Hepatitis C is one of the most attractive indications for drug development, and that could mean hep C-focused Achillion Pharmaceuticals (NASDAQ: ACHN) is perfectly positioned for a blockbuster opportunity. However, that opportunity could be at risk depending on how quickly competitors such as Gilead Sciences can roll out their own next-generation therapies.
Since Achillion Pharmaceuticals could be a poster child for high-risk, high-reward biotech stocks, let's consider three things that every investor ought to know before jumping in and buying shares.
1. Hepatitis C is a massive market
The market for a functional cure for hepatitis C is huge.
Three million Americans, 9 million Europeans, and more than 1 million Japanese suffer from the disease, and between 150 million and 170 million people are infected with hepatitis C globally.
Since hepatitis C can lead to life-threatening liver disease, including liver failure, there's a significant need for new treatment options.
Drugmakers have focused a tremendous amount of research and development spending on developing such treatments, and they have made significant strides in cure rates in the process.
The market share leader in hepatitis C treatment is Gilead Sciences, a biotech Goliath that markets the pan-genotype therapy Sovaldi and the genotype 1 drug Harvoni, which is a combination of Sovaldi and the company's NS5A inhibitor ledipasvir. Last year, those two drugs racked up sales of $10.4 billion (yes, with a "b") treating just 140,000 patients.
This year, AbbVie will also vie for some of that market share. AbbVie won FDA approval for its hepatitis C treatment Viekira Pak in December, but while the drug boasts cure rates in the mid-90% range, its multi-pill daily dosing schedule is onerous. That has industry watchers debating just how much market share it will win away from Gilead Sciences, but most analysts agree regardless that Viekira Pak will be a multibillion-dollar drug in 2015.
If so, then the hepatitis C indication will sport three drugs with blockbuster sales this year. But that could be just the beginning. According to a study by the University of Texas MD Anderson Cancer Center, U.S. spending on hepatitis C medicine could reach an absolutely stunning $136 billion over the next five years.
2. Achillion is a one-trick pony
The potential to win away even a small slice of this massive market has sent shares in Achillion Pharmaceuticals soaring -- up 225% in the past year alone.
That's an eye-popping return, but investors should recognize that Achillion Pharmaceuticals is a clinical-stage biotech company that doesn't yet have any revenue or marketed products.
Its drug nearest to commercialization is ACH-3102, which works similarly to Gilead Sciences' ledipasvir.
Achillion considers ACH-3102 to be a next-generation NS5A inhibitor. In midstage trials, combining ACH-3102 with Sovaldi produced a functional cure to 100% of patients in both an eight- and six-week treatment cycle. That's a marked improvement over the typical 12-week treatment course prescribed for Sovaldi and Viekira Pak. It's also an improvement over Harvoni, which can be used in 40% to 45% of genotype 1 patients over an eight-week cycle, but otherwise is prescribed for at least 12 weeks.
Achillion Pharmaceuticals is also researching ACH-3422 as a potential successor to Sovaldi in its drug duo. However, the company has yet to report any midstage study results for a combination of ACH-3422 and ACH-3102, so investors shouldn't count their chickens yet.
The company's only other drug in human trials is sovaprevir, a protease inhibitor that management hopes could one day become part of a hepatitis C triplet regimen alongside ACH-3102 and ACH-3422.
Investors should view Achillion Pharmaceuticals' shares as being unequivocally tied to the biotech's success, or failure, in treating hepatitis C, and that could be either very good or very bad.
3. Competitors could out-innovate it
In the coming years, treatment duration will be one of the most important battlegrounds for hepatitis C drugs. So far, Achillion Pharmaceuticals' ACH-3102 data suggests it has the best mousetrap.
However, a major risk could be coming in the form of even shorter treatments regimens being developed by both Gilead Sciences and Merck & Co. While neither company has delivered midstage success that rivals Achillion Pharmaceuticals' six-week data, either could roll out results down the road that could relegate Achillion to bit-player status.
Tying it together
Biotechnology stocks are notoriously hit-and-miss. The industry trades wildly on speculation tied to promising pipeline candidates and clinical trial news. Since Achillion Pharmaceuticals is leveraged to hepatitis C, and its pipeline is competing against some of the deepest pockets in the industry, there's a significant amount of risk in owning this stock. That said, Achillion appears to have an edge with ACH-3102 that it could exploit to carve out a treatment niche, and it could have an opportunity to be a much bigger player if ACH-3422 and sovaprevir pan out. Given that backdrop, this stock is best suited for the most speculative portfolios.
Todd Campbell owns shares of Achillion and Gilead Sciences. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.