The Logic of Biotech Bets

Big Pharma is investing big in targeted, biologically derived drugs, not least because they're safe from generic competitionfor now

It has never been a better time to be a biotech. On Dec. 3, Swiss pharmaceutical giant Novartis (NVS) agreed to pay as much as $1 billion over the next decade to MorphoSys (MORG.DE), a Munich-based biotechnology company, for its help in discovering and developing therapies based on antibodies.

Antibodies are part of a new wave of biologically derived drugs that will "markedly change the way we approach drug discovery," says Mark Fishman, president of the Novartis Institutes for BioMedical Research in Cambridge, Mass., which is especially focused on disease-related science (, 2/22/06).

Looking for the Next Best-Seller

Novartis isn't the only big-name pharmaceutical firm ramping up its biotechnology investments. Drugmakers looking to fill pipelines are paying ever larger sums to biotechs for early access to cutting-edge developments. The same day Novartis inked its MorphoSys deal, U.S.-based Merck & Co. (MRK) agreed to pay Swiss biotech Addex (ADXN.F) as much as $170 million to develop a new class of drugs for Parkinson's disease. Addex, which had a splashy initial public offering this year (, 5/22/07) also develops drugs for migraines and other ailments. And a few days earlier, France's Sanofi-Aventis (SNY) announced it will invest up to $810 million in a therapeutic-antibodies research collaboration with U.S. biotech Regeneron Pharmaceuticals (REGN).

These antibodies are part of a new wave of medicines known as biologics, which are obtained from living organisms instead of chemicals mixed in a lab. Acting like keys that fit only a certain lock, antibodies can bind to specific targets in the human body, while typically producing fewer side effects than traditional, chemical-based drugs.

They're among the fastest-growing segments of the pharmaceutical industry, offering the potential to develop breakthrough treatments for cancer and other maladies. Already some of the best-selling medicines today are based on antibodies, including Roche Holding's (RHBY) breast-cancer drug Herceptin and Johnson && Johnson's (JNJ) arthritis treatment, Remicade. Biologics now account for 25% of all the new medicines about to enter clinical development at Novartis.

New Drugs Are Unregulated by FDA

Although complex to manufacture, these targeted, biologic drugs are big moneymakers. Take Abbott Lab's (ABT) new blockbuster drug, Humira, which is used to treat a range of conditions from rheumatoid arthritis to Crohn's disease. It accounted for $2 billion of Abbott's $22.5 billion in 2006 revenues, and this year's sales are forecast to grow by more than 30%, to $2.7 billion. Overall, U.S. biotech sales grew 20% to $40.3 billion in 2006, compared to 8% growth in pharmaceutical sales, to $275 billion, according to pharma consulting outfit IMS Health (RX).

Moreover, unlike traditional drugs, biologics aren't vulnerable to generic competition, because the U.S. Food & Drug Administration is still mulling over how to regulate them. So instead of getting exclusive marketing rights for a decade as is the case with many other drugs, manufacturers of biologics get protection indefinitely—or at least until the FDA develops regulations.

Novartis has been building its position in biologics for several years. It created a Novartis Biologics unit this year, and in October announced plans to build a $700 million facility in Singapore to produce biologic-based therapies. The company already has five biologic facilities in Europe and one in California.

The MorphoSys deal, Fishman says, gives Novartis a powerful technology for rapid production of antibodies. "We are no longer confined to chemicals but can expand into a whole biological arena which has the potential to change drug discovery and development," he says. Given that kind of enthusiasm, the courtship of biotech by Big Pharma is likely to keep going strong.

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