Monday, November 19, 2007

Delivery Delays

Making money in drug delivery has always been tougher than its boosters promise. And 2007 has once again proven that point (for more on this topic see Start-Up and IN VIVO articles here and here).

Most spectacularly, Pfizer dumped the inhaled insulin Exubera (though, realizing its rudeness, it quickly decided to pay its partner, Nektar, $135 million as a kind of a forgive-me gift and make all the right noises about helping it with the insulin supply and technology transfer a new marketing partner would need.

Meanwhile, Procter & Gamble abandoned Nastech and their nasal parathyroid hormone project (good story on this at the WSJ Health Blog). The original deal back in 2006 was trumpeted as worth $577 million to Nastech – though as it turned out Nastech didn’t even get the full $15 million in first-year milestones.

And while undoubtedly some of the management changes are merely coincidental, it’s intriguing to us that the top three names in drug delivery—Alkermes, Nektar and Emisphere—have all gotten new CEOs this year. Only Emisphere’s Michael Goldberg was actually pushed out, but the fact that all of these companies are pretty long in the tooth and still trading at or below their 10 year share-price averages (even, in the case of Alkermes, when you delete from the average the crazy period of 2000) has got to give you some sense of the fatigue that sets into managers who have to run this business. Says a senior official at one of the Big Three: “Boards are saying to the senior executives ‘it's time to deliver on delivery.’"

OK, OK--there's been good news, too. Vivus got its transdermal estradiol spray Evamist approved – and with it a $140 million milestone payment from marketing partner KV Pharmaceuticals. Not bad for about three years’ work – and some evidence of a working economic model.

United Therapeutics saw its stock jump about 50% early this month when its TRIUMPH-1 trial showed that its nebulized formulation of otherwise injected or infused treprostinil boosted walking distance for pulmonary hypertension patients. Next stop: an aerosolized version using Aradigmn’s AERx Essence inhaler.

XenoPort takes more research risk for its programs—prodrug formulations of existing molecules. Its gabapentin prodrug was attractive enough to convince GlaxoSmithKline to fork over $75 million in cash and dangle another $500 million in regulatory and sales milestones for the compound. And the early Phase III data it released a few months after signing the GSK deal certainly heartened investors, who have nearly doubled the price of the stock.

But the XenoPort deal also highlights the challenge that continues to frustrate drug-delivery companies and their investors. XenoPort’s prodrug is a new chemical entity that offers hard-to-duplicate molecular advantages. By and large, the products of drug delivery don't do that. Most don't make a big enough difference in therapeutic outcome to justify a big investment—in partnering terms, in development programs, and in launches.

The Exubera example is instructive. Originally, Pfizer thought inhaled insulin's convenience was enough of an advantage to make the product a winner. And they weren't alone: so did their partner Aventis, the maker of basal insulin Lantus. But certainly within the last few years Pfizer had begun to realize that Exubera needed a superiority claim. And that would be expensive--far more expensive than Pfizer had ever dreamed. Pfizer in fact needed to test Exubera against Lantus. Sanofi, which by then owned Aventis, certainly didn't want to risk Lantus getting shown up and cannibalized by Exubera. So Pfizer had to spend lots of time and $1.3 billion buying out Sanofi’s share before it could get the Exubera vs. Lantus trial going. But Pfizer couldn't wait to launch the drug until it had the comparative data -- so Exubera came onto the market clothed only with convenience. You know the rest.

The Exubera failure will help keep Big Pharma, and investors, on the sidelines of drug delivery. That’s one reason for investors’ indifference to what looked to us like the enormously positive data on once-weekly Byetta LAR: it did a bit better than the twice-a-day Byetta in reducing A1C levels but no better in reducing weight: its basic advantage is that it's a lot easier to use.

Convenience is pretty attractive to mid-sized companies like KV or United Therapetics. And they’re willing to pay for it. For them, a drug with a minor advantage can provide great growth. But they’re limited in what they can sell well. They're not, for example, particularly good at missionary sales—as Cephalon has demonstrated with its underwhelming results on Alkermes’ alcoholism treatment Vivotrol.

Alan Frazier of Frazier & Co., an investor in a variety of drug delivery companies, including XenoPort and Alexza, noted that VCs "always underestimate how much it takes to develop these systems," which can be quite complex. And they've got to be complex, he notes, because they have to provide real thereapeutic advantages over the convential therapy. So you end up with a great deal of investment on the technology side, he says--and then even more on the development side. After all, he says, pharma companies have been burned by drug delivery technology failures so they want more and more clinical data -- including Phase III trials. "Tough to finance,” he laments.

In short, drug delivery--the supposedly cheaper and less risky alternative to NME development--is often just as risky and certainly no cheaper.

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