The continued strength of the pharmaceutical chemicals market defies the sector’s historic cyclicality. There are many theories as to why the current upswing has endured a good five years: R&D successes for established drug firms, the rise of start-up companies whose research is also advancing, abandonment of in-house manufacturing by the drug industry, and a return of contract work from Asia to the West are the most common.
But on top of external factors, suppliers of contract manufacturing services have evolved in recent years. There is an increased melding of chemical manufacturing with services such as process design support and finished drug formulation.
Despite quality concerns that have refocused customers on Western suppliers, suppliers themselves are increasingly interested in China—both as a market and as a place to manufacture starting materials for active pharmaceutical ingredients (APIs) made at home. And suppliers are expanding in size and global reach through acquisitions and investments in new plants, attempting to cover their customers’ shifting bases and increased service requirements.
Three firms in particular epitomize this recent activity: WuXi Pharmatech, a Chinese contract research firm that has established an API manufacturing division; Siegfried, a Swiss API maker that built a plant in China, acquired a California finished dose drug formulator, and recently purchased the pharmaceutical chemicals operations of BASF; and Patheon, a finished dose formulator that merged with DSM’s big pharmaceutical chemicals business and followed with a slew of smaller acquisitions.
None of these firms made truly pioneering moves. But the scale and level of risk involved in their gambits have raised eyebrows. And the transformation of business model in each case garnered skepticism, if not mocking predictions of spectacular failure from competitors. So far, however, all three firms claim early evidence that their plans are working. Industry insiders acknowledge that these firms are worth watching to assess the road forward in contract manufacturing and services.
WuXi, China’s largest contract research organization, began offering manufacturing services in China in 2004 and followed with the acquisition of AppTec Laboratory Services, a North Carolina-based biologics firm, in 2008. WuXi has continued to add capacity in China under its small-molecule manufacturing subsidiary, Syn-The-All Pharmaceutical Co. (STA). It’s also building a cell therapy plant at the Navy Yard in Philadelphia.
WuXi’s founder, Ge Li, is now in the process of removing the company from the New York Stock Exchange, possibly with an eye to a new listing on the Chinese stock market.
Minzhang Chen, head of the STA subsidiary, describes the move into manufacturing as a natural progression for the firm’s process research services. The company is currently spending $150 million on a production facility for STA in Changzhou, China. The plant, phase one of a three-phase construction project, will begin operation early next year and be completed in 2020. WuXi has annual sales of about $800 million, one-quarter of which comes from STA.
WuXi sees small biopharmaceutical companies and pharma start-ups, organizations that lack research staff and manufacturing assets, as a primary market, Chen says. But the company is also looking to serve large drug companies. WuXi already supplies advanced intermediates for the cancer drug Imbruvica, marketed by Pharmacyclics and Johnson & Johnson.
WuXi’s growth and ambitious investment have bucked two conventional perceptions in contract chemical services. China, despite the success of some Chinese firms with western ties, is viewed as the wrong place to go for materials manufactured to the U.S. Food & Drug Administration’s current Good Manufacturing Practice (cGMP) quality standards. And the one-stop shop—a comprehensive service approach championed by WuXi—hasn’t fully caught on.
Chen, however, is confident that the contract development and manufacturing model that he claims WuXi pioneered will come to dominate the pharmaceutical services sector. The tough part for companies emulating the model will be the front end—research and development.
“We have the largest process chemistry team in the world—500 process chemists,” Chen says. “This is not easy to copy.”
To Rudolf Hanko, CEO of Siegfried, the term contract development and manufacturing may be new, but the service offering it describes isn’t. “It’s very fashionable to create a new acronym once in a while,” he says. “But can you be competitive in the contract manufacturing market without development services? I doubt that very much.”
Hanko notes a general trend toward bolstering both process development and downstream services in the sector. In 2012, he points out, Siegfried purchased Alliance Medical Products, an Irvine, Calif.-based firm that provides fill-and-finish services for parenteral drugs.
But the company has followed with more ambitious moves, including a $60 million investment in a plant in Nantong, China, that replicates its home facility in Zofingen, Switzerland, and the $300 million acquisition of three API plants from BASF.
In the six years he has been at the helm of Siegfried, Hanko says, the company has more than doubled annual sales to $630 million. The deal with BASF, the last of the big, diversified chemical companies to exit the pharma chemicals business, makes Siegfried one of the largest in the world.
Hanko, who managed fine chemicals businesses at Bayer and Evonik Industries before coming to Siegfried, says he has made strategic changes as well. “We saw that we were in a very attractive market but not ideally positioned,” he says. “Our two main gaps were asset strategy and critical size.”
In other words, the company was doing everything at a single plant in Switzerland, one of the most expensive places in the world to manufacture chemicals. Siegfried excelled at product quality but needed to add the cost benefit of pre-cGMP manufacturing in China. Thus, the plant in Nantong.
Hanko concedes that Siegfried’s moves over the past three years have raised eyebrows. “At every step you see puzzled people,” he says. “It’s always controversial when you go to China.”
The California acquisition may have been the most surprising to market observers, he says, not because of the addition of fill-and-finish services, but because of the odd mix of Swiss and California cultures. The cultural exchange has posed a challenge, he admits. “But when you ask people now, the vast majority of them say it was a good move.”
