Until fairly recently, top tier pharmaceutical companies obtained license rights to a product developed by a biotechnology company, thereby infusing much needed capital for furtherance of clinical research. In return, the pharmaceutical company obtained outright or major ity rights to marketing and manufacturing. In 2000, biotech companies saw their bank accounts increase exponentially as venture capitalists poured money into the industry and biotech stocks soared in value. During that year, U.S. biotech companies raised $33 billion on Wall Street, more than in the previous five years combined, according to a report from Ernst and Young — Focus on Fundamentals: The Biotechnology Report. While financing slowed in 2001, a year that was considered the worst financing environment in a long time, the biotech industry raised about $13.4 billion — its secondbiggest financing year ever. All of this means the biotech industry is relatively flush, with more than 50% of publicly traded companies having at least three years of cash on hand. That cash injection has enabled biotech com panies to develop their products to a later stage before seeking a partnership, and to begin to realize the goal of greater autonomy through their own commercialization efforts. FUTURE Biotech of The

BY KIM RIBBINK AND TAREN GROM

FUELED BY GREATER MARKET CAPITALIZATION, combined with a maturing market, biotechnology companies are starting to EXERT MORE CONTROL over their product lines — a growing number of these entities, once dependent on big pharma for capital,are BECOMING INTEGRATEDCOMPANIES on their own. ONTHECUTTING EDGE … STEVEN BERNITZ. Executive VP and chief operating officer, Organogenesis Inc., Canton, Mass.;Organogenesis was the first company to have developed and gained FDA approval for a massproduced product containing living human cells G.STEVEN BURRILL.CEO,Burrill & Co., San Francisco; Burrill & Co. is a lifesciences merchant bank investing in human healthcare, including biotechnology,agricultural biotech nology,nutraceuticals,human healthcare diagnostics, biomaterials, and bioprocesses STEVE COTTRELL. Senior VP, U.S. Services, Ventiv Health U.S. Sales, Somerset,N.J.;Ventiv Health U.S. Sales is a division of Ventiv Health Inc., an outsourced marketing and sales services provider for the pharmaceutical and lifesciences industries MARSHAFANUCCI.VP,mergers and acquisitions, Millennium Pharmaceuticals Inc., Cambridge,Mass.;Millennium is a biopharma ceutical company focusing its R&D and commercialization activities in four key areas: cardiovascular, oncology, inflammation,and metabolic disease CARL FELDBAUM.President,Biotechnology Industry Organization (BIO),Washington,D.C.; BIO represents more than 950 biotechnology companies,academic institutions, state biotechnology centers, and related organizations in all 50 states and 33 nations FARIBAGHODSIAN,PH.D.Managing director/director, healthcare research,Roth Capital Partners LLC,Newport Beach,Calif.; Roth Capital Partners is a fullservice investment bank providing professional financial services to emerging growth companies G.THOMASHEATH.VP,sales and marketing, NPS Pharmaceuticals Inc., Salt Lake City; NPS is engaged in the discovery and development of novel, small molecule drugs and recombinant peptides DARRENMAC.Analyst,Fulcrum Global Partners LLC,New York;Fulcrum is a securities firm serving the research and trade execution needs of hedge funds,asset managers,and institutions LONNIE MOULDER. Executive VP, responsible for operations,commercialization strategy, and business development,MGI Pharma Inc., BIOTECH integration The Genesis MAC. Many biotech companies were started around core technologies that had either sequencing efforts or functional genomics efforts. In the past 12 to 18 months there has been a shift in business models for a lot of these companies. Instead of relying on collaborations for their technology, biotech companies are realizing that to better serve investors and shareholders, they need to have a recurring source of revenue, which isn’t found on the content side. POSTLE. Biotech companies with tool kits such as genomics, proteomics, monoclonal antibody technologies had leads over anybody else. They had unique intellectual property. But a lot of this intellectual property is being eroded, and now it’s not so much how good the intellectual property is, but how good is the company at applying that intellectual property in a way that leads to products in development. Many biotech compa nies started with a business model that was based on their platform technolo gy and they created a sustainable busi ness. The trouble is these various tool kits quickly become commodities and so the opportunity to develop a sus tained business just by being a plat form technology company diminishes. MAC. Companies that provide gene sequence, gene expression, and SNP data are seeing erosion of pricing power, as more efforts are undertaken in the public domain. They have a problem with depreciation of that asset base, and to drive the organiza tion they have to move downstream into drug discovery and development. GHODSIAN. From the beginning there have been companies that have been moving toward the direction of full integration. The largest biotech company, Amgen, established the model of a fully integrated biopharmaceu tical company and obviously that trend is con tinuing. A lot of companies seek a partnership with large pharma for their first product, but Minneapolis,Minn.;MGI Pharma is an oncologyfocused biopharmaceutical company that acquires, develops,and commercializes differentiated products that address the unmet needs of cancer patients MARTYNPOSTLE. Senior VP, Cambridge Pharma Consultancy,Cambridge,United Kingdom;Cambridge Pharma is an international pharmaceutical consulting firm CAROLYNPRATT.Principal,biotechnology analyst, Needham & Co. Inc., NewYork; Needham is a fullservice investment bank that is national in scope,offering corporate finance, investment analysis, trading, and sales services FELICIA REED.VP,biotechnology analyst, Adams,Harkness &Hill Inc., Boston; Adams, Harkness &Hill is an investment bank that specializes in conducting research into emerg ing growth companies BOBROCHE.SeniorVP,pharmaceutical operations,Cephalon Inc., West Chester,Pa.; Cephalon is an international biopharmaceutical company dedicated to the discovery, development,and marketing of products to treat neurological disorders MICHAELROSEN. President and chief operat ing officer, DOR BioPharma Inc., Lake Forest, Ill., and vice chairman — HumanHealth of the Illi nois Biotechnology Industry Organization;DOR BioPharma (formerly Endorex) is a developmentstage drugdelivery company focusing on oral and mucosal formulations of small molecule and macromolecular drugs that traditionally are delivered in nonoral formats SUSANC.SHAKE.VP,PDI Product Commercialization,Upper Saddle River, N.J.;PDI is a sales and marketing partner to the pharmaceutical and healthcare industries WILLIAMTANNER,PH.D. Managing director, biotechnology.S.G.Cowen Securities Corp., NewYork;S.G.Cowen is the