Fine Chemicals

CPhI: The ship sails on

Suppliers to the pharmaceuticals industry are more buoyant than might have been expected. Andrew Warmington reports from CPhI Worldwide 2012 in Madrid

CPhI Worldwide, by far the largest trade show in the pharmaceuticals industry, returned to Madrid for a third time in early October, alongside its satellite shows, ICSE, Bio-Ph, InnoPack and P-Mec, and various other side events. Considering the well-documented travails of the industry, suppliers were generally pleased - even delighted - about the state of business.

The only major showpiece news announcement was that of the Almac-DSM alliance in biocatalysts, while off-stage ICIG acquired the Tessenderlo Group's pharma businesses and Saltigo had decided to focus on its more profitable agro business. However, there was plenty of grapevine talk, not least about how biotechs and Small Pharma companies are increasingly setting the tone and about the inevitability of a consolidation ... eventually!

Overall, organiser UBM Live said on the first morning, about 29,000 visitors were expected from a record 133 countries to see about 2,200 exhibitors, including a record 236 newcomers, at about 1,500 stands. There were, at least by CPhI standards, some quiet parts at times, but it is still a huge and well-attended event.

A survey UBM conducted before the show found that 94% of the exhibitors and 89% of the visitors who responded saw the business outlook for next year as positive. There were also strong positive-negative balances in terms of expectations about the impact of GMP certification (+69%), supply chain issues (+56%), the rise in outsourcing (+54%) and the rise in generics (+52%). Negatives, not surprisingly, were headed by counterfeit ingredients, though only at -11%.

This optimism was broadly reflected on the show floor. Suppliers of APIs and intermediates continue to see a 'flight to quality' - or, as a senior figure at CordenPharma put it, a 'flight to reliability and flexibility' - as the true price of 'cheap' supply from Asia emerges. Both labour and environmental costs in China are rising, while Western suppliers are pruning their own cost base to stay in business and the cost gap between them is shrinking.

"Some Big Pharma companies are coming back with intermediates that they no longer want to source from China or would at least like to dual-source," said Xavier Jeanjean, sales director at Isochem. "It's an ongoing process and the volumes that come back are usually smaller than before but it's a good balance and leaves us with flexibility for other work."

Another cause for optimism, according to Gert de Coster, sales and marketing director at Sumitomo Chemicals Europe, is that FDA and EMA approval rates have been higher this year than in the last few years. "The most important thing is that the innovation pharma companies try to create needs to be translated into products and that seems to be happening," he said.

CPhI returned to Spain's capital for the third time this year

While talking things up at CPhI is not unknown, many had solid evidence from turnover figures and full facilities. David DeCuir, director of Albemarle's Fine Chemistry Services business, said that contract manufacturing element had grown by over 25%/year for the past four years and may be the fastest growing business in the fine chemicals industry. Other than the Fine Chemicals business, of which Fine Chemistry Services is a little under half, the company's sales will be flat this year.

Even though pharma had lagged behind other markets, business in APIs, generics (after 35 years, Albemarle is still a major supplier of ibuprofen from a US site) and contract manufacturing have all been very strong, DeCuir said. The board has also just approved a second expansion of the non-GMP contract manufacturing facility in Tyrone, Pennsylvania.

Gilles Cottier, president of SAFC, said that he was "quite pleased with our performance in APIs and contract manufacturing for small molecules". Q2 saw an 8.5% increase in sales over Q2 2011 to $233 million, though Q1 was flatter. Following recent acquisitions, SAFC now accounts for more than a third of Sigma-Aldrich's sales. It recently added a second powder manufacturing facility at its site in Irvine, Scotland.

Meanwhile, Guy Villax, CEO of Hovione, revealed that the 24% year-on-year growth to $180 million the firm achieved in the fiscal year to March 2012 should continue in the current year. Growth was roughly similar in generics and custom manufacturing, which together make up 80% of Hovione's business. During this year, the company was behind three NDAs, all for new molecular entities.

Ian Shott, president for Europe at AMRI, mainly stressed the development of the SmartSourcing concept that the company has been rolling out in recent months (see also SCM, September 2012) to rebrand its now globalised capabilities. AMRI has recently signed three major multi-year contracts and is in advanced discussions about deals that will replicate its contract at Eli Lilly, where AMRI scientists are embedded.

Many suppliers of APIs who spoke with SCM on the show floor were extremely happy with business, even the Swiss companies who are coping with highly adverse exchange rates. For instance, Andreas Meudt, head of marketing and sales, said that RohnerChem was seeing "a significant number of huge new projects" across the life sciences.

Gwin Bompas, managing director of Omnichem, said: "If we had extra capacity, we could fill it". Omnichem itself is probably the largest volume supplier of high potency APIs. Indeed, shortly after the show, it announced the completion of the first campaign product at its newly started high potency APIs (HPAIs) facility at Wetteren, Belgium.

This €18 million investment added 1,1200 litres of capacity, bringing the total to 7,300 and is equipped with latest isolation techniques, allowing safe handling of highly potent drugs at large scale, the company said. It can handle HPAIs and intermediates with an OEL down to 0,1 µg/m³/8 hours.

