A Two Pharma Horse Race In Follow-On Biologics

It’s official. In the horse race to develop follow-on biologics, there are two companies vying for the pole position: Teva Pharmaceutical Industries Ltd. and Merck & Co. Inc. Even as other pharmaceutical companies weigh the merits of building FOB capabilities, these two companies are demonstrating their commitment not just with words but with cold, hard cash. In January, the Israeli drugmaker dramatically increased its own FOB manufacturing capacity when it signed a partnership with the Swiss contract manufacturing group Lonza to develop, manufacture and market "generic equivalents" of selected biological products. [See Deal] Merck quickly followed suit, announcing in mid-February its intent to buy the entire follow-on biologics platform developed by Richmond, VA-based Insmed Inc. for $130 million. [See Deal]

The recent deal activity shows that despite the concerted effort both companies have already made to add to their capabilities in this arena—Teva through its 2008 acquisitions of Barr Pharmaceuticals Inc. and CoGenesys Inc. and Merck through the creation of a business unit specifically dedicated to address the market potential of biosimilar and innovative biologics—each feels the need to do more. [See Deal] [See Deal] (See "Merck’s Head-long Leap Into Follow-On Biologics," IN VIVO, December 2008 (Also see "Merck's Head-long Leap into Follow-On Biologics" - In Vivo, 1 Dec, 2008.).) William Marth, president and CEO of [Teva North America] acknowledged as much at the Goldman Sachs Healthcare CEOs Unplugged conference in January. "What you need to invest to get into that market [is] $100 million to $150 million per product per entry, and my view is you need to have eight to 10 of them in your basket in order to come to the market with a really powerful offering," Marth said at Goldman Sachs. He added that a key component of success would be access to a broad range of technologies: "You don't have to own them all ... but you're going to have to have all the capabilities within your sphere of influence in order to get to the market," Marth explained.

Financial details of the Teva/Lonza partnership were not released, but the companies said they expect to begin their collaboration this quarter and have agreed on specific targets. "The agreement signed today includes the first group of products which the parties intend to develop," Denise Bradley, senior director of communications for Teva USA, said in an interview. "These products cover most of the current biopharmaceutical market value." In an earnings call in late January, Lonza’s CEO Stefan Borgas divulged that Lonza will share in clinical development costs of the biosimilars, a scenario that allows it to reap a significant chunk of the sales revenues--50 percent, according to Borgas--associated with the FOBs Teva hopes to commercialize. "We have been able to negotiate more than a manufacturing margin for this," he revealed.

Merck is clearly following that same mantra with its Insmed deal. When it announced the creation of Merck BioVentures at its analyst meeting in December, the company emphasized the importance to the endeavor of the glycoengineering technology the pharma gained through its 2006 acquisition of GlycoFi Inc.[See Deal] But even though that humanized yeast cell platform allows Merck to produce highly specific versions of a given protein via a faster, cheaper, and more tightly controlled production process, it won’t allow Merck to reach its stated goal of launching at least six follow-on biologics in the 2012-2017 time period. To date, the company has just one candidate in clinical development--a pegylated erythropoietin for anemia called MK2578 in Phase II development that is designed to compete with Amgen Inc.'s darbepoetin alfa (Aranesp).

The Insmed deal, announced February 12, extends Merck’s biologics capacities tremendously, and positions the company to further attack Amgen’s market share in the US biologics space. For its money, MBV gains two additional clinical stage programs, including INS19, a follow-on to Amgen’s filgrastim (Neupogen) currently in Phase III, and INS20, a pegfilgrastim (Neulasta) follow-on in Phase I. In addition, Merck gains preclinical programs to develop biosimilars of interferon beta-1b (INS21) and epoetin alfa (INS22), an Epogen follow-on.

With these new assets in-house, MBV will seek to develop products with enormous earnings potential. During its earnings presentation last month, Amgen reported that Epogen brought in $2.45 billion in 2008, while the Neupogen/Neulasta franchise produced a combined $4.66 billion. "Insmed's pipeline of follow-on biologic candidates presents the opportunity to expedite Merck's entry in the biologics marketplace," said Frank Clyburn, SVP and general manager of Merck BioVentures in a press release announcing the news. Interestingly, the deal also means Merck could soon be in direct competition with Teva, which already markets in Europe a granulocyte-colony stimulating factor biosimilar called TevaGrastim analogous to INS19.

But just as Teva was obviously concerned about bioprocessing capacity, Merck’s acquisition of Insmed was very much about adding manufacturing capacity. Indeed, for its $130 million, Merck obtains a state-of-the-art 50,000 square-foot facility in Boulder, Colorado that includes a "biologics process development analytical laboratory," manufacturing, and 70 protein experts to run it. Even better, apparently the Boulder plant offers yeast-fermentation capabilities essential to the glycosylation process Merck is already using via its next-generation GlycoFi technology.

The site’s production capacity, along with the expertise of the existing staff "gives [Merck] in my view an accelerated head start on developing these products," says Geoffrey Allan, president and CEO of Insmed. Analysts seem to agree, speculating that the ability to acquire a low cost biologic manufacturing facility gives Merck added flexibility as it tries to pursue anFOB strategy where product pricing will almost certainly be lower than the cost associated with innovator products. "My guess is that Merck’s own biologic facilities for vaccines were not built with low-cost production in mind, so are inappropriate for FOBs," said one analyst musing about the deal.

It’s clear Merck wanted the assets--both the products and the capacity--enough that they were willing to purchase them outright from Insmed. Indeed, the agreement provides initial payments of up to $10 million for INS19 and INS20, with the remaining $120 million due at the close of the transaction, which is expected to occur by March 31. Nor is it likely that Merck is finished wheeling and dealing just yet. "We are looking at additional partnerships," Clyburn told IN VIVO one month ago in an interview at the JP Morgan Healthcare Conference. And with $1.5 billion in capital committed to MBV over the next five years, they’ve got a lot of money to put to work to solve the problem.

And that could make it more difficult for the other pharmaceutical companies still sitting on the FOB sidelines, especially Pfizer Inc., GlaxoSmithKline PLC, and Eli Lilly & Co. All three have made public pronouncements about their interest in the space and the potential attractiveness of the market, but none have made moves that remotely rival the steps Teva and Merck have taken. As those two race neck and neck to amass technologies and processing capacity, their cohorts are left even further behind.

Ellen Foster Licking and Joseph Haas