Hepatitis B is a major global health problem that affects over 400 million people worldwide and is the most common cause of chronic liver disease. The disease can lead to cirrhosis (scarring) of the liver, hepatocellular cancer (HCC, or liver cancer), liver failure and death. Hepatitis B is endemic in Southeast Asia and is also highly prevalent in Africa and the Middle East. The disease is considered to be relatively rare in the US, although an estimated 1.25 million people have chronic hepatitis B in the US and approximately 5,000 patients die each year due to disease-related complications.

Hepatitis B is caused by infection with the Hepatitis B virus (HBV). HBV is transmitted by exposure to infectious blood or other body fluids. Initial infection with the virus may cause an acute illness in some patients but for the majority of patients, this initial infection is asymptomatic and goes by unnoticed. Patients who are able to clear the virus following the initial infection do not suffer long term consequences from the infection. However, in persons who cannot clear the virus, chronic hepatitis B (CHB) ensues and the patient is at increased risk of liver disease and liver cancer. The age of infection greatly affects outcome with 95% of adults with a fully functioning immune system able to clear the virus but only 10% of infected babies (transmitted from infected mother at birth) able to do so. It is estimated that 15%-40% of patients with CHB will go on to develop cirrhosis (severe scarring), liver failure or liver cancer.

CHB is treated by a finite course of interferon alpha or prolonged therapy with nucleoside/nucleotide inhibitors. Interferon alpha is only used in a small number of patients due to debilitating side effects. Nucleoside/nucleotide analogues are orally available and tend to result in a better and more rapid reduction in viral DNA than interferon alpha. However, these nucleoside/nucleotide analogues are liable to resistance development and can result in a rebound if treatment is stopped too soon. Of the five nucleoside/nucleotide inhibitors approved for CHB, Viread and Baraclude are the least likely to cause development of resistance and are recommended as front-line agents. We believe that Viread in particular will be the drug of choice owing to its robust potency and high barrier to resistance. While there are a few drugs in clinical development for CHB, these are still early in development and the majority do not look like they will make it to the market.

From 2005 to 2009, due to the entry of more efficacious drugs, the education of doctors and the identification of new patients, US sales of CHB drugs have almost tripled, and we expect them to triple again over the next 5 years to approximately $1.5 billion as these trends continue. However, we believe that the expected introduction of generics for Baraclude and Viread in 2015 and 2017, respectively, and the lack of drugs currently in clinical development will effectively create a patent cliff for the entire Hepatitis B market.

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