
 The market for custom manufacturing weakened in 2008, and this downward trend is expected to continue in 2009, according to a recent business outlook survey by the Synthetic Organic Chemical Manufacturers Association (SOCMA). SOCMA is the US-based trade association representing custom and batch manufacturers, including contract manufacturers of active pharmaceutical ingredients (APIs) and intermediates. Despite these negative signs, however, underlying fundamentals such as near-term growth in outsourcing and investment levels in research and development (R&D) and capital spending remain on par with the past two years. The survey was conducted in November and December 2008. 
 
 
 


 The state of the global and US economy was cited as a major concern among survey respondents. Sixty-five percent of the respondents said that the state of the US economy was a high-impact factor affecting the industry, and 58% said the state of the world economy was an impact factor. These levels are up from the 2007 survey, when only 40% of respondents cited the performance of the US economy as a high impact factor, and 33% cited the global economy. 
 
 As the economy takes center stage in shaping business conditions, other factors such as energy prices and competition from emerging markets have decreased in relative importance. In 2007, 40% of respondents said that the price of natural gas and oil was a high-impact factor, but only 25% said so in 2008. Also, in 2007, 36% of respondents said that competition from emerging markets was a high-impact factor, but only 28% said so in the 2008 survey. 
 
 The level of new chemical entities (NCEs), an important fundamental for outsourcing, was also considered. Only 18% of respondents said that the number of NCEs was a high-impact factor compared with 24% in 2007 and 25% in 2006. 
 
 

  
 The survey showed that declining economic conditions had an impact on companies' performance in 2008 and on their outlook for 2009. Sixty-two percent of respondents said they experienced an increase in company sales in 2008, compared with 76% in 2007 and 79% in 2006. And more respondents reported a decline in sales in 2008. Twenty-seven percent of respondents reported a decrease in their companies' sales in 2008, compared with 18% in 2007 and 13% in 2006. 
 
 Expectations are also lower for 2009. Sixty-one percent of respondents expect an increase in sales in 2009, and 27% anticipate a decline in sales. In contrast, when projecting on performance for 2008, 88% of respondents in 2007 felt their sales would increase, and only 7% anticipated a decrease. 
 
 Despite this downward trend, capacity utilization was only slightly down in 2008 compared with 2007. In the 2008 survey, the mean capacity utilization among respondents was 72.7% compared with 76.2% in 2007 and 75.7% in 2006. 
 
 

 
 Although respondents cited concerns with the economy and company performance in 2008 and 2009, investment levels in 2008 remained on par with previous years. Forty-four percent of respondents said that they have actual plans to increase capital investment in 2009, and 23% said that they are very likely to make capital investment in 2009. Although this is slightly down from the levels reported in the 2007 survey, this level is consistent with survey results from 2006. The 2007 survey showed that 52% of respondents had actual plans for spending in 2008, and 21% said they were likely to make capital investments. In 2006, 44% of respondents said that they planned to increase capital expenditures, and 19% said they were very likely. 
 
 Also, planned mean capital expenditures as a percentage of overall sales in 2008 is compatible with 2007 levels and up from 2006 levels. The 2008 survey showed that mean capital spending as a percentage of sales planned for 2009 was 10.5%, which compares with 10.8% planned for 2008 among respondents in the 2007 survey, and 8.8% planned for 2007 by respondents in the 2006 survey. 
 
 Spending on R&D  for 2009 is on par with previous years as well. The mean spending as a percentage of sales that respondents anticipate spending in 2009 was 8.6%, which is the same level reported in the 2007 survey, and slightly up from the 8.0% reported in the 2006 survey. 
 
 

 
 Another positive sign from the survey is that respondents anticipate a fairly healthy level of outsourcing during the next three years. Seventy-five percent of respondents expect that more projects will be outsourced during the next three years, 11% say less projects will be outsourced, and 14% anticipate no change in outsourcing. These levels are slightly down from levels anticipated by respondents in the 2007 survey, but slightly better than what was expected by respondents in the 2006 survey results. In 2007, 80% of respondents felt that more projects would be outsourced during the next three years, 3% felt that less projects would be outsourced, and 18% anticipated no change in outsourcing levels. In 2006, 70% of respondents expected that outsourcing would increase during the next three years, 5% thought it would decline, and 25% said it would stay the same. 
 
