Actelion-InitiationBarclay 2010

EQUITY RESEARCH
Healthcare | European Pharmaceuticals | 23 July 2010
ACTELION To be or not to be a biotech company

Initiating with a 1-Overweight rating generic risk priced in. Recent pipeline disappointments have taken some of the shine off the Actelion biotech story and led to a re-rating of the stock with more focus now on the pending Tracleer patent expiries (90% of revenues) in 2015/16. Our analysis and expert feedback suggest that the companys life-cycle management strategy is set to protect at least 25% of its key franchise. With 90% of NPV generated prior to the Tracleer patent expiry, we believe the generic exposure is now priced in. This leaves significant free pipeline optionality as well as a skew to the upside should the macitentan SERAPHIN trial demonstrate surprisingly positive results in 2011. Initiating with a 1-OW rating and a CHF50 PT. Near-term growth and diversification. With the top-line maturing, operational gearing should continue to drive earnings growth as margins are set to increase, based on our analysis. Investors should hence benefit from >20% 2009-13E earnings CAGR while at the same time we expect the company to continue to diversify its product portfolio. This diversification would further de-risk the company and allow this above-sector average earnings growth to drive performance as we would expect Actelions multiple to increasingly reflect the near-term growth potential. Valuation and risks. We value Actelion through a DCF valuation assuming a risk-free rate of 4%, an equity risk premium of 5%, an asset beta of 1.5 and a target debt ratio of 0%. These assumptions result in a cost of capital of 12% and our price target of CHF50. Risks to our stance are: further pipeline disappointments in the near term before the all important macitentan SERAPHIN trial; disappointing SERAPHIN trial; less-than-expected P&L gearing; more-than-expected competitive pressure on the PAH franchise as well as the potential decision by major shareholders to sell out of their holdings. ATLN.VX: Financial and Valuation Metrics CHF
FY Dec EPS Previous EPS Consensus EPS P/E EV/EBITDA FCF yield (%)
Source: Barclays Capital Thomson Reuters
Stock Rating
1-OVERWEIGHT
from N/A
Sector View
2-NEUTRAL
Unchanged
Price Target
CHF 50.00
from N/A
Price (21-Jul-2010) Potential Upside/Downside Tickers
CHF 40.95 +22% ATLN VX / ATLN.VX 5273 128.76 82.73 0.6 N/A 23.00 14.14
Market Cap (CHF mn) Shares Outstanding (mn) Free Float (%) 52 Wk Avg Daily Volume (mn) Dividend Yield (%) Return on Equity TTM (%) Current BVPS (CHF)
Source: FactSet Fundamentals
Price Performance 52 Week range

70 60 50 40 30 01- Oct 01- Jan
Exchange-VTX CHF 66.20-39.19
01- Apr
01- Jul
Link to Barclays Capital Live for interactive charting
2008 N/A N/A N/A N/A 14.5x 8.4
2009 2.53A 3.30A N/A N/A 14.9x 5.5
2010 3.54E N/A 3.66E 11.6 9.9x 5.3
2011 3.46E N/A 3.80E 11.8 10.6x 8.7
2012 4.71E N/A 4.36E 8.7 8.3x 12.0
European Phamaceuticals Michael Leuchten +44 (0)20 3134 3039 michael.leuchten@barcap.com Barclays Capital, London Mark Purcell +44 (0)20 3134 7189 mark.purcell@barcap.com Barclays Capital, London Edward J. Dulac III +44 (0)20 3134 3296
Barclays Capital 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. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 39.
edward.dulaciii@barcap.com Barclays Capital, London Brian Bourdot +44 (0)20 3134 3038 brian.bourdot@barcap.com Barclays Capital, London
Barclays Capital | Actelion
CONTENTS
INVESTMENT SUMMARY..................................................................................................................3 CONVERTIBLE BOND .......................................................................................................................11 PULMONARY ARTERIAL HYPERTENSION: TRACLEER/MACITENTAN/PGI2.........................12 Pulmonary arterial hypertension ..........................................................................................................13 Other competition....................................................................................................................................17 Combination therapy limiting erosion.................................................................................................19 Use in functional class II patients .........................................................................................................22 PAH pipeline ..............................................................................................................................................22 ZAVESCA (MIGLUSTAT) .................................................................................................................26 Gaucher disease type 1...........................................................................................................................26 Zavesca (miglustat) .................................................................................................................................26 Niemann-Pick disease (NPC).................................................................................................................28 Cystic fibrosis (CF) ...................................................................................................................................28 ALMOREXANT ..................................................................................................................................29 Insomnia.....................................................................................................................................................29 CLAZOSENTAN .................................................................................................................................32 PHASE II PIPELINE ............................................................................................................................34 CRTH2 receptor antagonist ...................................................................................................................34 S1P1 receptor agonist (ACT-128800).................................................................................................34 SUMMARY FINANCIALS..................................................................................................................36
23 July 2010
INVESTMENT SUMMARY
Our assumptions behind our 1-Overweight rating:

Generic erosion priced in > CHF3bn cash to drive diversification P&L leverage driving >20% earnings CAGR Pipeline upside not reflected in share price Unlike other EU mid-cap peers, low near-term EPS risk due to EU healthcare reform
Figure 1: Actelion portfolio

Product name Tracleer (bosentan) Ventavis (iloprost) Zavesca (miglustat) epoprostenol macitentan clazosentan selexipag ambrisentan CRTH2 antagonist S1P1 agonist antibiotic project Status marketed marketed marketed marketed pIII pIII pIII pIII pII pII pI Indication pulmonary arterial hypertension pulmonary arterial hypertension Gaucher's disease pulmonary arterial hypertension pulmonary arterial hypertension/idiopathic pulmonary fibrosis (pII) vasospasm post subarachnoid hemorrhage pulmonary arterial hypertension sleep disorder Asthma/allergic rhinitis multiple sclerosis/psoriasis anti-infective cardiovascular % of 2010E revenues 88% 7% 4% >1% 0% 0% 0% 0% 0% 0% 0% 0% % of 2018E revenues 16% 4% 12% 10% 42% 3% 14% 0% 0% 0% 0% 0%
cardiovascular project pI
Source: Company data, Barclays Capital
Figure 2: Actelion DCF build-up (CHF/share)

100 90 80 70 60 50 40 30 20 10 0 1
Source: Barclays Capital
clazosentan '10-16 selexipag '10-16 Zavesca '10-16 Ventavis '10-16 Tracleer '10-16 macitentan '10-16 Net debt
2017-TV
'10-16 OPEX
epoprostenol '10-16
CAPEX & NWC '10-16
10
11
23 July 2010
Generic exposure priced in

>80% of company revenues exposed to generic risk but cash generation justifies c90% of todays share price
While Actelion is significantly exposed to generic erosion of its key Tracleer franchise in 2015/16 (see below), on our estimates it should generate enough cash until then to justify c90% of todays share price with only very modest pipeline assumptions. Beside our customary caution on early pipeline assets, the post Tracleer valuation contribution is also limited due to only muted conversion into life-cycle management projects. Our forecasts may prove too conservative ahead of key clinical data due to be reported by end 2011. The company may well choose to utilise the cash generated over this period to diversify its product portfolio further (as demonstrated in the recently acquired option to acquire privately held Trophos) but by doing so should be able to increase its chances of generating more value in the post-Tracleer period. As a result we regard the risk/benefit balance skewed in the stocks favour (our valuation range is CHF37-88) forming the basis of our 1-Overweight recommendation. Figure 3: DCF breakdown
60 50 (CHF/share) 10 40 30 20 10 0 DCF per share 2010-16
today's share price
2017-TV
Partly sustainable PAH franchise on conservative estimates

Long-term outlook depends on partial sustainability of PAH franchise
Actelion is a leader in the treatment of pulmonary arterial hypertension (PAH) and generates c90% of its revenues with one product Tracleer. Based on our forecasts even after the launch of new products, the dependence on Tracleer will only decrease slightly (organically) over the next few years with c86% of revenues still generated by the product in 2013 (see Figure 5). Consequently Actelions valuation largely depends on the at least partly sustainability of this franchise (Tracleers patent will expire in 2015 in the US and most of Europe 2016) and/or the ability to diversify into new therapeutic areas. While Actelion is pursuing efforts in other therapeutic areas outside PAH (eg, almorexant in insomnia, clazosentan in vasospasm, CRTH2 in asthma), the degree of diversification is still limited and burdened with a significant degree of risk. One key to our investment thesis is therefore the (partial) sustainability of the companys PAH franchise.
23 July 2010
Figure 4: 2009 product revenues

Ventavis 8% Zavesca 3%
Figure 5: 2013E revenues

epo pro steno l 4% clazo sentan <1 %
Zavesca 4% Ventavis 6%
Tracleer 89%
Source: Company data Source: Barclays Capital
Tracleer 86%
As Figure 8 demonstrates, the introduction of new products in the PAH market historically has expanded the market. Even developed markets have accommodated new products as earlier diagnosis and more aggressive therapy have has negated competitive pressure and we expect this pattern to continue. We therefore do not expect Actelion to experience any marked competitive erosion of its PAH franchise prior to the introduction of Tracleer generics (2015/16). In turn we believe the currently available evidence suggests that Actelions macitentan (currently in pIII development) has a good chance of showing a morbidity/mortality benefit making it the potential treatment of choice for new patients prior to the Tracleer patent expiry. Unfortunately current market dynamics will not allow a full switch of patients from Tracleer onto macitentan and the introduction of generics could partly erode the franchise. However, our clinical resources suggest that a differentiated macitentan (coupled with an at least modestly successful oral selexipag that Actelion recently in-licensed) should allow Actelion to retain at least 25% of its Tracleer franchise (see Figure 9).
Macitentan scenarios
LCM project macitentan scenarios generate a valuation range of CHF37-88/share
Supported by our experts, we currently believe that macitentan is likely to reach the primary endpoint in the SERAPHIN trial of morbidity/mortality and hence to become a credible LCM strategy for Tracleer. The key sensitivity driver to Actelions valuation is macitentans ability to protect (or better recapture) the companys existing Tracleer franchise. Figure 6 demonstrates the sensitivities. The skew in the sensitivities results from our assumption around the sales and marketing effort required to achieve the conversion rates in the table. Figure 6: macitentan scenarios
2009-19E Sales CAGR macitentan fails 25% conversion 50% conversion 75% conversion 100% conversion
EPS CAGR n/a -25% 3% 8% 12%
DCF value 37 50 62 70 88
-7% -2.5% 1% 3% 5%
23 July 2010
Our base-case assumption is that macitentan will capture 50% of new PAH patients prior to Tracleer patent expiries but upon the generic introduction of Tracleer will not be able to capture more than 30% of new patients. As a result, our base-case assumes a 25% conversion of the Tracleer franchise. Figure 7: Expert feedback
Key take-away (1) PAH market dynamics are slow to change Comment Notes - Significant clinical experience with bosentan supported by weekly publications and broad industry relationships and support have resulted in a stable franchise despite the launch of ambrisentan which on-paper offers less toxicity, 1xdaily dosing and robust efficacy in its own right. We estimate that new patients represent c20% of patients in any one year, with ambrisentan currently capturing 20% of new ERA patient share Notes - it is rare for a physician to withdraw a therapy due to the fear that dose interruption causes worsening in the patient. Therefore new therapies tend to be addon to existing treatment regimens Notes - physicians remain relatively price-insensitive; doing whatever it takes to improve patient outcomes irrespective of price. Market dynamics might change once bosentan goes generics with physicians confronted by $6,000 versus $60,000 treatment cost and payors weighing-up the value of a potential mortality/morbidity claim with macitentan Notes - oral and inhaled agents avoid the complications of hospital treatment with iv agents; if oral agents such as selxipag were able to demonstrate half of the efficacy achieved with iv agents, it would mark a new paradigm in treatment practice Notes - while some physicians are data-driven, others would extrapolate back a mortality/morbidity claim to other drugs. If macitentan demonstrated a mortality/morbidity endpoint, it would encourage use in all physicians and the community would explore how specific the data are to macitentan and whether Endothelin-A selectivity is important
(2) Use of combination therapy expected to rise
(3) PAH market remains relatively price insensitive
(4) Effective oral prostacyclins could introduce a new paradigm (5) Macitentan mortality/morbidity claim would likely face a mixed reception
Figure 8: PAH market product revenues Q1 2005 to Q1 2010

