The Protein Production Challenge
The shortfall in manufacturing capacity for therapeutic proteins threatens the market value of biotechs and competitive positions among innovators, marketers, and service providers.
by Roland Andersson and Richard Mynahan
Growth of the biopharmaceutical market is going to create critical shortages in protein manufacturing capacity with severe consequences for pharmaceutical companies’ ability to deliver products and meet rising market expectations.
Companies whose pipelines are heavily reliant on expression systems with limited capacity are particularly vulnerable and should now be making strategic make/buy/collaborate decisions.
As capacity tightens, contract manufacturing organizations will gain greater leverage — enabling them to negotiate more strategic business relationships with higher financial returns.
Innovator companies are looking beyond cell culture to alternative technologies such as transgenic animals as a future production platform in part because they provide greater flexibility.
Significant investment in biotechnology over the past few years is paying off. Though the pharmaceutical industry will grow 7-8% annually over the next 5 years, we expect the therapeutic protein segment to reach as high as 15% annually over that same period. This significant growth reflects a pipeline with roughly 700 biopharmaceutical products in various phases of development in areas such as oncology, immunology, and cardiovascular and infectious diseases — disease areas that today account for over half of worldwide pharmaceutical sales. Our analysis indicates that roughly two-thirds of the proteins in development are targeting these disease areas.
Though small-molecule drugs that were developed and marketed by integrated pharmaceutical companies have dominated these segments in recent years, the future has a different look. Increasingly, drugs entering the pipeline are targeting protein-protein interactions. The resulting shift toward protein drugs reflects the fact that the function of drug targets is more readily intervened with therapeutic proteins than traditional chemical compounds. Furthermore, these products are being discovered and developed by biotech companies, not by the large pharmaceutical companies.
By and large, Big Pharma — and plenty of others, investors included — were caught unawares because the success of protein drugs has been relatively sudden, at least in pharmaceutical terms. Five years ago, when much of the current later-stage pipeline was being put together, few of the products now reaping such huge rewards were predicted to be worth anything like what they’ve become. Idec Pharmaceuticals Corp. sold Genentech Inc. the marketing rights to rituximab (Rituxan) in 1995 for what in retrospect appears to be an absurdly low price largely because Idec could convince neither investors nor other pharmaceutical partners to value the asset appropriately.
At that time, no one seemed to want MAbs. The first MAbs had proven clinically and economically disappointing in the 1980s and early 1990s, when the industry had built up what turned out to be a huge and expensive manufacturing infrastructure for a therapeutic protein pipeline that failed to materialize.
Not unnaturally, companies and investors have approached the issue of manufacturing much more cautiously the second time around. But they have been too cautious.
Advances in monoclonal antibody technology over the past decade have resulted in some significant success stones, thereby reviving this market segment. Biopharmaceutical marketers will sell an estimated $3.5 billion of MAbs in 2001, up from $900 million in 1999. As a result, production of these marketed products has reportedly pushed capacity utilization to the limit at integrated biopharmaceutical manufacturers such as Genentech and at contract producers such as the Lonza Biologics unit of Alusuisse-Lonza Holding Ltd., Boehringer Ingelheim GMBH, and DSM NV.
Indeed, the once ignored MAbs are at the root of the production gap, with the 10 marketed MAbs consuming a disproportionate share of industry cell culture capacity. The reason is relatively straightforward: MAbs are used primarily for chronic diseases (cancer, immune disorders) and require relatively high doses (multiple grams per patient year). Consequently, requirements for product can be significant.
However, today’s capacity limitations are mild compared to what lies ahead. We identified about 270 MAb products in the pipeline, and other reports cite as many as 350-400. Application of standard clinical success rates for therapeutic proteins to these 270 pipeline products yields an estimated 50-60 product approvals over the next 6 or 7 years.
Given that the existing 500 KL of cell culture capacity is almost fully utilized with 10 approved MAbs on the market, and assuming only modest improvements in production technology, the industry will need an estimated five- to six-fold increase in cell culture capacity as pipeline products reach commercialization. Though the cost of building cell culture facilities has trended downward overtime, recent construction activity by the Genetics Institute Inc. unit of American Home Products Corp., Genentech, and Biogen Inc. suggests that the level of capital required for commercial scale facilities is roughly $2 million per KL of capacity. This implies that $5-6 billion of capital is required to satisfy industry production requirements.
