Why Europe is ascendant in the pharmaceutical chemical business
Nov. 2018/10/30 14:39:31 By LEAP Chem
Reflecting on Europe’s current status in custom pharmaceutical chemical manufacturing during a C&EN reception at the CPhI Worldwide conference in Madrid earlier this month, Rudolf Hanko, CEO of Siegfried, evoked the godfather of the sector. “As Peter Pollak once said,” Hanko recounted, “if you want to succeed in this business, you have to be on the Rhine.”
Pollak, who built the custom active pharmaceutical ingredient (API) business at the Swiss firm Lonza, watched the sector grow from primarily European in the mid-20th century into a global industry in the 21st. Later, as a consultant, he saw the industry’s swing to low-cost producers in Asia and the beginning of its shift back to higher-quality, more secure suppliers in the West.
Hanko, whose company is headquartered near the Rhine, may be right that Pollak, who died in 2016, would have felt vindicated by recent trends.
The pharmaceutical service sector remains a global industry. But managers of contract development and manufacturing organizations (CDMOs) who convened in Madrid gave credence to the notion that the business of making custom APIs for new drugs has largely resettled with European firms.
Recent deals in which the U.S. firms Ricerca, PCI Synthesis, and Kalexsyn were acquired by the European companies Olon, Novacap, and Dipharma Francis, respectively, mark a shift away from the U.S. that largely favors Europe, according to Lee Newton, vice president of API development and manufacturing at Lonza. “But I’m not sure it’s a trend driven by the geography itself,” he said. “It’s more about the nature of the companies.”
Companies are pushing to expand services and build global networks through acquisition, and larger firms are better able to make and digest acquisitions, Newton said. Most of the larger firms are in Europe, and most of these companies have in recent years attempted to place research and manufacturing assets in the biggest market, the U.S.
“Clearly, some of the business returning from the East has helped us,” Newton added. He was referring to a shift in custom chemical production away from China due in part to a recent environmental crackdown in which the government has been closing facilities and whole industrial parks, crimping supplies of key chemicals and intermediates.
In fact, Lonza is trying to capitalize on the trend with a new program to offer intermediates made at its facility in Visp, Switzerland, to customers that in the past might have acquired them from farther afield. The company has been quietly providing the service for about a year and is now going public with it.
Lonza has a history of major acquisitions—most recently the drug delivery technology firm Capsugel—and is not ruling out further deals, but its focus now is on targeted organic growth, Newton said. “We aren’t interested in putting assets on the ground at risk and running around trying to sell them. We are looking for customer-supported investments that fill specific needs.”
After the recent spate of acquisitions, larger, more established firms are beginning to assert themselves as global suppliers, said Mark Griffiths, CEO of Carbogen Amcis, another Swiss company. But he agreed with Pollak’s view of Switzerland’s strength in pharmaceutical chemicals. “It’s been Switzerland and Germany in Europe since almost time immemorial,” he said. “It’s just always been that way.”
Of course, in today’s multinational industry, few firms are purely European. Carbogen Amcis, for example, has a large-scale manufacturing facility in Shanghai and is owned by an Indian company, Dishman, which purchased it in 2006. Griffiths notes, however, that Carbogen Amcis operates independently.
Similarly, the largest pharmaceutical chemical facility operated by Germany’s Evonik Industries is its Tippecanoe factory in Lafayette, Ind., acquired from Eli Lilly & Co. in 2010.
“I don’t know if it’s Europe versus the rest of the world,” said Jean-Luc Herbeaux, head of Evonik’s health care business, pointing to the U.S. management team in Indiana. “We don’t see it as a European site in the USA.”
Evonik just announced a $42 million expansion of its API and advanced intermediates business that includes a modular, continuous-processing pilot plant in Germany, highly potent API capacity in Germany and the U.S., and a pilot plant for custom synthesis of PEGylated APIs in Germany.
The firm’s recent acquisitions have focused on specialized technologies, regardless of geography, Herbeaux said. He pointed to Transferra Nanosciences, a Vancouver, British Columbia-based liposome nanoparticle firm that Evonik acquired in 2016. Evonik, he said, is not interested in providing an end-to-end or one-stop shop to customers; instead, it prefers a menu of best-in-class services.
“A lot of consultants and financial investors have made a living out of trying to convince the industry that an end-to-end approach is the best strategy,” Herbeaux acknowledged. But he argued that the drug industry generally resists an all-things-to-all-customers strategy.
While the opportunities for acquisition have thinned considerably, one pending purchase of a U.S. asset by a European firm could be found at CPhI. The British firm Sterling Pharma Solutions hopes to close on a deal by the end of the year, CEO Kevin Cook told C&EN.
The plan is to set up an arm close to North American innovators for preclinical custom synthesis that can be transferred to larger assets in England—a strategy pioneered by the Portuguese firm Hovione in 2003 and emulated in several recent acquisitions of U.S. companies by European as well as Indian, South Korean, and Chinese firms.
“We want a relatively small but perfectly formed laboratory and kilo lab to handle preclinical to Phase I on the basis that the more projects you work on, the more chance you have for graduation,” Cook said.
He attributed Sterling’s annual sales growth of 35% on average over the past three years in large part to the shift in projects back to Europe from China.
That trend has prompted other investment in Europe as well. “When you look back over the years since the financial crisis of 2008, we have invested heavily in process development,” said Markus Blocher, CEO of the Swiss firm Dottikon Exclusive Synthesis. “Customers have to make the molecule.”
