Gilead Sciences and Johnson & Johnson Push Vertex Out of Hepatitis C Race

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Following significant moves toward FDA approval for two hepatitis C agents last week -- sofosbuvir by Gilead Sciences  (NASDAQ: GILD  ) and simeprevir by Johnson & Johnson (NYSE: JNJ  )  -- competitor Vertex Pharmaceuticals (NASDAQ: VRTX  ) is cutting jobs associated with its hepatitis C drug and changing focus to the hopefully more profitable and less competitive cystic fibrosis space.

Vertex knew this day was coming, as the race to a new hepatitis C treatment has had major players Gilead, Bristol-Myers Squibb, AbbVie, and Johnson & Johnson long vying for a new interferon-free agent.

Vertex's Incivek is a first-generation oral agent against hepatitis C that is still used in combination with interferon and thus is not completely interferon-free (which is the ultimate goal for new therapeutics, given the unpleasant flu-like side effects of interferon). Incivek, as well as Merck's Victrelis were both approved in 2011 as protease inhibitors to stop replication of the hepatitis C virus; the new agents coming down the pipeline work under a similar mechanism, but better and with potential to be independent of interferon.

While now clearly a short-term asset, Incivek was quite successful at initial release. Sales peaked at $456.8 million in 2011 and helped Vertex reach profitability. However, as physicians stopped starting new patients on the agent, waiting for newer agents to gain approval, Incivek sales quickly declined. This past quarter alone, sales were down 66%. The company is on a $124.1 million loss this quarter, and the 15% workforce cut and restructuring is expected to product a $150 million to $200 million reduction in operating expenses this year.

Meanwhile, Gilead is investing $47 million and 80 jobs for the manufacturing of sofosbuvir, which achieved a unanimous recommendation from a panel of experts at the FDA last week. While sofosbuvir was tested in conjunction with interferon, it is expected to be the first-in-class oral, interferon-free hepatitis C treatment. Peak annual sales are estimated at $7 billion.

J&J's simeprevir also got unanimous support from an FDA panel, although it targets a narrower class of genotypes for hepatitis C. Both drugs will likely gain FDA approval this year. To seal the coffin, Bristol-Myers Squibb and AbbVie are both expected to file New Drug Applications next year and around 20 agents are in the hepatitis C pipeline.

It is no wonder Vertex is moving away for this quickly crowded space. In the release announcing the cost-cutting measures, CEO Jeffrey Leiden indicated his vision for opportunity in cystic fibrosis. Most likely he was referring to Kalydeco, a treatment for the genetic disease that was approved last year. So far, its 2013 total sales are growing at $261 million, already well surpassing the $171 million in total 2012 sales. Sales more than doubled for Kalydeco this quarter, to $101.1 million and Vertex's force for 2013 is $365 million in sales.

While a smart move, the shift will still likely take a toll just due to the smaller market for cystic fibrosis. Around 170 million people are infected worldwide with hepatitis C, as opposed to about 70,000 worldwide for cystic fibrosis. Patients can live a normal lifespan with hepatitis C, whereas cystic fibrosis is longevity-limiting -- the median age of survival for cystic fibrosis is in the 30s.

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