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DOWN BUT NOT OUT
Italian Generics Firms Fight Back

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COVER STORY
April 1, 2002
Volume 80, Number 13
CENEAR 80 13 pp. 23-35
ISSN 0009-2347
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GENERIC DRUGS
Some fine chemicals companies make generic bulk actives and some don't, but no company can afford to ignore them

MICHAEL MCCOY, C&EN NORTHEAST NEWS BUREAU

When it comes to generic drugs, the public and the major pharmaceutical companies wear their hearts on their sleeves: The public loves them for their low prices, and drugmakers hate them for what they do to profits.

POTBOILER Thanks to new generics business, Regis Technologies is expanding its plant in Morton Grove, Ill.
For fine and pharmaceutical chemicals companies, however, the emotions are more complex. The manufacture of bulk generic actives is a large source of revenue, but it can cause conflicts for companies as they pursue a more lucrative field--the custom manufacturing of intermediates for patented drugs.

As a result, philosophies toward generic active pharmaceutical ingredients, or APIs, vary widely among U.S. and Western European fine chemicals companies. Some embrace them wholeheartedly, some avoid them completely, and some walk a fine line between making them for generic drug companies and conducting exclusive synthesis for the big drug makers against which the generic firms compete.

Broadly speaking, exclusive--or custom--synthesis is a risky but potentially highly profitable business for fine chemicals companies, whereas making generic APIs offers producers stability but only modest profits.

This is because exclusive synthesis is generally carried out for "innovator" drug companies that are launching new products based on original research. If approved and successful, these products enjoy years of patent protection and profits, for both the drug company and the chemical company that supplies it with intermediates or active ingredients. But if products fail during clinical trials or are withdrawn from the market because of unforeseen complications, both parties must swallow the losses.

The generics business kicks in when, after years on the market, successful products finally lose patent protection. Then, multiple generic drug companies launch copycat versions of the original drug, based on an API they can buy from multiple fine chemicals firms. Profits for these chemical companies are much lower, but because the drug is a proven commodity, they are relatively ensured.

THE ATTRACTIVENESS of this certainty has become clear to the fine and custom chemicals business over the past two years. While generics chugged along, custom synthesis providers had to contend with industrywide overcapacity, unexpected drug failures, and a consolidation among drug industry customers that cut into outsourcing.

The upshot of these developments, according to Enrico T. Polastro, a vice president at the consulting firm Arthur D. Little, is that the return on capital in exclusive synthesis fell in 2000 to below 10%, from historic levels of almost 20%. In contrast, returns in generic API manufacture stayed relatively constant at about 15%.

Polastro cautions, however, that generics are no walk in the park. Competition is stiff, and the field is increasingly being pursued by low-cost newcomers from countries such as India and China. "The advantage of generics is you have a lot of products and you are more in control of your own destiny," he says. "The art is to select ones that will be winners versus ones where there will be enormous competition."

That competition, not surprisingly, is in active ingredients for the $1 billion-plus blockbuster drugs--like GlaxoSmithKline's Zantac and Eli Lilly's Prozac--that come off patent to much fanfare.

Howard Foote, formerly with the fine chemicals company Aerojet and now president of the consulting firm Meadowbrook Associates in Sturgeon Bay, Wis., cites the recent example of Bristol-Myers Squibb's Glucophage, which lost patent protection in January and immediately met with heavy generic competition.

Glucophage, chemically metformin HCl, is a big generic opportunity. Sales of Glucophage were $1.7 billion last year, and because it treats a chronic disease with a hefty dose--2 g per day--active ingredient consumption is high. Indeed, Foote calculates that metformin is the largest volume prescription synthetic pharmaceutical on the market, with worldwide bulk active consumption of roughly 2,000 metric tons per year.

But competition in bulk metformin is intense, and industry observers say the major providers of the API are not the big, well-known fine chemicals companies, but rather low-profile firms such as Chemsource in Puerto Rico, Farmhispania in Spain, and USV in India.


"If we have been a part of the supply chain under patent protection, what will we do post-expiry?"


FOOTE NOTES that more than 40 fine chemicals companies around the world--many of them in India--claim to be able to make the compound. And, despite being a relatively complex molecule requiring several synthetic steps, metformin sells for less than $20 per kg in the U.S. and below $10 elsewhere. "It's hard for a big U.S. or European company to make money at that price," he says.

