Wall Street Journal - February 25, 2009
Thomas Gryta

Vertex Pharmaceuticals Inc. is seen as the front-runner in bringing such a therapy to the market, with Schering-Plough Corp. close behind. But they may see short product cycles as a horde of companies develop more advanced products and make deals to get a foothold in the multibillion-dollar arena.

"This is the next big market...because almost every single pharmaceutical company is involved," said Cowen & Co. analyst Rachel McMinn.

Like many others, Ms. McMinn expects Vertex to be the market leader. She projects its stock to outperform the market by more than 30% over the next 12 months, as the launch of the company's telaprevir treatment gets closer.

Analysts overall are bullish on the stock, with 14 rating it a buy or better, five as a hold and none at sell or underperform, according to Thomson Reuters.

Vertex already has had a good run: Its stock was the top performer in the Nasdaq 100 last year and is up about 82% over the past 12 months as sentiment about telaprevir's effectiveness improved. But some aren't expecting the run to continue, as about 10% of the stock is sold short, meaning those investors are betting the stock price will decline.

Hepatitis C is a blood-transmitted virus that causes liver inflammation. Patients often have no symptoms for many years, but it ultimately can lead to cirrhosis, cancer and liver failure.

Vincent Lo Re, an infectious-diseases specialist at the University of Pennsylvania School of Medicine, estimates that 1.6% of the U.S. population, or four million people, have the disease, and that there are a total of 175 million patients world-wide. The disease kills 8,000 to 10,000 Americans a year, according to the Centers for Disease Control and Prevention.

ThinkEquity LLC analyst Jason Kolbert estimates the market for hepatitis C treatments is about $2.5 billion a year and projects that it will quadruple over the next decade.

The standard therapy for the disease is a combination of interferon injections and ribavirin pills over 48 weeks. The drugs give a cure rate of about 45% but can cause severe side effects, including anemia, depression and flu-like symptoms.

Vertex and Schering-Plough are developing drugs called protease inhibitors, which fight viral replication. They could raise the cure rate for hepatitis C to between 65% and 95% when given in combination with ribavirin and interferon, Dr. Lo Re said.

Wall Street has favored Vertex's telaprevir because most patients need to take it for 24 weeks, compared with 48 weeks for Schering-Plough's boceprevir. The difference is significant because of the side effects from interferon and ribavirin. In studies, telaprevir has caused a severe rash in some patients, which may give an advantage to boceprevir, despite its longer treatment period.

Notably, telaprevir has shown effectiveness in patients who failed prior treatment, whereas boceprevir has shown only a mild benefit. Both drugs must be taken three times a day, but data later this year may show that telaprevir may need to be taken only twice daily.

Schering-Plough won't disclose its filing plans but expects to have data from two late-stage clinical studies of boceprevir in mid-2010. Vertex expects to file for Food and Drug Administration approval of telaprevir in the second half of 2010.

Many on Wall Street believe that Vertex's calendar is conservative, and in fact will have telaprevir on the market by the end of 2010. Estimates about teleprevir's margin in beating boceprevir for FDA approval vary from a couple of months to as long as a year.

Of course, the success of either drug isn't guaranteed, although the positive midstage trials are seen as good predictors.

Vertex is joining with Johnson & Johnson to sell telaprevir overseas, but it plans to market the drug itself in the U.S.

The first drug on the market likely will establish its brand with physicians, but will also be used by 300,000 to 400,000 patients who have failed existing therapies for hepatitis C.

The race between Vertex and Schering-Plough is competitive, but the market is expected to get crowded fast as companies rush to develop more advanced therapies.

"It is unlikely that telaprevir will be a market leader more than two or three years after it launches," said ThinkEquity's Mr. Kolbert, who said a new drug typically takes about seven years to reach peak sales.

Indeed, Boehringer Ingelheim GmbH is in midstage trials for a once-daily protease inhibitor and could have data on it in 2010. Johnson & Johnson is working with Medivir AB to start Phase IIb trials on a similar drug in the second quarter.

Merck & Co. is working on a protease inhibitor, and Roche Holding AG has teamed with InterMune Inc. in developing such a drug as well.

Physicians hope new drugs will bring an end to using interferon and ribavirin, and result in an all-oral combination therapy such as those used in HIV treatment.

Roche is working with Pharmasset Inc. on a polymerase inhibitor, which also fights the virus's ability to replicate. Pfizer Inc., Gilead Sciences Inc. and Idenix Pharmaceuticals Inc. are among the many companies working on similar programs.

Ms. McMinn, the Cowen analyst, says many large pharmaceutical companies have hepatitis C programs in their pipelines using unknown mechanisms of action, but they aren't yet advanced enough to be highlighted publicly.

Furthermore, as the development of such treatments advances, deals are likely to flourish as drug companies try to ensure their foothold in the market.

ThinkEquity's Mr. Kolbert is puzzled that large pharmaceutical makers haven't bought small drug companies developing hepatitis C treatments -- such as Anadys Pharmaceuticals Inc., Achillion Pharmaceuticals Inc. and Idenix.

"Pharma seems to be waiting until they have proof of concept in hand before they make a deal," Mr. Kolbert said.

Write to Thomas Gryta at thomas.gryta@dowjones.com

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