Expert Financial Analysis and Reporting

The landscape for treating hepatitis C virus is on the verge of dramatic change due to the development of new classes of drugs offering significant improvements in efficacy, convenience and tolerability over the current standard of care which is pegylated alpha interferon combined with ribavirin. The first of the new drugs are protease inhibitors: Vertex/JNJ’s telaprevir and Merck’s boceprevir. Vertex discovered telaprevir and JNJ licensed marketing rights in European, South American, Middle Eastern, African and Australian markets.

 

There is an advisory committee meeting for boceprevir on April 27 and one for telaprevir on April 28. The PDUFA date for boceprevir is May 6 and for telepravir May 26. We expect that boceprevir and telaprevir will be recommended for approval by the advisory committees and that the FDA will approve both drugs around or before the time of their PDUFA dates. It is possible that both drugs will be approved on the same day. JNJ filed telepravir in Europe in December 2010 and received accelerated assessment, which could result in approval in the next month or two.

 

This report is complicated because of the need to use abbreviations to describe treatments and their outcomes. The reader may find this glossary useful

 

Glossary

1. Hepatitis C virus (HCV): a virus that attacks the liver
2. Standard of care (SOC): the current recommended treatment regimen for HCV is pegylated alpha interferon plus ribavirin given over 48 weeks
3. Pegylated alpha interferon (PEG): the backbone of current standard of care for HCV
4. Ribavirin (RBV): added to pegylated interferon to enhance efficacy
5. HCV RNA: This is messenger RNA from the HCV and its presence in the blood is used as a measure of the intensity of the infection; i.e. the viral load
6. Sustained viral response (SVR): defined as undetectable levels of HCV RNA for at least 24 weeks following cessation of therapy. This is the considered a cure and is the therapeutic goal.
7. Viral log decline: A 1 log decline is a tenfold decrease in virus levels, a two log is a hundredfold decrease, three logs is 1000 and so on
8. Early virologic response (EVR): defined as ≥ 2 log decline in HCV RNA after 12 weeks of therapy

 

Stock Opinion

I am recommending Johnson & Johnson and while I am enthusiastic about telepravir, it is only a contributing factor as JNJ is so large and diverse that no one product on its own can move the company. Please see my report of April 24 entitled “Johnson & Johnson Looks Promising Based on New Product Potential” for more details. I think that Vertex has an incredibly strong fundamental outlook for the next three years, but the price may already reflect much of this and at this point I am neutral. I anticipate that boceprevir will be a significant product for Merck, but I am also currently neutral on the stock.

 

Current Treatment of HCV

The current standard of care (SOC) for HCV is a combination of pegylated alpha interferon (PEG) and ribavirin (RBV). These drugs are given over a 48 week course of therapy in which PEG is given as one shot per week and ribavirin which requires 800 to 1200 mg. given with two doses per day.

 

HCV treatments can eradicate the virus in a meaningful percentage of cases and produce a cure. Just suppressing the virus does not seem to alter the course of long term complications which can be life threatening. The goal of therapy is sustained viral response (SVR) which is defined as undetectable levels of HCV RNA for at least 24 weeks following the end of therapy. Patients who do not achieve an SVR but achieve ≥ 2 log viral load reduction are termed partial responders. Patients who fail to achieve early virologic response (EVR) which is defined as ≥ 2 log declines in HCV RNA after 12 weeks of therapy are unlikely to achieve viral eradication.

 

There are three broadly prevalent genotypes of HCV; genotypes 1, 2 and 3. Genotype 1 is responsible for roughly 70% of HCV infections in the US and PEG/RBV is effective in about 40% of treatments. In genotypes 2 and 3, the effectiveness of PEG/RBV is much higher at 80% to 90%. HCV is a slowly progressing disease so that patients seeking treatment are those who were infected perhaps 20 to 30 years ago and who are just becoming symptomatic, not the newly infected.

 

The treatment of HCV infection is very low in relation to the pool of patients who carry the disease as only about 22% of those chronically infected in the US and roughly 13% of those infected in developed overseas markets have been treated. This low level of treatment is due to: (1) unawareness by the patient that they are infected; (2) symptoms are not so severe as to warrant therapy, and (3) inability to tolerate the onerous side effects associated with PEG/RBV therapy.

 

Adding Telaprevir and Boceprevir to Standard of Care

Telepravir and boceprevir should quickly become part of the standard of care and lead to a surge in patients seeking therapy; each will be added to PEG/RBV. The gating factor for sales will be the availability of treating physicians and facilities to treat patients. Remember that this is complicated therapy regimen that lasts 24 to 48 weeks.

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It is estimated that under normal conditions there are about 50,000 treatments of HCV infections annually in the US. However, anticipation of the approval of telepravir and boceprevir has caused as many as 300,000 patients to defer initial treatment until the new drugs become available. In addition, it is estimated that there an additional 350,000 patients who have failed to respond to current standard of care and who are also awaiting boceprevir and telaprevir. This suggests that as many as 650,000 patients are awaiting treatment in the US.

 

At the anticipated price per treatment of $35,000+, this represents an addressable market of a staggering $23 billion. It is difficult to estimate how many of these patients will actually receive treatment, but I have seen estimates that suggest the percentage will be about 60% to 65% which translates into $14 to $15 billion of US sales that will be reached very quickly. The gating factor for sales is the number of doctors and facilities available to provide treatment and follow-up over treatment periods that range up to 48 weeks. I have again seen estimates that the US has the capability of treating 75,000 to 120,000 patients per year which translates into annual sales of telaprevir and boceprevir of $2.6 to $4.2 billion. Hence the bolus of patients will probably take about 5 years to work through.

