The rise and fall of the U.S. pharmaceutical chemical maker

News this year of the sale of PCI Synthesis and Ampac Fine Chemicals to French and South Korean companies, respectively, came as something of a surprise. Both drug contract manufacturing organizations (CMOs) had been doing well, investing in growth and honing a focus on technologies and services that are in high demand.

On the other hand, the deals are only the latest in a string of acquisitions marking an evolution in the pharmaceutical chemical service sector toward large global operations offering a menu of services from early-stage process design to finished-drug manufacturing.

Notably, many of these large operations are based outside the U.S. In the U.S., by contrast, independent pharmaceutical CMOs have nearly vanished.

Many of the acquiring firms are European, which is not surprising given that contract pharmaceutical chemical production was pioneered by family-owned European companies such as Fabbrica Italiana Sintetici and Olon in Italy and Hovione in Portugal. The largest early player, Switzerland’s Lonza, remains dominant.

“Who’s left?” asks James Bruno, president of Chemical & Pharmaceutical Solutions, a consulting firm serving the sector. Watching the nonstop activity in the U.S. and Canada over the past five years, he saw financial buyers and diversified service firms competing to pay top dollar for U.S. operations. The activity was fueled by a long stretch of profitability in the business.

“The only reason this is going to slow down is because there isn’t anything left to buy. Pretty soon there will be only one company left,” Bruno says, suggesting it might be Cambrex, a publicly traded U.S. firm that in 2016 acquired PharmaCore, a smaller U.S. player. More recently, Cambrex acquired Halo Pharma, a finished-dose drug contractor.

The acquired companies are not physically disappearing. For example, BioVectra—purchased in 2013 by the biotech firm Questcor, which was in turn acquired by Mallinckrodt—now operates as an independent unit of a diversified company.

Many others are being integrated into comprehensive service organizations in new roles that are likely to impact how they do business. In some cases, the U.S. operation becomes the front end, offering process design and small-scale manufacturing for projects that are transferred to other divisions for subsequent work.

A typical example is Ricerca, which the Italian firm Olon bought last year to gain a pipeline of early-stage projects from U.S. biotech firms. “It gives them an opportunity to take in projects early on that they wouldn’t normally have done if it was just Olon alone,” Bruno says.

The problem is that a small specialist risks losing customer focus when it becomes part of a chain of services. “Little guys suffer,” Bruno says, “because they go into a big company and they are a little bit of a lost number, all the way in the back some place.”

Guy Villax, CEO of Hovione, attributes the sweep-up of U.S. firms to the sector maturing during a boom. The CMO market, according to Villax, heated up incredibly in recent years with Lonza’s acquisition of Capsugel, and initial public offerings by Patheon, following its merger with DSM’s pharmaceutical chemicals operation, and Catalent.

“These three things created a sector that has attractive multiples,” Villax says, referring to the ratio of the amount a buyer pays to the earnings of the acquired firm. A “massive string” of deals followed. Active pharmaceutical ingredient makers in the U.S. became prime targets for overseas companies like Novacap, SK, and Porton that were interested in a piece of the action.

“I think everybody agrees you now have a genuine sector being built,” Villax says, with “lots of money pouring in.”

Several of the targets were small, midwestern companies launched by entrepreneurs with chemistry backgrounds looking to take advantage of the fast-growing outsourcing market. One of those entrepreneurs was Michael Major, who launched Cambridge Major Laboratories (CML) in 1999 in Germantown, Wis.

“I went into it because of my love of science and research,” says Major, who describes himself as a dyed-in-the-wool chemist. Success would hinge on solving process design and manufacturing problems by working closely with customers. Remaining independent was important.

By 2007, CML’s annual sales had reached $20 million, and Major and his partner determined that further growth meant becoming a “full service” contracting firm. Planning to add formulation and regulatory consulting, Major sold a majority interest in the company to Arlington Capital Partners to access financial resources.

Major left the company shortly after that, and CML was sold to another financial buyer that merged it with AAIPharma Services, an analytical services firm in Wilmington, N.C., forming Alcami in 2013. Amid rumors of difficulties melding the two pieces together, Alcami was sold to another financial buyer this summer.

