By Alan Rappeport and Helen Thomas in New York and Andrew Jack in London

Gilead, the US pharmaceutical company, has agreed to buy Pharmasset in an $11bn cash deal designed to diversify the group away from HIV drugs and give it a lead in the fast-growing market for hepatitis C medicines.

The deal values Pharmasset at $137 a share, an 89 per cent premium to its closing share price on Friday and

a 59 per cent premium to its all-time high closing price. It far exceeds Gilead?s previous acquisitions, including Myogen, bought for $2.5bn in 2006, and CV Therapeutics, purchased for $1.4bn in 2009.

Gilead shares fell almost 12 per cent to $35.24 in early US trading on concerns the price was too high for a company not expected to generate profits for three years. Pharmasset shares surged more than 80 per cent to $134.48.

?While we understand the strategic rationale, the price tag is lofty for a pre-commercial asset and not aligned with what we would like to see from Gilead in terms of capital allocation,? said Joshua Schimmer, an analyst at Leerink Swann.

Pharmasset is developing oral drugs for hepatitis C, which Gilead expects to become important as patients switch from existing therapies that must be taken more regularly, require injection and have significant side effects.

The purchase – one of the largest in the drugs sector in recent months – will strengthen Gilead?s position in the field and reflects a strategy it has used to become one of the leading producers of HIV treatments, including tenofovir.

John Martin, Gilead?s chief executive, said: ?The acquisition of Pharmasset represents an important and exciting opportunity to accelerate Gilead?s effort to change the treatment paradigm for [hepatitis C virus]-infected patients by developing all-oral regimens for the treatment of the disease, regardless of viral genotype.?

A number of leading drug groups are investing heavily in hepatitis C treatment as the market moves towards a once-a-day oral cure rather than the cocktail of medicines now used to control the disease. Merck, Roche, Johnson & Johnson and Vertex are among those targeting the market.

Hepatitis C is a viral disease that causes the liver to swell. Gilead said estimated global prevalence was 160m people, including 12m infected in big markets, while only 200,000 patients were being treated. According to the US National Institute of Health, the disease affects about 1.5 per cent of the US population.

The deal consolidates Gilead?s own hepatitis treatments with two approved medicines and a further half a dozen in development. Pharmasset has three hepatitis C drugs undergoing clinical trials, including one in a partnership with Roche. Schaefer Price, the company?s chief executive, said Gilead?s marketing and antiviral drug development expertise would make the acquisition a good fit.

The company said the deal would be dilutive to earnings until 2014 and accretive from the following year. It will temporarily suspend its share repurchases and fund the transaction with cash and additional borrowings.

Les Funtleyder, an analyst at Miller Tabak, said some investors found the deal risky because it was dependent on the success of clinical trials. ?Many people are reading this as an act of desperation for Gilead, meaning that maybe their pipeline wasn?t really so great,? Mr Funtleyder said.

Barclays Capital and Bank of America Merrill Lynch advised Gilead on the deal and provided $6.2bn in new debt financing. Morgan Stanley advised Pharmasset.

? The Financial Times Limited 2011