Feature Article

Insmed Gets Used to Biotech

Geoffrey Allan has seen failure. He's witnessing success. And he's closely monitoring an uncertain future. 

"It's all about building a company, taking the risk and living through all of those hardships where you wonder where the next paycheck is coming from - and staying with the game," said Allan, chairman and chief executive of Henrico County-based biotechnology company Insmed Inc. "Insmed and its employees have been through those battles."

The positive outcome has been the Dec. 12 federal approval of Insmed's lead drug, iPlex. Success has also come at the cost of a failed product line and an overhanging patent-infringement case that threatens production and sales of the drug - and revenue the treatment could bring.

Insmed's drug treats children who suffer from a rare but severe growth disorder.

But the company's tale isn't complete until introducing its competitor, Tercica Inc., a Brisbane, Calif., firm that makes and sells a drug similar to iPlex, called Increlex.

Tercica had its drug approved by the U.S. Food and Drug Administration in late August, nearly four months before the FDA approved iPlex.

Both companies started selling the drug this year - though Tercica had a five-month head start. The treatments could help as many as 6,000 patients who suffer from a severe form of a disease that causes children to grow more slowly than normal.

The market is estimated at $150 million to $200 million. About 30,000 U.S. children could have a less-severe type of the disorder, and both drugs could have potential in this larger market.

Increlex and iPlex treat a relatively small number of people. But each drug has capabilities in far more common conditions - indications that also carry larger sales potentials.

Insmed is researching ways to use iPlex to treat the buildup and loss of fat related to HIV, muscle and nerve degeneration, diabetes and extreme resistance to insulin - a condition that can lead to obesity, high blood pressure and elevated levels of fat in the blood. John A. "Chip" Scarlett, president and CEO of Tercica, said his company has interests beyond growth disorders, but didn't want to give specifics.

Insmed will release data on iPlex clinical trials on other uses for the drug in coming months. Allan said no new iPlex treatments will gain approval until after 2008.

"It's always been that iPlex would create a franchise around metabolic illnesses," said Allan, 53, a native of England. "It's a very broad-pronged approach to look at a variety of indications."

There is, no doubt, some uncertainty in Insmed's future as the company faces a trial in November on charges it infringed on patents held by Tercica.

Despite insecurity - which comes with the territory in high-risk, high-reward biotech companies - local biotechnology officials point to Insmed as a symbol of the Richmond area's potential for growth in the life-sciences industry.

"Having the drug approved by the FDA by anyone's standard is a huge success. I don't care what state you're in - that's big news," said Mark A. Herzog, executive director of the Virginia Biotechnology Association. "It's a big step forward for the modern biotech community."

He believes Richmond has not seen such a promising pharmaceutical company since A.H. Robins Co., the medical firm founded here in 1889 that became part of Wyeth.

Insmed has shifted shapes many times since its founding in Charlottesville in 1988, when it spun out of the University of Virginia to develop diabetes drugs.

Allan joined Insmed in 1994, and the company became one of the first tenants in the Virginia BioTechnology Research Park in 1995. Some five years later, Insmed purchased Celtrix Pharmaceuticals Inc., a then- struggling public company that made a diabetes drug called SomatoKine.

Because the two companies were involved in similar drug research, Celtrix was a good fit, said Kevin P. Tully, Insmed's chief financial offer. The company went public after the acquisition, trading under the Nasdaq symbol INSM.

Buying Celtrix, Insmed officials would later learn, was a good move.

In September 2002, Insmed dropped development of its drug for diabetes and polycystic ovary syndrome, which failed in trials. The company cut its work force in half to about 25 employees.

But the acquisition had given Insmed another drug to research. Without Celtrix and SomatoKine, Allan said, "we would have probably ended up as a failed company in 2002."

That year, a California company formed after licensing technology from Genentech. The patents and technology were for a drug called recombinant human insulinlike growth-factor-1, or rhIGF-1.

The company was Tercica.

Within a month of Insmed's product failures, the company had turned its focus to SomatoKine, which could be used to treat children with growth-hormone deficiency.

The drugs from Tercica and Insmed could treat this condition, replacing the nonexistent hormone with the similar rhIGF-1 - the active ingredient in both iPlex and Increlex.

Developing such a treatment was the "fastest, least cash-intensive" path to get approval from the FDA, Allan said.

And the move paid off.

The FDA greenlighted SomatoKine within three years, and the drug's name was changed to iPlex.

