Gilead betting the Pharmasset on hepatitis C

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The year 2011 belongs to hepatitis C. For all the major breakthroughs and developments in melanoma, multiple sclerosis and novel anti-coagulants, surely no other therapeutic area can have had such a dramatic rise in valuation and therapeutic potential in such a short space of time.

Gilead Sciences’ eye watering $11bn purchase today of the sector’s brightest star Pharmasset – at $137 per share almost double the biotech’s already stratospheric valuation and six times the stock price at the start of the year – confirms not only the potential in Pharmasset’s hepatitis C pipeline but the likely strong competition from big pharma for the New Jersey company’s hand. Yet for all Pharmasset’s undoubted potential, which has only been reflected in phase IIb data so far, the high price appears a slightly bitter pill to swallow. Shares in the HIV specialist, which is borrowing $6bn to fund the acquisition while suspending a $5bn stock repurchase programme, slumped 12% to $35 in early trade.

Thunderbolt moment

On a conference call with investors today John Martin, Gilead’s chief executive officer, revealed the company had been tracking Pharmasset for some time, but that a medical conference earlier this year proved the turning point.

“The key event for me was EASL (International Liver Congress) – it became clear that the world was changing very rapidly towards all oral regimens (for hepatitis C)," he said. 

Pharmasset’s nucleotide analogue, PSI-7977, is seen at the forefront of that march to an all oral regimen, eliminating the need to use highly intolerable interferons, which are also very susceptible to resistance. Two phase III studies have recently been initiated in combination with ribavirin, another standard of care agent, although the ultimate goal is for new combinations with other novel agents such as non-nucleotides and cyclophilin inhibitors.

With nucleotide agents currently seen as holding most potential, another contributing factor to the Pharmasset deal was that Gilead admitted its own nucleotide candidate, GS 6620, was not cutting the mustard.

The deal means that Gilead now covers most of the hepatitis C development bases, with two nucleotide analogues, one protease inhibitor, two non-nucleotides and one NS5A inhibitor in phase II or above. PSI-7977 remains the jewel in the crown for now, seen as the successor to J&J/Vertex’s Incivek which currently has a peak global sales forecast of $4.5bn in 2014.

Handsome price

As for the high price, Mr Martin indicated it was a competitive process. “We do know that Pharmasset intended to have multiple parties involved; although we don’t know the specifics we have to assume there were.” With Pharmasset already involved in research collaborations with Johnson & Johnson, Roche and Bristol-Myers Squibb, then add to the mix the likes of Novartis and Merck & Co with established track records in hepatitis C, it is safe to assume that competition was pretty intense.

Mr Martin would not be drawn on the level of peak sales that PSI-7977 would have to achieve in order to help justify the price tag, but was keen to stress the view that significant growth in the hepatitis C market is sustainable into the late 2020s.

The clear comparison here is the HIV market which Gilead dominates, but is somewhat stagnant given the major advances in treatment and dynamics of the disease itself.

For some time now investors and analysts have been waiting for Gilead to move beyond HIV, particularly with patent expiries looming for its core franchise. The company has dabbled in other therapeutic areas – the $1.4bn purchase of CV Therapeutics in 2009 for a cardiovascular franchise caused much head scratching – so the move on Pharmasset certainly makes much better strategic sense.

A shame then that it comes at such a high price. Gilead will use existing cash, $5.5bn as of the end of September, and $6.2bn in fresh debt, at an estimated interest rate of 3%-3.5%, to fund the deal. The company will suspend the $5bn share repurchase programme initiated in January this year and will focus is on paying down that debt.

With the deal also predicted to dilute Gilead’s earnings through to the end of 2014, investors will rightly be concerned about the impact from what is still a relatively risky move at this stage. The company will be hoping that short term pain will eventually be replaced by long term, and dramatic, gains.

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