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Business

Optimism Prevails For Fine Chemicals

Increased product outsourcing and busier plants make custom manufacturers feel more prosperous at CPhI

by Ann M. Thayer
October 22, 2007 | A version of this story appeared in Volume 85, Issue 43

Moving Ahead
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Credit: Rick Mullin/C&EN
Pharmaceutical and fine chemicals executives found business brisk at CPhI in Milan.
Credit: Rick Mullin/C&EN
Pharmaceutical and fine chemicals executives found business brisk at CPhI in Milan.

BETWEEN 2000 AND 2005, pharmaceutical outsourcing was going nowhere, and the fine chemicals business nearly came to a standstill. Developers withdrew many late-stage and marketed products, leaving only a trickle of new projects coming out of the drug development pipeline. To cut costs, some drug firms moved production inside, using their own plants to make a diminishing number of drug candidates. Custom chemical manufacturers were left with limited business, excess capacity, and low-cost competition emerging from Asia.

In the past few years, however, custom chemical makers have found themselves on the move again. The number of drug candidates progressing through development has been on the rise. Several drug companies have shuttered plants and turned increasingly to outside manufacturers. In response, fine chemicals producers are again investing in capacity and technology. Evidence for this upswing was in full view earlier this month at CPhI???the conference on pharmaceutical ingredients???in Milan, Italy (C&EN, Oct. 8, page 7).

According to Jan Ramakers, who runs Jan Ramakers Fine Chemical Consulting Group, in Scotland, "the industry is certainly doing a lot better, and profitability levels in general are up." A few years ago, as many as 70% of the top 45 companies posted operating profits as a percentage of sales below 10%, Ramakers said. Today, the number of such companies is declining.

Business is good, agreed Jim Birnie, business manager for custom synthesis at Sumitomo Chemical. "The drug companies are appraising carefully before investing in their own manufacturing capacity. If they can have a custom supplier do it for them, they are clearly articulating that they won't do it themselves."

At CPhI, Sumitomo exhibited a new line of organocatalysts that can replace metal-based catalysts in a range of asymmetric reactions. Besides offering environmental benefits, the catalysts support milder conditions and simpler reactions. Sumitomo is already using the catalysts in its own custom work for some customers.

BASF offered catalysts for the first time to the fine chemicals market at CPhI, thanks to its mid-2006 purchase of Engelhard, which formed the basis of a new catalyst division. Among the company's offerings was a new technology for removing blocking groups, which was developed to meet the needs of customers engaged in synthesis of pharmaceuticals and fine chemicals. The supported catalysts are designed for cost-effective reactions requiring deprotection steps.

Chemtura, meanwhile, has brought together three chemistry families—bromine products, reagents for intermediates, and catalysts—as a customer-focused offering to the fine chemicals market. "These areas require very high product stewardship," said Janet Chetland, Chemtura vice president for global high-performance industries. "These products are not readily available from anybody and need special packaging, logistics, and handling."

Chemtura finds the fine chemicals market attractive but challenging. "The market is becoming ever more global, and the geography of supply is changing along with the need to provide long-term security of supply in the regions where customers are operating," Chetland explained. "We'll invest as appropriate to meet our customers' needs and understand whatever long-term challenges they face."

Hooking up
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Credit: Rick Mullin/C&EN
SAFC was among custom manufacturers looking to attract customers.
Credit: Rick Mullin/C&EN
SAFC was among custom manufacturers looking to attract customers.

THE PAST YEAR has proven to be a strong one for fine chemicals producers both big and small. The consensus among manufacturers is that "life is good," according to James Bruno, director of the consulting firm Chemical & Pharmaceutical Solutions. "Sales are up, reactors are full. There are a lot of processes and projects ongoing, and some expansion plans under way."

Bruno noted that fine chemicals makers are benefiting from an upturn in new product approvals. In particular, several key new drugs require complicated syntheses and consequently are soaking up capacity. More generally, he said, many big pharmaceuticals companies have spent the past year choosing longer term partners in preparation for outsourcing more synthesis work.

