Deals Of The Week Ponders Project Financing

GlaxoSmithKline has been out ahead of other big pharmas when it comes to investing in venture funds. Its deal with Avalon Ventures represents another flavor of the relationship – investing as a partner rather than as an LP and creating companies around a single drug. But in the rush to mint single-asset companies, are the stakeholders giving short shrift to innovation?

On April 22, GSK joined with Avalon Ventures to form up to 10 start-ups in one San Diego-area facility. Avalon will contribute up to $30 million from its Fund X, and GSK will provide up to $465 million in seed funding, based on development milestones, while retaining an option to swoop in and acquire a company if and when it produces a clinical candidate. Avalon will pick the early-stage prospects, and both companies jointly will approve the formation of new companies.

We’ve seen these deals before, motivated by the neediness of the two parties: big pharma needs low-risk access to external innovation as its own internal labs sputter; VCs need access to funding as their traditional sources dry up. GSK has been particularly active in teaming up with VCs, and seems to be trying out different flavors of collaboration. It invested last January in Sanderling Venture’s Fund VII; and in March 2012, it joined with Johnson & Johnson to invest in Index Ventures’ Index Life VI fund.

The Avalon deal is a new twist, however. GSK is not an LP in the venerable San Diego firm’s Fund X, which closed last year with $200 million in commitments. Rather, it is an investment partner, with the two sides forming syndicates of two for each company they create. They will not look to bring in more investors, officials from GSK and Avalon said this week.  And although GSK’s relationship to Index is as a limited partner, not a roll-up-the-sleeves, company-creation partner, it’s similar to the Avalon deal in one respect: the focus is on single-asset companies.

That’s also DOTW’s focus this week: project financing. Not from the perspective of the VCs who popularized the model and are investing in it like lemmings, but rather from the perspective of the scientists who do the daily work of inventing drugs. From the scientists’ point of view, the asset-centric model isn’t about lower risk and better returns. (After all, it’s an ongoing experiment whose benefits we won’t know for some time yet.) Scientists are asking a different question: is it the best route to innovation?

A single-asset company refers to a virtual start-up formed around a single drug. All staff, funding, planning and operations are geared to advancing that drug to an exit, whether it be the sale of the asset or the company that houses it. The leanness of the operation, and the need to outsource R&D, is thought to lead to capital efficiency. The exclusive focus on a single project is thought to offer operational efficiency and speed to proof-of-concept. The single-asset vehicle can make a clean, attractive package for a buyer, unencumbered with staff, infrastructure and overhead.

Here’s where the contrarian view comes in. Everything is outsourced these days, including synthesis and chemistry, in vitro and in vivo tox, ADME, pharmacokinetics, etc. But not so much target selection or lead optimization. Also, the outsourcing of R&D requires staff to oversee the tasks and manage the relationship – initiating the work, measuring performance and assuring quality, reviewing interpreted data, etc. Depending on the amount and complexity of the work, this can add bloat and cost.

Opinions about the capabilities and quality of CROs vary among scientists. Hermann Mucke PhD, founder of HM Pharma Consultancy, says he “would not trust a CRO's claims of its ability to identify any target, or optimize any lead structure.” He allows that a platform company with a sideline business could do specific target-related tasks quite well, likely better than most companies. But he adds that it’s sometimes difficult to achieve that narrow match. And it also requires more teamwork between internal staff and service provider than classical outsourcing.

Mucke’s last point about teamwork raises another potential problem with the virtual model. In his 1974 book “Lives of a Cell,” Lewis Thomas described the phenomenon of groups of ants, bees, fish, termites or people behaving like a thinking organism. It happens, like magic, when the group reaches critical mass. But does it happen in a virtual company with a handful of employees working from home, sometimes at a considerable remove from the operations? Thomas, who died in 1993, was the former Dean of Yale School of Medicine and New York University School of Medicine, and President of Memorial Sloan-Kettering Cancer Center. He knew something about scientists working in teams.

The short horizon to an exit  also could make it hard to attract top scientific talent. Scientists tend to like to dig deep into a project and are open to following leads thrown up by serendipity. Pfizer’s Xalkori (crizotinib) is a good example. The molecule was discovered at Sugen and came into Pfizer’s portfolio when it acquired Pharmacia, Sugen’s parent. Pfizer scientists at La Jolla, Calif., several of whom started at Sugen, spent seven years hitting crizotinib’s c-MET target before a chance publication in Nature magazine clued them into ALK and set them set them on the right path. Xalkori launched four years later.

