This thread has attracted the strangest of people - - thanks. that's the nicest thought i've heard in 2010.
here's j. birchenough's 1st report of the year, reviewing 23 large cap, mid-cap and small mid-cap companies:
Equity Research
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 25 AND IMPORTANT DISCLOSURES BEGINNING
ON PAGE 26
1
Investment Conclusion
We are reiterating our 1-Positive rating on the US biotechnology group following our 2009 sector upgrade and ahead of a potentially
eventful 2010. Attractive valuations, positive resolution to healthcare reform, key transformational events and likely industry consolidation
should drive sector outperformance over the next 12 months. Opportunities for the US biotechnology group are selective and we tend to
prefer small-mid cap stocks over large-cap stocks overall in 1H10. Within the large cap group our rank order of preference is AMGN,
GENZ and CELG as top picks with GILD and BIIB viewed less favorably. Top mid-cap picks include AMLN, CEPH, HGSI, ONXX and
REGN while we are less positive on THRX, OSIP and ZGEN. Balance sheet concerns persist with small-cap names although top picks
RIGL, ISIS, CRME, ARRY and ARIA have benefited from, or should benefit from meaningful partnership funding and support. With M&A
as a major theme we continue to advise focus on antibody products, key therapeutics areas like hepatitis C, orphan indications, and
companies with shared economics with larger partners. Key issues are reviewed for 23 covered names in this first weekly update.
Summary
?? The US biotechnology group outperformed the broader market in 2009 with the BTK up 46% as compared to a 23% increase for the S&P
index. Outperformance in 2009 was not broad based however, with most upside driven by mid-cap standout HGSI, and with focus on 5
large cap components all lagged the broader index with AMGN down -1.7%, BIIB +12.6%, CELG flat, GILD -15.4% and GENZ -26%.
With large-cap valuations at historic lows and at current year 2010 PE multiples of 14x we estimate a 5-year EPS CAGR of >15% and
would suggest upside potential for the group. Key drivers of outperformance include denosumab data in prostate CA SRE reduction and
prostate CA bone met prevention for AMGN, recovery from Allston manufacturing disruption and Myozyme 4000L approval in the US for
GENZ and updated MM-015, IFM-2005-02 and CALGB maintenance data along with Myeloma market share and dose duration
expansion for CELG's Revlimid. While GILD is at the lower end of a historical trading range we expect shares to remain range bound
given maturity of its HIV franchise and uncertain value of its "Quad-pill" and "alternate triplet" as a switch option and mitigant of generic
threat. While BIIB shares recovered late in 2009 on prospects for a JC virus diagnostic, test attributes remain uncertain in terms of
sensitivity and specificity and we expect continued acceleration of PML cases and broader adoption of Tysabri drug holidays to create a
persistent overhang in 2010.
?? Small-mid cap biotechnology stocks could offer more upside potential in 2010 with several new product approvals expected, increasing
profitability, substantial pipeline progress, continued M&A activity, and with improved balance sheet strength. Within the mid-cap product
group we would highlight AMLN as a top pick trading at 2x revenues following our recent upgrade and ahead of likely approval of once
weekly exenatide LAR for type II diabetes in March. We also favor HGSI for its scarcity value as an emerging antibody therapeutics
company with a potential $3B blockbuster in Lupus expected to launch later in 2010. Other top mid-cap ideas include CEPH on potential
Nuvigil settlement and expected Treanda acceleration as well as ONXX on Nexavar expansion into Asia as well as option value for
NExUS results in NSCLC. Our top small-cap picks include RIGL on likely partnership for R788, CRME as a low priced comparable to
THRX ahead of likely EMEA approval of vernakalant IV and phase III initiation for oral vernakalant, and ISIS ahead of broader phase III
data for mipomersen in hyperlipidemia. We are less constructive on prospects for Tarceva growth for OSIP, lorcaserin approval in obesity
for ARNA, telavancin approval in HAP for THRX and Oncotype DX penetration beyond breast CA for GHDX.
January 04, 2010
Biotechnology
Market Commentary/Strategy
Expect Broader-Based Strength in 2010
Sector View:
New: 1-Positive
Old: 1-Positive
Americas
Healthcare
Biotechnology
??
Equity Research
2
Amgen
Product Snapshot
AMGN 2009E 2010E
Product Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Aranesp $2,722.5 18.5% 48.6% 51.4% $2,738.3 17.4% 50.0% 50.0%
Epogen 2,536.5 17.2% 100.0% 0.0% 2,700.0 17.1% 100.0% 0.0%
Enbrel 3,526.5 23.9% 94.1% 5.9% 3,618.4 23.0% 92.9% 7.1%
Neupogen 1,328.6 9.0% 68.7% 31.3% 1,368.9 8.7% 64.9% 35.1%
Neulasta 3,447.7 23.4% 76.0% 24.0% 3,784.6 24.0% 76.3% 23.7%
Sensipar 655.9 4.4% 66.9% 33.1% 753.1 4.8% 67.6% 32.4%
Denosumab 0.0 0.0% 0.0% 0.0% 90.9 0.6% 73.9% 26.1%
Vectibix 229.1 1.6% 41.1% 58.9% 257.8 1.6% 28.2% 71.8%
Other products 86.0 0.6% 78.0% 22.0% 68.0 0.4% 80.0% 20.0%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
TREAT Impact on Aranesp use - $600M of $2.6B in sales at risk. MEDCAC worst case would be Aranesp rescue use at
Hgb<9 g/dl with 50% downside or $300M with $ 0.20 impact. Expert feedback suggests worst case unlikely and that TREAT
impact is likely already absorbed
Bundling Impact on Aranesp use - Street expectation is for 30% decline in Epogen dose in 2011 with switch to subQ from
IV form under a bundled payment system and with Kaiser experience as a precedent. Feedback from Nephrology expert and
CMS advisor Dr. Jay Wish suggests that DaVita and Fresenius unlikely to switch to subQ initially to maintain competitive
advantage
Impact of Mircera, Hematide, follow-on biologic competitors - pricing competition is a potential risk although experience in
Europe within a capitated system suggests limited impact from price discounts with biogeneric competitors gaining only 5-10%
share over 2 years. Renegotiation of 5-year contract agreement with DaVita ahead of expiry in mid-2011 could provide upside
Brand and biogeneric competition to Enbrel - Enbrel market share in the US has remained stable at >30% in
rheumatology and >60% in dermatology despite multiple brand competitors with physician feedback suggesting long-term
safety as a key driver of Enbrel preference. Expect category growth to offset potential future share loss
Sensipar risk to bundling - multiple nephrology experts and CMS advisor Dr. Jay Wish have suggested that inclusion of oral
drugs in the proposed CMS bundling rule could result in >80% reduction in Sensipar use. Strong opposition during the
comment period, lack of inclusion in the MIPPA and "reasonableness" of CMS medical director suggests that bundling will be
modified for oral drugs
Denosumab approvability for treatment of PMO and prostate CA TIBL - CHMP recommendation in Europe should
support an $700M opportunity on approval in 1Q10 while favorable tumor progression data in breast CA and solid tumor SRE
trials should support US approval by June, 2010. FDA may require tumor progression data from the prostate CA SRE trial but
with hazard ratio <1.0 in other SRE trials risk to non-approval is low
Denosumab opportunity in reducing skeletal related events (SREs) - superiority to Zometa in breast CA and numerical
advantage in solid tumor SRE should support dominant market share in 600,000 patients with bone metastases in the US.
Expert feedback suggests that avoidance of adverse renal effects and infusion reactions should expand opportunity in elderly.
