Fine Chemicals

Fine outlook in Frankfurt

The 'flight to quality' is real, but a major consolidation could be on the way. We spoke to the leading API manufacturers at CPhI

CPhI Worldwide is where contract manufacturing organisations (CMOs) serving the pharmaceuticals industry can meet and take stock of the state of the market once a year. This year in Frankfurt, as ever, there were diverse views but there was a consensus among major players about two things: business is generally strong but a longer-term consolidation of the CMO industry seems unavoidable.

Although the volumes in each project are getting smaller as the blockbuster model dies and niche therapies are increasingly targeted, Western CMOs are seeing business at both early and late stages of the development chain clearly up on 2009 and 2010. Biotechs and Small Pharma companies have been able to get more access to finance and restarted dormant projects.

Moreover, many CMOs said that they were seeing projects coming back from Asia as customers faced supply and/or quality problems, or wanted to find alternative sources of supply to head this threat off. Thus the 'flight to quality', which has been talked of for some time now, appears to be a reality.

Most non-GMP work is still going to India and China, of course. However, many said, customers increasingly prefer the critical GMP work to stay in Western Europe and North America. In some cases, requests were coming in for products that they had long since given up as lost to China forever.

Customers are thinking more in terms of value for money and the downside of things going wrong than just the bottom line. There are plenty of reputable firms in Asia - many of them linked to development capabilities in the West - but the big cost advantage they once enjoyed has been eroded by rising wages and stronger currencies. Those who can still massively undercut on cost invariably have a hidden cost lurking under the surface.

"Business is generally stable," commented Andreas Stolle, head of the pharma business line at Saltigo. "We are building a new pipeline and we see quite a few new drugs out there. In some areas, we are seeing GMP steps and APIs coming back, because customers want Western suppliers as well as Chinese."

Roger Herger, chief of staff at Dottikon Exclusive Synthesis, said: "Business is picking up at all stages of development. Things are better than at the same time in 2010 and we have ended short-time working in parts of our facility." The effects of the strong Swiss franc, he added, were also being overstated as customers come to companies like Dottikon with problems to solve. Cost is just one factor.

There were plenty of big stands at CPhI this year

Meanwhile, Pierre Charrier, CEO of French firm Minakem was "cautiously optimistic. 2011 will be a reasonable to good year and we see some late-phase projects coming out of the pipeline". Charrier also dismissed speculation linking Minakem's owners with a bid for its cash-strapped compatriot, Groupe Novasep.

For Novasep itself - which has put together a debt-to-equity package to head off attempts by one disgruntled shareholder to pursue an industrial merger - Jean Blehaut, director of marketing and business development, said that business levels were good. Novasep Process, which offers purification services to complement the more traditional molecules cababilities of Novasep Synthesis, is doing especially well.

"Molecules are becoming more complex to make, due to two things: drugs targeting ever more targeted niche therapies and the need to patent them," Blehaut said. "It is hard to patent simple molecules, so customers often prefer to make more complex ones, even if that costs more in the first instance. Many of these have crystallisation issues that require chromatography; Novasep has picked up a fair amount of business this way."

Vincent Touraille, CEO of another French firm, PCAS, agreed that business was much better after a "difficult" end to 2010, as more if smaller projects return from Asia. In the longer term, he added, as more and more Big Pharma companies look to generics, companies like PCAS that are active in both this field and custom manufacturing will be well positioned.

As well as other GMP and non-GMP investments across its network, PCAS has been active in the development of speciality polymers for medical applications. It recently signed an agreement with a US firm to develop a PEKK-based polymer that uses techniques similar to 3D photocopying to scan bones for surgery.

Axyntis, also of France, is a prime example of a mid-sized player in contract manufacturing. During 1H, it saw turnover increase by 33% on 1H 2010 to €34.4 million "due to new products and new markets, and the medium-term commitments made by the Group's clients. It expects turnover for the full year to be "significantly higher, at €70 million".

François Baduel, EVP of sales and marketing, added that there was a 15-20% dip in sales in 2009-10 but Axyntis has rebounded, partly on the back of projects coming back from China. Its business model, he believes, is well suited to the current situation because it offers long-term reliability with the strength of a mid-sized company that is visibly there for the long haul.

"Price is still a challenge, a European company cannot afford to charge twice what a Chinese company does but it can compete," said Baduel. "If you are, say, only 15-20% more expensive, business can and does come back, because customers are not just looking at the top line cost any more."

Redmond in the US will be the focus for Saltigo's expansion in high potency

In the longer term, however, some players foresee a major consolidation of the supplier base. The pharmaceuticals industry is facing an unprecedented 'patent cliff' in the years to 2014 as drugs worth $120 billion lose protection. It is also seeking to rationalise its supplier base in order to cut costs and reduce complexity, witness Pfizer's recent move to reduce its CRO supplier base from 17 to just two, Parexel and Icon.

