Gilead bets $11 billion on hepatitis in Pharmasset deal

Mon Nov 21, 2011 5:02pm EST

(Reuters) - Gilead Sciences Inc (GILD.O) struck a deal to buy biotechnology company Pharmasset Inc VRUS.O for about $11 billion in a huge and risky bet on the next generation of hepatitis C treatments.

Gilead, the world's largest maker of HIV drugs, will pay $137 per share for each Pharmasset share, an 89 percent premium for a company with no significant marketed products.

Pharmasset shares had already more than tripled in the past year based on the potential of its experimental hepatitis C medicines to create a new standard of care for the 180 million people worldwide infected with the serious liver disease.

Vertex Pharmaceuticals Inc (VRTX.O) and Merck & Co (MRK.N) won approval this year for hepatitis C medicines that stand to significantly increase cure rates, but they must be taken with commercially manufactured interferon.

Interferons are proteins that help the body's immune system respond to viruses, but they often cause flu-like side effects that lead many hepatitis C patients to stop or delay treatment.

The oral treatments being developed by Pharmasset and other companies such as Abbott Laboratories Inc (ABT.N) could eliminate the need for interferon if they are approved in the next few years.

Pharmasset soared 84.6 percent to $134.14 on the Nasdaq. Shares of Gilead, which said the deal would reduce its earnings through 2014, fell 9.1 percent to $36.26, also on the Nasdaq.

Analysts questioned whether the deal price -- equal to more than one-third of Gilead's market value -- was too steep. A Wall Street survey conducted by ISI Group analyst Mark Schoenebaum after the deal was announced found that 82 percent thought Gilead paid too much.

"It's definitely a high-risk acquisition, but I think it could pay off in dividends for them," said Brian Skorney, an analyst with Brean Murray, Carret & Co. "Given the premium, Gilead is hoping to avoid another potential suitor."

Skorney said a competing bid could emerge. He noted that Roche Holding AG (ROG.VX) has a partnership with Pharmasset. Bristol-Myers Squibb (BMY.N), Johnson & Johnson (JNJ.N) and Merck also sell or are developing hepatitis medicines.

Shares of Inhibitex Inc INHX.O, which also is developing hepatitis C medicines, gained 18.8 percent.

$16 BILLION MARKET

Untreated, hepatitis C can lead to cirrhosis, liver cancer and the need for a liver transplant. According to Gilead, more than 12 million people are infected with hepatitis C in major markets, but fewer than 200,000 are treated annually.

The market for hepatitis C drugs is expected to soar to $16 billion in 2015 from $1.7 billion last year in major commercial markets, according to research firm Decision Resources. It estimates the market will then fall to $11.3 billion in 2020, because many patients will have been cured by the new drugs, reducing the number of people who need treatment.

Vertex recorded enormous initial sales of its new drug, Incivek, but its shares have fallen on expectations that new treatments, such as Pharmasset's, may soon overtake it.

Vertex shares fell 2.6 percent on Monday.

Among the big Pharmasset investors set to profit are investment fund company Fidelity, biotech investing firm Burrill & Co and Pharmasset founder Raymond Schinazi, who holds 4.4 percent of the company, according to Thomson Reuters data.

Gilead, which had a market value of about $30 billion before Monday's trading, has developed a lucrative HIV franchise by combining several drugs into single pills. HIV patients must otherwise juggle multiple pills a day and risk developing AIDS if they fail to stick to their medicines.

Investors are concerned about looming generic competition to its products. Gilead is counting on a four-drug pill, known as the Quad, to propel the franchise in the future.

Pharmasset, which had 82 employees as of its most recent annual report, has three hepatitis C medicines in clinical trials. Its lead candidate, PSI-7977, was recently advanced into two Phase III studies. Gilead expects PSI-7977 to be submitted for U.S. approval in the second half of 2013.

Gilead Chief Executive John Martin said on a call with analysts that Pharmasset's experimental drugs, combined with Gilead's own hepatitis C portfolio, would allow the company to test multiple regimens that are oral and interferon-free.

In justifying the high premium, Gilead said PSI-7977 will be more valuable in its hands because it has the infrastructure to bring the product to more people faster than Pharmasset.

But Leerink Swann analyst Joshua Schimmer said "the need to buy into the (hepatitis C) market with such a big price tag makes us question Gilead's core development capabilities in this space."

Gilead said the deal would hurt its earnings through 2014 but boost them after that. It expects to close the acquisition in the first quarter of 2012 and will temporarily suspend its share repurchase program to focus on paying down debt. The agreement carries a standard break-up fee, about 3 percent of the total deal value, a source close to the situation said.

It said it would finance the deal with cash on hand, bank debt and senior unsecured notes and has financing commitments from Bank of America Merrill Lynch and Barclays Capital. The

Barclays and Bank of America advised Gilead on the deal, while Morgan Stanley advised Pharmasset. Skadden, Arps, Slate, Meagher & Flom LLP is Gilead's legal counsel, while Sullivan & Cromwell LLP is serving as legal counsel to Pharmasset.

(Reporting by Lewis Krauskopf in New York and Anand Basu in Bangalore; Additional reporting by Toni Clarke in Boston and Nadia Damouni in New York; Editing by Michele Gershberg, Esha Dey, John Wallace and Steve Orlofsky)

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