BioWorld Insight Editor

Editor's Note: This special reprint from BioWorld Insight is the second in a two-part series on newly commercial biotechs. To read Part I, which discussed why initial sales miss analyst expectations, email trista.morrison@bioworld.com.

Despite the fact that recent biotech product launches have fallen short of analyst expectations across the board, there's reason to believe these drugs might yet achieve their peak sales potential and foster a new wave of fully integrated pharmaceutical companies.

"There's value inherent in having an approved biologic for an unmet need," J.P. Morgan analyst Cory Kasimov wrote in a recent research note. He lowered his 2011 estimates for Savient Pharmaceuticals Inc.'s Krystexxa (pegloticase) after the gout drug's slow launch and disappointing first quarter sales, yet he maintained that Krystexxa's long-term value proposition – which analysts peg at between $300 million and $600 million worldwide – "has not dramatically changed."

Ditto for Dendreon Corp.'s prostate cancer vaccine Provenge (sipuleucel-T). Sales of $48 million in 2010 were one-third less than the $72 million Cowen and Co. analyst Eric Schmidt was predicting a year ago. Yet Schmidt said there "appears to be plenty of demand" to satisfy Dendreon's 2011 sales guidance of $350 million to $400 million, and he expects Provenge to quickly become a blockbuster.

The story is similar for many recently launched biotech drugs: Auxilium Pharmaceuticals Inc.'s Xiaflex (collagenase clostridium histolyticum) for Dupuytren's contracture, Acorda Therapeutics Inc.'s multiple sclerosis drug Ampyra (dalfampridine), Dyax Corp.'s Kalbitor (ecallantide) for acute hereditary angioedema, AMAG Pharmaceuticals Inc.'s iron replacement therapy Feraheme (ferumoxytol), Allos Therapeutics Inc.'s peripheral T-cell lymphoma drug Folotyn (pralatrexate) and Avanir Pharmaceuticals Inc.'s Nuedexta (dextromethorphan hydrobromide and quinidine sulfate) for pseudobulbar affect.

Initial sales for each of those drugs failed to meet analyst expectations for a variety of reasons. Yet Schmidt said it's possible the "good drugs will still achieve their peak potential," although "the shape of the curve has changed." (See Part I of this article in BioWorld Insight, May 23, 2011.)

Looking at the Bottom Line

As the latest class of commercial biotechs overcome launch difficulties and improve their sales performance, several should start turning profits.

Dyax has said it will break even on cash flow in 2013 and turn the corner to profitability in 2014. Wedbush PacGrow LifeSciences analyst Greg Wade models Avanir becoming profitable in 2013. Jefferies analyst Thomas Wei predicts Auxilium will turn a profit in 2012.

Does that mean the much-touted fully integrated pharmaceutical company (FIPCO) business model isn't dead after all?

Back in 2005, you couldn't make it through a biotech investor presentation without hearing about "multiple shots on goal." Companies were built with broad pipelines and positioned for IPOs, all with the hope that they'd grow independently and eventually launch a handful of products, becoming the next Amgen or Genentech.

But after the 2008 financial crisis, "tightly focused" became the catchphrase of the day. Biotechs emphasized whatever single product would give them the best chance of being acquired. More than a few experts proclaimed that the FIPCO business model was dead. (See BioWorld Insight, June 15, 2009.)

The newest commercial biotechs seem to have the potential to become earnings stories, even with just one product.

Michael Schick, vice president of sales and marketing at Allos, said that his company absolutely could become profitable based on Folotyn alone – particularly if the drug becomes the backbone of treatment regimens for both solid and liquid tumors as Allos intends.

"It's silly to say the FIPCO model is dead," Schmidt told BioWorld Insight, pointing to Alexion Pharmaceuticals Inc. as a biotech that launched a product and became profitable within the last five years. "Companies that have great drugs will realize their commercial potential and become great stocks. Nobody in biotech investing is giving up on that."

Yet Piper Jaffray & Co. analyst Ted Tenthoff isn't so sure how many FIPCOs biotech will see in the future. He noted that the biggest success stories – including Genentech Inc., Genzyme Corp., MedImmune Inc. and others – have been acquired by big pharma. Even companies that are on track to become FIPCOs – like Plexxikon Inc. and Calistoga Pharmaceuticals Inc. – are increasingly being bought out. Future potential FIPCOs like Vertex Pharmaceuticals Inc. and Regeneron Pharmaceuticals Inc. have been named as possible acquisition targets as well, although Tenthoff said he hopes they remain independent and grow much larger.

Will the latest commercial biotechs remain independent? That's "the best way for shareholders," Dyax President and CEO Gustav Christensen told BioWorld Insight. But he added that if someone "bids so much that the shareholders vote you out, then it's out of your control."

Does FIPCO Have a Future?

While a handful of biotechs have launched products and become FIPCOs over the past few years, and a handful more are poised to follow in their footsteps, venture investor Stephen Bloch noted that all of these companies have been around a long time and have been able to access a lot of capital in the public markets.

Vertex, for example, recently said during a conference call that it took $4 billion and 20 years to get to last month's FDA approval of hepatitis C drug Incivek (telaprevir). (See BioWorld Today, May 24, 2011.)

Bloch, a general partner with Canaan Partners, said building a company with a "grand vision" – like Vertex or Millennium – takes an "enormous amount of capital." Even building a company with just one or two products takes a lot of resources, he said. Those resources are not available through an initial public offering and subsequent public financings like they were for biotechs in the past, and venture capitalists are not going to put up that kind of money.

It's a rare biotech indeed that can get a product all the way to approval without tapping the public markets or tying itself to a big pharma partner. Gloucester Pharmaceuticals Inc. did it in 2009 with cutaneous T-cell lymphoma drug Istodax (romidepsin) – and was promptly acquired by Celgene Corp. (See BioWorld Insight, Nov. 16, 2009.)

Between the scarcity of capital and the abundance of big pharma business development activity, Bloch doesn't expect to see any next-generation Amgens or Biogens emerging any time soon. But that's not necessarily a bad omen for the future of the biotech industry.

Bloch – like many VCs – believes small companies and big companies have different strengths. "I'd like to think small companies can succeed at innovation and have a ready and willing group of partners willing to pay for it," he told BioWorld Insight. Biotech can be big pharma's pipeline, he added, and "there is not anything wrong with that." n