Antibiotics have long been viewed as a losing R&D game for pharmaceutical companies. The drugs are only used for short courses and usually offered at very affordable prices, meaning the sales per patient is pennies compared to the therapies for chronic diseases. The development of antibiotic resistance also gives drugs a definite eventual expiration on their efficacy, further minimizing the ROI on the R&D investment.
As pharmaceutical companies have slashed R&D budgets across the board and also been stepped away from antibiotics for over a decade, the demand for new drugs has only increased. The CDC estimates over 2 million patients annually are effected by drug-resistant infections, accruing $20 billion in heathcare and productivity costs and causing 23,000 deaths. In the EU, at least 25,000 patients die from drug-resistant infections and accrue 1.5 billion Euros in health care and productivity costs.
Multiple public health reports have identified antibiotic resistance a growing crisis, and President Obama's 2014 State of the Union address identified drug-resistant bacteria as a priority. Many of these pathogens are gram-negative bacteria such as E. Coli, salmonella, shigella and enterobacteria. These pathogens, enterobacteria in particular, received some considerable press as "nightmare bacteria" when the deadly carbapenem-resistant enterobacteria (CRE) spread throughout hospitals last year.
The private sector
As hospital-acquired drug-resistant infections continue to rise into a growing public health crisis, the private sector must step in, and Roche (NASDAQOTH:RHHBY) is one of the largest biotechs to do so without government funding.
In a new partnership with UK biotech Discuva to develop antibiotics, Roche agreed to $16 million upfront and up to $175 million in milestones per drug developed and royalties for sales. Discuva utilizes a bioinformatics platform (SATIN) on gene sequencing to identify targets for multi-drug resistance gram negative bacteria.
This follows Roche's $560 million deal ($40 million upfront, $520 million in milestones) with Swiss company Polyphor for Phase II anti-pseudomonal agent POL7080. Pseudomonas aeruginosa is a common hospital-acquired infection that does not respond to many of the common antibiotics.
So why would Roche reenter a market known for limited profitability? To be fair, it is not completely charitable. Roche's focus is clearly on hospital-acquired and drug-resistant serious infections, both of which have significant demand that could justify top-dollar pricing and likely inpatient administration which will yield better reimbursement than outpatient medications.
Additionally, both of Roche's new antibiotic partnerships could be proof-of-concepts that the companies can use for other, more profitable agents in their R&D focuses. Discuva's bioinformatics technology is certainly unique and could be used in other fields, and Polyphor's antibiotic utilizes a novel drug mechanism that also could be explored for other products.
The public sector
In addition, Roche may be positioning to benefit from either government funding or policy changes.
GlaxoSmithKline (NYSE:GSK) was recently granted a contract worth up to $200 million from Biomedical Advanced Research and Development Authority (BARDA) of the U.S. Department of Health and Human Services to develop antibiotics combating bioterrorist threats and drug resistance. This deal should allow GSK to not only address bioterrorist infections but also conventional and hospital-acquired infections as well, although that is not the primary focus.
BARDA has given federal funding for antibiotics to private corporations before, but never like the deal with GSK, which allows for the funds to be used for various drugs in GSK's antibiotic portfolio, not a specific one. In the past, BARDA has granted money to private companies for a specific agent in trials, such as $60 million to Achaogen's plazomicin for serious gram negative infections and $58 million to Cempra for solithromycin for bioterrorism and community-acquired bacterial pneumonia.
While Roche has not received federal funding yet, it is not unreasonable that government money may be available in the future, especially if its new partnerships with Discuva and Polyphor yield promising antibacterial agents.
And approval for these agents is only becoming more streamlined. The bipartisan ADAPT Act (Antibiotic Development To Advance Patient Treatment) introduced in December of last year (currently referred to subcommittee) would simplify approval for certain last-resort antibiotics by requiring fewer patients in clinical trials. It would label these drugs specifically so that it would only be used for patients with few or no other options. While the ADAPT Act was only introduced in the House last December and currently being referred to subcommittee, it would be an addition to the Generating Antibiotic Incentives Now (GAIN) Act of 2012 which extended the period of exclusivity and sped up the approval process of antibiotic agents against serious infections.
Regardless of both of these acts, the FDA already has other avenues for expedited review for drug developers to utilize. The FDA just recently gave fast-track status to Actelion for its Phase III clostridium difficile drug cadazolid.
Antibiotics are a relatively unprofitable market that drug companies are slowly reentering, mostly when incentivized by government intervention and funding. The necessity for new agents is growing as the public health concern regarding drug-resistant and hospital-acquired infection rises, and the federal government has already clearly made it a focus to incentivize and remove barriers from antibiotic R&D.
Roche is one of the only major drug makers delving back into antibiotics without direct government incentive, but the outlook on market development is certainly positive. I believe that Roche's entry will pave the way for others and in the long term may pay off for Roche to have played it aggressive early.
Amy Ho has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.