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Pharmasset: A Breakout Year But Big Catalysts Lie Ahead

Executive Summary

Although only half over, 2011 already has been pivotal for hepatitis C drug development, with the launch of two paradigm-shifting protease inhibitors, Johnson & Johnson/Vertex Pharmaceuticals Inc.'s Incivek (telaprevir) and Merck & Co.'s Victrelis (boceprevir). Both hit the market in May, even as attention is now shifting to the next big advance in HCV. Based on its work on next-gen HCV treatment, Pharmasset, Inc. has captivated the investment community.

Although only half over, 2011 already has been pivotal for hepatitis C drug development, with the launch of two paradigm-shifting protease inhibitors, Johnson & Johnson/Vertex Pharmaceuticals Inc.'s Incivek (telaprevir) and Merck & Co.'s Victrelis (boceprevir). Both hit the market in May, even as attention is now shifting to the next big advance in HCV. Based on its work on next-gen HCV treatment, Pharmasset, Inc. has captivated the investment community.

2011 certainly has been a breakout year for the Princeton, N.J.-based drug discovery and development company, which has three drugs in mid- to late-stage clinical development for hepatitis C. Its value hinges on the development of a drug that will play a role in reducing the amount of interferon needed, or eliminating the need for the drug altogether. Interferon is the current standard of care.

A Stock To Watch: From 25 To 125 In A Year

Pharmasset's stock has been on a Mount Everest-like climb this year, reaching a historical high of $129.98 on July 7 before closing at $125.07. That’s almost a 300% gain since the beginning of the year. And just one year ago, the stock traded in the mid- to high-twenties. The company's market cap is now more than $4 billion, impressive for a company with no marketed drugs or Phase III assets.

What has sparked the run-up and impressed investors? Encouraging safety and efficacy data on the company's three clinical-stage polymerase inhibitors is clearly driving the growth. Much attention is focused on PSI-7977, which could have the potential to become the backbone of an oral treatment regimen. Positive data from small studies for all three drugs were presented at the American Association of the Study of Liver Diseases' annual meeting in November 2010 and the European Association for the Study of the Liver Congress in April 2011, fueling momentum. An evolving awareness of the role nucleotide/nucleoside polymerase inhibitors could play in treating HCV is also a driver, given the mechanisms’ superior resistance profile and broad efficacy across a range of genotypes, and the scarcity of such assets in the clinic.

While the early focus in the push to develop an all-oral HCV regimen was mainly on protease inhibitors, the first-generation drugs to hit the market still require backbone therapy with interferon and ribavirin. Incivek and Victrelis are also approved only in genotype 1 patients, while nucleoside/nucleotide polymerase inhibitors work across all genotypes, 1 through 6. Genotype 1 patients account for the majority of patients in the U.S. and Europe, about 75%, while genotypes 2 and 3 account for about 24%. But in some countries outside the U.S. and Europe, non-genotype 1 patients are predominant.

Nucs look increasingly like a key component of an oral cocktail that could eliminate the need for the current standard of care, which cures some patients but not all and comes with nasty flu-like side effects that limit the number of patients willing to undergo or stay on treatment.

The traditional treatment protocol with interferon and ribavirin can run a lengthy 48 weeks, though the addition of Incivek and Victrelis to the market has allowed for shorter regimens for some patients, ranging from 12 to 48 weeks, based on response-guided criteria.

Interferon-Free On The Way, CEO Price Says

Pharmasset's CEO Schaefer Price believes an all-oral regimen will become a reality sooner than some in the industry expected. "We could be maybe four years away from interferon-free in the best case scenario," he speculated in a recent interview.

Pharmasset has emerged in the last year as the clear frontrunner in the space. Its nucleotide analogue, PSI-7977, in Phase IIb development, is the furthest nucleotide ahead in clinical development and demonstrated encouraging safety and efficacy in Phase IIa. A second molecule, PSI-938, is a guanine nucleotide polymerase inhibitor, which is moving into Phase II testing.

