1 Hidden Pharmaceutical Technology for Your Portfolio

Pharmaceutical companies are always looking for competitive advantages. Historically, getting a leg up on the competition has centered on identifying novel active pharmaceutical ingredients, or APIs, which are more effective than the market's best therapies. While that is still the overwhelming focus of the industry, companies are beginning to invest heavily in novel manufacturing capabilities that often go unnoticed by investors. One relatively new technology being explored is the use of highly optimized biocatalysts, or enzymes and microorganisms that accelerate chemical reactions.

Nature uses enzymes to efficiently create and synthesize chemicals. Why shouldn't modern society do the same?

A process that utilizes biocatalysts can take less time, energy, equipment, and resources to complete and result in enhanced production metrics and less waste overall. The goal is to make APIs easier to isolate, purer, and cheaper. Think the advantages are overstated? Consider first how biocatalysts are designed around the process along with several real-world case studies.

Wanted: More efficient manufacturing process
Who manufactures biocatalysts? Chemical behemoth BASF (NASDAQOTH: BASFY  ) is among the handful of companies utilizing a directed evolution technology platform that engineers enzymes and metabolic pathways of microorganisms. The platforms are effectively squeezing tens of thousands of years (or more) of evolution into a period of several months by nudging enzymes into optimized structures for a given process. That is powerful. So powerful, in fact, that the world's largest chemical company opened its third pharmaceutical enzyme manufacturing line in India (after Italy and the United States) this summer.

There is plenty of work ahead and the platforms are far from perfect, but the field has enormous value-adding potential. One estimate thinks that disrupting small molecule and biologic manufacturing represents an estimated annual market opportunity of $5 billion. That is a lot of money to go around to just a few well-established biocatalysis companies, which also includes Novozymes from Novo Nordisk and Genencor from DuPont. It is also just one area of the complete picture for optimized industrial enzymes that can also revolutionize chemical production, fuels, animal feed, textiles, wastewater treatment -- you get the point.   

Prove it!
There are dozens of pharmaceutical companies and universities around the world working with BASF to incorporate optimized enzymes into their manufacturing processes. The success of the following case studies probably has a lot to do with the industry's increased appetite for biocatalysts:

Merck (NYSE: MRK  ) , Januvia (sitagliptin)

The oral type 2 diabetes drug raked in $5.75 billion in 2012 -- crushing the injectable in-class competition. It has gotten off to a slow start in 2013, but is still one of the best-selling drugs on the market. The prior process required five total steps, three separate isolation steps, specialized equipment, and toxic catalysts. It also sported an overall yield of just 74%.

Merck and Codexis redeveloped the process with biocatalysts with amazing results. Sitagliptin is now produced in just two steps, with an 87% overall yield, 30% higher productivity, 19% less waste, and without the need for specialized equipment. The rework took nine months, screened 36,480 catalysts before finding the perfect match, and increased reactivity 25,000-fold from the base catalyst. The pair won the prestigious U.S. EPA Presidential Green Chemistry Challenge Award in 2010 for their process.   

Novartis (NYSE: NVS  ) , Exelon (rivastigmine)

Exelon became the first globally approved treatment for dementia due to Parkinson's disease in 2006, so manufacturing plays a crucial role in maintaining a stable supply of the drug. Novartis also worked with Codexis to improve the process's stability in high temperatures by over 24-fold, maintained crucial process parameters, and increased process activity from less than 5% conversion to greater than 95% conversion.  

There are risks to consider, namely that not every drug gets approved. Biocatalysts are still a relatively new manufacturing tool, but there is serious momentum behind the idea. If you still don't think the growth in biocatalysts is real, consider their use in major pharmaceutical trials in 2010:

Source: Codexis Corporate Overview May 2013.

And compare that with where they stand today:

Source: Codexis Corporate Overview May 2013.

If a drug wins approval and uses a biocatalyst, the supplier (i.e., BASF) locks in royalties for the life of the drug. In fact, the process has to be included in any New Drug Application submission. Once the drug loses market exclusivity, BASF can offer its manufacturing improvements to generic-drug makers such as Teva (NYSE: TEVA  ) to continue generating revenue, albeit with smaller margins. While Merck and Teva have gone virtually all in on biocatalytic processes, they aren't the only big names involved. Pharma and biotech companies of all sizes and focuses, from Pfizer to Vertex, are beginning to employ small biocatalysis teams. 

Foolish bottom line
You may not want to invest directly in BASF since its biocatalysis business is just a tiny sliver of the overall company, but investing in more proven pharmaceutical companies that utilize biocatalysts in their manufacturing processes could certainly lead to better long-term results. Skip Volante, vice president of R&D at Merck in 2010, made an eye-opening confession to C&EN Magazine about the improvements made to Januvia's process:

The advance led to a threefold increase in productivity and helped [Merck] avoid the cost of building a second factory to meet rising demand for Januvia.

That's a pretty big deal when you consider that a new manufacturing facility can cost hundreds of millions of dollars to build and take years to get final approval. Investors may never see a number put on the cost savings associated with using biocatalysts, but Merck may have already saved several hundred million dollars for shareholders. The potential is too great to ignore.

It may be difficult to find a direct investment in biocatalysts, but that doesn't have to turn you off to their potential. Even then, it could take a while to see direct cost savings play out in larger pharmaceutical investments. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" not only shares stocks that could help you build long-term wealth, but also winning strategies that every investor should know. Click here to grab your free copy today.


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