HPAIs form one of the fastest growing market subsets. SAFC has also been doing "very, very nicely" over the past 18 months in high potency, according to Cottier, and plans further investment at its site in Verona, Michigan. CordenPharma likewise is seeing a lot of enquiries based on its capabilities in this field.

Helsinn is another strong player in this field. The day after CPhI, the company officially inaugurated a new cytotoxics facility at its main site in Biasca, Switzerland, which Sandra Moro, deputy director of business development in the US, called "the Ferrari of Ferraris" in its field.

High potency APIs are a strong growth area for many firms

The laboratories opened in July and the commercial operations will follow in January but three projects are already ready to go into it. This, ventured Moro, shows customers' confidence in Helsinn and perhaps also the lack of supply elsewhere. The high containment and high potency parts of the business have gone to triple shift operations, just to keep up with demand.

Demand is huge in the regular CMO business too, particular from Phase III, and the whole plant is full, so Helsinn is carrying out a delicate juggling act to avoid turning business away. For instance, it has outsourced some early phase projects it would have done in-house before, set up external collaborations for starting materials to free up space and is becoming much more selective on projects and even bidding on them.

Laura Coppi, marketing and sales director at Italy's FIS, was equally happy. "Business is amazing, fantastic. Big Pharma, Small Pharma, generics - everything is going well. We are blessed," she remarked.

Historically a large-volume manufacturer of later stage APIs and intermediates, FIS has been quietly spreading its wings. It has just the completed the integration of Delmar, a Canadian specialist in early phase development and manufacturing. This has enabled it to add the small volumes it hitherto lacked outside HPAIs, while also getting a foothold in generics via a presence in the country where patents tend to expire first. An even more recent addition was a stake in Areta International, a small Italian supplier of CMO services to biotechs.

The late stages remain much stronger than the early phases. Denis Geffroy, VP of business development at Almac, commented that the firm's decision to invest in Phase III capabilities is now reaping its rewards and about 25% of the pipeline is now in Phase III, mostly small volume and/or high potency.  Almac cannot go after every late phase project but at least it no longer automatically loses those that exit Phase II.

"Three years ago we had nothing in Phase III. Our strategy has been to spread risks and our new alliance in biocatalysts with DSM is part of that," Geffroy said. The company has also realised the need to offer more than API synthesis. It is now very strong in solid state chemistry, which could be a big growth area considering that over half of all compounds going through development have solubility issues.

Sales were 15% up in the financial year to September and Almac is expecting a similar result in the current year as projects go through the pipeline. Technology - particularly biocatalysis - has increasingly become the number one means to differentiate itself from low cost competition, followed by project management, proximity to customers and track record.

Of course, in an industry where track record is everything and demand lumpy, both feast and famine are always present. Moro remarked that Helsinn recently lost a bid to a Western competitor that undercut it by about 40%, which must indicate desperation to fill empty vessels. For others, business was just 'OK', though no-one said it was very bad.

Almac has expanded capabilities at its main site in Craigavon

"The Golden Age of Pharma is over, as a result of austerity and the price-setting power of regulators in emerging countries" said Roger Herger, chief of staff at Dottikon Exclusive Synthesis. "The total number of potential CMO projects is lower than five years ago and strongly frontloaded with projects in earlier phases, with heavy development needs. We have broadened the project base significantly, but their pace in the growth phase and to reach maturity is slower than before."

One very clear message from CPhI was that Big Pharma is no longer the only - or maybe even the most desirable - target customer. This is a welcome development for many in fine chemicals, including several CEOs, who have become fed up by the endless rounds of meetings and vettings by lawyers before Big Pharma signs the contract.

Smaller firms, who do not and will not do chemistry and who appreciate the technical capabilities and project management skills CMOs bring, might even sign it after the first meetings. Jeanjean of Isochem said that he had been pleasantly surprised by the firm's success in bringing in work based on these skills.

Mark Griffiths, CEO of Carbogen Amcis, remarked that he recently had a meeting with an executive at a Big Pharma company that talked him through its nine core values, of which price was the ninth, then closed his presentation and started discussing his FTE costs. Big Pharma, in his view, talks a lot about partnership but only really cares about price.

"Psychologically, we have made the leap to regarding biopharma companies as our best customers. We've diversified ourselves to the point where only 15-20% of our business is with Big Pharma," Griffiths said. "Our business model is based on customer intimacy and Small Pharma companies both need that and appreciate the value of it. They are thinking in terms of value in product rather than trying to save another 10% of the costs."

How this works in practice once a Big Pharma buys a smaller firm that has steered a compound to Phase II varies, inevitably. Carbogen Amcis has had some buyers simply tell it to carry on to, while another split the whole package up, asked it to requote and gave it only one relatively simple part, only to find the project delayed when one of its new, cheaper suppliers was unable to deliver on the complex chemistry needed.