Importantly, Pharmasset owns full rights to PSI-7977 and PSI-938, which, given the huge commercial potential of the drugs, has investors seeing dollar signs. Pharmasset has one other clinical-stage asset, RG7128, or mericitabine, a nucleoside polymerase inhibitor for HCV, which it licensed to Roche Holding AG in a 2004 deal. At the time, the molecule was in preclinical development and Pharmasset received a $4 million equity investment in exchange with the potential to earn up to $168 million in milestones, about $25 million of which the company has realized ([See Deal]).

Mericitabine is the furthest ahead in clinical development of the three molecules, having completed Phase IIb testing. However, it is not the furthest ahead in terms of an interferon-free regimen. Roche initiated a Phase II study, INFORM-SVR, earlier this year evaluating an oral regimen including mericitabine with its investigational NS3/4 protease inhibitor danoprevir. Pharmasset investors are fixated mainly on the two wholly-owned drugs.

In a small, early study presented at EASL, the two drugs used in combination alone, without interferon or ribavirin, led 15 of 16 treated patients to achieve 95% undetectable HCV RNA levels at 14 days. That data generated a lot of fanfare at the meeting, with the suggestion that Pharmasset could be on its way to developing an all-oral combination (Also see "EASL Preview: Dual Versus Quad Combinations" - Pink Sheet, 7 Mar, 2011.).

PSI-7977 And Its Many Combinations

Pharmasset plans to initiate a larger study, QUANTUM, evaluating PSI-7977 and PSI-938 in combination, in the third quarter, though it has not released any details on the design. And the company has several other trials ongoing evaluating PSI-7977 in different interferon-sparing or interferon-free regimens.

Pharmasset has also inked clinical collaborations with Bristol-Myers Squibb Co. and J&J to test PSI-7977 in combination with the big pharmas' investigational NS5A replication complex inhibitor BMS-790052 and investigational protease inhibitor TMC-435, respectively, reinforcing the potential value of PSI-7977. With those deals, PSI-7977 is now being studied in interferon-free combinations with each of the three leading classes of direct-acting antivirals: a protease inhibitor, a NS5a inhibitor and a nucleotide polymerase inhibitor.

Bristol and Pharmasset announced the start of their trial May 26, which will enroll 84 previously untreated patients with HCV genotypes 1, 2 or 3 and measure sustained virologic response (SVR) at 24 weeks (Also see "Bristol, Pharmasset To Study Oral HCV Regimen Together" - Pink Sheet, 10 Jan, 2011.). J&J and Pharmasset announced their collaboration July 6, leading the stock up to its highest point yet, with plans to initiate a Phase II combination study in the second half of the year.

PSI-7977 is being studied in three other Phase IIb studies, evaluating a range of treatment regimens, including interferon-sparing and interferon-free regimens, and in several genotypes. In June, the company said it would expand the ongoing ELECTRON trial, evaluating the drug in 12-week regimens with ribavirin alone or with abbreviated durations of interferon (four weeks, eight weeks or 12 weeks), to include one arm exploring PSI-7977 as monotherapy and two arms exploring other interferon-sparing regimens.

The company’s decision to expand the ELECTRON trial was based on "encouraging data" it saw in the first part of the study, though management hasn't offered any further insights. Data from Part 1 of ELECTRON has been submitted to the AASLD for presentation in November.

Those results will be closely watched by investors, as will other key studies scheduled to be released later this year and into 2012. Data from another trial, PROTON, evaluating PSI-7977 in genotype 1, 2 and 3 patients in combination with ribavirin and interferon for 12 weeks, rather than what is normally 24 weeks of therapy, are expected in the second half. A third study, ATOMIC, is evaluating PSI-7977 mainly in genotype 1 patients and comparing 12 weeks of therapy to 24 weeks in a response-guided method. In one arm, patients will receive PSI-7977 plus ribavirin and interferon for 12 weeks; if they achieve undetectable RVR through 12 weeks they are eligible to stop therapy. In the other arm of the study, patients will be treated with PSI-7977 plus ribavirin and interferon for 24 weeks. A third arm will treat patients with the triple combination for 12 weeks followed by PSI-7977 alone for 12 weeks.

