Plenty of promising biotech stocks on the market right now have slipped under the radar thanks to the COVID-19 pandemic. Akero Therapeutics (NASDAQ:AKRO) is one such company. Founded back in 2017 and only recently going public in mid-2019, Akero managed to attract a fair bit of excitement surrounding its only drug candidate, AKR-001. Thanks to encouraging early-stage clinical results, investors are once again starting to pay more attention to this this company.

While investing in small-cap biotech stocks is risky, there's also plenty of upside surrounding Akero Therapeutics. Will early investors end up making a fortune off of Akero, or would they do better to stay away from this alluring but risky biotech stock?

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What the heck is NASH?

Non-alcoholic steatohepatitis (NASH) is a condition where a buildup of fat in the liver ends up causing excessive inflammation, and eventual damage, to the organ. NASH is technically a more severe form of non-alcoholic fatty liver disease. While having a fatty liver doesn't always lead to symptoms or complications, there's a significant portion of patients who end up with liver damage due to the resulting inflammation.

NASH, as well as fatty liver in general, is more common among patients who are overweight or drink a lot of alcohol. While positive lifestyle changes such as exercise, healthy eating, and losing weight can help treat the condition, some patients need to take medications that reduce the inflammation of the liver as well.

The National Institutes of Health guesses between 3% and 12% of U.S. adults have some degree of NASH. As such, the size of the NASH market is also pretty wide ranging. Estimates put the current global market at around $35 billion per year, with some projections saying this will grow to $61.6 billion by 2028.

What's clear is that there's a massive market for NASH drugs, and even small biotech stocks have the potential to make a name for themselves in this arena if they can develop a successful candidate in this field.

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Recent success

Akero Therapeutics has only one drug candidate in development right now: a NASH treatment called AKR-001 that's administered via weekly injection. While still in clinical development, the drug hit a massive milestone back in March when it posted impressive results from a phase 2 study.

More specifically, AKR-001 was able to reduce liver fat in Type 2 diabetes patients by between 12 and 14% over 12 weeks in comparison to a placebo, results that more than surpassed the trial's primary endpoints of reducing liver fat levels. The drug was also well received by patients as well, with the worst side effects being some gastrointestinal issues (like diarrhea).

Of course, AKR-001 isn't the only NASH candidate undergoing clinical tests right now. There is a handful of other potential treatments undergoing clinical trials as well. However, considering how large the potential market size is, Akero's AKR-001 needs only to gobble up a small portion of the total NASH market to become a mega-blockbuster. That's a very realistic goal if there's just a few other competitors in this area.

Buyer beware

The biggest risk with Akero is the fact that the company's still a young biotech stock with only one potential candidate. If things don't work out with AKR-001 for whatever reason, then shares are going to plummet. There have been plenty of drugs that have passed phase 2 trials only to fall apart when it comes to the more stringent phase 3 trials.

One of those happened to be Genfit's elafibranor, whose recently released phase 3 trial data ended up failing to show statistically meaningful improvements in patients. It was a devastating piece of news for an otherwise promising NASH drug, and a similar fate could end up befalling Akero's AKR-001.

According to data conducted by the Biotechnology Innovation Organization, just 58.1% of all drug candidates between 2006 and 2015 passed their phase 3 trials and moved on to seek regulatory approval. Statistically, that's a little bit better than tossing a coin. What's more, not all drugs that pass phase 3 trials end up receiving approval. Around 14.7% of drugs end up failing to pass this final hurdle and get rejected by healthcare authorities as well.

Those are far from great odds. While it's true that a small-cap biotech company like Akero only needs to hit one home run to become a massive success, it would be easier to recommend the stock if the company had multiple different drug candidates in development. With just one drug in the works, everything's riding on how AKR-001 turns out.

There's also the question of Akero's finances. As an early-stage biotech stock, it's expected that Akero will be losing money. In its recent first-quarter 2020 financial report, the company announced a net loss of $11.9 million, more than double Q1 2019's quarterly loss. As for revenue, Akero hasn't reported even a single dollar in income.

The company still has $125.3 million in cash on hand, enough to finance almost three years' worth of expenses at the current rate of expenditure. However, given that phase 3 trials are much larger and typically more expensive than phase 2 trials, expect Akero's losses to continue to mount in the upcoming years. Further fundraising might be required, but given how exciting the NASH market is, I don't think Akero will have trouble finding sources of credit.

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What's the verdict?

Could Akero Therapeutics make early investors a fortune? Definitely. Does that necessarily mean that you should stock up on shares right now? Probably not.

With only one drug candidate, early investors are essentially gambling on whether or not clinical results will stay positive moving forward. While it's easy to get optimistic, especially when earlier results have been strong, the biotech world is littered with promising candidates that flopped in late-stage trials.

There's just too much risk here to justify investing in Akero right now for the average investor. However, I'd definitely recommend keeping your eye out for this company in the future. Maybe once phase 3 trial results are announced, Akero could be worth taking a shot on, but buying in too early doesn't seem like a smart move.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.