Pharmasset Sets Inhibitex-to-Achillion Drugmaker Deals: Real M&A

The acquisition of Pharmasset Inc. at the highest valuation on record for a drug takeover is turning makers of hepatitis C therapies from Inhibitex (INHX) Inc. to Achillion Pharmaceuticals Inc. into the next targets.

Gilead Sciences Inc. agreed yesterday to buy Pharmasset for $10.8 billion, valuing the developer of an experimental, oral treatment at 70 times its net assets, the most ever for a medical drug acquisition greater than $500 million, according to data compiled by Bloomberg. The price is 94 percent higher than Princeton, New Jersey-based Pharmasset’s 20-day average, also the industry’s richest on record. Applying that premium, Inhibitex would cost $1.1 billion, Achillion $791 million, and Idenix Pharmaceuticals Inc. $1.3 billion, the data show.

With the market for the next generation of hepatitis C therapies potentially worth $20 billion by 2020, Inhibitex, Achillion and Idenix may be bought within a year, William Blair & Co. said. While Gilead (GILD) suffered its steepest stock drop in a year and a half yesterday, and none of these unprofitable biotechnology companies have a hepatitis C drug for sale yet, the other targets would require no more than a fifth of the price for Pharmasset even with the same premium, the data show.

“These deals tend to happen in waves,” Dan Veru, who oversees $3.4 billion including Pharmasset shares as chief investment officer of Fort Lee, New Jersey-based Palisade Capital Management LLC, said in a telephone interview. “It’s amazing to me that Gilead’s willing to gamble $11 billion. It is a statement on the future opportunity to the market. Hepatitis C is an enormous business target.”

Oral Treatment

Gilead, the world’s largest maker of HIV medicines, is paying $137 a share in cash for Pharmasset to gain an oral drug in development for a virus that is now largely treated with injections. The price tag is 70 times its book value (VRUS), or the value of its assets minus liabilities, topping the industry’s previous record of 60 times when Barr Laboratories Inc. bought Duramed Pharmaceuticals Inc. in 2001, according to data compiled by Bloomberg.

Pharmasset reported earlier this month that 40 patients who received its experimental hepatitis C treatment, PSI-7977, were responsive after 12 weeks. About half the patients had been followed up to 24 weeks and were all cured with no significant adverse events. The drug was tested in combination with ribavirin, a medication currently used in treating the disease, in patients with hepatitis C genotypes 2 and 3. Genotype 1 is most common and hardest to treat.

‘Land Grab’

Hepatitis C is a viral infection that can lead to swelling of the liver. As many as 170 million people globally carry the virus, which is transmitted through exposure to infected blood, and more than 350,000 die from related illnesses each year, according to the Geneva-based World Health Organization.

“Hepatitis C is very prevalent in the population,” Andrew Berens, a senior health-care analyst with Bloomberg Industries in Skillman, New Jersey, said in a phone interview. “A lot of the market opportunity is going to expand if you have an all- oral regimen. We’re going to see a land grab to try and get companies that are developing them.”

Even after Pharmasset’s shares more than tripled this year before the deal was announced, the price is still 94 percent higher than its 20-day average of $70.65. That’s a record for a takeover greater than $500 million in the drug industry, which has fetched an average premium of only 25 percent, according to data compiled by Bloomberg.

The price was high because it was a competitive process after every sizeable company in the industry was contacted, John Milligan, Gilead’s chief operating officer, said in a phone interview.

‘High Price’

“A company and a board can’t agree to do an acquisition where you don’t believe you’re going to make your money back in multiples,” Milligan said. “Obviously we have confidence in not only this molecule, but this molecule plus our portfolio, in achieving the sales levels necessary to justify this.”

Andrew Cole, a spokesman for Pharmasset, didn’t return a phone call and e-mail requesting comment.

Gilead, based in Foster City, California, fell 9.1 percent to $36.26 yesterday, the biggest drop since April 2010. Gilead, which is raising $6.2 billion in debt, is paying a “high price and premium” and could have bought a smaller company with a hepatitis C treatment for less financial risk, Brian Abrahams, a New York-based analyst at Wells Fargo & Co., wrote in a report yesterday.

Gilead shares increased 6.9 percent to $38.76 today.

