Unlike consumer or industrials sectors, biotechnology is very different in that while scale of economies or network effects often serve as the barriers to entry for consumer or industrials companies, biotechnology companies have technology and patents that serve as the primary barriers to entry for new comers.
While one could argue that consumer or industrials companies also rely on technology as barriers to entry, at the end of the day, it really comes down to economy of scale because the number of customers that you can spread your R&D and marketing dollars serve as the barriers to entry – particularly given that there is generally no clear data on which product is better or not.
Therefore, large businesses often have a very stable business with little innovation in somewhat complacency with low margin profile. Pharma-equivalents would be generic businesses like Teva or Mylan – they have little or no innovation and rely on scale and relationship to drive revenue and growth.
However, true biotechnology companies are different – once patents expire (loss of exclusivity in biotech-speak), you get a flood of generics, and the 50% or more of your business can go out the door immediately. Or one breakthrough drug funded by a VC or incubated in a university lab could have amazing clinical data and flip the game overnight.
Alexion Pharmaceuticals (ALXN) is a company that has maintained ownership/leadership in its therapeutic area for over 10 years. Founded by Dr. Leonard Bell of Yale in 1992, Alexion is the first and currently only company to have FDA’s approval of a complement inhibitor agent. Their flagship product is Soliris and now Ultomiris, and they also own other metabolic disease drugs – Strensiq and Kanuma.
As shown below, Alexn has three products that are treating 5 or more rare diseases, and generated $3.5bn of revenue in 2017. Alexion maintains $25bn of market capitalization because it owns its therapeutic areas, which allowed them to have essentially monopoly in those diseases.
Alexion’s complement franchise (Soliris and Ultomiris) has been able to maintain its monopoly for following reasons.
- Complement system is related to human immune system and it is very sensitive and difficult to understand. For instance, Roche, a powerhouse in drug development – as it has Genentech, has been trying very hard for a long time to develop a competitive drug, but has not able to show a drug that provides stronger benefit for the patients.
- Because the drug works by inhibiting auto-immune disease, patients must be chronically on Soliris/Ultomiris and there has been fatalities that were reported when patients stopped taking the drug temporarily. Due to concern on drug-drug interaction, patients must be weaned off Soliris/Ultomiris – due to the half-life, patients would be at least during the wean-off process. Patients with these diseases are very fragile and therefore it is very challenging to maintain patient safety and execute clinical trials.
- For the second bullet point, you need to run trials on patients that are naive to Soliris. However, the diseases are ultra rare and as Soliris has been the standard of care, it is hard to find enough patients to run trials – you would generally need to go to a market where Soliris is not available, but Soliris is already approved in over 50 countries.
- Lastly, you can’t ignore safety database – it regulates sensitive immune system and has blackbox warning for “serious meningococcal infection” – Blackbox warning from the FDA is serious manner. Soliris has been safely treating patients for over 10 years – for physicians, it is difficult to recommend a newly development drug over Soliris from ethical point of view as well.
For the above reasons and with massive commercial success, Alexion has been growing rapidly – Alexion went public at $8.25 per share, peaked at $190 (it was once rumored that Roche may acquire Alexion) and currently it is around $110-$120.
Stock price charts tell you the story of the company. When you look at times of rapid share price decline, it is often when a competitor announce promising P1 or P2 data. However, Alexion has been able to maintain its monopoly and leadership in complement inhibition space – reflected in revenue growth of 10-20% almost every year.
This is all on the barrier to entry, and I plan to discuss pipeline in a product next time – which is using one molecule for multiple different diseases – this is particularly attractive when driving growth in early stage biotech companies.
