Global Pharmaceutical Powers

More so than established contract manufacturing organizations and nonclinical contract research organizations in Europe and North America, up-and-coming contract service providers born in India and China have embraced the global nature of drug development. These companies were originally established to exploit the big differentials in wages paid to chemists and other scientists in their home countries versus North America and Europe. However, the most strategically committed CROs have realized that in addition to offering a platform for low-cost drug development, they need to be near their customers to secure those relationships.

Jim Miller

Proximity increases opportunities for relationship building, which leads to trust and more business. Further, there are certain activities such as projects that require close interaction with client scientists and/or involve intellectual property protection issues that are best carried out when close to the client's research and development (R&D) operations.

In the past two years, several India-based contractors have stepped up to acquire European and North American bases of operations, sometimes paying a considerable premium for the privilege. These include companies such as Nicholas Piramal (Mumbai), which bought operations from Avecia and Pfizer in the United Kingdom; Dishman Pharmaceuticals and Chemicals (Ahmedabad), which bought Carbogen and Amcis in Switzerland; and Jubilant Organosys (Noida), which acquired injectables manufacturer Hollister-Stier Laboratories in the US.

Those companies are about to be joined by Shanghai-based WuXi PharmaTech, which announced plans in late December to acquire AppTec Laboratory Services, Inc. (St. Paul, MN) for $162.7 million. AppTec, which has 495 employees, provides manufacturing and laboratory services to the biopharmaceutical and medical device industries. The company also provides clinical-scale cell culture manufacturing at its Philadelphia facility, where it has a 2500 L bioreactor train and a number of Wave bioreactors.

AppTec's growth has been nothing short of phenomenal. Revenues for 2007 of $71 million were up 40% from $51 million in 2006 and more than three times 2004 revenues of $23 million. Most of that growth has been organic and has come from the biopharmaceutical sector.

WuXi's story has been striking as well, as it has emerged as a major player in chemistry-based discovery, process development, and manufacturing services since 2002. Its 2007 revenues of $133 million were double its 2006 revenues and almost eight times its 2004 revenues of $21 million. In 2007, WuXi successfully completed an initial public offering (IPO) on the New York Stock Exchange, raising $155 million. It has 2700 employees, including 2100 scientists and claims most major pharmaceutical companies as clients.

Aside from AppTec's growth prospects, WuXi CEO Ge Li cited three elements in his strategic rationale for the AppTec acquisition: WuXi gets biologics capabilities and expertise to complement its chemistry position; it expands its US customer base and addressable market; and it gains an operational footprint in the US. Li added that the company plans to "amplify" AppTec's capabilities in China rather than replicate them; we take this to mean building larger scale biomanufacturing capabilities.

Building very large-scale facilities has been a key part of WuXi's strategy. Its facilities include a 630,000-ft² discovery chemistry laboratory, a 220,000-ft² process development and manufacturing facility in Shanghai, and a 130,000-ft² chemical manufacturing facility in Tianjin. It is building a 267,000-ft² preclinical toxicology facility in Suzhou, China, a bold move to expand its service offerings beyond chemistry and leap ahead of preclinical market leaders Covance (Princeton, NJ) and Charles River Laboratories (Wilmington, MA) in terms of China-based preclinical capacity.

The aggressive moves by WuXi PharmaTech, Jubilant Organosys, Nicholas Piramal, and other Asian pharmaceutical services providers stand out in contrast to Western competitors who have been in the business much longer and would seem to have more resources and stronger pharmaceutical company relationships to draw on. Thus far, only a few Western companies, notably Albany Molecular Research, Aptuit (Greenwich, CT), and Lonza (Basel, Switzerland), have taken the plunge to set up wholly owned chemistry and development operations in Asia.

Admittedly, it is more difficult for Western companies to establish themselves in India and China than for Asian companies to come west due to restrictive regulations governing foreign investment and the challenges of learning to operate in a different culture. But most Western service companies seem to be held back by a severe aversion to risk and an unwillingness to accept near-term losses and uncertainties in return for longterm strategic opportunities. It would be unfortunate if the pharmaceutical services industry's pioneers ceded their future to a band of relative newcomers, but it wouldn't be the first time that happened in the history of business.

CROs on parade

Like all corporations, CROs and CMOs have three principal constituencies: customers, employees, and shareholders. Presentations to customers and employees are usually focused on how the company will help them be successful, but presentations to shareholders are about how the company itself will be successful. As such, shareholder presentations provide a window into company strategies, their executives, and how they view market trends.

The annual JPMorgan Healthcare Conference, held in San Francisco last month, brought together CEOs and CFOs from more than 200 public and private bio/pharmaceutical, medical device, diagnostic, and managed care companies. The CEOs and CFOs addressed some 7000 money managers and dealmakers to explain why they should invest in their companies. The CRO and pharmaceutical supplier sectors were well represented at this year's conference, with more than 15 companies presenting.

Because profit margins and growth prospects drive stock valuations, investors want to know how companies will grow their revenues and profits. The CRO executives, in particular, had a very compelling story: major pharmaceutical companies are embracing outsourcing as part of their efforts to restructure their business models, and those efforts will drive the CRO business for years to come. All noted that the bio/pharmaceutical industry outsources only about 25% of its R&D spending, so they expect to enjoy robust growth simply by taking a piece of the growing share that will be outsourced. The bigger CROs also expect to fuel growth by increasing their market share of outsourced spending (e.g., by building massive preclinical toxicology laboratories or enhancing their ability to conduct large global trials). In their view, the balance of power has shifted from the pharmaceutical companies to the service providers over the past three years.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, info@pharmsource.comwww.pharmsource.com.