The nondisclosure agreement is a defining feature of business between drug companies and the firms that supply their chemicals. It reflects a culture of secrecy that makes pharma companies loath to reveal their suppliers of fine chemicals and active pharmaceutical ingredients (APIs). It’s not surprising, then, that unsubstantiated anecdotes abound in any discussion of trends in contract manufacturing of pharmaceutical chemicals.
One of the most prominent claims lately has been that business is looking up in Europe and the U.S. because a lot of the work that used to be outsourced to China is returning to the West. Fine chemicals firms claim that Western drug companies have learned through experience that doing business with a supplier on the other side of the world is not as much of a bargain as had been perceived.
The firms also argue that drug companies have growing safety concerns following scandals such as the 2007 case of contaminated heparin from China that killed more than 80 people. And as China responds to drug safety problems, regulatory oversight is increasing, adding to costs.
Some major drug firms, however, deny there’s a move. “We are not actively looking to move manufacturing back from China,” says Paul Duffy, vice president of external supply at Pfizer. The company has one plant of its own in China and sources intermediates from contract manufacturers there.
Western chemical suppliers offer little substantive evidence of the supposed shift, and most concede that it is difficult to generalize: Trends play out differently for APIs and chemical intermediates, as well as for patented and generic drugs. Even those who contend that the balance between East and West is shifting are far from counting China out. Chinese companies themselves say they are in the game more than ever.
“I would agree that you hear these anecdotes,” says Guy Villax, chief executive officer of Hovione, a Portuguese contract manufacturing organization, or CMO. “The costs are rising in Asia, and therefore the delta is not as good as it used to be,” says Villax, whose company owns a plant in Macau. “But I have been saying for years that it’s a big mistake to refer to the ‘Indians’ and the ‘Chinese’ and the ‘Europeans.’ Because in all these regions you have good, competent people—and then you have the others.”
Aslam Malik, president of California-based Ampac Fine Chemicals, contends that a westward shift is under way and, without naming names, says Ampac has been a beneficiary. But Malik also warns against generalizations. “There are very good companies in China,” he says. “The reasons they are good is that they have their eye on regulatory compliance and safety. And they have a Western staff.”
Indeed, the Chinese companies most frequently named by Western API suppliers as serious competitors—Asymchem, Porton, and WuXi AppTec—have close ties to the West. The three firms, each of which claims to be experiencing double-digit sales growth, emphasize their adherence to Western standards of safety and quality. They also point to aspects of their business that they claim distinguish them from other Chinese firms: All supplement manufacturing with research and other services, and all seek to establish long-term partnerships with drugmakers.
Asymchem’s CEO, Hao Hong, founded the company in North Carolina in 1995 after finishing a postdoc at the University of Georgia, Athens. He focused on kilo-scale custom synthesis, signing on customers such as Merck & Co. and Pfizer. As the business grew, he started contracting with manufacturers in China for chemical intermediates before setting up his own operation in Tianjin. The firm entered API manufacturing in 2005.
Asymchem has since expanded to four sites, establishing high-potency API manufacturing at one site in Tianjin, R&D and multipurpose manufacturing at a second site there, β-lactam manufacturing in Fuxin, and commercial-scale manufacturing in Dunhua. Asymchem moved its headquarters to Tianjin three years ago, keeping North Carolina as a U.S. sales and marketing base.
Elut Hsu, president of the company’s U.S. operation, insists that cost is still a major incentive for large companies to buy material from China. “It would be very surprising if there was a shift back to Western suppliers,” she says. Most of Asymchem’s competition comes from Indian and other Chinese producers, Hsu says. “The only way pharma can save money is by shifting production away from Western Europe and the U.S.”
That said, signing up major drug companies requires being able to supply manufacturing-related services, Hsu says. Asymchem has specialized in process development from its inception and has since added drug formulation as well as enzyme chemistry and biocatalysis capabilities. “You can’t compete by just being the lowest cost manufacturer out there,” she says. “You have to be able to add value.”
More than half of Asymchem’s revenue comes from commercial-scale production, Hong says, with the balance accruing from associated services. Growth has been averaging 30% per year, he claims.
A more recent entry in the Chinese CMO world, Porton was launched in 2004 by Oliver Ju, who had previously worked for six years at AkzoNobel. “At first, I had no idea of the CMO business,” Ju says. “I was just making pharmaceutical chemicals. But in 2005, we realized that CMO is a very special segment in the pharma industry.” The defining principle, according to Ju, is long-term service-based partnerships.
The trick was to establish a Western-style partnering strategy, Ju says. “It’s taken us years to figure out how to offer the same level of service. I think first of all you need good people who understand the business, and you need to create the right business process and the right culture.”
Ju realized in 2008 that Porton would also need U.S. and European sales offices. The company hired a salesperson in New Jersey and another one in Belgium. “Things started to click,” Ju says. “Personnel and talent started to mesh with customers, and the investment in the plant allowed us to produce reliably and safely.”
Today the company operates two plants in Chongqing, including a kilogram-scale lab launched in 2008. Porton also manufactures drug intermediates and starting materials at commercial scale. Ju says 80% of the work can be characterized as “general chemistry,” but Porton has developed areas of specialization including chiral technology, biocatalysis, and asymmetric hydrogenation.
With annual sales of $110 million, Porton is experiencing annual growth of more than 30%. Porton expects to take another step forward later this year when it opens a $30 million commercial-scale API facility, also in Chongqing.
WuXi is an even more recent entrant into custom manufacturing. The firm has been in business for almost a decade but focused for much of that time on research and clinical trial services. The commercial manufacturing business is headed by Minzhang Chen, who worked for 18 years in the U.S. as a process chemist at Schering-Plough and then as director of technical operations at Vertex Pharmaceuticals before coming to WuXi in 2008.
“We started as a development services and R&D-scale manufacturing company back in 2004,” Chen says about WuXi. “As our client base broadened and drug candidates moved to later stages, larger-scale manufacturing—even commercial-scale—was a natural move for WuXi.”
Today, the company is manufacturing intermediates for six commercialized drugs and intermediates and APIs for another seven in Phase III clinical trials. WuXi invested $50 million in its new manufacturing site in Shanghai. The company currently supplies only advanced intermediates at the commercial scale, “but we want to be one of the first CMOs in China able to manufacture new chemical entity APIs for the global market,” Chen says.
He says the company hopes to have the plant inspected by the U.S. Food & Drug Administration this summer.
Executives at Asymchem, Porton, and WuXi agree that the cost of doing business is rising in China, but they say the country still offers significant cost advantages. “The government says it wants salaries to double in the next 10 years,” Porton’s Ju says. “But salaries now are only about $500 per month.”
The fortune of CMOs operating in China will depend, ultimately, on decisions made by large drug companies about where they will source chemicals and APIs. Many drug firms continue to produce APIs at their own facilities, despite the downsizing of manufacturing operations. Major drug companies also have established relationships with CMOs in both the West and Asia, and they have no plans to change this.
Pfizer’s Duffy acknowledges increased concerns about the safety of pharmaceutical chemicals coming from Asia. “It raises questions in people’s minds,” he says. “But from our point of view, we put a lot of time and due diligence into selecting our vendors.”
Executives with Chinese CMOs say they are confident that business will continue to grow despite rising costs and increased scrutiny of supply-chain safety.
“I think most of our pharma customers know that there are a lot of companies in China and that there is a big difference between the good ones and the less competent companies,” Porton’s Ju says. The trick for a Chinese CMO is to establish itself in the top tier, among the companies with which Western firms are willing to do business. “We don’t see a negative image of China because of heparin,” Ju says. “We see pharma companies still looking for partners.”