Magazine Article | August 5, 2010

A New Breed Of Generics Company

Source: Life Science Leader

By Dan Schell, Editorial Director, Life Science Leader

I admit it — I was skeptical of the claims Alvogen was making. Prior to typing a single word on this two-year-old generics company, I encountered claims such as “creating the pharmaceutical company of tomorrow … ,” “a radical new business model … ,” and “Alvogen will be one of the world’s 10 biggest generic drugmakers by revenues in five years.” Further, in everything I read, vague terms such as “flexible,” “strategic partnering,” and “lean” kept popping up. I wanted clarification. I wanted to know if the company could live up to its marketing rhetoric. I wanted answers.

Lucky for me, the company’s CEO, Doug Drysdale, was happy to oblige. During the course of our conversations, the soft-spoken, 40-year-old Englishman patiently answered all of my questions and gave me a clear explanation of how the company planned to grow by limiting its fixed infrastructure (e.g. staying “lean” with the number of locations it owns) and focusing on emerging markets and the production of “complex” generics.

Keeping M&As To A Minimum
The vision for Parsippany, NJ-based Alvogen originated in 2008 with Drysdale, who set out to create a U.S. company focused on the development of complex generic products. Robert Wessman, who, in 2009, purchased a 30% stake in the company and became executive chairman, enabled the launch of Alvogen’s international expansion plan and strategy to target the top 20 emerging markets. Previously, Wessman had served as CEO of generics company Actavis, where Drysdale also was employed. By joining forces, this duo was able to recruit several former colleagues and attract notable industry leaders to become members of the Alvogen executive team (e.g. CFO, chief organizational development officer, COO). “Bringing this team together with proven expertise and synergy made it a lot easier in terms of ramping up and executing on projects quickly,” explains Drysdale.

And ramp up quickly is exactly what they did, growing a portfolio of 220 products in two years. Of course, it helped that the company had previously purchased New York-based Norwich Pharmaceuticals, a large, full-service CMO and packaging provider that creates the bulk of the company’s products. In addition to Norwich, Alvogen is currently working on opening plants in Eastern Europe and China. Beyond that, though, it mostly relies on outsourcing partnerships, shunning the more traditional model of purchasing large portions of the value chain through high-priced M&As.

“Many companies that have grown through acquisition have found themselves with an extensive network of manufacturing plants throughout the world,” says Drysdale. “That fixed infrastructure requires a lot of capital to maintain and continuously operate. We believe it’s important to keep our core infrastructure in-house to avoid having a sprawling network of plants with fragmented capacity. By having fewer larger plants, we are more apt to fill those plants and use them more effectively.”

While a lot of M&As is not part of the expansion plan for Alvogen, the company isn’t averse to growing via greenfield projects, as long as those projects can meet the company’s strategy of turning cost centers into profit centers. For example, in April 2010, Alvogen announced it was opening Norwich Clinical Services, a CRO established in India with regional operations in the United States and Europe. Initially the facility will offer pharmacovigilance monitoring, bioanalytical studies, and medical writing services. A 60-bed clinical trial facility located on a hospital campus will be added later this year for Phase 1-4 studies.

The CRO’s pharmacovigilance services will come in handy since Alvogen plans to conduct at least 100 bio studies during the next 12 months. “Our internal costs to provide these services to ourselves are obviously lower than going to third parties, but our main rationale for creating this division is to have better control over quality and compliance,” says Drysdale. “This is important because compliance issues at CROs have prevented products from being approved, and we don’t want to find ourselves in that situation. Our partners will see that we take these services very seriously, considering our own products are going to be produced using these facilities.”

Forget The Bureaucracy — Let’s Make Decisions!
Of course, with a business strategy based on maintaining a lean infrastructure, you need to rely more on partners. That translates to a lot of time finding and vetting the right partner, which is why it pays to have people like Drysdale and his former Actavis colleagues on staff. Drysdale was in charge of M&As in his former job, and he and the other Alvogen executives all have a lot of contacts in the industry. Those contacts have led to nearly 20 multinational partnerships, such as those with Penwest (for providing formulation services for up to five compounds) and Orchid Chemicals and Pharmaceuticals (for development and manufacture of eight oral nonantibiotic formulations).

Having a staff with strong industry connections and knowledge also equates to a team with a high level of confidence when it comes to quick decision making, which Drysdale attests is imperative to his company’s fast growth trajectory. “We are a very low bureaucracy organization,” he explains. “We operate locally, with strong local management teams, and have a very small corporate management group. We’re obsessive about detail and execution, having strong tracking systems for each material project, but we’re also very action-oriented and comfortable about making decisions fast without having 100% of the information.” As an example, he cites one project with a multimillion-dollar development cost. After meeting with the partner company at an industry meeting, Alvogen dispatched a technical team the following day to Europe. Within three days of the initial meeting, the Alvogen team had completed its initial technical and business review and had signed a term sheet to partner the development of this complex project. Drysdale says this is also a good example of why he often uses the terms “lean” and “flexible” when describing Alvogen.

Another example of flexibility relating to partnering is the company’s regional packaging centers in Europe. The establishment of these facilities enables Alvogen to hold packaging product in bulk and then pack as needed for each of the small markets around the region. This allows inventory to be flowed to meet the changing demand of each market and creates greater flexibility to meet customers’ packaging priorities.

The Lands Of Untapped Potential
The phrase “emerging markets” is bandied about today almost as much as terms like flexible and lean. All pharma companies seem to be focusing on some definition of emerging markets with the expectation that these countries represent varying levels of untapped sales potential.

According to the March 2010 IMS study, “Pharmerging Shake-Up: New Imperatives in a Redefined World,” the following 17 countries are now considered high-growth “Pharmerging” markets: China, Brazil, India, Russia, Venezuela, Poland, Argentina, Turkey, Mexico, Vietnam, South Africa, Thailand, Indonesia, Romania, Egypt, Pakistan, and the Ukraine.

