New Challenge For An Old Plant | October 12, 2009 Issue - Vol. 87 Issue 41 | Chemical & Engineering News
Volume 87 Issue 41 | pp. 30-32
Issue Date: October 12, 2009

New Challenge For An Old Plant

A former Merck manufacturing site is being recast as the contract manufacturer Cherokee Pharmaceuticals
Department: Business
Keywords: Cherokee, Merck, PRWT Services
Workers at Merck’s former Riverside, Pa., site now run operations as Cherokee Pharmaceuticals.
Credit: Cherokee Pharmaceuticals
Workers at Merck’s former Riverside, Pa., site now run operations as Cherokee Pharmaceuticals.
Credit: Cherokee Pharmaceuticals

Cherokee Pharmaceuticals’ story has three main characters: a new company, its neophyte owner, and its biggest customer. A tale that opened with a spur-of-the-moment business decision is now, in its later chapters, about turning a big pharma company’s production site into a contract manufacturing business.

Merck & Co. had operated its site in Riverside, Pa., for almost six decades. But by late 2005, like other drugmakers that were shrinking their manufacturing footprint, Merck was looking to rid itself of this and other underused facilities.

Enter PRWT Services, a back-office business services and facilities management company founded by Willie F. Johnson, an African American businessman. While making a proposal to manage some Merck facilities up for sale, Johnson spontaneously decided to bid on the Riverside site.

Although the decision was sudden, several factors made it appealing, says Stratton Lee, PRWT executive vice president for business development, including an entrance into the life sciences market, a workforce-oriented operation, and the Pennsylvania location. “We also recognized a historic opportunity to become the first minority-owned active pharmaceutical ingredient [API] manufacturer in the U.S.,” he says. For Merck, the deal would increase its supplier diversity spending.

What ensued was a detailed, two-year due-diligence process during which PRWT went through the paces of assembling a team of experts and preparing transition plans. Merck, meanwhile, thoroughly vetted PRWT. “As a new entrant in the space, we had to give, without a shadow of a doubt, the assurance of supply, quality, cost, and service,” Lee says. “Merck got comfortable with our vision and with our having the core competencies in being able to successfully manage the facility.”

Stepping in on Jan. 1, 2008, as the new owner, outsider PRWT surprised the close-knit custom chemicals sector, where reputation, past performance, and customer relationships are key. The change was no less remarkable for PRWT. “It was transformational for our business and our focus,” Lee admits. Not only is PRWT planning to expand Cherokee, but its legacy operations also see opportunities in the life sciences area as well.

Cherokee has a jump start in its new business because the purchase came with a five-year, up-to-$200 million supply agreement with Merck for antibiotics and APIs.

Yet it’s too soon to write a happy ending for Cherokee. In the past few years, several drug industry plants have changed hands and become merchant market facilities, adding capacity to a market that already has plenty of general-purpose API capacity, says Wilhelm Stahl, a managing member at Rondaxe, a pharmaceutical consulting firm. Although new owners typically get supply contracts to tide them over, “they still have limited time to get the plant filled up,” he says.

Moreover, in-house pharmaceutical production differs culturally and operationally from the custom manufacturing world. “The pharma industry is somewhat risk averse with regard to manufacturing, whereas custom manufacturing requires more of an entrepreneurial spirit,” Stahl says. Custom manufacturers must be responsive to different customer needs and expectations around very diverse products.

“The customer focus may be different than what the operation experienced before,” he explains. A drug company site often focuses on just a few products for an internal customer, namely its own sales and marketing group. “A pharma unit is in a more protected environment compared with a custom manufacturer, which is very much exposed to global competition,” Stahl says.

Cherokee executives say they are aware of these challenges and that they have an aggressive strategy to grow beyond Merck. “From the beginning, we have worked to bring in new customers, new products, and to diversify beyond the Merck products that were there when we took over,” says Cherokee President John Elliot, who headed GlaxoSmithKline’s global antibiotic supply network before joining the new firm. Efforts have included putting together a team with custom chemicals experience to manage the 400 employees already at the 340-acre, multiplant site.

So far this year, Cherokee has signed one commercial supply deal and seven development agreements, says Dennis P. Bauer, the firm’s senior vice president for sales and marketing. It has a long-term contract to supply DuPont Applied BioSciences with a fermentation-derived product. Cherokee anticipates the program could eventually occupy 40 to 60% of its previously unused fermentation capacity.

Pilot-scale programs under way include some fermentation-derived agricultural products, which often get on a regulatory fast track when they are made by “green” methods, Bauer says. “They could be on the market as soon as next year and fill up our capacity to the 70 to 80% level,” he adds. In another plant at the site, Cherokee makes an antiparasitic crop protection product for a major agribusiness firm. The companies are discussing a long-term supply deal that might fully occupy that plant.

“Since the end of 2008, there has been substantial interest in the marketplace for fermentation capacity in the U.S., and Cherokee is one of the biggest merchant fermentation houses,” Bauer points out. “We also are very cost-competitive with the Asian market.”

By spending $15 million, the company is tripling capacity of a third facility, a multiproduct small-molecule API plant that, if fully utilized, could generate another $150 million to $175 million in business. Beyond expertise in making antibiotics, Cherokee can conduct a range of chemistries, such as handling toxic or potent compounds and high-hazard reactions.

Other capabilities on-site include a Merck-built technology center that has labs for process development and scale-up work. The center also houses kilogram-scale production under current Good Manufacturing Practice (cGMP) conditions.

“Customers are looking for a turnkey ability to support their programs from the development stage through to full commercialization,” Elliot says. They also desire what he calls a “low maintenance” supplier that doesn’t need a lot of hand-holding and can drive optimization and efficiencies to ensure competitive costs.

Cherokee has about 105,000 sq ft of warehouse facilities and has entered into a marketing and distribution partnership with SAFC, Sigma-Aldrich’s fine chemicals unit, to leverage them. Cherokee will provide analysis, testing, and warehousing of large-scale pharmaceutical raw materials under cGMP standards. SAFC is responsible for sourcing products, including reagents and excipients. Their target customers are pharmaceutical companies in the northeastern U.S.

All told, PRWT predicts that Cherokee has the potential to post sales of $625 million to $725 million per year. In 2008, Cherokee had sales of $83 million, about half of the service firm’s revenues. This year, PRWT sees that sales figure rising to $156 million, or 65% of its revenues. Having paid a fraction of that in cash and a seller loan, PRWT seems to be getting a good return.

The purchase “has met all our expectations and then some,” Lee says, and has whetted PRWT’s appetite for more business in the life sciences. About 178 acres at the Cherokee site are designated as a Keystone Opportunity Zone by the state of Pennsylvania. For 10 years, this status provides tax incentives that PRWT hopes will encourage small firms to build there. Lee says the vision—perhaps the story’s final chapter—is to build a life sciences campus.

But for Cherokee itself, PRWT leaves day-to-day business to Elliot and his team. Simply put, Elliot says, “the main plank of our strategy is to use the capabilities and capacities that exist on the Cherokee campus.” At the same time, he adds, “PRWT, by inclination and culture, is an entrepreneurial company, so we continually assess opportunities to expand our technical and geographic footprints.”

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