700 600 500 ($m) 400 300 200 100 0 1 3 5 7 9 11 13 15 17 19 21 Remodulin (UTHR) Letairis (GSK) Volibris (GILD/GSK) Ventavis (ATLN) Tracleer (ATLN)
Source: Company data
23 July 2010
Figure 9: Actelions group revenues (CHF000)

3,500,000 3,000,000 clazosentan 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2007 Zavesca selexipag macitentan epoprostenol Ventavis Tracleer
2009
2011
2013
2015
2017
2019
Diversification to continue
Actelion is likely to continue to diversify hence reducing its Tracleer dependence and risk exposure
The company seems more than aware of pending threat to Tracleer and the fact that a mere substitution of Tracleer by macitentan is likely difficult to execute. With the aim to affect the PAH treatment algorithm once again through a differentiated trial design, the company strives to offer an improved PAH treatment via the combination of macitentan and selexipag. Outside that, it is likely to utilise its cash resources (we estimate cCHF3bn by 2014 or more should the convertible bond be refinanced) in order to diversify its portfolio further as demonstrated by the recently purchased option to acquire Trophos SA by end 2011. We expect the company to look for products or product candidates in the areas it is currently active in (eg, expansion of its Orphan Drug portfolio via the potential acquisition of Trophos): pulmonary disease, cardiovascular and infection amongst others. These assets would not come cheap, we believe, but could reduce the risk profile of the company as it diversifies away from its key franchise.
Near-term growth through P&L gearing

P&L gearing to deliver bottomline growth as top-line matures
With the long-term outlook of the companys most important franchise at least partly secured via a 25% conversion to macitentan, Actelion should be able to deliver near-term earnings growth by leveraging its P&L despite funding ongoing R&D projects, we believe. The full implementation of an IT investment project should be completed by the end of 2010, according to the company. With further research (as opposed to development) expenditures limited by physical space and lab facilities available until 2012, we expect margin expansion from 19.1% in 2009 (20.1% excluding milestone payments) to 33.7% in 2013 (see Figure 11). Limits to further geographic expansion should also support this margin expansion. As a result we expect more gearing throughout the P&L than previously observed resulting in an EPS 2009-13 CAGR of 25% (non-GAAP EPS 14%).
23 July 2010
Figure 10: Diluted EPS and FCF/share

7 6 5 (CHF) 4 3 2 1 0 2006 2008 EPS
Figure 11: Operating margin

40% 35% 30% 25% 20% 15% 10% 5%
2010E FCF/share
2012E
0% 2006
2007
2008
2009 2010E 2011E 2012E 2013E Operating margin
Pipeline offers upside potential

Pipeline offers upside potential most assets not included in our estimates
We currently only include macitentan, selexipag and clazosentan in our estimates and chose not to include estimates for almorexant in sleep disorder (partnered with GSK), CRTH2 in asthma, miglustat in cystic fibrosis and S1P1 in multiple sclerosis (in the absence of phase II data). As such, our near-term growth estimates do not depend on the pipeline and as discussed above, our view of the companys long-term outlook also does not depend on success outside PAH. As such the projects that we do not include in our estimates offer upside potential. In other words, at 11.8x 2011 earnings, we believe investors pay a pharma-like multiple for premium growth with exposure to biotech-like assets in development.
23 July 2010
Figure 12: Actelion pipeline

BarCap Peak sales Peak sales potential (CHFm) (CHFm) n/a 200 40 n/a 300-400 80
Phase Product IV IV III III III III III II II II II I Tracleer Miglustat clazosentan clazosentan macitentan selexipag almorexant CRTH2 antagonist S1P1 agonist macitentan antibiotic
Indication PAH (sildenafil combination therapy) Type 1 Gaucher disease patients switched from ERT to miglustat Prevention of vasospasm-related morbidity/mortality post a subarachnoid hemorrhage (SAH) Prevention of vasospasm-related morbidity/mortality post SAH PAH PAH sleep disorder Asthma/allergic rhinitis multiple sclerosis/psoriasis Idiopathic pulmonary fibrosis anti-infective
Study COMPASS-2 MAINTENANCE CONCIOUS-2 CONCIOUS-3 SERAPHIN GRIPHON n/a
Results end 11/early 12 2010 Oct-10 H2 2011 end 2011 2013/14 Q1 2011 2011/12 H2 2011
590 250 0 0 0 0 0 0
2000 500 500 500 750 250 100
MUSIC
H2 2011
cardiovascular cardiovascular
Less reform exposure cash to be deployed in Europe

Limited reform exposure and deployable cash potentially driving corporate activity
Tracleer, Ventavis and Zavesca are targeting rare diseases and as a result authorities have granted all three products Orphan Drug status in pulmonary arterial hypertension and Gauchers disease respectively. While cost containment measures will likely impact the pharmaceutical space significantly over the remainder of 2010 and also 2011 as demonstrated by Novartis Q2 results (-3% price pressure in Europe prior to major markets cutting prices, double that level expected in H2), Orphan Drugs will likely be sheltered from such measures we believe, as they are either entirely excluded from such price cuts (see Greece where orphan drugs were excluded from government enforced price cuts) or will face only small price erosion based on discussions between governments and the company. From that perspective, Actelion is one of the odd ones out in the midcap space where some of its European peers are facing significant operating profit risk to EU healthcare reform. This coupled with the fact that a number of larger pharmaceutical companies are currently sitting on significant funds outside their home markets that cannot easily be repatriated, could potentially lead to an increase in corporate activity.
Valuation and risks

We value Actelion primarily through a DCF valuation. Assumptions include a European riskfree rate of 4%, an equity risk premium of 5% based on historical observation, an asset beta of 1.5, pre-tax cost of debt of 5% but a target debt ratio of 0%. These assumptions result in a cost of capital of 12%. Beyond our explicit forecast horizon, we assume returns fade to cost of capital over a number of years. These assumptions result in our valuation rising to CHF50/share. Risks to our stance are: further pipeline disappointments in the near term before macitentan can demonstrate the potential to sustain the PAH franchise; disappointing macitentan data in 2011; less-than-expected gearing through the P&L; more-than-expected competitive
23 July 2010 9
pressure on the PAH franchise as well as the potential decision by major shareholders to sell out of their holdings. Sector risks include further healthcare reform efforts in the US and Europe as well as further regulatory set-backs. Figure 13: Actelion newsflow
Date Oct-10 Event Comment
clazosentan in subarachnoid hemorrhage 1,100 patients with aSAH and treated with aneurismal surgical clipping. This study is CONCIOUS-2 trial results expected to complete enrollment, with close to 1,150 patients, at the end of April 2010 miglustat in cystic fibrosis - proof of concept study to start miglustat MAINTENANCE Type 1 Gaucher disease patients switched from ERT to miglustat A first Phase IIa study with miglustat in cystic fibrosis was concluded in mid-2009. Following further preclinical and clinical analysis, a newly designed proof-of-concept study will be initiated in 2010.
2010
2010
20/07/2010 H1 results 21/10/2010 Q3 results Q1 2011 mid 2011 H2 2011 H2 2011 H2 2011 almorexant non-pivotal pIII data extension Data will allow to decide whether to take the compound into another pIII CRTH2 antagonist allergy/rhinitis PoC trial Trial due to start H2 2010 in Southern hemisphere results clazosentan in subarachnoid hemorrhage 5mg/kg and 15mg/kg - apparently no safety issue with high dose CONCIOUS-3 trial results (coiled) Macitentan pII IPF MUSIC study results S1P1 receptor agonist pII dose response study in MS (400pts) data 178 patient trial By June 2010 200 pts enrolled. Psoriaisis trial to be initiated in H2 2010
end 2011 2012 2013/14
Macitentan pIII SERAPHIN study (primary endpoint of morbidity and all-cause 750 patients fully enrolled December 2009. 250-260 events required mortality) results CRTH2 antagonist asthma PoC trial results selexipag (PAH) pIII data Trial enrolling patients on all back-ground therapies except prostacyclins
23 July 2010
10
CONVERTIBLE BOND
Not an equity alternative, but the share price target implies that reappraisal of the overlooked embedded equity option is merited
The following has been contributed by our convertibles analyst Angus Allison. Actelions CHF 460mn 0% convertible bond due 2011 closed Monday at a mid-market price of CHF 99.1 versus a share price reference of CHF 41.41. This share price is below the conversion price of CHF 54.17, hence the shares would need to rise by 31% before bondholders might consider converting. At this current share price, we believe the convertible market is discounting the conversion option almost entirely. At our CHF 50.00 price target, however, the share price would be sufficiently close to the conversion price that investors considering the convertible should assign significant value to this option. This view is bolstered by the bond not maturing until 22 November 2011, providing an additional four months to the 12month horizon. For example, we calculate that the market is currently assigning only one point of option value to the convertible, but we believe this embedded option is worth 2.4 points at present, assuming 25% volatility in line with the equity options market. Were the shares to meet our CHF 50.00 target earlier than a one-year horizon, however, then the value of this option would rise. By way of example, if the target was met at a six-month horizon, then we calculate that the value of the equity option would be five points. That said, the currently bond-like profile of the convertible, combined with its 0% coupon, and the 1-Overweight rating on the shares, do not merit the bond with appeal as an equity alternative. Rather, for convertible investors we consider the convertible to be a relative safe-haven: it provides a yield of 75bp above the risk-free rate, with a potential equity kicker to this and very low foreseeable risk of default, in our view.
23 July 2010
11
PULMONARY ARTERIAL HYPERTENSION: TRACLEER/MACITENTAN/PGI2

Pulmonary arterial hypertension (PAH) represents Actelions biggest franchise with the following assets: Tracleer, Ventavis and i.v. epoprostonol. The progressive nature of the disease, a comprehensive set of clinical trials and broad positioning have made Tracleer a major corner stone within the treatment of PAH and the company does have a life cycle management strategy with macitentan. As such, while revenue spikes are unlikely due to already significant penetration rates and off-label use, this franchise is highly unlikely to be dislodged in the near-term and hence provides a reasonably stable base-business until patent expiry with the potential to maintain a part of the franchise beyond expiry. In the past the introduction of new products has expanded the PAH market as earlier diagnosis, more aggressive treatment and combination use accommodated new products (see Figure 14). We expect this trend to continue going forward. Figure 14: PAH market product revenues Q1 2005 to Q1 2010
700 600 500 ($m) 400 300 200 100 0 1 3 5 7 9 11 13 15 17 19 21 Remodulin Letairis Volibris Ventavis Tracleer
Unfortunately Tracleer will lose patent protection in 2015 in the US and 2016 in most of the EU and even though macitentan represents a reasonable life-cycle management strategy (we believe the SERAPHIN trial should demonstrate a morbidity/mortality benefit), this will not protect 100% of Tracleer. We believe macitentan will be able to protect 25% of the Tracleer franchise unless a clear mortality benefit is being demonstrated.
23 July 2010
12
Figure 15: Actelions PAH franchise revenues

3,500,000 3,000,000 2,500,000 (CHF'000) 2,000,000 1,500,000 1,000,000 500,000 0 2007 selexipag macitentan epoprostenol Ventavis Tracleer
2009
2011
2013
2015
2017
2019
Pulmonary arterial hypertension

