Issue Date: January 31, 2011
Many pharmaceutical firms want to be seen as health care providers and not as makers of chemicals. Consequently, they have sharpened their focus on selling medicines while stepping away from actually producing them. Companies such as Merck & Co., Pfizer, and Roche are significantly decreasing their manufacturing footprints and outsourcing more of their active pharmaceutical ingredient (API) needs.
Despite these shifts, some firms still capitalize on their long-standing expertise by offering contract manufacturing services to outside customers.
Whether producing custom APIs, generic products, or finished dosages, most such service operations rely on spare capacity in their parent company’s facilities. As a result, the capabilities of these operations are subject to the whims of consolidation and shifts in strategic thinking. At the same time, like any custom chemical firm, these operations can benefit from a rise in industry outsourcing.
Beyond custom manufacturing, many contract businesses also produce and sell generic APIs and intermediates. These products may be once-proprietary drug substances that had been lucrative sellers for the parent company. Antibiotics, analgesics, steroids, and hormones frequently fall into this category.
“Most big pharma companies stay in the market once a product becomes a generic,” says fine chemicals industry consultant Jan Ramakers. “There are so many products going off patent that they might as well make the generic version and at least generate some cash flow from it.”
Back in the mid-1980s, drug companies began seeing indicators that more generic drugs would emerge and their pipelines would slow down. “Capacity was becoming available at all the major pharma companies, and most quietly got into the contract manufacturing business as a ‘capacity-plug play,’ ” explains Keith Kentala, general manager of contract manufacturing sales and marketing at Abbott.
Unlike most independent firms in the custom chemicals industry, Abbott’s business is not a pure-play contract manufacturing organization (CMO), Kentala says. “We are a global business unit within Abbott doing contract manufacturing work utilizing available capacity at our different sites around the world.”
That said, the business is not just about optimizing reactor volumes, but includes a certain regard for customer needs. “We use the same assets that we use for our own pipeline products and all the services that we would render for our own products we do for our customers,” Kentala says. Custom and generic APIs—both biologics and small molecules—make up about 70% of the group’s output. The rest is finished drug products.
Abbott, like other large firms, routinely evaluates its manufacturing assets. For example, a few years ago, the company invested in its Puerto Rico facility to increase its focus on biologics. “Whatever the strategic vision is, operationally, we in the custom business follow suit behind that,” Kentala says.
Adds Michelle Calhoun, Abbott’s contract manufacturing sales and marketing director, “Keeping in mind our client list and the trends in regard to manufacturing needs, we assess how to best utilize the excess capacity and bring value into the marketplace.”
Similarly, Sanofi-Aventis is shifting its chemical industrial activities in France over to biotechnology and vaccine production by 2014. Since 2008, it has invested about $900 million in the transformation. When Industrial Affairs Senior Vice President Philippe Luscan announced the change last March, he said it reflects a new balance in the industry between APIs derived from synthetic chemistry and vaccines and molecules arising from biotechnology.
Accompanying the manufacturing transformation, in 2008, Sanofi created what it calls the Commercial & External Partnership, Industrial Affairs (CEPiA) group to promote the use of the company’s manufacturing network for contract work. Projects range from classic tolling to full-service custom manufacturing, for a total of about $775 million in annual sales.
“This business has always been part of our culture,” explains CEPiA Vice President Jacques Tavernier. “One of the main objectives for CEPiA is to remain a major player in the industry by supplying a wide range of key intermediates and APIs, as well as drug product manufacturing activities, such as dosage forms and packaging.”
Third-party work is under way at 62 of 73 Sanofi industrial facilities, he says. CEPiA provides bioprocessing and custom synthesis, and it markets about 200 intermediates and APIs, such as antibiotics, corticosteroids, analgesics, antihistamines, prostaglandins, and opiates. Sanofi is also a growing player in mammalian cell culture through its recent MAbLaunch bioproduction partnership with LFB Biotechnologies, Tavernier adds.
“We have 70 scientists working for third parties,” he says. They develop and implement processes and analytical methods, handle quality assurance, and provide regulatory materials and support through the development and commercialization processes.
Pfizer is going through a similar manufacturing transformation in which it plans to close eight plants and reduce operations at another six over the next four years.
But Jeffery W. Frazier, vice president for fine chemicals marketing at Pfizer CentreSource, Pfizer’s contract manufacturing arm, says the manufacturing overhaul is actually working to his group’s benefit. For many years, PCS has supplied steroid APIs and intermediates and offered sterile-dosage-form manufacturing. New access to Pfizer facilities in Illertissen and Freiburg, Germany, now allows PCS to produce highly potent oral solids, and a plant in Strängnäs, Sweden, will add microbial fermentation.
