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Gilead Plans $11 Billion Takeover of Pharmasset to Gain Hepatitis Drugs

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AIDS drug developer Gilead is paying an eye-popping premium to take over a clinical stage company developing a promising hepatitis C drug.

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Gilead Sciences (GILD), the large biotech known for its leading HIV treatments, is making an $11 billion wager on another infectious disease agreeing to buy Pharmasset (VRUS), a company developing the next generation of hepatitis C drugs.

The deal is stunning in its size and premium for Pharmasset, a money-losing, clinical stage company. Gilead is betting big that Pharmasset will succeed in bringing a better hepatitis C drug to market -- one that doesn't require an injection of the older drug interferon. (See Pharmasset Winning Hepatitis Drug Race)

Gilead agreed to pay $137 a share in cash for Pharmasset, an almost 90% premium over the stock's closing price Friday. Gilead execs say they believe other companies also bid on Pharmasset. While initially offering a combination of stock and cash, Pharmasset's board preferred an all-cash deal, according to Gilead.

Pharmasset is a logical takeover from a strategic standpoint. Gilead, the maker of Truvada and Viread, has been trying to stay ahead of rivals who market HIV therapies and needs to plan for eventual lost sales once drug patents begin to expire in the next several years. Hepatitis C is a hot area for drug research as millions of Americans are estimated to be infected with the virus and many people don't know they're carrying it. Chronic hepatitis C can eventually destroy a person's liver.

But Pharmasset's valuation has skyrocketed this year, rising more than 200% with a market cap that rose to $5.5 billion (before Monday's deal announcement). There's been so much excitement about Pharmasset's hepatitis franchise that the company's market cap was nearing that of established hepatitis player Vertex Pharmaceuticals (VRTX). Vertex sells a new, breakthrough hepatitis drug, Incivek. That drug is rapidly moving toward blockbuster status, and is impressively thumping rival Merck (MRK) and its hepatitis drug, Victrelis. (See Vertex Shatters Sales Goal for Hepatitis Drug)

Incivek and Victrelis (both approved in the US this year) are selling products considered far superior to older treatments for hepatitis C. But these new treatments have to be taken with an older, injected drug called interferon, which can cause serious side effects in patients. Some people can't tolerate interferon. What Pharmasset has is potentially the first all-oral hepatitis C treatment. The company plans to apply for US approval of its experimental drug, PSI-7977, in the second half of 2013.

The acquisition is "an important and exciting opportunity to accelerate Gilead's effort to change the treatment paradigm" for the hepatitis C virus, Gilead CEO John C. Martin says in a statement.

More than 3 million Americans have chronic hepatitis C virus infection, according to government estimates. At least three-quarters of the people who become infected with the virus develop a chronic condition. The virus is mostly transferred through dirty needles -- it was often spread through organ transplants and blood transfusions before the US began thorough blood supply screenings in the early '90s. An estimated 180 million people worldwide are infected with hepatitis C, according to estimates.

The deal would deplete Gilead's earnings through 2014, the company said. It hopes to close the transaction by the first quarter of next year. Gilead shares dropped 11% on the announcement, trading at $35.51 Monday morning. The stock was down 10% on the year prior to the deal news.

Twitter: @brettchase

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No positions in stocks mentioned.
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