“Active pharmaceutical ingredient manufacturing does not happen in a vacuum,” points out Kate Kuhrt, senior director at the market research firm Thomson Reuters. Instead, the ingredients, known as APIs, are developed and made to order when needed by innovator and generic drug companies.
The demand by drug companies for APIs is shifting as firms merge and consolidate, shut down R&D and manufacturing, and rebuild their pipelines after losing patent protection for once-large-volume products. What is coming through development today are often highly potent drugs required in low volumes because they target small patient groups.
Although sales volumes these days can be small, many of the drug compounds themselves have become more difficult to synthesize and harder to formulate into effective therapies.
For help in manufacturing these products, drug firms, both innovators and generics providers, often turn to custom chemical partners. These partners, in turn, are finding that the needs of their drug company customers can vary widely. At the same time, custom manufacturers must operate in increasingly complex supply chains as customers and markets become spread out across the globe.
Custom chemical manufacturers need to juggle all these factors to determine where to invest in capabilities that will allow them to compete. “It is very difficult to be everything for everybody, so they need to focus and really understand the areas that they are going after,” Kuhrt says. Decisions can include whether to work with innovator or generics customers, on biologics or small molecules, in established or emerging markets, or on general or specialty products.
To thrive, custom manufacturers need to understand drug industry dynamics and customer demands. Ultimately, they must be able to anticipate customer requirements “even before the customers can articulate those needs,” Kuhrt says. It’s the only way that suppliers can have “the right capacity for the right types of products for the right parts of the globe.”
In the sections that follow, C&EN explores the impact of drug industry trends on contract manufacturers through the firsthand experiences of leading firms.
Business prospects for custom chemical makers look promising in the U.S. and Europe. In 2014, the Food & Drug Administration approved 41 new molecular entities, an 18-year high. About 40% of these compounds target orphan diseases, and 20% are for cancer. The European Medicines Agencyokayed 40 new drugs and 17 orphan disease products.
Approval trends reveal that drug developers are betting a good portion of their research dollars on niche areas. As a result, the market is becoming segmented across smaller populations of patients with specific diseases.
This evolution to more personalized medicines is starting to “trickle through the whole system,” says Denis Geffroy, vice president for business development at Almac, a contract manufacturer based in Northern Ireland. Having left behind the “one size fits all” drugs, pharma companies no longer request tens of metric tons of an API. With its medium-sized reactors, Almac is adapting easily, Geffroy says, in contrast to suppliers with large plants that may have to find many small projects to fill them.
Hovione is keeping busy producing 35 commercial and 70 development-stage APIs, according to Chief Executive Officer Guy Villax. The Portugal-based company has been a manufacturing partner for at least one of the new drugs FDA approved in each of the past five years, he says.
“The pipeline we have going forward of late-Phase III compounds is very encouraging, and I think we will be getting at least two per year,” Villax says. “To achieve this, you need a big effort in R&D.”
Late-phase candidates are more likely to become commercial drugs than early-phase ones, but they are also more limited in number, and competition to manufacture them is higher. New Jersey-based Cambrex covers the bases with a balance of projects across development phases, product volumes, customer sizes, and geography, says Chief Operating Officer Shawn P. Cavanagh.
And the silver lining to today’s smaller-volume drugs is that contract manufacturing organizations (CMOs) can usually charge higher prices for manufacturing them. “We may only be making a few kilos and not a few tons, but that is reflected in the price,” Geffroy says.
The downside is that very expensive medicines attract the ire of government and health care payers. “Being safe and effective is no longer enough in many markets,” Kuhrt says. “Pricing pressure is making it increasingly challenging for innovators to get market share.” A consequence for API suppliers is that their customers’ estimates for the market may be “way off,” she says.
Kuhrt suggests that suppliers monitor the market themselves to anticipate how a customer’s drug might fare and what quantities will be needed. “Otherwise, you may be making revenue models off of assumptions far from reality,” she warns.
Market unpredictability driven by price resistance isn’t the only unforeseen circumstance for contract manufacturers. The Michigan-based CMO Ash Stevens confronted a different problem when it won the contract to manufacture the API in Ariad Pharmaceuticals’ Iclusig, one of the highest-priced cancer drugs available.
FDA granted an accelerated approval in 2012 for use against rare cancers, only to suspend sales in late 2013 because of safety concerns. FDA allowed sales to resume soon after but for an even smaller patient group. The upside is that Ariad envisions the drug’s use will expand globally and that, thanks to its high price, sales will hit $350 million in 2018.
With specialty medicines and biologics driving drug industry growth, Kuhrt and other analysts believe more specialized manufacturing capacity will be required of CMOs. In 2013, biologic drugs made up 33% of the development pipeline, up from 20% in 2009. Part of the biologics manufacturing opportunity will be biosimilar versions of several blockbusters that will lose patent protection in the next few years.
