Achillion Pharmaceuticals

Triple regimen is a potential six-week treatment

Clinical update

Pharma & biotech

28 September 2016

Price	US$8.25
Market cap	US$1128m

Net cash ($m) at 30 June 2016		425

Shares in issue	136.7m
Free float	69.1%
Code	ACHN

Primary exchange	NASDAQ
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(3.4)	10.3	8.6
Rel (local)	(3)	2.2	(2.9)

52-week high/low

US$10.8

US$5.6

Business description

Achillion Pharmaceuticals is engaged in the discovery and development of treatments for chronic hepatitis C virus (HCV) and progressing compounds from its research platform in its novel factor D program. The company is collaborating with Janssen Pharmaceuticals (J&J) to develop and commercialize its HCV franchise including a promising combination treatment, which holds the potential to be best in class.

Next events

Phase II start ACH-4471 PNH/C3G	2016
Phase III start combination regimen HCV	2017

Analysts

Maxim Jacobs	+1 646 653 7027
Nathaniel Calloway	+1 646 653 7036

healthcare@edisongroup.com

Edison profile page

Achillion Pharmaceuticals is a research client of Edison Investment Research Limited

Updated interim results from the Phase IIa dose ranging study ALS-022335, simeprevir and odalasvir for the treatment of genotype 1 hepatitis C virus (HCV), were announced at the European Association for the Study of the Liver conference in September 2016. The study showed a sustained virologic response at 12 weeks post treatment (SVR12) or longer of 100% for all patients (n=60) who received three drugs. Moreover, one cohort (n=20) showed 100% SVR12 following only six weeks of treatment.

Year end	Revenue ($m)	PBT* ($m)	EPS* ($)	DPS ($)	P/E (x)	Yield (%)
12/14	0.0	(61.7)	(0.63)	0.0	N/A	N/A
12/15	66.1	(3.9)	(0.03)	0.0	N/A	N/A
12/16e	0.0	(73.3)	(0.54)	0.0	N/A	N/A
12/17e	0.0	(77.1)	(0.54)	0.0	N/A	N/A

Note: *PBT and EPS are normalised, excluding amortization of acquired intangibles, exceptional items and share-based payments.

Triple regimen works in 100% of those tested

A total of 80 patients were treated across four arms of the open-label study. The only arm in which patients did not achieve 100% SVR12 was one omitting simeprevir. SVR12 has been used as an approval endpoint (in addition to durability of response) for all the other recently approved HCV treatments.

Six weeks compares favorably to other treatments

A result of 100% SVR12 after only six weeks of treatment (n=20) is faster than has previously been seen for the other approved and development stage HCV treatments promoted by Gilead, AbbVie and Merck for genotype 1. Janssen has announced that the triple regimen will progress to a multi-genome Phase IIb study shortly and a Phase III study in early 2017.

AEs largely mild, one discontinuation

The adverse event profile of the triple regimen was predominately mild to moderate in severity and consisted of reports of common ailments such as headache and fatigue. There was a single discontinuation due to a serious adverse event because of a benign type 1 atrioventricular block that was detected during routine cardiovascular monitoring, although there were no clinical symptoms and the patients went on to achieve an SVR12.

Valuation: Increased to $2.75bn or $20.15/share

We have increased our valuation to $2.75bn or $20.15 per basic share, from $2.36bn or $17.30 per basic share. We have increased our predicted market penetration from 25% to 30% based on the prospect of a six-week treatment regimen reaching the market. This has increased our peak sales estimates for the combo from $3.5bn to $4.2bn. The company ended Q216 with $425m in cash and investments, which we expect to be sufficient to reach profitability.

New triple regimen knocks out HCV in six weeks

At the European Association for the Study of the Liver (EASL) annual meeting in September 2016, a poster was presented detailing the updated interim results from the Phase IIa study of the new triple drug regimen for the treatment of hepatitis C virus (HCV). The study was a collaboration between Janssen and its subsidiary Alios BioPharma with Achillion. The regimen consisted of the nucleoside analogue ALS-022335 (AL-335) developed by Alios, the NS3/4a protease inhibitor simeprevir (SMV) developed by Janssen, and the NS5a inhibitor odalasvir (ODV) developed by Achillion. This combination of agents (a nucleoside, a protease inhibitor and an NS5a inhibitor) is a proven combination of antiviral agents that is already employed in the approved Viekira Pak (AbbVie) and is being investigated in a Phase III study of sofosbuvir, velpatasvir, and voxilaprevir by Gilead and a Phase II study of grazoprevir, MK-3682 and MK-8408 by Merck.

The current study investigated the combination AL-335 and ODV at different doses both with and without SMV at different dosing durations. The study only investigated patients with HCV genotype 1 who were previously untreated with at most mild (Child Pugh A) cirrhosis. The results reported that all patients treated with the triple regimen at all dosing levels achieved a sustained virologic response (SVR, undetectable viral load) measured 12 weeks following the end of treatment (SVR12). This included patients on the lowest dose cohort (cohort 4), who were only treated for six weeks. The rate of SVR12 is one of the primary approvable endpoints for HCV. The longest measure for the durability of the response was in the high dose cohort (cohort 1), 100% of whom maintained an SVR up to 24 weeks.

