Business Development

Business Development Model

The company’s ambition is to be a bridge between TCM and Western medicine in many aspects and, in particular, in business development.

Our initial business strategy is to move a series of product candidates along the prescription drug development pathway with the goal of out-licensing these agents, currently at the Phase I/Phase II clinical trial stage, in accordance with current organization.  We believe that this strategy will optimally drive the valuation of the Company, and that it fits well with our R&D expertise, and can be later expanded.

1.     R&D Expertise

Our research expertise is based on starting with known medicines from TCM, confirming activity with animal models predictive of clinical activity, and adding value to the product candidates (goto Research Process).  This is accomplished primarily with our staff of scientists.  Subsequently, our expert Development Consultant team works with Pharmaceutical Vendors to effect the early development of product candidates (goto Development strategy).

2.     The TriptoSar agreement with PFM

Pharmagenesis, Inc. has signed an agreement with Pierre Fabre Medicament (PFM), a European company that has pioneered the use of natural extracts for pharmaceutical and dermatological products, to license TriptoSar, a patented derivative of a compound from a plant widely used in Chinese medicine.  Preclinical studies have shown that using TriptoSar can significantly inhibit growth of a broad range of human tumor cells.  A Phase I clinical trial was initiated in the USA under a Pharmagenesis, Inc. IND.

The license agreement gives PFM worldwide cancer rights to develop, register, manufacture, market and sell TriptoSar, except in Taiwan, China and Hong Kong.  The Group considers distributing TriptoSar in those territories through its two joint ventures, PhytoHealth (Taiwan and Hong Kong) and Tianjin Hualong (China).

Under the terms of the agreement, PFM will cover all related costs associated with development, manufacturing and marketing activities for TriptoSar.  Pharmagenesis  organized and monitored the first part of  Phase I clinical trials in the United States for TriptoSar and submits back-up compounds, if necessary.  PFM paid Pharmagenesis an up-front fee ($10.6 million) in 2001, and shall pay milestone payments and royalties based on worldwide sales up to 20% of sales.

TriptoSar will become one of PFM’s anti-cancer drugs.  PFM currently sells Navelbine® (Vinorelbine tartrate) originally extracted from periwinkle as a plant alkaloid.  Registered in more than 80 countries, Navelbine® is currently available in the United States through GlaxoSmith Kline, one of the world’s leading research-based pharmaceutical companies. 

Pierre Fabre SA, PFM's mother company, already has an equity investment in the holding Company of Orchid Sarl, initiated in 1999.

3.     Fujisawa Pharmaceutical Co., Ltd

On Sept. 23, 2002, Pharmagenesis, Inc. announced a collaborative research agreement with Fujisawa Pharmaceutical Co., Ltd., regarding novel and potent immune suppressants created by Pharmagenesis, Inc.  The agreement also gives Fujisawa an option to acquire the exclusive and worldwide development and marketing rights, except greater China, to WilGraf and related compounds in the therapeutic areas of transplantation and autoimmune diseases. 

The specifics of the deal includes that Fujisawa provides Pharmagenesis, Inc. with cash ($2.2 million) and Pharmagenesis, Inc supplies drug for renal transplant studies in the primate.  The deal lasts for 1 year and before the end of the period, Fujisawa will negotiate with Pharmagenesis, Inc. to license WilGraf or a structurally related derivative.  The territories of China, Taiwan, Singapore, Malaysia and Hong Kong are under negotiation.  The field of use of transplantation and autoimmune diseases may be expanded to include dermatology but not cancer.

Fujisawa is interested in our products because they inhibit cytokine production in T cells through a different mechanism of action from Fujisawa’s flagship drug Prograf® and are expected to be effective in prevention of acute rejection and chronic rejection for patients undergoing organ transplants.  Combination use with Prograf® would also be possible. 

Immunology and inflammation are among the major research focuses for Fujisawa. The immunosuppressant Prograf® is now commercially available in 57 countries and is the best selling product for the Company.  Fujisawa is actively searching new compounds following or to be used in combination with Prograf®.  Currently, Fujisawa is conducting Phase II clinical trials of FK778 (Fujisawa development code) in Europe.  In order to further strengthen its product portfolio, Fujisawa has decided to enter in collaborative research with Pharmagenesis, Inc. 

