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Gilead takes a billion dollar gamble on hep C

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Biotech firm Gilead Sciences is spending US$11 billion to bolster its hepatitis-C pipeline, with the acquisition of Princeton, New Jersey-based Pharmasset.

Gilead, of Foster City, California, which already has products in development for hepatitis C, is paying a hefty premium to buy Pharmasset, which itself has three treatments for hepatitis C in clinical trials. The agreed-upon price of $137 per Pharmasset share announced on Monday is an 89% premium to the shares’ closing price on Friday.

At present, Gilead makes much of its money from HIV drugs, but this area is slowing and patents don’t last forever. To deal with this, the company is gambling on putting out an effective oral treatment for hepatitis C, which has a global prevalence of 160 million, it notes. The company says there are more than 12 million people who have hepatitis C in its ‘major markets’, including countries such as the United States, Japan and Brazil, but fewer than 200,000 are treated each year.


Reactions have not been universally positive, and although Pharmasset’s shares have surged on the news, Gilead’s have slumped. A survey of analysts by ISI Group reported by Reuters found that four out of five thought the price was too high. Erik Gordon, a business professor at the University of Michigan in Ann Arbor, told Bloomberg that he too was not impressed with the deal.

‘‘Gilead is paying too much, paying all in cash, borrowing money to do it, diluting earnings for three or more years — to get a drug candidate or two in an area that was supposedly a core strength at Gilead,’’ he said. ‘‘You can do a lot of research for $11 billion.’’

The Wall Street Journal‘s ‘Heard on the Street’ column sums things up:

…Gilead has probably shocked some investors who were drawn to its stable cash flows and affordable valuation. With the Pharmasset deal, Gilead has transformed itself into a much riskier company. While all signs suggest Pharmasset’s drug is on a successful path, if something goes wrong, the value of the company could disintegrate.

It is a huge bet. But with Gilead’s HIV patent expiries beginning in 2018, bold treatment was necessary.

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