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With an upgrade and an initiation at "Buy" on Wednesday morning, Achillion (NASDAQ:ACHN) is back in the good graces of at least some biotech investors. I've been favorably inclined towards Achillion for a while now, thinking that its NS3 protease inhibitor sovaprevir (aka ACH-1625) and NS5a inhibitor (ACH-3102) gave it a better-than-average chance of being a player in the hepatitis C (HCV) market or, more likely, a target for a company that fears being left on the outside of this eventual multi-billion dollar market.

Data Has Been On Target

Arguably the biggest incremental development at Achillion (apart from well-publicized setbacks at would-be rivals) has been the Phase II-b data on sovaprevir. An early look at SVR4 data pointed to an overall 92% SVR rate, with 100% response in the 800mg group (and 85% at 400mg and 90% at 200mg). This was basically on target with expectations, and the final results will probably fall in the 70-80% range that similar drugs from Vertex (NASDAQ:VRTX), Merck (NYSE:MRK), and Johnson & Johnson (NYSE:JNJ) have delivered.

There are a couple of other worthwhile points on this drug. The above-mentioned results show some wonky dose response characteristics, but this was a small study so I wouldn't make too much of it; more to the point, it wouldn't surprise me if the lower doses became the focus in future combos (better safety). There's also still a chance that this drug can show pangenotypical efficacy. It's also worth noting that this drug has thus far shown solid safety data and minimal drug interactions, which could make it a valuable core drug in combination therapies.

Data on ACH-3102 is also on the way. Proof-of-concept data should be out pretty soon, and the company expects to start a combo study of '3102 and sovaprevir before year-end. This should be an interferon-free study, and initial data should be available in the first quarter of 2013 (one of the benefits of HCV drug trials is that they go pretty quickly). The combo will probably need to show SVR rates around 80% to be truly competitive with Gilead (NASDAQ:GILD) and Abbott (NYSE:ABT), but good data and no unexpected safety issues could see this combo on the market before the end of 2015 (about six to twelve months behind Abbott).

Is There Room For Second Place?

One of the bearish angles on Achillion has been that the company just doesn't fit. Supposedly, its protease inhibitor(s) aren't as good as those of Gilead, protease inhibitors aren't critical for effective combos, and the company will have a hard time establishing differentiated efficacy in harder to treat populations like GT1a.

Those points could all still prove to be true, but I think Achillion hasn't gotten enough credit for the data it has provided so far, and I think it would be a mistake to write off the utility of protease inhibitors just yet. Moreover, while the majority of the attention here is focused on the two most advanced drugs (sovaprevir and '3102), there are other drugs in the pipeline ('2684 and '2928) that could develop into strong candidates, particularly if their pangenotypical activity potential is realized.

But let's say that Gilead does indeed live up to expectations and become the big dog in the HCV yard. What then?

Well, for starters, it will depend upon whether Achillion's compounds can show strong or better efficacy in the GT1a subtype. GT1a has emerged as a harder-to-treat subtype, and compounds that work well for these patients could garner premium pricing. What's more, there's bound to be a stratification of the market on the basis of price, safety, drug interactions and so on - meaning that Achillion could come in second (or third), and still get a meaningful share of a sizable market.

I also wouldn't ignore the potential of a deal. Bristol-Myers' (NYSE:BMY) major setback with BMS-986094 and the dimming outlook for Idenix's (NASDAQ:IDIX) nucleos(t)ide polymerase inhibitor highlight that this is still a fluid situation, and that these companies still don't necessarily know exactly what they have. Roche (OTCQX:RHHBY), for instance, seems to be getting increasingly desperate (launching what looks like a Hail-Mary oral combo study, and talking more about the potential in emerging markets like China), and companies like Pfizer (NYSE:PFE) and Eli Lilly (NYSE:LLY) may ultimately decide that they need to be more involved in the market.

The Bottom Line

There's still plenty of room for things to go wrong. Achillion's drugs could fail to show enough efficacy for approval (or commercial success) and safety issues could still crop up. Likewise, it's possible that a rival like Gilead, Abbott, Johnson & Johnson, etc. will buy or build a combo that just sucks all the air out of the room. Last and by no means least, this is HCV - a market where a new winner is crowned and then promptly scheduled for the guillotine, so market perceptions on who will win will almost certainly shift again over the next six to twelve months.

I'm already pretty heavily weighted to biotech, which is the primary factor keeping me from buying Achillion. If Achillion's combo can secure $1 billion in sales out of what I think could be a $9 billion-plus market in 2017, these shares are worth something in the neighborhood of $15. This will not be an easy stock to hold because of all the cross-talk in the HCV market, but so long as the data holds up, I think investors should stick with Achillion.

Disclosure: I am long OTCQX:RHHBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Achillion Back On The Hep C Roller Coaster Of Love