The Other Cholesterol How Kos Beat Big Pharma to HDL

www.pharmexec.com | ANADVANSTAR★ PUBLICATION Kos CEO Adrian Adams PHARMACEUTICAL EXECUTIVE Contents OCTOBER 2004 www.pharmexec.com

Cover Story Under Construction Patrick Clinton Editor-in-Chief How Kos Pharmaceuticals turned a 50-year-old drug for raising HDL cholesterol into a brand-new, burgeoning business.

Mulling the Future Kos CEO Adrian Adams, seated, maps strategy with key executives: (from left) Ralf Rosskamp, Christopher Kiritsy, Richard King, and Mark McGovern

“We didn’t start with the idea of being a $200 million company. Growing as fast as possible: That was our goal from the get-go.” Kos Pharmaceuticals was first to market with a product to raise HDL cholesterol, and it wants to join pharma’s billion-dollar club by 2007. Big plan. Under Here’s how it’s going. Construction

t’s hard to imagine that many pharma companies experienced more plain old good news this summer than Kos Pharmaceuticals. First, there were the second-quarter financials. Revenues for the quarter were $120.3 million, almost double last year’s figure. Net income for the quarter grew 245 percent to $38.5 million. The company raised its guidance for the year, predicting that full-year sales would be $480 million, 60 percent over last year— and CEO Adrian Adams boasted that Kos was the fastest-growing specialty pharma company in the United States. A few weeks later came encouraging results from a Phase II trial of IKos’ new inhalable insulin product for diabetes, and recruitment began for pivotal trials of a new combination product to consolidate Kos’ position in the burgeoning cholesterol market. Kos’ flagship product, Niaspan, is an extended-release formulation of niacin, used to raise high-density lipoproteins (HDL)—“good” cholesterol. A second product, Advicor, combines Niaspan with the statin lovastatin. The one under development extends the concept, combining Niaspan with simvastatin, the active ingre- dient of Zocor, the second-highest selling statin worldwide. Another few weeks later, the company’s new headquarters in Cranbury, New Jersey—a wasteland of boxes and boards in August—was finished and occupied by the company’s commercial and business personnel, and the respiratory research and devel- opment team. »

BY PATRICK CLINTON, EDITOR-IN-CHIEF | PHOTOGRAPHY BY JOHN HALPERN Billion-dollar Vision Kos CEO Adrian Adams (seated) and his executive team (from left) Ralf Rosskamp, EVP- R&D; Mark McGovern, EVP and chief medical officer; Christopher Kiritsy, EVP and CFO; and Richard King, EVP-commercial operations; have ambitious goals for their company. bankrupt,” says Jaharis. “We did a million and a half in business, and we were losing some incredible amount like $700,000.” Jaharis set about salvaging the company. “Mike’s pri- mary skills were sales and marketing and product selec- tion—he’s got a great knowledge of the products in the industry and what’s wrong with them,” says Kos Chairman Daniel Bell, a former auto executive Jaharis originally recruited as Key’s COO. “It came from his days of carrying the bag.” Eventually an idea turned up. “I had heard from some people at the University of Florida that we should perfect our theophylline product,” Jaharis says. (The caffeine derivative was a preferred treatment for asthma before the introduction of inhaled corticosteroids.) “I asked how much it would cost. They said—I can’t imagine—$25,000 or $50,000. I couldn’t do it. They said, ‘We really think you should.’ So we took a bet and put some money into it.” The product became Theo-Dur, the first sustained- release theophylline. Jaharis developed a sales force of 15 Learning the lessons Kos Chairman Daniel Bell (left) and founder and chairman to promote the product to the allergists and immunologists emeritus Michael Jaharis worked together to turn around Key Pharmaceuticals in the 1980s. Their strategy of reformulation and focused marketing became the who dominated asthma prescribing. “We taught them how core of Kos. to use it, gave them measures,” says Jaharis. “There were 17 different theophyllines in sustained-action form, but no Behind it all is the story of a company to watch: one else really explained the science to doctors.” » By pursuing a low-to-the-ground reformulation strategy, and A second product followed: Nitro-Dur, a transdermal nitro- seizing on a neglected molecule whose benefits have been known glycerin delivery system. By 1986 Key was selling $200 million a for half a century, a tiny startup was able to beat Big Pharma to year and it was bought by Schering-Plough for $836 