Pulmonary arterial hypertension (PAH) is a rare disease with an estimated 30-50 cases per million. However, the prevalence in certain at-risk patients is substantially higher. For example in HIV infected patients the prevalence is an estimated 0.5%, in patients with sickle cell disease the prevalence is 20-40% and in patients with systemic sclerosis the prevalence has been reported up to 16%. Idiopathic pulmonary hypertension accounts for an estimated 40% of cases with associated PAH (connective tissue disease, HIV etc.) accounting for most of the remainder. Due to the non-specific nature of the symptoms, PAH is most frequently diagnosed when patients have reached an advanced stage of disease suggesting that the actual prevalence is higher than reported in literature. PAH is characterized by vasoconstriction and vascular remodelling possibly coupled with the formation of thrombosis in situ leading to an increase in pulmonary arterial pressure, with resulting right ventricular failure and death. Left untreated, PAH is associated with poor outcome with a median life expectancy of 2.8 years from diagnosis (National Prospective Registry on Primary Pulmonary Hypertension). Better understanding of the molecular and genetic mechanisms of PAH have introduced the concept of multiple-hit hypothesis, which proposes that the disease is initiated by an interaction of predisposing factors (genetic abnormality or substrate) and one or more stimuli (eg, collagen vascular disease, HIV, hypoxia). A combination of these hits results in an overproduction of mediators (endothelin-1, angiotensin II, thromboxane A2, and serotonin) that lead to vasoconstriction, smooth muscle cell proliferation, and an increase in profibrotic and/or prothrombotic effects. At the same time, there is a increased production of nitric oxide (NO) and prostacyclin (PGI2), which opposes the above forces (via vasodilation, anti-remodelling, and platelet disaggregation).
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13
Figure 16: PAH treatment pathways

PAH
Endothelin pathway
Nitric oxide pathway
Prostacyclin pathway
Pre-pro-ET -> pro-ET
L-arginine -> L-citrulline
Arachidonic acid -> Pgl2
Endothelin 1 Endothelin receptor antagonists ETA ETB

GMPc
Nitric oxide +
Prostacycline -> (pgl 2) + Prostacycline derivatives
Vasoconstriction proliferation
Vasodialation
PDE5 antiproliferation
AMPc Vasodilation antiproliferation
Phosphodiesterase type 5 inhibitor

Figure 17: PAH products by pathway

Pathway Products
Endothelin pathway Nitric oxide pathway Prostacyclin pathway Phosphodiesterase type 5 inhibitor pathway
Tracleer, Letairis/Volibris riociguat Remodulin, Flolan, Ventavis, epoprostenol Revatio
Before 1996 PAH was uniformly fatal without effective treatment (conventional therapies included Warfarin, diuretics, oxygen and calcium channel blockers) but the area has witnessed an unsurpassed interest and progress over the past decade (even though the prognosis is still poor, with approximately 50% mortality within the first five years after diagnosis, ie, an average survival from diagnosis of less than three years). The current approach to treatment of PAH is targeting the aberrancies identified in the three pathways mentioned above:

augmenting the deficiencies in the prostacyclin nitric oxide systems blocking the actions of ET-1.
Seven treatments are FDA approved now (Tracleer/bosentan, Ventavis/iloprost, Letairis/ambrisentan, Revatio/sildenafil, Flolan/epoprostenol, epoprostenol sodium (stable at room temperature) and Remodulin/treprostinil) but despite these treatment options, significant morbidity and mortality continue to dominate. A key underlying reason for this is that PAH is a complex process involving a multitude of redundant pathways, which are further influenced by many overlapping secondary messenger systems. No single agent affecting one pathway can produce consistent or continued improvement and continuous efforts are made in developing new agents or in combining existing treatment options. Utilising combination treatment to target as many of these aberrant pathways as possible for PAH makes mechanistic sense.
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Figure 18: NYHA/WHO classification for PAH severity
CLASS I
CLASS II
CLASS III
CLASS IV
Patients show no symptoms of PAH
Patients show some symptoms during ordinary activities with some limitations to physical activities
Patients show moderate symptoms and higher limitations to physical activities
Patients show symptoms even while resting
Figure 19: PAH treatments by functional class

NYHA/WHO functional class Class II Class III Class IV
Revatio Remodulin IV/SQ Letairis/Volibris (Tracleer)
Revatio Remodulin IV/SQ Letairis/Volibris Flolan/epoprostenol Tracleer Ventavis
Revatio Remodulin IV/SQ Flolan/epoprostenol Tracleer Ventavis
Source: Barclays Capital, ACCP PAH guidelines
23 July 2010
15
Figure 20: Treatment algorithm in PAH

Pulmonary arterial hypertension (functional class II/III/IV NYHA)
Conventional treatment (anticoagulation/diuretics/oxygen)
Acute vasoreactivity testing? Yes No
Calcium channel blockers (CCB)
Class II
Class III
Class IV
Long-term response?
Endothelin receptor antagonists or Phophodoesterase type 5 inhibitors
No Yes
Endothelin receptor antagonists or Prostacyclin analogs or IV epoprostenol or Phophodoesterase type 5 inhibitors
Endothelin receptor antagonists or Prostacyclin analogs or IV epoprostenol
No improvement or deterioration (combination therapy?)
Continue CCB Atrioseptostomy and/or pulmonary transplantation

Source: Ther Adv Resp Dis
Actelion portfolio
Actelion is currently competing in the PAH market with three products: Tracleer, Ventavis and i.v. epoprostenol.
Tracleer
Tracleer (bosentan), an endothelin-1 (ET-1) receptor antagonist. ET-1 exerts its vascular effects through activation of ETA receptors located on smooth muscle cells and ETB receptors located on vascular endothelial cells and smooth muscle cells. Activation of these receptors on smooth muscle cells induces vasoconstriction, cellular proliferation, and hypertrophy. Tracleer blocks both receptors and is indicated in WHO class II, III and IV patients. The product is also indicated in the EU for reducing the number of new digital ulcers in patients with systemic sclerosis and ongoing ulcer disease. Gileads Letairis (ambrinsentan) is an ETA receptor antagonist (selective for ETA) and competes against Tracleer. Letairis was approved in the US in 2007 and in Europe in 2008 (marketed by GSK) and is indicated in PAH in patients with WHO class II or III. Pfizers Thelin (sitaxsentan) is also more selective on ETA and was approved in Europe in 2006 (Canada and Australia in 2007) but so far has not cleared the FDA hurdles (following two approvable letters in 2006 stating that efficacy outcome issues raised in the context of the STRIDE-2 study were still unresolved). The product is now in combination trials (three)
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with sildenafil (SR-PAAS study) with completion dates between 2011 and 2014. The products efficacy is similar to Tracleer but seems to have a better liver safety profile and is expected to be marketed as a safer drug if/when approved.
Ventavis
Actelion has US rights to Ventavis an inhaled synthetic prostacyclin PGI2 analogue. It dilates systemic and vascular beds increasing blood flow through the lungs. Platelet aggregation is also affected but the relevance to the treatment of PAH is unknown. Ventavis is indicated in class III and IV patients however, its short half-life is an important draw-back as six to nine inhalations are needed per day, each taking approximately 30 minutes. A new 20mcg/ml dosing regiment (delivers the same dose in half the volume which is expected to reduce inhalation time and further support patient compliance) gained FDA approval in August 2009, but the product continues to put a high administration burden on the patient. The clinical data behind Ventavis is somewhat less strong than maybe desired with patients in the only randomised multi-centre study (STEP) showing post-inhalation improvements in hemodynamic parameters but no significant modification in measurements made preinhalation. Only 17% of patients receiving iloprost reached the primary combine goal of 10% increase on the 6MWD and improvement in NYHA functional class against 4% in the placebo group. Long-term survival rates also were in-line with the predicted survival with conventional therapy. As such we believe Ventavis will remain a niche product. United Therapeutics Tyvaso (inhaled treprostinil) is a direct potential competitor to Ventavis. Tyvaso was approved by the FDA in July 2009 on the back of the TRIUMPH study (see below) and has a more convenient dosing schedule (4 doses per day vs. 6-9 with Ventavis) than Ventavis can offer at this point.
i.v. epoprostonol
In 2009 Actelion acquired a new formulation of i.v. epoprostonol with improved thermal stability. Epoprostenol exerts its efficacy via the prostacyclin pathway. Experimentally i.v. epoprostonol has been used since the 1980s and has been approved in Europe since 1997. To date, epoprostenol is the only treatment that in a prospective study has shown a short-term survival benefit, however, long-term survival/effectiveness has never been evaluated. However, despite the clear benefit, epoprostenol perfusion cannot be considered an ideal treatment as it has a short half-life of 3min, and thus needs to be administered by continuous IV perfusion through tunnelized catheter which requires hospitalisation (expensive: cost of drug, ambulatory pump, IV lines, supplies and hospital stay). As a result, even though Actelions epoprostenol allows storage at room temperature for up to 48h, and hence makes it more convenient, administration remains complex, uncomfortable and expensive. Actelions epoprostonol competes mainly against United Therapeutics Remodulin (treprostinil, also stable at room temperature even though it should be kept refrigerated), a prostacyclin analogue which benefits from a longer half-life of 58-83min and is administered by sub-cutaneously by a mini-pump similar to the diabetes pumps.
Other competition
Besides the products mentioned above that represent Actelions main competitors (Letairis, Thelin, Tyvaso, sq Remodulin) further competition is possible yet not necessarily a threat with the oral prostacyclines and Bayers sGC stimulator unlikely replacing current corner stones of PAH therapy.
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Oral prostacyclines
Beraprost is an oral prostacyclin agonist. Initial trials showed encouraging outcomes but further investigation yielded disappointing results in terms of disease progression (death, lung transplant, requirement for i.v. epoprostenol) and results observed at six months were not maintained over nine or 12 months. These results suggest that initial efficacy fades with time and beraprost does not influence disease progression or prognosis, perhaps due to the tachyphylaxia phenomenon classically described with the prostaglandins. Systemic sideeffects observed with beraprost limit the increase in dosage and may have contributed to its lack of efficacy. These results have precluded the marketing of beraprost. United Therapeutics now has oral Remodulin in development but its FREEDOM-C trial (patients on background therapy) did not meet its primary endpoint of the 6-minute walking test (6MWT) at 16 weeks (analysis suggests that the inability to dose titrate was a limiting factor that suppressed the overall treatment effect). The trial missed the primary endpoint improving walk by 11 meters (p=0.072) and while a significant improvement was observed at week 12 (13m) at 16 weeks, the result was not statistically significant. Another trial is ongoing (FREEDOM-M: patients NOT on background therapy). Based on the observations from the FREEDOM-C clinical trial relating to patient tolerability and tablet strength, United Therapeutics submitted a protocol amendment to the FDA in February 2009 to add patients to the ongoing FREEDOM-M trial. These additional patients receive a lower-strength tablet (0.25mg) when they begin the trial and their doses will be titrated in 0.25mg increments with the aim of improved tolerability. In addition the amended FREEDOM-M protocol now specifies that the primary statistical analysis of the trial will include only those patients who started the trial using the 0.25mg tablet (instead of the initial patients starting on 1mg). United Therapeutics also commenced a second Phase III clinical trial (FREEDOM-C2), to continue studying dosage and efficacy of oral Remodulin in PAH patients on an approved background therapy. Filing is not expected before 2012. Actelion has its own oral prostacyclin receptor agonist selexipag in development (see below).
sGC stimulator riociguat