Now, getting back to GSK – in siding with VCs, is the pharma seeking speed and cost-cutting advantages or is it hoping to get an innovative drug out of the investment? Are GSK’s interests aligned with its partners?

Beats us. We just thought the question needed to be aired. - Mike Goodman

We also think the following deals merit your patient attention:

Merck/Cerecor: In its second deal with Merck in the past month, on April 19 neuroscience specialist Cerecor acquired exclusive worldwide rights to develop and commercialize MK-0657, Merck’s NMDA (N-methyl-D-aspartate) receptor subunit 2B antagonist for all indications including depression.  The molecule was originally developed by Merck for Parkinson’s disease, but failed to show efficacy in an early study. However it did show a promising signal of antidepressant activity.  Dr. James Vornov, Cerecor’s SVP of clinical development, said his team was particularly interested in the oral drug’s “potential to rapidly reduce depressive symptoms, including suicidal ideation” in patients refractory to available therapies. Terms of the deal were not disclosed. Cerecor will immediately assume full development and commercialization responsibilities. The agreement includes milestone payments and royalties “consistent with clinical stage licenses in neuroscience.” Deals in the psychiatric space tend to feature low upfronts and moderate-large downstream payments, in keeping with the high-risk nature of neuropsychiatric drug development. In March, Cerecor received exclusive worldwide rights to develop and sell Merck’s catechol-O-methyltransferase (COMT) inhibitors, with potential applications in Parkinson’s disease, schizophrenia, and addictive behaviors. Financial terms were not disclosed. Founded in 2011, the start-up specializes in translating early stage neuroscience therapies into early human trials, and developing them for market. Merck’s mid and late-stage neuroscience pipeline shows no candidates for disorders of mood or behavior; but there are two for insomnia, two for neurodegenerative diseases, and one for neuromuscular blockade. - M.G.

AstraZeneca/Alchemia: In its ambition to transform the company through deal-making, AstraZeneca has signed yet another early-stage collaboration, this time a multi-target drug discovery deal with Australian oncology drug developer Alchemia. The agreement, announced April 23, gives AstraZeneca access to Alchemia’s Diversity Scanning Array (DSA) and associated Versatile Assembly on Stable Templates (VAST) chemistry platform to discover novel small-molecule drugs in a multitude of therapeutic areas, including oncology, respiratory and cardiovascular disease. Alchemia will receive an undisclosed upfront payment and is eligible for preclinical, clinical and commercial milestone payments of up to $240 million. The Alchemia’s DSA is a suite of 14,000 novel compounds that scan three dimensional molecular shapes and peptidomimetic functionality. It forms the basis of the VAST discovery platform which can identify the shape and binding elements required for target modulation. The deal is the fifth AstraZeneca has signed since unveiling its turnaround strategy to investors in March; the most recent was with Bind Therapeutics. - Jessica Merrill

Opko Health/Prolor Biotech: Opko Health announced April 24 that it will acquire Israel’s Prolor Biotech in an all-stock transaction valued at roughly $480 million. The stock-swap deal, expected to close during the second half of this year, is structured so that Prolor’s management and personnel will remain in place, serving as the biologics subsidiary of Opko, which already produces small-molecule drugs, vaccines and diagnostics. Prolor’s business focus is on developing longer-acting formulations of approved protein products, with a lead product for growth hormone deficiency, the Phase III human growth hormone hGH-CTP. Prolor intends to begin a Phase III trial in adults later this year, with a plan to position hGH-CTP as a weekly injectable more convenient for both adult and pediatric patients than the current daily-injection therapies. Opko Executive VP Steve Rubin said his firm placed a lot of value on acquiring the GHD product, which has orphan drug designation in both the U.S. and Europe in both adult and pediatric populations. The EU designation would protect the product, if approved, from direct competition for 10 years, he added. “This is the way we’re building Opko,” he said. “This gives us four products that will be in Phase III, which is very important to us. They’ll come on to the market at different times.” During an investor call, Prolor President Shai Novik spoke of how the deal structure – in which Prolor shareholders will receive 0.9951 shares of Opko stock for every full share in Prolor – will give his company’s investors the opportunity for lasting value by participating in Opko as long-term investors. The deal values shares in Opko at $7.03 a piece and Prolor shares at $7.00, a 20% premium over the Israeli firm’s closing price on April 23. - Joseph Haas

