I take the highly aggressive stance that out of all the investment options in the sector, small-cap biotech companies offer the best bang for the buck in the long run. That holds for risk-tolerant investors as long as the companies are carefully chosen -- and you don't mind a bumpy ride while the story unfolds.

Picking the likely winners is the key. The duds have to be avoided as best as possible. As you may expect, that's easier said than done. There are, however, a few characteristics to look for to tilt the odds in our favor. One important trait to look for is the development of products that fill an unmet medical need. These are conditions where either no current therapies are available or the treatments that are available are woefully inadequate. If the company we're researching has come up with a drug that works, it will be able to grab a huge market share.

One disease that is in definite need of new drugs is hepatitis C (HCV), a virus that attacks the liver. The eventual outcome of HCV can be cirrhosis and/or liver cancer, making HCV infection the leading cause of liver transplants in the United States. Roughly half of the people that contract HCV respond to the current drugs.

The state of the market
The standard of care right now is pegylated interferon in combination with ribavirin. That combo is effective in a large percentage of cases and has made treating HCV a major source of revenue for companies such as Schering-Plough (NYSE:SGP) and Roche.

This effective one-two punch works by stimulating the patient's immune system to get rid of the virus. Unfortunately, as I mentioned above, the drugs will clear the virus from the blood in roughly half of the patients that seek treatment. The remaining patients -- that other half -- have few treatment options aside from trying experimental drugs.

Thus, HCV is an unmet medical need. Opportunity knocks for new and more effective drugs to enter the field and capture market share.

Stopping the virus cold
It is important to recognize that the existing drugs do not actually attack the virus itself, which makes me think that an innovative company that hits the virus directly can do quite well. Direct antiviral drug therapy has been the backbone of HIV treatment for years. Though HCV is lagging HIV in this regard, at least conceptually the same approach could work in this market.

This brings me to Idenix Pharmaceuticals (NASDAQ:IDIX). Idenix has a drug called valopicitabine (NM 283) in phase 2 trials for treating HCV-infected patients. Valopicitabine is an RNA polymerase inhibitor. Unlike the current drugs, which work indirectly through the immune system, valopicitabine goes straight to the source of the problem.

So what does that mean, exactly? When a virus infects the body it makes copies of itself over and over and over again. One enzyme required for that process is RNA polymerase. Shutting it down with valopicitabine is like throwing a monkey wrench into a machine. When that happens, the virus can no longer continue to pump out copies of itself, and levels of HCV in the patient's blood should drop and hopefully disappear entirely.

There's a big difference between talking about drug theory and showing that it works in practice. Though Idenix still bears that burden of proof with valopicitabine, the company is clearly getting there as the clinical program picks up steam. It's just a matter of time before we find out if valopicitabine is going to advance the field.

While patience and caution are still warranted, some encouraging clinical data that is supportive of this approach was released just last week. In the currently ongoing phase 2a clinical trial, nine patients receiving the combination of valopicitabine with pegylated interferon had their HCV RNA levels in the blood drop by 99.99% after 24 weeks of therapy. In the majority of these patients, viral levels were undetectable even with highly sensitive measurement techniques.

This is a promising -- but still very preliminary -- result. The next batch of anticipated clinical data is from an important phase 2b trial that is currently running. In this trial, which is scheduled to release data in November, valopicitabine will be added to the current standard of care (ribavirin plus pegylated interferon) to see if it improves the effectiveness of the combo when used in patients that have already failed that therapy. This is where the need in HCV for a new drug is the greatest. Patients that fail the standard treatments do not have many options, so if valopicitabine works in this segment it will be significant.

As biotech investors know, it is the phase 3 studies that are the final hurdle. Idenix has said that these trials will begin in 2006. When those kick into gear, the timeline to launch will begin to firm up a bit. Realistically it will be several years until valopicitabine could enter the market. But in biotech, it's often better to be early than late to the party.

Final thoughts
I like investing in drug markets where there is a clear and unmet medical need. Many of the top-tier biotechs became big names by filling these holes. Think of MedImmune (NASDAQ:MEDI) with Synagis or Genzyme (NASDAQ:GENZ) with Cerezyme, to cite two examples. Finding these companies before they break out is my core strategy in Motley Fool Rule Breakers. HCV is a market ripe for the emergence of a rising star, and Idenix is one biotech to keep on your watch list for the next year -- with special note of valopicitabine's phase 2 data set to release at the end of this year and the initiation of phase 3 trials in 2006.

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Fool contributor Charly Travers does not own shares of any company mentioned in this article. The Motley Fool has a disclosure policy .