While many of the major Western fine chemicals companies resist the temptation of blockbuster generic APIs, only a few of them--such as Avecia, Lonza, and Dow Chemical--don't make generics at all. And even these firms must take generics seriously, if only because generic competition at the end of the lives of their customers' patented products will undoubtedly mean lower sales for them as well.

For Avecia, the focus is on making the onslaught of generics as painless as possible. "We're more interested in helping customers manage their products' life cycles than we are in capitalizing on patent expiry," says Nicholas Hyde, vice president of Avecia's pharmaceuticals business.

According to Hyde, Avecia is fortunate in that none of its major customers face patent expirations for the next five years. Still, he says the company is already trying to answer a key question: "If we have been a part of the supply chain under patent protection, what will we do post-expiry?"

Some products enjoy a manufacturing or other technological barrier to entry that can keep Western companies competitive after patent expiration. For example, Avecia is one of just a few firms with expertise in handling cyanogen chloride. But for products without such barriers, Hyde says it may not be realistic for a company like Avecia that conducts most of its pharmaceutical chemistry in Britain to try to compete with firms from developing countries.

ONE SOLUTION would be for Avecia to establish manufacturing in a low-cost country in order to continue supplying customers that want to stay active in the post-patent market. "We're contemplating it seriously," Hyde says.

Almost all fine chemicals companies--including those active in generic APIs--emphasize that their primary commitment is to innovator drug companies and that they won't pursue business that jeopardizes that relationship.

For example, Bernard Fontana, vice president of the French fine chemicals maker SNPE, acknowledges that SNPE has a line of generic APIs, but he says the firm's major focus is on innovator firms. SNPE is beholden to these companies and won't market generic versions of their products after patents expire. "We are loyal to the partner to the end," Fontana says, "even if it means we have to stop production."

Drug companies take different approaches after patents on their products expire and prices fall in the wake of generic competition. Some in fact do abandon the market or sell the business to a generics firm for a nominal sum. If that buyer turns to a new API source, then the run is over for the fine chemicals company that supplied the originator firm for many years.

Other scenarios can develop, however, that allow the supplier to hold onto some business. Take the case of Laporte, now part of Degussa, which for many years supplied an advanced intermediate that a major pharmaceutical company used to make the active ingredient in an ulcer drug.

When patent expiration approached, the drug company turned to an Indian firm for supply at a price that Laporte couldn't match. But according to Clive Rankin, vice president and general manager for pharma intermediates and exclusive synthesis at Degussa Fine Chemicals, rather than leave Laporte in the cold, the drug company granted it a license to use the technology needed to make the intermediate. Rankin says Degussa has had "modest" success pursuing business based on the technology.

In other cases, Degussa has held onto intermediates sales to innovator partners when their products have gone off patent. And in still others, manufacturers of aging patented products have approached Degussa for help in developing lower cost routes to an intermediate or API in order to stay competitive in the post-expiry market. In such cases, Degussa isn't the original supplier, so the chance to come up with improved chemistry is a business opportunity.

Fine chemicals makers can also win when companies that don't want to slug it out in the generic prescription drug market seek FDA approval to sell the product as an over-the-counter medicine. Schering-Plough recently said it planned to pursue this strategy with the allergy medication Claritin, which goes off patent later this year. AstraZeneca, the maker of the soon-to-be-generic ulcer medication Prilosec, is working with Procter & Gamble to take that product over the counter.

8013cover.footies
BALANCED Hovione strives for a 50-50 split between generics and custom manufacturing.
SUCH A SWITCH would be in the tradition of Zantac and Pepcid, two formerly prescription stomach remedies that are now sold on drugstore shelves. The profits aren't nearly as good as they were when the products were under patent, but they may be better than in the generic prescription market. And, of interest to fine chemicals makers, the API production volumes are likely to be higher than in either prescription scenario.

"Large pharmaceutical companies are much more open to a variety of ways to manage their product franchises at the end of patent life," says George Biltz, vice president of Dow Chemical's custom and fine chemicals business. He anticipates a proliferation of novel approaches, particularly as politicians and the courts lose patience with the competition-delaying tactics that drug companies traditionally put up in front of generics.

Dow's strategy is to work with patent holders, and it has no intention of becoming a player in the classic generics market. But Biltz sees an opportunity to help drug companies manage patent expiration creatively by coming up with lower cost manufacturing routes--just as Dow scientists did recently when they developed an improved route to the cancer drug tezacitabine being developed by Matrix Pharmaceutical. "We want to help customers move to a competitive place with their products as they come off patent," he says.