 

My estimates for sales are shown below:

 

Worldwide Sales Estimates for Telaprevir and Boceprevir  ($ millions)
	2011	2012	2013	2014	2015
telaprevir
US	600	1,600	2,100	2,200	1,600
JNJ Territories	400	2,750	3,700	3,800	3,600
ROW		300	450	550	700
Total Worldwide	1,000	4,650	6,250	6,550	5,900
boceprevir
US	400	1,000	1,400	1,500	1,100
ROW	300	1,600	2,100	2,700	3,200
Total Worldwide	700	2,600	3,500	4,200	4,300

Source: SmithOnStocks estimates

 

Brief Summary of Clinical Trials for Telepravir and Boceprevir

There is tremendous excitement and anticipation in the medical community and on Wall Street about these drugs. Both drugs have shown that they can significantly increase SVR for treatment naïve patients when added to standard of care. They have also demonstrated that for those treatment naïve patients who respond to treatment quickly as determined by undetectable viral load, the length of treatment can be shortened from the 48 weeks required with SOC to 24 to 28 weeks. This is important because interferon causes flu like symptoms for 2 to 3 days after each weekly administration for many people. Imagine having 48 cases of the flu in weekly succession. Lastly, the drugs when added to SOC can also produce dramatically higher SVRs in patients who have failed previous therapy. Each of these drugs is a revolutionary improvement in the treatment of life threatening HCV infections.

 

Physician experts I have listened to expect telepravir to capture a somewhat larger share of the market for both treatment naïve and treatment experienced patients. Telepravir has two advantages: (1) it appears to be somewhat more potent in both treatment naïve and experienced patients and (2) the duration of therapy with telepravir is shorter. More naïve patients will be able to use a short 24 week course of therapy on telepravir, and it is also an advantage that patients only need to be on telepravir for 12 weeks while boceprevir was dosed for 24 to 48 weeks in its phase III trials. Each of these drugs have side effects that are additive to those of standard of care so that less exposure is desirable.

 

There were three phase III trials conducted with telaprevir and two with boceprevir. I have summarized the key findings of these trials as follows:

Both of these drugs when added to PEG/RBV in treatment naïve genotype 1 patients can dramatically increase the SVR (cure rate). Telaprevir increased the SVR to as much as 75% of treated patients while boceprevir increased it to 66% Standard of care produces an SVR of about 40%.. There may be a slight edge to telaprevir, but both drugs produce dramatic improvement in this life threatening disease.

1. Telepravir can shorten the course of therapy to 24 weeks for about 58% of treatment naïve patients. Boceprevir can shorten the course of therapy for treatment naïve patients to 28 weeks for about 44% of patients. This again appears to be a slight advantage for telaprevir.
2. In treatment experienced patients, telaprevir provided an SVR of 65% and boceprevir 66%. However, the boceprevir patients did not include null responders and its patient group taken as a whole was not as difficult to treat as the telaprevir group. This could be a slight edge for telepravir.
3. The major side effect of boceprevir is anemia as opposed to rash with telepravir. Anemia is somewhat more serious so again there might be a slight edge for telaprevir.

 

Looking Ahead in HCV Therapy

Most experts expect that PEG/RBV will remain part of the standard of care for at least five years and maybe longer. Beyond that there is a mixed opinion on their role. The long term goal or hope is to move from non-specific immunomodulator drugs like PEG and RBV to direct targeted anti-viral therapies such as protease inhibitors, nucleotide and non-nucleotide polymerase inhibitors and other drug classes in development. The ultimate hope is to come up with a cocktail of targeted therapies which would obviate the need for PEG/RBV.

 

There are numerous products that are aspiring to succeed telepravir and boceprevir as next generation protease inhibitors. Achillion, Boehrringer-Ingleheim, Bristol-Myers Squibb, Gilead, Roche and Tibotec/ JNJ have second generation protease inhibitors in development. Also being developed are nucleoside and non-nucleoside polymerase inhibitors from Vertex, Pharmasset/ Roche, Anadys, Idenix and Boehringer Ingleheim.

 

It is too early to handicap who will come up with the first of the new generation of protease inhibitors. These include Medivir/ JNJ’s TMC-435 which is in phase III trial and 8 others that are in phase II. TMC 435 is a key new protease inhibitor to watch. In phase II trials, it has been shown to be potent, well tolerated and to be a true once a day drug. Because of the inconvenient three times per day dosing, both telepravir and boceprevir are subject to significant replacement in the period beyond the next three years if cocktails come into favor. There is a close parallel to the HIV market in that in cocktail therapies, the aim is to reduce dosing complexity and pill burden so that one a day or twice a day drugs are much favored.

Disclosure: The author of this article owned shares of Johnson & Johnson at the time this note was written. This should be taken into account as it may introduce bias into the conclusions and interpretations that are made. In reading this note, you acknowledge that you have not used it as the sole basis of your decision making and that all investment decisions are based on your own analysis. An investment in Johnson & Johnson carries substantial risk and investors could potentially lose much of their investment. The reader acknowledges that he/she has carefully read the Investment Approach, Terms/Conditions and Disclosures sections in the About Us section of the website. The reader acknowledges that he/she will not hold SmithOnStocks accountable for any investment loss that may be incurred if a decision is made to invest in Johnson & Johnson

 

 

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