Gilead Is Paying How Much For Pharmasset?

Gilead Is Paying How Much For Pharmasset?

November 22nd, 2011 // 2:29 pm @ jmpickett

For those keeping close watch on the Hepatitis C market or biotech stocks this morning, the $11 billion deal in which Gilead Sciences agreed to buy Pharmasset is now well known. But does it make sense? And if so, for which side of the table? Gilead shares, for instance, are down nearly 5 percent, although the markets are diving anyway. Pharmasset is soaring because Gilead is paying an 89 percent premium.

Here are some details: Already a big gorilla in the market for HIV meds, Gilead is betting that Pharmasset and its trio of experimental drugs can yield a big payoff in the HCV market before key patents begin to expire on its HIV franchise. However, Pharmasset does not yet have a drug on the market and Gilead expects earnings to take a hit through 2014 thanks to the acquisition.

The deal comes at an intensely competitive moment in the Hepatitis C market. Earlier this year, both Vertex Pharmaceuticals and Merck, which now has a collaborative venture with Roche, won FDA approval for new treatments and the overall market is forecast to as much as $20 billion over the next decade, when the number of patients may peak (see see here and here)

The move amounts to a huge gambit for Gilead, which dominates the HIV market with the Atripla, Truvada and Viread HIV meds. “Gilead has become the leading player in HIV by having the best-in-class treatment,” Gilead ceo John Martin boasted in a conference call earlier today. “We believe the same opportunity exists in HCV.” He maintains the HCV market will last into the late 2020’s, because not everyone is currently getting treated and years may pass before everyone is tested and diagnosed.

Investors, though, are mixed. Here is what some of the wags are saying… The Pharmasset “HCV franchise is clearly in the lead with a very attractive clinical profile,” writes Leerink Swann analyst Joshua Schimmer. “…While we understand the strategic rationale, the price tag is lofty for a pre-commercial asset and not aligned with what we would like to see from Gilead, in terms of capital allocation…While over the long-term this deal may prove to be value-creative, we will not have clarity on this front for a number of years.”

But Thomas Russo at RW Baird writes that “this is pricey, but the Pharmasset stand-alone model supported valuations higher than $137 a share with continued clinical success, broad patient populations and economics. We are comfortable as long as the data remains great and Gilead moves forward in similarly innovative, aggressive fashion. In Gilead’s hands, the worldwide infrastructure is already in place, and there are wholly owned compounds spanning the other desirable classes to combine if necessary.”

Meanwhile, ISI Group biotech analyst Marc Schoenebaum says the deal “is an admission by Gilead that its internal ‘nuke’ program wasn’t going to cut it.” And he notes that Gilead declined to provide a peak sales estimate for the lead HCV compound, called 7977, which is slated for a 2014 launch, and would not provide any guidance on costs or R&D until January. Pharmasset has 82 employees and lost about $91 million in the fiscal year ended September 30.

Schoenebaum, by the way, conducted a quickie survey of 216 investors and found that 82 percent believe Gilead overpaid and 94 percent do not think another drugmaker will try to bid for Pharmasset. They also believe the lead Pharmasset compound will generate, on average, $3.6 billion in peak sales in 2018.

Source: Pharmalot