Interesting stuff from GS this morning on SGP, Roche and Hep C treatments:
<Schering-Plough currently enjoys near 100% market share for the treatment of hepatitis C as its recently launched (October 2001) Peg Intron is the highest standard of care currently approved. However, we are expecting Roche to launch a formidable competitor, Pegasys, by the end of 2002. Last week during its R&D sessions, Roche updated the timing and profile of Pegasys. With competition expected later this year, we project 10% growth for SGP's franchise in 2003. Competitive threats in the Hep C business combined with the loss of Rx Claritin in December 2002 gives us concerns about the consensus earnings estimates for Schering-Plough.
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INVESTMENT CONCLUSION: MAINTAIN MP ON SGP SHARES
We are cautious on SGP shares and would not be adding to positions. The
company's lower profitability level in 2003 will be driven by the
expiration of Claritin's exclusivity, reflected in our below consensus
earnings estimates ($1.57 GS vs. $1.67 FC). Although the OTC market for
Claritin will help somewhat, the company still has to build a business in a
new marketplace with lower margins.
One of the bright spots for Schering recently is its strong Hep C
franchise. Peg-Intron will face new competition this year and is still
supply constrained. We believe our current Intron franchise estimates of
$2.5 billion in 2002 (up 75%) and $2.8 billion in 2003 (up 10% and up from
$1.4 billion in 2001) reflect an optimistic scenario for Schering and could
face downwards pressure if Roche's Pegasys takes significant market share.
KEY COMPETITIVE POINTS FOR PEGASYS INCLUDE:
-Viral responses seem similar
-Single dose, not weight based dosing
-Pre-mixed
-Roche supplied ribavirin.
ROCHE R&D DAY: REITERATING TIMELINE FOR PEGASYS
Last week Roche hosted R&D sessions in Germany for investors. Part of the
event included an update concerning Roche's second generation hepatitis C
product, Pegasys, which is currently registered with FDA for approval. The
competitive profile of this market is extremely important for Schering as
this franchise could represent 25% of total company sales this year and we
are currently modeling this product line to be larger than the
Claritin/Clarinex franchise in 2003. Additionally, the hepatitis C
franchise is now one of Schering's few areas of strong prescription and
sales growth.
SCHERING HAS HISTORICALLY DOMINATED THIS MARKET...
While this upcoming competitive threat is legitimate, it should be noted
that Schering-Plough currently, and has historically, dominated this market
owing to its first mover advantage. Schering's most advanced treatment,
Peg-Intron + ribavirin, is unequivocally the best treatment option on the
market; patients waited for the product's approval throughout 2001 creating
extra demand for the drug.
...BUT SUPPLY CONSTRAINTS COULD OPEN THE DOOR A CRACK
The problem is that recently Peg-Intron has been limited by supply
constraints as this complex biologic is not quickly produced. The
manufacturing yield should increase this year, but if any patient backlog
exists when Pegasys is approved, it could be to Roche's gain. Prescription
trends indicate that the franchise is reaching a plateau, likely owing to
limited supply.
HIGHLIGHTS FROM ROCHE R&D UPDATE
-Roche continues to assert that it will manufacture its own version of
ribavirin that does not violate intellectual property claims of other
companies.
-Pegasys mono-therapy is currently registered with FDA and in May or June
of this year combination data (Pegasys + ribavirin) will be filed. Roche's
ribavirin data will be filed with the combo data at this time.
-If Roche only receives approval for mono-therapy (or legal challenges to
ribavirin do not allow for a timely combination launch), Roche will launch
Pegasys alone, since ribavirin is available in unbundled form in the US.
-According to Roche, Pegasys may have a stronger effect in patients with
the Type 1 genotype (generally tougher to treat).
-Roche has not completed large scale head-to-head trials with Pegasys and
Peg-Intron, citing a likely trial time of 2 years as a rate limiting
factor.
-We could expect to see combination data for Pegasys and ribavirin at the
AASLD meeting in Boston this November.
-Roche is also studying Pegasys in patients with HCV-HIV co-infection and
specifically in African Americans with hepatitis C (historically a
difficult to treat patient population.)
