SUMMARY

 

Although this summary highlights information about us and our business that we believe is important for you to read and consider, you should read this entire prospectus carefully, including “Risk Factors” beginning on page 9 and our consolidated financial statements and the related notes to those financial statements beginning on page F-1, before you decide to buy our common stock. In this prospectus, all references to “Pharmasset,” “the company,” “we,” “us” and “our” refer to Pharmasset, Inc. Unless otherwise noted, all market size data is derived from research conducted by Datamonitor, an independent research provider.

Our Business

 

Overview

 

We are a clinical-stage pharmaceutical company committed to discovering, developing and commercializing novel drugs to treat viral infections. Our primary focus is on the development of oral therapeutics for the treatment of hepatitis B virus, or HBV, hepatitis C virus, or HCV and human immunodeficiency virus, or HIV. Our research and development efforts focus on a class of compounds known as nucleoside analogs, which act to inhibit the natural enzymes required for viral replication. We are currently focusing on three product candidates, two of which we are developing ourselves and one of which we are developing with a strategic partner:

 

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Clevudine, for the treatment of HBV, expected to enter Phase 3 registration clinical trials in the second calendar quarter of 2007;

 

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R7128, a pro-drug of PSI-6130 for the treatment of HCV, in a Phase 1 clinical trial; and

 

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Racivir, for the treatment of HIV, in a Phase 2 clinical trial.

 

We are developing clevudine and Racivir ourselves in the major global antiviral markets, and we have formed a strategic collaboration with F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (collectively Roche) for the development of PSI-6130 and its pro-drugs, including R7128. We are also evaluating the efficacy and safety of dexelvucitabine, or DFC, for the treatment of HIV following the completion of a Phase 2b clinical trial.

 

Roche is a market leader in HCV therapy through their FDA-approved products, Pegasys and Copegus, according to Datamonitor. We believe R7128 represents an HCV product candidate that could complement Roche’s expanding HCV franchise. Our Roche collaboration provides us with potential income from milestone payments that can be used to fund the advancement of our proprietary product candidates. Under this collaboration, Roche will reimburse us for all of the currently expected external expenses (up to an agreed-upon amount) associated with, and we will be responsible for, certain preclinical work, the IND filing, and the initial clinical trial. Roche will fund all of the expenses of, and be responsible for, other preclinical studies, future clinical development and commercialization of R7128. We will continue to develop and retain worldwide rights to ongoing and future HCV programs unrelated to the PSI-6130 series of nucleoside polymerase inhibitors licensed to Roche.

 

Although there are many currently approved antiviral drugs, there is an unmet medical need for hepatitis drugs that offer a sustained viral response, or SVR, defined as a viral load that is undetectable 24 weeks after the cessation of therapy, as quantified by a standard test called a polymerase chain reaction test, or PCR test. For HBV and HCV, pegylated interferon has demonstrated the ability to offer an SVR for some patients. Pegylated interferon is a modified version of alpha interferon, a protein that occurs naturally in the human body and boosts the immune system’s ability to fight viral infections. However, pegylated interferon is injectable and has serious side effects, including fatigue, bone marrow suppression, anemia and neuropsychiatric effects. In the treatment of HBV, pegylated interferon is not widely used because it produces an SVR in too few patients to justify its serious side effects. In the treatment of HCV, pegylated interferon in combination with ribavirin provides a higher SVR rate and is the standard of care. In both HBV and HCV, we believe there is a medical need for drugs that offer an improved SVR rate with fewer side effects. We believe that sales of HCV drugs increased as new therapies that

 

improved the SVR rate were introduced. For example, when adding ribavirin to interferon in 1998 increased the SVR rate from a range of about 13% to 19% to a range of about 38% to 43%, sales of HCV drugs increased significantly from approximately $400 million in 1996 to approximately $600 million in 1998. Additionally, when the replacement of interferon with pegylated interferon in 2000 further increased the SVR rate to a range of about 47% to 54%, sales of HCV drugs again increased significantly from more than $1.3 billion in 2000 to more than $2.0 billion in 2002. For HBV and HCV patients that do not achieve an SVR and for HIV patients, treatment involves a lifelong regimen of antiviral drugs to keep their viral load as low as possible. During such prolonged treatment, viral mutations occur that make the viruses resistant to the drugs being used. We believe there is a medical need for drugs that are effective against resistant viruses and can replace existing therapies that have lost effectiveness.

