Contract Service Providers: The State of the Market

With a fresh infusion of capital, a new executive team, including a new CEO and president, and a new board, Patheon brass decided to give the company a fresh new look, a new beginning, and an opportunity to embrace a new vision. The name remains the same, says CEO Wes Wheeler, who joined the company in December 2007, to reflect the company's "heritage of quality and service."

However, he adds, "we put the name in lower case to project a more people-friendly, compassionate company. We changed the logo color to green to reflect a fresh new start, and to venture into colors that none of our competitors own to convey that we are unique. The unique 'P' in the logo ... called the 'infiniP,' signifies our commitment to continuous improvement. The new slogan 'Performance the world over' reminds our customers that we have a global footprint, and are committed to proving through metrics that we get the job done."

Wheeler recently took some time to share his perspective on the challenges and opportunities that lay ahead for contract service providers with Pharmaceutical Technology. What follows is a transcript of that talk.

Wes Wheeler CEO and President, Patheon

PharmTech » What is your overall assessment of the market for contract service providers?

»Wheeler: We operate in two areas of that market. Twenty percent of our business is in pharmaceutical development, 80% in commercial manufacturing. So I can speak to those two markets specifically.

Our original concept in the development market was to bring products in when manufacturing was being scaled up for Phase II and III clinical trials. This would load our pipeline for commercial manufacturing. Now, however, we treat development as a separate business and offer services for formulation and process development for Phase I trials. Then, if we are lucky, we transition these drugs to our commercial manufacturing units.

PharmTech» What in the market changed to motivate Patheon's change in approach?

»Wheeler: In the old days, contract manufacturing organizations (CMOs) were awarded 'tail' products—that is, products that were further along in their life cycles, so that the clients could free up their capacity for newer products. We like those 'tail' products, but we're a bit selfish in that we also want to get products that are at an earlier stage in their life cycle. It gives us growth in volume and better stability.

PharmTech» That implies a change in Big Pharma's approach to outsourcing. What are your thoughts in this regard?

»Wheeler: Several of the large pharma companies are coming to us to help develop new products, which has been a nice change. So we have both the large companies and the smaller 'virtual' companies which have traditionally outsourced to us. We can offer all of them full formulation development, analytical services, and scale-up.

PharmTech»Why do you think pharma is bringing you earlier-stage projects?

»Wheeler: Pharma companies are outsourcing up to 30% of their development, and that number is expected to grow to 40%. The trend by pharma to outsource development is motivated by a desire to reduce cost, temper the ebbs and flows, and manage risk.

PharmTech» I hear it said that pharma companies are varying their product mix. Is this accurate?

»Wheeler: Yes. Traditional pharma is moving into biologicals and biotechs are moving into small molecules. The two types of Big Pharma companies are becoming one.

PharmTech» What do you think the market is for development services?

»Wheeler: We estimate that market to be about $10 billion annually. We have between 2–3% of that market and have high expectations for our ability to grow.

We operate six development centers around the world—in North America and Western Europe. We just opened a sales office in Japan and are moving headquarters to Research Triangle Park in North Carolina.

PharmTech» When you say you share the risk, what do you mean?

»Wheeler: We share the risk if we put time and effort into a compound that doesn't make it to market. We don't get the benefit of the revenues from commercial production.

PharmTech» You don't take an equity stake?

»Wheeler: Not at the moment.

PharmTech» What are you seeing on the commercial side of the business?

»Wheeler: On the commercial side, we see the market to be $10 billion, including Japan, but not India, Australia, or the rest of Asia. We have 7% of that market, which puts us second in the world in market share. We operate nine plants in five countries, excluding two plants we're selling (one in Canada and one in Puerto Rico). The retail value of the products we produce is more than $50 billion. We employ just under 5000 people, distribute to 85 countries, and manufacture all dosage forms.

We don't currently own much of our own technology, but we hope to do that in the future. We will encourage scientists in all six of our development centers to file patents. We also expect to partner with academia.

PharmTech» What do you perceive to be the trends in commercial manufacturing?

»Wheeler: We divide that market into five segments, each with its own dynamic: Big Pharma, specialty pharma, generics, biologics, and biotech

Depending on the company, Big Pharma outsources anywhere between 5% and 25% of its total manufacturing. Many companies have established strategic outsourcing divisions and are becoming very sophisticated. Specialty pharma companies are growing scripts faster than Big Pharma. About 200 companies classify as specialty pharma, and Patheon will focus more energy on this segment. Generics represent a very large market. Over 60% of all US prescriptions are now written generically. It's a market segment we can't ignore. Even though we've traditionally not worked closely with generics manufacturers, we are starting to establish relationships with them. But of course, we don't want to help cannibalize business from our own customers, the innovator companies.

As a company, we practice portfolio management. That's why generics are becoming so important to us. They produce high volumes of predictable products. It allows us to absorb our overheads and take on other, riskier projects.

For the biologics manufacturers who have traditionally produced proteins and peptides, we serve to fill out their capacity in biologics. But we are starting to work with them to develop their small molecules as well.

Companies in the biotech space generally don't have their own commercial manufacturing capacity, so we can help them develop their products. Also for the biotech companies, we can offer full service, from early clinical through commercialization, and we do this for many of them.

PharmTech» What's your read on the markets in India and China?

»Wheeler: No question that they are large players in the active pharmaceutical ingredient market. The majority of the industry's intermediates are now manufactured in India and China.

But the final finish step, the purification step, is still typically done in the West. For final dosage-form manufacturing, however, I see slower movement toward China and India. China is a longer way off, given the well publicized issues with quality and intellectual property. India is closer.

Combined, however, they don't have much more than 5% of the western (American and European) markets, and that might double to 10% in the near term. They are the lower cost alternative, but I don't see them taking over the majority of the market within the next five years.

PharmTech» Why doesn't Patheon have a finished-dose plant in Asia to service that market?

»Wheeler: We are considering a joint venture for development services in India. There is a huge amount of talent, and India can offer a lower cost alternative. We want to test the waters—test the logistics of that relationship as well as the quality standards. Patheon represents a high-quality brand, and we wouldn't want to neutralize our brand, but we do want to test the waters where it makes sense.

We are also thinking about Eastern Europe, possibly Poland, for commercial manufacture.

Another dynamic I've noticed with regard to India is that Indian companies are now acquiring finished-dose facilities in North America and Europe. In these cases, they're competing within our own cost structure. I say: Bring it on! I can be competitive on that kind of playing field.