The Motley Fool comments on "The Hepatitis C Bubble"...

Posted 2/29/12 on The Motley Fool.com. Brian Orelli, PhD comments on investor 'irrational exuberance' within HCV drug developer stocks and urges caution. Having been in the pharma and biopharma industry since '93, I'm in Orelli's camp in erring on the side of fiscally conservative. The major of preclinical drugs - and even drugs in phase II development - never make it to market. That's never more been the case than in Hepatitis C drug development. The 'Phase II graveyard' of compounds that will never see the light of day is huge by any standard. 

3 Signs of a Hepatitis C Bubble

By BRIAN ORELLI, PHD, THE MOTLEY FOOL
Posted 9:37PM 02/29/12 Investing
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Gilead Sciences' (NAS: GILD) purchase of Pharmasset and Bristol-Myers Squibb's takeout of Inhibitex threw gasoline on a fire that was already raging.

But higher values in and of themselves don't necessarily mean the indication is in a bubble that's sure to pop. You have to dig a little deeper. Here are three signs the enthusiasm might be getting a little extreme.

Preclinical fever
BioCryst Pharmaceuticals (NAS: BCRX) rose 12% in one day earlier this month after announcing data on its hep C drug, BCX5191. That's not weird -- drugmakers are supposed to go up when they release positive data.

But BCX5191 hasn't even made it into the clinic yet.

Early-stage success does tend to be a better predictor of approvability for hepatitis C drugs than it is for drugs treating other indications, but I'd be very cautious reading too much into the results, especially considering how many drugs are already in the clinic.

Acquisition exuberance
BioLineRx shares more than doubled at one point last month on 675 times the volume the day before apparently because the company licensed a hepatitis C drug BL-8020 from a privately held French biotech, Genoscience.

Did it get such a good deal that the company was instantly worth twice as much? Who knows? The terms of the deal weren't disclosed. It couldn't have been worth that much, though, considering BL-8020 hasn't made it to the clinic either. Then again, see above.

My guess is that investors jumped into BioLineRx because they think having a hepatitis C drug makes the biotech a takeout target. And considering the premiums we've seen thus far, the rewards could be plentiful if they continue.

Trading in tandem
Speaking of acquisition, Idenix Pharmaceuticals (NAS: IDIX) and Achillion Pharmaceuticals (NAS: ACHN) have been long-rumored acquisition targets, especially as Pharmasset and Inhibitex were taken out.

The drugmakers have traded virtually in tandem as investors have treated them identically, expecting both to be the next M&A victor.

But it's not like they have the same pipelines. There's no reason to think they have the same risk-reward profile. Losing perspective of the underlying asset is a sure sign of a bubble.

But will it pop?
There's no doubt there's a bubble: Valuations on hepatitis c drugs are much higher than any other drug. I'm unaware of any biotech without a drug on the market that has a valuation above $11 billion, the price that Gilead paid for Pharmasset.

But whether the bubble will pop is harder to know. I tend to think that investors and companies snapping up the assets will eventually come to the realization that the rewards at these insane levels don't justify the risks.

But it doesn't have to go down like that, I guess. There are a lot of patients infected with the virus who may not be identified and still more who know they're infected and choose to wait for the next generation of medications. And the cost of not ridding the patients of the virus is fairly high - hepatitis C is a leading cause of liver transplants -- so hep C drugmakers can justify fairly high prices.

The drugs could succeed in the clinic and patients could be identified, resulting in billions of dollars in sales and a justification of the high prices.

But even in that rosy picture, not every drug is going to work. And even if it's approved, there's no guarantee it'll actually get prescribed over the rivals. Just look at the competition between Vertex Pharmaceuticals (NAS: VRTX) and Merck, whose drugs launched at nearly the same time, but Incivek has sales five times higher than Victrelis.

Even if the entire hep C drug space doesn't pop, someone is going to be left holding the bag. Be careful out there.