ITEM 4: INFORMATION ON THE COMPANY
Introduction
We are a globally operating company that develops, manufactures and markets
innovative pharmaceutical and chemical products for a range of targeted, highly
specialized applications. In 2005, we reported net sales of € 3,272 million, 82%
of which were generated outside of our home market Germany, and operating income
of € 676 million.
In each of the last five years, we were able to significantly increase our
revenues and operating income, although the growth rate has flattened in recent
years. Much of this development has been driven by Pantoprazole, our main
therapeutic, which we offer for the treatment of reflux disease as well as
gastric and duodenal ulcers, but increasingly also from growth of our chemicals
business. We expect further growth of our Pantoprazole sales but, given the
market position that Pantoprazole has achieved to date, we expect this growth to
slow in the coming years. The following table provides a breakdown of our net
sales and shows our operating income for the three years ended December 31,
2005:
Results of Operations
2003 2004 2005 CAGR(1)
(€ in millions, except %) (%)
Net sales
Pharmaceuticals 1,980 2,109 2,365 8.3
Chemicals 755 854 907 6.6
Total 2,735 2,963 3,272 7.8
Operating income 558 (2) 604 (2) 676 7.9
As % of net sales 20.4 (2) 20.4 (2) 20.7
(1) The Compound Annual Growth Rate ("CAGR") measures the average annual growth
of a line item over the period for which data is shown in the table.
(2) 2003 and 2004 figures have been adjusted to reflect the retroactive
application of IFRS 2. For further details see Note 2 to our consolidated
financial statements as of and for the year ended December 31, 2005.
For a description of our principal capital expenditures over the last three
years, see "Item 5: Operating and Financial Review and Prospects - Liquidity and
Capital Resources".
Our pharmaceuticals division is committed to developing innovative
therapeutics for the global pharmaceuticals markets with a strategic focus on
unmet medical needs in the gastrointestinal and respiratory areas. Our
pharmaceuticals business is currently mainly driven by Pantoprazole. We market
Pantoprazole in virtually all regions of the world with the exception of Japan.
The main markets for the drug are the United States and Europe. Pantoprazole has
been chiefly responsible for the growth of our pharmaceuticals division in
recent periods, and we expect that it will continue to be a key revenue driver
in the coming year.
In addition, after successfully completing the Mutual Recognition Procedure
("MRP") in most European countries, we started marketing Ciclesonide, an
innovative product for the treatment of asthma, as a metered dose inhaler
("MDI") device under the brand name Alvesco®. We initially launched this product
in two European markets, Germany and the United Kingdom. As of mid-March 2006,
we had received regulatory approval for Ciclesonide in 35 countries and had
launched it in 17 countries. In October 2004, our collaborative partner in the
United States, Sanofi-Aventis S.A. ("Sanofi-Aventis"), received an "approvable
letter" for Ciclesonide from the FDA.
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We are also developing Roflumilast, a drug candidate for the treatment of
asthma and chronic obstructive pulmonary diseases ("COPD") which we intend to
market under the brand name Daxas®. Following the termination of our cooperation
with Pfizer, Inc. ("Pfizer") and withdrawing our European Marketing
Authorization Application (MAA) with respect to Roflumilast in 2005, we are
conducting further clinical studies to obtain more data. The submission of a new
MAA will be pursued if we view the clinical data obtained in the ongoing
clinical trials as sufficiently strong for this purpose.
In addition to our portfolio of prescription therapeutics, we offer imaging
reagents and an assortment of over-the-counter ("OTC") drugs, which are drugs
that are available to patients without prescription.
Our chemicals division offers a portfolio of innovative high quality
specialty chemicals, including additives and measuring instruments, metallic
effect pigments and printing inks, coatings and sealing compounds, and
electrical insulation coatings for use in a wide range of downstream
applications. In light of the highly application-specific nature of the
specialty chemicals that we offer, we maintain close contact with our customers
and constantly aim to develop, manufacture and market products that respond to
their specific requirements. We believe that our customer-oriented approach has
enabled us to achieve leading positions in the selected markets that we serve as
well as revenue growth and margins above the average of our peers.
At December 31, 2005, we had operating subsidiaries in over 25 countries,
which marketed our products on a worldwide basis. At that date we employed
almost 13,300 people, of whom 18% worked in research and development. We believe
that our commitment to the international expansion of our business and to R&D
will enable us to capture future growth opportunities in the pharmaceuticals and
specialty chemicals industries in our various targeted markets.
We are incorporated as a stock corporation under the laws of the Federal
Republic of Germany and began operations as a separate legal entity in 1977
following our spin-off by VARTA AG. The legal name of our company is ALTANA
Aktiengesellschaft. Our principal executive offices are located at Am
Pilgerrain 15, D-61352 Bad Homburg v.d. Höhe, Germany, and our telephone number
is ++49 (0) 6172-1712-0.
Strategy
Our group mission, which serves as a guiding principle for both our
divisions, is to increase our value through sustained profitable growth by
developing, manufacturing and marketing innovative products in selected
high-margin areas and expanding our operations internationally. We are committed
to fully exploiting the opportunities of emerging technologies by investing a
substantial amount of our annual earnings in R&D and to enlarging our presence
in all important international markets, particularly the United States and Asia.
We measure our success in creating value by reference to sustained levels of
growth in earnings, annual dividends and market capitalization. To focus our
efforts on these criteria, we have sought to align the interests of our
management and employees with those of our shareholders by implementing
stock-based compensation programs. Accordingly, we operate annual stock option
plans that are open to our management board, senior executives and other key and
high-potential employees. We also offer an annual share ownership plan for those
of our employees who are not eligible to participate in our stock option plans.
For more information on these plans, see "Item 6: Directors, Senior Management
and Employees - Share Ownership - Stock Option Plans" and "- Item 6: Directors,
Senior Management and Employees - Share Ownership - ALTANA Investment Program."
In 2005, we announced our intention to dissolve our present group structure
and to achieve an independent operation of our two divisions in the course of
2006. With respect to our pharmaceuticals division we are analyzing potential
strategic partnerships with the aim to examine various options for the long-term
future development of our pharmaceuticals business. We also intend to pursue the
independent operation of our chemicals business as a listed company. No final
decision regarding these projects has yet been made.
In addition to our overall group strategy, we have also formulated more
detailed strategies for each of our two divisions.
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In our pharmaceuticals division, our strategy is to:
• Develop innovative therapeutics in high-growth areas. To capitalize on
opportunities in the worldwide pharmaceuticals markets, we concentrate our
efforts on the discovery and development of innovative therapeutics in
those areas that we believe offer the highest growth potential. Our
current focus is on expanding our successful gastrointestinal franchise by
exploiting the expertise that we have gained through the development of
Pantoprazole, while strengthening our respiratory franchise. To this end,
we are actively developing next-generation therapeutics for the treatment
of ulcers and acid reflux disease, including Soraprazan, which is a
potassium competitive acid blocker in Phase II clinical development. We
have launched a metered dose inhaler ("MDI") application of Ciclesonide,
an innovative drug for the treatment of asthma, under the brand name
Alvesco® in 17 markets, including Germany, the United Kingdom, The
Netherlands, Brazil, Australia and other countries, and are in the process
of obtaining more clinical data regarding an innovative drug for the
treatment of asthma and COPD, Roflumilast, which we intend to market under
the brand name Daxas®, provided we manage to obtain regulatory approval.
Our medium- to long-term goal is to supplement our existing franchises by
entering the oncology market, which we expect will grow substantially in
the future.
• Expand our business internationally, particularly in the United States, to
capture growth opportunities in the global pharmaceuticals markets.
International markets already account for more than 80% of the net sales
of our pharmaceuticals division. We consider the further
internationalization of our business a key element of our growth strategy.
The strong market position of Pantoprazole in the United States has
enabled us to achieve substantial sales increases over the past years. In
2005, our U.S. pharmaceutical sales amounted to € 651 million,
representing 27.5% of the total net sales of our pharmaceuticals division
in this period. To solidify and expand our position in this and other
important international markets, we aim to increase our visibility by
entering into co-promotion arrangements with partners that have
established marketing and sales organizations and by exploiting the launch
of our pipeline drugs to gradually expand our own sales and marketing
organizations for innovative pharmaceuticals in the United States and
other overseas markets. In addition, we plan to create and expand our own
research, clinical development and regulatory affairs facilities in
overseas locations, especially in the United States and Japan.
• Focus on R&D. We believe that the foundation of our long-term growth
strategy is our continued emphasis on R&D with a special focus on
therapeutics, the strategic core of our pharmaceuticals business. In
addition, we intend to expand the depth and scope of our R&D activities by
entering into strategic collaborations with third parties active in
biotechnology and molecular science with a view to enhancing our R&D
efforts in the areas of genomics and proteomics. To fully exploit the
fruits of our research, we complement our own efforts by entering into
co-development arrangements with third parties. We also develop drugs on
the basis of technologies licensed from third parties. See
"Pharmaceuticals - Research and Development - R&D strategy" for more
information on our R&D strategy.
In our chemicals division, we seek to:
• Market comprehensive customer-oriented solutions. In our chemicals
business, we provide our customers with comprehensive solutions that
combine specialized chemical products with technical advice and assistance
regarding their adaptation and integration into our customers'
manufacturing processes. To this end, we typically market our products on
a decentralized basis and maintain customer service facilities in
proximity to our customers' premises. We believe that this strategy
enables us to add substantial value to our customers' products and their
manufacturing efforts. Our customer-driven philosophy has enabled us to
achieve leading positions in terms of innovation, quality and service in a
number of selected markets. In addition, because our customers pay us
primarily for the performance of our products, rather than the chemical
substances of which they
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consist, we believe that our ability to offer comprehensive solutions has
allowed us to attain higher profit margins than many of our peers.
• Maintain an innovative portfolio of technologically superior products. We
believe that our focus on developing innovative products has earned us an
industry-wide reputation as a supplier of technologically advanced
specialty chemicals. We intend to build upon this reputation by continuing
to spend substantial resources on R&D. To ensure that our R&D efforts are
at all times geared towards improving the performance of our products, all
our R&D projects are carried out in close cooperation with our sales and
service organization. This approach, which we believe distinguishes us
from our competitors, enables us to collaborate with our customers and to
constantly adapt the focus of our efforts in response to their needs.
• Focus on selected markets. We seek to achieve a leading position in each
of our targeted markets through innovation, quality and service. A key
element of our strategy is to focus on markets that are too small to form
a core business of our larger competitors and yet too complex to be
serviced by smaller companies, which typically have insufficient resources
to meet the market's expectations in terms of R&D and international scope.
In selecting markets to enter, we aim to maintain a strategic portfolio of
downstream markets that allows us to supply a wide array of complementary
industries. We believe that this approach enables us to diversify our risk
by reducing our exposure to the business cycles of individual markets. In
line with this strategy, we have divested almost all of our industrial
coatings business, which did not meet our criteria with respect to
innovation and high demand for technical support, and have decided to
focus increasingly on solutions for flexible packaging within our Coatings
& Sealants business.
