Lung cancer is the leading cause of cancer deaths worldwide. Although lung cancer accounts for only 15% of all cancers, it accounts for 28% of all cancer deaths. More people die from lung cancer than from breast, prostate, and colon cancer combined. According to the World Health Organization, more than 1.3 million new cases of lung cancer were diagnosed in 2002, while 1.1 million patients died from the disease in the same year. In the U.S. alone, 172,570 new cases of lung cancer are expected in 2005, while an estimated 163,510 patients will die from the disease in 2005. Unlike many cancers in which the cause is unknown, the main cause of lung cancer is tobacco smoking, which causes lung cancer in up to 90% of cases.

The most common form of lung cancer is non-small cell lung cancer (NSCLC). NSCLC is an incurable disease with a poor outlook. Advanced NSCLC is typically treated with radiation therapy and chemotherapy, but despite these interventions, the 5 year survival rates remain poor.

There are new drugs in development that can potentially revolutionize the treatment of NSCLC. Of these, we believe Tarceva and Avastin will become the most widely prescribed targeted therapies for NSCLC. Pending positive clinical trial data of the two drugs used together, the combination of Tarceva and Avastin could potentially become the drug regimen of choice, replacing chemotherapy as the gold standard. We also predict that Onyx's BAY 43-9006 and Telik's Telcyta to be widely used when approved, with BAY 43-9006 providing strong competition to Avastin.

Based on their expected drug performance, we believe that Millenium and Telik are currently undervalued. Millenium has a solid pipeline portfolio, with Velcade set to expand their revenue potential. We value Millenium's 5 and 10-year pipeline at $17.47 and $13.08 a share, respectively. Telik is a riskier option as it is a young company. It has two promising drugs in its pipeline: Telintra, which is demonstrating promising results in myelodysplastic syndrome, and Telcyta, which we believe will become an important therapeutic option for NSCLC. We value Telik's 5 and 10-year pipeline at $47.55 and $33.99 a share, respectively. We also believe ImClone is significantly overvalued. Imclone's only late-stage drug, Erbitux, has not demonstrated strong clinical efficacy, and as such, we feel will not become an important treatment option in NSCLC. We value ImClone's 5 and 10-year pipeline at $24.23 and $13.67 a share, respectively.

BACKGROUND

There are two main types of lung cancer: small cell lung cancer (SCLC) and non-small cell lung cancer (NSCLC). Small cell lung cancer, named for the small round cells that make up the cancer, accounts for approximately 13% of all lung cancers and is always caused by smoking. SCLC is an aggressive cancer that spreads quickly throughout the body.

The second type of lung cancer, NSCLC, is far more common than SCLC, accounting for the remaining 87% of lung cancers. NSCLC is classified according to the tumor cell type and the stage of the disease. Currently, only patients with advanced NSCLC (Stage III and IV) are treated with drug therapies, typically chemotherapy. Two new targeted therapies have recently been approved: Iressa and Tarceva. These new therapies have revolutionized the treatment of NSCLC.

Types of NSCLC

There are 3 main tumor cell types associated with NSCLC:

Disease staging in NSCLC

The stage of NSCLC determines the treatment and outcome of the disease and is described using 4 stages:

Treatment options

The most important prognostic indicator is the extent or stage of the disease. Patients with stage I or II NSCLC are generally treated by surgical removal of the tumors and have the best prognosis for survival. Patients with stage III or IV are considered advanced and are usually treated with radiation therapy and chemotherapy. In approximately 60-75% of patients, NSCLC is first diagnosed at an advanced stage (Stage III or IV). By this stage, the cancer has spread beyond a localized foci and surgery to remove the tumor is not an option.

According to the American Cancer Society, the 5 year survival rates for patients with NSCLC is 47% for those with stage I disease and 26% for stage II. Stages III and IV have a poor prognosis with only 8% and 2% surviving at 5 years, respectively, with the rates higher for those with type A than those with type B. With such a high mortality rate, there is a need for better treatments that not only alleviate symptoms (palliation) but prolong life.

