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Outsourcing

How former drug company labs are becoming contract research firms

In Europe, facilities being spun off by drug companies are finding new life as multiclient R&D facilities

by Sean Milmo, special to C&EN
August 4, 2018 | APPEARED IN VOLUME 96, ISSUE 32

 

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Credit: Arcinova
Arcinova's labs in Alnwick, England, were once operated by the drugmaker Sanofi.

Europe’s drug industry is going through an efficiency drive to cut costs, raise productivity, and focus on more profitable therapeutic areas. Research chemists and other scientists face the prospect of losing their jobs as staff numbers are reduced. Whole research units are being closed or transferred to new owners that want to economize with fewer employees.

But researchers have a reasonable prospect of finding work in an R&D sector that is no longer dominated by pharmaceutical multinationals. In addition to drug discovery start-ups, new jobs can be found in the growing collection of contract research organizations (CROs) serving the discovery and preclinical stages of research.

These CROs earn their revenue by providing a range of support services to both big and small companies at the leading edge of drug technology. Many CRO research staffers are former employees of big pharma companies where the priority is no longer the in-house discovery of new molecules. In some cases, they even work in facilities spun off by their former employers.

Life in CROs isn’t always as cushy as it was in big pharma, but it’s never dull. Even if CRO scientists work in familiar surroundings, they must constantly adapt to new technologies. They cover areas like process development, compound synthesis, assay development, target validation, screening services, lead optimization, and computational support.

Having sufficient—and sufficiently versatile—scientific expertise to maintain diverse revenue streams is a major reason many CROs in Europe have healthy balance sheets. They can earn high fees from technological guidance while also creating value from their own proprietary drug discoveries.

Evotec, a large German CRO founded by a group of academics in the early 1990s, recorded a 46% rise in revenue last year. Sales of Selvita, a Polish CRO, have risen almost sevenfold in the past five years. In the first quarter of this year, revenues in its services segment went up by 53%.

Of course, they have competition, increasingly from Chinese firms such as Pharmaron and WuXi AppTec. These Asian companies are highly competitive because they are able to offer services from the low-cost environment of their home market, especially those based on data analysis and processing.

“We have an economic advantage in the European market because we are operating out of China,” explains Barry Morgan, the U.S.-based chief scientific officer of HitGen, a Chinese service firm that recently formed alliances with Boehringer Ingelheim and Leo Pharma for the use of its DNA-encoded library technology.

“Our strategy is to target large and small companies in Europe and the U.S. engaged in small-molecule drug discovery,” Morgan says. “Our technology is well suited for start-up companies because its economics make it a more viable proposition for them.”

For smaller European-based CROs, the intensifying competition can be a major challenge. Many of them started as independent entities after being spun off by their parents.

For a parent company, spinning off a lab or business offers a way out of a money-losing or distracting operation and a chance to concentrate on core therapies. For the spin-off’s management and staff, the process provides opportunities for entrepreneurship, the discipline of having to comply with stricter financial targets, and close identification with the fortunes of a new company.

Experience shows that spin-offs in pharmaceuticals can work. A study published in the Journal of Business Chemistry in September of 2011 examined 42 pharmaceutical spin-offs from the mid-1990s. It found that only three had gone into liquidation, while eight were able to make initial public offerings of stock.

Among the most successful was Actelion Pharmaceuticals, originally a specialist in pulmonary arterial hypertension research that Roche spun off in 1997. It expanded into a fully integrated operation covering drug discovery, clinical development, manufacturing, and marketing, before Johnson & Johnson acquired it for $30 billion in 2017.

One advantage many spin-offs have from the start of their existence is that they are already contracted to do research for their parent companies, which often also provide additional financial support. That was the case for Evotec when it acquired facilities from the French drug company Sanofi in 2015 and earlier this year.

In Europe, fledgling CROs often seek to become involved in government-backed projects. A popular one until recently was the European Lead Factory (ELF), a consortium of big pharma companies, small firms, and academia.

The five-year project began in 2013 with the help of a $95 million European Union grant and a 300,000-molecule library from seven multinational drug industry partners, including AstraZeneca, Bayer, Merck KGaA, and Sanofi. In addition, it had partnerships with 10 small companies—including several CROs from across Europe—and 12 universities and research institutes.

