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

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Achillion Pharmaceuticals and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Equities

Equities by Sector

Sectors

Megatrends

Thematics

Latest

Edison explains: Weight-loss drugs – how are GLP-1s redistributing consumer spending?

Edison explains: Europe’s ageing buildings

Stock of the month – PZ Cussons

Audiovisual

Latest

The Metals Company – equity proposition

Vantage: Rockwood Strategic – UK small-cap value and active engagement

Bull, Bear & Beyond – Living REIT: executive interview

About Edison

Corporates

Investors

Careers

Achillion Pharmaceuticals — Update 28 September 2016

Latest

Wheaton Precious Metals — Streaming showing its mettle

Agnico Eagle Mines — Hope springs eternal

Corero Network Security — Moving up a gear in 2026 and beyond

HELLENiQ ENERGY — Q226: Record quarter, driven by Refining

ZOO Digital — Rebuilt for a market that now pays for speed

Carbios — Update 28 September 2016

Equities

Equities by Sector

Sectors

Megatrends

Thematics

Latest

Edison explains: Weight-loss drugs – how are GLP-1s redistributing consumer spending?

Edison explains: Europe’s ageing buildings

Stock of the month – PZ Cussons

Audiovisual

Latest

The Metals Company – equity proposition

Vantage: Rockwood Strategic – UK small-cap value and active engagement

Bull, Bear & Beyond – Living REIT: executive interview

About Edison

Corporates

Investors

Careers

Achillion Pharmaceuticals — Update 28 September 2016

Latest

Wheaton Precious Metals — Streaming showing its mettle

Agnico Eagle Mines — Hope springs eternal

Corero Network Security — Moving up a gear in 2026 and beyond

HELLENiQ ENERGY — Q226: Record quarter, driven by Refining

ZOO Digital — Rebuilt for a market that now pays for speed

Carbios — Update 28 September 2016

Subscribe to Edison