This week, NPS Pharmaceuticals (NASDAQ:NPSP) filed for U.S. marketing approval of Preos, a recombinant parathyroid hormone (PTH) intended to treat osteoporosis. NPS shareholders, looking forward to Preos revenues in the first half of 2006, have long been waiting for this event. The filing had been delayed for several months as NPS worked through some technical issue with the voluminous application package, but management now says all its ducks are in a row.

If approved, Preos will compete directly with Eli Lilly's (NYSE:LLY) Forteo, a closely related PTH fragment that brought in sales of $239 million in 2004, its second year on the market. Is now a good time to consider an investment in NPS -- or, for that matter, one of several other companies working on new osteoporosis drugs?

The large osteoporosis treatment market is growing, and as the population ages, it will likely continue to expand for years to come. By 2010, the market for osteoporosis drugs is expected to grow to around $10 billion. Some studies suggest there could be even larger growth potential because the disease often goes undiagnosed -- particularly among men and non-whites, where it is less common but still not infrequent, but also among the "classic" population of post-menopausal white women. There is a significant opportunity to improve the care of patients and plenty of grist for a motivated marketing team with a new product to sell.

Also, a remarkable number of advanced products are moving toward commercialization, creating an increasingly competitive environment. Before looking for potential winners in this crowd of contenders, we need to look at how the treatment universe breaks down.

Anti-resorptive agents
These slow or halt the breakdown of bone (the resorption of bone tissue), which over time makes bones fragile and subject to easy fracture. This therapeutic class includes everything from old-school calcitonin and hormone replacement therapy to bisphosphonates, the mainstay of current osteoporosis care. Newer selective estrogen receptor modulators (SERMs), most notably Eli Lilly's Evista, offer an alternative to hormone replacement therapy and also fall into the anti-resorptive category.

Bisphosphonates work by binding to bone and inhibiting the action of osteoclasts, cells that break down bone tissue, which in healthy people makes room for osteoblasts, another cell type, to lay down new bone tissue. King among the bisphosphonates is Merck's (NYSE:MRK) Fosamax, followed by the Procter & Gamble (NYSE:PG) and Sanofi-Aventis (NYSE:SNY) drug Actonel. These leaders, however, are being challenged by some new entrants (see table below).

Anabolic agents
Anabolic agents stimulate production of osteoblasts and actually lead to the formation of new bone. One such agent, fluoride, is as plentiful as it is cheap, but is seldom used as therapy because the bone it forms tends to be brittle and can actually lead to an increase in fractures. The only other anabolic agent at the moment is Forteo, but that could change with Preos. These drugs tend to be used in treating severe osteoporosis.

Osteoporosis drugs: Up-and-coming challengers

Company Product Class Status
Amgen AMG 162 Novel anti-resorptive Phase 3 initiated in 2004
Chugai Nasally administered parathyroid hormone (CHS13440) Anabolic Phase 2
Novartis Zometa (zoledronate) Bisphosphonate Already approved for other indications. Once-yearly IV infusion for osteoporosis in phase 3 with a 2007 filing anticipated. Tentative U.S. brand name is Aclasta.
Novartis AAE581 (cathepsin K inhibitor) Novel anti-resorptive and anabolic Phase 2. Phase 3 planned for the first quarter of 2006 with 2008 regulatory submission.
NPS Pharmaceuticals Preos (recombinant parathyroid hormone) Anabolic U.S. and European approval pending
NPS Pharmaceuticals and GlaxoSmithKline (NYSE:GSK) Calcilytics Novel oral anabolic Phase 1
Pfizer (NYSE:PFE) and Ligand Pharmaceuticals Oporia (lasofoxifene) SERM Pending FDA approval
Roche and GlaxoSmithKline Boniva (ibandronate) Bisphosphonate Approved in U.S. March 2005. Once-a-month tablet.
Servier Laboratories Protos (strontium ranelate) Pill with anabolic and anti-resorptive properties -- related to a molecule used to treat osteoporosis as far back as the 1950s. Approved in Europe September 2004 under brand name Protelos. U.S. regulatory plans unclear.
Wyeth Bazedoxifene SERM Phase 3. NDA submission planned for 2005.

Drawing the lines
Right now, there are several battles taking shape in the osteoporosis drug market. One is between the leading bisphosphonates, Fosamax and Actonel, and newer entrants that offer easier dosing schedules. Boniva is already on the market with a once-a-month dosing schedule, and Zometa, although given by intravenous infusion, may be approved as a once-yearly therapy. The convenience of these new dosing schedules offers a powerful marketing tool, but Fosamax has been on the market for almost a decade, has an extensive safety record, and, particularly when it goes generic in 2008, will presumably have a price advantage. Actonel, which was not as good as Fosamax at increasing bone mineral density in a recent head-to-head trial, is probably the biggest loser here.

