Provided by The Motley Fool
By Leo Sun | More Articles
October 25, 2013
This week, Gilead Sciences (NASDAQ: GILD ) and Johnson & Johnson (NYSE: JNJ ) received positive news from the Food and Drug Administration regarding their new hepatitis C treatments. The FDA issued a positive review for Gilead's sofosbuvir, and an FDA advisory panel voted unanimously to recommend the approval of J&J's simeprevir.
What do these two victories mean for Gilead and J&J, which are competing against other major companies to usher in the next generation of hepatitis C treatments?
What an approval would mean for Gilead
The FDA stated that Gilead's sofosbuvir cured 90% of patients with the most common form of hepatitis C within their first 12 weeks of treatment.
If approved, Gilead's drug will mark the first major step forward for hepatitis C drugs in two years. The last major advance in hepatitis C treatments was made by Merck (NYSE: MRK ) and Vertex Pharmaceuticals in 2011. Merck and Vertex's drugs raised the average cure rate from approximately half to 65% and 75%, respectively, when administered with other treatments.
Gilead's sofosbuvir is a once-daily, orally administered treatment, whereas older treatments were either injected or required multi-pill cocktails. In addition, it does not contain interferon, a protein frequently used in older hepatitis C treatments that can cause flu-like symptoms.
Gilead is seeking approval of sofosbuvir for the treatment of all six genotypes of the hepatitis C virus, since treatment for the type 1,4,5, and 6 genotypes still require the drug to be administered with a dose of pegylated interferon, such as Merck's Pegintron or Roche's Pegasys, along with ribavirin, an older hepatitis C drug.
Therefore, if approved, sofosbuvir only drastically improves the lives of patients with genotypes 2 and 3, who will only need to take the pill once a day with ribavirin. The type 1 genotype is currently the most common form of hepatitis C in the United States.
Nonetheless, Wall Street believes sofosbuvir has blockbuster potential -- analysts polled by Bloomberg expect the drug to generate up to $6.03 billion in annual revenue for Gilead by 2016, and analysts at Morningstar believe it could hit peak sales of $8 billion by 2022 -- equivalent to 80% of Gilead's revenue in 2012.
Diversification and growth beyond HIV treatments
For Gilead, the success of sofosbuvir is the key to growing the company beyond its current portfolio of HIV treatments, which generated 86% of its total product sales last quarter.
The main weakness in Gilead's portfolio of HIV treatments is that they are all combination treatments built on top of a single treatment, Viread, which will face its first patent expirations in 2017.
Gilead's top seller, Atripla, is a combination of Viread and another antiviral drug, Emtriva. Its second best-selling drug, Truvada, is a triple combination ("triple pill") of Viread, Emtriva, and Merck's Sustiva. Its newest HIV drug, Stribild, is a four-way combination ("quad pill") of Viread, Emtriva, the HIV drug EVG, and cobicistat, a medication that inhibits liver enzymes from metabolizing HIV medications.
It's a clever strategy that allows Gilead to maximize sales of HIV treatments as long as it can, especially if its newer triple and quad pills are considered more convenient and effective treatments. However, there are also concerns that generic versions of Viread could simply bring the whole house down.
Therefore, sofosbuvir's approval could help Gilead enter a new phase of growth by diversifying its drug portfolio away from HIV treatments. Gilead is already testing its combo drug strategy on sofosbuvir with two new combination hepatitis C treatments -- one which combines sofosbuvir with another new hepatitis C drug ledipasvir, and another triple pill which combines that combination pill with ribavirin.
What an approval would mean for Johnson & Johnson
Johnson & Johnson, on the other hand, is far less ambitious with simeprevir than Gilead is with sofosbuvir.
J&J is only seeking the approval of the treatment for hepatitis C patients with the type 1 genotype. Like sofosbuvir for type 1 hepatitis C patients, simeprevir must be administered with an injection of pegylated interferon and a dose of ribavirin. However, the treatment might not benefit 48% of patients with the type 1 genotype who have a particular polymorphism known as Q80K -- which narrows down the potential market for simeprevir even further.
Due to its narrower appeal, sales estimates for simeprevir are considerably lower that sofosbuvir, with analysts at Bernstein estimating $400 million in peak annual sales by 2016.
Yet for J&J, gaining a new hepatitis C treatment isn't a top priority for the company, which generates the majority of its pharmaceutical revenues from the blockbuster rheumatoid arthritis treatment Remicade, which accounted for 24% of the segment's top line last quarter.
Instead, J&J has plenty of other more exciting treatments to keep an eye on, such as ibrutinib, a blood cancer treatment that it is co-marketing with Pharmacyclics, and Invokana, a first-in-class diabetes treatment which helps diabetics excrete excess blood sugar through the urine.
Although the approval of simeprevir would be an added bonus for J&J, don't expect $400 million in annual peak sales to mean much for a company whose pharmaceutical business generated $25.4 billion in sales in 2012.
Don't forget about AbbVie
Last but not least, AbbVie's (NYSE: ABBV ) combination hepatitis C treatment should not be overlooked.
Like Gilead, AbbVie is looking toward hepatitis C treatments for diversification. One of the most common criticisms of AbbVie, which was spun off of Abbott Laboratories last year, is that it is far too dependent on its blockbuster rheumatoid arthritis drug, Humira, which generated 55% of its revenue last quarter.
AbbVie's treatment is also orally administered, but it requires four pills -- three in the morning and one at night -- and is only being tested on the type 1 genotype, on which it has demonstrated similar cure rates as sofosbuvir. Back in June, AbbVie declared that it could possibly beat Gilead to a market approval, although the company has remained relatively quiet on the issue ever since.
The Foolish takeaway
There is certainly plenty of hype about the next generation of hepatitis C treatments, but investors should cut through the headlines to better understand what each upcoming treatment means for each company.
Companies like Gilead and AbbVie have the most to gain if their treatments succeed, due to their need for diversified growth. For larger companies like Johnson & Johnson, a new hepatitis C treatment is just another brick in the wall.
However, all of these treatments are scientifically significant, since they represent higher cure rates, shorter treatment times, and easier methods of administration, which could substantially improve the quality of lives for patients.
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