Gilead Sciences (NASDAQ:GILD) is a Goliath in hepatitis C treatment; however, the company is shifting its research spending in the future away from hepatitis C to other indications, and that decision could have big implications on the hepatitis C market in the long term. Let's take a closer look at the hepatitis C market and Gilead Sciences' decision to press the pause button on hepatitis C R&D.

Image source: Getty Images.

First, some background

Hepatitis C is one of the most lucrative indications for drugmakers, and Gilead Sciences is the dominant player in disease treatment.

The Centers for Disease Control estimates that there are 3.5 million people in the United States with hepatitis C, and that between 40% and 85% of these patients are unaware they've been infected. Globally, the World Health Organization believes between 130 and 150 million people are infected with hepatitis C, including 15 million people in Europe.

Hepatitis C has six genotypes. The most common (and easiest to treat) is genotype 1, which represents about 70% of chronic HCV infections in the United States. Of the rest, 15% to 20% of cases are genotype 2, 10% to 12% are genotype 3, 1% is genotype 4, and less than 1% are genotype 5 or 6.

Historically, hepatitis C treatment offered coin-flip cure rates and involved multidrug cocktails laden with side effects and dosed over as many as 48 weeks, but that began to change rapidly beginning in 2013. Today, cure rates have reached nearly 100%, the co-administration of drugs with unfavorable side effects has largely been eliminated, and treatment can last as few as eight weeks.

The significant shift in hepatitis C treatment is due largely to new drugs launched by Gilead Sciences. In late 2013, Gilead Sciences' won FDA approval of Sovaldi, an oral HCV therapy that's become the backbone of Gilead Sciences' HCV product lineup and is mostly used in non-genotype 1 patients. Harvoni, a combination of Sovaldi and another drug, ledipasvir, hit the market in October 2014, and it's primarily used in hepatitis 1 and hepatitis 4 patients. Also, Gilead Sciences' Epclusa, a pan-genotype therapy, won approval this summer. Eplcusa is primarily being positioned for use in genotype 2 and genotype 3 patients. Most patients are given these drugs over 12 weeks; however, roughly 45% of genotype 1 patients can be given Harvoni over an eight-week period.

In 2015, Gilead Sciences' drugs were used to treat about 90% of the 250,000 patients who started treatment in the United States, and as a result, the company's hepatitis C drugs exited 2015 with an annualized global sales run rate of roughly $20 billion.

Currently, Gilead Sciences' drugs are treating about 85% of HCV patients, and in the third quarter, U.S. patient starts were tracking at an annualized 244,000 patients. As a result, the company's global hepatitis C sales clocked in at an annualized pace of $13.3 billion in the third quarter. For perspective, the company's U.S. hepatitis C product sales were $2 billion in Q3, down 37% year over year, despite Epclusa's launch in June.

Image source: Gilead Sciences.

Shifting gears

The drop-off in hepatitis C revenue is tied to both fewer patient starts and increased competition. Many patients with advanced cases of hepatitis C have already been treated, and that's leading to a normalizing of quarterly patient starts. A healthier proportion of hepatitis C patients receiving treatment is also shifting the product mix toward the eight-week Harvoni treatment course, which costs less than the 12-week regimen.

Meanwhile, new, cheaper hepatitis C drugs from AbbVie and Merck & Co. are crimping Gilead Sciences' hepatitis C revenue because they're forcing Gilead Sciences to offer more discounts than last year. 

In the wake of a maturing and more competitive market, Gilead Sciences has decided to focus its future R&D spending elsewhere. That suggests Gilead Sciences' three-drug combination pill (Sof/Vel/Vox) will be its last HCV drug -- at least for a while. Gilead Sciences' management plans to file for approval of this therapy soon, and if it's approved, it will be positioned as a salvage therapy for use in patients who have failed to be cured by other treatments.

In discussing management's decision to concentrate on other indications, CEO John F. Milligan said:

From a pipeline perspective, with SOF/VEL/VOX being our fourth generation of HCV product now being approved, there really isn't much left in terms of unmet medical need. And so from a pipeline perspective, this is really the end of what we'll be developing in terms of HCV molecules and that will allow us then to turn our attention to the important aspects in our fibrosis and NASH franchises and our oncology franchises. So, we've really largely turned our attention away from HCV to those areas already.

Looking forward

Gilead Sciences' news could give AbbVie and Merck & Co. an opportunity to gain share if they continue developing new therapies that can compete better. AbbVie's ABT-493 plus ABT-530 mash-up, for example, is in late-stage studies that include an eight-week dosing option. If trials are successful, that therapy could compete more effectively against the short-duration Harvoni regimen in genotype 1.

A pause in R&D development at Gilead Sciences could also give Johnson & Johnson an opportunity to win market share someday. Johnson and Johnson is evaluating a multidrug cocktail (which includes an Achillion Pharmaceuticals drug) that has shown promise over treatment periods as short as six weeks.

For now, Gilead Sciences' dominance in the indication doesn't appear to be in question, but if the company rests too heavily on its laurels, it may see its market share fall if competitors ramp up their efforts.

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