Gilead Sciences Inc
Gilead, the world's largest maker of HIV drugs, will pay $137 per share for each Pharmasset share, an 89 percent premium for a company with no significant marketed products.
Pharmasset shares had already more than tripled in the past year based on the potential of its experimental hepatitis C medicines to create a new standard of care for the 180 million people worldwide infected with the serious liver disease.
Vertex Pharmaceuticals Inc
Interferon are proteins that help the body's immune system respond to viruses, but they often cause flu-like side effects that lead many hepatitis C patients to stop or delay treatment.
The oral treatments being developed by Pharmasset and other companies such as Abbott Laboratories Inc
Pharmasset soared 85.1 percent to $134.48 in morning trading. Shares of Gilead, which said the deal would reduce its earnings through 2014, fell nearly 11 percent to $35.66.
Analysts questioned whether the deal price was too steep.
It's definitely a high-risk acquisition, but I think it could pay off in dividends for them, said Brian Skorney, an analyst with Brean Murray, Carret & Co. Given the premium, Gilead is hoping to avoid another potential suitor.
Skorney said a competing bid could emerge. He noted that Roche Holding AG
Shares of Inhibitex Inc
Untreated, hepatitis C can lead to cirrhosis, liver cancer and the need for a liver transplant. According to Gilead, more than 12 million people are infected with hepatitis C in major markets, but fewer than 200,000 are treated annually.
The market for hepatitis C drugs is expected to soar to $16 billion in 2015 from $1.7 billion last year in major commercial markets, according to research firm Decision Resources. It estimates the market will then fall to $11.3 billion in 2020, because many patients are expected to be cured by the new drugs, reducing the number of people who need treatment.
Vertex recorded enormous initial sales of its new drug, Incivek, but its shares have fallen on expectations that new treatments, such as Pharmasset's, may soon overtake it.
Vertex shares were down 2 percent after the Pharmasset deal was announced.
Gilead, which had a market value of about $30 billion before Monday's trading, has developed a lucrative HIV franchise by combining several drugs into single pills. Such convenience is critical for HIV patients who otherwise must juggle multiple pills a day and risk developing AIDS if they fail to stick to their medicines.
Investors are concerned about looming generic competition to its products. Gilead is counting on a four-drug pill, known as the Quad, to propel the franchise in the future.
Pharmasset has three hepatitis C medicines in clinical trials. Its lead candidate, PSI-7977, was recently advanced into two Phase III studies. Gilead expects PSI-7977 to be submitted for U.S. approval in the second half of 2013.
Gilead Chief Executive John Martin said on a call with analysts that Pharmasset's experimental drugs, combined with Gilead's own hepatitis C portfolio, would allow the company to test multiple regimens that are oral and interferon-free.
In justifying the high premium, Gilead said PSI-7977 will be more valuable in its hands because it has the infrastructure to bring the product to more people faster than Pharmasset.
Gilead has vast experience in antivirals and is currently a leader in HIV, but has been hard at work developing a broad pipeline of therapies for Hep C, JPMorgan analyst Geoff Meacham said in a research note.
Gilead said the deal would hurt its earnings through 2014 but boost them after that. It expects to close the acquisition in the first quarter of 2012.
Gilead will temporarily suspend its share repurchase program to focus on paying down debt.
It said it would finance the deal with cash on hand, bank debt and senior unsecured notes and has financing commitments from Bank of America Merrill Lynch and Barclays Capital.
Barclays and Bank of America advised Gilead on the deal, while Morgan Stanley advised Pharmasset. Skadden, Arps, Slate, Meagher & Flom LLP is Gilead's legal counsel, while Sullivan & Cromwell LLP is serving as legal counsel to Pharmasset.
(Reporting by Lewis Krauskopf in New York and Anand Basu in Bangalore; Additional reporting by Toni Clarke in Boston; Editing by Michele Gershberg, Esha Dey, John Wallace and Steve Orlofsky)