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Volume 87 Issue 3 | pp. 22-28
Issue Date: January 19, 2009

Cover Stories: Custom Chemicals

From Compound To Pill

Custom chemical firms add capabilities ranging from chemistry development through finished-dose manufacturing
Department: Business
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Custom Work
Some integrated service providers have capabilities for contained synthesis of highly potent compounds.
Credit: AMRI
8703cover2_open
 
Custom Work
Some integrated service providers have capabilities for contained synthesis of highly potent compounds.
Credit: AMRI

THE SERVICE DEPARTMENT at a major auto dealer in the Houston area offers "Ladies' Day" on Thursdays. Along with oil changes and brake work, there are manicures.

It's quite a gamble to become a one-stop repair shop for nails and cars. If the auto seller's foray into nail care turns out to be second rate, its customers are more likely next time to opt for other dealerships or repair shops in the sprawling metropolis.

Today, many custom chemical firms are likewise broadening their service offerings to become the pharmaceutical version of the one-stop shop. They are adding end-to-end capabilities that include drug development, analytical methods, process chemistry, manufacturing, compound characterization, formulation, and clinical trial services. A few firms were founded with this intent, but most started life as custom manufacturers, small contract research firms, or synthesis houses.

Because of these disparate origins, these providers have slightly different ideas about what constitutes a one-stop shop. In general terms, it's a business model that gives suppliers the potential safeguard of diverse operations and a broad customer base while addressing almost all customer needs for single or bundled services.

The one-stop shop idea isn't new—custom chemical manufacturers tried a version of it about a decade ago with mixed success, says Jeffrey M. Evans, president of Rondaxe Pharma, a drug development consulting firm in Syracuse. Then, the full-service model was making active pharmaceutical ingredients (APIs) from the gram scale up to commercial quantities.

And there's no guarantee the strategy will work this time around, particularly given the economic environment.

"I'm not a strong proponent of the classical one-stop shop," says James Bruno, director of the consulting firm Chemical & Pharmaceutical Solutions. "Working with a one-stop shop can limit customers if they don't get the flexibility of being able to pick and choose." If different capabilities are required, if the relationship sours, or if business conditions change, customers may wish they had more choices.

Although having everything under one roof sounds convenient, certain competencies are bound to fall outside the scope of a one-stop shop. For example, only a few custom chemical manufacturers can conduct hazardous reactions economically and safely at a large scale. Many one-stop shops steer clear of large-scale manufacturing; making low-volume, highly potent compounds is a popular commercial niche.

Capabilities At Full-Service Custom Chemical Firms Range From Postdiscovery To Commercialization

Discovery support:
Medicinal chemistry
High-throughput screening
Lead optimization

Preclinical technologies:
Toxicology
Safety pharmacology
Drug metabolism and pharmacokinetics
Bioanalytics

Clinical services:
Clinical-supply manufacturing
Packaging and distribution
Trial design and monitoring
Data management and analysis

Drug substance development:
Custom synthesis
Route development
Process R&D and scale up
Preclinical and clinical API supply

Drug product development:
API characterization/preformulation
Analytical method development/validation
Drug-delivery technologies
Formulation/dosage form development

Commercialization:
Contract API manufacturing
Finished dosage form production
Quality control testing

API = Active pharmaceutical ingredient.

PROVIDING A RANGE of services at small scales suitable for early-stage development work makes sense, Bruno says, because suppliers probably can do most everything required, including difficult chemistries. But offering too many services may increase costs, since even infrequently used ones still must be outfitted and staffed. In contrast, dedicated specialists benefit from using a given capability routinely.

Bruno believes that small or emerging drug companies seeking the development and manufacturing services they lack may get the most value in finding a "one-stop project manager" that can help them figure out how to advance their drug candidates. "The supplier doesn't need to do all the work as much as it needs to be able to organize all of the work," he says.

Those trying to create a soup-to-nuts offering admit the business model is often disparaged as an overused or undoable claim. "People say that you are trying to do everything and do nothing particularly well, and that's something we have tried to avoid," says Frank J. Wright, vice chair of Greenwich, Conn.-based Aptuit.

