How Small Firms Sometimes
Hit Big With Drug Discards
When Big Pharmaceutical Companies Give Up
On New Medicines, Entrepreneurs Are Waiting
By RON WINSLOW
Staff Reporter of THE WALL STREET JOURNAL
SOUTH SAN FRANCISCO, Calif. -- Gary Patou could hardly believe his eyes. There on his computer screen was news that pharmaceutical giant GlaxoSmithKline PLC had just given up its rights to sell a promising antibiotic.
Dr. Patou knew the drug well. He used to work at the company and had championed the drug's development. Now president of a small biotech start-up, Dr. Patou immediately told his boss the rights to the antibiotic might be up for grabs. His boss said, "Maybe we should go for it," Dr. Patou recalls.
That was 16 months ago. Today, closely held Genesoft Pharmaceuticals Inc. -- which has only 22 employees, including Dr. Patou -- owns rights to sell the pill in North America and Europe. In April, it won approval from the Food and Drug Administration to sell the drug in the U.S. Two weeks ago, the FDA cleared the drug for any pneumonia-causing bacteria that may be resistant to the five major classes of antibiotics -- the first drug to win such an approval.
Investors close to the company think the drug, called Factive, could fetch as much as $500 million a year in sales. Independent projections are hard to come by, but the drug is a potent member of a class of antibiotics called flouroquinolones, which rang up nearly $3 billion in global sales in 2002. All told, the global antibiotic market exceeds $10 billion.
Genesoft faces daunting challenges to making the drug a big seller. It needs a larger, well-heeled partner to market Factive to primary-care physicians, the biggest prescribers of antibiotics. In addition, the drug is approved for fewer types of infections than most of its competitors. But for Genesoft, a tiny start-up that was on the verge of financial collapse late last year, getting Factive was like finding a winning lottery ticket in the trash.
One reason Genesoft was able to pluck a potential money-maker from Big Pharma's discard pile is that the industry's giants are increasingly focused on billion-dollar blockbusters to drive profits. Glaxo jettisoned Factive after an initial rejection from the FDA -- even though the drug appeared to work, and the company had invested five years and an estimated $200 million or more in its development.
Genesoft is among a growing number of entrepreneurial companies that are finding opportunity in industry cast-offs. The Medicines Company, Parsippany, N.J., recently won approval for a blood thinner called Angiomax that was dropped by Biogen Inc., Cambridge, Mass. A small company called Scios Inc. won FDA approval for its heart-failure drug Naturcor on the second try -- after an earlier denial prompted giant Bayer AG to back out of a co-development deal. Scios's perseverance paid off: in February, the company was bought by Johnson & Johnson for $2.4 billion.
BACTERIA BUSTERS
Top-selling antibiotics, by global sales in 2002
DRUG
COMPANY
SALES (Millions)
Augmentin
GlaxoSmithKline
$1,787
Zithromax
Pfizer
1,516
Cipro*/Ciprobay
Bayer
1,334
Biaxin
Abbott Laboratories
1,102
Levaquin*/Floxin
Johnson & Johnson
1,032
*Member of flouroquinolone class
Source: Med Ad News
"These kinds of orphans are all over the industry," says Luke Evnin, general partner at MPM Asset Management LLP, a South San Francisco venture-capital firm that is Genesoft's major investor.
The Factive tale began in 1995, when Dr. Patou was recruited by what was then SmithKline Beecham PLC to head its anti-infective program. His main assignment: Come up with a sequel to Augmentin, SmithKline's $2 billion-a-year antibiotic that was slated to lose U.S. patent protection in 2002.
His search led him to LG Chemicals Ltd. of South Korea. In 1993, LG researchers had discovered a new flouroquinolone antibiotic. The company, part of the big Korean conglomerate LG Group, was eager to find a partner to develop and market the drug in the West.
Over the next 2½ years, the company tested Factive in 14 major trials on a total of nearly 7,000 patients with pneumonia, a form of chronic bronchitis, urinary-tract infections and sinusitis -- common ailments that could lead to a huge potential market. Studies the company submitted to the FDA showed the drug matched the bacteria-killing effectiveness of leading antibiotics already on the market.
The new drug appeared to have advantages. Its treatment regimens typically were two or three days shorter than other products. It was effective against bacteria that had become resistant to other antibiotics. There weren't significant problems with liver toxicity or heart-rhythm changes that had raised concerns with other flouroquinolones.
