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Anxiety Floats Over Fine Chemicals Sector

Despite near-term optimism, CPhI attendees see darkish shadows on the horizon

by Rick Mullin , With reporting by Ann Thayer
October 27, 2014 | A version of this story appeared in Volume 92, Issue 43

The Gates of Hell or CPhI Paris.
Credit: Ann Thayer/C&EN
A moment of sunlight at the gate during a cloudy week in Paris.

The pharmaceutical fine chemicals sector, which is known for its precipitous ups and downs, has managed to sustain a solid run of good years. Now fully recovered from a downturn in 2010, manufacturers of active pharmaceutical ingredients (APIs) and drug intermediates are looking ahead to 2015 with the same optimism that they exuded for the past three or four years.

But a certain level of anxiety has entered the mix as well. And it was on display at CPhI Worldwide, an annual pharmaceutical ingredients conference and exhibition, in Paris earlier this month.

Given their experience with the 2008 financial crisis, chemical executives at the event voiced concern over the European economy, which they see as teetering on another recession. Taxes, regulations, and energy costs in Europe were cited as challenges, especially by companies that also operate plants in the U.S.

Attendees were also anxious about the rise of DPx, the year-old combination of DSM Fine Chemicals and the pharmaceutical services firm Patheon. The new company continues to be criticized as too large, with a business mix of API and finished-dosage drug products that some competitors argue is incongruous.

On balance, exhibitors spoke warmly of 2014. Frédéric Gauchet, president of France’s Minakem, characterized his firm’s contract pharma chemicals business as stable. “I have not seen any decrease in business,” he said, noting plenty of indicators that business should be increasing. “We still see a lot of demand for new chemicals and intermediates,” Gauchet said. “For a small company like us, if we want to find projects, we find projects.” The difficulty, he noted, is doing so profitably, particularly in France.

“Our factories in the U.S. are working well, and we have improved our margins,” Gauchet added. “But in France, we are struggling not to decrease our operating margins by too much. I have between €3 million and €4 million of additional expenses in France because of production taxes and energy costs.”

Attempts to raise prices generally result in a loss of business, he complained. “It’s a highly competitive market. Customers are asking for more services and higher quality, but many companies can provide that.”

Minakem has been investing in its U.S. and German operations. Meanwhile, developments in Asia have had a positive effect on business this year, Gauchet said. In January, the U.S. Food & Drug Administration banned imports of the heartburn drug esomeprazole from Ranbaxy Laboratories after finding a slew of quality violations at a plant in India. Minakem manufactures the API at a plant in Dunkirk, France, that it acquired from AstraZeneca in 2009.

Other French firms are divesting operations outside France. Novasep recently sold a plant in the Bahamas to private investors. The facility, which manufactures the AIDS drug active ingredient tenofovir, was deemed a noncore operation for the firm, which specializes in chiral separations and highly potent APIs. And Isochem divested its Framochem phosgene chemicals business in Hungary earlier this year to focus on its core pharmaceutical chemicals operation.

Xavier Jeanjean, vice president of sales and commercial development at Isochem, said he anticipates moderate growth through 2017. Although Jeanjean told C&EN earlier this year that Isochem would consider a U.S. acquisition, the firm sees more opportunity in Europe, where there is a greater need for consolidation in the market.

Also confident regarding growth, Italy’s Fabbrica Italiana Sintetici is in the middle of a two-year, $50 million investment in sterilization facilities, high-potency production capacity, and spray-drying services.

Dottikon, the Swiss contract firm, has opted this year to offer spray drying through a partnership with Micro-Sphere, a specialist in the process. Markus Blocher, chief executive officer of Dottikon, says he views spray drying as a formulation service “that is not so close to chemistry.” On the chemistry front, Dottikon has expanded its high-pressure technology lab and beefed up R&D by 20%, hiring between 15 and 20 chemists in each of the past two years. Blocher says that business continues to improve, but he is less sanguine about the prospects for the future than some others. He is also not satisfied with the market’s recovery since 2008.

“Indications of the next downturn?” he responded to a query. “We’re still waiting for the next upswing. We still have large vessels to be filled.”

Firms offering spray drying admit they are going after a market pioneered by Hovione, a Portuguese API producer that significantly boosted its spray-drying capacity with the 2009 acquisition of a Pfizer plant in Cork, Ireland. The company has been developing its capabilities around spray drying and particle engineering for about 10 years, according to CEO Guy Villax.

“When we started, we really didn’t know there was a business that existed between the API and the drug product,” Villax recalled. Today, the firm boasts the world’s largest installed capacity for commercial spray drying, an important part of a business that is “no longer just APIs,” Villax said. Hovione’s $200 million in annual sales is split about equally between off-patent APIs and contract manufacturing services around innovator drugs.

