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Americas/United States Equity Research
New Antibiotics Expected to
Drive Greater Outpatient Use
Research Analysts
INDUSTRY PRIMER
Jason Kantor, PhD
Diverse Set of Forces Likely to Increase Size of
Jeremiah Shepard, PhD
Outpatient Market
Ravi Mehrotra PhD
Two forces will likely converge in 2014 to increase the use of new antibiotics: (1) increased cost management and hospital avoidance for patients with skin infections, and (2) the launch of three new antibiotics with similar marketing Lee Kalowski
messages. This industry overview is published in connection with a separate proprietary survey (LINK). Koon Ching PhD
■ Same marketing message from three different companies: CBST, DRTX
and MDCO will be in the market starting in 2014 with similar economic Anuj Shah
messaging – avoid costly hospitalizations by using more expensive branded drugs that allow for outpatient management. This is key in growing the market for branded drugs where generics are currently entrenched. The efforts of three companies should increase awareness of the potential savings, which is key to driving demand for these products. ■ Long-acting antibiotics can create significant savings for hospitals, but
uptake could take time: Two long-acting antibiotics (dalbavancin from
DRTX and oritavancin from MDCO) have had successful Phase III trials, and
we expect FDA approval for both in 2014. Dalbavancin requires two IV
administrations one week apart (30 minutes each), and oritavancin requires
a single IV administration (three hours). Both can potentially prevent or
reduce costly hospitalization in appropriate patients ( 1/3 of skin infections),
generating significant savings relative to traditional IV antibiotics (no in-
patient stay, no daily or twice-daily infusions in outpatient setting, etc). That
said, we recognize that entrenched interests could cause clinical uptake to
take time.
■ Tedizolid offers IV to oral switching: Tedizolid represents an improved
version of the marketed antibiotic Zyvox ($665M in US and $656M exUS in 2012). Importantly, tedizolid has the same IV to oral switching as Zyvox. The IV to oral switch provides another means for reducing in-patient expenses by allowing for more rapid discharge on an oral therapy. ■ Proprietary survey published separately (LINK). We conducted a survey
of 51 doctors regarding potential future use of long-acting antibiotics and tedizolid. ■ We are increasing our target prices for CBST ($77 from $72) due to using
a 4X multiple of 2015 sales instead of 2014 sales and revisions to our antibiotic DCF assumptions; for DRTX ($18 from $15), as we now include 3 additional years of future revenues due to QIDP status; and for MDCO ($45 from $37), with increased value to oritavancin and newly acquired Gram-negative program. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 07 January 2014
Forces Changing Treatment of
Complicated Skin Infections
The current paradigm
Patients with acute bacterial skin and skin structure infections (ABSSSI) most often present in the emergency room. These infections can range from an unexplained red and swollen area to deep surgical or wound infections. Skin infections can present with no other symptoms or with systemic symptoms of fever, high white cell count, and/or sepsis. ■ Less complicated cases are typically treated with oral antibiotics. ■ More serious cases with systemic symptoms, rapid progression, or other co- morbidities are likely to be treated with IV antibiotics. Often, patients who are prescribed IV antibiotics will be admitted to the hospital. Sometimes hospital admission is solely for the purpose of administering daily or twice daily IV antibiotics, and sometimes the admission is to monitor treatment progress for a few days. Patients with more complicated infections may be hospitalized for five or more days. Patients are released from the hospital to receive IV antibiotics at home or in an outpatients infusion center, or are transitioned to orals. Economic and policy forces are likely to drive changes in ABSSSI treatment
There are structural changes that are driving patient care to the outpatient setting. Below we highlight the factors that will pressure the traditional in-patient IV antibiotic treatment paradigm. 1) In-patient ward costs most significant part of in-patient treatment: The largest
Survey results: Average portion of the costs associated with treating a patient in the hospital is the hospital stay length of stay was 3.5 days ($1,960/day [2013 Kaiser State Health Facts]; average 4.5 days for ABSSSI; [Stephens et for ABSSSI patients for the al, ClinicoEconomics and Outcomes Research, 2013]) and non-drug related costs, which can be avoided with outpatient therapy. Many patients are hospitalized solely to administer IV antibiotics but are otherwise healthy. There has been a shift to outpatient care and observation stays versus admissions over the past few years, and we anticipate that this trend will continue, and potentially accelerate with new drug options. 2) Hospitals often lose money on diagnosis-related group (DRG) reimbursement.
DRG reimbursement for skin infections is typically insufficient and hospitals lose money on
average for patients admitted for IV antibiotic infusions. Long-acting antibiotics
administered in the outpatient setting or IV/oral switch can reduce hospital costs. IV
antibiotics administered in the outpatient clinic may be reimbursed on a cost plus basis
(ASP+6%), providing a profit motive rather than a loss. Additionally, a switch to oral
therapy transfers the cost burden away from the hospital, which is a primary driver for oral
Zyvox use and future tedizolid use.