 


 Consistent with previous surveys, the top three strategies for improving profitability cited by respondents were new product introductions, process improvements, and offering broader process technologies. Although these approaches were ranked as the top three ways to increase profitability in the 2008, 2007, and 2006 surveys, in 2008, more respondents identified offering broader process technologies as a strategy for improving profitability than in earlier years. 
 
 In 2008, 45% of respondents identified broader process technologies as a growth strategy for their companies compared with 28% in 2007 and 34% in 2006. Fewer respondents also thought that process improvements would be used to improve profitability. In 2008, fifty-eight percent of respondents said that process improvements would an approach to improve their bottom lines compared with 68% in 2007 and 59% in 2006. 
 
 New product introductions, the top-ranking strategy in all three years, were comparatively ranked each year. In the 2008 survey, 76% of respondents ranked this as an important strategy, 80% did so in 2007, and 73% did so in 2006. 
 
 Perhaps reflecting current market conditions and financing, fewer companies anticipate using acquisitions as a means for growth. In 2008, only 17% of respondents said that growth through acquisition was a top strategic goal, compared with 24% who said so in 2007, and 25% in 2006. 
 
 


 Competition from suppliers in emerging markets is expected to continue, according to the survey, with increased penetration by offshore suppliers. For 2009, the mean market share of suppliers from emerging markets is expected to be 30.8%, which is up from the 26.5% in 2008, 26.3% in 2007, and 22.2% in 2006. For purposes of the survey, emerging markets refer to India, China, Eastern Europe, and Latin America. 
 
 


 Although the overall outlook for the chemical industry, inclusive of the fine-chemicals industry, weakened in the 2008 cycle and is expected to continue in 2009, there are still positive signs for the custom and batch manufacturing sector. Planned investment in R&D and capital spending remains comparable to previous years. Competition from emerging-market suppliers is still prevalent, and is likely to continue. And companies' strategies to encourage growth center on new product introductions, process improvement, as well as a broadening of process technologies.


Articles

Global Feature

Weakening fundamentals in 2008 and projected for 2009 dampen the outlook for pharmaceutical chemical outsourcing, but near-term growth and investments levels in R&D and capital spending remain fairly robust.

Outlook for Custom Manufacturing is Mixed

With financial support for emerging companies down and major pharmaceutical firms pruning back their development pipelines, 2009 hasn't started auspiciously for contract service providers. One bright spot is the growing trend among major pharmaceutical companies to outsource a greater portion of their development activities to contract research organizations (CROs).  

A particularly striking element of this outsourcing trend is the willingness of some major biopharmaceutical and pharmaceutical firms to give up their entire capability in one functional area and depend solely on a CRO partner. These are not just redundant or nuisance activities: they include mission-critical activities necessary for business operations and regulatory approval and compliance. These new pharma company–CRO relationships, which we have termed "strategic service partnerships," often involve the sale of one or more facilities and transfer of all of the pharmaceutical company's technical staff to the CRO. 

This practice first appeared several years ago when Wyeth (Madison, NJ) outsourced its clinical data management capability to Accenture. It also gained a great deal of attention in the summer of 2008 when Eli Lilly and Company (Indianapolis) made Covance (Princeton, NJ) its sole provider of toxicology capabilities. The most recent example came in January of this year when Merck (Whitehouse Station, NJ) made PPD (Wilmington, NC) its single source of testing and assay development capabilities for its vaccine development program. PPD agreed to purchase Merck's 130,000-ft

  laboratory in Wayne, Pennsylvania, and hired the 80 Merck employees that staff the laboratory. 

Driving these strategic service partnerships is the realization by major pharmaceutical companies that CROs can deliver certain activities cheaper, faster, and better than their in-house operations. Part of that performance advantage stems from the fact that the client pays only for the share of the facility's capacity it is actually using, rather than absorbing the total cost of staffing and operating the laboratory. Additional value comes from the CROs who realize that their success depends on delivering better performance, and gearing their processes and metrics to meet that objective.  

Table: Examples of strategic service partnerships. 

Another feature of these partnerships is the close cooperation they entail between the client and the service provider. Typically, the pharma company already has extensive experience with the supplier, knows and appreciates its abilities, and is comfortable entrusting it with a critical function. The partners in these deals, however, often move beyond that experience to improve the processes involved in the relationship. They work together to identify cost drivers, for example, and restructure processes in an effort to reduce resources employed in the activity. 