Advanced NSCLC (Stage IIIB and IV) is typically treated with chemotherapy. In the past, cisplatin or a related drug, carboplatin, were the chemotherapy agents most often used to treat NSCLC. These drugs are usually combined with another chemotherapy agent such as Gemzar (Gemcitabine; Eli Lilly), Taxol (Paclitaxel; Bristol-Myers Squibb), Taxotere (Docetaxel; Sanofi-Aventis), or Navelbine (Vinorelbine; GlaxoSmithKline).

Due to the severe side-effects associated with chemotherapy, there has been a lot of focus to develop more specific drugs that can interfere with specific pathways involved in tumor cell growth and division. These pathways include the EGFR and VEGF pathways.

New targeted therapies

Growth factors, such as epidermal growth factor (EGF) regulate cell differentiation and proliferation. They exert their effects by binding to their receptors, the epidermal growth factor receptor (EGFR). EGFR belongs to a family of 4 closely related receptors: EGFR (or ERBB-1), HER-2/neu (or ERBB-2), HER-3 (or EEBB-3), and HER-4 (or ERBB-4). The receptors exist as inactive single units, or monomers, that when activated, combine with another EGFR family member to form an active dimmer. The activation of the EGFR signaling pathway results in cell division and promotes neoplastic transformation. The excessive activation of EGFR has been associated with the development of metastatic cancer and results in a poor prognosis. Thus, there has been a lot of research to inhibit the EGFR signaling pathway, either through the inhibition of the binding of the ligand to the receptor, or the inhibition of its signaling molecules.

Two EGFR inhibitors, Iressa and Tarceva, have already been approved for NSCLC, while numerous others are still in clinical development, including Erbitux, Panitumumab, Herceptin, and Omnitarg. Iressa and Tarceva inhibit the tyrosine kinases involved in the EGFR signaling pathways, while Erbitux, Panitumumab, Herceptin, and Omnitarg are monoclonal antibodies that prevent the binding of ligand to the EGF receptors.

Summary of targeted therapies in development for NSCLC:

DRUGS ALREADY APPROVED

Iressa
Iressa (Gefitinib; AstraZeneca) was the first EGFR inhibitor to be approved for NSCLC, as a third line treatment, based on its limited palliative capacity. It was shown to alleviate coughing, shortness of breath, and chest tightness. Its approval was surprising given its lack of efficacy on patient survival. This lack of effect on survival was further highlighted when initial results from the ISEL trial were released late 2004. The Iressa Survival Evaluation in Lung cancer (ISEL) trial, which enrolled 1692 patients, showed that although Iressa significantly shrunk tumors (the objective response rate), this response rate did not translate into a statistically significant survival benefit. In the overall NSCLC population, Iressa treatment resulted in a median survival of 5.6 months compared to 5.1 months for placebo, and in patients with the adenocarcinoma subtype, Iressa use led to a median survival of 6.3 months compared to 5.4 months in placebo patients. Iressa’s European regulatory submission was withdrawn based on these results.

Iressa appears to work well in approximately 10 -15% of patients. Recent studies have suggested that patients who respond to Iressa share common mutations in the kinase domain of the EGFR gene. Patients with these mutations tend to be females and/or Japanese patients that have never smoked or who had quit smoking, and who have bronchoalveaolar carcinomas or those with adenocarcinomas with bronchoalveaolar (BAC) features.

The FDA is currently reviewing Iressa to determine whether to withdraw the drug. Given Iressa’s efficacy in a specific subset of patients, we believe that it won’t be withdrawn. We believe Iressa will remain on the market, and in the absence of tests that can identify patients with the appropriate Iressa-responsive EGFR mutations, it will be mainly used as a second/third line treatment in non-smoking female patients, or patients of Asian origin, with bronchoalveaolar NSCLC.

