Last Friday, the Food and Drug Administration approved Gilead Sciences' (GILD -1.15%) Sovaldi for the treatment of chronic hepatitis C.

Since Gilead acquired Sovaldi, together with its developer Pharmasset, for $11 billion in November 2011, now it's the time for both Gilead and its investors to reap the reward of their investment.

Gilead decided to set the wholesaler acquisition cost of Sovaldi at $28,000 for a 28-tablet bottle, or $1,000 per day. That translates to $84,000 for the 12 weeks of treatment recommended for most patients, and $168,000 for the 24 weeks needed for a hard-to-treat strain of the virus.

Since chronic hepatitis C affects an estimated 4 million people in the United States and more than 150 million worldwide, the financial reward could be enormous. Sovalid's sales are also expected to be strong from the start because many patients, on the advice of their doctors, have been putting off starting treatment until Sovaldi became available.

Hepatitis C virus
The hepatitis C virus is an enveloped single stranded RNA virus that needs to penetrate a host cell, which is generally a hepatocyte, in order to replicate. Once it replicates, the virus slowly damages the liver, leading to cirrhosis and in some cases to liver cancer. There is no protective vaccine against hepatitis C virus, and standard treatment regimens are often ineffective or toxic to the patient.

Sovaldi
The genome of the hepatitis C virus encodes three structural proteins (C, E1 and E2) and six non-structural proteins (NS2, NS3, NS4A, NS4B, NS5A, and NS5B).

Sovaldi is an oral nucleotide analog inhibitor of the hepatitis C Virus NS5B polymerase enzyme, which plays an essential role in the virus replication.

Sovaldi's efficacy has been established in patients with hepatitis C viruses that are infected with one of four different genotypes of the virus, and the FDA granted it priority review and breakthrough therapy designation because it offers high cure rates on a shortened 12-week course of therapy for many patients.

Competition
The current standard of care for hepatitis C involves up to 48 weeks of therapy with a pegylated interferon and ribavirin regimen, which may not be suitable for certain types of patients. Sovaldi is the first ever oral treatment regimen for genotypes 2 or 3 and the first regimen for patients awaiting liver transplantation to prevent hepatitis C virus recurrence, so there relatively no competition in this particular space.

However, AbbVie (ABBV 0.25%), Bristol-Myers Squibb (BMY 0.96%) and Johnson & Johnson (JNJ 0.67%) are developing similar all-oral regimens for hepatitis C that could reach the market in the next one to three years.

In September this year, the FDA approved Johnson & Johnson's new chronic Hepatitis C drug Olysio for use in the treatment of patients suffering from genotype 1 of the disease. Genotype 1 constitutes roughly 70% of Hepatitis C cases in the U.S. and is the most common form of the disease globally. According to some estimates, the new drug could achieve sales of over $450 million by 2016.

AbbVie is developing a three drug treatment regimen of ABT-333, ABT-450 and ABT-267. AbbVie's drug combination tested well and, according to the company, its interferon-free hepatitis C therapy showed roughly 96% of the patients who took the combination had no detectable levels of the virus after 12 weeks of therapy.

The FDA has given AbbVie's hepatitis C antiviral regiment, both alone and taken in combination with ribavirin, a Breakthrough Therapy designation, which could prove a swift review and an early launch.

Bristol-Myers is developing a daclatasvir-plus-asunaprevir treatment regimen in late phase 3, and, according to the company, the therapy might receive approval in Japan soon. 

Valuing Gilead

Gilead Sciences shares, which have doubled in value since the beginning of the year, are currently trading near their all-time highs. The company, which trades at a P/E ratio of 48, has generated $8.8 billion in the first nine months of the year and is expected to close the year with $10.4 billion in revenue. Since Gilead is currently valued at $114 billion, its 2013 price-to-sales ratio can be estimated at 10.

Matthew Roden, an analyst at UBS, said in a note recently that annual sales could surpass the record of around $13 billion achieved by Pfizer's (PFE -0.12%) Lipitor. That is more than Gilead's present total annual revenue levels and the comment would definity bring pure joy to many of Gilead's long-term investors.

Foolish takeaway
Although Sovaldi's approval was much anticipated by the investment community and has been factored in Gilead's share price, the sheer magnitude of hype and publicity surrounding the launch are likely to raise volatility in the stock with an upside bias.