Shares of Gilead Sciences climbed as much as 6.9 percent Tuesday after tumbling 9 percent Monday to a 52-week low on news that it was buying Pharmasset for $11 billion. While Gilead's $137-per-share bid represents a 89-percent premium over Pharmasset's closing price on November 18, analysts appear largely supportive of the deal, noting that both companies are developing drugs for the treatment of hepatitis C.
Gilead COO John Milligan remarked that the price was high because it was a competitive environment. "We made a very difficult decision to do an acquisition which is much larger than we typically like to do, but one that we felt was very important for the company," he noted, adding that "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."
Miller Takak & Co. analyst Les Funtleyder commented that "usually we associate these kinds of premiums with biotech bull markets, but it also can be a function of other possible bidders, scarcity and stage of assets." He added that "if anybody was thinking about doing something in hepatitis C, they would be thinking a lot harder today than they would be yesterday." Funtleyder and Brean Murray Carret & Co. analyst Brian Skorney singled out Bristol-Myers Squibb, Johnson & Johnson, Merck & Co. and Roche as drugmakers that could be interested in expanding their presence in the hepatitis C market, with Skorney noting that these companies are "all heavily invested in the antiviral arena," and "worldwide this is a huge, huge market opportunity."
However, Erik Gordon, business professor at the University of Michigan, countered that "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." He added that "you can do a lot of research for $11 billion."
Besides Pharmasset, Skorney noted that Inhibitex may also be an attractive takeover target because its experimental therapy, INX-189, "looks like it has the best shot at being competitive" with Pharmasset PSI-7977. Moreover, the analyst noted that with a market value of $831 million, Inhibitex would be a smaller acquisition and a "much different de-risking story" than Pharmasset.
Achillion, which is awaiting clinical data on three experimental hepatitis C therapies by year end, is currently in "advanced discussions" with potential partners and acquirers, CEO Michael Kishbauch said. The company, which does not currently market any products, has a market value of $414 million and may be worth $12 per share, or about twice the company’s recent closing price, according to Piper Jaffray & Co. analyst Edward Tenthoff.