In 2009, when Lonza made a bid to acquire Patheon, a contract manufacturer of drugs in final dosage form, industry watchers shook their heads and said, “Nope.”
Such an acquisition didn’t make sense, given the fundamental differences between Lonza’s main business, the manufacture of active pharmaceutical ingredients (APIs), and Patheon’s production of finished drugs. Many viewed it as a step too far in a trend, heating up at the time, of API manufacturers adding service components to their business via acquisition. And, sure enough, the deal fell through.
Last November, however, a successful deal was struck between Patheon and the Dutch chemical company DSM. The two formed a new firm, DPx, consisting of DSM Fine Chemicals, Patheon, and Banner Life Sciences, a manufacturer of over-the-counter drugs that Patheon acquired in 2012.
The combination seems less surprising than when Lonza proposed its version of it four years ago. Any eyebrows raised over the current deal had to do with DSM’s decision to exit the fine chemicals business, and not the deal itself. Overall, the deal sent a strong message that manufacturing APIs is no longer enough, that the business is trending toward contractors that can cover the entire life cycle of drug development from early-stage process design through to commercial-scale API manufacturing and finished-dosage formulation.
The DSM-Patheon deal followed by one month a similar, if smaller, one: the acquisition of the pharmaceutical chemical maker Cambridge Major Laboratories by AAIPharma Services, a contracting firm offering analytical and final dosage formulation services.
Major milestones in the evolution of contract drug research and manufacturing.
1999 Rosy Deutsche Bank report about industry draws in several major chemical companies.
2003 Uneven growth and competition from China causes many of these firms to drop out.
2004 Companies pursue specialized technology as a means to compete, through deals such as the merger of Novasep and Dynamic Synthesis.
2009 Attention turns to services beyond chemical synthesis, such as spray drying and solid-state services.
2012 R&D spending by big pharma falls, business moves back from China, and the one-stop-shop business model advances via firms such as Aptuit and WuXi AppTec.
2014 Mergers of DSM and Patheon and of Cambridge Major and AAIPharma Services highlight contract manufacturers’ push for full coverage of the pharmaceutical life cycle.
And earlier this month, Albany Molecular Research Inc. bought Oso Biopharmaceuticals Manufacturing, a contract manufacturer of highly complex injectable drugs. The purchase continued a push by AMRI, historically a pharmaceutical chemical research and manufacturing operation, into finished-dose products.
The uptick in mergers is viewed by some industry watchers as a sign that a long-awaited round of consolidation is starting in fine chemicals and other services for the drug industry. What is more apparent, however, is the emergence of the contract development and manufacturing organization (CDMO), a business model melding contract manufacturing with support services including process development, analytical chemistry, and final drug production.
The advent of yet another new business model is perhaps not surprising for the pharmaceutical chemical sector, which has seen multiple changes in the makeup and modus operandi of its players. Most major chemical companies once tried to serve the market, and nearly all of them withdrew, unable to navigate the high-technology, high-risk seas. The smaller specialists that remain also have experienced ups and downs as they adjust to a shift in the sector’s customer base from 10 or so big pharma companies to myriad biotech and virtual pharma firms.
And as big pharma cuts back on research and cedes more innovation to smaller firms, the entire industry will need a lot more support in research, process development, analytical services, and manufacturing, executives say. They point to the recent acquisitions as an attempt by manufacturing companies to broaden their portfolios to provide this support.
“Do I see a trend? The short answer is yes,” says Rudolf Hanko, chief executive officer of Siegfried, a Swiss API producer. Contract research organizations (CROs) have been investing in large-scale manufacturing at the same time that commercial-scale API makers have been building up R&D and other services. Siegfried, for example, purchased Alliance Medical Products, a California-based sterile-filling specialist, in 2012.
“At the end, you might end up somewhere in the middle,” Hanko says. “This is a logical step, if you look at our customers. They don’t want to have different suppliers for the more development-driven activities versus the large-scale activities. You would like to avoid a handover.”
Guy Villax, CEO of the Portuguese contractor Hovione, agrees. “You obviously save on tech transfer, and you can have tremendous benefit in combining process development and scale-up with the manufacture of clinical trial materials,” he says. “If you combine all this as a service, and you’re lining up with a manufacturing mind-set to become the launch site, this is optimum. You gain time.”
