Some Biotechs May Benefit From Hepatitis C Treatment Market Shift

Apr. 26, 2011 2:30 PM ETJNJ, MRK, VRTX, MVRBF, ACHN, BMY, GILD, RHHBY, ANDS, IDIX5 Comments
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Smith On Stocks


The landscape for treating hepatitis C virus is on the verge of dramatic change due to the development of new classes of drugs offering significant improvements in efficacy, convenience and tolerability over the current standard of care which is pegylated alpha interferon combined with ribavirin. The first of the new drugs are protease inhibitors: Vertex (VRTX)/Johnson & Johnson's (JNJ) telaprevir and Merck's boceprevir. Vertex discovered telaprevir and JNJ licensed marketing rights in European, South American, Middle Eastern, African and Australian markets.

There is an advisory committee meeting for boceprevir on April 27th and one for telaprevir on April 28th. The PDUFA date for boceprevir is May 6th and for telaprevir May 26th. We expect that boceprevir and telaprevir will be recommended for approval by the advisory committees and that the FDA will approve both drugs around or before the time of their PDUFA dates. It is possible that both drugs will be approved on the same day. JNJ filed telaprevir in Europe in December 2010 and received accelerated assessment, which could result in approval in the next month or two.

This report is complicated because of the need to use abbreviations to describe treatments and their outcomes. The reader may find this glossary useful


  • Hepatitis C virus (HCV): a virus that attacks the liver
  • Standard of care (SOC): the current recommended treatment regimen for HCV is pegylated alpha interferon plus ribavirin given over 48 weeks
  • Pegylated alpha interferon (PEG): the backbone of current standard of care for HCV
  • Ribavirin (RBV): added to pegylated interferon to enhance efficacy
  • HCV RNA: This is messenger RNA from the HCV and its presence in the blood is used as a measure of the intensity of the infection; i.e. the viral load
  • Sustained viral response (SVR): defined as undetectable levels of HCV RNA for at least 24 weeks following cessation of therapy. This is the considered a cure and is the therapeutic goal.
  • Viral log decline: A 1 log decline is a tenfold decrease in virus levels, a two log is a hundredfold decrease, three logs is 1000 and so on
  • Early virologic response (EVR): defined as 2 log decline in HCV RNA after 12 weeks of therapy

Stock Opinion

I am recommending Johnson & Johnson and while I am enthusiastic about telaprevir, it is only a contributing factor as JNJ is so large and diverse that no one product on its own can move the company. Please see my report for more details. I think that Vertex has an incredibly strong fundamental outlook for the next three years, but the price may already reflect much of this and at this point I am neutral. I anticipate that boceprevir will be a significant product for Merck, but I am also currently neutral on the stock.

Current Treatment of HCV

The current standard of care (SOC) for HCV is a combination of pegylated alpha interferon (PEG) and ribavirin (RBV). These drugs are given over a 48 week course of therapy in which PEG is given as one shot per week and ribavirin which requires 800 to 1200 mg. given with two doses per day.

HCV treatments can eradicate the virus in a meaningful percentage of cases and produce a cure. Just suppressing the virus does not seem to alter the course of long term complications which can be life threatening. The goal of therapy is sustained viral response (SVR) which is defined as undetectable levels of HCV RNA for at least 24 weeks following the end of therapy. Patients who do not achieve an SVR but achieve ? 2 log viral load reduction are termed partial responders. Patients who fail to achieve early virologic response (EVR) which is defined as ? 2 log declines in HCV RNA after 12 weeks of therapy are unlikely to achieve viral eradication.

There are three broadly prevalent genotypes of HCV; genotypes 1, 2 and 3. Genotype 1 is responsible for roughly 70% of HCV infections in the US and PEG/RBV is effective in about 40% of treatments. In genotypes 2 and 3, the effectiveness of PEG/RBV is much higher at 80% to 90%. HCV is a slowly progressing disease so that patients seeking treatment are those who were infected perhaps 20 to 30 years ago and who are just becoming symptomatic, not the newly infected.