 

Clevudine

 

Clevudine is an oral, once-daily pyrimidine nucleoside analog that we are developing for the treatment of HBV. We licensed clevudine from Bukwang Pharm. Co., Ltd., or Bukwang, a Korean pharmaceutical company. Based on two completed Korean Phase 3 clinical trials conducted in 337 patients, Bukwang received Korean approval for clevudine in November 2006. Bukwang has recently initiated the commercial launch of clevudine in the Korean market under the brand name Levovir. We plan to initiate two Phase 3 clinical trials of clevudine for registration in the United States and Europe in the second calendar quarter of 2007 to determine its safety and efficacy in patients given 30 mg per day over a 48-week treatment course when compared to adefovir, an approved HBV therapy. The primary endpoint of these registration studies is expected to be a composite endpoint measuring the percentage of patients with undetectable HBV DNA (less than 300 copies/ml) and the normalization of liver enzyme levels at the 48th week on therapy. We believe these trials will be designed to test the superiority of clevudine over adefovir on this combined endpoint. We also plan to continue these studies from week 48 to week 96 to gather additional safety and efficacy data, as well as assess clevudine’s SVR rate.

 

In March 2006, Bukwang completed Study 303, a Korean open-label study of clevudine in 55 HBV patients, including 15 patients in whom the e-antigen was not present and who have not been previously exposed to anti-viral therapies, referred to as treatment-naïve patients. Chronic hepatitis B patients are classified into two groups: e-antigen positive individuals are those in whom the e-antigen is present and e-antigen negative persons are those in whom the e-antigen is not present. The e-antigen is a viral protein that indicates active replication of HBV. The e-antigen negative form of the disease has been more difficult to treat effectively than the e-antigen positive form. In Study 303, 80% of e-antigen negative patients sustained a viral load that was undetectable by PCR 12 weeks after completing the 48-week course of therapy. Based on the results of completed clinical trials, we believe clevudine has the potential to provide an improved SVR rate without the serious side effects of interferon and with the convenience of oral administration.

 

R7128

 

Roche and we are developing R7128 for the treatment of HCV. R7128 is a pro-drug of a molecule we discovered named PSI-6130, an oral cytidine nucleoside analog. A pro-drug is a chemically modified form of a molecule designed to enhance the absorption, distribution and metabolic properties of that molecule. PSI-6130 demonstrated potent and specific anti-HCV activity in preclinical cell-based assays against wild-type HCV. In these assays, PSI-6130 was approximately five-fold more potent in vitro than the parent molecules of NM-283 and R1626, in development by Idenix and Roche, respectively, for the treatment of HCV. In combination with interferon, PSI-6130 was active and additive to the activity of interferon alone in these preclinical assays. In combination with other classes of HCV inhibitors, PSI-6130 appeared to be additive within the range of concentrations tested.

 

In October 2006, Roche and we initiated a Phase 1 clinical trial with R7128 designed to assess the safety and pharmacokinetics of R7128 in healthy volunteers and HCV-infected patients, as well as provide antiviral potency

 

data over 14 days in HCV-infected patients. Roche and we recently completed Part 1 of this study, which involved dosing 38 healthy volunteers with R7128. Preliminary safety and pharmacokinetic data from Part 1 of this study supported progression, in February 2007, of R7128 to Part 2 of this study which involves dosing 40 HCV-infected patients for 14 days. We currently anticipate that the data from this study will be available in the third quarter of 2007, and we anticipate the initiation of a Phase 2 combination study of R7128 with Pegasys and Copegus in the first half of 2008. Further testing will be required to provide enough evidence of safety and efficacy to support an NDA filing with the FDA in the future.

 

Racivir

 

Racivir is an oral, once-daily cytidine nucleoside analog that we are developing as an HIV therapy for use in combination with other approved HIV drugs. A major challenge of antiviral therapy is the emergence of viral mutations that result in forms of the virus that are resistant to current therapies. In a recently completed Phase 2 clinical trial, for those patients carrying the M184V mutation and less than three thymidine analog mutations, replacing lamivudine (a component of the standard first treatment regimen for HIV patients, with annual sales of approximately $1 billion) with Racivir in their existing therapies caused a mean decrease in viral load of 0.7 log (80% reduction) in the second week of treatment, with 28% of these patients achieving an undetectable level of virus (less than 400 copies per milliliter) and 64% of these patients achieving at least a 0.5 log decrease (68% reduction) in viral load. These results suggest that an HIV combination therapy regimen containing Racivir may benefit HIV patients failing their first treatment regimen.