Avecia and Dow are exceptions, and most major chemical companies find themselves--sometimes reluctantly--in the generics business to some extent, either for historical reasons or because generics came as part of acquisitions made to bolster their fine chemicals business.

DSM, for example, became a major competitor in generic bulk antibiotics when it acquired Gist-brocades in 1998. Its strategy in this competitive market is threefold: build plants for low-priced antibiotics like penicillin in low-cost countries, shift its product portfolio to higher margin products, and use its skills in biotechnology to devise cheaper routes to antibiotic intermediates.

In fine chemicals, DSM found itself in the generic bulk actives business when it acquired Catalytica in 2000 for $800 million. This is because a year earlier Catalytica had bought Wyckoff Chemical, a small but respected API maker based in South Haven, Mich., for $60 million.

Today, DSM representatives decline to discuss the generic API business. They say the South Haven plant continues to supply the market with products such as terconazole and lidocaine, but that the company's overall strategy for generics is still being developed. People outside DSM speculate that the firm is concerned about offending innovator drug companies that may not want to see it making generics.

Other big companies are frank about their dual participation in generics and exclusive synthesis. At Degussa, Rankin acknowledges that the company does keep its eye out for generics that will fit with its manufacturing strengths. "If we see a molecule that we have a good route to, we would not be doing our job if we didn't look at it," he says.

Degussa's Radebeul plant in the former East Germany makes a number of "legacy" generics that were developed in the facility's preunification past. Since acquiring the plant, Degussa has modernized it, and company executives are now looking for new opportunities, which, Rankin says, include generics. "But we have to look at customer relationships first," he asserts. "They are more important. Essentially, we go to existing customers and ask, 'Do you mind?' "

Like Degussa and DSM, Clariant is another big fine chemicals player that found itself in generics as a result of an acquisition--in its case the 2000 purchase of BTP for close to $1 billion. Today, Clariant's life sciences molecules business is divided roughly 70-30 between exclusive synthesis and generics, a ratio that business head David Maddox says he is comfortable with.

"We have a reasonably strong presence and interest in multicustomer APIs and intermediates," Maddox says. "But our main thrust is building strong relationships with major discovery companies."


"The art is to select [generics] that will be winners versus ones where there will be enormous competition."


CLARIANT IS notable among the larger fine chemicals companies in that it continues to launch and publicize new generic products. Another active developer is Cambrex Corp., which operates a separate generic pharmaceutical business and has a stated goal of launching six to eight new generic APIs each year.

However, Clariant doesn't approach generics like the "true generic firms that trawl products coming off patent and choose one as a target," Maddox says. Rather, the company discusses the generics landscape with its major innovator customers to ensure that it doesn't get into an unwanted competitive situation.

In fact, Clariant sometimes enters a generic market in cooperation with an innovator firm that is preparing for patent expiry. "Often our first partner on a generic is the originator," Maddox says. "They know the product will become more competitive, and they may want a more competitive supply situation. If we have the technology to make it, then the arrangement works for both parties."

In addition, Maddox notes that Clariant only pursues generics to which it brings some special manufacturing or technological capability. An example is the tetracycline antibiotic minocycline, which Clariant recently began making in Origgio, Italy. Clariant's strength is twofold: Minocycline requires a unique raw material that the company already makes, and one step in its synthesis involves a high- pressure hydrogenation that the Origgio plant is equipped to handle.

Clariant is also a major manufacturer of the angina treatment isosorbide mononitrate, supplying both innovator and generic drug firms. "It's a difficult technology involving a potentially explosive nitration step," Maddox says. "That transcends all discussion of competition."

Maddox says Clariant is so far relatively unscathed by generic API manufacturers from low-cost countries, partly because of its strategy of leveraging manufacturing strengths. The company hasn't been so fortunate in generic agrochemicals: It had to close its Elgin, S.C., pyrethroid insecticide intermediates plant a few years ago and move production to India.

It's clear that no U.S. fine chemicals plant is going to thrive in today's competitive generic API market by doing me-too chemistry. Yet unique, specialized chemistry isn't a sure route to success in generics either. As Cliff R. King, director of new business development at contract manufacturer Pisgah Laboratories, puts it, "You can go broke doing chemistry you enjoy."