-Phase I trials with Pegasys + levovirin are on track. According to Roche,
levovirin might offer a better adverse event profile than ribavirin
especially with regard to anemia and mutagenicity.
HEPATITIS C BACKGROUND
The disease is rapidly becoming a pandemic with an estimated 4.1-6.9
million patients infected in the US and 170 million patients infected
worldwide. Treatment has improved with sustained-release products and add-
on antivirals to levels so great that many patients were withheld from
therapy until Schering-Plough's launch of Peg-Intron and ribavirin
(Rebetol) together (October 3 launch).
DISEASE OVERVIEW
Hepatitis C builds slowly toward liver failure and cancer, often without
symptoms. The discovery of hepatitis C as a distinct disease is a
relatively recent phenomenon: Prior to 1989, hepatitis C was known as non-
A, non-B hepatitis. Transmission of hepatitis C is primarily through
blood contact, usually through tainted blood products or by sharing
contaminated needles, although sexual transmission and transmission from
mother to newborn seems to be rarer occurrences.
Severe disease is rare, but silent progression leads to very poor outcomes.
Progression of hepatitis C tends to be milder than hepatitis B during the
acute phase but tends to become chronic more frequently. In general, the
older a person is when he or she contracts hepatitis C, the worse the organ
damage.
Additionally, alcohol, co-infection with hepatitis B and a poor immune
status are significant contributors to cirrhosis. Hepatic failure in acute
hepatitis C is relatively rare. The mean time from exposure to cirrhosis is
20.6 years. Mean time from exposure to liver cancer (hepatocellular
carcinoma) is 28.3 years (as compared with 50 years in hepatitis B). Most
but not all cases of liver cancer are preceded by cirrhosis.
INTERFERON TREATMENT OF HEPATITIS C
The interferon franchise has been built on several cycles of innovation,
with pegylated (long-duration) interferon and ribavirin the new standard of
care. The early and sustained response rates have meaningfully improved
over the years.
Interferon, the first treatment for hepatitis, needed improving.
Interferons bind to receptors on target immune cells, inducing a wide
variety of chemical responses and immunomodulation. Treatment of chronic
hepatitis C patients elicited between 11% and 50% SVR (sustained viral
response) rates, also dose dependent. The label for Intron A claims a 12%
SVR in chronic hepatitis C with 48 weeks of therapy. Almost all treated
patients complained of 'flu-like' symptoms with many complaining of other
problems such as itching, rashes, diarrhea, and weight loss. The
psychiatric effects of interferon are especially debilitating and include
depression and irritability.
RECENT TREATMENT INNOVATIONS
-Adding an antiviral boosts the response of an interferon. Ribavirin is an
antiviral agent with activity against a broad range of both RNA and DNA
viruses. Mode of action is unknown and mono-therapy with ribavirin is not
successful in producing SVRs. In naive patients, treatment with ribavirin
and interferon-a induced SVRs in 43%-60% of patients. When treating
interferon-a relapse patients, SVRs of 75%-90% were achieved. In interferon
a non-responders, SVR rates of 13%-30% are seen. Ribavirin's main side
effect is causing a dose-dependent mild hemolytic anemia.
-Longer-duration therapy. The hepatitis C virus has a half-life of three
hours with a daily production of 12 billion virons. Interferon-a has a half
life of six hours meaning that tri-weekly dosing regimens do not put
sustained pressure on the virus. Pegylation (attachment of a polyethylene
glycol molecule) of interferon is an attempt to increase the half-life and
put sustained pressure on the virus. Pegylated interferon has a half-life
of 72 hours and Phase III studies with ribavirin show a dramatic
improvement over previous treatments with 56% SVRs for chronic patients.
-Rebetol and Peg-Intron plus Rebetol. On July 2001, Rebetol was approved
for sale as a stand-alone product (previously it could only be sold
together with Intron A). Because physicians were awaiting this approval,
the treatment of many patients was being stalled until they could be placed
on Peg-Intron plus Rebetol.>
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