Bayer AG is investigating its soluable guanylate stimulator (nitric oxide pathway), riociguat in phase III trials in PAH and chronic thromboembolic pulmonary hypertension (CETPH) with results expected in 2011. Riociguat works through the same signalling pathway as the bodys own vasodilating substance, nitric oxide (NO) which relaxes the musculature in the blood-vessel walls. The product has a dual mode of action: it sensitises sGC to the bodys own NO while also directly stimulating sGC independently of NO. The latter is thought of importance as NO levels in the pulmonary circulation are decreased in patients with PH. A recent Phase 2 trial in 75 patients with PAH and CTEPH demonstrated that treatment with riociguat resulted in clinically relevant improvements in walking distance from baseline in the 6-MWT, which were evident as early as 14 days after initiating treatment. Significant improvements occurred in PAH and CTEPH patients and the gained distance in both groups (73.5m and 64.3m) compares favourably with existing therapies, even though this is a bit unfair given that Tracleer recruited WHO class III and IV patients when the trial above only recruited class II and III patients. Long-term data in these patients was recently presented at the ATS. 68 patients (41 CTEPH, 27 PAH) entered the long-term extension of the initial 12 week trial. Mean 6MWD was sustained for at least 15 months following the initial 12 week period (430m) and the proportion of patients in class I/II increased from 20.6% at baseline to 47% at week 12 and was maintained at 53.2-58.1% during the extension period (albeit 26 patients received ERA therapy during the trial from 6 at baseline and 1 patient received
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iloprost). Peripheral edema and nasopharyngitis were the most common side-effects followed by hypotension, respiratory tract infection and syncope. Further pII data in pulmonary hypertension owing to interstitial lung disease (PH-ILD) also reached its safety and tolerability endpoint: riociguat showed a reduction in hemodynamic variables (pulmonary vascular resistance and cardiac output) yet there only was a slight improvement (321+/-95m at baseline to 342+/-113m after 12 weeks) in the 6-MWD in this trial and functional class remained unchanged. On the back of these Phase 2 data, the product has now moved into Phase 3 in PAH (PATENT trial) as well as CTEPH (CHEST trial) and results are expected in 2011. We do not regard ricoiguat as a credible Tracleer competitor as combination use is more likely. We believe Riociguats three times daily dosing however will likely pose a significant competitive hurdle and reformulation to a once daily version is not possible due to titration requirements (relative to a patients blood pressure).
Combination therapy limiting erosion

Even though recent guidelines from the American College of Chest Physicians and expert consensus from the American College of Cardiology Foundation and American Heart Association do not definitively support or disapprove of combination pharmacotherapy for the treatment of PAH, there are several potential advantages of using combination treatment. As mentioned above, the existing PAH therapies act by three different, yet potentially complementary mechanisms (endothelin pathway, nitric oxide pathway, prostacyclin pathway) and using combination therapy may provide additive benefit by simultaneously addressing multiple disease pathways. Beyond a simple additive effect, certain combinations may also have a synergistic action. Combination of PDE-5 inhibitor Revatio/sidenafil with prostacycline has shown such potential (see United Therapeutics Remodulin strategy) and combining Tracleer and Revatio/sidenafil to block the ET-1 system and augment the NO pathway has garnered interest early in the treatment of PAH. Aside from simultaneously targeting the 2 mechanisms, the potential to derive greater benefit by using 2 oral agents with the possibility of avoiding more complicated IV therapies also has great appeal. Unfortunately as we summarise below, even with the published data, the overall consensus remains unclear. Nevertheless, we believe combination therapy will be used increasingly in particular following the results of the macitentan and selexipag phase III trials that recruited patients on background therapy (see below).
Combining oral agents

3 COMPASS studies were launched addressing short-term and long-term efficacy and safety of using the 2 oral agents in the PAH population.
COMPASS-1 investigated the combination of Tracleer and Revatio and demonstrated that the combination significantly reduced pulmonary vascular resistance (PVR). PVR decreased by 15.2% (-20.8, -9.6; p<0.0001) and total peripheral resistance by 13.3% (17.0, -9.6; p<0.0001). There were no serious adverse events. The trial thus suggested that the pharmacokinetic interaction between these two agents may have no relevance to the acute pharmacodynamic effects of Revatio when used in combination with Tracleer. COMPASS-2 is designed to evaluate for the first time in a randomised, controlled trial the hypothesis that the therapeutic interventions of 2 agents, an ETRA and a PDE-5 inhibitor, will achieve a better clinical outcome than either one alone. This is a phase IV
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multicenter, double-blinded, randomised, placebo-controlled, event-driven study enrolling 180 patients. The co-primary objectives are to demonstrate that the combination of Tracleer and Revatio prolongs the time to the first morbidity/mortality event compared with Revatio monotherapy, and that the combination increases the 6minute walk distance. This study is currently enrolling and is targeted to finish in 2011.
COMPASS-3 assesses the percentage of patients that can achieve a target 6-minute walk distance of 380m using a Tracleer-based stepped combination approach with Revatio. Secondary objectives are to assess the correlation between the changes in cardiac magnetic resonance imaging (c-MRI)-derived parameters and changes in typical patient assessments (6-minute walk distance, echocardiogram, and biomarkers). 100 patients will be initiated on Tracleer monotherapy and have Revatio added at week 16 if they do not reach the target 6-minute walk distance. Data was expected in 2009 but the study continues to recruit patients.
Prostacyclin plus Tracleer

The evidence for combining Tracleer with prostacyclines is mixed but while patients and caregivers are often deterred by the disadvantages of parenteral prostanoids, the relative ease of delivery of inhaled prostacyclins (combined with clinical benefits), might expand the prostanoid treatment options for PAH patients (oral versions of prostacyclins even more so). The BREATH-2 trial included 33 PAH patients who were designated to receive IV Flolan and were randomised to either Tracleer in combination or placebo (2:1). Even though being the first double-blind, randomised and placebo controlled study making use of combination therapy, the major limitation of the study was that it was not adequately powered to show meaningful therapeutic difference. Although a trend toward improvement was observed among patients receiving combination therapy, no significant difference was found between the 2 groups in hemodynamic parameters or clinical measures. The combination showed some capacity to lessen the rate of prostanoid side effects and abnormal hepatic function was less frequent in the combination group. On the other hand, lower limb edema and diarrhea was more frequent in the combination group. The STEP trial was a 12-week, multicenter, randomized, double-blind trial conducted to evaluate the efficacy and safety of combining inhaled Ventavis versus placebo in 67 symptomatic patients (NYHA classes IIIV) with PAH who were already receiving Tracleer. Results of this study found an improvement from baseline in the 12-week post-inhalation 6MWD in the Ventavis group (30m v 4m on placebo, p=0.051). The Borg dyspnea score improved in the Ventavis group from baseline (p=0.031) to the end of the study; however, when compared with placebo, the value was not significant (p=0.16). Compared with baseline, the NYHA functional class improved significantly in the Ventavis group (by one class in 34%) versus the placebo group (6%) at the end of week 12. Unfortunately, these results could not be replicated in a similar study where patients on Tracleer were receiving Ventavis or placebo (Hoeper MM et al) and this trial had to be terminated based on a futility analysis. Unfortunately the COMBI study also did not have adequate sample size to draw definitive conclusions. The trial was a 40 patient (WHO class III) trial in patients already taking Tracleer 125 mg twice/day. Patients received inhaled Ventavis 5 g/inhalation 6 times/day or placebo. There were no statistically significant differences in primary (6MWD) or secondary (quality of life questionnaire, clinical worsening, change in functional class, peak oxygen uptake, ventilatory efficacy, and peak systolic blood pressure during exercise) outcome measures. As a result this trial did not support or disprove combination therapy in the treatment of idiopathic PAH.
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A non-controlled study in 39 patients showed that when Tracleer was added to Remodulin/treprostinil in 12 patients who had remained in NYHA functional class III after a year of therapy and another 7 who had experienced intolerable treprostinil-related side effects that limited therapy, mean arterial pressure declined from 59.7 to 50.5mm Hg and there was a significant improvement in 6MWD. Adding Tracleer to Flolan increased the number of patients in NYHA functional class II from 5% to 58%. Definitive conclusions cannot be drawn as this was a small, uncontrolled study but the results suggest that adding Tracleer to Flolan seems to be safe, and may be associated with improvements in functional class, exercise capacity, and hemodynamics. The TRIUMPH trial enrolled 235 class III/IV patients with PAH who had been receiving a stable dose of bosentan or sildenafil for at least 3 months. For 12 weeks, patients received either Tyvaso/trepostinil (up to 45mcg four times daily) or placebo four times a day. The primary endpoint, 6-minute walk distance, increased by 21.6 meters in the inhaled treprostinil group and by 3.0 meters in the placebo group and 31% of patients in the treatment group vs 12% in the placebo group could walk at least 50 meters further on the 6-minute-walk test at 12 weeks. But while patients on Tracleer had statistically significant gains in exercise capacity from adding Tyvaso, patients taking sildenafil did not (6MWD improved 22m for Tracleer patients at 6 weeks and 25 meters at 12 weeks, compared to 11 and 9 meters for the sildenafil subgroup). Tyvaso was associated with significant improvements in quality of life, but there were no differences between treatment and placebo groups in Borg Dyspnea Score, NYHA functional classification, or PAH signs and symptoms at 12 weeks.
Epoprostenol and sidenafil

The PACES trial is the largest double-blind placebo-controlled study of combination PAH therapy to date. The trial involved 267 patients (91.1% WHO class II/III in the sildenafil group vs 91% in the placebo group) who were already receiving long-term intravenous epoprostenol therapy. Patients were randomly assigned to receive sidenafil or placebo on top of existing epoprostenol therapy. At the conclusion of the study, patients assigned to the sildenafil group had statistically significant increases in 6MWD (29.8m v 1.0m) and showed adjusted hemodynamic benefit of 3.8mm Hg. The time to clinical worsening was also longer in the sidenafil treatment group. Only the Borg dyspnea scores did not exhibit any significant differences. Adverse events were reported more often in the sildenafil group but the sildenafil group had fewer patients with serious adverse events (not disclosed). Unfortunately the FDA-approved dosage of sildenafil for PAH (20 mg 3 times/day) was not the target dosage of this study (PACES used 20 mg orally 3 times/day for the first 4 weeks, with the dosage titrated to 40 mg 3 times/day during weeks 48 and to 80 mg 3 times/day for the last 8 weeks of the study). Nevertheless, PACES remains the largest double-blind, placebo-controlled combination study of PAH therapy to date and supports the role of combination therapy in patients with PAH.
Early days but combination likely the way forward

Even though the clinical data is far from solid at this point, early indications are that combination therapy is feasible and as a result, there is a tremendous sense of hope and expectancy among the PAH community regarding advances in the treatment of PAH. For patients with suboptimal response to therapy, the clinical trials currently underway should
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answer some, if not all, of the key questions as to when to add additional treatment options and when. The amount of data forthcoming holds further promise for the treatment of PAH and should further establish Tracleer as the cornerstone of the treatment of PAH. Taking this into consideration, cannibalisation seems unlikely to us.
Use in functional class II patients

