Kos Pharmaceuticals, Inc. - Company Profile, Information, Business Description, History, Background Information on Kos Pharmaceuticals, Inc.

1001 Brickell Bay Drive
Miami, Florida 33131

Company Perspectives:

Kos is committed to being a leading provider of specialty pharmaceuticals.

Our Company will improve human health and quality of life through our innovation in drug-delivery systems, product development and commercialization.

The Kos culture, rich in spirit, fosters peak performance for the benefit of patients, health-care practitioners, customers, shareholders, and employees.

History of Kos Pharmaceuticals, Inc.

Kos Pharmaceuticals, Inc. specializes in the development of proprietary pharmaceutical products for the treatment of cardiovascular and respiratory disease through the reformulation of existing, government-approved medicines. By reformulating approved medications into different forms of delivery, such as a time-release pill, a skin patch, or an inhalation device, Kos seeks to improve the safety and effectiveness of these products, as well as to make them easier for patients to use.

Kos markets two proprietary cholesterol modulation products, reformulated with its patented time-release technology. Niaspan is a once-a-night tablet of a niacin compound prescribed for reducing low-density lipoprotein (LDL), or bad cholesterol, and raising high-density lipoprotein (HDL), or good cholesterol. Advicor, a combination of time-release niacin and lovastatin in once-a-night dosage, provides stronger cholesterol modulation by increasing HDL cholesterol and lowering LDL, triglycerides (TG), and lipoprotein (a). For the treatment of asthma, Kos owns and markets Azmacort Inhalation Aerosol, an inhaled corticosteroid manufactured by Aventis Pharmaceuticals. Kos takes its name from the Greek island where Hippocrates originated the science of medicine.

Company's Founding by Successful Team of Executives in 1988

Before forming Kos Pharmaceuticals, Michael Jaharis, with then partner Dr. Phillip Frost, owned and operated Key Pharmaceuticals. The two men acquired Key in 1972 for $50,000 as the company neared bankruptcy. Under the direction of Jaharis and Frost, Key became profitable, first marketing the company's cough and cold medicines, then a best-selling asthma product, Theo-Dur. The product originated with a 50-year-old asthma medicine, theophylline, which Jaharis and Frost revived by applying time-release technology to resolve problems associated with the drug. During Jaharis and Frost's ownership of Key, revenues increased from less than $1.5 million in 1972 to $200 million in 1986. That year Key merged with Schering-Plough, with Schering-Plough acquiring Key for $826 million. Jaharis gained $90 million from the transaction and reinvested the funds to start Kos Pharmaceuticals.

Jaharis founded Kos in 1988 along with two other former Key executives, Daniel Bell, the chief operating officer, and David Bova, director of product development. Taking the positions of chairman, chief executive, and director of product development, respectively, Jaharis, Bell, and Bova formed Kos Pharmaceuticals to take advantage of medicine reformulation opportunities. Because existing medications have withstood the rigors of research and development, as well as regulatory scrutiny, newly reformulated products could potentially be developed at a significantly lower cost. In addition, a product created with a new delivery system is considered proprietary and, therefore, patent protected from generic imitations for a period of time.

From the start Kos focused on the development of pharmaceutical products for the treatment of chronic cardiovascular and respiratory diseases. The company's most promising product involved a time-release version of niacin, a B-vitamin, known to reduce LDL and increase HDL. Niacin has an uncomfortable side effect, a prickly flushing sensation, and is potentially damaging to the liver, however. Existing time-release niacin products did not address these problems adequately and delivered the niacin too slowly.

To support the development of respiratory products, Kos acquired Aeropharm Technology, Inc. and IEP Group, Inc. in 1993. Aeropharm developed asthma medicine, and IEP designed and engineered proprietary, ergonomically correct inhalation devices that deliver the medicine into the lungs. In 1996 Kos signed an agreement to collaborate on hypertension products with Fuisz Technologies, Ltd., a specialist in controlled release formulations of pharmaceuticals. Lower-cost products became available, however, and Kos ended the program in 1998.