The show floor evidence, however, did not support such a view at first sight. According to the organiser, UBM, preliminary figures show the number of exhibitors - though this is not the same as the number of stands - at a record 2,200 and visitor numbers also hitting an all-time record above 2010's figure of nearly 29,000, despite a clash of dates with the American Association of Pharmaceutical Scientists annual meeting and exposition in Washington DC.

Some within the industry, such as Gert de Coster of Sumitomo Chemical Europe, argued that this consolidation is happening already "under the radar screen" as Big Pharma struggles to divest unwanted sites. Many are being closed or drastically downsized without great fanfare. Euticals buying Archmica, de Coster added, could be a sign of things to come.

According to Gilles Cotter, president of SAFC, consolidation is inevitable. As well as the 'patent cliff', the pharmaceuticals industry is also looking at the more positive challenge of making medicines that are currently affordable to 1 billion people living on over $50/day affordable to 5 billion more living on $5/day.

"This will trigger a lot of changes in the supplier base. Pharma will have to cut the costs of drugs and delivering them, even as volumes go up - it is not just about generics," he said. "Customers will want the same quality standards, no matter how much cost are cut. The only way they can deliver this is by a consolidation of the supplier base. Suppliers won't cut their costs drastically without commitments on volume."

The difference now, Cottier argued, is that the CMO industry was financially stronger five years ago. The dynamics of the market will not change so much in the next five years, which will of itself drive a consolidation, as will competition from generics and the pressure on healthcare budgets. The industry is heavily regulated, so the change will not come as rapidly as market forces alone might dictate, but it will come.

SAFC's response is to position itself very carefully. "We are only in about one tenth of the $60-80 billion/year fine chemicals market but we are very selective about where we play and where we don't," Cottier said. "Our approach is to choose market segments where we can compete based on distinctive technologies, competencies and solutions based on manufacturing capabilities and a presence around the world."

The company thus emphasises strong differentiating technologies like high potency APIs (HPAPIs), zinc finger nuclease fermentation, viral particles and antibody-drug conjugates (ADCs), which position it well in both the traditional small molecules sector and in biologics. Most recent investment has been in these areas. ADC capabilities have also helped Groupe Novasep, according to Blehaut, and the rising Indian-based giant Piramal Healthcare, which also has Western assets.

The aisles were busy most of the time at CPhI Worldwide 2011

In 1H 2011, SAFC increased its sales by 13%, mainly driven by the rebounding biopharmaceuticals and electronics markets. It expects full-year sales to be 9% up on the €647 million last year. Acquisitions have been made in most of the large emerging markets, notably Brazil, as the company seeks to globalise its footprint.

Gerhard Klement, director of Piramal Pharma Solutions, was equally convinced that a consolidation must come. "Pharmaceuticals companies will be trimming their supplier bases from 90-100 to 10-15," he said. "There are too many companies fishing in the same area. The best will survive and absorb the smaller ones as suppliers seek to improve their competencies. Only those who can offer services across the full supply chain will flourish; those who just make commercial APIs will be taken over or shut down."

As ever, few Western players saved significant news to announce at CPhI. The major exception was the Almac Group, which had just announced three investments at its site in Craigavon, Northern Ireland, in manufacturing, formulation and analytical capabilities and a dedicated mass spectrometry laboratory.

Denis Geffroy, VP of business development, said that lack of late-stage capacity had been a limiting factor for the company to date. Some companies were reluctant to place early phase work with Almac, knowing that they would have to do a technology transfer to a commercial-scale facility elsewhere. It had thus suffered in the early phase downturn of recent years.

"The strategy we put in place is paying off, because we have six active Phase III projects for APIs and advanced chiral intermediates. We also have much better visibility for the volumes we will need from 2013 onwards," Geffroy said. "Three customers made late-stage manufacturing commitments to us ahead of the investment. Obviously, there are risks, but if just one or two go forward, we will be in a good position."

The upgraded facility will also include reactor vessels with clean room product isolation and drying equipment to allow HPAPI manufacture at batches of up to 600 kg. Almac expects to build, commission and validate it within the next two years. This will bring total capacity at Craigavon to over 30 m³.

The second major investment will add a non-GMP formulation development facility for the development and scale-up of solid oral dose drug products.  It will operate at lab scale, complementing existing GMP pharmaceutical development facilities, which focus on drug products up to pilot scale and registration. A second phase will see a "significant expansion" of GMP analytical support capabilities with the construction of two QC laboratories. This is due to be completed at the end of 2012.

Despite the attractions of some gold-plated ex-Big Pharma sites going cheaply, Almac decided to invest rather than buy. The strategy, said Geffroy, is to integrate all services on a single site, as it has done in the new US facility, because customers consistently say that they want this.

Hovione followed up on its XCaps system with further technology innovations

"Buying plants can be attractive for short-term gain but it can mean long-term pain," said Geffroy. Almac's ownership structure - it is part of the trust set up by its late founder Sir Allen McClay to fund R&D into cancer - enables it to take the longer term view, as well as giving customers the stability of knowing that the firm cannot be acquired.

