The MDS market is poised for growth in the coming years with a number of new promising treatments in development. Historically MDS has not been a well-understood disease, but this is changing and we expect MDS awareness to continually increase in years to come. We are initiating coverage of the MDS market, with six updated or new drug revenue models. We currently feel Telik’s Telintra is best positioned to capture the market should it be approved. Based on Telik's 5 and 10 year pipeline, we feel the company is currently undervalued and could perform well in 2005, should it report positive data.

BACKGROUND

The myelodysplastic syndromes (MDS) are a group of unusual blood disorders characterized by bone marrow malfunction and immature blood cells. In MDS, the bone marrow overproduces defective cells that become halted in their maturation, resulting in immature cells, called blasts, which do not function correctly. Most of these cells are destroyed in the bone marrow before entering the bloodstream, leading to shortages of functional cells in the blood.

As MDS is not a disease for which the Centers for Disease Control (CDC) mandates case reports, the annual incidence of MDS is not known, but according to the American Cancer Society an estimated 14,000 cases of MDS are diagnosed each year in the U.S. The disease typically occurs in elderly people with the risk of developing disease increasing exponentially with time. The average onset of disease occurs between ages 60-70 years. The cause of disease is unknown in the majority (60-70%) of patients although some patients develop the disease after exposure to benzene, radiation, or chemotherapy (secondary MDS). The life expectancy of MDS ranges from 4 months to 5 years depending on the aggressiveness of the disease and approximately 30% of MDS patients progress to acute myelogenous leukemia (AML). Patients who have secondary MDS or whose disease had progressed to AML are much more resistant to chemotherapy and have a poorer prognoses than de novo patients.

Over the past two decades, MDS was categorized into 5 subtypes based on cell morphology at diagnosis. This system is known as the French-American-British (FAB) classification with the 5 subtypes being: Refractory Anemia (RA), RA with Ringed Sideroblasts (RARS) where there is abnormal iron accumulation in the cell’s mitochondria, RA with Excess Blasts (RAEB) where the number of blasts is abnormally high, RA with Excess Blasts in transformation (RAEB-t) where the disease becomes closer to AML, and Chronic Myelomoncytic Leukemia (CMMoL). Patients with RAEB and RAEB-t have a poor prognosis with a life expectancy of 4-12 months.

Despite its value for diagnostic categorization of MDS patients, the FAB system does not consistently predict complete remission, leukemia-free survival, or overall survival. Due to these limitations, a new classification system was developed by the International MDS Risk Analysis Workshop which has markedly improved prognostic stratification of MDS patients. This system is called the International Prognostic Scoring System (IPSS) for primary MDS. The IPSS score is derived from the sum of three important prognostic factors: the percentage of blasts in the bone marrow, the cytogenetic findings, and the number of cytopenias. Patients are stratified into Low, Intermediate-1 (Int-1), Intermediate-2 (Int-2), or High risk groups, with the increase in risk representing an increase in risk of mortality or leukemic transformation. Low-risk MDS is characterized primarily by cytopenias, anemia, and thrombocytopenia, with a low incidence of progression to AML. High-risk MDS is characterized by a greater incidence of progression to AML and mortality.

CURRENT TREATMENTS

Until last year, there was no established drug treatment for MDS, with therapy consisting of supportive care such as platelet and blood transfusions. Unfortunately blood transfusions can lead to accumulative iron overload and toxicity which can be fatal. The only known cure for MDS is a bone marrow transplant, however, as this procedure is highly intensive, patients over 50 years, which represents the majority of MDS patients, are not eligible. Thus, MDS remains an unmet medical need and with the ageing population and a corresponding increase in incidence, this need becomes more apparent. The FDA approved Vidaza last year, marking an important step towards the goal of effective therapies for MDS.

DRUGS IN DEVELOPMENT

Although Vidaza was approved for all MDS subtypes, it is primarily used in high risk patients, and there remains an unmet need to improve the treatment of patients with low and intermediate risk MDS. A number of agents are currently being evaluated in MDS, including Dacogen, Thalomid, Revlimid, Telintra, Trisenox, Zarnestra and Velcade, with Dacogen being the closest to FDA approval. Of these drugs in development, we believe that Revlimid will be the drug of choice for patients with 5q deletions and Telintra to have the most potential for wide usage amongst all subtypes since it will not be limited to 5q deletion patients.

