Overview

Achillion Pharmaceuticals (ACHN) is a clinical-stage biopharmaceutical company focused on advancing its oral factor D inhibitors into late-stage development and commercialization. Each of the drug candidates in its oral factor D portfolio was discovered in its laboratories and is wholly owned by it. Achillion Pharmaceuticals is focusing its drug development activities on alternative pathway-mediated, rare diseases where there are no approved therapies or where existing therapies are inadequate for patients. To advance its investigational drugs into phase III and commercialization, the company plan to work closely with key stakeholders including patients, payors, regulators and healthcare professionals.

The company's first-generation factor D inhibitor, ACH-4471, has demonstrated preliminary clinical proof-of-concept in patients with C3 glomerulopathy, or C3G, a disease affecting the kidney, and paroxysmal nocturnal hemoglobinuria, or PNH, a blood disorder, and has advanced into phase II clinical trials in both diseases.

In addition to ACH-4471, Achillion Pharmaceuticals has two potent and specific orally-administered second generation factor D inhibitors in phase I clinical trials, ACH-5228 and ACH-5548. The company may seek to advance one or both of these compounds into phase II for C3G or PNH pending analysis of the phase I clinical data in the fourth quarter of 2018.

In interim data from the first four patients enrolled in its phase II clinical trial for C3G patients, ACH-4471 demonstrated reductions in the biomarkers associated with the over-activation of the complement alternative pathway characteristic of patients with C3G, as well as significant reductions in proteinuria, a marker of renal dysfunction.

In interim data from the first four patients enrolled in its phase II clinical trial for PNH patients, ACH-4471 demonstrated reductions in lactate dehydrogenase, or LDH, a marker of intravascular hemolysis, increases in hemoglobin, and improvements in fatigue score. The company believe that its alternative pathway factor D inhibitor compounds may have a pharmacological advantage by potentially preventing extravascular hemolysis, or the destruction of PNH red blood cells outside of blood vessels, while also potentially preventing intravascular hemolysis, or red blood cell destruction within blood vessels. In addition, the company believe its alternative pathway factor D inhibitor compounds may be able to treat the proportion of patients with PNH who have a suboptimal response to, or who fail to respond to, currently approved treatments for PNH.

Achillion Pharmaceuticals has discovered and are developing small molecule compounds that have the potential to be used in the treatment of immune-related diseases associated with the alternative pathway of the complement system. The complement system is a part of the human innate immune system and is believed to be comprised of three pathways: the alternative pathway, the lectin pathway and the classical pathway. Achillion Pharmaceuticals is advancing novel small molecules from its platform which target complement factor D, an essential protein within the amplification loop of the alternative pathway. Experts believe the alternative pathway plays a critical role in a number of disease conditions including rare orphan conditions such as C3G and immune complex membranoproliferative glomerulonephritis, or IC-MPGN, both diseases affecting the kidney, and PNH, a blood disorder, as well as several more prevalent indications.

Achillion Pharmaceuticals was incorporated on August 17, 1998 in Delaware. Since its inception, Achillion Pharmaceuticals has spent substantial research and development funds to develop its drug candidate pipeline and expect to continue to do so for the foreseeable future. Achillion Pharmaceuticals has incurred losses of $17.2 million and $22.5 million for the three months ended June 30, 2018 and 2017, respectively, and $37.8 million and $42.7 million for the six months ended June 30, 2018 and 2017. As of June 30, 2018, the company had an accumulated deficit of $640.4 million.

Achillion Pharmaceuticals has funded its operations primarily through proceeds from the sale of equity securities. Through June 30, 2018, Achillion Pharmaceuticals has received approximately $932.4 million in aggregate gross proceeds from stock issuances, including convertible preferred stock, its initial public offering, private placements of its common stock, registered offerings of its common stock and an equity investment by a former collaboration partner.

The company expect to incur substantial losses for at least the next several years as the company seek to continue preclinical and clinical development of certain complement inhibitors drug candidates.