Still holding their own, small molecules account for about 70% of new U.S. drug approvals over the past decade. “While there has been a lot of talk about biologics, we believe that small molecules are still a very large opportunity,” says Vivek Sharma, head of the Indian contract manufacturer Piramal Pharma Solutions.
Whether they be small molecules, biologics, or a combination of the two, new drugs are increasingly complex. “For everybody, it is just getting harder and harder to get these products to the market because of the complex chemistry and regulatory challenges,” says Jerry Whelan, head of custom pharmaceutical services (CPS) in North America for India’s Dr. Reddy’s Laboratories.
To provide solutions, API suppliers need specialized technology and expertise. “Assuming you aren’t doing only biologics, you have to have some glass-lined steel reactors that everybody has for doing the ordinary stuff, but then you also need specialist gear,” says Nick Hyde, a consultant with London-based Results Healthcare.
For example, the drug industry’s emphasis on oncology is adding many highly potent compounds to firms’ development lists. Several API suppliers can handle these materials, but analysts expect that more CMOs will need to invest in facilities to meet demand. Even harder to find are manufacturers that can produce and link cytotoxins and disease-targeting antibodies to create antibody-drug conjugates, or ADCs.
“ADCs are the hottest growth area within biologics,” says Barry Littlejohns, head of advanced delivery technologies at Catalent Pharma Solutions, a New Jersey-based drug delivery specialist that acquired technology in this area last year. Although in its infancy, the ADC market is expected to grow an average of 40% per year over the next few years.
Piramal is running near capacity for ADCs and is expanding, Sharma says. At its Scottish facility, it already makes Phase II and III batches for the clinical trials of large customers, and he predicts that three to four ADCs will turn commercial within five years. The company also offers ADC formulation development in Mumbai and hopes to add product filling and finishing.
In general, advanced formulation and delivery technologies are needed, often early in development, to turn compounds into effective drugs. “A lot of molecules are becoming very, very difficult to develop,” says Elliott Berger, Catalent’s vice president for strategy and marketing. Issues include improving solubility and controlling delivery of the drug in the body.
Business is no longer just about having vessels and capacity but about specific skills, knowledge, and expertise for managing API production and final dose manufacturing. “There is a significant emphasis on development” in contract manufacturing, Berger says. “Five years ago, everyone was a CMO. Now, a lot are C-D-MOs.”
As such, many have bought formulation and finished-dose plants to round out their businesses. Finished-product manufacturing is “a bit easier to manage because the contracts tend to be long term, and you have visibility and a degree of predictability,” says Ian Muir, managing director at the CMO Aesica Pharmaceuticals.
Also, the formulation business is a good fit for Western suppliers facing growing competition from Asian newcomers. Companies are finding that although drug firms may buy intermediates or semifinished products from lower-cost countries, they usually like the final stages of API synthesis and product formulation to occur in more regulated environments.
More and more, the complex molecules being contracted out to CMOs are part of generic drugs, Thomson Reuters’s Kuhrt points out. Sophisticated drugs that hit the market a decade ago are now going generic, and they will require specialized production or formulation just as the patented drug did.
Generic drug firms are also pursuing modified versions of popular drugs to create barriers to competition. Being able to develop APIs that competing CMOs cannot make or APIs that lend themselves to new or challenging formulations can make a CMO “a very valuable partner,” she adds.
For example, having created a sizable particle engineering business, Hovione has decided to offer a range of generic APIs delivered nasally or by inhalation. For these, features of the API particle remain crucially important, even after formulation, Villax explains. “Knowing how to make these particles is a major differentiator.”
As contract manufacturing grows, suppliers are trying to determine how best to respond, be it through acquisition or construction of new facilities. But growth is not just about capacity. As they try to serve innovator and generic drug firms, CMOs need to respond quickly, cost-effectively, and without sacrificing quality.
At Cambrex, Cavanagh’s favorite way to increase capacity is through continual improvement, reducing cycle times, and being more effective in asset use. “But that will only get you so far,” he says, so the company is now thinking about whether to build, as it did a few years ago, or buy.
Similarly, Almac, which has always grown organically, is considering an acquisition, Geffroy says, in part because its biocatalysis technology has opened the door to producing chiral intermediates at large scale. Ideally, he would like to acquire capacity near an existing Almac site. “Clients want integrated services,” Geffroy says.
As part of a leading generic drug firm, Dr. Reddy’s CPS business can offer a full range of capabilities economically, Whelan says. “We can do anything our target customers can do, and we are there to do it for them when they don’t want to.” Pharma companies also are thinking about their strategy for products that go off patent. To meet demand, Dr. Reddy’s has built specialist CPS facilities in India for APIs and dosage forms.
