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Is Pharma's Perfect Storm Biotech's Greatest Opportunity?

Many folks within pharma lament the present challenges and appearance returning to a gilded era when blockbusters provided rivers of cash flow and supported growth based activities - both R&D and marketing. But, could this present biotech's greatest opportunity as a possible industry?

We all have been too familiar with how a economics for large pharma have changed within the last couple of years. Factors include:

patent expiries (existing and imminent) declining R&D productivity (as measured by more dollars for fewer approved products) healthcare payor pressures as governments seek out budget cuts in every areas paucity of future blockbusters in the pipeline Biotech has often been suggested as a saviour with the suggestion a focused research style according to deep insights, rather than wide pools of area expertise and serendipity, would cause greater R&D productivity. After over 30 years of trying, there doesn't appear to be any conclusive evidence that biotech's research approach has received any longer success. Yet, there is certainly still cause of hope, though for reasons driven by necessity and economics as opposed to just science.

Biotechs by their nature begin (and frequently remain) as small, nimble companies being forced to find a niche in just a much greater ecosystem. As with every small organism or business, you survive when you're great in a focused area or developing niche expertise. You merely would not have the resources to compete with the big players.

Considering target markets, in spite of the top-line attractiveness of blockbusters, biotechs often target niche indications. While these could be small and initially simply have sales potential from the poisonous of dollars, that may still make a huge difference to a online business. The equation for giant pharma is significantly tougher while they need new drugs, for growth or to replace patent expiries, to get greater sales to go the performance needle. And yet some drugs which beginning of in niche (or even orphan) indications, gain approval and then widen their market opportunity through label extension. A few examples include:

Amgen's buy erythropoietin epo stimulating agent, or ESA, franchise, including Epogen (also called epoetin) and Aranesp. Epogen was initially approved in 1989 for anaemia in patients with end stage renal disease, selling $100 million in 1989. By 1997, the American Society of Clinical Oncology (ASCO) and American Society of Hematology (ASH) were considering an "evidence based clinical practice guideline around the usage of epoetin in cancer patients". Since Amgen had licensed non-chronic kidney applications to J&J (developed as Procrit), they further capitalised on growing using Epogen in cancer anaemia by developing Aranesp, approved in 2001. By 2010, Epogen and Aranesp had combined sales of around $5 billion, from Amgen 2010 10K SEC filing.

Other orphan drugs can turn out to be priced so richly that even it may result in blockbuster status eventually. An example is Genzyme's Gauchers disease franchise and Cerezyme containing over $1 billion in sales (as well as in no small part driving Sanofi-Aventis buying of Genzyme this season for $20 billion).

Another instance of growth through label-extension use includes Cephalon's drug for insomnia issues, Modafinil or Provigil (trade name). This became originally approved by the FDA in 1998 for improved wakefulness in patients with narcolepsy. In 2004, this label was expanded for approval to "improve wakefulness in patients with excessive sleepiness (ES) associated with obstructive sleep apnea/ hypopnea syndrome (OSAHS) and shift work disorders (SWD)". Provigil sales were $25 million 1999, the entire year of launch, together grown to $1.12 billion by 2010. Nuvigil, a single-isomer formulation of Provigil, was approved in '09, and created to extend the sleep problem franchise. This had 2010 sales of $186 million. Provigil and Nuvigil comprised around 46% of total Cephalon sales by 2010 (data from Cephalon 2010 SEC 10-K filings). Provigil's growth from the company's earlier history provided a significant cashflow bedrock allow further pipeline development. Interestingly, Teva is acquiring Cephalon for $6.8 billion. When one considers contribution to sales, and exactly how its helped pipeline growth, Provigil has played a serious part in supporting this transaction. Additional circumstances supporting a market focus add the increasing hurdle with phase II failures. Reporting anyway Reviews Drug Discovery, the Centre for Medicines Research learned that "Phase II results for brand new development projects have fallen from 28% (2006-2007) to 18% (2008-2009)". In his blog reviewing what's behind the phase II failures, Derek Lowe (Within the Pipeline) notes that four therapeutic areas included over 70% of the failures - cardiovascular, CNS, metabolic diseases (diabetes) and oncology. He recognises oncology and CNS as traditional dangerous areas and diabetes is really a tough well-served market with higher existing standard of care (making the efficacy barrier higher). Yet in cardiovascular, he suggests keeping away from the important, obvious plays:

...that's interesting, since that area has traditionally had among the finest trial results. Perhaps that certain can be suffering from the standard of care being very good (and often generic, or soon to be). And so the high-success-rate mechanisms of the old days are very well covered, resulting in to attempt your luck from the riskier ideas, while still looking to beat some decent (and relatively inexpensively) drugs...

In a article from Bloomberg, Datamonitor reports that antibiotic R&D spend and revenue is anticipated to say no. The report anticipates that by 2019 3 antibiotics can have sales that could reach over $500 million - Levaquin from J&J and Cubicin from Cubist Pharmaceuticals. Yet inside my own research I'm coming across initial phase companies (going to enter or already in the clinic) where the business structure is made around niche and/ or orphan indications for infectious diseases. Again this permits an issue in which a company with even quite lowly sales (by pharma standards) - say a couple of hundred million dollars - could still turned into a significant commercial success for both the company and investors.

As well as being nimble and niche focused with target markets, biotechs have always must be extremely careful with cashflow management, more so with the current economic environment. They just don't have the luxury of a few high selling products to aid ongoing R&D and pipeline development, so judicious use of any funds raised is essential. Which means the rise from the semi-virtual and virtual label of biotechs - where core expertise and control (e.g. program development, managerial, financial) is saved in house, yet other skills are outsourced as required. It's not typical from the pharma approach, yet in biotech can lead to improved using invested funds and greater bargain. One of the most fascinating examples of this recently is Ferrokin Biosciences - a California based biotech devoted to a niche space of congenital anemias. A recent article through the Atlantic describes just how far they've taken virtual:

FerroKin is seven employees who work from home, and a collection of about 60 vendors and contractors who supply all of the disparate components of the drug-development process. Rienhoff, your physician and former venture capitalist, founded it in 2007 as a start-up, an online biotech company. Subsequently, his team has found talent and resources as required, raising $27 million to see a medicine from development into Phase 2 clinical trials.

and extolling the virtues of the approach, it further states:

The lower cost structure of companies like FerroKin-old-fashioned drug development can take up hundreds of millions of dollars-translates into more variety in the market, plus more niche drugs targeting neglected or rare diseases.

Whenever we return once more for the pharma challenge of refilling pipeline, a clear source because of this (aside from internal development) is thru partnering or M&A with biotechs. I've stated previously a number of recent deals where biotechs took a step-wise niche approach and ultimately got purchased by their much bigger pharma brethren (Genzyme/ Sanofi-Aventis, Cephalon/ Teva) which trend looks set to carry on and grow. Infact, when one considers that recently 2 of the largest biotechs happen to be acquired by big pharma (Genentech and Genzyme), then you definitely recognise that actually, any biotech with product, sales and pipeline prospects could be fair game.

David Snow, CEO of Medco Health a pharmacy benefits manager (PBM) discusses with Reuters that No biotech is way too large to get. Given the payor pressures, he sees the increase potential of biotech as more important than in the past. Interesting perspective the fact that that as being a PBM, Medco serves Sixty five million members and profit more by using cheaper medicines (including generics). According to the business overview inside the 2011 10-K filing:

...Medco making medicine smarter? for longer than Sixty five million members. Medco provides clinically-driven pharmacy services designed to improve the quality of care and minimize total healthcare costs for private and public employers, health plans, labor unions and government departments of all sizes, and then for individuals served by Medicare Part D Prescription Drug Plans.

Then when you will find one of several shrewdest, smartest investors of our time, Carl Icahn, pursuing biotechs just as one activist investor, you start to appreciate how much value might be locked up within certain companies from the sector. He's made close enough a billion dollars on shaking up investments in Biogen Idec and Genzyme.