What You Should Know About Gilead's Sovaldi And Johnson & Johnson's Olysio

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Over the past five years, few drugs have been as highly anticipated as Gilead's (NASDAQ: GILD  ) Sovaldi, a new-generation oral treatment for hepatitis C infection.

Sovaldi won FDA approval in December, and despite only being available for a few weeks, Sovaldi still recorded $140 million in sales during the fourth quarter. That momentum accelerated in the first quarter, with Sovaldi generating an eye-popping $2.3 billion in sales.

But Sovaldi wasn't the only next generation hepatitis C treatment approved by the FDA last winter. The agency also gave the nod to Johnson & Johnson's (NYSE: JNJ  )  Olysio. Sales estimates for Olysio were more tempered than for Sovaldi; however, Johnson's first quarter results were impressive given the company sold $350 million worth of Olysio in the quarter.

While Sovaldi is likely to continue to generate blockbuster sales this year, the outlook for Johnson's Olysio is murkier given new therapies from AbbVie (NYSE: ABBV  ) , Bristol-Myers (NYSE: BMY  ) , and Merck (NYSE: MRK  ) may soon challenge it.

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Working with Sovaldi
Before Gilead won FDA approval for Sovaldi, J&J won approval for its own next-generation hepatitis C drug, Olysio. Although Olysio got the nod ahead of Sovaldi, investor enthusiasm for Olysio's potential has been tepid.

That's because Olysio wasn't as effective as Sovaldi in trials, particularly in patients with a polymorphism known as Q80K that occurs in about half of those patients with the most common variation of hepatitis C, genotype 1a.

Additionally, while drugmakers continue to advance therapies that eliminate the pesky, side-effect-laden interferon and ribavirin, Olysio's approval eliminated neither.

As a result, Olysio's significant sales in the first quarter took many by surprise.

However, diving a bit deeper into Johnson's first-quarter conference call sheds light on how Olysio managed to rack up more than $350 million in sales. As it turns out, most of Olysio's use is alongside, rather than instead of, Sovaldi.

J&J owes that better-than-expected outcome to guidelines issued by the Liver Society in January. Those guidelines recommend the use of Olysio and Sovaldi in genotype 1 patients that can't tolerate, or are ineligible for peg-interferon. That suggests that most of Olysio's sales also have a corresponding sale of Sovaldi.

Of course, both drugs face potential competition, and particularly given pricing pressure on Sovaldi (a full course of treatment costs $84,000, which has provoked an enormous payer outcry), investors will want to watch these competing drugs very carefully.

AbbVie and Bristol-Myers are arguably the two closest to commercialization.  In phase 3 trials, AbbVie's three drug cocktail cleared hepatitis C in 90% of genotype 1a patients when used without ribavirin, and 97% of patients when combined with ribavirin. Results were even better in genotype 1b patients, rising to 99% among this easier-to-treat patient population. AbbVie filed for FDA approval of this cocktail in late April.

Bristol-Myers is also nearing approval for its hepatitis drug, daclatasvir. Daclatasvir posted up to 100% cure rates in phase 2 trials that combined it with Sovaldi. Based on that mid stage success, European regulators have already approved the combination for compassionate use in critical cases of hepatitis C. Bristol filed for FDA approval of daclatasvir, and another hepatitis C drug, asunaprevir, in early April.

Merck appears to be furthest away from an FDA green-light, given it just reported phase 2 data for its two drug, one pill, combination of MK-5172 and MK-8742. That regimen eliminated the virus in 98% of genotype 1 patients during those trials. Based on that success, Merck is advancing the therapy into phase 3 trials.

Fool-worthy final thoughts
If AbbVie, Bristol, and Merck do get the FDA nod, they may take some market share from Sovaldi and Olysio, which currently have the market all to themselves.

I think Gilead is likely less at risk of losing its market share to these new players, since it has already filed for approval for its second-generation Sovaldi therapy.

Gilead's latest approach combines Sovaldi with another Gilead drug, ledipasvir. If the FDA approves that therapy this fall, that combination could become the first approved therapy to eliminate the use of both interferon and ribavirin -- and don't forget the dosing advantage of one tablet a day.

Meanwhile, Bristol-Myers has also filed for approval of its daclatasvir and asunaprevir combination, and AbbVie plans to file approval for a three drug combination soon, too.

That means this market is about to get very crowded, very soon. Most are confident that Gilead will ultimately be the biggest winner out of all the new treatments, but it remains to be seen which company will come out with the runner-up. For now, it's Olysio.

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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