Hepatitis C virus (HCV) treatments are moving stocks of HCV developers up and down in a chaotic way that makes no sense. While Vertex’ (VRTX) Incivek sales have been breaking the record of drug sales, investors who have been fed immature and unconfirmed knowledge that Pharmasset’s oral HCV therapeutics combination will render Incivek obsolete caused a sell-off in VRTX. Investor logic that patients would definitely prefer all oral drugs over a combination that has injectable alfa interferon is undisputable, that’s we too are waiting for a successful all oral HCV treatment, which has yet to emerge.
With the media stressing that Pharmasset was the firm that will put the magic combination on the market, Pharmasset's stock doubled from over $20 in January 2010, to around $45 at the end of December. In 2011, the stock rallied again from $45 in January to $135 in August, split 2 to 1 and started climbing back from around $66 to $72. The firm was then acquired by Gilead (GILD), which paid an additional 67% premium over its obese market price, i.e., around over $130 per share.
This scenario does not make sense to us. Contrary to the market’s culture, investors, for one reason or another, sold a real present to buy a future designed on mere speculation. They sold VRTX, a company that had a marketed HCV drug, which is the first ever to represent a cure for the life-threatening HCV infection and whose sales have been actually generating record revenues to buy into Pharmasset’s oral combination while still in mid-trial and requires more lengthy experimentation before confirming the all-oral combination’s safety and long-term efficacy.
Just before concluding the acquisition deal, on December 16, 2011, Pharmasset surprisingly announced its decision to discontinue all treatment arms with a regimen containing its drug PSI-938 because of laboratory abnormalities associated with liver function in subjects receiving the drug at a dose of 300 mg/day. This news surprised investors, especially Gilead’s shareholders who began to question the value of the deal with Pharmasset. The news did not alter Gillead’s decision to acquire the company. After the acquisition, Gilead’s stock experienced a temporary retreat. Many investors believed that $11 billion was an unprecedented high amount of money to be paid for molecules that have yet to complete clinical trials, confirming their superiority as described by the media since 2009. Investors’ temporary negative reaction toward the deal was the only understandable action in this story.
It did not take time for GILD to fiercely rebound after the firm announced its financial results. The stock was up to $56, matching its new high for the past three years. Less than two months later, though, other trial results with Pharmasset’s combination on HCV genotype 1 patients with a prior “null” response to an interferon-containing regimen demonstrated that the majority of patients experienced viral relapse within four weeks of completing 12 weeks of treatment with what has become Gilead’s combination of GS-7977 plus ribavirin (RBV). GILD tumbled, trading now at around $45, after loosing around 15% of its value.
In the mean time, Vertex is generating millions of dollars selling its selective HCV protease inhibitor. Its stock, though, remained boxed - sold every time it makes an attempt to rally even though Vertex is also trying its own all-oral combination. The stock remained boxed even after data from two treatment arms of the Phase 2 ZENITH study evaluating an interferon-free (all-oral) treatment regimen of the non-nucleoside polymerase inhibitor VX-222 in combination with INCIVEK (telaprevir) tablets and ribavirin in people with genotype 1a or 1b hepatitis C who were new to treatment have demonstrated promising safety and efficacy and after learning that the data from this study will be used to design a Phase 3 program with the goal of submitting a New Drug Application (NDA) to the FDA for the first interferon-free regimen for genotype 1 (1a and 1b) patients by the end of 2014 or beginning of 2015.
Investors didn’t even bother considering the fact that Vertex and its collaborator Alios BioPharma are conducting Phase 1 studies of two structurally-distinct nucleotide polymerase inhibitors, ALS-2200 and ALS-2158. Vertex has begun the first seven-day viral kinetic studies of ALS-2200 and ALS-2158 in people with genotype 1 hepatitis C, whose safety and viral kinetic data expected in the second quarter of 2012. Positive results would enable the initiation of Phase 2 studies in the second half of 2012 to evaluate multiple interferon-free combination regimens of ALS-2200, ALS-2158, INCIVEK, VX-222 and/or ribavirin.
What continued to make no sense at this stage is that investor pessimism with Gilead's all-oral combination that erased 15% of GILD price, did not transform into optimism for VRTX, which was cremated by the enthusiasm for Gilead’s drug that investors are now experiencing doubt about. It looks as if investors are sensitized to not appreciate the firm that introduced the first HCV cure and the first approved cystic fibrosis drug that works at the root cause of the disease, knowing in fact that Vertex has plans ready to bring breakthrough treatments to all cystic fibrosis patients.
Gilead is a great firm and at the end of the day it will probably succeed in bringing an HCV breakthrough treatment to the market. But this does not mean that Vertex will not succeed reaching the same goal. Vertex is also a great firm that has already changed the way chronic life-threatening diseases have been treated. Gilead has a lot of current and upcoming good news and so does Vertex. The HCV market is huge. It requires more than one, or two treatments to satisfy its needs.
Disclosure: We are long both firms.