Tarceva
Tarceva (Erlotinib; OSI) is the second EGFR tyrosine kinase inhibitor to be approved for NSCLC. Unlike Iressa, Tarceva’s approval was based on positive phase III data that showed that Tarceva extended survival in patients with advanced NSCLC. Tarceva was shown to statistically significantly prolong survival in patients with stage III or IV NSCLC by a median of 2 months (6.7 months median survival for Tarceva compared to 4.7 months for placebo). This study was the first clear indication that the inhibition of EGFR could help patients live longer. Although Tarceva only received FDA approval as a second and third-line agent, its significant survival benefit leads us to believe that it will also be used off-label in the first-line setting for patients, particularly in those not suitable for Avastin.

A phase II study of Tarceva in combination with Avastin was recently initiated. If the combination of the two drugs appear to be more effective than either drug alone, we predict that the Taceva and Avastin combination will become the gold standard for the treatment of NSCLC, both in the first and second line setting.

Although Tarceva and Iressa target the same molecule, it is not yet clear as to why Tarceva is capable of producing a survival benefit in NSCLC while Iressa does not. We speculate that Tarceva is a “dirtier” drug and targets more than just tyrosine kinases in the EGFR family. Tyrosine kinase inhibitors tend to be non-specific and thus, we attribute Tarceva’s efficacy, in part, to additional tyrosine kinases or other proteins that may also be modulated by Tarceva.

DRUGS IN PHASE III STUDIES

Erbitux
Erbitux (Cetuximab; Imclone) also inhibits the EGFR signaling pathway. Unlike Iressa and Tarceva, which inhibit the receptor tyrosine kinases, Erbitux is a monoclonal antibody that binds specifically to the EGFR receptor. The binding of Erbitux to EGFR results in the blocking of the EGFR signaling pathway, and thus prevents cell growth and promotes apoptosis (cell death).

Erbitux received FDA approval in early 2004 for the treatment of EGFR-positive metastatic colorectal cancer as a second or third line treatment.

Similar to Iressa, Erbitux’s approval in colorectal cancer was not based on a clear clinical benefit, rather it was based on the response rate. Despite showing a positive effect on the response rate, Erbitux has yet to demonstrate a survival benefit. At ASCO in 2004, in a phase II study, Erbitux was shown to improve the overall rate of disease control and slightly improve the overall survival in lung cancer patients. However, these results were not statistically significant. Thus, without a clearer benefit on disease progression or survival, we believe that the use of Erbitux in NSCLC is limited to patients not suitable for other targeted therapies such as Avastin or Tarceva.

Avastin
Avastin (Bevacizumab; Genentech) is a recombinant humanized antibody that binds to Vascular Endothelial Growth Factor (VEGF). VEGF plays a critical role in promoting angiogenesis, or new blood vessel formation, which enhances tumor growth and survival by providing essential blood nutrients to the growing tumor. Thus, the inhibition of angiogenesis has been an active area of research for the development of anti-tumor drugs.

Avastin has already received approval as a first-line treatment for colorectal cancer. In colorectal cancer, Avastin extended patient survival by approximately 5 months. Avastin is currently in phase III studies for NSCLC. Genentech and the National Institute of Health (NIH) recently released data from the pivotal phase III study, E4599 showing that Avastin significantly prolonged survival in non-squamous advanced NSCLC patients. Avastin, given after a standard chemotherapy regimen, extended median survival by 2.3 months, with the Avastin treated group achieving a median survival of 12.5 months compared to a median of 10.2 months with the control (chemotherapy only) group. This study is the first to show that a targeted therapy is superior to chemotherapy alone in extending survival in treatment-naïve advanced cancer patients.

Based on its survival benefit, we expect Avastin to become the treatment of choice for most patients with advanced NSCLC. Avastin could potentially replace standard chemotherapy as a first-line treatment for NSCLC, either alone or in combination with Tarceva. However, not all patients are eligible for Avastin. Patients with squamous cell carcinoma, and those that cough up blood, are not likely to be given Avastin since previous clinical trials have suggested that these patients are at a higher risk of serious bleeding with Avastin use.