Aesica Pharmaceuticals, which began life in 2004 as a buyout of BASF's Cramlington, England, site, has taken advantage of these shifts. In October 2006, the company bought Merck & Co.'s facility in Ponders End, England. A multiyear supply agreement worth up to $300 million came along with the deal.

Last month, Aesica acquired Abbott Laboratories' site in Queenborough, U.K., along with a six-year supply agreement. "The acquisition broadens our offering to the industry away from supplying just active pharmaceutical ingredients (APIs) to formulated finished products as well," Aesica Chief Executive Officer Robert Hardy told C&EN. In Ponders End, the company can produce cytotoxic and potent APIs, and it is interested in extending its capabilities in Queenborough to formulate these APIs there, too, he added.

In August, Aesica completed construction of a pilot plant in Cramlington that will allow it to manufacture small-scale quantities (10-100 kg) of compounds for clinical development. Hardy said the addition, which is the first part of a possible four-phase expansion, allows Aesica to supply APIs across all production scales.

Hardy envisions further acquisitions to broaden Aesica's global API and formulation capabilities, as well as a partnership in China. With more than 700 employees, Aesica has tripled its sales since 2004, Hardy said, and his goal is to do so again and reach $600 million in sales by 2010 through organic growth as well as acquisitions. At CPhI, the company launched an expanded commercial team to handle its growing business.

Similarly, Novasep Synthesis, part of France's Groupe Novasep, has invested in a second new high-potency kiloscale lab in Le Mans, France, with capacity ranging up to 50 L. The firm is also looking to broaden its range of services, said Jean-Baptiste Agnus, business development manager. "The idea is to offer services from preclinical to technology development—to start early and scale up large production suites." Novasep will gain more capacity for APIs through its planned acquisition of PharmaChem Technologies in the Bahamas.

To meet mounting demand, Saltigo, the Lanxess subsidiary focused on fine chemicals, has upgraded 60 m3 of reaction volume in Leverkusen, Germany, to current Good Manufacturing Practices standards. It also is expanding a cGMP production plant that, when in full operation by year-end, will have a total capacity of more than 200 metric tons.

Carbogen-Amcis, which continues to invest in its Swiss contract manufacturing operation, will grow 18-20% in 2007, adding to two previous years of double-digit growth, CEO Mark Griffiths told C&EN. One year after its purchase from Solutia by India's Dishman Pharmaceuticals & Chemicals, the company is leveraging its specialization in high-potency APIs into a broader range of services, including early-phase and large-scale production.

"We continue to operate independently," Griffiths remarked. "But a lot of the bigger customers want us to look like one organization, so we have systems and procedures in place for tech transfer." Carbogen is involved in customer projects that ultimately will require more capacity than it has in Switzerland, he added. "Some of these projects are already being transferred to Dishman facilities in Bavla, India, for large-scale cGMP manufacturing."

India's NPIL Pharma has been building its custom manufacturing business, which is based largely on the 2005 acquisition of Avecia's U.K. and Canadian operations and the 2006 purchase of Pfizer's Morpeth, England, plant. At CPhI, the company said it will invest $4 million to expand its early-phase pharmaceutical development and scale-up capabilities in Chennai, India.

"The Chennai site is becoming our leading development facility in India," said R. Ananthanarayanan, NPIL's president and director. When the expansion is completed, the company will be able to offer integrated services across early-phase API production, formulation, and clinical manufacturing, he said.

As part of the investment, NPIL has already added a new process safety lab and upgraded an existing 2,200-L pilot plant to cGMP status. By December, the firm will increase cGMP pilot-plant capacity by 12,000 L, Ananthanarayanan said. A new R&D lab is being added, along with four new scientific teams that will increase technical staff in Chennai from 25 to as many as 40 people.

IN ADDITION to capacity expansions, new technology and specialized offerings continue to attract customers. Many U.S. and European companies have successfully modified their strategies in the past few years to focus on technology, Bruno said. "They are taking labor out of the equation," he noted, as a means to compete with the lower cost environment in Asia.

