On November 4 I had taken a position in Inhibitex (INHX) at around $8.80, after it had already run up 115% that day from phenomenal early results of its Phase 2 trials of its Hepatitus C drug INX-189. Even despite the strong runup that day, I correctly predicted it had further to go because of the Hepatitus C hype. As I show in my INHX article published on November 7, Hepatitis C is a very feared disease, and most people who have it don’t know they have it. I have never seen so many billboards warning about a disease on the subways and the side of buildings. I would say Hepatitus C is the disease of 2011.
Although the further advance in share price was warranted, up to about $10 or $11, it has now reached parabolic levels. Since my article was published, INHX shares have advanced 60%, for a total 370% gain since the close on November 3. This additional rise is mainly due to Gilead Sciences’ (GILD) recent announced buyout of Pharmasset (VRUS), and further positive data for INX-189, Inhibitex's Hepatitis C drug. I present the view that maybe GILD’s acquiring of VRUS isn’t as good for INHX as INHX investors think, and further recent positive data for INX-189 already was baked into the share price.
- Analysts have given INHX price targets that go far beyond its current value. Canaccord raised its INHX target to $22 based on recent solid INX-189/ribavirin combo 7-day treatment data that made them even more impressed with the drug. However, I think Canaccord should have expected that early tests of INX-189 will be positive. To quote myself in my INHX article: “antiviral activity increases the bigger the dose taken of INX-189, and there are very minor side effects. This great report of INX-189 comes after only the first step of Phase II studies!”
It was established that early tests are going great for INX-189. However, as tweeted by TheStreet writer and biotech expert Adam Feuerstein on November 4: “Typically, Hep C drugs that look great early blow up late b/c of safety problems that crop up after prolonged dosing. That's major risk.” I suggest the analysts at Canaccord should take the long term risk into account, and not get as excited over favorable results from a short-term 7-day treatment.
- Gilead Sciences (GILD) announced on November 21 that it has agreed to buy Pharmasset (VRUS) for $11 billion. That was an 89% premium over VRUS’ market cap. Gilead is very experienced in developing a treatment for Hepatitus C and it already has seven unique molecules in development for it.
INHX had already reported unexpectedly positive efficacy and safety results during Phase II trials for its INX-189 drug before GILD announced to buy VRUS. I don’t know what went on in the bidding process for VRUS, but one would think GILD might have waited a little before buying VRUS after the positive reports of INX-189.
“There’s speculation that it was a competitive process to get Pharmasset,” said Mark Schoenebaum, a biotech analyst for ISI group. Even if there was some competition, GILD would still have to be very confident to buy Pharmasset for a whopping $11 billion which has reportedly made many GILD shareholders angry. I’m sure GILD had a team of analysts furiously researching INX-189 to see if INHX might be a better (and much cheaper) buyout than VRUS.
INX-189 and Pharmasset’s PSI-7977 are very similar. They’re both oral medications and don’t require peginterferon and its nasty side effects. If GILD thought there was potential for INX-189 to be a better drug than PSI-7977, it could’ve paid around $2 billion or less for INHX, some $9 billion less than it will pay for VRUS.
On the Gilead conference call discussing the acquisition, a question was asked by Mark Schoenebaum about why they chose VRUS over other companies developing similar drugs to PSI-7977. A GILD executive answered that there are 2 reasons: Because PSI-7797 is way ahead of everyone else with safety and efficacy data; and because there’s a huge first mover advantage with the nucleoside market. This can be interpreted either good or bad for INX-189. One could say that since GILD was eager to get the first mover nucleoside, then that's why they overlooked INX-189 and so there's still much value there. The bad side of this statement is that since INX-189 isn't the first mover, that will make it tougher to sell once it finally gets to market.
“In biotech, companies that everybody thinks are going to get bought generally aren’t,” Mark Schoenebaum cautioned – and vice versa. “In the last few months, people said ‘Pharmasset isn’t going to get bought, it’s too expensive now.’ Well, it got bought. Now, everyone is saying Inhibitex is going to get bought – it might. But often those are the ones that don’t get bought.”
INX-189 is about a year behind PSI-7977 in the trials stage, as it expects to be finished with Phase 2 trials in the second half of 2012. If INX-189 is equal or superior to PSI-7797, one year doesn’t seem like too long for GILD to wait in order to save $9 billion in the buyout price.
VRUS just started Phase 3 trials of PSI-7797 in November. It’s expected to finish the Phase 3 trials by the second half of 2013.
- INHX sold 1,949,015 shares on November 29 for $10.25 a share, or about 33% lower than the current share price. This offering was done well after news was out that GILD will acquire VRUS. INHX has plenty of cash to last at least another year, even to expand its Phase 2 program for INX-189. It seems as though the company knows the stock is overvalued, and wanted to quickly take advantage of the current hype to raise capital.
If the company had waited a week, it probably could’ve gotten at least 20-30% more for its shares, as the stock has now reached parabolic levels. I believe a second share offering is likely at these levels in the near future, either that or management will be more generous with employee stock compensation. If management is selling shares for $10.25, the wise decision would be to also sell them at $14 a share.
Hepatitus C now could be at the peak of its hype. Adam Feuerstein on November 29 tweeted: “VRTX now a cystic fibrosis stock, de-emphasizing Hep C. Citi's Werber only latest to push this new theme (including VRTX mgmt)” On November 21, Adam Feuerstein tweeted: “Why didn't $GILD buy $INHX?”
On Nov 21=, Adam Feuerstein tweeted: “I don't see any change to the $INHX buyout thesis stemming from the $GILD/$VRUS deal. Still possible. Timing? Who knows?” (This tweet contradicts my short thesis, but I think the INHX buyout thesis is weakened a little by the VRUS buyout.)
INHX likely will drop 15-20% from these levels as takeover rumors settle down. If safety problems emerge in later testing, it could drop by over 50%. It seems as though the major catalysts have already come for INHX, and the stock has now fully consumed all the good news.
Risk of shorting: If it turns out that the GILD buyout of VRUS was only based on timing, and INX-189 is deemed an equal or better drug than PSI-7797, then a buyout by another big pharma company could give the stock another boost to $20 or above. Given that INHX has already sold 2 million shares for $10.25, I find a huge rise in price or a takeover in the near future to be unlikely. Even though 2 million shares is only 2.5% of the shares outstanding, it still makes a statement of management’s perceived value of the stock.
Target price for INHX in the next 3 months: $11.
Disclosure: I am short INHX.