- Entry: $9.86 10/2/14
- Take Profits: $14.45 11/12/14
- Hold 10-20% of profits into event for M&A upside.
Achillion (NASDAQ:ACHN) has been a stellar performer since we wrote about it on October 2nd- up more than 44% from our entry through our proprietary options strategy taking advantage of time, VOL, and market positioning. The washout move to the downside following 3Q14 results allowed us to close our short VOL options expiring in November, and today we are taking profits on our longer dated long VOL options, maintaining a smaller position ahead of key risk event.
Post-AASLD, nothing changed in our view. All information released was already known or anticipated by us. The only change has been that the Street was late to our call, and now everyone is late to the trade in our view. Our thesis is quickly becoming consensus.
To summarize our last report on October 2nd, we wrote:
We believe that the late entrants have lost significant time, leverage, and competitiveness since the Merck (NYSE:MRK)/Idenix (NASDAQ:IDIX) acquisition this summer. We highlight Achillion as a top trade idea with our $34 DCF takeover valuation (model in subsequent sections) and $16 SOTP price target as a standalone entity that is solely positioned to take advantage of the inevitable shift taking place in the HCV market. This creates a compelling risk/reward (-50% downside, but potentially >300% upside) setup for 4Q14 into year-end, if data is positive we expect a takeover bid within 3 months of data release…. ABBV remains “Nuc-Less” and we believe that ABBV’s regimens without a Nuc is a high risk strategy that could lead to its market share eroding from 20-30% in 2015 to only 5% by the end of 2018.
We believe ACHN-3422, as the sole clinical stage Nuc represents significant scarcity value and upon favorable data a competitive bidding process will be initiated. In subsequent sections, we build the case for a $27-$34 ACHN acquisition dependent upon the strength of data to be presented in by December 20th.
Our analysis on October 2nd revealed that AbbVie (NYSE:ABBV) has the most to lose upon MRK’s and ACHN’s success.
Early in 2014, sustainability was a popular idiom when discussing GILD, our analysis on GILD covered elsewhere refutes this notion on HCV and pricing. However, the question of sustainability was at the forefront of our analysis viewed through the lens of a possible “3 Nuc” market place. In essence, ABBV’s HCV regimens and pipeline simply could not and would not have a place in a future market with 3 Nucs. We assumed both MRK’s and ACHN’s drugs would be discounted to Sovaldi regimens by 10% and 20% respectively, at best ABBV’s regimen could have as little as 3-5% total market share by 2018 even if it is discounted to Sovaldi by 30%.
Recall, Goldman Sachs and Morgan Stanley (and every other sell-side firm) throughout this year have been promoting ABBV’s potential in HCV as “underappreciated,” while branding GILD’s as “unsustainable,” consequently ABBV’s estimated market share in HCV has risen dramatically throughout 2014 from $2B to as high as $4B.
We evoke the issue of sustainability in a different context, and ask this: How can ABBV’s franchise be sustainable if it’s the ONLY regimen without a Nuc? Additionally, how can ABBV compete when ALL other competition is studying combination with Sovaldi or proprietary Nuc? And lastly, how can ABBV’s regimens be competitive when global treatment guidelines for 1st, 2nd, 3rd line therapy are Sovaldi based (and we anticipate Nuc based more generally in the future)?
Citigroup & FBR Capital Markets came out validating our September/October thesis ahead of AASLD on November 10th by saying:
FBR Capital Markets on November 10th wrote:
“If upcoming ACH-3102 viral suppression data are compelling, we expect increasing M&A potential given that the company will have three wholly-owned assets in the three main HCV classes of drugs. We believe possible suitors could be any company with an existing HCV franchise, including both Gilead and AbbVie, as well as Bristol-Myers, Johnson & Johnson, and Roche.”
And Validating our claim that beyond 2017 HCV will be dominated by GILD & MRK (not ABBV) Citigroup wrote to clients on November 10th
“The field will be a 2-man horse race between Gilead and Merck in the future while we see AbbVie, BMS, and JNJ as less relevant. AbbVie will need a nuc in our view and ACHN is the only one left that is not partnered.”
Source: Alpha BioPharma in a “3-Nuc Market Place”
We conclude that our thesis has quickly become consensus, and triggers our profit-taking going into this binary event with only a small amount of profits at risk. The risk/reward at $9.86 at time of publication was “(-50% downside, but potentially >200% upside),” has now shifted to -70% and +140% effectively becoming a 1:2 risk-reward, from the original 1:4.
We recommend investors adjust their positions accordingly to reflect the more symmetrical risk-reward at the current level of $14.45. We note that if traders take all principle off the trade, and leave only 10% of profits at risk, would still double current profits at risk if our M&A scenario plays out with only 10% of profits at risk and no principle at risk.
According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, blogger Dr. Paul Nunzio De Santis has a total average return of +9.3% and a 57% success rate. Dr. Paul Nunzio De Santis is ranked #1348 out of 3877 bloggers.