Here’s a phrase Gilead shareholders probably did not particularly enjoy reading on Monday morning, in the press release about their company’s $11bn acquisition of Pharmasset: “accretive in 2015 and beyond.” The “and beyond” bit is especially dispiriting. When a company spends the equivalent of a third of its enterprise value, and for its money will not get an actual marketed product for at least three years, the effects are predictable – Gilead’s stock fell by more than a 10th.
But holders of Gilead stock should have known what they were in for. Here is a company with $5bn in gross cash on its balance sheet, 50 per cent operating margins and excellent cash flow, but which depends on a portfolio of drugs for HIV with slowing sales growth and patents beginning to expire in the middle of this decade. These drugs are simply too big to replace with internally developed products. Something had to be done.
The Pharmasset acquisition, despite its mind-boggling price tag, is not simply a desperate or overpriced deal. It has considerable advantages. The market for hepatitis C drugs, on which Pharmasset focuses, is huge (9m patients in the US and European Union alone) and under-penetrated. Most patients are undiagnosed, untreated, or both. US rival Vertex sold $420m of its hepatitis C product in the most recent quarter – which it only launched in May. The potential helps offset two big risks: that a side-effect problem for the main pipeline product, PSI-7977, shows up in late-stage trials, and that one of the hundreds of hepatitis C drugs now in development is even better than 7977’s impressive clinical results. It is hard to assess the balance of risk and reward in Gilead’s gamble. The salient point for investors in all maturing pharma and biotech companies is how high the stakes are for any company that wants to stay in the game.
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