Issue Date: October 27, 2008
Picking Up The Pieces
IN 2004, when suppliers of active pharmaceutical ingredients (APIs) were several years into a prolonged slump, the management of a generic API plant operated by BASF in Cramlington, England, sensed it was the right time to launch a new fine chemicals business. The group acquired the site through a management buyout and formed Aesica.
By 2006, the contract API sector had started to rebound, fueled in part by drug companies closing or selling their manufacturing plants and shifting production to third-party suppliers. Aesica took advantage of this trend and acquired two other sites in England—an API plant from Merck & Co. and an API and formulation facility from Abbott Laboratories.
Other pharmaceutical chemical companies have acquired unwanted big pharma API plants, but Aesica is the first contract manufacturer built solely out of discarded drug industry assets. Now it has set out on a potentially more difficult task: creating the relationships with major drug companies that are necessary to survive in the contract manufacturing business for the long term.
Robert Hardy, Aesica’s chief executive officer, says he can do it. “When we set up the business, it became pretty clear in a very short period of time that there was big change happening in pharmaceutical outsourcing,” Hardy says. “There were pronouncements from chief executives and operations directors from AstraZeneca, Pfizer, and GlaxoSmithKline, all wishing to outsource. Our plan was to use the generics business as a way into contract manufacturing. There was lots of potential but also lots of risk.”
At the time of the management buyout, BASF’s Cramlington site produced several important APIs, including paroxetine, a selective serotonin uptake inhibitor. The buyout also came with a number of short-term contracts for generic products. But Aesica’s management envisioned a different approach to the market, one that would shift operations to exclusive, long-term contracts with large drug companies.
Aesica discerned a significant change afoot in how big drug companies wanted to deal with fine chemicals suppliers. “We found out very quickly that the most important thing is relationships, and relationships take a long time in this industry,” Hardy says. “Although we supplied a couple of big pharma companies, it was very much on a supply basis; there was no relationship there.”
One of the best ways to garner relationships, according to Hardy, fit well with the company’s need to expand capacity: acquisition. He says Aesica spent two years looking at opportunities, finally buying the Merck facility in Enfield in 2006. It added potent compound manufacturing, bulk API finishing, and drug intermediates capacity. In 2007, Aesica bought Abbott’s Queenborough plant, which added formulation and packaging capabilities. Both deals came with supply agreements.
“We started with just average contracts,” Hardy says, citing as an example a multiyear supply deal BASF had with Pfizer. “They were small contracts, not strategic partnerships, whereas the relationships we have with Merck and Abbott now are very strategic,” he says.
According to Hardy, Aesica has gone from annual sales of $40 million in 2004 to $100 million last year, and he predicts sales will hit $170 million in 2008. Today, single-customer APIs account for 65% of the firm’s production, whereas generics make up less than half, he says. The firm is spending about $5 million on upgrades, including the installation of a pilot plant in Cramlington and improvements to the existing pilot plant and formulations facility in Queenborough.
The firm is also on the lookout for its next acquisition. Having opened a U.S. sales office in Saddle Brook, N.J., earlier this year, Hardy says, Aesica may next acquire API manufacturing assets in the U.S.
Aesica’s purchase of big pharma assets is not unique. Nor has it always succeeded for other companies. In 1997, for example, fine chemicals firm Catalytica acquired a Glaxo Wellcome facility in Greenville, N.C. Catalytica was subsequently purchased by DSM, which closed the Greenville chemical operation as the sector went into a downturn.
MORE RECENTLY, the NPIL Pharma division of India’s Piramal Healthcare acquired Pfizer’s manufacturing plant in Morpeth, England, and the firm has indicated it wants to make more such deals.
Industry analyst Rob Bryant, of Brychem Business Consulting, cautions that there are downsides to acquiring drug industry assets. He says the big boost from such an acquisition is the accompanying supply contract, but such boosts are short-lived. “The multinationals sweeten the pill with a contract, but the bad news is that, in three years, they will go to India for half the price,” Bryant says.
Moreover, he sees cultural differences in how drug companies and fine chemicals firms operate plants and do business. “Buying plants from multinationals is not a way of succeeding,” Bryant says. People working for drug companies are used to being told what to do, he explains.
Hardy counters that the staff Aesica inherited in its acquisitions have a tradition of innovation, starting with the original BASF workforce. “Most of our API development comes out of Cramlington,” he says. “Our technical teams are very innovative.” The facilities have capacity beyond what is needed to fulfill contracts with the original owners, allowing Aesica to secure new ones. Yet ideally, Hardy says, Aesica wants to work with no more than six key customers.
According to Michael Staff, Aesica’s vice president of sales and business development for North America, the company has a varied menu of core technologies, including highly potent API synthesis, chiral resolution, and high-pressure hydrogenation. “But we don’t do everything, and we don’t claim to want to do everything,” Staff says. The focus is on maintaining long-term relationships, which involves more than technology. “Cost is a factor,” he says. “But so are speed and transparency.”
According to Staff, Aesica does about 90% of its business with large drug companies. That is not likely to change drastically anytime soon given the profile of Aesica’s preferred customer. “I am careful about the balance sheet,” he says. “We do not have much business with small companies and biotechs.”
The idea of a “preferred customer” may sound strange in a business described more often in terms of preferred suppliers. But the increasing importance of partnerships in which suppliers are critical to a drugmaker’s supply chain has heightened the vetting process on both sides of the bargaining table, according to Hardy. “There aren’t too many top-quality contract manufacturing organizations around,” he says. “They are trying to attract us, and we are trying to attract them.”
Indeed, Bryant, the consultant, acknowledges that Aesica has managed to form a competitive firm out of the stripped parts of drugmakers. “Aesica is an interesting company,” he says. It seems to have succeeded in establishing its own set of services at what once were plants dedicated to the needs of specific drug companies. “In fine chemicals, that may be the holy grail,” Bryant says.
The challenge, according to Hardy, is selling the company as a partner for the long run. “We have to prove to customers that we are a supplier of choice,” he says, noting that Aesica has “two or three” of the kind of contracts it wants to land. Hardy’s target is to triple sales in three years through internal growth and by sticking to a strategy of acquiring drug company assets.
“When customers come to our site, they want something that will integrate into their model,” he says. “They want to see something like themselves, only more efficient.”
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