Source: Gilead Sciences via Google Maps

Following the FDA approval of AbbVie's (NYSE:ABBV) hepatitis C cocktail Viekira Pak, and Express Scripts' (NASDAQ:ESRX) decision to make Viekira Pak its exclusive hepatitis C drug on its preferred formulary, investors endured a nausea-inspiring share price drop in Gilead Sciences (NASDAQ:GILD).

However, Gilead Sciences shares are rebounding from their lows following news that the company has inked its own deal with CVS Health (NYSE:CVS) that makes Harvoni the go-to hepatitis C therapy for patients covered by plans relying on CVS Health's prescription benefit management business.

Moving chess pieces
The stakes are incredibly high for these two drugmakers. After Gilead Sciences launched its first-generation hepatitis C drug, Sovaldi, last December, the drug went on to generate more than $8.5 billion in sales through the first nine months of the year.

That success stemmed from a combination of a patient population that numbers nearly 3 million strong and Sovaldi's sky-high price tag of around $84,000 for a 12-week treatment course. Sovaldi's pricing shocked payers, including Express Scripts and state Medicaid departments, which fired back at Gilead Sciences by restricting Sovaldi's use to only the sickest of patients.

However, even when faced with the rationing of access to Sovaldi, Gilead Sciences remained undaunted in October, when it priced its second-generation hepatitis C drug, Harvoni, at $94,500 for a 12-week treatment course, a price that was about in line with Sovaldi's price plus the cost of ribavirin, a drug that was commonly being prescribed alongside Sovaldi, but wouldn't be prescribed alongside Harvoni.

Gilead Sciences' Harvoni pricing decision drew additional ire from Express Scripts, which had become all too willing to see a competitor like AbbVie emerge. As a result, in hindsight, it probably isn't too surprising that Express Scripts sat down with AbbVie following the FDA approval of Viekira Pak to offer exclusivity on its preferred drug formulary in exchange for an undisclosed price cut.

Source: AbbVie.

Impact on sales
AbbVie's Viekira Pak is an undeniably good drug with cure rates in the mid to high 90% range; however, it's arguably not as good of a drug as Harvoni.

Viekira Pak requires patients to take three pills in the morning and another pill in the evening, and patients are likely to continue to be prescribed ribavirin alongside Viekira Pak, which means even more pills.

Meanwhile, Harvoni, arguably offers equal to or better cure rates (without ribavirin) in the common hepatitis 1a genotype than Viekira and is dosed as just one pill taken daily. Additionally, 40% of hepatitis type 1a patients may qualify to take a shorter eight-week treatment course of Harvoni, while all Viekira Pak patients must take the cocktail for 12 weeks.

Absent a deal like the one AbbVie made with Express Scripts, Harvoni's advantage may have relegated Viekira Pak to second-line status, crimping Viekira Pak's peak sales opportunity in the process.

Instead, by entering into an agreement with Express Scripts, AbbVie clears the way for Viekira Pak to achieve billion-dollar blockbuster status.

About 25 million people are covered by Express Scripts' preferred formulary, and since roughly 1% of the population is diagnosed with hepatitis C, and 70% of hepatitis C patients have the genotype 1 variation of the disease affected by AbbVie's deal, Viekira Pak is likely to be the go-to therapy for as many as 175,000 patients this year.

Although we don't know how much of a price discount AbbVie is offering Express Scripts, it's likely those 175,000 patients will translate into billions in sales. Why? Because even if AbbVie is charging Express Scripts half its $83,319 wholesale price, it would still mean this is a $7.3 billion revenue opportunity for Viekira Pak.

And that $7.3 billion will come directly at Gilead Sciences' expense, which also makes it little wonder that Gilead Sciences was willing to sit down with CVS Health (which operates the second largest pharmacy benefit management business behind Express Scripts) to lock up its position as the defacto therapy for patients covered by CVS Health's formulary -- a move that sidesteps the risk of AbbVie delivering a second blow to Harvoni's market share.

Gilead Sciences' exclusivity agreement with CVS Health for Sovaldi and Harvoni is also an important win given that CVS Health reported in the middle of December that Harvoni's prescription volume was tracking at roughly 2.5 times the levels notched by Sovaldi at the same point following its launch last year, and that Sovaldi's prescription volume hadn't slipped dramatically following Harvoni's launch, which suggests the total number of patients being treated is moving higher, not lower.

Stage is set
If CVS Health is right and overall hepatitis C treatment demand climbed, the fourth quarter could prove to be a blockbuster for Gilead Sciences. But the real impact of these competing deals on Gilead Sciences and AbbVie won't be known until the first-quarter earnings release. That's because Viekira Pak's just won FDA approval on Dec. 19, and Gilead Sciences' agreement with CVS Health began today.