Benefit in upcoming prostate CA SRE trial should be most pronounced given differential effect in patients with high bone
turnover and avoidance of adverse renal effects in a patient group at high risk
Expectations for denosumab trial in prevention of prostate CA bone mets - Expert feedback suggests data by mid-year
with mixed opinion on outcome. Zometa success in preventing breast CA bone metastases is tempered by retrospective
nature of data. Pre-clinical support for denosumab is strong and anti-prostate CA effects, anti-VEGF effects, along with critical
role for RANK in bone metastases should support a >50% likelihood of success
Equity Research
3
Biogen Idec
Product Snapshot
BIIB Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Avonex $2,302.4 52.8% 60.5% 39.5% $2,408.4 52.0% 59.1% 40.9%
Tysabri 786.5 18.1% 29.5% 70.5% 1,089.6 23.5% 27.5% 72.5%
Rituxan 1,030.8 23.7% 76.1% 23.9% 937.0 20.2% 83.2% 16.8%
Fumaderm 48.2 1.1% 0.0% 100.0% 52.3 1.1% 0.0% 100.0%
Other products 4.4 0.1% 100.0% 0.0% 0.0 0.0% 0.0% 0.0%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Impact of new PML cases on Tysabri trends in the US- acceleration of PML cases with 24 confirmed cases as of October
and FDA warning regarding time dependence of PML will likely temper new patient starts and increase drug holidays.
Neurology expert feedback suggests that drug holidays will increase dramatically at 2 years post dosing and with a large
number of patients completing 18-24 months of therapy in 3Q09 we believe that patient attrition is an under-appreciated risk
Impact of new PML cases on ex-US Tysabri trends -With the vast majority of 24 new confirmed cases occurring ex-US and
with the majority of those cases occurring in Germany we believe that greater risk exists to ex-US Tysabri trends on likely
heightened risk management. Potential product withdrawal or severe restriction in Germany is a possibility given outlier PML
rate and EU expert feedback suggests that German PML trends are being carefully tracked by regulators
Impact of JC virus testing on Tysabri adoption - introduction of JC virus testing in 1H10 could potentially identify patients
at low risk for PML although validation of testing with clear sensitivity and specificity will be critical for broad adoption. With JC
virus negative patients as a potential target for Tysabri use estimates are variable and range from 40-60%.
Sustainability of growth for Avonex - Avonex volume trends were down in the US and in Europe through 3Q09 but offset by
aggressive price increases. With Avonex approaching Tysabri price and at parity with high priced competitor Rebif further
price increases are unlikely and sales decline is likely to follow volume decline. Biogeneric threat in Europe is limited but
remains an overhang as with AMGN ESAs
Competitive risks from FTY-720, oral cladribine, Campath - Tysabri-like efficacy, oral convenience and mixed safety results
will likely put FTY-720 in front of an FDA panel in 2010 although expert feedback suggests likely approval with a strict REMS
and some competitive risk to Tysabri. Oral cladribine likely to be positioned after Tysabri due to myelosuppression and
timelines for approval remain unclear after refuse to file (RTF) letter from FDA. Campath remains most under-appreciated
competitor with superior efficacy to Tysabri in phase II, unprecedented improvement in disability, one cycle/year dosing and
with phase III data in 2011
Equity Research
4
Celgene
Product Snapshot
CELG Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Thalomid $439.3 16.5% 66.7% 33.3% $375.1 12.1% 67.0% 33.0%
Revlimid 1,686.3 63.2% 78.7% 21.3% 1,970.0 63.8% 79.0% 21.0%
Vidaza 390.4 14.6% 612.5 19.8%
Alkeran 19.9 0.7% 0.0 0.0%
Other products 19.2 0.7% 21.3 0.7%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Revlimid growth opportunity in the US - 60% of global sales of $1.7B, or $1B, coming from the US market supported by
30% frontline market share and 11 month dosing duration. Incidence of 20,000 should increase with aging population and
prevalence of 50,000 should double over next 5 years with 10,000 net patient adds per year. Expect MM-015, IFM-2005-02
and CALGB maintenance studies to support doubling of dosing duration to 2 years with associated doubling of sales. Expert
feedback from Dr. Amitabha Mazumder suggests post-transplant maintenance dosing of 2.5 years with CALGB data
supporting dosing >3 years
Revlimid growth opportunity ex-US - demographics in Europe suggest prevalence slightly higher than in US. With
transplant as a more common modality in 60% of patients IFM-2005-02 data in transplant eligible patients is more important
as a driver of Revlimid use as compared to MM-015 results in non-transplant eligible patients. Significant upside to $600M in
sales with dosing duration of 7 months likely to increase at least threefold, by our analysis. Incremental upside from Japan in
2011 as world’s 2nd largest market
Implications of MM-015 data for Revlimid trends - Feedback at ASH suggests that RMP vs MP induction curves will
separate beyond the median with higher response rate and greater depth of response. Superiority of RMP maintenance vs
MP induction should support NCCN recommendation in the US and frontline approval ex-US. Median PFS for RMP
maintenance trending to 25-30 months suggests roughly 2 years of dosing duration beyond induction
Thalomid generic risk - company feedback suggests 30-month stay extended to late 2010 with limited movement in court
case vs Teva. Patents on REMS remains untested territory with broader implications for pharma/biotech. Impact to CELG
limited with Thalomid contribution in US of 15% and increase in Thalomid ex-US sales
Risk of ANDA filing against Revlimid - Polymorph patents have yet to be invalidated and composition claim is sufficiently
differentiated by virtue of unanticipated increased activity, lower neuropathy and increased myelosuppression. Strong data for
pomalidomide and investigator enthusiasm provides a further line extension for iMID franchise
Equity Research
5
Genzyme
Product Snapshot
GENZ Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Cerezyme $780.6 17.1% 41.1% 58.9% $710.0 13.5% 62.5% 37.5%
Fabrazyme 344.7 7.5% 56.0% 44.0% 550.0 10.4% 38.2% 61.8%
Myozyme/Lumizyme 303.5 6.6% 49.4% 50.6% 460.0 8.7% 40.2% 59.8%
Aldurazyme 151.4 3.3% 40.6% 59.4% 167.1 3.2% 40.9% 59.1%
Renagel/Renvela 717.7 15.7% 57.0% 43.0% 810.0 15.4% 57.0% 43.0%
Hectorol 138.9 3.0% 158.3 3.0%
Thyrogen 173.4 3.8% 212.0 4.0%
Mipomersen 0.0 0.0% 0.0% 0.0% 0.0 0.0% 0.0% 0.0%
Synvisc/Synvisc-ONE 323.1 7.1% 61.0% 39.0% 385.0 7.3% 60.6% 39.4%
Sepra 153.2 3.4% 204.0 3.9%
Mozobil 15.5 0.3% 50.6% 49.4% 43.3 0.8% 48.5% 51.5%
Thymoglobulin 198.5 4.3% 212.3 4.0%
Genetics Testing & Diagnostics 524.1 11.5% 572.0 10.9%
Other products/R&D 743.4 16.3% 751.6 14.3%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Risk to further supply disruption for Cerezyme and Fabrazyme - feedback from GENZ CEO Henri Termeer during our
recent non-deal Roadshow suggests that Allston plant is being made redundant and that FDA is on board with transfer of
2000L product manufacturing to Framingham by 2011 and fill and finish to Waterford in 1H10 - consent decree prior to
manufacturing transfer is unlikely given progress in addressing product manufacturing -483 observations and reliance of infant
Pompe population on 160L fill and finish at Allston. Few personnel and raw materials have common source between Allston
and Belgium and with active screening for vesivirus re-infection is unlikely
Potential for Cerezyme recovery on renewed supply - broad supply available on December 28 with GENZ guiding to full
demand being met by the end of 1Q10. Full demand reflects 100% of prior dose in all patients and as such sales recovery is
dependant on demand as opposed to supply at this point. Results of our proprietary survey of Gaucher prescribers suggests
76% of Gaucher patient likely to return immediately to full dose
Potential for Fabrazyme recovery in 2010 - Fabrazyme remains supply constrained due to temporary 4-week Allston shutdown
at YE09 and low-end normal production yields of 70%. GENZ estimates meeting 30% of demand in 1Q10 and 70% of
demand for the balance of the year. Low-end normal yields due not involve cell culture process and as such are not reflective
of new viral contamination. Yield is constantly being reassessed with tweaking of temperature, ph and other variables in
hopes of increasing to 100%.