Both DeCuir of Albemarle and Roger Viney, global sales director at Hovione, commented on the increasing importance of Quality by Design (QbD) and Design of Experiments (DoE) in what their companies do. Hovione increasingly uses both to keep its offer competitive and secure FDA approval for its NCEs more rapidly. Two of the NDA approvals it did last year included QbD.

Low-temperature reactor at Dottikon ES's site

SAFC has also oriented itself more and more towards the biotechs and more than half of its sales are now for biological drugs. Its two latest acquisitions - BioReliance, which supplies testing services for biological drugs, and Research Organics, which makes buffers, amino acid derivatives and other critical raw materials - have taken it further in that direction.

"Many companies are restructuring and cost-cutting, changing their business models, doing more in-licensing and setting up strategic alliances with universities and biotechs and it seems to be paying off," commented De Coster of Sumitomo. "The trend has yet to be confirmed but if it does, in two of three years, there will be a real change. Pharma is increasing focusing on science more than products. It has realised that it needs to come up with better strategies than securing access to doctors through an army of sales reps. As a science and technology-based company, we welcome this."

Several senior figures argued that a consolidation must happen, albeit slowly. Cottier said that fundamental processes in the industry will force change. Customers are under huge pressure on costs and regulation, even as demand creates new opportunities in emerging markets. Simplifying a supplier base that has been expanded in part by their own mega-mergers is highly desirable.

"They need to produce drugs and make them available and affordable over the next five to ten years to 5-6 billion people who will not have the living standards of the Western countries," he said. "Volumes will go up three- to four-fold and prices must come down, while quality requirements will not decrease. As suppliers, we need to help customers to get costs out of the system and it will take more than process improvements to achieve it."

Vijay Shah, executive director and COO of Piramal Healthcare, likewise sees consolidation as inevitable and desirable. "A lot of private equity money has chased assets in the past, but now we are seeing many exits," he said. "The top ten in both APIs and formulations both have less than 30% of the market between them and there are too many players."

Logically, consolidation should have happened years ago, some might argue, given the huge overcapacity and low profit margins. "Sheer economic necessity will cause it. Many customers have suppliers in too many places because of the outsourcing boom. To reduce costs and get real transparency, the supply chain must be rationalised," Cottier added.

"There are too many people chasing too few sales," agreed DeCuir, echoing De Coster's comments about "a terrible imbalance between supply and demand". However, finding the right buy is not so easy, he admitted. Albemarle itself had been "left at the altar" a couple of times before.

Many agree that there are too many 'me-too' companies chasing too few contracts. One only has to walk around CPhI to know that. However, fine chemicals do not always run to the same rules as other industries. For one thing, many companies that seem basically similar are actually operating in very difference niches and integrating them into each other is a complex process that some are reluctant to attempt.

Hovione has made a success of Pfizer's former site in Ireland

Piramal Healthcare is the primary example of how hard it can be to execute the right deal. It has over $3.5 billion to spend following the sale of its branded generics business to Abbot Laboratories and has looked at six European CMOs since January in pursuit of its target of becoming a top five player but has yet to add to its three assets in the UK.

The company, Shah said, is looking for capabilities and strategic fit rather than discounted valuations, notably in technology platforms like sterile injectables and formulation, as much as API capacity. At present, he said, most assets are being sold by private equity. Piramal has had great success with the formulations facility it bought from Pfizer at Morpeth and would happily buy something similar to that, but there is not much on the market right now.

Cottier believes that the recycling of ex-Big Pharma sites that should really close is not really sustainable. However, while such gold-plated assets come onto the market at attractive prices, they will often find buyers and many CMOs have made a success of doing just that.

Down the years, Aesica Pharmaceuticals has acquired three sites from separate firms in the UK (one has now been closed) and three more in continental Europe from UCB, as well as development phase assets. Most of its business is now in formulations. Business, said Kevin Cook, managing director of the APIs business unit, is very good at present.

"From an API point of view, I am delighted with the number and quality of RFPs we are getting and our conversion rate. We have been successful in acquiring some good projects to increase the capacity utilisation of our current network," Cook added. "I am convinced there is a future for Western manufacture. We need to focus on adding value for customers and being reliable."

Now Aesica is keen to acquire both in the US, where a kilo lab, analytics and maybe a pilot plant are top of the list, and additional API manufacturing capabilities in Asia. They might be from fine chemicals companies or Big Pharma. Building is another option. The company is also investing heavily in project management capabilities and partnerships with universities and start-ups.

Another company that has made a success of a Big Pharma site is Hovione. Nearly three years ago it acquired a site at Ringaskiddy, Ireland, that once made $13 billion worth of Lipitor. Despite the immense challenges of turning a site with  massive built-in redundancies into a multi-purpose CMO facility, this has now broken even six months ahead of schedule and is producing five commercial products, with two more to come.

CPhI returns to one of its perennial locations, Frankfurt, next October. Despite rumours that Paris would be dropped following serious transport issues during the last show there in 2010, Greg Kerwin, portfolio director for pharma at UBM, confirmed that Paris is "still in the rotation". He also revealed that the next brand extension of CPhI will be to Russia next April.

 

 

From Online Issue: October 2012