3 Drug Stocks Leading the Charge Against Infectious Diseases

By Markets Fool.com

Infectious disease has become a hot sector recently thanks toGilead Sciences' instant-blockbuster hepatitis C drugs,Harvoni and Sovaldi -- but there's more to the infectious diseases than hepatitis C.

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We asked our team of healthcare experts for their top picks for companies developing drugs to treat infectious diseases. Read on to see why Brian, Sean, and George think Merck , Gilead, and Dynavax Technologies are good bets for companies knocking back viruses and bacteria.

Brian Orelli: There was a time that antibiotics were the black hole of drug development. No company wanted to develop one because the return on the investment was so low. It's harder to produce substantial sales from a drug that's a cure -- kill the bacteria and the patient stops taking the drug -- than from a drug that treats a chronic condition year after year.

Unless, of course, you can fetch a high price for the drug. But the large number of generic antibiotics kept prices down. So drugmakers abandoned the space.

Methicillin-resistant staphylococcus aureus (MRSA) bacteria. Source: NIAID via Flickr.

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But then bacteria became resistant to the older antibiotics, which stopped working. Companies then pounced on the opportunity to sell badly needed, high-priced antibiotics. Better yet, with the threat of bioterrorism, the federal government, through the Biomedical Advanced Research Development Authority, was prepared to help pay for the development of new antibiotics.

Quite a few companies are developing new antibiotics, but I think Merck is the best bet for those interested in investing in the space. The Big Pharma player certainly isn't a pure play on antibiotics, but it has become a leader with the acquisition of Cubist, which itself gained prominence through a couple buyouts before being picked up by Merck. Merck sells Cubicin and Sivextro for skin infections, among other antibiotics, and has a few antibiotics in phase 2 and phase 3 development.

Merck also has a strong vaccine portfolio and a blockbuster HIV drug, Isentress, and it is also working on an all-oral treatment for hepatitis C to compete with Gilead's Harvoni, so it's a nice play on the overall infectious disease market as well.

: Although most investors pay close attention toGilead Sciences' hepatitis C dynamic duo of Harvoni and Sovaldi, which delivered $12.4 billion in sales in 2014 and dramatically boosted the cure rate over the previous standard of care, I believe people forget Gilead is playing a major role in slowing the progression of HIV/AIDS.

According to the World Health Organization, some 35 million people worldwide were living with HIV/AIDS as of 2013, meaning there's a mammoth opportunity for drug developers to make substantial profits while also drastically improving patients' quality of life and survival.

Gilead's next-generation HIV/AIDS drug is Stribild, a four-in-one once-daily pill. In clinical studies that led to its approval in summer 2012, Stribild led to undetectable levels of HIV in patients' bloodstream at 48 weeks in 88% to 90% of instances. Comparably, Atripla and Truvada, two prior-generation Gilead drugs, produced undetectable levels of HIV in 84% and 87% of instances, respectively, at 48 weeks. The great thing here is that while patients will probably switch to Stribild over time, in the meantime Gilead's diverse pipeline enables its patient pool to expand without cannibalizing the sales of its prior-generation drugs.

Stribild is also a big step up for Gilead in that all four components that make up the once-daily pill are produced in-house; comparatively, the three compounds comprising Atripla were derived from three different companies. Ultimately, this means Gilead can keep all of its revenue from Stribild, producing beefier margins.

Stribild delivered $1.2 billion in sales last year, up 122% from the $539 million it delivered in 2013 -- and Gilead is only touching the tip of the iceberg in international markets. Personally, I wouldn't be surprised to see Stribild surpass $2 billion in sales this year and make a run at $4 billion or more in peak annual sales within a few years.

If you're looking to take advantage of infectious disease drug growth, don't make the mistake of overlooking Gilead.

: Hepatitis B is a highly contagious liver disease transmitted primarily through infected bodily fluids. In fact, the hep B virus is roughly 100 times more infectious than HIV. So it's not surprising that an estimated 1.8 billion people worldwide are now believed to carry this disease, with the bulk of hep B cases occurring in rapidly emerging markets such as China and India.

Because most Western nations have relatively low rates of hep B infection, though, there hasn't been a major push to improve the current host of commercially available vaccines, even though they aren't particularly effective in the obese, the elderly, or patients with type 2 diabetes. Moreover, the most commonly prescribed vaccines, such asGlaxoSmithKline's Engerix-B, require three to four doses over a six- to 12-month timespan. That's not exactly convenient for individuals getting vaccinated before traveling abroad to high-risk areas, which is by far and away the biggest driver of hep B vaccine sales in the U.S. and EU right now.

Tiny biotechDynavax Technologies hopes to change this situation with its toll-like receptor-based vaccine called Heplisav-B. Heplisav-B has already completed two late-stage trials in which it proved to be more effective at producing immunity to the virus than Engerix-B, and showed some particularly interesting trends in hard-to-treat subpopulations such as type 2 diabetics. Furthermore, Heplisav-B only requires two doses within a single month, making it far more convenient than the current generation of hep B vaccines.

Because this vaccine uses a novel adjuvant, however, the Food and Drug Administration requested an additional late-stage trial to assess the possibility of the vaccine inducing rare but serious autoimmune events.

This trial, dubbed "HBV-23," is now well under way, having completed two of its three pre-specified safety reviews. The company said this pivotal trial is on track to wrap up by October of this year.

From an investing standpoint, Dynavax could be a real gem based on Heplisav-B's commercial potential. If this vaccine is indeed able to improve immunogenicity in hard-to-treat subpopulations and exits this ongoing trial with an acceptable safety profile, it could more than double its present valuation of about $270 million. Its favorable dosing regimen should also make it a staunch competitor in the hep B marketplace in general, potentially displacing older, less effective vaccines altogether.

The article 3 Drug Stocks Leading the Charge Against Infectious Diseases originally appeared on Fool.com.

Brian OrelliandSean Williamshave no position in any stocks mentioned. George Budwell owns shares of Dynavax Technologies and Gilead Sciences. The Motley Fool recommends Gilead Sciences and owns shares of the company. 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.