Specialized technology companies have been among those most consistently reporting good business conditions, even during the lean years. According to Aslam Malik, president of Ampac Fine Chemicals, a technology-based strategy is paying off for his firm, which has focused its business around energetic chemistry, high-potency ingredients, and continuous processing. He expects 2007 to be "another great year," building on record sales in 2006. AFC plans to invest $3.3 million in its Rancho Cordova, Calif., facility.

Ash Stevens, which added to its high-potency API capacity in Michigan this year, also sees much healthier times for medium-sized players focused on niche technologies. Doing business in India and China is becoming more expensive, easing some of the pressure on U.S. firms, explained CEO and President Stephen Munk.

Furthermore, venture capital investors are putting money into the biotech industry, enabling start-up drug firms to continue to push their discoveries through the pipeline. This situation means more work for contract manufacturers, Munk said.

Portugal-based Hovione, while offering a range of custom manufacturing services, has been investing in specialized particle design and formulation for drug delivery. For the fiscal year ending March 31, Hovione's sales grew 16% to reach $94 million. This year, according to CEO Guy Villax, growth will be closer to 10%. "But 10% is not down," he noted, and in 2007, the company has set the goal of breaking $100 million in sales.

Biologics is another niche into which companies have been expanding. Combining high-potency and biologic capabilities, SAFC will spend $29 million to expand fermentation-based production of highly potent biologics at its facility in Israel by 2009. The company also is adding a new small-scale production suite in St. Louis for conjugating potent APIs to targeted delivery molecules, such as monoclonal antibodies, for oncology therapies. The new facilities will be operational in late 2007 and able to provide early-stage clinical quantities.

After years of focus on small-molecule APIs, SAFC is making a concerted effort to expand its custom manufacturing of large molecules, noted Amanda Halford, director of global marketing. The overall market is healthy, she commented, with increased demand for outsourcing of both biologics and small molecules.

Also pursuing fermentation, Pfizer CentreSource (PCS) will use its expertise in fermentation, recovery, and purification to offer custom services from its Kalamazoo, Mich., site. In 2006, in response to rising costs, the company contracted with two Chinese partners to produce 18 steroid APIs and intermediates. PCS kept only the initial bioconversion production steps, which are the most proprietary ones, at the Kalamazoo site.

The new service reflects growing demand for fermentation capabilities. "Fermentation is a complex process that requires a large investment in terms of expertise, equipment, process, and quality control. Very few companies currently have or choose to develop those resources in-house," said Jeff Frazier, director of strategic initiatives and business planning for PCS Fine Chemicals. "Outsourcing simply makes good economic sense."

MEANWHILE, biocatalysis process developer Codexis of Redwood City, Calif., continues its transformation from a "technology company to a product company," said Peter Seufer-Wasserthal, vice president and general manager of the firm's pharma services group. This transition gained momentum with the acquisitions of enzymes producers Julich Fine Chemicals in 2005 and BioCatalytics in July.

"It also has involved the use of our technology to deliver hundreds of kilos of compounds. And that's the model going forward; we make products now," Seufer-Wasserthal explained. "We are looking at certain compounds where we believe we can really add benefit, develop processes, and then ultimately deliver, not the enzyme or technology, but the chemical."

Codexis also has been developing the generic intermediates production business it launched in late 2006. "This effort broke down the barrier within the company to have its own production," Seufer-Wasserthal said.

To introduce customers to biocatalysis capabilities, Codexis launched four more biocatalyst "panels" at CPhI covering different enzyme classes for reaction screening. Customers have already found hits from a ketoreductase panel launched in February, and these enzyme hits have been effective enough, even without further optimization, to be used to make initial kilogram quantities of pharmaceutical ingredients, according to Seufer-Wasserthal.

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Despite upbeat attitudes and an improved business outlook, many challenges remain. "The industry has gone through a trough and a number of difficult years, but profitability is not quite up to the levels of the late 1990s," Ramakers commented. And amid the uptrend U.S. and European custom manufacturers chronicled at CPhI, they also acknowledged that Asian producers continue to be a significant competitive concern.

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