Bristol-Myers Squibb/Merck: Confident that its daclatasvir will prove the best-in-class NS5A replication complex inhibitor for hepatitis C, Bristol-Myers Squibb on April 22 signed its second non-exclusive partnership this month to test the compound in tandem with another company’s HCV candidate. The agreement to test Phase III daclatasvir in a Phase II combination trial with Merck’s MK-5172 follows on a similar arrangement signed with Vertex April 5 to test the NS5A inhibitor with nucleotide analog VX-135. The deal includes no financial considerations; Merck will fund the trial, with Bristol only contributing the volume of study drug needed, Doug Manion, Bristol’s senior VP of development, neuroscience, virology and Japan, said. The arrangement is open-ended, like other combo trial collaborations Bristol has entered – if the two companies want to move on to Phase III work with the combination being studied, they need to work out a new agreement. Manion said NS5A inhibition is a compelling pathway for treating HCV, in part because the exact function of the NS5A gene product in HCV is not fully understood. “It’s very complicated,” he said. “It does a large number of things and the virus can’t survive without it, we know that for sure. We were the first company to actually ‘crack the nut’ in terms of how to drug it.” Bristol plans to file the combination of daclatasvir and its proprietary Phase III protease inhibitor asunaprevir for Japanese approval later this year, specifically to treat genotype 1b of the virus, the version most prevalent in Japan. - J.A.H.

Achaogen/BARDA: The private anti-infectives company Achaogen secured $60 million from the Biomedical Advanced Research and Development Authority, a division of the U.S. Department of Health and Human Services, to advance its lead program. Disclosed on April 24, the funding is an extension of a 2010 contract with BARDA that brings the total to $103 million. The latest funding will go to conduct a global Phase III superiority study of plazomicin (ACHN-490) to treat patients with serious gram-negative bacterial infections due to carbapenem-resistant Enterobacteriaceae (CRE) infections. The trial is slated to start in the fourth quarter. Plazomicin is a next-generation aminoglycoside antibiotic; it’s also being developed against biothreat agents such as Yersinia pestis, which causes plague, and Francisella tularensis, which causes tularemia. Plazomicin is engineered to overcome known aminoglycoside resistance mechanisms. - Stacy Lawrence

Deals Of The Week: Outsourcing

Stop the presses! Pfizer has done the unthinkable! The Big Pharma has upended its huge R&D operation!

Reading the headlines and tweets May 26, this blogger anticipated a dramatic pronouncement from Pfizer's head of R&D Mikael Dolsten explaining exactly how the behemoth intended to strengthen its "innovative core." But we were pretty sure Pilates wasn't part of the prescription.

It was just three months ago, after all, that newly installed CEO Ian Read announced sweeping budget cuts to the R&D organization and hinted that certain business units might be ripe for spinning out. But the R&D changes announced Thursday was more ho-hum than a humdinger.

In fact, it wasn't even an R&D shake-up at all. What Pfizer has instead done is winnow its myriad clinical service providers from 17 (!) to 2, moving to a system that is less about buying clinical trials capacity than it is about buying expertise. "We think that expertise can actually help us execute trials more effectively, faster, and with better quality, which will ultimately lower costs," Pfizer's SVP of development operations John Hubbard told "The Pink Sheet" DAILY.

With the looming patent expiration of Lipitor coming in November, there's no doubt Pfizer must cut costs. But it's hardly clear how much Pfizer will actually save via its newly announced preferred provider relationships with Icon and Parexel. It's not as if the drug maker is outsourcing significantly more of its total research and development work to outside organizations after all, a move that would allow for additional job eliminations -- and cost reductions -- in the R&D organization.

