How Bad Will The Partial Hold On Sovaprevir Be For Achillion?

Jul. 02, 2013 9:27 AM ETAchison Inc. (ACHN)ABBV, BMY, GILD, IDIX19 Comments
Stephen Simpson profile picture
Stephen Simpson

Achillion (OTC:ACHN) investors got a huge piece of bad news on Monday evening, when this biotech virology specialist announced that its lead protease inhibitor for hepatitis C (HCV), sovaprevir, has been placed on clinical hold by the FDA after troubling safety data. With the stock down sharply in after-hours trading, this is clearly a major near-term problem for the company and the stock, and it definitely raises troubling questions about the safety profile of this drug.

While I do not believe this development devastates the long-term potential of the drug in HCV treatment, it most likely freezes any possibility of an acquisition and it is almost certainly going to appear as an issue if/when the company files for FDA approval.

An Unexpected Safety Problem In Healthy Patients

This partial clinical hold on sovaprevir did not come from the company's ongoing studies of sovaprevir in HCV patients. Rather, the safety issue appeared in a small (31-patient) study of healthy test subjects receiving sovaprevir with ritonavir-boosted atazanavir. The purpose of this study was to test for potential drug interactions, and that seems to be exactly what has happened.

In 16% (5 of 31) of the patients, worrisome elevations of ALT liver enzymes were detected, which indicates damage to the liver. Two of the patients had grade IV elevations and three had grade III elevations, though none of them reached the technical definition of a serious adverse event.

Why Do This Study?

Ritonavir-boosted atazanavir is a relatively common treatment option for people with HIV, and atazanavir is a member of the protease inhibitor class. Although atazanavir is generally safe in HIV patients co-infected with HCV, prior studies have seen single-digit percentages discontinue the drug due to liver issues.

So why would Achillion even do a combination study like this?

Approximately 25% of HIV patients in the U.S. are co-infected with HCV, and so it stands to reason that the FDA will want information on the safety and efficacy of these new HCV drugs in HIV patients taking some of the most commonly-prescribed medications. Along those lines, Achillion has done many other drug interaction studies with sovaprevir (with oral contraceptives, for instance), and thus far the drug had been building an attractive drug interaction profile.

What's The Impact?

I think it's very important to note that the FDA has NOT ordered a halt or hold on the company's ongoing study of sovaprevir in the Phase 2 "007" study in combination with ACH-3102. I think it's also important to note that similar liver enzyme elevations have not been seen in prior HCV studies, nor in prior drug interaction studies.

I wouldn't say that Achillion was completely clear in its conference call, but it sounds like there was an unexpected synergistic effect between sovaprevir and atazanavir, leading to much higher effective doses (plasma concentrations). Nevertheless, this brings investors very much back to mind of the clinical hold and troubling safety data that ruined the HCV drug Bristol-Myers (NYSE: BMY) acquired from Inhibitex and the clinical hold currently on an Idenix (IDIX) HCV drug. While it's worth noting that sovaprevir is a different drug and those other two drugs showed troubling safety data in HCV studies, the reality is that "elevated liver enzymes" is never good news when you're talking about a drug that treats a liver disease.

If the safety data on sovaprevir remains otherwise intact and the FDA permits ongoing studies of the drug, the impact of this development may ultimately be modest. Though 25% of HIV patients are co-infected with HCV that amounts to about 275,000 patients in the U.S., or about 7% of estimated HCV patients. Likewise, not all of those patients are on atazanavir, so the ultimate market share/financial impact to Achillion could be modest.

But those are significant "ifs." Who's to say what will happen in further drug interaction studies, or in long-term use of sovaprevir in HCV patients. Moreover, with the multi-billion dollar soaking that Bristol-Myers took on Inhibitex, it is not unreasonable to think that this development has chilled any considerations of a pharma company or larger biotech acquiring Achillion. Likewise, with Gilead (GILD) and AbbVie (ABBV) potentially as much as two years ahead of Achillion and holding excellent safety and efficacy data, any drawback or issue with sovaprevir is significant today.

What Should Investors Do Now?

Given that it was only a week ago that I wrote up Achillion as a potential double in the biotech space, I feel terrible about this development. Along the same lines, I don't want to be seen as "talking down" this bad news in an effort to preserve face or ego. In the results-only world of Wall Street, this is an absolutely miserable call so far, and I have no intention of hiding from that fact.

Still, I don't think this is the end. Management indicated on the call that they had not seen even grade I ALT elevations in prior studies of sovaprevir, so I really do think this just happened to be a bad luck mix of two drugs that really don't work well together. In market terms, it certainly sullies the commercial profile of sovaprevir, but I never expected sovaprevir to be the lead drug in the HCV space, and I don't believe the "HIV co-infected with HCV and taking atazanivir" market segment is large enough to fundamentally alter Achillion's potential.

If I held Achillion shares going into this reversal, I'd likely continue to hold. The damage has been done, and I think there's still a case to make that the drug can be a safe, effective, and appealing treatment option for non-HIV-infected HCV patients (the other 93%). If I take 7% out of my prior revenue estimate and up the discount rate by more than 15% to account for the added risk, the new suggested fair value is a still-appealing $12.25.

All told, I simply don't know what to make of this new information. Any negative information on safety for an HCV drug is very serious, and I don't want to diminish that, but I think there is a substantial difference between negative safety data from an actual HCV study and data from a drug interaction study that may only apply to a small percentage of the target market. Though Achillion is now a much riskier call, I do believe it still has a fighting chance to be a factor in the new generation of HCV therapies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

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