Gilead to acquire Pharmasset for $11 billion

Analyst views on wisdom of purchase are mixed, but Gilead predicts acquisition will be dilutive to its earnings through 2014 and accretive in 2015 and beyond

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FOSTER CITY, Calif. & PRINCETON, N.J.—Gilead SciencesInc. is willing to pay $137 per share for the honor of acquiring PharmassetInc., which represents an 89 percent premium to Pharmasset's closing shareprice on Friday, Nov. 18, the last trading day prior to the companiesannouncing 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 debtand senior unsecured notes—was unanimously approved by Pharmasset's board ofdirectors. Gilead expects that the transaction, when completed, will bedilutive to its earnings through 2014 and accretive in 2015 and beyond. Furtherguidance will be provided when the transaction closes, probably in the firstquarter of 2012.
Pharmasset currently has three clinical-stage productcandidates for the treatment of chronic hepatitis C virus (HCV) advancing intrials in various populations. The company's lead product candidate, PSI-7977,an unpartnered uracil nucleotide analog, has recently been advanced into twoPhase III studies in genotype 2 and 3 patients. Both studies will utilize 12weeks of treatment with PSI-7977 in combination with ribavirin. One study willcompare this all-oral regimen against 24 weeks of the standard-of-carepegylated interferon/ribavirin in treatment-naïve patients, and the secondstudy will compare the all-oral regimen to placebo in interferon-intolerant/ineligiblepatients.
A third Phase III study in genotype 1 patients will beinitiated in the second half of 2012, the design of which is dependent on theoutcome of Phase II studies which are evaluating PSI-7977 in variouscombinations in genotype 1-infected patients. If successful, this strategycould 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 2binterferon-free trial as monotherapy and in combination with PSI-7977 insubjects with HCV of all viral genotypes. Mericitabine (RG7128), a cytidinenucleoside analog, is partnered with Roche and is being evaluated in threePhase IIb trials. Roche is responsible for all aspects of the development ofmericitabine.
"The acquisition of Pharmasset represents an important andexciting opportunity to accelerate Gilead's effort to change the treatmentparadigm for HCV-infected patients by developing all-oral regimens for thetreatment of the disease regardless of viral genotype," said Dr. John C.Martin, chairman and CEO of Gilead, in a prepared statement. "Pharmassetpresented compelling Phase II data earlier this month further characterizingthe strong efficacy and safety profile of PSI-7977. The compound, together withPharmasset's other pipeline candidates, represents a strong strategic fit withGilead's vision, pipeline and capabilities. This transaction will serve todrive the long-term growth of our business, and we look forward to workingclosely with the Pharmasset team to advance a broad clinical program in HCV toaddress the unmet needs of patients and the medical community."
The Phase II data from earlier this month that Martin noteshas certainly been compelling, as noted in a Nov. 8 ddn  article, showing a 100 percent cure ratefor HCV among the 40 patients in the trial, pushing Pharmasset's stock pricesbriefly into the mid-70s before dropping back down to around $69.
This led Canaccord Genuity biotechnology analyst Dr. GeorgeFarmer to go bullish, claiming that this study provides "an advance signalof strong proof of concept from the ELECTRON trial, and lending support to ourthesis that nucs such as 7977 will represent the backbone of an interferon-freefuture for HCV therapy." He currently holds a "Buy" rating on thecompany and a price target of $92. 
However, had a different view on Nov. 8, whenPharmasset'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 feeblegrowth in its earnings per share."
Reaction to the acquisition deal from market-watchers alsoran a wide range, from a JPMorgan analyst calling the move "a bold andstrategically positive deal" for Gilead, to a Stifel Nicolaus analyst callingit "a big bet" that could or could not pay off, to a University of Michiganmarket-watcher calling the deal an "amazing risk" in which "everything hadbetter work perfectly" for Gilead to come out looking good.
On announcing the deal, Gilead sawits shares drop 11 percent to $35.57. This isn't an uncommon occurrence for an acquiringcompany in a large deal, but it also could signal unease among investors thatGilead 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 DecisionResources has predicted the market for HCV drugs will rise from about $1.7billion last year to $16 billion in 2015. Meanwhile, while Gilead's stock pricedropped slightly, Pharmasset's share price surged dramatically to just over $134at the end of trading on Monday, Nov. 21.
"We are excited to join togetherwith Gilead, which shares our commitment to providing HCV patients with new,highly efficacious and safe oral therapies," said Schaefer Price, president andCEO of Pharmasset. "We are very encouraged by the data from our Phase IIstudies of PSI-7977 and believe strongly in the potential of this compound tobe a component in the transformation of the treatment of chronic HCV. Gilead'sestablished expertise and leadership in the field of antiviral drug developmentand commercialization, coupled with the company's existing portfolio ofpromising compounds for HCV, make this partnership an ideal step to fullyrealize the potential of our promising molecules as part of future all-oralcombination 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.)

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