Founded in 2005 to streamline the drug development process, Aptuit has grown to more than 2,700 employees, serves 800-plus clients, and has annual revenues exceeding $400 million. After collecting capabilities in API manufacturing, solid-state chemistry, and drug development, Aptuit managers spent 2008 considering the direction of the pharmaceutical industry and where to focus the company.

Although Aptuit has niche commercial API production in the U.S. and U.K. and is putting larger scale manufacturing in India, its integrated offerings best address customer efforts from postdiscovery through Phase II proof-of-concept drug trials, Wright says. "That's where we see the natural point at which we hand off to either a major pharmaceutical company or a company that will take a compound all the way to market," he says.

In October 2008, Aptuit launched an expanded version of a program it calls INDiGO. The 26-week program is designed to move compounds quickly from preclinical candidate selection through the steps required for the Investigational New Drug (IND) regulatory submission to begin Phase I human trials. "INDiGO is the application of most of our capabilities to achieve a first-in-man program," Wright says.

INDiGO is designed to avoid typical delays and obstacles that might arise when customers use multiple suppliers, Wright says. An Aptuit project manager navigates a client's compound through product development steps including API manufacturing, toxicology testing, analytical method development, formulation, clinical material supply, and regulatory filing preparation.

In a similar manner, Azopharma Product Development Group, based in Hollywood, Fla., offers a program called Phase I Express. "We have a proprietary system of work flows such that we can go from powder to clinic in four months or less," Chief Executive Officer Phil Meeks says. In contrast, large pharmaceutical firms can take 12 or more months to complete the same process.

"It's not that they are necessarily doing anything wrong, it's just that the way we are set up and organized, we are able to move much quicker," Meeks says. Efficiency comes from managing data and conducting work in parallel, avoiding redundancies and fumbled hand-offs. "We can handle what it may take several vendors to handle in the traditional outsourcing manner," he adds.

Azopharma has eight operating divisions for assorted services but centrally manages sales, marketing, information technology, finance, and quality assurance. Most of its manufacturing capabilities are focused through Phase I, but it can provide Phase II or III trial materials and niche commercial products. Project managers coordinate activities across the divisions.

Six of the divisions were acquisitions. Keeping acquisitions to a manageable size will allow the company to make two more this year and to expand in manufacturing and formulation, Meeks says. Azopharma opened its first overseas operation, a lab in London, in late 2008. According to Meeks, sales and pretax earnings have grown about 100% annually over the past five years.

Azopharma was formed around a core formulations business in 2003, when there were few such providers. Now it serves customers wanting either a full-service array or the talents of any one of its specialist shops. "By setting up our organization the way we have, we are able to tailor our services to both types of customers," Meeks explains.

Large pharmaceutical firms traditionally have outsourced manufacturing of drug intermediates and some APIs, while holding inside what Meeks calls "the last crown jewels" of formulation, analytical method development, and final-dosage form production, because these relate to critical regulatory filing requirements. But as they rationalize their operations, many drug companies are outsourcing even these tasks.

Nevertheless, large companies tend to outsource work piecemeal and seldom cede control. "Major pharmaceutical companies know exactly what they want and how they want to achieve it, so they give fairly precise instructions," Wright says. About 40% of Aptuit's customers are large firms.

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FINISHED PRODUCTS
Some one-stop shops not only synthesize drug compounds but also can fill prescription vials.
Credit: Aptuit
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FINISHED PRODUCTS
Some one-stop shops not only synthesize drug compounds but also can fill prescription vials.
Credit: Aptuit

"OUR BUSINESS MODEL has a bias toward the small, virtual, and biotech companies," Wright says. "Because they don't have the infrastructure, the small companies are looking for a much more collaborative and consultative relationship. They are very open and trusting, and they place a great deal more confidence in us."

More often than not, small companies want to quickly establish a compound's efficacy to meet developmental milestones or to secure funding and licensing deals. "They are looking for predictable outcomes—not only clinical, scientific, and technical outcomes, but also financially predictable outcomes," Wright points out.

Full-service providers, particularly those oriented toward early drug substance or product development, say there are compelling arguments for their business model in today's unstable economy. Many say they can offer small firms all the needed capabilities at a predetermined price and on a more or less guaranteed timeline.