million. the soon-to-be-major HDL market. Today, tiny no more, Kos is Jaharis had learned valuable lessons: that familiar products riding the expansion of the overall cholesterol market—and could be revived by reformulation and sophisticated delivery; that preparing the ground for a wave of HDL products expected to specialists drove substantial prescription volume; and that sci- emerge from other companies. ence-based selling could single out a product in a crowded mar- » This is a sequel of a sort. Kos is the second effort at company ketplace. He was eager to put them into practice again. building by the same team who turned an almost bankrupt Key Pharmaceuticals into a surprise success in the 1980s—and this Why Don’t We Do It Again? time around they’re aiming even higher. “The Schering-Plough transaction took place in June 1986, and I » And Kos is a kind of clinical trial for an important pharma stayed on for a month to help with the transition,” Bell says. “I business model. At a time when many smaller companies are took a month off, and in September came back to a new office experimenting with outsourcing and new business models, Kos is they had set up for me and Mike. The very first day, Mike said, unabashedly devoted to the traditional fully integrated model. ‘Sitting on your desk is a proposal to buy a division of Rohr. Why Designed for growth, Kos aims to become a billion-dollar don’t we see if it would make sense to buy that thing?’” Rohr ulti- company by 2007. The latest numbers show the company mately decided not to sell, so Jaharis and Bell spent the next two halfway to the mark, but there’s still plenty to do: new years looking for a company to buy. products to develop (Kos currently has only three on the mar- It wasn’t easy. Says Bell, “During that time frame—1986, ’87— ket); deals to make; perhaps a merger or acquisition to accel- there was a stock market crash. The Democrats started talking about erate growth. But if the leaders of the fastest-growing special- not allowing the interest expense on leveraged buyouts to be tax ty pharma company pause to savor their success, who’s to say deductible. It became difficult to buy anything, and once it eased up, they’re wrong? prices got out of sight. I remember Mike and I saying, ‘This doesn’t “Everything,” says Adams, “is moving in the right direction.” make any sense. Why don’t we just do it again ourselves?’” In the summer of 1988, Jaharis, Bell, and another Key vet, Turnaround at Key Dave Bova, launched Kos Pharmaceuticals. Perhaps in tribute to As Michael Jaharis, Kos’ founder and chairman emeritus, tells the Jaharis’ Greek heritage, it was named for the Greek island where story, he got into pharma because his last name begins with a J. Hippocrates founded the science of medicine. From the start, it “The army called me in the Korean War in 1950,” he says. was built on the lessons Jaharis had learned at Key. “Following basic training, everyone from A to J in our company “We wanted to do proprietary drugs, not generics, because went into the medical corps and the rest into the trucking corps. I proprietary drugs have much higher gross margins,” says Bell. decided I wanted to be a doctor, but I realized that by the time I “We decided to do reformulations of existing products, exactly got through picking up chemistry and those things, I’d be 31, and the same formula we used at Key. It’s difficult to develop distinct, that was too old.” patentable proprietary advantage when you’re working with Jaharis took a job as a sales rep for Miles Laboratories and drugs that are off patent—but that risk is still less than starting at attended law school at night. He rose in the company, eventually the basic bench-science level. serving as vice president of the ethical drug division. By the early “And we wanted to develop our own drugs, manufacture 1970s, tired of corporate bureaucracy, he partnered with dermatol- them, and have our own sales force. In short, we wanted to be a JOHN HALPERN ogist Phillip Frost to take over Key Pharmaceuticals, a Miami-based fully integrated specialty pharmaceutical company.” manufacturer of cough and cold remedies. “We were essentially At the time, most of the companies that had been Key’s peers, “The only way to treat cholesterol was diet, exercise, and niacin. I couldn’t understand why no one had formulated something that would take away some of the problems of niacin.” including Alza and Marion Laboratories, pursued less integrated tion through the development and acquisition of numerous strategies and either worked on formulation and delivery (like patents. What we’ve done is crack the code on niacin.” Alza) or marketed products that had been developed by others (like Marion). In going with a bolder business model, Kos had Layers of the Onion two big advantages: The management team was experienced in Niaspan launched in 1997, the only such product approved by development, delivery, and sales and marketing. And in Jaharis it FDA to date. But Kos was by no means out of the woods. had a patient, committed investor. “Originally, Niaspan’s ramp wasn’t a rocket ship,” says “A venture capitalist who doesn’t have the kind of faith in the Christopher Kiritsy, executive vice president and chief financial industry that Mike had would never have stuck with this model as officer. “I remember when investors said Niaspan at peak was long as Mike was willing to,” says Bell. “Mike kept saying to him- going to be a $25 million product.” self, ‘People think I’m an idiot for putting so much money into this.’” The problem was that, though the world had grown much But Jaharis had his sense of the market. And he thought Big more aware of cholesterol, it wasn’t nearly as aware of HDL Pharma was making a mistake by forgetting about an old, old cholesterol. drug that some people called God’s gift to cholesterol. “Niaspan and Advicor are pioneering a form of treatment,” says Richard King, executive vice president of commercial opera- The Secret Weapon tions. “We spent about three years in a highly educational mode, Before Mark McGovern became Kos’ executive vice president and working with the cardiology groups and key-thought-leader car- chief medical officer, he spent 11 years at Bristol-Myers Squibb, diologists to generate understanding. Once the understanding was where he was executive director of heart-failure atherosclerosis there, they became evangelical.” clinical research and was responsible for clinical development of One of the lessons Jaharis learned at Key is that it’s possible to Pravachol (pravastatin). He knows cholesterol, and he came to grow certain products by starting with a core of high-prescribing Kos partly for the chance to work on the neglected piece of the specialists and gradually expanding the market as each new group puzzle: HDL. of physicians understands and accepts the message—“peeling the Interestingly, an effective HDL drug had long been known. “In layers of the onion,” as Adams calls it. But Kos, despite its rapid the 1960s,” says McGovern, “niacin was being investigated as an growth, is still a small company. Growing the sales force has been experimental treatment for schizophrenia, and it was being admin- a challenge. istered in doses far beyond the 10 to 20 milligrams you need as a “You couldn’t hire enough people, and you couldn’t put the vitamin. By serendipity, it was discovered that patients treated with management infrastructure in place for a 400-person sales force niacin had very low cholesterol levels. It was later discovered that from the get-go,” says Bell. “At our first sales meeting in 1997, we niacin raises HDL and lowers triglycerides. Niacin was what John had 87 reps and managers. That was way too few, but it was what Guyton at Duke calls the secret weapon of the endocrinologist, we could afford. Our idea was to get it up to a couple of hundred something only highly skilled people would use, given its side effect as quickly as we could. There were two controlling elements. One profile and the need to titrate.” was how much cash we had and how much we had to pay for The most familiar side effect of high doses of niacin was a them, and number two was how quickly we could go through the flush. “If you take regular, immediate-release niacin, which you recruitment process.” can buy at a grocery store, you will turn beet red and start itch- Kos has tended to cherry-pick reps from its larger competitors ing,” explains McGovern. “Pharmaceutical companies as early as in cardiology.“We looked for those with strong pharma experi- the 1970s figured out that if you slowed the absorption and made ence and relationships in the cardiovascular area already,” says a controlled, slow-release product, you could cut down on the King. “We paid more for that type of individual, but we realized flushing. But if you did that, you created liver toxicity. For a lot early on it was the right thing to do.” of years it was recommended that nobody be treated with con- trolled-release niacins.” The Right Balance When Jaharis was casting about for products for his new com- In 2001, Adrian Adams was president and CEO of Novartis UK, pany, niacin seemed like a natural. “At that time the NIH had when he got a phone call from Jaharis. Says Adams: “I’d heard his stated that the only way you could treat cholesterol was diet, exer- name, and I’d certainly heard of Kos. He said he’d heard about cise, and niacin,” he says. “I could never understand why some- me from a number of people and asked if I’d be interested in join- one had not formulated something that would take away some of ing Kos. At the time I was happy, so I said, ‘Send me some infor- the problems related to niacin. mation.’ Mike replied, ‘Why don’t you just get on a plane and “But I didn’t realize the difficulties there would be. What I come see us?’” A few days later, Adams was at Jaharis’ apartment envisioned as a $15–$20 million investment on my part turned in New York, a few blocks from the Metropolitan Museum of into perhaps $75 million before we got it approved and could do Art, where a gallery of Greek sculpture and the rooms housing the an IPO in 1997.” museum’s Byzantine collection are named for Jaharis and his wife. In the meantime, the cholesterol market was transformed by “I was in a suit,” says Adams, “and there’s Mike Jaharis in his the introduction of a new class of drugs. “Statins took over the slippers, sitting in his chair. He immediately started talking about market for cholesterol, and people largely forgot about niacin and family and values, and we talked for four hours. The week after, I other drugs such as gemfibrozil,” says McGovern. was offered the job. Within two weeks I’d gone from being happy “We’ve done a great deal of research into niacin’s method of at Novartis to resigning.” action and its pharmacokinetics,” he continues. “We determined Why leave? As Adams tells it, a big part of his decision was the that to optimize niacin, the secret is a ‘Goldilocks approach.’ It opportunity to help form the culture of a company, backed by has to do with the rate of absorption—not too fast and not too people who felt as strongly about that process as he does. “Dan slow. Once we understood this, we developed a proprietary posi- Bell and Mike have tremendous integrity and honesty,” says Adams. “What they talk about is values. You’re talking about a million or more family-oriented culture, where you can get the best out of people Niacin/simvastatin combination: KS 01-019 pursues the same strat- because you treat them like ingredients of success.” It’s a descrip- egy as Advicor, combining Niaspan with a statin—in this case, sim- tion you’ll hear from virtually any member of senior management vastatin (the active ingredient of Merck’s Zocor). “Many doctors, at the company. when they step up to combination therapy, would like to stay with Adams joined Kos as COO. One year later, Bell stepped down their statin of choice,” says Adams. Patients are currently being as CEO, and Adams took the reins. The year was a turning point recruited for a pair of Phase III trials, and Kos is aiming for a 2007 not just for Adams, but for the company. In 2002: launch, shortly after the expiration of Merck’s simvastatin patent. » The company launched its second product, Advicor, which Further back in the pipeline are products for cardiovascular dis- combines the statin lovastatin and Niaspan in a single pill. The ease, diabetes, and the area where Mike Jaharis first made his product acknowledged an obvious truth about Niaspan—that mark: respiratory disease. most patients who received it also received a statin—and it put Inhaled insulin: In late August, Kos announced the results of a control of multiple aspects of dyslipidemia into a single pill. phase IIa study of its inhaled insulin formulation that compared the Jaharis, a bit of a crusader, takes Advicor himself and boasts of product head to head with insulin glargine (marketed by Sanofi- his lipids to visitors: a healthy HDL of 69 and an LDL of (this Aventis under the brand name isn’t a misprint) 17. Lantus), the most prescribed insulin » It boosted its sales force to 400 from 250 by Niaspan and in the United States. After a month of collaborating with the contract sales organiza- treatment, insulin-naïve patients tion Innovex (a year later it signed an agree- Advicor Sales receiving Kos’ crystallized recombi- ment with Takeda Pharmaceuticals North Kos is in a sweet spot of high year-to-year nant human insulin showed a mean America to increase the effective sales force by sales growth. Needed next: more products. reduction in mean blood glucose of 1,250, to a total of 1,700). 