Competitive risk to Cerezyme and Fabrazyme - feedback from Gaucher providers suggests limited impact from
velaglucerase and prGCD treatment INDs due to paperwork burden of filing treatment IND. Recent Gaucher town hall meeting
suggests patient reluctance to switch ERTs and as such competition to Cerezyme will likely be for new patients in the US
while most market growth is occurring ex-US. Fabrazyme from Replagal US approval by mid-2010 is similarly limited by
reluctance to switch with EU experience suggesting preference for Fabrazyme
Potential for Myozyme 4000L approval in the US - Feedback from GENZ CEO Henri Termeer suggests that agreement
with FDA on bioequivalence of Myozyme 4000L to Lumizyme 2000L is explicit as is agreement to reference all clinical and
pre-clinical data for Lumizyme 2000L in a new Myozyme 4000L BLA filing. Essentially the Myozyme 4000L BLA filing
encompasses the same data already approved by FDA with a new manufacturing section based on 4000L experience in
Belgium. Successful plant inspection in Belgium should support approval by mid-2010. Global opportunity beyond the US
remains significant with up to 40,000 patients with Pompe disease globally or $12B in market opportunity
Equity Research
6
Gilead
Product Snapshot
GILD Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Atripla $2,302.3 33.4% 69.3% 30.7% $2,872.3 35.8% 67.2% 32.8%
Emtriva 17.0 0.2% 49.5% 50.5% 24.6 0.3% 36.1% 63.9%
Truvada 2,458.7 35.7% 47.3% 52.7% 2,711.5 33.8% 47.4% 52.6%
Viread 661.9 9.6% 43.5% 56.5% 708.3 8.8% 44.0% 56.0%
Hepsera 275.3 4.0% 36.3% 63.7% 253.8 3.2% 38.5% 61.5%
Ambisome 292.1 4.2% 313.7 3.9%
Cayston 0.0 0.0% 0.0% 0.0% 27.4 0.3% 51.8% 48.2%
Letairis 187.0 2.7% 93.3% 6.7% 270.1 3.4% 84.2% 15.8%
Ranexa 133.2 1.9% 96.0% 4.0% 222.5 2.8% 93.3% 6.7%
Tamiflu 393.2 5.7% 485.3 6.0%
Lexiscan 26.9 0.4% 37.5 0.5%
Adenoscan 10.8 0.2% 1.2 0.0%
Other products 19.1 0.3% 9.1 0.1%
Other royalties 91.5 1.3% 75.2 0.9%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
HIV product trends and sustainability of long term growth - HIV market appears saturated with GILD products with 75%
market share in the US and 65% share ex-US. Updated guidelines for earlier treatment of HIV at CD4+ count >350 cells/mm3
could bring additional patients onto therapy however expert feedback suggests that renewed growth in Atripla and Truvada
since early 2009 has been driven by early use already
"Quad-pill" and Truvada + TMC278 strategy as a mitigant of generic risk - expectations for both the "quad-pill" and
Truvada + TMC278 are high with limited margin for error in terms of efficacy trends or safety. "Quad-pill" should demonstrate
comparable efficacy to Atripla based on prior results from Merck for Truvada + isentress however this may not be sufficient to
extend GILDs HIV franchise. Expert feedback suggests that vast majority of patients on Atripla are tolerating the drug well
with complete viral suppression and no impetus for a switch. Mechanism for generic substitution beyond 2017 remains
unclear and we expect overhang to persist
Pipeline opportunity and product diversification - GILD remains the least diversified of all the large-cap biotech stocks
with limited opportunity away from HIV. Pipeline investment is at the very low end of peers with R&D expense at 12% of
revenues as compared to 20-26% for peers. Recent failure of darusentan and lack of depth in late stage pipeline suggests
that GILD operating margins are not sustainable as R&D investment needs to increase.
Equity Research
7
Amylin
Product Snapshot
AMLN Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Byetta $677.0 81.4% 100.0% 0.0% $764.0 82.2% 98.9% 1.1%
Symlin 87.7 10.5% 100.0% 0.0% 88.7 9.5% 100.0% 0.0%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Impact of Byetta label expansion/REMS - while Byetta prescription trends have been flat for several years we expect recent
frontline label expansion to support a broader prescribing base and to be viewed by primary care physicians (PCPs) as a
proxy for the drugs safety. Prior labeling restricting Byetta use to patients failing oral hypoglycemics effectively served to niche
Byetta use to specialists treating more severe diabetics and with expanded labeling Byetta can now be viewed on a level
playing field with metformin, SFUs, TZDs, DPP-IVs and long-acting insulins. REMS requirements for patient education is not
overly cumbersome and reinforces risks that are already well established in terms of association with pancreatitis and risk for
acute renal failure
Implications of Byetta post-approval requirements for exenatide LAR - with the Byetta monotherapy approval letter
highlighting potential risks from pancreatitis, pancreatic cancer, impaired biliary motility, thyroid cancer and acute renal failure
and with post-approval studies requested to better assess Byetta risk-benefit concerns have been raised regarding
implications for exenatide LAR approval in March. We would note that in the context of potential risks, FDA was willing to
expand the Byetta label for frontline monotherapy use and that with full vetting of the Byetta safety database by FDAs Office
of Drug Safety exenatide LAR approval should be relatively straightforward under a line extension designation. With the
greatest risk to a LAR line extension involving the potential differential risk of thyroid cancer between long acting and short
acting GLP-1 drugs we take comfort in the fact that FDA contemplated thyroid cancer risk with Byetta and still approved the
label expansion. With competitor liraglutide flagged for a cross-gender, cross-species thyroid cancer signal occurring at
human exposure levels we would contrast exenatide LAR as having no cross-gender or cross-species effect and a signal
emerging only at 30x human exposure
Exenatide LAR market potential - While Byetta sales have flattened at a run rate of roughly 300,000 patients per year or
roughly $750M in sales, over 1 million patients with a sales potential of $2.8B have initiated Byetta in the US. With lack of
persistence as the primary issue affecting Byetta sales growth expert feedback suggests patient fatigue with twice daily
injections, substantial nausea in 30% of patients, disappointment with weight loss could be addressed by a more effective,
better tolerated once weekly option with Byetta. While exenatide LAR dose form may be suboptimal and lack of pen delivery
may be a barrier to broad adoption we believe that 700,000 patients that have initiated Byetta and not persisted represent a
significant pent-up demand for the drug
Implications of Takeda deal for obesity assets -AMLN obesity assets remain best in class, in our opinion, with peripheral
mechanism of action, favorable tolerability profile, lack of adverse CNS effects and superior weight loss effects when
compared to currently marketed drugs as well as late stage products in development. We believe that the $1B+ partnership
with Takeda and full funding of development and commercialization should position AMLN obesity assets, pramlintide + leptin
as well as davalintide, ahead of later stage products like Arena's lorcaserin, Vivus's QNexa and Orexigen's contrave and
should command a premium valuation to the $800M valuation for Vivus.
