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Interview With Jonathan Houssian, RxElite Founder:
We're "A Significant Growth Investment"
posted on: October 21, 2007 | about stocks: BUF
Jonathan Houssian, President and Founder of RxElite (subsidiary of Southridge Enterprises (SOUT.OB))
discusses the company's generic drug business in a changing political climate, and outlines upcoming
financial milestones for investors.
Give us a brief historical overview of RxElite, its incorporation and business focus.
[JH] In 2000, I founded RxElite with a vision for changing how Generic Drug manufacturers operate.
RxElite develops, manufactures, and markets generic prescription drug products in specialty generic
markets. These markets include areas of anesthesia, sterile liquid dose drugs (including respiratory
inhalation drugs, ophthalmics, and injectable drugs), and transdermal patch products. RxElite uses very
focused selection criteria to enter a new market and produce a generic drug. We seek opportunities where
we will potentially face two to five competitors to ensure price stability and then seek to capture between
10 and 15% of market share.
Competition is limited in these segments of the generic pharmaceutical industry because of process
patenting or unique expertise in a particular area.Our strategy then, is to find areas of limited competition
characterized by high barriers to entry, limited competition, and stable market opportunities. We then
leverage our distribution strength by partnering with low cost-high quality international generic drug
producers. The major buyers in the United States are our customers and we have purchasing agreements
that can reach up to 95% of the generic drug market.
Strategy is nothing without execution. Generic drugs are commodity items sold on three variables: price,
deliverability, and quality. We maintain price by intense focus on maintaining low cost operations, not by
cutting quality. RxElite maintains deliverability by focusing on the customer’s needs. We have 100%
service levels for 76 of 81 months of uninterrupted supply. To ensure quality, we maintain our own QA/QC
programs, with thorough product, vendor, partner, and internal audits.
How does the company predict the political environment of the coming US presidential race will
affect its generic drug business?
Healthcare in general and specifically the cost of providing healthcare will likely be significant topics in
the next national elections. Generic drugs for use in the United States have a bi-partisan appeal with a win
for the consumer and for healthcare providers because they allow the market to adjust the price of
healthcare. With regard to specific parties, the GOP looks to make healthcare more accessible and
affordable to all Americans. They seek to do so by market forces which favor generic drugs. This is most
evident in the GOP approach to Healthcare Savings Accounts. The Democratic Party also favors reducing
healthcare costs for the average consumer. Every plan for healthcare put forward by the major candidates
for the Presidential election favors expanding generic drug availability.
Does the company have any operations outside the U.S.?
Alkem and Zach S.pA. are currently two of RxElite’s overseas partners. Alkem, based in India, produces
oral solid products in a partnership with RxElite. Zach has operations in Europe, South America and Asia
and is a producer of fine chemicals. In addition, we are partnered with Stason Pharmaceuticals for
production of a solid oral dosage product in China.
Please introduce us to Sevoflurane. What expectations does the company have for its market
performance over the next year or so?
Administration of an Inhalation Anesthetic is a routine part of general anesthesia for both inpatient and
outpatient surgery. Sevoflurane, an inhalation agent, is especially useful for outpatient anesthesia. It is
highly fluorinated, which results in a lower blood solubility than Isoflurane or Halothane. This leads to
faster elimination from the body and quicker recovery from anesthesia. Another result of the lower
solubility of Sevoflurane is that of a more rapid rate of rise of the alveolar concentration toward the
inspired concentration. This allows a greater degree of control over the depth of anesthesia. At any given
fresh gas flow rate, the less soluble anesthetic will have a lower uptake and will therefore be controlled
more precisely. The lack of airway irritation and low solubility of Sevoflurane results in a rapid inhalation
induction. It has a low incidence of respiratory complications and provides a quality of induction judged to
be similar to or better than that of Halothane. (Outpatient Anesthesia Dennis E. McCarthy, M.D., as shown
at http://www.dcmsonline.org/jax-medicine/1998journals/december98/outpatient.htm on 9/28/07)
According to Oppenheimer’s company update report for Minrad (BUF), who is RxElite’s strategic partner,
the market for Sevoflurane is expected to grow 11-15% per year. RxElite intends to capture 15% of what is
currently a $400 million market. As of this writing, pricing remains strong. Strong price is an indicator of
another successful selection by RxElite, marketing only those generics with process patent protection and
other high barriers to entry for other competitors. In the case of Sevoflurane, RxElite through their Minrad
partnership have a third process patent. Most members of the pharmaceutical community agree that a
fourth process would not likely pass through an infringement challenge by the current three patent holders.
What are RxElite’s current partnerships, and what milestones does the company expect to reach
with its partners over the next few years?
We have an aggressive and full pipeline. In the area of Anesthetic Gases, we partner with Minrad. We have
exclusive rights to market their products under our name in the United States, including Desflurane, which
has a $200 million plus market in 2008/2009. This is largely based on expectations of FDA approval to
market the generic. This is a very attractive competitive landscape with 1 competitor until 2011 due to
process patents and limited global manufacturing for all anesthetic gases.
Rxelite intends to take full advantage of our knowledge and experience in the sterile generic drug arena
both inside and outside Blow-Fill-Seal Manufacturing. RxElite in partnership will enter the sterile drug
markets in 2010 and continue to build on our experience and credibility in this area.We are currently
developing 2 sterile ANDAs to be filed in 2008, and have 5 more in various stages of development. We
have identified an additional 30 products that can work in this format including the ability to put injectibles
in plastic.
For Transdermal Patches, we have Core Tech Solutions as our exclusive manufacturing (at cost, with profit
share) partner for transdermal patch products. We expect the Fentanyl patch to launch in late 2009. This is
currently a $1.6 billion dollar market and we have every intention of capturing an 8 to 10% of market
share.
Please briefly outline the competitive companies and their products expected in the near future, and
how RxElite plans on staying on top of the market?
We do not intend to dominate the generic drug market. It is in fact our intention to move into areas where
larger companies such as Abbott (ABT) and Baxter (BAX) are not. We also intend to limit our market
share in order to maintain price stability.
How has the company established such a large distribution network for its generic drug products?
Our company was founded on the notion that generic drugs are commodity products, where price,
deliverability and quality are the driving factors of success. We have always put the customer first both in
terms of transparency of our operations to them and in making sure that we regard the delivery of an item
as complete when it arrives at the customer’s distribution center, not when it leaves our warehouse.
What can investors look forward to over the next few years in terms of the company’s equity value,
revenue, and profitability?
We expect a small profit next year, assuming our current path remains open and that in three years, to be at
or above $250 million in revenues, with attendant profit. Our company should be regarded as a significant
growth investment.
The company’s shares just began trading on the bulletin board recently, with a relatively low float.
Does RxElite have a timeframe for a possible move to a national stock exchange such as the AMEX
or NASDAQ?
We have filed to become listed on the American Exchange. This is a process that we may complete early or
defer to a later time. We certainly intend to keep that as one of our objectives.