Don't look now, but Johnson & Johnson (NYSE:JNJ) last month bought up South San Francisco-based Alios BioPharma for a cool $1.75 billion.
So what's afoot? What is the health care giant really after with this deal?
Alios is a clinical stage biopharmaceutical that has some novel therapies Johnson & Johnson clearly wants to feed into its pharmaceutical pipeline. The investigational therapies are called "nucs," or nucleoside analogs, and are a relatively new class of treatments that prevent viral replication in infected cells.
In particular, Alios has two promising hepatitis-C nucs that could synergize J&J's drug Olysio in fighting the deadly liver disease. There's been analyst speculation that J&J's desire to further its hep-C franchise is what really cued the deal. The analyst's rationale is that if either Alios nuc proves out, one or both could someday go head-to-head with Gilead Sciences's (NASDAQ:GILD) megablockbuster nuc Sovaldi.
But neither of Alios' hep-C nucs have started human testing, and the mortality rate of preclinical drug programs is daunting. That's particularly true with nucs, where development can be extremely difficult and the bar for continued progress very high.
With Alios's hep-C program still multiple years from possible fruition, it's no surprise that J&J's management down-played hep-C when announcing the deal. Instead, they cited something else entirely as their key interest.
A possible cure for a major childhood disease
Alios's most-promising treatment (AL-8175) is currently in phase 2 testing for respiratory syncytial virus, or RSV. If all goes as planned, the drug could someday fulfill a critically important unmet medical need.
In the United States, RSV is the most common cause of pneumonia in infants, according to the Centers for Disease Control and Prevention. The disease causes as many as 125,000 hospitalizations a year in children under the age of one. While RSV infections are often mild, to the point they can pass without notice, the virus can also make infants gravely ill. In particular, the disease is a nightmare for parents of premature or immuno-compromised infants, whose children are particularly vulnerable. RSV is also an important cause of respiratory tract infections in adults with chronic pulmonary diseases.
RSV is the only major childhood disease with no specific drugs approved for treatment, despite over forty years of attempts to produce a cure. But other companies are now in the hunt. Gilead Sciences was the leader, with an investigational RSV compound in mid-stage trials. But J&J had its own early stage RSV pipeline, and buttressed by Alios's mid-stage RSV program, J&J may now be the first to come out with an innovative RSV treatment.
"We are excited that this acquisition will enable us to explore treatment options for a number of viral infections, including RSV, the last of the major pediatric diseases with no available preventive therapy," said William N. Hait, global head of research and development at J&J's Janssen Pharmaceuticals division.
Will Alios nucs keep the party going in the J&J's pharma division?
Last quarter, J&J roped in sales of $18.5 billion, an increase of 5.1% compared with the same quarter last year. The prescription drug segment has been the standout in the past three quarters. In the first nine months of 2014, prescription drugs brought in $24.3 billion, an impressive 16.7% increase over the same period a year ago.
Still, despite the impressive numbers, the stock price fell slightly following earnings.
Some Wall Street wizards attributed J&J's price drop to worries that the party for Olysio is already winding down. Olysio's launch is less than a year old, but J&J pessimists have been pointing out that the rapidly evolving hep-C market is significantly diminishing Olysio's value and may even be threatening to eventually turn the drug obsolete.
While the picture is not that bleak, Olysio's sales are showing signs of stress. While Olysio delivered a jaw-dropping $1.18 billion in sales in the first half of 2014, its $831 million in sales in Q2 slipped to $796 million in Q3. In fact, J&J's CEO Alex Gorsky clearly warned in the previous conference call that Olysio's impressive sales were not sustainable."For the second half of the year, we will have competition for Olysio that we did not have in the first two quarters," he told investors.
CFO Dominic Caruso was not shy about pointing to storm clouds on J&J's horizon either. He referred to a "headwind" when asked about Olysio's likely sales trajectory. "We're not providing guidance for 2015 [but competition] will certainly pose a headwind," he said.
The "headwind" in this case is Harvoni, Gilead's recently released hep-C drug.
Harvoni negates the need for Olysio for many hep-C patients, because doctors typically prescribe J&J's drug in tandem with Sovaldi. By contrast, Harvoni combines Sovaldi with Gilead's new agent, ledipasvir, in a one-pill "cocktail" that doesn't require Olysio.
Multiple problems coming for Olysio
Cost-conscious payers in the U.S. are another problem for Olysio and J&J. The sum cost for Olysio and Solvadi is alarming. Solvadi's $84,000 list price is bad enough, but when coupled with Olysio, the price stretches to around $150,000.
By contrast, Harvoni almost looks cheap. A 12-week regimen costs a "mere" $94,500.
J&J has said it will work with payers on costs. But the company will need to slash Olysio to $10,500 to compete with Harvoni. It seems unlikely J&J will be willing to offer such a large rebate.
The competition of Olysio doesn't end with Harvoni. AbbVie's hep-C cocktail (which also doesn't need Olysio) could be on the verge of winning FDA approval.
With Olysio, J&J has tasted the commercial rewards of the hep-C market. With that franchise being threatened, it makes sense the company will try hard to resurrect it with Alios's nucs. The good news is that if either experimental drug proves out, one or both could be combined with Olysio to create a more potent hepatitis C treatment. At that point, J&J would have its own all-in-one cure, and could potentially sidestep Gilead.
The bad news is that opportunity is years in the future--and may never happen.
Drug manufacturers in search of breakthrough products have made a number of billion-dollar deals to acquire biotechs in recent years. Despite its hefty price-tag, the Alios deal is at the low end of the recent buyouts. Over the summer, Merck paid $3.9 billion for Idenix Pharmaceuticals and its nuc stockpile, a deal that Johnson & Johnson also bid on according to Fierce Pharma. And of course, Gilead Sciences traded more than $11 billion for Pharmasset in 2011 to pick up what would become Sovaldi.
Clearly, with this buyout, J&J's management is signaling it wants to keep the party going in the company's pharma division. But with the thousands of failures of investigational drugs, and the typically lengthy process from clinical trial to FDA approval, it's way too early for investors to break out the confetti.
Cheryl Swanson owns shares of Gilead Sciences. The Motley Fool recommends Gilead Sciences and Johnson & Johnson. The Motley Fool owns shares of Gilead Sciences and Johnson & Johnson. 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.