Demystifying Biologics

By Michael Shulman

Biotech products (i.e., biologics) are drugs, treatments and, occasionally, diagnostic tests created by using biotechnology.

They are typically antibodies, proteins (proteins are antibodies, but a very distinct category) and nucleic acids, including RNA, DNA and oligonucleotides (a form of RNA or DNA) -- all used for therapeutic or diagnostic products.

The distinction you need to understand is that biologics are manufactured, and not extracted directly from a naturally occurring source.

Most biotech drugs are derived from life forms of the cellular and sub-cellular form, but the term is also used to cover a wide variety of products, including many that do not technically meet this definition. For investors and regulators the crucial difference is in the manufacturing process.

Biotech drugs are not a mixture of Active Pharmaceutical Ingredients (APIs), rather they are derived and manufactured (cooked, so to speak) in processes using living ingredients, such as proteins. This means the manufacturing process can still be further patented even years after initial patents are filed at the beginning of preclinical research, extending the "proprietary" life of the product.

The ChangeWave occurring in biologic treatments can be seen in the activity of hundreds of startups and pre-revenue biotechs, and also in the pipelines, development efforts and partnerships announced by Big Pharmas.

The expiration of major patents, the FDA's increasing hostility toward copycat drugs and the inexorable momentum of technology have all combined to push even the most conservative Big Pharma outfits into spending an increasing amount of money on the development of biologics.

Instead of buying chemicals and Active Pharmaceutical Ingredients, research shops are now buying proteins, devices to tear proteins apart, reagents and other biological components that are protected by patents.

And companies with unique products protected by patents can generate revenue from sales, and from ongoing royalties and licensing fees tied to the manufacturing process.

Simply put, the suppliers now have a much larger financial stake in the game than before when they were just selling the ingredients to Big Pharma and other companies that needed them to make pills.

The Enablers

Enablers are so-called because they provide enabling technology. They are supply companies that provide products and services that "enable" other companies to build and sell drugs, treatments and diagnostic tests.

Enablers face a rapidly growing market for three reasons:

1) The increasing efficacy and FDA acceptance of biologic treatments and tests.

The pharmaceutical marketplace is dominated by sales of products that fall into two categories: therapeutic proteins and monoclonal antibodies.

FDA approvals and sales of biologic drugs are accelerating, compared with more traditional drugs -- traditional drugs being drugs or treatments that generally fall into the class of products called "small molecule" products, like Lipitor.

According to market research firm Datamonitor, while sales of traditional drugs are expected to grow less than 1%, sales of biologic-based products are expected to grow 13% per annum through 2010, with monoclonal antibody-based treatments leading the way with 26% growth.

2) The nature of the manufacturing process of biological drugs.

Biologics are manufactured by unique processes. Each drug, and sometimes each factory, has its own process that requires a unique blend of biologic components to create and/or to be a part of the treatment.

This allows component makers to play a larger role in the drug development and manufacturing process. It also allows them, depending on the product, to charge higher prices and occasionally win royalties for the use of their products in the manufacturing process.

3) How the biogeneric industry will bring biologics to market.

At present, biogenerics are trying to get a foothold in Europe. In the United States it will take at least several years to get the legislation necessary to provide FDA regulatory evaluation and approval for biogenerics.

If and when this happens, biogeneric manufacturers will be as dependent on suppliers for proprietary components as brand manufacturers. That means higher profit margins from supplying biogeneric manufacturers than the margins currently being generated by suppliers of Active Pharmaceutical Ingredients for traditional drugs.