Industry Update

Despite the advancement from the embryonic stages toward maturity, the mere mention of the term “biotechnology” engenders a multiplicity of thoughts in the professionals within the sector, regulatory agencies, governments, and targeted consumers of the output of the industry. Reactions can vary from wonder at the latest marvels of pharma clinical trials that appear to mitigate the impact of cancer to unwarranted fear of the unknown in genetically engineering and modified food crops. The role of the entrepreneurial mind is as robust as ever in fostering the growth of the industry despite the financial reverses and overly optimistic projections of years past. Three years ago we advised caution in the sector for results were lacking and resistance from many aspects was high. In the past 12-18 months, we have begun to advice a closer look at the potentials.

The industry as a whole is poised for the transition from an “R&D” focus to one of commercialization but many real as well as perceived barriers continue to exist. For example:

• Pharma - Various sources indicate that over 180 vaccines or biotechnologies drugs are on the market. More than 350 additional are in clinical trial. Genentech’s Avastin successful trials and acceptance is what we feel is the beginning of the recognition wave.

• Food Crops - The Genetically Engineered/Modified food crops are moving forward, particularly in view of the EU lifting their product ban of a genetically modified strain of sweet corn for human consumption.  However, success in this arena is contingent upon consumer acceptance of the modified products – Currently a significant unknown adoption rate.

• Pharm Crops - GM Food Experiments – Although approval was granted to developed a range of genetically engineered crops in New Zealand (including rice, apple, tomato, wheat, barley, melon ryegrass, gum, pine and others), there has been significant concerns expressed by individuals in the public and private sectors. One major concern is the use of markers, typically antibiotic resistant, in genetically engineered organisms that could possibly lead to higher antibiotic resistance in medical applications. Use of organism genes resistant to neomycin, ampicillin and kanamycin are the basis for the expressed medical trepidation.

We can continue the listing nearly ad infinitum this should provide a modest indication of the Pros and Cons from an acceptance perspective.  We prefer to turn to opportunities with the transition from the Laboratory of Discovery to the transition to commercialization. The commonality across all sectors of the industry is the needs to produce in volume, i.e. manufacture the product in commercially viable and profitable quantities. The facet on the road to profitability and ROI is rife with opportunity to share in the economic benefits of Biotechnology for the astute organization, investors and yes, governments.  The following discusses one aspect that in our opinion require s attention for it presents an appreciable market opportunity for those knowledgeable in the manufacturing area.

Manufacturing – Bioprocess Manufacturing and Bio Engineering

It is one thing to invest millions (or cumulative billions) in the discovery and approval efforts. It can all be for naught if the product (organism or whatever) cannot be replicated in volume and be controlled during processing, be it a chemical production facility or plowed crop land. Our focus here is a brief discussion of the manufacturing issues confronting the industry from a process control perspective that is impacted with the regulatory restrictions. 

As more biopharmaceutical products enter the pipeline, commercial manufacturing processes, standard operating procedures, and specialized equipment continue to evolve.  Herein, is the opportunity as well as hidden pitfalls. The greatest short term opportunity is with suppliers of engineering, design, equipment, process assistance, software, computer systems, IT, and specialized hazard and waste control services. Special consideration in assessing investment or market opportunity should be given to computer and IT providers that specialized in Industrial systems and Supply Chain Management for we anticipate the new facilities will be highly automated.

We expect the opportunities based upon manufacturing considerations that must be addressed (and must be reconciled) include the following factors. Each provides an opportunity.

First and foremost are the regulatory issues, not only with the product itself, but also with facets such as the by products, pollution control, and hazard containment requirements.

• Definition of the manufacturing process itself and the operational strategies/controls including;
• Procedural processes and controls
• Separation and segregation requirements and controls to avoid cross contamination
• Bio burden and other controls
• Control/reduction of viral elements if used
• Operator training
• Emergency procedures
• And many others to ensure a viable, safe and profitable process and operation.

• Hardware design is crucial for many applications/products will require unique or modified equipment, instrumentation controls, level of automation, and process flows through closed systems. These are engineering problems that can be readily resolved but require investment. Longer term much of this will become standard as it is in other existing chemical production facilities today. Aspects will be defined in each case include at a minimum:

• Facility ad equipment design consideration. Does the facility need a “clean room” approach as is typical in part of semiconductor manufacturing? What is the process flow for the design?
• How to control critical parameters in the production process.
• How is the equipment to be maintained and cleaned as necessary for safety of operation and purity of the products?

• Manufacturing control is a major aspect. What are the process flows? What is the facility flow from raw material to finished product? What is needed for certification? What are the automation issues? What level of automation is ideal? How fine do the controls need to be for replicable results? And many other facets that are part of a world class production operation. In my manufacturing management experience, these are some of the most difficult issues for operator involvement increase complexity of control.

• Manufacture of bio products may require significant changes to process utility requirements versus traditional product processes. For example, clean room requirements, pressurized areas for containment of hazards elements, and discharge controls pose interesting engineering issues. Equipment cleaning and sterilization of hazardous elements needs consideration. With utilities, cooling water requirements can differ from traditional pharma manufacture in that the process may require cool water versus warm to hot in other processes creating unique contamination control methods.

