Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report.

Jim Miller

Out of bankruptcy and focused on its contract research business again, 

 (Wilmington, NC) is investing in its traditional core strength: chemistry, manufacturing, and control (CMC) development services. 

Bolstered by a $30-million equity infusion from its current private investors, the company will make significant upgrades to its analytical, formulation, and manufacturing capabilities. AAI-Pharma's recently appointed senior vice-president for operations, Lee Karras, provided an update about the plans during November's AAPS Annual Meeting. 

AAIPharma will make a major investment in its Charleston, South Carolina parenteral manufacturing facility, spending $1.3 million on various upgrades. Planned projects will improve people and material flow, provide better engineering controls, and add GMP warehouse space. The improvements, says Karras, will enable the Charleston facility to meet  the compliance standards of the Medicines and Healthcare products Regulatory Agency (MHRA, the UK regulatory body) and European Union (EU) compliance standards, so that clinical-trial materials manufactured at the facility can be exported to EU countries. The 48,000-ft

  Charleston facility, which has two filling suites and a 54-ft

  lyophilization unit, already has FDA approval. 

AAIPharma also is making investments in its formulation and analytical-services capabilities, service areas where it was once an industry leader. Karras says that the company has managed to retain the scientific talent in those areas from the prebankruptcy days. Nonetheless, AAIPharma suffered from under-investment during the years when it tried to remake itself as a specialty-pharmaceuticals company. The company is planning to invest at least $500,000 to update instrumentation, including ultra HPLC and GC–MS capabilities. Formulation and analytical-chemistry services are provided from the company's Wilmington, North Carolina facility, which also manufactures solid-dose clinical trial material (CTM). The company also has a small laboratory-services group in New Ulm, Germany. 

Along with upgrading its existing capabilities, AAIPharma will be expanding its CMC development services offerings, according to Karras. The company recently launched a physical-chemistry practice. Physical Chemistry is a hot area in which opportunities are underscored by the recent acquisition activity in that area, including 

 (Cambridge, UK). Karras said the company is likely to add clinical packaging and distribution in the coming year.   

As it reorganizes, AAIPharma is pursuing an integrated services model, packaging together clinical and nonclinical capabilities to target specific market segments. It is currently promoting packaged services under the brand names "AAIGeneric," "AAIBiotech," and "AAIOncology." The latter offering was created following the recent acquistion of 

, (CAC) a Paris-based CRO specializing in oncology drug development. CAC has experience in running early-stage clinical trials as well as large, international Phase II/III trials for oncology drugs. 

A tour of the exhibit hall at this year's AAPS Annual Meeting showed that the integrated services model is the "next big thing" in CMC and early-development services. One of the biggest proponents is Aptuit, whose model calls for integrated API and dosage-form development and manufacturing capabilities tied together with a sophisticated project-management system. Aptuit recently announced two major acquisitions to fill out its service offerings: the API manufacturing operations of 

, a provider of solid-state analytical-chemistry services. Aptuit already had preclinical, formulation, CTM manufacturing, and packaging services as a result of its acquisitions last year of 

' (Research Triangle Park, NC) nonclinical operations and clinical packager 

 (Miami, FL) are other examples of CROs offering an integrated services package. 

The emergence of sourcing options in the low-cost countries of Asia has provided a learning experience for both buyers and sellers of contract services. Nowhere has this learning process been more evident than in the discovery services arena. A year ago, North American and European providers of discovery services were under tremendous pressure as major pharmaceutical companies seemed intent on pushing down everyone's prices to Asian levels. A year later, Western discovery CROs are more optimistic. While the flow of discovery, chemistry, and biology projects to Asia continues to grow, Western CROs are learning to compete more effectively.  

Part of the improvement stems from the fact that pharmaceutical companies are becoming more sophisticated in deciding where to place their projects.  They are differentiating their projects and providers with criteria such as speed, experience, innovation, and intellectual property (IP) considerations, as well as cost and matching requirements and capabilities more closely. 

"It seems like cost was a major driver," says Mike Trova, senior vice-president of discovery services for 

 (AMRI, Albany, NY). "I think the pendulum is swinging back to a middle ground now where it doesn't have to be one or the other."  Pharmaceutical clients are growing more comfortable placing projects in locations that best match the project's requirements, he notes. 

