Gilead Sciences (NASDAQ:GILD) is a favorite healthcare stock for numerous Fools, and it's no surprise why. The recent stumble of AbbVie (NYSE:ABBV) in its hepatitis C efforts has boosted the share price of Gilead, which has two key treatments that fight the illness.

Fools Kristine Harjes and Todd Campbell take a closer look at recent developments in the battle against hep C, and how these two companies in particular are likely to fare.

Listen to the full podcast by clicking here. A full transcript follows the video.


Kristine Harjes: Hepatitis C has certainly been in the news a ton during 2015, and I think it's poised to be a big issue in 2016 as well. There are a handful of different companies that are working on improving treatment for hepatitis C, and in the most recent news, AbbVie, which makes a drug called Viekira Pak, and another one called Technivie, received news from the FDA that there was a safety alert going out that the FDA had received reports of liver failure and complications in patients taking these drugs that had already had scarring of the liver.

In reaction to this, AbbVie has said that a causal relationship between the treatments and the adverse effects hadn't actually been established, but the drugs couldn't be ruled out as a cause. Another result was that the label for the drugs is being updated to warrant against use in patients with more advanced liver scarring. This is 3%-5% of hepatitis C patients, just for context. I think people saw that news and they said, "AbbVie is not going to be a big player in hepatitis C anymore."

If they're potentially going to lose market share because of this, who do you think stands to be the big winner here? This is a no-brainer, for me at least, if you've listened to our show before. Todd?

Todd Campbell: Gilead Sciences.

Harjes: Woo!

Campbell: Not very surprising for longtime listeners, that's for sure. The news coming out of that -- AbbVie tried to downplay this on their earnings conference call, and I urge people to always dig into the transcripts of the conference calls, especially with top-selling, multibillion-dollar drugs to make sure there's nothing they could be aware that could shift the way market share looks. Certainly, as we go into 2016 a lot could theoretically happen that's going to shift shares around in hepatitis C.

AbbVie is one part of that, but it's an important part of it, because as we came into 2015, the big question on everyone's mind was, "How much market share can Viekera Pak steal away from Gilead Sciences' top selling drugs Sovaldi -- which launched in December of '13 -- and Harvoni, which launched in October of '14?" Those drugs have been massively successful. They're high-priced drugs, but they work very, very well, and as a result they've been used to treat hundreds of thousands of patients and they've generated out billions of dollars in revenue for Gilead Sciences.

Viekera Pak, over the first nine months of this year -- it won approval and launched in January -- has not reached the run rate that AbbVie had hoped and guided for coming out of 2014. AbbVie had hoped to see that drug putting up a run rate of about $3 billion per year. We're not quite there. In the third quarter it was about $469 million. You look at that and wonder why that's happening. It could be that there was some early insight into this problem with livers, as doctors were discussing with one another.

This revelation and addition to the label is not a deal-breaker for Viekera Pak, because it's still very successful in patients that don't suffer from liver disease already, but it certainly could mean fewer people are treated with it, especially since Sovaldi and Harvoni work so well. To some extent, the sales impact on AbbVie in 2016 may be offset by a recent approval in Japan, which is a major market for hepatitis C treatment.

I'm not willing to go out and say yet that the year-over-year sales will decline for Viekera Pak in 2016 because of this, because Japan should offset some of that downside risk, but it's definitely something to keep an eye on. I think most people should be re-evaluating their models on what they think Viekera Pak could do in the next 12 months.

Harjes: When you look at Gilead, you compare the numbers of Harvoni and Sovaldi, and they combine for $4.8 billion in sales during the third quarter. Todd quoted that Viekera Pak generated a revenue of $469 million in the third quarter. Half a billion dollars is not nothing, but it really pales in comparison to Gilead's numbers.

Gilead is claiming a 90% market share of hepatitis C patients. Clearly they're currently the dominating player, but is there anyone else other than AbbVie that's competing in this space and could stand to take down Gilead's dominance here?

Campbell: There are a couple. Bristol-Myers (NYSE:BMY) has a couple of drugs that are currently on the market. However, most of those sales -- again, we should downplay a $1 billion run rate -- but Bristol-Myers' drugs in third quarter for hepatitis C brought in about $400 million, down from $460 million the year before, because a lot of their sales in that space are coming out of Japan. In the past year, Gilead Sciences has won approval in Japan, and now AbbVie is winning approval in Japan.

