Updated from 8:56 a.m. EST

Gilead Sciences ( GILD - Get Report) said Wednesday it plans to acquire Triangle Pharmaceuticals ( VIRS) for $464 million in cash, combining twobiotech firms that specialize in drugs to treat HIV and other infectiousdiseases.

Gilead has been riding a string of regulatory successes in recent months, with the approval and launch of two drugs to treat HIV and Hepatitis B, respectively. The Foster City, Calif.-based biotech firm has also recently turned profitable. But at the same time, some investors have grown concerned over Gilead's rich valuation, especially given the fact that its drug development pipeline was weak.

Meanwhile, Triangle has just submitted its first HIV drug candidate to the Food and Drug Administration, all the while struggling with dwindling cash, the loss of a marketing partner and the lack of internal sales and marketing expertise.

Gilead shares were off 47 cents to $36.41 in recent trading. Triangle shares were up 31% to $5.90.

The transaction is structured as a two-step acquisition, comprisedfirst of a cash tender offer for all of Triangle's common stock at $6 ashare, followed by a cash merger in which Gilead would acquire anyoutstanding Triangle stock for $6 a share. That represents a 33% premiumover Triangle's Tuesday closing price of $4.50 per share.

Good Combination

"There aren't many mergers and acquisitions in biotech that makes sense, but this one does," says Banc of America Securities analyst Mike King. He rates Gilead market perform and his firm doesn't have a banking relationship with the company. King doesn't cover Triangle, although Banc of America Securities is acting as the company's advisor in the transaction.

Gilead had $625 million in cash at the end of the third quarter. While a majority of that cash will be used to complete the Triangle merger, Gilead executives, on a conference call with analysts, expressed no concerns because the company is cash flow positive.

Gilead says the acquisition will be dilutive to earnings in 2003,neutral in 2004 and accretive in 2005. The company was expected to post its first annual profit of 41 cents per share this year, according to Thomson Financial/First Call.

On its conference call, Gilead executives declined to offer any specifics on future earnings guidance or cost savings related to the acquisition. The company intends to start the tender offer process within days and hopes to complete the transaction in the first quarter 2003, pending regulatory approval.

Gilead currently markets six drugs, most notably the anti-HIV medicineViread and the Hepatitis B drug Hepsera. By buying Triangle, the company gains immediate access to a complementary pipeline of experimental drugs.

Durham, N.C.-based Triangle is currently seeking regulatory approval to sell Coviracil, another anti-HIV drug, with an FDA decision expected in September 2003. An approval application for use in Europe will be filed shortly. Gilead says that upon completion of the merger, the combined companies will develop a combination of Viread and Covaricil that, if approved, would be the first combination anti-HIV treatment formulated as a once-a-day pill. Triangle's pipeline also includes two other drugs in midstage testing aimed at treating HIV and Hepatitis B, respectively.

"My biggest concern with Gilead has been its lack of a pipeline," says Banc of America's King. "I like Viread and Hepsera, but there was really nothing behind them. Gilead needed to do something, and with this deal, they backfill the pipeline in a very clever way."

But while Triangle was successful in getting its first drug in front of the FDA, it was facing other struggles. The company had $68 million in cash on hand at the end of the third quarter, or less than a year's worth of cash remaining at its current level of spending. A marketing partnership with Abbott Laboratories ( ABT) had recently been terminated, forcing the company to put a cost-savings plan into place, including scaling back on early drug research, and more importantly, plans to build its own sales and marketing team.