 "We have had to react to the developing Asian CROs," says David Phillips, senior vice-president of sales and marketing for UK-based 

 (Mechelen, Belgium). "Not by competing head-to-head, but rather by trying to position our unique selling points to be more competitive." 

Phillips says BioFocus DPI has become more targeted in its business development efforts. "We are much more selective about the type of work we pitch for," says Phillips. "We'll tell a pharmaceutical company, 'This may not be the right project for us.' We try to help them position projects with us more effectively." 

Going global has become an important strategy for the larger discovery CROs. BioFocus expanded beyond Europe by acquiring the remnants of 

 (San Diego,  CA), a US-based discovery company, and initiated collaborative arrangements for chemistry services with two Indian companies. 

AMRI recently opened its second facility in India, focused on early-stage drug discovery research, including custom chemical synthesis and medicinal chemistry. The company opened a facility in Singapore in 2005. "Diversification and globalization of our business are key," says Trova. "We can offer differing expertise and a variety of cost models around the world, and it allows us to expand our customer base." 

Projects that require speed frequently stay in the United States. "Timing is everything, especially for small companies,"  says Deborah Minor, whose company, 

 (Bath, NC), represents approximately 40 small- to mid-sized CROs and CMOs in the United States. "Communication is another factor. If you want information about your API real-time, that's not always easy to get with the time differences." 

Western CROs also may find that developments in the Asian markets may close some of the cost gap. The supply of key resources, including staff, energy, and water, is often unreliable, and their costs seem to be escalating. Phillips from BioFocus DPI notes that Indian salaries have risen, so the comparative advantage has narrowed there. Trova at AMRI sees some price pressures already beginning to surface in China, with escalating salaries and the cost of doing business there. That could lead to other countries becoming bases for discovery work. 

"Big Pharma began exploring options around the world years ago," Trova says. "I would suggest that there will be developing markets in other parts of the world." 

Articles

The integrated services model is the "next big thing" in CMC and early development services.

AAIPharma Returns to its Roots

 trade shows, held this year October 2–4 in Paris, provided the opportunity to take a comprehensive look inside the global pharmaceutical chemical manufacturing industry as well as the European dose-manufacturing sector. This year's meetings provided signs that several trends are continuing to drive the industry, including pharmaceutical company consolidation, the growing importance of Asian producers, and the overcrowded European dose-manufacturing market. 

The weeks immediately preceding this year's meetings saw a rash of major acquisition announcements in Europe. Three major transactions were announced: the acquisition of 

 (Geneva, Switzerland). These deals follow by several months the acquisition of 

. All four transactions reflect the realization by both buyers and sellers that mid-size regional players have little chance for success in an industry increasingly dominated by large global players.  

The consolidations will have some interesting implications for the contract manufacturing industry. Although UCB and Schwarz Pharma are already major outsourcers, the other companies have extensive captive manufacturing networks with substantial excess capacity. The integration of the companies could result in more contract manufacturing opportunities if facilities are closed as a cost-saving move, or it could result in even more capacity being thrown onto a market that is already swimming in capacity. 

In fact, two of the acquiring companies—Nycomed and Bayer—were at CPhI/ICSE flogging excess dose manufacturing capacity. Nycomed was there to offer the parenteral manufacturing capabilities of its Linz, Austria, site and the blow–fill–seal capacity available at its Elverum, Norway, site. Bayer, aggressively promoting its dose-manufacturing capabilities, had a very large presence in the ICSE hall. Its offerings included parenteral, solid dose, and nonsterile liquid manufacturing and packaging services at sites in Leverkusen and Grenzach-Wyhlen, Germany. The Bayer facilities are FDA-compliant, which gives them a leg up over most of the competitors in Europe. 

The efforts by Nycomed and Bayer only threaten to exacerbate the oversupply situation in the European market, where dedicated global CMOs (defined as those with FDA compliance), regional CMOs (including those spun off from pharmaceutical companies), and branded and generic-pharmaceutical companies are all competing for business. Competition is intensifying as the Western European CMOs and generics houses lose more business to manufacturers in Eastern Europe and Asia. Major dedicated CMOs such as 

 (Ravensburg, Germany) are increasingly looking to the North American market for future growth. 

