Big Pharma Digs Deep

Companies like J&J and Novartis are paying up for access to hepatitis C research.
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When it comes to developing treatments for hepatitis C, the big guys are so impressed with what the little guys are doing that they're willing to pay a lot of money for hope.

The latest example saw

Roche

last month agree to work with

InterMune

(ITMN)

to fight the blood-borne virus that can lead to liver cancer, liver damage or even a liver transplant.

Biotech deal-making isn't headline news for Big Pharma,

but the size of Roche's pact jolted analysts because InterMune's drug hasn't been tested on humans yet. InterMune gets $60 million upfront and as much as $470 million in milestone payments and sales-based royalties.

"Given that Roche is the market leader ... with 2005 sales of approximately $1.4 billion for its hepatitis drugs, we believe that the Roche partnership reduces clinical development and commercial risks associated with the product," says Eun Yang of Jeffries in a recent report.

Yang is neutral on InterMune because clinical trials haven't started for its drug ITMN-191. The analyst doesn't own shares of the company.

Drug giants are willing to take these risks because hepatitis C presents a potentially lucrative market. The National Institutes of Health says 170 million people worldwide are chronically infected, including about 3 million in the U.S.

In the U.S., the disease persists primarily due to needle-sharing among drug users, but it's also caused by unsafe sex and transfusions of infected blood or transplants of infected organs.

Without better drugs, deaths related to the virus "will double or triple in the next 15 to 20 years due simply to the length of time most people in the U.S have been infected," the NIH predicts. The current death rate is 1% to 5%.

Although seven brand-name drugs are sold in the U.S. to fight hepatitis C, more than two dozen compounds are being tested, says Sagient Research Systems, which tracks biotechnology developments.

Researchers are seeking medications that are more effective, have fewer side effects and are easier to take than current drugs, but there probably won't be any new products at least until late 2008 or 2009.

Roche and

Schering-Plough

(SGP)

dominate the market. Both sell injectable drugs called pegylated interferons and brand-name versions of the now-generic antiviral ribavirin.

The gold-standard treatment is combining the two drugs, but they can cause dangerous side effects and are only partially effective. Hepatitis C has six major strains, or genotypes, but existing drugs only help about 45% of patients with genotype 1, the most common and hardest-to-treat strain in the U.S. The drugs also can treat about 75% of U.S. cases of types 2 and 3.

Given this batting average, it's not surprising why big drugmakers are opening their checkbooks.

Howard Liang of Leerink Swann calls the InterMune deal "extraordinary" because Roche is offering the type of funding that would ordinarily be offered only after a later stage of clinical testing. Liang has a market-perform rating on Intermune. He doesn't own shares.

Liang, in a research report, says Roche's price is similar to the June arrangement between

Novartis

(NVS) - Get Report

and

Human Genome Sciences

(HGSI)

for a drug in Phase 2 testing.

In that deal,

Novartis initially paid $45 million and could make up to $507.5 million in milestone payments for Albuferon, a fusion of interferon and the blood protein albumin. The companies will co-promote Albuferon in the U.S., while Novartis will handle marketing elsewhere.

The terms Roche reached with Intermune "likely reflect the scarcity of licensable assets for hepatitis C and the high demands for protease inhibitors," says Liang. Protease inhibitors are meant to block an enzyme that helps the hepatitis C virus replicate. Several companies are developing protease inhibitors, including Schering-Plough, whose drug is in Phase 2 testing.

Roche also has another drug, called a polymerase inhibitor, in Phase 2 testing, and it has deals with two other firms pursuing three other compounds.

Another big dealmaker is

Johnson & Johnson

(JNJ) - Get Report

, which signed a pact with

Vertex

(VRTX) - Get Report

for VX-950, a drug in Phase 2 testing.

J&J paid $165 million upfront. On top of that, it will lay out up to $380 million if certain sales targets are met and will pay a sales-based royalty. J&J is also working with Sweden's

Medivir

on a drug still in preclinical testing.

However, Novartis is most actively seeking involvement in hepatitis C research. In addition to the Human Genome agreement, it owns 56% of

Idenix Pharmaceuticals

(IDIX)

, a company with a drug Phase 2 clinical trials.

Five months ago, Novartis connected with

Genelabs Technologies

(GNLB)

for access to drug research, providing $12.5 million upfront and as much as $175 million in milestone payments. The Genelabs drug hasn't been tested on humans.

Additionally, Novartis collaborated with

Anandys Pharmaceuticals

(ANDS)

last year, and in April, when it bought the rest of Chiron, it gained access to an experimental hepatitis C vaccine.

Companies like Roche and Novartis can afford to make multiple deals, and they know it's also wise to be diversified when fighting hepatitis C. Since 2003, says Sagient Research, companies have suspended or cancelled work on at least 10 compounds.

Making multiple deals also allows big companies to pursue hepatitis C treatments in many ways. Novartis' deals cover different types of compounds, giving it a choice of strategies to achieve the same goal.