© 2005 PUNCHSTOCK

If times are tough for the pharmaceutical companies, they're no easier for drug delivery companies, whose fates are tied to that of the industry. The price of the average drug delivery stock has fallen 55% over the past five years, according to industry analyst David M. Steinberg of Deutsche Bank Securities, San Francisco. "It's a bear market for drug delivery stocks," he said at the annual Drug Delivery Partnerships meeting, held in San Diego in late January.

In the traditional drug delivery business model, the company develops one or more technology platforms that it then incorporates into products for other companies. Partner companies pay royalties to the drug delivery company, which shoulders little of the financial risk of developing the product but also does not reap the rewards of a product that succeeds in the market.

Their partners make many of the decisions that affect drug delivery companies. In an attempt to control their own destiny, many drug delivery companies are adapting their business models to one in which they develop products that they will eventually market themselves. The transition that many companies are making was a common theme at the Drug Delivery Partnerships meeting.

Investors are most interested in companies with products, not just technologies. "In a more exuberant market environment, sometimes investors will pay up for exciting technologies and platforms, but in a more subdued market environment, people want to invest in products, because products lead to revenues and revenues lead to earnings," Steinberg says.

Jack Khattar, president and chief executive officer of Shire Laboratories, Rockville, Md., agrees. "We've been trying to split the company and raise money to fund the new company. Investors value products. They don't value technologies at this point," he says. "If you're trying to fund your own pipeline that's product based with some real product concepts, it's much easier and investors' interest is much higher."

Shire Laboratories is currently part of the Shire Pharmaceutical Group, but moves are under way to spin off the drug delivery division into an independent company. Khattar expects the move to happen within the next couple of months. "The partner business will continue as usual, but we have already started building our own pipeline of proprietary products. We will continue to be a drug delivery business to everyone on the outside," he says.

Shire Labs is just one of the many companies that are trying to change their business model from the traditional drug delivery model to a more fully integrated specialty pharmaceutical company. Such companies focus on therapeutic areas served by specialist physicians because the sales force required won't have to be as large as would be needed to target the primary care market. Because specialty pharmaceutical companies have fewer resources than the big pharmaceutical companies, they can't afford to develop as many projects and therefore must be more selective in what they move forward.

Alza built its success by developing proprietary products with generic compounds. It turned commercialized drugs that had lost patent protection into successful brand name products, including Ditropan XL (oxybutynin), a treatment for overactive bladder; NicoDerm CQ (nicotine); and Concerta (methylphenidate), the same active ingredient as Ritalin.

Alza pushed the specialty pharmaceutical model as far as it could. In doing so, it ran into one of the issues that all specialty pharmaceutical companies eventually face--access to molecules, especially new chemical entities (NCEs).

Without being part of big pharma, drug delivery companies and other specialty pharmaceutical companies find it almost impossible to discover NCEs because of the prohibitively high costs. Estimates for the cost of developing an NCE from start to finish are in the range of $1 billion. Drug delivery and specialty pharmaceutical companies simply don't have the financial resources and research infrastructure for such an expensive endeavor.

"Because you are a small drug delivery company, you are not going to be discovering new chemical entities. You will have to focus on products or molecules that exist in the marketplace," Khattar says. "You're looking to improve those products by applying your own specific capability, your own drug delivery technologies. Without them, it would be very difficult to develop your own pipeline."

Alza solved the problem of access to NCEs by becoming part of Johnson & Johnson. "Being a part of large pharma, we now have access to a pipeline of molecules," says Suneel K. Gupta, Alza's senior vice president of experimental pharmacology and clinical research and director of the company's center for excellence in drug delivery.

Gupta says Alza's working relationship with Johnson & Johnson is similar to previous work with partners, only better. "It's a bit easier because we get to see everything. In the old days, if you asked for too much knowledge, people gave you their absolute lemons."

As part of big pharma, Alza now has the desired opportunity to work with new chemical entities. Rather than being used only for life cycle management, in which new versions of existing brands are introduced to extend their profitability, drug delivery can be used as a way to differentiate products from the outset.

Other companies would like to follow in Alza's footsteps.

"People get tired of their whole destiny being controlled by third parties. They end up developing their own products and becoming a fully integrated specialty pharmaceutical company," Khattar says.

The transformation from a pure drug delivery company can take five to seven years. During that time, "people have a tough time figuring out what you are," said David MacNaughtan, senior vice president for business development at Drug Royalty Corp., a company that provides financing based on existing or future royalty streams. He participated in a session on funding opportunities for drug delivery companies at Drug Delivery Partnerships.