Research and development on time-release niacin took several years, during which time Jaharis provided incremental loans to support the process. As a development stage company, Kos lost $42 million during the three years from 1994 through 1996. The losses increased progressively as Kos completed the four phases of clinical trials on Niaspan, its time-release niacin product, as required by the Food and Drug Administration (FDA). Phase I and Phase II proves the efficacy and safety of a product, Phase III initiates human clinical trials, and Phase IV involves a wider sample of patients.

Kos filed for related patents as research proved its claims. In 1995 the company filed a patent claim for method-of-use in the composition of niacin and hydroxypropyl methylcellulose as a once-a-night sustained-release treatment of hyperlipidemia (high cholesterol). Two patents made additional claims for the niacin composition. One, filed in March 1997, established claims for safety, involving lower elevations of uric acid and glucose and reduced liver toxicity; the other patent, filed in October, asserted claims for reducing flushing.

1997 Transition from Development Stage to Marketing Stage

Kos took a number of steps to prepare for the public introduction of its sustained-release niacin, named Niaspan. First the company hired another Key executive to develop a marketing strategy, Robert E. Baldini, formerly senior vice-president of sales and marketing, and, later, president of Key as a division of Schering-Plough. Baldini joined Kos as vice-chairman and chief sales and marketing officer and began to develop a sales organization.

In March 1997 Kos made an initial public offering of 3.6 million shares of stock at $15 per share. Although Kos had not made the transition from a development stage company to a marketing company, and held $60 million in debt, investors expressed confidence in an experienced management team with a record of success. Kos applied proceeds from the offering to fund its marketing efforts.

In late July Kos received final FDA approval to market Niaspan for lowering LDL cholesterol, triglycerides (TG), and ApoB in patients with hypercholesterolemia (high cholesterol) and mixed dyslipidemia (mixed lipid disorder). A few days later Kos hired a staff of 85 sales representatives experienced in cardiovascular medical products to promote Niaspan. The initial market involved 70,000 specialists in coronary heart disease, including cardiologists, endocrinologists, and internists, as well as general practice physicians. On August 15, the company shipped its first orders to wholesalers, meeting its promise to shareholders to bring a new product to market in a timely manner.

With a new product bringing income to the company, Kos made a secondary offering of 3.6 million shares of common stock at $42.75 per share, including 2.15 million shares owned by Jaharis, reducing his ownership in the company from 69.7 percent to 52.5 percent. The company's net proceeds of $44.1 million, from 1.1 million primary shares sold, were used to expand its sales and marketing staff, as well as production, and to fund research and development for eight other products.

Initial sales of Niaspan progressed slowly for several reasons. Competition from a plethora of new cholesterol modulating products hindered sales. Pfizer introduced a cholesterol-reducing product, Lipitor, five months before Kos introduced Niaspan. Pfizer, as well as other large pharmaceutical companies with similar products, had the advantage of a large sales force and an established presence. In addition, Kos did not advertise or market the product prior to FDA approval and did not advertise directly to consumers. Kos reported revenues of $2.8 million in 1997, and a net loss of $40.6 million.

Throughout 1998 Kos expanded its sales force to 200 representatives, provided more sales training, and narrowed its market to 25,000 high prescribers in large cities. The retail prescription rate increased steadily, an average 20 percent per month. Kos executives considered this successful growth given the size of the company's sales organization. In 1998 sales of Niaspan reached $13 million.

In July 1998 Kos filed an application with the Medicines and Healthcare Products Regulatory Agency to market Niaspan in the United Kingdom, the first step toward expanding distribution throughout Europe. The United Kingdom acts as a reference member state. After approval there, the next step is to gain approval in individual countries through the European Union Mutual Recognition Procedure.

