Playing the New Hepatitis C Drugs

Hepatitis C has been a much discussed topic among biotech investors so far this year, mainly due to a new drug, Sovaldi, which treats this potentially fatal disease. Sovaldi is garnering its share of press due to its huge initial sales ($5.8 billion in its first two quarters of rollout). The drug also has been in the news due to its high price tag domestically ($84,000 for a 12-week, once-a-day regimen), which has been the focus area for a significant amount of Congressional carping. Hepatitis C is likely to remain in the headlines for the foreseeable future. More than three million people are chronically infected with the hepatitis C virus (HCV) in the United States, and about 170 million people are infected worldwide. Up to 10,000 deaths from chronic HCV infection occur every year domestically. Obviously, this is a very large and potentially lucrative market for drug makers. Sovaldi provides an over 95% cure rate if the full regimen is taken as prescribed. However, other biotech firms are trying to develop competing products and drugs that can be used in conjunction with Sovaldi as well. Hepatitis C has been a core and profitable theme within the allocation of biotech stocks in 2014 in my portfolio. I expect it to continue to be so. Here is how I am playing this core biotech focus area right now. Obviously, the most straight forward play is to invest in the maker of Sovaldi, Gilead Sciences (GILD). Not only is Gilead my biggest position within biotech, but the stock is the biggest allocation to any one company I have within my portfolio as a whole. The company is not by any imagination a one-trick pony. Gilead has been the market leader for HIV drugs for some time, and is still seeing good growth within that franchise. It also has drugs in late stage development for certain types of leukemia, RSV and other diseases. However, it will be Sovaldi that will be the core driver of earnings and revenues for Gilead in the near term. The drug was just approved for the U.K. market at the full requested price for a regimen this week. Sales in Europe should continue to accelerate and Japan should approve Sovaldi within the next year. Gilead is tracking to almost quadruple earnings this year to over $8.00 a share on better than a 125% gain in revenues. This stock is still ridiculously cheap at around 12x this year's earnings even after the shares' recent rise. I also have had a smaller, much more speculative position in Achillion Pharmaceuticals (ACHN) since the stock sold recently at around $7.50 a share earlier this quarter. The company announced last week that in a small, phase II proxy study, its lead HCV product (a second generation NS5A inhibitor) used in conjunction with Sovaldi had positive results in 12 out of 12 patients in the study. This compound will now move on to further studies. Achillion also has several other multiple, direct-acting antiviral candidates with complementary mechanisms of action for the treatment of HCV in early stage development. Given the large hepatitis C population and the success of Sovaldi since launch, Achillion's promising early-stage products and under $1 billion market capitalization is more than likely to attract significant buyout interest in the near future. As a standalone entity, the shares make sense as a speculative play based on the compounds under development. It is nice that such significant and recent progress has been made on the hepatitis C front. These companies are two ways to play on this continued progress.

Playing the New Hepatitis C Drugs

There has been huge progress in treating this lethal disease.

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