After Johnson & Johnson (NYSE:JNJ) announced it's ending its agreement to develop Achillion Pharmaceuticals' (NASDAQ:ACHN) hepatitis C drugs, Achillion Pharmaceuticals shares lost 22.2% of their value today.
In 2015, Johnson & Johnson acquired the rights to Achillion Pharmaceuticals' hepatitis C drug pipeline. Johnson & Johnson agreed to pay Achillion Pharmaceuticals up to $1.1 billion in clinical, regulatory, and sales milestones, plus royalties on any eventual sales. It also acquired $225 million worth of Achillion Pharmaceuticals' stock.
On Sept. 9, Johnson & Johnson told Achillion Pharmaceuticals that it will no longer develop any of Achillion Pharmaceuticals' hepatitis C drugs. The company cited an increasingly competitive hepatitis C market as the reason for its decision.
Management didn't say if Johnson & Johnson is planning on selling its 18,367,346 Achillion Pharmaceuticals shares soon, but it did say that those shares are subject to a lock-up period that expires early next year.
When Johnson & Johnson licensed Achillion Pharmaceuticals' drugs, the limited hepatitis C treatments that were on the market were commanding sky-high prices. However, the launch of new hepatitis C drugs has changed the market dramatically since then, leaving the licensing decision looking like a mistake.
Doctors and patients now have multiple treatment options available to them that deliver nearly 100% functional cure rates, and prices have dropped significantly as competitors battle over market share. For example, AbbVie (NYSE:ABBV) won approval for its pan-genotype hepatitis C drug Mavyret last month, and it can cure the disease in as little as eight weeks at a cost of just $26,400 for a full treatment course. For perspective, AbbVie launched its prior-generation hepatitis C drug, Viekira Pak, at a retail price of $83,500 in 2015.
If Johnson & Johnson had kept pursuing development of Achillion Pharmaceuticals' drugs, it would have had to pay Achillion Pharmaceuticals up to $100 million in phase 3 enrollment and dosing milestones. Given the changing marketplace, Johnson & Johnson decided the market simply didn't justify that kind of investment anymore.
Undeniably, the loss of potential hepatitis C revenue is bad news for Achillion Pharmaceuticals, but the company has spent the better part of two years reinventing its R&D pipeline so that it's now focused on paroxysmal nocturnal hemoglobinuria, or PNH, a rare disease in which the immune system attacks and destroys red blood cells. Mid-stage trials on its lead PNH drug ACH-4471 are under way, and based on management's comments, it appears the PNH program will remain Achillion Pharmaceuticals' focus.
Overall, ACH-4471 targets a big market, but it's going to be a while before we know if it's effective and safe. In the meantime, Achillion Pharmaceuticals will have to spend big bucks on development without the opportunity to offset that spending with a windfall from Johnson & Johnson. Toss in the risk that Johnson & Johnson sells its shares in Achillion Pharmaceuticals, and I can't help thinking investors are better off focusing on other ideas than this one right now.
Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.