3) Approximately 1/3 of hospitalized ABSSSI patients may not need to be admitted:
Survey results: The 51 docs Durata estimates that approximately 1/3 of patients admitted for IV antibiotic treatment do indicated that 30% of their not have the characteristics that would require a hospital stay (i.e. co-morbidities), and are patients are admitted solely admitted for the primary purpose of receiving IV antibiotics. This represents the low for receiving IV antibiotic hanging fruit for new long-acting antibiotics. 4) Penalties for nosocomial infections: Penalties for hospital acquired conditions will
also push institutions to reduce admissions for patients with infections that lack co-
morbidities in order to reduce the incidence of nosocomial infections.
5) Penalties for Readmissions: The Hospital Readmissions Reduction Program was
enacted on October 2012 and penalizes hospitals for readmissions. This puts pressure on
New Antibiotics Expected to Drive Greater Outpatient Use
07 January 2014
the hospital to admit fewer patients, and especially those with infections who may be more likely to require readmission. 6) Accountable Care Organizations (ACO): These medical providers are incentivized to
optimize quality and cost rather than fee for service models. In this structure a more
holistic view of treatment cost is considered and may facilitate more hospital-avoiding
outpatient treatments.
7) Antibiotic stewardship programs: Hospitals and healthcare providers are increasingly
focused on the appropriate use of antibiotics to avoid overuse, resistance, and excess
costs. If new treatment paradigms are adopted by these programs, it could lead to more
rapid adoption of new agents.
Headwinds to change
Challenges to conventional treatment practices are typically met with resistance. For antibiotics, this includes the hospital formulary approval process, existing antibiotic stewardship programs, long-standing clinical practices, and a tendency to save newer agents for later lines of treatment. We expect that the new antibiotics in 2014 will face the following headwinds: ■ Long-acting antibiotics will require a change in clinical practice: Current
standards of care require daily or twice-daily IV infusions. Physicians can make treatment decisions for these patients daily and consider switching therapies if the response to treatment is suboptimal. A once per week or once-and-done approach is a significant enough change in practice that it could hinder the initial uptake by more conservative physicians. ■ Pricing of the drugs may at first be viewed negatively without greater Survey results: 49% of docs
understanding of the overall savings: The companies will make the case that the
indicated that a price of all-in cost of treatment is greatly reduced with a long-acting antibiotic, even if the drug $1000 or higher would be cost is significantly higher. However, cheap generics are likely to remain the mainstay acceptable. We note docs in ABSSSI treatment, and high drug costs could be a barrier to market share gains. tend to low-ball price, so this is encouraging. ■ New antibiotics tend to have slow adoption curves: Unlike most therapeutic areas
where new drugs are often used first, infectious disease doctors often reserve the newest drugs for patients who fail other drugs. Initial uptake will also be slowed by the formulary approval process in hospitals and complicated decision structures with multiple potential decision makers (ER docs, ID docs, pharmacists, hospital administrators, etc). ■ Physicians may be worried about adverse effects in a long-acting drug: In clinical
trials, the safety data for both dalbavancin and oritavancin are similar to vancomycin. However, physicians may still be concerned that side effect management will be more difficult with long-acting drugs. Education and physician experience are likely to make this concern a nonissue one to two years into launch. Drug specific caveats that could create additional headwinds
■ Dalbavancin requires a second infusion which may be impractical for some patients Survey results: ED docs presenting in the emergency department. noted a strong preference for once-and-done vs. once ■ Oritavancin requires a three hour infusion, which may not be ideal for a busy per week (88% vs. 12%). ID emergency department focused on getting patients out. The very long half-life of the docs were more evenly split drug may prevent some physicians away from using the drug. ■ Tedizolid may have some of the same side effects as Zyvox, and a switch to oral treatment has compliance risk. The availability of generic Zyvox potentially in mid:2015 in the US, will likely slow the uptake of tedizolid. New Antibiotics Expected to Drive Greater Outpatient Use
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Quick Look at the "Class of 2014"
Gram (+) Antibiotics
Dalbavancin, oritavancin and tedizolid will be reviewed for approval in 2014 (Exhibit 1).
The PDUFA date for dalbavancin is May 26, tedizolid is June 20, and oritavancin will likely
be in Q3:14. Dalbavancin and oritavancin are both glycopeptides and are most similar to
vancomycin (Exhibit 2). Tedizolid is an oxazolidinone and most similar to Zyvox (Exhibit 3).
We group them together as the "class of 2014" in this report because of the timing of their
launch and the likely similarity of their marketing messages (hospital avoidance).