A shake-out is badly needed in European contract manufacturing business, but labor laws and the regional nature of much of the buying behavior make this seem unlikely. Efforts by major pharmaceutical companies to consolidate their supply bases may provide an impetus for supplier consolidation, but the process promises to be painful. 

Two major pharmaceutical manufacturers announced new ventures that seek to leverage the cost advantages of Asian suppliers. 

 (Gottingen, Germany) announced a joint venture with Indian manufacturer 

 (Mumbai, India) to offer solid-dose manufacturing. The companies are jointly building a new facility in Pune, India. NextPharma is providing the facility design and equipment specifications and will be responsible for quality systems and assurance. It will provide sales and marketing efforts to reach clients in the Western countries and is putting in a small amount of capital. Centaur will provide most of the investment capital and will handle day-to-day operations.  Operations are expected to begin in April 2007. 

 (PCS, Kalamazoo, MI), the API and contract manufacturing unit of Pfizer, Inc., announced a joint venture with two Asian suppliers for the manufacture of generic steroid APIs currently manufactured by Pfizer. PCS will transfer the manufacture of 18 steroid products over the next three years to its partners 

 (Shanghai, China). PCS will continue to handle the early stage, technology-intensive bioconversion manufacturing step at its Kalamazoo facility but send the intermediate for late-stage processing to its partners, whose operations are in more cost-favored locations. The venture is seen as a step to make Pfizer's steroid APIs more competitive in the global market. 

In a symbolic gesture that could nonetheless set a pattern for other global corporations, 

 (Armonk, NY) has moved its global procurement headquarters to China. The shift includes moving the office of Chief Procurement Officer (CPO) John Paterson from the New York City suburbs to IBM's China Procurement Center in Shenzhen. According to the company's announcement, the Shenzhen center is one of IBM's largest procurement operations outside the United States. 

The shift is symbolic in the sense that the global nature of IBM's procurement operations makes the location of its CPO's office almost irrelevant: IBM has procurement operations in 60 countries, according to its press release. The size of its annual procurement spend—$40 billion—is more than the annual revenues of all but three major pharmaceutical companies. 

At the same time, the move to Asia is meaningful because it is being made in anticipation of changes in the way IBM does business. The company noted in its announcement that Asia already accounts for 30% of its $40-billion procurement spend, distributed among 3000 suppliers, but most of that spending is to support its hardware business. However, in the future, the company expects to tap into Asian suppliers to support its software and services businesses, which now account for over two-thirds of its $100 billion in revenues. "To meet the demand, it will require developing relationships with new partners and suppliers and working with existing ones to help them build skills, processes, and management practices to compete globally in the services market," the company said in its statement. 

Though it's unlikely that any major pharmaceutical companies will move their sourcing headquarters to Asia in the foreseeable future, the IBM move is instructive for the pharmaceutical industry on several levels. A growing share of pharma's procurement spend is flowing to Asia, so much so that most major companies now have major procurement operations located there (mostly in Singapore). Furthermore, like IBM, the mix of what pharma is buying in Asia includes more and more "human capital," (

, R&D services) along with physical goods such as raw materials. These trends are likely to accelerate as major pharmaceutical companies establish R&D and manufacturing operations in Asia and as they seek to increase their sales in those countries. 

Contract research and manufacturing organizations must take note as well. As pharmaceutical company sourcing becomes more global, they will have to develop their own strategies to service these global procurement operations, lest they cede that business to local suppliers.  

 is president of PharmSource Information Services, Inc., and publisher of 

Mid-size regional players have little chance for success in an industry increasingly dominated by large global players.

Global Supply and Procurement March On...

Global Supply and Procurement March On

Contract manufacturing organizations (CMOs) are always looking for a competitive edge—something that can distinguish them from rivals and add incremental margin to their bottom lines. One of the tactics that CMOs are trying is to offer proprietary drug delivery technologies. 

Drug delivery technologies are viewed by CMOs as offering several potential business advantages: 					

They constitute unique value-adding solutions for clients that competitors cannot easily imitate.

They generate royalty revenues over and above the usual fees for manufacturing the product.

They yield better manufacturingmargins by locking the client into using the CMO that controls the technology.

