Gilead Goes For The Gold (Standard) In Plan To Acquire HCV Specialist Pharmasset

The planned purchase price of $11 billion, or $137 a share, an 89% premium over Pharmasset’s closing price on Nov. 18, is by far the highest ever paid for a clinical-stage biotech.

In the deal that will cause all the record books to be rewritten, Gilead Sciences Inc. has reached an agreement with Pharmasset Inc.’s board of directors to acquire the latter company, [See Deal]a biotech with three promising mid-stage candidates for hepatitis C for $11 billion.

That price, by far the most ever paid for a clinical-stage biotech, represents an 89% premium over Pharmasset’s closing share price on Nov. 18, the last business day before the transaction’s announcement.

Gilead, a virology-focused specialty pharma with a market-leading franchise in HIV and a portfolio of seven HCV candidates in clinical development, was attracted primarily by the potential of Pharmasset’s lead candidate, the Phase III once-daily oral nucleotide polymerase inhibitor PSI-7977.

In addition, Pharmasset brings with it PSI-938, a Phase II guanosine nucleotide polymerase inhibitor thought by some analysts to offer as much potential as ‘7977, and mericitabine (RG7128), a Phase II cytidine nucleotide polymerase inhibitor (Also see "Pharmasset: A Breakout Year But Big Catalysts Lie Ahead" - Pink Sheet, 11 Jul, 2011.). While ‘7977 and ‘938 are unpartnered, Roche holds a license to mericitabine and is responsible for all worldwide development of that compound.

The planned purchase price of $11 billion, $137 a share, an 89% premium over Pharmasset’s closing price on Nov. 18, is by far the highest ever paid for a clinical-stage biotech.

PSI-7977 has been the focus of significant business development chatter in recent weeks, after Pharmasset unveiled astonishing Phase II data at the American Association for the Study of Liver Diseases meeting Nov. 6 (Also see "Pharmasset Casts Wide Phase III Net With Interferon-Free, Two-Drug Combo" - Pink Sheet, 14 Nov, 2011.). In the 40-patient Phase II ELECTRON study in genotype 2 and 3 HCV patients, researchers reported a 100% cure rate – all 40 patients, across three different dosing arms showed sustained viral response (SVR) after 12 weeks of treatment.

Of those patients, 30 were dosed with ‘7977 and oral ribavirin, part of the current standard of care, but not pegylated interferon. Peg-interferon, an injectable, also is part of the standard of care, but has a very poor safety and side effect profile, causing flu-like symptoms for the duration of therapy in many patients.

The ELECTRON data provided the first “proof of principle” that a single direct-acting antiviral could achieve SVR in hepatitis C along with ribavirin but without peg-interferon. For safety and dosing simplification reasons, an all-oral combo of drugs has been seen as the coming gold standard for HCV therapy, with ELECTRON and other trials providing strong indication that ‘7977 may be the most promising agent in the direct-acting antiviral pipeline.

HCV Seen As Solution To Gilead’s Patent Woes In HIV

Gilead, facing a patent cliff beginning in 2018 for its lucrative, multi-product HIV franchise, has been looking to HCV - which some analysts peg as ultimately a $30 billion a year worldwide opportunity - as its pathway to continued growth. Saying his company had performed a year of due diligence on Pharmasset before offering $11 billion for the Princeton, N.J.-based biotech, Gilead Chairman and CEO John Martin said his company is ideally positioned to realize the potential of ‘7977 and the Pharmasset pipeline.

“Based on our experience in HIV and liver disease, we believe we have the necessary experience to successfully bring this product in future combination regimens through clinical development, accomplish commercial-scale manufacturing, navigate the regulatory path and ultimately bring this product to market globally to benefit the currently underserved HCV patients,” Martin said during an investor call Nov. 21. Gilead officials also pointed to the company’s established antiviral sales force as a synergy that will enhance the deal’s value.

Wall Street reviews were mixed, reflected in a day of heavy trading as Gilead’s share price tumbled 9% to $36.26 on Nov. 21, while Pharmasset’s shares soared 85% to $134.14. Some analysts congratulated Gilead for obtaining the most promising asset in the HCV space, while others suggested the company had overpaid and hamstrung its flexibility for the near future.

“I believe that Gilead is paying a full but fair price for Pharmasset,” said Robert W. Baird & Co. analyst Thomas Russo in an interview. “Our model for Pharmasset as a standalone company had upside to at least $137 with continued success with broad patient populations in hepatitis C. The asset is only worth more in Gilead’s hands given they already have the commercial and other infrastructure established worldwide. Effectively, they are paying now for the future value of the asset.”