Running counter to this appeal, however, is a slowdown in projects coming from small and virtual drug companies. Although a few service firms say requests for proposals are running high, many small drug firms lack the funding to move ahead or are delaying early-stage projects to conserve cash for more advanced ones.

Consequently, service suppliers are banking on expected increases in outsourcing by larger drug firms, many of which are acquiring drug candidates and conducting exploratory work to help decide which products to move ahead. Others, however, say even the large companies are cutting back on spending.

Meeks is optimistic. "We're seeing dramatic increases in the number of compounds some larger and midsized companies are putting into Phase I," he says. "They are trying to fix the pipeline by putting more into Phase I development."

Azopharma's focus on drug development rather than on commercialization is a strategic choice to avoid a competitive threat. "We don't see the offshoring, whether it's to India or China, of clinical phases happening to nearly the degree that it would on the commercial end because of intellectual property concerns around new chemical entities or compounds critical to a company's success," Meeks says.

Others say barriers to working in Asia are falling for geographic and economic reasons. R. Ananthanarayanan, president of the Pharma Solutions division of India's Piramal Healthcare, highlights his company's ability to conduct lower cost API development work at its sites in India while completing product formulation or finishing at its Morpeth site in England.

For reasons of speed or security, some customers want their suppliers to be nearby. "Customers may want the early-phase work to be done locally, but as the drug goes into the later life cycles, they want a specific solution from a specific geography," says Vineet Luhariwala, Piramal Healthcare's vice president for formulations business development. "For this reason, we have set up a center in Ahmedabad, India, that will offer formulations development and clinical trial materials for solid-dosage forms."

The ability to supply services globally confers more than just time and cost benefits. "It's not only development of the API, but the geographic and global reach that many of our clients today are requiring because they are looking at clinical programs and anticipating final market launches in a number of countries," Wright explains.

In another attempt to control costs, more customers want production in stages, rather than taking large quantities upfront, Ananthanarayanan says. Piramal Pharma Solutions serves both large and small customers, which bring in more than $325 million in annual revenues.

Geographic expansion, coupled with the systematic addition of capabilities, has been its approach to grow an integrated business and expand its customer base. Major acquisitions were Avecia's pharmaceutical chemicals business in 2005 and Pfizer's Morpeth plant in 2006.

Last year, it bought Healthline Pharma's sterile injectables unit in India and the clinical trials management firm Tangent Data, in Romania. It also added late-stage antibody-drug conjugate production and clinical trial packaging and distribution facilities in the U.K.

"The driver was to build ourselves from a regional contract manufacturer in India into a global player," Ananthanarayanan says. With process development and API production already in Canada, he'd like to acquire a U.S. presence for early-phase API and formulation work.

"Strategically, we've been able to offer more and more services from drug development to commercialization," Luhariwala adds. To avoid spreading itself too thin across technology areas, Piramal focuses "on those platforms that we believe have a good value proposition on a global basis," he says, such as high-potency compounds, biocatalysis, and chiral chemistry.

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AT THE READY
Quality control and analytical services are in demand at full-service companies.
Credit: Dr. Reddy???s Laboratories
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AT THE READY
Quality control and analytical services are in demand at full-service companies.
Credit: Dr. Reddy???s Laboratories

SIMILARLY, Dr. Reddy's Laboratories, in India, started as a generic API producer but now offers a host of custom services. "This is a differentiator for us because there are not a lot of generic pharmaceutical companies very actively pursuing custom pharmaceutical services," says Abhijit Mukherjee, president of Dr. Reddy's pharmaceutical services and active ingredients division. "And we have a large pipeline of products that many pure-play custom services businesses may not."

A few years back, Dr. Reddy's saw an opportunity in offering end-to-end custom services. The company is "pursuing technology-advantaged manufacturing services," Mukherjee says, through acquisitions and its own chemistry and process expertise. By keeping to this strategic intent, "it's not difficult to achieve 20% year-on-year growth in spite of the times," he notes.