According to PSD, Pfizer will increase the percentage of clinical trials work it outsources by only about 10%, with the move really designed to streamline the management of vendors, something Hubbard admits is "complex." Thus, consider this not a revamping of how R&D is done but a consolidation of already outsourced development work into the hands of just a few players. As such, the move sounds a lot like Sanofi's broad 10-year collaboration with Covance. Announced last year, that alliance also met with sweeping headlines but was in reality a more prosaic realignment designed to reduce the complexity of managing development work.

We aren't saying Pfizer's newly announced arrangement isn't noteworthy-- or smart. We're just saying its iterative rather than innovative. (And, maybe, just plain old common sense.)

What's really smart about the set-up is that Pfizer didn't pick just one preferred provider. By signing on two different CROs (can we now call them clinical repair orgs?), the drug maker has created a situation that fosters competition. Financial details of the two new partnerships, which start in June and last until 2016, haven't been disclosed, but Pfizer is apparently keeping a scorecard that benchmarks how well Icon and Parexel each execute on their assigned trials. And as Pfizer gathers data on quality, timeliness -- and perhaps most importantly cost -- that means it can pit the two service providers against each other, potentially further increasing efficiencies. Five years from now, you can imagine CROs jockeying for position to be the next preferred vendor. To merit an alliance, such outfits will be forced to guarantee they can deliver "x" by time "y", and it will only cost "z".

It's a new kind of pay-for-performance arrangement -- and it's definitely a step in the right direction.

But it's far from the sexy R&D shake-up proclaimed in the blogosphere -- and still far from what Pfizer (or any other big pharma, quite frankly) needs to do to solve its moribund R&D productivity problem.

As for the larger changes afoot in Pfizer R&D, it's anybody's guess what model (or what acronym), the drug maker will pursue. We hear CEDDs are out and TAUs and TSUs are the new fashion. (Don't forget OI -- for open innovation -- either. JNJ's promising its externally driven model will yield fruit -- and plenty of products for regulatory approval by 2015.)

Whatever. To be honest, the acronym that most excites us is B-B-Q. Before you quaff your first summer pale ale of the holiday weekend, remember to read...

Elan/Proteostasis: Elan's tie-up this week with Proteostasis replicates last year's mega Celgene/Agios tie-up on a smaller scale. The new deal, potentially worth $50 million to the privately-held Proteostasis, requires Elan to pay $20 million upfront as well as $30 million for R&D expenses over the next five years. In return, the developer of the blockbuster multiple sclerosis drug Tysabri (natalizumab) gets a 24% stake in the U.S. biotech, seats on its board of directors and scientific advisory boards, and the first right to license any neurodegenerative compounds that come out of the collaboration. Yeah, that's right. The privately-held co. has agreed to an option-style deal that gives Elan first dibs on its potentially novel disease-modifying drugs in return for the security of funding. The deal is the first industry collaboration Proteostasis has signed since its splashy debut in 2008: a $45 million Series A financing from high-profile investors, including HealthCare Ventures, Fidelity Biosciences, New Enterprise Associates, Novartis Option Fund, and Genzyme Ventures. (Hmm, wonder what happens to any Novartis options as a result?) The company has stayed under the radar in the interim, using the time and considerable financial backing to build its platform, which is designed to target the biological pathways that regulate the correct folding or placement of proteins within a cell. (For more on protein folding and disease, check out this still-relevant Start-Up feature.) Proteostasis' molecules are still preclinical but the new alliance with Elan could accelerate the biotech's clinical development plans; that's because it marries the biotech's discovery technology with Elan's proprietary animal models, biology, med-chem and clinical development capabilities. --EL

Eli Lilly/BioCritica: Attention biopharma insiders! We interrupt your regularly scheduled programming to bring you news of that rare species observed in the Rx wilderness: the spin-out. On Monday May 23 came news that Eli Lilly was spinning out US development and commercial rights to its commercially underwhelming sepsis drug Xigris to private investors Care Capital and NovaQuest Capital. The new private company, which has been christened BioCritica, will focus initially on the continued development of Xigris but the ultimate goal is to create a portfolio of critical care medicines. To bolster its pipeline, BioCritica has the option to in-license other critical care compounds in preclinical development at Lilly as well as the right to acquire ex-US rights to Xigris. In exchange, Lilly will receive royalties on US sales of the drug and an equity stake in BioCritica. The financial terms of the agreement were not disclosed.The decision to shed Xigris reflects Lilly's effort to focus development resources, according to the company. Though Xigris has been available commercially since 2001, its sales have not met Lilly's or Wall Street's expectations and Lilly has had a spate of expensive late-stage development snafus. BioCritica will continue Lilly's work on identification of the best uses of the controversial treatment, which has serious bleeding side effects and questionable efficacy in the broad sepsis patient population.--Jessica Merrill

