When the road gets rocky, it pays to have an experienced driver behind the wheel. Faced with a looming decline in business, the custom pharmaceutical chemical manufacturer Ash Stevens is expanding, much as it did when approaching similar potholes in 2000.
Back then, one of the four approved products the company was making for drug industry customers was about to lose patent protection. With a sales drop imminent, President Stephen A. Munk convinced Ash Stevens’ board to quickly invest about $13 million—more than the firm’s annual sales—to add capabilities and help bring new business to its Riverview, Mich., manufacturing site.
The plan worked, and Ash Stevens rode out the patent loss. In fact, in the fiscal year that ended on Sept. 30, 2010, sales grew 15% to a record level of more than $23 million. But 2011 will again be bumpy for Munk, because Ash Stevens makes the active pharmaceutical ingredient (API) for Celgene’s cancer drug Vidaza, which will lose orphan drug exclusivity.
“Like so many in our industry, when our clients face a patent cliff, we face a patent cliff, but we have lived through this before,” Munk says. He hopes that a $20 million investment will again bring success, and he is confident that the company is prepared. “Today we have a bigger management team and a much more solid infrastructure, along with 11 approved products and a broader customer base,” he explains.
It’s a big shift from Ash Stevens’ origins as a laboratory operation founded in Detroit by Wayne State University chemistry professor Calvin L. Stevens and WSU alumnus Arthur B. Ash. Set up in 1962, the company was the first occupant in one of the first university-sponsored research parks. Ash was involved in the firm’s day-to-day management until his death in 1994, and Stevens, age 87, still serves as chairman. The Ash and Stevens families are the majority owners.
Initially, the company provided contract research services to federal agencies such as the National Institutes of Health and the National Cancer Institute. “The strategy was to conduct excellent science and use word of mouth as the principal driver of growth,” Munk says. Trained as a chemist, he joined Ash Stevens in 1997 as vice president for research. He became president in 1998 and added the chief executive officer title in 2002.
For a small company, the amount of money Ash Stevens will spend is a lot, Munk admits, but most of the expansion is to be self-funded. “Our board has been very generous in allowing us to retain earnings, save the money, and spend,” he says, calling it one of the benefits of not being owned by venture capitalists or other financial investors. Munk also acknowledges the state and the Michigan Economic Development Corp. for supporting expansion and providing tax abatements to make it possible.
Being a privately held firm can have its advantages, including some independence in decision-making, agrees Howard J. Foote, principal of the consulting firm Meadowbrook Associates. “Not being owned by a large company is positive in terms of selling to both big pharma and smaller customers,” he says, “as long as the company keeps itself in good shape financially.”
Although Ash Stevens’ business will increase in scale, Munk doesn’t expect it to stray far from its roots. For the time being, the company will remain focused on small-molecule chemistry, particularly its strength in synthesizing highly potent compounds. About two-thirds of the APIs the company manufactures go into the growing oncology drug market.
Highly potent APIs are small-volume products, ranging from tens of kilos to a few metric tons per year. Although the volumes are attractive for small operations, “it tends to be difficult chemistry, and the compounds have to be handled properly,” Munk says. “We have a very bulletproof industrial hygiene program that we have developed internally.”
With its largest reactors at 300 and 500 gal, Ash Stevens can make a total of 1 to 2 metric tons of API material per year. The new expansion program will allow it to produce larger batches, compete for bigger projects, and be more cost competitive. “At the end of the project we’d like to be able to produce a total of 5 to 10 metric tons per year, spread over quite a number of projects,” Munk explains.
Earlier this year, the company brought a $2 million commercial-scale hydrogenation unit on-line, and it just finished building a 10,000-sq-ft warehouse and materials-handling facility at a cost of $3 million. This addition freed up space to add a lab for solid-state analysis and a bay for larger reaction vessels, which will cost another $12 million. By Dec. 1, engineering should be complete for installing 500-, 750-, and 1,000-gal reactors and a large filter dryer under high-containment conditions.
Construction is expected to start in 2011, and the new operations should be ready in about two years, Munk says. “Once we bring the large-scale equipment on-line, our plan is to complete the purchase of some land and consolidate our laboratories.” This step will involve moving its remaining Detroit staff, including eight scientists, to Riverview.
In the past 15 months, Ash Stevens has hired eight people for a total of about 70 employees. Once the latest expansion is complete, “we’ll have to double our staff to properly occupy and utilize the capital that we have spent,” Munk says, a process he expects to take about five years. The company has already benefited by hiring people who were let go during the downsizing of drug industry operations in the Midwest.
At its current size, Ash Stevens is fairly lean, and most employees have a hand in the business. “Everyone’s very close to the bench,” Munk likes to say. Even as CEO his concerns are beyond the bottom line. “The goal has to be good science and regulatory compliance. If you get good science done, meet timelines, and manage products well, you will be able to make money,” he says.
Small contract manufacturing firms about the size of Ash Stevens dot the U.S. landscape, Foote, the consultant, points out, and many of them happen to be situated in the Midwest. But he cautions about attempts to expand, noting that some overly ambitious firms have ended up struggling or being acquired.
Making highly potent compounds can be a lucrative business for small firms, Foote says, but moving into larger reactors means stepping into a new league. “When you get up to 1,000 gal, you have to deal with a number of issues that you wouldn’t have when you are doing 100-gal reactions,” he explains. “You really have to have a facility that protects the employees and protects the environment.”
Beyond these concerns, new logistical and business issues will emerge. “You’ll likely be working with bigger companies, and they have serious expectations,” Foote points out. “Some small companies have gotten themselves in trouble by not meeting clients’ expectations.”
Ash Stevens views its expansion as a means to retain existing clients and win new ones that require larger capabilities. In particular, it is aiming to get a foot in the door with big pharma companies that typically work with a core group of contract firms. “You have only one chance to make a good first impression. If not, you are done, because there is so much competition that it is very difficult to get a customer back,” says Vince Ammoscato, vice president for operations.
“You really need to have your systems in place because there is a lot of scrutiny when you work with big pharma,” he says. On the plus side, Ammoscato adds, Ash Stevens is benefiting from an increase in outsourcing by the large companies.
Ash Stevens also has seen an upturn in the number of early-stage drug development projects it is running, despite a paucity of them in the marketplace. “The beginning of 2009 was the worst, and it has just been a slow steady recovery,” says James M. Hamby, vice president for business development. “We get a lot of repeat business, so many clients who are bringing on their second or third products tend to stay with us.”
Several years ago, Munk was not as enthusiastic as he is now about being a U.S.-based custom manufacturer. His concerns centered on a shift by customers to low-cost providers in India and China. “The good news is that a lot of that work is coming back to the states,” he says. “I think people are realizing the true cost of project management halfway around the world, and it makes it a little more cost competitive to be in the states, Canada, or Europe.” Some customers, he adds, also want their potent materials handled within the U.S.
Foote suggests that “there’s a real place” for small U.S.-based custom manufacturers. They can be comfortable-sized partners for small biotech companies and attractive to big firms that want to have more clout. “Pharma companies can easily keep track of projects and quality, and there aren’t three levels separating who you are talking to from where the work is getting done,” he says.