Sagent Turns Generic Injectable Shortages Into Business Opportunity

The specialty generic manufacturer has a facility dedicated to producing shortage drugs, a seemingly endless commercial opportunity given the development, regulatory and reimbursement challenges in the sterile injectable space.

Sagent Pharmaceuticals Inc., a high-growth drug manufacturer playing in the generic injectable space, is focusing on drug shortages as one area of expertise and benefiting commercially.

The company, which operates a sterile manufacturing plant in Chengdu, China dedicated to shortage drugs, launched its first product out of the plant last year after FDA approved the facility in 2012.

That product was the chemotherapy carboplatin, which Sagent launched in November 2013 after larger rivals were unable to supply the product due to high demand, manufacturing delays and issues accessing pharmaceutical ingredients. The U.S. market for carboplatin injection is estimated to be around $30 million, based on IMS Health data.

Sagent, based in Schaumburg, Ill., has filed another six products, all of which address drug shortages, CEO Jeffrey Yordon said in a recent interview.

“Right now there are over 300 injectable shortages in the U.S.,” Yordon said. Sagent is mainly focusing on manufacturing cancer drugs at its new facility; oncology is a therapeutic area where there is often high demand for older medications that are used in backbone cocktails, but frequently a limited supply. One reason for the short supply is that the drugs are reimbursed at such a low rate it is often not profitable for manufacturers to make them.

“We make them, but our philosophy is we don’t participate in intense contract negotiations,” Yordon said. “We have it if you need it but we are not going to sell it below our rate.” Still, he said Sagent will price the products at a “reasonable rate.”

“We want to make a 30% to 35% margin, which when you think about what goes into making these drugs, we think is a reasonable margin.”

Another issue contributing to shortages is manufacturing quality, an issue particularly for drugs produced in India, where FDA has imposed import bans on several manufacturers, including Ranbaxy Laboratories Ltd. and Sun Pharmaceutical Industries Ltd. (Also see "Sun Pharma Joins List Of Indian Pharmas Shadowed By U.S. FDA" - Scrip, 13 Mar, 2014.).

But Indian firms are not the only ones facing quality issues. Germany’s Boehringer Ingelheim GMBH sold most of the assets from its U.S.-based sterile injectable business, Bedford Laboratories, Inc., earlier this year due to quality control and the investment needed to upgrade the facility (Also see "Hikma To Buy Bedford, Transfer Manufacturing For U.S. Generics Injectables" - Pink Sheet, 28 May, 2014.). Novartis AG’s Sandoz generic unit has also come under fire from FDA for manufacturing quality concerns.

Drug shortages are a hot button issue at FDA, which is exploring ways to address the challenge (Also see "Generic Rx Shortage Initiative Stuck: Too Few Manufacturers To Pick Up Slack" - Pink Sheet, 8 Jul, 2013.). One advantage for Sagent is that FDA is willing to work closely with manufacturers who can fill a void in the market.

Higher Barriers To Entry Presents Opportunity

Generic injectables are a challenging business area. The sterilized manufacturing process is highly complex and the products can require more sophisticated formulations and packaging than small molecule generics. The products are also generally sold to hospitals and clinics through contracts negotiated by group purchasing organizations, which can require a hospital-focused commercial organization. But the higher barriers to entry mean fewer competitors and more pricing leverage for the players that can establish a successful business (Also see "Generic Injectables: Pharma Takes A Shot At A Growing Market" - Pink Sheet, 9 Nov, 2009.).

That is where Sagent is looking to capitalize on the opportunity, with its state-of-the art facility in China built using a fully automated isolator technology. The company built the facility in a joint venture collaboration with the Chinese company Chengdu Kanghong Pharmaceuticals (Group) Co. Ltd., but acquired the full rights last year for $25 million to gain more control over its supply and move forward with plans to expand capacity.

But a lynchpin of Sagent’s strategy is that it also works with a network of 38 contract suppliers around the world; it has helped those companies secure FDA manufacturing approval and then uses their facility to manufacture products to sell in the U.S. As a result, the company has a broad supplier base to tap.

“We have about 2,500 people doing development where most of our competitors have about 100 people doing development,” Yordon said. “Most of those people don’t work directly for us, but they are part of the consortium.” Sagent itself employs about 110 people in the U.S. and 200 in China.

Aside from drug shortages, another big emphasis for the company is improved formulations; for example, putting a product that has never been available in a premix bag into a premix bag or creating a liquid product from a drug that was previously only available in a lyophilized formulation.

Last year, Sagent launched a generic version of zoledronic acid (Novartis’ Zometa) for cancer that has spread to the bone available in a premix bag for the first time.

“There are 14 competitors on the generic market. We are the only premix bag,” said Yordon. “We have a much higher price and about a 40% margin.” The launch was one of Sagent’s most successful last year, along with generic versions of the chemotherapy docetaxel.

Expenses Limit Profitability

So far this year, Sagent has benefited from two shortages in the market for drugs it was able to supply: the anticoagulant heparin and leucovorin calcium, which is used alone or with other drugs to treat cancer. Sagent reported $4 million in incremental revenue in the first quarter as a result of being the only supplier of one particular heparin code during the period. Revenue for the first quarter was $70.9 million, up 18% over the prior quarter. The company reported net income of $5.1 million in the first quarter.

Sagent has been a high-growth revenue generator but its profit line has not seen the same level of growth, largely because of the company’s high spending on its pipeline and manufacturing investment. The company expects to spend $12 million to $16 million annually as it ramps up supply at its Chinese manufacturing facility and another $30 million over the next several years as it expands with the addition of a second line.

“We believe Sagent has one of, if not the best, management team in the generic injectables business and view their collaborative business model as highly innovative,” said one analyst, Jefferies’ Daniel Steinberg. “That said, the fundamental weakness in the strategy, in our view, is that the company has effectively traded margin for pipeline breadth and diversity.”

Sagent, which was established in 2006 and went public in 2011, is forecasting 2014 sales will be in the range of $250 million to $290 million. driven by 10 to 15 new launches. Net income will be in the range of a $10 million loss to $10 million in earnings. One reason the company is giving such broad guidance is because it expects to have less visibility from FDA on ANDA approval guidelines as the Generic Drug User Fee Act (GDUFA) goes into effect.

GDUFA will require generic sponsors to include more exhibit batches and stability data with their applications than previously required, effective June 20 (Also see "GDUFA’s Perfect Storm: Approvals Drop, Submissions Jump" - Pink Sheet, 21 Apr, 2014.). Critics think the new requirements will slow the approval process down. Sagent, like many of its competitors, has been rushing to file ANDAs ahead of the deadline; the company expects to file all 16 of the ANDAs it has targeted for filing this year by June 20, Yordon said.

One way Sagent could drive more growth is via acquisition, and the company is actively looking to acquire new products or a smaller competitor.

“We are intensely focused on several key deals,” Yordon said. The company is interested in expanding outside the U.S., for example, and is now considering biosimilars, an area of development it has so far avoided.

Yordon has stayed out of the emerging business area because he thinks it is an expensive investment given the uncertain regulatory hurdles and commercial opportunity. Now as the biosimilar opportunity matures, he said the company might consider a marketing partnership with a company that has already developed biosimilar drugs. The catch is finding an acquisition the small company can afford.