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Big Pharma's Rx to Rise and Shine

By Amy Tsao Investors and insomniacs can rest easy: The Food & Drug Administration approved Lunesta, Sepracor's (SEPR) new drug for sleeplessness, on Dec. 15. Unlike rival drugs, including Sanofi-Aventis' (SNY) blockbuster Ambien, the new product has a label that doesn't warn against using it for longer than two weeks. Lunesta also claims another advantage: With Ambien, most troubled sleepers can get to sleep, but they often wake up in the middle of the night. The older sleep drugs, called benzodiazepines, pack a knock-out punch and can be addictive. According to David Southwell, Sepracor's chief financial officer, Lunesta "bridges the two" types of sleep aids.

Sepracor plans to back Lunesta with intense marketing and to play up data on safety and effectiveness from the six-month trial. The outfit says it will spend $60 million on consumer-marketing efforts and deploy 1,250 salespeople. Shares in the Marlborough, (Mass.) company rose 10%, to just over $55, on news of its approval. Lunesta is critical for Sepracor because it could drive the company to profitability in 2006. In 2004, analysts, on average, expect Sepracor to post a loss of $305 million on revenue of $371 million.

LOOSER LABEL. Will Lunesta be the huge hit Wall Street expects? Maybe, but Sepracor is in for a hard slog, since several big competitors are lusting after the same market. Starting with Lunesta's launch early next year, sleep treatments will become one of the most visible and fastest-growing categories of prescription medicines in years. By 2009, total revenues for such drugs could reach $4.4 billion, up from $1.7 billion in 2003, figures Aaron Reames, analyst at Houston-based boutique investment bank Stanford Financial Group.

Fast on Sepracor's heels are three other drugs: Sanofi's continuous-release version of Ambien called Ambien CR; Indiplon, which is being co-developed by Neurocrine Biosciences (NBIX) and Pfizer (PFE); and Japanese drug maker Takeda's Ramelteon, which takes advantage of the beneficial effects of melatonin. All of theose outfits have submitted or are close to submitting applications to the FDA.

The absence of the formerly standard two-week warning from Lunesta's labeling may bode well for the entire sleeping-pill market, since it indicates that the FDA is open to giving other drugs less-limited labeling if the data support it.

PFIZER'S MARKETING MUSCLE. Also, Sepracor's plans for heavy TV and magazine advertising will heighten awareness of insomnia, which could result in "people becoming more willing to go and ask for prescriptions," says Ken Wahl, analyst at Mehta Partners. The market may well be underserved: The National Sleep Foundation figures that up to half of the U.S. population suffers some degree of insomnia, with only 10% seek treatment.

Analysts expect overall sales of sleeping pills to rise -- as antidepressants and allergy treatments did as more of those drugs entered the market. As that happens, companies will undoubtedly gear up their advertising. The market-share winner will be the product with the deepest pockets, predicts Reames -- and Neurocrine, with Pfizer backing it, will probably have the greatest resources: "If you take a look at [Pfizer's] marketing budget, there's no comparison," Reames notes. Pfizer did not return calls for comment.

Sanofi is no slouch, however. The world's third-largest drug company will likely make a huge push to convince patients and doctors to switch from Ambien to Ambien CR. The goal is to achieve combined peak sales of $2 billion for both products, vs. sales of $1.5 billion for Ambien worldwide in 2004.

LEFT BEHIND? Lunesta's approval will "increase education about insomnia, which will benefit the market as well," says Sarah Conway, a spokesperson for Sanofi. But Sanofi is hoping physicians will view Ambien as the "trusted gold standard treatment for a decade now." Ambien CR's application was filed with the FDA in July, and Sanofi anticipates approval in the second quarter of 2005.

It's far from clear how much market share Sepracor can secure with less than a year's jump on the nearest competitor. The other brand-name entrants are expected to reach the market beginning in the second half of 2005, while generic versions of Ambien will arrive in 2007. In 2009, Reames expects generics of Ambien to make up 20% of the total sleep-drug market with Indiplon holding 38%. He predicts that Lunesta will be at the back of the pack with an 11% market share.

Mehta Partners' Wahl predicts Lunesta will be a "medium-sized" drug with peak sales of $650 million in 2010. (Wahl doesn't own shares, and neither does his firm.) Reames is less optimistic, projecting peak annual sales of $400 million for Lunesta. Reames rates Sepracor a sell with a price target of $35. (Reames doesn't own shares, but his firm is a market maker in the stock.)

THE VIOXX FACTOR. Ironically, physicians could be an obstacle for emerging sleep medicines. In recent years, both the medical community and insurance companies have been slow to embrace the newest lifestyle drugs. "Why move patients over if they are not having any issues and risk additional side effects?" says Reames. The safety concerns raised in recent months by Merck's (MRK) withdrawal of popular arthritis pain drug Vioxx can only magnify that attitude.

Southwell is nonetheless buoyant about Lunesta's prospects, figuring that it could be a "billion dollar" drug in the next few years. Also in his product's favor, the National Institutes of Health in June will debate whether to change the recommendations for the length of use of the newer insomnia medications. "If they alter the language with respect to time limitations, we're still going to have advantage because we have run the longest studies," he says.

Southwell is also expecting other studies of Lunesta to help it increase market share. Sepracor is conducting trials in menopausal women, people with chronic pain from rheumatoid arthritis, and those suffering depression.

Sounds impressive, but so do the plans of the Sepracor's big rivals. Tsao is a reporter for BusinessWeek Online in New York

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