Medco/Exagen: Can Medco do for methotrexate in rheumatoid arthritis what it's done for warfarin in the blood thinner market? An interesting alliance announced Monday May 23 between Medco's research institute and the privately-held Exagen Diagnostics shows that it is going to try. Exagen, which has raised a minimal amount of venture money since its 2002 founding, has developed proprietary software to discover and create predictive molecular tests that can aid in disease diagnosis, prognosis, or predict a likely treatment response. One of its tests, Avise PG, helps doctors and patients monitor the effectiveness of low-dose methotrexate therapy in rheumatoid arthritis patients. The oral anti-folate is, of course, decades old --it was first introduced as an oncologic in 1947 and became an important part of the RA armamentarium in the 1980s. And compared to newer TNF-alfa injectables like Humira or Remicade or Simponi the drug is definitely a cost-effective choice for treating the auto-immune disease. The problem is that establishing the right dosing regimen for patients isn't trivial, since individuals metabolize the medicine so differently. (Hmm, methotrexate's profile is starting to sound a lot like another cheap, effective, but difficult to use medicine: warfarin.) And if docs can't get the dosing right in a defined period of time, the default is to move to the costlier biologics. For payers who are increasingly concerned about the cost of specialty products -- and RA is an area of intense interest these days -- new tests that can promote the use of older, cheaper drugs are an obvious solution. But there's got to be data showing the utility. Enter Medco, whose research arm will recruit around 400 patients to participate in a pilot study (called Nimble) gauging the usefulness of Avise in RA patients beginning methotrexate therapy. Docs will send patient blood samples to Exagen's lab, which will conduct the Avise test, and report back on appropriate dosing; outcomes data will be compared to a similar cohort of patients who don't receive the Avise PG test. Why should the drug industry care? Medco's been resurrecting warfarin, conducting a series of observational studies gauging the utility of the medicine plus the genetic test versus newer, pricier drugs like Pradaxa. If the Medco/Exagen team can demonstrate the same utility for methotrexate, it's bad news for newer RA meds, creating a higher bar for adoption with payers.-- EL

Valeant/Sanitas & Watson/Specifar: Need growth? Try a branded generics firm in Central or Eastern Europe. That's the message from a duo of deals this week, both acquisitions by hitherto US-focused firms – and the first of more to come as US growth shrivels up, according to those familiar. Barely a week after Takeda finally confirmed it was forking out €9.6 billion to buy Nycomed, whose attractions also included its strength in CEE and Russia, Canadian specialty pharma Valeant announced it was paying €314 million cash for Lithuania's listed Sanitas, and Watson snapped up Greece's privately-held Specifar for €400 million, plus earn-outs linked to a tablet form of Nexium due to launch in some markets later this year. Europe's ultra-tough pricing and reimbursement environment may make it a graveyard for growth in innovative drugs, but there's plenty of upside in generics, particularly of the branded, specialist kind. The battle for Germany's ratiopharm, ultimately won in March 2010 by Teva, was one of the more high-profile asset-grabs in this field. Valeant had to pay almost four times' sales for Sanitas, a healthy multiple that reflects what was a "dynamic" auction process, according to someone close to the deal. The attraction: for starters, development prowess in dermatology, ophthalmology and hospital injectables (niche, high-margin drugs), formulation expertise, some pipeline, and a portfolio that's 80% non-reimbursed (thus circumventing the government pricing pressures). The deal furthers Valeant's stated goal of doing at least five ex-US deals this year, and follows the February 2011 acquisition of PharmaSwiss, which provided a commercial infrastructure in Eastern Europe. If Sanitas shareholders think they did well, how about Specifar's: Watson appears to have paid over five times 2010 revenues for this group, based in a country whose economy is falling apart and where generic penetration is one of the lowest in Europe. Most of Specifar's revenues come from developing and out-licensing products worldwide, and it’s highly profitable, according to a source involved in the deal. So Watson has paid for a European R&D engine to bolster the sales infrastructure and starter revenue-base it started to establish via its $1.8 billion cash and stock deal in 2009 for Western-European based Arrow. --Melanie Senior

