Source: Gilead Sciences.

Gilead Sciences (GILD 0.45%) got the FDA go-ahead last week for its next generation Harvoni, a hepatitis C drug that offers what amounts to a functional cure for most hepatitis C patients. The approval isn't a surprise. Industry watchers and Gilead competitors were widely expecting a green light based on impressive late stage trial data showing that as many as 99% of patients taking Harvoni were effectively cured of the disease.

Those results sparked doctors to begin warehousing patients for treatment during the third quarter; but doctors weren't the only ones watching regulators closely last week. Fears tied to Harvoni's pricing likely had executives at healthcare insurers like UnitedHealth Group (UNH 1.66%) on the edge of their seats, too.

Overcoming pushback
Harvoni isn't Gilead's first breakthrough drug for treating hepatitis C; that moniker belongs to Sovaldi. Gilead paid more than $11 billion to buy Pharmasset in 2012 to acquire Sovaldi. When FDA regulators approved Sovaldi last December, Gilead shocked the industry by slapping an $84,000 price tag on a 12-week treatment course.

Sovaldi's price was a significant jump from Vertex Pharmaceuticals' (VRTX 0.54%) previous blockbuster hepatitis C drug Incivek, which cost about $50,000. It also marked a massive increase from the $20,000 payers were coughing up for a side-effect laden treatment course of ribavirin and peg interferon just a few years earlier.

Sovaldi's price prompted specialty drug distributor Express Scripts (ESRX) to yell "foul" and led to a wave of Congressional inquiries to investigate whether Gilead's pricing was exorbitant and ostensibly cold-hearted. The attention made Sovaldi the most controversial, revolutionary medicine approved in recent history. Through it all, however, Gilead remained unfazed and unwilling to budge on Sovaldi's cost.

Instead, Gilead rolled out a slate of evidence suggesting that Sovaldi's price was not only in line with the cost of treating patients with a combination of Incivek, ribavirin, and peg interferon, but was also a bargain when compared to the nosebleed spending associated with liver transplants for the sickest of hepatitis C patients. As a result, Sovaldi became the fastest drug ever launched to reach the $1 billion blockbuster sales mark, leading to Gilead's Sovaldi sales totaling more than $5 billion through the first six months of this year.

Similar roadmap?
Harvoni's efficacy is undeniable. Depending on the genotype of the disease, functional cure rates ranged in the mid to high 90% range. Even more importantly, Harvoni finally casts aside the use of ribavirin and peg interferon for most patients, significantly reducing the number of side effects endured by those taking previous generation treatment regimens.

Since Sovaldi's efficacy warranted a high price, Gilead has similarly priced Harvoni at a premium. A 12-week course of treatment will set payers back $94,500.

That's a heady price that investors should take a moment to consider. According to Gilead, just 70,000 of the nearly 3 million people diagnosed with hepatitis C in the United States were treated with Sovaldi in the first two quarters; yet, Gilead's sales totaled in the billions. Because Harvoni is likely to displace Sovaldi as the go-to treatment, its higher price suggests Gilead's sales (and profit) will climb during the next 12 months -- that is, if payers agree to pay for it. Gilead's on the offensive to convince payers of the merits of Harvoni and its nearly six-figure price tag.

Alongside Gilead's price announcement, the company was quick to remind people that as many as 40% of hepatitis C patients may be able to achieve a functional cure in eight weeks rather than 12 weeks. The cost to treat those patients, who include those previously untreated without liver disease, would come in at just about $63,000, or 25% less than it would have cost to take Sovaldi.

The bigger picture
Gilead's Harvoni is a game-changing drug for the 120 million people diagnosed with the disease globally. It's pricing will likely incite scrutiny, but the company appears to have plenty of cover justifying it. A study conducted by the Henry Ford Health System in 2011, for example, found that the costs for caring for hepatitis C patients run an average of $24,175 per year. If so, even at this price, Harvoni appears a relative bargain.