Image source: Achillion Pharmaceuticals.

What happened

After updating investors on its third-quarter performance and reporting that it's still looking for a safe dose of ACH-4471 -- an oral complement factor D drug -- to study further, shares in Achillion Pharmaceuticals (NASDAQ:ACHN) are nose-diving 36% today.

So what

Achillion Pharmaceuticals licensed its hepatitis C drug pipeline to Johnson & Johnson (NYSE:JNJ) last year, and ever since, it's been focusing its R&D spending on the development of oral complement Factor D inhibitors that could eventually target autoimmune diseases, including paroxysmal nocturnal hemoglobinuria (PNH), C3 glomerulopathy (C3G), and dry age-related macular degeneration (dry AMD).

In the company's third-quarter results, management said Johnson & Johnson plans to begin a phase 2b study of a six-week hepatitis C triplet therapy that delivered 100% functional cure rates in phase 2a trials. However, that news was overshadowed by management's admission that it had observed plasma trough concentrations in ACH-4471 patients participating in a safety and dose escalation study that "exceeded the range the company anticipates for potential treatment of patients."

Now what

ACH-4471 is in the earliest stages of research, and Achillion plans to "assess additional dosing regimens to maintain the projected effective trough concentrations and safety of ACH-4471."

The uncertainty regarding ACH-4471 is a blow because it represented the lion's share of Achillion's efforts to diversify from its exposure to hepatitis C. ACH-4471 R&D is continuing, so there's still the possibility of finding a dose that's effective and safe, but investors are right to worry about this program's future.

Nevertheless, ACH-4471's setback could be creating an opportunity for risk-tolerant investors to profit longer-term from Johnson & Johnson's ongoing efforts to compete in hepatitis C. The hepatitis C drug market exceeded $20 billion last year, and currently, the shortest approved treatment regimen on the market is eight weeks. Conceivably, a shrinking of treatment duration to six weeks could boost patient adherence, improve cure rates, and reduce payer costs.

That being said, there's no guarantee Johnson & Johnson's hepatitis C studies will continue to deliver functional cure rates at these levels as the number of patients participating in its studies increases. There's also no guarantee that safety concerns won't emerge that could derail the development of Achillion Pharmaceuticals' hepatitis C regimens. Overall, Achillion Pharmaceuticals remains a risky stock, and it arguably just got a lot riskier because of ACH-4471.

Todd Campbell owns shares of Achillion Pharmaceuticals. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle @ebcapital to see more articles like this.

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