Image source: Merck & Co.

The FDA is expected to make a decision on whether to approve Merck & Co. (NYSE:MRK) two-drug, once-daily therapy for hepatitis C in January, and if the agency gives Merck & Co. the green light, then it could significantly impact Gilead Sciences' (NASDAQ:GILD) market share in the most common variation of this disease.

Joining the fight
By delivering 90% plus functional cure rates, eliminating the reliance on side effect-laden prior treatments and reducing treatment duration to as little as eight weeks, Gilead Sciences' Harvoni and Sovaldi have reinvented hepatitis C treatment. As a result, Gilead Sciences' hepatitis C sales are running at an annualized pace of nearly $20 billion.

But Gilead Sciences' two drugs aren't the only recently approved medicines that are putting up big sales numbers. AbbVie's (NYSE:ABBV) Viekira Pak, a genotype 1 therapy with a more onerous dosing regimen than Gilead Sciences' drugs, posted sales of $469 million in Q3 and Bristol-Myers Squibb's (NYSE:BMY) hepatitis C franchise delivered sales of $402 million last quarter, primarily thanks to sales in overseas markets, including Japan.

Stealing away market share
Although it's premature to guess what Merck & Co. would price its therapy, payers have made it clear that they're more than willing to offer up exclusivity on their drug formularies in exchange for big-time discounts.

Last January, Express Scripts, the nation's largest drug benefit manager, cut such a deal with AbbVie for the then recently approved Viekira Pak. That exclusivity deal is a big reason why sales of Viekira Pak, an arguably second-tier treatment choice, have been as strong as they've been this year.

If Merck & Co. decides to compete on price, then it could reduce Viekira Pak to a bit role in the indication, while also relegating Bristol-Myers Squibb's drugs even further into niche status. More importantly, a low price for Merck & Co.'s therapy could pose the most significant challenge to Gilead Sciences market share in the U.S. yet.

Image source: AbbVie.

Although Viekira Pak is effective, it relies on the co-administration of ribavirin, a previous generation drug that most doctors are shying away from. Additionally, Viekira Pak is a multi-drug, multi-tablet formula that requires multiple daily doses. That makes patient adherence tough. Add those drawbacks to recently reported safety concerns and it's not hard to see why Viekira Pak is a bit of an also-ran in the race against Harvoni in genotype 1 treatment.

Merck & Co.'s therapy, however, is better than Viekira Pak.

In trials, the once-daily, single-tablet medicine delivered 95% cure rates, including in co-infected HIV patients. Rates in previously treated patients who failed to respond to other therapies were also an impressive 94%. The drug's cure rate was as high as 100% in genotype 4 patients and better than 80% in genotype 6 patients. Grazoprevir/elbasvir also appears to be safe given that adverse events occurred about as frequently in the treatment arm as the placebo arm and few patients discontinued treatment because of them.

Looking ahead
The FDA is considering approval of Merck & Co.'s therapy for genotypes 1, 4, and 6, and there's no guarantee that the FDA will approve the drug, but the trial results appear to support a green light. If so, then Merck & Co's success in hepatitis C will depend on its ability to outcompete Gilead Sciences. Unfortunately for Merck & Co. investors, it's not clear to me that they'll be able to do that.

Gilead Sciences' Harvoni has an edge as the first-to-market alternative and an even bigger advantage as the only treatment approved for use for as little as eight weeks. About 45% of genotype 1 patients qualify for Harvoni's shorter, eight-week treatment duration and those patients aren't likely to embrace Merck & Co.'s 12-week regimen willingly.

Gilead Sciences may also be able to sidestep Merck & Co.'s threat if it can win FDA approval for its next-generation hepatitis C drug that combines Sovaldi with velpatasvir, an improved NS5A inhibitor.

In October, Gilead Sciences filed for FDA approval of this therapy for use in all six genotypes of the disease after it put up an impressive average 98% cure rate in trials, and if it's approved next June, when the FDA is slated to make its decision, then it could remove the need for genotype testing. Because only one patient dropped out of this drug's trials, its safety is arguably as good, if not better than, Merck & Co.'s and for that reason, it could be the biggest reason why a Merck & Co. approval may not be as damaging next year to Gilead Sciences as it may seem.