The company will need substantial additional financing to obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish manufacturing and sales and marketing capabilities for its complement inhibitor program, which the company will seek to raise through public or private equity or debt financings, collaborative or other arrangements with third parties or through other sources of financing. There can be no assurance that such funds will be available on terms favorable to it, if at all.

In addition to the risks associated with being a drug development company, there can be no assurance that the company or any future collaborators will successfully advance or complete its research and development programs, obtain adequate patent protection for its technology, obtain necessary government regulatory approval for drug candidates the company develop, find and maintain appropriate collaboration partners or that any approved drug candidates will be commercially viable. In addition, the company may not be profitable even if the company or any future collaborators succeed in commercializing any of its drug candidates.

Restructuring

In February 2018, the company implemented a restructuring plan that will reduce employee headcount by approximately 20% to approximately 70 employees. The restructuring plan was implemented following a strategic assessment of its portfolio. During the assessment, its management team and board of directors concluded that its strategic focus would be on the development of its existing clinical candidates, ACH-4471, ACH-5228, and ACH-5548. Achillion Pharmaceuticals is continuing to assess the staffing levels required to accomplish its revised strategic goals and have reduced its staff across several functional areas, while retaining the biology and chemistry core strengths that the company believe will be necessary to advance its complement factor D portfolio and also strengthening its clinical development capabilities.

Recent Developments

In May 2018, Joseph Truitt, its President and Chief Operating Officer, was named Chief Executive Officer to lead the strategic focus on late-stage development and commercialization and was appointed to the Company’s Board of Directors. Additionally, Milind S. Deshpande, Ph.D. stepped down from his role as Chief Executive Officer and resigned from the Board of Directors.

In July 2018, the company entered into a two-year lease agreement effective August 1, 2018, for additional office space of approximately 3,000 square feet in Blue Bell, Pennsylvania. The company anticipate that certain of its officers and employees will be located in this office.

Research and Development

The company's research and development expenses reflect costs incurred for its proprietary research and development projects which consist primarily of salaries and benefits for its research and development personnel, costs of services by clinical research organizations, other outsourced research, materials used during research and development activities, facility-related costs such as rent and utilities associated with its laboratory and clinical development space and operating supplies.

Complement Factor D Program

The first clinical compound from its complement inhibitor platform is ACH-4471. ACH-4471 is an orally administered compound designed to target and inhibit complement factor D. The next clinical compounds from its complement inhibitor platform that Achillion Pharmaceuticals is focusing on are ACH-5228 and ACH-5548, both of which are next-generation factor D inhibitors that Achillion Pharmaceuticals is seeking to advance for oral administration.

ACH-4471. ACH-4471 is a potent and specific inhibitor of factor D which has demonstrated preliminary proof-of-concept in phase II clinical trials in patients with PNH and C3G. Achillion Pharmaceuticals is currently continuing to conduct phase II clinical trials of ACH-4471, in both indications, and plan to conduct additional trials in patients with PNH and in patients with C3G or IC-MPGN.

