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Do Johnson & Johnson's Results Suggest a Pop or Drop for Gilead Sciences?

Johnson & Johnson's (NYSE: JNJ  ) Olysio surprised in the first quarter, as doctors increasingly turned to prescribing it alongside Gilead's (NASDAQ: GILD  ) Sovaldi for patients intolerant of, or unwilling to take, interferon. The fact that Olysio continued to be prescribed in the second quarter may not have been shocking, but the fact that its sales doubled from the first quarter might be. That doubling suggests that either more patients were treated for hepatitis C in the quarter, or that a larger number of patients who would otherwise have been treated with Sovaldi alone are being treated with the combination, instead.

Source: Gilead Sciences.

First, a bit of background
Olysio won FDA approval at the end of last November, and Sovaldi was approved about a week later in December; but, based on clinical trial results, Sovaldi is the better drug, particularly in patients with a common specific gene mutation known as Q80K.

Although Sovaldi's clinical results were better than Olsyio's, doctors interested in eliminating interferon from treatment protocols have embraced dosing Olysio alongside of Sovaldi. That combination approach translated into $350 million in sales for Olysio during the first quarter, and more than $830 million in sales during the second quarter.

Source: Department of Veteran Affairs

Potential impact for Sovaldi
It's anyone's guess what Sovaldi's total second-quarter sales will clock in at when Gilead reports results on July 23rd. On the one hand, extrapolating Olysio's revenue relative to Sovaldi's revenue in the first quarter would suggest a huge -- and somewhat unfathomable -- quarter for Sovaldi.

Sovaldi sales were 6.57 times larger than Olysio's in the first quarter, so Olysio's $831 million in sales would work out to $5.46 billion in Sovaldi sales in the second quarter. That eye-popping figure, however, likely substantially overstates Gilead's tally, because we don't know how many people were treated with the two-drug combination as a percentage of total patients versus the prior quarter.

If doctors decided to hold off on treating all but the most critical patients ahead of the potential approval of Gilead's Sovaldi and ledipasvir two-drug therapy, the total number of hepatitis C patients would be lower, suggesting that Olysio's outstanding results are due to increased use as a combo therapy, rather than a surge in patients.

That could be true given that the Sovaldi-plus-ledipasvir combination, which is currently in front of regulators with a decision date set for October 10th, was remarkably effective during trials. In phase 3, 94% of genotype 1 patients treated with the therapy in Gilead's Ion trials were effectively cured in eight weeks, and 98% were effectively cleared in 12 weeks.

Fool-worthy final thoughts
The hepatitis C indication is very hard for investors to predict because doctors have some flexibility to hold off on treatment, given how quickly new drugs are coming to market. If doctors believe Gilead's next-generation treatment offers a meaningfully better outlook than Sovaldi alone, it's likely that only the most critical cases were treated in the second quarter, and that treatment was likely with the Sovaldi and Olysio protocol.

That could be happening, but, according to IMS, Sovaldi's weekly prescription data continued to climb through the first half of the quarter, and only started falling in June. That means that the total number of scripts could still handily outpace the first quarter, leading to sequential sales growth.

We'll know soon enough whether that's the case; but for now, the only thing that's certain is that basing your outlook for Sovaldi sales on Olysio alone may prove to be folly, and that the number of people effectively cured next year will be far higher than this year. For that reason, investors may want to focus long term on this one.

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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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