Hovione has been adding nonmanufacturing capabilities for the past several years. For example, internally, it has been building up services in drug particle design and inhalation technology. And when Hovione acquired a Pfizer pharmaceutical chemical plant in Cork, Ireland, in 2008, the company also got new capacity in spray drying, a service it had been offering at its plants in Lisbon and East Windsor, N.J. With the emergence of comprehensive contracting services, Villax says, the industry has reached maturity. “We are now in the world that Peter Pollak predicted 15 years ago,” he says, referring to an eminent consultant to the pharmaceutical chemical industry who once led Lonza’s fine chemicals business. “In other words, outsourcing today has become absolutely strategic. It is no longer opportunistic; it is no longer tactical. Big pharma is no longer allowed to spend zillions in capital expenditure to prepare for launch. There is too much risk. They have to use contractors.”
This realization is not lost on firms that started out as mainly CROs. Companies such as WuXi AppTec are pursuing the CDMO business model by adding larger-scale manufacturing capacity.
“We started as a CRO in early-stage process development and making materials for clinical trials,” says Mingzhang Chen, general manager of process R&D and API manufacturing at WuXi AppTec. “Now, as our programs move into later-stage development and commercialization, the contract manufacturing model is a natural extension of our business.”
Currently, WuXi operates at two sites in Shanghai, one for R&D and one for large-scale manufacturing. The company, however, is building a new site about 100 miles from the city at which it will offer services “from beginning to end,” Chen says. The new facility will triple the firm’s capacity.
It was the desire to offer a comprehensive range of services that pushed DSM and Patheon to form DPx. Lukas Utiger, a former DSM executive who now heads DPx’s API operations, says the API manufacturing business has broadened considerably since the early 2000s to cover all phases of clinical trial supply and commercial-scale manufacturing. The combination of API and finished-form drug production was a logical next step.
“Now you need an organization that is strong enough and has enough skill to pull it off,” Utiger says. “Everyone claims they can do life-cycle management. Only a couple of firms have the skills to do it.”
He acknowledges that DPx is running two essentially different businesses with varying levels of complexity in both science and business. Most of the manufacturing aspects of the API and fill-and-finish operations are run separately, though all of DPx’s business conforms to one quality standard, and some operational functions, such as purchasing, have been centralized.
DPx is studying future acquisitions, Utiger says. “We will not stop here, but there is always the question of whether you want to build it yourself or buy it.” The build-or-buy decision will hinge on the complexity of the technology involved and the logistics of adding a new location to the DPx network. In fill and finish, he says, a company can operate efficiently with several small sites, whereas some API manufacturing requires a single site offering multiple chemistries.
Utiger acknowledges that the former DSM division will need to completely change its mind-set to act like a CDMO and pursue business with Patheon’s 400 customers. “We had significantly fewer at DSM, where we focused on the top 10 big pharma companies,” he says. Now the API division will need to pursue smaller companies with completely different business models.
“We will stay active with the big pharma customers,” Utiger says, “but there is a whole new market we can really explore now with a large sales force and the contacts already made.”
Michael Lehmann, president of pharmaceutical development services at Patheon, says the CDMO model is emerging naturally in an environment where small and virtual drug companies proliferate and big pharma is scaling back on research and manufacturing. “Just as our clients are going through a transformation, I think our piece of the industry is going through a transformation,” he says. “Customers want ‘simpler’ and ‘faster,’ and that pushes us forward to develop a comprehensive offering.”
AAIPharma and Cambridge Major are similarly adjusting to becoming a business that offers both API and finished-product manufacturing, plus associated services. Susan Nestegard, CEO of CML Pharmaceuticals, a holding company that owns the two units, says communicating the combined firm’s full-service expertise is important, even though that expertise won’t be a fit for all customers.
“We understand that offering end-to-end service may not be what every customer wants,” Nestegard says, but she sees the drug industry moving generally in this direction.
In combining API manufacturing with finished-dosage-form production and other nonsynthesis services, DPx and CML are following the lead of Almac, a Northern Ireland-based pharmaceutical services firm that was among the first to create a wide-ranging business.