While capacity issues have not yet hurt the biopharmaceutical industry, the potential ramifications are severe. The ongoing situation with Immunex Corp.’s etanercept (Enbrel) , a fusion protein indicated for rheumatoid arthritis, illustrates the potential impact. As a result of the product’s rapid and broad acceptance in the rheumatoid arthritis market following its launch in 1999, sales exceeded $650 million in 2000 — far greater than the $500 million in sales predicted for peak penetration. However, the company’s initial production contract with Boehringer Ingelheim was only sufficient to meet the demand for product sales valued at $750 million.
Immunex has taken action to modify this supply agreement to meet increased sales in the short term. To meet long-term needs, it expects to have onstream in mid-2002 a $400 million plant in West Greenwich, Rhode Island; it’s also contracted to gain access to an American Home plant in Grange Castle, Ireland, with an expected completion in 2005.
But in the short term, Immunex is in a precarious position. Assuming a standard after-tax margin of 20% and a price/earnings multiple of 50, each $100 million of demand that goes unfulfilled destroys $1 billion of market value. In an industry in which only three out of ten launched drugs return a positive NPV, it is critical for a firm to be able to use the above-average success of winning products in its portfolio to offset the many drugs that never return their cost of capital.
In years past, excess capacity put traditional contract manufacturing organizations (CMOs) in a weak contracting position. In the early days of biotech, many CMOs failed — Verax Corp., Damon Biotech, and Bio-Response Inc., for example — in part because producers like Johnson & Johnson’s Centocor Inc. and Amgen Inc.’s subsidiary Synergen Inc. built their own plants. Others simply produced lackluster results. More recently, however, improved capacity utilization and firmed-up pricing in this sector has enabled CMOs to generate positive economic returns.
With manufacturing assets at the largest capacity and providers such as Genentech and Boehringer Ingelheim at or nearing full capacity, traditional CMOs are now even better positioned to secure favorable financial returns. For many players, conservative approaches with business models based on a manufacturing margin that satisfies financial hurdle requirements will remain standard. However, as capacity continues to tighten, it is likely that innovative firms will negotiate higher-value business relationships to maximize their slices of the economic pie.
Companies attempting to contract with these organizations will find them increasingly demanding. However, recognition of the downside risk of capacity shortages has prompted many companies with strong pipelines to ensure access to production capacity now.
The recent agreement between Lonza and Abgenix Inc. is a good illustration of how these dynamics are likely to evolve. Under the contract, Lonza will provide Abgenix with exclusive access to one of its manufacturing suites in Slough, England, for a period of five years, with an option to extend the arrangement beyond the five-year time horizon. In return, Lonza receives a monthly fee of $1 million for the next five years in addition to a 15% raw material charge. Ultimately, this relationship benefits both Abgenix, which has ensured the availability of production capacity for internal development candidates, and Lonza, which has locked in a minimum financial return from this asset.
The Place for Alternative Technologies
Given the changing dynamics around production capacity, companies are looking beyond traditional production technologies to transgenic protein production. Although this technology is still largely unproven from a regulatory perspective, growing pressure for protein production capacity will make alternative production platforms such as transgenics appear more attractive to innovators. Genzyme Transgenics Corp. (a unit of Genzyme Corp.), PPL Therapeutics PLC, and Pbarming Group NV, the leading players in the transgenics segment, continue to make advances in their mammalian technology platforms, and it is only a matter of time before the first transgenic protein is approved. Additionally, companies such as TranXenoGen Inc., AviGenics Inc., Geneworks LLC, Origen Therapeutics Inc., and Viragen Inc. are developing platforms based upon protein production in the eggs of transgenic chickens. A host of other organizations are developing corn, tobacco, duckweed, and other plant-based production platforms. Of these transgenic alternatives, transgenic animal systems are the most technically mature, followed by chickens and, lastly, plants.
Transgenic animals are capable of producing multiple grams per liter of milk, making large-scale protein production commercially viable. The most obvious economic benefit associated with this system is in scale-up, as it requires significantly less capital to scale-up a production herd than it does to construct a cell culture plant. It also affords the marketing company added flexibility for product upside — instead of spending tens of millions to build a new plant to handle the overload; the producer simply adds animals to the herd.
The problem with transgenics, however, lies at the preclinical and early-clinical stage, where the animal production technologies are competing not with full-blown commercial plants but with pilot plants, which are relatively inexpensive and quick to construct. With the transgenic goat, for example, it often takes 18 months or more to achieve natural production of milk, from which proteins are harvested. This is slow compared to cell culture, which can typically move from raw DNA to protein produced in a pilot plant in just 6-12 months. In a fiercely competitive environment in which speed to clinic is a top priority for innovators, this weakness has limited the market success of transgenics, at least in the short-term.
