Should Gilead Sciences, inc. Fear Incoming Competition?

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Gilead Sciences' shares have tumbled more than 8% in the past week as investors digest the FDA approval of its second-generation hepatitis C drug Harvoni and the potential competitive threats from AbbVie and Bristol-Myers Squibb .

Since investors are wondering whether hepatitis C drugs coming from AbbVie and Bristol-Myers might spark a price war, let's look at the threat to Gilead's bottom line and see how worried the company and its shareholders should be.

Source: Gilead Sciences via Google Maps.

Tough to treat, until now
The landscape for hepatitis C treatment looked very different when Gilead launched first-generation drug 
Sovaldi last December. Hepatitis C affects more than 120 million people worldwide, and until now it was tough to treat and too often the cause of life-threatening liver failure.

Prior to 2010, hepatitis C treatment relied on a combination therapy of peg interferon and ribavirin. Those treatments, however, failed to work in as many as half the patients treated and came with a slate of often intolerable side effects.

The situation began to change in 2011 when Vertex Pharmaceuticals launched Incivek, a revolutionary new therapy. Demand was so high that it quickly became the fastest drug to ever reach $1 billion blockbuster sales status. However, despite its advances, Incivek was far from a perfect drug: it was delivered via injection, rather than by tablet; it still required a 24-week treatment period; it was still dosed alongside pesky peg interferon and ribavirin; and it provided a functional cure for only about 80% of patients.

In a bid to do better, drugmakers spent billions on research and development that yielded several promising therapies. But one stood out: Pharmasset's Sovaldi. Sovaldi's midstage trial results were so impressive that Gilead acquired Pharmasset for more than $11 billion in 2012; this was a jaw-dropping price tag given that Pharmasset didn't have any commercial products or sales. Sovaldi's success suggests this was money well spent. In the first six months on the market, Gilead's Sovaldi sales totaled more than $5 billion.

Source: Gilead Sciences.

But much like Invicek, Sovaldi is far from a perfect solution. Sovaldi's 12-week treatment course is still too long; it still requires either peg interferon or ribavirin, or both, in some patients; and it doesn't cure everyone. As a result, Gilead developed Harvoni, a combination of Sovaldi and a new drug, ledipasvir, which can be dosed over as little as eight weeks, doesn't require peg interferon or ribavirin, and has shown cure rates as high as 99% in phase 3 trials.

Crowding the field
Sovaldi's shortcomings likely gave AbbVie and Bristol-Myers hope that the money each has already spent on their own hepatitis C programs wasn't wasted. It remains to be seen, though, how much threat these companies will pose to Gilead in this market.

For example, AbbVie's three-drug hepatitis C treatment cured up to 99% of genotype 1b patients during phase 3 trials. That's an impressive cure rate; however, before getting too excited, it's important to recognize that while genotype 1 is the most common variation of hepatitis C in the United States, the 1b variation accounts for only about a third of genotype 1 cases. In the more common 1a variation, AbbVie's cocktail clears the disease in about 90% of patients. If you add ribavirin, the 1a cure rate jumps to 97%, but given that doctors have been looking to move away from peg interferon and ribavirin for years, they may shy away from prescribing AbbVie's cocktail over Harvoni -- especially since AbbVie's combination requires three pills a day, rather than one for Harvoni. That dosing disadvantage maycould

Bristol-Myers' Daklinza might face similar struggles. Most industry watchers expect an FDA green light for Daklinza given that it's already approved for use in Japan, but how much of a dent the drug might make in Gilead's market share is questionable. Last week, Bristol Myers yanked its FDA filing for asunaprevir, which when used alongside Daklinza would have been the most direct Harvoni competitor. Bristol's decision to forgo asunaprevir in the United States could mean the company is ceding the market for all but the toughest to treat cases to Gilead. Instead, Bristol appears to be bargaining that Daklinza will win scripts as a companion to Sovaldi in patients who aren't cured with Harvoni. During trials, matching up Sovaldi with Daklinza produced a 98% cure rate in genotype 1a patients and a 100% cure rate in genotype 1b patients.

Shifting gears
Since AbbVie and Bristol-Myers come up shy in efficacy to Harvoni, their ability to win market share will have to rely on either pricing or, in Bristol's case, targeting niche markets.

Gilead watchers worry that Harvoni's $94,500 price tag for a 12-week treatment course will prove too rich for insurers and drive drug intermediaries like Express Scripts to avoid the product in their formularies. Those formularies are used as the basis for prescription approval by many insurers; if AbbVie undercuts Harvoni's price, it could result in insurers creating hoops designed to promote AbbVie instead of Harvoni. However, whether payer pushback will actually result in fewer Gilead scripts isn't clear. Doctors focus more on patient outcome than payer checkbooks; if they feel Harvoni delivers the best patient outcome, they're likely to push for its use regardless of insurer objections. The sheer size of the hepatitis C market in the U.S., and the fact that just 70,000 patients  have been treated with Sovaldi through the first two quarters, makes it hard for me to imagine Harvoni won't be a major blockbuster, regardless of AbbVie's price decision. We won't know for sure until next year, so it's likely this debate is far from over.

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The article Should Gilead Sciences, inc. Fear Incoming Competition? originally appeared on

Todd Campbell owns shares of Gilead Sciences. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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