As Zytiga's Importance Grows, So Does That Of Generics

Aug. 16, 2017 9:00 AM ETBTGYY, JNJ, PFE
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Johnson & Johnson's (JNJ) Zytiga was launched in 2011 with barely any patent life left and, now that its potential in very early stages of prostate cancer is clear, a battle over the entry of generics has taken center stage.

The legal dispute is complex, but analysts expect US generics to enter late next year, putting half of Zytiga's $2bn of annual sales at risk. True, holding off generics is a long shot, but a comparison of two scenarios using EvaluatePharma sellside consensus reveals $2.8bn of NPV at stake, and the importance to BTG (OTC:BTGYY), Zytiga's licensor, is particularly striking (see table below).

BTG's involvement is one of many steps in Zytiga's protracted development; the UK firm had bought the asset from the Institute of Cancer Research before licensing it to Cougar Biotechnology, which was then acquired by J&J. This convoluted pathway meant that Zytiga was launched in 2011 protected by just five years' US patent life, and data exclusivity alone in Europe.

This latter provision will hold off European generics until September 2021, and is not in dispute. What is hotly debated is the all-important US market, where Zytiga's key '213 patent expired last year.

October 2018

The start of infringement proceedings against generics companies triggered a stay on approval until October 2018, the date seen as the point at which the first generics could enter.

The dispute, however, is not about the '213 patent, but about '438, a piece of IP that covers administration of Zytiga with the steroid prednisone - the use specified on the drug's label. This claims to protect Zytiga until August 2027.

Most analysts do not believe that '438 will hold, but a surprise result could unlock some $10bn of cumulative US sales between 2018 and 2027. A comparison of the base case, whereby US sales fall off from 2019, versus a bullish scenario where they continue rising modestly until 2027 confers on Zytiga NPVs of $3.9bn on the one hand and $6.7bn on the other.


Zytiga (J&J) current sellside consensus
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Sales ($m) 2,174 2,025 1,474 1,145 990 869 766 669 579 496 420
Cash flow ($m) 985 913 649 495 423 369 322 279 239 202 171
NPV ($m)* 3,918
(Source: EvaluatePharma)
Zytiga (J&J) potential bull-case scenario
2017 2018 2019 2020 2021** 2022 2023 2024 2025 2026 2027^
Sales ($m) 2,174 2,174 2,282 2,396 2,516 1,510 1,585 1,665 1,748 1,835 1,927
Cash flow ($m) 985 979 1,004 1,036 1,074 640 667 695 722 749 787
NPV ($m)* 6,700
(Source: EP Vantage estimates)
NPV difference ($m) 2,782
BTG share of above ($m)^^ 97
Notes: *using 6.5% WACC; **last year of EU sales; ^last year of US sales; ^^assumes BTG gets 3.5% net royalty.

The resulting $2.8bn difference is a relatively small 0.7% of J&J's market cap. However, Zytiga is BTG's biggest revenue contributor, and the UK group's net 3.5% royalty interest amounts to a potential $97m, or 3.0% of its valuation; investors would be foolish to assume that success is guaranteed, but this is a potential outcome that could turn expectations on their head.

Stifel analysts, who cover BTG, point to delays in two key avenues being pursued by and against generics groups challenging the '438 patent - a main patent trial and inter-partes review proceedings. It is "increasingly unlikely that a final ruling will be reached before the end of 2018... a win for the generics is far from a foregone conclusion," they wrote in June.

Stampede

The legal proceedings have gained special importance since the Stampede trial showed a striking effect for Zytiga in prostate cancer that is still hormone sensitive (Asco - Zytiga moves back to centre stage in prostate cancer, June 3, 2017).

This could even see Zytiga challenge Pfizer's (PFE) all-powerful Xtandi. However, the potential for greater revenues could see a reverse effect, whereby payers seeing Zytiga's broad utility push hard for price savings, and the pressure in favor of generics grows.

As a curious aside, two inventors of the '438 patent are Alan Auerbach and Arie Belldegrun. Mr. Auerbach, now chief executive of Puma Biotechnology (PBYI), had headed up Cougar; Mr. Belldegrun is chief exec of Kite Pharma (KITE), but was earlier a practizing urologist.

A central point to be litigated is whether addition of prednisone to Zytiga is obvious. Prednisone had previously been used with ketoconazole, which works in a similar way to Zytiga, but apparently its purpose there was to avoid adrenal insufficiency rather than, as with the J&J drug, to prevent resistance to Zytiga.

It seems that there is no middle ground: if use of prednisone with Zytiga is not obvious then there might be no US generics before 2027. It is a tall order for Zytiga bulls, but litigation over '438 really does represent a binary outcome.

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EP Vantage is a forward-looking comment and analysis service tailored to the needs of pharma and finance professionals, focusing on the events that will define the future of companies, products and therapy areas. Written by experienced journalists, EP Vantage provides timely financial analysis of regulatory and patent decisions, marketing approvals, licensing deals, and M&A, giving fresh angles and insight to both current and future industry triggers. EP Vantage is powered by EvaluatePharma, the industry leader in consensus forecasts.

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