Thanksgiving came early for Pharmasset Inc. with the news that Gilead Sciences Inc. will gobble it up in a deal valued at $11 billion.
Gilead, of Foster City, Calif., agreed to pay $137 per share in cash for the transaction, which Pharmasset's board unanimously approved. The agreement values shares of Pharmasset (NASDAQ:VRUS) at an 89 percent premium over the stock's closing price of $72.67 on Friday. The company's shares soared on the news, opening 85 percent higher on Monday and maintaining that threshold throughout the day to close up $61.47 at $134.14. Gilead shares (NASDAQ:GILD) retreated 9 percent during a broad market swoon, closing at $36.26.
The deal, which Gilead will finance with cash on hand, bank debt and senior unsecured notes, will be dilutive to Gilead's earnings through 2014 and accretive to the company's earnings beginning in 2015. In a conference call early Monday morning, Gilead officials said they would provide additional guidance at the close of the transaction, expected in the first quarter of 2012.
Under terms of the merger agreement, a wholly owned subsidiary of Gilead will initiate a tender offer to acquire the outstanding shares of Pharmasset's common stock. Gilead will acquire any shares not tendered in the offer through a second step merger at the same price. Gilead said Bank of America Merrill Lynch and Barclays Capital, which are acting as financial advisors, have committed to assist in financing the transaction. Morgan Stanley & Co. LLC is serving as financial advisor to Pharmasset.
Earlier this month, Princeton, N.J.-based Pharmasset set the biotech world abuzz with stunning findings on interferon-free regimens for hepatitis C virus (HCV), reported at the American Association for the Study of Liver Disease in San Francisco. (See BioWorld Today, Nov. 8, 2011.)
Pharmasset's Phase II ELECTRON study, designed to test the minimum requirement for interferon in combination with PSI-7977, found 100 percent sustained viral response to treatment with PSI-7977 – the company's lead HCV nucleotide analogue – across four, eight and 12 weeks of treatment, with and without interferon.
The blockbuster biotech deal, inked just days after full ELECTRON findings were released, provided "clear validation of VRUS's nuc prodrug platform, led by PSI-7977," Canaccord Genuity analyst George Farmer wrote in a research note following Gilead's conference call early Monday morning, "support[ing] our belief that nuc prodrugs such as 7977 will form the backbone of a future interferon-free HCV treatment landscape."
Indeed, John Martin, Gilead's chairman and CEO, confirmed during the conference call that the Pharmasset acquisition "will greatly accelerate our goal to develop and bring to market all-oral regimens for the treatment of HCV, regardless of genotype." He said the Pharmasset assets represent "a complementary fit with Gilead's vision, pipeline, global infrastructure and capabilities."
Gilead may have been compelled to move on the acquisition to enhance its HIV portfolio and protect its own HCV franchise. Gilead has seven molecules in various stages of clinical development for HCV, including the non-nucleoside polymerase inhibitors GS 9190 and GS 9669, NS3 protease inhibitors GS 9256 and GS 9451, NS5A inhibitor GS 588, nucleotide polymerase inhibitor GS 6620 and TLR-7 agonist GS 9620.
However, with the Gilead HCV compounds still in Phase I and II studies, "it's pretty clear to us" that the acquisition propels PSI-7977 to the front of Gilead's HCV class, said John Milligan, Gilead's president and chief operating officer. The company will likely seek to commercialize PSI-7977 with ribavirin before exploring other combinations that would ensure market leadership that company officials predicted would last well into the 2020s.
Gilead has been under pressure for several years to expand beyond its HIV franchise, which includes Emtriva (emtricitabine) – acquired in a $464-million merger with Triangle Pharmaceuticals Inc. in 2002 – and the Emtriva-containing HIV combination products Truvada (emtricitabine-tenofovir disoproxil fumarate) and Atripla (efavirenz-emtricitabine-tenofovir disoproxil fumarate).
However, many additional attempts to divest have so far underwhelmed. Gilead co-developed Tamiflu (oseltamivir phosphate) with F. Hoffmann-La Roche Ltd. before moving further into respiratory therapeutics with the $390 million purchase of Corus Pharma Inc. That deal brought Gilead a Phase III inhaled antibiotic aztreonam lysine, which subsequently received a complete response letter from the FDA before the FDA's Anti-Infective Drugs Advisory Committee voted 15-2 in favor of the drug, due in part to the unmet medical need. The drug, Cayston, was approved in February 2010. (See BioWorld Insight, April 13, 2009, and BioWorld Today, Feb. 24, 2010.)
