We’re now heading into the final days of 2016, and markets are cooling off for the Christmas period. The biotech sector, however, is as hot as ever. A flurry of last minute deals and mergers are hitting press, and these are translating to some volatility in the space. The latest news on the wire is that Akebia Therapeutics Inc (NASDAQ:AKBA) has picked up funding for its late stage study of chronic kidney disease (CKD) derived anemia. The company is running up on the back of the news, so it makes sense for us to take a look at the deal, and figure out what to look for next.

So, here goes.

On Tuesday, the company announced that it had entered into a collaboration and license agreement in the U.S. for Vadadustat, an oral hypoxia-inducible factor (HIF) stabilizer currently in development for treatment of the above mentioned anemia associated with CKD. There are around 1.8 million patients in the US that suffer from this condition. It comes about as a result of the kidney being unable to produce a hormone called erythropoietin, which is the hormone responsible for the production of red blood cells. Anemia is a lack of functioning red blood cells, and can become a pretty serious condition if left untreated.

Vadadustat is a pretty interesting drug from a mechanism of action perspective. Basically, it tricks the body in to thinking it is at a high altitude. When the human body is at altitude, it responds by triggering extra red blood cells, so, by making the body think it is at altitude, Vadadustat triggers the production of red blood cells.

There’s a circa $3.5 billion market for this sort of condition, so if Akebia can get the drug to market, there’s a decent amount of upside potential on offer above and beyond its current market capitalization of $380 million.

What does the deal involve?

As an initial outlay, Otsuka will pay $265 million or more in committed capital. This $265 million derives from a payment of $125 million on the initial signing of the deal, and then a payment of approximately $35 million in the first quarter of 2017. The agreement also provides for Otsuka to pay $105 million or more of the costs of the global development program for the drug.

Additionally, Otsuka will pay potential development and commercial milestones up to $765 million. If the drug hits the market, then, there’s a big balance sheet boost on the cards. So, the next question is, what are the chances of its reaching the market?

Well, there’s some strong early to mid stage data supportive of efficacy and tolerability, and the drug is currently under investigation as part of two phase III trials. It’s worth noting that these trials are slow burners – enrollment generally takes a couple of years, so an allocation ahead of a Vadadustat NDA submission is going to be a long term exposure. That said, the first started enrolling in January this year, and should complete enrollment at the end of next. The second started enrolling in August, and will close out enrollment in early 2018. This sets up late 2018 and 2019 as potential topline periods.

So the trials are fully funded now, and that removes some of the risk associated with Akebia position – trial capitalization is always the big concern for companies at this end of the space. The company has also maintained a decent portion of the rights to the drug, so there’s a positive. The risk for us right now lies in competition. There’s a drug called roxadustat, currently in development by FibroGen Inc (NASDAQ:FGEN), and backed by ASTELLAS PHARMA NPV (OTCMKTS:ALPMF) and AstraZeneca plc (ADR) (NYSE:AZN), that is set to read out topline early 2018. That puts it a step ahead of Akebia, and might allow it to pick up an approval ahead of Vadadustat.

With that said, and even with the threat of competition from a similar drug, we think there’s still plenty of upside potential here. We’re watching the development pathway closely (in the hope that we get some sort of interim readout on enrollment completion) for clarity.