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CAPScall of the Week: Achillion Pharmaceuticals

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For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at Achillion Pharmaceuticals (Nasdaq: ACHN  ) .

What Achillion Pharmaceuticals does
Achillion Pharmaceuticals is a developmental stage biotechnology company focused primarily on developing compounds to treat hepatitis C. It currently has four clinical-stage hepatitis C compounds -- three in phase 1 clinical trials and one in phase 2 trials. Its leading candidate, ACH-1625, showed 100% efficacy in early phase 2 clinical trials at high doses. Achillion also has one pre-clinical experimental drug aimed at being the next antibacterial drug.

Being a clinical development company, Achillion currently has no revenue and recently reported a slightly wider operating loss than it had in the previous year.

Whom it competes against
Now here's a targeted area of treatment with absolutely no shortage of competitors.

Achillion will need to compete not only against existing hepatitis C treatments that are given with interferon, including the current dominant treatment, Incivek, owned by Vertex Pharmaceuticals (Nasdaq: VRTX  ) , and Merck's Victrelis, but also against numerous up-and-coming nucleotide-based treatments that don't use interferon.

Luckily for Achillion, the field of potential competitors shrank a bit with the cessation of mid-stage clinical trials of Bristol-Myers Squibb's (NYSE: BMY  ) BMS-986094, after a patient had an adverse cardiac reaction. This drug, which was acquired by Bristol when it purchased Inhibitex for a steep $2.5 billion in January, was a gamble given it was barely out of phase 1 trials and proved to be a $1.8 billion boo-boo for Bristol as I suspected it would.

Concerns about the safety of nucleotide-based inhibitors has also been raised, which provided the impetus for investors to gang up on Gilead Sciences (Nasdaq: GILD  ) and Idenix Pharmaceuticals (Nasdaq: IDIX  ) . Idenix had mid-stage trials of its leading hepatitis C candidate, IDX184, halted indefinitely due to possible concerns about its inhibitor that could be similar to the problems Bristol-Myers experienced.

Achillion's biggest competition will be from the existing interferon-based treatment, Incivek, which became the fastest drug to reach $1 billion in sales since the drug was launched, and from Gilead Sciences' GS-7977, which it acquired when it purchased Pharmasset for $11 billion in 2011. The experimental treatment has shown incredible efficacy up until now and could become a standard combination therapy, as was evidenced by strong efficacy when combined with Bristol-Myers Squibb's daclatasvir.

The call
After reviewing the prospects of Achillion Pharmaceuticals, I've decided to make a CAPScall of underperform on the company.

To me this seems like an easy call given that the hepatitis C pie just isn't big enough for this many companies to be successful. Although the target for hepatitis C-focused biotechs is to develop treatments that aren't subject to the side effects of interferon, Incivek is a very effective and highly lucrative treatment that isn't likely to slip away overnight. In addition, Gilead Sciences has a clear edge over all of the other clinical-based hepatitis C companies in terms of development and success rate -- especially with regard to patient tolerability and side effects. Finally, Bristol's purchase of Inhibitex reminds investors that promising early-stage data is really a pipedream sometimes. There are plenty of efficacy and safety obstacles that could still stand in the way of Achillion's hepatitis-based pipeline.

You can follow this selection, as well as all previous CAPScalls I've made, by clicking here to be immediately whisked away to my CAPS portfolio.

Achillion Pharmaceuticals isn't the only company looking for the next disruptive product that will transform the sector. In the technology sector, our analysts at Motley Fool Stock Advisor have identified three stocks with a disruptive new technology that's capable of igniting the next industrial revolution. Find out the identity of these companies, for free, by clicking here to get your copy of this latest special report.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals and Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 28, 2012, at 12:08 PM, truep287 wrote:

    Nice summary, but I disagree with your conclusion. As a physician who treats hep C, I can say from personal experience that due to severe side effects, Incivek is already losing market share to Victrelis (Merck). The newer protease/polymerase inhibitors appear to be just as, if not more, effective and with far fewer side effects. As a result, most experts don't see a long future for Incivek. With the new CDC recommendations for all baby boomers to be screened for hep C, the hep C "pie" is going to be very large, and unlikely to be dominated by a single agent/company.

  • Report this Comment On August 29, 2012, at 1:09 PM, Momentum21 wrote:

    "To me this seems like an easy call given that the hepatitis C pie just isn't big enough for this many companies to be successful."

    I disagree here Sean. You may certainly be right in the end but it is not an easy call. I am happy to be an investor in ACHN at these levels.

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