Biotech Values

[DewDiligence]

More from the Smith Barney’s Lucentis report:

[The report summary was posted in #msg-9279334. Following is the body of the report. Tables and some commentary are not posted here, but I’ve sent the full report to everyone of this board’s email distribution list.]

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This weekend, we attended the MACULA 2006 meeting, a combined meeting of the Atlantic Coast Retinal Club and the tri-annual New York meeting focusing on retinal and macular diseases. In addition, Genentech held an analyst meeting on Saturday evening, January 14th, following the MACULA 2006 meeting. Detailed data from the Phase IIIANCHOR study comparing Lucentis to Novartis/QLT’s Visudyne in patients with predominately classic wet form of age-related macular degeneration (AMD) was presented at this meeting. This study demonstrated overwhelmingly positive efficacy and safety data, with over 94% of patients in both Lucentis groups (0.3 mg and 0.5 mg) losing less than 15 letters at one year compared to only 64.3% of patients treated with PDT (photodynamic therapy)/Visudyne. These topline results were previously released upon the completion of the study in early November.

However, most striking as has been shown in other Lucentis studies, a significant number of patients showed an improvement of vision or a reversal of disease, which has not been shown with currently available therapies, such as Pfizer/OSI Pharmaceuticals’ Macugen or Novartis/QLT’s PDT/Visudyne. Specifically, over 35% of patients in both Lucentis groups had a greater than 15 letter gain at one year (compared to 5.6% of PDT/Visudyne patients), over 30% of patients in both Lucentis groups achieved a visual acuity of 20/40 or better (compared to only 2.8% of PDT/Visudyne patients), and 6.4% and 12.2% of patients in the Lucentis 0.3 mg and 0.5 mg groups, respectively, achieved at least a 30 letter improvement from baseline at one year (compared to 0.0% of PDT/Visudyne patients). All these results reached statistical significance in the trial. The mean change in visual acuity between the Lucentis 0.5 mg group and the PDT/Visudyne group was over 20 letters, and between the Lucentis 0.3 mg group and the PDT/Visudyne group, approximately 18 letters. The investigator for this study also indicated that these and other data support the use of Lucentis after Macugen and/or PDT/Visudyne use.

From a safety perspective, the adverse events observed were similar to prior Lucentis studies. The frequency of myocardial infarctions (heart attacks) was slightly higher in patients treated at the high dose of Lucentis (2.1%) than in the low dose arm or placebo (0.7%). However, in our opinion, the risks associated with cardiovascular adverse events are well recognized by physicians with VEGF compounds and will not deter usage in appropriate AMD patients. These strikingly positive results, which even exceeded the positive results demonstrated in the previously presented MARINA study of Lucentis in minimally occult/classic AMD patients, support our premise that Lucentis will become the leading drug for the treatment in all types of AMD after its launch in late 2006. We estimate that Lucentis is potentially a $1+ billion product.

Off-label Usage of Avastin in AMD

In our opinion, several other presentations at this meeting provided valuable insights into current trends in the AMD market, as well as potential Lucentis expansion opportunities. At this meeting, thought leaders from regional, academic medical centers presented their anecdotal experiences with off-label intravitreal Avastin usage in AMD, followed by a discussion and a legal implications lecture. The moderator indicated that a summary article of Avastin usage off-label in AMD will be published in the March edition of a major medical journal called Retina (to be released at the end of February).We remind investors that Lucentis is similar to Avastin as Lucentis is a fragment of Avastin but possesses a higher binding affinity to VEGF. This off-label usage of Avastin is much less expensive given the need for relatively low doses of Avastin (approximately $5.50 per mg) than the projected Lucentis cost (~$3500-$4000 per mg) and current cost for Macugen (~$3300 per mg), and has raised investor concerns on the impact of Avastin use in AMD on the market potential for Lucentis. In our opinion, the discussions and presentations at this meeting indicated that Avastin is being used exclusively in salvage indications (i.e., when patients fail all other therapy, including Macugen and Visudyne/PDT). Furthermore, we also believe that this will continue to be the case as to date, there is only anedoctal [sic--LOL] evidence for Avastin use in AMD as opposed to well-controlled large clinical trials with reimbursement not widely available. Furthermore, although there has been inquiries from the medical community, it does not appear likely that CMS will endorse Medicare reimbursement of Avastin in this setting under a National Coverage Determination policy as the CMS has cited its concerns that this would set up a precedent for other oncology drugs to be used in a non-oncology setting. In our opinion, the high level of interest and usage of off-label intravitreal Avastin as evidenced by acknowledgement of such use among the 200+ physicians at attendance at the Macula 2006 meeting is indicative of the unmet medical need in AMD and pent-up demand for Lucentis. We believe the recent initiation of the SAILOR study, which is targeted to enroll 5,000 patients, will serve to provide more ready access to Lucentis at this stage and mitigate off-label Avastin use. We note that although the cost of Avastin in this setting is relatively low, there are still considerable associated costs for administration and follow-up (including the cost of the injection procedure, OCT monitoring, office visits, etc.) that may not be readily reimbursed. Importantly, a session at this meeting highlighted the legal implications of using Avastin off-label in AMD and raised the issues of the lack of a consensus about an informed consent protocol for administering intravitreal Avastin and the potential risk of liability associated with any adverse event occurring with off-label Avastin usage. In our opinion, these concerns will serve as a sufficient deterrent to Avastin usage in the front-line treatment of AMD, especially when Lucentis is launched in late 2006.

