In 2004, drug giant Pfizer ran 80 manufacturing sites. By 2014, as its product volumes dropped and cost-cutting ensued, that number had fallen to 55, even after a megamerger with Wyeth. With its 2015 acquisition of Hospira and ongoing deal for Allergan, Pfizer is likely to consolidate further. And it isn’t alone.
After two banner years for mergers and acquisitions (M&A), pharma industry outsourcing to contract manufacturing organizations is increasing. CMOs are responding by investing in their existing plants and acquiring new ones. They are also girding themselves for heightened regulatory scrutiny of pharmaceutical production.
“What is happening in the CMO space is being driven by the M&A of the pharmaceutical companies,” says George Svokos, chief operating officer of Albany Molecular Research Inc. (AMRI), a leading contract development and manufacturing firm.
“After merging, they are looking for synergies, for better utilization of their assets, and they have a desire to consolidate the number of vendors,” Svokos says. “That trend is forcing us to follow along.”
To capture business, many CMOs are determined to be recognized as preferred suppliers that can offer a broad range of services. At the same time, customers are asking CMOs to manufacture and formulate more complex and hard-to-handle drugs. To provide the specialized chemistry and materials-handling required, at least two dozen leading CMOs invested in their facilities and acquired operations from competitors and pharma firms in 2015.
While they try to meet the rising demand and technical challenges, companies also face mounting scrutiny from regulators. Although burdensome, growing regulator and customer concerns about quality have been helping business for CMOs in the U.S. and Europe.
Having lost confidence in many Indian and Chinese firms after a rise in warning letters and import bans, pharma companies are moving outsourcing business back to the West, says industry consultant Jan Ramakers. Taking any risks is unnecessary because pharma firms also no longer enjoy significant cost advantages from outsourcing to Asia.
As a consequence, manufacturing sites in the U.S. and Europe are in demand, according to Kevin Bottomley, a partner with Results Healthcare. The London-based corporate adviser helps pharma firms evaluate and divest their facilities and gives M&A advice to CMOs.
“The market is very buoyant,” Bottomley says. “There is a demand from the marketplace for additional manufacturing capacity, and there are CMOs that are literally at capacity. So they can do one of two things—either invest on their own and build or acquire.”
An acquisition can be up and running immediately with trained personnel and the former owner as a ready-made client. But sometimes buying an existing site can require compromises. “It can be a bit of a ‘square peg in a round hole,’ or not absolutely ideal,” he adds. To ensure an exact fit, CMOs may find that their best move is to build a plant, but that takes time.
CMOs that want to buy are finding pharma company small-molecule production sites up for sale. Rather than repurpose them for other products as they once did, drugmakers are often outsourcing, especially if their internal needs have shifted toward biologics (see box on page 13).
But buyers today aren’t looking for the huge reaction vessels once built to support blockbuster drugs, Bottomley points out. “When it comes to producing small-molecule drugs, interesting chemistries, flexible sites, and high-potency containment are now of great interest,” he says.
Likewise, not all biologics production sites are equally attractive. “The wrinkle there is that the technology in biologics manufacturing is changing very, very rapidly,” Bottomley says. For example, dramatic increases in yields are also making large-scale plants obsolete. “There is a move toward disposable systems and other exciting manufacturing innovations that will be quite radical in terms of the design of biologics sites,” he says.
When making small-molecule active pharmaceutical ingredients (APIs), biologics, or finished products, “for a site to be sold, it ideally has to have three things—a nice flexible plan with access to lots of interesting technologies and some means for managing costs during the transition,” Bottomley says.
A review of recent expansions and acquisitions by CMOs shows that the hot areas include API manufacturing, formulation development, and finished-drug production. Other more stringent requirements often come on top of this, notes Hovione Chief Executive Officer Guy Villax. For example, “we don’t do any investments now that cannot also deal with potent compounds,” he says, “the simple reason being that everything has some potency.”
Hovione bought a 75% stake in China’s Hisyn Pharmaceutical in 2008 and a large Pfizer facility in Ireland in 2009. The acquisitions gave the company enough capacity to last a few years, Villax says. Now, Hovione has started investing in capacity again. “We need more to grow,” he says.
The company is expanding spray drying and refurbishing a formulation plant in Portugal for inhalation and oral-dosage forms of potent and moisture-sensitive compounds. It also will spend $25 million to more than double its New Jersey facility, adding commercial-scale spray-drying and API capacity.
“Within a year, I think, we’ll also have a rather large R&D center up and running in Lisbon with 250 scientists,” Villax says.
Although they are looking to expand their service offerings, Hovione and other firms tell C&EN that they don’t expect all of their customers to use them as one-stop shops. That said, suppliers do hope that having a breadth of services can reduce the need for some of the handoffs customers make among CMOs. Being able to link manufacturing steps at a single supplier can address customer desires for speeding up production and ensuring continuity.
The challenge for CMOs is to offer multiple services and be good at them all. Villax suggests that a supplier will be awarded multiple steps, such as making the API and the final product, only if it is the best option for each. “Clients want solutions,” Villax says. “They don’t want to take any risks, and they want find the best possible home for each step of manufacturing.”