Perhaps the corporate move that garnered the most skepticism in recent years was Patheon’s acquisition of DSM’s pharmaceutical chemicals business. The deal, which followed a failed attempt by Lonza to acquire Patheon, was met with a general consensus that the fundamentally different businesses of finished product and API manufacturing cannot be combined.
Patheon was hardly the only API producer looking at downstream services. In addition to Siegfried, Hovione, a Portuguese API producer, has bolstered its downstream services, and firms such as Albany Molecular Research have made acquisitions in the finished drug realm. Still, the Patheon and DSM merger was by far the biggest recent bet on establishing a combined service.
Nor did Patheon stop with DSM. The company last year acquired Gallus Pharmaceuticals, a biologics manufacturing company with two mammalian cell culture facilities that will complement former-DSM biologics plants in the Netherlands and Australia. Gallus has commercial-scale manufacturing in St. Louis and process development in Princeton, N.J.
More recently, Patheon acquired Florence, S.C.-based Irix Pharmaceuticals, a specialist in highly potent and controlled APIs. Next, it bought
Patheon’s approach to the market, which it has branded One Source, would rank as a one-stop-shop strategy, offering as it does both large- and small-molecule services from process development through finished drug manufacturing.
Lukas Utiger, president of Patheon’s drug substance services, says the firm’s objective has been to build a network linking manufacturing and other services, with a presence in the U.S., Europe, and Australia. The company now has 25 facilities in all. “And clearly we have identified small and mid-sized pharma, mainly located in the U.S., as target customers,” he says.
And those firms are interested in the business model, according to Utiger. “We are getting a lot of inquiries,” he says. “There is clear value added with project management and supply chain management. It makes sense when you look at the finance.”
Among those skeptical of the comprehensive manufacturing and services business model are market analysts James Bruno, president of Pharmaceutical & Chemical Solutions, and Roger Laforce, president of Laforce Business Solutions. Both men are on their own after careers in the pharmaceutical chemical industry.
Bruno notes that the one-stop-shop concept has a long history and that its popularity cycles in and out with great regularity. But he concedes that the three companies are positioning themselves well for a market in which 60–70% of the projects are coming from service-needy small and virtual pharma companies that are likely to see value in paring down the number of contractors they use.
It can be argued that these companies are moving in the right direction, Laforce says, but it remains to be seen whether they are doing it right. Siegfried’s move into China is well timed, he says, affording the company the opportunity to learn from the mistakes of competitors who moved in early. Notably, Siegfried is combining Western business and manufacturing standards with local management in China, Laforce says.
Still to be determined is whether large-scale, international operations, which may be the most significant shared facet of WuXi, Siegfried, and Patheon, set the tone for business development in the industry, Bruno and Laforce agree.
Here, also, the three firms are following a path already traversed by others. Laforce notes that Hovione and Fabbrica Italiana Sintetici, the Italian firm where he was general manager for eight years, more than doubled in size over a period of time in which Siegfried experienced no such growth.
“In the pharmaceutical industry, we copy,” Bruno says. “Nobody wants to be the first.”
Talking relationships at a New Jersey pharmaceutical outsourcing meeting
The topic of contracting etiquette dominated discussions at the annual Pharma ChemOutsourcing conference in Long Branch, N.J., earlier this month. Representatives of contract research and manufacturing firms and the drug companies that use their services focused on the challenges of connecting, crafting agreements, and managing expectations in the development and manufacture of pharmaceutical chemicals.
Much of the discussion seemed rudimentary, covering such topics as communication and respect for partners’ schedules. “It’s kind of like, ‘Everything I know about contract work I learned in kindergarten,’ ” said Jeff Samuel, senior business development manager for Regis Technologies, speaking on one panel. “Play nice and all that.”
But Samuel and other panelists said the relationship between manufacturing project sponsors and contractors has changed with the rise of start-up and virtual drug companies, many of which have little experience in working with a partner to develop and manufacture a molecule.
“The balance of power has shifted to smaller companies that have fewer resources” than the large drugmakers that once dominated the market, said Edward Price, president of the contract manufacturer PCI Synthesis. “There is a need now for the contractor to also be a consultant.”
Samuel agreed. “We have to educate the customer,” he said.
Representatives of small drug companies on the panel acknowledged their increased reliance on contractors. Some noted, however, that their companies are staffed by former big pharma project managers who are experienced enough to educate their contractors.
Speaking on another panel, Michael Thompson, senior director of chemical development at FibroGen, a small drug company in California, said contracting has been further complicated in recent years by the rise of big pharma/small pharma partnerships and the growing role of venture capital in drug development. The multiple interests have increased time pressures as each party pushes for fast results, said Thompson, who earlier worked for Bristol-Myers Squibb.
Many of the speakers noted that it is a seller’s market for contract services. Some contractors are fully booked. “Vendors have more of a luxury of turning away projects,” said Stuart Levy, principal of SGL Chemistry Consulting, speaking on the panel with Thompson.
Michael Cannarsa, director of business development at Almac, a contract research and manufacturing firm, agreed that contractors are currently in a good position. “We are at a peak right now,” he said. “There are a lot of people asking for stuff to be made.”
FibroGen’s Thompson countered that project sponsors are not amenable to being told by fully booked contractors to wait their turn. “Our expectation is that you are available for us immediately with as many people as we need,” he said.
And needs may arise quickly as unexpected prospects present themselves, Thompson added. Although FibroGen tries to discuss project timing well in advance, he said, that kind of planning can also be a luxury.