Tarceva Approval Only Half OSI's Battle

Last April 26, shares of OSI Pharmaceuticals(OSIP) soared 139%, hitting $98 per share, on word that its lung cancer drug Tarceva was able to prolong survival in patients with the most advanced stage of non-small cell lung cancer.

Thursday night, the Food and Drug Administration approved Tarceva for sale. OSI shares trading closed at $64.25. Can the company get back to its all-time high?

The answer depends largely on how well Tarceva performs in the non-small lung cancer market, especially as it goes up against Iressa, a rival lung cancer drug from AstraZeneca(AZN) that's been on the market since 2003.

If doctors perceive Tarceva to be a stronger, more effective drug, it will steal market share from Iressa and grow the market, too. But if doctors perceive both drugs to be equivalent, or if the lung cancer market does not expand, OSI may have a hard time meeting Wall Street's more bullish expectations.

The bull and bear case are reflected somewhat in the divergent Tarceva sales estimates carried by analysts in their financial models. Looking beyond the 2005 launch year, sell-side estimates for U.S. Tarceva sales in 2006 range roughly from $300 million to $600 million; the gap grows further out, with some analysts forecasting well over $1 billion in U.S. sales in 2008, while others predict only half that amount. (The longer-term estimates include assumptions that Tarceva is ultimately used for treatment of other cancers. Remember, too, that OSI shares revenue and profit for Tarceva equally with Genentech(DNA).)

Tarceva and Iressa (both oral drugs) belong to a class of drugs that attempt to halt the growth of cancer cells by blocking a key enzyme, epidermal growth factor, or EGF. ImClone System's (IMCL) Erbitux is also an EGF inhibitor, but it's an injectable drug, so it works in a slightly different way. Erbitux is also approved only for colon cancer right now.

Iressa was approved on the basis of uncontrolled studies that showed the drug shrank tumors in about 10% of patients who have failed all other treatments; the studies were not designed to determine whether patients lived longer. AstraZeneca posted Iressa worldwide sales of $282 million in 2003. In the first nine months of this year, worldwide sales totaled $309 million, up from $136 million in the first nine months of 2003.