The 2005 purchase of a Roche facility in Mexico gave Dr. Reddy's steroid-handling capabilities, and the acquisition of Dowpharma's small-molecule business in the U.K. last year added chiral chemistry to the list of offerings. On the product services side, Dr. Reddy's can handle potent compounds, formulation development, and oral solid-dosage forms.

Emerging drug firms typically want what Mukherjee calls pipeline services for API and product development, whereas mature companies want commercial services for intermediate and API manufacturing. Although the profit margins are better, pipeline services are not highly scalable and result in a less predictable revenue stream, especially in current times, he explains, compared with the large-scale commercial services.

As a result, and counter to the views of some other integrated suppliers, Mukherjee sees limited opportunity for long-term collaborations with emerging drug firms. "Although we do a lot of early-stage work, it is not very easy to imagine that one would remain a partner until launch," he says. "The journey is very long, and the chances of those assets making it to the end are increasingly lower these days.

"Building a business model based on the perceived launch of products is too farfetched," Mukherjee continues. Instead, Dr. Reddy's offers pipeline services as they are needed, but it looks for customers closer to commercialization for more sustainable business.

Geographic growth and a broader customer base are also focuses of Germany's PharmaZell, which was created in 2006 through a management buyout of Noveon's API and intermediates business, which had facilities in Raubling, Germany, and Chennai, India. In June 2007, the firm acquired GEA Pharmaceutical, a Copenhagen-based finished-dosage form and pharmaceutical development services business, from Novartis.

Backed by the Munich-based private equity firm Auctus, PharmaZell has more than doubled its staff to about 500 and expects to continue to grow. In 2008, it opened an R&D center and current Good Manufacturing Practice (cGMP)-compliant plant in Visakhapatnam (Vizag), India.

Switzerland's Solvias also benefits from being a management buyout, says Stephan Haitz, the company's executive vice president for sales and marketing. "We can realize our 'midterm' strategy and take more steps toward achieving our goal of being a comprehensive integrated chemical-development services provider," he explains. To this end, the 300-person firm has grown from its backbone in analytical services, solid-state chemistry, synthesis, and catalysis.

"AT THE MOMENT, we are broadening and deepening our expertise in all our individual services," Haitz says. The firm is building a cGMP-compliant, kilogram-scale plant at its Basel, Switzerland, headquarters. Previously, Solvias made small quantities of materials for toxicology testing and provided analytical technology packages. It would then transfer the process technology to a third-party manufacturer, often managing the overall project on its customers' behalf.

"This was part of the old strategy," Haitz says. "Customers said that they want to avoid another tech transfer, so we had a good reason to invest in the cGMP miniplant." The multipurpose plant will manufacture materials for Phase I and early Phase II clinical trials. In addition to catalysis, Solvias can handle hazardous and high-pressure chemistries. "We hope that the first suite we are investing in will be accepted well by our customers because we have space to expand," he adds.

Still, when it comes to making drugs for late-stage development or product launch, Solvias offers customers its expertise for evaluating manufacturing partners, as well as for tech transfer and project management. "We want to stay a flexible service provider and are not intending to be a large-scale manufacturer," Haitz says.

Solvias' sales grew 20% in 2007 to a record $57 million. Haitz says 2008 was a good year in which the company underwent controlled growth, a path it will follow as it expands into new facilities by 2010.

Meanwhile, as a new service, Solvias is combining its solid-state chemistry and analytics skills to provide preformulation packages. And it has partnered with Canada's Patheon to offer formulation development. Patheon's "Quick to Clinic" program is designed to rapidly develop compounds for Phase I studies.

Taking a different route to becoming a full-service provider, Albany Molecular Research Inc. began life as a contract research organization (CRO) in 1991 at a time when major drug firms did limited outsourcing and few small companies were working on small molecules. AMRI has remained focused on small-molecule drugs, while growing to about 1,300 employees and amassing nearly $230 million in annual revenues from its proprietary R&D and fee-for-services businesses.

In 2008, AMRI increased its chemical development and production resources in India by acquiring and then expanding an intermediates plant in Aurangabad. It also opened its first in vitro biology lab, in Singapore, where it also expanded its medicinal chemistry lab. CEO Thomas E. D'Ambra says AMRI intends to build a multipurpose cGMP pilot plant in India and roll out formulation development services.

