Updated from 10:42 a.m. EDT

How big a cancer drug can Tarceva be?

That's the next question being asked by investors in the wake of a triumphant clinical announcement late Sunday night, which sent related shares soaring Monday. Results from a phase III study, sponsored by OSI Pharmaceuticals ( OSIP), showed the experimental drug Tarceva helped patients with advanced non-small cell lung cancer live longer than patients taking a placebo.

Tarceva is being co-developed by Genentech ( DNA) and Swiss drugmaker Roche. For Genentech, Tarceva's success is like hitting the cancer-drug lottery jackpot twice. Recall last year, right around this time, Genentech hit it big with positive results from its Avastin colon cancer study.

Shares of OSI Pharmaceuticals soared and were recently up $53.80, or 141%, to $92.11 in very heavy trading; clearly, few investors were heeding Merrill Lynch's downgrade to neutral from buy, based on valuation concerns. Meanwhile, shares of Genentech were recently up $13.94, or 11.8%, to $132.16.

Specific data from the study are not being disclosed at this time, but OSI says Tarceva achieved its primary endpoint, which was improving overall survival by a minimum of 30%. The study also hit its secondary endpoints, including time to symptomatic deterioration, progression-free survival and response rate, OSI said.

OSI said it will seek approval for Tarceva from the Food and Drug Administration during the summer. Data from the Tarceva study are expected to be presented at the annual meeting of the American Society of Clinical Oncology, or ASCO, which begins June 5. This is the same medical conference venue where the Avastin colon cancer data was presented last year.

If the FDA grants Tarceva a priority six-month review, the drug could be on the market in the first quarter of 2005.

Now, to address the Tarceva sales question: There are approximately 100,000 non-small cell lung cancer patients in the U.S. who would conceivably be eligible for Tarceva therapy, based on this study. Banc of America Securities biotech analyst Mike King puts a $30,000 price tag on the drug and assumes that these patients survive about six months, which puts Tarceva peak sales around $1.5 billion. This, of course, assumes that every patient gets the drug, which never happens. It also assumes that Tarceva is priced at a healthy premium to AstraZeneca's ( AZN) lung cancer drug, Iressa, its primary competitor.

Other estimates peg the drug's sales potential for its primary indication in the range of $500 million to $700 million. At this early stage, be careful about such sales projections; they're always a guess, and often more optimistic than realistic.

But King, who gets credit for predicting the positive Tarceva results (which erases his disastrous downgrade of Genentech the morning the Avastin results came out), says Tarceva sales numbers really multiply if the drug one day can be used as chronic, long-term therapy against lung cancer.

"Why not make Tarceva like Celebrex or Lipitor -- a drug that patients take every day for a long time to stave off recurrence of their disease?" he asks. In this scenario, lung cancer patients would have surgery to remove their tumor and chemotherapy to put the disease into remission. Doctors would then have patients take a daily Tarceva pill to stop the cancer from returning. (King has buy ratings on OSI and Genentech; his firm has not done investment banking for either.)

On its conference call, Genentech executives expressed "great interest" in testing Tarceva in this so-called "adjuvant" setting for lung cancer, although the company said such studies are complicated and difficult to conduct.

In addition to lung cancer, Tarceva is also being studied as a treatment for cancers of the pancreas and brain.

Under their co-marketing agreement, Genentech and OSI Pharmaceuticals will split the U.S. profits of Tarceva equally. Genentech's large cancer drug sales force will assume the lead marketing role here, with OSI salespeople right behind them. Roche will market the drug outside the U.S.

Despite an equal Tarceva profit split and the fact that OSI is a bigger percentage gainer Monday, Genentech has added approximately $8 billion to its already mighty market cap to just over $2 billion for OSI. The discrepancy is not easily explained, but it could be because Genentech will add hundreds of millions of dollars in Tarceva sales to its top line without having to spend very much at all to market the drug, given the fact that Genentech has already bulked up its sales force to sell Avastin. (These sales people will call on the same doctors for both drugs.)

Also, coming soon are more studies looking at combination treatments of Avastin and Tarceva, which could boost sales of both above current estimates. There will be some midstage data on the Avastin-Tarceva combination in lung and kidney cancer at this year's annual ASCO confab.

For the number buffs out there -- but not necessarily those adherents to "sane" or "traditional" valuation metrics -- Genentech is now only about $5 billion shy of Amgen's ( AMGN) sector-topping $75 billion market cap, despite having about half the annual sales. Biotech investors love companies that have momentum on their side, and Genentech has it in spades. Amgen, by comparison, is mature, which is really a four-letter word in biotech. Anyone want to guess how long it takes before Genentech is the market-cap leader among biotech?

Enzyme Blockers

An oral drug, Tarceva is a member of the closely watched class of drugs that attempts to halt the growth of cancer cells by blocking a key enzyme, epidermal growth factor receptor, or EGFR. In this way, Tarceva is very similar to AstraZeneca's Iressa, which was the first of these EGFR inhibitors to be approved in the U.S. last year, also for late-stage non-small cell lung cancer patients. ImClone's ( IMCL) Erbitux is also an EGFR inhibitor, but it's an injectable drug, so it works in a slightly different way.

The phase III Tarceva study enrolled about 700 non-small cell lung cancer patients who failed all approved drugs and had no other good medical treatment options. These patients were split into two groups; one group was given Tarceva, while the other group (the control) was treated with the standard "best supportive care."

As long as the actual data confirm Sunday's findings, Tarceva will most likely be viewed as superior to AstraZeneca's Iressa. The Tarceva study is the first controlled study of an oral EGFR drug to demonstrate that it can boost the survival of advanced non-small cell lung cancer patients. The studies used to approve Iressa only showed that the drug shrank tumors in about 10% of patients; they were not designed to look at changes in survival. Last year, AstraZeneca reported worldwide Iressa sales of $228 million.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to adam.feuerstein@thestreet.com.

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