"Here, we are trying to see if 12 weeks is as good as 24, and if 24 weeks gives you the best outcome, can you use only 12 weeks of interferon but 24 weeks of our drug as a way to diminish the use of interferon in the marketplace," Price said. The study is enrolling patients now and data are expected next year.

Pharmasset will need to deliver strong data and keep building the safety database around its two lead assets if it is to keep investor confidence riding high. So far, the safety database for PSI-7977 includes about 120 patients, but regulators like to see 300 to 500 before green-lighting Phase III, according to the company.

Who Needs Big Pharma?

Importantly, Pharmasset also needs to show that it can front the Phase III clinical program, which is sure to be costly and could take longer than Pharmasset anticipates. Thus far, the company has stated its intention to go it alone, with no plans to sell rights to a big pharma partner. "There really isn't an offer that is so attractive that we couldn't pass it up," CEO Price maintained.

"Most of the major pharma companies were created off of a single blockbuster opportunity with other drugs bolted on to round out the portfolio," he explained. "A question that we face is whether PSI-7977 or PSI-938 is the next blockbuster. If they are, then we should do everything that we can to hold onto all of those marketing rights on a global basis."

But Phase III trials in hepatitis C are generally large and lengthy. And Pharmasset could draw some lessons from the experience Vertex had with the development of telaprevir. Vertex partnered ex-North American rights to the protease inhibitor with J&J in mid-2006 after initiating two 1,000-patient Phase II trials (Also see "J&J, Vertex Partner To Commercialize VX-950 For Hepatitis C" - Pink Sheet, 30 Jun, 2006.). At the time, the company said it could be in a position to file an NDA in 2008. In reality, the Phase III trials began in 2008, with an NDA filing in November 2010 and an FDA approval in May of this year.

Price has no inclinations to partner PSI-7977 ahead of Phase III, however. "We've been doing quite fine in development on our own and don't see what a big pharma partner would bring to us in terms of the remaining development or the ability to continue to finance the development of our portfolio," he said.

Price estimates a Phase III clinical trial would cost about $75,000 to $100,000 per patient, depending on genotype status. He said the company should be in a position to fund a "couple of Phase III studies" ranging in size from 400 to 1,000 patients if needed. The two pivotal studies for Victrelis had a combined enrollment of 1,500 patients, while the three Phase III trials for Incivek enrolled close to 2,300. It remains to be seen what the Phase III program for PSI-7977 will look like, and the drug could take one of several regulatory paths forward.

"We could go down a genotype 1, a genotype 2, or genotype 3 path, or an interferon-containing path or an interferon-free path," Price said. "We are not prepared to talk about what we want to do yet until after we have discussed it with the regulatory agencies."

Pharmasset is taking advantage of the current momentum to get its financing in order. In the first quarter, the company completed a $123.4 million common stock offering. As of March 31, the end of its fiscal second quarter, the company reported cash and equivalents of $208.3 million. With a burn rate of about $17 million, the company estimates it has a cash runway of about 10 quarters, though, of course, the costs will grow as it gears up for Phase III studies.

For now, Pharmasset remains the darling of Wall Street analysts, who see room for growth in the stock. JP Morgan analyst Geoff Meacham raised his two-year price target for the stock in May to $200 by year-end 2012."The scarcity value of having wholly owned assets in hepatitis C and solid Phase IIb clinical data bodes well for continued upside in [Pharmasset] shares," he wrote in a May 24 research note. His projections assume that nucs become the dominant drug in HCV upon launch, expected in late 2015/early 2016, and that PSI-7977 could be the market leader. He projects peak sales of PSI-7977 in the U.S. of more than $1.8 billion.

By Jessica Merrill

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