The treatment of HCV infection is very low in relation to the pool of patients who carry the disease as only about 22% of those chronically infected in the US and roughly 13% of those infected in developed overseas markets have been treated. This low level of treatment is due to: (1) unawareness by the patient that they are infected; (2) symptoms are not so severe as to warrant therapy, and (3) inability to tolerate the onerous side effects associated with PEG/RBV therapy.

Adding Telaprevir and Boceprevir to Standard of Care

Telaprevir and boceprevir should quickly become part of the standard of care and lead to a surge in patients seeking therapy; each will be added to PEG/RBV. The gating factor for sales will be the availability of treating physicians and facilities to treat patients. Remember that this is complicated therapy regimen that lasts 24 to 48 weeks.

It is estimated that under normal conditions there are about 50,000 treatments of HCV infections annually in the U.S. However, anticipation of the approval of telaprevir and boceprevir has caused as many as 300,000 patients to defer initial treatment until the new drugs become available. In addition, it is estimated that there an additional 350,000 patients who have failed to respond to current standard of care and who are also awaiting boceprevir and telaprevir. This suggests that as many as 650,000 patients are awaiting treatment in the U.S.

At the anticipated price per treatment of $35,000+, this represents an addressable market of a staggering $23 billion. It is difficult to estimate how many of these patients will actually receive treatment, but I have seen estimates that suggest the percentage will be about 60% to 65% which translates into $14 to $15 billion of U.S. sales that will be reached very quickly. The gating factor for sales is the number of doctors and facilities available to provide treatment and follow-up over treatment periods that range up to 48 weeks. I have again seen estimates that the U.S. has the capability of treating 75,000 to 120,000 patients per year which translates into annual sales of telaprevir and boceprevir of $2.6 to $4.2 billion. Hence the bolus of patients will probably take about five years to work through.

My estimates for sales are shown below:

Worldwide Sales Estimates for Telaprevir and Boceprevir ($ millions)













JNJ Territories











Total Worldwide



















Total Worldwide






Source: SmithOnStocks estimates

Brief Summary of Clinical Trials for Telaprevir and Boceprevir

There is tremendous excitement and anticipation in the medical community and on Wall Street about these drugs. Both drugs have shown that they can significantly increase SVR for treatment naïve patients when added to standard of care. They have also demonstrated that for those treatment naïve patients who respond to treatment quickly as determined by undetectable viral load, the length of treatment can be shortened from the 48 weeks required with SOC to 24 to 28 weeks. This is important because interferon causes flu like symptoms for 2 to 3 days after each weekly administration for many people. Imagine having 48 cases of the flu in weekly succession. Lastly, the drugs when added to SOC can also produce dramatically higher SVRs in patients who have failed previous therapy. Each of these drugs is a revolutionary improvement in the treatment of life threatening HCV infections.

Physician experts I have listened to expect telaprevir to capture a somewhat larger share of the market for both treatment naïve and treatment experienced patients. telaprevir has two advantages: (1) it appears to be somewhat more potent in both treatment naïve and experienced patients and (2) the duration of therapy with telaprevir is shorter. More naïve patients will be able to use a short 24 week course of therapy on telaprevir, and it is also an advantage that patients only need to be on telaprevir for 12 weeks while boceprevir was dosed for 24 to 48 weeks in its Phase III trials. Each of these drugs have side effects that are additive to those of standard of care so that less exposure is desirable.