On September 4, 2003, Pharmagenesis and Fujisawa have agreed upon a “Long term cooperation between Fujisawa Corporation and Pharmagenesis, Inc., “ under which:

§         The option agreement is extended by two years and Fujisawa pays $4 million to Pharmagenesis, Inc. as an upfront compensation;

§         Fujisawa has an option to invest $3 to 10 million in Pharmagenesis.  In such case, $1 million out of the $4 million above shall be credited against the investment amount;

§         Heads of the future license agreement are defined, with Milestones payment up to $26,5 million and royalty up to 10% of sales.

 

Business Development in Asia

1.     Environment of pharmaceutical industry

Taiwan’s initial commercial success is based on electronics and, in the 1990’s, the government decided to consider other commercial sectors for expansion.  After a decade of study, the Ministry of Economics selected the pharmaceutical industry as the next arena for government support.  This is not a surprise decision, for the Taiwan government was the first to decide in the 1980’s on mass vaccination of the entire population with the hepatitis B vaccine.  To date, this is the only example in the world of government-driven mass vaccination that covered the entire population.  The Department of Health (DOH) reviewed the cost and benefit consequence for hepatitis B and came to the conclusion that the optimum solution was a mass vaccination despite the enormous cost for the program.  This is a very progressive step toward modernization of the healthcare care system in Taiwan.  At the time, the DOH of Taiwan focused on the available vaccines and was exposed to the environment of the Biotech industry.  The mass vaccination program coincided with the development of recombinant DNA hepatitis B vaccines.  It became increasingly clear that the pharmaceutical industry would have strong appeal as a commercial sector for expansion.  The Ministry of Economy decided to provide benefits to pharmaceutical companies engaged in the R&D of new drugs in a manner identical to that of the electronics industry.

2.     Strategy in Taiwan

Since the founding of Pharmagenesis, Inc., Taiwan has always had a strategic importance.  The founder of Pharmagenesis, Inc. Mr. Tih-Wu Wang was also the founder of a giant media-communication enterprise based in Taiwan.  As Pharmagenesis, Inc. moved into the development phase, with the first product PG2 progressing into clinical development in China, it was deemed necessary to establish a commercial alliance to market this new drug and to take the product into Asian countries.  Together with the evolving situation of a favorable focus on the pharmaceutical industry by the Ministry of Economy, the time was ripe for the establishment of a pharmaceutical company in Taiwan. With the collaboration of four powerful groups from Taiwan, PhytoHealth was formed.  Pharmagenesis, Inc. currently owns 10.3 % of the shares of PhytoHealth. 

In a parallel fashion, many of the countries in Asia with an evolving electronics industry also developed an interest in the pharmaceutical industry.  In the 1990’s many of the tertiary hospital and medical schools were involved with multinational pharmaceutical projects in Phase III clinical trial under US INDs.  Much experience was gained in the area of Good Clinical Practice by the participating investigators and their clinical centers throughout Asia.  Most notably, Taipei, Hong Kong, and Singapore each has one or two top-tier university hospitals that participated in the Phase III trials in a majority of the multinational pharmaceutical projects that were submitted for support of NDAs.  In part, this is a strategy of the multinational pharmaceutical companies, which allows their products to gain rapid registration in those markets when the NDA is approved.  However, since the clinical data generated in this way became part of the NDA clinical database, close attention was paid to selection of investigators and subsequent monitoring during the clinical trial.  The end result is an existing pool of qualified investigators in those top-tier hospitals and universities throughout Asia.  However, in most of those countries and territories, the indigenous pharmaceutical companies are not yet at the stage where they are generating new drugs of significant interest to take advantage of that expertise.