• Supplement organic growth with acquisitions of selected targets. In
furtherance of our strategic goal to maintain and expand our leading
position in selected markets of the specialty chemicals industry, we have
historically relied on a combination of organic growth and selective
acquisitions, and we intend to continue to pursue this strategy in the
future. In selecting acquisition targets, we focus on the potential for
synergies, the availability of experienced and competent management and
the willingness and ability of the target to accept our corporate culture
and our focus on serving our customers. In the fourth quarter of 2005, we
acquired ECKART GmbH & Co. KG (the "ECKART Group"), a leading supplier of
metallic effect pigments, which now represents our Effect Pigments
business. In the fourth quarter of 2005, we also acquired Kelstar
International Inc. ("Kelstar International"), a company active in the
market of packaging coatings, particularly in the United States.
Pharmaceuticals
Overview
We develop, manufacture and market a wide range of pharmaceutical products,
with a focus on innovative therapeutics. In addition, we offer imaging reagents
and OTC drugs. We benefit from an extensive product portfolio, with particular
strengths in the area of gastrointestinal therapies, and market our
pharmaceuticals internationally, mainly in the United States, Germany and other
countries in Europe, as well as in Latin America. The strength of our portfolio
has enabled our pharmaceuticals division to increase its net sales substantially
in recent years.
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In 2005, our pharmaceuticals division generated net sales of €
2,365 million, an increase of 12.1% compared with 2004. The chart below
provides a breakdown of our pharmaceuticals net sales by geographic region for
the three years ended December 31, 2005:
Pharmaceutical Net Sales by Geographic Region
[[Image Removed: (BAR CHART)]]
A substantial portion of our growth is attributable to the successful
marketing of Pantoprazole in all key markets for branded proton pump inhibitors
("PPIs") with the exception of Japan. While we have experienced strong double
digit growth in the European markets, growth in North America has recently
slowed down due to increased competition in the U.S. market, including from
generics and OTC products. We expect that the proportion of our net sales
accounted for by sales to Europe and North America will continue to increase in
future years due to the continued commercialization of Pantoprazole and the
introduction of new pharmaceuticals, such as Ciclesonide, an MDI version of
which we are marketing in 17 markets (as of mid-March 2006), including Germany,
the United Kingdom, The Netherlands, Brazil, Australia and other countries. This
trend may, however, be less pronounced than it has been in the past. The
increase in net sales in Latin America in 2005 was due primarily to growing
sales of Pantoprazole and Neosaldina®.
As a result of the international dimension of our business, our results of
operations are materially affected by exchange rate fluctuations in any given
period, especially by changes in the exchange rate between the euro on the one
hand, and the U.S. dollar and currencies linked to the U.S. dollar on the other
hand. See "Item 3: Key Information - Risk Factors - Risks Related to each of our
Businesses" and "Item 11: Quantitative and Qualitative Disclosure About Market
Risk" for more information on our exchange rate exposure.
In 2005, our pharmaceuticals division comprised three principal business
areas:
• Therapeutics, comprising prescription drugs for gastrointestinal and
respiratory indications as well as a variety of other therapeutics;
• OTC, comprising drugs, tonics, vitamins and medical accessories that
patients may purchase over-the-counter without the need to obtain a
prescription; and
• Imaging, comprising diagnostic reagents, such as contrast media, for in
vivo applications.
In addition, we generate limited revenues from other sources, mainly from
contract manufacturing on behalf of third parties.
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The following chart provides a breakdown of our pharmaceutical net sales by
business area for the three years ended December 31, 2005:
Pharmaceutical Net Sales by Business Area
[[Image Removed: (BAR CHART)]]
The growth of our pharmaceuticals division is driven primarily by our
therapeutics business and especially by our acid suppressant Pantoprazole, which
due to increased sales in most European countries (including Germany) continued
to be the primary growth driver for the division, accounting for 57.6% of its
net sales in 2005.
Products
Therapeutics
Overview. In our therapeutics business, we develop, manufacture and market
prescription drugs, commonly referred to as ethical therapeutics, primarily for
gastrointestinal and respiratory indications. In addition, we market
therapeutics for cardiovascular and a variety of other indications. In 2005, our
therapeutics business generated net sales of € 2,071 million.
The following table shows a breakdown of our therapeutics net sales by
franchise for the three years ended December 31, 2005:
Therapeutics Net Sales by Franchise
2003 2004 2005
(€ in millions)
Gastrointestinal 1,241 1,367 1,536
Respiratory 59 59 69
Other 424 413 466
Total 1,724 1,839 2,071
In the medium- to long-term, we intend to expand our therapeutics business
by entering the oncology market. We have already commenced basic research
related to oncology and entered into a number of collaborations with biotech
companies through which we seek to enhance our R&D expertise in this area. See
"- Research and Development - R&D strategy" for more information on our R&D
strategy.
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Gastrointestinal franchise. In our gastrointestinal franchise, we market
drugs for the treatment of diseases affecting the human esophagus, stomach and
intestine. In 2005, our gastrointestinal business achieved net sales of €
1,536 million.
The most important product in our gastrointestinal portfolio is our
patent-protected therapeutic Pantoprazole. In 2005, Pantoprazole accounted for
net sales of € 1,361 million, or 88.6%, of the revenues of our gastrointestinal
franchise.
Pantoprazole is an acid suppressant drug that belongs to the family of
so-called proton pump inhibitors ("PPIs"). Over the past decade, the worldwide
market for PPIs has experienced rapid growth, and the number of PPIs and their
labeled indications has expanded. Doctors typically use Pantoprazole for the
short- and long-term treatment of patients with gastroesophageal reflux disease
("GERD"), a chronic condition caused by the reflux of stomach acid into the
esophagus. Medscape estimates that more than 40% of adults experience GERD
symptoms at least twice a week. If left untreated, esophageal damage caused by
GERD can lead to even more serious complications, including a precancerous
condition known as Barrett's esophagus and esophageal cancer. Pantoprazole
blocks the enzyme responsible for producing acid in the gastric mucosa, thereby
restricting the flow of acid into the stomach. Pantoprazole has also received
approval in the United States and Europe for the long-term treatment of GERD and
recently in some European countries for the "on demand" treatment of GERD. These
developments have expanded its use. In addition, Pantoprazole has also received
regulatory approval in many countries outside the United States for the
treatment of gastric and duodenal ulcers as well as the prevention of ulcers
caused by non-steroidal anti-inflammatory drugs ("NSAIDs"). Ulcers result from
the digestive action of the gastric juice on the mucous membrane when the latter
is rendered susceptible to its action, for example, by certain drugs or local
factors, including the Helicobacter pylori infection. Helicobacter pylori is the
bacterium chiefly responsible for peptic ulcers. In addition, Pantoprazole has
received approval in the United States, Europe and various other countries for
application in an intravenous formulation. Pantoprazole intravenous has
important therapeutic benefits for the treatment of patients who are unable to
receive a PPI by other routes and who need an intravenous ("IV") agent for the
short term. In some countries, we also offer Pantoprazole in combination with
two antibiotics for the eradication of Helicobacter pylori.
We believe that Pantoprazole enjoys therapeutic advantages vis-à-vis its
competitors. First, clinical studies we have conducted on Pantoprazole suggest
that Pantoprazole has less clinically relevant potential for metabolic
interaction with other drugs. This feature distinguishes Pantoprazole from
competing PPIs. Our studies have also shown that Pantoprazole has a higher
bioavailability than other PPIs. Bioavailability is a measure for the degree and
rate at which a substance is absorbed into the body.
Pantoprazole enjoyed substance patent protection in Europe until June 2005
and enjoys protection based on supplementary protection certificates ("SPCs") in
a majority of European countries until May 2009 and enjoys patent protection in
the United States until July 2010 with a possible further expansion of six
months in the United States due to a pediatric indication. In 2004, a third
party submitted an Abbreviated New Drug Application ("ANDA") for approval of a
generic version of Pantoprazole challenging our Pantoprazole substance patent to
the U.S. Food and Drug Administration ("FDA"). In response to this patent
challenge, we filed a patent infringement suit against the applicant in the
United States in May 2004. We are confident that our U.S. patent relating to
Pantoprazole is valid and enforceable and of sufficient scope and strength to
prevent the company that submitted the ANDA or any other third party from
manufacturing and distributing Pantoprazole-based generics during the remaining
life of this patent. In 2004, we also received notices regarding two ANDAs
challenging our Pantoprazole oral formulation patent. Because the earliest date
that patent infringement with respect to any of our formulation patents for
Pantoprazole could pose a threat to our business is 2010 (until which date we
believe we will continue to enjoy protection under our substance patent), we
decided not to take any immediate steps with regard to these two ANDAs. At the
beginning of March 2005, we received a notification from one of the challengers
of our Pantoprazole oral formulation patent, informing us about an amendment of
the ANDA to include a paragraph IV certification relating to our Pantoprazole
substance patent. In view of this amended ANDA, we filed a patent infringement
suit against the applicant in April 2005. At the end of May 2005, we received an
additional notice on another ANDA challenging our Pantoprazole oral formulation
patent. As in the case of former challenges of our oral
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formulation patent, we decided not to take any immediate action with regard to
this new ANDA. At the end of June 2005, we received an additional notice
regarding an ANDA for our Pantoprazole IV formulation patent, again challenging
our Pantoprazole substance patent and additionally alleging non-infringement of
our Pantoprazole IV formulation patent listed in the "Orange Book". In view of
this new ANDA, we filed a complaint in the U.S. Federal District Court for the
District of New Jersey on August 5, 2005. In this complaint we claim
infringement of our substance patent, but in line with the attacks on our oral
formulation patents, do not claim that our IV formulation patent has been
infringed. For additional information, see "- Intellectual Property",
"- Regulation - United States", "Legal Proceedings" and "Item 3: Key
Information - Risk Factors - Risks Related to our Pharmaceuticals Business".
We have offered Pantoprazole in our home market, Germany, under the name
Pantozol®, since 1994 and in the United States, under the name Protonix®, since
2000. As a result, we currently offer the drug in virtually all regions of the
world with the exception of Japan. According to our internal records and data
provided to us by our co-marketing partners, co-promotion partners and
licensees, global market sales of Pantoprazole amounted to € 2,768 million in
2005. Market sales include our own direct sales to the market as well as the
sales of our licensees and co-marketing and co-promotion partners. See "- Sales
and Marketing" for a description of our sales and marketing organization.
Pantoprazole has experienced rapid growth in almost every market in which it
has been launched, although the growth rates have tended to flatten over the
years, as Pantoprazole has achieved an established market position. Based on
data available to us, total market sales of Pantoprazole in 2005 totaled
€ 1,531 million in North America, € 292 million in Germany, € 757 million in
Europe excluding Germany, € 52 million in Latin America, and € 136 million
elsewhere. These figures yield total market sales of Pantoprazole of
€ 2,768 million in 2005, compared with € 2,481 million in 2004 and €
2,350 million in 2003. The growth in total market sales of Pantoprazole in each
of the three years reflects the strong growth in demand for this product in many
regions of the world, including the U.S. market.
