Early this morning, New York-based biotechnology company OSI Pharmaceuticals Inc. (OSIP) and Genentech Inc. (now a wholly owned member of the Roche Group) announced that a phase III SATURN study proved that Tarceva was successful in improving survival of advanced non-small cell lung cancer (NSCLC) patients when used directly after initial chemotherapy.

Tarceva is promoted in the U.S. by both companies and sales force costs are split equally. The significant improvement in overall survival supports the use of Tarceva as a first-line maintenance treatment for NSCLC.

SATURN (front-line maintenance therapy in NSCLC post-chemotherapy non-progressors) is a placebo-controlled, randomized, double-blind study conducted by Roche that enrolled 889 advanced NSCLC patients at more than 150 sites worldwide.

Tarceva (erlotinib), a small molecule inhibitor of the epidermal growth factor receptor (EGFR), is currently marketed for the treatment of patients with locally advanced or metastatic non-small cell lung cancer (2nd line NSCLC) after the failure of at least one prior chemotherapy regimen and pancreatic cancer.

In the oral EGFR market, Tarceva competes with AstraZeneca’s (AZN) Iressa. However, we believe that Tarceva will receive little competition since it has already captured over 95% of the total oral EGFR market. Market share should also continue to expand as AstraZeneca is giving up on a number of Iressa-based trials.

The overall survival data from the SATURN study will be submitted to the U.S. FDA to further substantiate the supplemental New Drug Application (sNDA) submitted in March 2009 for the new indication. The filing was accepted in June 2009 and the Prescription Drug User Fee Act (PDUFA) target date is around January 18, 2010.

We expect approval of this new indication in early 2010. This will significantly expand Tarceva sales beyond 2010. Roche has also filed an application with the European Medicines Agency (EMEA) for approval in Europe.

However, we are presently concerned about flat U.S Tarceva sales in recent quarters. Tarceva sales figures in the rest of the world too recorded marginal improvement in the first quarter of 2009. Since Tarceva is the key growth driver for OSIP, any slowdown in sales will adversely affect OSI Pharma’s stock price.

Therefore, label expansion is a must to revitalize Tarceva sales in our view. The SATURN study, along with other studies, is being conducted by the two companies to expand the Tarceva label to help drive higher market penetration.

We feel OSI Pharma is one of the few fully integrated, profitable biotech companies in the U.S. and regard it as a key player in the biotech field. As such, we are neutral on the stock.

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