In 2009, the company acquired CV Therapeutics Inc., of Palo Alto, Calif., for $1.4 billion in an effort to expand into cardiovascular disease, but that moved turned into a disappointment when Gilead's lead compound darusentan fizzled in a Phase III trial. (See BioWorld Today, Dec. 16, 2009.)
Last year, Gilead made a move into cancer, buying CGI Pharmaceuticals Inc. for up to $120 million. With four oncology candidates in Phase I and II studies, the jury is still out on the odds of the company's success in the kinase arena. (See BioWorld Today, June 28, 2010.)
In the meantime, the Pharmasset HCV candidates have demonstrated safety, efficacy and ease of use in HCV. Pharmasset has three clinical-stage product candidates for chronic HCV advancing in trials in various populations. PSI-7977, an unpartnered uracil nucleotide analogue, has advanced into two Phase III trials in genotype 2 and 3 patients. Both are studying 12 weeks of treatment with PSI-7977 in combination with ribavirin. One study, dubbed FISSION, is comparing the all-oral regimen to 24 weeks of standard-of-care pegylated interferon/ribavirin in treatment-naïve patients, and the other, POSITRON, is comparing the all-oral regimen to placebo in interferon-intolerant/ineligible patients. (See BioWorld Today, Nov. 2, 2011.)
A third Phase III study, NEUTRINO, will be launched in the second half of 2012 in genotype 1 patients, with its design dependent on the outcome of Phase II studies evaluating PSI-7977 in various combinations in genotype 1-infected patients. Pharmasset officials said earlier this month that successful trials could lead to an initial U.S. regulatory approval of PSI-7977 in 2014.
Pharmasset's PSI-938, an unpartnered guanosine nucleotide analogue, also is being studied in QUANTUM, a Phase IIb interferon-free trial as a monotherapy and in combination with PSI-7977 in subjects with HCV of all viral genotypes. And the company's mericitabine (RG7128), a cytidine nucleoside analogue partnered with Roche Holdings AG, of Basel, Switzerland, is being evaluated in three Phase IIb trials, with Roche responsible for all aspects of the drug's development.
The Combined Effect
In terms of the combined pipelines, "we have all the ingredients in hand now, so to speak, to explore whatever we need" to develop the most effective nuc approach for genotype 1, whether PSI-7977 alone or in combination with PSI-938, a PI and/or an NS5A, said Norbert W. Bischofberger, Gilead's executive vice president, research and development and chief scientific officer.
A combination approach could potentially be co-formulated into a single tablet using Gilead compounds, he added, noting that the company would study data emerging from ongoing Gilead and Pharmasset studies over the next six to eight months to determine the most appropriate strategy.
Martin also said Gilead "carefully reviewed" the Pharmasset intellectual property for more than a year and found the patent protection "sound and defensible."
During the call and in a flurry of quick research updates, many analysts endorsed the bold move. Deutsche Bank biotechnology analyst Robyn Karnauskas pegged the value of Pharmasset at $12 billion to $16 billion, depending on a discount rate ranging from 11 percent to 14 percent and noted that the deal "eliminates the HIV patent cliff risk" for Gilead. "We also believe there could be additional synergies derived by GILD from the deal once complete since GILD is broadly an infectious disease company," Karnauskas added.
However, some questioned the economics of the deal. In a first crack at accretion, Leerink Swann analyst Joshua Schimmer modeled the HCV global franchise as reaching $4.1 billion in 2017 and peaking at $6.5 billion in 2020.
"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 GILD in terms of capital allocation," Schimmer wrote in a research update. "While we maintain our [outperform] rating, our valuation range falls from high-$40's to low/mid $40's."
Martin defended the purchase price by pointing to Gilead's track record in commercializing HIV and liver disease drugs and said the company offers superior experience to complete clinical development, accomplish commercial-scale manufacturing, navigate regulatory requirements and bring the Pharmasset assets to market globally.
But Gilead officials declined to field a question by ISI Group analyst Mark Schoenebaum about potential peak sales of 7977 that would justify the purchase price. So Schoenebaum conducted his own poll of investors, with 216 respondents split nearly down the middle on the prospects for the deal either to create (49 percent) or destroy (51 percent) value.
In addition, 82 percent suggested that Gilead paid too much for the company, compared to just 16 percent who said the price was "about right."
Still, most (56 percent) of the respondents to Schoenebaum's informal survey characterized Gilead as a "buy," and respondents said 58 percent of Pharmasset's cost base would have synergy with Gilead.