History not on Gilead's side in high stakes gamble on Pharmasset

Only time will tell if Gilead Sciences paid over the odds in its $11bn purchase of Pharmasset this week, but current opinion certainly suspects that they did (Gilead betting the Pharmasset on hepatitis C, November 21, 2011).

The staggering amount paid by Gilead on phase II data alone is illustrated by the fact the next biggest company acquisition for purely development stage assets was Amgen’s $2.2bn purchase of Abgenix in 2005. Yet Amgen had previously worked with Abgenix and its lead product was already filed with the FDA when the deal was struck. Indeed, of the top 15 M&A deals involving development stage companies, you have to go down to the fifth biggest in Pfizer’s $1.3bn acquisition in 2003 of Esperion Therapeutics’ HDL raising agents for a comparable deal to Gilead-Pharmasset. Of further concern for Gilead is that only three of these 15 deals qualify as a successful investment (see table below).

Big stakes gambles

The table below, extracted from EvaluatePharma, shows the top 15 M&A deals where the target company was still at a developmental stage, with no approved or marketed products.

After the Amgen-Abgenix deal is Pfizer’s $1.9bn purchase of Vicuron Pharmaceuticals and the acquisition of Aviron by MedImmune for $1.6bn. However, both Vicuron and Aviron also already had their lead products submitted for approval, significantly more advanced than Pharmasset is today, which has only just embarked on a phase III programme with promising hepatitis C candidate PSI-7977.

As such Pfizer’s purchase of Esperion, which had two phase II assets, is arguably more comparable to the Gilead-Pharmasset deal. And although in very different therapeutic areas, it could also be argued the hype around cholesterol-lowering agents and HDL raising compounds in particular was similar to the huge expectations currently being piled on hepatitis C.

So with the Gilead-Pharmasset deal 8.5 times higher than its closest comparator in the Pfizer-Esperion tie-up, any nervousness from Gilead shareholders is perfectly understandable.

Limited success

The overall poor track record of these high stakes gambles could also be a source of nerve shredding. While the jury is naturally still out on four of the 15 deals as we wait for late stage data and subsequent regulatory approval, just three of the transactions can be qualified as a success on the basis that the acquiring company has or will see a return on investment.

Qualification for a success is obviously dependent on at least one product gaining regulatory approval and subsequent sales or net present value indicating a return on investment.

So Amgen’s purchase of Abgenix, which brought what was to become Vectibix and Prolia/Xgeva, is clearly a major success – the current NPV of $14.5bn does not even include previous cashflows from Vectibix in particular.

Similarly, J&J’s purchase of Cougar Biotechnology to bring prostate cancer drug Zytiga and Daiichi Sankyo’s acquisition of Plexxikon for novel melanoma agent Zelboraf should pay off in the long run.

Duds

However, the table is dominated by failures, not least the Pfizer-Esperion deal with the lead candidates failing and the pharma giant spinning out Esperion as a separate company in 2008. Pfizer’s other major gamble on Vicuron did not come off – although Eraxis eventually made it to market, sales have been underwhelming while dalbavancin was been sold off to Durata Therapeutics in 2009.

Amgen, which certainly likes a flutter and won handsomely with Abgenix, lost out on Tularik while the verdict on its recent move for BioVex will be determined by phase III melanoma data on OncoVex which reads out next year.

‘You win some, you lose some’ is a philosophical way of looking at these types of deals, and in Amgen’s case it is still up. The problem for Gilead in raising the stakes so dramatically higher than anybody before is that there is no margin for error, and the gamble on Pharmasset will have to come off spectacularly well.