Exhibit 1: Regulatory timelines for all three antibiotics
NDA filing
FDA AdCom
US Launch
MAA filing
Potential EU
EU Launch
NDA filing
FDA AdCom
MAA filing
Potential EU
EU Launch
NDA filing
FDA AdCom
US Launch
MAA filing
Potential EU
EU Launch
Source: Company data, Credit Suisse estimates Long-acting antibiotics: Dalbavancin and oritavancin
Dalbavancin and oritavancin represent a new class of IV drugs with unusually long half-lives, which have the potential to move treatment out of the hospital and into the outpatient setting. Dalbavancin has a shorter half-life than oritavancin. It is dosed with a convenient 30 minute infusion on day 1 and then again on day 8. Oritavancin has a longer half-life and can be dosed as a single 3 hour IV infusion. Both are ideal for use in the emergency department without the need to admit patients to the hospital. Dalbavancin and oritavancin have both completed multiple Phase III trials in ABSSSI. Other potential indications include pneumonia, osteomyelitis, and diabetic foot infections. Long-acting antibiotics may be particularly well suited for chronic infections such as osteomyelitis, which often require months of treatment. New Antibiotics Expected to Drive Greater Outpatient Use
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Exhibit 2: Overview of the profile for long-acting antibiotics relative to vancomycin
30 min infusion on day 1 3 hour infusion one time only Twice daily with continuous trough level monitoring Class of molecule Glycopeptide Repeated dosing unclear because of long residence time Pneumonia, osteomyelitis, Prosthetic joint infections, Numerous Gram (+) diabetic foot infections bacteremia, and endocarditis Source: Company data, Credit Suisse estimates Tedizolid
Tedizolid belongs to the oxazolidinone class of antibiotics (like Pfizer's Zyvox). This class is differentiated in that it offers IV to oral switching due to high bioavailability. This dosing strategy provides for the flexibility of IV treatment in the hospital with the ability discharge patients on oral treatment. While the mode of administration and treatment paradigm is different relative to long-acting antibiotics, the marketing push is likely to be similarly focused on the economics of hospital cost avoidance. Survey results: Docs appeared willing to use Because of its similarity to Zyvox, there will be fewer initial barriers to market tedizolid, but with the likely entrance of generic Zyvox in the coming years, tedizolid will face increased challenges to adoption. A key point of differentiation versus Zyvox includes a shorter six-day course and once daily dosing relative Zyvox with ten days of twice daily dosing. A differentiated side effect profile may also be reflected in the label, though that remains to be seen. The Phase III studies demonstrated that tedizolid has an improved hematological profile relative to Zyvox (Exhibit 3). CBST is conducting a Phase III study of tedizolid vs. Zyvox in pneumonia (HAP/VAP). The trial was scheduled to start in December 2013. This 726-patient study will test for non-inferiority in all-cause mortality. New Antibiotics Expected to Drive Greater Outpatient Use
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Exhibit 3: Overview of the profile for tedizolid relative to linezolid
Zyvox (linezolid) Daily dosing of IV or oral Twice daily dosing of IV or oral formulation for 6 days formulation for 10-14 days Class of molecule Potential for extended Yes Limited by myelosuppression dosingPotential for Phase I I to start by YE:13 Approved for HAP and CAP pneumonia indicationOther indications Approved for vancomycin-resistant E. faecium infections, including concurrent bacteremia; uncomplicated skin infections Source: Company data, Credit Suisse estimates Efficacy: Non-inferiority to standard of care
All three antibiotics recently completed Phase III studies that demonstrated non-inferiority to standard comparators in ABSSSI (Exhibit 4). Oritavancin was compared to vancomycin; dalbavancin was compared to vancomycin with the potential to switch to oral Zyvox; and tedizolid was compared to Zyvox. Exhibit 4: Efficacy results for the recent Phase III studies
US Primary endpoint (48-72 hours)
US Primary endpoint (48-72 hours)
US Primary endpoint (48-72 hours)
ESTABLISH-1 (Oral only) ESTABLISH-2 (IV to Oral) ≥20% reduction in lesion size
≥20% reduction in lesion size
≥20% reduction in lesion size
ESTABLISH-1 (Oral only) ESTABLISH-2 (IV to Oral) EMA Primary endpoint (7-14 days)
EMA Primary endpoint (7-14 days)
EMA Primary endpoint (7-14 days)
ESTABLISH-1 (Oral only) ESTABLISH-2 (IV to Oral) US primary endpoint = Cessation of spread, absence of fever, and no rescue antibiotics. EMA primary endpoint = Investigator-assessed clinical cure. Source: Company data, Credit Suisse estimates Durata likely to make the case that its patients were sicker
The patients enrolled in the DISCOVER-1 and -2 trials were generally sicker than those enrolled in oritavancin's SOLO-1 and SOLO-2 trials (Exhibit 5). While this does not change the overall conclusion of either clinical program, DRTX is likely to use this as a point of differentiation. Specifically, more patients were enrolled with fever ( 85% vs. 14-24%), with larger lesion size ( 350 cm2 vs 250-290 cm2), and with signs of systemic infection (SIRS: 40-60% vs 15% in SOLO-1; NA for SOLO-2). New Antibiotics Expected to Drive Greater Outpatient Use
