Pharmasset's soaring valuation prompts pressure to deliver


A second research collaboration for Pharmasset’s nucleotide polymerase inhibitor, PSI-7977 – but notably no licensing deal – underscores the intense excitement around this novel hepatitis C agent and the company’s determination to hang on to its prize asset.

Even though only minimal phase II data have been released so far the drug is widely considered the most potent direct anti-hepatitis C agent in development; the potential seen has prompted Pharmasset’s stock market value to more than double so far this year, to $4.34bn. Despite this eye-watering sum many believe the company’s shares will continue to rise – a record high of $124 was hit in early trade today yet some equity analysts have price targets of $200. With more crucial data on the horizon and clear interest from potential partners these predictions could well come true, but there is still a long way to travel.

Second tie-up

News today of a second collaboration, testing PSI-7977 in combination with Johnson & Johnson’s protease inhibitor, TMC435, follows a similar deal struck with Bristol-Myers Squibb back in January. Under that tie up PSI-7977 is being trialled with BMS-790052, a NS5A replication complex inhibitor - both collaborations are investigating all oral, interferon-free regimens.

Essentially, these investigations are exploring the potential of PSI-7977 as a viable backbone therapy for new hepatitis C regimens. Hopes that the agent might be able replace interferon, an often-intolerable therapy with many side effects, is driving a lot of the excitement around the drug, and Pharmasset (EASL - Beyond protease inhibitors hep C pipeline filling up, April 4, 2011). 

Expectations were lifted by data released at the European liver conference EASL in March this year, from a trial of PSI-7977 in combination with an earlier-stage nucleotide analogue, PSI-938. Rapid reductions in viral load over 14 days were seen, at various combinations and with ‘938 as a monotherapy.

With J&J now onboard to test another interferon-free combination these data – likely to emerge next year – will be crucial to confirm this potential.

Broader potential

But PSI-7977 remains the focus for now and a swathe of data in various settings are due over the next 12 months, from two studies called Proton and Electron.

The phase IIb Proton study evaluated PSI-7977 in combination with interferon and ribivarin. Initial data in genotype 1 patients was released at EASL; awaited later this year are longer term results and these will be held up against the recently launched protease inhibitors, Incivek (telaprevir) and Victrelis (boceprevir). Sustained viral response rates at week 24 (SVR24) of 79% and 66% respectively are the numbers to beat for PSI-7977. At week 12, the drug generated an SVR of 92% - the sustainability of that figure is crucial.

Also awaited from Proton is confirmation of the drug’s efficacy in genotype 2/3 patients.

While great things are expected from the newly approved protease inhibitors telaprevir and boceprevir, they only work in patients with genotype 1 hepatitis C. This is admittedly the most common variant representing 75% of cases in the US and 70% in Europe. However, the apparently broader effectiveness of the nucleotide analogues across other genotypes and what so far looks like more benign side effect profiles means many believe these agents hold greater potential in the longer term.

Perhaps more hotly anticipated are the first data from a second phase IIb study called Electron, a multi-arm study trialling PSI-7977 with and without ribivarin and interferon. The study was amended in June to include three more cohorts, including one arm without either of these standard-of-care therapies which caused much excitement. 

Data from these last three arms are unlikely to emerge until next year but the original cohorts should yield results in the fourth quarter. Providing the first evidence from a mid-stage trial of the drug’s efficacy with lower or zero interferon doses, these data will be pivotal in building confidence in the drug’s future as a new backbone therapy.

Price targets

Clearly, both PSI-7977 and PSI-938 are still very early stage candidates and it seems unlikely that they would be attracting such huge valuations if they were in any other therapy area. Recent advances in hepatitis C with the first-in-class protease inhibitors and hopes that combinations of new and potent anti-viral therapies will transform the illness, echoing the successes seen with HIV, are no doubt boosting confidence.

Since the EASL conference and the recently modified trial design for Electron, analysts appear to have ripped up their previous forecast models for Pharmasset and started again. The table below shows the recent upgrades on the stock and the extent to which banks like Citi, JP Morgan and Morgan Stanley are predicting even greater share price gains over the next 12 months or so (Pharmasset success story leads small caps in first half of 2011, July 5, 2011). It is worth noting that Citi and Morgan Stanley were Pharmasset’s leading agents in its recent share sale.

Analysts at Goldman Sachs are the only ones to have a ‘neutral’ rating on the stock, so with Pharmasset’s shares today touching the bank’s price target of $125, it will be interesting to see whether they fall in line with their peers and upgrade forecasts once more.

Raising cash

At this stage, Pharmasset has indicated it will go it alone and take these agents to the market without a partner in any territory. This is an ambitious aim - not even Vertex managed this, signing up J&J to market Incivek outside the US.

Seeing the success of Incivek will help Pharmasset persuade investors to part with cash to fund this plan.

Pharmasset raised $123m in January this year, through the sale of 2.8 million shares at $46.33 per share. The company held $208m in cash, and negligible debt, as of the end of March, which should last until 2013. Most analysts therefore expect the company to seek a fresh injection of cash some time next year, although there must be a temptation to strike again now while the shares are so high.

Pharmasset has raised just over $400m and spent $200m over the last eight years; with the company currently valued at $4.3bn that represents quite a phenomenal return on investment so far.

Analysts are already talking about peak sales of PSI-7977 in the multi-billion dollar range. For comparison, Incivek currently has a net present value of $11bn, based on consensus sales of $3.55bn in 2016, according to EvaluatePharma.

As such, should the data over the next 12 months confirm the potential in the company’s pipeline, a takeover bid cannot be ruled out, even at these valuations. However for this to happen, Pharmasset has much to prove over the coming months.

Recent Analyst Upgrades on Pharmasset
Broker Current Price Target Previous Price Target Date of Upgrade
 Citi  $200  $71  03-Jun-11
 JP Morgan  $200  $100  24-May-11
 Morgan Stanley  $175  $164  23-Jun-11
 Brean Murray  $174  -  02-Jun-11
 Canaccord Genuity  $160  $57  05-Jul-11
 Think Equity  $150  $120  09-Jun-11
 Bank of America-Merrill Lynch  $149  $72  05-Apr-11
 William Blair  $142  $125  14-Jun-11
 Leerink Swann  $133  $95  26-Apr-11
 Goldman Sachs  $125  $77  16-Jun-11
Consensus $161
Share price (6 July - early trade) $124.50

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