Equity Research
8
Cephalon
Product Snapshot
CEPH Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Modafinil $1,111.2 50.8% 94.2% 5.8% $1,130.0 46.6% 94.0% 6.0%
Fentanyl 378.2 17.3% 85.4% 14.6% 409.3 16.9% 85.0% 15.0%
Gabitril 52.9 2.4% 100.0% 0.0% 48.0 2.0% 100.0% 0.0%
Treanda 215.5 9.9% 100.0% 0.0% 270.0 11.1% 100.0% 0.0%
Other oncology 107.3 4.9% 16.7% 83.3% 136.0 5.6% 16.0% 84.0%
Amrix 111.8 5.1% 100.0% 0.0% 180.0 7.4% 100.0% 0.0%
Other products 170.6 7.8% 19.7% 80.3% 210.0 8.7% 19.0% 81.0%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Effectiveness of Provigil to Nuvigil switch in protecting modafinil franchise - generic entry pushed back to early 2012
with reverse settlement providing 2 years to effect switch from Provigil to once daily follow-on Nuvigil. Prescription market
share of 25% for Nuvigil should grow to 60% in 2010 and >80% in 2011 driven by aggressive Provigil price increases. Barriers
to switching back to Provigil generic from Nuvigil in 2012 include lack of direct substitutability, potential for differentiated label
and potential co-pay assistance. Roughly 50% of Nuvigil Rxs are for new patients where greater brand loyalty may exist
Generic risk to Nuvigil prior to 2023 patent expiry - patent infringement lawsuit filed against Teva on December 2, 2009
claiming infringement of patents 7,132,570 (-570 patent), 7,297,346 (-346 patent) and RE37,516 (-516 patent). Composition
claim in -570 patent claiming form 1 polymorph of armodafinil appears to offer strongest protection and expires December 18,
2023. Polymorph patent validity has rarely been challenged successfully and non-infringement arguments would have to
involve less stable polymorphic forms. Reverse settlement with Teva likely in our opinion and could represent a significant
value driver in 2010
Treanda Opportunity in CLL and NHL - Treanda exited 3Q09 on a $220M run rate with limited use beyond
relapsed/refractory CLL. Updated frontline NHL data from Dr. Rummel at ASH suggesting superior ORR, CR rate, PFS and
OS with improved tolerability for Rituxan + Treanda vs Rituxan + CHOP and recent NCCN recommendation for frontline
Rituxan + Treanda use should support reacceleration of trends. Community oncologist feedback suggests Treanda could be a
profit center with Medicare Part B reimbursement and we expect rapid replacement of R-CHOP with R-Treanda to support a
$1B+ opportunity
Multiple pipeline opportunities to diversify business - while anti-IL5 antibody reslizumab failed to meet both co-primary
endpoints in eosinophilic esophagitis statistically significant reduction in eosinophil count support further drug development
and suggest biologic plausibility in upcoming eosinophilic asthma trial. Phase II anti-TNF mAb CEP-37247 also has biologic
plausibility in sciatica and other radiculopathies based on published research for other anti-TNFs. Lupuzor represents a highrisk,
high-reward proposition in SLE although more robust proof-of-concept work is required with better elaboration of biologic
rationale. Earlier programs for next generation proteasome inhibitor, c-met inhibitor and VEGF-Tie 2 inhibitor (validated by
fluoro-sorafenib) remain under-appreciated, in our view
Equity Research
9
Human Genome Sciences
Product Snapshot
HGSI Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Abthrax $199.9 73.8% $0.0 0.0%
Benlysta 1.6 0.6% 0.0 0.0%
Zalbin 8.9 3.3% 0.0 0.0%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Benlysta approval likely and commercial opportunity significant in SLE - Highly statistically significant results in two
separate phase III trials (BLISS-52 and -76) with SPA agreement, favorable safety and tolerability and significant unmet need
should support certain approval. Expert feedback from several large lupus centers suggests that Benlysta will be a
maintenance agent in up to 75% of patients with moderate to severe disease. Current global peak sales estimate of $2.9B
assume 22% penetration and may prove conservative
Zalbin (albuferon) approval for hepatitis C unlikely but expectations low - we remain skeptical regarding incremental
opportunity for Zalbin as an alternative to PEGASYS in hepatitis C. While primary efficacy endpoint of non-inferiority was met
in both phase III trials we remain concerned regarding unfavorable efficacy trends with numerically lower SVR rates vs
PEGASYS along with higher SAEs and severe pulmonary AEs in particular. We have no estimates for Zalbin in our model and
upside potential could exist given unpredictability of FDA action
Additional ABthrax Orders Could Drive Profitability - HGSI collected $162M in 1H09 for delivery of 20,000 doses of
ABthrax to the US Governments Strategic National Stockpile. With an additional order of 45,000 doses by the US government
expected to generate an additional $152M in revenues between 2010 and 2012 we believe that stockpiling by other
governments could be an underappreciated value driver, much like Tamiflu stockpiling for Gilead and Roche. Complete
response letter from FDA requesting human data appears unreasonable and should not impact ability to gain further
contracts.
Pipeline Opportunity for darapladib, Syncria and mapatumumab - Syncria opportunity as a once weekly GLP-1 agonist
for type II diabetes could be significant although timelines for data are extended until 2012 and differentiation from other GLP-
1s in terms of hypoglycemia, nausea, pancreatitis, renal effects and pre-clinical thyroid CA risk is unclear. Darapladib
represents a high-risk high-reward proposition in patients with coronary artery disease with timelines extended until 2013-
2014. Mapatumumab data in cancer has thus far been disappointing however significant interest exists in TRAIL targeting
drugs and optimization of dose, schedule, target population and combination regiments will be key
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Onyx Pharmaceuticals
Product Snapshot
ONXX Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Nexavar $227.7 91.5% 27.3% 72.7% $324.8 94.2% 24.1% 75.9%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Nexavar growth opportunity in RCC and HCC - Nexavar global sales in RCC remain stable at roughly $300M despite
competitive entry from Sutent, Avastin, Torisel and Afinitor. Global HCC sales of $550M in 2009 have significant room to grow
with $200M in US sales representing only 50% penetration, $250M in sales in EU representing only 15% penetration and with
$100M in Japanese sales representing roughly 10% penetration. Incremental opportunity of 40,000 patients exists from South
Korea and Taiwan with approvals expected shortly and Chinese reimbursement remains the largest incremental opportunity at
>300,000 patients or $6B in sales potential
Nexavar late stage pipeline opportunity - expectations for NexUS trial results in frontline NSCLC are exceedingly low
based on prior US trial failure. Lack of early stoppage at prior interim analyses suggest safety issues encountered in US trial
not seen in NexUS with elimination of high risk squamous patients. Statistically significant benefit in phase II 3rd line
randomized discontinuation study suggest activity in NSCLC with 2nd phase III trial initiated recently. Statistically significant
PFS benefit in Xeloda + Nexavar combination phase II trial suggests significant activity in metastatic breast CA (mBC) with
phase III trial initiation expected in 1H10. Further option value to HCC TACE combination trial, Thyroid CA phase III, and
adjuvant trials in HCC and RCC
Nexavar JV profitability expected to increase in 2010 - Commercial margins on Nexavar within the joint venture (JV) with
Bayer increased in 3Q09 and are expected to continue to increase in 2010. Continued investment in Nexavar R&D with
multiple phase III initiations will continue to depress overall Nexavar profitability although investments appear rational based
on strong phase II results and we appear to be at the very heaviest part of the spend with dramatic margin expansion
expected in future periods.