 

Nucleoside Analog Opportunities in HBV, HCV and HIV

 

We believe nucleoside analogs are well suited to treat viral diseases because they can be designed to be highly specific and potent, are relatively simple to manufacture, and have the potential for oral administration. Nucleoside analog drugs have a well-established development and regulatory history, with 14 nucleoside analogs approved by the FDA for the treatment of HBV, HCV or HIV. In addition to clevudine, R7128, Racivir and DFC, we also have other nucleoside analog discovery programs focused on HIV and HCV. Our scientific team of virologists, biologists and nucleoside chemists has experience discovering and developing nucleoside analog drugs for antiviral indications. Collectively, our management team’s product development experience includes 25 New Drug Application, or NDA, approvals. Our discovery platform includes a library of nucleoside analogs and a collection of viral and cellular assays that we use to evaluate potential new product candidates.

 

Risk Factors

 

We are subject to a number of risks of which you should be aware that may prevent us from achieving our primary objectives, such as:

 

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All of our product candidates are in the development stage;

 

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Neither we nor our collaborative partner has received regulatory approval for, or generated commercial revenues from, any of our product candidates, except for clevudine for which Bukwang has recently received marketing approval in Korea;

 

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We may be unsuccessful in maintaining a broad pipeline of potential product candidates or in discovering new product candidates;

 

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We have no experience commercializing drug products ourselves and may be unable to enter into additional collaborations on favorable terms or at all.

 

These risks and the other risks that we face are more fully described under the heading “Risk Factors,” which you should review carefully before you decide to buy our common stock.

 

We incurred net losses of $5.0 million in the fiscal year ended December 31, 2004, $13.7 million in the nine months ended September 30, 2005 and $11.3 million in the fiscal year ended September 30, 2006. For the three

 

months ended December 31, 2006, we had a net profit of $3.9 million due to a one-time milestone payment from Roche. At December 31, 2006, our accumulated deficit was $46.7 million. We expect to continue to incur significant operating losses for at least the next several years.

 

Corporate Information

 

We were initially incorporated as Pharmasset, Ltd. on May 29, 1998 under the laws of Barbados. We became domesticated as a corporation under the laws of the State of Delaware on June 8, 2004 as Pharmasset, Inc., and the existence of Pharmasset, Ltd. in Barbados was discontinued on June 21, 2004. Pharmasset, Inc., then-existing as a Georgia corporation and the only subsidiary of Pharmasset, Ltd. was merged with and into us on July 23, 2004.

 

In 2005, we changed our fiscal year end from December 31 to September 30 for financial reporting purposes. The change was effective for the nine-month period ended September 30, 2005. For tax reporting purposes in 2005, we retained a twelve-month year ended December 31, 2005.

 

Our principal executive offices are located at 303-A College Road East, Princeton, New Jersey 08540. Our telephone number is (609) 613-4100, and our Internet address is www.pharmasset.com. Information contained in our website does not constitute a part of this prospectus.

 

The Offering

 

Common stock offered

6,000,000 shares

 

Common stock to be outstanding after this offering

21,524,071 shares

 

Over-allotment option

900,000 shares

 

Use of proceeds

We intend to use the net proceeds of this offering to advance our clinical development program for clevudine into phase 3 clinical trials.

 

Proposed Nasdaq Global Market symbol

“VRUS”

 

The number of shares of our common stock that will be outstanding after this offering is based on 15,524,071 shares of common stock outstanding as of December 31, 2006 after giving effect, upon the closing of this offering, to the automatic conversion of all outstanding shares of our preferred stock and redeemable common stock and the automatic cashless net exercise of Series D-1 warrants into shares of our common stock, assuming $13.00 as the current market price of the common stock in connection with such exercise. Unless specifically stated otherwise, the information in this prospectus assumes a 1.5 to 1.0 reverse split of our common stock to be effected prior to the effectiveness of the registration statement for this offering, and excludes:

 

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2,662,858 shares of our common stock issuable upon the exercise of stock options outstanding as of December 31, 2006, at a weighted average exercise price of $3.59 per share, of which options to purchase 1,268,227 shares of our common stock were then exercisable;

 

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836,640 shares of our common stock issuable as of December 31, 2006 upon the exercise of Series D-1 warrants exercisable at an exercise price of $0.10;

 

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Approximately 1,622,331 shares of our common stock reserved for future grant under our 2007 Equity Incentive Plan, which will become effective upon completion of this offering, including the addition of 412,985 shares of common stock reserved for future grant under our 1998 Stock Plan upon the effectiveness of our 2007 Equity Incentive Plan; and

 

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900,000 shares of our common stock issuable in connection with the underwriters’ over-allotment option.