Our launch of Pantoprazole in the United States benefited from our marketing
collaboration with Wyeth Pharmaceuticals, the pharmaceuticals division of Wyeth,
Inc. ("Wyeth"). According to IMS Health, as of the week ending February 24,
2006, Pantoprazole's share of new U.S. prescriptions for PPIs was 19.7%, while
our total prescription share amounted to 19.8%.
We expect Pantoprazole to continue to be a key revenue driver for our
business for at least the next several years, although we expect the growth rate
to flatten given that the drug has already achieved a substantial position in
all markets in which it has been launched and as a result of the impact of
increasing competition. Pantoprazole faces competition from various other
branded PPIs, including Takeda Pharmaceutical Company Limited's ("Takeda")
Lansoprazole and AstraZeneca's Esomeprazole. If our competitors continue to
invest heavily in marketing these products, the ability of Pantoprazole to
capture market share or maintain its current market share could be adversely
affected. In addition, Pantoprazole faces increasing competition from generic
PPIs, in particular generic PPIs based on a substance called Omeprazole. A
variety of companies, including Schwarz Pharma AG ("Schwarz Pharma"), Mylan
Laboratories Inc. ("Mylan"), Novartis AG ("Novartis"), TEVA Pharmaceutical USA,
Inc. ("TEVA") and Torpharm Inc. ("Torpharm"), are marketing Omeprazole-based
generics in Europe and the United States at prices that tend to be lower than
the price of Pantoprazole and other branded PPIs. Further competition may result
from the launch of generic versions of PPI molecules other than Omeprazole once
the relevant patents have expired. In addition, Pantoprazole competes with OTC
PPIs. Unlike Pantoprazole, these PPIs are available to patients without a
prescription. Various Omeprazole-based OTC PPIs have been launched in the United
States and several European countries and are being marketed with increasing
success. While generic and OTC PPIs have so far had a limited impact on the
market for branded PPIs, including Pantoprazole, in Europe and the United
States, we have started to experience stronger pricing pressure in the
U.S. market.
Factors that we believe should limit Pantoprazole's ongoing exposure to
competition include Wyeth's branding experience, which we believe should enable
us to continue to convey the therapeutic benefits of Pantoprazole to the market,
and the pricing of Pantoprazole at a substantial discount to other PPIs,
including AstraZeneca plc's ("AstraZeneca") Esomeprazole. However, there can be
no assurance that we will be able
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to raise or maintain Pantoprazole's market share in future periods. See "Item 3:
Key Information - Risk Factors - Risks Related to our Pharmaceuticals Business"
and "- Competition" for more information on the competitors of Pantoprazole.
Our continued commitment to the development of innovative gastrointestinal
therapeutics has yielded Soraprazan, a potential next-generation drug for
indications similar to those of Pantoprazole. Soraprazan is currently in Phase
II clinical development. See "- Research and Development - Pipeline" for more
information on Soraprazan and its therapeutic profile and on our R&D efforts in
the area of gastrointestinal therapeutics generally.
Respiratory franchise. In our respiratory franchise, we offer drugs to treat
chronic obstructive lung diseases, such as asthma and chronic obstructive
pulmonary disease ("COPD"), and respiratory infections. Asthma is a chronic
inflammation of the airways, often of allergic origin, that is marked by
continuous labored breathing accompanied by wheezing, breathlessness, a sense of
constriction in the chest, and often by attacks of coughing or gasping.
According to the Global Initiative for Asthma ("GINA"), more than 300 million
people worldwide suffer from asthma. The prevalence of asthma is increasing by
approximately 50% every decade, and worldwide deaths from asthma total more than
180,000 annually. COPD is a pulmonary disease that is characterized by chronic,
typically irreversible airway obstruction resulting in a slowed rate of
exhalation. The airflow limitation is typically associated with an abnormal
inflammatory response of the lungs to noxious particles or gases. COPD is often,
though not always, caused by smoking. Over time, greater airway damage occurs,
and patients eventually die due to lung failure. COPD affects 600 million people
worldwide and deaths total more than 2.75 million people each year, according to
estimates by the World Health Organization. Our respiratory business generated
net sales of € 69 million in 2005. We expect the sales of our respiratory
business to show above average growth in the next years.
Currently, the principal drug of our respiratory franchise is theophyllin,
which we market under the brand names Euphyllin®/Euphylong®. Theophyllin is used
for the treatment of asthma and COPD.
As of mid-March 2006 we had received approval for another respiratory drug,
Ciclesonide, in 35 countries and launched the MDI application of Ciclesonide
under the brand name Alvesco® in 17 markets, including Germany, the United
Kingdom, The Netherlands, Brazil, Australia and other countries. In February
2006, the indication of Alvesco® has been extended to treat mild to severe
persistent asthma in adolescent patients aged 12 and older. The United Kingdom
was the MRP reference member state for marketing approval across a number of EU
countries. We intend to obtain approvals in the remaining European countries
based on the MRP as soon as practicable. For more information on the MRP see
"- Regulation - European Union". Starting in 2002, we filed applications for
regulatory approval of Ciclesonide in many other countries, including in the
United States at the end of 2003. Our collaborative partner in Japan, Teijin
Ltd., filed for regulatory approval of Ciclesonide in January 2004. In October
2004, our collaborative partner in the United States, Sanofi-Aventis, received
an approvable letter for Ciclesonide from the FDA. An approvable letter outlines
specific issues that must be resolved before the FDA will approve a drug for
marketing. Sanofi-Aventis is working closely with the FDA to address the
requests outlined in the letter.
We have an additional innovative respiratory drug candidate, Roflumilast, at
an advanced stage of clinical development. After withdrawing the MAA for
Roflumilast in November 2005 we will complete the ongoing clinical trials and
conduct further clinical studies to obtain more data with a view to submitting a
new MAA. The submission of a new MAA will be pursued if clinical data are
considered sufficient. We also intend to submit an application for regulatory
approval for Daxas® in the United States as soon as we have obtained the
necessary data. See "- Research and Development - Pipeline" for more information
on our R&D pipeline in the respiratory area and "Item 3: Key Information - Risk
Factors - Risks Related to our Pharmaceuticals Business" for risks associated
with the regulatory approval of pharmaceuticals under development.
For respiratory indications, we also offer Broncho-Vaxom®, an oral drug used
principally for the treatment of recurrent respiratory tract infections.
Broncho-Vaxom® consists of fractions of eight different strains of bacteria
whose application stimulates the natural defenses of the body. As a result, the
drug can reduce the severity of symptoms and help patients develop a greater
resistance to respiratory tract infections,
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thereby reducing the incidence and duration of such infections in adults and
children. We license Broncho-Vaxom® from OM PHARMA SA, a company located in
Switzerland.
Other therapeutics. In our other therapeutics business, we market a variety
of therapeutics for indications outside of our two main franchises, including
therapeutics to treat cardiovascular diseases. In 2005, our other therapeutics
business had net sales of € 466 million.
Our main product offerings in the cardiovascular area is Ebrantil®, a drug
based on a substance called urapidil, which is available as both an oral and an
IV formulation. Ebrantil® is used for the treatment of hypertension.
Hypertension is characterized by an increase in blood pressure above normal
levels over a prolonged period of time. The condition can cause damage to the
heart and blood vessels, creating an increased risk of heart attack, heart
failure and stroke. Ebrantil® is a so-called selective alpha-1 receptor
antagonist with central anti-hypertensive action. Alpha receptors are cellular
entities that exist on the surfaces of cells and are stimulated by the
sympathetic nervous system. Alpha receptor antagonists reduce stress symptoms by
inhibiting the effects of the sympathetic nervous system, thereby preventing
cardiovascular damage. Ebrantil® is a result of our own cardiovascular R&D
efforts. Apart from cardiovascular products, our main products in this area are
drugs for the treatment of rheumatism and for urological and gynecological
indications, as well as iron supplements and facial topicals. In 2005, we
acquired the rights to certain dermatology products in the United States from
GlaxoSmithKline plc ("GlaxoSmithKline").
OTC
In our OTC business, we market a variety of non-prescription drugs directly
to the consumer. Our portfolio includes gastrointestinal drugs, pain killers,
tonics and vitamins. Unlike ethical therapeutics, patients may purchase OTC
drugs without a prescription. The OTC market has grown considerably in
importance in recent years, as health insurance companies have become more
cost-sensitive and refuse to refund the costs of certain categories of
therapeutics (especially drugs used to treat "trivial" complaints). Therefore,
we have switched several products from prescription to self-medication. We
achieve approximately 30% of our OTC revenues in Germany. We also distribute OTC
drugs through our subsidiaries in a number of other regions of the world, most
notably in other parts of Western Europe and in Latin America. In December 2003,
we acquired Neosaldina®, an OTC product for pain treatment, in Brazil. In 2005,
our OTC business generated net sales of € 131 million.
The most important products in our comprehensive OTC portfolio are
Buerlecithin®, Neosaldina®, Riopan® and Sanostol®. Buerlecithin® is a tonic
based on lecithin, a substance found in soy plants, and is used to increase
mental productivity. Neosaldina® is a pain killer that is widely used for the
treatment of headaches and is well-established in Brazil, where it is the
best-selling pain treatment drug in pharmacies. Riopan® is an antacid for the
treatment of GERD, duodenal and gastric ulcers, and stress-related mucosal
damage. Antacids are agents that neutralize acidity and are used as an adjunct
to other drugs to relieve ulcer pain and as self-medication against acid
indigestion, heartburn, dyspepsia and sour stomach. The therapeutic importance
of antacids has been declining in recent years in view of the better clinical
efficacy of PPIs, such as Pantoprazole. We currently market Riopan® as an
ethical therapeutic in some markets but mainly offer it as an OTC drug.
Sanostol® is a widely recognized vitamin preparation for children in Germany and
many other countries.
Imaging
In our imaging business, we offer a variety of in vivo diagnostic
applications, which are applications for diagnosing medical conditions in the
living body of a human. Imaging is a term that covers a range of diagnostic
techniques for creating images of parts of the human body. Our portfolio
comprises contrast media for x-ray imaging, magnetic resonance imaging ("MRI")
and ultrasonic imaging. MRI is an increasingly important noninvasive diagnostic
technique that produces computerized images of internal body tissues and is
based on nuclear magnetic resonance of atoms within the body induced by applying
radio waves. In 2005, our imaging business generated net sales of €
108 million. We offer our imaging portfolio in cooperation with Bracco S.p.A.
("Bracco"), an Italian company active in contrast media. Under the terms of our
collaboration
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with Bracco, we manufacture a variety of contrast media developed by Bracco and
market them in Germany and in parts of Central Europe. We believe that as a
result of our collaboration with Bracco, we are among the leading providers of
contrast media in Europe.