Examples of CMOs offering proprietary delivery technologies include 

), which has its "Zydis" fast-dissolve, solid-dose technology and "DelPouch" and "Microsponge" topical delivery systems; 

), whose portfolio includes the "Nanoedge" technology for drug solubilization and "Promaxx" microsphere technology; and 

), which has a proprietary dual-chamber prefilled syringe for lyophilized injectable drugs. 

The latest CMO to add the drug delivery technology arrow to its quiver is 

). Patheon recently announced an alliance with 

) to promote Depomed's "AcuForm" technology to its clients. AcuForm is a controlled-release tablet technology that delivers drugs to the stomach and upper segments of the small intestine. It incorporates proprietary excipients and formulation approaches, but can be manufactured on conventional tableting equipment. 

Depomed has two commercially approved products incorporating AcuForm: "ProQuin XR" tablets for the treatment of uncomplicated urinary tract infections and "Glumetza" for type 2 diabetes. A third product, "Gabapentin GR," is in Phase III clinical trials for the treatment of postherpetic neuralgia. Patheon is the current contract manufacturer for both approved products. 

Under their agreement, Patheon will provide development and scale-up services for products incorporating the technology. Both companies will jointly review compounds before initiating work to avoid conflicts with Depomed's internal pipeline and to set development terms and license arrangements with third-party clients. Depomed and Patheon will share license fees, milestone payments, and royalties generated in deals involving the Depomed technology. The agreement further stipulates that any formulated products developed will be manufactured at a Patheon site.  

The fact that Acuform is used in several marketed products removes a risk factor that Patheon has had experience with in the past. Some years back, Patheon announced an alliance with a UK company, Weston Medical Group, for a needle-free injection device for which Patheon was to provide the manufacturing services. Patheon went so far as to build the filling line at its Swindon, UK facility. That technology has gone nowhere because Weston ran into financial problems and the successor owner, Aradigm, made only limited progress with it. Aradigm recently sold the technology to a start-up company. 

One of the drawbacks of the delivery technology strategy is that the limited applicability of any single technology restricts its potential to enhance a CMO's bottom line. The successful application of a drug delivery technology requires the confluence of multiple factors, including market factors such as competing therapies and reimbursement potential and technical factors such as compatibility of the API with the technology and pharmacokinetics of the drug when formulated. Very few candidates clear all the hurdles, so the CMO gets very few opportunities to cash in on its intellectual property. 

One solution to that problem is to have your drug development advantage be in the form of broad expertise rather than a single technology. Cardinal Health, for instance, has developed considerable expertise in formulating products with controlled-release properties using widely available excipients and processing technologies such as Wurster column coating. This expertise can and has been used with a range of APIs and dosage forms. 

With the contract manufacturing industry facing a new era of competition, CMOs will be developing various competencies aimed at differentiating themselves and gaining customer loyalty. Drug delivery expertise joins supply-chain management, process optimization, and operating global networks as critical skill sets for the next generation of leading CMOs. 

) serves as a reminder to Western contract manufacturers that drug manufacturers in India and China, where cost is critical but intellectual property concerns are not, probably have more attractive opportunities in the generics sector than in contract manufacturing for branded products. It is also a reminder of how brutal competition at the retail end of the pharmaceutical value chain is becoming. 

Matrix is a leading global supplier of generic APIs and has been a growing presence in the contract pharmaceutical chemical industry. Mylan is acquiring 51.5% of Matrix's outstanding shares from several large investors and will tender for another 20% of the shares. When the transactions are completed, Mylan will have controlling ownership of Matrix, but the company's remaining shares will continue to trade on the Bombay Stock Exchange. Mylan expects the total value of the transaction to be approximately $736 million. 

Mylan is justifying its acquisition of Matrix on several grounds. For one, it expects to achieve cost and margin advantages by owning a manufacturer of generic APIs, especially one located in a low-cost country. Currently, it only has dose manufacturing capabilities and buys APIs on the merchant market. Furthermore, Matrix affords Mylan greater entry into the European market through its fully owned Belgian subsidiary, Docpharma, which it acquired in 2005, as well as to markets in Asia and Africa. In addition, Mylan was attracted by Matrix's portfolio of antiretroviral products, which accounted for nearly a quarter of Matrix's 2005 revenues. 