EARLY
Until August 2009 (2008 in Europe) Tracleer was approved only in WHO functional class III and IV and until recently, studies have focused primarily on patients with PAH who are in the later stages of their disease process, with 60% to 100% of patients class III or IV at study enrolment. Thus, the ability of pharmacotherapy to modify disease progression at an earlier stage (ie, FC II) of PAH had been largely unexplored until then. The EARLY trial performed by Actelion is the first randomised trial to assess the role of parmacotherapy (Tracleer) on disease progression in patients with FC II at enrolment (n=185, primary endpoint change of PVR and 6MWD, secondary endpoint time to clinical worsening, PAH-related hospitalisation, and symptomatic progression of PAH). The trial showed the following results:
At 6 months, the mean PVR was 83.2% of baseline in the Tracleer-treated group and 107.5% of baseline in the placebo group (22.6%; p<0.0001). Reduction in PVR was also observed in the subgroup of patients receiving concomitant treatment with Revatio. The mean 6MWD increased 11.2m in the Tracleer-treated group and decreased 7.9m in the placebo group; the treatment effect (+19.1 meters) fell short of statistical significance (p=0.0758). There was a significant delay in time to clinical worsening in the Tracleer-treated group (HR 0.227, p=0.0114) largely driven by a reduction in progression of symptomatic PAH in the Tracleer-treated group (1%) vs the placebo group (10%).
The failure to achieve statistical significance on the 6MWD is probably due to the ceiling effect commonly observed and underscores the limitations of the 6MWD test as a singular surrogate endpoint. EARLY demonstrated that even in patients with PAH who have relatively preserved baseline functional capacity, pharmacologic intervention improves cardiopulmonary hemodynamics, neurohormonal evidence of right ventricular unloading, and delays clinical progression. At the same token, EARLY also demonstrated that patients at a relatively early stage of the disease are subject to hemodynamic and clinical worsening over a relatively short period of time. This would suggest that once diagnosed, physicians should intervene aggressively rather than watch the disease progression. Actelion has received EU approval for FC class II patients in 2008 and US approval was granted in August 2009 (albeit off-label use in this patient group was likely already significant). We believe this patient group should continue to add volume growth to the Tracleer franchise.
PAH pipeline
Macitentan
Increasing evidence shows that the endothelin system is a tissular system and that endothelin-1 does not act as a circulating hormone but a as a tissular factor. Macitentan, aka Actelion-1, is a new dual ET(A)/ET(B) endothelin (ET) receptor antagonist designed for tissue targeting. Like Tracleer, macitentan has dual blockage but is designed to have a more
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benign side effect profile also on the liver. Experimental models suggest that the combination of improved tissue penetration and dual ET receptor antagonism translates into high potency and beneficial long-term effects on end-organ damage and survival. A phase II study in 379 hypertensive patients showed that macitentan was more efficacious than enalapril and placebo in reducing blood pressure. The overall frequency of adverse events was similar to those observed in the placebo group. In 2007 macitentan entered a phase III study in PAH (SERAPHIN global enrolment was completed December 2009). SERPAHIN is the largest morbidity/mortality study in PAH to date, with 742 patients from at least 180 centres worldwide due to be enrolled randomized to 3mg and 10mg macitentan or placebo (1:1:1) in patients on any background therapy except ERAs. Results are expected by the end of 2011.
Survival data in PAH rare but long-term benefits crystallising

Survival data in PAH is rare (most long-term PAH studies to date have been nonrandomised, observational trials focused primarily on mortality and safety) with most approvals based on surrogate markers such as 6MWD and hemodynamic parameters. However, macitentan is probably best thought of as better Tracleer and open-label extension of two prospective randomised studies allowed long-term evaluation of patients and showed that the functional and hemodynamic improvements were maintained over time. Another long-term follow-up study showed an improvement of survival with Tracleer first-line therapy, as compared with predicted survival with conventional therapy: overall survival was 90%, 87%, and 79% with the Tracleer first-line treatment strategy (Provencher et al. 2006b; Mclaughlin et al. 2005; Sitbon et al. 2005; D'alonzo et al. 1991) compared with 71%, 61%, and 51% predicted by the NIH equation at one, two, and three years respectively. Survival without event (death, transplantation, need for another PAH treatment, hospitalisation for right heart failure) was only 61%, 44%, and 40% at one, two, and three years, respectively. Recently presented long-term use of ambrisentan over a two-year period (ARIES-E trial) also resulted in sustained improvements in exercise capacity (6MWD improved for the 5-mg +23m and 10-mg +28 m groups from base-line) and dyspnea, a stabilisation of WHO functional class, a low risk of clinical worsening and death (at an acceptable safety profile). Estimates of survival and freedom from clinical worsening for the ambrisentan treatment groups combined were 94% and 83%, respectively, at one year, and 88% and 72%, respectively, at two years. Considering the progressive nature of the disease, this suggests that SERAPHIN has a good chance of demonstrating a morbidity/mortality benefit.
Morbidity/mortality benefit likely but conversion not a given

We believe SERAPHIN will be able to demonstrate a morbidity/mortality benefit for a number of reasons:

The long-term evaluations mentioned above indicate a likely survival benefit. A meta-analysis published by Galie et al. suggests an improvement of survival in patients treated with targeted therapies. SERAPHIN enrolled more treatment nave patients than expected leading to a bias in macitentans favour. Actelion is in possession of more than 9 years clinical data that should have allowed for adequate powering of the trial.
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For these reasons we believe that SERAPHIN has a good chance of a positive outcome and will hence be able to serve as a LCM strategy once Tracleer reaches the end of its patent life (2015 in the US/2016 EU). However, for a number of reasons we also believe in turn that positive SERAPHIN results will not necessarily lead to a >50% conversion of the Tracleer franchise:
The morbidity/mortality endpoint will likely be driven by soft components of the endpoint like hospitalisation and not necessarily mortality. We believe physicians could extrapolate the benefit to other ERAs (macitentan may be thought of a s a better Tracleer).
In the presence of bosentan generics the clinical benefit may be regarded with scepticism
A single trial in PAH may not convince physicians.
Overall we therefore expect the macitentan uptake to be mixed with 50% of new ERA patients receiving the drug initially (prior to Tracaleer patent expiry) but see the uptake decline as generics come to market resulting in a 25% conversion of the Tracleer franchise.
Selexipag (PGI2, NS-304)

Actelion in-licensed a potent, highly selective, long-acting oral non-prostanoid PGI2 receptor agonist from Nippon Shinyaku in April 2008. Actelion will be responsible for the global development and commercialisation of selexipag outside Japan, and the two companies will co-develop and co-commercialise the drug in Japan. Selexipag is chemically dissimilar from prostanoids. It is a pro-drug that has a lower affinity for the IP receptor natively but its metabolite (MRE-269) selectively binds to receptor. By this metabolic step, the drug avoids causing GI side effects when given orally and leads to sustained release of MRE-269 and a longer half-life. Phase I data has demonstrated linear PK data after single and multiple doses with a half-life that supports twice daily dosing. The trial showed no accumulation after multiple doses, no impact on Warfarin PK/PD and no food interaction. The safety profile in this trial also showed no SAEs, no significant changes in blood pressure or heart rate and no ECG abnormalities. A phase IIa study demonstrated efficacy, safety and tolerability in 43 PAH patients already on background therapy. The result of the class II/III patient trial (randomized 3:1 to selexipag initiated at 200 mcg b.i.d., which, if tolerated, was titrated to b.i.d. 400, 600 and 800 mcg or placebo) showed a significant reduction in pulmonary vascular resistance (all patients on ERA or PDE-5). The reduction was 30.3% after 17 weeks (p=0.0045) and the trial also showed a numerical benefit in 6MWD (24.2m placebo adjusted, p=0.3129). Serious adverse events were recorded in 40% of placebo patients and 18.2% of selexipag patients. The most frequently reported treatment-emergent adverse events included as expected headache, pain in extremity, nausea and nasopharyngitis. On the back of these results, Actelion has moved selexipag into a pIII morbidity/mortality study (GRIPHON study, FPI late 2009). If successful, due to twice daily oral dosing, selxipag has the potential to significantly expand the use of prostacyclin pathway modulators but will likely do so at the expense of the currently available inhaled products.
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Other programs
Actelion is also in the process of investigating Tracleer in a number of sub-sets of PAH in an attempt to carve up these markets. These programs include:
PAH related to HIV: the open-label BREATHE-4 trial showed improvement in exercise capacity, WHO functional class, and quality of life as well as cardiopulmonary hemodynamics compared to baseline after 16 weeks of treatment with Tracleer. Eisenmenger syndrome (congenital heart effect): BREATHE-5 showed that that Tracleer decreases pulmonary vascular resistance and improves exercise capacity. Paediatric PAH: the BREATHE-3 trial showed safety and efficacy data in children with PAH treated with Tracleer with or without concomitant prostanoid therapy. FUTURE-1 evaluated the safety and pharmacokinetics of a new dispersible tablet formulation of Tracleer. FUTURE-2 (open-label extension study) is ongoing assessing long-term safety and outcome data.
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ZAVESCA (MIGLUSTAT)
Gaucher disease type 1

Gauchers disease is the most common of the lysosomal diseases. The disease is characterised by enzyme deficiency (glucocerebosidase, GCB) that leads to an accumulation of its substrate, the fatty substance glucocerebroside. This fatty material can collect in the spleen, liver, kidneys, lungs, brain and bone marrow. The symptoms include enlarged spleen and liver, liver malfunction, skeletal disorders and painful bone lesions and severe neurological complications. The disease shows autosomal recessive inheritance and hence affects both males and females. Type-1 (or non-neuropathic type) is the most common form (90%) of the disease occurring in c1 of 50,000 births and most often occurs in persons of Ashkenazi Jewish heritage (1 in 500 to 1,000). Symptoms occur early in life and include enlarged liver and grossly enlarged spleen. Skeleteal weakness and bone disease can be extensive. The brain is not affected but there may be lung and sometimes kidney impairment. Many patients have a mild form of the disease and may not show any symptoms. For type-1 patients, enzyme replacement therapy with i.v. recombinant glucocerebrosidase can significantly reduce liver and spleen size, reduce skeletal abnormalities and reverse other manifestations. Due to the rarity of the disease, dose-ranging trials have been difficult to perform and a certain controversy over optimal dose and frequency persists. The currently existing enzyme therapies are Genzymes Cerezyme (imiglucerase) and Shires velagucerase that costs up to $250,000 annually per patient (velaglucerase priced at c15% discount). Glucosylceramide synthase inhibitors are an alternative to enzyme replacement. These agents inhibit the initial enzyme in a series of reactions that result in the synthesis of most glycosphingolipids, including glucocerebroside. The goal of treatment is to reduce the rate of glucocerebroside biosynthesis so that the amount is reduced to a level that allows the residual activity of the deficient glucocerebrosidase enzyme to be more effective.
Zavesca (miglustat)
Actelions Zavesca is indicated in Gaucher diseas type-1 (100mg tid). The product is a synthetic analogue of D-glucose. Zavesca inhibits the enzyme glucosylceramide synthase which is essential for the synthesis of most glycosphingolipids. Miglustat exhibits large volume of distribution and has the capacity to access deep organs such as the brain, bone and lung. It currently is only used in patients that cannot be treated with enzyme replacement therapy. Despite the rarity of the disease, Zavesca is still growing double-digit which is likely due to a combination of finding new patients (150-200 new patients are being identified world-wide every year with life-long treatment) and the roll-out of its most recent indication Niemanns-Pick disease (see below). Furthermore the inclusion of bone disease data in the European label in 2008 may continue to add to momentum. Bone disease is not adequately treated by enzyme replacement therapy and a pooled analysis of three Zavesca trials has demonstrated that the product reduces bone pain, increases bone mineral density and increases the bone marrow fat fraction (skeletal benefits with enzyme replacement therapy are slow to manifest themselves).
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Actelion is testing Zavesca in a new maintenance modality for patients that have been stabilised on ERT. The advantages are oral administration and a lack of immunoreactivity (1015% of patients with Gaucher disease treated with ERT develop antibodies to the enzyme protein, but few develop any significant allergic reactions) that allows treatment in the few patients that have allergic reactions or neutralising antibodies to the enzyme therapy. This approach may also be an alternative for patients with severe adverse reactions. The MAINTENANCE trial is currently assessing the long-term safety and efficacy of miglustat as maintenance therapy following a switch from enzyme replacement therapy in mild-to-moderate type-1 Gaucher patients. The trial has reached full enrolment in Q2 2008 (n=42) and is expected to read out in 2010. An open-label phase II trial showed that all patients switched to miglustat remained stable on all key parameters and in chitotriosidase levels. Liver and spleen volume were unchanged in switched patients, no significant differences were seen between groups regarding mean change in hemoglobin. No drug related severe adverse reactions were observed during treatment. This trial formed the base of the MAINTENANCE trial and suggests that it has a reasonable chance of success.
Miglustat competition
Protalix is developing UPLYSO (prGCD), a plant-cell expressed recombinant glucicerebrosidase enzyme for the treatment of Gaucher disease. The company partnered the drug with Pfizer in November 2009. The product is developed under an SPA agreement with the FDA and the company has also initiated a switch-over study. The company believes that its manufacturing technology produces more effective enzymes than mammalian cell-based expression systems and claims that the half-life of prGCD is significantly longer than Cerezyms. The largest concern for Protalix is that its product will be immunogenic, as plant cells utilize three sugars not found in humans during the glycosylation process. Structural analysis of Protalix glucocerebrosidase suggests these sugars are masked and may not be accessible to immune cells. However, when expressed in the human body these sugars could be detected by the immune system when the protein has not folded properly, causing an immune response in some patients. In any case, as this is an infusional enzyme therapy, we do not see direct competition springing from prGCD for miglustat. The pIII trial (n=39) that forms the basis of the SPA met its primary endpoint of mean reduction in spleen volume after nine months compared with baselines, in both 60 U/kg dose and in the lower 30 U/kg dose treatment groups (P<0.0001). The safety analysis for both doses showed that UPLYSO was well tolerated and no serious adverse events were reported. Despite the concerns mentioned above, only 6% of patients in the trial developed antibodies to UPLYSO during the study. None of the patients in the trial developed neutralising antibodies to UPLYSO. Only 6% of the patients in the trial experienced hypersensitivity. As the switch-over trial is not part of the SPA, Potalix has finalised its rolling FDA submission in April 2010 (with the submission of validation data on its manufacturing process) and is also expecting approval in Israel shortly after FDA approval. Genzyme is developing eliglustat tartrate/GENZ-112638, a specific oral inhibitor of glucosylceramide synthase. As a substrate reduction therapy, the drug decreases the body's production of glucocerebroside so it does not accumulate in cells. After encouraging twoyear follow-up data from the phase II trial, the drug is now being investigated in two pIII trials with data expected no earlier than 2012. With one trial assessing the use of eliglustat in patients stabilised on Cerezyme and the other in nave patients, this product seems to be a potential direct competitor to Zavesca.
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Shire has conducted a switch-over trial in patients moving off Cerezyme and onto velaglucerase. The trial result showed that no patients developed IgG antibodies to velaglucerase, including 3 patients who tested positive for anti-Cerezyme antibodies at screening. In addition, haemoglobin concentration, platelet counts, and liver and spleen volumes remained stable over the course of the one year study, demonstrating safety and maintenance of efficacy over this time frame. One patient in the Phase III trial discontinued due to a serious hypersensitivity reaction and the most common side effects reported in the two studies were infusion-related reactions. To an extent the switching study could pose a competitive threat to the miglustat MAINTENANCE trial.
Niemann-Pick disease (NPC)

