What Johnson & Johnson’s Alios Acquisition Means for Gilead Sciences

RBC Capital Market’s Michael Yee and team look at what Johnson & Johnson’s (JNJ) acquisition of Alios BioPharma means for Gilead Sciences (GILD):

Johnson & Johnson announced an agreement to acquire Alios BioPharma for $1.75B in cash. We generally agree that the deal was in good part for its respiratory syncytial virus (RSV) drug ALS-8176 which has completed positive Phase II data similar to Gilead’s positive Phase II data earlier this year. Johnson & Johnson believes this could be synergistic to its existing early-stage RSV candidates. However — we note that Alios recently stated it has two Hep C nukes completing preclinical studies…

The Alios RSV drug showed positive data after treating healthy volunteers infected with RSV within 12 hours, similar to Gilead’s program so we will continue to watch this which in some ways “validates” Gilead’s RSV program and opportunity…..That said, while we think an RSV drug can be a $1B type product and we wrote about Gilead’s Phase II RSV drug– we clearly think the long-term “call option” upside here is the Alios nukes….if those can show a 4-log reduction in HCV virus and have a good safety profile. Of course that is not a lay-up as we know development of nukes can be extremely difficult and the bar for continued progression is very high. As a reminder, Vertex Pharmaceuticals (VRTX) was partnered on two prior Alios nukes and dropped development of both due to a narrow therapeutic window (one weak efficacy, one had signs of liver tox).

Bottom line from the Gilead standpoint for us is the Johnson & Johnson for Alios transaction is particularly interesting for 1) its RSV candidate to watch, 2) longer-term Alios has two nukes going into the clinic. 3) whether this has any read-through into companies that still might be interested in Achillion’s (ACHN) Phase I nuke program which will have data this fall and investors expect that to be acquired too since there were multiple bidders for Idenix Pharmaceuticals (IDIX). 4) This may also suggest if Johnson & Johnson continues development of these nukes that there is still a long tail for HCV if they want to invest in this for a drug that would be on the market out in 2018.

Shares of Johnson & Johnson have gained 0.2% to $106.74 at 1:20 p.m., while Gilead Sciences has fallen 1% to $106.48 and Achillion has sunk 6.3% to $10.09.