Chicken players are competing on cost, but are also attempting to differentiate their technology platforms on the basis of speed to market and ease of scale-up, claiming that it is significantly quicker to generate a chicken herd than a herd of goats or cows. However, it does not appear that any of the leading chicken players have thus far been able to achieve commercially viable expression levels, making ease of scale-up a moot point for the time being.
Changing Market Dynamics Ahead
The least mature of these technologies is the plant-based system. While transgenic plants also offer capital and scale-up advantages relative to cell culture systems, plant-based transgenics companies have experienced limited success moving products into the clinic. The primary reason for their slowness is a safety concern. In addition to standard genetically modified organism risks, plant-based systems produce a protein with a complex carbohydrate structure that can elicit an immune response in humans.
Despite the weaknesses associated with transgenics, our view is that the imminent cell culture shortages will make transgenic technology increasingly attractive, particularly for products that are likely to require in excess of 100 KG of protein. Indeed, the impending shortage of cell culture capacity will force companies across the value chain to reevaluate their manufacturing strategies. When manufacturing was plentiful — and nearly all important drugs were small organic molecules — drug companies could afford to be tactical and relatively last-minute in their manufacturing decisions.
No more. Companies will be forced to compete fiercely for manufacturing capacity for new protein drugs to protect franchises in certain categories, like oncology or immune disorders.
Likewise, production capacity will be a crucial advantage in sourcing products from other companies. The fact is that most late-stage products are currently owned by innovator biopharmaceutical organizations that do not have the ability to produce and market the products internally. Organizations that offer manufacturing capacity as a complement to sales and marketing muscle will be able to approach partnering from a position of strength. For example, when Elan Corp. PLC was figuring out its commercial strategy for natalizumab (Antegren), which recently completed Phase II trials for multiple sclerosis (MS) and Crohn’s disease, it had to refigure it’s manufacturing strategy. Originally conceived as a product for MS flares — the sudden episodes of disease that cause a marked worsening of a patient’s condition — it turned out the drug had worked no better than steroids. Elan scientists figured that the humanized MAb treatment had come in too late along the biological sequence of events to stop the inflammatory process, so they reconceived the drug as a chronic therapy, requiring much larger doses, far beyond Elan’s current capacity to produce. And with the drug merely in Phase II testing, and no other near-term MAbs in its pipeline, Elan simply didn’t wish to incur the expense and risk of building its own plant.
Instead, it turned to Biogen who was very interested in sharing the proceeds from a potential competitor to its own MS beta interferon drug, Avonex. But what won Biogen the deal — in addition to its willingness to spend the money for a relatively early-stage drug — was its ability to offer immediate manufacturing capacity. Only half of its anticipated 100 KL cell culture plant was allocated to the production of alefacept (Amevive), a fusion protein in Phase III for moderate-to-severe chronic plaque psoriasis. Other companies could have certainly offered neurological clinical expertise and marketing capabilities, but could not match Biogen’s manufacturing capacity.
Strategies for Success
With construction costs for a new facility ranging from $ 150-250 million (and even higher for a fully integrated site) and requiring 4-5 years for development, few marketers will be a source of one-stop-shopping for clinical development, production, and marketing in the next couple of years. However, given that many of the breakthrough products of the future are still very early in the pipeline, making sound manufacturing strategy decisions today will have significant value creation implications in the future.
To ensure success in a world where protein drugs plan an increasingly important role in medicine, companies must make the right manufacturing choices today. There will be no one-size-fits-all approach — firms will need to make decisions that reflect their unique circumstances. The menu of choices is straightforward, and includes building and owning assets in-house, forming alliances to strategically access capacity, or contracting for CMO capacity as required.
But it’s clear companies will have to make a choice. The manufacturing decision is crucial to a stake in the large-molecule game and it’s simply no longer possible to ignore large molecules. Had Eli Lilly & Co., for example, followed through on its late-1980s decision to move away from therapeutic proteins, it would not today be co-promoting abciximab ReoPro. Nor would it possess a price-to-current growth rate at the top of the Big Pharma league tables, a valuation due in large part to the likely approval of recombinant activated protein C (Zovant) for sepsis. Instead, with the imminent genericization of what has been its most important product, fluoxetine (Prozac), Lilly would be an extremely vulnerable takeover candidate.
Even the best pipelines don’t assure the future. Given the need to maximize access to the available clinical candidates, drug companies could well find protein manufacturing a requirement not simply for success, but mere independence.
Roland Andersson is the Managing Director of, and Richard Mynahan a Manager in, the North American health care practice of Arthur D. Little, the Cambridge, MA-based consultancy.
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Last modified: October 02, 2001 |