Telcyta
Telcyta (TLK286; Telik) is a novel therapeutic agent that targets the enzyme glutathione S-transferase P1-1 (GST P1-1). This enzyme is overexpressed in many human cancer cells and its overexpression is associated with a poor prognosis. GST P1-1 is a detoxifying enzyme that is known to promote drug resistance in cells that express the enzyme and thus its inhibition may prevent tumor resistance to chemotherapy.

In phase II studies in stage IIIB and IV NSCLC patients resistant to platinum-based therapy, Telcyta monotherapy resulted in an 8% response rate with a 67% overall disease stabilization rate. These results are comparable to those observed with Tarceva. In platinum refractory NSCLC patient, some of whom have also failed EGFR inhibitors, the combination of Telcyta plus Taxotere resulted in a 27% response rate and a 67% disease stabilization rate.

While Telcyta has shown efficacy in disease stabilization, questions remain as to whether it can extend survival in NSCLC patients. In a small follow-up study of Telcyta as a monotherapy, median survival had not been reached at the end of the study, suggesting that Telcyta can promote survival. Results from ovarian cancer patients have also been promising in terms of survival, however, results from one malignancy cannot always be translated to another.

A pivotal phase III (ASSIST-2) study was initiated last year to evaluate the survival benefits of Telcyta. The study is comparing Telcyta to Iressa in the third line setting with the primary endpoint of the study being the demonstration of superiority over Iressa in prolonging survival. Results from this trial are expected later in 2005, and if Telcyta demonstrates superiority over Iressa, an NDA submission is expected before year-end. The company chose Iressa as the control treatment since it was the standard third line therapy for NSCLC at the time of trial initiation. While we believe Telcyta can show superiority over Iressa, given the recent developments that highlighted Iressa’s lack of survival benefit, the FDA may request additional trials.

DRUGS IN EARLY DEVELOPMENT

BAY 43-9006
Onyx’s BAY 43-9006 (Sorafenib) is a novel agent that targets the RAF signaling pathway. The RAF kinases are proto-oncogenes that, through the activation of RAS, activate the mitogen-activated protein kinase/extracellular signal regulated kinase (MAPK/ERK) pathway. This pathway has shown to promote cell proliferation and cell migration and metastasis, hallmark features of tumors. Mutations in the Ras gene has been shown in approximately 20% of all human cancers, including 90% of pancreatic cancer, 50% of colon cancer, and 30% of non-small cell lung cancer.

BAY 43-9006 is not specific to RAF, however, as it also inhibits the VEGF signaling pathway, particularly VEGFR-2 and PDGFR-beta, receptors of VEGF and platelet-derived growth factor (PDGF), respectively. These pathways play key roles in angiogenesis. With its broader range of targets, BAY 43-9006 is expected to be more efficacious than Iressa and Tarceva, at least in terms of shrinking tumors, however, as seen in the case for Iressa, the ability to shrink tumors does not always correlate with significant clinical outcomes.

In April 2004, a phase II study of BAY 43-9006 was initiated in patients with advanced, refractory NSCLC. The study is planning to evaluate time to disease progression as well as overall survival. BAY 43-9006 has shown promising results in renal and liver cancer, demonstrating that it can shrink tumors and slow the time to disease progression. In fact, due to its statistically significant benefit in prolonging progression free survival (PFS), Onyx is expected to file an earlier than expected NDA for BAY 43-9006 for the treatment of renal cell cancer.