The moderator of the meeting indicated that Lucentis would clearly become the standard of care when launched, with off-label Avastin being relegated to salvage therapy in refractory patients. Upon the commercial availability of Lucentis, we believe it will also be difficult to conduct large, controlled studies of Avastin in AMD or any large head-to-head studies of Avastin versus Lucentis. In our opinion, the widespread interest and use of off-label Avastin may serve as a catalyst for the FDA to consider granting a priority review status (six month review) for the Lucentis application and lead to a potential approval by late June. [I agree.] We believe the high level of interest and recognition of Lucentis as a revolutionary treatment will lead to rapid uptake of its use upon its market launch.

Upside opportunity in diabetic macular edema (DME)

Additionally, an interim analysis of a Phase I trial of Lucentis in diabetic macular edema was presented that suggested Lucentis may have a similarly, unequalled potential in this ubiquitous disease, with an ability to reverse the disease process, decrease macular swelling, and restore vision. While this was a pre-planned interim analysis in only 10 patients, the Lucentis patients demonstrated a dramatic decrease in foveal thickness (160 microns at 6 months), a decrease of 60% in macular volume, and a mean 10 letter gain at 6 months. The investigators demonstrated that the foveal thickness correlated with visual acuity in this study. In our opinion, if the clinical trials continue to support the efficacy and safety of Lucentis in DME, it has the opportunity to become the standard of care in this disease. We remind investors that this is a sizable market potential, with over 20 million diabetics in the United States of which only 14.6 million are diagnosed today, a number that is increasing due to obesity and dietary habits, according to the American Diabetes Association. The incidence of DME in diabetic patients is 10%, with over 500,000 cases diagnosed in the U.S. and an annual incidence of 75,000 patients according to a epidemiology article titled “A Review of Diabetic Macular Edema” from the Digital Journal of Ophthamology [sic] from Harvard University. Additionally, the incidence increases with duration of diabetes, indicating a growing market as the U.S. population ages.

While a supplemental label indication would take several years to achieve, given the tremendous unmet medical needs of this disease, it is our opinion that off-label Lucentis usage is likely when the product is available, especially if a compendium listing can be obtained. [This is a no-brainer, IMO]. Given the Avastin off-label AMD usage by opthamologists [sic] presently, it is unlikely that this group of clinicians would be deterred by the lack of a DME label indication especially if there is adequate clinical data to support Lucentis use in this indication.

Raising our Lucentis sales estimates

Given our expectation of a likely priority review for Lucentis particularly in light of the strong clinical data for the compound, and a rapid uptake upon its launch, we are raising our sales estimates for Lucentis. We note that we expect a modest size sales force (60-100 sales reps) only would be necessary as the retinal specialists represent a highly concentrated group of only about 1,000-1,500 physicians. We expect the company to launch the product no later than Q4 2006 and introduce our estimate of approximately $25 million in sales in that quarter. We are raising our Lucentis sales estimates to $270 million from $231 million in fiscal 2007 and to $500 million from $404 million in fiscal 2008. [I think these figures are too low.] With these changes, our EPS estimates (excluding any stock option expenses) are raised to $1.83 from $1.82 for fiscal 2006, to $2.47 from $2.45 for fiscal 2007 and to $2.97 from $2.93 for fiscal 2008. We estimate that Lucentis can become a $1+ billion product.
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