BUSINESS the most successful drug delivery firms are having breaking into Alza's league. Richard F. Pops, Alkermes' chief executive officer, says his firm is trying to pack everything Alza did over 30 years into one decade. Alkermes has proprietary products in clinical trials, about $70 million invested in manufacturing, and a nascent sales and marketing organization preparing for the launch of its first commercial product, Pops says. It planned a big push into marketing with the Reliant merger, but was forced to retrench last June when the Food & Drug Administration failed to approve a drug on which Alkermes was working withJ&J. This kind of surprise setback is endemic to the risk-filled environment of any pharmaceutical business, Pops maintains, and not indicative of a fundamental problem with the company's strategy
REDEFINING THE ENDGAME Drug delivery firms struggle with the 'integrated pharma' business model RICK M U L L I N , C&EN NORTHEAST NE
C
OMPANIES OFFERING DRUG D E -
livery t e c h n o l o g y have att e m p t e d in r e c e n t years t o break away from the traditional business model of developing technology and licensing it to pharmaceutical firms for royalties generally ranging between 2 and 10% of sales. Most have added research, licensing, manufacturing, and marketing arms with the aim of upping revenues and, in some cases, transforming into pharmaceutical companies. Several firms have been working on it for nearly a decade, and moves now under way at companies such as Penwest Pharmaceuticals, Cima Labs, and SkyeP h a r m a indicate a c o n t i n u e d push t o ward what industry watchers call the "int e g r a t e d p h a r m a " b u s i n e s s m o d e l of developing, manufacturing, and marketing proprietary drugs. HTTP://WWW.CEN-ONLINE.ORG
S BUREAU
However, the transformation is not an easy one. Alza and Elan, sector pioneers, may be the only firms to start in drug delivery and arrive at t h e s t a t u s of fullfledged pharmaceutical company. Their fortunes t u r n e d recently. Elan's t o o k a turn for the worse last year, as the company became embroiled in an accounting scandal and is now selling its drug delivery business. Alza, on the other hand, was acquired by Johnson & Johnson in 2 0 0 1 for $11.8 billion—approximately 11 times its earnings. At the time of the deal, Alza had several p r o p r i e t a r y drugs and had shown solid profitability. I n d u s t r y watchers p o i n t to a n o t h e r event last year—Alkermes' failed attempt to acquire Reliant Pharmaceuticals, which would have given the drug delivery firm a large U.S. sales and marketing operation— as an indication of the difficulty that even
DRUG DELIVERY FIRMS launched in the 1990s are trying to move even faster than Alkermes. Lately, they are getting a push from investors. Analysts say Cima, SkyePharma, and other companies that are less advanced in expanding into research, clinical trials, and manufacturing have been hit hardest in the battering that the sector took on Wall Street in 2 0 0 2 . T h e message is clear, according to analyst Paul Donofrio of Bank of America: "The traditional model doesn't work, period. Stop it!" Firms t h a t license out drug delivery technology w i t h o u t taking on some of t h e responsibility of clinical trials and manufacturing—or t h a t have no intellectual property rights in the final drug— are seen as risky investments, Donofrio says, precisely because they take on too little risk themselves in t h e process of drug development and thus receive minuscule rewards. "Investors don't like it," he says. Tod R. H a m a c h e k , Penwest's C E O , agrees. H e says investors figured this out about 18 months ago and have applied severe pressure, to which Penwest and other companies formed in the 1990s are responding. "There is n o such thing as a viable drug delivery company in the traditional sense," he says. For its part, Penwest has spent $50 million over the past two years beefing up marketing, tripling its overall efforts. T h e company has also pursued partnerships with pharmaceutical companies in which Penwest retains up to 5 0 % of the rights to drugs reformulated with its oral dosage technology Successful drug delivery companies, Hamachek says, have as many as three products in the pipeline for which C&EN
/ JANUARY
6, 2 0 0 3
17
BUSINESS they have responsibility for clinical trials, regulatory filing, or manufacturing. While business strategies vary widely in drug delivery most companies say they are headed to the same place —the ground staked out by Alza. But Ian Sanderson, an analyst with investment banking firm SG Cowen, questions their ability to get there. "It is proving difficult to make the transition," he says. "The problem is that companies tried to preserve their earnings growth when they should have been investing in a sales force or their pipelines." Drug delivery executives contest this. Most claim they have been building on the basic licensing model for years and are making the necessary investments. Hamachek says that Penwest, which focuses on a niche in timerelease oral formulations, has cultivated a strategy of partnering with small specialty drug firms, retaining a significant stake in jointly developed products. The efforts of one partnership are about to pay off, he says: A New Drug Application for a 12hour release form of the pain-control drug oxymorphone, jointly developed with Endo Pharmaceuticals, was filed with FDA in mid-December. Hamachek says the partnership with Endo is a template for how Penwest wants to expand its business. "We do formulation; they do clinical and regulatory filing, manufacturing, and marketing," he says. In this case, the partners will bring in a third-party marketing firm.