NPC is a very rare but fatal neurogdegenrative genetic disease primarily affecting children and teenagers. Symptoms are caused by storage of glycosphingilipids within certain cells of the body, including the brain. The disease is invariably progressive and most patients die within five to ten years of diagnosis. Clinical trials demonstrated that miglustat improved or stabilised several clinical markers of NPC with comparable safety as observed in the Gaucher type-1 patient population. After The European agency has granted full approval in January 2009, followed by full approval in Russia, South Korea and Brazil, submissions in other markets are being assessed. Due to the rarity of the disease, NCP should help to maintain momentum but unlikely be a significant revenue driver for the company, we believe.
Cystic fibrosis (CF)

CF is a fatal, autosomal and recessive genetic disease that is due mainly to inactivating mutations in the chloride channel CF transmembrane conductance regulator (CFTR) in the lung, liver, pancreas and intestines. Thick mucus production results in frequent lung infections, diminishing secretion of pancreatic enzymes in poor growth and deficiency in fat soluble vitamins. Pre-clinical data shows that miglustat restores functionality in epithelial CF cells and rescues functional channels. In October 2007, Actelion initiated a phase IIa POC clinical trial in cystic fibrosis. This trial failed to achieve proof-of-concept but following further preclinical and clinical analysis, Actelion has decided to initiate a newly designed proof-of-concept study in 2010. In the United States, approximately 30,000 individuals have CF and most are diagnosed by six months of age. This represents a cUS$400m market it the US alone, clearly a substantial market. However, in the absence of POC data, it is difficult to predict the drugs potential in this setting.
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ALMOREXANT
Insomnia
Currently available and future drugs exert their therapeutic effects by modifying neurotransmission at distinct sites within the arousal controlling neuronal network. The level of arousal is controlled by an intricate interplay between distinct wakefulness and sleeppromoting nuclei situated in the hypothalamus and brainstem. Wakefulness-promoting nuclei include amongst others the orexinergic lateral hypothalamic/perifornical area. These nuclei form a mutual inhibitoryexcitatory loop, with arousal centres active during wake and inhibitory centres active during sleep. This loop works in a sort of switch mechanism being in either state with a very rapid transition state. The mechanisms that control this circuit, and the factors that influence it, have been the topic of considerable research and this enables classification of therapeutic drugs for sleep disorders on the basis of their modes of action:
drugs that interact Ambien/zolpidem).
with
the
GABAergic
sleep-promoting
system
(e.g.
drugs that interact with different wakefulness-promoting systems. drugs that modulate the level of arousal by mechanisms that do not initially involve the basic network (eg, melatonin, adenosine).
The past decade has witnessed an explosion of knowledge of the neural mechanisms that control sleep and arousal including the orexin receptors. Orexins (hypocretins) have been implicated in the regulation of the normal sleep-wake cycle, in sensorimotor programming, and in other homeostatic and neuroregulatory processes. In the light of the wake-promoting effects of the endogenous peptid orexin, the development of orexin receptor antagonists acting selectively on OX1 or OX2 or unselectively is hence not unexpected. However, the lack of suitable orexin receptor antagonist has prior to almorexant precluded a detailed pharmacological investigation of the role of the brain orexin system.
Phase II data
A proof-of-concept dose-ranging trial in patients with primary insomnia indicated that almorexant significantly improved the time spent sleeping when confined to bed during an eight-hour period measured by polysomnography (PSG). The doses tested were 100mg, 200mg and 400mg. The secondary endpoints (trial was not powered for these) showed that almorexant decreased the latency to persistent sleep (LPS) which was significant at 400mg, and deceased WASO (wake time after sleep onset) which was significant at 400mg, 200mg and 100mg. Almorexant increased or maintained the percentage of time spent in REM (rapid eye movement sleep) and non-REM sleep (an observation not seen with the hypnotics/GABA receptor modulators) and also improved subjective sleep variables. No negative effects were observed on next-day performance (assessed by fine-motor testing and mean reaction time). No severe adverse reactions were observed. Overall, almorexant seems to demonstrate a good dose response however, according to the company, a dose response was observed up to 1000mg and how representative the information at 100, 200 and 400mg is, is currently unclear.
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Overall this data seems in-line with pIIb data presented by Merck on MK-4305 (10mg, 20mg, 40mg and 80mg showed WASO -26.9m, -22.9m, -33.2m -37.9m and LPS of -24.0m at 20mg, -21.6m at 40mg and -21.3m at 80mg all at night one). Data presented by Actelion indicates that almorexant also reduces the time to persistent sleep by 10-20min (at the 100 and 200mg dose taken into phase III) and increases the total sleep time by 1030min. The highly used benzodiazepine receptor antagonists reduce the time it takes to fall asleep by c30min and increases the time spent sleeping by 10-20min thus improving total sleep time during the night by c40min. In other words, judging by the clinical data available, almorexant is not significantly more or less efficacious than existing therapies. Differentiation would hence in our view have to occur via the lack of next-day hang-over effect or the lack of next-day sedation. As in the case with melatonin and other sleep-related neurotransmitters, an important question is whether hyperfunction of the orexinergic system in the general insomniac population actually contributes to their poor sleep, or whether this only relates to a specific subpopulation. The move away from the GABA-A receptor system with its limitations (dependence, increased abuse potential, and some degree of withdrawal symptoms) and the focus on more subtle endogenous pathways that control the sleep-wake cycle seems adequate. However, even though these approaches might be more adequate for helping particular subpopulations suffering from insomnia, a number of limitations are inherent to this approach. If only specific populations will respond to the treatment, the need for better diagnostic criteria and a deeper understanding of insomnia is necessary. Furthermore, modulation of the sleepwake cycle is very much a question of timing of dosing, so the development of dosage forms, and application systems that can ensure dosage at the correct time, will be essential for this approach.
Phase III program shifting goal post?

Actelion has initiated a phase III program called RESTORA for almorexant. The first primary insomnia trial (RESTORA-1: 670 patients assessing 100mg and 200mg over two weeks with an active zolpidem control arm. WASO as primary endpoint, LPS as secondary) has finished. The trial reached its primary end-point late 2009 (p<0.001) and at least some secondary endpoints but hit a hurdle on findings of safety ("some safety observations" that were also detected in the ongoing non-pivotal trials) that the company did not elaborate on further but that require further assessment in ongoing long-term safety trials the company extended the non-pivotal part of the trial and results of this trial in Q1 2011 will allow Actelion to decide whether to take the compound into another pIII trial. This safety observation may very well be a CNS signal (orexinergic neurons seem to have many axis of pathways - serotonin, dopamine, noradrenergic and the chance of off target activity is very high) and may hence represent a significant risk factor with a number of precedents where drugs have not cleared the safety hurdle:
Lundbecks/Mercks gaboxadol was discontinued in 2007 after a higher incidence of psychiatric side effects at a therapeutic dose of gaboxadol was observed 38% v 15% in a study of drug abusers. A reanalysis of data from studies in adults with insomnia also showed that these effects were observed in a handful of patients at high doses. Indiplon modified release received a non-approvable letter in 2007 and the originator has ceased all clinical development activities.
The RESTORA program will include dedicated profiling studies. The non-pivotal program is ongoing and the company is currently preparing further late-stage trials in adults and elderly patients that will evaluate the long-term efficacy and safety of the drug.
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Even though Actelion does not see the above mentioned safety issue leading to a significant delay in development the lack of clarity is disconcerting as we are not aware of any recent centrally active agent with a safety signal that would have gained approval. Almorexant could become a successful drug if it were to show:

Substantially improve sleep quality. Leaving a patient feeling rested the next day without hangover. Was to be perceived by patients as safe and not so cognitively impairing as Ambien or Lunesta.
In addition, augmentation potential with other drugs given its unique mechanism of action would offer added-value. Whether the drug will be able to meet those benchmarks at the 100mg dose range is unclear and the third bullet point clearly is currently in question. We understand that the FDA is also now requiring longer studies and objectives as well as subjective endpoints. Actelion is in discussions with the agency regarding further phase III trials required for US filing under an SPA (special protocol assessment) Actelion already had to provide additional four-week safety data as well as data form a dose-ranging trial in elderly patients during the end of phase II discussion. This would mean a number of trials may be required in a range of patient groups.
GSK collaboration
After GSK dropped its proprietary orexin receptor antagonist GW649868 for undisclosed reasons, the company entered into an exclusive world-wide collaboration (ex Japan) for almorexant. Under the agreement, GSK will contribute 40% of the ongoing development costs in primary insomnia (development costs in other orexin related diseases will be shared equally). Actelion has received a total of CHF150m in upfront payment and will be eligible for additional potential milestone payments of up to CHF415m in regards to the successful development and approval of almorexant in primary insomnia. Additional milestone payments will be due pending successful development of two other major indications for almorexant yet to be evaluated through clinical investigation (a total of CHF 2.735 billion). Costs and profits resulting from this collaboration will be shared equally between the two companies.
Market potential and valuation

