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.
The Street will be looking for a loss of 16 cents per share on virtually no revenue. That's not an error. In the third quarter, for instance, the company didn't recognize any revenue. Nor did Achillion recognize any revenue in the year-ago quarter. Therein lays the problem with speculative biotechs.
As much as you would like to believe revenue is not an important metric, you have to remember profits don't just magically appear without sales. And how long will investors wait for this company to emerge out of this perpetual "development stage?"
Analysts have been bullish over the past quarter and have steadily raised estimates. If Achillion can continue to grow earnings, it's a great thing. But it doesn't change the fact that this company remains a speculative play, at best. Even if the numbers do come out better-than-expected, it doesn't reduce the risk.
What's important here is what management says about the company's hepatitis-C drug. This is where the emphasis must be placed. I'm curious to hear what management says about ACH-3102, which is a second-generation inhibitor of hepatitis-C. It is believed that ACH-3102 has more enhanced resistance capabilities when compared to first-generation inhibitors. I'd like to know how close the company is to development.
What's more, management has spoken highly of ACH-3422, which is a preclinical compound designed to inhibit HCV NS5B polymerase, a form of the hepatitis C virus. Management had promised to begin in-human studies of this new nomination by the first half of 2014. Any positive outlook to these drugs will be encouraging. But impressing the FDA is a separate matter.
There is some hope here. My concern, however, is with the recent exuberance in the stock. It's a mistake to buy these shares before any real announcement about when the new drugs will come to market.
At the time of publication, the author was long AAPL but held no position in any of the other stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.