Based on these assumptions, we believe that both Celgene and Telik have the potential for big years in 2005. Celgene should get a boost in share price due to Thalomid and Revlimid results expected later this year, most probably at ASH. More importantly, Celgene should get two FDA approvals within the next year or so: Thalomid for multiple myeloma in 2005, and Revlimid for MDS by early 2006. We also think that Telik will have a good 2005. Telik is a fairly young company that already has two promising drugs in the pipeline: Telcyta and Telintra. We expect detailed results from their ongoing phase II studies of Telintra in MDS later this year, again most probably at ASH. If the results remain as positive as they have been so far, we expect Telik to file an NDA later this year or early next year based on these phase II results, which should provide a big boost to Telik.

Vidaza (Azacitidine; Pharmion)

In May 2004, the FDA approved Vidaza as the first drug treatment for MDS. Vidaza is pyrimidine analog that demethylates DNA. In MDS as well as in other cancers, the hypermethylation of DNA plays an important role in disease progression. The hypermethylation of DNA results in the inhibition of “suppressor genes”, genes involved in the regulation of cell differentiation and proliferation. The inhibition of suppressor genes results in the halted maturation and unregulated proliferation of these cells. Vidaza has been shown to reverse this DNA hypermethylation, thereby allowing suppressor genes to regulate cell differentiation and division, promoting normal cell growth and development.

FDA approval of Vidaza was based on results from a pivotal, randomized, open labeled, controlled phase III study in 191 patients (172 evaluable) of patients from all 5 FAB subtypes. Patients were randomized to receive supportive care or Vidaza plus supportive care. An overall response rate of 15.7% was observed in the Vidaza treated group compared to no response in the control group. Response was seen in all 5 subtypes of MDS. A median time to death or leukemic transformation of 21 months in the Vidaza treated group compared to the 13 months in supportive care was also observed. Thus, Vidaza showed superiority to supportive care and delayed death or the onset of leukemia in all subtypes of MDS patients.

Dacogen (Decitabine; SuperGen)

SuperGen’s Dacogen is considered a “me too” drug since it also inhibits DNA methylation. Dacogen therefore has to prove at least equal efficacy, if not, superiority to Vidaza for it to be competitive. At the American Society of Hematology (ASH) meeting in December 2004, SuperGen detailed results from the Dacogen phase III study, which formed the basis for its NDA submission, completed in November last year. This phase III study evaluated Dacogen in intermediate and high (Int-1, Int-2, and high) risk MDS patients. The overall response rate was 17% for the Dacogen treated group compared to 0% for control. A median time to leukemic transformation or death of 11.1 months for the Dacogen treated groups compared to 8.6 months for control was also observed. Although the time to leukemic transformation or death appears to be less than that noted in the Vidaza trial, the placebo group also had a shorter time to progression in this study, most probably due to the lack of low risk patients in this study. It appears from this study that Dacogen’s efficacy is comparable to that of Vidaza.

Given that Vidaza was approved in May last year and represents the only approved therapy for MDS, we believe Dacogen will receive FDA approval later this year to add to the repertoire of treatments for MDS. Like Vidaza, Dacogen was also granted orphan drug status and should receive market exclusivity once approved. Despite the two drugs having the same mechanism of action, they are different chemical entities, allowing both drugs to obtain orphan drug status. Vidaza is generally prescribed to high risk patients only and we predict that Dacogen will be used in the same patient population in patients who are refractory to Vidaza. Given that only 16% of patients respond to Vidaza, there is still room for Dacogen to make an impact.