Treatment Acquirers

“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,” Les Funtleyder, a New York-based health strategist and portfolio manager at Miller Tabak & Co., which owns Pharmasset shares, said in a phone interview. “If anybody was thinking about doing something in hepatitis C, they would be thinking a lot harder today than they would be yesterday.”

Pharmaceutical companies that may look to expand in the market for hepatitis C treatments include Roche Holding AG (ROG), Merck (MRK) & Co., Bristol-Myers Squibb Co. (BMY) and Johnson & Johnson (JNJ), according to Miller Tabak’s Funtleyder and Brian Skorney, a New York-based analyst at Brean Murray Carret & Co.

These companies are “all heavily invested in the antiviral arena,” Skorney said in a phone interview. “Worldwide this is a huge, huge market opportunity.”

Ron Rogers, a spokesman for Whitehouse Station, New Jersey- based Merck, Jennifer Fron Mauer, a spokeswoman for Bristol- Myers of New York, and Carol Goodrich, a spokeswoman for J&J of New Brunswick, New Jersey, declined to comment on speculation. Calls placed to the U.S. media line for Basel, Switzerland-based Roche weren’t immediately returned.

Inhibitex as Target

Inhibitex is an attractive takeover candidate because its INX-189 treatment is similar to Pharmasset’s drug, Skorney said. With a market value of $831 million, Inhibitex would be a smaller acquisition and a “much different de-risking story” than Pharmasset, he said. Inhibitex shares climbed as much as 34 percent yesterday before closing at $10.61, a 19 percent gain. The shares rose 1.6 percent to $10.78 today, the highest since December 2004.

“The drug that you turn to that looks like it has the best shot at being competitive with Pharmasset right now is Inhibitex’s,” Skorney said in a phone interview.

Inhibitex’s oral treatment was potent and well tolerated, showing no serious side effects in a clinical study, the Alpharetta, Georgia-based company said in a statement Nov. 4.

An assistant to Russell Plumb, chief executive officer of Inhibitex, couldn’t comment.

Achillion (ACHN) For Sale

Achillion, the New Haven, Connecticut-based company expecting clinical data on three experimental hepatitis C therapies by about yearend, is in “advanced discussions” with potential partners and acquirers, CEO Michael Kishbauch said in an interview last week. The hepatitis C market may be worth $20 billion by 2020, Kishbauch said.

Achillion, which doesn’t have any products for sale yet and has a market value of $414 million, may be part of “continued consolidation” in the industry, Edward Tenthoff, a New York- based analyst at Piper Jaffray Cos., wrote in a note to clients yesterday. It may be worth $12 a share, he said, twice the company’s closing price yesterday.

The shares fell 1 percent to $5.88 today.

“Achillion Pharmaceuticals has the most optimized portfolio of treatments for chronic hepatitis C and are committed to providing the greatest value to our shareholders” and hepatitis C patients, Christin Miller, an outside spokeswoman for Achillion, said in an e-mail. The company hasn’t set a deadline for completing its review of alternatives, which include a sale or partnership, she said.

‘Clear Frontrunner’

Idenix (IDIX), with a market value of $765 million and a slate of five experimental medicines for hepatitis C, according to its website, may also be a target, Y. Katherine Xu, a New York-based analyst at William Blair, said in a phone interview. Idenix shares rose 3 percent to $7.47 today, the highest level since September 2008.

Kelly Barry, a spokeswoman for Idenix, didn’t respond to a phone call and e-mail seeking comment.

The most advanced, IDX184, is a nucleotide polymerase inhibitor, the same kind of medicine as Pharmasset’s lead drug. The Cambridge, Massachusetts-based company started enrolling patients in a mid-stage clinical trial this year and expects to report one-month data for the first 30 patients next quarter.

“Pharmasset for a while now has been the very clear frontrunner as far as a drug in clinical development,” Brean Murray’s Skorney said. “For the other pharma companies, there’s going to be some pressure to make a decision to try to be competitive. There’s so much potential revenue to be made that I don’t think they’re ready to give up and just say because Gilead did this deal the game’s over.”

To contact the reporters on this story: Meg Tirrell in New York at mtirrell@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Reg Gale at rgale5@bloomberg.net.

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