After Achillion traded as high as $10.17 in February of last year, the stock tanked to $2.26 in October -- losing close to 80% in seven months. Investors were stunned by the news that the Food and Drug Administration, or FDA, opted to not remove sovaprevir, the company's lead protease inhibitor for hepatitis C, off clinical hold. The FDA wasn't convinced that the drug was safe.
I can't think of a better example than this to explain the pitfalls of investing in the biotech industry. It's known for some meaningful breakthroughs, yes. But it's also extremely volatile. This is a sector that moves quickly in either direction on the prospects of any new drug.
But investors have to realize that not all drugs are going to be blockbuster candidates. And without the right management and funding for research, the company may never get a product to market. This is regardless of how much "potential" investors believe they have. What's important to remember when betting on these drugs is that the FDA is known to say "over my dead body."For Achillion, this has been the response. The good news is, since the stock bottomed at $2.26 last October, shares have been up by 53%. It's worth asking: What has been the catalyst, given that there's been very little progress with sovaprevir. I will grant that the Street could have overreacted. That the stock took an 80%-pounding in seven months seems a bit extreme. Still, it's worth asking, should investors have speculated so highly on Achillion in the first place? On Wednesday, when Achillion reports fourth-quarter results, management will try to convince the Street that this company is not the long shot that many investors believe it is. The way I see it, absent a clear and healthy pipeline update and an improvement in revenue, there won't be much about which to be excited.