In the same way, AMRI looks for ways to differentiate itself within each of its three businesses: API manufacture, finished-drug products, and discovery and drug development services.
“We have a very specific strategy for growth for each of those three businesses, and it’s not to be a one-stop shop,” Svokos says. For its drug discovery and development business, AMRI recently spent $54 million to acquire the New Jersey-based analytical and testing services company Whitehouse Laboratories.
In APIs, AMRI wanted to enter the steroids market so it acquired Spain’s Gadea Pharmaceutical Group last year for $174 million. Separately, AMRI decided to close its Holywell, Wales, facility, which it had acquired in 2010. It will transition the chemical development and API manufacturing done there to its other sites.
What AMRI isn’t looking to do, Svokos says, is handle “high-volume products with a lot of white powder and be the place to punch out billions of tablets. That’s not our strength.”
Meanwhile, Aptuit has been carving out a niche by focusing on an integrated offering for drug design, APIs, and drug product up to Phase II clinical trial scale. Recently, it has begun extending that through Phase III and into small-scale manufacturing in response to customer requests. The company has been adding API capacity and formulation capabilities at its Oxford, England, and Verona, Italy, sites.
Staying ahead of the demand curve is a challenge of late, but it’s critical for meeting customer deadlines, says T. Bowman Adair, senior director for process and project management at Aptuit. The company is seeing more business from both big pharma companies looking for additional resources and small companies that don’t have in-house capabilities.
Because Aptuit does everything from discovery all the way through packaging for clinical trials, it can provide for its customers’ whole development cycle, he says.
Business from small drug firms has grown as venture funding has returned, suppliers say. This support has driven drug discovery, filled the development pipeline, and increased the need for clinical trial materials. “More drugs being developed leads to more approvals, but it’s not just the approved drugs that bring in money. It is all that pipeline management that comes prior to it,” Villax says.
Whereas small firms offer a growing number of projects, bigger pharma firms can be the source of long-term, repeat business, Adair points out. “Very few of the small biotechs go on to become sustainable drug firms.” The ones that succeed in developing one or a few drugs often end up being acquired.
When this happens, CMOs hope that the products won’t be taken in-house but outsourced. Already working with the small firm can help a CMO get a foot in big pharma’s door. On the other hand, being an existing partner of the bigger firm can mean gaining projects from an acquired biotech. “This is very much a relationship-based business where you really have to worry about who the decision-maker ends up being after an acquisition,” Adair says.
Last year, Aptuit sold its solid-state chemistry business in Indiana and sterile injectables manufacturing site in Glasgow, Scotland, to AMRI for $60 million. The sale provided Aptuit with the money it invested in its core operations. For AMRI, the acquisitions allowed it over one year to build a four-plant finished-drug business that will account for about one-quarter of its 2016 sales.
Indeed, formulation sites are sought-after acquisition targets, according to Bottomley, the consultant. “We see as many formulation sites being sold as API sites, and theoretically a formulation site could manufacture both biologic as well as injectable small-molecule drugs,” he says. “Within formulation, the market is desperately looking for sterile filling and finishing sites.”
According to AMRI, sterile drug manufacturing is an area with some of the fastest levels of growth. It is also an area that has been plagued with quality problems and plant shutdowns. As a result, customers are looking for suppliers that can reliably formulate injectable drugs.
Because of the quality-control and handling demands, “it takes a lot to run a parenteral drug plant, and to run a parenteral plant for one or two products becomes costly, so working through a CMO that can manufacture 30 products makes a lot of sense,” Svokos says.
Denmark’s Xellia Pharmaceuticals is taking advantage of the strong interest in bringing back capacity to the U.S., CEO Carl-Åke Carlsson says. “There is still undercapacity in the injectable manufacturing space and drug shortages.” Since mid-2014, Xellia has expanded a Raleigh, N.C., injectable drug facility it bought from Fresenius Kabi. It also makes finished products in Denmark and APIs in Denmark, China, and Hungary.
This past fall, to address its own capacity crunch, the company acquired a large sterile injectables facility in Bedford, Ohio, from Hikma Pharmaceuticals. The site has not operated since 2013, when Ben Venue Laboratories decided that manufacturing quality issues were too expensive to fix and shuttered it. Hikma bought it for $300 million in 2014 but did not restart it either.
Xellia has been working closely with the U.S. Food & Drug Administration and plans to invest significantly to restaff and restart production, according to Carlsson. Although some equipment is needed, the process mostly requires “a lot of people-time for the testing, documentation, and validation,” he says.
As the Bedford facility comes to life over the next two years, Xellia’s capacity will exceed what it needs itself. “We will then use that capability to help in the market, actively working with companies or operating as a CMO,” he says. Xellia, which once was Alpharma’s API business, has been shifting from its origins as an API supplier to also providing finished-dosage forms of specialty drugs.