Ampac Fine Chemicals, on the other hand, emerged from a diversified corporation, American Pacific, and established itself as a specialist in simulated moving bed separations. In 2010, it acquired a fine chemicals plant in La Porte, Texas, and in 2016, it bought a Boehringer Ingelheim plant in Petersburg, Va. Ampac’s purchase by SK Holdings this year places it in a more comprehensive and global organization, according to Ampac CEO Aslam Malik.

Malik, who will remain at the helm of Ampac, says the diversified South Korean company operates on four “pillars”: chemistry, energy, semiconductors, and pharmaceuticals. Ampac will join SK Biotek to compose the pharmaceutical pillar.

“What this means is that now we belong to a family, and in the family we have a sister,” Malik says. “We want to see what we can offer customers on our own, but we also see a lot of synergies.” It is possible now, he says, for SK to work on starting materials in South Korea, transfer them to Ampac for advanced chemistry, and then move the work to SK’s Swords, Ireland, plant, which SK recently purchased from Bristol-Myers Squibb, for downstream services.

“But it’s customer first,” Malik says. “If the customer doesn’t want us to do synergies, we won’t.”

The handful of independent players remaining tend to highlight a customer-focused business model similar to the one Major touted as the basis for CML. They claim a higher level of responsiveness than U.S. operations that are part of widely dispersed service giants. They also regularly field calls from interested buyers.

“People call all the time,” says Louis Glunz, CEO of Morton Grove, Ill.-based Regis Technologies, a family-owned business. “But I’m quite happy owning the company.” Regis already has the U.S. location that overseas conglomerates covet, and it’s succeeding with a business model of R&D services in support of manufacturing, Glunz says.

The evolution of Regis’s competition from small to large poses little threat, according to Glunz. “It’s not like someone’s cornered the market on the raw material for something like steel,” he says. There is demand for Regis’s approach to chemistry services. He is expanding staff and finding a lot of talented chemists on the job market.

Joseph Miller, who recently joined Regis as vice president of chemistry and strategy after working at Patheon, says employee motivation and morale tend to be higher at small, independent firms. Top management is also more likely to be regularly involved in projects, which is appealing to Regis’s customers, most of which are located in the U.S.

“At small companies, workers know that what they do impacts the bottom line,” Miller says. “At larger companies, it’s hard to understand that.”

Bhaskar Venepalli is CEO of CiVentiChem, a Cary, N.C.-based CMO that also operates a facility in India. The company is doing well, he says, and next year will add a new clinical-scale plant in Cary certified to the U.S. Food & Drug Administration’s current Good Manufacturing Practices quality standard.

Recent acquisitions in the U.S. support the contention that European companies are interested in a U.S. footprint, Venepalli says, especially when it comes with a pipeline of early-stage projects. He points to Novacap, which over the past 10 years has amassed a European CMO business with the acquisitions of Chemie Uetikon in Germany and PCAS outside Paris. Novacap’s recent acquisition of PCI in Newburyport, Mass., fits the model perfectly, he says.

Prospective buyers have contacted Venepalli expressing an interest in CiVentiChem. As for his interest in selling: “Who knows? Everything is for sale,” he quips. “What I find mind boggling is, Where is the money coming from?”

Sources agree that companies have plenty of money to invest and that the venture capital market still sees the CMO business as primed for growth.

Industry watchers such as Major are even enthusiastic about the prospect of entrepreneurs launching new companies. But an investment in a start-up has a much longer payback cycle than one in an acquisition, and venture capitalists may not want to wait the five years it could take for a new plant to post a return on investment.

Bruno says he hears a lot of discussion about new ventures. “People talk to me all the time,” he says. “I know the rumblings are there.” Bruno says speculators point to a shift in the pharmaceutical business away from so-called blockbusters to rare disease treatments, personalized medicines, and high-potency therapies, all of which require high-tech chemistry and manufacturing services.

Could an entrepreneur succeed in launching a U.S. firm that serves the chemistry needs of small companies conducting drug discovery and development? “Absolutely,” Bruno says. “But I just don’t think we’d have the financial backing and the right market to do that.”