To expand its revenue base and to make fuller use of its sales staff, Kos signed an agreement with Knoll Pharmaceuticals Company in July 1999 to co-promote Knoll's once-a-day, anti-hypertension drugs, Mavik (trandolapril) and Tarka (trandolapril/extended release verapamil). Kos and Knoll shared the costs of promotions, using Kos's sales force, which specialized in marketing to cardiovascular physicians. Kos obtained the right to market Mavik and Tarka for five years and to receive an increasing percentage of revenues as sales grew. Kos expected $5 million in revenues the first year, and $25 million by 2004.

Kos received a boost for potential sales of Niaspan in October when the FDA approved a supplemental application of the product for increasing HDL cholesterol in patients with dyslipidemia, the second product to obtain approval for HDL treatment. Advanced clinical studies showed that Niaspan raised HDL up to 26 percent while it lowered LDL up to 17 percent, and TG up to 35 percent.

Niaspan sales potential increased with the approval of several healthcare services extending coverage for the product. By the end of 1999 eight of the ten largest health maintenance organizations and nine of the ten largest pharmacy benefits managers provided reimbursement for Niaspan prescriptions. Niaspan won approval for reimbursement by state Medicaid agencies in California and Tennessee, where standards were the most stringent. Thus coverage was automatically extended to Medicaid agencies in all 50 states. In January 2000 the U.S. Veterans Affairs Department extended coverage to Niaspan, adding it to the national formulary at 170 hospitals serving more than 3.5 million military veterans.

During 2000 Kos obtained approval of patents filed for components of Niaspan technology in 1995 and 1997. These included the composition and method-of-use patent for once-a-night dosage and the patent related to additional claims on safety and formulation. The two patents extended patent protection for Niaspan to 2017, as well as to other products, not yet on the market, which contained a once-a-night dosage of time-release niacin, alone or in combination with another compound.

Aeropharm Technology obtained two patents in November 2000 for formulations of non-ozone depleting propellants for use in pressurized metered-dose inhalation devices, with patent protection expanded to 2017 and 2018. This brought Kos's total patents to 20, with another 38 patents pending. In July 2001 the Aeropharm subsidiary received a patent for a non-ozone depleting formulation that used water as the stabilizing component to deliver aerosolized protein through an inhaler.

2002 Launch of Second Proprietary Product: Advicor

In September 2000 Kos filed a New Drug Application for a new product, then named Nicostatin, which integrated the benefits of Niaspan with lovastatin, a drug known to reduce cholesterol. In preparation for product launch Kos signed a marketing agreement with DuPont Pharmaceuticals to market Nicostatin. DuPont agreed to invest up to $80 million in Kos, beginning with an initial equity investment of $30 million plus $20 million for product development. Kos and DuPont agreed to share equally in promotional costs as well as profits, less initial royalties paid to Kos.

Bristol-Myers Squibb acquired DuPont Pharmaceuticals in late 2001, however, and terminated the agreement. In December Kos received a $45 million cash settlement from Bristol-Myers Squibb, which brought Kos to profitability for the first time. Without the settlement Kos would have recorded a net loss of $36.6 million in 2001, but instead recorded net income of $2.4 million. Revenues reached $91.4 million in 2001, including about $7 million in royalties from the sale of Knoll products.

Kos applied funds from the settlement to the launch of Nicostatin, renamed Advicor, after Kos received FDA approval in late 2001 to begin marketing the product. Advicor became the first dual-component treatment for cholesterol modulation to be approved by the FDA, as clinical trials showed that Advicor increases HDL cholesterol up to 30 percent while it lowers LDL up to 42 percent, TG up to 44 percent, and lipoprotein (a) up to 22 percent. Kos launched Advicor in January 2002 with a staff of 300 sales representatives. The company allocated more than five times the resources for marketing than it did for Niaspan, expanding its market base to primary care physicians and incorporating a medical education program. A two-year marketing agreement with Quintiles Transnational added 150 sales representatives specially trained in cardiovascular health to Kos's sales efforts. Sales of Advicor reached $27 million in 2002 and seemed to benefit sales of Niaspan, which rose 73 percent to $146 million.