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Exhibit 5: Comparison of Disease Severity in SOLO and DISCOVER Trials
Median Lesion size (cm2) 2 87.8 3 08.8 3 33.0 3 67.8 3 13.5 3 62.4 Source: Company data, Credit Suisse estimates MDCO is likely to point to its efficacy in MRSA
In many cases where IV antibiotics are used for ABSSSI, the target organism is drug-resistant staph (MRSA). The SOLO-1 and SOLO-2 trials enrolled a large number of MRSA patients (N=405 total) and the efficacy was essentially identical between the arms for both the US and EU primary endpoints. In a pooled subset analysis from SOLO-1 and SOLO-2 oritavancin was statistically better than vancomycin for the more stringent endpoint of reducing lesion size ≥20% at 48-72 hours (Exhibit 6). While this data may not make it into the FDA approved label, MDCO expects to publish these results, which could be utilized in a marketing campaign for the drug. DRTX enrolled fewer MRSA patients in DISCOVER-1 and -2 (N=133 total) and the efficacy results in this subgroup were therefore more variable. There were nonsignificant numerical differences in favor of the control group for the EMA endpoint in DISCOVER-1 and the FDA endpoint in DISCOVER-2. However, we believe that the variability between the groups in the arms was likely due to small MRSA patient numbers in these studies. Exhibit 6: MRSA subset analyses for dalbavancin and oritavancin
US Primary endpoint (48-72 hours)
US Primary endpoint (48-72 hours)
≥20% reduction in lesion size
SOLO-1
EMA Primary endpoint (7-14 days)
EMA Primary endpoint (7-14 days)
Source: Company data, Credit Suisse estimates New Antibiotics Expected to Drive Greater Outpatient Use
07 January 2014
Economics and Pricing
Hospital avoidance is key for premium value-based
pricing
Both DRTX and MDCO have presented separate pharmcoeconomic analyses for costs associated with ABSSSI treatments. The IV antibiotic most frequently used in the hospital setting by patient share is vancomycin and by dollar value is Cubicin. These two therapies are administered as an in-patient or started as in-patient and then continued in the outpatient setting. ■ DRTX has conducted an analysis for IV antibiotics in the in-patient and outpatient setting. Vancomycin treatment with five days of in-patient treatment followed by nine days of outpatient treatment costs approximately $13,000, while Cubicin treatment with the same in-patient and outpatient split costs about $16,000. If a patient is administered dalbavancin in the outpatient setting at a cost of approximately $3,000 there is still substantial savings. ■ MDCO has completed its own analysis and estimates that a four day in-patient stay with 6 days of outpatient treatment costs approximately $7,750 for vancomycin. Nearly all of that cost can be avoided with oritavancin ( $7,300). This provides a wide range of options for value based pricing and a sharing of the savings between the payor and MDCO. The key takeaway message is that long-acting antibiotics can potentially generate significant savings with an outpatient treatment with one or two infusions. The DRTX analysis also highlights that meaningful savings (to the healthcare system) can be realized from avoiding repeated outpatient visits as well (though outpatient visits are a profit center given the current reimbursement model). Exhibit 7: DRTX and MDCO pharmacoeconomic analyses of IV therapy costs
DRTX estimates
Key assumptionsDrug 5 days in-patient 5 days in-patient 4 days in-patient 9 days out-patient 9 days out-patient 6 days out-patient In-patient medical Out-patient medical 900 MDCO estimates adjusted to fit format. Source: Company data, Credit Suisse estimates Pricing of the new antibiotics
We believe that both MDCO and DRTX are going use value based pricing for oritavancin and dalbavancin. This means calculating the total savings to the hospital and splitting that savings between a higher drug price (to the company) and some amount of cost savings to the hospital/provider (incentive; Exhibit 7). As a reference, MDCO and DRTX may also look at the full cost for a course of branded antibiotics, such as Cubicin (Exhibit 8). From our conversations with management and our analysis of their presentations, we conclude that DRTX is likely to price dalbavancin more in-line with a full course of Cubicin New Antibiotics Expected to Drive Greater Outpatient Use
07 January 2014
