Achillion Pharmaceuticals — Update 25 January 2016

The Factor D program, which targets complement-mediated diseases, was initiated in house through Achillion’s own research platform as a therapeutic target holding promise in a variety of ultra-rare diseases and serious conditions. A validated and druggable target, Factor D’s low plasma concentration enhances the target value, which is amenable to potent inhibition by small molecules. The company held a symposium on its complement Factor D program on 6 December at the ASH, at which time expert speakers2 presented on complement immune-biology, and relative risks of infection associated with immune modulation of the complement system. Achillion’s chief medical officer, David Apelian (M.D., Ph.D.), profiled the company’s lead small-molecule Factor D inhibitor compound ACH-4471 just before the company filing an IND regulatory package for the drug.

Achillion is initially focusing its research on the orally dosed ACH-4471 in PNH, a disease caused by the deficiency of complement-regulated proteins CD55 and CD59. The only approved treatment for PNH is Alexion’s Soliris, or eculizumab, (2014 sales $2.2bn), which has significant limitations including intravenous administration, a black box warning of serious meningococcal infections, while ~25% of patients have suboptimal response3 to the treatment due to partial protection. Achillion aims to provide consistent and potent inhibition of complement for all PNH patients. A Phase I single and multi-ascending dose study is planned in healthy volunteers for initial investigation of safety and pharmacokinetics and will begin in the coming weeks once the company receives a green light on its regulatory submission. A Phase Ib/IIa proof of concept trial is also planned in 2016 in multiple ascending doses (seven to 14 days) in treatment-naïve PNH patients whereby a marker of hemolysis – lactate dehydrogenase (LDH) – will be used to establish efficacy. The oral ACH-4471 compound will also begin Phase I trials in one other yet to be disclosed ultra-rare disease in H216. Achillion reports its overall portfolio of Factor D inhibitors looks to be potent and highly specific with early safety assessments, including repeat-dose toxicity studies, supporting clinical development. Research is ongoing with distinct new chemical entities (NCEs) in indications with varied patient population sizes, including dry age-related macular degeneration (AMD), chronic obstructive pulmonary disease, myasthenia gravis and atypical haemolytic uremic syndrome (aHUS). Additional compounds undergoing evaluation are capable of alternative routes of administration including ocular and inhalation.

Achillion, through its partner Janssen, is moving forward with the development and commercialization of a short-duration, highly effective, pan-genotypic Hep-C treatment, aiming to initiate Phase III development in the early part of next year. The link up with Janssen has increased the odds of marketing the first triple combination – NS5A, NS3 and nucleotide polymerase – and best-in-class Hep-C treatment serving to firm up Achillion’s positioning in Hep-C by adding multiple options for combination (see Exhibit 2 below), enabling many shots on goal. Janssen brings two additional Hep-C candidates for inclusion in the potential triple regimen: NS5B polymerase inhibitor ALS-335 and the already approved NS3/4A protease inhibitor (PI), Olysio or simeprevir, both of which are included in trials currently underway. Notably, both milestones and royalties will be paid on any regimen containing any one Achillion compound.

The following studies have been initiated by Janssen since its acquisition in mid-2015 of the worldwide licensing rights to three Hep-C drugs in the Achillion portfolio4:

As indicated by the companies, Olysio’s status as a currently marketed PI could allow for an accelerated time to commercialisation for the triple regimen (and Olysio is therefore being pursued as a component in the mix). Olysio was previously heavily prescribed with Gilead’s Sovaldi before Gilead’s launch of Harvoni (Ledipasvir/Sofosbuvir NS5B polymerase inhibitor) in late 2015.

In the meantime in H215 Achillion also announced positive confirmatory results in a second cohort of its Phase II proxy study evaluating its own NS5A inhibitor, odalasvir (ACH-3102) and Gilead’s sofosbuvir for genotype 1 HCV. The company reported 100% SVR12 (HCV undetectable after 12 weeks) in the second cohort of patients treated for just six weeks, which followed on to previously announced SVR24 in two earlier cohorts receiving eight and six weeks of therapy.

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Our valuation changes only slightly to $2.26bn from $2.27bn ($16.5/share from $16.7 or $16.0/share from $16.1 on a diluted basis) with the subtle difference related to cash spend and actual cash inflow from the deal with Jannsen. We do not yet include Achillion’s Factor D program in our valuation but will do so on the start of Phase I trials, expected in Q116. Based on our current assumptions and estimates, Factor D could potentially add some $125m to our risk-adjusted valuation of the company assuming peak sales of $2bn for products in PNH, probability of success of 12% and a WACC of 12.5%.

As announced by the companies, Janssen will wholly fund all development and commercialisation costs related to HCV, while Achillion is eligible to receive up to $905m in development, regulatory and commercial milestone-based payments.

Last November Achillion announced third-quarter and nine-month 2015 results also providing updated financial guidance. In Q315 (ending September 2015), the company reported net income of $26.3m supported by revenue of $33.8m stemming from a portion of the premium paid by JJDC (Janssen) as part of its equity purchase. This compared with a loss of $15.7m in Q314. R&D expenses of $12.0m in Q315 were roughly on par with that of the $12.1m spent in Q314 as increased costs related to the complement inhibitor program were offset by decreasing costs of HCV studies. The increase in G&A expenses in Q315 ($4.9m) vs. Q314 ($3.7m) related primarily to consulting and legal fees associated with the licensing deal with Janssen. Achillion’s financial guidance for the full year 2015 has been revised as follows: R&D of $60-65m (ex stock compensation), G&A $24-25m (ex stock compensation), a net loss of $18-20m, and operating cash burn of $60-65m (ex revenue related to Janssen).

Our forecasts have been adjusted to reflect the premium stock payment from JJDC as well as higher than anticipated R&D expenses in 2015 which partly reflects the timing of R&D expenses taken on by Janssen. Per terms of the collaboration, JJDC will be taking over all R&D related to the licensed compounds from Achillion moving forward. All in all, we expect FY15 revenue of $67m, EBITDA loss of $19m and normalised PBT loss of $17m. In FY16, we now see EBITDA and normalised PBT loss of $70m (from $60m) and $59m (from $48m) respectively.

Achillion has a strong balance sheet with estimated cash and cash equivalents of $451.2m at end FY15, which we expect will be sufficient to fund operations through to profitability when significant royalty payments from Janssen are forecast to begin feeding through. We currently model first sales of a potential triple Hep-C regimen in 2018.