By Arthur Wong For the pharmaceutical industry, 2004 was not exactly a banner year. Big Pharma was beset by as host of industrywide and company-specific woes like Merck's (MRK) withdrawal of its painkiller Vioxx from the market, product-liability litigation worries, Chiron's (CHIR) vaccine manufacturing problems, continued pricing pressures, and looming major patent expirations.
S&P's Top 10 Drugs to Watch in 2005
Cervical cancer vaccine
The industry's continued problems have been reflected in Standard & Poor's ratings downgrades of major pharmaceutical names in the past year, such as Merck, Bristol-Myers Squibb (BMY), and Schering-Plough (SGP).
And the bad times may stick around for a while. Several of the challenges faced by the industry, such as major patent expirations, relatively light near-term product pipelines, and product liability litigation, are all long-term in nature and will weigh on Big Pharma's performance, as well as company credit ratings, for the next several years.
Nonetheless, Big Pharma credit ratings remain relatively high. How can they stay that way? These companies will have to maintain productive research and development programs introducing a steady stream of compelling new products. While the industry has been criticized in the past several years for the relative lack of R&D productivity, despite the increasing billions poured into research, there are several very promising product candidates that may form the core of major pharmaceutical companies' future drug portfolios.
APPROVAL PROCESS. Standard & Poor's Ratings Services has selected 10 of the most promising new products -- or pipeline prospects -- from rated U.S.-based pharmaceutical companies, based on sales potential and relative importance to the ratings of their respective companies. (View a related slide show.) The drugs we selected are all new chemical entities that are expected to be submitted to the FDA for approval, have already been submitted, or are entering their first full year on the market in 2005.
These products are also selected based on S&P's expectations that they each will eventually generate significant annual sales -- generally more than $1 billion. S&P also chose these names based on their relative importance to the company. The commercial success, or lack thereof, of these products may have credit-rating implications. S&P will be paying close attention to the progress of these drugs through their various approval or commercialization stages.
The 10 products are listed below in alphabetical order.
Why it's important: Bristol-Myers, while it has made significant strides in resolving past business issues -- excess wholesaler inventories, shareholder lawsuits, a relatively light near-term product pipeline, etc. -- still faces the patent expiration on Pravachol, a key product, in the first half of 2006. The commercial success of high-sales-potential near-term prospects such as abatacept and muraglitazar (see below) are critical in stemming the three-year slide in Bristol-Myers' ratings.
Status: Phase III trials, rolling submission. Holds FDA Fast Track review status. Expected to be launched in late 2005 or early 2006.
Abatacept, a first-in-class T-cell co-stimulation modulator discovered by Bristol-Myers, is the company's entry into the fast-growing rheumatoid arthritis treatment market. T-cells manage the autoimmune response that leads to joint inflammation often associated with rheumatoid arthritis. Abatacept disrupts the T-cell activation process, preventing joint inflammation.
This compound will provide an alternative to patients that have failed to respond to TNF (tumor necrosis factor) inhibitors, which include the three current leading rheumatoid arthritis treatments -- Amgen's (AMGN) Enbrel, Johnson & Johnson's (JNJ) Remicade, and Abbott Laboratories' (ABT) Humira, all high-priced treatments that are generating significant sales.
Abatacept is also being tested for use in conjunction with anti-TNF inhibitors. Still, how quickly doctors will prescribe Abatacept as a first-line treatment will govern how quickly the drug becomes a significant sales generator.
Cymbalta (duloxetine HCL)
Why it's important: Lilly (LLY) has had an impressive run of new product launches, but the long-awaited antidepressant Cymbalta is key. The company's best-selling Zyprexa has been losing market share in the U.S. to newer rivals. Cymbalta is Lilly's best opportunity to quickly reduce its heavy reliance on Zyprexa for earnings and cash flows, given the size of the antidepressant market.
Status: FDA approved.
Cymbalta is a member of the newest generation of antidepressants known as SNRIs (serotonin and norepinephrine reuptake inhibitors), as opposed to the current leading antidepressants, the SSRIs (selective serotonin reuptake inhibitors), such as Zoloft (from Pfizer), Paxil (from GlaxoSmithKline), and Celexa (from Forest Laboratories [FRX
]). Cymbalta benefits from Lilly's traditional strength in central nervous system drugs, as well as from the company's extensive experience competing in the antidepressant market. (Lilly essentially created the market with Prozac, an SSRI.)
