In early March, shares of Gilead ($GILD) notched a five-year-high of $84.88 per share thanks to the company’s Hepatitis C super drug Sovaldi. Costing $1,000 for a single tablet, Sovaldi cures the most common type of Hepatitis C in 12 weeks and is proven effective for some hard-to-treat patients.
Sovaldi is on track to top the list of biggest drug sellers, according to the Wall Street Journal. Given the $20 billion Hepatitis C market, Sovaldi is estimated to roll in $ 3 to 5 billion dollars this year, that’s about 50 percent of the company’s revenue of last year. On the flip side, the drug’s huge success is blamed for slashing heath providers’ bottom line – leading Henry Waxman, longtime drug industry gadfly to ask, “What makes the pill cost so much?”
Huge Market, Few Treatments
The most obvious answer to that question is that Gilead has no looming alternatives in the market. But more fundamentally, this drug has changed the trajectory of Hepatitis C medicine development and could unleash a wave of less expensive new formulas from competitors like Abbvie ($ABBV).
Research labs had thrown in billions of dollars to develop pills to repair virus damages before several biotech companies decided to shift their focus to blocking virus replication. Progress came slowly. The earliest therapy, a two-pill combo called interferon-alfa, was priced at $20,000. However, a chronicle Hepatitis C patient only had a 6 percent chance of recovery by taking the drug, not to mention painful side effects. Around 2011, a combination of telaperivior plus peginterferon and ribavirinimproved the cure rate to 65 percent in a 48-week treatment course compared with 96 percent achieved by Sovaldi in a 12-week plan.
Sovaldi came from Gilead’s big scoop in 2011 when the company bought a small medical compound in New Jersey for 11 billion. The acquired firm, called Parmasset, had no commercial production but was in the late stage of developing antivirus that destroy NS5A, a key protein in the virus’ RNA. In a trial reported at that time, the therapy cured all patients with hepatitis C genotypes 2 and 3.
Competitors Nipping at Gilead's Heels
Others will soon find their way to develop similar drugs. In 2013, Johnson&Johnson ($JNJ) acquired GlaxoSmithKline ($GSK)’s Simeprevir, another NS5A inhibitor that blocks the growth of Hepatitis C virus in host cells. Both Abbvie and Bristol-Myers Squibb ($BMY) began rolling out their own versions of NS5A drugs in 2012, and their product will hit the market around the second quarter of 2014.
As the drug race intensifies, investors are showing concerns about how this seemingly vast market could be filled up quickly. On March 24, a roster of companies revealed their latest milestone in abstract brochures released ahead of the International Liver Conference. Gilead’s strong rival, Abbvie, will soon debut its “cocktail” formula, a 12-week fixed dose treatment, showcasing a cure rate of 99 percent among chronicle Hepatitis C patients. For patient whose illness has already caused liver damage, Abbvie’s therapy reached recovery odds of 92 to 96 percent. Meanwhile, Bristol Myers Squibb’s antivirus reported a 90 percent cure rate for patients without liver impairment.
These breakthroughs nevertheless showed on companies’ balance sheet as high research and development (R&D) costs.
Abbvie’s R&D expenses were 5.3 billion dollars last years, accounting for 15 percent of the revenue. But the company estimated to rake in at least 19 billion in 2014, boosted by promising result from new Hepatitis C drug trials.
Gilead warned that the R&D spending, running at 19 percent of its sales in the quarter ended Dec 31, 2013, would be higher in 2013 as the market leader tried to distance itself from competitors, but Gilead could find it hard to defend the $1,000 dollar price when competitors’ products arrive on pharmacy shelves this summer.
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