therapy (around $3,000). MDCO has been less clear and their presentations have some inconsistencies. MDCO's pricing decision may be influenced by the price of dalbavancin, which is expected to launch first. We do not expect MDCO to aggressively compete on price and expect the message for both drugs will be around the value to the hospital/provider. Our conclusions from our work on the potential pricing of the long-acting antibiotics are the Survey results: 49% of docs indicated that a price of $1000 or higher would be (1) While the companies may have hinted at price ranges, this remains an undetermined acceptable. We note docs tend to low-ball price, so this (2) A price of $3,000 per course of treatment seems defendable (3) MDCO has had success with value based pricing with Angiomax, and we expect it to pursue a similar tact with oritavancin pricing (4) MDCO has suggested that it will not try to undercut DRTX on price, but will compete on differences on the product profile - we do not expect a large price difference between the two products. (5) It is unclear if MDCO will choose to price oritavancin relative to the first dose of dalbavancin or both doses (6) In addition to the cost saving messaging, there may be incentives (ASP +6%) to use higher priced drugs to the outpatient setting For reference, we have included the pricing for approved therapies per recommended course of therapy in ABSSSI (Exhibit 8). Exhibit 8: Current pricing for approved therapies in ABSSSI
Drug price analysis
Price (Unit size) Recommended Duration Source: Company data, Credit Suisse estimates DRTX – Value based pricing
Based on prior presentations, we believe that DRTX is considering an average cost of $3,000 per therapy (Exhibit 9), which is comparable to the drug cost for 10 days of Cubicin therapy. ■ The first dose is twice the size as the second dose, and thus will be priced proportionally. If 100% of the patients were to receive the second dose, then the $3,000 price would be split $2,000 for the first dose and $1,000 for the second dose. However, it is unlikely that all patients will receive the second dose. ■ If we assume (as we believe DRTX is) that approximately 50% of patients will receive the second dose, then the $3,000 price would be split $2,400 for the first dose and New Antibiotics Expected to Drive Greater Outpatient Use
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$1,200 for the second dose to for an average cost of $3,000 per treatment (Exhibit 10). A high price for the first infusion will likely be an impediment to adoption for hospitalized patients (reimbursed under a fixed DRG). However, the price is likely more reasonable if hospitalization can be avoided, and in the outpatient setting, clinics may charge ASP+6% for dalbavancin, providing additional profits. DRTX is doing extensive market research and already has a team of 20 MSLs/marketing team members interacting with decision makers at the top 500 hospitals. Exhibit 9: Slide from recent DRTX corporate presentation
DRTX cites
$3,000 price
in corporate
Source: DRTX corporate presentation 2013 Exhibit 10: Potential pricing for dalbavancin
Realized price
if 100% receive
if 50% receive
Source: Company data, Credit Suisse estimates MDCO – Value-based pricing
MDCO is most likely to price oritavancin based on the projected savings to hospitals. However, its peak sales estimate seems to imply a much lower price. We do not expect MDCO will offer oritavancin at a steep discount to dalbavancin or an equivalent course of Cubicin. Value-based pricing
Value based pricing would imply that MDCO will price based on a percentage of the savings that it can offer to hospitals. Given its estimated cost savings of approximately $7,000 (Exhibit 7), MDCO could price at $3,000 and still offer significant savings to payors. A higher price point could also be supported, in our opinion. New Antibiotics Expected to Drive Greater Outpatient Use
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Given MDCO will launch after DRTX, it is unclear how it will price oritavancin relative to dalbavancin. It could price at a premium to the first infusion of dalbavancin and offer the convenience and additional savings of no second infusion. We believe that the value based pricing model will be MDCO's primary determinant of price (MDCO's stated strategy), while it also is likely to offer oritavancin at a discount to the all-in cost of the two infusions of dalbavancin (our assumption). Backing into price
At its analyst event on October 9, MDCO disclosed key assumptions to arrive at its >$400M peak sales estimate for oritavancin. MDCO expects to reach these sales with 19.8% share of a 1.5 to 2.1M eligible patient market that is expected to grow 1% each year (Exhibit 11). Using these estimates, we were able to back into a range of potential prices for a patient pool in 10 years. If you take the mid-point for the eligible patient population (1.8M), we arrive at a $1,000 price point (Exhibit 12). We believe the oritavancin market share estimate is too high, which artificially deflates the price estimate. We believe that MDCO is likely to charge a meaningfully higher price than $1,000. Exhibit 11: Slide from MDCO presentation at Investor and Analyst Day
Source: MDCO corporate presentation 2013 Exhibit 12: Potential pricing for oritavancin
Key assumptions (per MDCO)
Est. pts now
Source: Company data, Credit Suisse estimates CBST likely to charge premium for tedizolid relative
to Zyvox