Exhibit 1: Triple regimen Phase IIa results

Cohort	AL-335	ODV	SMV	Treatment duration (weeks)	SVR achieved	%	Endpoint
1	400mg qd	50mg qd	100 mg qd	8	20/20	100	SVR24
2	800mg qd	50mg qod	-	8	18/20	90	SVR12
3	800mg qd	50mg qod	75 mg qd	8	20/20	100	SVR12
4	800mg qd	50mg qod	75 mg qd	6	20/20	100	SVR12

Source: EASL 2016

The high rate of SVR12 observed after only six weeks of treatment compares favourably to other studies of HCV treatments. The fastest current treatment recommended by the FDA is Harvoni, which can be considered for an eight-week course in genotype 1 patients without cirrhosis and a viral load below 6m IU/mL. Merck announced results on two novel triple regimens in November 2015, which achieved high rates (96-100%) of SVR12 after eight weeks of treatment from a Phase II study. Regulus Therapeutics reported 100% SVR12 following four weeks of injections of its oligonucleotide based HCV treatment RG-101 in combination with Harvoni, albeit in patients with lower initial viral loads (Log10 of 5.77-5.85 vs 6.1-6.3) than the current study. The RG-101 study has subsequently been put on clinical hold following the report of two serious cases of jaundice, indicating potential liver toxicity. A previous study of odalasvir in combination with Sovaldi (Gilead) has also showed high efficacy at only six weeks (18/18 patients achieved SVR24). These data combined with recent results provide increasing support for the potency of odalasvir.

Exhibit 2: Comparison of other treatments for naïve HCV genotype 1

Drug	Sponsor	Weeks	SVR12	%	Inclusion
Epclusa	Gilead	12	117/118	99%	1a and 1b, -cir or comp cir.
Harvoni	Gilead	8	202/215	94%	1a and 1b, -cir
grazoprevir + MK-3682 + MK-8408	Merck	8	45/47	96%	1a and 1b, -cir
grazoprevir + MK-3682 + elbasvir	Merck	8	46/46	100%	1a and 1b, -cir
Zepatier	Merck	12	273/288	95%	1a and 1b, +/-cir
Viekira Pak + ribavirin	AbbVie	12	308/322	96%	1a and 1b, -cir
RG-101* + Harvoni	Regulus	4	27/27	100%	1a, 1b, and 4, -cir

Source: Company reports. Note: cir=cirrhosis; comp cir = compensated cirrhosis. *On clinical hold.

Two serious adverse events were observed during the study: a carcinoma of the urethra that was deemed unrelated to treatment and a type 1 second-degree atrioventricular block that was deemed potentially related to treatment. However, the patient exhibited no clinical or echocardiographic abnormalities, and the arrhythmia resolved following withdrawal of the patient from the trial. Cardiac events related to HCV treatment are not unheard of. Interferon treatment has been associated with myocardial dysfunctions, although generally subclinical in nature.1 Sovaldi and by extension Harvoni are associated with potentially fatal bradycardia when administered with amiodarone via an unknown mechanism. The only discontinuation due to adverse events was for the arrhythmia, but the patient went on to achieve an SVR24. The other adverse events observed in trial were common (headache, fatigue, etc) and mild or moderate in severity.

Teragawa H, et al. (1996) Adverse effects of interferon on the cardiovascular system in patients with chronic hepatitis C. Jpn Heart J. 37, 905–15.

Janssen has stated that it intends to advance the triple regimen to Phase IIb based on these results. The 300-person study will examine efficacy across genotypes 1, 2, 4, 5 and 6, in both treatment-naïve and experienced patients. Janssen has previously stated that its goal is the initiation of a Phase III study in 2017.

Valuation

We have increased our valuation to $2.75bn or $20.15 per basic share, from $2.36bn or $17.30 per basic share. We have raised our estimates of the peak penetration of the HCV combo from 25% to 30% based on the potential of a six-week treatment regimen. This has correspondingly increased our peak sales estimate to $4.2bn from $3.5bn. Our valuations have also increased due to rolling over our NPVs to mid-2016.

Exhibit 3: Achillion valuation

Product	Main indication	Status	Prob. of success	Launch year	Peak sales ($m)	Patent protection	Royalty	rNPV ($m)
All oral combo	US, HCV	Phase II	60%	2019	$2,119	2029	12-24%	709
All oral combo	EU Big-5, HCV	Phase II	60%	2019	$1,288	2029	12-24%	428
All oral combo	Japan, HCV	Phase II	60%	2019	$813	2029	12-24%	379
Milestones								584
ACH-4471	PNH	Phase II	20%	2021	$694	2034	N/A	229
Total								2,329
Cash and cash equivalents (30 June 16) ($m)								425
Total firm value ($m)								2,754
Total basic shares (m)								137
Value per basic share ($)								20.15
Stock options(June 2016, m)								10.7
Weighted average exercise price ($)								7.25
Cash on exercise ($m)								77.5
Total firm value ($m)								2,832
Total number of shares (m)								147.4
Diluted value per share ($)								19.22

Source: Achillion reports, Edison Investment Research

Financials

Achillion ended Q216 with $425m in cash and investments. We expect this cash to be sufficient to fund the ongoing development programs through the commercialization of odalasvir, which will trigger significant milestone payments from partner Janssen. Spending for Q216 was well within our estimates: $14.2m in R&D and $5.2m in G&A expenses. We are maintaining our estimates for 2016 and onward, and we expect $87.2m and $89.8m in operational spending for 2016 and 2017, respectively.

