Executive Word -- Make Good Deeds Part Of Business Strategy

Sigma-Tau Pharmaceuticals COO Ken Mehrling discusses how his company is able to produce orphan drugs while it remains a profitable business venture.

Ken Mehrling COO Sigma-Tau Pharmaceuticals Inc. Gaithersburg, Md. Born: 1950 Education: Attended St. Andrews Presbyterian College. Career Highlights: 1975: Named product manager for Searle Laboratories Calan products line. 1986: Hired by American Critical Care to commercialize Cardene. 1989: Joined Sigma-Tau as director of marketing and sales. 1994: Appointed executive vice president/general manager. 2001: Appointed COO. Interests: Active in orphan drugs since 1990, Mehrling has held positions on the board of directors for Neurofibromatosis Inc., the National Organization for Rare Disorders (NORD) and Exceptional Parent Magazine. This interest has allowed Mehrling to work in developing treatments for orphan patient populations similar to the one, Neurofibromatosis, which claimed his brother's life.

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This year marks the 20th anniversary of The Orphan Drug Act (ODA), which provides incentives to companies that develop drugs for disorders that affect 200,000 or fewer people. Such groups usually are too small to be considered profitable markets for large pharmaceutical companies. Sigma-Tau Pharmaceuticals Inc., Gaithersburg, Md., produces orphan drugs. A division of privately held Italian company Sigma-Tau S.p.A., it has 110 employees and sales of roughly $30 million. The parent company employs 2,400 with sales of $500 million. IndustryWeek spoke with Sigma-Tau Pharmaceuticals COO Ken Mehrling about how his company has been able to produce orphan drugs, remain profitable and capitalize on technologies it has developed. IW: What's your business model? How do you make money? Mehrling: We're a niche company. We have limited resources, so we could never compete by introducing a beta-blocker or an ACE inhibitor without partnering with someone. We currently have 30 sales representatives. We don't think that that number will get above 50 in any short-term situation. But the business model really is to find unmet needs regardless of the patient-population size. So, you could call us an orphan drug company, although we don't really look at it that way. We don't mind being a niche player in a larger market, but we haven't found an opportunity. IW: Is there a visionary at the company? Mehrling: Dr. Cavazza [Claudio Cavazza, CEO and president]. He's our founder. His family controls the company, and he holds the majority share of the family. What we do is look for different products that, if possible, are a naturally occurring substance and will correct a disorder that no one else is willing to go after. The company really has an objective of 'No patient will be overlooked.' IW: Describe some of your products. Mehrling: Our leading product is Carnitor [chemical name levocarnitine]. Its oral formulation is used to treat errors of metabolism that people are born with. Carnitor doesn't correct the error but it buffers the effects of the error. It's also used for patients in end-stage renal disease because when you filter the blood [through dialysis], one of the substances lost is levocarnitine. On the inborn-error side, about 10,000 to 15,000 patients take Carnitor. On the end-stage-renal-disease side, about 7,000 take it with a potential of 50,000 to 70,000 taking it. IW: Carnitor has turned out to be a profitable product for your company, but not all of your products and efforts are. Can you talk about your company's involvement in cystinosis? Mehrling: Cystinosis strikes infants between the ages of nine months and 18 months. It causes extremely painful crystals to form on the eyes and can result in blindness. In the United States there are about 300 patients, worldwide between 1,000 and 1,500. Since 1996 we've been working with NORD (National Organization for Rare Disorders) to develop an eye drop for cystinosis patients. It will never be profitable, and the reason it won't is because the patient population is too small, and if we priced it out to cover our costs in the first three years, it would be a heck of a burden for the patients and the insurance companies. IW: So what does your company gain by taking this on? Mehrling: Well, there will be between 300 and 1,500 people who can lead a normal life. The second thing is, when others are looking for a company to develop a product, they know that we're going to be able to develop it, and -- if it meets an unmet need -- we're not going to have the review that a large company would have based strictly on dollars and cents. Trust me, we don't want to lose money because to provide a benefit, we still have to be in business and be viable, but we don't have a need to have X% return on investment because we're a private company, and our president has seen fit to allow us to do what's right, whether or not it's a good business decision. IW: How do you think large, publicly held pharmaceutical companies would feel about that model? Mehrling: We don't always get accused of being the brightest business people in the world, but we're never accused of stiffing patients to make money. I think the pharmaceutical industry has an obligation to provide benefit in terms of care. And there are pretty healthy margins in this industry, so we should be able to find a way to make our money in those areas where we are profitable and have larger patient bases and continue to give to the people who, unfortunately, are in a 300-patient disorder group. IW: Why aren't more pharmaceutical companies taking on orphan drugs? Mehrling: I think it's a private/public issue No. 1. I think it's a Claudio Cavazza issue No. 2 in that he's concerned about making money, but he's not killing us to have a 20% to 30% EBIDTA either. We run it like a real business but don't have a need to make all of our decisions as net-present-value-return-on-investment decisions. He takes the personal side into account as well as the money. IW: In addition, don't you benefit from the research associated with 'causes' that might not be a directly profitable product? Mehrling: In certain instances we do. For example, with the issue of newborn screening, we've worked closely with a company called Neo Gen [Pittsburgh]. We were able to take the [levocarnitine] screening from the newborn and with some alterations we were able to apply it to end-stage renal disease, which hadn't been done before. We've been able to get a patented process for testing carnitine deficiency in end-stage renal disease. IW: Your company was founded in 1989 and turned profitable in 1994. Would you be here today without the ODA? Mehrling: No. We wouldn't have had the protection afforded us in the beginning. It allowed us to invest without risk of people coming in to take our market. The investment was made from 1989 to 1992/3 as a loss, knowing that we had until 1999 to recoup the investment for carnitine deficiency secondary to inborn errors of metabolism. IW: But you aren't completely happy with the ODA. Carnitor has no competition in the inborn error market, despite your patent protection expiring in 1999. But it has generic competition in the end-stage-renal-disease market, a much more profitable market, and you feel it shouldn't. Why? Mehrling: The generics are indicated for the first use -- inborn errors of metabolism -- not end-stage-renal disease -- but they are being used and reimbursed by the federal government, which pays for the care of 92% of end-stage-renal-disease patients. There's no protection, despite our indication [for end-stage-renal-disease treatment, which was granted in 1999 and gives a seven-year patent protection.] We've been unable through the courts and Congress to correct this. IW: Have other companies complained about this? Mehrling: The ODA is probably the most successful health-care legislation ever passed by Congress. The failing is that there isn't a clear way to take care of the same compound being studied for an additional indication. We're the first company to see this. But anyone who looks at the precedent isn't going to invest in orphan drugs. Our owner and founder is not young. And I don't know if his vision will survive him. That's the scary part of a private company doing the right thing. E-mail nominations for Executive Word to Editor-in-Chief Patricia Panchak at [email protected].
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