There were three Phase III trials conducted with telaprevir and two with boceprevir. I have summarized the key findings of these trials as follows:

  • Both of these drugs when added to PEG/RBV in treatment naïve genotype 1 patients can dramatically increase the SVR (cure rate). Telaprevir increased the SVR to as much as 75% of treated patients while boceprevir increased it to 66% Standard of care produces an SVR of about 40%. There may be a slight edge to telaprevir, but both drugs produce dramatic improvement in this life threatening disease.
  • Telaprevir can shorten the course of therapy to 24 weeks for about 58% of treatment naïve patients. Boceprevir can shorten the course of therapy for treatment naïve patients to 28 weeks for about 44% of patients. This again appears to be a slight advantage for telaprevir.
  • In treatment experienced patients, telaprevir provided an SVR of 65% and boceprevir 66%. However, the boceprevir patients did not include null responders and its patient group taken as a whole was not as difficult to treat as the telaprevir group. This could be a slight edge for telaprevir.
  • The major side effect of boceprevir is anemia as opposed to rash with telaprevir. Anemia is somewhat more serious so again there might be a slight edge for telaprevir.

Looking Ahead in HCV Therapy

Most experts expect that PEG/RBV will remain part of the standard of care for at least five years and maybe longer. Beyond that there is a mixed opinion on their role. The long term goal or hope is to move from non-specific immunomodulator drugs like PEG and RBV to direct targeted anti-viral therapies such as protease inhibitors, nucleotide and non-nucleotide polymerase inhibitors and other drug classes in development. The ultimate hope is to come up with a cocktail of targeted therapies which would obviate the need for PEG/RBV.

There are numerous products that are aspiring to succeed telaprevir and boceprevir as next generation protease inhibitors. Achillion (OTC:ACHN), Boehrringer-Ingleheim, Bristol-Myers Squibb (BMY), Gilead (GILD), Roche (OTCQX:RHHBY) and Tibotec/JNJ have second generation protease inhibitors in development. Also being developed are nucleoside and non-nucleoside polymerase inhibitors from Vertex, Pharmasset (OTCPK:VRUS)/Roche, Anadys (ANDS), Idenix (IDIX) and Boehringer-Ingleheim.

It is too early to handicap who will come up with the first of the new generation of protease inhibitors. These include Medivir (OTC:MVRBF)/ JNJ's TMC-435, which is in Phase III trial and eight others that are in Phase II. TMC 435 is a key new protease inhibitor to watch. In Phase II trials, it has been shown to be potent, well tolerated and to be a true once a day drug. Because of the inconvenient three times per day dosing, both telaprevir and boceprevir are subject to significant replacement in the period beyond the next three years if cocktails come into favor. There is a close parallel to the HIV market in that in cocktail therapies, the aim is to reduce dosing complexity and pill burden so that one a day or twice a day drugs are much favored.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