Overcoming Hurdles to International Distribution in 2003

With patents in place and a second product on the market, Kos focused on international distribution of its products. In June 2001 Kos hired Adrian Adams as chief operating officer. Formerly chief executive officer of Novartis-UK, the Swiss pharmaceuticals giant, Adams brought international experience to Kos just as the company prepared for overseas expansion. Adams became chief executive of Kos in January 2002; Bell became chairman and Jaharis, chairman emeritus.

Initial international expansion focused on Europe and Canada. Kos applied to the European Union to market Advicor in July 2002 and, a few months later, signed an agreement with Merck KGaA to market Niaspan and Advicor outside of North America and Japan. Kos received an initial payment of $15 million to be supplemented with licensing and milestone fees, expected to add up to $46 million in revenues, as well as royalties of 25 percent of net sales. In August 2003 Kos signed an agreement with Oryx Pharmaceuticals to market Niaspan and Advicor in Canada, granting Oryx exclusive rights. Kos expected the drugs to be approved by late 2005.

Kos continued to advance its sales efforts within the United States. Kos signed a comarketing agreement with Takeda Pharmaceuticals-North America (TPNA) to market Niaspan and Advicor to 48,000 physicians. More than 1,000 TPNA sales representatives sold the products as a complement to TPNA's ACTOS, a pioglitazone HCI used by patients with type 2 diabetes, which is associated with cardiovascular disease. Kos expected 10 percent revenue growth from the association with TPNA during 2004.

In order to better compete with large pharmaceutical companies, Kos continued to approach health insurance providers to advocate for coverage of Niaspan and Advicor. Kos emphasized its role as a specialty manufacturer providing a lower-priced option. Price comparisons illustrated the difference. For instance, a bottle of 60 tablets of 500 mg Niaspan sold at Walgreens for $79.99, while 30 tablets of 40 mg of Pfizer's Lipitor sold for $95.99; 500 mg Advicor was priced at $55.99. Comparatively, the daily dose was $1.70 for Niaspan, $1.97 for Advicor, and $2.42 for Lipitor.

Merck began to market Niaspan in the United Kingdom in November 2003, a few months after receiving approval. The United Kingdom approved the Niaspan label for the treatment of dyslipidemia and mixed hyperlipidemia, as an adjunct to healthy diet and exercise. In February 2004 the European Mutual Recognition Procedure approved the label by a consensus of 13 countries. Merck awaited marketing authorization pending price negotiations, to be followed by a national license in each country.

New Products and New Product Applications Leading to the Future

Unable to bring a proprietary respiratory product to market, in March 2004 Kos acquired Azmacort Inhalation Aerosol, an inhaled corticosteroid used by asthma patients, from Aventis Pharmaceuticals for $200 million. Global sales of Azmacort reached $88 million in 2003. The product acquisition included global rights to Azmacort, which is a CFC propellant product, as well as an environmentally safe hydrofluoroalkane (HFA) propellant still in development; Kos agreed to pay royalty fees once the HFA technology was used in a marketed product. In addition to increasing revenues, Kos viewed the acquisition as an entry into the respiratory pharmaceuticals market and expected to create new and differentiated products by combining its own respiratory technologies with Azmacort and the HFA propellant. Kos considered it possible to combine the HFA propellant with other products in the formulation stage, such as an inhaled insulin then in the proof of concept phase of human clinical study.

Kos sought to expand medical applications for its products. An independent study of Advicor proved it to be an effective treatment for cholesterol modulation in patients with metabolic syndrome. Metabolic syndrome involves more than one contributing factor in coronary heart disease, including obesity, high blood pressure, and high blood sugar, in combination with a high level of bad cholesterol and a low level of good cholesterol. Kos awaited FDA approval to expand usage of Niaspan to reduce the risk of stroke and for lipid disorders related to type 2 diabetes, which contributes to coronary heart disease.

Principal Subsidiaries: Aeropharm Technologies, Inc.

Principal Competitors: Abbott Laboratories; Bristol-Myers Squibb Company; Merck & Co., Inc.; Pfizer, Inc.; Schering-Plough Corporation; Sepracor, Inc.


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