Issue Date: November 9, 2009
Peter Pollak, who headed the fine chemicals division of Lonza in the 1990s, is one of the founding fathers of the contract pharmaceutical chemicals industry. One might call him the Thomas Jefferson of the industry, given his seminal vision of a new wing of the fine chemicals sector that would specialize in the production of active pharmaceutical ingredients (APIs) for major drug companies. Pollak put this view into practice by helping establish Lonza as a leader in the new field.
By the time Pollak left Lonza in 1999, contract manufacturing of fine chemicals was viewed as a viable business, one with so much potential for growth that diversified chemical producers ranging from Dow Chemical to Rhodia lined up to pay exorbitant sums for pharmaceutical chemical businesses. Pollak, who has worked as a consultant for the past 10 years, covered the bust that followed in his book "Fine Chemicals: The Industry and the Business," published in 2007 by John Wiley & Sons (C&EN, Sept. 24, 2007, page 110).
C&EN caught up with Pollak at the CPhI pharmaceutical ingredients conference in Madrid last month to discuss recent changes in a still-evolving industry—changes that will result in rewritten chapters and one additional chapter in a new edition of his book, due out in 2011. One big change has to do with where Pollak could be found at the conference—at the exhibit floor booth of Hikal, an Indian fine chemicals firm that recently launched a contract research operation. Pollak is on the company's board of directors.
"If you look at the market for APIs, it is about $90 billion," Pollak says. "About 25% of that has been outsourced, but that has risen recently by another 10%." Much of the new business, he said, will go to Asian producers, primarily in India.
He sees a more important shift, however. "The pharmaceutical industry no longer views the manufacturing of APIs as its core function," Pollak says. A significant move away from manufacturing has occurred over the past two years with firms such as AstraZeneca, Merck & Co., and Pfizer selling plants and committing to higher levels of outsourced production. This shift, he says, creates not only greater demand for contract services but also an opportunity for service firms to acquire drugmakers' manufacturing assets.
More outsourcing, however, serves largely to offset the dramatic decrease in New Drug Applications since the early 1990s. Contract manufacturing has shifted from a seller's to a buyer's market, Pollak says. The field has also diversified, with much of the business now coming from virtual pharmaceutical companies.
The virtual companies, with no assets at all, are numerous enough to constitute the "second best" market for pharmaceutical chemicals after big pharma, Pollak says. But the risks are high, given the virtual firms' dependence on venture capital and the difficulty in assessing whether their drug candidates will succeed.
Biopharmaceutical firms present another opportunity: the emergence of generic biologic drugs, or biosimilars, which Pollak will cover in the new chapter of his book.
Taking all these changes into account, Pollak says that a clear path forward for pharmaceutical chemical firms has emerged, one that favors independently owned, preferably family-owned, companies with some manufacturing operations in Asia. He mentions Lisbon-based Hovione as an example of the kind of risk-taking entrepreneurial firm that finds itself in a good position.
Hovione has shown a willingness to make investments that may take years to become profitable, Pollak notes, including the purchase of a plant in China and a Pfizer plant in Ireland. Italy's FIS, Pollak says, is another family-owned firm positioned for growth, although he is quick to point out that FIS does not own Asian production, an important part of what he sees as a forward-looking strategy, given the cost of production in the West.
Pollak has never hesitated to criticize the fine chemicals industry; his views are controversial and often provocative. "I'll make a broad statement," he says. "Western firms should not invest in building new plants. If they need capacity, they can buy it from a pharmaceutical company for a handful of rice." Cambridge Major Laboratories' new plant in Wisconsin, a $30 million investment that spotlighted the moxie of founder Michael Major, might be an exception to the rule, he concedes.
Pollak is skeptical regarding his former employer's bid for Patheon, a finished dosage pharmaceutical manufacturer. (Lonza dropped the bid after a big Patheon shareholder balked.) Although many in the industry say adding drug formulation services to API production is the wave of the future—DSM and Siegfried already offer formulation—Pollak contends that the move does not make sense. "Making pills is a terrible commodity service," he says. "You won't make any money."
The path forward, even for companies that follow his prescription, is risky, Pollak acknowledges. Despite holding Hovione up as an example of how to proceed, Pollak famously sent Hovione Chief Executive Officer Guy Villax a Christmas card last year with a bulleted list of reasons that the Pfizer acquisition may be a mistake. Pollak's card noted that Hovione now has four sites to worry about and that drug companies don't run assets such as those in Ireland to make money.
But the level of risk clearly fascinates Pollak, who, at 74, says he can finally claim a victory in helping establish a service sector to support a changing drug industry. "I always dreamed—hoped, expected—that big pharma would move from purely opportunistic to strategic outsourcing of chemical manufacturing," he says. "Now, a dream has become true—albeit 20 years later than expected."
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