Insomnia and sleep is very common with at least 15% of adults reporting persistent or severe symptoms. Primary insomnia accounts for c12-30% of chronic insomnia (the majority of insomnia is driven by external stimuli such as physiological disturbances or stress factors). Sanofi-Aventis Ambien/Ambien CR is the worlds most successful sleep drug despite its drawbacks of being a scheduled drug (abuse potential) that denies the opportunity for long-term dosing and the franchise generated 2bn at peak prior to generic erosion. At this sort of revenue level, taking the GSK collaboration into account, almorexant represents cCHF5/share potential upside, based on our analysis. As GSK currently funds 40% of the development of almorexant in its primary indication, we believe it is in Actelions interest to continue development even if the mentioned safety signal was already significant. We therefore treat the prospects of almorexant with extreme caution.
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CLAZOSENTAN
Vasospasm occurs 5-14 days following subarachnoid hemorrhage (SAH) and leads to strokes and neurological deficits that cause significant disability to patients and is a major cause of death. As many as 70% of people who have aneurysmal SAH (aSAH) may have arterial narrowing and even with the most advanced surgical and endovascular advances in securing the aneurysm (coiling or clipping), the outcomes remain poor with up to 30% developing neurological deficits or dying. Pivlaz/clazosentan is an IV Endothelin receptor antagonist (added through the acquisition of Axovan in 2003). The product is currently in pIII development in vasospasm related morbitiy and mortality following aSAH. The product has received orphan drug status in Europe and the US.
Phase II program
Clazosentan has been evaluated in two pII studies. A PIIa proof-of-concept placebocontrolled study of prevention of vasospasm after clipping (no coiling) for aSAH showed fewer cases of vasospasm and less severe vasospasm (angiographically confirmed vasospasm occurred in 88% of those who received placebo but in only 40% of clazosentantreated patients, p=0.008). The trial also showed fewer patients with new cerebral infarcts in the clazosentan-treated group (a trend). An open-label extension of the trial demonstrated that clazosentan treatment was successful in the reversal of established angiographic vasospasm in 50% of assessable patients who initially received placebo (however, in patients who initially received clazosentan an escalated dose of clazosentan therapy proved ineffective in altering established vasospasm). The second pII trial was called CONSCIOUS-1. This study evaluated the safety and efficacy of three dose levels of clazosentan (15, 5 and 1mg/hour) in preventing the occurrence of cerebral vasospasm following aSAH in 514 patients who underwent either clipping or coiling to stop the initial bleed, assessed by angiography. Trial results were mixed with CONSCIOUS-1 showing a treatment effect on the primary endpoint (clazosentan significantly reduced moderate/severe vasospasm at all tested doses, from 66% in the placebo group to 36% in the high-dose clazosentan group) but did not show a significant benefit on 3-month functional outcome. A post-hoc analysis did show a trend in favour of reducing morbidity/mortality related to vasospasm using central assessment.
Phase III program

As the pII data was not conclusive, Actelion had to initiate a pIII program. Clazosentan is currently being evaluated in two pIII trials: CONSCIOUS-2 and CONCIOUS-3. CONSCIOUS-2 in over 1,150 patients (2:1, 5mg/h or placebo) with aSAH and aneurysmal surgical clipping measures the clinical benefits of clazosentan through the primary endpoint of vasospasmrelated morbidity and all-cause mortality (neurological deterioration, new brain infarcts, introduction of vasospasm rescue therapy, or death from any cause). The trial finished enrolment in April 2010 and results are expected in October 2010. CONCIOUS-3 in 1,500 patients is evaluating the efficacy and safety of two doses (5 or 15 mg/h) of clazosentan versus placebo in patients post-aSAH treated by endovascular coiling. The trial has the same endpoints as CONCIOUS-2. Trial results are expected 2011.
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Market potential
The average incidence of subarachnal haemorrhage is 9.1 per 100,000 annually (de Rooij NK, Linn FH, van der Plas JA, Algra A, Rinkel GJ, December 2007). Around 85% of these haemorrhages are caused by rupture of aneurysms resulting in a theoretical yearly incidence of 24k cases of aSAH in the US and 39k in the EU. Assuming Actelion would be able to charge $100/day and patients receive the drug up to 14 days, this creates a market potential of cCHF80m in the US and the EU combined. Clazosentan is included in our model with CHF40m in revenues.
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PHASE II PIPELINE
CRTH2 receptor antagonist

Actelions CRTH2 receptor antagonist blocks the effects of prostaglandin D2 (the major prostanoid generated by mast cells) on inflammation with beneficial impacts on allergic reactions. CRTH2 is one of two known receptors for PGD2 and the expression profile of this receptor is restricted to a number of key inflammatory cell types including Th2 cells, eosinophils and basophils. Increasing evidence indicates that CRTH2 plays a central role in key aspects of allergic pathology. POC data for this class has been broadly positive so far. Actelions compound showed positive POC data (not published) in an 18 patient trial (mild asthma). Following these results, Actelion is planning to initiate a pII dose-ranging trial in asthma and allergic rhinitis in H2 2010 with data expected in H1 2011 and results in asthma expected in 2012. Further investigation of this compound makes sense as Oxagen has demonstrated positive pII data for its CRTH2 receptor antagonist OC00459 in 2009 and as Novartis is evaluating its QAV680 in a pII trial. At this point in time in absence of POC data for Actelions compound, we do not include estimates in our model. At a conservative CHF500m potential in asthma this represents a cCHF4/share potential upside, based on our analysis.
Oxagens OC000459
Phase II data presented at the ERS 2009 showed that Oxagens CRTH2 receptor antagonist (OC000459) improved lung function and quality of life in patients with moderate persistent asthma. In the per-protocol population (132 patients), FEV1 increased by a mean of 9.2% (214 mL) from baseline in the OC000459 treatment group, which was 7.4% (184 mL) greater than the increase in FEV1 in the placebo group (P = 0.037). A significant improvement was also seen in clinic peak expiratory flow with OC000459 (P = 0.009). Scores in a validated quality-of-life measurement increased significantly from baseline with OC000459 compared with placebo (P = 0.011). Further significant decreases in serum immunoglobulin E (P = .033) and sputum eosinophil count (P = 0.03) were observed in the OC000459-treated arm relative to the placebo arm. No serious adverse events were observed. A phase IIb dose-ranging trial in patients on LABA therapy finished recruiting in December 2009.
S1P1 receptor agonist (ACT-128800)

It is currently established that S1P stimulates at least five different G-protein coupled receptors (GPCRs): S1P1,2,3,4, and 5. Activation of these GPCRs mediates a complex variety of biological responses, such as lymphocyte migration, endothelial cell proliferation, blood vessel constriction, heart rate modulation and others. S1P1, the predominant S1P receptor expressed on lymphocytes, is a major regulator of lymphocyte trafficking. By modulating the S1P1 receptor, agonist modulate the adaptive immune response (by inhibiting the transendothelial migration of T cells) without affecting the function of T cells.
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Novartis Gilenia (FTY720) has demonstrated the effectiveness of this mechanism of action in multiple sclerosis but has left a number of questions open in regards to safety (skin lesions/cancers, lethal infections, cough, dyspnea, hypertension, bradycardia, macular edema and liver enzyme elevation). FTY720 is little specific (high affinity to S1P1, S1P4 and S1P5, lower affinity to S1P3, no affinity to S1P2) and whether the lack of specificity of FTY720 contributes to the adverse event profile remains open for debate. Actelions S1P1 agonist (in collaboration with Roche) has been selected for its S1P1 selectivity (with the assumed implication of offering a wider safety margin) and following a successful pI program, the product was moved into a pIIb trial in multiple sclerosis in October 2009. By the end of June 2010, half of the targeted 400 patients had been recruited in this trial and results are expected in H2 2011. The product was also assessed in a pIIa trial in psoriasis in 2009 but this trial did not reach statistical significance. Nevertheless, Actelion has moved the product into a POC trial in this setting that will be initiated later in 2010. Unfortunately despite the clinical data mentioned as well as the strong POC data presented with FTY720, Roche decided in December 2009 to return the product to Actelion for undisclosed reasons other than rationalisation of its portfolio. Whether this decision was at least partly based on clinical or safety stumbling blocks is currently not known. The portfolio rationalisation argument does not sit easy with us as Roche has ocrelizumab in pIIb development in MS and a safer oral agent should in our mind be of clinical value in any MS portfolio. We therefore remain cautious on the compound until we see pIIb trial results. As a better Gilenia, S1P1 would have >CHF1bn revenue potential and represents CHF8/share potential upside, based on our analysis.
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SUMMARY FINANCIALS
Figure 21: Actelion P&L
(CHF'000, exc. per share) Product sales Contract revenues Total net revenues Cost of sales R&D M&S SG&A Amortization of acquired intangible assets Litigation settlement Operating income Non-GAAP EBIT Interest income Interest expense Amortization of debt discount Other financial income/(expense) net Income before income tax expense Income tax Net income Basic EPS Diluted EPS Non-GAAP EPS -549,976 -19,977 0 371,357 476,800 21,776 -6,629 -17,112 -31,870 337,522 -31,449 306,073 2.59 2.48 3.38 -645,472 -35,614 -93,713 339,406 567,900 4,423 -7,450 -17,864 20,007 338,522 -27,252 311,270 2.62 2.53 4.38 531,845 688,084 2,963 -6,000 -16,400 -30,200 482,208 -53,043 429,165 3.60 3.54 4.81 489,992 657,777 6,378 -3,000 -16,700 0 476,670 -57,200 419,470 3.52 3.46 4.80 655,389 -85,201 570,188 4.78 4.71 5.96 866,300 1,259,207 1,470,692 -121,282 -188,881 -220,604 615,344 -92,302 523,042 4.36 4.30 4.84 226,006 -33,901 192,105 1.60 1.58 2.09 90,349 -13,552 76,796 0.64 0.63 1.14 649,113 823,736 9,276 -3,000 0 853,637 1,241,878 1,447,405 1,034,901 12,664 0 0 1,427,363 17,329 0 0 1,622,063 23,286 0 0 586,738 664,873 28,606 0 0 194,466 268,504 31,540 0 0 57,593 131,541 32,756 0 0 -722,929 -39,020 -773,534 -37,524 -835,416 -36,107 -960,729 -34,765 -960,729 -33,494 -960,729 -32,290 -816,619 -31,149 -734,958 -26,068 -734,958 -25,043 2008 1,428,906 44,602 2009 1,697,990 74,574 2010E 1,892,841 102,861 2011E 2,026,012 6,100 2012E 2,216,008 4,200 2013E 2,535,948 200 2014E 2,982,835 200 2015E 3,225,839 200 2016E 2,100,651 200 2017E 1,564,840 200 2018E 1,410,591 200
1,473,508 1,772,564 1,995,702 2,032,112 2,220,208 2,536,148 2,983,035 3,226,039 2,100,851 1,565,040 1,410,791 -157,668 -374,530 -194,223 -464,136 -200,641 -501,267 -214,757 -516,305 -234,897 -464,674 -268,811 -418,207 -316,181 -430,753 -341,939 -443,676 -222,669 -443,676 -165,873 -443,676 -149,523 -443,676
745,018 1,070,326 1,250,088 6.24 6.14 7.43 8.95 8.81 10.11 10.44 10.28 11.50
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Figure 22: Actelion balance sheet

