About Kristi Park

The world of monoclonal antibodies and genetic testing may seem far removed from the realm of mortgage-backed securities and the other bogeymen of the current credit crisis, but the biotech industry is still feeling the fear. Despite an increasing number of profitable biotech companies, like Genentech and Applied Biosystems, the industry is still dominated by unprofitable start-ups that rely heavily on venture funding and capital from the public markets. And the economic environment being what it is, companies are having a hard time going public or getting attractive acquisition offers from larger life sciences companies.

That leaves the venture capitalists in a bind. Venture capital firms like to cash out their investments – either through IPOs or sales of a company – in about five to seven years. But with “exit opportunities” limited right now, they are having to put more of their money into bankrolling later-stage biotech companies while they wait for a better IPO environment or a juicy acquisition deal to come along.

The good news is, venture firms are still ponying up lots of cash. The MoneyTree report for the second quarter of 2008 (produced by PriceWaterhouseCoopers and the National Venture Capital Association) shows that overall funding from venture capital firms has held steady so far this year. But there is a difference in where all that money is going and what it’s being used for.

According to the report, investment in life sciences companies (which includes both biotech and medical device firms) went down 14% in the quarter. Perhaps more importantly, the amount of money going into later-stage companies – the ones that at another time would probably be going public – has gone up, potentially leaving the next crop of new, innovative start-ups without the money to, well, start up.

So what’s the solution to the capital quandary? Some analysts think that, with the IPO option not available, the life sciences sector will see more mergers and acquisitions in the vein of Thermo Fisher Scientific’s acquisition of Open Biosystems (a maker of RNA research tools) and Invitrogen’s proposed merger with Applied Biosystems Group. Experts are also optimistic about the growth of emerging markets like India and China and the likely increase in funding from government sources like the NIH. But even with those bright spots, early-stage biotechnology companies may have to get creative when it comes to finding the money to fund their innovations.

Hot on the heels of Fresenius’ proposal to buy APP Pharmaceuticals, consolidation in the generics industry continues unabated with two giants in the sector agreeing to make a match. The world’s largest generic drugmaker, Israel’s Teva Pharmaceutical Industries, announced Friday it would buy Barr Pharmaceuticals, a US-based player with about $2.5 billion in sales in 2007.

Teva is paying a cool $7.5 billion for Barr, in a deal most agree makes sense for the Israeli firm. The acquisition of Barr expands Teva’s market share in the US (particularly in the area of oral contraceptives, Barr’s bread and butter) and gives it presence in fast-growing markets in Central and Eastern Europe, markets Barr entered in 2006 with its own acquisition of Croatian firm PLIVA.

Additionally, the deal adds Barr’s proprietary prescription drug unit Duramed to Teva’s small portfolio of brand-name drugs and expands Teva’s efforts in the nascent field of biogenerics (off-brand versions of difficult-to-replicate biological drugs). Barr’s efforts with biogeneric development — another operation gained with the PLIVA acquisition — will complement Teva’s purchase earlier this year of CoGenesys, a privately held biotech firm formerly part of Human Genome Sciences.

Teva has already been in expansion mode in 2008. In addition to buying CoGenesys, it is in the process of acquiring Bentley Pharmaceuticals’ Spanish drug business. The buying spree is part and parcel of Teva’s intention (announced this year) to reach $20 billion in annual revenue with 20% profit margins by 2012.

The Teva/Barr deal is just the latest (and biggest) in a run of acquisitions and mergers in the generics sector, which is growing at a considerably faster clip than the brand-name pharmaceuticals industry. Last year Mylan bought Merck KGaA’s generics business, a business Teva also made a bid on, for $6.7 billion. And this year, we’ve already seen big deals between Daiichi Sankyo and Ranbaxy, and Fresenius and APP. Nobody expects the trend to stop — only question is, who will be next?

Counting itself one of the luckiest girls in town this week, APP Pharmaceuticals got a $3.7 billion engagement ring from Fresenius SE, the German health care group best known for its worldwide network of dialysis clinics.

Fresenius is acquiring APP Pharmaceuticals and its stable of generic injectable drugs to expand its Fresenius Kabi unit, which makes infusion therapies such as intravenous nutrition and blood volume replacement products. The acquisition gets Fresenius Kabi into the North American market, where APP has operated exclusively, and gives APP the ability to go global. Fresenius has agreed to the nearly $4 billion cash payment, as well as additional payments if financial targets are met. It will also assume nearly a billion dollars in APP’s debt.