• As with all manufacturing facilities, equipment needs to be cleaned periodically and the requirements will be more stringent. Design may need to accommodate both cleaning out of place and cleaning in place. FDA regulation compliance is the over riding directive with this facet of operations.

Site Location Considerations – Political or Emotional

California was the birthplace of the nascent biotech industry and has more biotech companies located in the state that any other in the nation. As the industry grows, expectations – real or not – are that it will provide a major boost to the very troubled and sagging manufacturing sector in the state. Experience with off shoring, outsourcing, and manufacturing fleeing to low wage areas in the electronics and the electronics sector may create a backlash against such actions in this arena. When California allowed the state manufacturing investment tax credit to expire on January 1, the state opened the door for companies to consider locating production facilities in other parts of the US. For example, Maryland offers biotechnology companies a tax rebate; Arizona embarked upon increased the biotech infrastructure in Universities; North Carolina provides loans to start-up companies – all attempting to attract this next wave of manufacturing growth. Other countries are also aggressive in attempting to attract and gain a foothold in this emerging powerhouse sector. However, indications are that investors wish to retain the intellectual property and potential manufacturing jobs in the US. It will be interesting to see if Government takes a role in this area given the high visibility of outsourcing and the election year.

In any event, suppliers to the industry need to consider locating a facility (sales, service or supply depot) near the core concentrations to facilitate long term supplier-vendor relationships.

Industry – Alliances/Agreements and Mergers/Acquisitions

Agreements -- Given the complexity of bringing products to market – technical, regulatory. Manufacturing, and financial, a key strategic mode is utilization of marketing and manufacturing agreements or alliances for the costs and risks for most to “go it alone” can be prohibitive. We anticipate a continuing wave of such relationships increasing on a global basis especially between pharmaceutical and biotech companies. Viability of such agreements is always a question but most succeed.

Several examples from 2003 include the following:

Altus Biologics Inc. and Dr. Falk Pharma GmbH

Access Pharmaceutical Inc. and Zambon Group

AEterna Laboratories Inc and German Remedies Ltd.

AEterna and Hainan Tiawang International Pharmaceutical Co.

Aastrom Biosciences Inc. and CDK Tibbi Malzeme Ticaret Ltd. Sti. and Capitalife Ltd.

We anticipate there will be a significant increase in such agreements during the next 2 years.

Mergers/Acquisitions – In view of the risks and financial requirements to bring forth a product and to be successful, at times the most realistic options is a merger or acquisition to maintain viability given the long time to market in this sector.  This is expected to continue as long as share prices are under duress or the “winners” share prices are highly valued enabling cost effective acquisitions. We do not expect a return to the "dot-com” boom price scenarios but value investment by companies positioning for the future and expanding their product portfolios at relatively modest cost and time investments.

Again, using examples from 2003, mergers/acquisitions include:

Generex Biotechnology Corp acquiring Antigen Express, Inc.

BioPort Corp acquiring Antex Biologics Inc.

Baxter Healthcare acquiring Alpha Therapeutic Corp.

Watson Pharmaceuticals acquiring Amarin Development AB.

Here again, we expect an increase in consolidation by acquisition/merger in the US and Internationally as the financial demands for commercialization increase for the smaller or one product companies.

Emergent Concept/Product Highlight

At a recent show in San Francisco – CLEO – we were privileged to see and learn about and interesting concept to merge biological/medical testing with electronics, in this case a BioCD. “This so called BioCD can be used as an immunosensor where a solution can be screened for the presence of antigens specific to the antibodies immobilized on the system.

The BioCD can provide a screening test for thousands of disease markers while the patient waits. Physicist David D. Nolte (Purdue University Physics Department) led a team to pioneer a method of creating analog CDs that can be used as a diagnostic tool for protein detection. Blood contains more than 10,000 proteins that could be monitored. By creating an analog CD with thousands of pits (each pit is a few micrometers) and with up to 10,000 tracks, each could be paired with a different protein.  The blood sample required is about one drop. Recent experiments demonstrated a sensitivity of 10 nanograms per milliliter with selectivity greater than 10,000.  Considerable work remains to be done before it can reach the physician’s office.  Our understanding is the research has been largely funded by the National Science Foundation.

If this can be commercialized, it can provide a significant advance in testing and increase the information available to the physician about the patient.  The question then becomes how to assimilate and utilize this immense increase in information.

Conclusions and Recommendations

Our advice to our client base is to look closely as selected facets of the industry and selected participants in addition to the biotechnology companies for investment and long term gains. For the hardware, computing, and infrastructure companies, we advise a close investigation and positioning of tailored systems and service in the Biotechnology Industry for significant opportunity exists for penetrating this attractive market.

A word of caution -- There will be short term perturbations as the youthful industry moves forward to massive commercialization but long term attributes in the aggregate are present for those willing to accept higher than average risk levels. This is the time to think strategically and act accordingly.

Next Biotech Issue Topics

1. Implications/Considerations – Nanotechnology and Biotechnology – Where are the opportunities for integration.
2. Show Review – Bio2004
3. Emerging Technology/Product Highlight

05-18-04        

Ed Poshkus, BS Chem.Eng., MBA    and Jeri Trippe, Editor