ZymoGenetics Drug Getting Off to Slow Start in Marketplace
ZymoGenetics executives have been tamping down sales expectations for months about the company’s first marketed product, and they weren’t kidding. Recothrom, a genetically engineered treatment for surgical bleeding approved by the FDA in January, eked out $1.4 million in net sales in the second quarter, the company said yesterday. Even Kevin DeGeeter, an analyst with Oppenheimer & Co. in New York who has a “sell” rating on the stock, was expecting more—about $3.5 million in sales.
The Seattle biotech company (NASDAQ: ZGEN) insists better days are ahead. Four of the six major bulk-buying organizations that serve hospitals have agreed to purchase discounted Recothrom since mid-July, and talks are ongoing with the other two, said CEO Bruce Carter, in a conference call with analysts. Hospital purchasing committees have taken a long time to meet and decide on surgical bleeding drugs, but when they sat down, about three-fourths agreed to switch to Recothrom or add it to their preferred drug list along with the standard product. And it’s only been since mid-June that ZymoGenetics has been able to offer a more complete array of Recothrom in small and large vials, and a spray kit to put it on a better footing against archrival King Pharmaceuticals’ Thrombin-JMI, Carter says.
“Most people think that with a new drug, it’s like Cialis, where you have a sales person say ‘Please prescribe it,’ the doctor does it, and you’re off to the races,” Carter said yesterday in an interview. “Selling to hospitals is different.” Still, he conceded he’s been surprised that hospital purchasing committees sometimes fail to meet because they lack a quorum, bleeding drugs aren’t always a top priority, and even when they agree to put it on their list, they don’t always start placing orders right away. “It’s a bit frustrating,” he says.
All of this is putting pressure on the company’s sales team. ZymoGenetics had a net loss of $37 million in the quarter, with $117 million of cash and investments left in the bank at the end of June. Even though it can tap a $100 million loan from Deerfield Investments, the company is counting on Recothrom sales to pick up fast. “It’s make-or-break time for these guys,” says DeGeeter.
The opportunity isn’t a huge one by biotech industry standards. The King product is used in an estimated 1 million surgeries a year in the U.S., and generated $267 million in sales in 2007. Carter is not offering any forecast on sales or market share, but here’s his latest read on the demand:
—Since Recothrom was approved in January, 169 hospital purchasing committees have held meetings with an agenda that included discussion of whether to buy it. Decisions have been put off or are pending for 66 of them, while 103 have made decisions, Carter says.
—Of those 103 who made decisions, 30 percent of the hospitals decided to completely switch over to Recothrom, which ZymoGenetics and its partner Bayer (NYSE: BAY) markets as a potentially safer alternative to Thrombin-JMI, because as a genetically engineered product that mimics a human clotting protein, it is less likely to carry a blood-borne pathogen like HIV or cause the body to mount an immune reaction to the drug that could cause a bleeding episode.
—About 45 percent of hospitals said they’d add it to their formulary, or preferred-drug list, along with Thrombin-JMI, while the remaining 25 percent said they wouldn’t buy it. Some of those denials came before June, when ZymoGenetics didn’t have a full product lineup, Carter says.
—ZymoGenetics has said it plans to charge a 20 percent higher price, although that showed some signs of moderating yesterday. When asked by analyst Han Li of Stanford Group whether customers are sensitive to the higher price, Carter said they are willing to pay if they’ve seen a case of a severe bleeding episode from a reaction to the standard drug. If not, “others say they’ve never seen a clotting problem, it’s a theoretical risk. Then they are price-sensitive.” When I followed up in the interview, Carter confirmed that it is selling Recothrom at a “more modest” premium than the original 20 percent to the bulk-buying organizations, and that when King has offered discounts, it has responded by offering its own, Carter says.
—Carter has said repeatedly to investors, before the product was approved, that once hospitals switch to Recothrom, the market works like a “ratchet” and they will never switch back to the alternative derived from cow blood. So far, ZymoGenetics is finding customers in a wait-and-see mode. “Some people fully convert and others say, ‘You guys are new, we’ll put you on the formulary, but we want to see if you can consistently supply us.’”
It will be interesting to watch what happens when Bristol, TN-based King (NYSE: KG) reports its second quarter results on Thursday. If King commits to lower its price to fight off ZymoGenetics, that could pose a threat to both companies, DeGeeter says. “If King cuts price and ZymoGenetics doesn’t follow, King will keep its share,” he says. “This is shaping up to be a lousy market for everyone.”
Wall Street is going to expect Recothrom to generate $15 million to $17 million in sales in the second half, DeGeeter says. ZymoGenetics isn’t giving specific guidance on sales for the period, or further in the future, until it has gathered more data, says chief financial officer Jim Johnson.
Before I hung up with the always-upbeat Carter, he left me with one separate thought. It’s about PEG-interferon lambda, a “distant cousin” of the antiviral interferon-alpha drugs used for hepatitis C, which cause fever and flu-like symptoms that make them difficult for patients to take. An early-stage clinical trial of the ZymoGenetics version suggests it may offer the virus-killing benefits without the toxic side effects. The company dropped hints that partners are interested in co-developing this drug. “This is the big sleeper in our pipeline,” Carter says.
The folks who work at ZymoGenetics and/or invest in the company had better hope he’s right, because Recothrom may end up being a tougher sell than once thought.