Credit: Rick Mullin/C&EN
DPx’s Utiger says the newly formed provider of drug substance and product is headed in the right direction.
Lucas Utiger of DPx.
Credit: Rick Mullin/C&EN
DPx’s Utiger says the newly formed provider of drug substance and product is headed in the right direction.

Throughout the six exhibit halls at CPhI, other firms detailed how they have crafted businesses to sustain growth in a diverse and changing pharmaceuticals sector.

Northern Ireland’s Almac is capitalizing on investments it has made over the past decade, according to Denis Geffroy, vice president for business development. Facing competitive challenges from Asia, the company decided to “diversify to survive,” he said. Starting from a base in small molecules, it has added—among other things—services in large molecules, peptides, and analytics. “About 25% of our business is in the peptide area,” Geffroy observed.

Almac has assembled the pieces needed to play in the emerging market for antibody-drug conjugates (ADCs). According to Geffroy, few contract manufacturers have expertise both in large molecules and in chemistry for making linkers and the toxins that are typically the “drug” part of the ADC. “Because ADCs are often extremely potent, you don’t need very large scale,” which fits with Almac’s profile, he said. “We were in the right place at the right time.”

Making a similar bet on ADCs, Catalent Pharma Solutions recently acquired Emeryville, Calif.-based Redwood Bioscience and its SMARTag technology. “ADCs are one of the hottest areas for growth in biologics,” said Barry Littlejohns, Catalent’s president for advanced delivery technologies.

During presentations at the conference, Hovione’s Villax was among those extolling statistics-based quality programs in pharmaceutical chemical manufacturing. He also criticized regulators for relying too heavily on the stick without offering a carrot. Making a distinction between compliance and quality, Villax proposed that FDA go beyond its current penalty-based auditing system by launching a “Dean’s List” that would recognize individual company achievements in developing a quality-focused culture.

India’s pharmaceutical industry sees related problems with regulators who take process-oriented, rather than risk-based, approaches in their oversight. “Process is important to ensuring the quality of medicines, but there are some processes where infringement, even if it has taken place, does not impact the end product in any manner,” Sudhanshu Pandey, joint secretary of India’s Ministry of Commerce & Industry, told C&EN.

Pandey visited CPhI along with an entourage of Indian government, regulatory, and industry representatives. Much of the group’s energy went into defending the Indian drug industry’s reputation following a series of regulatory compliance issues that resulted in FDA bans of APIs and finished drugs from Indian facilities.

“Undue criticisms” of the Indian industry are “scientifically unsupported,” Pandey said. FDA’s complaints center on documentation and data management violations that “had zero to do with any impact on the quality of medicines,” he asserted.

In fact, though, FDA has cited missing or falsified data and inappropriate testing as well as lapses in quality at some firms. Regulators have “raised very valid questions about the processes and procedures,” Pandey admitted, but he and others attribute many of the problems to cultural differences and different interpretations of compliance requirements. To resolve the situation, the Indian government is undertaking its own regulatory reforms, adding people, and increasing training, he said.

DPx could be said to have cornered the market on sheer optimism at CPhI this year. Lukas Utiger, president of the firm’s fine chemicals division, was on hand in the Patheon booth to explain how DPx views its combination of drug active and finished-product offerings as a step ahead of the market. The new company combines “the best in class” in both categories, Utiger said, “and moves the industry in the right direction.” Feedback at CPhI, he claimed, was positive.

DPx was in the spotlight at the European Fine Chemicals Group dinner, held annually during CPhI. The dinner speaker was Stefan Doboczky, a DSM board member who is also on the board of DPx. Doboczky acknowledged that the combined API-drug product offering has been a hard sell and that other firms attempting to offer both have failed.

“The idea that the two different things can’t be made one? You might be right,” he said. But DPx is banking on changes in the health care market to bolster demand for integrated services at the scale offered by DPx.

Doboczky was challenged in a Q&A session by Villax of Hovione, who cited a need for small specialists in the pharmaceuticals market. “We feel a bit like a five-star restaurant business, not like a 12,000-employee McDonald’s,” Villax said.

Another dinner attendee, Jean Hoffman, CEO of the Portland, Maine, veterinary medicines firm Putney, acknowledged that the large-scale, one-stop shop described by Doboczky might make sense for investors and large pharmaceutical customers, but she backed Villax’s view that smaller specialists have appeal to the market as a whole.

“Both models are necessary for a healthy and profitable pharma industry, as big players provide scale, but innovation comes from smaller, nimble companies,” Hoffman told C&EN. “Big pharma is less and less innovative, and advancement of the industry requires innovation from small, quality firms.”

A Solomon-like take on DPx seemed apropos given the upside-downside view of the market that pervaded CPhI this year. But the downside shadows certainly seemed persistent in Paris. “In France, as long as we don’t have a revolution, we can’t change anything,” Minakem’s Gauchet grimly joked.

With reporting by Ann Thayer


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