Serving both innovator and generics customers is important, Hovione’s Villax says, because “both segments drive good behaviors.” Making generics requires lean, cost-effective operations, while innovators want a depth of science and technology. Making bulk generic APIs can also keep a supplier’s plants occupied between custom projects.
Both innovator and generic drug firms have been consolidating and becoming more powerful buyers. They often control many aspects of the supply chain, have proprietary technology, and know exactly what it costs to make a product, Whelan says. If they choose to hire an outside manufacturer, “the decision comes down to economic value,” he says. “They are going to source from someone they feel can offer the best custom services and integrated solutions to speed up process development without compromising on quality.”
Responsiveness and speed have become big factors. On top of needing more complex compounds, customers often want supplies sooner. In 2014, about 25% of new drugs approved received accelerated or fast-track approvals, which can expedite production timelines.
“The wheels are turning,” says Steve Leonard, Catalent’s senior vice president for operations. Gone are the days when a CMO could crank out a billion doses’ worth of one product. Companies today are manufacturing smaller products for multiple customers. “The size and shape of what a factory looks like, how agile it is, and how quickly things can change is really quite different,” he says.
To succeed in this new environment, “API manufacturers need to be constantly looking at ways to reduce costs and streamline processes without sacrificing quality,” Kuhrt says. “It is hugely important to stay on top of the changes in regulations because if you lose your reputation, it is very, very difficult to get it back.”
Having the right manufacturing capabilities in place means nothing if the customers don’t come. The good news for custom manufacturers is that drugmakers continue to outsource. But the mix of companies in terms of their sizes, needs, and target markets is presenting new challenges.
Quality and high-tech facilities are two ways that Western CMOs are trying to gain competitive advantage and attract customers who might be enticed by a potential supplier elsewhere on the globe. The Western CMOs say they are succeeding. “You see a lot of big pharma coming back from low-cost countries,” Cavanagh says.
At the same time, though, drug industry growth is expected to come largely from emerging markets. To support customers’ geographic expansion, Catalent’s Berger sees a need for “multiregional” activities as part of a “more sophisticated and more agile supply chain.”
But it’s a more complicated supply chain as well. Where demand might once have been for millions of tablets of a given drug in the U.S., the same quantities today may be split up among many smaller-country markets, Aesica’s Muir says. “The supply chain is becoming much more fragmented.”
Partnerships can help address regional needs. Cambrex, for example, has a 51% interest in a drug delivery and dosage form business in Hyderabad, India. Flexible sourcing strategies also can be used instead of building or acquiring facilities, Cavanagh suggests.
Each emerging market will present its own business, political, health care, and regulatory issues for CMOs. “Regulations will continue to increase and likely improve the credibility of manufacturing in emerging markets—and also increase the cost of manufacturing,” Kuhrt says. To understand the opportunities in these regions, Western suppliers need to compare their cost structures with those of the local suppliers.
At the same time, CMOs may find drug companies that lack assets in emerging regions turning to them for help. Ten or 15 years ago, many drug companies started outsourcing to cut costs and reduce their manufacturing footprint, Catalent’s Leonard points out. “Today I think outsourcing is really being used as a way to increase the resiliency of the supply chain.”
Custom suppliers agree that outsourcing is here to stay, but they have different views on its dynamics. Aesica’s Muir sees large pharma firms falling into two camps. Some are bringing products inside to fill existing capacity, while others are more aggressively outsourcing. “Then you’ll get some tactical activity in between,” he says.
More outsourcing by large pharma companies closing plants of their own is contributing to Almac’s better-than-market rate of growth, Geffroy believes. “About 40% of our business now comes from the top 10 pharma companies, when two years ago that was close to single digits.” In addition, “there is definitely money coming back into start-up biotechs and virtual companies.”
Although these smaller drug companies typically have only a handful of products, more of them can carry their products further through the development process—if not all the way to launch—than in years past, custom suppliers say. For example, Pharmacyclics took its cancer drug Imbruvica all the way to market, finding a distribution partner only near the end, Berger says.
Small biotech companies without internal resources rely on CMOs for a wide range of expertise and services. “Big pharma customers are experts in a number of ways, and they are looking to plug in certain capabilities,” Berger says about their outsourcing needs. “Smaller companies are experts at their molecule and are looking for a broader solution to help them get it through the clinic to whatever exit point they desire.”
That exit point is typically getting acquired by a large pharma firm. Although such changes in ownership often make news, the increased work and complexity of the supply chain for CMOs don’t. “Our relationship often ends up being with the molecule and not necessarily the customer,” Berger says. Some molecules Catalent works on are now on their third or fourth owner.
Ultimately, most commercial products end up being marketed by large drug companies, CMO executives say. But until that happens, both small and large drug companies remain important customers. “Slightly more than half of new products that are launched are outsourced through CMOs,” Piramal’s Sharma says. “That gives us the opportunity to continue to grow and invest in this business.”