Gilead’s Giant Gamble in Buying Pharmasset

Gilead Sciences (NASDAQ:GILD) shareholders better hope the Foster City, Calif., company’s planned acquisition of Pharmasset (NASDAQ:VRUS) pays off — and in a big way.

After all, Gilead lost more than 10% of its market value Monday after announcing that it was buying Pharmasset for $11 billion. Gilead’s $137-a-share bid represents nearly a 90% premium over Pharmasset’s closing price last Friday. Princeton, N.J.,- based Pharmasset is trading at about $134 today.

Some industry observers think Gilead is overpaying. “Pharmasset was an attractive company,” noted the online site 24/7 Wall St, “but this one seems like Gilead is spending above and beyond a normal amount here to close this deal.” Not surprisingly, Gilead begs to differ, citing the opportunity to “change the treatment paradigm” for patients with infected with hepatitis C, said CEO John C. Martin in a company news release.

Martin was referring to Pharmasset’s hepatitis C treatments that have to potential to do away with the need for interferon and marshal in a new standard of care for a disease that affects an estimated 180 million people worldwide. Pharmasset is studying the first oral treatment for hepatitis C, which would obviate the need for the injections of interferon that accompany current therapy, thus eliminating nasty side effects.

Eyeing a potential 2014 approval, Pharmasset has its oral therapy in two late-stage studies, with a third to begin in the second half of 2012. If the oral therapy does make it to market, look for it to take a huge chunk out of the sales of Invicek from Vertex Pharmaceuticals (NASDAQ:VRTX). An improved treatment, Invicek has gobbled up a big share of the market since being approved in the second quarter of 2011. Third-quarter sales of Invicek were $419 million, but that could change dramatically with the introduction of an interferon-free method.

Canaccord Genuity life sciences analyst George Farmer said Monday that an interferon-free competitor to Incivek would blast Vertex’s revenue, according to Fierce Health Care. “We model for a steep decline of Invicek sales from $3.7 billion in 2014 to $500 million in 2015, as a consequence of the first interferon-free regimens expected to hit the market,” he noted. “We anticipate significant threats to Incivek market share from competitive drugs under development in all-oral interferon-sparing regimens. Current innovation leaves Incivek well behind and without a role in future FDA approved all-oral regimens, in our view.”

Vertex investors don’t appear to be panicking, however, as company shares are down about the same as the overall market.

Gilead’s acquisition of Pharmasset has evidently sparked investor speculation that other hepatitis C developers may be targets. Inhibitex (NASDAQ:INHX) is up nearly 20% while Achillion Pharmaceuticals (NASDAQ:ACHN) shares have gained more than 2%. Gilead, Inhibitex, Achillion and a fourth company, Idenix (NASDAQ:IDIX), were all cited as potential takeover targets in a Nov. 8 article on InvestoPlace) (see “Hepatitis C Drug Progress Puts Several Companies on Acquisition Watch”).

Perhaps what’s most surprising about the Pharmasset acquisition is that the suitor isn’t a member of Big Pharma. Given the multibillion market for treating hepatitis C, we speculated the large drugmakers might be thinking about following in the footsteps of Swiss giant Roche (PINK:RHHBY), which last month agreed to buy Anadys Pharmaceuticals (NASDAQ:ANDS) for $230 million in cash.

Guess Gilead just beat Big Pharma to the punch. Investors can only hope the company doesn’t absorb too many blows as a result of its hefty investment.

As of this writing, Barry Cohen in long GILD.

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