Merrill
OSI Pharmaceuticals, Inc.
Company Update; Panel Favors Tarceva; Use May Be Limited
FDA PANEL FAVORS TARCEVA IN PANCREATIC CANCER. The FDA
panel voted 10-3 in favor of approving Tarceva in combo with Gemcitabine to
treat patients with pancreatic cancer. While the FDA typically follows the
recommendation of its advisory committee, we still remain skeptical that the FDA
will fully approve a label expansion for Tarceva in pancreatic cancer. If full label
expansion is granted, we project peak sales in the indication may be about $40
MM, which would boost EPS by about $0.18 at peak. The incremental revenue
from Tarceva in pancreatic cancer may be modest, however, the stock may be
fueled by removing the overhang of the panel meeting. Regardless of the outcome
of the FDA decision, we remain positive on the underlying fundamentals of OSI’s
core business and believe that the stock is undervalued. Thus, we maintain our
BUY.
LIMITED CLINICIAL BENEFIT AND TOXICITIES MAY LIMIT USE
Following the release of FDA’s briefing documents, the street was largely
expecting a negative panel meeting. Thus, the positive vote in favor of approving
Tarceva without additional trials shifted that sentiment. We believe oncologists
would like as many drugs available for their patients as possible, especially those
with rapidly progressing disease, such as pancreatic cancer, or who have failed
other therapies. However, because of Tarceva’s limited overall survival benefit
when combined with gemcitabine compared to gemcitabine alone (6.4 mo vs 5.9
mo), limited improvement in progression free survival (3.75 mo vs 3.55 mo), and
lower quality of life with increased toxicities, including stroke, infections and
diarrhea, we anticipate limited use if the Tarceva label is expanded to include
pancreatic cancer.
LABEL EXPANSION COULD YIELD INCREMENTAL $40 MM SALES
AND $0.18 EPS. We do not have any revenues in our model for Tarceva in
pancreatic cancer. There are about 30,000 patients with pancreatic cancer. The
drug will likely be given at the 100mg dose, which is 2/3 of the dose used in lung
cancer, and would cost about $1,553 per month. We anticipate relatively slow
adoption of Tarceva use in pancreatic cancer if the label is expanded, with peak
penetration of 20%. Assuming 3.75 months of use on average, peak sales in the
indication could reach $40 MM by our estimates. Although we are not adjusting
our model at this time, if label expansion is approved by the FDA, incremental
revenues in pancreatic cancer could boost EPS by about $0.18 at peak.
Eric J. Ende
Research Analyst, MLPF&S
OSIP; $32.30; C-1-9
Buy
Volatility Risk: High
12-Month Price Objective: $51.00
(08-Sep-2005)
EPS (Dec): 2004A -$4.53; 2005E -
$1.58; 2006E $0.62
P/E (Dec): 2004A NM; 2005E
NM; 2006E 52.1x
Market Cap: US$1,653.86mn |