The Insmed of today, Allan says, is truly the product of the past six years of development. The company has about 45 employees at 4851 Lake Brook Drive in Glen Allen. A few miles east of the Rocky Mountains, Insmed employs 85 workers in a Boulder, Colo., manufacturing facility called Insmed Therapeutic Proteins.

The lease on the brick Henrico building is up in October, and Insmed plans to move its lab spaces to Colorado but will keep administrative operations in Richmond. The company has a sales force of about 20.

Risks to Insmed's future are clear.

"It's a business of managing and balancing risk, but in several areas," said Tully, the CFO. In addition to drug research, Insmed is involved in manufacturing, sales, finance and ongoing litigation, he said, "and each one of these areas has its own level of acceptable risk."

Analysts expect the patent-infringement trial later this year to be a large hurdle.

Last week a California court ruled that Insmed's process for making iPlex infringes on parts of patents held by Tercica. The rulings mean the dispute will have to be resolved at trial in November.

But as is the case in many patent suits, a monetary settlement would be more likely if Insmed is found to have infringed upon Tercica's technologies. An appeals process may follow any outcome.

Insmed also must successfully develop other product lines for iPlex and differentiate the drug from Tercica's Increlex, Andrew S. Fein, an analyst at C.E. Unterberg Towbin in New York, wrote in a recent research note.

Wall Street hasn't shown much excitement for Tercica or Insmed in the past year.

Shares of Insmed hit a 52-week high of $3.35 in January after approval of iPlex, but they have since plummeted 61.5 percent, closing Friday at $1.29. Tercica, meanwhile, hit its one-year high of $12.77 in September after approval of Increlex, but shares have fallen 64.8 percent to close at $4.50 on Friday.

"You have two companies going head to head in a small patient population," said Matthew S. Osborne, an analyst who covers both firms at Lazard Capital Markets in New York.

Insmed's future, he said, depends on a favorable outcome in the patent-infringement case and successful development of iPlex for conditions outside of growth disorder.

Though he views Insmed's once-daily iPlex as superior to twice-daily Increlex, Osborne remains uncertain on the patent case. "There's something to be said for the owner of a patent," he said of Tercica, "and that's what's at stake right now."

Analysts at Cowen and Company believe Tercica will have its patent rights upheld and "will eventually come to dominate the [severe growth-disorder] market."

Lazard places a buy rating on Insmed and hold on Tercica; Cowen rates Tercica a market outperform.

In surveys of 68 children's doctors, Osborne has found more than half are already using Tercica's Increlex to treat a less-severe form of the growth disorder, which may affect 30,000 patients as opposed to only 6,000.

"So we expect the same for Insmed's iPlex," he said, even though neither drug is currently approved to treat the condition.

Tercica is undergoing clinical trails to get FDA approval for the less-severe growth disorder; Insmed is not.

Regulatory approval will allow Tercica to broaden marketing efforts of Increlex beyond its current severe growth-disorder indication, said Scarlett, the company's CEO.

Without approval, Insmed will not be able to market iPlex for the less-severe growth disorder and will have to rely on the doctor's advice.

While some analysts have questioned the safety of Increlex, Scarlett rebuts such theories. The thinking may stem from the way in which the drug's active ingredient was first given to patients many years ago - into a vein, which may have put dangerous levels of the drug into the blood, he said.

"Today, I think we have a product that is very safe and also a product that has shown excellent efficacy," he said. Insmed has added a protein to iPlex, which the company believes makes the drug safer. Scarlett said an additional protein "doesn't seem to be called for."

Tercica has long noted that Increlex has gained FDA approval, which in and of itself means the drug is safe for consumer use. Scarlett maintains that iPlex and Increlex have also never been tested head to head, so it is difficult to compare the two.

As for Insmed, Osborne sees the company turning a potential profit - its first - in late 2008. Fein, at C.E. Unterberg, projects Insmed's 2009 revenue at $125 million.

If one of the alternate uses for iPlex fails in clinical trials, there are further indications for the drug to fall back on, Allan said. "Even if we miss on one or two, then it will not be a blow to the company," he said.

For Allan, "even if I leave the company tomorrow, to see it become a commercial success will still be a huge payoff for me. And I don't mean financially."

"We took on a plan. We executed on that plan. And we were successful," he said. "Not everybody can come back from a failed product and regenerate itself. And we did that."

Geoffrey Allan, chairman and CEO of Insmed Inc., says that if the company hadn't bought Celtrix Pharmaceuticals and its diabetes drug SomatoKine, "we would have probably ended up as a failed company."
P. KEVIN MORLEY,

TIMES-DISPATCH