	Ashton	Khattar
	COURTESY OF SKYEPHARMA	COURTESY OF SHIRE LABORATORIES

In the first stage, a company acts as a service company, performing development work paid for by partner companies. "As we matured, we broadened the scope of our technology. Now we have a very broad band of technologies," Ashton says. "As we continue developing products further into development, we move further up the value chain."

In the second phase of the process, the company assumes more of the development risk by taking a product through some or even all of the preapproval development work on its own and then licenses the product at a late stage. Further stages involve companies marketing products themselves and fielding a sales force.

Even if drug delivery companies don't get to the point of marketing a drug themselves and need to license the drug to another company at the later stages of development, they try to hold on to products as long as possible to increase the royalties that they would receive from licensing.

For example, SkyePharma held on to DepoDur, a 48-hour sustained-release formulation of morphine, all the way through Phase III clinical trials. At that point, but prior to approval by the Food & Drug Administration, it licensed the product to Endo Pharmaceuticals. The milestone payments were approximately $120 million, including an initial payment and additional payments when the drug was approved. In addition, SkyePharma will receive royalties of 20 to 60% of annual sales, depending on the value of those sales.

Choosing the right products and the right therapeutic area is crucial to success. Products must have real clinical value that addresses an unmet medical need. "Me-too" drugs are no longer enough.

In keeping with this tenet, at SkyePharma, "our strategic approach will be to look at specific therapeutic areas where we believe we could make a material difference in the commercialization of products," according to Ashton. "Our variety of technologies provides us the benefit to identify areas where there are unmet medical needs."

BioDelivery Sciences International, located in Newark, N.J., and Morrisville, N.C., has chosen to focus on therapeutics for acute conditions such as nausea, vomiting, and pain, according to Mark A. Sirgo, president and chief operating officer. Sirgo was a participant in the Drug Delivery Partnerships panel on the challenges of becoming a fully integrated specialty pharmaceutical company. BioDelivery Sciences expects to file a New Drug Application in the second quarter of this year for Emezine, a product for nausea and vomiting that is delivered across the cheek membrane. At this point, the company is in many ways a virtual company, meaning that it outsources most of its manufacturing and commercial needs, Sirgo said.

Also participating in the same panel, Tod R. Hamachek, CEO of Penwest Pharmaceuticals at the time, described the process that Penwest went through to make its transition, which took between two and two-and-a-half years. "You feel like a frog in a pot, and the thermostat has been turned up. You don't know how you got in hot water," he said.

Penwest hired a consulting firm to help determine where it should focus. Four therapeutic areas were suggested, and the company chose the central nervous system because the field could be tackled with a small sales force. The company decided against multiple areas because it "can't afford to play the field," Hamachek said. "You have to develop a portfolio" of potential products, he said. "Technology is worthless unless it's in a product."

(On Feb. 15, Hamachek announced his resignation from Penwest, citing undisclosed family health matters. In a written press statement, Paul Freiman, Penwest's lead director, said: "The board of directors accepted Tod's resignation with regret. It was his vision that led to the spin-off of Penwest in which Penwest became an independent, publicly traded company in 1998. Since that time, it has been Tod who has been the guiding hand in the progress the company has made." Robert J. Hennessey, a member of Penwest's board of directors since 1997, was named CEO.)

The trick for the drug delivery companies is balancing work for pharmaceutical partners while working on their own product pipeline.

"The partner business will continue to be important, especially during the transition period," Khattar says. "It provides you some cash flow that will help you fund your own pipeline. You can't just neglect it."

DESPITE THE current bear market, Steinberg thinks the economic climate may be getting ready to change for drug delivery companies. "These things tend to go in cycles, and we may be on the cusp of a new cycle with some exciting products just about to reach the market."

One such product is Exubera, an inhaled version of insulin that is being developed by Pfizer and Nektar Therapeutics, the drug delivery company formed by the combination of Inhale Therapeutic Systems, Shearwater, and Bradford Particle Design. Exubera is in Phase III clinical trials in the U.S.; an application to market the drug has been filed in Europe. Steinberg estimates that annual sales of Exubera could be as much as $3 billion.

Ultimately, investors are looking for sustainable earnings. "People don't want one-quarter wonders, where you have profits and then go back to losing money," Steinberg says. "You need to keep getting market share, keep growing your product, keep investing in R&D, but have an increasing amount of your revenues flowing through to profits. What investors will pay a premium for are sustainable growth and profits."