The connection of quality and manufacturing issues to disruptions in drug supplies has resulted in more regulatory scrutiny, suppliers say. Inspections by FDA and other countries’ regulators seem to be increasing, and the number of FDA warning letters issued to companies—in India and China as well as the U.S.—is on the rise.
Particularly worrying is that some of the issues identified relate to fraud and a lack of data integrity. In response, both procedural and cultural issues at companies are being scrutinized.
“FDA has really gone to town on data integrity, and it is causing major difficulties inside companies,” Hovione’s Villax says. Not only is the agency looking for attention to quality within companies, but it now also wants tamperproof systems, which are costly and cumbersome to implement.
In July, FDA’s new Office of Pharmaceutical Quality released a draft guidance detailing how it plans to collect performance measures, or “quality metrics,” from manufacturers. The agency intends to collect 10 production-related baseline metrics. It also has proposed five optional metrics related to a company’s culture and performance “as evidence of manufacturing robustness and a commitment to quality.”
One goal is to alleviate the burden of plant inspections on both suppliers and the agency itself. According to FDA, having the data will allow it to improve the effectiveness of its inspections. Strong metrics might merit fewer inspections. Although the agency says the metrics might help it identify facilities at risk for quality problems, it’s unclear whether poor metrics will translate into more inspections.
FDA has been soliciting and responding to feedback on its metrics in anticipation of releasing a final guidance this year. The drug industry generally supports modernizing regulatory oversight. But a lot of questions have been raised around the details, including how the metrics might be implemented and used.
Two trade groups, Pharmaceutical Research & Manufacturers of America and the Generic Pharmaceutical Association, have even questioned whether the agency has the authority to require manufacturers to submit the data. Meanwhile, the Biotechnology Innovation Organization (BIO) trade group says it is “supportive of FDA’s stated position that it will not publicly disclose quality metric data submissions.”
BIO contends that such data should be kept confidential because they fall under disclosure exemptions granted for trade secrets and other commercial information. These exemptions, BIO pointed out in a November response to FDA, are designed to encourage companies to provide the information in the first place.
Hovione’s Villax has been a vocal proponent of making quality metrics public. He believes it’s inevitable that the data will become public anyway when investors, insurers, employees, consumers, and others begin asking to see them. “If FDA doesn’t make the data public, the market will force the data to go public,” he says.
Villax also sees metrics as a way for FDA to focus on quality and good performers, rather than just noncompliance and poor performers. And he applauds the agency for trying to address quality culture within companies. “It really is a major step forward in terms of encouraging people to do much more than just being in compliance,” he says.
Setting up metrics to measure quality will be difficult, and implementing them will entail considerable work. But for contract manufacturers, success in achieving them should help ensure prosperity in an era of greater outsourcing.
Some of the biggest investments being made by contract manufacturing organizations (CMOs) are for biologics. Five-year-old Samsung BioLogics recently committed more than $1.4 billion to build plants at its South Korean site. China’s WuXi AppTec is spending at least $150 million, and Lonza has expansions under way in the U.S. and Europe.
These and other CMOs provide biomanufacturing services to many leading drug and biotech firms, but there may not be enough of them to meet demand. “If you want to outsource biologics, the choices are a lot more limited than if you want to outsource straight chemistry,” says industry consultant Jan Ramakers.
To satisfy their capacity needs for the high-value products they care about most, many big pharma firms are restructuring internal production. For the most part, they are investing in biologics and moving away from small molecules.
For example, with patent expirations looming on its major small-molecule drugs, such as the cholesterol-lowering agent Crestor, AstraZeneca is closing small-molecule drug plants in England and India. But since biologics account for about 50% of its development pipeline, it has been expanding capacity worldwide.
In late 2014, AstraZeneca launched a $200 million addition to its biologics production site in Maryland. In May 2015, it said it would invest $285 million in a biologics finished-products facility in Sweden. And in September of that year, it bought a bulk manufacturing site in Colorado from Amgen. AstraZeneca also just recently struck a deal to invest $100 million and have the option to acquire a WuXi plant in China.
Similarly, Roche announced in November that it will restructure small-molecule manufacturing and exit four sites. The firm did say it will put about $300 million toward producing more complex, specialized small-molecule drugs. But that figure is dwarfed by the $2 billion Roche has invested in biologics capacity in the past two years.
Sanofi also has indicated that it wants to “reshape its plant network to match business evolution with increased emphasis on the growing biologics portfolio.” The company reportedly is trying to sell a midwestern plant where it has made the active ingredient for the now-off-patent small-molecule allergy drug Allegra.
Meanwhile, Bristol-Myers Squibb is building a $900 million biologics facility in Ireland. When completed in 2019, the plant will not only significantly increase the firm’s biologics capacity but also play a central role in its global manufacturing network.
In December, Boehringer Ingelheim, which produces its own drug products and acts as a CMO as well, said it is making a $550 million investment to expand biopharmaceutical production at its Vienna site. According to board member Wolfgang Baiker, the company’s “biopharmaceutical development projects and the heavy market demand for contract manufacturing were the basis for our decision to invest.”