(CHF000) 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Cash and cash equivalents Short-term deposits Derivative instruments Trade and other receivables Inventories Other current assets Deferred tax assets Total current assets Long-term deposits PP&E Other non-current assets Intangible assets Goodwill Long-term financial assets Deferred tax assets, less current portion Total assets Trade and other payables Accrued expenses Deferred revenue, current portion Other current liabilities Short-term financial debt Total current liabilities Long-term financial debt Deferred revenue, less current portion Other non-current liabilities Pension liability Deferred tax liabilities Total liabilities Common shares Additional paid-in capital Accumulated profit Treasury shares, at cost Accumulated other comprehensive income (loss) Total shareholders' equity
877,325 1,152,941 1,103,537 1,674,265 2,458,784 3,540,197 4,841,866 5,668,041 6,015,471 466,234 11,545 469,557 61,365 46,916 4,868 466,234 11,545 534,500 73,505 46,916 4,868 466,234 11,545 569,642 78,677 46,916 4,868 466,234 11,545 619,780 86,055 46,916 4,868 466,234 11,545 704,209 98,479 46,916 4,868 466,234 11,545 822,137 115,833 46,916 4,868 466,234 11,545 886,263 125,270 46,916 4,868 466,234 11,545 589,339 81,575 46,916 4,868 466,234 11,545 447,944 60,768 46,916 4,868
1,937,810 2,290,509 2,281,419 2,909,663 3,791,035 5,007,731 6,382,962 6,868,518 7,053,746 0 281,152 19,443 283,364 77,630 13,149 52,369 375,505 19,443 254,344 77,630 13,149 61,342 434,974 19,443 226,820 77,630 13,149 72,110 452,470 19,443 200,713 77,630 13,149 84,591 458,757 19,443 175,947 77,630 13,149 98,981 463,897 19,443 152,453 77,630 13,149 115,051 467,946 19,443 130,163 77,630 13,149 129,513 470,960 19,443 109,014 77,630 13,149 129,513 472,990 19,443 92,946 77,630 13,149 129,513
2,664,917 3,091,923 3,125,545 3,757,658 4,634,942 5,849,353 7,220,807 7,688,226 7,859,417 117,460 406,343 107,599 48,583 426,910 1,106,895 0 89,065 47,794 13,100 412 87,703 41,081 13,100 412 83,503 4,877 13,100 412 667,949 64,814 83,303 4,877 13,100 412 638,733 64,814 83,103 4,877 13,100 412 657,374 64,964 82,903 4,877 13,100 412 683,491 65,114 82,703 4,877 13,100 412 697,601 65,264 82,503 4,877 13,100 412 631,140 65,414 82,303 4,877 13,100 412 599,387 65,564 111,467 406,343 6,100 29,148 443,300 996,358 119,310 406,343 4,200 36,204 0 566,057 130,498 406,343 200 0 0 537,041 149,339 406,343 200 0 0 555,882 175,656 406,343 200 0 0 582,199 189,966 406,343 200 0 0 596,509 123,705 406,343 200 0 0 530,248 92,152 406,343 200 0 0 498,695
1,257,266 1,138,654 64,264 64,814
1,098,840 1,214,733 1,299,591 1,390,731 1,504,206 1,622,024 1,729,129 1,739,818 1,750,506 882,260 1,311,425 1,730,895 2,301,083 3,046,101 4,116,427 5,366,515 5,889,557 6,081,662 -558,227 -79,483 -558,227 -79,483 -558,227 -79,483 -558,227 -79,483 -558,227 -79,483 -558,227 -79,483 -558,227 -79,483 -558,227 -79,483 -558,227 -79,483
1,407,654 1,953,261 2,457,590 3,118,918 3,977,561 5,165,855 6,523,199 7,057,079 7,260,023
Total liabilities and shareholders' equity 2,664,920 3,091,916 3,125,538 3,757,651 4,634,935 5,849,346 7,220,800 7,688,219 7,859,410
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Figure 23: Actelion cash flow

(CHF000) 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Net income Non-cash adjustments Depreciation & amortization Stock based compensation Excess tax benefits from share-based payments (Gains) Losses on derivatives (Gains) Losses on securities Amortization of debt discount and issuance costs Trade and other receivables Inventories Other current assets Other assets Trade and other payables Accrued expenses Deferred revenue Other liabilities Changes in other operating cash flow items Operating cash-flow Purchase of deposits Proceeds from deposits Purchase of PP&E Purchase of securities Proceeds from securities Settlement of derivatives Purchase of intangible assets Acquisition of subsidiary Net cash flow provided by (used in) investing activities Payments on capital leases Repayment of financial debts Proceeds from exercise of stock options, net of expense Purchase of treasury shares Proceeds from exercise of options related to own shares Excess tax benefits from share-based payments Financing cash flow Net effect of exchange rates Net change in cash Cash at beginning of period Cash at end of period
311,270 63,995 71,392 -6,970 -7,918 9,272 17,864 -105,789 -10,441 -14,875 -7,171 29,276 177,893 -52,428 -7,941 424,151 -898,738 806,321
429,165 74,667 81,573 -8,973
419,470 78,055 89,730 -10,768
570,188 78,612 96,011 -12,481
745,018 1,070,326 1,250,088 78,478 102,786 -14,390 78,355 107,130 -16,069 78,241 96,417 -14,463
523,042 78,135 0 0
192,105 74,038 0 0
16,400 -64,943 -12,140
16,700 -35,143 -5,171
0 -50,138 -7,378
0 -64,126 -9,437
0 296,925 43,695
0 141,395 20,807
-84,429 -117,928 -12,424 -17,354
-5,993 6,000
7,842 3,000 -6,100
11,189 3,000 -4,200
18,841 0 -200
26,317 0 -200
14,310 0 -200
-66,261 0 -200
-31,553 0 -200
-43,278 -102,861
412,895
557,615
684,803
833,680 1,130,575 1,350,831
875,336
396,592
-132,546 -130,000 -100,000 -50,000 50,000 -3,795 -8,058 -57,785 -10,000 -32,148 -10,000 -32,148
-60,000
-50,000
-50,000
-50,000
-50,000
-50,000
-10,000 -39,204
-10,000 0 -60,000
-10,000 0 -60,000
-10,000 0 -60,000
-10,000 0 -60,000
-10,000 0 -60,000
-294,601 -172,148 -142,148 -109,204 -140 -193,800 108,042 -115,947 215,925 6,970 21,050 -734 149,866 727,459 275,616 -49,404 570,727 34,870 -464,871 -4,871 0 -460,000 75,870 -41,000 36,129 -41,000 0 36,129 -41,000
0 10,839 0
0 10,839 0
0 10,839 0
0 10,839 0
0 10,839 0
10,839
10,839
10,839
10,839 826,175
10,839 347,430
784,519 1,081,413 1,301,669
877,325 1,152,941 1,103,537 1,674,265 2,458,784 3,540,197 4,841,866 5,668,041
877,325 1,152,941 1,103,537 1,674,265 2,458,784 3,540,197 4,841,866 5,668,041 6,015,471
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ANALYST(S) CERTIFICATION(S)
We, Michael Leuchten, Mark Purcell and Angus Allison hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
IMPORTANT DISCLOSURES CONTINUED

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 1-212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analysts account. On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Primary Stocks (Ticker, Date, Price) Actelion (ATLN.VX, 21-Jul-2010, CHF 40.95), 1-Overweight/2-Neutral Risk Disclosure(s) The convertible valuations are based on Barclays Capital proprietary convertible valuation model, under which key assumptions relate to credit spread and equity volatility metrics. Material changes in any of these variables can have a significant impact on valuation. Upside/downside analysis takes into consideration likely future valuation and expected trading patterns, among others. It is based on a total return participation of the convertible relative to a +/ 25% (unless otherwise specified) change in the common stocks price over a oneyear investment horizon. A material change in the companys financial situation can significantly alter this assessment. Guide to the Barclays Capital Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the sector coverage universe). In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating 1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12month investment horizon. 3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Sector View 1-Positive - sector coverage universe fundamentals/valuations are improving. 2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. 3-Negative - sector coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "sector coverage universe":
European Pharmaceuticals
Actelion (ATLN.VX) GlaxoSmithKline (GSK.L)
AstraZeneca (AZN.L) Ipsen (IPN.PA)
Bayer AG (BAYG.DE) Novartis (NOVN.VX)
23 July 2010
39

Novo Nordisk (NOVOb.CO) UCB SA (UCB.BR) Distribution of Ratings: Barclays Capital Inc. Equity Research has 1514 companies under coverage. 43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 51% of companies with this rating are investment banking clients of the Firm. 43% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 44% of companies with this rating are investment banking clients of the Firm. 11% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 35% of companies with this rating are investment banking clients of the Firm. Barclays Capital offices involved in the production of equity research: London Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Capital Japan Limited (BCJL, Tokyo) So Paulo Banco Barclays S.A. (BBSA, So Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (BB, Hong Kong) Toronto Barclays Capital Canada Inc. (BCC, Toronto) Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Roche (ROG.VX) Sanofi-Aventis (SASY.PA)
23 July 2010
40
Actelion (ATLN VX / ATLN.VX)

CHF 40.95 (21-Jul-2010) Rating and Price Target Chart - CHF (as of 21-Jul-2010)
75
Stock Rating
1-OVERWEIGHT Currency=CHF Date Closing Price Rating
Sector View
2-NEUTRAL
Price Target
70
65
60
55
50
45
40
35 Jan- 08 Jul- 08 Jan- 09 Closing Price Jul- 09 Jan- 10 Jul- 10
Link to Barclays Capital Live for interactive charting
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Actelion.
23 July 2010
41
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EQUITY RESEARCH

Healthcare | European Pharmaceuticals | 23 July 2010

ACTELION To be or not to be a biotech company

Price (21-Jul-2010) Potential Upside/Downside Tickers

Price Performance 52 Week range

Exchange-VTX CHF 66.20-39.19

Link to Barclays Capital Live for interactive charting

2008 N/A N/A N/A N/A 14.5x 8.4

2009 2.53A 3.30A N/A N/A 14.9x 5.5

2010 3.54E N/A 3.66E 11.6 9.9x 5.3

2011 3.46E N/A 3.80E 11.8 10.6x 8.7

2012 4.71E N/A 4.36E 8.7 8.3x 12.0

Barclays Capital | Actelion

Barclays Capital | Actelion

Figure 1: Actelion portfolio

Figure 2: Actelion DCF build-up (CHF/share)

CAPEX & NWC '10-16

Barclays Capital | Actelion

Generic exposure priced in

today's share price

Partly sustainable PAH franchise on conservative estimates

Barclays Capital | Actelion

Figure 4: 2009 product revenues

Figure 5: 2013E revenues

EPS CAGR n/a -25% 3% 8% 12%

Barclays Capital | Actelion

(2) Use of combination therapy expected to rise

(3) PAH market remains relatively price insensitive

Source: Barclays Capital

Figure 8: PAH market product revenues Q1 2005 to Q1 2010

Source: Company data

Barclays Capital | Actelion

Figure 9: Actelions group revenues (CHF000)

Source: Company data, Barclays Capital

Near-term growth through P&L gearing

Barclays Capital | Actelion

Figure 10: Diluted EPS and FCF/share

Figure 11: Operating margin

2009 2010E 2011E 2012E 2013E Operating margin

Source: Company data, Barclays Capital

Pipeline offers upside potential

Barclays Capital | Actelion

Figure 12: Actelion pipeline

Study COMPASS-2 MAINTENANCE CONCIOUS-2 CONCIOUS-3 SERAPHIN GRIPHON n/a

2000 500 500 500 750 250 100

Source: Company data, Barclays Capital

Less reform exposure cash to be deployed in Europe

Valuation and risks

Barclays Capital | Actelion

end 2011 2012 2013/14

Source: Company data, Barclays Capital

Barclays Capital | Actelion

Barclays Capital | Actelion

PULMONARY ARTERIAL HYPERTENSION: TRACLEER/MACITENTAN/PGI2

Source: Company data, Barclays Capital

Barclays Capital | Actelion

Figure 15: Actelions PAH franchise revenues

Source: Company data, Barclays Capital

Pulmonary arterial hypertension

Barclays Capital | Actelion

Figure 16: PAH treatment pathways

Nitric oxide pathway

Pre-pro-ET -> pro-ET

L-arginine -> L-citrulline