Research and Development
R&D strategy
We consider R&D to be the foundation of the long-term growth of our
pharmaceuticals division and are committed to maintaining a high level of
investment in R&D in the future. The table below provides information regarding
our pharmaceutical R&D expenditures for the three years ended December 31, 2005:
R&D Expenditures
2003(1) 2004(1) 2005
(€ in millions, except %)
R&D expenditures 376 410 418
% of pharmaceuticals net sales 19.0 19.4 17.7
% of therapeutics net sales 21.8 22.3 20.2
(1) 2003 and 2004 figures have been adjusted to reflect the retroactive
application of IFRS 2. For further details see Note 2 to our consolidated
financial statements as of and for the year ended December 31, 2005.
We believe that our current level of R&D expenditures positions us well
vis-à-vis our peers. Our goal is to continue to spend approximately 20% of our
therapeutics net sales on R&D in the future. We intend to allocate approximately
20% of our R&D expenditures in any given year to basic research and drug
discovery.
The main focus of our R&D expenditures in recent years has been
therapeutics, which is the single most important contributor to our
pharmaceuticals revenues and which we expect to increase in importance in the
future. Within therapeutics, we concentrate on the development of innovative
drugs for gastrointestinal and respiratory indications. We have identified
oncology as a further focal point of our R&D efforts. To this end, we have
commenced basic oncological research and entered into a variety of
collaborations with biotech companies. In addition, we also conduct R&D related
to molecular diagnostics.
Our current R&D facilities are located in Constance, Germany; Hamburg,
Germany; Bromma, Sweden; Florham Park, New Jersey; and Waltham, Massachusetts.
In addition, we recently established a new research institute in Mumbai, India.
This new institute is intended to enhance our research capacity in the field of
medicinal chemistry and focuses on discovery research into small molecules, new
targets and new chemical entities as well as data management of clinical study
results and clinical development activities. We expect that this institute will
significantly increase our ability to synthesize new chemical compounds in our
core indication areas and will be part of our global clinical development
program.
In addition to carrying out R&D projects internally, we continuously seek to
enhance the scope and depth of our research portfolio by obtaining access to
outside knowledge, mainly through collaborations with companies in the biotech
field. Our immediate goal is to intensify our activities in the areas of
genomics, proteomics and high-throughput screening ("HTS") by acquiring equity
holdings in biotech companies, sponsoring research projects and facilitating
collaborations that we believe will yield results which may assist us with the
development of innovative new therapeutics. In addition to collaborating with
third parties in the area of basic research, we also enter into co-development
arrangements with third parties. By supplementing our own development efforts
with the resources of third parties, we believe that we can enhance the
commercial potential of our research results.
We believe that our scientific staff is a key to our success. At
December 31, 2005, 1,764 of our employees - about 20% of the workforce of our
pharmaceuticals division - worked in our pharmaceutical
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R&D laboratories and offices. Our goal is to attract and retain the
best-qualified scientists for our R&D activities. To this end, we offer our
employees a competitive compensation package, which includes the ability to
participate in our various employee incentive plans. See "Item 6: Directors,
Senior Management and Employees - Share Ownership - Stock Option Plans" for
additional information on our stock option plans.
Pipeline
Overview. We currently have several therapeutics in various stages of our
R&D pipeline. For each project, we are required to conduct a number of
pre-clinical and clinical studies. In the pre-clinical project phase, we
typically conduct a number of in vitro and in vivo studies on animals to test
the molecular and physiological effects of a drug candidate on cellular systems
and its mechanisms of action. If these tests yield positive results, we then
conduct Phase I, Phase II and Phase III clinical studies on humans to test the
safety and clinical efficacy of the drug candidate. For more information on the
regulatory approval process, see "- Regulation - Overview of the clinical trial
process".
While regulators in the United States and the European Union require that we
conduct comprehensive pre-clinical and clinical studies before applying for
authorization to market a drug, we typically need not conduct all requisite
studies in each of the two jurisdictions. Instead, we are usually able to apply
to the regulator of one jurisdiction to give us credit for studies conducted in
other jurisdictions. Sometimes, a regulator will require us to supplement our
existing studies with additional trials in order to satisfy all applicable
requirements. As a result, we often manage to use, for example, the results of
Phase I trials conducted in the European Union in order to qualify for Phase II
trials in the United States and vice versa. Historically, we used to first test
our drug candidates in the European Union and subsequently transfer the results
of these tests to the United States, subject to any additional testing required
by the FDA. More recently, in connection with the international expansion of our
business, we started to conduct trials in the European Union and United States
in parallel. In doing so, we rely partly on our own resources and partly on
collaborations with third parties.
Consistent with our R&D strategy, we focus our development efforts on
innovative drug candidates for gastrointestinal and respiratory indications.
Gastrointestinal franchise. In the gastrointestinal area, we focus our R&D
efforts on a new class of therapeutics known as potassium competitive acid
blockers ("P-CABs"). Our main drug candidate in this area is Soraprazan, which
we are developing for the treatment of GERD and other acid related diseases.
P-CABs are widely considered the next generation of acid suppressants. Like
PPIs, P-CABs restrict the flow of acid into the stomach. They differ from PPIs,
however, in the way they operate. Whereas PPIs must be converted in the body
before they can bind to the proton pump, P-CABs act directly via an ionic
inhibition of the pump. As a result of this difference, Soraprazan displays a
faster and more pronounced onset of action and disconnects much more easily from
the pump, which we believe should lead to significant therapeutic benefits
compared with currently available treatments for GERD and ulcers, such as better
symptom relief. This characteristic should make Soraprazan more suitable for
treating the symptoms of various gastrointestinal diseases. Soraprazan is
currently in Phase II development. Initial data from early Phase II studies
indicate that Soraprazan is effective and well-tolerated.
Respiratory franchise. Our pipeline for respiratory indications contains a
series of innovative drug candidates for the treatment of asthma, COPD and
rhinitis. Rhinitis is a disease that causes inflammation of the mucous membrane
of the nose.
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The table below provides an overview of our respiratory pipeline along with
the respective development stages of each drug:
Drug candidate Indication Current project phase
Ciclesonide metered dose inhaler Asthma Phase III/IV(1)(2)
Ciclesonide nasal Rhinitis Phase III/filed in the
United States and Canada
Ciclesonide combined with Asthma Phase II
formoterol(3)
Roflumilast oral Asthma Phase III EU/United
States
Roflumilast oral COPD Phase III EU/United
States
(1) In conducting Phase III studies with respect to this project in the United
States, we collaborate with Sanofi-Aventis.
(2) Already launched in 17 and registered in 35 countries as of mid-March 2006.
(3) Formoterol is a long-acting beta agonist that acts as an acute
bronchodilator.
As part of the regulatory approval process, a New Drug Application ("NDA")
must be submitted to the FDA in the United States. In the European Union, a
Marketing Authorization Application ("MAA"), has to be submitted to the EMEA.
For more information on the regulatory approval process, see "- Regulation". In
light of the inherent unpredictability of the regulatory process, you should be
aware that there can be no assurance that an MAA or NDA with respect to any of
the drug candidates listed in the table above will be filed by any particular
time or at all.
Ciclesonide, which we have started to market under the name Alvesco®, is an
inhaled corticosteroid for the treatment of asthma. Because asthma is a global
and widespread disease, there is a substantial need for further effective
therapeutics in addition to those which are already on the market.
Corticosteroids are powerful anti-inflammatory drugs that prevent asthma attacks
by reducing airway hyper-responsiveness and inflammatory reactions, such as
edema and mucous secretion. Inhaled steroids are considered the current drug of
choice for the treatment of asthma, as they offer the best overall therapeutic
profile. The inhaled steroids currently available on the market, however, have
two main side effects. First, when administered via inhalers, portions of the
drugs' active ingredients are deposited not only in the lung but also in the
mouth and throat, which can cause local side effects such as hoarseness and
fungal infections. Second, once spread throughout the body following absorption
and distribution via the blood, the systemic availability of these ingredients
can lead to serious systemic effects. Of these systemic effects, diabetes,
osteoporosis and slowed growth in children are the most important. In contrast,
Ciclesonide is activated predominantly in the lung. This feature of Ciclesonide
reduces the systemic effects that characterize existing inhaled steroids and may
provide the drug with a significant therapeutic advantage over present
treatments. In clinical trials, patients treated with Ciclesonide have
experienced significantly fewer mouth and throat side effects, while benefiting
from improved lung function, effective symptom control and reduced use of rescue
medications.
We are developing Ciclesonide for use in connection with MDIs, nasal
applicators and as a dry powder inhaler ("DPI") in combination with formoterol,
which is a compound acting as an acute bronchodilator.
As of February 2006, we had received approval for an MDI version of
Ciclesonide, for which we use a CFC-free environmentally friendly device, in
35 countries and had launched it under the brand name Alvesco® in 17 markets. In
October 2004, our collaborative partner in the United States, Sanofi-Aventis,
received an "approvable letter" for the MDI version of Ciclesonide from the FDA.
Phase II studies with respect to a DPI version of Ciclesonide in combination
with formoterol for oral inhalation are ongoing. With respect to the nasal
applicator version of Ciclesonide, we have completed several Phase III studies.
In December 2005, we submitted a New Drug Application (NDA) for marketing
approval in the United States, and filed for registration of the nasal
applicator version of Ciclesonide in Canada in January 2006.
Roflumilast, which we intend to market under the name Daxas®, is a selective
phosphodiesterase ("PDE") 4 inhibitor for the treatment of asthma and COPD. In
the United States, COPD is second only to cardiovascular disease as a cause of
disability, according to U.S. Social Security statistics, which speaks to
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the substantial need for an effective treatment. PDE 4 inhibitors are substances
that have anti-inflammatory and immuno-modulatory effects and are effective
against various inflammatory diseases. We refer to Roflumilast as a "selective"
PDE 4 inhibitor because it selectively inhibits one form of the PDE enzyme
family, namely the PDE 4 enzyme. As a result of its special molecular
interaction with this enzyme, we expect that Roflumilast will have an improved
side-effect profile compared with other PDE 4 inhibitors. Unlike most existing
therapies for asthma and COPD, Roflumilast can be administered orally.
For both the asthma and the COPD indications of Roflumilast, we have
completed a number of Phase III studies and are currently in the process of
conducting several additional studies. Effective June 30, 2005, we mutually
agreed to terminate our collaboration with Pfizer regarding Roflumilast, and in
November 2005 we withdrew the MAA for this drug candidate after consulting with
the EMEA because the clinical record we had established at that time was less
compelling than we had expected. The submission of a new MAA will be pursued if
we view the clinical data obtained in the ongoing clinical trials as
sufficiently strong for this purpose.
