March 27, 2012
I've followed biotech for a long time now, and I have a hard time thinking of an example of another addressable market like hepatitis C (HCV) where investor interest has just exploded in the space of about a year. Like antisense, monoclonal antibodies, RNAi, genomics, stem cells and every other hot property in biotech, there has been no end of hope, hype, and hucksterism. Although HCV is likely to grow into a very financially significant drug target in the coming years, it's worth wondering just how much of the frenzy today can be justified in long-term valuations.
In particular, I'm curious about Achillion Pharmaceuticals (ACHN) these days. I've watched this stock for a while now and came close to buying on multiple times in the pre-2010 pre-$2 level. I underestimated just how fast this market would heat up, though, and had to re-learn a painful lesson - sometimes, you snooze and you lose.
Achillion jumps out as the only serious HCV play I'm aware of with a market cap below $1 billion (while Idenix (IDIX) is hardly a giant at $1.1 billion). Not only is it relatively small, but it also may be one of the relatively few players with its own home-grown effective combination therapy.
Of course everything Achillion is working on in HCV is still in the clinic and as Gilead (GILD) showed so clearly recently, "surprising" clinical results are not always positive surprises. The end result, then, is that this may be the next Pharmasset or just another biotech destined to flame out.
The Good - Interesting Compounds All Their Own
Achillion has at least two HCV antivirals well worth watching - ACH-1625 and ACH-3102.
ACH-1625 is a potentially pangenotypical NS3 protease inhibitor (PI) that has shown both solid efficacy and encouraging safety in early studies. Showing both strong efficacy and safety thus far, it could perhaps be the backbone for future combination therapies. That said, pangenotypical efficacy is not yet established and the compound still has not gone through a pivotal Phase 3 study.
The good news with antivirals is that, unlikely oncology and anti-inflammatory drugs, efficacy signals in early pilot studies often hold up through pivotal studies. What's more, these studies are relatively easy to enroll and can be completed expeditiously. What that all means for investors is that ACH-1625 could have a relatively quick path to market.
Achillion is also developing ACH-3102, a NS5a inhibitor, and expects to put it in human studies soon. This drug looks like it should be less subject to resistance and the company (as well as bulls) seem more excited about this drug than the more advanced ACH-2928 (also a NS5a inhibitor). Coupled with ACH-1625, this could be a very interesting combo therapy, but it's worth mentioning that almost every drug is interesting to bulls going into Phase 2 studies.
These aren't the only drugs in Achillion's HCV pipeline, and the company does have identified experimental compounds targeting bacterial infections and HIV. It should be noted too that Achillion's HCV pipeline is wholly-owned.
The Bad - Competition, And Expectations, Left Right And Center
Achillion is very definitely not going to be the first company to market with new HCV drugs, and there is apt to be extensive competition in the market. That is not only going to place a premium on the SVR efficacy data and safety profile, but also potentially on the marketing muscle of the company in question.
Since its acquisition of Pharmasset, Gilead was put in the pole position in the race to develop blockbuster HCV drugs. That is, until the company reported Phase 2 data on the superstar-to-be '7977 that showed it is not 100% perfect. Specifically, this Phase 2 study indicated that '7977 may not be effective in null responders (patients who have failed to respond to earlier treatments), and may give new hope to alternate approaches that include a NS5a inhibitor or NS3 protease inhibitor.
That said, a little perspective is in order. Maybe '7977 isn't flawless, but SVR-12 rates of 91% in genotype 1 and 100% in genotypes 2 and 3 in a thus far safe drug is still pretty impressive. Moreover, Gilead is looking at a variety of combination possibilities and while the company would certainly love to have "the one antiviral to rule them all", being a part of a blockbuster combination therapy is not a bad consolation prize.
Along Gilead and Achillion is a host of companies developing therapies and a sea of drugs known more by number than by name.
Bristol-Myers Squibb (BMY) has its NS5a inhibitor daclatasvir well along in studies, a PI ('032), and the NS5b inhibitor it acquired with the Inhibitex deal, as well as other earlier stage compounds. The NS5a inhibitor has shown solid efficacy, and its PI/NS5 combo showed 100% SVR without PEG-interferon or ribavarin.