Other industries such as information technology have been taking advantage of these types of partnerships for more than 25 years. Based on their experiences, we can expect the model to be refined over time. Some of the deals, for instance, include take-or-pay elements that commit the client to a minimum level of expenditure. These provisions protect the CRO's downside, but negate some of the cost and risk-mitigation advantages that would otherwise accrue to the pharmaceutical or biopharmaceutical company. Future deals may leave out such take-or-pay provisions or make them less onerous. We also expect future deals to be more global in scope (many current partnerships focus on providing regional services).  

We also expect strategic service partnerships to move into new activities in the development value chain, especially in the areas of clinical pharmacology, analytical chemistry, and clinical packaging. There are very competent contract providers in these areas and current captive capacity is probably underused.  

In their public presentations, many CRO executives claim to be in discussions with multiple clients about establishing more strategic service partnerships. These opportunities will be open only to the largest CROs, those that have deep capabilities and experience as well as a strong balance sheet. If they are to serve the major drug companies, smaller CROs will need to find unique niches that complement the capabilities of their larger competitors.  

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

Outsourcing

Dire circumstances are driving major drug companies to seek out CRO partners. This article contains bonus online-exclusive material.

Strategic Service Partnerships Gain Momentum


SAFC (St. Louis, MO), part of the life-sciences chemicals giant Sigma-Aldrich (St. Louis, MO), is moving ahead on a plan to deliver growth and market share in 2009 and beyond. Gilles Cottier, who took over the helm of SAFC in January 2009, hopes to continue the progress made by his predecessor, former SAFC president Frank Wicks, which saw SAFC transform from a $200-million bulk-chemicals provider to one of the top 10 fine-chemicals organizations with sales exceeding $600 million during his recent five-year tenure. Wicks became president of Sigma-Aldrich’s research specialties and research essentials business in January 2009. Cottier had previously held the post of president of research essentials.

SAFC achieved this transformation through organic growth and acquisitions in the biosciences and select technology-based companies to build its position in contract manufacturing for active pharmaceutical ingredients (APIs) and intermediates, customized raw materials in fine chemicals and biosciences, and contract manufacturing for niche biologics areas. The company is organized into four major businesses. SAFC Supply Solutions is the largest part of SAFC and provides customized raw materials and related support services such as regulatory compliance to the pharmaceutical, diagnostics, and flavor and fragrances industries. SAFC Biosciences, the next largest piece of SAFC, provides raw materials for cell-culture manufacturing, including media, sera and supplements, and custom-media development and manufacturing services. SAFC Pharma offers contract small-molecule and biologics manufacturing. And SAFC Hitech offers specialized chemistry services to the electronics industry.




SAFC Pharma, the custom-manufacturing arm of SAFC, achieved double-digit growth for the past four years, says Wicks. Although SAFC Pharma increased its large-scale manufacturing capacity, most notably through the 2006 acquisition of Iropharm, a former custom-manufacturing unit of Honeywell (Morristown, NJ) with manufacturing facilities in Arklow, Ireland, SAFC’s real strength has been in building its position in niche technologies.

“We are well-positioned as a technology leader with expansions and acquisitions in emerging complex technologies,” says Cottier. These areas include solid-state chemistry research, viral manufacturing, high-potency APIs, potent and nonpotent bioconjugation, and  fermentation.

Key acquisitions for SAFC included: Tetrionics in 2004 to gain a base in high-potency APIs; the contract chemistry-services provider Ultrafine in 2004; Pharmorphix, a firm offering solid-form research services such as polymorph investigation, structure and crystallization characterization, and salt selection, in 2006; and Molecular Medicine Bioservices, a contract biologics manufacturer of viral products, in 2007.

SAFC also enlarged the size and depth of SAFC Biosciences through the $370-million acquisition of CSL’s former JRH Biosciences division in 2005. It also added Proligo, a producer of raw materials for oligonucleotide manufacture, in 2005 to augment the offerings of SAFC Supply Solutions.



 
Following these acquisitions, SAFC expanded its operations in these niche technologies and also geographically in Asia. In January 2009, it began operations at a 7000-ft

 laboratory complex in Carlsbad, California, next to its viral production substance facility, which the company gained in its acquisition of Molecular Medicine Bioservices. Commissioning of the new laboratories at Carlsbad follows SAFC’s 2008 announcement of a $12-million expansion at the site to construct two fully segregated manufacturing suites, which are scheduled to be operational by the end of 2009.

 SAFC also invested $16 million in the expansion of a large-scale protein extraction and purification facility in St Louis that was completed in 2007.

