GILD Gilead Sciences Inc

Gilead Sciences, Inc. (GILD) announced recently that it has entered into a definitive agreement to acquire Pharmasset, Inc. (VRUS), a maker of drugs for the treatment of chronic hepatitis C virus (HCV), for $11 billion. Gilead will pay $137 for each share of Pharmasset which represents an 89% premium to Pharmasset's closing share price on November 18, 2011. The transaction, approved by Pharmasset's board of directors, is expected to close in the first quarter of 2012 and is expected to be dilutive through 2014 and accretive to earnings from 2015 onwards. The transaction is expected to be financed by Gilead with the available cash in hand, bank debt and senior unsecured notes.

Pharmasset currently has three pipeline candidates in various stages of development for the treatment of HCV. The lead candidate is PSI-7977 which recently moved into two late-stage trials in patients with HCV of genotype 2 and 3. Both studies are studying PSI-7977 in combination with ribavirin. PSI-7977 is also being studied in a mid-stage trial in combination studies in HCV patients infected with genotype 1 virus. The candidate is expected to move into late-stage trials in the second half of 2012. The second candidate PSI-938 is being studied as a monotherapy and also in combination with PSI-7977 in HCV patients of all viral genotypes. The third candidate Mericitabine (RG7128), being developed in partnership with Roche, Inc. (RHHBY), is in mid-stage trials.

These pipeline candidates are expected to synergize well with Gilead’s HCV portfolio. Gilead is hoping to build one of the largest HCV pipelines and is currently evaluating seven molecules for treatment of HCV. Gilead is also studying drug combinations to develop all oral regimens aimed to reduce treatment duration to 12-16 weeks and spare the use of the current standard-of-care pegylated interferon associated with some serious side effects. Three mid-stage trials are ongoing to develop all oral interferon free regimens, data from which are expected in 2012 and early 2013. Gilead believes Pharmasset’s candidates, particularly PSI-7977, have the potential to be combined with Gilead’s HCV pipeline candidates to develop multiple all-oral interferon-free regimens.

Our Recommendation

We currently have a Neutral recommendation on Gilead. The stock carries a Zacks #3 Rank (short-term Hold recommendation). We are encouraged by the billions of dollar Pharmasset deal. Inspired by the enormous success that Gilead earned with its fixed-dose combination drugs in the HIV franchise, we believe the HCV combination treatments hold a similar nascent potential.

Gilead’s HIV franchise drugs, Truvada and Atripla, have amply proved its worth. We believe the positive outcomes of two late-stage trials of its investigational HIV combination pill, Quad, will lead to its approval. The much anticipated Quad pill is a combination of Gilead’s pipeline candidates elvitegravir, cobicistat and Truvada. On approval, Quad has the potential to reach blockbuster status and become a market leading HIV medicine. We are also encouraged by the launch of Complera in the US, which together with Quad, once approved, will further fortify the HIV franchise and help mitigate the impact of the upcoming patent expirations. Complera is a fixed-dose combination of Truvada and Johnson and Johnson’s (JNJ) new HIV drug Edurant. However, we are concerned about patent challenges against its key HIV drugs. We maintain a cautious stance until Complera along with the current pipeline proves their worth, compensating for lost revenues from patent lapses.

 
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