Arcus Biosciences Inc. “brings the milk without [Gilead Sciences Inc.] having to buy the whole cow” is the way one analyst characterized the pair’s 10-year cancer immunotherapy deal, which could be worth as much as $2 billion, and some may have detected downside for Arcus, as shares (NYSE:RCUS) closed May 27 at $27.05, down $6.49, or 19%.

Foster City, Calif.-based Gilead is paying Arcus, of Hayward, Calif., $175 million up front, shelling out a $200 million equity investment, and pledging potentially $1.6 billion or more in the form of R&D support, opt-in cash and milestone payments.

The setup is designed to develop and commercialize current as well as future candidates in Arcus’ pipeline. Arcus not only has immune system-targeting prospects but also those taking aim at cell-intrinsic pathways in cancer. The roster includes antibody compounds meant for immune checkpoint receptors, including PD-1 and TIGIT. At the clinical stage, Arcus has four immuno-oncology (I-O) programs, with six undergoing preclinical work. A key part of Arcus’ strategy is the development of intraportfolio combinations that include small molecules and antibodies.

Arcus CEO Terry Rosen told investors during a conference call that his firm’s emphasis on combo therapies made Gilead the “perfect” collaborator to fulfill “exactly the vision we would have had for a partnership from day one. We recognized early on that to fully leverage [the drug-pairing strategy] ideally you would have one partner,” since a “modular approach” with various partners in charge of assorted drugs would be “complicating.”

Under the terms, the pair will co-commercialize Gilead-optioned programs in the U.S. with equal profit-sharing. Arcus is in line for double-digit royalties outside the country, has agreed to keep researching new targets independently, and is providing Gilead with opt-in rights to all programs in the pipeline. “Should they not opt in, those sorts of programs we could continue to develop independently,” Rosen noted. “We do have the option of partnering those programs with others. Frankly, if I could have my wish, they’d opt in on everything. It keeps the integrity of the portfolio very strong.”

Specifically, Arcus is eligible to bank up to $1.225 billion in opt-in and milestone payments with respect to its current clinical candidates. The pact grants Gilead immediate rights to anti-PD-1 monoclonal antibody zimberelimab, as well as opt-in rights to all other current Arcus clinical prospects, which include AB-154, AB-928 and AB-680, upon payment of a fee that ranges from $200 million to $275 million per program, after the delivery of a qualifying data package. Among Arcus’ 10 ongoing clinical studies is a randomized phase II experiment in first-line non-small-cell lung cancer (NSCLC), evaluating combos of AB-154, an anti-TIGIT monoclonal antibody; AB-928, an A2aR/A2bR antagonist; and zimberelimab.

Roche to quell TIGIT fidgets?

If Gilead opts in to the AB-154 program, Arcus could collect as much as $500 million, should goals be met related to U.S. regulatory approval. Gilead would pay $150 million per program if opt-in rights are exercised on other programs that emerge from Arcus over the next 10 years. Ongoing R&D support will be provided to the tune of up to $400 million over the collaboration term, and Gilead has the right to appoint two people to Arcus’ board once the contract is made final, which is expected to happen in the third quarter of this year.

Gilead “continues to stay extremely busy during [the COVID-19 pandemic] and is nicely building out the pipeline to the point [that] investors will figure out there is much more than just HIV” to the company’s story, wrote Jefferies analyst Michael Yee, who made the cow analogy. “We like what we see so far,” he added, citing Gilead’s takeover this year of Menlo Park, Calif.-based Forty Seven Inc. in a $4.9 billion deal that brought aboard CD47 “don’t eat me” blocking antibody magrolimab.

SVB Leerink analyst Geoffrey Porges said in a report that the Gilead-Arcus deal, rumored since mid-April, is “largely what we expected” and expands Gilead’s reach while allowing Arcus to maintain its independence. Gilead (NASDAQ:GILD) closed at $74.90, up $1.72.

Gilead’s $200 million equity investment will be at a price per share of $33.54. The company will have the right to buy more shares from Arcus, up to a maximum of 35% of the outstanding voting stock of Arcus, over the course of the next five years, at a 20% premium at the time Gilead exercises such an option, or, if greater, at the initial purchase price per share.

BTIG analyst Thomas Shrader said Gilead’s interest in Arcus “seems long overdue.” On the TIGIT front, “excitement is likely based on the actions at [Roche Holding AG], where a phase II NSCLC trial has been completed,” with data due at American Society of Clinical Oncology meeting later this month, he wrote in a report. “What is probably more intriguing is that Roche, a company with a huge I-O pipeline and a history of conservative development, has launched two large phase III trials testing TIGIT in NSCLC.”

Cowen and Morgan Stanley & Co. LLC are acting as financial advisors to Gilead. Citi is serving as financial advisor to Arcus. Covington & Burling LLP, Skadden, Arps, Slate, Meagher & Flom LLP and Venable LLP are legal counsel to Gilead, with Cooley performing the same job for Arcus.

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