Pharmacokinetics and Metabolism. Pharmacokinetic results and activity in preclinical studies and clinical trials suggest that ACH-4471 should be explored in clinical development for potential oral dosing three times daily. Controlled release formulation systems were also being developed for ACH-4471 with the objective of optimizing trough exposures and reducing dosing frequency. The company completed a phase I bio-availability assessment of a series of preliminary controlled release formulation systems in healthy volunteers and determined that, while half-life and exposure levels in human subjects were improved, additional formulation work would be necessary to achieve less frequent dosing of ACH-4471, however, Achillion Pharmaceuticals is not currently undertaking this work.Preclinical. Six-month and nine-month toxicology studies testing the effects of ACH-4471 in rats and dogs, respectively, have been completed and supported progression of ACH-4471.Phase I. After oral administration of ACH-4471 in phase I clinical trials in healthy volunteers, the company noted complete suppression of alternative pathway activity to 24 hours post-dosing. In single-ascending and multi-ascending dose phase I clinical trials in healthy volunteers, at doses ranging from 75mg three times daily to 200mg, 500mg, 800mg, and 1200mg twice daily, ACH-4471 was demonstrated to be generally well tolerated with no treatment-related serious adverse events reported. In the multi-ascending dose 14-day phase I clinical trial, two cases of self-limited alanine aminotransferase, or ALT, elevations (Grade 3 and 4) were observed post-treatment at doses of 500mg and 800mg twice daily, respectively, with neither subject exhibiting signs or symptoms of hepatic decompensation. Both subjects’ ALT levels normalized without intervention during follow-up. Further, no treatment-associated fever or infections were observed.Phase II. ACH-4471 has been demonstrated to be highly specific for inhibition of factor D, a protein critical to the amplification of the complement system. In on-going dose ranging phase II clinical trials, doses start at 100mg or 150mg three times daily, or TID, with allowance for intra-patient dose escalation. To date, 250mg TID has been the highest dose administered.

C3G and IC-MPGN. The company initiated a phase II clinical trial of ACH-4471 in patients with either C3G or IC-MPGN in September 2017 and the company continue to add additional clinical trial sites and enroll patients. A sentinel group of patients received dosing of 100mg TID for a period of 14 days with a 7-day taper period, and subsequent groups of patients are being dosed at 200mg TID. This clinical trial is designed to measure C3, a complement protein in blood plasma that is typically low in C3G and IC-MPGN patients, as well as other measures of kidney function or damage characteristic of C3G and IC-MPGN. Preliminary data from four patients with C3G in this 14-day phase II trial suggest that ACH-4471 may reverse the alternative pathway hyperactivity in C3G based upon the observed improvements in complement biomarkers and proteinuria following 14 days of treatment of these four patients. In these patients, the primary clinical manifestation was significant proteinuria, or protein in the urine, which was reduced during the treatment period. Data from this 14-day biomarker study is anticipated to be released in the fourth quarter of 2018.

Achillion Pharmaceuticals has also initiated two longer-term clinical trials in patients with biopsy-confirmed C3G or IC-MPGN. One is a phase II open-label, 12-month treatment trial in which patients will receive treatment with ACH-4471 with periodic assessment of clinical endpoints including proteinuria and estimated glomerular filtration rate, or eGFR. Patients from its 14-day phase II clinical trial in C3G or IC-MPGN will be eligible to continue therapy under this protocol after a wash-out period. Interim data from this open-label trial is anticipated to be released in the fourth quarter of 2018. Achillion Pharmaceuticals has also initiated a phase II randomized, placebo-controlled, 6-month trial. This trial is expected to assess post-treatment renal biopsy findings, as well as changes in complement biomarkers, and clinical endpoints such as proteinuria and eGFR. Data from this clinical trial is anticipated to be released in 2019.

PNH. A phase II clinical trial of ACH-4471 in patients with PNH is on-going and continues to enroll untreated PNH patients. Data from the first four PNH patients in this trial was released in 2017. Three of these patients have completed the three-month trial and have entered the long-term extension trial. A fourth patient voluntarily withdrew from the trial on day 41 for reasons unrelated to safety. Interim data from this trial demonstrated that ACH-4471 mechanistically inhibited factor D, its intended target, and meaningfully improved LDH, hemoglobin, fatigue score, and other measures of response, including PNH clone size. The company anticipate that interim data from this trial will be released in the fourth quarter of 2018.

Achillion Pharmaceuticals has also initiated a phase II clinical trial evaluating ACH-4471 in PNH patients currently receiving eculizumab, a therapy for patients with PNH, and who are deemed to be sub-optimal responders who have hemoglobin levels below 10 gm/dL and require transfusions with red blood cells. This trial is designed to evaluate 6 months of treatment with ACH-4471 plus eculizumab with the potential for patients to transition to a long-term treatment extension. The company anticipate that interim data from this trial will be released in the fourth quarter of 2018.

