Monday, November 21, 2011

Is Gilead Overpaying, Today -- For "The Future Hope" -- Of Hep C Cures?

Just over $11 billion in cash (for a product not likely to be fully-released into the US markets before 2015) is very heady, in these cash-constrained times -- based on a small study of under 200 patients, in total. Even so, the 100 percent cure rate is indeed an out-sized result.

The price is particularly eye-popping, given that Vertex is already effectively curing many many thousands of Hep C patients (worldwide), week-by-week here, with Incivek® (and to a much smaller degree, Merck's Victrelis® is also curing patients, on a 48 week regimen).

Per the New York Times, today:

. . . .Under the terms of the deal, Gilead will pay $137 a share in cash, nearly 89 percent above Pharmasset’s closing price on Friday. That is also nearly 55 percent above Pharmasset’s 52-week high of $88.52.

Major drug makers have been on an acquisition spree in the last few years, driven by the need to refill their product pipelines. Gilead, based in California, has itself made 10 deals since 2006, though the Pharmasset deal is by far the biggest takeover in Gilead’s 24-year history. . . .

The takeover is expected to dilute Gilead’s earnings through 2014, and then begin adding to them in 2015. . . .

I'll return with some more precise financial analysis, and acquired-leverage insights, later this evening -- but I think this is the very top of the range for this particular target. And perhaps -- just perhaps -- a waft of desperation is floating through.

Forgetting for the moment a rather yawn-inducing analysis of Gilead's paying -- today -- three times 2018 peak sales (and the $6 billion of increased/acquired leverage), I am very skeptical that any well-insured (or government-payor eligible) Hep C patient will delay treatment to perhaps 2015, or later, for the Pharmasset candidate.

By 2015-2016, most of the insured patients (north of 80 percent, I predict) will have already been cured by Vertex (and a smaller number will have been cured by Merck).

That leaves new cases, and the uninsured/ineligible/developing world cases -- for Pharmasset. Even then, in those arenas, it will compete with Vertex and Merck.

While it is true that the Pharmasset offering will be all-oral, and fewer doses per day, that won't command a price multiple in the developing world, or even in western Europe -- when telaprevir and boceprevir will have been well-entrenched by then.

In short, I just don't see it -- certainly not when it takes the form of all cash, and $6 billion of that, as Gilead's added debt.

Finally, the suggestion (this morning, by Gilead management) that the deal becomes accretive in 2015 for Gilead implies that many many Pharmasset employees are soon due to be declared redundant. That's unfortunate, in the extreme.

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