Health Care Deal News: Spotlight on Biotechnology - December 2011

In the largest deal of the month, one so large that it accounts for slightly more than one-half of all dollars spent on health care M&A, Gilead Sciences (NASDAQ: GILD) is buying Pharmasset, Inc. (NASDAQ: VRUS) for $11.0 billion. Based in Foster City, California, GILD discovers, develops and commercializes therapeutics to advance the care of patients with life-threatening diseases. The company is already the world’s largest manufacturer of HIV drugs, but it is also in search of a therapy that will create a paradigm shift in the treatment of hepatitis C, and it strongly believes that Pharmasset has the treasure map to find it. Based in Princeton, New Jersey, VRUS, a clinical-stage pharma, is involved in novel drugs to treat viral infections, focusing on hepatitis C. As befits its clinical-stage status, on a trailing 12-month basis, it generated revenue of $897,000. This acquisition gives GILD one drug candidate for treating hepatitis C that is in phase 3 trials and two more that are in phase 2 trials. This portfolio thus places GILD in a strong position to transition to an all-oral regime for treating hepatitis C without resorting to injections of interferon.  The change in delivery from an injectable to an oral drug would doubtless confer a significant competitive advantage on GILD.

And for this advantage, GILD is willing to pay up. Under terms of the deal, GILD is offering to pay $137.00 per share in cash, which represents an 89% premium to the stock’s prior-day price and a 55% premium to its 52-week high. The transaction is to be financed with cash on hand, bank debt and senior unsecured notes. Among those who think GILD may have paid a tad too much is Raymond Schinazi, the founder and largest individual shareholder of VRUS. In an interview, Mr. Schinazi estimates that GILD could have had VRUS in 2004 for $300.0 million, when it started soliciting take-over offers. Pharmasset is not the name of some town on Cape Cod, but one that Mr. Schinazi coined from ‘pharmaceutical’ and ‘asset’, with the intention of selling off those assets. Such was the original business plan. Mr. Schinazi walks away from this deal $440.0 million richer. Merry Christmas, indeed!

Barclays Capital and BofA Merrill Lynch provided GILD with financial advice on this deal; Morgan Stanley provided VRUS with similar advice.

In November’s second largest deal, Japan’s Otsuka Holdings (T: 4578) is entering into an alliance with H. Lundbeck A/S (OMX: LUN) to develop and sell up to five psychiatric and neuroscience drugs. Under terms of the deal, valued at $2.0 billion, LUN will make a $200.0 million upfront payment and commit to making up to $1.8 billion in milestone payments and royalties. This alliance seeks to replenish both companies’ psychiatric drug offerings. LUN’s most important drug loses patent protection in 2012 (that’s next month) and Otsuka’s main schizophrenia drug loses U.S. patent protection in 2015. Under this alliance, LUN gains rights to two compounds which could generate accumulated revenue of over $9.1 billion if fully developed and marketed while Otsuka gets three of LUN’s drugs in midstage development. Otsuka has strengths in antipsychotic drugs while LUN has strengths in anxiety and depression treatments.

Amylin Pharmaceuticals (NASDAQ: AMLN) and Eli Lilly & Co. (NYSE: LLY) have finally called it quits on their alliance to create a GLP-1 diabetes drug, one which began in 2002 and eventually involved lawsuits as LLY sought a new diabetes collaborator in Boehringer-Ingelheim. In effect, AMLN is buying out LLY’s stake in the alliance, resolving the litigation between the two. The company is paying as much as $1.45 billion, consisting of $250.0 million upfront and up to $1.2 billion in revenue-sharing payments. The assets AMLN is gaining include Byetta (exenatide) as well as the long-acting version Bydureon. LLY will immediately transition U.S. commercial operations to AMLN and will transfer operations outside the U.S. on a market-by-market basis over the next two years. AMLN is to make revenue-sharing payments to LLY equal to 15% of global net sales of exenatide products until the company has made aggregate payments of $1.2 billion plus interest...Want to read more? Click here for a free trial to The Health Care M&A Monthly and download the current issue today