Rapidd, Almac's integrated early development service for taking a lead drug development candidate to Phase I regulator submission, is progressing well after a slow start, Geffroy added. To date, five progammes have been completed, three in 2011, and five more are in the planning stages. Whilst targeted time savings of 12 months have yet to be achieved, Almac estimates that it saved six and three months respectively in the first two completed projects.

Also enjoying a strong year is Portugal's Hovione. Global sales director Roger Viney said at CPhI that the company's sales should be 15% up this year and that orders are already higher than for the whole of last year. Generics and custom synthesis have shared the growth roughly equally, the former driven by volumes, the latter by a strong drug pipeline, especially from biotechs.

At Frankfurt, Hovione revealed that it had started a relationship with Bend Research that will add oral drug delivery, formulation and engineering expertise to its own commercial-scale spray-drying capabilities and also launched a rapid proof of concept service for dry powder inhalation (DPI) products, following on from the filing in June of a patent for its high efficiency DPI, XCaps.

David Hoffman, president of US operations, described these moves as significant "because they enhance our pipeline to commercial manufacturing". There is growing need for technologies that address insolubility in drugs, especially in early stage development, where these technologies will be mainly focused, he added.

Hovione has also seen customers returning because of lost CEPs or reliability issues at Asian suppliers, Viney said. Of course, the company itself is an Asian-based supplier in its own right, with large manufacturing sites in Macao and Guangzhou province. It is also about to open a commercial office in Mumbai to address growing opportunities in this market.

Several other news announcements or comments at CPhI concerned HPAPIs. Saltigo said that it would build new HPAPI capacities for the American pharmaceuticals industry at its US site in Redmond, Washington State. The company is also looking to Japan, having recently had its Leverkusen site accredited by the Japanese Pharmaceuticals & Medical Devices Agency.

"Our customers increasingly wanted us to get into high potency," Stolle explained. "There are a lot of existing suppliers in the field but the feedback from our customers was 'We like to work with you, you have the background and reputation'. We have had some promises of RFPs already."

Redmond, which was already producing at lab and gram scale, will be expanded to produce and handle SafeBridge Category III substances, as well as Category IV. Kilo-scale quantities will become available from early 2012. Saltigo will then be able to produce HPAPIs with an Occupational Exposure Limit of less than 10 µg/m³ of air.

Evonik had a big advertising presence throughout Frankfurt during the fair

Carbogen-Amcis has signed a strategic alliance that will combine its expertise in HPAPIs with the liposome technology for the formulation of APIs developed by Austria's Polymun Scientific in new ways of delivering cytotoxics and cytostatics. Also in Switzerland, Siegfried will shortly begin work on a high potency formulated drugs line, taking its integration of services another step further.

One of the pioneers in the field, OmniChem, had already revealed plans to expand its capabilities in high potency with a new production facility designed to handle products at OELs down to 0.1 µg /m³/8-hour shift. This will add 4,800 litres of capacity for Class 5 products at its site in Louvain-la-Neuve, Belgium.

Aesica, finally, announced after the show that it had officially opened its potent manufacturing facility at Queenborough, near London, which formerly belonged to Abbot Laboratories. The site already makes HPAPIs and will now have the ability to make formulated products to SafeBridge Category 3, as well as Schedule II controlled drugs, like opiates.

Meanwhile, Minakem has invested about €500,000 in a solid form laboratory at its main site at Beuvry-la-Forêt, northern France, as well as in micronisation for steroids at the former AstraZeneca site in nearby Dunkirk and three 10 m³ reactors, one glass-lined, one stainless steel and one Hastelloy, with associated filter dryers at Leuna, Germany. It is now beefing up its QA and RA capabilities to meet increasing demand from the generics sector for aid in filing DMFs.

Also in expansionary mode was Halocarbon of the US. It has expanded capacity for trifluoroacetic acid and trifluoroacetic anhydride for life science applications, in part by squeezing out extra capacity via clever engineering. It has also upgraded its plant to meet growing demand for hexafluoroisopropanol, which is tight because of high demand in other fields.

All this, however, was mostly incremental expansion, based on specific capabilities. A warning came from the CEO of Cambridge Major Laboratories Europe, the Netherlands-based subsidiary of a US firm which is also among the few that have added major commercial capacity in the West, via a new site in the US, and which expects to achieve 20% growth this year.

Peter Van Tilburg was sceptical about the claims of projects coming back to Europe, citing rumours that DSM wants to exit production at Venlo, Netherlands, under relentless cost pressure from the Far East. "At the rate things are going, there may not be any commercial-scale assets to come back to in five years time," he said.

The trends in Asia that some see as an opportunity may actually be dire threats, in Van Tilburg's view. "Eventually there will be 400 million people in the Far East living to Western standards. What if one day the Chinese government tells companies to stop exporting API and meet domestic demand? We will be scrabbling around for medicines that are 20 years old."

Outsourcing, moreover, is still driven first and last by price and quality remains a secondary consideration. Parts of China are now struggling to compete. "I hear that Vietnam is the next hot destination. What then - Sudan? Somalia?" Van Tilburg asked, rhetorically. "My advice to people would be 'Don't get sick'."

 

 

From Online Issue: December 2011