Thalomid (Thalidomide; Celgene)

Thalomid, or Thalidomide, is now being evaluated in numerous malignancies and is currently in phase III studies for MDS. Thalomid was originally approved back in the 1950s for insomnia and morning sickness, but was withdrawn soon after it was realized to cause birth defects. The activities of Thalomid that led to birth defects are now being exploited for the treatment of various cancers, including MDS. Thalomid is an angiogenic inhibitor, blocking the formation of new blood vessels required for the nourishment and proliferation of cancer cells. Although Thalomid was only approved for leprosy in 1998, it has been widely used off label for multiple myeloma (MM), and more recently, for MDS.

Celgene recently presented new data from its phase II study of Thalomid in patients with MDS at the American Society of Hematology meeting. The results show that Thalomid promoted erythropoiesis (red blood cell formation) with a 35% response rate, primarily in patients with the RA subtype (low risk). Thalomid did not improve neutrophil or platelet counts. The results suggest that Thalomid could be useful for patients with low risk MDS (RA subtype) who require blood transfusions. However, toxicity was a concern with 35% of patients pulling out of the trial by week 10 of Thalomid treatment due to side effects. Thus, it is conceivable that Thalomid could be approved for low risk MDS patients who require blood transfusions to promote red blood cell formation and transfusion independence.

Revlimid (Lenalidomide; Celgene)

Celgene is currently developing Thalidomide analogs, termed immunomodulatory drugs or IMiDs, which are designed to be more potent inhibitors of angiogenesis and immune modulation with less toxicity. The most clinically advance IMiD is Revlimid, formerly called Revimid, which is currently in phase II studies for MDS. In a phase I/II study in MDS patients, Revlimid showed a remarkable benefit in low to intermediate risk patients with RA who required blood transfusions. An erythroid response was seen in 75% of patients with RA and 71% of patients with low to intermediate risk MDS. Overall, 11 out of 25 patients became transfusion independent, while another 4 patients had reduced their transfusion requirements by more than half. Revlimid was particularly effective in MDS patients with the 5q minus abnormality, a commonly seen abnormality in MDS in which a portion of chromosome 5 is deleted.

Celgene is currently investigating Revlimid in two phase II studies, in patients with low to intermediate-1 risk with 5q deletion (MDS-003 study) and 5q non-deletion (MDS-002 study). At ASH late last year, Celgene provided updates on both studies. In the MDS-003 study, which had enrolled 148 patients with 5 q deletions at the time of analysis, almost two-thirds of patients (64%) became transfusion independent. In the 5q non-deletion (MDS-002) study, 26% of the patients became transfusion independent. These very positive results suggest that Revlimid could become the treatment of choice for patients requiring red blood cell transfusions, particularly those with the 5q deletions. Celgene recently announced that they have initiated a rolling NDA for Revlimid for 5q deletion MDS patients based on these results.

While Revlimid was initially designed to reduce the toxicity associated with Thalomid, whether it does so has been controversial. In both phase II studies, grade 3 myelosuppression was the most common serious side effect, however, there were some treatment related deaths in both studies. In the MDS-002 study, 10 (4.6%) patients died from non-treatment related causes, while 2 (0.9%) patients died from suspected drug treatment. In the MDS-003 study, 10 (6.7%) patients also died from non-treatment related deaths and 2 (1.4%) died from suspected drug related deaths. Therefore, a total of 1% of patients died in each study due to Revlimid treatment. Although this is a concern, it must be noted that there is an annual 10% death rate in this patient population and so the benefit may outweigh the risk. While we are cautious about the drug’s safety profile, the overwhelming response rate, especially in patients with 5q deletions, lead us to believe that Revlimid will become the therapy of choice for low to intermediate risk patients, particularly those with 5q deletions.

Telintra (TLK199; Telik)

Telintra is an inhibitor of glutathione S-transferase P1-1 (GST P1-1), which has shown, in animal studies, to increase white blood cell production. However, translational results recently presented at ASH showed that Telintra not only augments white blood cell production, it can also increase red blood cell and platelet production in MDS patients. Therefore, Telintra is the first treatment for MDS that can increase production of all blood cell lineages. The data came from the ongoing phase II study of Telintra in MDS patients of all subtypes. Preliminary results on 26 patients demonstrate that 62% of patients showed clinical improvement in one or more blood cell lineages, including 25% of patients who had trilineage improvements and 21% of patients with bilineage improvement. These hematological improvements led to reduced red blood cell, platelet and growth factor requirements, and in some cases led to transfusion independence.