Cymbalta will compete against Effexor, a fast-growing SNRI from Wyeth that generates more than $3 billion in annual sales. However, Standard & Poor's believes that Lilly will market Cymbalta more against the older SSRIs, which account for more than 54% of the market for new prescriptions, given the perceived superiority of the SNRIs in treating depression. A direct assault on Effexor is unlikely, given that compound's established market position and more extensive clinical data. Cymbalta also currently lacks a once-a-day formulation, a key advantage in addressing the major problem of patient compliance.
Why it's important: In the face of major patent expirations over the next several years, increasing competition to Lipitor, and safety questions over COX-2's such as the company's Celebrex and Bextra, Pfizer (PFE) will be heavily relying on new drugs such as Exubera, Indiplon, and Lyrica to provide sales and cash flow growth.
Status: Phase III clinical trials; FDA submission expected in the first half of 2005.
Exubera is Pfizer's inhaled version of insulin under development with Aventis. Exubera provides the obvious advantage of being more convenient to administer, vs. current injected insulin. The efficacy of Exubera is not questioned. But there have been some concerns on the safety front, given the incidence of slight declines in lung function during clinical trials. However, such declines did not progress and they reversed upon halting of use. Given Exubera's increased convenience, related better patient compliance, and large market, S&P believes the product could be a significant sales contributor.
Gardasil (human papilloma virus vaccine)
Why it's important: With Merck already facing the 2006 patent expiration on best-selling Zocor, significant new products have become even more critical, given the company's market withdrawal of $2.5 billion-a-year-in-sales Vioxx in September, 2004. Merck now faces an uncertain future regarding Vioxx-related litigation. The near-term product pipeline, already relatively thin, also took a blow from the Vioxx withdrawal, with COX-2 prospect Arcoxia's approval being delayed by the FDA.
Status: Phase III; FDA submission expected in the second half of 2005.
With the Arcoxia setback, Standard & Poor's believes Gardasil is now Merck's most important near-term, internally developed product prospect, given its sales potential. Gardasil is a quadrivalent (effective against four strains of the virus) vaccine against infection by the human papilloma virus (HPV), which could lead to cervical cancer. The vaccine has been shown to be 100% effective during clinical trials. Merck has also done surveys that suggest that the vaccine will be well received by women, and is shifting promotional assets freed up with the loss of Vioxx to support its upcoming vaccine launches, including Gardasil. GlaxoSmithKline has a competing vaccine under development, but it appears that Gardasil will reach market first and be effective against more strains of the virus.
Why it's important: See Exubera, above.
Status: Submitted for FDA approval on Nov. 22, 2004.
Indiplon, which Pfizer is licensing from Neurocrine Biosciences, is a treatment for insomnia. It will compete in the large and growing sleep medication market. The market is currently dominated by Sanofi-Synthelabo's Ambien, which generates roughly $1.6 billion in annual sales. The market has no other really significant branded players, other than possibly Sonata, which was acquired by King Pharmaceuticals in 2004.
Another competitor, Sepracor's Lunesta (see below) will make it to market before Indiplon, and with Lunesta's overall very favorable label, Indiplon has a high standard to beat. However, given Pfizer's much greater marketing power, Indiplon should establish a strong position for itself in the market, and could very well accelerate the growth of the overall sleep-medication market.
Why it's important: See Exubera, above.
Status: FDA approved on Dec. 31, 2004.
Lyrica is a new, improved version of Pfizer's best-selling epileptic and neuropathic pain treatment Neurontin, which is now facing generic competition from several players. Neurontin generated $2.5 billion in annual sales in 2003, its last full year with patent protection. More potent than Neurontin, Lyrica has a more convenient dosing regimen and an improved safety profile. It's the only drug approved for both diabetic peripheral neuropathy and postherpetic neuralgia, the two most common forms of neuropathic pain.
However, Lyrica is classified as a controlled substance and Neurontin is not. Thus, the higher level of documentation required to prescribe a controlled substance may slow Lyrica's market penetration.
