Gilead's Q3 Bombshell: No More Hepatitis C R&D

Gilead Sciences (NASDAQ: GILD) is a Goliath in hepatitis C treatment; however, the company is shifting its research spending in the future away from hepatitis C to other indications, and that decision could have big implications on the hepatitis C market in the long term. Let's take a closer look at the hepatitis C market and Gilead Sciences' decision to press the pause button on hepatitis C R&D.

Image source: Getty Images.

First, some background

Hepatitis C is one of the most lucrative indications for drugmakers, and Gilead Sciences is the dominant player in disease treatment.

More From Fool.com

Motley Fool Founders Issue New Stock Buy Alert

Forget GE! Heres how to play the largest growth opportunity in history

Forget Apple! Heres a Better Stock to Buy

He Made 21,078% Buying Amazon. Heres His New Pick

The Centers for Disease Control estimates that there are 3.5 million people in the United States with hepatitis C, and that between 40% and 85% of these patients are unaware they've been infected. Globally, the World Health Organization believes between 130 and 150 million people are infected with hepatitis C, including15 million people in Europe.

Hepatitis C has six genotypes. The most common (and easiest to treat) is genotype 1, which represents about 70% of chronic HCV infections in the United States. Of the rest, 15% to 20% of cases are genotype 2, 10% to 12% are genotype 3, 1% is genotype 4, and less than 1% are genotype 5 or 6.

Historically, hepatitis C treatment offered coin-flip cure rates and involved multidrug cocktails laden with side effects and dosed over as many as 48 weeks, but that began to change rapidly beginning in 2013. Today, cure rates have reached nearly 100%, the co-administration of drugs with unfavorable side effects has largely been eliminated, and treatment can last as few as eight weeks.

The significant shift in hepatitis C treatment is due largely to new drugs launched byGilead Sciences. In late 2013, Gilead Sciences' won FDA approval of Sovaldi, an oral HCV therapy that's become the backbone of Gilead Sciences' HCV product lineup and is mostly used in non-genotype 1 patients. Harvoni, a combination of Sovaldi and another drug, ledipasvir, hit the market in October 2014, and it's primarily used in hepatitis 1 and hepatitis 4 patients. Also, Gilead Sciences' Epclusa, a pan-genotype therapy, won approval this summer. Eplcusa is primarily being positioned for use in genotype 2 and genotype 3 patients. Most patients are given these drugs over 12 weeks; however, roughly 45% of genotype 1 patients can be given Harvoni over an eight-week period.

In 2015, Gilead Sciences' drugs were used to treat about 90% of the 250,000 patients who started treatment in the United States, and as a result, the company's hepatitis C drugs exited 2015 with an annualized global sales run rate of roughly $20 billion.

Currently, Gilead Sciences' drugs are treating about 85% of HCV patients, and in the third quarter, U.S. patient starts were tracking at an annualized 244,000 patients. As a result, the company's global hepatitis C sales clocked in at an annualized pace of $13.3 billion in the third quarter. For perspective, the company's U.S. hepatitis C product sales were $2 billion in Q3, down 37% year over year, despite Epclusa's launch in June.

Image source: Gilead Sciences.

Shifting gears

The drop-off in hepatitis C revenue is tied to both fewer patient starts and increased competition. Many patients with advanced cases of hepatitis C have already been treated, and that's leading to a normalizing of quarterly patient starts. A healthier proportion of hepatitis C patients receiving treatment is also shifting the product mix toward the eight-week Harvoni treatment course, which costs less than the 12-week regimen.

Meanwhile, new, cheaper hepatitis C drugs fromAbbVie and Merck & Co. are crimping Gilead Sciences' hepatitis C revenue because they're forcing Gilead Sciences to offer more discounts than last year.

In the wake of amaturing and more competitive market, Gilead Sciences has decided to focus its future R&D spending elsewhere. That suggests Gilead Sciences' three-drug combination pill (Sof/Vel/Vox) will be its last HCV drug -- at least for a while. Gilead Sciences' management plans to file for approval of this therapy soon, and if it's approved, it will be positioned as a salvage therapy for use in patients who have failed to be cured by other treatments.

In discussing management's decision to concentrate on other indications, CEO John F. Milligan said:

Looking forward

Gilead Sciences' news could give AbbVie and Merck & Co. an opportunity to gain share if they continue developing new therapies that can compete better. AbbVie's ABT-493 plus ABT-530 mash-up, for example, is in late-stage studies that include an eight-week dosing option. If trials are successful, that therapy could compete more effectively against the short-duration Harvoni regimen in genotype 1.

A pause in R&D development at Gilead Sciences could also give Johnson & Johnson an opportunity to win market share someday. Johnson and Johnson is evaluating a multidrug cocktail (which includes an Achillion Pharmaceuticalsdrug) that has shown promise over treatment periods as short as six weeks.

For now, Gilead Sciences' dominance in the indication doesn't appear to be in question, but if the company rests too heavily on its laurels, it may see its market share fall if competitors ramp up their efforts.

A secret billion-dollar stock opportunity The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early, in-the-know investors! To be one of them, just click here.

Todd Campbell owns shares of Achillion Pharmaceuticals and Gilead Sciences.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.Like this article? Follow him onTwitter where he goes by the handle@ebcapitalto see more articles like this.

The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool recommends Johnson and 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.