By: Drew Armstrong

Merck & Co. (MRK)鈥檚 experimental hepatitis C pill produced clinical trial results positioning the drug as a strong competitor to a potential blockbuster therapy from Gilead Sciences Inc. (GILD)

Merck鈥檚 two-drug combination once-a-day pill stopped the virus in 98 percent of newly treated patients with few major side effects, according to a mid-stage study presented today at the European Association for the Study of the Liver in London.

The only major difference with Gilead鈥檚 drug will be four weeks longer of treatment, said Alex Arfaei, an analyst with BMO Capital Markets Corp. 鈥淲e believe Merck can compensate for that with a modest discount,鈥 he said in a note to clients today. It could be on the market by early 2016, he said.

The therapy from Merck will go to final-stage testing as Gilead and AbbVie Inc. (ABBV) compete to be first to market with regimens aiming to eliminate the need for interferon, an older therapy with difficult side effects, for patients with a strain of hepatitis C known as genotype 1.

Gilead鈥檚 Sovaldi is cleared for some hepatitis C patients with other drugs and the company has applied to U.S. regulators for approval of a combination single-pill treatment that can cure hepatitis C in more than 90 percent of patients with the most common strain. AbbVie plans to submit its three-drug therapy for U.S. clearance this year, and also is working to formulate it into a single pill.

True Rival

Merck鈥檚 medicine 鈥渨ill be a pill that hits almost every genotype except genotype 3,鈥 said Eliav Barr, vice president of infectious disease for the Whitehouse Station, New Jersey-based drugmaker. The pill may prove a true rival on efficacy, convenience and safety if the promising data is borne out in a larger, final clinical test.

Merck rose 2.2 percent to $55.85 at the close in New York. The stock has gained 19 percent in the past 12 months. Gilead fell 7.3 percent to $65.48.

An estimated 2.7 million people with hepatitis C live in the U.S. The disease can be symptomless for years before it begins to scar the liver, leading to cancer, organ failure and, eventually, a transplant. Genotype 1 is the most common type in the U.S. and Western Europe.

Patients fall into two main groups, older people who got blood transfusions before 1992 when screening began, and intravenous drug users who pass it to each other through shared needles. The World Health Organization yesterday recommended screening all high-risk people as a way to reduce what it called an alarming number of new infections. The new drugs for the disease are more effective and more convenient than older therapies and produce fewer side effects.

Study Results

In interim results from Merck鈥檚 Phase 2 trial released today, hepatitis C patients were given the two drugs, MK-5172 and MK-8742. Some also got ribavirin, an older virus-fighting drug. Merck鈥檚 combination cleared the virus in 98 percent of 44 patients given the drug for 12 weeks after not having been treated before. When combined with ribavirin for 12 weeks, it cleared the virus in 94 percent of 85 patients and 83 percent of 30 patients treated for eight weeks.

Merck reported data for three of the 16 patient groups that were part of the trial. The most common side effects included fatigue, headache, nausea and diarrhea. All the side effects except headache were less frequent in the group that didn鈥檛 get ribavirin.

Annual Sales

Analysts have estimated Merck may gain only about $400 million in full-year sales in what is projected to be at least a $133 billion market in the long term, said Mark Schoenebaum, an analyst with ISI Group LLC.

鈥淓ven assuming modest market share for Merck, the $400 million in Street models looks increasingly wrong if the data don鈥檛 disappoint,鈥 he said in a note to clients yesterday. Sovaldi from Foster City, California-based Gilead is projected to sell $12.2 billion by 2017, according to data compiled by Bloomberg.

A successful new treatment would help boost Merck鈥檚 sales, giving it a replacement for the older hepatitis C drug Victrelis, which produced $428 million last year. The drugmaker鈥檚 earnings have fallen short of analyst expectations as sales of its biggest product, the diabetes pill Januvia, have been relatively unchanged.

Cost Scrutinized

The new hepatitis C drugs have been scrutinized by policy makers and private insurers because of their cost. The WHO yesterday called for lowering the price of the drugs. Gilead鈥檚 drug now costs $84,000 for a 12-week treatment, and the combination pill before regulators is expected to cost more.

While Gilead has said the cost is comparable with current treatments, and less than a liver transplant, pharmacy benefit managers have called the price unsustainable, and Democrats in Congress have demanded Gilead appear and justify it.

A huge group of infected patients who have had the disease for years are heading toward liver damage and failure — costs far larger than the new medicine, Merck鈥檚 Barr said. 鈥淚f we could cut that off, we鈥檙e going to be saving a great deal of time and money and effort for the health-care system,鈥 he said in an interview.

鈥淢erck鈥檚 idea is that medicines don鈥檛 work unless patients use them,鈥 Barr said. 鈥淏ut you also need to talk about their impact on the health-care budget, and what inevitable costs you save downstream.鈥

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