While clinical trials of the various pipeline drugs described above have so
far shown promising results, given the nature of the drug development process,
there can be no assurance that any of these drugs will reach the market. There
is always a significant risk that adverse results with respect to a drug will
become apparent in the future, which may result in substantial delays in the
launch of the drug and possibly force us to abandon the drug altogether.
Oncological franchise. Since 2001, we have systematically built up research
structures for oncology and a research network with experienced partners. We
have made progress in our discovery research activities and intend to identify
our first clinical project candidates in the coming years. We are focusing on a
portfolio of synthetic small molecules, which are anti-cancer drugs targeting
processes in tumor cells that have been proven to be important for the oncogenic
phenotype.
Furthermore, we are evaluating in-licensing projects in oncology with a
strategic and content-wise fit to our own research.
R&D collaborations
Overview. The table below provides an overview of some of our more important
current R&D collaborations, including a brief description of the scope and
objectives of each:
R&D Collaborations
Partner Scope
Research collaborations
GeneData AG Bioinformatics and genomics information
management and analysis systems
Data storage and analysis of
high-throughput screening assays
GPC Biotech AG Collaboration in the area of pathway
mapping and kinases
Atugen AG Antisense target validation, i.e.,
validation of drug targets by using a
complementary sequence to a given
segment of genetic material with a
special technology we have licensed from
Atugen AG
Evotec OAI AG Technical collaboration in the field of
confocal laser detection in high
throughput screening
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Partner Scope
Proteros Biostructures GmbH Crystallization and x-ray analysis of
drug target complexes in order to obtain
three-dimensional information on the
binding geometry of drug molecules and
their biological target
BIOCRATES Life Sciences GmbH Exploitation of (novel) metabolomics
technologies for biomarker discovery in
COPD and other respiratory diseases
Development collaborations
Sanofi-Aventis S.A. (formerly Aventis Co-development and co-promotion of the
S.A.) MDI and DPI versions of Ciclesonide as
well as a combination product with
formoterol in the United States
Teijin Ltd. Development and marketing of Ciclesonide
under the brand name Alvesco® in Japan;
co-development of the nasal application
of Ciclesonide and marketing in Japan.
Tanabe Seiyaku Co. Ltd. Co-development and co-promotion of
Roflumilast under the brand name Daxas®
in Japan
Research collaborations. In 2000, we entered into an alliance with GeneData
AG ("GeneData"), a Swiss company that is a leading provider of bioinformatics
and genomics information management and analysis systems used in various genomic
R&D applications. Our collaboration with GeneData has put us in a position to
manage the huge amounts of data involved in functional genome analysis, thereby
significantly enhancing our capabilities in this important area of
pharmaceutical R&D. In 2002, we expanded the scope of our collaboration with
GeneData to develop a high-throughput screening ("HTS") data storage and
analysis system. HTS is an automated process that is used to select the best
drug candidate from among hundreds of thousands of candidate molecules.
We are engaged in a research alliance with GPC Biotech AG ("GPC"), which
includes different research programs and collaboration agreements. In 1998, we
entered into our first collaboration, under which we cooperated to investigate
new genomic targets for the control of infections. In December 2000, we entered
into a research alliance with GPC in the area of tumor research. Under the terms
of this agreement, we collaborated in the identification of tumor-specific
targets, i.e., targets whose inhibition selectively eradicates cancer cells (but
not normal cells). Both research programs have been completed. In addition to
research, we are also entitled to have target validation, assay development and
screening carried out by GPC. In 2001, we entered into an agreement with GPC,
pursuant to which the company provides us with technology for our research unit
in Waltham near Boston, Massachusetts, which specializes in functional genomics
and proteomics. In addition, under the terms of the agreement, we collaborate
with GPC in the area of pathway mapping and kinases. Kinases are enzymes that
catalyze the transfer of phosphate groups and play an important role in the cell
cycle and for the regulation of biochemical pathways in living cells.
In July 2001, we entered into a three-year arrangement with Atugen AG
("Atugen") pursuant to which Atugen will carry out target validation for us,
including the validation of tumor-specific targets. The agreement was partially
renewed until the end of September 2006. Target validation constitutes an
essential step in the process of turning new target proposals identified with
genomic technologies, which is the subject-matter of our agreement with GPC,
into new drugs. The agreement will help us determine whether a target is
critically involved in a disease process and whether drugs that modulate the
target are likely to have a beneficial therapeutic effect.
Since 2001, we have collaborated with Evotec OAI AG ("Evotec") in the field
of HTS technologies. As part of this collaboration, Evotec develops specialized
equipment for the detection of fluorescence signals in cellular HTS assays,
which constitutes a core capability for the high content screening of bioactive
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compounds and which we believe will provide us with a competitive advantage. The
collaboration entitles us to a non-exclusive license to this technology. In
October 2004, we signed an agreement with Evotec to advance the discovery of one
of its kinase assays. Applying Evotec's drug discovery engine from target to
clinic, we aim to identify and optimize novel lead compounds that interact with
the target in the research program.
In October 2001, we entered into a collaboration with Proteros Biostructures
GmbH ("Proteros"), a company specializing in x-Ray crystallography of proteins.
Under this collaboration, Proteros develops crystallization protocols for target
proteins, 3D-structure elucidation of these proteins as well as protein-ligand
complexes that permit the further optimization of our lead structures. The
collaboration gives us an exclusive right to use the data generated by Proteros
in our own R&D efforts, for example, in connection with the development of
biological targets and bioactive compounds.
In October 2005, we entered into an agreement with BIOCRATES Life Sciences
GmbH ("Biocrates") to conduct a placebo-controlled preclinical study which is
intended to characterize the effects of a novel drug in a mouse model for a
major metabolic ailment. As part of this collaboration, Biocrates develops
specialized assays based on mass spectrometry for the quantitative analysis of
metabolites in biological samples. By analyzing the changes of metabolites and
their concentration in body fluids as a response to the effects of a substance
in a biological system, the metabolomics technology is intended to speed up drug
discovery processes, reduce late-stage drug development failures due to adverse
side effects and discover new biomarkers for monitoring drug response in
patients.
Development collaborations. We are currently party to three development
collaborations. In 2001, we entered into an agreement with Aventis
Pharmaceuticals Inc., the U.S. pharmaceuticals subsidiary of Aventis S.A., now
Sanofi-Aventis, pursuant to which we cooperate with Sanofi-Aventis in connection
with the ongoing Phase III clinical trials for the MDI version of Ciclesonide
carried out in the United States and share the costs of these trials. In
addition, we agreed with Sanofi-Aventis that if we obtain regulatory approval to
launch the MDI version of Ciclesonide in the United States, we will distribute
the drug in the U.S. market in collaboration with Sanofi-Aventis. Additionally,
we co-develop the DPI version of Ciclesonide in combination with formoterol
together with Sanofi-Aventis. If we obtain regulatory approval we will launch
the combination product in the United States in collaboration with
Sanofi-Aventis. In 1998, we entered into a contract in relation to Ciclesonide
with Teijin Ltd. ("Teijin"), a Japanese conglomerate, pursuant to which we
granted Teijin the right to develop and market Ciclesonide in Japan. Our
collaboration with Teijin will enable us to gain access to the Japanese market,
which operates substantially differently from the U.S. and EU markets, through
an experienced partner. In addition, we agreed with Teijin to collaborate in the
development of the nasal application of Ciclesonide.
In 2002, we entered into an agreement with Tanabe Seiyaku Co. Ltd., a
Japanese company, for the co-development and co-promotion of Roflumilast in
Japan.
Effective June 30, 2005, we mutually agreed to terminate our collaboration
with Pfizer Inc. ("Pfizer") regarding the co-development and marketing of
Roflumilast. Under the terms of the termination agreement, Pfizer returned all
of its rights in Roflumilast to us. We have assumed sole responsibility for the
further development of Roflumilast and in particular further clinical studies.
Supplies and Raw Materials
We purchase our supplies and raw materials on a worldwide basis from a
number of third-party providers. In those instances where there is only a single
supplier, we seek to reduce our dependence on that supplier by accumulating and
maintaining strategic reserves of the supplies and raw materials that we need
for the manufacture of our products. We may also seek to qualify new suppliers,
and, to the extent feasible, develop production processes in our own facilities.
We typically attempt to secure strategic materials through medium- and long-term
supply contracts and to ensure that in case of an outage, alternative sources
would be readily available to us without undue expense and delay. We have not
experienced significant difficulties in obtaining sufficient amounts of supplies
and raw materials in recent years, and we do not expect to encounter such
difficulties in the foreseeable future.
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We have several sources for the most important raw materials of
Pantoprazole, i.e., the active ingredient of the drug and a freeze-dried IV
formulation. We source the active ingredient of Pantoprazole from our
FDA-approved Singen facility and from two suppliers, one of which has received
FDA approval. The IV formulation is sourced internally from our Singen facility
and from two external contract manufacturers as back-up sources, one of which
has received FDA approval.
Our product Ciclesonide is sourced from our partner 3M in the United Kingdom
based on a long-term supply and collaboration contract. 3M's manufacturing site
has already passed pre-approval inspection by the FDA.
Production
In the area of production, our goal is to ensure consistent quality and to
minimize costs by creating facilities that specialize in discrete manufacturing
tasks. We concentrate the manufacture of most of our products for the supply of
the worldwide pharmaceuticals markets in Europe. Our manufacturing facility in
Singen, Germany, has sole responsibility for all sterile application forms,
including Pantoprazole IV, and also produces non-sterile semi-solid and liquid
application forms as well as active pharmaceutical ingredients, predominantly
Pantoprazole. Our facility in Oranienburg, Germany, which we have recently
expanded, is engaged in the production of solid dosage forms, primarily
Pantoprazole tablets. In June 2005, we opened an expansion unit at our
Oranienburg facility, which increased our production capacity at that facility.
Our facility in Lyszkowice, Poland, specializes in solid and liquid OTC
formulations. We started the construction of a new manufacturing facility for
Pantoprazole and Roflumilast tablets in Carrigtohill, Ireland, in the fourth
quarter of 2003 and expect to complete this facility in 2006. In Latin America,
our facility in Jaguariuna, Brazil serves predominantly the local market with
various technologies, whereas the site in Mexico City supplies Mexico and other
countries in Central America. All of our sites comply with current Good
Manufacturing Practice ("cGMP") standards, which are a set of officially
recognized scientifically sound methods, practices and principles for the
development and manufacture of pharmaceuticals. In addition, certain of our
sites, including Singen and Oranienburg, have been inspected and have received
approvals by the FDA and the relevant EU authorities.
We currently operate ten production facilities around the world. We source
the active ingredient for Pantoprazole principally from our manufacturing
facility located in Singen, Germany, and Isochem S.A., a French company that
performs contract manufacturing for us. Pantoprazole tablets are manufactured at
our facilities in Oranienburg, Germany, and Jaguariuna, Brazil. While we procure
key starting materials for Pantoprazole from our facility in Mumbai, India, we
also use external sources. For the construction of our Mumbai facility we have
entered into a 50% joint venture with a third party. We own all of our principal
production facilities and, with the exception of our facility in Ireland,
substantially all of the land on which they are located.
