Looking Beyond Big Pharma For Fine Chemicals Growth

17 January 2005 00:01  [Source: ICB Americas]

Medium-sized, specialty, generics and start-up pharmaceutical companies are becoming increasingly attractive customers as demand from big pharma remains flat. Patricia Van Arnum reports.

For fine chemical companies and custom manufacturers meeting this week at Informex, the large trade show sponsored by the Synthetic Organic Chemical Manufacturers As-sociation (Socma), the critical factor for 2005 will be the health of the pharmaceutical industry. Big pharma’s reduced productivity, growing in-sourcing and increased purchasing power flattened the market for pharmaceutical custom synthesis in 2004, and not much improvement is expected this year. Other sources of demand—medium-sized phar-maceutical, generics, specialty pharmaceutical and biotech companies—have consequently taken on increased strategic value in the pharmaceutical outsourcing equation.

“The much touted recovery anticipated for the fine chemicals industry continues to remain highly elusive, with some predicting that the recovery will occur only at the horizon of 2006, if not 2007,” says Enrico Polastro, vice president and industry manager with the Brussels office of Arthur D. Little (ADL). “A more fundamental question than when the industry will recover is whether and why a recovery should or will occur.”

Although overall pharmaceutical in-dustry growth is expected to remain 4 to 5 percent above gross domestic product, the decline in new drug output has hurt fine chemical companies. “The number of investigational new drug applications (INDs)—a proxy for the number of projects entering clinical de-velopment—has remained constant over the past few years, which keeps the outlook positive,” says Dr. Polastro. “However, the revenue potential of pro-jects granted to third-party fine chemicals vendors has shrunk.”

The revenue potential of fine che-mical projects peaked in the 1990s as the number of new molecular entities (NMEs) also reached peak levels. In 1996, 53 NMEs were approved, but the number of NMEs subsequently declined, reaching a recent low of 17 in 2002, which improved slightly to 21 in 2003 and 24 in 2004.

“After a peak in the late 1990’s largely associated with the launch of several antiviral products targeting AIDS, the flow of new pharmaceutical products has reduced to a trickle,” says ADL’s Dr. Polastro. “While the reasons behind this decline reflect a multitude of factors, including closer scrutiny from regulatory authorities, the consequences for the fine chemicals industry are clear: less opportunities,” he says. Reduced demand and big pharma’s increased purchasing power for those projects have contributed to a decline in revenues for fine chemical companies. “The revenue potential of fine chemicals projects has eroded,” says ADL’s Dr. Polastro, “perhaps declining by as much as half today compared to the levels seen in the late 1990s.”

Seeking Opportunities Beyond Big Pharma

Faced with declining returns from big pharma, custom manufactures are seeking opportunities within other segments of the pharmaceutical industry. “Large pharma is not anymore completely dominating the scene as a customer group for fine chemicals vendors,” says Dr. Polastro. “There are other segments—medium-sized pharmaceutical companies, start-ups, generic houses and specialty pharmaceutical companies—that can provide opportunity for fine chemical companies. For example, generic houses are increasingly looking to develop a competitive edge through exclusive access to the drug substance, an avenue they are leveraging by entering into custom synthesis supply contracts with fine chemical vendors. This represents a radical departure from their traditional approaches, when generic houses viewed access to the bulk as rather banal and relied on informal agreements with a range of vendors,” he says.

The specialty pharmaceutical sector, which is broadly characterized as those segments outside of big pharma and biotech, is “a recently rediscovered breed of companies that is worth a particular look,” says Dr. Polastro. These companies are often segmented by therapeutic or product focus and can be characterized by their different approaches to the pharmaceutical market—segment concentrators, project recyclers, portfolio sca-vengers, and multi-source marketers, Dr. Polastro says.

“There are the ‘segment concentrators,’ which are mini-replicas of large pharmaceutical companies that focus on select therapeutic or product niches,” notes Dr. Polastro.

One example is Allergan Inc., an Irvine-Calif.-based specialty pharmaceutical company that develops and com-mercializes products for eye care, neuromuscular treatments and skin care. The company, which posted 2003 ethical drug sales of $1.67 billion, is one of the success stories among medium-sized pharmaceutical companies (see table, page FR8), having achieved growth of over 23 percent in 2003.