U.S.brokerdealer subsidiary, providing securities and investment banking services to corporate clients and institutional investors worldwide TERRENCEO’BRIENTORMEY. President and chief operating officer, Nelson Professional Sales, Lawrenceville,N.J.;Nelson Professional Sales, a division of Nelson Communications Inc., offers a range of proven, resultsbased selling solutions and has worked with leading pharmaceutical and healthcare organizations nology MGI Pharma anticipates launching several products between now and 2005,and establishing them in the U.S.oncology marketplace. LONNIE MOULDER BIOTECH integration for subsequent products they believe they could be in a better position to market prod ucts themselves. BURRILL. The big test along the way always has been clinical milestones for integrated drug companies. But as we look to the plat form and information companies that didn’t have clinical milestones, it was difficult to evaluate them. For example, when companies began sequencing the genome, Wall Street’s reaction was to ask, how does that translate into growth and earnings? Wall Street needed help to understand what that means. By and large the models that the information or tech nology providers began to offer to Wall Street didn’t seem to have anything that Wall Street could really understand in terms of revenue and how the company could make money. TANNER. Many biotech companies were started essentially with one discovery. There’s the argument that through the discovery of something very important a company could be created around that discovery. But, the question being raised is, does one discovery provide a track record for further discovery or was the company lucky once? The “renewabil ity” of the pipeline is an issue. Merck, Pfizer, BristolMyers Squibb have a track record of always innovating and coming up with new drugs. But, with a scientist who started a biotech company because he or she cloned a gene or discovered a molecule — there’s no real established track record. Establishing a biotech company as a fullyintegrated phar maceutical company in terms of sales and mar keting based on one discovery might be putting the cart ahead of the horse. BURRILL. Over the last 20 years, Wall Street has moved back and forth from being fully integrated company lovers to being lovers of companies that were able to extract tremen dous value by being niched in a smaller area. The Evolution FELDBAUM. Within the ranks of biotech companies are future Pfizers, Mercks, Glaxo 12 A p r i l 2 0 02 PharmaVOICE Financing — ADoubleStrandTwist BURRILL. Wall Street has honored predictability and consistency, and the enemy of Wall Street is unpredictability anduncertainty.The problem,by and large,is that the biotech industry has not met expectations, whether it’s clinical expectations or revenue expectations or earnings expec tations.Wall Street has had trouble trying to understand an industry that is not predictable, and that has led to a fair amount of complexity in trying to get Wall Street to follow it. So over the 20 years thatWall Street has had to deal with biotech it has tried to find surrogates for value and cer tainty.Corporate partnerships,head count,aggregate R&D spend,or quality boards all have been surrogate vehicles in trying to give the unknowing Street some comfort that biotech companies are real and are going to do something. POSTLE. There are too many biotech companies. And investors are becoming a lot more picky in terms of backing individual companies. I can remember when biotech was “in” and getting funds for any biotech companywas relatively easy.But now,the biotech company’s story has to be right. ROSEN.The total amount of money raised in 2001,versus 2000,accord ing to BioWorld (a major industry publication), was about $13.4 billion versus $36.5 billion. There is a bigger skew with IPOs. In 2000, there was about $22.8 billion raised in IPOs or secondary offerings, and in 2001 it was only about $4.2 billion. FELDBAUM. In 2000, the biotechnology industry attracted more invest ment than in the previous five years combined — a record $33billion in the U.S. and $6 billion in Europe.But what’s almost even more amazing is that, despite a correction in valuations,the industry remains a magnet for invest ment.2001 was second only to 2000 in terms of investment,with $14.5 bil lion raised for the year. Moreover, the industry’s market capitalization has G.STEVEN BURRILL Over the last 20 years, Wall Street has moved back and forth from being fully integrated company lovers to being lovers of companies that were able to extract tremendous value by being niched in a smaller area. BIOTECH integration SmithKlines, and Eli Lillys. Taking that ini tial leap into the marketplace is perhaps the most critical step. Already, this process is under way. Many of the dozen or so largest biotech companies have transitioned into launching and marketing products on their own. Indeed, these companies are now able to act much like large pharmaceutical companies themselves — witness the MillenniumCor acquisition, and the Amgen buyout of Immunex. Intrabiotech mergers of this size were simply unthinkable a few years ago. POSTLE. Now is a nice time to be a biotech company. But there is one downside, and that is biotech is still a cashburn industry, and because it’s a cashburn industry it still relies on going back to the stock market for period ic injections of funds to keep its cash flow going. The stock market has shown over the last five years that it is very volatile — it’s either open or it’s closed. And if the market happens to be completely shut when a biotech company needs more funds, the company is dead. When the market is shut it’s shut. If biotech is out of favor, then all biotech compa nies are out of favor. BURRILL. The biotech industry is cash rich today relative to where it has been. The money companies have raised over the past three years puts the industry in substantially better finan cial shape than it’s ever been in its history. Obviously, a better financial position allows biotech companies to partner from strength not weakness. The biotech industry has sub stantially more products in latestage clinical development and a much stronger balance sheet — and therefore is able to partner with big pharma on much more favorable terms. In many cases, there’s more risk sharing, more profitability ultimately accruing to the 13 PharmaVOICE A p r i l 2 0 02 Biotech Drug & Vaccine Approvals/New Indications 35 30 25 20 15 10 5 0 2 Approvals byYear Source:Biotechnology Industry Organization 0 0 1 5 2 3 5 5 3 7 7 16 20 19 21 22 32 24 5 YEAR remainedhigh by historical standards,and is currently almost$300billion — off about15% to 20% from the2000peak,but still more than three times the level of mid1998 and double the industry’s value in mid1999. BURRILL. The industry raised $5 billion in 1996, 1997, 1998 and that was the industry norm for 20 years. In 1999,amidst the excitement around the human genome project the industry raised $10 billion, then $32 billion in 2000,and $11 billion in 2001.Even in what is considered the