It's not clear what the acquisition means for Matrix's contract development and manufacturing services business, which accounted for only 8% of Matrix's 2005 revenues ($20 million out of total revenues of $250 million). Matrix has significant manufacturing resources that Mylan could leverage for the contract business or devote to extending its franchise in generics. Matrix's manufacturing assets include six FDA-inspected API manufacturing facilities in India; a process technology company in Switzerland (Explora Laboratories) with expertise in biocatalysis and nucleic acid chemistry; a controlling ownership of Indian biomanufacturer 

 (Ahmedabad), which has fermentation capabilities; and a controlling interest in a Chinese manufacturer of chemical intermediates, 

What is most striking about the deal is that although Mylan is the buyer, Matrix is clearly the more sophisticated global player. Matrix has built a sophisticated supply chain that sources early-stage intermediates in China, converts them to APIs in FDA-approved plants in India, formulates the APIs into finished dosage forms, and sells them in Asian and European markets. Mylan, by contrast, manufactures only drug product and operates largely in the United States. Matrix's global capabilities are likely to have much greater value to Mylan in the generics and branded generics markets than they are in contract manufacturing.  

 is the president of PharmSource Information Services, Inc., and publisher of 

More CMOs look to proprietary delivery technologies to enhance profitability.

Will Delivery Technologies Deliver Profits to CMOs?

They constitute unique value-adding solutions to clients that competitors cannot easily imitate;

They generate royalty revenues over and above the usual fees for manufacturing the product;

They yield better manufacturing margins by locking the client into using the CMO that controls the technology.

) to promote Depomed's "AcuForm" technology to its clients. AcuForm is a controlled-release tablet technology that delivers drugs to the stomach and upper segments of the small intestine. It incorporates proprietary excipients and formulation approaches, but can be manufactured on conventional tabletting equipment. 

The fact that Acuform is used in several marketed products removes a risk factor that Patheon has had experience with in the past. Some years back, Patheon announced an alliance with a UK company, Weston Medical Group, for a needle-free injection device, for which Patheon was to provide the manufacturing services. Patheon went so far as to build the filling line at its Swindon, UK facility. That technology has gone nowhere, because Weston ran into financial problems and the successor owner, Aradigm (Hayward, CA, 

), made only limited progress with it. Aradigm recently sold the technology to a start-up company. 

 One of the drawbacks of the delivery technology strategy is that the limited applicability of any single technology restricts its potential to enhance a CMO's bottom line. The successful application of a drug delivery technology requires the confluence of multiple factors, including market factors such as competing therapies and reimbursement potential and technical factors such as compatibility of the API with the technology and pharmacokinetics of the drug when formulated. Very few candidates clear all the hurdles, so the CMO gets very few opportunities to cash in on its intellectual property. 

One solution to that problem is to have your drug development advantage be in the form of broad expertise rather than a single technology. Cardinal Health, for instance, has developed considerable expertise in formulating products with controlled-release properties using widely available excipients and processing technologies such as Wurster column coating. This expertise can and has been used over a range of APIs and dosage forms. 

With the contract manufacturing industry facing a new era of competition, CMOs will be developing various competencies aimed at differentiating themselves and gaining customer loyalty. Drug delivery expertise joins supply chain management, process optimization, and operating global networks as critical skill sets for the next generation of leading CMOs. 

)serves				 as a reminder to Western contract manufacturers that drug manufacturers in India and China, where cost is critical but intellectual property concerns are not, probably have more attractive opportunities in the generics sector than in contract manufacturing for branded products. It is also a reminder of how brutal competition at the retail end of the pharmaceutical value chain is becoming. 

Mylan is justifying its acquisition of Matrix on several grounds. For one, it expects to achieve cost and margin advantages by owning a manufacturer of generic APIs, especially one located in a low-cost country. Currently, it only has dose-manufacturing capabilities and buys APIs on the merchant market. Furthermore, Matrix affords Mylan with greater entry into the European market through its fully owned Belgian subsidiary, Docpharma, which it acquired in 2005 as well as to markets in Asia and Africa. In addition, Mylan was attracted by Matrix's portfolio of antiretroviral products, which accounted for nearly a quarter of Matrix's 2005 revenues. 

is president of PharmSource Information Services, Inc., and publisher of 