Source: Achillion Pharmaceuticals
What: After reporting third quarter financial results and updating investors on its pipeline opportunities, shares in Achillion Pharmaceuticals (ACHN) jumped over 10% higher today.
So what: Achillion Pharmaceuticals' shares peaked near $16 earlier this year on enthusiasm surrounding hepatitis C drugs in its pipeline and the potential to be acquired, but its shares retreated following news that Johnson & Johnson (JNJ 0.67%) opted to license, rather than buy outright, those hepatitis C candidates earlier this summer.
The slide in Achillion Pharmaceuticals' shares, however, may be coming to an end as Achillion Pharmaceuticals shifts investors' focus away from M&A disappointment to the ongoing opportunity that exists for its NS5A inhibitor odalasvir.
Last month, Johnson & Johnson announced that it would combine odalasvir with two of its other hepatitis C compounds in an attempt to significantly shorten hepatitis C treatment duration.
Specifically, Johnson & Johnson will pair up odalasvir with Olysio, a hepatitis C drug that is already FDA approved, and ALS-335, a drug Johnson & Johnson acquired when it bought Alios last year.
Johnson & Johnson will study the combination therapy over a four-, six-, and eight-week treatment duration that if successful, would be a marked improvement over the current standard treatment duration of 12-weeks.
In addition to highlighting odalasvir's potential, Achillion reported revenue in the quarter of $33.8 million and net income of $26.3 million. Those results came courtesy of recording a portion of the premium associated with Johnson & Johnson's taking a $225 million equity stake in Achillion Pharmaceuticals as part of its licensing deal.
In regards to the company's bottom-line performance, Achillion Pharmaceuticals' R&D expenses were $12 million, and its general and administrative expenses were $4.9 million in the quarter. For comparison, Achillion Pharmaceuticals spent $12.1 million on R&D and $3.7 million on G&A in the third quarter of 2014.
Now what: Achillion Pharmaceuticals' success or failure is heavily reliant upon Johnson & Johnson's ability to develop and ultimately commercialize a therapy that includes one of Achillion Pharmaceuticals' hepatitis C drugs.
Results from the phase 2 combination study being conducted by Johnson & Johnson should be available next quarter, and if so, then investors should get additional insight into the potential for a phase 3 trial shortly thereafter.
If Johnson & Johnson does succeed in its attempt to develop a therapy that includes an Achillion Pharmaceuticals compound, then Achillion Pharmaceuticals could receive up to $905 million in milestones, plus royalties.
Because Achillion Pharmaceuticals' market cap is $1.35 billion, an argument could be made that the market is undervaluing the opportunity associated with the deal with Johnson & Johnson, but we won't know for sure if that's the case for a while. All in all, Achillion Pharmaceuticals is a risky bet that's best suited to only the most risk-tolerant of investors.
