Gilead Sciences Enters a Huge Market with $11 Billion Purchase

The hepatitis C therapy market is expected to be worth $20 billion by 2020, and, as a result, major pharmaceutical companies are jockeying to position themselves accordingly.

Gilead Sciences Ltd (NASDAQ:GILD) has agreed to spend $11 billion to acquire hepatitis C drug maker Pharmasset Inc (NASDAQ:VRUS)—a company that does not currently have any products on the market and showed a loss of $91.2 million in its last fiscal year. Under pressure to thwart rivals, Gilead made this gamble of an offer to the drug developer: $137 per share in cash at a premium of 89% on the November 18th closing price of Pharmasset.

The market gave a thumbs-down to the deal, with Gilead (NASDAQ:GILD) shares tanking 9.1 percent yesterday. ‘‘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,’’ said Erik Gordon, business professor at the University of Michigan in an e-mail. ‘‘You can do a lot of research for $11 billion.’’

Gilead (NASDAQ:GILD) COO John Milligan justified the purchase, however, by saying it was in order to win a competitive acquisition and gain a replacement for an unsuccessful therapy currently under development. “It was clear that if we were going to become competitive with the larger companies this would be an important thing for Gilead to have,” Milligan said yesterday in a telephone interview. “Value investors are less excited about the deal because it disrupts what they call a stable company, but from my point of view, it gives us a new long term trajectory for all investors.”

Merck (NYSE:MRK) and Vertex Pharma (NASDAQ:VRTX) obtained approval earlier this year for the first new hepatitis C therapies to appear in a decade. Inhibitex (NASDAQ:INHX) and Achillion Pharma (NASDAQ:ACHN) are also in the race to develop antidotes for the hepatitis C virus. On November 17th, Achillion CEO Michael Kishbauch revealed that his company is in advanced discussions with potential suitors. In October, Roche Holding (NYSE:ROC) bought out Anadys Pharma (NASDAQ:ANDS), another company making experimental medicines for hepatitis C.

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