In APEC discussions, it became clear that it is difficult for any one ASEAN country to develop a new drug, to conduct Phase III clinical trials within its own territory, and to derive sufficient numbers of patients to achieve statistically significant efficacy results.  The time and economic considerations dictate the necessity to conduct multicenter trials, but the centers must be equally matched in expertise and patient enrollment.  The only logical solution would be to conduct multicenter, multinational clinical trials calling on all of the top-tier centers in the ASEAN region.  This ideally would solve the problem of timely completion of Phase III clinical development without undue delay.  However, the product registration in each different country and territory follows a different algorithm and set of requirements.  There is currently a discussion to consolidate and harmonize the different regulatory requirements so that a single multicenter, multinational phase III will satisfy all member countries for registration purposes.   This concept is similar to the approval pathway developed in EU for new drugs. 

The PG2 product license was granted to PhytoHealth for Taiwan, Malaysia, Singapore, Indonesia.  The PG2 phase I/II trial is ongoing in Taiwan (goto PG2).  A multicenter, multinational Phase III trial is under discussion for the purpose of drug approval and registration in member countries in the ASEAN region.  It is anticipated that the PG2 phase III trial will be the first trial under this “bridge project” program, which could revolutionize new drug development in Asia.

As each future clinical project evolves from a research program, those that are heading for US and EU pharmaceutical markets would be heading for the US IND pathway.  As the project reaches Phase III, PhytoHealth will negotiate for participation in the multicenter study, thus gaining experience and later saving time for registration in license territories.  For projects selected for Asia development, like PG27, PhytoHealth would spearhead the development process from the beginning with Phase I.  Thus, PhytoHealth functions as the development and commercial gateway to Asia for Pharmagenesis, Inc.

3.     Strategy in China

a)    Background

The Chinese economy has enjoyed more than two decades of double-digit growth under the auspice of the free market economy.  The GDP for China was $1.7 Trillion in 2002.  However, this figure was deceptively low in view of the fact that much of the health care cost is not fully adjusted upward to reflect more realistic values.  In the late 1980’s and 1990’s, the central government devoted considerable resources in an attempt to prop up failing state-owned business entities.  By the late 1990’s, the central government made a painful decision to allow the unfit state-owned enterprises to be eliminated by market forces, resulting in an economy that is more driven by market conditions.  A recent article in Business Week (Dec. 9, 2002) entitled “Greater China”, estimated the disparity with real purchasing power with a corrected GDP figure of $7.8 trillion for 2002.  This projection estimates  nearly 10 percent annual growth for the next five years until 2007.   The nominal GDP of China therefore is expected to increase to $2.7 trillion.

b)    China’s pharmaceutical market

Pharmaceutical sales in China have grown at an average annual rate of 14 percent for the past 15 years.  The main drivers of the pharmaceutical boom in China have been demographic shifts in addition to changes in cultural attitudes and government policy.  The growth rate of the pharmaceutical sector is significantly higher than the growth rate of the GDP in the same time frame.  In part this is due to the gradual phase out of free health care entitlement for all state owned business and its replacement by private medical insurance offered by various independent business enterprises.

According to US government China Trade Mission, China’s pharmaceutical market was valued at $8 billion in 1999, is estimated by year 2010 to have sales exceeding $60 billion, and is expected to become the world’s largest pharmaceutical market by 2020.

At the distribution level, the Chinese pharmaceutical market is dominated by the hospital sector.  Chinese hospital pharmacies account for 90 percent of all pharmaceutical sales.  The remaining 10 percent are through retail pharmacies and local clinics.

At the production level, joint venture (JV) pharmaceutical companies account for 15 percent of the total sales, and imported drugs account for 16 percent of the total sales in China.  Pharmaceuticals made by domestic companies tend to be cheaper and account for 69 percent of the total sales.

With the cost of health care rising rapidly in China, free health care is becoming a thing of the past.  New, employer-based insurance schemes and employee contributions are the foundation of the new insurance paradigm.  Currently, 29 percent of the population (mostly urban) is insured.  In a population of 1.3 billion, that means there are 377 million customers who are better able to afford medicines.  This is a significant increase from a decade ago when the population enjoying medical insurance was less than 20 percent.  (Seventy percent of China’s population resides in rural areas.  Rural China is covered by a different insurance system, but many people outside the cities effectively have no insurance.)

c)     Pharmaceutical market players

The JV companies in China have enjoyed much success in the pharmaceutical sector.  The leaders are Xian Jensen, Shanghai Squibb, Tianjin SKF, Dalian Pfizer, Roche, and Glaxo.  Together they enjoy revenues accounting for 15 per cent of the total sales in China.