“These brand-new offerings are a result of Pfizer analyzing what specific assets within its overall network are strategic and then fully utilizing those assets both internally and externally,” Frazier says. “So sites deemed strategic have become available to PCS to consider for third-party work.”
For other contract businesses, restructuring definitely hurts. To turn around its core therapeutics business, Genzyme has decided to divest its pharmaceutical intermediates unit. Based in Liestal, Switzerland, the third-party manufacturing business chemically synthesizes pharmaceutical materials, such as lipids, peptides, amino acid derivatives, and small molecules, and offers drug delivery technologies.
Likewise, Roche launched an operational excellence program in November 2010 that includes streamlining its manufacturing network. The company plans to sell the Roche Colorado site, in Boulder, which produces peptides for Roche and outside customers.
Pharma company contract manufacturing groups are hard to rank within the fine chemicals industry because they are typically internal operations for which revenues aren’t reported. Boehringer Ingelheim is considered to have one of the largest operations, with more than $1 billion in annual sales, according to industry consultant Ramakers. That figure puts it among the top fine chemicals producers worldwide. It supplies small-molecule APIs and biopharmaceuticals.
Earlier this month, Boehringer agreed to buy Amgen’s Fremont, Calif., facility to expand its contract business. Amgen had been its customer for more than 10 years. The facility will add biologics process development and manufacturing to the firm’s contract manufacturing capabilities, according to Boehringer board member Wolfram Carius. Offering what it calls a one-stop-shop concept, Boehringer says it has already brought 18 biopharmaceuticals to market for customers.
A newer entrant, GlaxoSmithKline’s contract business, has sales on the order of $80 million to $110 million, according to Kristof Szent-Ivanyi, business development director for third-party sales. When it started up in 2005, the business focused on selling generic penicillin and antibiotics. It now also supplies small-molecule APIs and bulk pharmaceutical proteins. Operations are split about equally between making APIs and formulation fill-finish work, he says.
Meanwhile, Elan recently expanded manufacturing services within its Elan Drug Technologies unit, a business that has about $280 million in annual sales from providing drug delivery technologies and solid-dosage-form manufacturing. “Through an extensive operational excellence program over a number of years, we found that we could actually operate our manufacturing at a smaller scale, and so we ended up freeing up a good bit of capacity as a result,” says Fidelma Callanan, the firm’s director of marketing.
The manufacturing service debuted in October 2010, offering dosage-form capacity at Elan facilities in Ireland and Gainesville, Ga., that now have excess capacity. “We have seen quite a huge amount of interest and hope to sign a few deals in the next quarter or so,” Callanan says.
Some contract operations do have dedicated facilities. In 2010, despite plans to reduce its manufacturing footprint overall, Merck created the Merck BioManufacturing Network to target the biologics market. It combines the Avecia Biologics business that Merck purchased in late 2009 and Diosynth Biotechnology, which came with Merck’s acquisition of Schering-Plough. The network has facilities in Billingham, England, and Research Triangle Park, N.C.
About a decade ago, Baxter International purchased a plant in Bloomington, Ind., intending to leverage it solely for contract work, explains Bradley R. Newman, senior director of marketing for Baxter’s BioPharma Solutions (BPS) division. Not an API supplier, BPS carries out sterile filling and finishing of drugs.
Besides Indiana, the business works out of sites in Germany, Illinois, and California. It can access other Baxter facilities, depending on the technology required for a customer’s project, Newman explains. An expansion at Baxter’s Halle, Germany, site will increase commercial cytotoxic contract manufacturing capacity for BPS by more than 50%.
Although keeping capacity filled is obviously necessary, it’s not the overriding strategy for the business, Newman maintains. “We see those types of competitors out in the market, and there is a decidedly different service level,” he says. “There is a lot of competition in the market, especially in tough economic times, and we focus heavily on the level of service delivered.”
BPS focuses primarily on commercial-scale manufacturing, as well as some production of cytotoxics at clinical scales. “We don’t generally manufacture generic products, except in the emerging biosimilars area,” Newman explains. “We’re working very hard to refine our capabilities for biologics processing in the fill-finish space with vials, syringes, and IV bags to enhance delivery as those products come to market.”
Drug company contract manufacturers are subject to the same economic trends as other CMOs and are targeting the same growth areas (see page 13). “About 75% of the injectable-drug pipeline is biologics. You see a lot of the pharma companies pushing into this area,” Newman remarks.