Gilead’s gamble is a smart one, Russo added, because of what he sees as the predictive power of early data for future success in HCV. “One of the positive themes of investing in hepatitis C is that it is a predictable area,” Russo said. “In general, with four weeks of efficacy data and 12 weeks of safety data, you can place a high-conviction bet in that space. That normally is achieved early in Phase II development.”

Price Tag Called High Due To Delayed Accretion

Less enthusiastic about the deal was Leerink Swann analyst Joshua Schimmer – in a Nov. 21 note, he maintained his “outperform” rating for Gilead shares but lowered his valuation range from the high $40s to low to mid $40s. His concerns were the high price for a clinical-stage company and the reality that value creation from this deal would not occur for a number of years. Gilead said it expects the acquisition to be dilutive to value through 2014, and then accretive beginning in 2015.

Schimmer also asserted that the deal’s timing suggests cautious views about Gilead’s imminent launch of HIV drug Quad might be appropriate. Quad, which combines the existing two-drug combination pill Truvada (emtricitabine/tenofovir) with integrase inhibitor elvitegravir and booster drug cobicistat, is expected to launch next year. Led by tenofovir in 2018, Gilead’s HIV drugs face patent expiries during the 2018-2021 period.

“The need to buy into the HCV market with such a big price tag makes us question Gilead’s core development capabilities in this space,” Schimmer wrote. “The transaction likely limits Gilead’s ability to do additional sizeable deals, which is good, but also limits the company’s ability to repurchase shares, which was an aspect of the company we found attractive.”

Gilead, which plans to finance the acquisition of Pharmasset with both cash and more than $6 billion in debt, announced Nov. 21 that it will suspend its current planned share buyback program. To date, it had reacquired about $200 million of a planned $5 billion in shares.

Gilead said it plans to continue Pharmasset’s development path for ‘7977, which will enter Phase III in a trio of trials encompassing more than 1,000 patients and expected to cost roughly $100 million. Each of the three trials will test a 400 mg daily dose of ‘7977 along with ribavirin in differing cohorts of HCV patients.

The FISSION study, already underway, will test the ‘7977/ribavirin combo against peg-interferon and ribavirin. Meanwhile, the POSITRON and NEUTRINO studies will test ‘7977/ribavirin against a pair of placebos. POSITRON will target genotype 2 and 3 patients who cannot tolerate interferon, while NEUTRINO will targets patients across all genotypes who cannot take interferon.

Pharmasset’s strategy calls for filing first in genotype 2 and 3 patients in late 2013, to be followed by a filing for genotype 1 patients, the most plentiful cohort in North America.

In addition, Pharmasset is running a Phase IIb four-arm interferon free trial (QUANTUM) testing ‘7977 with its ‘938 in 450 treatment-naïve patients from all genotypes. Interim data are expected in second-quarter 2012. In addition, the Phase IIb ATOMIC trial is testing ‘7977 with peg-interferon and ribavirin in 300 treatment-naïve patients from genotypes 1, 4, 5 and 6. Interim data from that study are expected by mid-2012.

Combo Trials Continue With Bristol And Tibotec

Gilead also will inherit a pair of combination trials Pharmasset has initiated with big pharmas active in the HCV space. In January, Pharmasset agreed with Bristol-Myers Squibb Co. to test ‘7977 in an interferon-free regimen with Bristol’s NS5A inhibitor BMS-790052 (Also see "Bristol, Pharmasset To Study Oral HCV Regimen Together" - Pink Sheet, 10 Jan, 2011.). That was followed in July by an agreement with Johnson & Johnson’s Tibotec Group NV division to test ‘7977 with protease inhibitor TMC435 (Also see "J&J's TMC435 Joins The Pharmasset Club" - Pink Sheet, 6 Jul, 2011.).

Chief Medical Officer Norbert Bischofberger told the investor call that Gilead has “all the compounds available in-house” to explore numerous direct-acting antiviral combinations for HCV after the data from the current set of trials of ‘7977 are in. Gilead’s pipeline includes a nucleotide polymerase inhibitor (GS 6620) and a non-nucleotide polymerase inhibitor (GS 9190), along with two protease inhibitors (GS 9256 and GS 9451) and an NS5A inhibitor (GS 5885) in Phase II. In Phase I, it has GS 9260, a toll-like receptor 7 agonist, and GS 9669, another non-nucleotide polymerase inhibitor.

Gilead President John Milligan added that, after reaching market in genotypes 2 and 3 with ‘7977, one of the company’s top priorities would be to develop a ribavirin-sparing regimen for HCV. “[Ribavirin] does have considerable side effects and is inconvenient, being five or six pills given twice daily,” he said. “It’s a difficult regimen for patients given through 12 weeks.”