Domestic pharmaceutical companies, the industry leaders of which include many of the formerly state-owned entities, such as North China Pharmaceutical Group (Hua Bei), Xin Hua Pharmaceutical group, Tong Ren Tang, and recently formed groups such as Zhong Xin Pharmaceutical Group, account for 69 percent of total sales.

d)    The Tianjin Zhong Xin Pharmaceutical group

Tianjin Zhong Xin Pharmaceutical group is the first Chinese company that went public in the Singapore stock market.  Its core activity is the development, manufacturing and sales of TCM drugs.  Its main brand name, “Great Wall”, is the best-known brand for TCM drugs worldwide.  Tianjin Zhong Xin Pharmaceutical group also developed several successful joint ventures with Western pharmaceutical corporations, including China’s most profitable joint venture in the pharmaceutical industry, Tianjin Smith Kline.

Pharmagenesis, Inc. has recently obtained SDA approval of PG2 as a New Drug in August 2001.  In anticipation of this event a Joint Venture company, Tianjin Hualong Pharmaceutical Corporation (THPC), has been established with Zhong Xin to handle the manufacturing, marketing, and distribution of PG2 in China. 

e)    Tianjin Hualong Pharmaceutical Corporation (THPC)

THPC was incorporated in March 2000 as a Joint Venture between Pharmagenesis (70% ownership) and Tianjin Zhong Xin Pharmaceutical group (30% ownership).

·         The total share capital has been fully paid in cash (no contribution in kind) and equals the RMB equivalent of $4,500,000.  Voting rights and economical rights are proportional to shareholdings.

·         The Joint Venture agreement calls for shareholders loans of $4,500,000 out of which $1,000,000 had already been contributed as of December 31, 2002 by the Joint Venture partners to THPC, the rest being called by the Joint Venture in 2003 pending actual financial needs (financing of the start of operations and launch of PG2 in China).

·         The Board of Directors comprises 7 members including 4 nominated by Pharmagenesis and 3 nominated by the Joint Venture partner.

·         The General Manager is nominated by the Board amongst candidate(s) designated by Pharmagenesis and the Deputy General Manager is nominated by the Board amongst candidates designated by the Joint Venture partner.

The inter-company contracts and financial flows are as follows:

·         Between THPC and Pharmagenesis:

·         A shareholders loan ($700,000 as at December 31, 2002) bearing commercial interest

·         Between THPC and Pharmagenesis, Inc.

·         A technology licence agreement (providing Pharmagenesis, Inc. with milestones and royalty payments)

·         Other assistance is reimbursed by THPC to Pharmagenesis, Inc. at cost plus management fee.

New agreement

Recently, Orchid and Zhongxing signed a new agreement of Jianjin Huanlong J-V, that Zhongxing needs to reinvest $1,928,600 in the form of RMB cash as contribution to the registed capital of THPC.  The registered capital of THPC will increase from $4,500,000 to $ 6,428,600.  With this reinvestment, the capital from Zhongxing will make up to 51% of total shares, whereas Orchid will be 49%.  Zhongxing then will be the new major share holder for THPC.  This transition is now under process that has to be approved by the government of China.

With the above new agreement, Zhongxing is now proposing to reduce the current seven board members to five.  Three will be from Zhongxing and two will be from Orchid.  The two assigned from Pharmagenesis are Mr. Nicolas Druz and Dr. Jinhua An.

Currently, Ms. Yu Xiao has appointed as General Manager from the Zhongxing party, and Dr. Jinhua An as VP, Technology from the Orchid party.

THPC has successfully manufactured 3 batches of PG2 in its China SFDA GMP-certified facility in compliance with Chinese GMP.  The final application for PG2 manufacture and product launch has been submitted to SFDA.  Now, JV is targeting to launch PG2 in China in July, 2004.

 

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