Tedizolid is differentiated from Zyvox in that it caused less hematological toxicities (Exhibit 13) in the two Phase III studies and may be less likely cause resistance. We believe that CBST will be able to charge a premium relative to Zyvox based on this profile. We have assumed that CBST charges a 20% premium to the price of Zyvox for a 10-day course of New Antibiotics Expected to Drive Greater Outpatient Use
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therapy (we assume a 5% price increase for Zyvox from current levels in early 2014). We assume that this cost will be distributed over the 6-day course of therapy for tedizolid (Exhibit 14). Additionally, there is preclinical evidence that suggests that tedizolid could have a significantly reduced chance for serotonin effects (Flanagan et al, Antimicrobial Agents and Chemotherapy; July 2013, Vol 57:No. 7, pp 3060-3066). It is unclear if this difference will be reflected in the label. We assume a larger clinical program would be needed to demonstrate this difference. Establishing a differentiated profile in the market based on product attributes (vs. Zyvox) and not price will be key for CBST as generic Zyvox (potentially in 2015) would likely take substantial share and limit long term upside for tedizolid. Exhibit 13: Platelet analysis of tedizolid vs linezolid in ESTABLISH 1 & 2 studies
Zyvox (linezolid) Laboratory results Study Day 7-9 - # of patients Study Day 11-13 - # of patients Last dose of active drug - # of patients Any post-baseline through last dose of active drug Source: Company data, Credit Suisse estimates Exhibit 14: Potential pricing for tedizolid
Actual WAC cost NOW CS estimated 2014 WAC cost Drug price analysis
Dose in cSSSI (mg/kg) Recommended Duration Source: Company data, Credit Suisse estimates New Antibiotics Expected to Drive Greater Outpatient Use
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Fragmented market likely to expand
with new entrants
Oritavancin and dalbavancin should help expand the market
The biggest opportunities for new long-acting antibiotics are to take share from generic vancomycin, which accounts for approximately 70% of the current market, and from Cubicin's outpatient business, which accounts for approximately 50% of Cubicin sales. Since long-acting antibiotics are a new paradigm in the treatment of ABSSSI (weekly or Survey results: ED docs single-infusion antibiotic versus daily infusion), we believe that having two drugs entering noted a strong preference the market at the same time will be beneficial in accomplishing the relatively difficult task for once-and-done vs. once of changing clinical practice. We believe that the greatest opportunity will come from per week (88% vs. 12%). ID avoiding hospitalization or reducing the number of infusions needed in an outpatient docs were more evenly split The launch of these products should proceed like other antibiotic launches, which generally progress at a steady pace from launch through the life of the product. We estimate that this new class of drugs could conservatively capture between 10% to 30% of the market over many years (for comparison, Cubicin has 14%), which at current Cubicin pricing would be approximately $575M to $1.7B per year. Our current projections for dalbavancin and oritavancin conservatively estimate $700M in US sales by 2020. Fragmented Market for Gram-Positive Antibiotics
Generic vancomycin has the large majority of the Gram-positive antibiotic market, with approximately 70% share of total days of IV antibiotics (Exhibit 15). The overall branded Gram-positive antibiotic space generated U.S. sales of over $1.6B in 2012 (Exhibit 16). At Cubicin pricing, each percentage of market share is worth approximately $58M in net sales. The overall market shares are likely to change in the next few years with (1) several new branded IV antibiotics (listed in Exhibit 17), and (2) the introduction of generic Zyvox. Exhibit 15: Gram-Positive Market Analysis Based on Days of Therapy
3.7% ZYVOX® ORAL Note: CBST reported that Cubicin had 14.0% market share for the 12 months ending August 2013. Source: Company data, Credit Suisse estimates. New Antibiotics Expected to Drive Greater Outpatient Use

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Exhibit 16: Marketed Gram-Positive Therapeutics
Class of molecule
CY2012 US Sales
cSSSI, endo, bone, LRTI, cSSSI, HAP, CAP, uSSSI, DFI, cSSSI, cIAI, CAP HAP, VRE, DFI (Phase I I completed) Approved only in EU for CAP, Source: Company data, Credit Suisse estimates. Exhibit 17: Therapeutics in Late-Stage Development
Class of molecule
2 Positive Ph3 trials; PDUFA May 26, 2014; MAA filed Dec 2013 2 Positive Ph3 trials; NDA expected 1 dose total Bactericidal YE:13/Q1:14; MAA in H1:142 Positive Ph3 trials; PDUFA June 20, 2014; MAA H1:14Phase I I PROCEED Phase I I with SPA Bactericidal Aminomethylcycline expected to begin soon Source: Company data, Credit Suisse estimates. New Antibiotics Expected to Drive Greater Outpatient Use
07 January 2014
FDA – A Checkered Past, but
Significantly Improved Environment
There are few therapeutic areas that have had a more difficult road with FDA than drugs
for complicated skin infections. In fact, most of the drugs expected to be approved by the
FDA over the next two years were previously rejected or substantially delayed by FDA.