So I think Bristol-Myers is going to become more of a vintage drug in this space, offering and selling more drugs in the niche category. I think the much bigger threat could come from Merck (NYSE:MRK) next year. People should be watching Merck very closely in January of next year, because that's when the FDA is set to make a decision on approving its hepatitis C drugs, and in trials those drugs, in my opinion, matched up best to what Gilead's Harvoni delivered in its own trials. Obviously, we know that Harvoni has been a massive success, so it will be very interesting to see how that plays out.

Harjes: Especially because the drugs are kind of similar in efficacy, and they're both one pill per day. To me the only advantage, or distinguishing factor, that I could see here between the offerings from Gilead and from Merck is that Harvoni can be dosed over eight weeks in more than 40% of genome type 1 patients, which is the biggest percentage of patients with hepatitis C, and Merck's drug is always going to be 12 weeks.

If you reduce duration, that's going to improve adherence, which is going to make your real-life efficacy better. I could see that being an advantage going to Gilead. Maybe if it ends up going the other way, it could be a pricing issue?

Campbell: Yeah. Merck's conference call was pretty firm in saying they're not going to fight on price for market share. That will be interesting to see how that plays out, too. Viekera Pak could be the one that stumbles.

Harjes: Yeah. One other thing I'll point out: Merck doesn't have any other hepatitis C drugs, all the way back until phase 1. To me, it doesn't look like they have this huge lineup of drug after innovative drug, to win away market share. Whereas you look at Gilead Sciences, and they're already developing their own next-generation hepatitis C therapy. To me, this really looks like somebody who is continuing to innovate and continuing to try and get better and better drugs.

The next hepatitis C therapy that they just submitted to the FDA for approval on Oct. 28 is a pan-genotype drug, which could theoretically eliminate the need for genotype testing to distinguish if you have genotype 1, or which particularly variety of the disease you have. I could see this being particularly helpful in emerging markets if they don't have the same healthcare infrastructure that we have here.

To eliminate the need for genotype testing could make this drug more accessible, and the data looks pretty good. In phase 3 it posted a 90% durable response after 12 weeks, and this was a trial across genotypes 1 through 6.

Campbell: Yeah, this may allow them to sidestep any threat from Merck as well. There's no question in my mind that Gilead Sciences is going to be the dominant player again in 2016 in syndication. Merck may pass AbbVie. Then in 2017, if you really want to look forward, it might get more interesting again, because that's when AbbVie's next-generation cocktail could hit the market.

That's also when other therapies from Johnson & Johnson, may start to make their way toward the FDA as well. We shouldn't discount Johnson & Johnson. They're just a little further back in their research. They've got some ongoing phase 2 stuff under way, which looks really intriguing and could help them in creating a shorter duration therapy for HCV. This is going to be a very interesting space to watch over the course of the next two years, still.

Harjes: As long-term investors, that's what we want to be looking at. Not just who the current market share winner is, but looking ahead at the pipelines and figuring out who will continue to win this space. I think one last piece of the puzzle that is worth touching on is the fact that you have a hepatitis C treatment. That means you're cured.

So are these drugs eliminating their own market? Do you think that this isn't going to be a huge space for drugmakers in a couple of years because we've already treated everyone?

Campbell: Even if you look at it and say Gilead is going to treat 350,000 people a year, maybe the other ones would get up to 500,000 people per year, the U.S. market should be able to handle that kind of pace until at least 2020, maybe 2021. Japan should be able to -- that market's still probably addressable into 2023, 2024. I'd say Europe goes even further than that, because they've got 9 million people who are suffering from this disease.

Then there's the emerging-market population, which some people estimate as high as 170 million people. So, yes, eventually the goal would be to have no one having hepatitis C because of these drugs. Does that mean this market disappears in the next two years? No. Five years? It starts to get a bit murky in some places, but I would say that you're still generating a lot of money that is a multibillion-dollar blockbuster indication for at least 10 years.

Harjes: I would agree with you there. There are so many people that are estimated to have this disease, and I think once the drugs are more prevalent, especially in developing areas, you're going to get a woodwork effect where even more people go and get tested and figure out that they have the disease. The hope there is that we have the best of the best drugs to treat them with. 

Kristine Harjes owns shares of Gilead Sciences. Todd Campbell owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool recommends Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.