Yesterday's surprise announcement that Merck (NYSE:MRK) decided to acquire Idenix Pharmaceuticals (UNKNOWN:IDIX.DL) at a 239% premium for its experimental hepatitis C therapies sent shares of fellow hep C drugmaker Achillion Pharmaceuticals (NASDAQ:ACHN) soaring by over 45%. Investor enthusiasm centers around an apparent bidding war that broke out for Idenix among a group of pharma heavyweights desperate to catch up to Gilead's (NASDAQ:GILD) record-breaking drug Sovaldi. Put simply, investors appear to believe that Achillion could be the next hepatitis C drugmaker to be bought out.  

What's important to understand is that short sellers have been piling into Achillion ever since the Food and Drug Administration placed a clinical hold on the company's most promising hepatitis C clinical candidate called sovaprevir. Per the latest update, shorts now hold over 20% of outstanding shares, with this interest climbing markedly in recent weeks.

On the bright side, Achillion announced today that the FDA has lifted the clinical hold on sovaprevir. With this regulatory update and Indenix's buyout in mind, let's consider if Achillion Pharmaceuticals is setting up for a monster "short squeeze".

ACHN Chart

ACHN data by YCharts

Sovaprevir could be the key
As a refresher, the FDA placed a hold on sovaprevir last July after patients in an early stage trial exhibited elevated liver enzyme levels. Ever since the hold was put into place, Achillion has been in ongoing discussions with the FDA, which have finally paid off with today's announcement. With the clinical hold a thing of the past, Achillion can now explore a couple of different triple-directing acting antiviral combo treatments that incorporate this key drug.  

What else does Achillion have to offer?
Achillion has three other hepatitis C therapies under development, with ACH-3102 being the most advanced. Among the various clinical activities for ACH-3102, I find the mid-stage pilot study with Sovaldi to be one of the more intriguing value-wise. The goal of this study is to see if a combo treatment could shorten the average treatment duration for genotype 1, treatment-naive patients.  

What's important to understand is that the next step in the evolution of these drugs is going to be shorter treatment times in order to lower costs. It's no secret that insurance companies are pushing back against the high costs of these new treatments and shorter treatment durations would go a long way toward appeasing payers. So, I think this is definitely another drug in Achillion's portfolio that could spark interest in the pharma world. 

Foolish wrap-up
Perhaps the only question that matters at this point is whether or not Achillion has enough to entice a potential buyer. To answer this question, however, we need to consider the impact of Merck's monstrous deal for Indenix's hepatitis C pipeline.

Keeping with this idea, a rough comparison of Achillion and Idenix's hepatitis C pipelines reveals that the two companies are at a relatively similar stage in their development. That being said, I think sovaprevir gives Achillion the edge in terms of the more promising pipeline. With sovaprevir back in the fold, Achillion will have more flexibility regarding the development of triple-combo treatments, making it a much more attractive pipeline going forward. 

Although I don't see why big pharma is so keen on new hepatitis C drugs given that it will be difficult to compete against Sovaldi in a shrinking marketplace, Achillion is probably going to draw significant interest now that sovaprevir is back on track. So with that in mind, I think it's highly likely that shorts will start lowering their hefty position in this developmental stage biotech and a short squeeze could be in the works.   

George Budwell has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.