Source: Johnson & Johnson

Johnson & Johnson (JNJ -0.69%) is one of the planet's biggest drugmakers. Its drugs are used for a variety of diseases, including cancer and autoimmune disorders, but it's J&J's sales of the hepatitis C drug Olysio that are most interesting to Gilead Sciences (GILD 0.07%) investors. That's because Olysio is mostly prescribed alongside Sovaldi in hepatitis C patients who are unwilling, or unable, to take peginterferon.

Since Olysio is commonly prescribed with Sovaldi and J&J reported its third quarter earnings last week, let's take a closer look and see what J&J's results may say about Gilead's third quarter performance.

Hand in hand
Olysio has proven a remarkable, if not surprising, success for J&J. The company won FDA approval just days prior to Sovaldi and most, including me, thought its sales would fall flat given that it underperformed Sovaldi during clinical trials. Instead, sales took off following updated guidelines from the American Association for The Study of Liver Diseases, or AASLD, which were released in January.

The AASLD guidance called for the combined use of Sovaldi and Olysio in patients who were either intolerant to peginterferon or who had failed on previous treatment with peginterferon and ribavirin. As a result, sales of Olysio totaled $354 million in the first quarter and surged to $831 million in the second quarter. That strength provided an early (if not precise) glimpse into what investors could expect when Gilead reported its own quarterly results. First quarter Sovaldi sales reached $2.2 billion and second quarter sales soared to $3.5 billion.

Olysio's ability to help forecast the direction of Sovaldi, however, cuts both ways, and results from J&J's third quarter suggest that Gilead's Sovaldi sales may have slid from the second quarter. Olysio notched sales of just $796 million in the third quarter, down 4% from Q2. Olysio's sales fell by 7.5% in America, and that's especially concerning given that Gilead's U.S. Sovaldi sales totaled $3.03 billion during Q2, accounting for 85% of the company's Sovaldi revenue. We won't know for sure until Gilead reports, but I suspect we may see flat revenue from Sovaldi.

Hitting the wall?
Olysio's fall could have been caused by fewer patients needing combination therapy due to tough cases being treated quickly following the issuance of the AASLD guidelines, but it's more likely that the drop-off in demand is tied to doctors warehousing patients during the quarter ahead of new treatments from Gilead, AbbVie (ABBV -1.03%), and Bristol-Myers (BMY -0.27%).

Although Sovaldi marks a vast improvement over prior generation drugs, it's still imperfect. Sovaldi's 12 week treatment duration is less than ideal, plus Sovaldi still requires the use of ribavirin for many patients. Given Gilead's next generation drug, Harvoni, reduces the treatment course to as little as eight weeks and finally casts aside peginterferon and ribavirin in virtually all patients, doctors chose to wait for its approval in all but the most serious cases.

That patient warehousing is evident when analyzing Sovaldi's third quarter weekly script data. According to Bloomberg Intelligence data, the number of total Sovaldi prescriptions and the number of new Sovaldi prescriptions both slumped throughout last quarter.

Source: Bloomberg Intelligence data

Harvoni won the FDA go-ahead recently, so it's certainly possible that if Gilead's sales retreat in the third quarter, sales will bounce back sharply in the fourth quarter. But Harvoni's approval likely relegates Olysio to the back burner for most doctors. As a result, J&J will likely face a headwind next year given that year-over-year sales comparisons will be tough. According to J&J management, Olysio added about $0.20 to earnings per share during the first nine months of this year, so J&J will need other fast-growing drugs in its stable to pick up the pace if it hopes to make up for disappearing Olysio sales.

As for Gilead, investors will likely need to temper their expectations for Q3 sales and profit. That may be unwelcome news for investors given they've become accustomed to Sovaldi's blockbuster growth in the first two quarters. Investors will find out for sure when Gilead reports earnings later this month, but in the meantime they shouldn't be surprised to see Gilead's share price swing more wildly between now and then.