ACH-5228. ACH-5228 is one of its next-generation factor D inhibitors for oral administration. The compound demonstrated complete inhibition of the complement alternative pathway after repeat, twice-daily dosing in non-human primates over a seven-day period. The compound also has the following characteristics based on its preclinical research to date:

Pharmacokinetics and Metabolism. Pharmacokinetic characteristics for ACH-5228 suggest the possibility of less frequent dosing as compared to ACH-4471.Preclinical In short duration, non-clinical studies in rats and dogs ACH-5228 demonstrated tolerability and safety margins supportive of progression into human clinical development. ACH-5228 is also specific for factor D inhibition and demonstrated a two to three-fold greater potency than ACH-4471 in preclinical studies, delivering similar inhibition of the complement alternative pathway at inhibitory concentrations of approximately half that of ACH-4471.

The company initiated a first-in-human randomized, placebo-controlled, single-ascending dose phase I study of ACH-5228 administered to healthy volunteers in December 2017. Approximately 28 subjects have been enrolled. The primary endpoint for the trial is the safety and tolerability of ACH-5228. Secondary endpoints include assessments of pharmacokinetics, pharmacodynamics, and evaluation of alternative pathway inhibition in ex vivo laboratory assessments of blood samples from subjects in order to establish a PK/PD relationship for ACH-5228. The company expect to report interim data from this study during the fourth quarter of 2018.

The State of Connecticut provides companies with the opportunity to exchange certain research and development credit carryforwards for cash in exchange for foregoing the carryforward of the research and development credit. The program provides for such exchange of the research and development credit at a rate of 65% of the annual research and development credit. The benefit for such exchange is recorded as a reduction of research and development expenditures.

The company expect research and development expenses associated with its complement inhibitor program to be substantial and to increase over time. There are numerous existing factors associated with the development and commercialization, if any, of its complement inhibitor program, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on its stage of development. Additionally, future commercial and regulatory factors beyond its control will evolve and therefore are expected to impact the development of its complement inhibitor program and plans over time.

The successful development of its drug candidates is highly uncertain. At this time, the company cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of its drug candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

the scope, rate of progress and expense of its clinical trials and other research and development activities;the appropriate endpoints for clinical studies in diseases for which there are no previous regulatory approvals;the potential benefits of its drug candidates over other therapies;our ability to market, commercialize and achieve market acceptance for any of its drug candidates that Achillion Pharmaceuticals is developing or may develop in the future;results of future clinical trials that the company may conduct;results of clinical trials conducted by its competitors;the terms and timing of any collaborative, licensing and other arrangements that the company may establish;the expense and timing of regulatory approvals; andthe expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of any of its drug candidates would significantly change the costs and timing associated with the development of that drug candidate. For example, if the FDA or another regulatory authority were to require it to conduct clinical trials beyond those which the company currently anticipate will be required to complete clinical development of a drug candidate, or if the company experience significant delays in enrollment in any of its clinical trials, the company would be required to expend significant additional financial resources and time on the completion of clinical development.

Liquidity and Capital Resources

Since its inception, Achillion Pharmaceuticals has financed its operations primarily through proceeds from the sale of equity securities. Through June 30, 2018, Achillion Pharmaceuticals has received approximately $932.4 million in aggregate gross proceeds from stock issuances, including convertible preferred stock, its initial public offering, private placements of its common stock, registered offerings of its common stock and an equity investment by a former collaboration partner.