Nestlé/Prometheus Labs: Via its newly formed Nestlé Health Science subsidiary, global food products conglomerate Nestlé SA is buying specialty pharma and diagnostics provider Prometheus Labs as part of its goal of developing personalized nutrition strategies that will help in the management and prevention of chronic health conditions, according to the company’s announcement of the deal. Prometheus, which had been looking to go public, generated revenues of $519 million in 2010 including $316.5 million from the sales of the glucosteroid Entocort EC for Crohn’s disease, which Prometheus licensed from AstraZeneca for the US market in 2004. Prometheus also began distributing Novartis’ cancer drug Proleukin in the US in February 2010, which brought in $64 million. The diagnostic services business, comprising GI tests to differentiate irritable bowel disease (IBD) and Crohn’s from other disorders and oncology services to guide the use of targeted therapies, accounted for $81.3 million for the year, according to an S-1 amendment filed in February 2011. The companies are silent on the deal price, which an analyst cited in a Bloomberg report put at somewhere north of $587 million. Nestlé has also recently added Vitaflo, a maker of nutritional products aimed at individuals with genetic disorders that affect how the body processes food, and CM&D Pharma, which produces IBD, kidney disease, and cancer-related nutritional foods. But unlike those others, the Prometheus acquisition is aimed at the physician market. Nestlé is one of several food and consumer products companies thinking about ways it can leverage its marketing and distribution capabilities to deliver medical diagnostics and personalized medicine. Unilever has engaged the VC firm Physic Ventures to explore opportunities in the area, and for years, Procter & Gamble has maintained a notable presence at personalized medicine meetings. – Mark Ratner

(Image courtesy of flickrer Scott Ingram used with permission through a creative commons license.)

Are More Rent-A-Reps On The Way?

That's what Deutsche Bank analyst Barbara Ryan suggests in an investor note after digesting the news that Pfizer is cutting about 2,400 sales reps, or roughly one-third of its sales force, as part of its ongoing downsizing.

In her view, tapping contract sales organizations makes sense, since revenues now follow a "cyclical pattern surrounding patent expirations" and most US drugmakers will lose more than 25 percent of their revenue base during this upcoming period. The answer? A new model, of sorts, that involves moving from a fixed cost to a variable cost base in order to maintain margins.

How would it work? A mix-and-match approach that calls for augmenting a drugmaker's best salespeople with a CSO. "Mature brands will be managed by less costly outsourced sales forces, which could cost as much as 25 percent less, which can be pulled before patent expirations," she writes.

Of course, such gambits are already under way. Ryan, in fact, points out that Merck tried this a few months ago by signing a deal with InVentiv Health to market Cozaar and Hyzaar just as the drugmaker axed 1,200 sales reps. These sorts of efforts, by the way, were foreshadowed in an IN VIVO article in 2006:

"The drug industry has accepted the need to outsource R&D--now, with sales productivity down, and the rising cost and risk of owning too much commercial infrastructure, why not outsource more of the sales effort, too? Big and small pharmas resist the idea but will eventually have to accept it."

And since then, the need for a new model has been hastened by a few familiar factors - more product recalls, fewer product approvals and ongoing complaints from some physicians about the number and effectiveness of reps walking through their doors. The bright side? This is one job that can't be outsourced overseas.

image from flickr user 'Howdy, I'm Michael Karshis' used under a creative commons license

The Politics of Cost-Cutting: Pfizer Downplays Outsourcing in Letter to Congress

Investors urging Pfizer to make more aggressive moves in cost-cutting take note: Pfizer says it has not yet realized any savings at all from manufacturing outsourcing.

The company recently told Congress that “we have realized little, if any savings to date” from outsourcing of production. In a letter to Sen. Sherrod Brown (D-Ohio) Pfizer Vice President-Quality Gerald Migliaccio explained, “Pfizer has been very cautious in sourcing from emerging markets that provide lower cost.”

