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As Hep C Cure Rate Hits 98%, Merck Challenges Gilead

Big pharma Merck (MRK) reported stellar results for its phase-two hepatitis C (HCV) drug trials Thursday, sparking debate among analysts over its potential to take market share from leader Gilead Sciences.

At the International Liver Congress in London, Merck reported a 98% cure rate in patients with hepatitis C genotype 1 who took a combination of its drug candidates MK-5172 and MK-8742.

With the two potentially combined in one pill taken once per day, the pairing could rival the convenience and effectiveness of Gilead's (GILD) combo of sofosbuvir and ledipasvir, which is currently awaiting an FDA approval expected by October.

Gilead launched sofosbuvir alone, as Sovaldi, in December. Though it is still recommended to be combined with interferon for genotype 1, which accounts for 70% of all HCV infections, it is already enjoying the biggest launch in drug history.

Now, however, Wall Street's attention is turning to its rivals.

Facing The Competiton

ISI Group analyst Mark Schoenebaum wrote in an email to clients that consensus peak-sales estimates for Merck's regimen will almost certainly go up from the current $400 million. Nonetheless, he wrote, the rise should present no real danger to Gilead.

"Most analysts (me included) have assumed GILD will capture perhaps 60%-75% genotype 1 share at peak," he wrote. "The open question, however, has been which company grabs the other 25%-40% of the market. I would propose to you that perhaps MRK is now the leading contender for this position.

Because Merck still has a way to go through clinical trials before it can file for approval, it won't have the first competing regimen. That's expected to be AbbVie's (ABBV) and Enanta's (ENTA) cocktail, also expected to launch late in the year.

However, in a research note Thursday, Nomura analyst Ian Somaiya wrote that a symposium with hepatologist Stefan Zeuzam brought up Gilead's higher efficacy than AbbVie's with certain patients, as well as the risk of drug interactions with patients who also have HIV.

Zeuzam also raised the issue of higher alanine aminotransferase levels in a small percentage of patients in Merck's regimen, which "point to acute liver injury that could motivate many physicians to avoid the regimen." Somaiya raised his estimate on Gilead's total HCV franchise to $5.8 billion this year and $9 billion next year.

Underappreciation Defense

Wells Fargo financial adviser Brian Abraham rose to AbbVie's defense.

"Our thesis regarding hep C competitive dynamics is that AbbVie's regimen may be underappreciated as a competitor to GILD, given its efficacy across multiple patient types and clean safety (though it still has some disadvantages versus GILD), but that Merck's regimen may be over-hyped as a potential competitive threat," he wrote in his research note Thursday.

But Gilead shares tumbled more than 7% Thursday to 65.48, its lowest close since mid-October, as biotechs and other growth stocks led a sharp market sell-off. AbbVie lost 6.5%. Even Merck, which initially rose to a 6-year intraday high, closed down 2%.

Gilead may worry after an Express Scripts (ESRX) officer said that the pharmacy benefit manager will try to drive down Sovaldi's $84,000 price. Goldman Sachs analyst Terence Flynn on Wednesday trimmed his Gilead price target after his physician survey implied that the HCV market is price-sensitive.