Insomnia's Wake-Up Call


By Amy Tsao One of the most successful and fastest-growing drugs of these sleep-deprived times is Ambien. The prescription sleeping pill, made by French drug maker Sanofi-Sythelabo (SNY), generated $1.65 billion in worldwide sales in 2003, analysts estimate, and dominates the insomnia market. Soon, however, Ambien will be competitors. Two companies - Sepracor (SEPR) and Neurocrine Biosciences (NBIX) - have set on introducing products that could oust Ambien from its top spot (see BW Cover Story, 1/26/04, "I Can't Sleep").

Backed by expensive marketing campaigns, new drugs with fewer side effects are set to fire up growth in the insomnia drug market - to as much as $5 billion in sales in 2010, by some estimates. "The market is growing 25% a year," says Neurocrine CEO Gary Lyons. "We believe sleep is today where depression was 20 years ago," he adds, referring to another area where treatment and awareness soared as drugs like Prozac emerged.

"The prevalence of insomnia is massively large," says Sepracor CFO David Southwell. Sleep experts figure some 82 million Americans over the age of 15 have insomnia, and the prospect of effective prescription drugs that don't lead to the nightmarish dependencies associated with sleeping pills of the past is appealing.

SPLITTING THE TAKE. Investors have already flocked to Sepracor and Neurocrine. Their stocks have risen, too, but to different heights. Neurocrine's shares, at $57 as of Jan. 21, are up 17% over the past 52 weeks. Sepracor stock has risen around 117% in the same period, to $27. But both players, with about $2 billion market caps, could still gain, especially over the long haul, analysts say.

Because Neurocrine has to share a significant chunk of revenues - about 50% -- with marketing partner Pfizer (PFE), the benefit from launching Indiplon may not be a blockbuster. "Not to say there's limited upside, but there is profit-sharing there," says Ken Wahl, analyst at Mehta Partners.

In contrast, Sepracor, which will market its Estorra drug independently, keeps whatever revenue it generates. Wahl predicts peak sales of $550 million to $600 million by 2009 for Estorra. "Of the two companies, I would be more inclined to invest in Sepracor than Neurocrine," says Wahl. (Mehta Partners has a position in Sepracor in its hedge fund.)

MARKETING MIGHT. Sepracor has timing on its side as well. Estorra is expected to be approved in the summer of 2004, about a year ahead of Neurocine's Indiplon. "That's a huge difference," says Weidong Huang, vice-president at TimesSquare Asset Management. He sees Sepracor stock rising to $40, a 54% jump, upon approval by the Food & Drug Administration.

Sepracor will be competing against a highly successful incumbent in Ambien, but Huang notes that the challenger is no slacker at marketing. It sells a "me-too" drug for asthma called Xopanex that few expected would be a big seller. But Sepracor boosted sales 37% in one year, to $260 million in 2003. (TimesSquare owns shares in Sepracor.)

Huang says Estorra could take about 25% of Ambien's market share quickly, since its side-effect profile is better. When Indiplon is launched, Pfizer and Neurocrine could take another 25% of the market. By 2006, as Ambien loses patent protection and becomes available as a generic, the two newer drugs likely will be splitting most of the market for brand-name sleep drugs, says Huang.

PATENT LOSS. Ambien's maker disputes that these newcomers will be able to make such a big dent so quickly. To fend off competition from both upcoming generic copies of Ambien and the new brand-name rivals, Sanofi is developing a staggered-release version of Ambien it hopes to have on the market by the end of 2005 (see BW, 1/26/04, "Exploring New Paradigms in Sleep").

Still, investors with a long-term outlook might want to consider the kind of marketing heft that Pfizer brings to Neurocrine. Indiplon will be third to reach the market, but with Pfizer supporting it, some experts say the drug has real potential to become No. 1 in the market, with $1 billion in sales as soon as 2008. Neurocrine is testing two formulations of Indiplon - one that's designed to last longer than Ambien and a second, short-acting version that can be taken in the middle of the night by people who have trouble staying asleep.

Pfizer is especially motivated to make Indiplon a success because many of its brand-name drugs will be coming off patent soon, and it needs a blockbuster to help offset those lost sales, says Kris Jenner, drug analyst at T. Rowe Price. (T. Rowe Price is a top institutional holder in Neurocrine.)

STIFF COMPETITION. In the short term, though, Sepracor is likely to be more attractive, says Huang. "When I compare valuation and the timeline on sleep-drug approval, I go with Sepracor," he says. Sales of a new metered-dose inhaler version of Xopanex, along with sales from Estorra, should boost Sepracor's top line in 2004 by about 40%, to around $450 million. Sepracor will file its 2003 results on Jan. 22. Analysts on average expect a loss of $1.95 per share, down from a $3.34 per share loss in 2002.

Neurocrine, by contrast, has some early-stage drugs in the pipeline for cancer and autoimmune diseases but no established blockbusters yet. The potential for Indiplon revenues is the main incentive investors have to buy its shares.

Some analysts compare the coming battle for the sleep-drug market to the already intense war over the impotence treatments. Marketing powerhouse Pfizer has a dominant incumbent in Viagra, but Eli Lilly's (LLY) Cialis and Bayer's (BAY) Levitra are trying to horn in to the market. All three companies are spending millions in advertising and promotional campaigns for these so-called lifestyle drugs. Expect the same to happen in the insomnia market the next year or so. With reporting by Arlene Weintraub

Tsao covers financial markets for BusinessWeek Online in New York


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