ELF’s main purpose was to provide a screening service to small-molecule drug discovery companies and to academia. It has also been creating new compounds—a total of 200,000 by this summer. And two drug development partnerships were formed as a result of screening and other work by ELF.

But the risk of government projects is they expire, as ELF is set to do this year. Currently, European officials and industry and academia representatives are trying to find a way to relaunch it on a more permanent basis.

“The project has shown over the last five years that it works,” says Jon de Vlieger, a coordinator of ELF at Lygature, a foundation in the Netherlands. Despite doubts at the start, “the ELF collaboration has been a great success, and demand for its services continues to grow. We are developing a strategy to keep it going for many years.”

For the CROs involved, ELF has provided an opportunity to move beyond basic research help into broader services for later-stage drug development and manufacturing. CatSci, a small British firm, is trying to do much the same.

CatSci was spun off by AstraZeneca in 2010 as a catalyst screening provider. Seeking to move beyond a fairly narrow niche, it has since widened its competencies in the areas of chemical reaction optimization and scalable process development.

The company tried diversifying into areas like agrochemicals and flavors and fragrances in the hope that these would provide additional value. “Not surprisingly, given our decades of experience in big pharma, it became clear we should go back to our roots and focus on the pharmaceutical industry,” recalls Simon Tyler, CatSci’s chief operating officer. “More importantly, we needed to broaden our offering on process R&D rather than just focusing on catalysis.”

Making this change was not easy. “Critical was getting everyone at the company fully on board,” Tyler says. Customers then had to be persuaded that CatSci was not abandoning catalysis. With the shift, the firm endeavored to make the customer as important as the science it provides. “Before we diversified, we focused on our technical expertise,” Tyler says.

Arcinova, based in Alnwick, in northeast England, also attributes its success so far to an awareness of customer requirements. The company was formed in early 2016 through the acquisition of a struggling research service site from Covance, a large CRO. Covance itself had acquired the site from Sanofi in 2010.

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Credit: CatSci
CatSci has moved beyond its core competency in catalysis R&D.

When Ian Shott, Arcinova’s CEO, and Paul Ryan, the firm’s chief financial officer, took over the site, they closed down its main activity of animal testing to focus on its small-molecule chemistry capabilities. “We changed the whole business and made 62 people redundant out of a total staff of 112 in the first month,” Shott recalls. “We have since hired 50 scientists and over the next three to four years plan to recruit another 200.”

Arcinova has expanded into process development, with a major project being a modular system for continuous manufacturing. It also produces specialty active pharmaceutical ingredients and drugs for customer clinical trials. It now has a formulation development service and new analytical services. Sales rose 60% in 2017 to $11 million, Shott says, and Arcinova’s customer list has grown from 50 at the time of the takeover to 130, most of them small and medium-sized enterprises.

Evotec knows something about reviving former drug company sites. In 2015, the German firm took over Sanofi’s small-molecule drug development site in Toulouse, France, taking on more than 200 chemists. It also won a $275 million commitment from Sanofi.

Then last month, Evotec brought in another 100 Sanofi scientists in a deal to take over the drugmaker’s early-stage infectious disease portfolio and research center in Lyon, France. Sanofi paid Evotec $70 million and will provide further long-term funding to develop the drug portfolio.

Evotec will build on the infectious disease project for new “open innovation” initiatives with other drug and biotech companies, academia, and government agencies.

“Open innovation only works if you can ultimately leverage resources across many different players,” says Werner Lanthaler, Evotec’s CEO. “Evotec is in the middle of academic and commercial players and is uniquely positioned to help progress R&D in a commercially different way than players who only work for one pipeline within large pharma.”

Evotec has demonstrated that drug discovery CROs with enough critical mass can assume leadership in research in certain diseases. And by taking on former big pharma facilities and their staffers, the firm also demonstrates the degree to which the CRO sector is becoming a rival to big pharma in providing job opportunities to research scientists.

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Sean Milmo is a freelance writer based in England.

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