Transforming Siegfried

The Swiss pharmaceutical chemical firm Siegfried has an enviable problem, according to Chief Executive Officer Rudolf Hanko. The company needs to combine separate businesses in active pharmaceutical ingredient (API) manufacturing and finished dose drug formulation—activities that have synergies as well as fundamental technology differences. Once the integration is complete, however, Siegfried may have a winning combination of services for the pharmaceutical industry.

The ability to offer API and formulation services—sometimes called primary and secondary manufacturing, respectively—is emerging as a strategic strength in the pharmaceutical chemical field, and one that few companies can claim. Indeed, industry leaders Lonza and Albany Molecular Research have pursued this business model via acquisition in recent months. For Siegfried, it is a matter of integrating existing operations.

Hanko, formerly a fine chemicals executive at both Bayer and Degussa, joined Siegfried early last year as the company was launching a reorganization sparked by a 9% drop in 2008 sales. With sales of $275 million that year, the firm embarked upon process improvement and manufacturing streamlining under a plan it called “Deliver.” When Hanko came on board, however, he looked at the separate tracks for the firm’s API and formulation businesses and proposed a more radical plan called “Transform.”

Reorganization at Siegfried is largely a matter of coming to grips with the company’s history, Hanko says. Founded in 1873, Siegfried originally developed as a small drug company producing generics and controlled substances. By the 1990s, the company had begun vigorously pursuing contract manufacturing of patented APIs just as the market for custom fine chemicals was taking off. Custom API production developed as a second division within the company alongside the generics business, which included its formulation activities.

Now several months into his second year as CEO, Hanko has overseen a range of actions to improve performance, including reducing the firm’s workforce by 10% and looking for a partner for its inhaler technology division. Given the impact of the recession on Siegfried and its customers, who are making big changes in their supply chains, Hanko says cash management has been his guiding principle.

The company achieved sales of $271 million last year, a 2% drop from 2008. The API division, however, grew 15% to $209 million.

Hanko’s first major step in combining Siegfried’s two divisions was to establish a single research analytics group. “This idea came out of an analysis of our manufacturing streams,” he says. “We said we could become considerably faster by having an integrated analytics team covering everything we have to do from development to full-scale manufacturing work.”

The company invested approximately $16 million in a new laboratory to accommodate a central analytical research operation combining not only the analytics departments of the two divisions, but also several isolated research teams within the divisions. “Bringing these people together greatly enhances our flexibility in responding to changing schedules and capacity needs in our overall process,” Hanko says.

Now, he is hoping to generate even greater efficiencies by closing the gap between primary and secondary manufacturing. Currently, the company does most of its secondary manufacturing at its headquarters in Zofingen and at a $30 million plant in Malta that went into production in 2007.

In Malta, a small island nation in the Mediterranean Sea, the company takes advantage of low-cost operations to market its formulation services without on-site API production. In Zofingen, Hanko wants API and secondary manufacturing to be marketed in tandem.

And he wants to expand secondary manufacturing in Zofingen, adding capacity for high-potency-drug formulation and sterile filling. Hanko says the company is evaluating three possible plans for expanding secondary manufacturing at Zofingen, and he wants to complete the project by 2012.

The combined manufacturing model is likely to gain momentum with technology shifts in drug development, Hanko argues. “Look at the new drugs entering the market,” he says. “They involve very complex molecules, and formulation goes way beyond basic tablets. There is everything from timed release to injectables and prefilled syringes. There is a broadening of technology on both the API and secondary manufacturing side.” As drug firms focus on reducing costs, they will seek improved logistics between primary and secondary manufacturing, he says.

In fact, Hanko adds, customers have in recent years been asking Siegfried to coordinate the two in Zofingen. He says the company needs to pick up on this push from customers to better articulate a “unique selling point” that most other firms don’t have.

“We are not starting from scratch and saying we are building a new company,” Hanko points out. “It is more a reconstruction project—disassembling and reassembling, reorganizing to make our skill sets work together.”

James Bruno, president of consulting firm Chemical & Pharmaceutical Solutions, sees the elimination of separate divisions at Siegfried as a good move. “I don’t think Siegfried capitalized on synergies between the different groups,” says Bruno, who worked for Siegfried in New York 30 years ago. “Now they are trying to reconcile these businesses. And I have to say, Rudy is doing a good job.”

However, although demand is growing for drug formulation services, there are formidable hurdles to combining API production with secondary manufacturing, notes Peter Pollak, a fine chemicals consultant based in Switzerland. “The technologies for primary and secondary manufacturing are totally different,” he says. “And big pharma companies want to pick independently the best primary and the best secondary manufacturing options for a given product—or even to do one of them in-house. I would be surprised if Siegfried generates more than 10 to 20% of sales from products that it both manufactured and formulated.”

Hanko agrees that the two services are fundamentally different. “But our customers have signaled us that they want both,” he says. “We have come to the conclusion that the next step to making manufacturing more efficient is to integrate primary and secondary manufacturing.”

The differences between API production and formulation may even work in Siegfried’s favor, Hanko says, in that API specialists will not easily master secondary manufacturing. “I think the days are over when companies say that because they have been succeeding for years at business model A, they can just jump into business model B and succeed there as well,” he says. Had it not already spent years establishing its formulation expertise, Hanko adds, Siegfried would think twice about getting into the business.