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. 

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-ft

  discovery chemistry laboratory, a 220,000-ft

  process development and manufacturing facility in Shanghai, and a 130,000-ft

  chemical manufacturing facility in Tianjin. It is building a 267,000-ft

 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. 

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.  

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

Articles

Outsourcing

Another Asian services provider demonstrates the global nature of pharmaceutical outsourcing.

Global Pharmaceutical Powers

Supply-chain optimization is critical for sourcing active pharmaceutical ingredients and intermediates. Sourcing and related activities are typically served by a centralized procurement department within a pharmaceutical company or may be outsourced to manufacturing representatives and distributors. But 

 (St. Louis, MO), has devised a new business model to assist pharmaceutical companies in their sourcing activities.

That model involves leveraging the expertise and organizational structure of SAFC Supply Solutions. SAFC Supply Solutions provides customized raw materials to the pharmaceutical, diagnostics, and flavors and fragrances industries. It sells roughly 100,000 products, has its own production plants in Europe and  North America, and externally sources chemicals for its products in Europe, North America, and Asia. As part of its custom offerings, SAFC Supply Solutions also offers analytical, packaging, and quality-assurance support services. This infrastructure and organizational expertise in sourcing and procurement led SAFC Supply Solutions to offer an outsourced sourcing solution beginning in 2004.

"Certain pharmaceutical companies came to us with their problems in sourcing. As we worked to resolve those problems, we decided to launch an outsourced sourcing solution," explains Ed Roullard, vice-president of SAFC Supply Solutions.  

One example offered by Roullard is that of a large pharmaceutical company  that had limited capacity and headcount in their sourcing department. "The company had identified many strategic opportunities and aggressive savings goals, but lacked the internal resources within their sourcing department to achieve those objectives," he explains. "The company was frustrated by the time-consuming sourcing for compounds for development and the low impact that this sourcing had in realizing its goals for cost-savings. The development department was frustrated with the sourcing service levels from central procurement and sourced its own materials independently, further diluting savings goals." 

To address these problems, SAFC Supply Solutions developed a pilot program in which it would provide sourcing services on an outsourced basis. This approach was a departure from its usual course of business as strictly a supplier of chemicals and related support services. The change was to leverage, in a new business offering, the internal resources that SAFC uses in sourcing chemicals in its own business activities. The key factor in achieving a viable sourcing solution is the ability to leverage or extend its own internal sourcing activities externally. Roullard estimates that SAFC Supply Solutions has roughly 250,000 vendors in its internal database and that it regularly purchases from 10,000 of those vendors. Having that working relationship provides a potential customer with some valuable upfront benefits: previous vendor qualification, capability assessments, and performance records, all of which are important in making a determination to work with a given sourcing partner.

 "We had to go through that process in making our own determination to work with a given vendor. We can then offer our expertise and knowledge in working with a given vendor and whether it will be able to meet the requirements of a given project," says Roullard. "It also extends the pool of potential  candidates for the pharmaceutical company looking for particular chemicals," he says. These potential suppliers include vendors from low-cost economies. "A local presence is critical when working with these sourcing countries," says Roullard. "We have that local presence because of our own internal sourcing activities and can extend that expertise and related service support to external customers as part of our sourcing solution." 

Under its external sourcing model, SAFC uses dedicated staff for sourcing materials and works directly with development chemists. "We obtain quotes and lead time from vendors, including from SAFC," says Roullard. "SAFC is only one vendor, and we are competing for the project as any other vendor would and are given no special consideration. We provide the data  to the customer to make a decision for vendor selection. Once the customer selects the vendor, we manage the vendor to ensure on-time delivery." 

This outsourced sourcing solution worked well for the pharmaceutical company that had approached SAFC. "The sourcing department of the pharmaceutical company was able to devote a majority of its time on high-value initiatives," says Roullard. "The development chemists were satisfied because they received better service, improved  response time, and had more choices and access to the specific chemicals they needed." 

This sourcing solution provided quantitative improvements. "For the pharmaceutical company, the savings from sourcing the specific chemicals under the project increased from 3.5% to 13%. Also, on-time delivery improved from 70% to 90%.  