worst financ ing environment in a long time,this industry had its secondlargest financ ing year. The industry does have substantially more capital. The venture capital end of it in 2001 raised about $5billion in newmoney to invest, just in healthcare biotech. The industry’s absolute market cap at the end of 2001 was $366 billion. In December 2000, it was at $422 billion, down by 13% from 2001. At midSeptember 2001, the industry’s market cap was $305 billion. The industry went from $422 billion at the end of 2000 to as low as $305 billion after September 11,and then recovered to $366 billion by the end of the year, so it had quite a ramp up in the fourth quarter. ROSEN. What is happening in 2002, particularly after 2001, a year that was not as good for financing after a record year in 2000, is the continual movement toward building critical mass, which I define in three areas: product pipeline, financial stability,and product commercialization.These three things are driving the industry; and because it has been such a dif ficult year there are some relative bargains out there. Those companies that are in a good financial situation can pick up other companies and technologies relatively cheaply and enhance or increase their product line.The name of the game in the biotech industry is to secure a continu ous product pipeline. TANNER. One thing that has kept biotech companies from becom ing fully integrated is a lack of capital,since it’s an expensive proposi tion. It’s only in the last year and a half that the window for capital has been opened.Companies such as Millennium or Human Genome Sci ences went to the capital market several times in 2000. Most of these companies have historically high levels of cash and so their financial viability is greater in terms of their ability to take drugs further in development. FELDBAUM. The market capitalization of Pfizer is $247 billion; the entire biotech industry’s market cap is just under $300 billion. Why is one Pfizer worth almost as much as almost 300 biotech companies? Because Pfizer markets a vast array of products worldwide and has tremendous cash flow and substantial profits.The company’s diversifi cation across many established product lines ameliorates investor risk, even as a hefty portion of revenues are reinvested in R&D to create products for the future. POSTLE. In Europe, there’s a general nervousness about the market and the feeling I’m getting is that biotechs are almost turning their back on the market and finding that they have to get their funding elsewhere.There is far moreofa focus on looking at significant upfront payments to fund the next stage of research. Companies aren’t going to go for a rights issue, they are going to sell some of their family jew els and look to see if they can actually get the funds from a licensing deal.There’s an acceptance that going back to the market right now is very difficult because the market has been closed for so long in Europe. Nobody is forecasting that it will open imminently. biotech partner, not just the pharma partner. FELDBAUM. In general, there does seem to be a growing i terest in moving to full integration. That trend now extends to R&D stage companies, which are partnering aggressively and merging to combine tech nologies that will generate drug candidates. This means companies that can identify genetic targets are joining forces with those that can generate com pounds to act on those tar gets — antibodies, anti sense, and small molecules. MAC. The industry is just coming to maturity. Much of the reason that it has taken time for biotech com panies to become fully inte grated has been access to capital in terms of being able to afford the down stream effort. The capital that was raised in 2000, when the financing win dow was opened, definitely helped. There’s a cyclicity in the financing window for biotech. As compa nies have been able to get a few years worth of cash on the bal ance sheet, they could then look to expand their capabilities. Downstream capabilities finally became areas that biotech com panies realistically could support from a financial perspective. FELDBAUM.There is no single template as to which types of biotech companies are most likely to go it alone in the mar ketplace and when might be the right time to take such steps. Generally, a company doesn’t launch a product on its own until it’s reasonably established and on a solid financial footing. Often, a company takes that plunge with a second or third product after initially pursuing the traditional model of outli censing. But again, much depends on the specifics of each company — its corporate vision, the status and size of its pipeline, and the size of markets its products address. Some com panies pursue vertical integra tion by developing a product all the way through — from preclinical testing to mar keting. Others leapfrog into the marketplace by acquiring rights to a latestage or com mercialized product. The permutations, quite simply, are as varied as the companies them selves. BERNITZ. Organogenesis’ move towards full integration has been a very purposeful and planned transition. It’s to the company’s cred it that it’s been able to integrate very quickly. From mid2000 to where we are right now, we’ve made tremendous progress. It has involved some refocusing of resources. We’ve added people in marketing and sales, we’ve reduced some people in our basic research areas. We really looked at what skills we need ed and made the hard choices necessary to get there. Integration is certainly possible if the process is wellthought out and done well. But it’s certainly something that can be done badly. A company needs to have people in place who have broad enough experience to be able to recognize the pitfalls and be able to react quickly to them. FELDBAUM. These days, the largest biotech companies are opting to market products independently, and they’re even licensing in promising or approved compounds from smaller biotechnology companies. These 14 BIOTECH integration A p r i l 2 0 02 PharmaVOICE Abiotech company can have a salesforce up and running pretty quickly by partnering with a contract sales organization. And there have been some very creative deals that have happened between those contract sales organizations and biotech companies. MICHAEL ROSEN Companies are doing quite a bit of upfront spade work in understanding how a CSO can assist in the launch of the brand. STEVE COTTRELL BIOTECH integration biotech companies structure their efforts around specific disease franchises, for example in cancer or cardiovascular products, and are developing and inlicensing products to expand those core franchises. This strategy maximizes a specialty salesforce. BERNITZ. I come from the biotech industry, and before that big pharma, so I’ve seen many different types of companies go along the inte gration path. One thing I felt was highly risky, and I saw several companies have trouble with, is when a company invests large sums of money in infrastructure in advance of having sales to support it. When we set up our tech nology