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HCV Research and Development Company a Promising Investment

June 30, 2009

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According to some investor analysts, Achillion’s research and development programs (including potential Hep C solutions) make this company an ideal stock purchase.

Marcial: Achillion, a Promising Biotech

The maker of antiviral and antibacterial treatments is hunting for big partners, similar to its agreement with Gilead Sciences, to test and produce new products

By Gene Marcial

Investors scouting for depressed stocks that could spring positive surprises are turning to the biotechnology sector, which didn’t significantly participate in the market’s frenzied three-month rally. Analysts note that what’s being pursued are biotech companies with compounds that show promise to become compelling drugs and whose stocks are still at depressed levels.

One young biotech that some pros say possesses this kind of profile is Achillion Pharmaceuticals (ACHN), which is developing antivirals and antibacterials aimed at chronic hepatitis-C, HIV, and serious hospital-based bacterial infections. Although the company is tiny and unprofitable, its research and products under development have lured some big pharmaceutical companies such as Gilead Sciences (GILD). (See my previous Inside Wall Street column.)

Achillion’s stock price “doesn’t adequately account for potential advancements of the company’s clinical programs, possible new partnerships, and potential for royalty revenue generation,” says biotech analyst Brian McCarthy of Noble Financial Capital Markets. The stock has climbed from a 52-week low of 62ยข on Dec. 31, 2008, to 1.35 on June 26. That is still way below its 52-week high of 3 on July 23, 2008.

McCarthy figures that based on its current cash position of about $27 million and near-term clinical advancement of the company’s hepatitis drug programs, “Achillion’s shares could drive up to a fair value approaching 4.50 a share.” (Noble Financial expects to do banking for Achillion.)

FDA Trial Approval Expected

Achillion’s attraction centers on its two hepatitis-C virus candidates–ACH-1625 and ACH-1095, which are expected to undergo their first in-human clinical trials soon. ACH-1625 is capable of once-daily dosing and has been tested for safety, says Michael Kishbauch, Achillion’s president and CEO.

The Food & Drug Administration is expected to approve this month Achillion’s application to start the in-human clinical trials, according to some industry sources. Achillion is in active talks to partner with a big pharmaceutical company to further develop and commercialize the ACH-1625 protease inhibitor, says Kishbauch.

As for ACH-1095, the leading drug candidate for an oral treatment for hepatitis, Achillion has restructured its partnership with Gilead in its development, deciding to go it alone, with Gilead still retaining its basic rights to the drug. (However, Gilead could rejoin in the drug’s development later in its production.) So far, Achillion has received $8 million in up-front licensing payments and an additional $2 million in Achillion stock purchased by Gilead. The original partnership agreement projected that Gilead would pay up to $157 million to Achillion, plus an undisclosed royalty on net sales for 10 years from the date of the first sale, according to McCarthy.

Finding a partner for ACH-1625 and the imminent in-human clinical trials of the drug are two positive developments that should drive the stock higher, analysts say. For ACH-1625, McCarthy assumes a market penetration of 20% when launched, a 10% success rate based on clinical studies, and a 2013 launch of the product, “with a peak annual risk-adjusted royalty-based sales nearing $16 million as early as 2015.”

Meanwhile, ACH-1095, which Achillion says has demonstrated “significant potency in laboratory assays,” is also expected to gain a market penetration of 20%, a 10% success rate, a launch in 2013, and peak sales of $16 million by 2015, according to McCarthy.

HIV Co-Formulation Product

Achillion’s third major product, called Elvucitabine, is aimed at treating HIV and has an “attractive safety profile at appropriate doses,” says Phil Nadeau, biotech analyst at investment firm Cowen (COWN), who rates the stock outperform. (Cowen expects to do business with Achillion.) Elvucitabine could be a product for “co-formulation” with existing HIV products to enhance treatment of the disease, he adds.

The company expects to sign a commercial partner for Elvucitabine in the next 12 months, says Nadeau. Achillion has disclosed that several companies have signed confidentiality agreements concerning the product and received confidential data packages from the drug’s phase 2 clinical trials, he notes.

“This is a smart strategy, as a strong partner, particularly one with the ability to co-formulate Elvucitabine with another class of antiviral, could add significantly to Elvucitabine’s potential,” says Nadeau. And by teaming up with Achillion and creating a “combo” pill, the partner would get a share of the $2 billion cytosine inhibitor in the HIV treatment market, he adds. Achillion will move Elvucitabine into phase 3 clinical trials once a partner is signed up, says Nadeau.

Adam Cutler, biotech analyst at Canaccord Capital, believes Achillion’s stock is inexpensive and rates it a buy. “Achillion could start clinical trials of HCV protease inhibitor ACH-1625 very soon and move ACH-1095 into trials by the end of 2009,” he says. Cutler thinks the next catalyst for Achillion could be a partnership announcement or initiation of ACH-1625 trials. His 12-month price target is 2.75. (Canaccord has done banking for Achillion.)

Analyzing and assessing the true market value of biotechs can give investors headaches, since the companies usually have to spend a lot of money and expend a lot of time in developing new drugs. Without doubt, patience and a lot of diligent research are required to find hidden gems in the complex biotech sector. But therein lie the big rewards, as returns could be quite healthy for investors from these tiny, and often risky, biotechs.
Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial’s 7 Commandments of Stock Investing.

URL for Article Source:
http://www.businessweek.com/investor/content/jun2009/pi20090628_268277.htm

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