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1 Drug More Important to Gilead Than Sovaldi

Gilead's (NASDAQ: GILD  ) Sovaldi roared out of the gate following its FDA approval in December. Sales of the drug totaled more than $2.2 billion in its first quarter on the market, making it the fastest drug to ever reach billion-dollar blockbuster status, and one of the planet's top-selling drugs. But it's Truvada, not Sovaldi that may prove more important to Gilead over the long haul.

Source: Gilead.

A big, crowded market
The market for hepatits C drugs is continuously evolving, and a host of competitors are angling for a piece of a market that Express Scripts estimates will grow by more than 200% in each of the next two years.

Source: Express Scripts.

Among them are new hepatitis C drugs from AbbVie (NYSE: ABBV  ) , Bristol-Myer's (NYSE: BMY  ) , and Merck (NYSE: MRK  ) that are expected to hit the market in the next year. Gilead is also expecting approval for its own Sovaldi/ledipasvir combination drug this fall. The breakneck pace of development means that the rise-and-fall nature of drugs for the indication may continue during the next few years.

Only three years ago, investors were clamoring to buy shares of Vertex Pharmaceuticals following the launch of Incivek, its blockbuster hepatitis C drug. However, doctors who were anticipating Sovaldi chose to warehouse all but the most critical cases, causing a massive drop in Invicek's sales, which eventually resulted in Vertex selling its royalty stream to Johnson & Johnson, and shifting its focus to Cystic Fibrosis.

Sovaldi's sales should accelerate, not decelerate this year; but doctors and patients will have far more treatment options next year, and that may mean fewer sales for Gilead.

Dept. of Veteran's Affairs

AbbVie is awaiting approval for a three-drug combination therapy that effectively cured 99% of genotype 1b patients during phase 3 trials. Since genotype 1 is the most common genotype, and the 1b variation accounts for a third of genotype 1 cases, aggressive pricing by AbbVie could win scripts away from Gilead.

Similarly, Bristol-Myers Daklinza -- formerly known as daclatasvir -- is another promising hepatitis C drug awaiting a decision from regulators that could cut into Gilead's market share.

The FDA is expected to announce a decision on Daklinza on November 30th and, if approved, doctors could begin combining it with other drugs to treat patients. Daklinza is likely to be dosed alongside Sovaldi in most patients, but in some cases, it may be dosed alongside AbbVie's drugs, or Johnson's Olysio, which won FDA approval last November. Daklinza could also be dosed alongside Bristol's other hepatitis C drug, asunaprevir, where the two have posted solid results in genotype 1b patients.

Investors shouldn't ignore Merck's efforts either. In April, Merck reported that its MK-5172 and MK-8742 therapy successfully eliminated the virus in 98% of genotype 1 patients in phase 2 trials. That's got Merck racing through phase 3 in a bid to catch-up to the other three, and Merck is also making a big bet on the next generation in treatment, too. In June, the company paid $3.8 billion to acquire Idenix, a development stage company with promising hepatitis C drugs in mid-stage trials.

Tackling HIV means chronic care
While Gilead and its competitors have effectively cured hepatitis C for most patients, HIV remains a life-threatening chronic condition affecting millions, which requires lifelong treatment. Gilead has been at the forefront of rolling out successful anti-HIV drugs, and the company currently produces more than $9 billion in revenue annually from its HIV treatments.

Source: Gilead

Truvada is one of the company's more recent launches (it was approved in 2012), and it's arguably one of the most important HIV drugs launched to date. That's because Truvada is the only drug approved by the FDA for HIV prevention in people at risk of contracting the disease.

More than 50,000 people are diagnosed with HIV every year, and more than 1.1 million are living with the disease in the United States, including an estimated 200,000 who haven't yet been diagnosed. That number is dwarfed by incidence rates outside America.

Source: CDC

According to the Center for Disease Control, or CDC, there were about 2.5 million new cases of HIV diagnosed in 2011 worldwide, and more than 34 million people living with the disease globally. In order to reduce those incidence numbers, countries, states, and insurers are going to need to aggressively seek out and promote solutions that can reduce HIV transmission.

As a result, Truvada has quickly become an important drug, but its use may climb even more during the next couple years. That's because attitudes toward the drug are improving. When the drug initially launched, some inappropriately attached a stigma to it over concerns that its use would encourage risky behavior by providing a false sense of security.

However, the CDC issuing guidelines this spring recommending its use, and the state of New York instituting an aggressive plan to effectively eliminate new HIV cases thanks, in part, to prescribing Truvada, are correctly erasing those misperceptions.

Fool-worth final thoughts
Truvada is already a top seller. Gilead sold more than $750 million of the drug in the first quarter, and Truvada's sales totaled $3 billion in 2013. Truvada's $3 billion in annual revenue pales in comparison to Sovaldi, but fewer competitors, a patent that doesn't expire until 2021, and the need to take the drug every day suggests that Truvada may be more important to the company over the long haul.

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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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