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There's no doubt about it -- the hepatitis C market is huge. There are 3.2 million people in the U.S. alone infected with the virus, according to the Centers for Disease Control and Prevention.
But one of the reasons for the large number of patients could be the downfall for hepatitis C drugmakers.
Hepatitis C is a chronic disease that's slow to progress. It eventually causes liver problems including scarring of the liver or liver cancer, but that's often years after the initial infection. In fact, many of those 3.2 million Americans don't even know they're infected.
The slow progression of the disease allowed doctors to put off treatment, called warehousing, and wait for Merck's (NYSE: MRK ) Victrelis and Vertex Pharmaceuticals' (Nasdaq: VRTX ) Incivek to work their way through the drug-development process. The previous generation of treatment options -- Merck's PegIntron and Roche's Pegasys -- cure only around half of the patients and had nasty side effects that weren't all that appealing, considering the flip-of-a-coin chance at a cure.
Clearly, many doctors and their patients have decided that they've waited enough. Incivek is off to a blustering start, registering $420 million in sales during its first full quarter on the market.
But Incivek isn't perfect. It still requires patients to take PegIngron or Pegasys, albeit for a shorter duration of time than it was used when the drugs were taken on their own. Multiple companies are going after an interferon-free regimen that would be taken orally.
Pharmasset, which is being bought by Gilead Sciences (Nasdaq: GILD ) , has a hepatitis C drug candidate, PSI-7977, which looks good so far as an interferon-free treatment. Gilead has other hepatitis C drug candidates it's developing that could be used in combination with PSI-7977 if it doesn't work on its own. And there are plenty of other drugmakers, including Achillion (Nasdaq: ACHN ) , Inhibitex (Nasdaq: INHX ) , Vertex, Merck, Johnson & Johnson, and Bristol-Myers Squibb (NYSE: BMY ) , developing other hepatitis C drugs that they hope can be part of an interferon-free cocktail.
It seems entirely possible that doctors will continue warehousing all but the most-progressed patients until there's an interferon-free treatment regimen that works as well as or better than the current standard of care. If that occurs, the peak sales of Incivek would be substantially diminished.
And then ...
If patients are going to wait for all-oral interferon-free regimens, why not wait until the drugs become generic and save some money? Granted, it'll take a while to get to that stage; patients being seen by doctors right now aren't likely to be thinking that way, but it seems entirely possible that the effective patent life of hepatitis C drugs could be cut short by a few years as patients considering treatment within a few years of patent expiration might just elect to wait.
And of course, at some point, the hepatitis C market will begin to shrink. Unlike HIV drugs that aren't really a cure, hepatitis C drugs rid the patients of the virus, so as more patients are cured, the number of newly infected individuals should drop. How far in the future the drop begins will be dictated by how quickly patients get on medication, so the faster the ramp-up in sales, the sooner sales will drop off.
Far enough in the future?
That's what every hepatitis C investor has to ask: Can you capture the value now and get out before things eventually blow up?
At this point, investors seem to be ignoring the future -- Pharmasset is up more than 500% over the last year -- but that seems a little risky for long-term investors. If you're going to invest in the space for any reasonable length of time, consider a company that has its hand in more than one market. Vertex, for instance, is developing drugs for cystic fibrosis, and it's on sale.
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