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The following table shows selected key information with respect to our
principal current manufacturing facilities as well as our facilities under
construction:
Production Facilities
Location Function Size (m2)
Singen, Germany Pharma (sterile, liquid and 167,000
semi-solid dosage forms and active
pharmaceutical ingredients)
Oranienburg, Germany Pharma (solid dosage forms) 64,300
Lyszkowice, Poland Pharma (solid and liquid dosage 25,000
forms)
Melville, New York Pharma (semi-solid and liquid 52,000
dosage forms)
Hicksville, New York Pharma (semi-solid dosage forms) 23,200
Mexico City, Mexico Pharma (solid, semi-solid and 11,900
liquid dosage forms)
Jaguariuna, Brazil Pharma (solid, semi-solid and 214,000
liquid dosage forms)
Mumbai, India Key starting materials for 25,100
Pantoprazole
Carrigtohill, Ireland(1) Under construction; Pharma (solid 119,000
dosage forms)
Bromma, Sweden Diagnostics 2,785
(1) The land on which this facility is located is held under a long-term lease.
Sales and Marketing
We use the ALTANA brand to market products of our pharmaceuticals division
on a worldwide basis. In doing so, we use sales and marketing methods customary
in the pharmaceuticals industry. In addition to advertising our drugs, we
maintain a network of sales representatives, collaborate with third parties and
use our company's website to provide information about our pharmaceuticals. We
also grant rebates to our customers. Our rebate practices vary widely among the
countries in which we are active, depending on the respective country's
regulatory framework and our position in the relevant market. The amount of
control that we have over the sales mix used by our partners in any given market
depends on the distribution arrangements we use in that market.
We have sales and marketing organizations in most European markets. Like
other pharmaceuticals companies, however, we do not distribute our products
exclusively through our own sales and marketing organization but also use
collaborations with third parties. For example, while we supply a number of
hospitals directly, we frequently rely on wholesalers to distribute our products
to retailers, such as pharmacies.
Following the establishment of an additional sales force in the United
States in 2003, which co-promotes Pantoprazole in the U.S. market under the name
Protonix® alongside Wyeth, our sales force in the United States now comprises
approximately 600 individuals. We expect that our U.S. sales organization will
assume a significant role in the distribution of any new drugs launched in the
U.S. market. For the time being, our staff co-promotes Pantoprazole and several
drugs of Pfizer in the United States.
In Japan, we established our own operating subsidiary in January 2004, which
together with our Japanese partner Tanabe Seiyaku Co. Ltd. focuses on the
development and, following approval, the marketing of Roflumilast in the
Japanese market.
With respect to Pantoprazole, we have found it desirable to supplement our
own sales and marketing efforts with the branding experience and marketing
capabilities of external partners, particularly in the United States.
Among our third-party partners, we distinguish between licensees,
co-marketing partners and co-promotion partners. Licensee partners are typically
used in markets that we do not serve ourselves. By
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contrast, co-marketing and co-promotion partners are distributors that we use in
markets where we have a sales and marketing organization of our own. We use
co-marketing partners to sell a product under more than one brand in the same
market. Although we typically coordinate our efforts with our co-marketing
partners, particularly in terms of dealing with regulators and drug safety, we
and our co-marketing partners each manage a separate brand and use distinct
distribution channels. Typically, we charge our co-marketing partners a fee in
an amount tied to the price that they charge their customers. By contrast, when
we use co-promotion partners to market a product under a single brand, either we
or our co-promotion partners take sole responsibility for distributing the
product, although we cooperate with our co-promotion partners in promoting the
brand under which the product is marketed.
The type of arrangement we use in any given situation depends on the
particular product and the requirements of the targeted market. For example, our
licensing agreement with Wyeth to distribute Pantoprazole in the United States
has been expanded by a co-promotion agreement when we began to build a sales and
marketing organization of our own in 2003. Pursuant to the license agreement,
Wyeth is required to use commercially reasonable efforts to distribute
Pantoprazole in the U.S. market and to bill its customers for the drug directly.
Wyeth is free to set the retail price at its discretion, which affords it the
flexibility necessary to adapt its distribution strategy to the prevailing
market conditions. In return, Wyeth is required to pay us a fixed percentage of
its net sales, subject to a minimum price. Since July 2003, our own dedicated
sales force for the U.S. market has been co-promoting Pantoprazole together with
Wyeth in accordance with a separate co-promotion agreement entered into in April
2003. While this arrangement has afforded us a better understanding of the
marketing of Pantoprazole in the United States, the revenues that we derive from
this drug continue to materially depend on the resources that Wyeth devotes to
its marketing. We currently use co-marketing partners for the distribution of
Pantoprazole in many European countries, Latin America and Asia. In Australia
and Canada, we distribute Pantoprazole in collaboration with a co-promotion
partner.
Going forward, we intend to use licensees primarily in markets that we do
not consider a strategic focus or where we believe that the costs of building
and maintaining the necessary infrastructure and expertise outweigh the benefits
of having a sales and marketing organization of our own. In strategically
important markets that offer a substantial growth potential for our
pharmaceuticals business, especially the United States, our goal is to rely less
on licensees and instead to use experienced local companies as co-marketing and
co-promotion partners. We believe that this approach will enable us to gradually
build our own sales forces in these markets and to reduce our dependence on
partners. We have already entered into a co-promotion agreement with Aventis,
now Sanofi-Aventis, for the distribution of the MDI and DPI versions of our drug
Ciclesonide in the United States.
At December 31, 2005, Wyeth, the U.S. company through which we distribute
Pantoprazole in the United States, accounted for 2.5% of our accounts
receivable, compared with 7.8% at December 31, 2004. In 2005 and 2004, Wyeth
accounted for 11.4% and 14.2% of our net sales, respectively.
Competition
For the most part, our pharmaceuticals division operates in markets
characterized by intense competition. Our competitors include a wide variety of
companies, ranging from small pharmaceuticals companies to large national and
international pharmaceuticals groups and from off-patent manufacturers of
generic pharmaceuticals to owners of preeminent brands.
The global therapeutics markets are highly competitive and are targeted both
by large companies and by small niche players. The main competitive factors
include product efficacy and safety and distribution capabilities. In addition,
price has become increasingly important almost everywhere in the world. Our main
competitors for drugs in the gastrointestinal area are various other branded
PPIs, including Takeda's Lansoprazole and AstraZeneca's Esomeprazole. If our
competitors continue to invest heavily in marketing these drugs, the ability of
Pantoprazole to capture market share or maintain its current market share could
be adversely affected. In addition, Pantoprazole faces increasing competition
from generic PPIs. A variety of companies, including Schwarz Pharma, Mylan,
Novartis, TEVA and Torpharm, are marketing Omeprazole-based generics in Europe
and the United States at prices that tend to be lower than the price of
Pantoprazole
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and other branded PPIs. Further competition may result from the launch of
generic versions of PPI molecules other than Omeprazole once their respective
patents expire and from OTC versions of PPIs in the United States and certain
European countries, which, unlike Pantoprazole, are available to patients
without a prescription. While generic and OTC versions of PPIs have so far had a
limited impact on the market for branded PPIs, including Pantoprazole, in
Europe, pricing pressure in the U.S. market has grown stronger as a result of an
increase in the rebates provided by all market participants. See "Item 3: Key
Information - Risk Factors - Risks Related to our Pharmaceuticals Business" for
a discussion of the risks resulting from competition by other PPI brands,
generic and OTC versions of Omeprazole-based PPIs and "- Products -
Therapeutics" for more information on Pantoprazole. In the highly competitive
respiratory market, we compete primarily with AstraZeneca, GlaxoSmithKline,
Merck & Co. and Boehringer Ingelheim Pharma GmbH & Co. KG.
In the OTC area, the key competitive factors are price and branding. The OTC
market is highly fragmented, and we face competition not only from other
pharmaceuticals companies but also from distributors of homeopathic remedies and
medical accessories.
The imaging markets are highly competitive. The key competitive factors
include price (especially with respect to x-ray contrast media), product
efficacy, safety, and sales and marketing capabilities. As far as new diagnosing
techniques are concerned, technological innovation is also an important factor.
Our competitors include Guerbet, Schering AG, Tyco Inc. and GE Healthcare,
formerly Amersham plc.
Intellectual Property
Intellectual property and especially patent protection are of critical
importance to our pharmaceuticals business. At December 31, 2005, we held 118
U.S., 67 European and 23 Japanese patents for various pharmaceutical inventions.
In addition, we have 116 patent applications pending at the U.S. Patent and
Trademark Office, 189 at the European Patent Office and 173 in Japan. Our most
important patents are those covering Pantoprazole, Ciclesonide and Roflumilast
as well as the patents for which we have applied and which have been granted in
connection with our various pipeline drugs.
Pantoprazole enjoyed substance patent protection in Europe until June 2005
and, by virtue of an extension granted by the U.S. Patent and Trademark Office
in July 2003, enjoys patent protection in the United States until July 2010 with
a possible further extension of six months in the United States due to a
pediatric indication. In addition, Pantoprazole benefits from SPCs, which have
an effect similar to that of an extension of original patents, in the majority
of European countries until the end of May 2009.
In 2004, generic drug companies filed ANDAs with the FDA in the United
States challenging our Pantoprazole substance patent with a view to
manufacturing and distributing generic versions of Pantoprazole. In response to
one of these challenges, we filed a patent infringement suit in May 2004 against
TEVA and its parent company TEVA Pharmaceutical Industries, Ltd. in the
U.S. District Court for the District of New Jersey. Several companies have also
filed ANDAs challenging our Pantoprazole oral formulation patent. Because
Pantoprazole enjoys protection in the United States under our substance patent
until 2010 (and our oral formulation patent is therefore irrelevant for the time
being), we have decided not to take any immediate action with regard to these
ANDAs. However, in 2005, Sun Pharmaceuticals Advanced Research Centre (Limited)
("Sun"), one of the challengers of our Pantoprazole oral formulation patent,
amended its ANDA to include a paragraph IV certification relating to our
Pantoprazole substance patent and in addition filed an ANDA regarding our
Pantoprazole IV formulation patent. As a result, we filed complaints against Sun
in the U.S. Federal District Court for the District of New Jersey. In these
complaints, we claim that Sun is infringing our substance patent, but consistent
with our approach to the other attacks on our oral formulation patents, do not
claim that our IV formulation patent has been infringed. While we believe that
our U.S. patents relating to Pantoprazole are valid and enforceable and of
sufficient scope and strength to prevent the entities that have made the filings
and any other third party from manufacturing and distributing Pantoprazole-based
generics at this time, there can be no assurance that we will be successful in
defending our patents. For more information, see "- Pharmaceuticals -
Intellectual Property" and "- Legal Proceedings".
