Market Overview

Going Nuc-lear on Hepatitis C -- Is Idenix the Next Target?


If you are chasing Hepatitis C and don't have a nuc, you are in trouble. At least that is what Mark Schoenebaum of ISI Group says in a recent video note to clients. As Bristol Meyers Squibb (NYSE: BMY) shells out $2.5 billion in cash for Inhibitex (NASDAQ: INHX) and Gilead Sciences (NASDAQ: GILD) ponies up another $10.8 billion for Pharmassett (NASDAQ: VRUS)--Idenix Pharmaceuticals (NASDAQ: IDIX) remains the only stand-alone, nuc pure-play available for Hep C suitors.

To understand why respectable pharmaceuticals are willing to weather the sticker shock to get their hands on companies specializing on nucleocides (a.k.a. “nucs”), one needs to look at the market size. Mr. Schoenebaum says there are about 7 million Hepatitis C patients in Western Europe and the United States alone (Eastern Europe and Asia will likely add not-insignificantly to that number). At an annual treatment upwards of ten thousand dollars per patient, he projects the market size to be as high as $100 billion dollars over the next decade or so.

Such numbers are not necessarily definitive. Sources of data quoted by Bloomberg say as much as 170 million people worldwide carry the Hepatitis C virus, and annual dollar sizes vary from a current $3 billion to a projected $20 billion by 2020. But anyway you put it, the pie is positively huge to divvy between a handful of pharmaceutical companies with solutions in their current pipelines.

More than size alone, it is the current penetration of that market by treatment providers that provides the headline. According to Schoenebaum, only 10 percent of patients, around 700 thousand, get treatment currently. This is because at the present, treatment is delivered through heavy injections, often taking 6 months or more. In addition to physical discomfort, injections provide many side effects.

Enter the nucs! Schoenbaum says the nucleosides sit right in the middle of the demarcation line between the past and future eras in the goal to convert to an “all oral” Hepatitis C treatment regimen. He says that prior to 2011, serious doubts existed on whether an all-oral treatment was even possible, let alone what the specific drug classes were to achieve this. In 2011, Shcoenbaum says, it was learned that not only it has become possible to go all oral, but that “all you really need is a nuc!” He maintains that a “nuc + ribavirin is “clearly enough” for Genotype 2/3 patients (about a third of the population) and will “probably be adequate” in G1 patients (the other two thirds).

“This is why nucs have become unbelievably hot” continues Schoenbaum. INHX and VRUS snapped up respective premiums of 126 and 45 percent on stock prices before deals were announced. IDIX jumped 47 percent to its new 52 week high on yesterday as the latest deal was announced.

This sentiment is reverberated by Edward Tenthoff, a Piper Jaffray analyst, who expects “continued consolidation in the HCV space.” He tells Bloomberg that potential shoppers for the new generation of treatment include Vertex Pharmaceuticals (NASDAQ: VRTX), Merck (NYSE: MRK), Johnson & Johnson (NYSE: JNJ), Boerhinger Ingelheim, Abbott Laboratories (NYSE: ABT), Pfizer (NYSE: PFE) and Novartis(NYSE: NVS). Bank of America agrees, as it moved on Monday to raise its price objective on IDIX to $18 from $9 previously on much more attractive valuation following the INHX acquisition.

Let the bidding begin!


Traders who believe that the next generation of Hepatitis C treatment provides an opportunity, of whom we have seen just the tip of the iceberg, might want to consider the following trades:
  • Long IDIX: it is one of the last free standing nuc pure-play with a second-stage product in the pipeline
  • Long ACHN: a similarly sized player, Achillion (NASDAQ: ACHN) has received a similar bounce in valuation. Its product is still in the first stage however, which may make serious acquirers look elsewhere for now a
Traders who believe that the swelling in stock prices is a product of irrational exhuberance rather than equally imminent underlying pipelines may consider alternative positions:
  • Short IDIX, ACHN: anything short of stellar findings on the various phases of these pipelines may take the air out of the companies' stock
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