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Gilead to acquire Pharmasset for $11 billion
by Jeffrey Bouley  |  Email the author


FOSTER CITY, Calif. & PRINCETON, N.J.—Gilead Sciences Inc. is willing to pay $137 per share for the honor of acquiring Pharmasset Inc., which represents an 89 percent premium to Pharmasset's closing share price on Friday, Nov. 18, the last trading day prior to the companies announcing the signing of the definitive agreement.  
The transaction, which values Pharmasset at approximately $11 billion—and which Gilead plans to finance though cash on hand, bank debt and senior unsecured notes—was unanimously approved by Pharmasset's board of directors. Gilead expects that the transaction, when completed, will be dilutive to its earnings through 2014 and accretive in 2015 and beyond. Further guidance will be provided when the transaction closes, probably in the first quarter of 2012.  
Pharmasset currently has three clinical-stage product candidates for the treatment of chronic hepatitis C virus (HCV) advancing in trials in various populations. The company's lead product candidate, PSI-7977, an unpartnered uracil nucleotide analog, has recently been advanced into two Phase III studies in genotype 2 and 3 patients. Both studies will utilize 12 weeks of treatment with PSI-7977 in combination with ribavirin. One study will compare this all-oral regimen against 24 weeks of the standard-of-care pegylated interferon/ribavirin in treatment-naïve patients, and the second study will compare the all-oral regimen to placebo in interferon- intolerant/ineligible patients.  
A third Phase III study in genotype 1 patients will be initiated in the second half of 2012, the design of which is dependent on the outcome of Phase II studies which are evaluating PSI-7977 in various combinations in genotype 1-infected patients. If successful, this strategy could lead to an initial U.S. regulatory approval of PSI-7977 in 2014. PSI- 938, an unpartnered guanosine nucleotide analog, is being tested in a Phase 2b interferon-free trial as monotherapy and in combination with PSI-7977 in subjects with HCV of all viral genotypes. Mericitabine (RG7128), a cytidine nucleoside analog, is partnered with Roche and is being evaluated in three Phase IIb trials. Roche is responsible for all aspects of the development of mericitabine.  
"The acquisition of Pharmasset represents an important and exciting opportunity to accelerate Gilead's effort to change the treatment paradigm for HCV-infected patients by developing all-oral regimens for the treatment of the disease regardless of viral genotype," said Dr. John C. Martin, chairman and CEO of Gilead, in a prepared statement. "Pharmasset presented compelling Phase II data earlier this month further characterizing the strong efficacy and safety profile of PSI-7977. The compound, together with Pharmasset's other pipeline candidates, represents a strong strategic fit with Gilead's vision, pipeline and capabilities. This transaction will serve to drive the long-term growth of our business, and we look forward to working closely with the Pharmasset team to advance a broad clinical program in HCV to address the unmet needs of patients and the medical community. "  
The Phase II data from earlier this month that Martin notes has certainly been compelling, as noted in a Nov. 8 ddn  article, showing a 100 percent cure rate for HCV among the 40 patients in the trial, pushing Pharmasset's stock prices briefly into the mid-70s before dropping back down to around $69.  
This led Canaccord Genuity biotechnology analyst Dr. George Farmer to go bullish, claiming that this study provides "an advance signal of strong proof of concept from the ELECTRON trial, and lending support to our thesis that nucs such as 7977 will represent the backbone of an interferon-free future for HCV therapy." He currently holds a "Buy" rating on the company and a price target of $92.   
However, had a different view on Nov. 8, when Pharmasset's share prices dropped back into the 60s, rating Pharmasset as a "Sell" and maintaining that "The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, weak operating cash flow and feeble growth in its earnings per share."  
Reaction to the acquisition deal from market-watchers also ran a wide range, from a JPMorgan analyst calling the move "a bold and strategically positive deal" for Gilead, to a Stifel Nicolaus analyst calling it "a big bet" that could or could not pay off, to a University of Michigan market- watcher calling the deal an "amazing risk" in which "everything had better work perfectly" for Gilead to come out looking good.  
On announcing the deal, Gilead saw its shares drop 11 percent to $35.57. This isn't an uncommon occurrence for an acquiring company in a large deal, but it also could signal unease among investors that Gilead is making too high a bid for not enough payoff. On the other hand, Pharmasset is making a strong showing in the HCV market, at a time when Decision Resources has predicted the market for HCV drugs will rise from about $1.7 billion last year to $16 billion in 2015. Meanwhile, while Gilead's stock price dropped slightly, Pharmasset's share price surged dramatically to just over $134 at the end of trading on Monday, Nov. 21.
"We are excited to join together with Gilead, which shares our commitment to providing HCV patients with new, highly efficacious and safe oral therapies," said Schaefer Price, president and CEO of Pharmasset. "We are very encouraged by the data from our Phase II studies of PSI-7977 and believe strongly in the potential of this compound to be a component in the transformation of the treatment of chronic HCV. Gilead's established expertise and leadership in the field of antiviral drug development and commercialization, coupled with the company's existing portfolio of promising compounds for HCV, make this partnership an ideal step to fully realize the potential of our promising molecules as part of future all-oral combination therapies for millions of patients in need around the world."

(We will be covering this story in more depth in the January issue of ddn.)

Code: E11211101



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