Investors have been complaining that the firm is not serious about cutting costs as its blockbuster revenue base erodes, and the fact Pfizer has off-loaded 17 percent of its production operations without saving a dime may be seen as confirmation of that critique.

Of course, there is more to the story. In this case, context is everything. Brown's interest in outsourcing is driven by the heparin contamination debacle, and he (along with plenty of his colleagues in Congress) is quite eager to make that into an anti-globalization argument. So this would not be a good time for Pfizer to brag about efficiency.

The correspondence followed Migliaccio’s appearance at a Senate hearing where he touted the rigorous auditing Pfizer conducts of its contractors (Subscribers to "The Pink Sheet" can read Pfizer’s argument about the limited utility of inspections).

Brown had asked Pfizer about the risks of outsourcing, and the company emphasized that when conducted well, there aren’t any safety issues. But the exchange, as well as the grilling Baxter has faced over heparin, should serve as notice to firms that any savings they hope to achieve by moving operations oversees needs to be balanced against the increased spending they will likely take on in order to demonstrate that those activities remain in regulatory compliance.

And this is also a case where timing is everything. Pfizer notes in the letter to Brown that it only now received its first approval of a facility to supply raw material to the US from China--and that it has not yet used that facility as a source for finished products. But it will--and, we suspect, it will do so at a meaningfully lower cost to Pfizer.

Still, although Pfizer’s policies may reflect the full oversight costs of outsourcing, they may not be bowing to the financial realities of the company’s current circumstances, where all eyes are focused on the looming Lipitor patent expiration.

We are not adherents to numerology, but we do think it’s worth noting that Pfizer has also made another 17 percent change to its operations that may not save it any money. The company announced last week that it would stop providing grants to for-profit companies as part of changes to its policies for continuing medical education. ("The Pink Sheet" delineates how the move reduces the firm’s flexibility but improves its relations with academics.)

The 17 percent of Pfizer’s CME funds that are now spent with for-profit firms will likely go elsewhere (did we mention the improved relations with academics?), so don't expect that change to improve the bottom line.

Speaking of the number 17, Lipitor was approved on Dec. 17, 1996, and accounts for about 34 percent of Pfizer’s U.S. pharmaceutical revenue. When it goes generic in three years, Pfizer will need a lot more than the two 17-percent solutions it’s already implemented.

– M. Nielsen Hobbs

Globalization and its Discontents: Finger-Pointing Over Heparin

The US Food & Drug Administration's investigation into adverse reactions associated with Baxter's now-recalled heparin products is a major public health priority and a growing political liability for the agency.

It may also become another strain on relations between the US and China.

FDA is now confident that the reactions were indeed caused by a contaminant introduced into the raw material used by Baxter and its suppliers to produce heparin, a contaminant that FDA suspects was introduced deliberately somewhere early in the supply chain in China. The agency convened the latest in a serious of media conference calls April 22 to outline its findings so far. (Click here to read coverage of the conference call in PharmAsia News.)

Chinese regulators disagree, and called their own press conference at the Chinese embassy in Washington to make their position clear. They believe the problem is more likely the result of impurities introduced in the final production processes in the US, and plan to inspect Baxter's facilities themselves. (Here is The Washington Post's coverage of the press conference.)

Baxter, understandably, agrees with FDA's interpretation of events thus far. Assuming FDA is correct, Baxter's own liability for the adverse events will be less obvious: the company itself is presumably a victim of whomever is responsible for introducing the contaminant. (Though, as we have noted previously, the US Food Drug & Cosmetic Act is a strict liability statute that at least in theory allows for the punishment of Baxter simple because it ultimately introduced a tainted a drug.)

But the issue is a double-edged sword for the biopharmaceutical industry. If indeed the contaminant turns out to be a case of economic fraud initiated by an unscrupulous business in China, that may help Baxter, but it will also fuel the misgivings of many US consumers and politicians about the globalization of trade--and especially concerns about the perceived dangers of outsourcing to China.

The Democratic Presidential campaign is increasingly sounding some protectionist themes, and the political anxiety about the rise of China as an economic rival to the US is palpable. Then there is the sensitivity of the Chinese government to its global reputation, including outrage at the protests surrounding the Olympic torch relay.