In October 2014, the company entered into a Master Security Agreement for a $1.0 million Capital Expenditure Line of Credit, or the 2014 Credit Facility, with Webster Bank, National Association, or Webster. In May 2016, the company entered into an amendment to the Master Security Agreement. The amendment provided for a line of credit for equipment loan advances of $1.4 million, of which approximately $400,000 reflected the outstanding balance as of the date of the amendment, under the Master Security Agreement, dated October 2014 and extended the period during which the company were entitled to draw down equipment loan advances through May 26, 2017. In July 2017, Webster agreed to further extend the period during which the company were entitled to draw down under the facility through May 28, 2018. Under the facility, purchased equipment serves as collateral for any advances. Each drawdown under the facility is payable over a three-year term and bears interest at a fixed rate, determined at the time of each borrowing, equal to the Three Year Federal Home Loan Bank of Boston Classic Advance rate plus 4.75%. In October 2016, Webster advanced $443,000 to it under the facility.

As of June 30, 2018, its debt balance due to borrowings was $206,000 with a weighted average interest rate of 6.01%.

In February 2017, the company filed a universal shelf registration on Form S-3 with the U.S. Securities and Exchange Commission, or SEC, which was declared effective by the SEC on April 28, 2017, to register for sale from time to time up to $250.0 million of common stock, preferred stock, warrants and/or units in one or more registered offerings. Further, in February 2017, the company entered into a sales agreement with Cantor Fitzgerald & Co., or Cantor, as sales agent in an at-the-market sales arrangement pursuant to which, from time to time, the company may offer and sell shares of its common stock having an aggregate offering price of up to $75.0 million through Cantor pursuant to such universal shelf registration statement.

The company had $294.7 million and $330.6 million in cash, cash equivalents and marketable securities as of June 30, 2018 and December 31, 2017, respectively, and $152,000 of restricted cash as of June 30, 2018 and December 31, 2017, respectively. The company regularly review its investments and monitor the financial markets. As of June 30, 2018, its cash, cash equivalents and marketable securities included high-quality financial instruments, primarily money market funds, government sponsored bond obligations and other corporate debt securities which the company believe are subject to limited credit risk.

Cash used in operating activities was $37.3 million for the six months ended June 30, 2018 and was primarily attributable to its $37.8 million net loss, combined with a $3.9 million decrease in accounts payable and a $1.0 million increase in prepaid expenses. This amount was partially offset by $5.9 million in non-cash stock-based compensation. Cash used in operating activities was $22.7 million for the six months ended June 30, 2017 and was primarily attributable to its $42.7 million net loss, combined with a $3.9 million decrease in accounts payable. This amount was partially offset by a $15.0 million decrease in accounts receivable, primarily related to the receipt of the Janssen milestone payment in January 2017, combined with $5.9 million in non-cash stock-based compensation and a $4.1 million increase in accrued expenses.

Cash provided by investing activities was $27.1 million for the six months ended June 30, 2018 and was primarily attributable to $151.8 million in maturities of marketable securities partially offset by $124.4 million in purchases of marketable securities. Cash used in investing activities was $19.0 million for the six months ended June 30, 2017 and was primarily attributable to $208.6 million in purchases of marketable securities partially offset by $190.0 million in maturities of marketable securities.

Cash provided by financing activities was $1.9 million for the six months ended June 30, 2018 and was primarily attributable to $1.9 million in proceeds from the exercise of stock options. Cash used in financing activities was $232,000 for the six months ended June 30, 2017 and was primarily attributable to the payment of deferred financing costs related to the universal shelf registration on Form S-3 filed in February 2017 and its entry into the sales agreement with Cantor, combined with repayments of debt, offset by proceeds received from its Employee Stock Purchase Plan.

The company do not expect its existing capital resources to be sufficient to fund the completion of the development of its complement inhibitor program. As a result, the company may need to raise additional funds prior to, among other things, being able to further the development of its complement inhibitor program, market any drug candidates associated with that program, obtain regulatory approvals, fund operating losses, and if deemed appropriate, establish manufacturing and sales and marketing capabilities. The company may need to raise such additional financing through a combination of public or private equity or debt financings, collaborations, partnerships or other arrangements with third parties or other sources of financing.

The company believe that its existing cash, cash equivalents and marketable securities will be sufficient to meet its current projected operating requirements for at least the next 12 months.