December 8, 2023

DealBook: Gilead to Buy Pharmasset for $11 Billion

Test samples in a Gilead Sciences laboratory in Foster City, Calif.David Paul Morris/Bloomberg NewsTest samples in a Gilead Sciences laboratory in Foster City, Calif.

10:54 a.m. | Updated

Gilead Sciences made a bold move on Monday to capture the lead in developing the next generation of hepatitis C drugs, agreeing to pay $11 billion in cash for Pharmasset.

Gilead will pay $137 a share in cash, nearly 89 percent above Pharmasset’s closing price on Friday and almost 55 percent above its 52-week high of $88.52.

The treatment of hepatitis C has already undergone a revolution this year, with new pills from Vertex Pharmaceuticals and Merck sharply increasing the cure rates and also often cutting the required duration of treatment.

But those new drugs still must be used with interferon, a type of drug injected once a week that can cause severe flu-like symptoms and other side effects.

Pharmasset, based in Princeton, N.J., is leading the push to develop the first all-oral treatment regimen, doing away with the need for interferon. Its lead drug candidate, PSI-7977, has just entered the final phase of clinical testing and could be on the market as early as 2014, Gilead said.

Pharmasset is “way ahead of everybody else,” Norbert W. Bischofberger, Gilead’s executive vice president for research and development, told analysts on a Monday morning conference call.

Gilead is a leader in developing and selling drugs to treat H.I.V. infection and AIDS, and also sells medicines for hepatitis B. But it has not distinguished itself in the hepatitis C area.

Between Pharmasset’s drugs and Gilead’s own experimental hepatitis C products, “we have all the ingredients in hand now” to explore various combinations of oral drugs, Dr. Bischofberger said.

Eventually, he said, Gilead hopes to combine two or three hepatitis C drugs into a single pill, a strategy that has been very successful for AIDS with its drug Atripla.

Geoffrey Meacham, biotechnology analyst at JPMorgan, called the move “a bold and strategically positive deal” for Gilead. Yaron Werber of Citigroup said the acquisition “propels Gilead to potentially dominate the hep-C market.”

Still, shares of Gilead fell about 10 percent, to $35.64, in trading on Monday morning, perhaps because of concerns about the price of the deal and its effect on earnings. The takeover is expected to dilute Gilead’s earnings through 2014 and then begin contributing to profit in 2015.

Shares of Pharmasset, whose ticker symbol is VRUS, soared about 85 percent on Monday, to $134.20. Before Monday, the stock had already climbed more than 240 percent in the last year on expectations for PSI-7977. The company reported a $91 million loss for the year ended Sept. 30 on revenue of $897,000.

Major drug makers have been on an acquisition spree in the last few years, driven by the need to refill their product pipelines. Gilead, based near San Francisco, has made 10 deals since 2006, though the one for Pharmasset is by far the biggest in Gilead’s 24-year history.

Many of Gilead’s previous acquisitions, like those aimed at moving the company into cardiovascular medicine, have been considered less than successful by many on Wall Street.

Hepatitis C, being a viral disease, fits more with Gilead’s expertise. But there are likely to be questions about why Gilead was paying nearly twice Pharmasset’s market value, which was already considered extremely high for a company without a product on the market.

John F. Milligan, Gilead’s president and chief operating officer, told analysts that Gilead, unlike Pharmasset, already had the ability to apply for regulatory approvals and to sell PSI-7977 around the world.

“So in our hands, it becomes more valuable,” he said. He also said there was apparently competition to buy Pharmasset.

Desperation might have played a role as well. Dr. Milligan said one of Gilead’s own hepatitis C drugs had not lived up to expectations.

About 3 million to 4 million Americans — and as many as 170 million people worldwide — are estimated to have chronic infections of hepatitis C. Many of those infected in the United States are Baby Boomers who injected drugs using contaminated needles decades ago and might not even know they are infected. The infection can cause liver cirrhosis and liver cancer, but often not for decades after the initial infection.

Until recently, treatment of genotype 1 of the disease, which accounts for about 70 percent of the infections in the United States and is one of the most-resistant strains, involved an almost yearlong regimen of interferon and ribavirin, an oral medicine.

The new drugs, Vertex’s Incivek and Merck’s Victrelis, when combined with the existing two drugs, increase the cure rate for genotype 1 to 60 to 80 percent. And in some cases they require only 24 weeks of treatment.

Pharmasset’s PSI-7977 has been tested mostly for genotypes 2 and 3, which generally require only 24 weeks of treatment with the older drugs. In one small test, 10 of 10 patients treated with the drug and ribavirin were considered cured after only 12 weeks of treatment, a result that astounded researchers.

Pharmasset is now testing that combination in two phase 3 trials aimed at genotypes 2 and 3. It is less clear how well PSI-7977 will do against the tougher and more common genotype 1.

The new drugs work by directly blocking the action of enzymes used by the virus, similar to the strategy used so successfully against H.I.V. PSI-7977 blocks the polymerase enzyme. The Merck and Vertex drugs block the protease enzyme.

As with H.I.V., it is expected that a combination of two or three drugs might be needed, so drug makers will either have to cooperate with each other or make deals to buy up the various ingredients.

Roche, for instance, has made acquisitions and licensing deals in an effort to put together the pieces. It owns rights to one of Pharmasset’s drugs, called mericitabine. And Pharmasset has been testing PSI-7977 in combination with drugs from Bristol-Myers Squibb and Johnson Johnson. Those arrangements are expected to continue despite the takeover.

Pharmasset’s board unanimously approved the deal, which will be carried out through a tender offer, according to a news release from both companies.

Gilead plans to pay for the deal with a combination of cash on hand, bank loans and new bonds, with financing coming from Bank of America Merrill Lynch and Barclays Capital. Gilead said on Monday that it would suspend its share repurchase program for now.

Besides Barclays and Bank of America, Gilead was advised by the law firm Skadden, Arps, Slate, Meagher Flom. Pharmasset was advised by Morgan Stanley and the law firm Sullivan Cromwell.

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