* Gilead bets on Pharmasset experimental hepatitis C drugs
* Gilead to pay $137 per share, an 89 percent premium
* Gilead sees deal hurting earnings through 2014
* Pharmasset soars 85 pct, Gilead off nearly 11 percent
By Lewis Krauskopf and Anand Basu
Nov 21 Gilead Sciences Inc struck a
deal to buy biotechnology company Pharmasset Inc for
about $11 billion in a huge 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 and Merck & Co
won approval this year for hepatitis C medicines that stand to
significantly increase cure rates, but they must be taken with
commercially manufactured interferon.
Interferon 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
The oral treatments being developed by Pharmasset and other
companies such as Abbott Laboratories Inc could
eliminate the need for interferon if they are approved in the
next few years.
Pharmasset soared 85.1 percent to $134.48 in morning
trading. Shares of Gilead, which said the deal would reduce its
earnings through 2014, fell nearly 11 percent to $35.66.
Analysts questioned whether the deal price was too steep.
"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 has a partnership with Pharmasset.
Bristol-Myers Squibb , Johnson & Johnson and
Merck also sell or are developing hepatitis medicines.
Shares of Inhibitex Inc , which also is developing
hepatitis C medicines, jumped 17 percent.
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 are expected to be 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 were down 2 percent after the Pharmasset deal
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. Such
convenience is critical for HIV patients who otherwise must
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 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.
"Gilead has vast experience in antivirals and is currently
a leader in HIV, but has been hard at work developing a broad
pipeline of therapies for Hep C," JPMorgan analyst Geoff
Meacham said in a research note.
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.
Gilead will temporarily suspend its share repurchase
program to focus on paying down debt.
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.
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.