The only significant side effect seemed to be a rash that affected 3.6% of patients, more than triple the rate of other antibiotics used in the studies. But nothing in the trials suggested the rash had lasting effects. In most cases, it went away on its own. The company filed its application with the FDA at the end of 1999.
The FDA had little quarrel with the drug's effectiveness, but it was concerned about the rash. Among women under 40, the rate was nearly 10%. In December 2000, the FDA decided it needed more information on the rash and said no to Factive.
Its backers were taken aback. "We thought the rash was clearly benign," Dr. Patou says. But the company wasn't giving up. With the FDA's guidance, it launched a new trial of 1,000 women under 40. The study showed more than 30% of the patients got a rash, but there weren't lasting effects. A revised application was prepared for the FDA.
But it was never filed.
Three days after the FDA decision in 2000, government regulators approved a merger between SmithKline and Glaxo Wellcome PLC, creating a behemoth with more than $25 billion in revenue and 100,000 employees. With looming patent expirations on such drugs as the antidepressant Paxil, a $3 billion seller, the new company, GlaxoSmithKline, needed big selling new products. Factive, meanwhile, had just been given a black eye by the FDA.
In the wake of the merger, Dr. Patou left the company, joining Genesoft early in 2001. Other Factive scientists also departed. That left the drug without advocates to defend it to the new company's leadership. "All drugs, big or small, make it because there are product champions" within a company who won't let them die, Dr. Patou says.
In April 2002, Glaxo announced that, given its "existing commercial priorities," it was returning its developing and marketing rights to Factive to LG. At the time, it gave no reason.
Decisions on what drugs to bring to market are based on a mix of "science, clinical need and commercial opportunity," says Tachi Yamada, chairman of research and development at Glaxo. Potential market size is never the sole deciding factor, he says.
For LG, getting the drug back "was really shocking," says H.J. Yang, president and chief executive of LG Life Sciences Ltd, whose company was being spun off from its LG parent. Factive was its chief asset, but the company had little capacity to deal with the FDA. "I was at quite a loss at what to do," he says.
In accordance with the original licensing agreement, Glaxo turned over to LG the FDA application, including data from the clinical trials. LG put out feelers to about 50 drug companies to find a new partner to help the drug get through the FDA approval process.
In mid-April, as Dr. Patou was checking the price of his Glaxo shares, he spotted the Factive news item on his computer. He got in touch with LG.
It was a crucial time for Genesoft. Launched in 1998, it had two anti-infectives and a cancer program in early development. Genesoft had raised $22 million in the summer of 2001. Then the biotech stock-market bubble burst. To conserve cash that fall, Genesoft shuttered its cancer program and cut its staff to about 55 employees, from 80. But to advance its remaining compounds toward the market, the company desperately needed a source of revenue. Was Factive the answer?
On June 18, 2002, a five-member Genesoft team flew to Seoul to make their pitch: Dr. Patou's knowledge of the drug offered LG the best chance for approval at the FDA. Five other companies were in the running, says LG's Dr. Yang, who declined to name them.
That night, Genesoft and LG officials went to a sushi restaurant. After dinner, they joined the crowds jamming Seoul's streets, as huge TV screens showed South Korea playing soccer power Italy in the World Cup. Near the end, underdog South Korea tied the game, forcing sudden-death overtime.
Genesoft's chief executive officer, David Singer, a World Cup fan who had played soccer at Yale, says one of the LG officials turned to him and said: "If we win this game, you get the drug. It would be a good omen." In the second overtime, South Korea scored the game-winning goal. Amid the beer-soaked jubilation in the streets, Mr. Singer began to believe Genesoft would score as well.
By August, the parties shook hands on a deal that would give Genesoft the North American and European rights to Factive. LG, which retains Asian rights, would get royalties, a 14% stake in Genesoft, and $40 million in a series of payments beginning 45 days after the pact was signed. Dr. Yang says the crucial factor swinging the decision to Genesoft was Dr. Patou. "What we were interested in the most was who is most enthusiastic about our drug," he says.
Even before the deal closed, Dr. Patou began to revise the FDA application, rewriting several hundred pages to strengthen the case. The FDA accepted the revised application and scheduled an advisory committee meeting for March 4, where Factive would get a full public airing before a panel of experts.
With an accepted new drug application at the FDA, Mr. Singer figured Genesoft had a bankable asset -- and just in time. The company was running out of cash.
