Source: Johnson & Johnson

Hepatitis C treatment has been among the most dynamically changing markets in biotechnology. A host of companies are knee-deep in developing new, more effective treatments, but few have been as successful as Gilead Sciences (NASDAQ:GILD) and Johnson & Johnson (NYSE:JNJ).

Less than two years ago, the two biotech giants were locked in a horse race to develop the first oral hepatitis C drugs. Both successfully developed and brought to market their own therapies, but Gilead Sciences' Sovaldi won that game.

Now, a deal recently struck with Achillion Pharmaceuticals (NASDAQ:ACHN) puts Johnson & Johnson in position to threaten Gilead Sciences again. Here's what you need to know.

First, some background
Until the end of 2013, hepatitis C patients were treated with a side effect-laden cocktail of peginterferon and ribavirin that offered coin flip cure rates. The drugs were dosed over an astoundingly long 48-week cycle, and flu-like symptoms associated with the treatment caused roughly one in four patients to stop taking the medication prior to completion.

Because doctors lacked a good treatment option, millions of patients around the world risked a significant chance of liver failure.

According to the World Health Organization, more than 150 million people are living with hepatitis C globally, including 3 million people in the United States and 9 million in Europe.  With hepatitis C standing as the No. 1 cause of liver transplants, there was clearly a significant need for new medicines.

Goliaths race to market
Both Johnson & Johnson and Gilead Sciences invested big money to usher along new hep C drugs that reduced treatment duration and boosted functional cure rates.

Johnson & Johnson developed Olysio, a NS3/4A protease inhibitor that works by blocking an enzyme that hepatitis C uses to replicate in cells. In clinical trials, a treatment regimen including 12 weeks of Olysio and 24 weeks of peginterferon and ribavirin delivered cure rates north of 80%. Those results were good enough for the Food and Drug Administration to approve Olysio in November 2013.

Meanwhile, Gilead Sciences developed Sovaldi, a nucleotide analog polymerase inhibitor that infiltrates the RNA that is used by the hepatitis C virus to spread and interrupts the HCV life cycle. In clinical trials, Sovaldi delivered functional cure rates as high as 90%, while also eliminating many patients' need to take peginterferon. The FDA approved Sovaldi in December 2013.

Winner emerges
Sovaldi's arguably better efficacy and safety made it the gold standard for hepatitis C treatment last year. In its first quarter on the market, Sovaldi posted more than $2 billion in sales and reached reach billion-dollar blockbuster status faster than any other drug. That momentum accelerated throughout the year, with Gilead's drug notching total sales of more than $10 billion in 2014.

Johnson & Johnson's Olysio was highly profitable, but not nearly as commercially successful as Sovaldi. Despite becoming a second-tier option, doctors discovered that prescribing Olysio alongside Sovaldi improved the latter's already high cure rate. As a result, off-label use of Olysio and Sovaldi translated into $2.3 billion in Olysio sales last year.

Source: Gilead Sciences

That was a solid performance, but Olysio's success is likely to be short-lived. In October, Gilead Sciences won FDA approval of Harvoni, a mashup of Sovaldi and the NS5A inhibitor ledipasvir.

Harvoni casts aside both peginterferon and ribavirin for most patients, offers cure rates in the mid-90% range, and reduces treatment duration to eight weeks for up to 45% of genotype 1 hepatitis C patients.

In the fourth quarter of 2014 -- its first quarter on the market -- Harvoni's sales eclipsed $2 billion; in the first quarter of 2015, sales pushed past $3 billion. That success has come at Olysio's expense, as sales of J&J's drug slumped 33.9% year over year in the first quarter, to $234 million. 

A new battle emerges
Although Gilead Sciences won the first battle for improving hepatitis C efficacy and safety, Johnson & Johnson thinks it has a shot at winning the next fight over treatment duration.

In October, Johnson & Johnson spent $2 billion to buy the privately-held Alios to get its hands on nucleotide inhibitors AL-335 and AL-516. The company also just licensed global rights to Achillion Pharmaceuticals' hepatitis C pipeline, which includes a second-generation NS5A inhibitor.

Achillion's NS5A inhibitor, ACH-3102, is in small midstage trials that are studying its use alongside Sovaldi. In both eight-week and six-week studies, using ACH-3102 and Sovaldi together cured 100% of patients, suggesting ACH-3102 could be more robust than Gilead Sciences' ledipasvir.

If so, combining ACH-3102 with Alios' nucleotide inhibitors, or with Achillion's own nucleotide inhibitor, ACH-3422, could result in a treatment that works as well as Harvoni, but that also significantly reduces treatment duration.

Looking ahead
Johnson & Johnson has indicated that it plans to advance the study of ACH-3102 in combination with an undisclosed NS3/4A protease inhibitor and an NS5B polymerase inhibitor in a bid to develop a pan-genotype, short-duration cure. If this proves successful, then it could pose a new challenge to Gilead Sciences. However, investors might not want to count Gilead out. It is working on its own next-generation pan-genotype therapies that could also shorten treatment duration, and that means interested investors are likely to have plenty to consider as this next battle unfolds.