If 2017 ended today, Aurinia Pharmaceuticals (NASDAQ:AUPH) would rank as one of the biggest winners of the year among biopharmaceutical stocks. Aurinia's share price has more than tripled so far this year.

Is Aurinia overpriced after such tremendous gains? Some might think so. The stock has basically treaded water over the past six months after starting off the year with a roar. However, Aurinia stock is still dirt cheap, in my view, for a couple of key reasons. 

Jigsaw piece with price printed on it next to matching hole with value printed

Image source: Getty Images.

Its lead candidate looks fantastic

You can look over Aurinia's pipeline in detail in less than five seconds. That's because there's only one candidate: experimental lupus nephritis drug voclosporin. But what Aurinia's pipeline lacks in quantity, it makes up for in quality.

Aurinia reported results from a phase 2 study evaluating voclosporin in treating lupus nephritis (LN) in March. And those results were fantastic. After 48 weeks of treatment, 49% of patients receiving a twice-per-day combination of voclosporin with the current standard of care for LN, mycophenolate mofetil, experienced complete remission. Partial remission came for 69% of patients taking the voclosporin combo.

But what about potential safety issues? Voclosporin looked pretty good on that front also. Granted, there were some adverse events. However, nothing unusual popped up that wasn't typical of other immunomodulators. There were nearly as many adverse events in the control group of patients receiving placebo as there were among the patients receiving voclosporin. That's not surprising, considering the severity of LN. Most important, Aurinia reported no treatment-related adverse events leading to death.

It's fair to say that the results for voclosporin were the most encouraging of any drug targeting LN to date. Bristol-Myers Squibb's (NYSE:BMY) Orencia failed in a late-stage study for treating the disease. So did Roche's (NASDAQOTH:RHHBY) Rituxan. Roche also halted a phase 3 study of Ocrevus in treating LN because of a high rate of serious infections. 

There's a huge unmet need

Because of all these past clinical flops, there is still no therapy approved in the U.S. or in Europe for LN. The disease is a serious progression of systemic lupus erythematosus (SLE), commonly referred to as lupus. More than 500,000 Americans, primarily women, are affected by lupus. The disease occurs when the body's immune system attacks its own tissues, causing inflammation. Lupus nephritis, a severe inflammation of the kidneys, develops in as many as 60% of patients with lupus.

And it's a deadly disease. Only 13% of LN patients who don't go on dialysis and don't experience remission of the disease survive for 10 years or more. However, 92% of patients who have complete remission survive for at least 10 years without requiring dialysis. 

In addition to its medical consequences, there are significant financial consequences for LN as well. The average annual medical costs of LN per patient can be up to close to $60,000. That's more expensive than the average annual costs per patient of asthma, hypertension, and COPD combined.

Putting it all together

Combine a disease with a huge unmet need and no approved treatments with a drug that could be the most effective ever at treating the disease, and you have the recipe for a biopharmaceutical success story. Cantor Fitzgerald analyst Elmer Piros thinks voclosporin could achieve peak annual sales of $1.6 billion.

Yet Aurinia Pharmaceuticals has a market cap of only around $530 million. What gives? I get that investors are probably just playing the probability game. Around 40% of drugs in late-stage studies succeed. Of those that do succeed, another 15% don't win regulatory approval. Even when drugs do win approval, it can take years to reach peak sales levels. 

But even factoring in those probabilities, I think Aurinia stock is attractively valued. If the company has positive results in its late-stage study, Aurinia's valuation could easily double from where it is now. That could be a pessimistic view if the company becomes an acquisition target for a big pharma like Bristol-Myers Squibb.

It's possible, of course, that voclosporin will flop in phase 3, as several drugs before it have. However, based on the phase 2 results, my hunch is that it won't. I like the risk-reward proposition with Aurinia and continue to think that this high-flying stock is still dirt cheap.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.