Gilead to buy Kite for promising cancer therapies in $12 billion deal

By Natalie Grover and Michael Erman

(Reuters) - Gilead Sciences Inc (GILD.O) agreed to buy Kite Pharma Inc (KITE.O) in a nearly $12 billion deal on Monday, as it looks to replace flagging sales from hepatitis C drugs with an emerging and expensive class of cancer immunotherapies that are expected to generate billions of dollars in revenue.

Santa Monica, California-based Kite is developing chimeric antigen receptor T-cell therapy, known as a CAR T, which harnesses the body's own immune cells to recognise and attack malignant cells.

Gilead will pay $180 per share in an all-cash deal, representing a 29.4 percent premium over Kite's Friday close.

Kite's shares rose 28 percent to $178.39 at mid-afternoon, while Gilead's shares rose 2.3 percent to $75.51.

Recent breakthroughs convinced Gilead's management that they needed to buy a company developing CAR T treatments.

"It really became clear that it was going to work and it was going to work in more than one kind of tumour. ... And then, importantly, that the manufacturing on an industrial scale could work," Gilead Chief Executive John Milligan told investors on a conference call. "Now is the right time to get involved in this kind of therapy."

Gilead's growth has been fuelled by its pricey but revolutionary hepatitis C drugs but with fewer eligible patients and rising competition, sales have begun to fall.

Second-quarter sales of its hepatitis C drugs - Sovaldi, Harvoni and Epclusa - totalled $2.9 billion, down from $4 billion a year earlier.

Kite is one of the leading players in the emerging field of CAR T, and is competing with rivals Novartis AG (NOVN.S), Juno Therapeutics Inc (JUNO.O) and Bluebird Bio Inc (BLUE.O) in a race to get the first approved therapy.

Juno shares rose 15 percent and Bluebird shares rose 10 percent in morning trading on hopes that other deals in the sector will follow.

If approved, these drugs are expected to cost up to $500,000 and generate billions of dollars in sales. Success would also help advance a cancer-fighting technique that scientists have been trying to perfect for decades.

The U.S. Food and Drug Administration (FDA) is expected to decide by Nov. 29 whether to approve Kite's CAR T, axi-cel, for treatment of adults with advanced lymphoma.

Wall Street and Gilead shareholders have long been expecting Gilead to use its cash pile for a big-ticket acquisition. Gilead is hoping the deal, expected to close in the fourth quarter, repeat the success of its 2011 purchase of Pharmasset.

That deal allowed Gilead, then the world's largest maker of HIV drugs, to move into hepatitis C treatments. Last year, just under half of Gilead's $30 billion in sales came from hepatitis C treatments.

The company faced strong criticism for the steep price tag on those treatments, and the cost of Kite's CAR T offerings will likely generate backlash for the company as well.

"There will be headlines just because the price itself is so high," said Brad Loncar, CEO of Loncar Investments, which runs the Loncar Cancer Immunotherapy ETF (CNCR.O). "But unlike hepatitis C, they are treating patients that only have weeks or months to live and providing durable remissions."

BofA Merrill Lynch and Lazard are Gilead's financial advisers, while Centerview Partners is advising Kite.

Skadden is Gilead's legal counsel and Sullivan & Cromwell and Cooley are working with Kite.

(Reporting by Natalie Grover and Divya Grover in Bengaluru and Michael Erman in New York; Editing by Arun Koyyur and Bill Rigby)