venture division to develop our near term products, we started with an aggressive outsourcing strategy. We outsourced manufac turing and most of our preclinical develop ment. During the development stage, we kept our internal fixed costs pretty low so that we could adjust our expenses as timelines changed and as our strategy evolved. PRATT. As the biotech industry has matured, companies realize they don’t necessarily have to partner with the big pharmaceutical com panies for their drugs, they can take a com pound all the way through development themselves. That is often where the highest economic return is, so to realize that return the company needs to be fully integrated. ROCHE. Cephalon, in the past five years, has evolved from a pure discovery/research organi zation to an integrated company. Cephalon has gone through the various stages of maturation, growth, and development that followed the initial product paths through the drug evolu tion and development process 13 years ago. From bench research and discovery through early drug development, through preclinical development in nonhuman models, through earlystage clinical development in healthy volunteers into patients. And then through Phase I, II, III, and ultimately Phase IV research that a product follows in its life cycle. When I joined Cephalon in December 1994, we were just at the stage of embarking on our own commercialization exercise. We had drugs in development, and we had been successful in inlicensing compounds, such as Provigil at a relatively early stage in its development. So we were depending not only on our own discov eryresearch programs but also aggressively pursuing product prospects through business development means. We completed, at that point, the integration process, which included research, development, clinical activity, manu facturing, and selling and marketing. We built our own salesforce to copromote a product with BristolMyers Squibb back in December 1994 (Stadol NS, a potent opioid analgesic marketed for the relief of moderatetosevere migraine headaches). That really got us started as an entity in the commercial arena. It allowed us to develop relationships that we continue to nurture today. We grew from a sales organiza tion of 23 or 24 sales people to about 250 peo ple today in the U.S. alone. And every portion of the business has grown significantly since those days. The decision to become fully inte grated was a strategic one made by Frank Baldino, our CEO, years ago to ensure that Cephalon was able to fully benefit from its own research and development and from the rev enue and profitability that comes from being able to sell and market its products, whether they are developed inhouse or inlicensed from a third party. POSTLE. We are seeing a model evolving of the inlicensing biotech company, which is quite novel. A biotech company might have some prod ucts, which have big commercial potential that it has to outlicense, it has other products that it develops that can be commercialized itself, but it also tries to inlicense prod ucts that already are on the market that it can commercialize. This allows the biotech company to wean itself away from relying on funding from the stock market to relying on funding from a cash flow from its own small revenue products. BURRILL. Historically companies that have been larger and more inte grated are companies that Wall Street is more comfortable with — the big drug companies, big elec tronics companies, auto companies, those that are fully integrated and less binary. In the late 1990s, Wall Street fell in love with genomics and believed that the sequencing of the human genome was real and was going to give rise to “a whole new industry,” in which we were magi cally going to be able to take all this information from genes and convert it into drugs. Wall Street had an enormous appetite and there were large amounts of money thrown at any company that had a technology that was going to be able to extract some information and “build value.” There was a tremendous ramp up that ended in March 2000 when Bill Clinton and Tony Blair made some errant comments and the industry lost $100 billion in one week. That ramp up, which put expectations way ahead of reality, enabled 67 companies to go public in 2000 and enabled the industry to raise $32 billion in 2000. The expectations by Wall Street were that all these companies would be able to pro duce very large and growing revenue streams and high earnings and extract a lot of value from the information that they now had. As Wall Street began to sharpen its pencil, the reality versus the dream began to set in. Wall Street began to struggle with how all these companies were going to make money and who their customers were; how big the spend was going to be. Would these companies be able to really make big money or were they a job shop, a research shop, or an information provider? It was very clear that Wall Street understood the value of drug and biotech companies that came up with drugs, whether the company was ImClone, Human Genome Sciences, Genentech, or Amgen. Companies 15 PharmaVOICE A p r i l 2 0 02 DR.FARIBA GHODSIAN A lot of companies seek a partnership with large pharma for their first product,but for subsequent products they believe they could be in a position to market products themselves. that were drug compa nies as opposed to tech nology and information companies generally accrued higher values. There was a dramatic dif ference in how Wall Street perceived the value of an integrated drug company compared with an information provider. BERNITZ.As part of our strategy of becoming mo r e comm e r c i a l l y focused we’ve done two things. The first thing we did was develop the Technology Ventures Division, which was operationally separate from the rest of the company. That allowed the division to devel op products rapidly without having to pull people off Apligraf, our primary product. Once the new products were ready to be com mercialized, we reintegrated them into the company under the Worldwide Commercial Operations department. That worked very well. We formed the Technology Ventures division in August of 2000, and we launched the first product the following October, and the second one was approved in January 2002. Those products were FortaPerm and Forta Gen. We started the division with three peo ple — myself as general manager; a head of product development, who planned and over saw most of our outsourced activities; and a head of business development. We then brought in a very experienced director of sales and marketing after we decided to integrate into commercial operations. ROCHE. Cephalon has used a number of very innovative and highly productive means of selling and marketing. What we have done, at least as well if not better than any other niche pharmaceutical company, is to build our own sales organization and to train, prepare, direct, motivate and incentivize that sales organiza tion in a fashion that has caused it to become extremely effective and highly productive in terms of generating revenue. TORMEY. Our