Pisgah, based in Pisgah Forest, N.C., logs about 15% of its sales in generic APIs, according to King. Rather than launch products on the market to all takers, however, the firm tends to undertake specialty products brought by third parties. King says the typical Pisgah generics customer is a small firm that doesn't have the resources to go overseas or is a company that demands the security of a local supply source.

Jeffrey Bauer, vice president of business development at Eon Labs, a large generic drug maker in Laurelton, N.Y., says his firm sources many bulk actives for commodity generics from developing countries. "Eon looks to U.S. and Western European firms to supply the niche and special technology products," he says.

For products on the market and in its pipeline, Bauer figures that Eon sources 10% of its raw materials from U.S. firms, 80% from Western European companies, and the balance from companies in the rest of the world--primarily India but also Eastern Europe and China.

Eon and other generic drug companies work with U.S. firms for controlled substances because Drug Enforcement Agency (DEA) regulations prohibit importing certain classes of active ingredients. One company pursuing this market is Chattem Chemicals, a private API manufacturer in Chattanooga, Tenn.

Chattem had been making basic pharmaceutical-grade chemicals such as glycine and antacid actives for years when it was acquired in 1995 by Elcat, a holding company in Warren, N.J. According to Elcat President John Scansaroli, Elcat saw "an underutilized facility and an ability to invest in the API field."

In 1998, Elcat got its investment opportunity when it purchased a diverse, mostly generic API product line from Arenol, a small fine chemicals company in Somerville, N.J., that had suffered a plant mishap and the loss of a major customer. Since then, Scansaroli says, Elcat has transferred these products to the Tennessee site and is building up DEA-required R&D and quality control organizations.

8013cover.gloves
HANDFUL Clariant's Tonneins, France, site is one of several where the company produces generic APIs.

CHATTEM'S NICHE, Scansaroli says, is controlled substances--products such as methamphetamines that have a common base in active amine chemistry. At present, the firm makes six core APIs inherited from Arenol, three of which are controlled substances. Six more APIs are under development, five of which are also controlled.

And Chattem is looking to add to its product line, perhaps through agreements with European firms that possess technology but can't supply the U.S. market. Scansaroli's ideal product is the opposite of a blockbuster: a $500,000- to $2 million-per-year controlled substance API that is "off the radar screen" of bigger firms.

The government's controlled substance regulations make a nice barrier to entry, but not all U.S. API makers depend on it. Take PolyCarbon Industries, a fine chemicals company in Leominster, Mass., started by former employees of ChemDesign, another Massachusetts firm. PolyCarbon is bucking the move offshore and making generic APIs after only six years in business.

President Edward S. Price attributes PolyCarbon's success so far to pursuit of intermediates and APIs--generic and new--that meet a strict profile: end market sales of less than $100 million a year, at least five steps of chemistry, and use of some capability unique to the company. "China and India are low cost," Price concedes, "but a product that requires complex chemistry and has a volume of only 200 kg per year doesn't fit there."

PolyCarbon was inspected by FDA last month and will soon start production of flecainide acetate, a 3M Pharmaceuticals antiarrhythmia drug. The drug, known as Tambocor, went off patent in the U.S. several years ago but wasn't picked up by generics firms.

Price says PolyCarbon got involved when it was approached by a generics company to make a flecainide intermediate that required a specialized reduction technology. "We decided to do the whole thing," he says.

PolyCarbon is scaling up a second niche generic for a New York City-area firm that chose it because of two criteria: It wanted a U.S.-based supplier, and PolyCarbon was already making a key raw material. And in a third case, PolyCarbon signed a contract to make a mere 25 kg of an older, long-off-patent API. "Some people call them the cats and dogs of the drug industry," Price says of such products.

It's telling that PolyCarbon entered the generics business after supplying large pharmaceutical firms with custom synthesis for several years. "Half our sales are from these firms," Price says. "But we discovered that we had to branch out. There are too many players serving big pharma today."

Regis Technologies in Morton Grove, Ill., is another U.S. company that found stability in generics. Dave McCleary, Regis' director of business development, says that when he joined the company from Abbott Laboratories in 1999, its business was almost all small-scale exclusive synthesis for the clinical and early-phase trials of innovator companies.

POTBOILER Thanks to new generics business, Regis Technologies is expanding its plant in Morton Grove, Ill.
"IT WAS VERY unpredictable," McCleary says, "with lots of waiting between phases and during patient enrollment. It was a roller coaster." He and other managers determined that Regis needed more consistent cash flow, and that the quickest source was generics.