While this is encouraging, BAY 43-9006 has yet to demonstrate any survival benefit in any cancer setting and thus, we remain cautiously optimistic about BAY 43-9006. While the inhibition of the RAF/RAS pathway has yet to demonstrate clinical efficacy, BAY 43-9006 also inhibits the VEGF pathway, which has shown significant survival benefit as seen with Avastin. The combined inhibition of the VEGF and RAF/RAS pathway makes BAY 43-9006 an attractive drug candidate as it could potentially be more efficacious than Avastin. Also in its favor is the fact that it is orally available, and thus by passes the need for injections that plague most chemotherapies and Avastin. Therefore, if BAY 43-9006 can demonstrate a survival benefit with acceptible toxicity, we believe it could become the treatment of choice for both first and second line non-squamous NSCLC patients, eroding Avastin’s market share.

Herceptin
Herceptin (Trastuzumab; Genentech) is a humanized antibody targeted towards the HER-2 (also known as EGFR-2, ERBB2, and neu) protein. HER-2 is upregulated in many cancers, particularly breast cancer where approximately 20% of breast cancers have HER-2 mutations that causes its overexpression. Herceptin was shown to be effective in breast cancers that overexpressed HER-2, and became the first monoclonal antibody to be approved for the treatment of breast cancer.

In phase II studies in patients with advanced NSCLC, Herceptin, in combination with chemotherapy, showed no benefit over chemotherapy alone. However, the study was carried out in patients with and without HER-2 overexpressing NSCLC. Despite the unpromising data, Herceptin may provide a benefit in patients overexpressing HER-2. In this phase II study, the number of HER-2 overexpressing patients was too small to determine an effect. In the overall NSCLC patient population, approximately 4% of patients, including 10% of adenocarcinoma patients, overexpress HER-2. Therefore, we believe this 4% of patients will probably respond to Herceptin. However, due to the small number of patients overexpressing HER-2, we believe the penetration of Herceptin will be limited.

Omnitarg
Like Herceptin, Omnitarg (Pertuzumab; Genentech) is an anti-HER-2 antibody. However, Omnitarg blocks the ability of HER-2 to bind to other HER group members (HER1/EGFR, HER-3, and HER-4). Thus Omnitarg blocks the signaling of other EGFR members, not just HER-2. Therefore, its effects could be more widely applicable than to just cancers overexpressing HER-2. Theoretically, Omnitarg could be more efficacious than Herceptin, since it also blocks EGFR, not just HER-2. However, given that the EGFR inhibitor Erbitux has not shown much clinical efficacy, we are very cautious about Omnitarg’s efficacy and likelihood of approval. Phase II data is expected for Omnitarg in NSCLC patients later in 2005.

Panitumumab
Panitumumab (ABX-EGF; Abgenix) is a monoclonal antibody that inhibits EGFR, similar to Erbitux. Panitumumab is currently only in early phase II studies, and so far has shown promising efficacy and safety in combination with standard chemotherapy. Results from these studies are expected later in 2005.

REVENUE MODEL UPDATES

We have updated our revenue models for the following drugs within the NSCLC market: Iressa, Tarceva, Erbitux, Avastin, Telcyta, BAY 43-9006, Herceptin, Omnitarg, Panitumumab, Genasense, Velcade, and Advexin.

Iressa
Iressa was approved in May 2003 as a third line treatment for NSCLC. We believe Iressa will be used as a second or third line treatment in a small patient population, particularly those who are female, Asian, and who have never smoked or who are no longer smoking. We predict peak U.S. revenue for Iressa to be the $181.8 million achieved in 2004. We project 2005 U.S. revenue of $36.6 million and worldwide revenue of $212.3 million.

Tarceva
Tarceva was approved in November 2004 as a second line treatment for advanced NSCLC. Due to its significant survival benefit, we believe Tarceva will be the most widely used targeted therapy agent in the second and third line setting. We also predict that it will be used off-label in the first line setting in patients not suitable for Avastin or chemotherapy. We predict Tarceva to achieve a peak U.S. market share of 35% in the first line setting and 55% in second and third line. We project peak U.S. revenue of $921.1 million in 2008 and peak worldwide revenue of just under $2.0 billion in the same year.