research has led us to conclude that biotech is a very exciting and emergent marketplace. There have been 117 biotechnol ogy drug products and vaccines approved by the FDA. Of the biotech medicines on the market, 75% were approved in the last six years. There are more than 350 biotech drug products and vaccines currently in clinical tri als targeting more than 200 diseases. Accord ing to Ernst & Young, there are more than 1,200 biotechnology companies in the U.S., of which 300 are publicly held. Our experience at Nelson Professional Sales is there is a tremendous interest in outsourcing the selling functions with these biotech companies. The biotech companies requesting our assistance in commercializing their product vary. Inquires typically start with market research, then a request for marketing assistance. The biotech company’s need for sales support is usually the next topic. Their needs range from contracted field sales to telemarketing to lead generation to peer events to salesforce training and recruiting. HEATH. Our intention at NPS Pharmaceuti cals is to commercialize through our own organization two of the products that we have in development. The first of these products, Preos, human parathyroid hormone, is under study for the treatment of osteoporosis. We are currently conducting a large Phase III clinical program with Preos that we project will lead to our first NDA filing in 2004. The second proprietary product we have in clinical devel opment is a novel therapy for short bowel syn drome, a condition that prevents adequate absorption of nutrients. This product, ALX 0600, has been granted orphan drug status in the U.S. and Europe. We also have retained co BIOTECH integration 16 A p r i l 2 0 02 PharmaVOICE Smaller biotech companies will look to merger and acquisition activities to build a greater infrastructure, whether it’s on the R&D side for more pipeline and more clinical development support or on the sales and marketing side. SUSAN C. SHAKE At Millennium,having a commercial infrastructure opens a host of new doors and opportunities for us that were further awaybefore having an integrated infrastructure. MARSHA FANUCCI BIOTECH integration 18 A p r i l 2 0 02 PharmaVOICE promotion rights to selected products that we have licensed to other companies for develop ment. In addition, we are looking for products that could complement our own product line and be a strategic fit in a new sales organiza tion. GHODSIAN. If biotech companies are target ing a niche market, and they understand that market, going to a smaller number of physi cians may be very effective. Amgen took on the dialysis anemia market 20 years ago and built it into a $2 billion market. At the time, many pharma companies thought the market was too small. MOULDER. We have put in place a wellbal anced and unique pipeline. With Salagen tablets and Hexalen capsules on the market followed by palonosetron and irofulven in Phase III and MG98 in Phase II trials, we believe that our commercial organization is wellpositioned to launch oncology products over the next several years. We anticipate launching several products between now and 2005 and establishing them in the U.S. oncol ogy marketplace. Also, we will be executing on our business development and licensing strategy, which is to obtain currently market ed products and selectively pursue oncology product candidates that have demonstrated activity in human clinical trials, inlicense those products, and then fully develop them with our inhouse development group. When MGI first launched Salagen in 1994 it had less than 20 people in its sales and marketing team. In the spring of 2000, we really grew the salesforce and the internal marketing group. GHODSIAN. A good strategy for biotech companies looking to become fully integrated is to collaborate with a large pharma on one of the indications for their first one or two drugs through a copromotion arrangement rather than a license arrangement. Through a copromotion agreement, com panies can gain experience and learn how to promote their drug. They can establish a smaller salesforce and learn the marketing game, and apply that knowledge more effectively to their later drugs. FANUCCI. We have been very focused on the strategic mile stones for the company, ensur ing that we are building a com pany that’s durable in the long term and prepared to weather market down turns. Our focus is on continuing to build on that vision, with the understanding that the capital markets will reward that strategy in the long term. We have a very ambitious objective for the company, and in charting that path forward our perspective has always been very oriented toward the future and look ing at what we believe is required to succeed against the model. And while we certainly look at more defined areas to see what we can learn about success, we try not to constrain ourselves by the historic approaches to build ing a company. There has not been a success ful leading small molecule company that has been founded in the last 100 years. We’re operating in unchartered territory. MOULDER. With the commercialization of our own products generating sales revenue of $30 million, we have a product contribution that actually funds a good portion of the com pany business. So the financing needs of MGI have been less than most other companies in our sector because of this revenue and the resulting product contribution generated by the sales and marketing organization. BERNITZ. Integration will lead us into a much stronger financial position. Once a com pany has a commercialization capability that can be demonstrated it enables the company CARL FELDBAUM Within the ranks of biotech companies are future Pfizers, Mercks,GlaxoSmithKlines, and Eli Lillys.Taking that initial leap into the marketplace is perhaps the most critical step. Cephalon grew from a sales organization of 23 or 24 sales people to about 250 people today in the U.S.alone. And every portion of the business has grown significantly since those days. BOB ROCHE to bring in potential products from other com panies that are more research based. It also allows us more control over our own destiny. Integration will allow us to enter into world wide markets faster than if we were dependent on another company. The sentiment in the investment community is those companies that can commercialize products successfully probably will fare better in the future. The key for a small company like ours was to find within our portfolio products that were cost effective to develop and get to market, and that could be targeted to groups of physicians whom a small salesforce could adequately cover. Splicing Techniques BURRILL. In the last year, the biotechs did a better job in partnering with big pharma. I don’t believe, though most people do, that there will be as much consolidation in biotech as is expected. Partnerships are a great alterna tive and biotech traditionally has been a heav ily partnered industry. Big pharma has been able to acquire a lot of what it wants through partnering, it hasn’t had to do it through