 

Additionally, unless stated otherwise, the information in this prospectus does not reflect 310,028 shares of our common stock issued upon exercise of stock options between December 31, 2006 and March 31, 2007, or 140,000 shares of our common stock issuable upon the exercise of stock options granted between December 31, 2006 and March 31, 2007.

 

Summary Consolidated Financial Data

 

The following table contains our summary consolidated financial information. In 2005, we changed our fiscal year end from December 31 to September 30 for financial reporting purposes. The change was effective for the nine-month period ended September 30, 2005. The following summary statement of operations data for the year ended December 31, 2004, the nine months ended September 30, 2005 and the year ended September 30, 2006 and the balance sheet data as of September 30, 2005 and 2006 have been derived from our audited financial statements included elsewhere in this prospectus. The summary statement of operations data for the three months ended December 31, 2005 and 2006, and the balance sheet data as of December 31, 2006, have been derived from our unaudited financial statements included elsewhere in this prospectus and have been prepared on the same basis as our financial statements. In the opinion of management, the unaudited summary financial data presented below reflect all adjustments necessary for a fair presentation of this data. The statement of operations data for the year ended December 31, 2003 and the balance sheet data as of December 31, 2004 have been derived from our audited financial statements that are not included in this prospectus. The summary statements of operations data for the year ended December 31, 2002 has been derived from our unaudited financial statements that are not included in this prospectus. The results from the nine-month period ended September 30, 2005 are not indicative of results that would have been achieved for the twelve-month period ended September 30, 2005.

 

The pro forma net loss per common share reflects the automatic conversion upon the closing of this offering of all outstanding shares of our preferred stock and redeemable common stock into shares of our common stock as of the beginning of each period presented. The pro forma as adjusted balance sheet data reflect the automatic conversion upon the closing of this offering of all outstanding shares of our preferred stock and redeemable common stock into shares of our common stock and the sale of 6,000,000 shares of our common stock offered based on an assumed initial public offering price of $13.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. The summary financial information set forth below should be read together with our consolidated financial statements and the related notes to those financial statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus. The historical results are not necessarily indicative of results to be expected in any future period, and the results for the three months ended December 31, 2006 are not indicative of results expected for the full fiscal year.

 

Management determined, subsequent to their issuance, that our financial statements for the fiscal years 2004 and 2005 and the three months ended December 31, 2005 should be restated to increase the carrying value of the Series D Preferred Stock as of December 31, 2004, September 30, 2005 and December 31, 2005 to include amounts representing dividends using the interest method. See Note 15 to the audited consolidated financial statements included elsewhere in this prospectus.

 

		Year Ended December 31,												Nine Months Ended September 30,				Year Ended September 30,				Three Months Ended December 31,
		2002				2003				2004 Restated (1)				2005 Restated (1)				2006				2005 Restated (1)				2006
Statement of Operations Data:
Revenues:
Contract revenues			—			$	509			$	2,208			$	3,719			$	5,425			$	833			$	8,117
Contract revenues, related parties		$	3,393				—				—				—				—				—				—
Government grant revenues			299				538				545				—				—				—				—
Total revenues			3,692				1,047				2,753				3,719				5,425				833				8,117
Costs and expenses:
Research and development			5,751				4,809				5,317				10,468				10,498				2,244				2,562
General and administrative			1,321				1,761				2,898				8,096				7,911				1,960				2,055
Total costs and expenses			7,072				6,570				8,215				18,564				18,409				4,204				4,617
Operating (loss) profit			(3,380	)			(5,522	)			(5,462	)			(14,845	)			(12,984	)			(3,371	)			3,500
Investment income			333				182				495				1,136				1,659				280				407
(Loss) profit before income taxes			(3,047	)			(5,341	)			(4,967	)			(13,709	)			(11,325	)			(3,091	)			3,907
Provision for income taxes			84				337				17				—				—				—				—
Net (loss) profit			(3,131	)			(5,677	)			(4,984	)			(13,709	)			(11,325	)			(3,091	)			3,907
Preferred stock accretion			37				37				1,317				2,287				1,111				274				284
Net (loss) profit attributable to common shareholders		$	(3,168	)		$	(5,714	)		$	(6,301	)		$	(15,996	)		$	(12,436	)		$	(3,365	)		$	3,623