Image source: Flickr user Bill Brooks.

Last year the Senate Finance Committee spent a lot of time investigating whether or not Gilead Sciences (NASDAQ:GILD) intended to maximize revenue from its franchise of groundbreaking hepatitis treatments. Surprising nobody, the investigation concluded maximizing revenue was indeed Gilead's goal, but it also unearthed some startling facts about coverage restrictions.

An underserved population
The low percentage of infected patients treated in 2014 is stunning. An estimated 2.7 million Americans are infected with hepatitis C. Just over a third of the population is covered by Medicaid or Medicare. That year less than 2.4% of roughly 700,000 Medicaid enrollees with Hepatitis C were treated with Sovaldi. In a seperate disclosure from Medicare, just 57,397 beneficiaries were treated with Sovaldi, Harvoni, or the now obsolete Olysio. 

More recent data would be helpful, but given the numbers made available by the government, the addressable population was clearly underserved, and probably still is. The thing about hepatitis C is that many patients don't suffer any symptoms for years, but they're able to infect others. The responsible thing to do would be to treat as many as possible, as soon as possible.

Unfortunately, economic constraints make treating everyone today unfeasible. Many states with already overstretched Medicaid budgets have been rationing treatment only to those in dire need. It seems private insurers have taken state mandated restrictions as a cue to do the same, although just how restrictive they've been is unclear.

Insurers subpoenaed
A recently-launched probe could shine a light on the extent of denials before long. Beginning in December, and over the past few weeks, the office of New York Attorney General Eric Schneiderman has been requesting information regarding hepatitis C treatment coverage from 16 insurers, including Aetna (NYSE:AET) and Anthem (NYSE:ANTM)

Image source: Flickr user Brian Turner.

The more recent subpoenas have requested the insurers reply by the end of the month, but the probe may already be having an effect. After the subpoenas became news, Anthem noted that Empire BlueCross BlueShield, its New York-based company, recently expanded coverage for hepatitis C treatments.

The expansion was made effective Dec. 7, 2015, but there was no press release. Don't hold your breath waiting for an announcement from Aetna either -- drawing attention to coverage restrictions whether they're presented upfront or not isn't a great policy.

From an investor's standpoint
The story broke after the markets closed on March 2, and the losses in share price for Anthem and Aetna have so far been minor. 

I'm certain the probed insurers will point their fingers at the drugmakers and the high price of their treatments. I also expect New York's Attorney General isn't going to give a hoot where they point if advertised coverage and actual coverage don't line up. At the very least, between Anthem, Aetna, and the other 14 companies under the probe, I expect at least a few will be shelling out a bit more for New York's hepatitis C patients in the quarters ahead.

However, if the probe reveals unreasonable levels of denials that emboldens more law enforcement agencies to launch similar probes that force Aetna and Anthem to increase coverage, they could be in serious trouble. Over the past few years both have seen their overall profit margins dwindle to low single digits. Significantly increasing the number of hepatitis C patients they must treat could push earnings into negative territory.

The bright side
Luckily for the insurers, recent approvals for additional, highly effective hepatitis C treatments such as Viekira Pak from AbbVie (NYSE:ABBV), and more recently Zepatier from Merck & Co. (NYSE:MRK) have loosened Gilead's grip on the market, and driven the cost of treatment down significantly.

Just how far down is impossible to say because discounts and rebates negotiated between drugmakers and payers are considered proprietary and rarely disclosed. On the surface, Merck's list price of $54,600 for Zepatier undercuts Harvoni's by about 42% and is 34% lower than Viekira Pak's. For all we know, undisclosed discounts and rebates could set Zepatier, Viekira Pak, and Harvoni on equal footing, but I doubt it.

Price isn't everything
If the New York probes catch on and send demand for new hepatitis C treatments skyrocketing, which drugmaker is best positioned to gain?

The answer is not so simple. At first you might think Zepatier's competitive price will make it the go-to HCV treatment, but there are no caveats in the hippocratic oath for end-payer burden.

AbbVie's Viekira Pak entered the market late in 2014 at an $11,000 list price discount to Gilead's Harvoni. America's largest pharmacy benefit manager, Express Scripts, gave it exclusive access to its millions of patients in return for an undisclosed but "significant" discount to the list price. Despite all these advantages, Viekira Pak's safety profile couldn't stand up to that of Harvoni, and it barely dented Gilead's share of the hepatitis C space. Last year, Harvoni sales reached $13.8 billion, more than eight times that of Viekira Pak.

Would you like some ribavirin with that?
One cause of Viekira's underwhelming performance is a dosage regimen that includes poorly tolerated antiviral ribavirin for the majority of its indicated population. Harvoni's regimen also includes ribavirin, but only for patients with advanced cirrhosis and liver transplant recipients.

Merck's Zepatier is possibly a much stronger contender than Viekira, but I doubt it will seriously dent Gilead's HCV sales in the years ahead for a few simple reasons. First, just over a month after Zepatier's FDA approval, its label has more serious warnings and precautions than Harvoni's, which has treated tens of thousands of patients in the real world. Second, genotype 1a patients, which comprise a majority of HCV infections in the U.S., require a second genetic test for resistance to one of Zepatier's components. If positive, their treatment requires the addition of ribavirin.

Those are some pretty big hurdles for Zepatier to cross to earn a significant share of the HCV market from Gilead, but the biggest could be on its way. Last October, Gilead submitted an application for a pan-genotypic HCV antiviral that would eliminate the need for costly genotyping. The FDA has granted the application priority review, and Gilead expects a decision by the end of June.

I'm not going to place odds on the New York Attorney General's investigation leading to insurers reducing restrictions for HCV antivirals nationwide, but it's certainly worth watching. However, I am confident that if U.S. demand explodes -- or doesn't -- Gilead's dominance in this space will continue for years to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.