The result is that many of the drugs in late-stage development have traded hands one or more times, as the original sponsors ultimately gave up, and the programs were acquired by companies willing to rerun large Phase III programs. ■ Dalbavancin was originally taken to Phase III by Vicuron, which was acquired by
Pfizer in December 2009. After three approvable letters from FDA, Pfizer ultimately divested the program to Durata, which subsequently re-ran the Phase III program and recently reported two positive Phase III trials. ■ Oritivancin was taken into Phase III by InterMune. After failing to win FDA approval,
the program was acquired by Targanta, which attempted to gain approval without running additional Phase III trials. The Medicines Company acquired Targanta and subsequently re-ran the Phase III program, and it recently reported positive data for the two Phase III trials. ■ Tedizolid was developed by Trius, who took a risk in being the first company to run a
Phase III using newly established but unproven clinical endpoints for FDA approval. It ran its two Phase III trials sequentially rather than in parallel because of limited financial resources. Following two positive Phase III trials, Trius was ultimately acquired by CBST in July 2013. FDA Changed Guidelines for Phase III Trials
When Cubicin was approved in 2003 for complicated skin and soft-tissue infections (cSSTI), the primary endpoint was clinical cure rate at the test of cure date, which was typically 10-14 days after starting therapy. Subsequently, FDA began to question multiple aspects of skin infection trial design, including (1) the noninferiority margins, (2) the entry criteria, and (3) the clinical endpoint. The result has been a complete overhaul of the regulatory process to include: ■ A new definition of complicated skin infections is now called acute bacterial skin and skin structure infection (ABSSSI). The enrollment criteria for Phase III trials were defined more specifically to limit the number of patients with certain types of infections. ■ New primary endpoints for Phase III trials focus on shorter-term outcomes. Rather than defining success as clinical cure at the completion of treatment, success is now measured by cessation of spread or reduction in the size of the lesion in the first two to three days of treatment. This new endpoint required new tools to reproducibly measure lesion size. This endpoint is still in flux, and it is different from the accepted endpoint in Europe, which remains the clinical cure rate after treatment. ■ A clear definition of noninferiority is now 10%. Prior trials tested a range of outcomes from 10% to 15%. FDA 10% noninferiority is appropriate. New Endpoints Were Initially a Risk but Are Now Well Validated
When these regulatory changes were first suggested and adopted by companies that were running new Phase III programs, there was substantial risk that the new endpoints would not replicate the positive data seen in previous trials or that the new endpoints would not correlate well with established endpoints. New Antibiotics Expected to Drive Greater Outpatient Use
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Trius was the first company to complete a Phase III trial with the new endpoints. Subsequently, Durata and The Medicines Company have both completed Phase III trials with the new endpoints. Each company measured lesion size in slightly different ways, but the clear finding is that the new lesion size endpoint replicated previous Phase III results and correlated with the previous standard endpoints (which are now secondary endpoints). GAIN Act Provides New Incentives for Antibiotic
Development
In addition to the FDA providing better guidance for the development of antibiotics for treating skin infections, Congress passed new legislation in 2012 (GAIN Act) to promote the development of new antibiotics. The Act set up the qualified infectious disease product (QIDP) designation that is granted to antibiotics in specific indications. Exhibit 18: Comparison of QIDP status for each antibiotic
Indications with QIDP ABSSSI & HABP/VABP IP (before extensions) Exclusivity with QIDP Source: Company data, Credit Suisse estimates The QIDP provides antibiotic drug developers with two key incentives: ■ Five Years of Additional Market Exclusivity in Addition to the Five Years Already
Provided under Hatch-Waxman: We believe this is the most significant portion of the
legislation. For drugs with little or no patent protection, this provision may provide the
necessary incentive to run trials to seek approval. For drugs with adequate patent
protection, this provision delays potential Paragraph IV challenges by generics. A
Paragraph IV challenge can be made one year prior to the end of data exclusivity
which is in year four for most drugs and now year nine for drugs with the QIDP
designation. This is unique to antibiotic development.
