Merck BioVentures Enters the Generic Biotech Game

Merck’s (MRK) press release, “Merck Outlines Long-Term Prospects and Progress on Strategic Plan at 2008 Annual Business Briefing”, announces the BioVentures Division will develop “follow-on biologics”, a.k.a. generic biologics. The Wall Street Journal, in “Merck to Develop Biotech Generics”, reports that Merck is following the Novartis (NVS) lead. The article cited patents for Amgen’s (AMGN) Embrel, Neupogen and Epogen expiring between 2012 and 2015 with sales totaling $7B. Genentech’s (DNA) Avastin and Herceptin patents expire in 2017 and 2019 with sales totaling $3.6B.

I am sure each of these drugs has multiple levels of patent protection such as target, composition, and manufacturing process. So even if a biological drug (protein or antibody) is off patent, its complex manufacturing process might remain a trade secret or partially patented. The FDA has not established criteria for generic biologicals, and has even restricted process changes (such as the size of bioreactors) after the innovator has gotten marketing approval. So without the Intel (INTC) manufacturing mantra “copy exactly”, the follow-on companies cannot really produce true generics.

Merck will try to circumvent manufacturing restrictions by using its yeast cell process instead of the mammalian cell processes used by the innovators. By doing this, Merck is saying from day one that it expects to incur the full cost of clinical trials. The only issue is the magnitude of the clinical trials and the FDA approval criteria. Outcome trials would take much longer than matching the surrogate markers observed during the innovators trials.

Given that there is no such thing as biological generic, the innovators must be leaving enough money on the table for copycats to want incur the substantial expense of clinical trials. With clinical trials typically the highest cost of drug development, what is to be gained by the follow-on pharmaceutical companies? The key argument for Merck investing $1.5B in this effort would have to be a reduction in risk. The idea is that follow-on biologicals are less likely to fail in late stage testing.

Financial success will be based on how much of a discount will the follow-on have to offer compared to the innovator. Most likely the follow-on will need to be marketed based on its own clinical results, as well as price. This would require a sales force that is not typically required for chemical based generic drugs.

With some biological drugs costing patents up to $100,000 per year, copying is certainly tempting. The copiers will have to have deep pockets and a highly efficient clinical trial organization. Most big pharma companies have the cash to compete in this arena, but clinical systems and technology will create a moat around the successful ones.

No Disclosures.

Comments

[biopharmabull:]

Great article! However, you apparently havent really conducted an in-depth examination of the biosimilar opportunity. First, Merck is targeting (initally) EPO, which has multiple approved biosimilars in Europe, and is easier to characterize than say monoclonal antibodies (Oh--and is a $ blockbuster).

Yes, the FDA does not have a pathway for approval in place, but this will occur by 2010 (latest).......and the clinical costs, will be limited to phase 3 (you could do small phase 1 & skip phase 2), and ultimately dependent on how large of trials the innovator conducted for approval (at the most expensive end of spectrum).

In terms of patent/IP and mfg........you are correct that they wont be able to make exact copy cats like small molecules....but that is not the objective. Merck (and many others) acquired biotech engineering capabilities over last 5 years and can easily re-engineer biologics on market today.

But Merck's real competitive advantage will be on its margins. GlycoFi acquisition gave it capability to mfg protein therapeutics using a yeast-based culture vs mamallian--which is exponentially less expensive and will produce higher yields with reduced COGS. This enables Merck to be extremely competitive in its pricing approach..............

2008 Dec 11 01:52 PM

[Austinh:]

Do you understand this company though and the pharma business? Warren Buffet has said many times never buy what you don't understand. Does this company have a competitive edge or advantage over their competition? If it does what is it? Merck is solid but be careful none the less.

www.uinvest2.com

2008 Dec 14 01:16 AM