 

 SAFC Pharma also is investing $30 million to expand its Madison, Wisconsin, facility, by increasing its capacity to produce commercial-scale high-potency APIs. The investment includes the purchase of 15 acres of green space in Verona, Wisconsin, near its existing high-potency API production site, where the company will build a new 45,000-ft 

 manufacturing facility that will house commercial-scale reactors capable of producing batch sizes up to 4000 L. Construction of the new plant is expected to be completed by year-end 2009. The new facility’s design will adhere to Safebridge Category IV standards. The facility will include development laboratories, a 150-L mini processing plant, and two large-scale CGMP (current good manufacturing practices) manufacturing suites with reactors up to 4000 L.

SAFC has invested more than $75 million in developing its high-potency manufacturing capabilities in recent years. These investments include a $4.5-million project to add a CGMP pilot-plant and kilo-laboratory  capacity at Madison, completed in early 2008; a $29-million investment to expand bacterial and fungal fermentation-derived high-potency capacity at its facility in Jerusalem, scheduled for completion in 2009; and the $30-million investment to build the commercial-scale high-potency API facility at Madison and a high-potency bioconjugation suite in St. Louis that was validated in early 2008.



 In September 2008, SAFC began operations at a new reactor at its Arklow site, which increased its large-scale API capacity by 15%.  The $4-million project involved the installation and start-up of a 6000-L “Hastalloy” reactor for large-scale API manufacturing, increasing the total capacity at the site to 96,000 L. The investment complements two additional expansion projects at the Arklow site: the building of a $2.25-million, 15-kg pilot-scale filter dryer designed to double the facility’s capacity for small-scale (10–150 kg) manufacturing of APIs, which is scheduled to be commissioned in the third-quarter of 2009; and a $1.8-million expansion of the site’s CGMP warehouse capacity, also scheduled for completion in 2009. These investments follow a $10-million expansion of commercial-scale API manufacturing and storage capacity at its Arklow, and Buchs, Switzerland, facilities, respectively, in 2007.



 In  2008, SAFC completed the second phase of a  $600,000-expansion of its solid-state services research facility in Cambridge, England, by adding 7500 ft

 As part of its growth strategy, SAFC is proceeding with its first greenfield manufacturing project in China. The company is investing $25 million in Wuxi for building a large-scale, non-CGMP multipurpose plant to produce raw materials, intermediates, and final products to support SAFC Pharma, SAFC Supply Solutions, and SAFC Hitech. The Wuxi site will include a manufacturing plant and analytical, packaging, and warehousing facilities. The first construction phase is expected to be completed by 2010. Future development phases at the site will support SAFC's parent company, Sigma Aldrich's research chemicals business by further expanding analytical, packaging, and warehousing facilities.

In 2006, SAFC invested $12 million and opened a 139,000-ft

 medicinal-chemistry facility in Bangalore, India. The facility has more than 60,000 ft

 of production and research and development laboratory space and includes manufacturing suites for chemical development and production to a 50-L scale and an onsite warehouse.

Cottier says that SAFC’s entry in Asia, specifically China and India, reflects an extension of the company’s overall strategy and is not for merely creating a base for lower-cost production. “We are positioning our Asia footprint as an effective extension of our quality-focused resources not as an access point for low-cost manufacturing,” he says.




Cottier underlines that these investments support the company’s future focus that emphasizes technology, regulatory support, growth in Asia Pacific, customization, and supporting the global pharmaceutical supply chain. “We will continue to use emerging technologies to help customers explore opportunities across biologics and traditional chemistry,” says Cottier. “We also will continue to build upon our traditions of specialization and customization,” he adds, and “support customers through changing regulatory compliance requirements and in removing complexities associated with securing a supply chain.”

Cottier emphasizes to drive top-line growth, SAFC will continue supply-chain and quality improvements at SAFC Supply Solutions, expand its offerings and capabilities in high-potency API manufacturing, acquire additional Phase II and Phase III projects for its biosciences business, and selectively add resources in the CAPLA (Canada, Asia-Pacific, Latin-America) region.

Pharma Partner Focus

Gilles Cottier, SAFC's new president, plans to continue a growth strategy that emphasizes value-added technologies positions, growth in Asia, and customization in its supply-chain solutions.

PTSM: Pharmaceutical Technology Sourcing and Management-03-06-2009

Outlook for Custom Manufacturing is Mixed

Strategic Service Partnerships Gain Momentum

SAFC New President Outlines Growth Strategies