pharmaceutical companies. The fund is run by former portfolio manager in the Swedish AP Fonder, Ulrica Bjerke, and Dr. Torbjørn Bjerke, both with 20 years of experience from the industry. Daniel Bolanowski fills the role as anlyst on the team with a MSc in both Biotech and Economics. Aurora LifeScience was launched in May 2016 with both hedged and un-hedged share classes.
Past performance in Arctic Aurora LifeScience s no guarantee for future returns. Future returns depend on the market, fund manager skill, fund risk level, costs, among others. Performance in the fund may at times be negative and may for this fund vary considerably within periods.