APP Pharmaceuticals makes generic injectable drugs like the blood thinner heparin, as well as intravenously administered pain and cancer drugs. It became the US’s largest supplier of heparin in 2008 after tainted batches of the drug imported from China (and sold by Baxter International) were withdrawn from the market.

The deal is yet another sign of the growing interest in generics, particularly in the US market, where two-thirds of all prescriptions are filled by a generic equivalent. It follows newspaper reports last month indicating the intentions of Chinese drugmakers to enter the US, as well as Daiichi Sankyo’s agreement to acquire a controlling interest in Indian generic maker Ranbaxy, which also has a significant North American presence.

Incidentally, if APP is the luckiest girl in town, then its founder and former CEO Patrick Soon-Shiong is certainly the luckiest boy. Soon-Shiong, already named one of Forbes’ richest Americans last year, owns more than 80% of the firm, which was spun off from Abraxis BioScience in 2007. (Soon-Shiong owns a controlling stake in that company as well.) And he will get a payout of up to $3.8 billion, according to the LA Times, if all goes according to plan.

Like the Britney Spears of the business world, the Chinese drugmaking industry seems to be in the news quite a bit, but rarely for anything good. The country’s domestic prescription drug market has had numerous issues with counterfeit products, and the government executed its pharmaceutical regulatory chief for taking bribes last year. This year, tainted batches of the blood thinner heparin caused a number of deaths in the US; that heparin came from China, where the regulatory framework for monitoring the production of active pharmaceutical ingredients is shaky. Problems with FDA oversight of drug imports haven’t helped matters.

The concerns over Chinese drug manufacturing don’t seem to have stopped major international drug firms from investing heavily in the region, and, as the New Jersey Star-Ledger reported on Sunday, the country’s own generic drugmakers are looking to break into the enormous US market for generic drugs, where around two-thirds of prescriptions are filled with generic equivalents.

Though it will be at least three years before Chinese products start appearing in the US in large quantities, the onslaught of Chinese generics seems all but inevitable. In order to protect US consumers, the FDA would do well to use the intervening time to beef up its oversight of Chinese factories and to pressure the Chinese government to get its own act together. But drug users aren’t the only ones who ought to be worried about Chinese generics on the horizon. With their vastly lower labor costs, Chinese generic products would likely cost less even than their Indian counterparts, so the world’s big generic makers — Teva, Sandoz, Barr, Watson, and Mylan, among others — have plenty to keep them up nights too.

Competition among developers of diabetes drugs heated up this week, as news related to a class of therapies called incretin mimetics put pressure on Amylin Pharmaceutical’s Byetta, the first such drug to win regulatory approval. Amylin co-markets the drug with Eli Lilly.

The emerging class of incretin mimetic compounds (sometimes called GLP-1 analogues) is aiming for a piece of the $24 billion-a-year market for diabetes drugs. More than 20 million Americans have diabetes, and, according to the American Diabetes Association, 1 in 3 Americans born in 2000 will develop the disease. That presents a pretty compelling market opportunity for drug developers.

Byetta, which won approval in 2005, treats type 2 diabetes by encouraging digestion and insulin production. Patients must inject the drug twice-daily, and it is used in conjunction with other drugs such as metformin and insulin; unlike a lot of other diabetes therapies, however, it helps patients lose weight.

Byetta has proven to be a big success for Amylin since its approval, with 2007 sales of $636 million. But the drug’s success is threatened by several other promising incretin mimetics currently in development. Novo Nordisk, long a leader in diabetes therapies, is working on liraglutide, a similar drug that patients inject once a day. In addition to being more convenient to administer than Byetta, liraglutide may also be more effective; Novo Nordisk released data to that effect over the weekend, causing Amylin shares to sink.

Additionally, on Tuesday, Switzerland-based Roche announced it was moving its incretin mimetic drug, taspoglutide, into the final stages of clinical testing. And Sanofi-Aventis and GlaxoSmithKline also have similar drugs in their pipelines.

Over the long term, Amylin and Lilly may have little to worry about. Though most analysts expect Novo Nordisk’s drug to beat Byetta’s sales numbers after it is launched (projected for sometime in 2009), Amylin is working on a long-acting version of Byetta that requires only a once-weekly injection. That drug could regain the lead after its projected entry into the market in 2010.