Gilead Is Buying Immunomedic. What the Bond Market Has to Say About the Deal.

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Here’s another sign markets are acting like the recession is over: the return of debt-financed pharmaceutical megadeals.

On Monday,

Gilead Sciences

(ticker: GILD) offered to pay $21 billion in cash for cancer-drug developer

Immunomedics

(IMMU), for a little more than double Friday’s closing share price.

If the deal closes, Gilead will use about $15 billion of the cash it has on hand, and pay for the remaining $6 billion with new debt, the company said. In April, Immunomedics drug Trodelvy was approved by the U.S. Food and Drug Administration as a third-line treatment for triple-negative metastatic breast cancer.

To be sure, a $6 billion bond sale isn’t exactly record-setting, especially compared with deals funded with massive debt issuance, such as

Bristol-Myers Squibb’s

(BMY) $19 billion bond sold to buy Celgene, or IBM’s (IBM) $20 billion bond deal to finance its purchase of Red Hat.

But the deal means an additional $15 billion in cash won’t be available to spend on debt service or reduction. As Barron’s has reported, at least one Wall Street analyst has calculated the net present value of Trodelvy at around $12 billion, and it isn’t yet clear how the company will generate the $9 billion difference.

And the company still plans to return as much cash, if not more, to its shareholders, as CreditSights points out in a Sept. 14 note.

So it makes sense that the bond market is acting like Gilead’s management is saying the company is getting more comfortable carrying a higher level of debt—and with lower credit ratings.

S&P Ratings put the company on watch for a downgrade—most likely to BBB+ from A—less than one day after the deal was announced.

S&P says it expects the deal to drive Gilead’s leverage above 2.5 times its 2020 earnings before interest, tax, depreciation, and amortization. That amount of leverage warrants a rating within the so-called BBBs, the analysts say, the three lowest ratings below junk.

Bonds usually experience paper losses ahead of downgrades, though investors who buy after the selloff can receive higher yields and income.

Gilead’s long-term bonds were selling off on Tuesday, according to credit-market data platform BondCliQ. The pharmaceutical company’s longest-term bond, which carries a 4.15% coupon and matures in 2047, lost 10.4% on Monday and early Tuesday.

Because of the rally in benchmark Treasuries and the slide in their yields, the 27-year Gilead bond now yields about 2.7%, around 1.3 percentage points above 30-year Treasuries, according to BondCliQ.

CreditSights maintains its Underperform recommendation on the company’s bond. Gilead’s stock, in contrast, was up 0.2% in recent trading, at $66.49, after gaining 1.2% on Monday.

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com