Other companies are “project recyclers,” which resume the development of projects discontinued by the original inventor targeting niche indications. Dr. Polastro points to Helsinn Healthcare SA as an example.

Headquartered in Lugano, Switzer-land, Helsinn first in-licensed two non-steriodal anti-inflammatory drugs—fentiazac, a diphenylthiazole derivative (2-phenyl-4-p-chlorophenylthiazol-5ylacetic acid), from Wyeth, and nimesulide from 3M Pharmaceuticals. Its recent focus is cancer support products, which include Aloxi (palonosetron), a 5-HT3 receptor antagonist for the prevention and treatment of chemotherapy-induced nausea and vomiting (CINV). The drug, which was in-licensed from Hoffmann-La Roche in 1998, was approved by the Food and Drug Administration in 2003 and received a positive recommendation for marketing approval from European regulatory authorities last month. Gel-cair, another cancer care product in its portfolio, was in-licensed from Sinclair Pharma PLC.

Helsinn Healthcare is part of the Helsinn Group, which also includes two manufacturing arms—Helsinn Chemicals SA and Helsinn Advanced Synthesis. The company’s site in Biasca, Switerland, is expanding its manufacturing capabilities for active pharmaceutical ingredients (APIs) and for high-potency active ingredients (HPAI). A new cGMP HPAI small-scale manufacturing plant for clinical phase requirements (typically 0.1 to 0.5 kg of product) is expected to be on line by the end of 2005. This plant complements an existing high-potency plant (1 to 7 kg batches) and a larger containment bay planned for 2006.

Another type of pharma customer is the so-called “portfolio scavenger,” which specializes in marketing small products divested by large pharma, says ADL’s Dr. Polastro. Two examples are King Pharmaceuticals Inc., a specialty pharmaceutical company ranking among the top 50 pharmaceutical companies, and First Horizon Pharmaceuticals, a specialty pharmaceutical company specializing in cardiology and women’s health care and pediatric products.

King Pharmaceuticals is in the pro-cess of being acquired by Mylan Labo-ratories Inc., which is seeking to diversify from its generic drug portfolio into branded drugs. The proposed $4 billion deal, which was announced last July, is on hold, as the financier Carl Icahn and some Mylan investors oppose the takeover, citing the cost of the deal and concerns about King, which is under in-vestigation for its pricing practices. One of the key drugs in the pending acquisition is King’s anti-hypertensive drug Altace (ramipril).

Opportunities for fine chemical com-panies can also be found among the “product resurrectors,” which inject new life in old molecules through reformulation or development of new indications, says Dr. Polastro. BioVail and Watson Pharmaceuticals are two examples in this category, both of which have focused on formulations for oxybutynin.

“And we have focused multi-source marketers that offer a complete product range targeting select end-markets,” adds Dr. Polastro. Examples from this group include companies specializing in injectables, such as American Pharmaceutical Partners (specializing in oncology, anti-infectives and critical care markets), Bedford Laboratories (a division of Boehringer Ingelheim’s Ben Venue Laboratories) and the Australian Mayne Group (specializing in oncology injectables).

“Each of these groups have different fine chemicals requirements and sourcing patterns,” says Dr. Polastro. “This underscores the need to adapt sales and marketing approaches and rediscover the virtues of customer segmentation and to move beyond the traditional paradigm of focusing only on large pharma, a business model which has too often resulted in increasing customer dependency and rivalry with all vendors chasing the same opportunities,” he says.

However, Western fine chemical companies seeking business from specialty pharmaceutical companies continue to face competition from low-cost supplies from China and India. India has surpassed Italy as the country with the largest number of drug master files (DMFs) filed with the Food and Drug Administration, according to ADL, and the country’s position seems to be growing.

For example, last month the Mayne Group signed a memorandum of understanding with the Indian company Zydus Cadila for setting up a new manufacturing joint-venture company that would construct and operate select cytotoxic finished product and API manufacturing facilities in India. The move is consistent with Mayne’s broader strategy of achieving vertical integration through the ownership of API development and manufacturing facilities, in what the company calls a “low-cost and generic-friendly environment.”  

