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Expert Financial Analysis and Reporting

Will Inhibitex Be The Next Big Acquisition in the HCV Space ? (INHX, $10.69)

Gilead (GILD) is certainly paying up for Pharmasset with its offer to buy the company at $137 per share ($11 billion), an 89% premium to last Friday’s close. Gilead will be paying for the acquisition with cash on hand and debt. Relative to alternatives such as investing money in short term debt instruments or doing a stock buyback, I think this is a smart even though it may be dilutive to earnings until 2015. From a strategic standpoint, GILD desperately needs to diversify its business from its dominant position in HIV which faces ever increasing competition and intermediate term patent risks. The company has been trying to establish a drug pipeline in the hepatitis C field, but with uninspiring results as seen from the viewpoint of this observer. The acquisition of Pharmasset (VRUS) clearly puts Gilead in the hunt to be a dominant player in HCV. Most observers believe that Pharmasset’s PSI-7977 will be a key drug in next generation direct acting anti-viral products that will come to market in the 2014 to 2015 timeframe.


Hepatitis C therapy is rapidly evolving from the old standard of care which combined interferon and ribavirin. Looming on the horizon are a number of highly promising oral, direct acting, anti-viral drugs that can either improve the efficacy of interferon and ribavirin when combined with them or perhaps replace them entirely. Drawing on the experience gained with HIV drugs, the current consensus point of view is that the future lies with combining drugs from different classes or the same class that have differing therapeutic and resistance profiles. Vertex (VRTX) has recently launched the first of these new generations of drugs with Incivik (telepravir) with outstanding sales uptake. Merck (MRK) at the same time has launched Victrelis (boceprevir) which has been less successful to date.


Both Incivik and Victrelis belong to the class of protease inhibitors. The conventional wisdom is that another protease inhibitor added to these drugs would produce additive results. There are at least nine such drugs in development with Achillion’s (ACHN) ACH-1625, Boehrringer Ingleheim’s BI-201335 and Johnson & Johnson’s (JNJ) TMC-435 being the most promising in my opinion.


The next class of agents that I believe has great potential is the nucleos(t)ide polymerase inhibitors. The most promising drugs in this class are Pharmasset’s R7128 which is partnered with Roche, Pharmasset’s PSI-7977 and Inhibitex’s INX-189. Wall Street is generally betting and I agree that drugs of this class will be combined with the protease inhibitors.


A third class of drugs is the non-nucleoside polymerase inhibitors. Investors believe that Anadys’ (ANDS) ANA-598 and Vertex’ VCH-222 are best in class. However, there is concern that this class of drugs will be susceptible to resistance developing and there is skepticism on the group. Even though Anadys’ ANA-598 is only one year behind Pharmasset’s two nucleoside polymerase inhibitors in clinical development, it got very little attention from Wall Street until Roche acquired Anadys to get control of ANA-598. Two other emerging classes are the NS5a inhibitors and cyclophyllins.


Gilead buying Pharmasset follows closely on the recent announcement that Roche is buying Anadys to gain rights to ANA-598. We may be seeing a gold rush mentality as other companies that are targeting HCV try to line up assets through acquisition that they can use to complement other HCV drugs in their development pipelines. The list of companies who fit this description has enormous financial resources. They include Johnson & Johnson, Merck, Abbott (ABT), Roche (ROG.XV), Vertex and even Gilead may not be done.


At the top of most of these companies’ shopping list are likely to be Achillion (ACHN) and Inhibitex (INHX). Achillion’s ACH-1625 is a protease inhibitor in phase II development that has shown promising safety and efficacy. It also has in phase I proof of concept trials ACH-2684 (another protease inhibitor) and ACH-2928 (NS5a inhibitor). All three of these drugs are wholly owned. Inhibitex just released outstanding results with INX-189 (nucleoside polymerase inhibitor) that is wholly owned. I think that the probabilities of each of these companies being acquired in the next year or two are excellent. There are other companies such as Idenix (IDNX) that will be looked at, but these two would seem to be at the top of the big companies’ shopping lists.


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