acquisition. POSTLE. Biotechbiotech mergers work, but usually that’s only a preliminary phase. If the biotechbiotech merger can result in a company that then can become a pharmaceutical compa ny and have its own cash flow, that’s great. When big pharma acquires a biotech company, there’s a tendency of big pharma “ruining” what it just bought. Suits and the sandals don’t often mix that well. There’s another model that we’re seeing evolve, and that’s where big phar ma acquires a majority shareholding, and in exchange they put into the biotech company a small product stream that will allow the com pany to be selfsustaining. ROSEN. Recently, there have been a number of mergers announced, including our own. There always has been consolidation within the biotech industry. MedImmune bought Aviron for $1.3 billion and there was Millen nium and Cor, and more recently Amgen and Immunex. In our case, it was by comparison a smaller deal, but we completed our own $12 million to $15 million acquisition of a small company. The reason for our merger is that we faced the same issues as other larger biotech companies. The key question was how to build further critical mass. The foremost issue was a product pipeline. The difference between what happened last year and this year in the marketplace is that the investment community basically believed that if a compa ny’s product wasn’t in Phase III or Phase II, it really wasn’t a product. From an investment community perspective, when a drug is in a preclinical or even Phase I stage there’s too much development risk, so it doesn’t “feel” like a product. Any company that had a tech nology that was Phase I or earlier has been heavily discounted and that is reflected in stock prices. One of the strategic missions for us was to acquire a product portfolio that was closer to the marketplace as well as build our intellectual property base. SHAKE. Smaller biotech companies will look to merger and acquisition activities to build a greater infrastructure, whether it’s on the R&D side for more pipeline and more clinical development support or on the sales and mar keting side. BURRILL. A large number of companies are moving to full integration through acquisi tion. Millennium and others are using a strong balance sheet and a strong equity value to acquire companies that have candidates or technologies that are very synergistic and for whom the opportunity to build a capital base off the boomlet in Wall Street didn’t happen. Now in more difficult financing times, it’s much easier for the richer biotechnology com panies to use their cash and currency for acquisitions that add to integration. And since integration is perceived by Wall Street to be important, they oftentimes get more value in the postacquisition valuation that BIOTECH integration 20 A p r i l 2 0 02 PharmaVOICE One thing I felt was highly risky, and I saw several companies have trouble with, is when a company invests large sums of money in infrastructure in advance of having sales to support it. STEVEN BERNITZ BIOTECH integration actually pays for the acquisition by an increased market cap. A lot of biotechnology companies are looking at other biotechnology companies as a vehicle to increase integration from outside. Expanding the Chain MAC. The evolution started with Human Genome Sciences, and then we saw companies such as Millennium become fully integrated by acquiring downstream capabilities through the acquisition of Cor Therapeutics. A lot of these companies are moving from just discovering and validating novel drug targets to actually internally taking those compounds through clinical development. It’s a higher risk strategy, but the payoffs are much greater. When Millennium started out it formed col laborations for validating drug targets with pharmaceutical partners, getting about 9% royalties. Since Millennium has down streamed its capabilities, the company is tak ing products through screening, through talks, into the clinic and is forming new part nerships with pharmaceutical companies for copromotional activities — 5050 joint ven tures, which is up significantly from the 9% royalties the company received only two to three years ago. POSTLE. As more and more database com panies enter the arena, and as more and more of the human genome becomes public data, what these companies have to offer is really not worth that much. So they need to evolve up the value chain. They need to move from being database companies to being compa nies that specialize in targets coming from the genomic database. If they don’t become fully integrated pharmaceutical companies, at least they need to get into a product devel opment mode. BURRILL. It is easy for a company to become virtually integrated, and for that reason biotech companies have been able to use vir tual integration as a vehicle to access special ty marketing forces or distribution capabili ties, and/or partner in a limited area with big pharma companies or others that have sales or marketing forces in particular therapeutic cat egories. That gives biotech companies lever age that they don’t have to build themselves. They don’t all have to grow up and be fully integrated like Merck — biotechs can acquire many of those resources through partnering. They don’t have to build their own sales and marketing forces, although a lot of companies are. Biotech companies have to look at the reality of managed care and specialty practices to understand markets. In specialty markets, a few people can get a lot of leverage and cover a lot of space, compared with having to call on family doctors in 42,000 cities. A lot of biotech companies are focusing on markets where they can get both clinical approval and niche their way in by building a sales and dis tribution force in an area where they’re not competing headtohead with giant mar keters. HEATH. In preparation for Preos, and anticipating future product launches, we have started building a marketing organization. We are studying our options for developing our own sales force and evaluating the experiences of other companies that have commer cialized their first product. Over the next couple of years we will determine the optimal size and configuration of our own sales organization. We aim to be in a position to generate greater return on our product investments, a greater return than license and royalty revenues. This requires that we take the greater risk of selling our own products. Our best path to profitabili ty is to capitalize on our product devel opment investment by selling our own products. COTTRELL. The biotech companies are developing unique, specialty mar kets. To gain presence in those mar kets, one practice is to inlicense older brands within that target market that are either line extensions or have dif ferent delivery options. Another option is to launch medical science liaisons for educational purposes before a new product introduction to gain a market presence and properly introduce the new treatment. The biotech companies are now looking to the outsourcing industry to help with these and other