By Jim Shrine

Gilead Sciences Inc., on the verge of two product submissions, is acquiring NeXstar Pharmaceuticals Inc. in a stock deal valued at $550 million.

Analysts hailed the move as positive for both companies, giving Gilead needed international sales infrastructure and $100 million in annual revenues, while providing leadership to NeXstar and a boost to its stock.

Gilead, of Foster City, Calif., will own about 70 percent of the combined company¿s 48 million fully diluted shares outstanding. The combined company will have three products on the market with annual sales of more than $100 million, two new drug applications (NDAs) expected to be filed by the end of the second quarter, and five other products in development.

NeXstar, of Boulder, Colo., will not spin off the research side of the business, as announced last summer.

Caroline Copithorne follows both companies as a senior biotechnology analyst for New York-based Prudential Securities Inc. She had identified NeXstar as a takeover candidate for two reasons: its lack of management in place, since president and CEO Patrick Mahaffy resigned last August; and the under-utilized sales infrastructure.

¿It makes sense for both companies,¿ Copithorne said. ¿Given Gilead¿s size, this is a unique opportunity. They needed a sales force; the infrastructure they get in Europe they were going to build anyway. This gives it to them ready-made. It also brings them to profitability one year earlier.¿

NeXstar has an international sales force of 135, most of them in the larger markets in Europe. The company reported revenues of $108 million in 1998, mainly from sales of AmBisome (liposomal amphotericin B). Its other approved product is DaunoXome (liposomal daunorubicin). Gilead plans to file NDAs by the end of the second quarter for Preveon, a reverse transcriptase inhibitor for HIV; and for GS4104, an oral influenza drug being developed with F. Hoffmann-La Roche Ltd., of Basel, Switzerland.

NeXstar¿s sales forces in Europe and Australia are expected to be useful in marketing Preveon and, later, adefovir dipivoxil for hepatitis B (which is entering Phase III trials). Gilead¿s Vistide is approved for AIDS-related cytomegalovirus, and the company has another HIV drug, PMPA, in a series of Phase II studies.

NeXstar has MiKasome (liposomal amikacin) in Phase II trials for complicated bacterial infections and, in earlier stages, is developing a liposomal form of the cancer drug lurtotecan and a vascular endothelial growth factor product.

John Sonnier, a vice president at Vector Securities International Inc., in Deerfield, Ill., also follows both companies, and agreed the deal is positive for both. He said MiKasome could turn out to be the ¿crown jewel¿ from the acquisition.

¿It makes sense,¿ Sonnier said. ¿NeXstar got a good price. For Gilead, this is a very good and wise strategic acquisition for a variety of reasons. It adds a revenue stream of more than $100 million per year, and tremendous infrastructure value with a well-established and seasoned sales force in Europe. It should reduce Gilead¿s losses and enhance future earnings.¿

Thomas Dietz, senior managing director at Pacific Growth Equities Inc. in San Francisco, agreed on the good strategic fit. ¿It can only enhance Gilead¿s ability to build a bigger franchise,¿ he said. ¿NeXstar¿s price tag was a little bit high, but that will probably be irrelevant when you look at the endgame. I think it was a good deal, with the caveat that it was a little expensive; maybe in the end that¿s what it took to get the deal done.¿

NeXstar shareholders will get .425 of a share of Gilead for each NeXstar share held, assuming Gilead¿s price range stays between $36.47 and $45.88 per share prior to NeXstar¿s shareholder meeting, which likely will be in about three months. The ratio could be adjusted up or down, if Gilead stock rises or falls significantly before then.

Gilead¿s stock (NASDAQ:GILD) fell 50 cents Monday to close at $40.75. NeXstar¿s stock (NASDAQ:NXTR) had run up last week from $10.25 to $13.8125 on unusually high trading volume. It gained another $1.3125 on Monday¿s news, or 9.5 percent, to close at $15.125.

Jon Alsenas, managing director at New York-based ING Baring Furman Selz LLC, called the deal ¿a good example of the right kind of merger and acquisition for biotechnology companies. This is what they should be doing. It¿s a case of one plus one equaling more than two.¿

The deal significantly adds to Gilead¿s work force, bringing in 485 new employees to the 310 already on staff. It also brings on facilities in Boulder and Cambridge, U.K. Jeffrey Bird, Gilead¿s senior vice president, business operations, said all will be put to use. ¿Gilead had significant hiring plans for 1999,¿ Bird said. ¿This is seen as adding critical mass rather than an opportunity to cut costs.¿

Bird said Gilead considered building its European infrastructure through acquiring a mid-sized pharmaceutical company on that continent, but none proved the right fit. ¿NeXstar¿s European presence was almost exactly the size and in the locations we were looking for,¿ he said. An alternative, he added, was the creation of a pharmaceutical company from scratch.

NeXstar¿s development and regulatory capability in Cambridge, U.K., will be put to use right away through implementation of an expanded access program for Preveon, Bird said.

¿We were attracted to the diversification and reduced risk that came with this deal,¿ Bird said. ¿The remarkable company fit with regard to product launch time lines and complementary therapeutic expertise, as well as their talented development and commercial organization, allow Gilead to get to critical mass on an accelerated time frame.¿

Acquisition Could Accelerate Profitibility Time Line

It also will speed up the company¿s time to profitability, he said. Analysts generally have estimated Gilead will turn profitable in 2001, Bird said. ¿We think this will accelerate profitability by a quarter or two,¿ he said.

Bird said the combined company, with about $330 million in cash and international operations, is well positioned now to license attractive product candidates.

The $550 million stock deal is similar in size and structure to the $580 million Alza Corp., of Palo Alto, Calif., paid in stock to purchase liposome company Sequus Pharmaceuticals Inc., of Menlo Park, Calif., in October. (See BioWorld Today, Oct. 5, 1998, p. 1.)

Sonnier said that, on the buy side, there is ¿a greater appetite for critical mass and larger market-cap companies. I wouldn¿t be surprised if we see some more mergers and acquisitions this year.¿

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