Bloomberg News

Gilead Moves to Top Rivals With $11 Billion Pharmasset Deal

November 25, 2011

(Updates shares in the fifth paragraph.)

Nov. 22 (Bloomberg) -- Gilead Sciences Inc. paid about $11 billion for experimental hepatitis C drugmaker Pharmasset Inc. to win a “competitive” acquisition process and replace an unsuccessful therapy under development, said Chief Operating Officer John Milligan.

Gilead, the world’s largest maker of HIV medicines, has been in talks with Princeton, New Jersey-based Pharmasset about a potential partnership for two years, said Milligan, who is also company president.

Buying a company with no products on the market and a net loss of $91.2 million for the fiscal year ended Sept. 30, may be considered an $11 billion gamble, Geoffrey Porges, an analyst with Sanford C. Bernstein & Co. wrote in a research note. Milligan said Foster City, California-based Gilead made its $137-a-share offer, an 89 percent premium above Pharmasset’s closing price on Nov. 18, to top potential rivals.

“It was clear that if we were going to become competitive with the larger companies this would be an important thing for Gilead to have,” Milligan said yesterday in a telephone interview. “Value investors are less excited about the deal because it disrupts what they call a stable company, but from my point of view, it gives us a new long term trajectory for all investors.”

Gilead rose 3.8 percent to $37.62 at 9:39 a.m. in New York trading. Yesterday, the stock fell 9.1 percent, its biggest single-day decline since April 2010.

Development Setbacks

Pharmasset is developing oral drugs for hepatitis C, or HCV, which is now largely treated by injections. Gilead made its largest purchase ever after setbacks with GS 6620, the company’s hepatitis C drug under development, Milligan said.

“Our own nucleotide clearly doesn’t have a profile to allow it to go forward,” he said. “The products that they have, while just entering Phase 3, I think have a high degree of predictability, in terms of how they will perform.

“So we made a very difficult decision to do an acquisition which is much larger than we typically like to do, but one that we felt was very important for the company,” Milligan said.

Three stages of testing are generally required for U.S. regulatory approval of a new drug.

Hepatitis C is a viral infection that can lead to swelling of the liver. As many as 170 million people globally carry the virus, which is transmitted through exposure to infected blood, and more than 350,000 die from related illnesses each year, according to the Geneva-based World Health Organization.

Current $3 Billion Market

The hepatitis C market is currently about $3 billion worldwide, Andrew Berens, a senior health-care analyst with Bloomberg Industries, in Skillman, New Jersey, said in a telephone interview.

Earlier this year, Merck & Co. and Vertex Pharmaceuticals Inc. won approval for the first new therapies for hepatitis C in almost a decade. Companies including Inhibitex Inc. and Achillion Pharmaceuticals Inc. are also racing to develop medicines for the virus.

Erik Gordon, a business professor at the University of Michigan, also questioned the price of the Gilead’s proposed acquisition.

“Gilead is paying too much, paying all in cash, borrowing money to do it, diluting earnings for three or more years -- to get a drug candidate or two in an area that was supposedly a core strength at Gilead,” Gordon wrote in an e-mail. “You can do a lot of research for $11 billion.”

The purchase, which gives Gilead three potential treatments for chronic HCV now in development by Pharmasset, is five times bigger than the company’s 2006 deal for Myogen Inc. for $2.2 billion, according to Bloomberg data.

HIV Medicines

Gilead sells Atripla, Truvada and Viread, medicines for HIV that generated $2.9 billion, $2.7 billion and $732 million in 2010 revenue, respectively. The company had $7.9 billion in sales last year. Gilead’s experience with HIV treatment regimens will help bring the hepatitis C drugs through clinical development, Chief Executive Officer John Martin said.

Pharmasset reported data on PSI-7977 earlier this month, showing that 40 patients who received the therapy were responsive after 12 weeks. About half the patients had been followed up to 24 weeks, and all were cured. There were no significant adverse events. The drug was tested in combination with ribavirin, a medication currently used in treating the disease, in patients with hepatitis C genotypes 2 and 3. Genotype 1 is most common and hardest to treat.

Roche Holding AG, based in Basel, Switzerland, agreed in October to buy Anadys Pharmaceuticals Inc., another maker of experimental medicines for hepatitis C, for about $230 million.

“We see continued consolidation in the space, potentially including Achillion, which will report important proof-of- efficacy data by year-end and is actively exploring strategic opportunities,” Edward Tenthoff, an analyst with Piper Jaffray & Co., wrote yesterday in a research note.

Achillion CEO Michael Kishbauch said Nov. 17 that his company based in New Haven, Connecticut, is in “advanced discussions” with potential partners or acquirers. The hepatitis C market may be worth $20 billion by 2020, Kishbauch said in an interview.

--With assistance from Meg Tirrell and Elizabeth Lopatto in New York and Phil Serafino in Paris. Editors: Andrew Pollack, Angela Zimm

To contact the reporter on this story: Ryan Flinn in San Francisco at rflinn@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net


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