Dottikon will spend about $100 million on expansion of process development, quality control, and multipurpose manufacturing at its site in Dottikon, Switzerland, this year, more than twice the amount it invested last year. And the company plans to add a pilot plant and another multipurpose plant in the next few years.
The incentive is largely the movement of the custom pharmaceutical chemical business back from China. Dottikon made a direct appeal for repatriated work in an ad in the daily publication distributed at CPhI that featured a rhymed couplet: “China goodbye / in your supply?”
Italy’s Fabbrica Italiana Sintetici (F.I.S.) has also bulked up its multipurpose manufacturing in recent years and sees itself in a good position to pick up business coming back from China, said Giuliano Perfetti, senior director of marketing and business development.
“We have invested $220 million in the last four years to increase capacity of highly potent APIs,” Perfetti said. In addition to adding spray drying, sterile manufacturing, and crystallization services, F.I.S. has invested in fluorination that is compliant with current Good Manufacturing Practices; it expects this service to be in demand as supplies from China dwindle.
Much of the new investment in Europe reflects a push on the part of CDMOs into high-tech chemistry and biotechnology to meet the changing demands of drugmakers. Novasep, a French firm with 13 sites in Europe, the U.S., and Asia, recently opened a commercial-scale viral vector facility in Seneffe, Belgium, and plans to open a biologics finished-dosage operation in Chasse-sur-Rh?ne, France, focused on small-volume drugs, according to Jean Bléhaut, president of manufacturing.
The firm spent $45 million on these projects and another $5 million expanding its cryogenic manufacturing capacity. Last year, it spent $13 million boosting capacity for antibody-drug conjugates.
Almac, based in Craigavon, Northern Ireland, has focused on organic growth after acquiring Arran Chemical in 2015, according to Denis Geffroy, vice president of business development. It has been frustrated in a two-year effort to acquire large-scale API manufacturing.
“At the end, we concluded there was no perfect fit for us,” he said. “So the decision was taken three months ago to build a larger-scale API facility in Northern Ireland next door to our current activity.” The $20 million plant will be fully operational in 2020, he said.
Almac had looked at two sites in the U.S., Geffroy said, but determined they were too small. The plant that came closest to meeting Almac’s specifications was affordable but had prohibitively high operating costs. “In the U.S., we decided it would be difficult to remain competitive,” he said.
Despite overall concerns about the quality and reliability of Chinese supply, a handful of well-established CDMOs in China are widely recognized as operating at U.S. standards. Business for these companies is growing at a pace comparable to that of Western firms.
Customers have every reason to be backing off most Chinese suppliers, said Elut Hsu, president of Asymchem. But Asymchem’s clientele of large U.S. and European drug companies recognizes that the firm, with business offices in North Carolina, has built its own facilities, now numbering seven, all up to Western standards. At the same time, Asymchem still offers the cost advantage of Chinese supply.
“China is still much lower cost than Europe and the U.S. This is a no-brainer,” she said.
For STA Pharmaceutical, a unit of WuXi AppTec that is one of China’s largest producers of pharmaceutical chemicals, concern about China’s viability as a supplier has generated a lot of noise but hasn’t noticeably affected business with leading Western firms, according to Yu Lu, vice president of business operations.
This year, Lu noted, STA is involved in the production of 13 commercial drugs, 39 drugs in Phase III clinical trials, and 90 in Phase II clinical trials—the majority for U.S. and European companies. Overall, more than 1,000 scientists at STA are at work developing new chemical entities, she said. “For several large pharma firms we handle close to 90% of their early-stage manufacturing,” Lu said.
STA does get inquiries from U.S. customers about the effects of the new U.S. tariffs on the molecules it is producing for them. For the most part, Lu said, customers are not affected. As to difficulties obtaining starting materials in China because of environmental crackdowns, Lu said STA faces the same concerns as Western firms do. Often, she added, the firm’s solution is to shift to in-house production at its plants in China.
Porton Pharma Solutions (formerly Porton Fine Chemicals), another Chinese CDMO, recently acquired J-Star Research in South Plainfield, N.J., giving the firm a footprint in the main market for new molecules plus early-stage manufacturing assets for projects that can be transferred to China, according to CEO Oliver Ju. But Ju sees a lot of interesting action outside North America.
“From the Chinese CDMO point of view, we see that Europeans are playing a bigger role,” he said. “But Chinese contract firms are looking at new opportunities in China.”
Ju was among a handful of CDMO executives at CPhI expressing concern that the political tension between China and the U.S. could further exacerbate problems with supply from China. “There are some uncertainties,” he said. “If we invest in something in the West, Europe would probably be the good option for us.”
Still, Ju is excited about the potential for Porton’s New Jersey operation, extolling the expertise of its process chemists. Porton is investing in a second site in the state that it conceived before the J-Star acquisition. “We have gone from 50 to 75 people, and we are still hiring,” he said.
CPhI attendees remained optimistic regarding growth, seeing few near-term signs of a downturn. Many predicted further consolidation in a business where the largest players hold less than 5% market share and where trends seem to continue favoring European firms—especially those nearest the Rhine.
“We are a European company in a European business,” Carbogen’s Griffiths said. “We have a culture. Being European helps.”
Lonza’s Newton agreed. “It is not a great source of wonderment why we should have a number of successful CMOs in Switzerland, despite the cost base,” he said, pointing to chemistry heritage and an education system that fosters technical training.
“Increasingly, the conversation is about value now and not as much about price,” Newton said. “I don’t have a lot of purely price discussions anymore. It might be different the next time a downturn comes around.”