Gilead Faces Stronger Hepatitis C Rival on Merck & Co.’s Deal

Jun 10, 2014 12:01 am ET

June 10 (Bloomberg) -- Gilead Sciences Inc., first to market with a new hepatitis C drug, now faces a bulked-up rival in Merck & Co., which paid the highest premium ever in a health- care deal to gain an experimental product that’s similar.

Gilead and Merck plan to create drug combinations in the next few years that promise to work against most forms of the disease, and take less time to do it than current therapies. Until its deal to buy Idenix Pharmaceuticals Inc., though, Merck lacked a candidate that hit the same target as Gilead’s Sovaldi, blocking a viral protein critical for replication.

Merck’s $3.85 billion deal announced yesterday to buy Idenix gave them that drug, allowing the company the chance to combine it with two others that have been shown to work well in combination. Three-drug combinations, folded into a single pill, will probably be able to handle all forms of the disease and lessen the chance of resistance, said Andrea Branch, at the Icahn School of Medicine at Mount Sinai in New York.

“The faster you can shut it down, the less opportunity the virus has to replicate in the presence of the drug, the greater the likelihood of successful treatment,” Branch said.

Merck’s offer is the highest premium on record for health- care deals larger than $100 million, according to data compiled by Bloomberg.

Shares of Foster City, California-based Gilead, whose current drug costs $84,000 for a full regimen of treatment, fell 4.1 percent to $79.01 in New York trading after rising 49 percent in the previous 12 months. Merck’s shares rose less than 1 percent to $57.92.

Worldwide Market

The companies are competing with AbbVie Inc., Johnson & Johnson and other drugmakers in a market estimated at $20 billion to provide more effective, convenient treatments for a disease that affects an estimated 170 million people worldwide. The virus attacks the liver and may lead to cancer, organ failure and, eventually, the need for a transplant.

At the same time, Whitehouse Station, New Jersey-based Merck and Idenix, in Cambridge, Massachusetts, have legal disputes outstanding for patent rights to Gilead’s Sovaldi. A combined company could have better leverage on those disputes, said Brian Skorney, an analyst with Robert W. Baird & Co.

“Both companies have asserted the position that they’re entitled to rights,” Skorney said in a telephone interview. “Maybe now this puts pressure on Gilead to settle for something to avoid the risk of an outcome that’s unfavorable.”

Rights Lawsuit

Idenix is involved in three lawsuits in the U.S. with Gilead, and Merck has one claiming rights to sofosbuvir, the chemical name for Sovaldi, approved by the U.S. in December and already in use by more than 30,000 patients.

Cara Miller, a spokeswoman for Gilead, declined to comment. Pamela Eisele, a spokeswoman for Merck, didn’t return a call for comment.

Still, Gilead is looking longer term with plans to combine Sovaldi with other drugs to expand its use. The company already has applied for U.S. regulatory approval of a two-drug combination pill for hepatitis C that includes Sovaldi. And combinations of three Gilead drugs showed high cure rates in a small clinical trial, according to results reported at a scientific conference in March.

If Merck is able to do the same thing by combining its existing drugs and Idenix’s contribution, it will be a substantive competitor to Gilead, said Michael Yee, an analyst with RBC Capital Markets in San Francisco.

‘Long-Term’ Position

“Merck has an incrementally better long-term market position” with “significant financial resources and infrastructure in hepatitis C,” Yee said by telephone.

Merck’s existing two-drug combination has already shown that it can block crucial hepatitis C proteins. In April, the company reported on a mid-stage study showing that the combination therapy stopped the virus in 98 percent of newly treated patients with few side effects.

To be sure, there are no guarantees. The data on Idenix’s lead drug are “not fully robust yet,” Alethia Young, an analyst with Deutsche Bank Securities Inc., said in a telephone interview. “Hep C is a big market that will persist for a long time, there’s going to be more than one competitor.”

Merck’s second-phase data for its triple combination drug would still come six-to-nine months after Gilead’s triple combination is expected to be approved, said Asthika Goonewarde, an analyst with Bloomberg Industries. The drugs Merck gained in its purchase of Idenix also may carry more risk than Gilead’s approved Sovaldi, he said.

Gilead bought Pharmasset Inc. in 2011 for almost $11 billion to boost hepatitis C development while drugs were still in experimental stages. Bristol-Myers Squibb Co. purchased Inhibitex Inc. in 2012 for $2.1 billion for its experimental treatments, though the drugs failed in testing. Until Merck’s purchase, companies had held off acquiring smaller developers such as Idenix and Achillion Pharmaceuticals.

--With assistance from Tara Lachapelle and Callie Bost in New York.