“In the coming months we will carefully evaluate this opportunity,” says Stuart James, Mayne’s Group CEO and managing director. “The cost and time-to-market benefits of manufacturing API and finished products in these environments are compelling and represent a significant opportunity to build on our current capability at our existing cytotoxic facility at Mulgra.” Last fall, Mayne also signed an agreement with Intas Pharmaceuticals, an Ahmedabad, India-based formulation company, to contract manufacture one of the cytotoxic products in Mayne’s new product pipeline. Mayne recently established an Indian office based in Mumbai to manage quality, manufacturing and other commercial activities.

Beyond Big Pharma: Biotechnology

The need for fine chemical producers to look for business opportunity outside of big pharma is also evident in the innovation shift ongoing in the pharmaceutical industry. “Although the compound annual growth rate of the pharmaceutical industry will still be fairly healthy at 9.1 percent through 2008, according to a recent report by Wood Mackenzie, that growth will come largely from biotechnology companies. “Biotechnology companies are expected to continue outpacing the overall pharmaceutical market,” says Kevin Redpath, head of research for the life sciences with Wood Mackenzie. “The top seven biotech companies—Amgen, Genentech, Biogen Idec, Gilead Sciences, Genzyme, Chiron and Serono—are all expected to attain growth rates that will exceed the pharmaceutical market as a whole at 9.1 percent,” he says. “However, only three of the current top 10 pharmaceutical companies—AstraZeneca, Eli Lilly and Roche—are forecasted to achieve revenue growth in excess of the industry through 2008. It is clear that large pharmaceutical companies face a significant challenge.”

Biotechnology: Emerging Favorites

Biotechnology companies are increasingly making progress on both the revenue side and in innovating new drugs. “The leading biotechnology companies have evolved into integrated companies, retaining ownership of their developmental compound and substantially growing their revenue strengths in the process,” says Wood Mackenzie’s Mr. Redpath. “Amgen, for example, the world’s largest biotechnology company broke into the ranks of the top 20 global pharmaceutical companies in 2000, this is a first for a biotechnology company,” he says. “By 2008, we project Amgen will be one of the global top ten.”

Biotechnology companies are holding their own in innovation. Three re-cently approved monoclonal antibodies—Genentech’s anti-cancer treatment Avastin (bevacizumab), ImClone/Bristol-Myers Squibb’s anti-cancer treatment Erbitux (cetuximab) and Biogen-Idec/Elan’s multiple sclerosis drug Tysabri (natalizumab)—are slated for strong growth. “All three biological therapeutics are forecast to attain blockbuster status by 2008, compared to four new small-molecule drugs that were scheduled for launch in 2004,” says Mr. Redpath.

Biotechnology companies are also making inroads into small molecules. For example, several of the small-molecule drugs approved in 2003 originated in biotechnology companies, including Mil-lennium’s anti-cancer drug Velcade (bortezomib), Gilead’s HIV drug Emtriva (emtricitabine), Icos/Eli Lilly’s erectile dysfunction drug Cialis (tadalafil), Trimeris/Roche’s HIV drug Fuzeon (enfuvirtide) and Vertex/GlaxoSmithKline’s HIV drug Lexiva (fosamprenavir), says Mr. Redpath. Also, Amgen gained FDA approval in 2004 for its first small-molecule therapy, Sensipar (cinacalcet), a drug to treat hyperparathyroidism with renal failure or parathyroid cancer. “This clearly begs the NCE-productivity question for large pharmaceutical com-panies, as biotech companies are producing NCEs effectively,” he says.

Sensipar, along with Amgen’s panitumumab and Amgen’s AMG 162, are three promising drugs emerging from the biotech’s pipeline (see table, page FR11). Amgen’s panitumumab, which is projected to reach sales of $650 million by 2008, is a fully humanized monoclonal antibody directed against the epidermal growth factor receptor as a monotherapy and in combination with other anti-cancer agents. AMG 162, another fully humanized monoclonal antibody, targets the receptor activator of nuclear factor kappa beta ligand, a key mediator in bone remodeling, making it a treatment for diseases associated with bone loss such as osteoporosis. AMG 162 is projected to launch in 2008, with analysts projecting sales of $150 million in its first year.

What Is in Store for Big Pharma?

Although the late-stage pipelines of big pharma are leaner than in years past, analysts do point to some key candidates scheduled to launch through 2008 (see table, page FR12).