There are similar lines being drawn in the SERM market, where Evista has enjoyed dominance but may soon be challenged. A recent comparative study suggests that Pfizer and Ligand's Oporia, now pending FDA approval, may be superior to Evista in improving bone mineral density of the spine and reducing LDL (bad) cholesterol.

Yet another battle is shaping up among the anabolics -- the drugs that actually build new bone tissue by spurring production of osteoblasts. This is the battle NPS will need to wage if Preos is approved -- not just against Forteo, but against the other classes of medication. Anabolics are currently used in severe disease -- often in women who have already suffered a bone fracture associated with their illness. NPS will argue, as Lilly already has, that these drugs are also effective in preventing fracture among high-risk patients.

One obstacle for Forteo is that in a two-year study of rats, the drug increased risk of osteosarcoma, a malignant bone cancer. There are no known human cases of osteosarcoma linked to the drug, but it carries a prominent "black box" warning nonetheless. Thus, Forteo will continue to be a treatment reserved only for a subset of patients with severe illness unless enough real-world experience convinces physicians that the rat findings don't translate to humans. In addition, the FDA currently recommends that Forteo not be used for longer than two years.

NPS, conversely, went forward with a dose that did not cause any increased osteosarcoma risk in a similar rat study. This could lead to some subtle labeling differences between Preos and Forteo, although a warning will likely remain in the language for Preos. Whether NPS can turn this into a significant marketing advantage remains to be seen. Beyond this issue -- which is more about perception than anything else -- Forteo and Preos appear to be similar in terms of efficacy, although some biopsy data may indicate that Preos works longer and forms higher-quality bone.

Picking a winner
So is Preos a winner? I think it will be -- not because it is vastly different than Forteo, but because doctors are becoming more comfortable with anabolics in general. For physicians that remain uncomfortable with the cancer data in rats, Preos should have an edge.

This is also a case where Lilly has done some of the heavy lifting for NPS, educating physicians about a completely new treatment modality and establishing a body of real-world evidence that says these medicines don't pose a cancer risk.

When it comes to reaching a significantly broader audience of osteoporosis patients, however, the class will remain a tough sell for a couple of reasons. First, they are given by injection, while Fosamax, for instance, is a pill. Second, Forteo is very expensive -- therapy comes out to a cost of about $20 a day, while Fosamax is closer to $2.25 per day.

Here, NPS may have a real blockbuster in the works. Its calcilytic agents, one of which is in phase 1 trials in collaboration with GlaxoSmithKline, cause the body to release natural PTH, thus theoretically achieving the same effect as Preos. But these are small-molecule drugs that can be given in pill form and will cost much less, addressing perhaps the two biggest obstacles to widespread adoption of anabolics. Still, this potential Preos follow-on is a long way from reality, and Preos itself is unlikely to achieve real blockbuster status.

NPS a bargain?
When it comes to sizing up NPS as an investment, there is a lot more to consider than Preos. First of all, the company discovered Sensipar, the secondary hyperparathyroidism drug developed and sold by Amgen, and it gets a royalty on sales. That's some nice cost-free cash that drops straight to the bottom line, and it will grow as Sensipar sales climb and NPS's royalty rate graduates from high-single-digits to low-double-digits. This year, however, the total will be modest, probably about $16 million, and will be used to service a $175 million debt offering the company made last December.

Yet for a company already collecting royalties on one important product, with complete ownership of another significant drug pending FDA approval, NPS's market cap of $509 million certainly attracts my attention. Even more so, in fact, when you consider that the company keeps a healthy reserve of cash, equivalents, and marketable investments that totaled $280 million at the end of the most recent quarter. There is a darker side to the balance sheet, however -- long-term debt of $368 million. Still, an enterprise value just shy of $600 million looks pretty compelling for a company in NPS's position, and makes the company worth a careful look.

Be warned, however, that NPS is running full tilt with a pretty rich pipeline (it has another product, teduglutide, in phase 3 for short bowel syndrome and in phase 2a for Crohn's disease). It burned through almost $45 million in the first quarter of this year and won't slow down substantially in the near future. That's an annual run rate of $180 million. Yowzer! Despite the big coffers, NPS will need Preos revenue to keep the R&D engines burning.

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Karl Thiel, part of the Rule Breakers newsletter team, does not own stock in any of the companies mentioned in this article. Merck is a recommendation of Motley Fool Income Investor. Pfizer is a recommendation of Motley Fool Inside Value. The Fool has a disclosure policy.