Johnson & Johnson Bets $1.75 Billion On Alios Buy

The drama continued for big biotech Gilead Sciences Tuesday, as Johnson & Johnson moved into its viral-disease turf on two fronts with an acquisition.

Johnson & Johnson (JNJ) disclosed that it's buying privately held Alios BioPharma for $1.75 billion in cash. In a press release, J&J touted Alios' drug candidate for respiratory syncytial virus (RSV), a major cause of lung infection that has no current treatment. The drug, AL-8176, is in midstage clinical testing.

As it happens, Gilead (GILD) also has an RSV drug, GS-5806, in phase two clinical trials. Though it's been overshadowed by Gilead's bigger drugs, RBC Capital Markets analyst Michael Yee believes it has blockbuster potential. AstraZeneca's (AZN) Synagis, used to prevent RSV infection in high-risk infants, draws more than $1 billion a year just from that niche market.

Yee pointed out in a research note Tuesday that Alios is a potential competitor to Gilead in another way: It has two nucleotide drugs for the hepatitis C virus (HCV) in early stages of development.

Gilead's megablockbuster Sovaldi was the first nucleotide drug for HCV to hit the market, back in December. And this year, Merck (MRK) shelled out $3.85 billion to buy Idenix Pharmaceuticals because it also has "nukes" in development.

Not New To Hep C

J&J is also in the HCV game with its drug Olysio, which is a different class of drug and not directly competitive to Sovaldi.

The two are often prescribed together, which has helped buoy Olysio's sales; after its launch last November, in the first half of this year alone it sold $1.2 billion. Given the success of that combo, it's not surprising that J&J might want nukes of its own.

"We clearly think the long-term 'call option' upside here is the Alios nukes ... if those can show a four-log (99.99%) reduction in HCV virus and have a good safety profile," Yee wrote. "Of course, that is not a layup, as we know development of nukes can be extremely difficult and the bar for continued progression is very high. As a reminder, Vertex (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 toxicity).

Yee also wrote that it will be interesting to see how this development reads across to Achillion Pharmaceuticals (ACHN). Its stock boasts an IBD Relative Strength Rating of 99 based largely on the expectation that it would be the next nuke developer to be bought. Investors seemed to be reading it negatively: Achillion's stock fell 7.3% Tuesday to close at 9.98.

Still, Maxim Group analyst and Achillion bull Jason Kolbert did not sound very worried.

"Alios nukes are old news," Kolbert told IBD. "I think ACHN being down is a bit of nonsense. If their nuke shows good data, we are off to the races!

The High Price Of Sovaldi

Investors and analysts are interested in future competition to Sovaldi, not just for its effect on market share but also on Sovaldi's price, which some have questioned since day one.

Gilead charges $1,000 a day for the treatment, which typically runs for 12 weeks.

On Monday, the government of France addressed the issue in its 2015 social security budget bill. It proposed new taxes on sellers of hepatitis C drugs for whatever revenue they make if France's social security has to spend more than 450 million euros on the drugs. The government called this a "progressive contribution scheme.

The budget still has to be approved by lawmakers, but it's a sign that European countries are continuing to drive a hard bargain as Gilead rolls out Sovaldi there. The EU approved Sovaldi for sale in January, but every country has its own payment system that drugmakers have to negotiate separately.

However, in July France joined with 13 other countries to coordinate their strategies to drive down Sovaldi's price.

Gilead's stock slipped 1% Tuesday to close at 106.45.