The good times keep rolling in pharmaceutical chemicals

Pharmaceutical chemical manufacturers at the CPhI North America exhibition in Philadelphia last month were upbeat regarding growth prospects some six years into a strong run of profitability. Investment continues, as does consolidation and an evolution of business models to accommodate rapid change in the drug market.

The trend among drug companies to shift their outsourcing from Asia back to the U.S. and Europe is prompting contractors to bolster production of starting materials and intermediates that had been purchased from low-cost suppliers in China and elsewhere in recent years. Meanwhile, drug-chemical companies continue to push into downstream services, including final-dose manufacturing. And suppliers have their eyes on emerging cancer therapies and other high-tech drugs that will require special chemistry expertise.

But this year, some attendees were promoting the virtue of one-site, rather than one-stop, shopping. They warned that dispersing intermediate chemical, active pharmaceutical ingredient (API), and final-dose manufacturing among a network of facilities undercuts not only customer convenience but also manufacturing quality.

PCI Synthesis is typical of the contract manufacturers on a long run of profitability. PCI just completed its sixth year of double-digit growth, CEO Ed Price said. He noted that the company, formed as it operates today when PolyCarbon Industries acquired a Borregaard plant in Newburyport, Mass., in 2016, has doubled its revenues in four years. Price sees the streak continuing, with plenty of business opportunities in the Boston area.

Indeed, the vast majority—95%—of PCI’s customers are the kind of small and virtual companies that dot the Boston biotech hub. Several of these customers’ projects are moving toward commercialization, said Price, who recently returned from a trip to Europe to meet with potential partners that can serve as backup manufacturers. Arranging for backup, a function that has traditionally been handled by the drug company doing the outsourcing, has emerged as a new front in pharmaceutical services, according to Price.

“Our customers don’t have the bandwidth or wherewithal to understand who the players are in the market,” he said. “It makes a lot more sense that we find the appropriate partners.”

Price said PCI, which also operates a plant in Devens, Mass., is focused on developing the chemistry skills needed to manufacture today’s high-tech cancer therapies and personalized medicines. The company has adequate manufacturing capacity but will continue to invest heavily in analytical services, he said.

Many firms in the exhibit hall reported investing to accommodate growth and cover a broader stretch of the supply chain.

Almac’s API services and pharmaceutical development division added drug starting-material production capacity with the acquisition of the Irish firm Arran Chemical in 2015 and finished-dose drug manufacturing with the acquisition of a shuttered AstraZeneca R&D center in Charnwood, England, in 2016.

Almac, based in Northern Ireland, spent $24 million to recommission the Charnwood facility, a project that yielded a threefold increase in its solid oral-dose drug-making capacity. A $5 million investment at the Arran plant is under way in an effort to complete the link from early- to late-stage manufacturing, including the API production done at the company’s headquarters in Craigavon.

The expansion at Arran includes new glass-lined and Hastelloy vessels, bringing total manufacturing capability to about 50 m³, according to Michael Cannarsa, Almac’s business development director. The site includes a multipurpose pilot plant. While China has dominated the market for starting materials, Cannarsa said Ireland presents an attractive alternative, given rising costs and uncertainty in the wake of an environmental crackdown in China.

“We used to say we were all in one site, which we really can’t say anymore,” Cannarsa acknowledged. But it’s still pretty close to a one-site operation, he contended. “Arran is a two-hour drive, depending on who’s driving. And Charnwood is a very short flight to the Midlands region in the U.K.”

Almac’s recent moves, according to Cara Young, the firm’s director of business development, accommodate customer requests for a simplified supply chain. Both small biotechs and major drug companies are less comfortable than they once were with multiple vendors, some as far away as China, Young says, when, instead, “you can have all the people from the supply side and the customer side sitting in the same room.”

Hovione, which has likewise added services, including spray drying and finished-dose form manufacturing, in the past two years, continues to invest both at its headquarters in Loures, Portugal, and at its technology center in East Windsor, N.J.

The company spent about $100 million in 2017 and plans to invest as much again this year and next, according to Vice President for Sales and Marketing Frédéric Kahn. Hovione opened a 7,000-m² development services center at its main manufacturing facility in Loures, equipped to handle highly potent compounds. With 200 people hired over the past three years, the site now employs a staff of 1,600. Hovione may hire another 200, Kahn said.

In New Jersey, the company is in the process of doubling chemistry and analytical service capacity and will begin operating a continuous tableting facility this month.

The plan over the next three years is to continue investment, especially in Portugal, Kahn said, where the firm will add 165 m³ of chemical synthesis capacity, a spray-dryer building, and a 1,200-m³ analytical lab.

“This is capacity that we are going to have to sell,” Kahn acknowledged, “but we pursued it by listening to our customers—by understanding what their requirements are in terms of API, formulation, solubility enhancements, and continuous tableting.”

