Johnson & Johnson Takes Aim at Gilead Sciences, inc.

Johnson & Johnson doesn't typically like to play second fiddle to anyone, particularly when billions of dollars in drug sales are at stake. So it's not surprising that J&J ponied up $1.75 billion to acquire privately held biotech company Aliosand its intriguing hepatitis C nucleotide inhibitors.

The acquisition could help energize Johnson & Johnson's hepatitis C program, positioning it to more directly compete with Gilead Sciences , whose Sovaldi soundly trounced J&J's own Olysio after both drugs won FDA approval late last year.

Source: Johnson & Johnson.

A bit of background
The two companies raced neck and neck to develop game-changing hepatitis C drugs heading into 2013, but Gilead was the clear winner exiting last year.

That's because Sovaldi performed much better during critical phase 3 clinical trials than Olysio, which stumbled in treating patients with the common Q80K polymorphism found in about half of those with the genotype 1 variation of the disease.

Sovaldi has since become the drug to most rapidly ever reach billion-dollar blockbuster status, with sales totaling more than $5 billion in the first six months of this year.

But Olysio has been a surprisingly strong seller, too. Johnson & Johnson reported sales of the drug totaled $350 million in the first quarter and more than doubled to over $830 million in the second quarter. However, Olysio's sales success comes with an asterisk due to almost exclusively being tied to the drug being dosed alongside Sovaldi.

Doctors have increasingly embraced that two-drug combination -- despite an eye-popping price tag of about $150,000 per treatment course -- following the release of new treatment guidelines from the American Association for the Study of Liver Diseases in March recommending use of the two drugs together for patients who are unable, or unwilling, to take side effect-laden peg interferon.

Shifting of the guard
Johnson & Johnson's Olysio success, however, is likely short-lived. Competitors AbbVie, Bristol-Myers Squibb, and Merck are all working on new therapies that could soon hit the market and displace Olysio.

The biggest risk to Olysio isn't from these companies, but again from Gilead, which is close to winning approval for its own two-drug combination drug, Harvoni, that also eliminates the need for peg interferon and ribavirin.

Industry watchers widely expect the FDA will give Harvoni the green light in early October; if it does, the need to take Olysio will drop massively given that Harvoni has posted cure rates in the high 90% range and will likely carry a lower price tag than the cost of combining Sovaldi with Olysio.

Source: Alios.

Betting on the future
Recognizing that Olysio's moment in the sun is fading, Johnson & Johnson bought Alios to get its hands on early stage hepatitis C drugs AL-335 and AL-516.

Both drugs are in their very early stages, which means there's plenty of opportunity for them to fail during clinical trials. But paying less than $2 billion for the promise of creating its own Harvoni competitor was too great an opportunity for J&J to ignore.

The acquisition comes just weeks after Alios presented pre-clinical data showing that AL-335 not only appears to inhibit hepatitis C replication, but also inhibits the same NS5B protein targeted by Sovaldi. Alios also announced during its presentation that it would advance AL-335 into phase 1 trials before year-end.

Johnson & Johnson's team appears to have liked what it saw in doing due diligence on Alios. J&J also didn't want to wait until AL-335 proved itself in human trials, which if successful, would've significantly bumped up Alios' purchase price. Regardless, we're still years from knowing whether this buyout proves savvy, and that means Gilead's dominance in hepatitis C won't be threatened by Johnson & Johnson for a while.

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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 and Johnson & Johnson. The Motley Fool owns shares of Gilead Sciences and Johnson & Johnson. 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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