28 percent, compared with 23 percent » It formed an alliance with Merck KGaA to mar- with insulin glargine. ket Niaspan and Advicor worldwide, except in Kos’ product is not the only inhal- Japan and North America. able insulin in development. Pfizer » It made its first quarterly operating profit and and Sanofi-Aventis have submitted net income. Exubera for European approval, and Just as important, the company took steps to Lilly recently moved an inhaled strengthen its management structure. To head insulin into Phase III. Kos hopes to commercial operations, Adams recruited King of differentiate its product with an Solvay, with whom he’d worked at SmithKline- excipient-free formulation and an Beecham. As executive vice president for research easy-to-use, hand-held inhaler. and development, Adams brought in Ralf In addition, with its strong interest Rosskamp, who previously had headed global in metabolic syndrome, the company clinical research in endocrinology, metabolism, has been collecting data on the prod- rheumatology, and bone at Aventis—a role in uct’s effects on blood lipids. In the which, in an alliance with Pfizer, he planned the recent trial, Kos’ insulin produced a Phase III trials of the inhaled insulin product 10 percent reduction of LDL cholesterol at day 28, compared with Exubera. Kiritsy was promoted internally to his current role. The an increase of 1.4 percent with insulin glargine. “When we present- company also added a vice president of business development and ed the data to our advisors, they said that to their knowledge this a chief counsel. was the first time the data have shown that controlling glucose lev- “We’ve tried to get the balance right between growing our own els positively impacts LDL and triglyceride reduction,” says Adams. and bringing in fresh thinking,” says Adams. “To me, part of Environmentally friendly Azmacort: Kos acquired Aventis’ asthma growing an organization is not total reliance on the way things drug Azmacort (triamcinolone) for about $200 million this spring. have been done in the past, but getting fresh thinking and fresh (Azmacort, a declining product for Aventis, produced $88 million in experiences.” revenue in 2003 with minimal sales force support.) The inhaled steroid is already on the market for Kos with a CFC propellant. Building a Pipeline Rosskamp explains that Aventis received an approvable letter for With its jump on the HDL market, Kos is in an enviable spot. Other Azmacort with an environmentally friendly HFA propellant, and HDL products are coming, notably the products Pfizer acquired by Kos is completing the work required for approval. buying Esperion. But Adams says, “We have the playing field to our- KS 01-017, currently in formulation, is a dual regulator of glucose selves for the next three or four years.” and lipids. The market for such a product is enormous as nearly 50 There’s an if attached to that prediction. Barr Laboratories is cur- million Americans have been diagnosed with metabolic syndrome. rently challenging the Niaspan patent, and though Adams says Kos Looking forward, says Adams, “We’ve got to maintain momen- feels secure, the case is expected to come to trial in 2005 or later. A tum, add products to development, maintain our aggressive stance loss would be a serious setback. In the meantime, several new prod- on product acquisition, and look for opportunities for corporate ucts are in late-stage development. M&A activity, which is part of logical pharmaceutical develop- KS 01-018 treats peripheral arterial disease (PAD), which ment. But I want to do that while maintaining the special nature of causes leg pain. “It’s very prevalent in smokers,” explains Kos and the culture.” Rosskamp. “The American Diabetes Association issued guide- To Daniel Bell, this is just part of the plan. “We didn’t start Kos lines that every diabetic patient over age 50 should be screened with the idea of only being a $200 million company,” he says. “We for PAD.” Kos estimates the patient population at 8 to 12 mil- started Kos with the idea of growing it as quickly as possible to be at lion, the market at $1 billion, and potential peak sales at $400 least a billion-dollar company. That was our goal from the get-go.”

© Reprinted from PHARMACEUTICAL EXECUTIVE, October 2004 Printed in U.S.A. Copyright Notice Copyright by Advanstar Communications Inc. Advanstar Communications Inc. retains all rights to this article. This article may only be viewed or printed (1) for personal use. User may not actively save any text or graphics/photos to local hard drives or duplicate this article in whole or in part, in any medium. Advanstar Communications Inc. home page is located at http://www.advanstar.com.