Why it's important: After several R&D setbacks in the past, Sepracor has received FDA marketing approval for Lunesta, its potential blockbuster insomnia drug. Sepracor (SEPR) has been generating losses and burning cash for a number of years, given its high R&D expenditures. Lunesta has the potential to firmly establish Sepracor as a profitable specialty pharmaceutical company.
Status: Approved by the FDA on Dec. 15, 2004, but will not launch until possibly March, 2005, due to delay in obtaining U.S. Drug Enforcement Agency (DEA) classification.
The FDA has approved Sepracor's long-awaited insomnia treatment Lunesta with an overall favorable label. The insomnia market is currently dominated by Sanofi-Synthelabo's Ambien, which generates roughly $1.6 billion a year in U.S. sales and holds nearly 70% of the market. Lunesta holds several advantages over Ambien, in that Lunesta does not have a warning that limits its use to under 35 days, as does Ambien, and does not have any buildup of tolerance.
However, the launch and promotion of Lunesta will be very expensive. Sepracor is promoting the product alone, with its 1,250-member sales force, and needs to firmly establish Lunesta in the market ahead of Pfizer's rival, Indiplon (see above), which is expected to reach market in the near term.
Thus, S&P does not expect Sepracor to be profitable or cash flow positive until 2006. But, with the addition of Pfizer to the market, we believe that the overall therapeutic class will grow significantly, enabling Sepracor to generate significant sales.
Bristol-Myers Squibb and Merck
Why it's important: (For Bristol-Myers, see Abatacept, above; for Merck, see Gardasil, above.)
Status: Phase III.
The possible first in a class of Type 2 diabetes treatments known as dual PPARs, muraglitazar targets both alpha and gamma PPAR receptors, providing better blood-sugar control and improved lipid management. Muraglitazar will compete against established drugs Avandia (GlaxoSmithKline [GSK
]) and Actos (Lilly). However, muraglitazar has a dual action, which better sensitizes the body to insulin than do Avandia and Actos, but also reduces triglycerides in the body.
Bristol-Myers and Merck will share in the co-promotion costs and earnings of the drug. Bristol-Myers has had a longtime presence in the diabetes-treatment realm and Merck, which earlier canceled its own dual-PPAR program, brings added marketing prowess. Given the growing diabetes epidemic in the U.S. and the drug's unique dual action, muraglitazar may generate significant sales in the intermediate term.
Tysabri (formerly Antegren)
Elan and Biogen Idec
Why it's important: Long beleaguered Elan (ELN) needs new products to stem continued cash outflows. Meanwhile, Biogen Idec (BIIB), the co-development partner on Tysabri, is experiencing increasing competitive pressure to its largest-selling drug, the multiple sclerosis (MS) treatment Avonex, from newer market entrants.
Status: FDA approved.
Tysabri is the first and only monoclonal antibody indicated for multiple sclerosis (MS). The market is large and growing, but is largely unsatisfied with the current treatments. Tysabri is more effective than current leading MS treatments and holds high sales potential in terms of new patients and the conversion of existing ones. Tysabri will also benefit from Biogen Idec's long experience in the therapeutic class, given that the company's own MS drug Avonex is the best-selling drug in the category.
Tysabri is an infusion therapy (which is more inconvenient and requires delivery infrastructure), while all of its competitors are injectable, and will carry a much heftier price tag. However, S&P believes that the efficacy benefits of Tysabri outweigh these two issues.
Schering-Plough and Merck
Why it's important: Vytorin is the best opportunity for both companies to meet their much-publicized challenges. With Merck's recent loss of Vioxx, Vytorin is now an even more important franchise for the company as it looks ahead to a post-Zocor world in 2006. Both companies will share evenly in the franchise's profits.
Status: FDA approved.
A combination treatment consisting of Schering-Plough's Zetia and Merck's Zocor, Vytorin is critical to both companies' growth prospects. Vytorin competes in the largest therapeutic class, cholesterol lowering, which should continue to post strong growth. Early sales indications are promising. Clinical data has shown that Vytorin is the most effective at cholesterol-lowering. Also, in this environment that is much more sensitive to drug safety, Vytorin achieves higher efficacy at lower dosages, Zocor has been on the market for a number of years, and Zetia has a reputation of being very safe. Wong is a credit analyst following pharmaceutical companies for Standard & Poor's Ratings Services