“We are targeting the top 20 emerging markets in Central and Eastern Europe [CEE], Asia, and Latin America,” states Drysdale. “We see growth in those regions as their economies expand and grow. In fact, we are well on our way to building a strong pan-regional platform across CEE, we have a partnership in Vietnam, and we have established operations in China where we plan to file 10 to 15 marketing applications this year.”

When entering new markets, there are language and regulatory barriers that need to be overcome. Alvogen is solving this problem through a combination of greenfield operations and targeted local acquisitions. In the case of greenfield operations, the company is employing very experienced local management teams with strong local knowledge in multiple markets in CEE.

Tackling Complex Generics
Similar to how they are beginning to focus on emerging markets, many pharmaceutical companies are now investigating developing more complex drugs that may have, in the past, not been considered profitable enough. These types of drugs are Alvogen’s primary focus, not secondary, as with many established players in the market. “We try to choose products that have two to three or more barriers to entry,” explains Drysdale. “Some examples include those that are difficult to replicate [e.g. controlled-release products] or those with a complex formulation, complex intellectual property environment, limited-source APIs, special handling requirements [e.g. drugs like hormones or steroids], controlled substances, and complex clinical study requirements. Usually we find 3 to 5 competitors selling these types of products as compared with 10 to 15 with the other kinds.”

The company has a highly defined product selection process, which is executed by a group of experts who filter through all of the molecules coming off patent. The group takes into account a whole range of considerations, including what the market would look like, API sourcing/supply, the IP environment, technical/clinical challenges, and how the product is manufactured. “If the potential drug doesn’t appear to be complex enough, in our view, the product isn’t a fit for us,” comments Drysdale.

Alvogen partners with small firms that have the expertise for producing such difficult products. Alvogen’s in-house staff, which includes an R&D team that has a lot of experience with controlled-release products and filing first-to-file ANDAs (abbreviated new drug applications), works with those partners. The company’s partnership with Penwest is a good example of this kind of relationship. Penwest has a unique time-release technology used for controlled-release products that have profiles which are very difficult to mimic. “Our expectation is that very few companies will be able to produce these products, so this partnership fits well with our goal of expanding into complex products with limited competition,” Drysdale says.

220 Products In Development
In 2009, Wessman stated his company would spend approximately $70 million on R&D in the next two years. So far, the company is on track to reach that level, with a lot of those monies going toward its internal R&D group in New Jersey, expansions at Norwich in New York, and product development and formulation investment through partners. “We are spending aggressively in R&D because of the phase of growth we are at, but also, in a generics company, products have a fairly short life cycle, so there’s constantly a need to have a pipeline of new products,” Drysdale says.

Indeed, Alvogen is doing its best to keep that pipeline full; it currently has 220 products in development and registration, about 70 in the United States and 150 in Europe. The company can run its own clinical studies, manage its own legal/regulatory/IP requirements, manufacture, sell, market, and distribute its products, all without the burden of a huge worldwide infrastructure.

“Many other generics companies tend to have broader portfolios, and they try to be all things to all people,” concludes Drysdale. “As a result, they end up with portions of their portfolios that are not necessarily profitable — they are just covering their overhead. For us, when you combine the low overhead with the selection of products and markets, you can see we are being very strategic.”

6 Business Quesiotns For A First-Time CEO

Forty-year-old Doug Drysdale became CEO of Alvogen in March 2008.

This is your first CEO role. What part of your new job has been the most difficult to adjust to?
I know the devil is in the details from my M&A background, so I have a tendency to want to get into the details of every aspect of the team. Obviously, our rate of growth makes that challenging. I’m fortunate to have a strong management team leading our 400 to 500 employees located on three continents, the bulk of whom are in the United States.

Describe what tasks take up the majority of your time as CEO.
I’d say growth (i.e. sales and marketing/business development), execution of R&D projects and regulatory filings, and finally HR. I spend a lot for time interviewing prospective employees because the future of our company is in the hands of the employees we haven’t hired yet.

As a veteran of many M&As, explain some common mistakes made by companies seeking to be acquired.
Acquirers often get emotionally attached to a deal after many months of negotiating. And many hang on to that emotion and complete the deal anyway, despite the fact they should have walked away. You have to stay objective, and separate that emotion from the decision-making process. Some of the best decisions I’ve been associated with involved walking away from a deal. You have to stay true to the objectives you set upon at the beginning.

List a personal leadership skill you consider to be your most valuable.
Through all my years of negotiations, I’ve gained the ability to clearly understand the perspectives of others and see their unspoken concerns or sensitivities. That helps me in every part of the business — with suppliers, partners, employees, and customers.

What business lesson have you learned from working with Robert Wessman?
I’ve learned many lessons from Robert. I always use the mountain climbing example. Robert’s style is to keep pushing for one more ridge. There’s always one more ridge even after you reach the top. Our limitations are just preconceptions we set for ourselves and can definitely be exceeded and overcome. This pertains to everything from an M&A deal to trying one more shot at a product formulation.

What’s next for the generics industry?
I think further consolidation is inevitable. Scale will continue to be necessary to enable generics companies to leverage their pipeline investments. As brand companies have worked to differentiate and protect their products over the last decade or more, it follows that generic product development naturally becomes more complex and intellectual property barriers increase. This evolution means that overall generic product development investments will continue to rise and put pressure on companies to leverage their growth across multiple markets. Further, as off-patent small molecule targets are increasingly replaced by large molecules (e.g. biogenerics), generics companies relying on small molecule technology will be forced to partner or consolidate as they see their future potential pipeline opportunities shrink.