Watson announced yesterday that it is tying up with Amgen to develop biosimilars of ‘several’ oncology monoclonal antibodies. Under the terms of the deal, Amgen will have the main responsibility for the actual development work, as well as manufacture and initial commercialisation (under a joint Amgen/Watson label). Watson will chip in a maximum of $400m of co-development costs, spread over the development period, and will then receive royalties and sales milestones once products actually launch (but not apparently before). It will also be involved in the lifecycle management of the new products as they move from a branded to a more generic sales model and will provide expertise on how to market them in a generic arena. It may even do some marketing itself, but this will depend on how the biosimilar market develops in any given country – the joint label should facilitate products being switched between Amgen and Watson sales forces.
No matter how you look at it, this is a pretty smart deal. Watson has long been convinced that biosimilars will have to be actively marketed to specialists, which is why its in-house efforts in this area have been restricted to FSH, a product used in fertility treatment that it will be able to promote using its existing obs/gyn sales force. Watson does not currently have reps targeting oncologists and thanks to this deal, it won’t need to hire any as it can piggy-back off Amgen’s existing infrastructure. It also avoids having to invest in expensive production capacity or needing to rely on a small biotech partner to do the critical early development work. And finally, it gains credibility, as the physician community is more likely to be convinced by a biologic coming from Amgen, which is already well-known in the biotech field, than it is by one produced by Watson.
Watson expects that the overall development programme will last seven or eight years, with launches concentrated in the 2017-19 period (and hence the biggest part of the spending coming earlier than that, probably in 2014-16). It has not revealed the name of any of the products involved in the deal or said how far through development they are at present, although they have apparently reached a stage at which it is possible to diligence them. Given the money involved, we presume that there are around six drugs on the list, but since the spending won’t ramp up for a couple of years, they are unlikely to be very close to the clinic. In any case, the FDA has not yet come up with the full details of what trials it will require for its new biosimilar approvals pathway, which makes it difficult for biosimilar hopefuls to progress too far. Nevertheless, Watson believes that it will be present at market formation for all the products that it intends to develop.
On the conference call that it held to discuss the deal, Watson identified the biggest risk as being financial, ie that it wouldn’t get a return on its investment because the biosimilar market wouldn’t develop as expected. Management was much less concerned about Amgen being unable to develop, manufacture or launch the products. We agree that Amgen should be a competent partner and one that is well-placed to get biosimilars to market on time, but the risk of the market disappointing is higher even than Watson thinks, in our view. For one thing, the blockbuster oncology mAbs are likely to be popular targets, so unless Watson and Amgen have been reasonably cunning and gone for some less obvious drugs, they could find themselves in a rather crowded field – and one that contains big pharma companies like Merck as well as by the obvious generic players. Then there is the psychological challenge for the Amgen sales force of selling products that have no differentiating features from the originator apart from being cheaper. This is not the sort of message that big pharma reps are used to delivering and they may not be very good at it. Indeed, bizarrely, it may be harder for them to promote this message than it is for reps from a generic company.
Finally, there is the question of whether the interests of Amgen and Watson can remain aligned in the event that the biosimilar market becomes a truly generic one. As we have noted previously, the US differs from Europe in that the FDA has the authority to approve interchangeability between biosimilar and originator drugs, while the EMA does not. Without interchangeability, biosimilars are likely only to take a small percentage of the market, won through intensive promotion to doctors. With it, they will dominate the market, but at much lower prices. Since Amgen is responsible for manufacturing, Watson will need to hope that its partner’s production costs are low enough to compete in this environment and that Amgen is ready to put continued effort into products that could have much lower margins than its proprietary drugs. The fact that Watson appears to be taking a cut of sales, while Amgen needs to generate profits, also means that the two companies may not have the same incentive to keep going once prices get below a certain point. And if products launched early don’t turn out well, Amgen’s enthusiasm for getting the later ones through registration could be dimmed. According to Watson, several joint committees will oversee development and commercialisation of the chosen products, but management was less clear on what might happen if the partners run into disagreements somewhere down the line. Although Watson is free to develop other biosimilars with other partners, it is tied to Amgen for the ones included in the agreement, so there is no Plan B if Amgen gets cold feet.
All that said, Watson is only facing the same market uncertainties as its generic competitors and with the Amgen deal, it has both capped its expenditure and significantly reduced its development and commercialisation risk, which has to be a great result.
Posted on 12th December 2011