strategies. ROSEN. It’s not as expensive as it used to be to market products. Major pharmaceutical companies are abandoning markets with product sales of less than $500 million, so that opens the way for specialty pharmaceuti cal companies that have products with poten tial sales between $20 million to $100 mil lion, or more. Most major pharmaceutical companies today measure how many drugs they have in the “billiondollar” club. That means there are opportunities for biotechs to 21 PharmaVOICE A p r i l 2 0 02 Our intention at NPS Pharmaceuticals is to commercialize through our own organization two of the products that we have in development. G.THOMAS HEATH BIOTECH integration 22 A p r i l 2 0 02 PharmaVOICE market to niche areas — markets where there is a much more select physician audience and patient population. A biotech company can have a salesforce up and running pretty quick ly by partnering with a contract sales organi zation. And there have been some very cre ative deals that have happened between those contract sales organizations and biotech com panies. POSTLE. If a company has a product it has something that effectively no other company can take away from it, unless it sells it. The company also has something that biotech ana lysts understand and can believe and value. Biotech analysts are very bad at valuing plat form technologies, but they can value prod ucts in development. BURRILL. There are two types of companies. There are those companies with latestage clinical products. And there are a large num ber of companies that are technology and plat form providers. They don’t all aspire to be the next Merck, but that doesn’t mean they can’t be very successful companies. SHAKE. A biotechnology company may have a product for a small targeted audience, but unless the product has a broad market poten tial, it’s still not worth building a marketing structure. If the biotech company is coming into a market for hairy cell leukemia, for example, it’s not going to have a $500 million drug. Until the company has greater potential to generate revenue through its clinical devel opment plan, which includes additional indi cations, building an infrastructure is not viable. I think biotech companies acknowl edge that as long as they can get a partner that believes in their drug as much they do, then they are better off partnering until they have enough revenue to support the infrastructure themselves. REED. If biotech companies are to build a salesforce it should be for a product that tar gets a smaller indication and a smaller group of physicians. That doesn’t mean that at some point a company couldn’t look at some of its products for indications that target a larger group of physicians where it believes it could be competitive. FANUCCI. In the broadest context, what we have set out to do is to identify candi ates that accelerate the objective of building a fully integrated company that positions us for lead ership in the industry. Our 10year vision is to be among the the top 10 biotech companies. We have gone through, and continue to have, a process of identifying companies that are aligned well with that Millennium vision, with our culture, and in areas that we believe we can leverage. TANNER. For biotech companies to become fully integrated they need first to develop a drug successfully. They’re going to have to find a market that is targetable, such as oncology. Then biotech companies have to take a good hard look at themselves and ensure that if they do establish a sales and marketing effort they have something with which to follow. POSTLE. We advise companies that want to go up the value chain to think very carefully. First of all, as they go up the value chain it takes a lot more funds, especially as the prod uct goes into development. It takes much more money for development than if the com pany continues just to invest in its tool kit. And, the competitive position it enters as a company is very different. For example, Mil lennium now has its own products on the market, so it is competing with companies that at one time were its customers for its technology. The more a company invests megabucks in product development the greater the risk. The company is capturing more value, but it is also accepting that it is running with a higher degree of risk. As the biotechnology industry evolves, and as com If biotech companies are to build a salesforce it should be for a product that targets a smaller indication and a smaller group of physicians. FELICIA REED The question being raised is, doesone discovery provide a track record for further discovery or was the company lucky once?The “renewability”of the pipeline is an issue. DR.WILLIAM TANNER panies mature, they move into a position in which they can accept more of that risk. We think that all biotech companies will eventu ally have to go along that route. They can’t stay as selfsustaining tool kit companies. Finding the Right Link COTTRELL.We have seen an increased interest within the biotech arena. It’s been developing over the last 12 months to 18 months. Compa nies are doing quite a bit of upfront spade work in understanding how a contract sales organiza tion can assist in the launch of the brand. Com panies are looking at traditional CSO services as well as market development services such as tar get analysis and forecasting. Additionally, biotech companies are looking for national accounts and managedcare expertise. POSTLE.Markets for exploration are any niche market. Biotech companies need to understand whose behaviors they will have to change to make their product a commercial success. Then they have start to think of what is the most costeffective way to change those behaviors. Going headtohead with Pfizer or Merck in selling antirheumatic drugs probably is not the most costeffective model to adopt. FELDBAUM. For younger companies, co promotion is an increasingly popular option. The increasing frequency of such deals reflects the stronger cash position of biotechnology companies in recent years — because big pharma and, increasingly, big biotech are all chasing the lowhanging fruit of latestage products, a company with such a product is usually in the driver’s seat these days and able to secure copromotion rights. With such a deal, the company secures financial support, but also the prospect of market presence. For smaller companies with highly specialized or smallmarket products, direct marketing on their own may be a viable option, even for a first product. Often, by the time a product is launched, the key “thought leaders” in the relevant medical specialty already have worked with the product in clinical trials and reported formally and informally to their peers. Frankly, if a product serves a previous ly unmet, or poorly met, medical need, the physicians will be there from day one. Yet another model is to outsource marketing. These deals allow companies to tap into readymade marketing expertise on a com mission basis and for relatively short terms (often under five years). GHODSIAN. Amgen has been one of the best models for full integration. For