Earlier this week, Gilead Sciences (NASDAQ:GILD) raised its stake in Arcus Arcus Biosciences (NYSE:RCUS) to 33% from ~20% by making an additional equity investment of ~$320 million. The new share purchase came priced $21/share, compared to the $15.49 that RCUS shares were trading at on the open market during Tuesday’s midday action.
Did GILD overpay for this additional stake in RCUS, offering a 37% premium to Monday’s closing price?
Despite the steep premium included in the deal price, shares of RCUS barely moved on Tuesday, climbing under 2% in midday trading. This leaves a significant gap between the current market valuation and GILD’s $21-per-share view.
“Gilead’s private investment at $21/share is a bullish bet on Arcus’s anti-TIGIT asset – which is a unique cancer target, but among a few other developers like Roche,” Seeking Alpha analyst Stephen Ayers, who rates RCUS as a Speculative Buy with a confidence score of 65/100, said of the deal. “The public market isn’t as confident in the drug as Gilead appears to be.”
Ayers added that this gap in confidence creates a kind of “arbitrage opportunity,” although he cautioned that “it is not without risks for the public.”
“Even in the case of ‘information asymmetry’ wherein Gilead has access to non-public information that accounts for the valuation difference, Gilead’s investment may not come to fruition if the drug falls short,” he noted. “In all likelihood, Gilead is likely just placing their bets in the anti-TIGIT arena with Arcus as their playing card.”
With its additional investment, Gilead gets one more seat on Arcus’ board. Arcus said the additional investment by Gilead will extend its cash runway into 2027 and enable the funding of its Phase 3 studies in pancreatic and kidney cancers, while supporting the preparation for potential approvals.
The companies also plan to quash a late-stage trial testing their candidate domvanalimab in combination with another experimental drug zimberelimab vs. Keytruda monotherapy to treat a type of non-small cell lung cancer.
Turning to market opinions of RCUS more broadly, Wall Street generally has a bullish outlook for the stock. Of 11 analyst ratings, seven see the stock as a Strong Buy and another two offer a Buy recommendation. RCUS also has two Hold ratings.
Meanwhile, analysts’ price targets for the stock suggest that GILD might have gotten a good deal. The average price target among Wall Street experts sits at $40.30, with a high mark at $70.
Seeking Alpha’s Quant Ratings system, which uses quantitative measures to grade a stock’s prospects, similarly has a bullish view, giving the stock a Buy rating. However, it also suggests some signs of caution, presenting the stock with an overall score of 3.76 out of 5. RCUS receives a C- for valuation and a D for profitability.