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Drug companies are required to include a certification in their ANDA filings
when they intend to manufacture and distribute a generic version of a
patent-protected drug listed in the Orange Book, which is a list of proprietary
drugs together with pertinent patent information maintained by the FDA.
Inclusion of a paragraph IV certification in an ANDA implies that the applicant
is asserting that the patents listed in the Orange Book are either invalid or
unenforceable or will not be infringed by the manufacture and distribution of a
generic version of that drug. The applicant is required to notify the innovator
company that it has filed an ANDA with the FDA, and must describe the reasons it
believes the listed patents will not be infringed or are invalid or
unenforceable. Once the innovator drug company has received notice that a
generic application has been filed and its patent is being challenged, it may
file a lawsuit claiming patent infringement based on its review of the generic
drug company's notice. If a lawsuit is brought within 45 days of receiving the
applicant's notice, the FDA's approval is stayed for 30 months. The 30-month
period starts at the later of five years after the approval of the drug or after
receipt of the applicant's notice. If the patent court determines that the
patent is valid, enforceable and would be infringed by the product proposed in
the ANDA, the FDA will not approve the application until the patent expires. If
the court decides that the patent will not be infringed or is invalid or
unenforceable, the FDA may approve the generic application when that decision
occurs. The FDA may approve the application at the end of the 30-month period,
even if the litigation is ongoing. A generic applicant who is the first to
challenge a listed patent using a paragraph IV certification is granted a
180-day exclusivity period with respect to other generic applicants. This
exclusivity period provides generic applicants with an incentive to challenge
listed patent for innovative drug products.
Other patents and pending patent applications that are material to our
business include those set forth in the table below:
Patent Expiration Year
Europe(1) United States Japan
Ciclesonide (substance) 2011 (2) 2013 (3) 2011 (3)
Ciclesonide (key intermediate) 2014 2015 2014
Ciclesonide (purification process) 2017 2019 2017
Ciclesonide (aerosol) 2018 2018 2018
Ciclesonide (nasal formulation) 2020 2020 2020
Roflumilast (substance) 2014 (3) 2015 (3) 2014 (3)
Roflumilast (formulation) 2023 2023 2023
Soraprazan (substance) 2019 (3) 2019 (3) 2019 (3)
(1) Includes European patents or national patents in major European countries.
(2) SPCs for the extension of protection until 2016 have been granted or applied
for in Europe.
(3) Does not reflect a possible extension of the term of patent protection or the
grant of supplementary protection certificates for up to five additional
years.
We rely on intellectual property that we obtain through cross-licensing
arrangements with third parties to develop, manufacture and market
pharmaceuticals. For example, we have entered into licensing arrangements with
Hoffmann-La Roche and Invitrogen to obtain access to technologies that we
consider critical to the R&D projects carried out in our molecular diagnostics
unit. If we are unable to obtain licenses on commercially reasonable terms in
the future, we may be limited in our ability to develop, manufacture and market
new products.
We depend on our ability to obtain and, if challenged, successfully defend
our patents, licenses, trademarks, trade secrets and other forms of intellectual
property protection. Although we intend to continue to file and prosecute patent
applications vigorously, we may not be able to obtain patents for all our
inventions. In addition, the process of seeking patent protection is lengthy and
expensive, and the issuance of a patent is conclusive neither of its validity
nor of its scope. Therefore, there is no assurance that our currently pending or
future patent applications will result in patents being granted or that, if
patents are issued, they will be valid or of sufficient scope or strength to
provide us with meaningful legal protection or a commercial advantage in the
marketplace. In addition, if our competitors develop technologies that are
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themselves protected by patents or other forms of intellectual property
protection, the underlying technologies may be unavailable to us or available to
us only on unfavorable terms.
A significant part of our intellectual property consists of registered
trademarks. We are continuously engaged in developing brand names for new
products, securing trademark protection for our new brand names, policing our
existing trademarks and enforcing our legal entitlements in situations where
third parties infringe upon any of these rights. Before we start to advertise
and sell a product under a new brand name, we seek to minimize the risks of
infringing upon the trademark rights of others by filing for trademark
protection and by conducting trade and service mark searches and other
inquiries.
As with other pharmaceuticals companies, a portion of our know-how is not
patent-protected. To protect this information, we rely on trade secret law and
frequently enter into confidentiality agreements with our employees, customers
and partners. These agreements may be unenforceable, however, and the remedies
that are available to us for breaches may be inadequate. Likewise, our
competitors may gain access to our know-how by lawful means, for example, by
reverse engineering, or may independently develop the same know-how, which may
destroy any competitive edge that we may have.
As a result of the key role that intellectual property plays in the
pharmaceuticals industry, we may from time to time become involved in litigation
as either plaintiff or defendant. There can be no assurance that we will be able
to successfully settle or otherwise resolve claims that may be brought against
us by third parties in the future. If we are unable to successfully settle
future claims on terms acceptable to us, we may be required to engage in costly
and time-consuming litigation and may be prevented from, or experience
substantial delays in, marketing our existing pharmaceuticals and launching new
ones. Each of these events could materially adversely affect our business,
financial condition or results of operations or halt the sales of our existing
products. For more information concerning the types of litigation that we face
in our business, see "- Legal Proceedings" and "Item 3: Key Information - Risk
Factors - Risks Related to each of our Businesses".
Regulation
All companies developing, manufacturing and marketing pharmaceuticals are
subject to extensive, complex and evolving regulations in the United States,
Europe and Japan. We are working within the framework of the International
Conference on Harmonisation of Technical Requirements for Registration of
Pharmaceuticals for Human Use ("ICH") guidelines. The ICH is a collaborative
effort among regulators in Europe, Japan and the United States and experts from
the pharmaceuticals industry in the three regions with the goal of streamlining
the development and regulatory approval of medicinal products by harmonizing the
applicable procedures. Our compliance with the ICH guidelines assists us in
obtaining regulatory approval for our drug candidates in as many jurisdictions
as possible.
Overview of clinical trial process
Preclinical tests encompass the laboratory evaluation of a new
pharmaceutical, its chemistry, formulation and stability, as well as animal
studies to assess its potential safety and efficacy. Following the conclusion of
preclinical tests, the results of these studies, which have to demonstrate that
the pharmaceutical delivers sufficient quantities of the drug to the bloodstream
to create the desired therapeutic results, are submitted to the relevant
regulatory authority, which must approve before human clinical trials may begin.
Human clinical trials are typically conducted in three sequential phases:
• Phase I. During this phase, the drug is initially introduced into a
relatively small number of healthy humans or patients and is tested for
safety, dosage tolerance, absorption, metabolism, distribution and
excretion.
• Phase II. This phase involves studies in a limited patient population to
identify possible adverse effects and safety risks, to determine the
efficacy of the drug for specific targeted diseases or conditions, and to
determine dosage tolerance and optimal dosage.
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• Phase III. When Phase II evaluations demonstrate that a dosage range of
the drug is effective and has an acceptable safety profile, Phase III
trials are undertaken to further evaluate dosage, clinical efficacy and
test for safety in an expanded patient population at geographically
dispersed clinical sites.
United States
The principal U.S. regulators relevant to the business of our
pharmaceuticals division are the U.S. Food and Drug Administration ("FDA") and
to a lesser extent the U.S. Drug Enforcement Agency ("DEA") and state government
agencies. The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act
and other federal statutes and regulations all govern or influence the
development, testing, manufacture, packaging, labeling, storage, record keeping,
safety, approval, advertising, promotion, marketing, sale and distribution of
our pharmaceuticals.
FDA approval is required before any dosage form of any new pharmaceutical,
including any off-patent equivalent of a previously approved pharmaceutical, may
be marketed. The process for obtaining governmental approval to market
pharmaceuticals in the United States is rigorous, time-consuming and costly, and
it is difficult to predict the extent to which this process may be affected by
legislative and regulatory developments. Like all pharmaceuticals companies, we
are dependent on receiving FDA and other types of governmental approvals prior
to producing and marketing virtually all of our new pharmaceuticals in the
United States. Consequently, there is always a chance that the FDA or another
agency will not approve our new pharmaceuticals, or that the rate, timing and
cost of such approvals will adversely affect our launch plans and ultimately our
results of operations. See "Item 3: Key Information - Risk Factors - Risks
Related to our Pharmaceuticals Business" for a discussion of these risks.
All applications for FDA approval are required to contain information
relating to formulation, raw materials, stability, manufacturing, packaging,
labeling and quality control. There are three types of applications for FDA
approval:
• New Drug Application ("NDA"). An NDA is filed whenever approval is sought
for drugs with active ingredients and/or with dosage strengths, dosage
forms, delivery systems or pharmacokinetic profiles that have not
previously been approved by the FDA. A drug's pharmacokinetic profile
relates to the characteristic interactions of the drug with the human body
in terms of absorption, distribution, metabolism, and excretion. NDAs are
typically filed for newly developed branded pharmaceuticals as well as for
new dosage forms of existing drugs that have been approved previously.
• Abbreviated New Drug Application ("ANDA"). An ANDA is filed whenever
approval is sought for generic equivalents of previously approved drugs or
unapproved dosage forms of such drugs. The FDA will accept the filing of
an ANDA before the expiration of the exclusivity period of the relevant
patent only if the applicant simultaneously challenges that patent. For a
description of the recent ANDA filings challenging the patents underlying
Pantoprazole, see "- Intellectual Property."
• Supplemental New Drug Application ("sNDA"). Companies intending to make
changes to drugs or their labels after they have been approved, must
submit an sNDA. The supplement type refers to the kind of change that was
approved by the FDA. This includes changes in manufacturing, patient
population, strength and formulation.
The process mandated by the FDA before a previously unapproved
pharmaceutical may be marketed in the United States essentially involves the
following steps:
• Preclinical laboratory and animal tests;
• Submission of an Investigational New Drug Application ("IND"), which must
become effective before clinical trials may begin;
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• Adequate and well-controlled human clinical trials to establish the safety
and efficacy of the proposed drug for its intended use;
• Submission of an NDA containing the results of the preclinical and
clinical trials establishing the quality, safety and efficacy of the
proposed drug for its intended use; and
• FDA approval of the NDA.
An IND automatically becomes effective 30 days after receipt by the FDA
unless the FDA, during that 30-day period, raises concerns or questions about
the conduct of the trials as outlined in the IND. In such cases, the IND sponsor
and the FDA must resolve any outstanding concerns before clinical trials can
begin. In addition, an independent Institutional Review Board at the medical
center that proposes to conduct the clinical trials must review and approve any
clinical study before it commences. Following completion of Phase I, Phase II
and Phase III clinical trials, the results of the internal development processes
and the mandatory preclinical and clinical studies along with documentation
evidencing compliance with applicable Chemistry, Manufacturing and Controls
("CMC") requirements as part of an NDA are submitted to the FDA. The drug
development and NDA approval process averages approximately eight to twelve
years.