Carfilzomib investment in Myeloma supports longer term opportunity - incremental R&D investment expected to be
beyond initial ONXX guidance of $25M with initiation of 700 patient phase III trial of carfilzomib + Revlimid + dexamethasone
(CRd) vs Rd where we estimate an incremental cost of $60-80M or $30-40M/year. Accelerated filing on phase IIb data
represents high risk proposition with ORR likely <5% in truly Velcade refractory patients although 15-20% ORR in general
relapsed/refractory patients could support positive ODAC panel vote based on low neurotoxicity rate. Phase III CRd vs Rd is
likely to demonstrate superior PFS with broader ORR and greater depth of response according to expert consultant Dr.
Amitabha Mazumder
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OSI Pharmaceuticals
Product Snapshot
OSIP Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Tarceva $352.2 84.4% 56.1% 43.9% $372.0 80.9% 54.8% 45.2%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Flat Tarceva Trends Expected to Continue - Tarceva prescriptions trends in the US have been flat at roughly 2500-2600
per week for several years as oncologists appear to have identified the optimal positioning for the drug. Feedback from
oncology experts and updates at ASCO and thoracic oncology meetings suggests that favorable tolerability and oral
convenience of Tarceva is best leveraged in sicker 2nd and 3rd line patients. Bias in NSCLC is towards use of chemotherapy
while patients can tolerate it and profit on part B oncology drugs provides added incentive for IV chemotherapy use ahead of
oral Tarceva therapy
Early frontline maintenance use unlikely to change following FDA panel - ODAC panel vote against Tarceva approval for
frontline NSCLC maintenance therapy was well reasoned based on a) limited OS benefit of only 1 month b) zero OS benefit in
highly touted EGFR mutant subset population c) trial design elements which didn't truly assess early maintenance vs delayed
2nd line use and d) crossover effects in EGFR mutant population that suggest early PFS benefit is extinguished by delayed
cross-over to Tarceva. FDA unlikely to go against panel and new trials likely to be required. NCCN recommendations for oral
drugs don't carry weight with compendia and oncologist feedback remains negative
Competitive risk to Tarceva in NSCLC is increasing - relaunch of Iressa in Europe along with potential filing of Iressa or
Zactima by Astra Zeneca in the US is just the first of several late stage competitive risks emerging to Tarceva in NSCLC -
randomized phase II data for Nexavar suggests a benefit in 3rd line patients with recent phase III initiation and multiple oral
VEGF multikinase inhibitors (Sutent) have emerged along with IGFR inhibitors as potential competitors to Tarceva. ANDA
filing suggests potential generic risk although recent patent re-issuance should push generic entry back to 2018
Pipeline Opportunity Limited - key products in OSIPs pipeline are relatively undifferentiated, in our opinion, with its phase II
IGFR tk inhibitor representing one of 12 such products in development and with PFE's figitumumab (CP-751871) well ahead
in phase III. Early diabetes candidates PSN602, PSN821 and PSN010 have limited phase I data and are difficult to value at
present
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Regeneron
Product Snapshot
REGN Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Arcalyst $19.1 5.0% $23.5 6.8%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Aflibercept (VEGF-TRAP) opportunity in oncology - phase II data in ovarian CA, symptomatic malignant ascites (SMA)
and glioblastoma multiforme (GBM) suggest comparable efficacy and safety to Roche/Genentech's Avastin. Failure of
pancreatic CA phase III expected based on prior Avastin failure. Lack of early stoppage at interim analyses in NSCLC, CRC
and HRPC suggest no major safety concerns. With phase III data expected in 2H10/2011 we view 2nd line mCRC as low risk
based on prior FOLFIRI + Avastin phase III data, 2nd line NSCLC as intermediate risk based on mixed results for Avastin +
Taxol and limited experience with Taxotere combination and 1st line HRPC as speculative without precedent Avastin data
Aflibercept (VEGF-TRAP) opportunity in eye disease - NCI eye study likely to demonstrate non-inferiority of Avastin vs
Lucentis with potential limitation of AMD brand market. Upside potential for VEGF brand drugs could occur if increased AE
rate is seen with Avastin vs Lucentis (endophthalmitis, HTN, CV events). Aflibercept effects on retinal thinning and visual
acuity appear comparable to Avastin in AMD with potential for less frequent dosing and lower rate of eye inflammation which
could establish brand differentiation in $1B Lucentis market. Opportunities in DME and CRVO could be larger with no direct
comparison with low cost Avastin to limit market. Positive CRUISE and BRAVO study data for Lucentis lower technical risk for
aflibercept
Arcalyst (IL-1 TRAP) opportunity in acute gout - phase II data clearly establish efficacy of Arcalyst in acute gout with a
highly statistically significant 81% reduction in gout flare vs placebo (14.6% flare vs 45.2%). Positive phase III data are
expected in 1H10 although commercial opportunity is uncertain given availability of low cost alternatives like colchicine and
indocid SR. Gout market is significant, however, with 3 million sufferers and effective marketing could establish a $500M+
brand
Antibody platform opportunities gaining visibility – REGN’s antibody platform is best in class, in our opinion, with
significant differentiation of VelocImmune technology from other antibody platforms. Expanded collaboration with Sanofi
should support 32 to 40 new antibody candidates by 2017, rivaling biotech leader Roche/Genentech. Initial targets of anti-
NGF and anti-IL6 have significant proof-of-concept established through late stage compounds from Pfizer (tanezumab) and
Roche (Actemra) with early clinical data expected in 2010. Anti-NGF mAb in osteoarthritis could represent a multi-billion dollar
opportunity alone
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Theravance
Product Snapshot
THRX Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Vibativ $1.4 5.0% 100.0% 0.0% $15.1 32.0% 100.0% 0.0%
Horizon 0.0 0.0% 100.0% 0.0% 0.0 0.0% 100.0% 0.0%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Telavancin Opportunity in cSSSI is Limited - non-inferiority to generic vancomycin and worse effects on renal function and
QTc prolongation position telavancin unfavorably with hospital formularies - sensitivity to acquisition cost and alternatives like
Cubicin will make uptake very slow. Lack of bacteremia data and adverse trends on survival in HAP trials will further limit use
of the drug.
Telavancin label expansion for hospital acquired pneumonia (HAP) is unlikely - excess mortality in the telavancin phase
III program remains a significant concern following FDAs recent complete response letter. Hazard ratios above 1 suggest
adverse trends overall and when analyzed separately for VAP and HAP, per FDA guidance, trends appear even worse. FDA
request for additional data with overall survival as a primary endpoint suggests requirement for a new study and THRX reanalysis
of existing data with a post-hoc switch of primary endpoints seems to miss the point
HORIZON program for Next Generation Advair Holds Long Term Promise, Near term risk - With $7B in Advair sales a
once-daily line extension could represent a significant mitigant of generic and brand risk in 2012. With the HORIZON program
in COPD just initiating and with the asthma program yet to initiate phase III data flow is expected to be limited in 2010.
Intervening risks include potential re-emergence of formulation issues with limited data on combination of once daily ICS with
once daily LABA in new inhaler and increased visibility of brand and generic competitors
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United Therapeutics
Product Snapshot
UTHR Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
Remodulin $337.6 91.7% $345.0 71.5%
Tyvaso 15.4 4.2% 99.3 20.6%
Adcirca 3.2 0.9% 25.2 5.2%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
Competitive risk to Remodulin IV/SubQ - Remodulin IV/SubQ sales have continued to grow in 2009 despite entry of
generic competition to Flolan and with continued switches from brand Flolan. Expected launch of a room temperature stable
Flolan brand by Actelion in 1H10 could have a different impact on Remodulin IV/subQ franchise given Actelion's strong
presence and marketing prowess in the PAH space. Generic entry against Remodulin itself is pushed back to October 14,
2014 with 5-year patent extension of patent #5,153,222 although earlier ANDA filing could occur any time
Strong launch to inhaled Remodulin brand Tyvaso predicted by UTHR - With limited visibility on Tyvaso launch trajectory
beyond $5M of initial stocking in 3Q09 UTHR has suggested potential new patient starts >1000 by the end of 1Q10 although
the basis for the guidance is unclear as is the distribution between patients naïve to Remodulin vs Remodulin switch business.