Erbitux
Without a clear survival benefit, we believe that Erbitux's market share will remain very small, being limited to patients who are not eligible for other treatment options. We project Erbitux's peak U.S. revenue to be $62.1 million in 2012, with peak worldwide revenue of $181.8 million in 2013.

Avastin
Avastin has shown the most promising data thus far in the first line treatment setting. We believe that Avastin will be the drug of choice in as a first line therapy for non-squamous NSCLC patients. We also believe that it will be widely used in the second and third line treatment setting, perhaps in combination with Tarceva. Avastin is also priced higher than most other NSCLC treatments and as such will generate the most revenue. We project peak U.S. revenue of $3.4 billion in 2010, with peak worldwide revenue of $7.0 billion in the same year.

Telcyta
We predict that Telcyta will be mainly used in combination with either standard chemotherapy or with Tarceva or Avastin as both a first, second, and third line treatment. We project peak US revenues to be $632 million in 2011, with peak worldwide revenue of $1.5 billion the same year.

BAY 43-9006
BAY 43-9006 is set to become on of the most widely prescribed treatments for non-squamous NSCLC once approved due to its pill delivery form. We predict that it will erode Avastin market share if shown to prolong survival. We project peak U.S. revenue of $724.0 million in 2012, with peak worldwide revenue of $1.6 billion the same year.

Herceptin
With the small patient population overexpressing HER-2, we predict that Herceptin's market potential to be small as only HER-2 patients will be eligible for treatment. We project peak U.S. revenue of $44.7 million in 2014, with peak worldwide revenue of $100.7 million in the same year.

Omnitarg
Omnitarg can potentially replace Erbitux. However, due to Erbitux's small market potential, we believe Omnitarg to also have a small market potential. We project peak U.S. revenue of $133.0 million in 2015, with peak worldwide revenue of $387.4 million in the same year.

Panitumumab
Panitumumab is also similar to Erbitux. We also predict it will have a very small market potential. We project peak U.S. revenue of $130.0 million in 2014, with peak worldwide revenue of $382.5 million the same year.

Velcade
We predict Velcade (Bortezomib; Millenium) to be mainly used in the second and third line setting, and most likely by patients not responding to other targeted therapies such as Avastin and Tarceva. Velcade will most likely be used in combination with chemotherapy or other therapies. We project peak U.S. revenue of $285.3 million in 2014, with peak worldwide revenue of $758 million the same year.

Genasense
Genasense (Oblimersen; Genta) has yet to demonstrate any survival benefit in any cancer setting that it has been evaluated in. Given its toxicity and lack of clinical efficacy, we do not think it is likely to be approved by the FDA (we currently have Genasense at 10% below likelihood of approval). In the event that it does gain FDA approval, we believe that it will only be used as a last resort in the second and third line setting. We predict its market penetration to be very small and peak U.S. revenue to be $25.6 million.

Advexin
Advexin (Introgen) is a replication defective adenovirus vector containing the p53 gene. Advexin has yet to demonstrate a statistically significant survival benefit in its most clinically advance indication head and neck cancer. Its efficacy in NSCLC is also dubious as it has yet to undergo a randomized placebo controlled study. Similar to Genasense, we believe that Advexin has a below average likelihood of approval (10% below average), and if it does receive FDA approval, it is likely to be a last resort therapy. We project peak U.S. revenue of $43.8 million in 2014.

EVALUATED COMPANY UPDATES

Genentech
Genentech's share of the NSCLC market is very large, with revenues coming from Tarceva, Avastin, Omnitarg and Herceptin. We currently feel Genentech is fairly valued based on its 5-year pipeline value.

Telik
Telik is a company with a lot of promise should it be successful in getting Telcyta and Telintra approved. We currently feel Telik is significantly undervalued based on its 5 and 10-year pipeline values. Positive data in 2005 from either drug should propel Telik’s stock, as its currently trading close to a 52-week low.

