Gilead, Vertex and the Mystery of Missing Hep C Patients

NEW YORK (TheStreet) -- Why is everyone obsessed with hepatitis C? Initially described as "non-A/non-B," hepatitis C (HCV) didn't even have a proper name until the late 1980s, much less the rabid following the viral liver disease now enjoys in the investment and biotechnology communities. Since the early 1990s, routine screening of donated blood has drastically reduced the incidence of new HCV cases; there is no ongoing epidemic of new infections to explain the excitement. Moreover, successful HCV treatment leaves patients cured, and cured patients don't need expensive drugs. Yet despite these dynamics, drug companies large and small are spending hundreds of millions of dollars seeking new HCV drugs; investors are rewarding these efforts with multi-billion-dollar market valuations.

This mania is missing one crucial constituency: enough patients to make investors' blockbuster dreams come true.

Before I'm accused of being an HCV denialist, let me say that I believe Gilead Sciences'(GILD) expensively acquired HCV drug candidate -- for you science nerds out there, it's a nucleotide NS5B inhibitor -- will prove highly effective and acceptably safe in upcoming trials. The drug, GS-7977, disables a part of the virus called the RNA polymerase that is critical for replication; stop the virus from spreading and the patient has an excellent chance of cure. GS-7977's binding site is also very homogenous across HCV subtypes, which means the spectacular early results in the less common genotype 2/3 viral strain likely provide a good read through to the more difficult-to-treat genotype 1 subtype. Next month, Gilead will present important new data that will clarify GS-7977's potential.

Investors have already voted. Gilead shares are up 42% since announcing the $11 billion Pharmasset acquisition in late November. The stock's value already reflects high expectations, which suggests that even if GS-7977 shows superior efficacy compared to Vertex Pharmaceuticals'(VRTX) Incivek -- as I think it will -- Gilead shares could stagnate as investors debate the HCV market size and traders sell the news. Of course, there might be modest near-term upside if GS-7977 results are mind-blowingly phenomenal, but woe to the late-arrival that buys Gilead in the mid-$50s if the data show even hints of concern.

My advice? Caveat emptor. At Gilead's current share price, I would wait.