Buying a failing business

Buying a money-losing contract pharmaceutical research site in the outer reaches of England isn’t everyone’s idea of a smart business move. Yet this is the plan of fine chemicals veteran Ian D. Shott, who in February acquired Covance’s failing facility in Alnwick, just an hour from the Scottish border.

Under Covance, the Alnwick site was part of a global research service network. Survival now will mean competing against low-cost companies around the world as a lone contract research entity. Not surprisingly, the site had been up for sale for about a year with no takers.

Although the risk of failure appears high, Shott has a track record, both as a corporate executive and as an entrepreneur, of turning around poorly performing fine chemicals sites. By cutting costs in Alnwick and adding drug formulation services and small-scale active pharmaceutical ingredient (API) manufacturing, Shott thinks he can succeed again.

Covance had acquired the Alnwick site and another site in Porcheville, France, from the French drug giant Sanofi in 2010 as part of a 10-year deal worth up to $2.2 billion to supply services back to Sanofi.

Under the pact, Covance agreed to maintain employment at the two sites for at least five years. In January, having met those terms, Covance announced that the Porcheville site would close, resulting in the loss of 128 jobs.

Shott came to the Alnwick site’s rescue. He and his business partner Paul C. Ryan, acquired the facility from Covance on attractive terms with a long-term supply contract in place and without debt. Now called Arcinova, it features a modern 10,000-m2 building on 34 acres with numerous labs, offices, and meeting rooms, as well as staff with broad expertise in pharmaceutical research.

As Arcinova, it already has research contracts with multiple companies around the world, Shott says, but it will need more if it is to survive. And it will have to go up against competitors in parts of the world where hiring scientists is cheaper.

The situation is a stark contrast to the environment in 1982, when Sterling Drug established the Alnwick site. At the time, much of the world’s pharmaceutical research was conducted in the West. But in recent years, thousands of research jobs have been lost in the U.K. alone as big pharma companies downsized their operations and outsourced to Asian firms. Arguably, the Alnwick site is lucky to have survived.

In a bid to ensure the site’s continued survival, Shott has made immediate and major changes. For starters, he cut the workforce from 132 to 50, partly by closing the business’s animal testing unit.

At the same time, he is adding services. Arcinova is emphasizing its formulation development capability to drug industry customers. And Shott is installing kilogram-scale API manufacturing to complement the site’s existing gram-scale production.

Adding these services to the site’s existing contract research capabilities fits well with the trend in the drug industry toward small-volume, highly complex therapies such as orphan drugs, Shott says.

According to the market research firm EvaluatePharma, the worldwide market for orphan drugs, which typically require only small volumes of API, is set to reach $176 billion by 2020 and account for 16% of all prescription drug sales. Analysts estimate that the sector is growing by 9 to 11% annually.

Shott knows that carving out a profitable position in this market won’t be easy. He expects Arcinova to lose close to $4 million over its first two years with no profit until year three. To be on track, the business must generate sales of $7 million this year, $11 million in 2017, and $15 million in 2018, when profits should approach $3 million, Shott says.

The firm is off to a promising start: It met its first-quarter goal of $1.5 million in sales and secured $3.8 million in orders going forward. It also has made more than 100 bids for a total of more than $14 million of business, of which roughly $10 million is in API production.

“We have loads of intent in the API business,” Shott says, noting that the firm has 77 fume hoods in various chemistry labs ready to be used. “This gives you an idea of how quickly we can get cracking on the API side.”

Thus far, customer loyalty is holding up under the new ownership. “We’ve got the full skill set, and importantly, we have credibility, so people trust us,” Shott says. After laying off 82 employees when he arrived, Shott has begun hiring again. He has brought in six new staffers and plans to add another six by year-end.

Shott’s acquisition of the Covance site is reminiscent of his 2003 purchase of a money-losing fine chemicals manufacturing complex in Wales from Great Lakes Chemical for about $4 million. Shott renamed it Excelsyn and went about bringing in research contracts to fill its newly refurbished, but underutilized, labs.

“This time, with Arcinova, it’s the other way around: We’re investing in larger-scale pharma manufacturing capacity,” Shott says.

Shott succeeded in turning Excelsyn into a profitable business and in 2010 sold it to Albany Molecular Research Inc. for $19 million. Success in Wales didn’t last, however, and AMRI announced last year that it would close the site down.

Although some sites in Europe are closing, Shott is upbeat about Arcinova’s chances for survival. He has assembled a new management team, bringing in three executives to form a seven-member board. Among the arrivals is Mark Chadwick, who heads business development. More than a decade ago, Chadwick played a key role in bringing new business to Excelsyn, Shott says.

In addition to reorienting the business, Shott is looking to generate income by leasing empty labs and offices at the site. Arcinova is already in discussions with “six or seven” companies interested in locating there.

He is hoping that the site’s highly specialized equipment—including a high-resolution mass spectrometer, International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use-standard environmental storage chambers, and a solid-state nuclear magnetic resonance instrument—will be part of the attraction.

At the site’s peak, about 280 people worked there. Operating at full capacity with 300–400 staffers, the site could support future companies capable of generating combined annual sales approaching $110 million, Shott says.

Arcinova, Shott says, is the opportunity he has been waiting for. “It’s a perfect vehicle to bring all my experience to bear and build a strong, sustainable business.”

He certainly has the industry connections and business savvy to guide Arcinova through its tricky early years. Senior staffers have bought into the strategy, and sales, for now, are rising. In a highly competitive field, Arcinova has momentum.