Why Achillion Pharmaceuticals Crashed 22.2% Today

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What happened

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After Johnson & Johnson (NYSE: JNJ) announced it's ending its agreement to develop Achillion Pharmaceuticals' (NASDAQ: ACHN) hepatitis C drugs, Achillion Pharmaceuticals shares lost 22.2% of their value today.

So what

In 2015, Johnson & Johnson acquired the rights to Achillion Pharmaceuticals' hepatitis C drug pipeline. Johnson & Johnson agreed to pay Achillion Pharmaceuticals up to $1.1 billion in clinical, regulatory, and sales milestones, plus royalties on any eventual sales. It also acquired $225 million worth of Achillion Pharmaceuticals' stock.

On Sept. 9, Johnson & Johnson told Achillion Pharmaceuticals that it will no longer develop any of Achillion Pharmaceuticals' hepatitis C drugs. The company cited an increasingly competitive hepatitis C market as the reason for its decision.

Management didn't say if Johnson & Johnson is planning on selling its 18,367,346 Achillion Pharmaceuticals shares soon, but it did say that those shares are subject to a lock-up period that expires early next year.

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Now what

When Johnson & Johnson licensed Achillion Pharmaceuticals' drugs, the limited hepatitis C treatments that were on the market were commanding sky-high prices. However, the launch of new hepatitis C drugs has changed the market dramatically since then, leaving the licensing decision looking like a mistake. 

Doctors and patients now have multiple treatment options available to them that deliver nearly 100% functional cure rates, and prices have dropped significantly as competitors battle over market share. For example, AbbVie (NYSE: ABBV) won approval for its pan-genotype hepatitis C drug Mavyret last month, and it can cure the disease in as little as eight weeks at a cost of just $26,400 for a full treatment course. For perspective, AbbVie launched its prior-generation hepatitis C drug, Viekira Pak, at a retail price of $83,500 in 2015.

If Johnson & Johnson had kept pursuing development of Achillion Pharmaceuticals' drugs, it would have had to pay Achillion Pharmaceuticals up to $100 million in phase 3 enrollment and dosing milestones. Given the changing marketplace, Johnson & Johnson decided the market simply didn't justify that kind of investment anymore.

Undeniably, the loss of potential hepatitis C revenue is bad news for Achillion Pharmaceuticals, but the company has spent the better part of two years reinventing its R&D pipeline so that it's now focused on paroxysmal nocturnal hemoglobinuria, or PNH, a rare disease in which the immune system attacks and destroys red blood cells. Mid-stage trials on its lead PNH drug ACH-4471 are under way, and based on management's comments, it appears the PNH program will remain Achillion Pharmaceuticals' focus.

Overall, ACH-4471 targets a big market, but it's going to be a while before we know if it's effective and safe. In the meantime, Achillion Pharmaceuticals will have to spend big bucks on development without the opportunity to offset that spending with a windfall from Johnson & Johnson. Toss in the risk that Johnson & Johnson sells its shares in Achillion Pharmaceuticals, and I can't help thinking investors are better off focusing on other ideas than this one right now.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.