Cima has also pursued a partnering approach that includes manufacturing, according to CEO John M. Siebert. This has produced royalties of less than 10%, and the company is now looking to invest in developing its own drugs—licensing them or selling them on its own. Siebert says it takes a long time for a drug delivery firm to advance to marketing its own products. "I think most drug de-
Biovail began marketing its first product in Canada, a once-daily form of the antihypertension drug Tiazac, in 1997 Two years ago, it bought a marketing company in Raleigh, N.C., for about $200 million. In recent years, Biovail has acquired products from GlaxoSmithKline, Merck, and Solvay The firm is also licensing an oral daily-dose version of the antidepressant drug Wellbutrin to GSK. In October, it beefed up its U.S. marketing with a copromotion pact with Reliant. Biovail has experienced five-year compounded annual growth of 55% in revenue and 44% in profit. The company's sales hit $583 million in 2001 and will probably reach about $750 million in 2002, Howling says. Given the drugs in its pipeline, he believes the company can maintain growth in excess of 30% annually for the next three years.
Big pharmaceutical companies have forced the drug delivery sector to go into the pharmaceutical business and compete with them long term."
PENWEST IS ALSO staffing up to branch off into other aspects of drug development. "Experience taught us to shift to developing inside," Hamachek says. "We are adding people who will get involved in clinical and regulatory review." SkyePharma has taken the broad portfolio tack. With oral, injectable, and inhaled technologies, it "can cover 90% of the drug delivery requirements in the market," CEO Michael Ashton says. The company began in 1996 by licensing Pops these technologies, but in recent years it has built clinical, regulatory, and manufacturing operations. Manufacturing is in Lyon, France, and San Diego, and in the past two years the firm added research centers in Montreal and Malmo, Sweden. 18
C&EN / JANUARY
6,
2003
livery companies dream of becoming specialty pharmaceutical companies," he says. "The problem is that they make a decision to do so when they only have one or two products. That's not enough to support a good-sized marketing and sales organization. Pretty soon, they find they run out of money" However, there are big incentives to push forward, Siebert says, including the amount of money that J&J paid for Alza and the fact that full-fledged drug companies can sell the rights to their products to other drug companies for several times the annual sales of the drug. At this point, Cima is concentrating on gaining experience in developing drugs and in doing clinical studies and regulatory work. "You need several products in your pipeline before you make that decision to go into sales and marketing," Siebert says. The firm, which specializes in fast-melt oral technologies, recently introduced a new system called OraVescent that increases the rate and extent of the passage of drug actives through mucosal barriers. Canadian drug delivery company Biovail has been developing, manufacturing, and marketing drugs in Canada since 1997 and lately has been investing in a sales force to cover the U.S., according to Kenneth Howling, vice president of finance. The firm has three manufacturing plants in Canada and Puerto Rico, including a 120,000-sq-ft facility that it bought from J&J in Durato, PR., last year.
PRESSURE FROM Wall Street may limit the time companies have to complete their moves. Some of the drop in stock prices may have nothing to do with dissatisfaction over business models, however. For example, the dive in Cima's stock price from $85.75 inJune 2001 to $17 last month was mostly a reality check, according to SG Cowen's Sanderson. "The stock was way overvalued, and lately it is performing well," he says. Alkermes' share price, on the other hand, was shot down by the FDA nonapproval notice for Risperdal Consta. From $15 on June 30,2002, the stock hit $6.50 last month. Firms like Cima and Penwest say partnerships are essential to their businesses, and some industry watchers see a partnering model as a viable endgame for drug delivery companies. Some companies, however, lament the difficulty they've had forming such deals with major pharmaceutical firms, many of which have their own controlled-release technology "Big pharma doesn't want to give up 5 to 15% royalties, and there is the 'not invented here' factor," Hamachek says. "In many ways, big pharmaceutical companies, by not being willing to play ball, have forced the drug delivery sector to go into the pharmaceutical business and compete with them long term." For some companies, this means an evolution toward the integrated pharmaceutical ideal—perhaps even further into basic research and drug discovery, Howling says. Others believe that this may be too ambitious. "The best business model may be to partner," Sanderson says. "From there you can forward integrate slowly" • HTTP://WWW.CEN-ONLINE.ORG
