Bloomberg News

Gilead to Buy Pharmasset for $11 Billion to Win in Hepatitis

November 30, 2011

(Updates with comments from Gilead in third paragraph.)

Nov. 21 (Bloomberg) -- Gilead Sciences Inc., the world’s largest maker of HIV medicines, agreed to buy Pharmasset Inc. for about $11 billion, betting that its experimental hepatitis C treatments will lead the next generation of therapies in a market that may reach $20 billion by 2020.

Gilead will pay $137 a share in cash, 89 percent more than the closing price for Pharmasset on Nov. 18, the companies said in a statement today. The purchase, Gilead’s biggest, will reduce the Foster City, California-based company’s earnings through 2014 and then add to profit, the statement said.

“We felt we had several good assets in HCV, but we were not close to being the leader,” John Milligan, the company’s president and chief operating officer, said today in a telephone interview. “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.”

Pharmasset is developing oral drugs for hepatitis C, or HCV, which is now largely treated by injections. The company, with 82 employees, a net loss of $91.2 million for the fiscal year ended Sept. 30 and no products on the market, is a gamble at $11 billion, said Geoff Porges, an analyst with Sanford C. Bernstein & Co.

“For Gilead to give up effectively one-third of their value for an unproven asset still subject to significant ongoing clinical risk seems remarkable,” Porges, who is based in New York, wrote today in a research note. The company is “likely to be treated harshly by investors for apparently ‘top ticking’ the most visible asset in the market.”

Gilead Falls

Gilead dropped 9.1 percent to $36.26 at the close in New York, for its biggest decline since April 21, 2010. Pharmasset, of Princeton, New Jersey, rose 85 percent to $134.14, the most since shares were first sold to the public in April 2007. Pharmasset’s shares have gained sixfold this year.

The acquisition was spurred by setbacks in early testing for Gilead’s experimental therapy for hepatitis C, GS 6620, 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.”

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

‘Strong Statement’

The purchase “clearly sends a strong statement that Gilead is intent on becoming the leader in HCV over the next decade and wants the key drugs to make it happen,” Michael Yee, an analyst with RBC Capital Markets in San Francisco, wrote in an e-mail today. Pharmasset’s experimental drug, PSI-7977, “could add $3 billion to $5 billion in revenue over the long term,” he said.

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.

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 today in a telephone interview today.

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.

Gilead had $7.9 billion in sales last year. Pharmasset had revenue of $900,000 for the fiscal year ended Sept. 30. Erik Gordon, a business professor at the University of Michigan, also questioned the price of the acquisition.

‘Paying Too Much’

“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 today. “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.

The acquisition “is a smart direction for Gilead to take, since they know the antiviral space,” said Les Funtleyder, a portfolio manager at Miller Tabak & Co. in New York, in an e- mail today. His fund owns Pharmasset shares. “Ultimately we probably move to an all-oral treatment for hepatitis C. It’s likely Pharmasset’s drug serves as a backbone.”

‘Difficult Decision’

Gilead’s Milligan, acknowledging the questions about the price of the deal, said, “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.”

Gilead sells Atripla, Truvada and Viread, medicines for HIV that drew $2.9 billion, $2.7 billion and $732 million in 2010 revenue, respectively. Gilead’s experience with HIV treatment regimens will help bring the products for hepatitis C through clinical development, Chief Executive Officer John Martin said.

“Gilead has become the leading player in HIV by having the best-in-class treatment,” Martin said today in a conference call with analysts and investors. “We believe the same opportunity exists in HCV.”

Data Reported

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 they were all 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 in a research note today.

Achillion CEO Michael Kishbauch said on Nov. 17 that his company 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.

Achillion, based in New Haven, Connecticut, Inhibitex, based in Alpharetta, Georgia, and Cambridge, Massachusetts-based Idenix Pharmaceuticals Inc. are likely takeover targets, William Blair & Co. analyst Y. Katherine Xu said in an interview last week.

‘Gone in a Year’

“Idenix, Inhibitex, Achillion -- they’re going to be gone in a year,” Xu said.

Inhibitex rose 19 percent to $10.61, the highest price since Dec. 14, 2004. Idenix declined 2.1 percent to $7.25 and Achillion increased 1.7 percent to $5.94.

Bank of America Merrill Lynch and Barclays Capital agreed to finance the transaction, according to the statement. Both banks advised Gilead, while Pharmasset used bankers from Morgan Stanley. Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal counsel to Gilead and Sullivan & Cromwell LLP provided advice to Pharmasset.

Gilead plans to finance the acquisition with cash on hand, bank debt and senior unsecured notes.

--With assistance from Elizabeth Lopatto in New York, Phil Serafino in Paris and Ryan Flinn in San Francisco. Editors: Reg Gale, Andrew Pollack

To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net

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


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