Drug makers need a cure for the manufacturing crunch
Over the next several years, growth in demand for biotech production is estimated to outstrip the growth in supply.
By Beverly Goodman
April 22, 2002
Ever since scientists found a way to genetically engineer human insulin 24 years ago, the biotech industry has been all about the pipeline. Everyone wants to know what the next breakthrough will be. A cure for heart disease? Cancer? Psoriasis? Today the industry is on the verge of delivering its promise. A slew of therapies are on the market, and many more are on the way. But the success has created a problem: who's going to make these revolutionary treatments?
More precisely, manufacturing capacity is already in short supply in an industry that's about to need much, much more. That dearth of capacity is due to scientific, regulatory, and economic factors. Of course, in any industry, investors need to trust a company's ability to make the product it plans to sell--and the biotechnology industry is no different. But certain biotech products are different in one vital way: they are designed to be injected into the bloodstream, raising the manufacturing stakes considerably.
Most traditional pharmaceuticals are "small molecule" drugs; they are swallowed and are absorbed into the bloodstream through the walls of the intestinal tract. But "biologics" must be injected, since they tend to be fragile molecules that would degrade in the digestive system. Insulin is the best-known biologic; others include Genentech's Herceptin (for breast cancer) and Rituxan (for non-Hodgkin's lymphoma) and Amgen's Epogen (for anemia and chronic renal failure).
Pipeline watchers know that there are 99 protein-based therapeutics--that's just one subset of biologics, but it represents the bulk of manufacturing problems--in Phase II and III clinical tests. Forty of these will reach the market by 2005, estimates Peter Ginsberg, the senior research analyst at U.S. Bancorp Piper Jaffray.
Now comes the tricky part: biologics are produced in living cells in fermentation tanks. The culture cells are broken apart to release proteins, which provide the basis for developing therapies. Current manufacturing capacity is 475,000 liters, virtually all of which is utilized. An additional 1.1 million liters of capacity will come online by the end of 2006, but demand will continue to outstrip capacity, says J.P. Morgan analyst David Molowa.
If you think short-term manufacturing snafus don't matter too much, think again. In mid-2000, investors realized that Immunex (Nasdaq: IMNX) would be unable to meet the surging demand for Enbrel, its rheumatoid arthritis drug. The stock fell nearly 75 percent from August 2000 through August 2001, when the company purchased some unused capacity from MedImmune, which had bought it from Boehringer Ingelheim. Immunex went on to earmark $500 million last November to build a new facility in Rhode Island, and the prospects for Enbrel are such that Amgen agreed to buy the company last December. Immunex's hurdles are hardly unique: Genentech, IDEC Pharmaceuticals, Roche, and Schering-Plough have all had recent manufacturing setbacks, according to Mr. Ginsberg.
Biologics are expensive to make. Therapeutic proteins cost from $100 to $1,000 per gram to produce. And a typical manufacturing facility costs between $200 million and $400 million to build, a daunting amount, especially if it's for a drug that has yet to receive regulatory approval. "Only 50 percent of therapeutics get out of Phase III trials, but that's when the big-dollar decisions need to be made--it's really difficult to decide whether, or how, to spend money on manufacturing at that point," says Mark Wicker, partner and co-chair of the Life Sciences Group at Gray Cary, a Silicon Valley-based law firm.
You can't just slap a factory up overnight, either. On average, a plant takes four years to build, considering the intricacies of the process and the necessary U.S. Food and Drug Administration approval. "I cannot tell you how complicated and expensive it is," says Remi Barbier, chairman, president, and CEO of Pain Therapeutics. "People can't figure why, if you can make something in a lab, you can't just scale up."
This lack of capacity isn't bad news for everyone in the industry. After all, the beauty of capitalism is that one company's problem is another's opportunity (or something like that). Three groups could capitalize on this squeeze.
First are the drug companies with existing capacity, like Genentech and Novartis. While they presently have no excess to sell, in the future they might. By 2005, Biogen plans to add 180,000 liters of capacity, and IDEC 120,000 liters. "If a company can build enough so its capacity exceeds its needs, it's in a great position," says Rich van den Broek, a principal at health care investment fund Cooper Hill Partners.
Next are the third-party manufacturers, which could also enjoy a strengthening position. Companies like Boehringer Ingelheim and Lonza Biologics serve small and midsize biotech firms that lack capacity--as well as larger ones that need a little help. These contractors can now afford to pick and choose their partners and cut deals with increasingly favorable terms.
Third are the oft-overlooked firms poised in the sweet spot of this crunch--makers of raw materials used in the manufacturing process. Mr. Molowa suggests that investors keep an eye on Invitrogen, the leading provider of cell culture media (the fluid in which cells are grown), as well as other raw-materials makers, like Amersham Biosciences and Millipore.
The hot seat in this whole situation, though, belongs to drug developers with insufficient capacity. They need to partner with other drug makers, sign on with third-party manufacturers--perhaps paying to reserve capacity years in advance--or build their own facilities. And it's going to cost them, one way or another. "Biopharmaceutical companies must shoulder more of the economic burden," writes Mr. Molowa in a February report. Even if building capacity means diverting capital from research and development, he says, the move is vital. If new capacity isn't built, whatever new products come out of R&D will suffer serious delays when it's their time to hit the market. That's because these days, it's not about the pipeline--it's all about the manufacturing.
Beverly Goodman is a freelance writer living in New York City.
Write to Beverly Goodman.
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