We ink-stained wretches at the IN VIVO Blog don't fancy ourselves experts on international relations, nor do we have a crystal ball to say what if any difference the heparin issue will make in the great game of global diplomacy.

But we do know this: global pharmaceutical corporations--and investors seeking opportunities in emerging markets--have to factor in the political dynamics of globalization into their planning. If protectionists on either side win out, plenty of players in the biopharma sectors will be among the losers.

Heparin Investigation Takes an Ugly Turn for Baxter, Industry

There's nothing like a picture of pig intestines being sorted in China to dramatize the fears that outsourcing is jeopardizing the safety of the US drug supply.

The picture to the right is just one in a series posted on-line today by the Wall Street Journal, showing the first step in the production process for heparin, one of the mostly widely used hospital pharmaceutical products in the US. (You can see the rest of the pictures here if you have the stomach).

You can expect those photos of the heparin production process to show up again, any time someone wants to question the impact of manufacturing outsourcing in the pharmaceutical industry. Like maybe when House Agriculture Appropriations Subcommittee chair Rosa DeLauro holds a hearing on drug safety issues (and especially the Trasylol controversy) February 27.

The photos accompany a lengthy discussion of the investigation into an apparent increase in adverse reactions associated with Baxter's heparin product, which has been recalled in the US. The Chicago Tribune also weighs in with a story including some comments from Baxter CEO Robert Parkinson.

Now, bear in mind that no one knows for sure at this point that the Chinese facility has anything to do with the heparin adverse events. Not that that will make too big of a difference in how much damage the story will do to confidence in FDA, the industry and the drug supply.

First came the embarrassing admission by FDA that it never inspected the plant in China that serves as one raw material supplier for the product in question. That prompted a key overseer of FDA--Michigan Democrat Bart Stupak--to call for the resignation of Commissioner Andrew von Eschenbach.

But Baxter may face some tough questions of its own--at least based on comments made by top agency enforcement officials during a Food & Drug Law Institute conference February 19-20. According to the Tribune, Parkinson says Baxter wasn't even aware that the plant in question was part of its supply chain, since it was a subcontractor to the firm Baxter relied on for bulk API.

David Elder, director of the agency's Office of Enforcement, pointed out that FDA believes it is the responsibility of the finished dose product manufacturer to assure the quality of its products. He was responding specifically to a question about components of medical devices, not heparin. But he pointedly expanded to his answer to include finished dose pharmaceutical manufacturers being responsible for their suppliers.

Deputy Chief Counsel for Litigation Eric Blumberg also discussed the agency's ability to hold individual corporate executives criminally responsible for allowing adulterated products on the market. The authority--known as the Park doctrine after a Supreme Court ruling upholding the principle--allows FDA to file misdemeanor cases against executives even if there is no evidence of intent or even knowledge of GMP violoations.

The principle, Blumberg reminded FDLI, is that an executive has at least the opportunity to prevent a dangerous product from entering the market, while consumers cannot protect themselves from a contaminated drug once it is in distribution.

If Congress does look more broadly at supply-chain responsibility, things could get really interesting.

Both the Journal and the Tribune quote American Pharmaceutical Products Inc. CEO Patrick Soon-Shiong, asserting the advantages of his company's approach to supply chain management. APP is the big winner (if there is one) in the heparin recall, since its product is now the only one available.

Soon-Shiong has been in the news before. APP was the subject of a front page story in the New York Times in 2002 because of its relationship with the group purchasing organization Premier; that was during a time when Congress was looking into GPO practices following allegations by small device manufacturers that they were being shut out of the market.

Before that, Soon-Shiong played a part in the controversy surrounding generic launches of Bristol-Myers Squibb's paclitaxel (Taxol). APP asserted that a patent it held on a cremaphor free formulation of paclitaxel should block generics of the Bristol product. The issue briefly delayed generic launches and prompted a Federal Trade Commission inquiry. (Bristol ultimately settled a series of antitrust claims regarding its patent defense strategies for several brands; APP was never charged.)

One last thing: APP also has first-hand experience with the challenges of global supply chain management. The company acquired its injectable generic product line from Fujisawa USA in the 1990s. Shortly after the acquisition, APP had to recall injectable gentamicin due to endotoxin contamination. The culprit? A Chinese raw material supplier.

Soon-Shiong should make an interesting witness...