OSI Pharmaceuticals
All indications are that Tarceva will be a blockbuster drug for OSI. However, Tarceva’s potential appears to be well recognized by the market and as such we feel the company is slightly undervalued based on its 5-year pipeline value. We would look for OSI to advance Tarceva in other indications, or OSI to advance other drugs within its pipeline, to help continue its positive momentum.

ImClone Systems
Erbitux sales in colorectal cancer have been flat over the past several months. Combined with our forecast for Erbitux in the NSCLC market, we feel ImClone is significantly overvalued based on its 5 and 10-year pipeline values.

Onyx Pharmaceuticals
Due to Bay-43 9006’s potential to treat first-line NSCLC patients, its market potential is very large, however we currently feel Onyx is fairly valued based on its 5 and 10-year pipeline values.

Abgenix
We currently feel Abgenix is overvalued based on its 5-year pipeline value and undervalued when looking at its 10-year pipeline value.

Genta
Genta is a company we would avoid, even at $1.00/share.

Millennium Pharmaceuticals
Velcade has the potential to be a very large revenue contributor for Millennium in multiple indications, though it is early in development for all expect multiple myeloma. We currently feel Millennium is undervalued based on its 5 and 10-year pipeline values.

Introgen Therapeutics
Introgen’s pipeline is very young in all settings but head and neck cancer. We currently feel Introgen is overvalued based on it 5-year pipeline, but looking out to 10 years the company is fairly valued.

REVENUE MODEL UPDATES

We have updated our revenue models for the following drugs within the NSCLC market: Iressa, Tarceva, Erbitux, Avastin, Telcyta, BAY 43-9006, Herceptin, Omnitarg, Panitumumab, Genasense, Velcade, and Advexin.

Iressa
Iressa was approved in May 2003 as a third line treatment for NSCLC. We believe Iressa will be used as a second or third line treatment in a small patient population, particularly those who are female, Asian, and who have never smoked or who are no longer smoking. We predict peak U.S. revenue for Iressa to be the $181.8 million achieved in 2004. We project 2005 U.S. revenue of $36.6 million and worldwide revenue of $212.3 million.

Tarceva
Tarceva was approved in November 2004 as a second line treatment for advanced NSCLC. Due to its significant survival benefit, we believe Tarceva will be the most widely used targeted therapy agent in the second and third line setting. We also predict that it will be used off-label in the first line setting in patients not suitable for Avastin or chemotherapy. We predict Tarceva to achieve a peak U.S. market share of 35% in the first line setting and 55% in second and third line. We project peak U.S. revenue of $921.1 million in 2008 and peak worldwide revenue of just under $2.0 billion in the same year.

Erbitux
Without a clear survival benefit, we believe that Erbitux's market share will remain very small, being limited to patients who are not eligible for other treatment options. We project Erbitux's peak U.S. revenue to be $62.1 million in 2012, with peak worldwide revenue of $181.8 million in 2013.

Avastin
Avastin has shown the most promising data thus far in the first line treatment setting. We believe that Avastin will be the drug of choice in as a first line therapy for non-squamous NSCLC patients. We also believe that it will be widely used in the second and third line treatment setting, perhaps in combination with Tarceva. Avastin is also priced higher than most other NSCLC treatments and as such will generate the most revenue. We project peak U.S. revenue of $3.4 billion in 2010, with peak worldwide revenue of $7.0 billion in the same year.

Telcyta
We predict that Telcyta will be mainly used in combination with either standard chemotherapy or with Tarceva or Avastin as both a first, second, and third line treatment. We project peak US revenues to be $632 million in 2011, with peak worldwide revenue of $1.5 billion the same year.

BAY 43-9006
BAY 43-9006 is set to become on of the most widely prescribed treatments for non-squamous NSCLC once approved due to its pill delivery form. We predict that it will erode Avastin market share if shown to prolong survival. We project peak U.S. revenue of $724.0 million in 2012, with peak worldwide revenue of $1.6 billion the same year.