Current BCS estimates are for n=608 Remodulin naïve patients in 1Q10 with n=813 patients in 2Q10 which may prove
conservative if the majority of Tyvaso starts projected by UTHR are for patients new to the Remodulin franchise
Adcirca Opportunity as Alternative to Revatio - Adcirca once-daily convenience over Revatio, price discount and limited
presence for Pfizer in the PAH market should support UTHR dominance in the PDE5 market. With Revatio PAH sales
estimated at $150M and with a 30% price discount for Adcirca we believe that incremental sales of $100M may be achievable
for Adcirca. Long term contribution will be limited by Revatio generic in 2012 and as such we do not view Adcirca as a
sustainable value driver
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Zymogenetics
Product Snapshot
ZGEN Total Sales % Contribution U.S. % Ex-U.S. % Total Sales % Contribution U.S. % Ex-U.S. %
Product
RECOTHROM $29.0 21.6% $60.0 54.0%
Source: Company reports and Barclays Capital Research; Sales figures in mlns
Key Issues
RECOTHROM sales continue slow trajectory upwards - sales continue to show sequential growth to $8.5M in 3Q09
although market share of 15% suggests limited traction against entrenched bovine Thrombin JMI from King Pharmaceuticals.
Lawsuit filed in November by King Pharmaceuticals alleging false advertising and unfair competition remains an overhang
while the Citizen's Petition submitted to FDA in August by ZGEN requesting removal of bovine Thrombin JMI remains an
opportunity although an overburdened FDA may not make this a priority
PEG-IFN lambda appears promising but too early - phase Ib data suggesting a roughly 3 log reduction in HCV viral load
over 28 days with PEG-IFN lambda in relapsed and naïve HCV patients is encouraging although making cross study
comparisons is difficult. Early safety and tolerability appears favorable although liver enzyme elevations will need to be
monitored. Phase IIa data is unlikely to provide incremental insights and phase IIb initiation in mid-2010 will not yield data until
2011. Progress with potent direct anti-virals could adversely impact IFN market
IL-21 activity in cancer difficult to ascertain - combination data with Nexavar in RCC is difficult to interpret with no way to
assess incremental contribution of IL-21. Single arm data in melanoma is similarily difficult to assess with no active control
arm and melanoma remains a difficult target overall
Atacicept Development Progressing at Glacier Pace - following validation of BLyS inhibition with HGSI's Benlysta
development timelines for Atacicept phase II/III development in SLE with partner Merck Serono remain unclear. Excess
toxicity in Lupus Nephritis suggest potential problems with Atacicept therapeutic index. Role of APRIL inhibition remains
unclear and may not favorably impact therapeutic index of the drug
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Arena Pharmaceuticals
Key Issues
Phase IIII results for lorcaserin unlikely to support approval for obesity - BLOOM and BLOSSOM study results are
unlikely to support approval of lorcaserin for patients with obesity, in our opinion, given modest average weight-loss of 3.1-
3.6%, below that for approved agents like Meridia, and categorical weight-loss that is similar to intensive dietary counseling in
other studies
Thorough Evaluation of LOCF Analysis Critical to Understanding lorcaserin real-world benefit - We would also note
criticism of last observation carry forward (LOCF) by statisticians and would highlight FDA emphasis on assessment of drop
outs as an important supplementary efficacy assessment that could be more important in real world affects of the drug –
ARNA has yet to indicate what percent of 5% categorical responders were LOCF and as such we see significant risk to FDA
re-analysis
Overhang remains regarding long term effects of lorcaserin on valve function - We do not believe that a 12-month valve
assessment is sufficient to allay theoretical concerns of either investors or potential large pharma partners, given the
uncertainty on baseline valve dysfunction rates, intra-patient variability, and time course for actual drug-induced valvulopathy
CNS adverse events and abuse liability remain a focus - With a single new onset seizure in only 100 patients treated with
lorcaserin 20mg in Phase II, we believe that investors should wait for more mature patient exposure data to rule out this
potential drug effect as well as other adverse CNS effects – FDA assessment of results from neuropsychiatric testing in
BLOOM as well as specific abuse liability data will be critical to assessment of lorcaserin risk-benefit
Pipeline Opportunity Limited - Failure of insomnia drug candidate APD125 in phase II and program discontinuation
removes a potential future value driver and more importantly eliminates an important source of non-dilutive financing – recent
discontinuation of Merck Niacin receptor agonist collaboration raises additional questions regarding value of ARNA drug
discovery platform capabilities
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Ariad Pharmaceuticals
Key Issues
Ridaforolimus opportunity in cancer with partner Merck - substantial proof- of-concept for mTOR inhibition established
with approval for Torisel and Afinitor in RCC. Ridaforolimus described by investigators as best-in-class mTOR with predictable
MTD and optimal therapeutic index. Durable clinical benefit response (CBR) of 30% in sarcoma should support SUCCEED
success on either 2nd interim in 1Q10 or final analysis in 3Q10. Phase II data in endometrial cancer in 2H10 could support a
2nd phase III opportunity and associated milestone payment
AP-534 opportunity in Gleevec Resistant CML should support high value partnership - phase I data presentation at
ASH was highly positive with complete response (CR) rate of 25% in patients resistant to all available multikinase inhibitors.
Precedent for accelerated approval established with approval of dasatinib and nilotinib based on cytogenic response. Pivotal
phase II initiation possible in 2H10 with partnership likely in advance
Multiple options to address balance sheet concerns - Cash balance of $57M at the end of 3Q09 represents roughly 1 year
run-way. Upfront payment on -534 partnership as well as potential milestone payment approaching $25-30M for ridaforolimus
phase III initiation could provide added cushion. Renegotiation of Merck collaboration terms to allow for earlier access to
$200M credit line (currently available YE10) or restructuring of R&D repayment terms could represent significant de-risking
event and potential stock catalyst
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Array Biopharma
Key Issues
Opportunity for glucokinase inhibitor ARRY-403 in type II diabetes - partnership with AMGN provides validation and
much needed post-phase I and commercialization funding. Phase I single ascending dose (SAD) trial establishes significant
effect on post-prandial glucose with positive multiple ascending dose (MAD) phase I expected in 2Q10 and potential phase II
initiation by YE10
Opportunity for unpartnered oncology assets - establishing proof-of-concept in phase I/II oncology trials is exceedingly
difficult and ARRY's portfolio approach is well advised. Phase I MEK-inhibitor ARRY-162 is targeted initially at biliary cancer.