“One of the most promising drugs in the pharmaceutical pipeline is Sanofi-Aventis’s Acomplia (rimonabant), which is expected to launch in 2006,” says Jasjeet Mohain, health care analyst at Datamonitor PLC. Acomplia is a selective CB1 endocannabinoid receptor antagonist. “CB1 receptors have been found to be necessary to induce food intake after a short period of food deprivation. Hence, by blocking these receptors, there is a powerful reduction of food intake and increased energy expenditure.” Datamonitor forecasts that sales of Acomplia will reach $829 million by 2012.

Acomplia is only one of two late-stage candidates in the anti-obesity mar-ket. The other, ATL-962, is being de-veloped by the UK-based company Ali-zyme. ATL-962 has a similar action to Roche’s Xenical (orlistat), one of the two current leaders in the anti-obesity market, in that it functions as a lipase inhibitor by reducing the absorption of fat. However, ATL-962 has fewer side effects, and its production costs are lower, notes Datamonitor’s Ms. Mohain.

ATL-962 is expected to be launched by 2008 and reach sales of $945 million by 2012, according to Datamonitor. Acomplia and ATL-962 are expected to have combined market share of almost 70 percent in the anti-obesity market by 2012, trouncing the two current market leaders—Roche’s Xenical and Abbott Laboratories’ Merida (sibutramine). The market share of Xenical and Merida are expected to drop by 63 percent and 54 percent respectively by 2012.

Other drugs to watch for are Astra-Zeneca’s Galida (tesaglitazar) and Bristol-Myers Squibb/Merck & Com-pany’s muraglitazar, two peroxisome proliferation-activated receptors (PPAR) alpha/gamma agonists, which target glucose and lipid abnormalities associated with Type II diabetes and related disorders.

“The first PPAR agonists entered the market in 1999 with GlaxoSmithKline’s Avandia (rosiglitazone) and Eli Lilly/Takeda Actos (pioglitazone), and these have since become blockbusters, generating around $3 billion in annual sales, despite some well-documented side effects,” explains Wood Mackenzie’s Mr. Redpath.

“However, as gamma agonists, Avan-dia and Actos have a mixed effect on lipid levels. By targeting both the alpha and gamma receptors, the idea is that, alongside a reduction in glucose levels, Galida may reduce LDL and triglyceride levels and increase HDL levels. However, these dual agonists have not been without their problems,” notes Mr. Redpath. In 2003, Merck & Company withdrew MK-767 after the drug was linked to a rare form of cancer in mice. Merck subsequently in-licensed co-promotional rights to Bristol-Myers Squibb’s dual agonists, muraglitazar. The drug is projected to reach sales of $680 million by 2008.

Under the Merck-Bristol Myers Squibb pact for muraglitazar, which was signed last August, Bristol-Myers Squibb received an up-front payment of $100 million and will receive $275 million in additional payments based on reaching certain milestones.

“This collaboration with Merck reflects our new corporate strategy, which will build long-term growth by focusing on critical disease areas such as diabetes and will optimize the value of all our assets,” said Peter Dolan, chairman and CEO of Bristol-Myers Squibb, at the time of the agreement last year.

Tracking the Market: Therapeutic Winners

Looking ahead to 2008, oncology is expected to remain one of the leading therapeutic areas, with a growth rate of 13.5 percent, according to Wood Mackenzie. Key products in this area include monoclonal antibodies, such as Roche/Genentech’s Rituxan, im-munotherapies/vaccines, cell-signaling products such as Novartis’s Glivec and antiangiogenesis, such as Roche/Genentech’s Avastatin.

Some important drugs in late-stage development for oncology include Bayer Pharmaceuticals/Onyx Pharmaceuticals’ BAY 43-9006, a drug to treat advanced kidney cancer, which the companies hope to launch in 2006. BAY 43-9006 is the first clinical product to emerge from the collaboration between Bayer and Onyx focused on identifying and developing inhibitors of inappropriate growth signaling in the ras pathway. Analysts project sales of $308 million by 2008.

