Gilead's Electron Data Brings Some Reality Back To The Hep C Market

| About: Gilead Sciences, (GILD)

Nothing good lasts forever and it looks like Gilead (NASDAQ:GILD) has brought a little dose of reality back to the Hepatitis C market. While Hepatitis C plays like Pharmasset (acquired by Gilead), Idenix (NASDAQ:IDIX), Achillion (NASDAQ:ACHN), and Inhibitex (acquired by Bristol-Myers (NYSE:BMY)) were white-hot throughout much of 2011 on investor enthusiasm for a new generation of drugs that hold promise for very nearly curing the disease, some disappointing data in a small study shows there's no perfect drug yet.

A Disappointing Result In A Tough Crowd

Gilead announced that a Phase II study of GS-7977 (the star drug acquired in the Pharmasset deal) and ribavirin failed to show efficacy in treating so-called non-responders (that is, HCV patients who have shown insufficient response to prior therapy). In fact, within 4 weeks of stopping treatment three-quarters of the patients (6 of 8) showed significant relapse and higher viral loads.

Although null responders are a notoriously difficult patient group to treat, this marks the first setback with GS-7977, which heretofore was a wonder drug that had shown efficacy rates previously thought impossible. These results were also inferior to those seen in null responders taking Vertex's (NASDAQ:VRTX) Incivek, but this was not a head-to-head study and such statements have to be taken with serious caution.

Opening The Door For Others

Perhaps it seems ironic, but the apparent failure of GS-7977 in genotype 1 null responders could be a boon to other HCV therapy developers. Specifically, it suggests that drugs in the classes of NS5A inhibitors and NS3 protease inhibitors may have a role to play in HCV therapy even if nucleoside analogs like GS-7977 maintain their early efficacy rates through pivotal studies and become the standard of care.

Bristol-Myers conducted a small study of its NS5A inhibitor BMS-'052 and NS3 protease inhibitor asunaprevir (BMS-'032) in Japanese null responders with genotype 1b and the combination showed a 90% response rate. Roche (OTCQX:RHHBY) has also conducted a small study of a combination of its NS3/4A serine protease inhibitor danprevir with Norvir in null responders and the study showed strong efficacy in genotype 1b patients (but not much efficacy in type 1a patients).

At the time of this writing I was not able to ascertain whether the Electron study enrolled both genotype 1a and genotype 1b nor the ratio of patients enrolled, but that will likely be a question on the conference call.

Considering The Contenders

Investors interested in companies developing NS5A drugs should look at Bristol-Myers, Abbott Labs (NYSE:ABT), Gilead itself, and Achillion. On the protease inhibitor side are Johnson & Johnson (NYSE:JNJ) (through a partnership with Medivir), Boeringher Ingelheim, Merck (NYSE:MRK), Achillion and Abbott.

Among these, JNJ, Boehrigner, Bristol-Myers are furthest along with drugs in Phase III studies. Given the fact that most of the names involved here are core Big Pharma companies, it could well prove to be the case that sustained evidence that NS5A inhibitors and/or protease inhibitors can play a significant role in tough-to-treat HCV patients could make Achillion a more valuable partner or acquisition target.

A Stumble, Not A Fall

While it clearly would have been preferable for this Electron study to show strong data, this trial failure dents Gilead more from a momentum and perception standpoint than in any real long-range financial sense. Gilead paid $11 billion for Pharmasset and investors don't want to hear about any sort of setback or disappoint.

At the same time, Gilead arguably went too far too fast and was due for an overreaction to the downside. With a lot of hot money in the name, Friday's trading could easily see some of that wash out and take the stock down sharply. Should the stock get pounded down to, or through, the low $40s, it may well be worth a look for long-term investors once the negativity plays itself out.

Disclosure: I am long OTCQX:RHHBY.