Highly potent and cytotoxic compounds are another growth area. The ability to handle these compounds is a high barrier to entry, but big pharma companies have been in the business for years, Ramakers explains. Excess capacity in this area, for example, was the reason that Boehringer Ingelheim opened its contract manufacturing business years ago, he adds.
Bayer Schering Pharma targets the specialized field of bulk steroid manufacturing with its pharma chemicals unit. Sales of APIs are under $100 million per year, of which about 60% is marketed products and 40% is custom work, according to Bernd Ehrke, head of business development at Bayer Schering Pharma.
“We have been in the steroid business for more than 40 years, and that continues to be our stronghold,” Ehrke says. Western manufacturers still have an advantage over Asian producers because of sustainable levels of quality and better technical and regulatory support, he maintains.
With three production sites in Germany and one in Mexico, the Bayer business has chemistry and fermentation capabilities. “Not only does the steroid business increase plant utilization, but it also helps fulfill Bayer’s social responsibility,” Ehrke explains, because the company manufactures large volumes of steroids targeted for contraception purposes for nongovernmental organizations, governments, and other organizations in Asia and Latin America.
Although drug company CMOs are not the lowest-cost option, they can compete effectively with the independents, managers claim. “We bring a significant amount of scientific and service capabilities to the table,” Newman says about being part of a fully integrated drug company. “The underlying quality and regulatory systems, and the financial stability of Baxter and its global network, are foundational to supporting the BioPharma Solutions contract manufacturing business and give clients the security they are looking for when they turn a molecule over to be manufactured.”
By definition, pharma operations are experienced in scale-up and commercial production. Beyond this, BPS will even leverage Baxter’s sales force to help clients who otherwise would need to find a marketing partner or hire a contract sales force. “Baxter has a significant market share for injectable products in U.S. hospital pharmacies, and we can penetrate the market quickly with a client’s product,” Newman points out.
Although a drug company contract business can access a range of facilities and capabilities, it still must work within the parent organization’s vision for manufacturing its own products. In this regard, the business may face constraints on what it can or can’t do, Ramakers suggests. And the question always remains as to whether the parent will continue to consider the operation strategic.
To avoid these constraints, Abbott’s contract manufacturing business is adding disposable bioreactors. In addition to its current stainless steel reactors, Abbott recently commissioned a 500-L disposable manufacturing suite at its Worcester, Mass., site, which provides cost-effective manufacturing for smaller, early-stage projects, Kentala says. “We can work with customers when they are transitioning from Phase I to Phase II and then continue with them through commercialization, without the cost of technology transfer from another manufacturer.”
More typically, contract operations use existing equipment that already has a base load from the parent company. Although pharma manufacturing plants are not viewed as cost-efficient, the financial pressures may still be different from those of a stand-alone CMO, which alone bears the brunt of filling a plant.
“You are not a one-product, or not even a one-party, company, so you are spreading your risk,” Elan’s Callanan says about another benefit of drug company contract manufacturing. “There is a slight disadvantage in that your destiny isn’t completely in your own hands,” she adds.
Any CMO juggles multiple projects and must keep customers’ information separated and confidential, but pharma production operations have a mix of internal and external projects. The contract arm may even face the prospect of making a competing therapy for a rival pharmaceutical company.
Although some companies may view this situation as a dilemma, others are pragmatic. “We are not enabling them to compete, because either we’re going to manufacture the product or someone else is,” one executive says. “So why not move some manufacturing dollars our way?”
Some contract operations have their own employees, whereas others share staff with their parent. Although managers describe having rigorous disclosure and confidentiality measures, Ramakers says CMOs that were once part of drug companies can find it easier to attract customers after ties to the parent are cut because they can assure customers that there are no conflicts of interest.
“People will know that you’ve probably got top-class equipment and the right experience because you do the work for your own APIs,” he says of drug company CMOs, “but generally speaking, it’s probably easier to get more business if you are independent.”
Pharmaceutical company managers acknowledge this challenge, but much more important, they say, is the fact that their organizations have themselves been through the approval process and know how to produce approved drugs in licensed facilities. These demonstrated capabilities depend on having trained and experienced staffers who have developed, launched, and produced products and can apply the same skills to custom work.
“You can have a fantastic facility with installed capacity, but if you don’t have solid scientists and solid technology to work with, you are going to be on the outside looking in,” Kentala says. Customers have the assurance that “we’ve been there and we’ve done it,” he continues. “Instead of it being an Abbott product, it’s going to have their name on it, but it will go through the same processes that we go through.”
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