Smaller Market for Insomnia Drugs

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Earlier this week, Decision Resources issued a press release detailing its market research on insomnia drugs. It reported that 25% to 40% of managed-care organizations are not going to add a new nonbenzodiazepine to their formularies. This is important, as the formulary is the list of drugs that the insurance company will help patients pay for. It is crucial for a drug company to get its products on insurance company formularies after the drug is approved to speed up the ramp in sales.

Right now the insomnia market is dominated by Ambien from Sanofi-Synthelabo (NYSE: SNY). Ambien had 2003 worldwide sales of $1.3 billion euros, 80% of which was in the U.S. The general consensus among investors is that this is going to be an increasingly large market.

Because of the market potential, biotech companies looking to launch insomnia drugs have done very well. The biggest contenders to take Ambien's crown are Estorra from Sepracor (Nasdaq: SEPR) and Indiplon from Neurocrine Biosciences (Nasdaq: NBIX) and Pfizer (NYSE: PFE). And there is also Sanofi's product life-cycle extension, Ambien CR, which the company is trying to get onto the market to protect its franchise ahead of Ambien's U.S. patent expiration in 2007.

However, expectations for sales of Estorra and Indiplon may need to be tempered in light of this Decision Resources report. Ambien has been the clear standard of care in the insomnia market. When Ambien is available as a generic in a few years, the size of the insomnia market could very well shrink as insurers "encourage" patients to use the cheap generic drug instead of the newer, more expensive drugs such as Estorra and Indiplon.

With an early indication that the insurers are going to be resistant to covering Estorra and Indiplon, this becomes a plausible scenario that is worth watching.

To read more on the exciting biotech industry, check out:

• What's a Drug Worth?
• Biotech's Full Monte
• Unraveling Biotech Potential
• Don't Be a Biotech Gambler
• Avoiding Biotech Land Mines

Fool contributor Charly Travers does not own shares of any company mentioned in this article.