Although it is still early in development, Telintra holds much promise. Because it is so well tolerated and because it can modulate production of multiple blood cell lineages, not just erythrocytes, we predict that Telintra will become a gold standard first line therapy for MDS patients to help normalize blood cell formation and promote transfusion independence.

Trisenox (Arsenic Trioxide; Cell Therapeutics)

Trisenox is already approved for acute promyelocytic leukemia (APL), a special subset of AML. Trisenox is now being evaluated for MDS alone and in combination with Thalomid. In the ongoing phase II study of Trisenox monotherapy in patients with all subtypes of MDS, Trisenox was shown to improve hematological parameters in 27% of patients from all 5 FAB subtypes. Like Telintra, Trisenox can augment all three of the hematological lineages. Sixteen percent of patients became transfusion independent. As with Telintra, it is still too early to determine how effective Trisenox is in the treatment of MDS, but the results so far are highly encouraging.

Zarnestra (Tipifarnib; Johnson and Johnson)

Zarnestra belongs to a new class of anti-cancer drugs called farnesyl transferase inhibitors (FTIs). FTIs inhibit an important enzyme, farnesyl transferase, involved in the activation of the oncogene ras. In preliminary phase II studies in high risk MDS patients, Zarnestra showed a 32% response rate in these patients, and bone marrow analyses revealed that Zarnestra reduced the number of blasts in over half of the patients. These results are highly encouraging given the advance stage of these patients and warrants further investigation into Zarnestra, particularly whether it prolongs leukemia free survival or overall survival.

REVENUE MODELS

Vidaza (Azacitidine; Pharmion)-Approved
Vidaza was approved in May 2004 for all MDS subtypes, however it is primarily used in high-risk patients. Therefore, the potential market is smaller for Vidaza than for drugs such as Telintra which will be used in the larger, low-risk group of patients. We predict Vidaza’s peak U.S. revenue to come in 2005 before other treatments hit the market. We currently project peak U.S. revenue of $96.7 million in 2005, with peak worldwide revenue of $171.0 million in 2007.

Dacogen (Decitabine; SuperGen)–NDA stage
We expect Dacogen to be approved in September 2005 for all MDS subtypes. Like Vidaza, we expect Dacogen to be used primarily in high-risk patients and have a smaller market potential. We currently project peak U.S. revenue of $45.2 million in 2007, with peak worldwide revenue of $108.3 million in 2008.

Thalomid (Thalidomide; Celgene)–Phase III
Thalomid is expected to be approved in mid 2006, however, there is already some off-label use of Thalomid in MDS, though this is limited. We expect Thalomid to be used mainly in low risk patients with refractory anemia (RA). As such, the market size for Thalomid is larger than the high risk treatments. We project peak U.S. revenue of $147.9 million in 2015, with peak worldwide revenue of $367.1 the same year.

Revlimid (Lenalidomide; Celgene)–Rolling NDA stage
Celgene recently initiated a rolling NDA for Revlimid in 5q deletion patients in MDS. We predict that Revlimid will be approved in early 2006 for this patient population and will be the gold standard of therapy for 5q deletion patients. We also assume it will be used off-label by some low risk noon-5q deletion patients. We project peak U.S. revenue of $489.3 million in 2015, with peak worldwide revenue of $1.2 billion in the same year.

Telintra (TLK199; Telik)–Phase II
Telintra is in early phase II studies and like Revlimid, we predict that they will submit a rolling NDA based on their phase II data. We expect Telintra to be approved by early 2008 and to be used widely in the low-risk patient population as well as some int-2 patients. We project peak U.S. revenue of $693.2 million in 2015, with peak worldwide revenue of $1.7 billion in the same year.

Velcade (Bortezomib; Millennium)–Phase II
Velcade is also in early phase II studies in MDS. We expect it to be approved for MDS in early 2009 as a second or third line therapy for high-risk MDS patients. We project peak U.S. revenue of $23.9 million in 2013, with peak worldwide revenue of $57.3 million the same year.