Another promising late-stage oncology drug is Abbott Laboratories’ Xinlay (atrasentan). Xinlay is an oral, once-daily, non-hormonal, non-chemotherapy, anti-cancer agent that belongs to a class of compounds known as selective endothelin-A receptor antagonists (SERAs). SERA antagonize the effect of endothelin (ET-1), one of the proteins thought to be involved in the stimulation of cancer cells. Product sales are estimated at $250 million by 2008.

GlaxoSmithKline’s lapatinib is another promising late-stage oncology drug. The drug, which is projected to reach sales of $483 million by 2008, is being developed to treat breast cancer in patients that did not respond to two traditional therapies, including Herceptin (trastuzumab).

Several other therapeutic areas—genito-urinary and gastrointestinal—are also expected to stand out. Genito-urinary products include products for incontinence and erectile dysfunction, and these a markets are expected to deliver strong growth. “Competition is set to intensify in the incontinence mar-ket through the introduction of more selective antimuscarinics, such as No-vartis’s Enablex and GSK/Yama-nouchi’s Vesicare,” according to Mr. Redpath. “In the erectile dysfunction market, the growth of PD-5 inhibitors is increasing further following the launch of two competitor products to Viagra—Eli Lilly/Icos’s Cialis and Bayer/GSK’s Levitra.”

Gastrointestinal products are also poised for further growth, despite some setbacks. “Branded and generic therapeutics for peptic ulcers and related conditions are plentiful following patent expiration of the H2 antagonist and most, recently, proton-pump inhibitor (PPI) classes,” Mr. Redpath explains. “This has negatively impacted the growth of these two product classes, although PPIs remain the leading segment of the GI market. Longer term, growth is expected from newer treatments for irritable bowel syndrome and infla-mmatory bowel disease,” he says, pointing to anti-TNF products such as Abbott’s Humira.

Future products of interest in the cardiovascular market include Merck-Schering Plough’s Vytorin, a combination anti-cholesterol product, and HDL-increasing agents, such as Pfizer’s CETP inhibitor torcetrapib, according to Wood Mackenzie.

In anemia, the market is now do-minated by Amgen/J&J’s Procrit/Ep-rex, but future growth is expected for Amgen’s second-generation product Ara-nesp and Roche’s CERA. An EPO analogue, CERA (Continuous Erth-ropoiesis Receptor Activator) is projected to reach sales of $719 million by 2008.

Big Pharma: Strategies for Growth

In response to the decline in drug productivity, the large pharmaceutical companies are adopting various strategies that include revamping their R&D structures, redirecting their therapeutic focus to niche markets and developing a focused, in-licensing strategy.

“A number of pharmaceutical companies have radically rethought the way that they manage their R&D process,” says Wood Mackenzie’s Mr. Red-path. He points to Roche as one example. “Roche has adopted a number of different strategies in order to gain access to key R&D compounds—namely its majority shares in biotechnology leader Genentech and the Japanese company Chugai; using R&D spin-offs Basilea, Actelion and BioXell; and an oncology licensing agreement with the biotechnology company Antisoma,” he explains. Another example of a novel approach is provided by GlaxoSmithKline, which has established seven Centers of Excellence for Drug Discovery in a bid to improve the flow of early-stage candidates.

Another strategy has been to focus on niche markets. “Rather than maintaining the blockbuster mentality of the 1990s, a number of pharmaceutical companies have refocused their R&D efforts on niche markets and specialty products in an attempt to increase NCE output,” says Mr. Redpath. “This has led to an increasing number of pharmaceutical-biotechnology licensing deals in recent years as pharmaceutical companies have sought to in-license novel targets.”

Another strategy has been to focus on Phase II compounds in licensing. “Licensing has become an integral business development tool for all the leading pharmaceutical companies, but the preferred type of deal and desired stage of development varies considerably,” says Mr. Redpath. “Deals at Phase II continue to prove popular with large pharmaceutical companies, reflecting the reduced cost of licensing at this stage versus Phase III,” he says. “This, combined with broadly similar attrition rates to Phase III compounds, make Phase II compounds a sensible lower-cost option,” he says. “Licensing has become so competitive that late-stage deals and even preclinical agreements are just too expensive for many companies to consider. Rather, large pharmaceutical companies are in-creasingly turning to deals in proof-of-concept and Phase I/II compounds—a cheaper investment, but a riskier deal in terms of potential success.”

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