Hepatitis Still a Frustrating Foe

Despite the efforts of a slew of companies, the virus refuses to give up the fight.
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The last few weeks have been rough for companies trying to develop new treatments for hepatitis C.

Since March 14, three drugmakers,

Human Genome Sciences

(HGSI)

,

Idenix Pharmaceuticals

(IDIX)

and

Valeant Pharmaceuticals

(VRX)

, have announced disappointing clinical trial results, but vowed to continue their research.

These companies are far from alone in their pursuit, as they're joining more than a dozen Big Pharma and small biotech firms in searching for a solution.

The crowded field means hepatitis C, the blood-borne infection that can lead to chronic liver disease, cancer or the need for an organ transplant, is one of "the hottest areas of biotechnology drug development," according to a recent research report from Jim Reddoch, an analyst with Friedman Billings Ramsey. Reddoch has an outperform rating on Idenix. He doesn't own shares, but his firm seeks to do business with companies covered in its research reports.

Estimates from the Centers for Disease Control and Prevention say that 3.9 million Americans have the hepatitis C virus, including 2.7 million who are chronically infected. Seven out of 10 of those with chronic hepatitis C infections have chronic liver disease. The death rate can be as high as 5%.

The CDC points out that 80% of people with hepatitis C, whose main cause is needle-sharing among infected intravenous-drug users, don't show signs or symptoms. The disease can persist years or even decades before a patient becomes aware of the problem. There is no vaccine.

For researchers, hepatitis C is particularly challenging because there are six different strains of the virus and more than four dozen subtypes, says Sagient Research Systems, which analyzes pharmaceutical developments.

Needless to say, hepatitis C presents a big moving target for drugmakers, but even in a best-case scenario new drugs won't reach the market until mid-2008 or 2009, says Andrew McDonald, of ThinkEquity Partners. McDonald has a buy rating on Vertex and Valeant. He doesn't own shares.

"Although not enough data are available to call a winner just yet, we strongly believe that a next-generation agent that comes to the market well in advance of the competition will enjoy a strong foothold and will be difficult to overcome," McDonald says in a recent research report. "However, we have seen the hepatitis C treatment space change dramatically within just a few short years and a similar revolution in the future is always a possibility."

Oligopoly

Until the revolution comes,

Schering-Plough

(SGP)

and Switzerland's

Roche

will continue to dominate the market. Both make injectable drugs called pegylated interferons, which are more effective than older interferons and reduce dosing to once a week from three times a week.

Valeant sells Infergen, a cousin of standard interferon drugs that's often used by patients for whom pegylated interferons aren't effective.

The Roche and Schering-Plough drugs are often administered along with ribavirin, a now-generic antiviral pill that enhances the interferons' virus-fighting efforts. Schering-Plough and Roche sell brand-name versions of the drug, which by itself isn't effective for treating chronic hepatitis C.

Although the pegylated interferon-ribavirin combination is the top hepatitis C treatment, there's plenty of room for improvement. Both drugs can cause ferocious and sometimes fatal side effects. Interferons can cause or aggravate neuropsychiatric problems, bacterial infections and cardiovascular injuries, and ribavirin can lead to anemia.

The combination can repel the virus in about 80% of patients with genotypes 2 and 3, the CDC says. However, these strains represent only about 20% of hepatitis C patients. Existing drugs can only help, at best, half of the patients with genotype 1, which accounts for about 70% of the U.S. cases.

Where to Improve

Any drug that does a better job against genotype 1, improves dosing convenience or produces fewer side effects will be a big seller.

Many candidates are protease inhibitors, which target the enzyme the hepatitis virus needs to reproduce. Other protease inhibitors are used as HIV and AIDS treatments. Most hepatitis C treatments are in early to midstage clinical testing, and Schering-Plough is one of the players conducting studies.

The protease inhibitor attracting the most recent favorable attention is the pill VRX-950 from

Vertex Pharmaceuticals

(VRTX) - Get Report

of Cambridge, Mass.

Vertex's stock has quadrupled in 12 months, even though it has given back about 19% since early March. Wall Street is split on the stock, with nine buy recommendations, nine hold ratings and one sell rating, according to Thomson First Call.

Despite positive early test results, "novel mechanisms carry not only potential for reward but increased risk of failure," says a recent report by Needham & Co. Still, Needham's analysts acknowledge the upside, saying the compound "has the potential to transform the treatment of hepatitis C, possibly even curing patients of the infection." Analysts at Needham have a hold rating on Vertex; they don't own shares.

Idenix is working on the pill NM-283, an enzyme fighter known as a polymerase inhibitor. Idenix reported on March 23 that it would have to modify its clinical trials because high doses caused gastrointestinal side effects during midstage clinical trials. The following day the stock dropped 28%, and it hasn't recovered.

Idenix said then that the Food and Drug Administration has agreed to modifications in ongoing trials, adding that these changes will delay the drug's development. Idenix expects results in the next six months.

The company is working with

Novartis

(NVS) - Get Report

, the owner of 56% of the Cambridge, Mass., company. A few days after the test results were published Novartis exercised an option to license NM-283, paying as much as $70 million in licensing fees and $455 million in milestone payments.

The licensing deal "strongly suggests that Novartis believes NM-283 can be a billion-dollar drug," says FBR's Reddoch in a March 29 report. However, Wall Street overall is cooling on Idenix. In February, there were six buy ratings, and now there are only four.

More Hurdles

Wall Street also has mixed feelings about Valeant. Last month the company said a Phase 3 clinical trial had failed to meet its goal for the drug Viramidine, a cousin of ribavirin. The stock lost 14% in one day.

Valeant tested its drug against ribavirin with all patients also receiving pegylated interferon. Viramidine caused fewer cases of anemia, but it was less effective. Valeant said the results were affected by proportionally lower dosing among the Viramidine patients. Another Phase 3 clinical trial is in progress, and results are expected later this year.

The company predicts the drug could be on the market in late 2007, but McDonald wrote in a research report the day after the results became known that "Viramidine is dead." He expects poor results for the other Phase 3 test, predicting in an April 4 report that the Viramidine program will be canceled by the end of the year.

The credit-rating agency Moody's Investor Services has lowered its outlook to negative from stable on $300 million in Valeant's debt securities, whose B1 rating is well below investment grade. If the other Phase 3 trial yields poor results or Valeant delays its application to the FDA, the rating could be downgraded, Moody's says.

Human Genome Systems doesn't fare much better with analysts, whose nine hold or sell ratings outnumber the six buy recommendations. On March 14 it reported interim results from a pair of midstage trials for Albuferon, a fusion of alpha-interferon and the blood protein albumin. The company said it was encouraged by the results of this injectable drug, but the stock dropped 20% in one day and has been flat since.

Alexander Hittle of A.G. Edwards called the test results "ambiguous," but said the hepatitis C research "still has value." One test compared Albuferon plus ribavirin to pegylated interferon and ribavirin, but the data suggests that Albuferon wasn't better at reducing the hepatitis virus. Hittle has a hold rating on Human Genome Sciences. He doesn't own shares, but his firm has a short position in the stock.

Although the company has touted Albuferon as equal to pegylated interferon, Hittle said in a research report that "it appears to us that the market had hoped for superiority."