In 2010, the company launched a program it called Rapidd, which can take a customer’s preclinical compound through Phase I clinical trials with services including API synthesis, toxicology batch production, solid-state analysis and polymorph screening, formulation, and radiolabeling. More recently, the company has drawn from its pharmaceutical chemical and drug product divisions to extend coverage to late-phase and commercial production.
“Yes there is definitely a trend,” says Denis Geffroy, vice president of business development at Almac. “It’s not a really new trend, but it is now pronounced, and I’m not surprised to see it.” Four years of experience, he adds, has allowed Almac to fine-tune a comprehensive service offering.
“We have 600 customers in the world, and we need to be flexible,” Geffroy says. “Some clients still need one service or another. We have not merged business units. They still operate on their own two feet.” Only about 20–30% of customers request the integrated service, he estimates.
Although interest in integrated services is greatest among small and virtual biotech companies that lack manufacturing and R&D staff, Geffroy notes that interest has grown among big drug companies. Three have signed on for integrated manufacturing and R&D in the past 18 months, he says.
Not every pharmaceutical chemical company believes it should offer finished-dose drug formulation, but almost all of them have taken steps to add or expand services beyond API production. For example, Dottikon Exclusive Synthesis, a Swiss API firm, has made steady investment in R&D to supplement its traditional commercial-scale manufacturing service. “We have always had something of a CDMO model,” says Markus Blocher, CEO of Dottikon. “But the D has become more important.”
Blocher notes that a lot of the drug compounds moving into late-stage development “are underdeveloped chemistry-wise.” Compounds that drug firms in-license from small biotech companies are especially in need of process chemistry work, he says.
Acquisition may not be the answer for API manufacturers trying to expand into R&D services, Blocher cautions. He notes that Dottikon attempted to acquire the process development and analytical services business of Switzerland’s Solvias two years ago, but the deal fell through. Dottikon’s
“Chemists need experience in large-scale production,” Blocher says. “I want my chemists to know what is going on in the plant.” The company is now boosting its in-house process and analytical R&D capacity by 20%.
Drug and biotech company executives typically support efforts by their service suppliers to broaden the range of capabilities they offer, be it through acquisition or internal development.
Orexo typifies the small pharmaceutical company that is in the market for comprehensive research and manufacturing services. The 20-year-old Swedish firm started out mainly doing early-stage R&D on compounds that it then sold to other companies for commercialization. In 2012, Orexo began to commercialize its own drugs.
Jesper Lind, Orexo’s chief operating officer, came to the firm last year from AstraZeneca to oversee manufacturing outsourcing. The firm is contracting with Siegfried for one API and some associated research services, according to Lind.
Orexo, he says, needs to establish contractors as part of an internal supply chain, relying on companies such as Siegfried to provide a portfolio of research and manufacturing services. Lind, who was a manufacturing operations manager at AstraZeneca, says he has noticed a distinct movement by providers of both manufacturing and formulation services to a middle ground where they offer both.
The biotech firm Relypsa recently signed a multiyear agreement with DPx’s DSM Fine Chemicals arm under which the API maker will manufacture the active ingredient in Relypsa’s lead drug candidate, patiromer, an ion-exchange resin that helps manage potassium levels in patients with chronic kidney disease. Although Lanxess is the sole manufacturer of patiromer named in Relypsa’s pending New Drug Application, Relypsa plans to add DSM as a second manufacturer in the event of U.S. drug approval.
Wilhelm Stahl, senior vice president of pharmaceutical operations at Relypsa, likes what DPx can do for him. “We will be dealing with one company that basically can take care of raw material and API manufacturing, and handle the transfer entirely to the Patheon side to do the drug product manufacturing,” he says.
Stahl, who once worked for Lanxess, is watching the evolution of his former industry with interest. The flurry of deals combining API and finished-drug manufacturing may be a coincidence, he says, but it is still significant.
“It is an example of consolidation happening. We have all been expecting this for quite a while but not necessarily along the full value chain.” To him, the question is whether the merged companies will succeed at the one-stop-shop business model, which has yet to completely catch on in the pharmaceutical chemical business.
“Is it a new phase for fine chemicals?” Stahl asks. “We will have to see. But it is certainly a new facet in the development of the industry.”