David Paul Morris/Bloomberg NewsTest samples in a Gilead Sciences laboratory in Foster City, Calif.9:44 p.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.
The treatment of hepatitis C has 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 alpha interferon, a type of drug injected once a week that can cause severe flulike symptoms and other side effects.
Pharmasset, based in Princeton, N.J., is pushing to develop the first all-oral treatment regimen, doing away with the need for interferon. Its drug candidate, PSI-7977, has just entered the final phase of clinical testing and could be on the market by 2014, Gilead said.
Pharmasset is “way ahead of everybody else,” Norbert W. Bischofberger, Gilead’s executive vice president for research and development, told analysts in a Monday morning conference call.
But Gilead’s bid to dominate the market comes at a high price. It will pay $137 a share in cash, nearly 89 percent above Pharmasset’s closing price on Friday. Even before the deal, shares of Pharmasset had risen more than 240 percent over the last year on expectations for PSI-7977.
Investors balked at the deal on Monday, with shares of Gilead falling 9 percent on the announcement.
“For Gilead to give up effectively one-third of their value for an unproven asset still subject to significant ongoing clinical risk seems remarkable,” Geoffrey Porges, biotechnology analyst at Sanford C. Bernstein & Company, wrote in a note Monday.
Thomas Wei of Jefferies & Company estimated that Gilead’s sales of hepatitis C drugs would have to reach $4 billion a year — difficult, but not impossible — to justify the purchase price.
Competition to acquire Pharmasset and a setback for one of its own hepatitis C drug candidates contributed to Gilead’s willingness to pay up, according to remarks by Gilead executives in the call with analysts.
Some analysts applauded the move. Geoffrey Meacham, an analyst at JPMorgan, called it “a bold and strategically positive deal” for Gilead.
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, although the one for Pharmasset is the biggest in its 24-year history.
While Gilead’s deal-making record is mixed — particularly those aimed at moving the company into cardiovascular medicine — Pharmasset’s lineup is a better fit for the portfolio. 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 with its drug Atripla for AIDS.
An estimated three million to four million Americans — and as many as 170 million people worldwide — 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 have the disease. The infection can cause liver cirrhosis and liver cancer, but often not for decades.
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, Incivek from Vertex and Victrelis from Merck, 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. It is less clear how well PSI-7977 will do against the tougher and more common genotype 1.
As with H.I.V., 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. It owns rights to one of Pharmasset’s drugs, called mericitabine. 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.
Shares of Inhibitex, which is developing what is also considered a promising hepatitis C drug, rose 19 percent on Monday to $10.61 on speculation that it might be the next takeover target.
Pharmasset’s board unanimously approved the deal, which will be carried out through a tender offer, according to the companies. The takeover is expected to dilute Gilead’s earnings through 2014 and then begin adding to them in 2015.
Gilead plans to pay for the deal with cash on hand, bank loans and new bonds, with financing 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.