Gilead Sciences (NASDAQ:GILD) reported its first-quarter earnings this week, and those results show that its hepatitis C drug revenue continues to slide because of new competition from AbbVie Inc.'s (NYSE:ABBV)Mavyret, which won approval in August. Was Gilead Sciences wrong to stop developing new hepatitis C treatments? AbbVie's results suggest the answer to that question is yes.
What's hepatitis C?
Hepatitis C is a potentially life-threatening liver disease that's most commonly spread by contact with the blood of someone who is infected with the hepatitis C virus (HCV), which exists in six genotypes.
Genotype 1 is the most common, and also the easiest to treat; it accounts for 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, approximately 1% are genotype 4, and less than 1% are genotype 5 or 6.
Hepatitis C turns into a chronic disease in up to 85% of those infected, and among that group, up to 70% develop liver disease. Sadly, as many as 20% of hepatitis C patients develop cirrhosis within 30 years, and about one in five patients will die from cirrhosis or liver cancer.
Efforts to limit the spread of the virus have led to fewer people being diagnosed with hepatitis C, but thousands of new cases are still reported in the United States every year, and an estimated 71 million people with chronic hepatitis C worldwide are likely to require treatment.
Reshaping an indication
When Gilead Sciences launched Sovaldi in December 2013, it transformed hepatitis C treatment. Up until that point, treating the disease required a cocktail of side-effect causing drugs that had to be taken for up to 48 weeks, and that delivered cure rates of only about 80%.
Sovaldi reduced treatment duration to as little as 12 weeks, eliminated the need for patients to take peginterferon (the drug responsible for many of the side effects in the prior treatment regimen), and delivered cure rates north of 90%.
Gilead Sciences improved treatment even further in 2014 when it rolled out Harvoni, and again in 2016 when it launched Epclusa. Harvoni delivered mid-90% cure rates in as little as 8 weeks for genotype 1 patients, while Epclusa was the first drug to significantly improve treatment duration and cure rates in as little as 12 weeks, regardless of genotype.
Competition puts the kibosh on research
These drugs were so revolutionary that they generated a tidal wave of demand, which quickly translated into tens of billions of dollars in revenue for Gilead Sciences. That success, however, was short lived.
The lure of profits derived from treating those millions of patients led AbbVie Inc. and Merck & Co. to develop new drugs of their own with similar efficacy -- and lower prices. In response, Gilead Sciences aggressively cut its prices to maintain market share, but that seriously crimped its revenue.
The addressable market also began to decline as more people were being treated and cured than than were being diagnosed with new cases of hepatitis C. The combination of competing drugs, price cuts, and declining demand caused Gilead Sciences' hepatitis C treatment sales to plunge. In the first quarter of 2016, they were about $4.3 billion; in Q1 2017, they were down to to $2.6 billion, and by Q1 2018, they'd slid to $1.05 billion.
Given the shrinking market opportunity, Gilead Sciences decided to halt its research into new hepatitis C treatments in late 2016, shifting its focus instead to other indications, including nonalcoholic steatohepatitis (NASH), another liver disease.
AbbVie pockets Gilead's profit
Unlike Gilead Sciences, AbbVie continued developing its next-generation hepatitis C drug, Mavyret, and based on its performance, it seems that was the right decision.
In clinical trials, Mavyret delivered a 99% functional cure rate in patients with genotype 1, 2, 4, 5, or 6 and including the tough to treat genotype 3 patients, Mavyret delivered a 97.5% functional cure rate after only 8 weeks of treatment.
The FDA approved Mavyret in August 2017, and it's been siphoning away Gilead Sciences hepatitis C business ever since. Mavyret's sales were nearly $500 million in Q4 2017, and in Q1 2018, they were nearly $850 million, which gives it a $3.4 billion annualized run rate after less than a year on the market. That performance is better than AbbVie predicted, so management recently increased its full-year hepatitis C sales outlook from $2.5 billion to $3.5 billion.
AbbVie doesn't think the market for this drug will disappear overnight, either. On the company's earnings conference call last month, CEO Richard Gonazalez said:
"[T]his is a market that is going to be around for a long, long time and be a very big market. And I think now, essentially you have us and one competitor who have the lion's share of this marketplace. We're obviously doing extremely well. We have leadership position in a number of markets. And where we don't have the leadership position, we're awfully close to the market leader and continuing to move in that direction."
AbbVie's Mavyret appears to be the best treatment on the market, and I suspect it's going to continue to win away more of Gilead Sciences' sales in the indication for the foreseeable future. If so, then Gilead Sciences will find its decision to stop researching new hepatitis C treatments to have been a costly one.