Herceptin
With the small patient population overexpressing HER-2, we predict that Herceptin's market potential to be small as only HER-2 patients will be eligible for treatment. We project peak U.S. revenue of $44.7 million in 2014, with peak worldwide revenue of $100.7 million in the same year.

Omnitarg
Omnitarg can potentially replace Erbitux. However, due to Erbitux's small market potential, we believe Omnitarg to also have a small market potential. We project peak U.S. revenue of $133.0 million in 2015, with peak worldwide revenue of $387.4 million in the same year.

Panitumumab
Panitumumab is also similar to Erbitux. We also predict it will have a very small market potential. We project peak U.S. revenue of $130.0 million in 2014, with peak worldwide revenue of $382.5 million the same year.

Velcade
We predict Velcade (Bortezomib; Millenium) to be mainly used in the second and third line setting, and most likely by patients not responding to other targeted therapies such as Avastin and Tarceva. Velcade will most likely be used in combination with chemotherapy or other therapies. We project peak U.S. revenue of $285.3 million in 2014, with peak worldwide revenue of $758 million the same year.

Genasense
Genasense (Oblimersen; Genta) has yet to demonstrate any survival benefit in any cancer setting that it has been evaluated in. Given its toxicity and lack of clinical efficacy, we do not think it is likely to be approved by the FDA (we currently have Genasense at 10% below likelihood of approval). In the event that it does gain FDA approval, we believe that it will only be used as a last resort in the second and third line setting. We predict its market penetration to be very small and peak U.S. revenue to be $25.6 million.

Advexin
Advexin (Introgen) is a replication defective adenovirus vector containing the p53 gene. Advexin has yet to demonstrate a statistically significant survival benefit in its most clinically advance indication head and neck cancer. Its efficacy in NSCLC is also dubious as it has yet to undergo a randomized placebo controlled study. Similar to Genasense, we believe that Advexin has a below average likelihood of approval (10% below average), and if it does receive FDA approval, it is likely to be a last resort therapy. We project peak U.S. revenue of $43.8 million in 2014.

EVALUATED COMPANY UPDATES

Genentech
Genentech's share of the NSCLC market is very large, with revenues coming from Tarceva, Avastin, Omnitarg and Herceptin. We currently feel Genentech is fairly valued based on its 5-year pipeline value.

Telik
Telik is a company with a lot of promise should it be successful in getting Telcyta and Telintra approved. We currently feel Telik is significantly undervalued based on its 5 and 10-year pipeline values. Positive data in 2005 from either drug should propel Telik’s stock, as its currently trading close to a 52-week low.

OSI Pharmaceuticals
All indications are that Tarceva will be a blockbuster drug for OSI. However, Tarceva’s potential appears to be well recognized by the market and as such we feel the company is slightly undervalued based on its 5-year pipeline value. We would look for OSI to advance Tarceva in other indications, or OSI to advance other drugs within its pipeline, to help continue its positive momentum.

ImClone Systems
Erbitux sales in colorectal cancer have been flat over the past several months. Combined with our forecast for Erbitux in the NSCLC market, we feel ImClone is significantly overvalued based on its 5 and 10-year pipeline values.

Onyx Pharmaceuticals
Due to Bay-43 9006’s potential to treat first-line NSCLC patients, its market potential is very large, however we currently feel Onyx is fairly valued based on its 5 and 10-year pipeline values.

Abgenix
We currently feel Abgenix is overvalued based on its 5-year pipeline value and undervalued when looking at its 10-year pipeline value.

Genta
Genta is a company we would avoid, even at $1.00/share.

Millennium Pharmaceuticals
Velcade has the potential to be a very large revenue contributor for Millennium in multiple indications, though it is early in development for all expect multiple myeloma. We currently feel Millennium is undervalued based on its 5 and 10-year pipeline values.

Introgen Therapeutics
Introgen’s pipeline is very young in all settings but head and neck cancer. We currently feel Introgen is overvalued based on it 5-year pipeline, but looking out to 10 years the company is fairly valued.