Immunex

Inadequate manufacturing facilities can kill a company.

The Case: Immunex, after years of trying, produced a promising arthritis drug called Enbrel. Anticipation of its approval by the U.S. Food and Drug Administration sent shares of the Seattle biotech company soaring. But because Immunex lacked an adequate manufacturing plan, production could not meet demand, and investors deserted the company just when it should have been flying high.

Usually a biotech stock’s fate on Wall Street is tied principally to spicy news of patents, research, clinical trials, or a new collaboration, even to political or regulatory developments. But none of those factors were in play when Immunex, once so popular among investors, took a nosedive. The company could not keep up with the record-breaking demand for its rheumatoid arthritis drug, Enbrel, and was forced to ration the $14,000-a-year remedy.

By 2000, Enbrel had produced sales of nearly $500 million after barely two years on the market. As a result, Immunex became the third most valuable biotech business in the world, behind only Genentech and Amgen. However, when news of Immunex’s manufacturing woes hit the Street, investors panicked, surmising that the company’s upside was seriously compromised. Within months, the price of Immunex shares was down in the single digits.

Shortly after Enbrel’s launch in late 1998, the company had begun accelerating construction of its manufacturing plants in Washington state and Rhode Island. But investors considered the early-2003 completion target for the new Rhode Island plant to be too far off.

Still, timing is crucial. Biologics are produced in large batches by living cells in fermentation tanks, and as such, the manufacturing process can be more art than science. In addition, optimizing the manufacturing process in a manner that maximizes efficiency without compromising quality or risking “lot death” is a hugely expensive and highly regulated process that most biotech firms must turn over to a contract partner. And then there’s the expense: therapeutic proteins typically cost anywhere from $100 to $2,000 per gram to produce, and the capital costs of a manufacturing plant range from $250 million to $500 million. That’s an enormous amount to spend in anticipation of a product that, in the end, might not arrive when expected—or at all. Often an experienced partner can help guide a company, but Immunex’s key partner, American Home Products, was curiously of little help.

There was little Immunex could do at the eleventh hour to speed up the FDA’s review of the Rhode Island plant. Because Enbrel is an arthritis remedy, not a cancer cure, there would be no fast-tracking of the inspection. The only other option for Immunex was to find a contract manufacturer to pick up the slack. Unfortunately, this proved no small feat.

Immunex CEO Edward Fritzky tried everything—even cash up front. By paying a hefty premium, he managed to convince the cancer drug company MedImmune and Germany’s Boehringer Ingelheim, known as BI, to fill part of the manufacturing gap. But Immunex still fell far short of needed capacity. So Mr. Fritzky traveled to Germany with a $50 million check in hand to persuade BI to give Immunex reserve capacity earmarked for Genentech and other companies awaiting FDA approval.

But this time BI balked. No doubt its executives thought they had already done their part to help the upstart American customer out of a jam. Had BI not inked its original stopgap deal, Immunex would have failed to meet even initial demand created by the approval of Medicare-Medicaid insurance reimbursement, which was likely. And, if BI had given Immunex some of the capacity reserved for other products, investors might have assumed that production on those other products was being scaled back, probably due to lower-than-anticipated demand.

The manufacturing crisis hurt Immunex internally and destabilized a well-cultivated relationship with backers, dating back to 1997, when Phase II data on Enbrel suggested a bright future indeed. In those early days, Wall Street backed not only Mr. Fritzky’s original appointment as CEO but also his urging that shareholders spurn majority share owner American Home Products when it tried to buy out Immunex just days after learning of Enbrel’s Phase II data.

Ironically, investors did not push Immunex to expand its Washington manufacturing facility in 1997, an option many company insiders quietly pushed. The reason, according to one source who was at Immunex at the time: “That kind of outlay of cash early in the clinical program would have been devastating to the [profit and loss statement], and Wall Street punishes companies that overbuild facilities in anticipation of the need to manufacture. Then they’re surprised when manufacturing becomes a ninth-inning concern. It’s a tough balancing act.”

Investors ultimately did punish Immunex. Eventually Amgen, whose own arthritis drug had shown disappointing results, snapped up Immunex in 2001 for $11 billion, a fraction of the company’s peak market value of $45 billion.

With a record number of biologics now advancing to late-stage trials, it is worth remembering what can happen when a biotech company and its investors misread supply and demand. Managing scale-up for prescription drugs is fiendishly hard. The pharmaceutical industry has much experience with these matters; biotech companies, precious little. Within the next ten years, as much as half of all medicines in late-stage clinical trials will be biologics, according to the Biotechnology Industry Organization, also known as BIO; today 25% to 30% are in that category, up from just 5% ten years ago. And McKinsey & Company projects that sales of biologic medicines will grow 15% annually during the next three to five years.

Predicting manufacturing capacity in advance of a product launch is tricky. After all, how could Mr. Fritzky know that the drug, which analysts now forecast will be a $5 billion-a-year product by 2005, would be a blockbuster after only two years on the market? Still, in 1997, Immunex had Phase II data with blockbuster written all over it, the kind of data that could well have justified a massive manufacturing expenditure. And if Mr. Fritzky was worried about what investors might have thought of such spending, he should have weighed that scenario against the one that ultimately forced him to write his “Dear Doctor” letter warning that only existing patients would be eligible to buy Enbrel because of an indefinite supply shortage.

This much is true: had there not been a supply shortage, there would have been no Wall Street exodus. In fact, analysts said at the time that absent the Enbrel fiasco, Immunex could not have been bought for less than $40 billion. In all likelihood, Immunex would not have been bought at all. Flush with more than $1 billion in cash in 2000, and home to a blockbuster drug that would go on to be approved for additional indications like psoriatic arthritis and psoriasis, Immunex was a powerhouse. More than likely, it would have become a hunter instead of prey.

The time to prepare for unforeseen product demand is before, not after, a supply crisis leads to reactive spending in a desperate bid to resolve the crisis, triggering panic on Wall Street.

Case Studies

» Immunex

CellGate

CellGate

Stayin’ alive on the road to product development.

The Case: CellGate, a biotech company formed in 1998, had already burned through $39 million in cash before receiving nearly $44 million in a fifth round earlier this summer. But the back-slapping had barely stopped before the company got bad news: it missed its Phase II clinical endpoint for its most advanced drug candidate, PsorBan. What has made this company so attractive to investors, and may ultimately help it develop successful product, is an elegant technology, a sound product strategy, and an experienced CEO who can bring the drug to market.

The young biotechnology company CellGate had managed to raise and spend $39 million in venture capital funding from investors like Johnson & Johnson Development before completing a $44 million round this summer. It was led by two VC firms that have backed CellGate in earlier rounds, too: New Enterprise Associates, whose portfolio includes the small-molecule therapeutic company Theravance, and by HealthCare Ventures, which has also invested in companies like Dendreon and Thios Pharmaceuticals. But CellGate’s summer achievement was notable in such a tough funding environment, and it was particularly well timed.

Not only did the money ensure the company’s immediate survival, it would have been nearly impossible to raise just a few weeks later, when the company faced a significant setback. Phase II clinical trials of its lead drug candidate, PsorBan, for the skin condition psoriasis, did not go well. The drug proved ineffective in many patients, and the trials missed the goal outlined in the plan it submitted to the U.S. Food and Drug Administration.