Exhibit 4: Financial summary

	($000)	2012	2013	2014	2015	2016e	2017e
Year end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		2,607	0	0	66,122	0	0
Cost of Sales		0	0	0	0	0	0
Gross Profit		2,607	0	0	66,122	0	0
EBITDA		(42,953)	(53,157)	(61,664)	(4,341)	(76,090)	(78,345)
Operating Profit (before amort. and except.)		(43,361)	(53,556)	(62,153)	(5,035)	(76,834)	(79,139)
Intangible Amortization		0	0	0	0	0	0
Exceptionals		0	0	0	0	0	0
Stock options		(3,932)	(5,920)	(7,273)	(10,072)	(10,374)	(10,685)
Operating Profit		(47,293)	(59,476)	(69,426)	(15,107)	(87,208)	(89,825)
Net Interest		166	529	418	1,133	3,514	2,088
Profit Before Tax (norm)		(43,195)	(53,027)	(61,735)	(3,902)	(73,320)	(77,051)
Profit Before Tax (FRS 3)		(47,127)	(58,947)	(69,008)	(13,974)	(83,694)	(87,736)
Tax		0	0	0	0	0	0
Profit After Tax (norm)		(43,195)	(53,027)	(61,735)	(3,902)	(73,320)	(77,051)
Profit After Tax (FRS 3)		(47,127)	(58,947)	(69,008)	(13,974)	(83,694)	(87,736)

Average Number of Shares Outstanding (m)		73.97	93.98	98.37	125.59	137.00	143.85
EPS - normalised (c)		(58.4)	(56.4)	(62.8)	(3.1)	(53.5)	(53.6)
EPS - normalised and fully diluted (c)		(58.4)	(51.4)	(56.5)	(2.9)	(50.2)	(50.4)
EPS - (IFRS) (c)		(63.7)	(62.7)	(70.2)	(11.1)	(61.1)	(61.0)
Dividend per share (c)		0.0	0.0	0.0	0.0	0.0	0.0

Gross Margin (%)		100.0	N/A	N/A	N/A	N/A	N/A
EBITDA Margin (%)		N/A	N/A	N/A	N/A	N/A	N/A
Operating Margin (before GW and except.) (%)		N/A	N/A	N/A	N/A	N/A	N/A

BALANCE SHEET
Fixed Assets		1,503	1,344	1,780	1,785	3,103	3,895
Intangible Assets		0	0	0	0	0	0
Tangible Assets		1,247	1,265	1,726	1,735	3,019	3,800
Restricted cash		152	152	152	152	152	152
Investments		256	79	54	50	84	95
Current Assets		79,875	160,921	154,875	462,588	389,207	312,363
Inventory		0	0	0	0	0	0
Accounts receivable, net		277	480	95	506	886	936
Cash and cash equivalents		77,418	157,989	152,879	459,341	385,313	309,227
Other		2,180	2,452	1,901	2,741	3,008	2,200
Current Liabilities		(9,136)	(9,403)	(13,059)	(14,658)	(12,836)	(12,250)
Creditors		(8,786)	(9,112)	(12,864)	(14,435)	(12,606)	(12,045)
Short term borrowings		(350)	(291)	(195)	(223)	(230)	(205)
Long Term Liabilities		(347)	(56)	(279)	(231)	(264)	(285)
Long term borrowings		(347)	(56)	(279)	(231)	(264)	(285)
Other long term liabilities		0	0	0	0	0	0
Net Assets		71,895	152,806	143,317	449,484	379,210	303,723

CASH FLOW
Operating Cash Flow		(46,700)	(54,165)	(55,942)	4,444	(77,699)	(78,356)
Net Interest		166	529	418	1,133	3,514	2,088
Tax		0	0	0	0	0	0
Capex		(656)	(408)	(947)	(704)	(1,500)	(1,575)
Acquisitions/disposals		0	0	0	0	0	0
Financing		44,235	133,951	52,264	301,158	431	481
Net Cash Flow		(2,955)	79,907	(4,207)	306,031	(75,254)	(77,362)
Opening net debt/(cash)		(79,725)	(76,873)	(157,794)	(152,557)	(459,479)	(384,992)
HP finance leases initiated		0	0	0	0	0	0
Other		103	1,014	(1,030)	891	767	767
Closing net debt/(cash)		(76,873)	(157,794)	(152,557)	(459,479)	(384,992)	(308,397)

Source: Achillion accounts, Edison Investment Research

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