The Ups And Downs Of A One-stop Shop

Albany Molecular Research Inc. made two acquisitions earlier this year, purchasing Excelsyn, a pharmaceutical chemical manufacturer in Wales, and Hyaluron, a final-dosage drug formulator in Burlington, Mass. Both deals fit well with 
AMRI’s plan to increase its contract research and manufacturing business with large pharmaceutical firms, according to Chief Executive Officer Thomas E. D’Ambra.

AMRI’s moves were risky to begin with in a down economy. And as the year progressed, the firm faced unexpected challenges, including a Food & Drug Administration warning letter for the Hyaluron plant and an unfavorable arbitration ruling on a dispute with Borregaard Synthesis over the cancellation of a raw materials contract.

Reporting third-quarter earnings last month, D’Ambra spoke of a continuing shift of business in the pharmaceutical services sector to Asia and Europe—a shift reflected in the company’s growth overseas and concurrent falloff in domestic turnover. The 2% drop in revenues for the year to date compared with the same period in 2009 was largely attributed to the problems in Burlington.

“AMRI would have been within guidance, low range, if not for an FDA letter,” D’Ambra told analysts on an earnings conference call. The negative effect will drag on through the first quarter of next year, he said. “In 2011 we see growth. But the rest of this year will be tough.”

Tough times are nothing new for AMRI. D’Ambra suggests that the company he started in 1991 to offer medicinal chemistry to the drug industry can be viewed as nearing the end of a long uphill climb. AMRI has worked hard, he says, to put all the pieces in place for a one-stop-shop approach to pharmaceutical services. However, some industry watchers question whether the pieces are in the right places.

AMRI grew rapidly through a series of acquisitions in the 1990s and early 2000s. The company purchased a natural products drug discovery operation in Bothel, Wash.; a combinatorial chemistry business in Budapest; and a commercial-scale active pharmaceutical ingredient (API) plant near its Albany, N.Y., headquarters. In 2004, it embarked on a big push in Asia, establishing research and small-scale manufacturing operations in Singapore and India.

Publicly traded for 11 years now, AMRI has amassed bioanalytical, in vitro biology, and drug discovery services as well as API manufacturing. With the recent acquisitions, all AMRI needs is animal testing to run the full gamut of pharmaceutical contract services, D’Ambra says. AMRI had a deal on its radar in recent weeks, he adds, but is holding back for now.

Discussing the logic behind the company’s recent acquisitions and its prospects for returning to growth, D’Ambra tells C&EN that there are two routes forward. “One is to do more of what we are currently doing,” he says. “But we can also expand horizontally by adding services that complement what we do today.”

In that regard, adding finished-dosage drug formulation capability was a logical next step, he says. “A lot of customers that outsource APIs are also outsourcing drug products.”

D’Ambra notes that the company’s in vitro biology services enhance a single-source contract model that includes a combination of API and formulation development. The Burlington plant’s specialization in sterile fill-and-finish for injectable drugs also positions AMRI well for a raft of cancer therapies in big pharma pipelines. And he says it is fair to view the lyophilization capabilities in Burlington as a signal that the company may expand into biologics.

In addition to revenue from its service offerings, AMRI receives royalties on Sanofi-Aventis’ allergy medicine Allegra, stemming from AMRI’s serendipitous discovery of a new route to producing fexofenadrine, the drug’s active ingredient, which it patented in 1995.

Allegra went on to become a blockbuster. Royalties averaging $30 million per year have helped support AMRI’s $12 million to $13 million annual R&D budget and have fueled the company’s global expansion, according to D’Ambra. “We have spent $30 million in Asia in the last several years,” he says. But the two patents associated with Allegra expire in 2013 and 2015. The plan is for AMRI to make up for the inevitable revenue loss with a new royalties stream from drugs it has been developing on its own since 2004, D’Ambra says.