For SAFC, this approach also yielded results. The company charges a fee for the sourcing service, thereby gaining an additional revenue source. It also receives the opportunity to offer a quote on a given project. "The customer may select us or go to another vendor that we researched and offered as a candidate for the project. Even if we are not selected, we gain a stronger relationship with the customer," says Roullard.  

In addition to this project, SAFC signed another customer contract for this sourcing solution and is piloting a similar program with two other large pharmaceutical companies. 

"It is really a win-win situation for all parties," says Roullard. "We are able to provide customers with the benefits of a global infrastructure in resolving their sourcing problems." 

APIs

Leveraging its global infrastructure, SAFC Supply Solution pilots a new external sourcing program.

SAFC Supply Solutions Rolls Out a New Business Model for Sourcing

The issue of "inherently safer technology" (IST) in relation to chemical-site security took center stage last month as a member company of the 

Synthetic Chemical Manufacturers Association (SOCMA)

 testified before Congress. SOCMA and its members are urging Congress to avoid changes to recently adopted chemical-site security standards, in particular measures that would include an IST mandate. IST is a conceptual framework that covers chemical processing procedures, equipment, protection, and when feasible, the use of safer substances. SOCMA is the US-based trade association that represents batch and custom manufacturers, including producers of active pharmaceutical ingredients (APIs) and pharmaceutical intermediates.

At issue is proposed legislation, "The Chemical Facility Anti-Terrorism Act of 2008," particularly the bill's IST provisions. Last year, the Department of Homeland Security (DHS) issued regulations [The Chemical Facility Anti-Terrorism Standards (CFATS)] that established risk-based performance standards for the security of US chemical facilities. The regulations require chemical facilities covered under the regulations to prepare security vulnerability assessments that identify a facility's security vulnerability. The rule further requires chemical facilities to develop and implement site-security plans that identify measures that satisfy the identified risk-based performance standards. The regulation also contains associated provisions addressing inspections and audits, recordkeeping, and the protection of information that may be characterized as chemical-terrorism vulnerability information.

These measures went into effect June 8, 2007, except for Appendix A, which contained a tentative list of chemicals of interest. Last November, DHS adopted the final list of chemicals, along with information that identifies the security issues associated with each chemical. In promulgating the rule, DHS said that it would periodically update the list of chemicals and may add or remove chemicals based on additional information.

CFATS will expire in October 2009, and the US House of Representatives' Committee on Homeland Security reviewed and listened to testimony on a committee print of the proposed legislation, the Chemical Facility Anti-Terrorism Act of 2008, in late February. (A committee print is a draft of a bill not yet introduced). The bill would make CFATS permanent and provide further Congressional guidance for the future implementation of CFATS. Requirements for high-risk facilities to reduce their risk by IST is one issue under debate in the draft bill. 

SOCMA opposes an IST mandate. "SOCMA applauds the Committee's intention to make these standards permanent, and we have no objections to select portions of the discussion draft; however, we are concerned with substantive portions, particularly the draft's IST provisions," said SOCMA in a Feb. 27, 2008, release. "No matter how simple IST concepts appear on paper, they are quite complicated in practice... In some cases, a mandated change under the auspices of security 'IST' could delay by two years or more the availability of consumer products that the public relies on every day such as pharmaceuticals."   

David C. Pulham, PhD and director of compliance for 

 (USA) (Pennsville, NJ), a SOCMA member and contract manufacturer of APIs, testified before the House Committee on Homeland Security to offer an industry perspective on the proposed bill, including the IST measures. Prior to joining Siegfried, he spent 27 years as a national expert investigator with the US Food and Drug Administration.

"Siegfried supports DHS's existing Chemical Facility Anti-Terrorism Standards, which do not include any IST mandates," said Pulham in his testimony on Feb. 26, 2008. "These rules require comprehensive vulnerability assessments and security plans, and those plans have to meet almost 20 rigorous security performance standards. We encourage this Committee to support the current approach."