Phase Ib/II KSP-inhibitor ARRY-520 is targeted initially at Myeloma and AML. Phase I selective ErbB2 inhibitor is targeted
initially at metastatic breast CA (mBC). Phase Ib erbB family inhibitor is initially being targeted at combination therapy with
Xeloda, Taxotere and Gemzar. Phase I P38/Tie2 inhibitor is initially targeted at MDS with Tie2 inhibition suggested as
contributing to durable activity of Bayer's VEGF-multikinase inhibitor fluorosorafenib
Opportunity for partnered assets - collaboration deals with CELG and Roche/Genentech could yield IND candidates in
2010. Phase II MEK inhibitor AZD-6244 has a high therapeutic hurdle in melanoma and NSCLC. Phase Ib NS3 protease
inhibitor may be best in class with substantial class validation in HCV although economic benefit may be small with single digit
royalties
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Cardiome
Key Issues
Approvability of vernakalant IV in Europe in 2010 - following positive ACT study results and more recent success in the
AVRO head-to-head study vs amiodarone we expect vernakalant approval for acute atrial fibrillation by mid-2010. Few details
from AVRO were provided, however historical data would suggest at least a doubling of sinus conversion rate from <20% to
>50%. Inclusion of heart failure patients should address concerns raised by FDA. EMEA approval would bring a milestone
payment of $30M and could support profitability in 2011
Approvability of vernakalant IV in the US by 2011 - despite positive phase III results from ACT 1, 2, 3 and 4 studies,
positive recommendation by the FDA medical reviewer and 6-2 CRDAC panel vote in favor of approval FDA has required one
more study to establish vernakalant IV efficacy in non-heart failure patients. ACT-5 should confirm 50-60% conversion rate vs
5% for placebo with results expected in early 2011. We expect approval by 2H11 with global partner Merck likely to acquire IV
vernakalant rights in the US from Astellas earlier in 2010
Prospects for oral vernakalant - phase III initiation with partner Merck expected in 2Q10 with associated $20M milestone
payment. Overall program expected to encompass 7000 patients across 4 separate studies with 2 ANDROMEDA-like
conversion studies, 1 ATHENA-like outcomes study and 1 comparative study. Initial conversion data expected in 1H12 with
outcomes data expected in 1H13 and with NDA filing by YE13 We expect oral vernakalant to avoid excess mortality seen with
dronedarone in ANDROMEDA and to establish the same outcomes benefit as dronedarone in ATHENA. Anticipate a $2B+
global opportunity with 20% royalty to CRME
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Genomic Health
Key Issues
Oncotype DX Saturating ER+, node- breast cancer market - Expect Oncotype DX trends to flatten in 2010. Sequential
growth of 320 tests delivered in 3Q09 is well below sequential growth of 1250 tests delivered at YE08. Roughly 50,000 tests
delivered in 2009 represents >60% penetration of 80,000 patients with ER+, node- localized breast cancer. Remaining 35-
40% of patients primarily composed of patients where decision impact is likely to be less pronounced ie those with large
tumors, very young or very old patients, patients with contraindications to chemotherapy
Ex-US Growth Expected to be Challenging - Reimbursement of Oncotype DX likely to be challenged in capitated
government reimbursement programs in Europe. Regulators may choose to push for EU specific data to support
reimbursement decisions. Decision impact data in Europe could be an important value driver although no specific plans
delineated
Launch of colorectal test expected to be slow - QUASAR validation study for 18-gene Oncotype Dx assay for stage II CRC
suffers from multiple limitations including outdated standard of care with IFL in QUASAR, difficulty of withholding chemo in this
patient population and lack of biologic rationale for the gene markers. Expert feedback suggests limited incremental
opportunity for Oncotype DX in CRC given satisfaction with current diagnostics like microsatellite instability. Incremental
prognostic value beyond microsatellite instability testing is unknown from QUASAR validation study. Lack of chemo-benefit
claim will limit reimbursement and utilization
Regulatory risk and Competitive Risk Remain – Barriers to entry remain low with large pharma (Roche), large biotech
(Genzyme) and various small cap companies (Agendia) focused on molecular diagnostics. IVDMIA guidance from FDA
suggests that regulation of molecular diagnostics is inevitable with significant risk to chemotherapy benefit claims which drive
reimbursement and which have no prospective data support
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ISIS Pharmaceuticals
Key Issues
Mipomersen opportunity in homozygous FH - positive phase III data establish statistically significant 25% LDL reduction in
most difficult to treat population failing statins and multi-drug combinations. Liver enzyme elevations without bilirubin rise is
acceptable in very high risk population. Unmet need should support approval. Actual clinical use by lipidologists and
reimbursement by payers unlikely to be constrained by genotype and more likely to follow phenotype and actual CV risk.
Additional phase III data in heterozygous FH and high risk populations should be even better - LDL reduction with
mipomersen in phase II was greatest in patients with lower baseline LDL levels. Responsiveness of HeFH and high risk
patients to ApoB100 inhibition is greater than for HoFH patients and expect more significant LDL reductions in upcoming
phase III trials
Theoretical concerns regarding fatty liver with mipomersen appear overdone - initial liver imaging study suggests no
excess accumulation of liver fat. Preclinical primate models suggest actual regression of fatty liver. Alternate pathways for lipid
oxidation activated along with ApoB100 inhibition. No Hy's law criteria met in very sick HoFH patients in phase III. Further liver
imaging data expected in 2010 and should better establish liver safety profile.
Antisense Platform Supports Substantial Pipeline opportunity – Complete ownership of antisense platform and royalty
rights to RNAi therapeutics should support platform beyond $1.1B purchase price for 2nd tier RNAi player SIRNA by Merck.
Phase II PTP-1B inhibitor ISIS-113715 for type II diabetes has demonstrated statistically significant reductions in fasting blood
sugar (FBS), weekly average fasting blood sugar, glycated albumin and modest weight loss over a short period of 13 weeks
with 6 weeks required to achieve steady state drug levels. Phase III clusterin inhibitor OGX-011 has demonstrated a clinically
meaningful 6.9 month improvement in overall survival (OS) in a randomized phase II study in castrate resistant prostate
cancer (CRPC) with 39% reduction in risk of death (HR=0.61). Feedback on OGX-011 from prostate CA experts has been
highly positive. Phase II VLA-4 inhibitor ATL1102 has demonstrated Tysabri-like efficacy in RRMS. Survivin inhibitor
LY2181308 could yield phase II data in leukemia for partner LLY in 2010.