A biogenic amines program for central nervous system therapies that AMRI licensed to Bristol Myers-Squibb is in Phase I clinical trials. AMRI also runs a Phase I tubulin inhibitor program for oncology, for which it is seeking a partner. An obesity compound is nearing the end of Phase I, and the company has three other programs—for obesity, irritable bowel syndrome, and schizophrenia—at varying stages of preclinical development. Bruce J. Sargent, AMRI’s vice president of discovery R&D, says the firm hopes by next year to have clinical data that will be attractive to licensing partners for its obesity and oncology programs.

Sargent affirms that one of his main objectives is to establish a steady stream of royalties to replace those from Allegra. “I would like to think that will happen within three or four years of the expiration of the Allegra patents,” he says.

Describing his purview as “responsibility for all the company’s nonchemical activities,” Sargent says he sees a growing role for biological testing as well as drug absorption, distribution, metabolism, excretion, and toxicity (ADMET) testing as customers access multiple services from AMRI’s menu. “In the past,” he says, “customers called and asked us to make molecules. Now, more and more, biology is seen as the gateway to AMRI.” In addition to natural products, he notes, the Bothel acquisition netted AMRI a large library of small molecules for screening.

Michael P. Trova, senior vice president for chemistry at AMRI, also attests to the company’s success at marketing a global network of services that combine a cost advantage with a high level of technical proficiency. “Many of our customers like their projects done with portions in different countries, having our U.S. project management overseeing the global effort,” he says. “It may not be the absolute cheapest approach, but it provides good value and good to excellent performance.”

Trova emphasizes that the main determinants of value in the drug industry are research cycle time and the ultimate quality of compounds. “Big pharma does not make money on the number of compounds per chemist per year,” he says, “but on the number of pharmaceutical agents they can sell. Our objective is to make the very best compounds that have the best likelihood of making it into human testing.”

Still, some analysts claim that AMRI is at an increasing competitive disadvantage compared with companies operating in China, where activity is accelerating as concerns with quality of chemistry and protection of intellectual property fade.

D’Ambra shrugs this off, pointing to AMRI’s rapid growth in India and Singapore, where it has staffs of about 150 each. Indeed, the firm’s U.S. staff was cut by about 15% this year while Asian operations nearly doubled. The move offshore, he notes, reflects an industry trend that began after 2008, AMRI’s most profitable year. In 2008 the company’s revenues reached $229 million, a 19% increase over 2007. In contrast, revenues dropped by 11% last year.

James Bruno, president of consulting firm Chemical & Pharmaceutical Solutions, says it is reasonable for AMRI to be optimistic about a pickup in business next year as the overall market improves. “As I understand it, their large-scale manufacturing is doing well, though their overall business is down,” he says. “From that perspective, it would seem some of their projects are moving forward to a semicommercial if not commercial stage.”

However, Bruno says it is turning out that China may have been the better place for AMRI to have gotten started in Asia. “Ten years ago, there was not a single product coming out of China. Now there are a lot,” he says, noting that major drug companies such as Eli Lilly & Co. have committed more outsourcing to China. “I think AMRI lost the Chinese market and that China will be bigger than India. But they did get into India at the right time.”

David Windley, a stock analyst with Jefferies & Co., is critical of the recent acquisitions. AMRI, he contends, purchased technologies and services that will, like others the company has gathered in the U.S., eventually move to Asia. “I’m agnostic about India versus China,” he says. “But I’m not agnostic about Wales and Massachusetts versus India and China.”

D’Ambra responds that the chemical manufacturing assets in Europe are essential to a global contracting business and that final-dose manufacturing of injectable drugs is one of the least likely services to migrate away from the U.S. and Europe. AMRI is not about to begin building in China given its established base in India and Singapore, he adds.

Getting the company back on its 2008 growth path is D’Ambra’s main goal, and he claims to have a good feeling about it. “I think we hit bottom in the third quarter, and we are beginning to see an uptick in proposals for our U.S. operations,” he says. “As we look to 2011, there is an indication that we are going to start to grow again.”