The Associated Press November 21, 2011, 12:46PM ET

Gilead Sciences to buy Pharmasset for $11 billion

Gilead Sciences Inc. has agreed to pay about $11 billion for drug developer Pharmasset Inc. in a huge bet on experimental hepatitis C treatments. The offer includes an 89 percent premium over the stock's latest closing price.

The announcement sent Gilead's stock tumbling and Pharmasset's soaring.

Pharmasset, based in Princeton, N.J., has no products on the market, but it is studying a possible oral treatment combination for the viral infection that could become a preferred option if studies show it works as well as drug cocktails containing the injectable drug interferon.

"It could be the dominant player in a new, non-injectable paradigm for the treatment of hepatitis C," Stifel Nicolaus analyst Maged Shenouda said. "That's the bet, but it's a big bet at $11 billion."

Hepatitis C can lead to life-threatening liver damage and is the main cause of liver transplants in the United States. Analysts expect the disease to become a bigger health problem due to the large, aging population of U.S. baby boomers, including some people who used intravenous drugs when they were younger.

Hepatitis C is spread through the blood, and that can happen through needle sharing or having sex with an infected person. The disease, which can take years to manifest, also could be picked up from blood transfusions before 1992, when the blood supply began being tested for the virus.

Gilead, based in Foster City, Calif., said Monday that it will pay $137 per share in cash for each Pharmasset share. The stock, which has more than tripled in price this year, closed at $72.67 on Friday. On Monday, it soared almost 85 percent more, or $61.60, to $134.27, while broader trading indexes fell more than 2 percent.

Gilead shares dropped nearly 12 percent, or $4.70, to $35.18.

Analyst Erik Gordon of University of Michigan's Ross School of Business called the deal an "amazing risk" for Gilead. He noted that Pharmasset shares traded in the $20 range over the past year, and the price Gilead will pay multiplies the deal's risk.

"At that price, everything had better work perfectly," he said.

Pharmasset has a total of three potential hepatitis C treatments in clinical testing, including its lead candidate, known as PSI-7977. Pharmasset said earlier this month it had started late-stage clinical testing of PSI-7977. The company will run a 12-week study that treats hepatitis C patients with a combination of PSI-7977 and ribavirin, both of which are given orally.

Pharmasset plans to start two other late-stage trials in 2012 and hopes to file for marketing approval of treatment in the United States and European Union in the second half of 2013.

Analysts say it's too early to determine what sort of sales Pharmasset's lead candidate might achieve if it receives approval. But the Vertex Pharmaceuticals Inc. hepatitis C pill Incivek, which was approved last spring, rang up about $420 million in this year's third quarter.

Another pill, Merck & Co.'s Victrelis, received approval shortly before Incivek. It had $31 million in sales in the quarter. Both drugs were the first new breakthrough treatments for the liver disease to be approved in 20 years.

Gilead also is developing some oral hepatitis C treatments, but unlike Pharmasset, it has several other drugs on the market. Its top sellers include the HIV drugs Atripla and Truvada. In October, Gilead reported third-quarter earnings of $741.1 million, or 95 cents per share, on $2.12 billion in revenue.

Gilead Chairman and CEO John C. Martin told analysts during a conference call Monday that the future treatment landscape for hepatitis C will be defined by oral treatment regimens that are safe, well-tolerated and simpler to use than injections. He said the deal will allow Gilead to explore new combinations with its hepatitis C drugs under development.

Gilead said it will pay for the acquisition with cash on hand, bank debt and senior unsecured notes. It expects the deal to close in next year's first quarter, and it forecasts that the deal could start helping Gilead's earnings by 2015.


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