This article was written by

Smith On Stocks profile picture
My name is Larry Smith. My career was spent on Wall Street as a biotechnology and pharmaceuticals analyst and also as Director of Research at Smith Barney and Hambrecht and Quist. I began my career in 1971 as a Wall Street analyst and started following the pharmaceutical industry in 1974. I was consistently selected to Institutional Investor All Star team for a ten year period ending in late 1983 (highest ranking was number 2) when I was named Director of Research at Smith Barney. In the early 1980s, I was one of the first Wall Street analysts to develop an interest in biotechnology. I made a research call on Genentech before it came public. When Smith Barney brought Amgen public in mid-1983, I was the analyst in charge of coverage and was the first Wall Street analyst to recommend the stock. In 1991, I joined Hambrecht & Quist as Director of Health Care research and also as biotechnology analyst. I chaired the H&Q health care conference for five years and believe that I played a meaningful role in its creation. It is now known as the JP Morgan conference which plays a pivotal role in today’s biotechnology industry. I am proud of my career and note that I have had meaningful interactions with over 500 biopharma companies in my career. I am now 78 and financially very comfortable. I am not associated with any biopharma or investment company. I am not dependent on and do not need any external income to live a comfortable life. I have no hidden agenda. While I am retired from a financial standpoint, I have enormous intellectual curiosity and continue to spend significant amounts of time on researching innovative companies and not just limited to biotechnology. I maintain a website called SmithOnStocks. Until early 2022, I used this as a basis for a subscription service for my research. I have ended this subscription service but occasionally write articles. There is no charge for accessing this website and any articles. You should not rely on anything I write on my website for investment advice although you may want to use the information in forming an investment decision. The same goes for any articles or comments that I might make on Seeking Alpha I want to alert you to NYSE Issue In 1999 in which I made an ethical breach that resulted in a suspension from being a registered representative in the securities industry for a period of time. I believe that this measure was harsh beyond any reasonable measure and totally unwarranted. I have gone to great lengths in this report to give my side of the story and I hope that you will read the in-depth account that I have provided. This suspension took place over 20 years ago and has long since ended. There has been no restriction from the NYSE for many years on my working as a registered representative if I were to choose to go through the required registration procedures. Still, this NYSE action is like a Scarlett letter that I carry. I would urge you to read the full account of the events that led to this NYSE action and if you do so I believe you will agree that this in no way reflects on my integrity and the way I have always conducted myself, then and now. I strongly believe that the action taken was excessive and I think that if you read my full account you will agree. People make mistakes. Bill Clinton lied under oath, was impeached and disbarred as a lawyer in Arkansas in connection with the Monica Lewinsky affair. However, society has judged him on the body of work that he has done. Suspensions in the security industry can result from serious infractions in which investors are defrauded or swindled. In the events that led to my suspension no investors lost money and as I explain in this report investors who followed my advice made significant amounts of money. Before you rush to any conclusions, let me tell you my story. I Am Proud in How I Have Conducted My Career Before I go into the details of this ethical breach, I want to emphasize that I have had a distinguished career on Wall Street. My record from 1971 when I started on Wall Street until 1999 was unblemished. I came to New York from Indiana with no business connections and no money but through hard work I became a highly regarded Wall Street analyst and was selected to the Institutional Investor All Star team in pharmaceuticals for ten years in a row. Based on my record as being the top or one of the top analysts at Smith Barney, I was selected to be head of research from 1981 until 1989. I also served on the Board of Directors at Smith Barney. Based on my strong reputation, Hambrecht and Quist approached me in 1989 to head their life sciences research effort and to run the annual H&Q (now JP Morgan) healthcare conference. I was a Managing Director and on the operating committee at H&Q. I left H&Q in the late 1990s because I disliked the bureaucracy that was such an integral part of being head of research. I had made enough money to be financially secure and I wanted to get back into doing what I loved, biotechnology research. I joined Tucker Anthony in 1997 as a biotechnology analyst. Explaining the Events That Led to the NYSE Issue Tucker Anthony had a sister firm called Sutro and a decision was made early in 1998 to move health care research from Tucker to Sutro. Tucker was an east coast based firm and Sutro was based in Los Angeles. Sutro leased a New York office to which I moved. It was here that an unfortunate train of events was set in motion that led to the NYSE action that put a stain on what I consider an outstanding career. When I moved from Tucker to Sutro, I maintained my brokerage accounts at Tucker. I conducted normal trading in this account for some months. Then the research administrative research manager for Sutro contacted me and said that for regulatory purposes I would have to move my account from Tucker to Sutro. After some time spent in looking for a broker to handle my account at Sutro I became frustrated. At that time, I had over $5 million in my brokerage accounts. While I was sophisticated in health care investing which made up 10% of my portfolio, I needed help with other parts of the portfolio. I could find no retail broker at Sutro that I wanted to trust my portfolio to. I asked and received approval to look for a broker outside of Sutro and contacted Schwab about finding an investment advisor there to manage my account.  