Pharmasset Is A Good Acquisition Arbitrage Play

Dec. 7.11 | About: Gilead Sciences, (GILD)

Pharmasset (VRUS) is a steal at its current price of $129 as of 12/7/2011. Gilead (NASDAQ:GILD) recently made an offer to purchase VRUS for $137 a share, that would give investors an easy 6% gain, or 20% annualized return. This is about as risk-free as you can get for a 20% return.

The deal is expected to close in Q1 2012. A quick buy of VRUS now and either holding through the entire deal or selling if it goes within 1% of the buyout price might be a good strategy. Although the loss would be severe if the deal gets cancelled, it’s extremely unlikely that would happen, and is worth the risk.

Lately, there has been some chatter claiming that Gilead paid too much, and that the deal may fold. This has gotten some VRUS investors skittish and caused the share price to slip a little. News that Gilead has just assigned $3.7 billion in unsecured notes to help pay for the purchase has further committed them to making sure the deal goes through. Also, it has been reported that there was a bidding war for VRUS, another sign that it's worth every penny of the $11 billion.

VRUS could walk away from the deal and pay GILD a termination fee if a better offer is made. That would be good for VRUS shareholders. But GILD has no reason to walk away from the deal unless there is a “severe adverse event or problems with one of the plants making the drug for ongoing trials” as it says in the MAC clause. As explained here, MAC clauses are placed in nearly every agreement to sell a company. Recent court cases have made it quite tough to trigger MAC clauses.

If GILD pulls out of the deal just because it gets cold feet over the $11 billion price tag, this would trigger a nasty and potentially expensive lawsuit for GILD. It would also make GILD shareholders question the competence and stability of management. On Gilead’s conference call discussing the acquisition of VRUS, all the executives sound very convicted that they are doing the right thing and have done extensive due diligence.

GILD has been working on and studying PSI-7977’s IP for over a year. They say that with their worldwide influence with similar drugs, like for HIV, they are well poised to develop, market, and distribute the HCV drug. Analysts for the most part have applauded GILD for this acquisition.

At this point, VRUS just has to be very careful and make sure nothing gets screwed up with the drug production. They have executed flawlessly thus far, so it would be a slim chance for them to make a mistake now in the bottom of the 9th inning. And even if there happens to be a bump in the road, the two companies will probably be able to work it out.

Disclosure: I am long VRUS.