In early January, Apellis Pharmaceuticals (NASDAQ:APLS) announced late-stage clinical results demonstrating that its lead drug candidate bested a market-leading product from Alexion Pharmaceuticals (NASDAQ:ALXN) as a treatment for paroxysmal nocturnal hemoglobinuria (PNH). The results sent the pharmaceutical stock soaring. They also set the stage for an intriguing David-versus-Goliath showdown.

Apellis Pharmaceuticals is a pre-commercial company valued at $3 billion, although it sported a market valuation of only $800 million this time last year. Alexion Pharmaceuticals is a $23 billion industry leader. The former reported an operating loss of $90 million in the first nine months of 2019, while the latter generated an operating profit of $1.58 billion in that span.  

Will the head-to-head results give the experimental treatment from Apellis Pharmaceuticals a leg up in the market?

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What's at stake in PNH?

PNH is a rare blood disease characterized by hemolysis (the breakdown of red blood cells that often results in anemia), blood clots, and impaired bone marrow function, according to Johns Hopkins Medicine. The disorder is typically diagnosed between the ages of 35 and 40, although it only affects an estimated one in every 1 million people. Some individuals can be cured with a successful bone marrow transplant, but most require frequent transfusions as the disease gradually progresses. 

Today, there are only two drugs approved to treat PNH in the United States: Soliris and Ultomiris. Both are owned by Alexion Pharmaceuticals. The duo generated combined global revenue of $4.3 billion in 2019, albeit spread across four different indications. 

The head-to-head results

The market opportunity and limited competition explain why investors are suddenly intrigued by Apellis Pharmaceuticals. The company's lead drug candidate, pegcetacoplan, performed better than Soliris in a phase 3 study involving 80 individuals with PNH. 

After 16 weeks of treatment, the group taking pegcetacoplan achieved an average 2.4 g/dL increase in hemoglobin levels. Those taking Soliris achieved an average 1.5 g/dL decrease in hemoglobin levels. The results suggest pegcetacoplan is superior in managing anemia in PNH patients. 

While demonstrating superiority to Soliris in average hemoglobin changes was the primary endpoint of the late-stage study, the experimental therapy also showed promise on additional endpoints measured. Notably, 85% of individuals taking pegcetacoplan achieved transfusion independence, compared to only 15% taking Soliris. The drug candidate also demonstrated a positive trend in fatigue, a common symptom of PNH, compared to Soliris, although the study was not designed to test noninferiority -- to see if the drug was as safe as the others.

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Will pegcetacoplan best Soliris in the market? It's complicated.

The favorable clinical results increase the likelihood that pegcetacoplan will earn marketing approval from the U.S. Food and Drug Administration (FDA). However, earning approval doesn't necessarily mean Apellis Pharmaceuticals will seize the market from Soliris and Ultomiris.

Both pegcetacoplan and Soliris are injected twice weekly, whereas Ultomiris can be administered as infrequently as once every four to eight weeks. Convenience could be a deciding factor for individuals who live far from treatment centers and those who don't require more intensive treatment. 

Pegcetacoplan might also suffer from other inconveniences. In the matchup against Soliris, the experimental therapy had a significantly higher rate of injection site reactions (36.6% versus 2.6%) and diarrhea (22% versus 0%). Then again, frequent blood transfusions are pretty inconvenient, too, but individuals with less-severe cases of PNH might prefer Ultomiris.

It also helps that Alexion Pharmaceuticals has been successfully switching PNH patients from Soliris to Ultomiris, which could blunt the market impact of the head-to-head results between pegcetacoplan and Soliris. In fact, Ultomiris is now the leading PNH treatment in the United States, Japan, and Germany. The next-generation drug product generated revenue of $339 million in 2019 as a treatment for PNH and a related condition called atypical hemolytic uremic syndrome (aHUS). Over half of sales were generated in the fourth quarter of 2019. 

Investors should also consider that Soliris will begin to face competition from biosimilars this decade. Market success for any of them could put downward pricing pressure on both Ultomiris and pegcetacoplan. 

Apellis Pharmaceuticals is a pharma stock to watch

Although investors should carefully consider all factors likely to affect the market traction of pegcetacoplan in PNH, the market opportunity and limited competition suggest a high likelihood that the drug candidate can carve out a respectable niche if it earns marketing approval. Apellis Pharmaceuticals ended September with $434 million in cash and raised an additional $404 million in gross proceeds from a public offering in mid-January, which should make market launch less financially risky. 

What's the potential? SVB Leerink analyst Dae Gon Ha estimates pegcetacoplan can achieve peak annual sales of $306 million in PNH. That would represent a significant haul for the pre-commercial company, but Apellis Pharmaceuticals still needs to achieve successful outcomes in the three remaining clinical trials of pegcetacoplan (each in a unique indication) to justify its current $3 billion market valuation. That's especially true considering the pipeline contains only two drug candidates: pegcetacoplan and an early-stage asset called APL-9.

Simply put, Apellis Pharmaceuticals is a compelling pharma company, but it probably belongs on your watch list for now.