As I've said more than once, the shares of biotech Achillion Pharmaceuticals (ACHN) come with invisible mandatory tickets to a roller-coaster ride. This biotech may have a compelling all-oral Hep C regimen in its pipeline, but investors remain nervous that the company is going to be a distant runner-up to the more advanced programs at Gilead (GILD) and AbbVie (ABBV). With the shares down again on what I would consider "non-core" concerns, aggressive investors may want to run the numbers on this company and its stock.
Too Cautious For Its Own Good?
On Wednesday Achillion not only provided a business update on its near-term clinical plans, but also announced a larger-than-expected $125 million equity capital raise. In the wake of these data points, the stock is down more than 8% in a generally weak market.
So why are investors upset enough to sell the stock? I can see at least two potential reasons.
First, a $125 million capital raise would strongly suggest that the company is not about to announce a major partnership (or outright sale) with a larger pharmaceutical company. Partnerships are often the Holy Grail in biotech-land, and there's certainly a large cadre of investors hoping that Achillion will announce a deal with Bristol-Myers (BMY), Pfizer (PFE), Sanofi (SNY) or Big Pharma Inc. that brings it tens (or hundreds) of millions of dollars in upfront payments, no further late-stage trial funding demands, and future royalties.
Second, I think some investors may be disappointed that the company is taking a pretty slow-and-steady course with its clinical development plans. Instead of large-scale studies on '3102 and '1625 (sovaprevir) that would largely answer questions about its efficacy and safety, Achillion is pursuing smaller, stepwise studies. While investors should know by the end of the year whether the '3201/'1625 combo is safe, the small size of the studies will leave unanswered questions about the combo's efficacy (the sustained virologic response or SVR).
Big Pharma Is Playing It Cool
I'm not surprised that Achillion hasn't found a Big Pharma deal to its liking. Achillion is far from the only biotech out there with quality unpartnered programs (I'd include Lexicon (LXRX), Celldex (CLDX) and maybe Ziopharm (ZIOP) in this group).
Big Pharma executives have reason to be cautious in the Hep C space. Gilead paid big bucks for Pharmasset only to see less-than-perfect clinical data hammer the stock early in 2012 (though it has more than recovered since then from that overreaction). More recently, very serious adverse safety data from the key drug acquired in its $2.5 billion deal for Inhibitex has left Bristol-Myers executives looking as though somebody yanked their undies up and over their heads.
As Big Pharma is a risk-averse world where failures are punished more than successes are rewarded, it's not surprising that companies are taking a wait-and-see approach to Achillion. With plenty of development work still to go, larger prospective partners will have plenty of time to contemplate their options and bring prospective deals to the company. And if a rival moves faster and scoops them up first? Well, you win some and lose you some, and there is always another drug in oncology or auto-immune to consider.
Sometimes Discretion Is The Better Part Of Valor
When it comes to Achillion possibly being too cautious, I can understand investor frustration but that doesn't mean I agree with it. While a successful large-scale study could certainly de-risk the story (leading to a much higher target price) and entice a partner/buyer, a large study that enrolls too many of the wrong patients and delivers disappointing results (potentially avoidable results) would send the shares down even further.
With incremental studies, Achillion management will learn a lot about these drugs. Not only will the company build its safety database (important if and when it comes time to go before the FDA), but it will likely learn significantly more about which patients do, or do not, respond to the treatment. While "one pill to rule them all" may be the dream of investors, it's not likely to happen that way. With Achillion being a few years behind Gilead and AbbVie (and Johnson & Johnson (JNJ) as well), it pays for the company to think about how to differentiate its pipeline and maximize the clinical and market utility.
The Bottom Line
I still believe that Achillion is an under-appreciated company in the race to develop and market Hep C treatments. If the SVR and safety data exceeds expectations, Achillion may be a real player, particularly if the efficacy is pangenotypical (that is, effective in treating multiple genetic "varieties" of Hep C). Even if the data isn't enough to make the company a market leader, I still believe it has a good chance of being a solid player.
Right now I'm only modeling about 10% market share for Achillion's pipeline by 2019. Clearly there's a risk that all of the drugs will come up snake-eyes and that's where a large discount rate comes into play. All in all, though, I think a risk-adjusted fair value for Achillion comes in around $14 to $16.25 - roughly 60% to 85% higher than today's price. That makes Achillion a very worthwhile stock to consider for investors brave enough to venture into biotech, and I'm considering adding it to my own portfolio on this pullback.