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Source: Achillion Pharmaceuticals

What: After reporting third quarter financial results and updating investors on its pipeline opportunities, shares in Achillion Pharmaceuticals (NASDAQ: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 (NYSE:JNJ) 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.

Take Long View

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.

Todd Campbell owns shares of Achillion Pharmaceuticals. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool recommends 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.