While this was in process, the research administrative manager at Sutro called again and said that Sutro was probably planning to shut down the New York office and I would have to move to Los Angeles or leave the firm. Moving to Los Angeles was not an option for me as my roots were deep in New York. I informed her that given this choice I would soon be leaving Sutro rather then moving to Los Angeles and began to think about what to do. I came to the preliminary conclusion that I would start a consulting firm dealing in biotechnology. I also concluded that I would have to carefully manage my investment portfolio. It was here that I made a major mistake that I have regretted ever since. Frustrated that my money was tied up in Tucker and I was unable to trade in my account and unable to find a broker that I trusted, I decided to open an account at Schwab without a broker managing it. I indicated on the account transfer form that I was self-employed based on the assumption that I was going to be leaving Sutro imminently. This was my Bill Clinton moment and turned out to be a major mistake. I continued to work at Sutro while I was waiting for the New York office to be closed which I thought would be in a matter of days or weeks and during this time, I began to execute trades in my account at Schwab. However, after some weeks the research administrative manager at Sutro called and informed me that based on the response they had gotten from clients and the work that I was doing that the firm had reversed itself and now wanted to keep the office in New York and they were also willing to hire two assistants to aid me. There was also the promise of a significant bonus in the upcoming review that based on my work could amount to several hundreds of thousands of dollars. Not surprisingly, I decided to stay on at Sutro instead of leaving and starting my own firm. I then looked for and finally found a Sutro broker that I could trust to help manage my portfolio. The brokerage accounts at Schwab were opened in February of 1999 and transferred to Sutro in April 1999. When I moved my accounts to Sutro the compliance department at Sutro saw that there was this hiatus when I had an unauthorized account at another firm. This was reported to NYSE. NYSE Reviewed My Case and Took No Action for Three Years Management at Sutro looked very closely at what had occurred and decided that while it was certainly not something they could condone, it was a minor infraction and they thought that given my stellar and unblemished record that NYSE would not take any meaningful action other than a wrist slap. Sutro decided to be pre-emptive in administering the wrist slap and fined me and suspended me for one month. They thought that this would satisfy NYSE based on their interpretation of what had occurred. They wanted me to continue with the firm, paid the sizable bonus I was due and committed to pick up all legal fees. I then had a deposition with a lawyer from NYSE in early 2000. During a one day interview, he went over all of the details of the accounts that were held at Schwab and all of the trades that occurred in detail. He also looked at all of the reports that I had issued as an analyst during this time to compare to the trading in my account to the issuance of research reports. I then heard nothing more from the NYSE for three years. Sutro concluded as did I that this issue was behind us. Three years later in mid-2003, I heard from NYSE to my shock that they were re-opening the case. Why after three years was the case being re-opened? In talking to the lawyers at NYSE, I came to understand that this was the result of Elliott Spitzer’s attack on Wall Street research. Remember the famous case of Henry Blodgett who recommended stocks of investment banking clients to clients that he thought were actually sales. NYSE enforcement was under pressure because this unethical practice had been brought to light by Spitzer and they had missed it. They were under pressure to show how tough they could be as enforcers. They reviewed their records and came up with my case which they decided to reopen it in order to show that they were aggressive enforcers. They went over the same information that had been gathered in early 2000, but came up with an entirely different interpretation. They said that I effected stock transactions shortly before issuance of research reports which I had prepared and this was a violation of Exchange Rule 472.40(2) (iii). They also said that I failed to disclose that I held securities in stocks recommended in a research report. They said that I opened accounts at a member firm that concealed fact of my employment at another member firm; violated Exchange Rule 407(b). They recommended a censure and two and one-half year suspension. Two Stock Trades at Question The information on opening an account at another firm is something that I just discussed at length. This was not in dispute. However, NYSE focused on two stock trades that I made and explained the suspension largely on the basis of these two trades. I believe that they were clearly