Of course there are many more. Abbott (ABT) has its own all-oral combination (NS5a and PI), as does Roche (RHHBY.PK), although the efficacy in the Roche compounds has not been as encouraging. Johnson & Johnson (JNJ) has its TMC435 PI that it in-licensed from Medivir, and Boeringher Ingelheim has its PI as well. Indenix has a nucleotide inhibitor and NS5a inhibitor in trials and a non-nuc in preclinical development.
Last and not least are Vertex (VRTX) and Merck (MRK). These companies have brought the two newest HCV drugs to market (Incivek and Victrelis, respectively). Vertex has a PI in trials and two nucleotide inhibitors licensed in from Alios, while Merck's PI has seen a significant setback tied to safety issues.
A Quick Rundown On The Market, Prospects, And Deals
The oft-repeated statistic on HCV says that there are between 130 million and 170 million infected persons around the world. Approximately 4 million of those are in the U.S., with another 5 million the EU. By way of comparison, Brazil is thought to have at least 7 million HCV patients, India at least 10 million, and China 43 million.
Untreated HCV offer leads to severe chronic liver disease (including cirrhosis), but the long-used PEG-interferon and ribavirin therapy (dominated by Roche and Merck) has had success rates of below 50% in long-term usage.
That efficacy underlies a lot of the market expectation on HCV drugs. While the pre-Incivek/Victrelis HCV market was estimated to be about $3 billion (with $2.5 billion of that going to PEG-inteferon), analysts believe better efficacy could drive that figure close to $10 billion in 2016.
Admittedly, that's a large number. It may not be completely out of line, though, if these 90%+ SVR rates hold up in pivotal studies. Offer people with a serious lifelong illness a safer, more effective drug that is also easier to take and you can almost always charge a premium for it. Also, think about it this way - the U.S. and European insurance/payer systems are willing to pay several tens of thousands of dollars for cancer therapies that offer a few extra months of median survival benefit, so there's clearly a willingness to pay for better clinical outcomes.
What's this all mean for Achillion?
I could see ACH-1625 garnering perhaps up to a billion in sales if the early results hold all the way through studies. Moreover, there's the potential to be had from the combo therapy; whether that's in combination with another Achillion drug or a rival compound (like, say, Gilead's '7977). If Achillion could garner $1 billion in sales, that would translate into a fair value of $13 to $18 per share today based upon your forward multiple estimate (6x or 8x).
I'm sure $1 billion in sales will sound too small to Achillion bulls. Fair enough; if the early results hold up, maybe it's an even bigger blockbuster, but it looks like there are going to be a lot of competing therapies on the market and good marketing is going to deliver sales even in inferior compounds.
It may well be the case, though, that Achillion never makes it to the point where its sales matter. I would be quite surprised to see Achillion partner its drugs, but I think a buyout could well happen. Certainly there have been plenty of chatter on that subject, what with Gilead and Bristol-Myers paying up for HCV compounds (and Roche also making some deals of its own).
So how does the M&A scene break out? I don't think Bristol-Myers would need Achillion, and I don't think Gilead would go that route either unless a '7977/ACH-1625 really showed something special. Johnson & Johnson may think it needs non-PI partner compounds and may not want to pay for the overlap between their PI programs.
That said, I think there are a lot of names left that could be interested. Merck arguably needs a better protease inhibitor, and likewise Roche, Abbott, and Vertex may find that they need better compounds than they presently have. Companies like Sanofi (SNY) and GlaxoSmithKline (GSK) aren't doing much here today, but could find Achillion to be a ready-made HCV platform. Odds are, though, that Achillion holds out a bit for a desperate buyer - not because there's anything wrong with its pipeline, but because a desperate Merck or Roche may pony up a better deal if they feel pressure.
The Bottom Line
Taking a midpoint of that earlier $13-$18 range, I'd say Achillion may be worth about $15.50 a share today. Annoyingly, that's almost spot on with the current consensus number. I do believe there could be more upside as its pipeline matures and rivals run into problems, but I usually want more than 50% undervaluation before buying into a new biotech story.
Disclosure: I am long RHHBY.PK.
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