Douglas Pharmaceuticals diversifies, shoots for near quarter-billion dollar turnover

Douglas Pharmaceuticals, New Zealand's largest developer and manufacturer of generic pharmaceuticals, is targeting annual revenues of $244 million by 2020 from $145 million today as it diversifies and seeks higher risk, higher reward opportunities in novel drug development.

The traditionally media-shy Auckland-based company told BusinessDesk that growing exports, particularly into the US, Asia, and Middle East, was also critical to meeting the target, set in mid-2013.

Douglas Pharmaceuticals has four divisions: contract manufacturing for other drug developers; compliance packaging, making Medico blister packs for prescriptions mainly for the elderly; consumer products ranging from cough medicine to hair care, where it imports other brands and sells its own; and developing and manufacturing prescription medicines.

The strategy involves boosting volume in its Henderson manufacturing plant through increasing third-party manufacturing from the current $15 million a year to $25 million and making more prescription medicines with a new soft-gel capsule technology developed with a $2.5 million Callaghan Innovation grant.

Few manufacturers worldwide have a contained facility that can produce soft-gel capsules for toxic products, said managing director Jeff Douglas.

"We can't compete on large volume, low cost products against the big manufacturers based on price, so we look at technically hard products that require special manufacturing. The volumes are less but the prices are better and soft-gel is right in that sweet spot," he said.

The company has a number of drugs under development in the more convenient soft-gel capsule form, including Paricalcitol for renal failure. Dutasteride for benign prostate hyperplasia already has approval to be sold in Europe in 2017, once the patent expires and approval is expected this year in the US.

The soft-gel technology also allows the company to manufacture its biggest-selling generic product, anti-acne drug isotretinoin, which until now has been made by third parties in Europe and is now made in Auckland. The drug took 10 years to get approval in the US where it has grabbed a 22 percent market share of the acne medication market since launching two years ago.

The company also wants to buy consumer brands to better use its dominant New Zealand sales distribution of over-the-counter products, nutraceuticals and dietary supplements. That follows the successful purchase six years ago of the Clinicians brand, which is manufactured in its Fiji plant.

Last year the company started importing robots from Japan to fill its Medico blister packs sold to pharmacies and resthomes, rather than having to do them laboriously by hand. So far 30 have been sold to Kiwi pharmacists and the company also has exclusive licence rights in Australia.

But the riskiest and potentially most lucrative part of the diversification has been to move research and development beyond generic prescription medicines to novel drugs. A number of these are now in the pipeline, though Douglas won't say what for commercial reasons.

"We want to take an existing molecule or existing drug and change its form or use it for different indications. Those changes are patentable and we would be protected from competition for a period," he said.

One example now in the US market is Clozapine, a suspension schizophrenia treatment that Douglas was the first to make in a liquid form that still has the same efficacy as tablets.

While this R&D is more costly than developing straight generics, it is not as expensive as developing a brand new molecule. It hasn't all been plain sailing though, with one drug failing at patient trials last year after $7 million was spent on development.

The company has sought other ways to gain a point of difference, though they're hard to come by, Douglas said. An example is Silvasta, its generic drug for erectile dysfunction. Last October New Zealand men became the first in the world to be able to buy Douglas's pills for erectile dysfunction over the counter from specially trained pharmacists rather than by prescription, making it a convenient alternative to the patented Viagra.

Sales are, apparently, on the up.

The aim is to keep manufacturing and jobs in New Zealand, which hasn't proven easy since health reforms in the 1990s saw the government drug buying agency Pharmac set up tenders based on the lowest prices.

"The margins are extremely unattractive and not sustainable for local manufacturers who have to support machines and plant. Some of the product coming into New Zealand is dumped or marginally costed," Douglas said.

That argument fell on deaf ears and forced the company into exports, which now account for 70 percent of revenue.

Due to differing regulations in each market, Douglas has a mix of business models. The best margins are in the US, where it joint ventures with three major partners going 50:50 on drug development costs and profits. In Europe, it sells the IP for each drug and enters into an exclusive five-year supply agreement and in Asia and the Middle East it licences the IP and has a supply agreement.

Set up in 1967, Douglas Pharmaceuticals is still owned by founder Sir Graeme Douglas, despite a brief flirtation with selling it in late 2012. He remains board chairman but stepped back from running the company a year ago. The 86-year-old was meant to retire but has instead set up Douglas Nutrition, which is developing nutritional products for the young and the elderly.

Douglas Pharmaceuticals began manufacturing generic pharmaceuticals in the 1980s because drug patents only last 20 years under New Zealand law, five years less than elsewhere in the world. It has a window of opportunity to develop a generic version of a patented drug ahead of competitors and have it ready to go to market the day the patent expires in markets offshore.

The Americans have tried to close that window during the Trans-Pacific Partnership trade deal negotiations, arguing for a five-year extension of New Zealand's patent laws, but Douglas said he's been assured by government negotiators that they won't cave on the issue.

"We've not seen the agreement so we just don't know," he said.

It would not only hurt Douglas Pharmaceuticals, but also be bad for the country as New Zealand would end up paying higher prices for drugs, Douglas said.

(BusinessDesk)

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