its first prod uct, Epogen, the company needed the money/validation from big pharma, so it out licensed partial rights to Epogen in some mar kets, but at the same time kept one market for itself. Through that strategy the company developed its salesforce and grew the dialysis anemia market very successfully. This allowed the company to establish itself as a fully inte grated biopharmaceutical company with an established salesforce. Therefore when their second drug was available, it did not have to share it or copromote. MAC. One of the major shifts in the industry has been in the area of biotech to pharma part nering. Biotechs are now in a much stronger negotiating position. Pharma companies des perately need to bolster their pipelines as they face major patent expirations. They are increasingly reliant on the biotech industry. The problem is big pharma is going to have to pay more for those products now that the biotech industry is more established. FELDBAUM. Pharmaceutical companies have enjoyed stellar earnings gains in recent years, and they are under tremendous pressure from investors to keep posting doubledigit growth. To do that as products go off patent, they must refill the pipeline with patentpro tected products. That’s good news for biotech nology companies with Phase III or NDA/BLAstage products, because these are the optimum replacements for offpatent BIOTECH integration 24 A p r i l 2 0 02 PharmaVOICE MARTYN POSTLE Whenbig pharma acquires a biotech company,there’s a tendency of big pharma “ruining”what it just bought.Suits and the sandals don’t often mix that well. launch/support the product. The biotech industry is now seeing outsourcing as a viable alternative given the kind of quality services that are now available. TORMEY. Companies looking to do their own marketing and sales recognize they don’t have the internal resources necessary, so they’re going to outsource those functions — everything from the marketing, to the selling, to the ancillary services. As the biotech com pany matures, and as its products are brought online, the company begins to pick and choose the components it wants to bring in house. SHAKE. The greatest difference between pharmaceutical companies and biotechnology companies is a lack of infrastructure, in par ticular the lack of sales and marketing. Because biotech companies don’t have the infrastructure or established relationships with a lot of vendors, they are much more receptive to a comprehensive integrated solu tion for their sales and marketing commer cialization needs. It’s an alternative to out licensing or copromoting with big pharma, and allows them to keep more control of their product, as well as hold onto better down stream rights. F PharmaVoice welcomes comments about this article. Email us at [email protected]. 25 PharmaVOICE A p r i l 2 0 02 drugs — they are novel and just on the cusp of entering their patentprotected period on the market. Hence we’ve seen a spate of $100 mil lionplus deals in recent years. GHODSIAN. In general, biotech companies that have a broad platform are better able to pursue an integration strategy because they can share a portion of the revenue, but at the same time they keep enough to be able to go forward independently. Partnering with big pharma brings in cash as well as validation to a biotech company’s technology platform, making it easier to pursue the rest of its prod uct pipeline on its own. MOULDER. Clearly the way for a company to capture the most value from a biopharma ceutical product is to retain rights in key mar kets, such as the U.S., and to commercialize the product on its own, or to collaborate with a partner in its commercialization. MGI Pharma has elected to follow this business model, retain the rights and commercialize our products alone or in combination with a partner. The greatest economic value flows to the company that has a sales and marketing capability and can actually commercialize its own products. BERNITZ. It’s almost universal that a product is never as important to the big pharma com pany as it is to the company for whom it’s that company’s livelihood. Apligraf is an impor tant product to Novartis, but it’s our life. That philosophy exists in pretty much 100% of these types of collaborations. The other issue is a lack of control over the decisions that are made on commercializing and mar keting. A biotechnology company may believe that it knows the technology better, but is not in a position to make all the deci sions on its own. TANNER.Maintaining more control over the product might allow biotechs to evolve at a more rapid rate than in the past. In addition, control positions them as an attractive acquisi tion target. Companies that have given away the crown jewels are not attractive acquisition candidates. FANUCCI. Our corporate vision is transcend ing the limits of medicine. The whole idea is to apply the combination of productivity enhancement — and that is changing the algorithm for successful drug development — and to apply personalized medicine to be able to address the right drug to the right patient at the right point. We’re trying to merge some unique concepts with some of the more tradi tional requirements in building a company to get to a leadership position within our 10year strategy. Having a commercial infrastructure opens a host of new doors and opportunities for us that were further away before having an integrated infrastructure. ROCHE. Before we had our own products to commercialize, sell, promote and support, we worked with several other pharmaceutical companies, BristolMyers Squibb, Abbott Lab oratories, and a device company called Medtronic, and copromoted their products for them. This was about three years before we launched our own products. We established a salesforce and a marketing team to build a rep utation, a market presence, and relationships with key customers who would be critically important when we were ready to launch our own products. And it was through the rela tionships and strategic alliances that we devel oped with BristolMyers Squibb and Abbott that we were able to achieve our strategic objectives as well as establish our commercial organization as a selffunding entity within the company. We launched Provigil, our first prod uct in the U.S. in February 1999, and were able to experience tremendous initial success in the marketplace because of the excellent relation ships that we had been nurturing and support ing over an extended period of time. COTTRELL. The basic tasks of biotech sales teams are not largely different than big phar ma. A sales person must have sales ability. The difference lies in the execution of the strategy, the positioning of the brand, and the techni cal/educational requirements needed to BIOTECH integration Companies looking to do their own marketing and sales recognize they don’t have the internal resources necessary, so they’re going to outsource those functions — everything from the marketing,to the selling, to the ancillary services. TERRENCE TORMEY

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