Kahn declined to call the added services a push toward the one-stop-shop model. Rather, he said, the firm will now offer one-site, full-supply-chain service in both Portugal and New Jersey.

Dottikon Exclusive Synthesis is also promoting a one-site approach at its facility in Dottikon, Switzerland, according to Stephan Kirschbaum, head of business development. But it is sticking to its core competence: chemistry. The company, which focuses on process development and API manufacturing, will open a new analytical and process development center this year. The facility has space for 150 people. Dottikon currently employs 600.

Dottikon, like PCI, is adding R&D and analytical services largely because it is running out of lab space, Kirschbaum said. But it is also necessary to beef up such services to pursue the technologically complex drugs of the future, he said.

Customer demand will not lead the firm to add upstream or downstream services, especially if such activity would result in geographically dispersed operations, Kirschbaum insisted. “Being under a single brand doesn’t really help if locations are separate and not under one quality-management roof,” he said.

Sterling Pharma Solutions is spending about $16 million to add support services to its API operations in Cramlington, England. The project includes micronization, milling, and solid-state chemistry and expands pilot- and kilogram-scale manufacturing.

“I can see us adding a few more stages,” said Andrew Henderson, sales and marketing director. “We are progressing to become a full-service API supplier, to produce the drug substance ready to go into formulation. The next phase beyond that is integration into formulation. We are reviewing that as a strategy at the moment.”

The step after that would be small-scale oral-dose manufacturing, but that may be a step too far.

“I think there can be some good synergies between having API, having solid-state, and having the early formulation,” Henderson said. “There are a lot of feedback loops within the sciences. But with the next phase of going into contract manufacturing dosage form, there is less overlap from the scientific perspective.”

When Hovione set up in New Jersey in 2002, it was a trendsetter. Almac made a similar move into Pennsylvania in 2011 with a clinical trial supplies facility. Since then, other foreign pharmaceutical chemical makers have followed into the U.S., mostly by making acquisitions, as they realized the importance of an outpost in the biotech industry’s breadbasket.

The trend has accelerated of late. Since the beginning of 2016, India’s Piramal Enterprises bought Ash Stevens, a Michigan-based contract manufacturer; the Chinese services firm Porton Pharma Solutions bought J-Star Research of New Jersey; and Italy’s Olon purchased Ricerca Biosciences, an Ohio-based pharmaceutical chemical firm.

At this year’s CPhI, a similar deal was announced: the acquisition of Kalexsyn, a Kalamazoo, Mich.-based contract research firm, by Dipharma, an Italian maker of pharmaceutical chemicals. Like other acquirers of U.S. assets, Dipharma said the deal will allow it to offer broader services and better communicate with U.S. customers, which account for more than a third of its sales.

Unlike J-Star and Ash Stevens, Kalexsyn focuses on research and doesn’t follow the U.S. Food & Drug Administration’s current Good Manufacturing Practices (cGMPs) for making drug-grade molecules. David C. Zimmermann, Kalexsyn’s CEO, said Dipharma intends to change that. In a multi-million-dollar investment that will expand its footprint by about 50%, Kalexsyn will install two 200-L cGMP manufacturing lines, one of which can handle highly potent compounds, Zimmermann said.

Kalexsyn has long touted its independence. But Zimmermann said the firm was losing business because potential customers for its research services shied away when they learned it couldn’t advance successful projects into cGMP manufacturing. By the end of 2019, Kalexsyn will be able to do that for molecules in Phase I and early Phase II clinical trials. It can then transfer them to Dipharma’s Italian facilities for later trials and commercial-scale production.

The acquisition of Kalexsyn removed yet one more firm from the dwindling ranks of independent U.S. pharmaceutical services companies. Attendees pointed to firms like CiVentiChem, Obiter Research, and PCI as some of the few that haven’t been acquired.

By all accounts, interest in such firms is high. At the show, CiVentiChem CEO Bhaskar Venepalli showed a C&EN reporter an email he had received just that morning from a representative of a European company interested in acquiring it. But Venepalli, who cofounded CiVentiChem in 1994, said he is happy with his current model, in which the firm does research and small-scale cGMP synthesis in Cary, N.C., and large-scale, non-cGMP production in India.

Meanwhile, overseas firms without a U.S. toehold are assessing their options. Kenneth N. Drew, senior director of North American sales and business development at Flamma, an Italian pharmaceutical chemical maker, said his firm looked at Kalexsyn and was in the running to acquire PharmaCore, a small North Carolina firm that Cambrex ultimately acquired in 2016.

But Drew claims not to be in a hurry. And Flamma’s owners, he added, have no desire to become a one-stop shop through rampant acquisition, as some of the industry’s largest firms have.

“For us, consolidation is great,” he said in reference to moves by competitors. “Not everybody wants to shop at Walmart.” Flamma’s sales in recent years reflect that sentiment: They have almost doubled since 2012 to $112 million last year.

With reporting by Michael McCoy.