But his expectations for an easy new round of financing were quickly dashed. Thanks to its prior failure at the FDA, Factive looked to investors like a 50-50 chance at best. "It was like playing red or black at the casino," says George Montgomery, then of J.P. Morgan, Genesoft's investment banker. No one wanted to make an investment that could be worthless just three months later.
To stay afloat, the company arranged a $5 million bridge loan from its investors and planned to lay off another 30 employees, or 60% of its work force. It approached its landlord and other creditors seeking to stretch out payments. But after one creditor balked, the company plunged into crisis. It was going to miss its first $5 million payment owed to LG on Dec. 6. For the next two days, Mr. Singer worked the phones, getting to his desk at 3 a.m., looking for an infusion of cash. Finally, he negotiated a last-minute compromise with the reluctant creditor.
The FDA advisory panel was the key remaining hurdle. The resubmitted application asked for approval only for pneumonia and a stage of bronchitis called acute exacerbations of chronic bronchitis -- potentially fatal ailments that primarily afflict older patients. In a tactical decision, Dr. Patou decided not to seek approval for urinary tract and sinus infections -- common conditions that promised a large market for the drug, but that are more likely to affect younger women and thus trigger concerns about the rash.
The pneumonia and bronchitis infections left plenty of patients to treat. Up to four million cases of pneumonia are reported in the U.S. each year, resulting in 600,000 hospitalizations and 64,000 deaths. About 13 million Americans suffer from the bronchitis ailment, and for those who end up in the hospital, as many as 30% die.
Big pharmaceutical companies typically assign a team of 30 or more people for months to do nothing but prepare for an FDA panel. Dr. Patou had no employees and only four months to prepare for the 90-minute presentation.
He recruited three experts to present the case -- two authorities in antibiotic resistance and infectious diseases and one in drug-induced rashes. Aided by other consultants, they prepared presentations during intense weekend meetings at hotel conference rooms. The day before the early March hearing, Genesoft rented a hotel ballroom for a dress rehearsal, arranging tables and seating exactly as it would appear the next day.
The next morning, in a packed meeting room, Dr. Patou and the three doctors presented the case to the 19 FDA panel members. The FDA focused much of its presentation on patients for whom the rash was most severe. Some Genesoft supporters thought the drug was doomed.
But when the vote was finally taken, support for the drug was clear: 18 to 0, with one abstention, in favor of Factive for pneumonia; 15-3 with an abstention for the bronchitis condition.
Genesoft's Mr. Singer, who had two speeches in his pocket for a post-panel dinner, got to throw out the one about defeat, along with the phone number for a bankruptcy attorney. "We were high," recalls Don Low, an expert in antibiotic resistance at Mount Sinai Hospital, Toronto and one of Genesoft's presenters. "It was such a good feeling to think you've been part of a new drug coming to market."
A month later, less than a year after Glaxo had jettisoned the drug, the FDA approved Factive. Now its success will depend on the marketing. Genesoft is looking for a marketing partner, which is likely to be another, larger drug company. Dr. Patou estimates the launch will cost about $100 million. Genesoft hasn't determined its strategy yet, but such arrangements typically call for a marketing partner to put up a significant part of the launch and other costs in return for a share of the revenue and profit.
Some major pharmaceutical companies are shying away from the antibiotic market. Unlike medications for such problems as high blood pressure that patients take for years, antibiotics are prescribed for just three- to 10-day treatments. In addition, public-health officials are promoting conservative use of antibiotics to prevent development of resistant bacteria -- a potential damper on sales.
A big hurdle will be whether marketers can change doctors' prescribing habits. Under current practice, less-potent pills are often used first, while stronger ones are kept in reserve. Increasingly, experts believe that is a recipe for spurring development of drug-resistant bacteria. The company and some doctors contend it's better to use more-potent weapons -- such as Factive -- first against bacteria that cause pneumonia and other serious infections.
In South Korea, FDA approval of Factive was a national event. In the 105-year history of the drug industry in Korea, "we have not had any drug approved by advanced countries like the United States," says Dr. Yang. "It's really epoch-making." Mr. Singer and Dr. Patou were invited in May to a dinner attended by Korea's premier.
Congratulatory messages from around the industry were sent to Dr. Patou. He keeps one in a Lucite frame on his desk. It's from Dr. Yamada, Glaxo's R&D chairman, who wrote: "We are excited, and maybe a bit envious of your success."
Write to Ron Winslow at ron.winslow@wsj.com5
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Updated August 11, 2003 |
