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Grading Hep C Stocks Exiting EASL Confab

BARCELONA ( TheStreet) -- Wow, it's been a busy few days at the European Association for the Study of the Liver (EASL) annual meeting in this beautiful Catalan capital. Investors obsessed with emerging hepatitis C therapies had plenty of new data to analyze.

Let me make one general observation about the future of hepatitis C treatment before I recap and grade each of the companies with a significant presence at the EASL meeting. Interferon -- the injectable immune system booster saddled with troublesome side effects -- is dead. The future of hepatitis C therapy belongs to interferon-free regimens. Physicians at the conference talked about interferon as if it were invented in medieval times. It's clear that any company seeking a role in hepatitis C going forward must develop or acquire an effective interferon-free regimen or face irrelevance.

Let's move to the winners and losers of EASL 2012.

Gilead Sciences (GILD - Get Report):

Grade: A-

Gilead was the big story of the conference. The company emphatically reclaimed the driver's seat in HCV, at least for now, with a combination of solid scientific results and ruthless, strategic maneuvering.

In a crowded Thursday session, anxious Wall Streeters awaited new data for Gilead's GS-7977, a once-daily nucleotide polymerase inhibitor, or "nuc." Despite impressive early data -- which prompted the undeniably expensive $11 billion Pharmasset acquisition -- subsequent results from a GS-7977 trial called ELECTRON showed the drug to have little effect in "null" responders and generated lots of investor anxiety. I was no exception. Despite my favorable disposition towards GS-7977, I wanted confirmation of the early data; most investors I spoke with shared my view.

We got what we were looking for.

An impressive 88% of treatment-naive patients in ELECTRON achieved sustained virologic response four weeks after stopping treatment (an early indication of "cure" known as SVR4) with 12 weeks of GS-7977 and ribavirin (RBV), a companion drug used in hepatitis C. Expectations leading into EASL were for an SVR4 of 70%.

At the same time, Gilead issued a press release containing preliminary data from QUANTUM, an ongoing study in treatment-naive patients also using the GS-7977 plus ribavirin combination therapy. The SVR4 rate in this study was 59%, lower than ELECTRON due to enrollment of more difficult-to-treat patients. [84% of QUANTUM patients had unfavorable "non-CC" genetics, versus 56% in ELECTRON.]

Results from the ELECTRON AND QUANTUM studies of GS-7977 were important but not the star of EASL. What got everyone really excited were data from the mid-stage study combining GS-7977 with Bristol-Myer Squibb's (BMY - Get Report) NS5A replication complex inhibitor daclatasvir. Among the patients with genotype 1 hepatitis C, GS-7977 plus daclatasvir resulted in an SVR4 rate of 100%. Yes, the combination therapy cured all treated patients. These data literally elicited high fives from several of the generally reserved hedge fund analysts in attendance. It's hard to argue with an SVR4 of 100%, but longer-term follow-up data are needed to confirm these results. Physicians traditionally use SVR12 (12 weeks) or SVR24 (24 weeks) as a final indication of cure, although recent data show a strong correlation between SVR4 and later follow up assessments.

As if that weren't enough excitement, Gilead also generated some drama at the meeting -- and elicited a "patients-not-profits" rebuke from my colleague Adam Feuerstein -- when word got out that the company had refused an offer from Bristol-Myers to collaborate on further development of GS-7977 and daclatasvir. Although Gilead insists it hasn't made a final decision, I'm guessing management will try to combine GS-7977 with GS-5885, an early-stage drug candidate in the same NS5A class as daclatasvir. Obviously, Gilead wants to keep all the profits from a highly potent, all-oral hepatitis C therapy for itself.

In GS-7977, Gilead appears to control a strong, future "backbone" for any next-generation hepatitis C regimen. I have mixed feelings about Gilead's apparent desire to deny Bristol-Myers access to the drug and therefore prevent a daclatasvir-GS-7977 regimen from reaching the market. Patients and their advocates will probably be justifiably upset that such this apparently highly effective regimen won't be developed further. I understand that. Interestingly, physicians I spoke with at the meeting didn't care either way. That surprised me; I would have expected more complaints.

As an investor, I don't fault Gilead for angling to maximize profits -- I've never subscribed to the biotechnology industry's cloying "patients first" rhetoric. However, the move does increase the company's clinical risk in hepatitis C. Even though initial GS-5885 data look clean, a problem could still emerge and daclatasvir is far more established. Essentially, management is betting that the promise (and eventually, the reality) of an "all Gilead" HCV regimen outweighs additional R&D expenses and near-term clinical risks.

That seems like a reasonable bet, and I think the stock will continue to work -- Gilead is still only trading at around 13 times estimates 2012 earnings.

Bristol-Myers Squibb:

Grade: C

Bristol-Myers had quite the Dickensian conference. The company's daclatasvir plus Gilead's GS-7977 wowed investors and physicians alike. The best of times!

Unfortunately, Gilead doesn't want to partner GS-7977; the non-nucleoside polymerase inhibitor BMS-791325 seems only modestly effective and may have toxicity issues; the protease inhibitor asunaprevir has a messy side effect profile; and adverse event rumors are haunting BMS-986094 (formerly known as INX-189), the "nuc" obtained via the $2.5 billion purchase of Inhibitex. Oh, and brivanib fails in liver cancer. The worst of times!
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