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NPS Pharmaceuticals
Key Issues
Sensipar Revenue Contribution At Risk With Proposed Dialysis Bundling Rule – Nephrology expert and CMS advisor
Dr. Jay Wish has suggested on a recent conference call that Sensipar sales could be reduced by >80% in the event that oral
Medicare Part D drugs are bundled into the dialysis composite rate under a proposed CMS rule in 2011. Dr. Wish and other
nephrology experts have suggested that dialysis centers will be unable to afford Sensipar in all but the sickest patients under
proposed bundled reimbursement. Opposition to inclusion of oral drugs is intense during the comment period and the ultimate
rule could be modified in 2010 given lack of inclusion of oral drugs in the MIPPA
Gattex confirmatory trial for Short Bowel Syndrome (SBS) Carries Risk - Gattex subset analysis seems to suggest some
degree of activity in short bowel syndrome however given failure of the primary endpoint and retrospective nature of
subsequent data analysis we believe that risk remains to the confirmatory phase III
Commercial Potential for NPSP-558 in hypoparathyroidism Difficult to Assess - Expert feedback on -558 (formerly
Preos) for hypoparathyroidism appears positive however market opportunity is difficult to assess and relevance of Ca++
normalization as a driver of adoption beyond current Ca++ supplementation remains unclear
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Rigel Pharmaceuticals
Key Issues
R788 Efficacy Comparable to Potent Biologics in anti-TNF naïve RA patients - TASKi2 phase IIb data suggest ACR20,
50 and 70 rates of 66%, 43% and 28% respectively and are inline with Enbrel results of 71%, 39% and 15% with comparable
placebo responses. Similar data in the earlier phase IIa TASKi-1 study suggest robust reproducibility of results and should
support phase III success
R788 Failure in biologic failure RA patients Likely Due to Trial Design Flaw - TASKI3 results suggest early separation of
effect in ACR scores inline with prior TASKi2 and 3 results. Unexpected improvement in ACR scores with placebo confounded
TASKi3 overall results. Baseline imbalances, high placebo response and discordant data at several large centers likely
impacted TASKi3 outcome. We expect better trial design in phase III to support benefit in anti-TNF failures although larger
opportunity is in TASKi-2 anti-TNF naïve population
Concerns regarding hypertension signal overdone - average increase in BP seen across phase II TASKi trials was
modest and inline with NSAID and methotrexate effects (DBP increase of 4-6mmHg and SBP increase of 3.5-4mmHg). Lower
increases in TASKi2 suggest BP effects are manageable with monitoring. Separate outcomes trial requirement unlikely given
that Pfizer’s JAK2 phase III did not require outcomes data despite increased effects on lipids. Actemra increases lipids as well
and outcomes data does not appear to have been required by EMEA or FDA
Partnership Likely in 1H10 with upfront fees and program funding likely to unlock value - Management feedback
suggests all key players in RA market have expressed interest. Amgen needs a line extension to Enbrel and Roche's lack of
success with Rituxan in RA argues for a different approach. Enthusiasm expressed by major thought leaders at ACR should
attract attention of large pharma and biotech. Expect upfront payment of $100-150M with full R&D funding and 15-20% royalty
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Synta Pharmaceuticals
Key Issues
Failure of elesclomol in 2009 remains a difficult setback - Failure of elesclomol in the SYMMETRY phase III trial for
melanoma was absolute and we see no prospects for resurrection of a credible development effort here with excess mortality
associated with the drug
Elesclomol failure was unexpected and should not reflect poorly on management - While prior futility analysis
suggested no obvious problems with the trial only a few months earlier we believe that event rates accelerated in late
2008/early 2009 and that a truer picture of the drug emerged on the final analysis
Pipeline Opportunity Primarily Focused on HSP-90 Inhibitor - Earlier stage programs with HSP90 inhibitor -9090, apilimod
and CRAC channel agents provide for potential future value creation although timelines to meaningful data are extended and
cash preservation will be key
Future Development of follow-on IL-12 inhibitor could provide option value - Recent success with JNJs IL-12 antibody
ustekinumab in demonstrating superiority to anti-TNF Enbrel should provide further support for SNTAs IL-12 small molecule
program with apilimod although timelines for development appear somewhat unclear
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Analyst Certification:
I, Jim Birchenough, M.D., hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any
or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or
indirectly related to the specific recommendations or views expressed in this research report.
On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment
management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.
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Mentioned Company Ticker Price Price Date Stock / Sector Rating
Amgen Inc. AMGN US$ 56.57 31 Dec 2009 1-Overweight / 1-Positive
Amylin Pharmaceuticals AMLN US$ 14.19 31 Dec 2009 1-Overweight / 1-Positive
Arena Pharmaceuticals ARNA US$ 3.55 31 Dec 2009 2-Equal Weight / 1-Positive
ARIAD Pharmaceuticals ARIA US$ 2.28 31 Dec 2009 1-Overweight / 1-Positive
Array BioPharma Inc. ARRY US$ 2.81 31 Dec 2009 1-Overweight / 1-Positive
Biogen Idec BIIB US$ 53.50 31 Dec 2009 2-Equal Weight / 1-Positive
Cardiome Pharma Corp. CRME US$ 4.45 31 Dec 2009 1-Overweight / 1-Positive
Celgene Corp. CELG US$ 55.68 31 Dec 2009 1-Overweight / 1-Positive
Cephalon Inc. CEPH US$ 62.42 31 Dec 2009 1-Overweight / 1-Positive
Genomic Health GHDX US$ 19.56 31 Dec 2009 2-Equal Weight / 1-Positive
Genzyme General GENZ US$ 49.01 31 Dec 2009 1-Overweight / 1-Positive
Gilead Sciences GILD US$ 43.27 31 Dec 2009 2-Equal Weight / 1-Positive
Human Genome Sciences HGSI US$ 30.58 31 Dec 2009 1-Overweight / 1-Positive
Isis Pharmaceuticals ISIS US$ 11.11 31 Dec 2009 1-Overweight / 1-Positive
NPS Pharmaceuticals NPSP US$ 3.40 31 Dec 2009 2-Equal Weight / 1-Positive
Onyx Pharmaceuticals ONXX US$ 29.34 31 Dec 2009 1-Overweight / 1-Positive
OSI Pharmaceuticals OSIP US$ 31.06 31 Dec 2009 2-Equal Weight / 1-Positive
Regeneron Pharmaceuticals REGN US$ 24.18 31 Dec 2009 1-Overweight / 1-Positive
Rigel Pharmaceuticals RIGL US$ 9.51 31 Dec 2009 1-Overweight / 1-Positive
Synta Pharmaceuticals SNTA US$ 5.06 31 Dec 2009 2-Equal Weight / 1-Positive
Theravance Inc. THRX US$ 13.07 31 Dec 2009 2-Equal Weight / 1-Positive
United Therapeutics Corp. UTHR US$ 52.65 31 Dec 2009 2-Equal Weight / 1-Positive
ZymoGenetics Inc. ZGEN US$ 6.39 31 Dec 2009 2-Equal Weight / 1-Positive
Other Material Conflicts
CEPH: Barclays Capital is acting as financial advisor to Ception Therapeutics in the potential sale of the company to Cephalon.
Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative
analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types
of research products, whether as a result of differing time horizons, methodologies, or otherwise.
Guide to the Barclays Capital Fundamental Equity Research Rating System:
Equity Research
27
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see
definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry
sector (the “sector coverage universe”). Below is the list of companies that constitute the sector coverage universe:
Amgen Inc. (AMGN) Amylin Pharmaceuticals (AMLN)
Arena Pharmaceuticals (ARNA) ARIAD Pharmaceuticals (ARIA)
Array BioPharma Inc. (ARRY) Biogen Idec (BIIB)
Cardiome Pharma Corp. (CRME) Celgene Corp. (CELG)
Cephalon Inc. (CEPH) Genomic Health (GHDX)
Genzyme General (GENZ) Gilead Sciences (GILD)
Human Genome Sciences (HGSI) Isis Pharmaceuticals (ISIS)
NPS Pharmaceuticals (NPSP) Onyx Pharmaceuticals (ONXX)
OSI Pharmaceuticals (OSIP) Regeneron Pharmaceuticals (REGN)
Rigel Pharmaceuticals (RIGL) Synta Pharmaceuticals (SNTA)
Theravance Inc. (THRX) United Therapeutics Corp. (UTHR)
ZymoGenetics Inc. (ZGEN)
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-
Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system.
Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month
investment horizon.
2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a
12- month investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-
month investment horizon.
RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage
impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting
in an advisory capacity in a merger or strategic transaction involving the company.
Sector View
1-Positive - sector coverage universe fundamentals/valuations are improving.
2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals/valuations are deteriorating.
Distribution of Ratings:
Barclays Capital Equity Research has 1400 companies under coverage.
41% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 44%
of companies with this rating are investment banking clients of the Firm.
44% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating;
39% of companies with this rating are investment banking clients of the Firm.
13% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 32%
of companies with this rating are investment banking clients of the Firm.
Barclays Capital offices involved in the production of Equity Research:
London
Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)
New York
Barclays Capital Inc. (BCI, New York)
Tokyo
Barclays Capital Japan Limited (BCJL, Tokyo)
São Paulo
Banco Barclays S.A. (BBSA, São Paulo)
Hong Kong
Barclays Bank PLC, Hong Kong branch (BB, Hong Kong)
Toronto
Barclays Capital Canada Inc. (BCC, Toronto)
Equity Research
28
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