■ FDA Priority Review Potentially Shortens Review Period to Six Months: The
six-month review clock potentially means that drugs could reach the market quicker. While FDA has not done a great job completing review on time for other drugs with priority review, priority reviews are still quicker on average than standard reviews. The QIDP designation also makes the drugs eligible for "fast track" status. However, it is unclear what the significance of this status at the terminal part of the clinical development. This might help facilitate additional discussions, but does not seem as meaningful as the Priority review. The GAIN Act also calls for the FDA to develop new guidelines for the development of antibiotics to treat multidrug-resistant infections. These clinical/regulatory pathways will be developed for each indication and could provide drug developers with faster paths to market in more limited indications with high unmet medical need. These new pathways are likely to be tested first for some of the emerging Gram (-) antibiotics that target highly resistant pathogens. New Antibiotics Expected to Drive Greater Outpatient Use
07 January 2014
Exhibit 19: Estimated exclusivity and patent protection for the three antibiotics
Patent Term
Key patent expires in 2023
US Data Exclusivity
(with 6 month pediatric extension)
Paragraph 4 filer Patent Term
Key patent expires in 2015
US Data Exclusivity
(with 6 month pediatric extension)
Patent Term
Key patent expires in 2026
US Data Exclusivity
(with 6 month pediatric extension)
Paragraph 4 filer Source: Company data, Credit Suisse estimates Target Price
Cubist Pharmaceuticals (CBST) Durata Therapeutics (DRTX) The Medicines Company *O – Outperform, N – Neutral, U – Underperform, R – Restricted [V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Credit Suisse estimates. New Antibiotics Expected to Drive Greater Outpatient Use
07 January 2014
Companies Mentioned (Price as of 06-Jan-2014)
AstraZeneca (AZN.L, 3598.5p)
Basilea Pharmaceutica Ltd. (BSLN.S, SFr108.0)
Cubist Pharmaceuticals (CBST.OQ, $67.2, OUTPERFORM, TP $77.0)
Durata Therapeutics (DRTX.OQ, $12.44, OUTPERFORM[V], TP $18.0)
Eli Lilly & Co. (LLY.N, $51.53)
Forest Laboratories Inc. (FRX.N, $58.47)
Johnson & Johnson (JNJ.N, $92.33)
Novartis (NVS.N, $79.19)
Pfizer (PFE.N, $30.55)
The Medicines Company (MDCO.OQ, $37.74, OUTPERFORM, TP $45.0)
Theravance Inc. (THRX.OQ, $35.81)
Disclosure Appendix Important Global Disclosures
Jason Kantor, PhD, Ravi Mehrotra PhD and Lee Kalowski each certify, with respect to the companies or securities that the individual analyzes, that
(1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of
his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Cubist Pharmaceuticals (CBST.OQ) * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM
3-Year Price and Rating History for Durata Therapeutics (DRTX.OQ) * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM
REST RICT ED
New Antibiotics Expected to Drive Greater Outpatient Use
07 January 2014
3-Year Price and Rating History for The Medicines Company (MDCO.OQ) * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts' stock rating are defined as follows:
Outperform (O) : The stock's total return is expected to outperform the relevant benchmark*over the next 12 months.
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Underperform (U) : The stock's total return is expected to underperform the relevant benchmark* over the next 12 months.
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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
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Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Versus universe (%) Of which banking clients (%) (53% banking clients) (49% banking clients) Underperform/Sell* (43% banking clients) *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperfo rm, Neutral, and Underperform most closely correspond to Buy, Hold, and Sel , respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sel a security should be based on investment objectives, current holdings, and other individual factors. New Antibiotics Expected to Drive Greater Outpatient Use
07 January 2014
Credit Suisse's policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Cubist Pharmaceuticals (CBST.OQ)
Method: Our $77 target price is calculated using a 4.0x multiple of our 2015 revenue forecast and a sum of the parts DCF valuation. The high
multiple is justified based on greater revenue diversity, increased sales synergy, offset costs for the European expansion, and greater future top-line growth opportunities. Risks to our $77 Target Price include: 1) Expectation that CXA-201 wil receive US and EU approval in a timely manner, 2) Execution risk associated with the build out of the EU infrastructure, 3) New competitor drug sales could cut into Cubicin growth, and 4) Potential y reduced profitability over the next few years as the company ramps up clinical development and the EU build-out. Price Target: (12 months) for Durata Therapeutics (DRTX.OQ)
Method: Our $18 TP for DRTX is derived from a revenue multiple analysis of dalbavancin revenues by applying a 3.0X multiple to our 2017
revenue forecast of $231M, discounted back at 12% and a DCF of dalbavancin revenues through 2027. Key risk factors to our $18 TP include: 1) dalbavancin is not approved or the launch is significantly delayed, 2) dalbavancin launch ramp and/or peak sales underperforms our estimates, and 3) dalbavancin is not broadly adopted for other MRSA indications. Price Target: (12 months) for The Medicines Company (MDCO.OQ)
Method: We arrive at our $45/share target price using a 3.4X multiple of our 2015 revenue estimate and a sum-of-the-parts DCF, in which we
assign $14/share for Angiomax, $4/share for other marketed products, $25/share for the pipeline, and $2/share for its net cash. Risks to our $45 Target Price include: 1) Timing of generic threat to Angiomax is unresolved and could negatively impact the stock if it comes in 2015 instead of 2019, 2) Generic erosion for Angiomax is made worse by multiple entrants, and 3) Relatively short patent life for its pipeline could limit the peak revenues of products that reach the market. Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (DRTX.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (DRTX.OQ) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (DRTX.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (DRTX.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (CBST.OQ, DRTX.OQ, MDCO.OQ) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (CBST.OQ, DRTX.OQ, MDCO.OQ). Important Regional Disclosures
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New Antibiotics Expected to Drive Greater Outpatient Use
07 January 2014
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07 January 2014
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for New Antibiotics FINAL.d 22

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