A point raised by Siegfried and by SOCMA is that the member companies of SOCMA are required to adhere to the principles of the "ChemStewards" program, which is an environmental, health and safety, and security management system. This program incorporates SOCMA's security-vulnerability-assessment methodology, which is recognized by the Center for Chemical Process Safety (an industry organization formed by the American Institute of Chemical Engineers) and is accepted by the DHS for Tier-Four facilities under DHS's chemical facility antiterrorism standards.

"An IST mandate would complicate, and in some cases could undermine, existing practices or compliance," said Pulham. "Mandating IST for companies like Siegfried that manufacture hundreds of batches of specialty batch products every year is a much greater exercise than what may appear on the surface. Having to debate which approach is inherently safe in any given case would slow down our ability to meet customer needs, and it could be dangerous, if we are compelled to accept, or go along with, an approach that we personally think may not be the lowest-risk approach. With all due respect, this issue is vastly more complicated than most people appreciate."

SOCMA is also urging the committee to reconsider an IST mandate. "Many SOCMA members are highly regulated under existing environmental and process safety standards that incorporate principles of IST," said SOCMA in the Feb. 27 release. "We urge Congress to spend more time thoroughly studying the IST provisions being proposed while immediately ensuring that DHS receives the necessary funds to carry out the current authority Congress gave it in 2006 under the Chemical Facility Anti-Terrorism Act."  

In testimony to the House Committee on Homeland Security's Subcommittee on Transportation Security and Infrastructure Protection provided by William E. Allmond, director of government relations at SOCMA and Jeffrey Gunnulsfen, senior manager of government relations at SOCMA last December, SOCMA detailed the problems with an IST mandate (2). "Supporters of regulatory IST measures within the context of chemical security either ignore industry's commitment to this everyday process safety measure or they misunderstand its purpose. In the name of security, IST is being used to support environmental agendas and not security."  

SOCMA emphasized that IST is an established chemical engineering philosophy that was launched by the industry in the late 1970s, and its main goal is to reduce risks to health and the environment. "The concept of risk reduction, practiced through IST, pollution prevention, and other environmental management systems is an important feature of the business model employed by chemical producers. The same principle applies for those who use, store, or distribute chemicals. In many ways, IST is already built into the chemical supply chain," according to SOCMA's testimony. 

NJ IST provisions are part of the debate 

A factor entering into the viability of federally mandated IST are state provisions requiring IST in relation to chemical-site security. A case in point is the adoption of IST measures under New Jersey law. New Jersey recently amended its "Toxic Catastrophe Prevention Act" to require existing facilities to complete an IST review. 

Industry members, however, point out the practical implementation of the New Jersey measures compared with a federal IST mandate.  

"Siegried's assessment of this process [the New Jersey IST provision} is that it was essentially a paperwork exercise to document in great detail, steps, and considerations that we take as a normal part of our process," said Pulham. "Simply put, inherent safety is a concept that the chemical industry invented, and we consider it continuously as we design and modify our production processes."  

As the IST measures are debated, other chemical industry groups raise concern on what direction the proposal may go. "While we share the same goal of establishing permanent chemical security regulations, we need to be sure the draft legislation being considered by the Committee will not undermine the important work that is already underway," said 

 (ACC) President and CEO Jack N. Gerard in a prepared statement. "We look forward to working with the Committee and Congress as they continue their oversight of this critical program." 

The ACC is the US-based trade association of chemical manufacturers, primarily large chemical manufacturers. The ACC asserts that under the direction of DHS, more than 30,000 facilities that use or store chemicals are moving to meet the requirements of CFATS and that it will cost more $8 billion in additional enhancements to meet the requirements of CFATS over the next eight years. 

Global Feature

Draft federal legislation that would require high-risk chemical facilities to use inherently safer technology for reducing their risk may present potential problems for custom and batch manufacturers supplying the pharmaceutical industry.

PTSM: Pharmaceutical Technology Sourcing and Management-03-05-2008

Global Pharmaceutical Powers

SAFC Supply Solutions Rolls Out a New Business Model for Sourcing

IST Measures Raise Concern for the Pharma Supply Chain