Last year, the race to be the first next-generation oral anti-viral hepatitis C drug culminated with Vertex Pharmaceuticals (VRTX -0.06%) and Merck (MRK 0.37%) getting their drugs approved a little over a week apart. Vertex's Incivek went on to dominate the market.

But both drugs still require pegylated interferon, which has to be injected and has some nasty side effects. The year 2012 has been a banner year for drugmakers developing all-oral regimens that eliminate interferon.

Dueling leaders
With the next next-generation hepatitis C drugs, another duel has emerged. This time, between Gilead Sciences (GILD 0.23%) and Abbott Labs (ABT 0.63%).

Gilead jumped to the lead with its acquisition of Pharmasset at the end of last year. With it, the company gained access to sofosbuvir, formerly called GS-7977 and PSI-7977, which Gilead is combining with its home-grown GS-5885 to deliver a one-two punch.

Abbott operated somewhat in stealth mode, because it had all the necessary components to make a potent all-oral combination. The drugs will be part of the new AbbVie, which is set to be spun off as a separate company at the start of the new year.

It's hard to tell, at this point, which company will come out on top. The efficacy of the two combinations is approaching 100%, so the duel might come down to safety and convenience. Until we get phase 3 data, the jury is still out on the former. Gilead seems to have Abbott beat on the convenience side; its combination only has to be taken once a day, while Abbott's might need to be taken twice a day. But we still need to see how fast the drugs can cure patients. Taking a drug twice a day for 12 weeks might trump once-a-day for 24 weeks.

That's great, but...
Quite a few other drugmakers presented positive data for their hepatitis C compounds this year. Vertex's VX-135 here. Achillion Pharmaceuticals' (ACHN) sovaprevir here. Idenix Pharmaceuticals' IDX184 (Nasdaq: IDIX) here.

But these drugs aren't particularly useful on their own. To produce substantial cure rates, they'll need to be combined with other drugs. Gilead and Abbott don't appear to need the added help, leaving the drugs somewhat in limbo.

Some companies have joined forces to explore combined therapies. Vertex, for example, linked up with both Johnson & Johnson (JNJ -0.46%) and GlaxoSmithKline (GSK 0.49%) to test their drugs in combination.

It seems unlikely that the consortiums will be able to catch Gilead and Abbott; but, perhaps they'll be able to produce treatments that are safer and/or require a shorter dosing regimen. With the head start that Abbott and Gilead have, me-too isn't going to cut it.

Safety matters
Hepatitis C drugs have an insanely high efficacy rate. Not every drug works; Vertex had a drug fail in phase 1 trials this year. But if a drug is able to knock down the virus in a few patients in a phase 1 trial, there's a real good chance it'll rid patients of the virus in a phase 3 trial.

That translation of efficacy gives investors a false sense of security when it comes to the approvability of hepatitis C drugs. Remember, they need to be both efficacious and safe. The latter shouldn't be ignored for drugs moving into phase 2 and phase 3 trials when more patients receive the drug and side effects that are serious, but infrequent, can be revealed.

Bristol-Myers Squibb's (BMY 0.34%) investors learned that lesson the hard way. The phase 2 trial of BMS-986094 was stopped this year because of safety issues. The FDA also put a pair of related drugs from Idenix on hold over concerns that they could cause the same adverse events.

Onward and upward in 2013
Like 2012, there will be plenty of data next year. Gilead should have results from multiple phase 3 trials in the first quarter of next year . Abbott's data won't be available that early, but it will have some more phase 2 data in 2013 . Gilead looks like it's the front runner, but the lead might not be meaningful enough to make a difference by the time they get on the market.

Idenix should learn whether the FDA is willing to remove the clinical hold early next year. My prediction is the agency will allow the biotech to resume its clinical trials, which is why I picked it as the company I see as having a 2013 that looks to be better than its 2012.

The big wildcard is whether we'll see more acquisition in the hepatitis C space. After the acquisitions of Pharmasset and Inhibitex, other small biotechs, such as Idenix and Achillion, traded with acquisition premiums attached to them. Shares have dropped since, as investors finally wised up to the fact that acquisitions weren't a foregone conclusion. They'd be best off remembering that as we move into 2013.