Outsourcing Outlook: API Manufacturers Go From Grams to Tonnes

The annual Informex trade show, the principal North American showcase for pharmaceutical chemical manufacturers, is usually a bellwether of how the contract manufacturing industry is doing. The mood of the exhibitors is a good indicator of market conditions, and the presentations at the preshow Exhibitor Showcases are a reflection of what the manufacturers think the market is buying.

Jim Miller

This year's Informex was held in late January in New Orleans, and I would describe the mood as upbeat but cautious. Most manufacturers had a strong year in 2007, and they believe that the same dynamics are in place for 2008. In particular, the robust early stage pipeline continues to drive demand for process development services and preclinical and clinical quantities of intermediates and active ingredients, especially from small biopharmaceutical and pharmaceutical companies. In fact, company presentations during the Exhibitor Showcases focused primarily on development services, often touching just briefly on commercial-scale capabilities.

The ability to offer "one-stop shopping," i.e., to service the client from early development through commercial supply, was a common theme, but contract manufacturing organizations (CMOs) clearly understand that, in light of the slowdown in new commercial approvals, the present market opportunity is primarily in early development.

This year's "must-have" capability was solid-state chemistry, which has become increasingly important for improving compound performance and for intellectual property protection. Once reserved for a handful of specialty labs, the ability to analyze different polymorphs and salts of a chemical compound is now being offered by many, if not most, active pharmaceutical ingredient (API) manufacturers.

There has always been something of a herd mentality in the pharmaceutical chemical sector as CMOs try to offset any competitor's advantage in service offerings, and this year is no different. With most CMOs emphasizing their development and scale-up capabilities, solid state and chiral chemistry know-how, and high potency facilities, it's not easy to tell them apart.

Despite the strong showing last year and at the start of 2008, CMOs remain wary of the potential for an industry downturn. Several noted that the industry has traditionally been cyclical, and after four years on an upward trend, a correction may be due. There is growing concern that there may be too much capacity in the industry, even for preclinical- and clinical-scale manufacturing.

Several CMOs complained of some price-cutting by competitors, and there were concerns about some companies whose financial positions were somewhat shaky. There were some complaints about the relatively low number of pharmaceutical company attendees and slow floor traffic, but this may be a reflection of changing shopping habits (major pharmaceutical companies want fewer vendors, not more) rather than overall industry conditions.

Strategies bridge Asia and the West

A major element of the API development and manufacturing environment in recent years has been the emergence of CMOs and CROs, contract research organizations, in Asia and Eastern Europe. Although cost has been viewed as a major advantage of those companies, the actual strategic implications have been more complex. On the one hand, the cost advantage can be played in several ways, either on the development side, which is labor-intensive, or on the commercial side, where lower capital costs and environmental compliance requirements can be exploited. On the other hand, companies can compete in segments where cost advantages are not so important (e.g., for high-potency compounds; processes exploiting new technologies; or development services where proximity to the customer and intellectual property protection are more important considerations). These strategy considerations are faced equally by companies based in North America, Europe, and Asia.

API manufacturers are pursuing strategies that address these cost and non-cost considerations in various ways. For example, Cambrex Corporation (East Rutherford, NJ), now focused on the API market after the sale of its biomanufacturing and research products businesses to Lonza (Basel, Switzerland) last year, has targeted high-end generic APIs and custom manufacturing. With manufacturing assets in relatively high-cost countries (the United States and Sweden), Cambrex has focused on niche high-value APIs, including controlled substances and high-potency compounds.

At the same time, Cambrex's management realized that if it is to remain competitive in the custom manufacturing arena, it had to strengthen its offering of early development services, where long-term commercial relationships are often established these days. Consequently, in January, it agreed to acquire ProSyntest AS, of Tallinn, Estonia. ProSyntest provides early process development and scale-up services and has particular expertise in chiral and organometallic chemistries. It was established in 1990 and has 25 chemists. The business will be renamed Cambrex Tallinn after completion of the acquisition, and Cambrex will invest to expand its capacity.

The ProSyntest acquisition benefits that strategy in two key ways: it gives it the capability to serve the early development market, and it provides that capability in a low-cost geography, enabling Cambrex to compete more effectively with CROs in Asia. The deal should enhance Cambrex's ability to engage clients at early stages and keep them through scale-up to late-clinical and commercial-scale manufacturing, especially European clients.

Coming from the other direction, CMOs in India have used acquisitions in the US and Europe to gain proximity to clients and build their technology base. A prime example is Dishman Pharma and Chemicals (Ahmedabad, India) which acquired Switzerland-based Carbogen and Amcis in 2005 from Solutia. Carbogen Amcis, with three sites in Switzerland and one in the United Kingdom, has a strong technology base with particular capabilities in chromatography, chiral separations, and high-potency compounds. The company has a staff of 400, including 150 PhD chemists. According to CEO Mark Griffiths, Carbogen Amcis is doing more than 300 development project per year, which sets up a substantial potential commercial pipeline for Dishman. In fact, says Griffiths, the ability to offer a commercial scale-up route via Dishman's operations in India has been a business development boon for Carbogen Amcis, enabling them to win contracts that they might not otherwise have won without the large commercial capabilities.

Other prime examples of companies with footprints in the West and Asia include Albany Molecular Research (US, Eastern Europe, India and Singapore), NPIL Pharmaceuticals (India, Canada, and the UK) and Lonza (Switzerland, China, and the US). With the pharmaceutical research and development networks and high growth market opportunities now encompassing Asia and Latin America as well as North America and Western Europe, the globalization of the CMO industry is bound to pick up speed.

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