As an investor, you are always looking for a company with sustainable moat – a moat that can be preserved over time and a moat that can become stronger over time.
In biotechnology sector, it is often very difficult to find.
The reason is that the patents are widely available – so the competitors can easily copy them. And the patent exclusivity is time-limited. It sounds great in theory, but actually it is not that great because the therapeutic development is so risky and requires such a large increase in benefit for a new agent to break in that it is often that the next-gen product that is designed with the in-the-box mentality CANNOT OFTEN OVERCOME the efficacy hurdle that is set by the previous product.
In biotech, WE SAY “THE LIGHTENING DOES NOT STRIKE TWICE”
This is the reason why so many great biotech darlings often do not maintain their market capitalization after their success. There are so many:
Exelixis
Incyte / INCY
Exelixis and Incyte have super successful products – Cabometyx and Jakafi. However, they are both small molecule products – which means that they are HIGHLY EASY FOR GENERICS TO COME IN TO FLOOD THE MARKET WHEN PATENTS EXPIRE.
However, there are some products that will be very difficult for biosimilar / generic drug developers – and those products tend to maintain their exclusivity based NOT ON PATENT PROTECTION, BUT ON UNIQUE PROFILE OF THE PRODUCT THAT MAKE IT VIRTUALLY IMPOSSIBLE TO REPLICATE THE PHARMACOKINETIC AND PHARMACODYNAMIC PROFILE.
One product that I think fits this criteria is Krystexxa – a product to treat chronic refractory gout – marketed by commercial geniuses over at Horizon Therapeutics.
For therapeutic products, sometimes the chemical / generic name tells you a lot –
Pegylation: it is pegylated for extended duration!
Pegylation makes a biosimilar product more tricky because it adds additional structure to the molecule – which intrinsically makes the product more difficult to manufacture, replicate stability, or mimic the PK/PD of the original product
Enzyme: it is an enzyme -the drug itself is essentially alive! You are not blocking or activating some receptor to have an impact on downstream processes. The drug itself is the process machine. Many enzyme replacement therapies are enjoying extended exclusivity for this reason – so far, it is very difficult to show biosimilarity enzyme – just large molecules are difficult enough – enzyme is even more difficult.
The beauty of having a product that is difficult to produce biosimilar is that you can REALLY INVEST FOR THE LONG-TERM to drive growth because YOU KNOW THAT ALL THE R&D INVESTMENTS WILL PAY OFF AND YOU WILL REAP THE BENEFIT.
Krystexxa is now a >$500mm product and has potential to grow to $1bn (with HZNP’s aggressive development behind it) because HZNP was able to invest without having to worry about LOE.
This is not some shady pharma playbook that leverages legal loophole, but it is based on science – therefore it is highly likely to be sustainable.
FDA guideline clearly states the importance of PK/PD in proving biosimilarity of a biosimilar product to reference/original product.
With commercial power / execution, Horizon Therapeutics achieved some crazy growth since 2014 – 10x increase from 2021 to 2021.
A lot of growth has been driven by amazing success of Tepezza, but HZNP was able to acquire Tepezza because it had Krystexxa that could provide durable, high growth cashflow.
SO….
Market is going through some really tough phase right now. If you are looking to buy stocks, you may want to focus on companies with highly durable and growing moat.
As you explore biotechnology companies, it is helpful to identify which products will be harder to genericize or develop biosimilars – you may not get paid on it, but it does impact LT investment thought process for the management teams, who can plan long-term and create significant long-term value for its shareholders.
Hope this helps, and I will come back with another product with moat like Krystexxa!