wrong in their conclusions. Let me discuss those trades in detail. The first trade was in Stericycle, a medical waste disposal company. I had been following the company for some time with a neutral rating. In my reports, I noted that the Company wanted to buy the medical waste disposal business of Waste Management and if they were successful, I would immediately go to a strong buy. This acquisition was announced on April 14, 2009 after the close at 4 PM EST. Because it was 1 PM in Los Angeles I held a conference call with Sutro’s traders and the salesforce and told them I was going to a strong buy on the stock. It was the practice of Sutro to initiate new ideas with a conference call in this manner. The traders and sales force would then go out to the clients with the idea. After this, the analyst would follow-up by publishing a note on First Call (an electronic distribution network) and this was done on April 15 This was then followed up by a written research report on April 16. On April 16, I bought 2500 shares of the stock at a price of $12. This was accepted practice at Sutro for research analysts buying stocks that they recommended. There was no requirement to wait for a period of time to buy the stock. The analyst was allowed to buy the stock at the same time as other Sutro employees and clients The NYSE judged my conduct on standards that were different from those that were accepted practices at Sutro. By today’s standards, the Sutro practices seem very loose but they were common at the time. This is why Sutro did not view this trade as a breach of conduct and kept me as an analyst. The NYSE also said that I did not disclose that I owned Stericycle in my written report. However, none of the analysts at Sutro were required at the time to do so. This was also standard operating procedure. Stericycle was a major success for investors. Adjusting for stock splits the stock traded at about $3.00 when I first recommended it. Fifteen years later, the stock is trading at about $119. This was one of my best recommendations ever. I held the Stericycle stock for many years and only sold it recently. The NYSE did not accept that my actions were in line with the practices of Sutro even though I produced a letter to that effect from the research administrative officer. I also argued that a $30,000 investment in a portfolio that amounted to $5 million at the time was de minimus. I argued that the stock was bought and maintained as a long term investment. I argued that it was an excellent money making idea for investors. The NYSE dismissed all of these arguments and maintained that I traded ahead of my recommendation. The second trade that the NYSE emphasized was a trade in Schering Plough. On April 18, the stock had traded down by 5%. I had an accumulate rating on the stock essentially telling investors to buy the stock for the long term, but connoting less emphasis than a buy. In the morning call to traders and salesmen, I alerted them to the price weakness, but told them there was no change in the fundamental outlook and there was no change in my price target. I was not intending to issue a report, but the research administrative manager told me that the price drop in Schering Plough based on my price target indicated 25% upside that was the accepted criteria for a buy recommendation. Hence, I needed to put out a report in which I upgraded my opinion from accumulate to buy. I bought the stock on April 20 at the same time as the written report was issued. I previously owned 500 shares and this increased my position to 1000 shares for a total investment of about $35,000 which again was within a $5 million portfolio. The NYSE again accused me of the same things as in the Stericycle situation. They said that I traded ahead of my recommendation and did not disclose that I owned the stock. My responses were the same as for Stericycle and were once again rejected. Was The NYSE Action Justified? I think that the NYSE action was out of all proportion to what actually transpired. I think the enforcement officers applied new standards in overturning the prior decision to take no action on this case that had been in effect for three years. They were under pressure to make a big splash in the Elliot Spitzer era to show how tough they were. My recommendations were solid recommendations and indeed the Stericycle recommendation was outstanding. I fully recognize that my decision to open the brokerage account at Schwab prior to resigning from Sutro was an ethical breach on my part even if I was planning to resign from Sutro. When I decided to stay with Sutro, I transferred my accounts immediately. I strongly and absolutely maintain that my trading in Schering-Plough and Stericycle was in accordance with policies in place at Sutro at the time. By today’s standards these seem loose, but this was common industry practice at the time. The NYSE review was conducted by a mediator and it was he that determined the punishment. He had spent his entire career as an enforcement officer for the NYSE. He was also friends with the NYSE lawyers on my case and sent out to lunch with them during the hearing. He was the judge, jury and executioner of my fate. As I look back, I question his objectivity and motives. In writing his opinion, he did not acknowledge documents from Sutro that showed that my stock trading disclosures were in-line with their internal procedures. I had no opportunity to review or correct his opinion in the opinion he wrote. In a country in which, guilt or innocence is established by one’s peers, mine was determined by a hanging judge with no experience in the securities business and an apparent pre-determined view on my actions.

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