"One way we have competed well with the very large European custom manufacturing companies is by having strong process and analytical development groups," D'Ambra says. "By being very strong in the lab and establishing relationships early, and then adding capacity, we have been able to work with small companies as they take their compounds into clinical development and then as they scale up."

Many large drug firms are cutting back on the number of vendors they use. They also are increasingly looking for "surge capacity," says Steven R. Hagen, AMRI vice president for pharmaceutical development and manufacturing. "They need a full range of services, but they may not need all of them at the same time. There's a lot of stated interest by the larger companies in having a flexible operating model."

AMRI itself is working on APIs for 59 compounds in Phase I or II trials and another 16 in Phase III trials—about the equivalent of a major drug company's development pipeline. "Over the years, the customer landscape has evolved, and so have we," D'Ambra says. "We have tried to build our business along the lines of what we view the industry could use and outsource, in many ways mirroring what goes on in a fully integrated drug discovery company."

LIKE AMRI, Shanghai-based WuXi AppTec began life as a CRO in late 2000. To its discovery chemistry services, WuXi added process chemistry, formulation, and manufacturing at ever-bigger scales, as well as discovery biology, toxicology, and analytical services. "We have the capability to start with a client's target and move it all the way through drug discovery and development and to deliver a compound ready for clinical development," says Steven M. Hutchins, vice president for business development.

Until recently, WuXi's largest-scale reactor was 3,000 L. Then in late 2008, it completed construction on a commercial cGMP facility with reactors up to 20,000 L for small-molecule intermediates and APIs. "We're also opening the largest Good Laboratory Practices-compliant preclinical center in Asia," Hutchins says. "We continue to expand not just the capabilities but also the capacities that we have."

Last year marked WuXi's expansion into the U.S. and into biologics with its $150 million acquisition of AppTec Laboratory Services. But its bet on biologics has had mixed results. In December, in the face of lower demand from small biotech firms, WuXi ceased biologics manufacturing in Philadelphia. Even though many large drug companies are moving into biopharmaceuticals, they tend not to outsource manufacturing.

The lost revenue is less than 4% of WuXi's estimated $260 million in 2008 sales. WuXi instead will devote the facility to biologics testing and cell banking and therapy services. In this area, "we have a strong base with larger clients that have not been affected as much by the economic situation," Hutchins says.

Although full-service providers try to replicate the production, drug compound, and product development capabilities that large drug companies have in-house, they nevertheless remain external suppliers. "The only way the one-stop-shop business model becomes sustainable is if and when the service providers can become aligned with the goals of the innovators," Rondaxe's Evans says.

"In the old model, where big pharma had all the assets internally, everybody in the company benefited ultimately from the sale of a drug," he explains. "The only way the one-stop shop model works is if there are true partnerships and common goals—and that is tough."

A customer and supplier may no longer be aligned if they outgrow one another. When working with a full-service company that has only small-scale capabilities, the customer eventually will have to move its product to a "better home," suggests Guy Villax, CEO of Hovione, a large custom chemical manufacturer based in Portugal.

"Better could be large enough," Villax says, "but it could also mean a home where they perceive there's less risk in the approval process from a manufacturing-compliance perspective and where they feel they have a credible solution.

"It's a very desirable vendor from the perspective of a small biotech firm," Villax acknowledges about the one-stop shop. "What a dream to be able to hand over a patent and out of the box would then come a perfectly packaged pill. But I don't think it's that simple."

Aptuit's Wright believes the full-service business model has been well received and defends it by citing repeat business from customers that bought one service and then returned for many more. And Hutchins says many WuXi clients are looking to develop strategic, long-term relationships.

Full-service providers also argue that they have the opportunity to align with their customers simply by working with them from compound selection through product development, whereas specialist or large-scale manufacturing shops have only a narrow window into a project. And when the need arises, they can partner with these others to extend their capabilities.

"We can bring a different perspective because you need to be thinking about the end goal," AMRI's D'Ambra says. "In every project changes occur unexpectedly, and being able to anticipate or deal with that change brings the best outcome."

 
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