Achillion (ACHN) investors are probably shaking their heads wondering what's wrong with their company following Johnson & Johnson's (JNJ -0.72%) acquisition of the privately held Alios for $1.7 billion this week.
On the surface, J&J's willingness to fork over so much money for the unproven nucleotides percolating in Alios' pipeline would seem to support a higher valuation for Achillion, which has two hepatitis C drugs in phase 2 trials and boasts a market cap of just $1.1 billion. But instead of climbing, Achillion shares retreated following the announcement, so let's take a closer look.
First, a bit of background
The market for hepatitis C treatment has exploded over the past three years following the approval of Vertex's Incivek, a game-changing drug that cut in half the treatment time for pre-existing therapies peg interferon and ribavirin.
Incivek's approval, and its rapid ascent to billion-dollar blockbuster sales status, kicked off a flurry of hepatitis C research that contributed to Gilead Sciences' (GILD -0.34%) massive $11 billion acquisition of Pharmasset in 2012.
That deal landed Gilead Sovaldi, a revolutionary drug that cured roughly 90% of hepatitis C patients after 12 weeks of treatment. That performance handily outpaced Incivek, which boasted cure rates near 80% after 24 weeks of treatment.
As a result of Sovaldi's improved efficacy, doctors began warehousing all but the sickest hepatitis C patients up to a year ahead of Sovaldi's FDA approval last December.
That pent-up demand, coupled with the sheer size of the hepatitis C population (which stands north of 130 million people globally) turned Sovaldi into an instant sales success. During its first six months on the market, Sovaldi racked up more than $5 billion in revenue.
Racing to the next checkpoint
Gilead's Sovaldi beat a slate of R&D programs from AbbVie, Bristol-Myers Squibb, and Merck.to market, and while those competitors remain hopeful that their respective hepatitis C drugs can make it through regulators and cut away at Gilead's dominance, the real behind-the-scenes money is being bet on a future generation of treatments.
That's because Gilead is likely to win FDA approval of its Sovaldi successor soon. Gilead's Harvoni, which combines Sovaldi, an NS5B protein inhibitor, with Gilead's ledipasvir, an NS5A inhibitor, has an FDA decision date set for Oct. 10, and if the drug gets the go-ahead it will officially do away with the use of side effect-laden peg interferon and ribavirin in hepatitis C patients.
Harvoni put up impressive results in phase 3 trials that suggest it will be tough to beat on efficacy alone. During those studies, up to 99% of patients treated with Harvoni were functionally cured of the disease after 12 weeks.
Since Harvoni's cure rate is so high, the next wave of R&D is likely to focus on reducing treatment duration. That's because Harvoni's approval will probably be for 12 weeks of treatment for most patients and possibly eight weeks of treatment for previously untreated patients.
Locking up emerging players
Recognizing that new treatment will need to have multiple targets to maintain efficacy and shorten treatment duration, Big Pharma is actively hunting for next-generation biotechnology companies with promising hepatitis C candidates that can be combined with their own in-house programs.
In June, Merck -- arguably the furthest back of the current wave of competitors -- paid an eye-popping $3.85 billion to buy Idenix and its early-stage hepatitis C program. That payment represented a 240% premium to Idenix previous closing price and sparked a wave of speculation that Achillion could be next.
However, instead of buying Achillion, J&J chose to instead buy Alios, a pre-clinical biotech with two potential nucleotide inhibitors heading toward phase 1 trials.
Continuing to continue
Achillion speculation could spark again if mid-stage trials produce compelling results. The company is currently studying its ACH-3102, a drug that like ledipasvir targets the NS5A protein, alongside Sovaldi in a bid to reduce treatment time to six or eight weeks. In a small phase 2 pilot study, each of the 12 patients receiving Sovaldi and ACH-3102 together achieved sustained viral response at four weeks following eight weeks of treatment.
While that's a solid showing, investors should watch most closely for data on the shorter treatment duration, because if Achillion can show that ACH-3102 produces similar results at six weeks, the company may indeed become attractive to one of the remaining big buyers.