FDA approval of an ANDA is required before a generic equivalent of a drug
that previously has been approved under an NDA or a previously unapproved dosage
form of a drug that has been approved under an NDA may be marketed. The ANDA
approval process differs from the NDA approval process in that it does not
require new preclinical and clinical studies; instead, it relies on the clinical
studies establishing safety and efficacy conducted for the previously approved
drug. The ANDA process, however, requires the generation of data that show that
the ANDA drug is bioequivalent (i.e., therapeutically equivalent) to the
previously approved drug. "Bioequivalence" compares the bioavailability of one
drug with another and, if established, indicates that the rate and extent of
absorption of an off-patent drug in the body are substantially equivalent to the
previously approved drug. "Bioavailability" establishes the rate and extent of
absorption, as determined by the time-dependent concentrations of a drug in the
bloodstream needed to produce a therapeutic effect. Supplemental NDAs or ANDAs
are required for, among other things, approval to transfer products from one
development site to another. Such applications may be under review by the FDA
for a year or more. In addition, certain drugs may be approved for transfer only
once new bioequivalence studies have been conducted or certain other
requirements have been satisfied.
To obtain FDA approval of both NDAs and ANDAs, a pharmaceuticals company's
procedures and operations must conform to FDA quality system and control
requirements generally referred to as current Good Manufacturing Practices
("cGMP"), as defined in Title 21 of the U.S. Code of Federal Regulations. These
regulations cover all aspects of the development, manufacturing and marketing
process from receipt and qualification of components to distribution procedures
for finished products. Since they are evolving standards, we have to continue to
expend time, money and effort in all production and quality control areas to
maintain compliance. The evolving and complex nature of regulatory requirements,
the broad authority and discretion of the FDA, and the high level of regulatory
oversight results in the continuing possibility that we may be adversely
affected by regulatory actions despite our efforts to maintain compliance with
the applicable regulatory requirements. See "Item 3: Key Information - Risk
Factors - Risks Related to our Pharmaceuticals Business" for a discussion of
these risks.
In addition, we are subject to periodic inspections of our facilities,
procedures and operations and/or the testing of our pharmaceuticals by the FDA,
the DEA and certain other authorities that conduct periodic inspections to
assess our compliance with applicable regulations. The FDA also conducts
pre-approval and post-approval reviews and plant inspections in connection with
its review of our applications for new products to determine whether our systems
and processes comply with GMP and other applicable FDA regulations. If the FDA
determines that deficiencies have occurred at any of our facilities, it may,
among other things, withhold approval of any NDAs, ANDAs or other applications
that we have submitted. Our vendors that provide us with finished products or
components used to manufacture, package and label pharmaceuticals are subject to
similar regulations and periodic inspections. Following its inspections, the FDA
may issue notices on Form 483 and Warning Letters that may cause us to modify
certain activities identified during the inspection. A Form 483 notice
("inspectional observations") is typically issued at the conclusion of an FDA
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inspection and lists conditions that the FDA investigators believe may violate
cGMP or good clinical practice ("GCP") or other FDA regulations. FDA guidelines
specify that a Warning Letter be issued only for violations of "regulatory
significance" for which the failure to adequately and promptly achieve
correction may be expected to result in an enforcement action.
Failure to comply with FDA and other governmental regulations may result in
fines, unanticipated compliance expenditures, recall or seizure of
pharmaceuticals, total or partial suspension of production and/or distribution,
suspension of the FDA's review of NDAs, ANDAs or other applications, enforcement
actions, injunctions and criminal prosecution. Under certain circumstances, the
FDA also has the authority to revoke previously granted approvals. Although we
have internal compliance programs, if these programs do not meet the applicable
standards or if our compliance is deemed deficient in any significant way, our
business may be materially adversely affected. See "Item 3: Key Information -
Risk Factors - Risks Related to our Pharmaceuticals Business" for a further
discussion of risks in connection with FDA regulations.
The Generic Drug Enforcement Act of 1992 established penalties for
wrongdoing in connection with the development or submission of ANDAs. Under this
act, the FDA has the authority to permanently or temporarily bar companies or
individuals from submitting or assisting in the submission of ANDAs and to
temporarily deny approval and suspend applications to market off-patent drugs.
The FDA may also suspend the distribution of all drugs approved or developed in
connection with certain wrongful conduct and/or withdraw approval of ANDAs and
seek civil penalties. The FDA may also significantly delay the approval of any
pending NDA, ANDA or other regulatory applications under the Fraud, Untrue
Statements of Material Facts, Bribery and Illegal Gratuities Policy Act.
In recent years, there has been enhanced political attention and
governmental scrutiny at the federal and state levels of the prices paid or
reimbursed for pharmaceuticals under Medicaid, Medicare and similar programs.
The U.S. Federal Trade Commission ("FTC") has announced its intention to conduct
a study of whether brand-name and generic drug providers have entered into
agreements, or have used other strategies, to delay competition from generic
versions of patent-protected drugs. The FTC's announcement could affect the
manner in which generic drug providers resolve intellectual property litigation
with branded pharmaceuticals companies, and may result in an increase in
private-party litigation against pharmaceuticals companies. See "Item 3: Key
Information - Risk Factors - Risks Related to our Pharmaceuticals Business" for
a discussion of government regulation in connection with third-party
reimbursement programs.
European Union
Much of what has been said with respect to the approval process applicable
to new drugs in the United States also applies to the European Union. In the
European Union, however, several different procedures are available: a
centralized approval procedure, a Mutual Recognition Procedure ("MRP"), a
Decentralized Procedure ("DCP") and the common national procedures. The
London-based European Medicines Agency ("EMEA") governs the centralized drug
registration and approval process. The respective scientific committees, the
committee for medicinal products for human use ("CHMP") and the committee for
veterinary medicinal products ("CVMP"), make recommendations based on reviews by
appointed rapporteurs and co-rapporteurs, who are part of the CHMP/CVMP.
Following the committee's recommendation, the European Commission issues a
formal decision, which is valid throughout the entire European Union. Upon
completion of the approval process, the drug may be marketed within all member
states. An alternative procedure is the MRP. Pursuant to this procedure, one
Reference Member State ("RMS") carries out the primary evaluation. The other
Concerned Member States ("CMS") then have 90 days to decide whether they accept
or reject the decision made by the RMS. If a member state does not follow the
decision of the reference country, then the issue is referred to the CHMP for
arbitration. Based on the CHMP's determination, a formal decision is made by the
European Commission. The new DCP is in effect since the end of 2005 and operates
similarly to the MRP. It will be used mainly where an authorization does not yet
exist in any of the member states. The CMS are involved at an earlier stage of
the evaluation than under the MRP in an effort to minimize disagreements and to
facilitate the application for marketing authorization in as many markets as
possible. Generics of medicinal products authorized through the centralized
procedure will have the option of applying through either the centralized
procedure or the DCP or MRP.
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Japan
In Japan, two issues make the approval process difficult for drugs developed
outside of that country. First, the Japanese approval agency recognizes only a
limited number of the documents used in registration procedures in other
countries. Second, the Japanese approval agency requires that tests to determine
appropriate dosages for Japanese patients be conducted on Japanese subjects and
patients. As a result of these issues, parts of Phase II and Phase III clinical
trials carried out in the United States or Europe typically need to be repeated
in Japan. These regulatory requirements may cause delays of two to three years
in introducing drugs developed outside of Japan to the Japanese market.
Chemicals
Overview
We develop, manufacture and market a wide range of specialty chemicals
targeted at selected markets. Specialty chemicals are high value-added products
used in the manufacture of a wide array of applications. Compared with commodity
chemicals, specialty chemicals are typically produced in smaller volumes. We
offer our specialty chemicals together with support and comprehensive customer
service regarding the use of our products and their adaptation to the specific
manufacturing requirements of individual customers. The highly
application-specific nature of specialty chemicals impedes product substitution,
which fosters close relationships between suppliers and customers.
In 2005, our chemicals division generated net sales of € 907 million, an
increase of 6.2% compared with 2004. The chart below provides a breakdown of our
chemicals net sales by geographic region for the three years ended December 31,
2005:
Chemicals Net Sales by Geographic Region
[[Image Removed: (BAR CHART)]]
In 2005, our chemicals net sales increased in all regions due to increased
demand and the net effect of acquisitions and dispositions, with the exception
of Europe (excluding Germany), where our net sales declined due primarily to
various dispositions. As a result of the international dimension of our
business, our results of operations are materially affected by exchange rate
fluctuations in any given period, especially by changes in the exchange rate
between the euro, on the one hand, and the U.S. dollar, Chinese renminbi yuan
and the Japanese yen, on the other hand. See "Item 3: Key Information - Risk
Factors - Risks Related to each of our Businesses" and "Item 11: Quantitative
and Qualitative Disclosure about Market Risk" for more information on our
exchange rate exposure.
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Our chemicals division comprises four business areas:
• Additives & Instruments, which comprises paint additives, plastic
additives and wax additives as well as paint testing instruments,
including gloss and color meters;
• Effect Pigments, which comprises metallic and pearlescent effect pigments
for applications such as paints, plastics and cosmetics as well as
metallic printing inks;
• Electrical Insulation, which comprises electrical insulation coatings for
copper and aluminum wires, electrical insulation systems for use in
electrical and electronic components, and compounds for a variety of other
applications; and
• Coatings & Sealants, which comprises coatings for packaging and general
industry applications, sealing compounds, and, increasingly, solutions for
flexible packaging.
Our chemicals division has grown steadily over the past several years both
organically and as a result of strategic acquisitions. We expect to continue to
rely on a combination of organic growth and acquisitions for the expansion of
our operations in the future. In identifying suitable targets for acquisitions,
we seek majority interests in companies that present a clear strategic fit, have
potential for net income contribution and whose management is both experienced
and competent.
The chart below provides a breakdown of our chemicals net sales by business
area for the three years ended December 31, 2005:
Chemicals Net Sales by Business Area
[[Image Removed: (BAR CHART)]]
(1) We formed our Effect Pigments business in the fourth quarter of 2005 in
connection with the acquisition of the ECKART Group.
Because chemicals are used in a variety of industries, manufacturers of
specialty chemical products are typically affected by the business cycles
experienced by the industries that they serve. By targeting selected markets in
complementary industries all over the world, we seek to diversify our risk and
reduce our exposure to these cycles.
Products
Additives & Instruments
We provide a wide range of innovative, high-quality additives and related
measuring and testing instruments. In 2005, net sales generated by our Additives
& Instruments business totaled € 364 million.
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Table of Contents
We offer a comprehensive portfolio of paint additives, plastic additives and
wax additives, which we develop for the specific requirements of our customers
in the coatings, plastics and printing ink industries and which we market under
our global brand BYK-Chemie. Additives are substances that have essentially two
applications: first, they facilitate manufacturing processes, for example, by
reducing viscosities and shortening processing times, and second, they
substantially improve the quality of products, especially their mechanical
properties and appearance. Because additives can ach |