Regis partnered with a generic drug company that, because of an unexpected loss of supply, was in urgent need of a new supplier for a family of five prescription cough and cold products. Regis started making the products on an exclusive basis during 2000, and the customer has since tapped it to make two more products: One was scaled up in December 2000, and the other is being commercialized now.

With two more APIs that were added last year, close to 20% of Regis' business is now in generics, from nothing just three years ago. The cough and cold actives are made with conventional chemistry, McCleary adds, while the others rely on chromatographic separation techniques, a Regis specialty.

What Regis learned about generic APIs--that, properly chosen, they can smooth out the ups and downs of the exclusive synthesis business--is not news to the midsized European firms that are the veterans of the fine chemicals industry.

"Custom synthesis is very, very risky," says Giorgio Oberrauch, U.S. general manager for Zambon, an Italian firm active in generics and exclusive synthesis. "We have seen other companies devote too many resources to custom synthesis, and then one project or two projects disappear and they are in big trouble."

This view is shared by other European fine chemicals producers such as the German company Chemie Uetikon, which sold about $30 million worth of intermediates and APIs last year. Commercial Director Ingo Graefe says he likes Uetikon's 60-40 sales split between exclusive synthesis and its own product line of intermediates and generics. His view: "Doing only custom synthesis, in my opinion, is very dangerous. You lose one product--okay. You lose three, and you have a very difficult situation."

At Hovione, a Portugese API manufacturer with annual sales of about $60 million, the split is almost dead even between generics and exclusive synthesis, a balance that Bill Heggie, vice president for process chemistry, says the company wants to maintain for optimum resource allocation.

"We control the generic--how much we make, how much is in inventory," Heggie says. "When we work for clients in custom synthesis, they tell us when they want the product. They are waiting on results from clinical studies and don't want to invest until they have concrete results."

Hovione has an active generics pipeline: The corticosteroids fluticasone propionate and halobetasol propionate and the cholesterol-lowering agent simvastatin, for example, are being prepared for launch later this year. Heggie says Hovione avoids blockbusters, choosing instead products that play to its in-house strengths. Steroids are a Hovione specialty, and simvastatin couples synthetic chemistry with fermentation--another company strength.

European firms say they generally avoid the kind of deals Pisgah, Regis, and PolyCarbon have entered--those in which generics are made exclusively for one customer. Although there are exceptions, Heggie says Hovione tries not to be tied to one company, "so as to give ourselves the best opportunity to make a success out of the business." Oberrauch is more blunt. "We offer products to the market," he says of Zambon's generics business. "Exclusive deals are just as risky as custom synthesis."

THE RELUCTANCE of some firms notwithstanding, Bauer says Eon Labs has a few exclusive supply contracts or strategic alliances, particularly for specialty APIs. "It's a matter of trust," he says. "We explain to suppliers that, in certain cases, there are advantages to marketing their actives through one U.S. generic partner."

Graefe notes that there is a compromise on the issue of exclusive generics. He points to the case of terazosin HCl, the active ingredient in Abbott Laboratories' hypertension drug Hytrin, which came off patent about a year and a half ago. Uetikon was approached by a U.S. generic firm that knew it had experience making a structurally similar veterinary product. Uetikon developed it exclusively, but after the U.S. company launched its generic, Uetikon began offering it to the general market.

U.S. AND Western European fine chemicals companies that make generics know that drug companies like Eon Labs are increasingly sourcing their off-patent APIs from Asia. Yet almost all are bullish about the business, and many are even expanding.

Regis, for example, recently acquired land to triple capacity at its Morton Grove facility, partly in response to the success of its new generic products. Cambrex recently announced plans to spend $2.5 million on a new generics R&D lab in Paullo, Italy.

Chemie Uetikon is in the process of starting up a $20 million facility at its site in Lahr, Germany. Graefe says the facility will focus on products that must be made under current Good Manufacturing Practices standards--both generics and exclusives--freeing up the old plant for intermediates and non-cGMP fine chemicals.

Hovione, too, is expanding, through the construction of a new kilo lab and drug development facility in New Jersey. At the same time, Heggie acknowledges the growing Asian competition. "It is a fact that Chinese and Indian producers are entering into this arena, driving the price of generic products down," he says.

But Heggie maintains that this "can only be for the good of the pharmaceutical industry. Our focus is on providing service and value to our clients." He points to one of Hovione's oldest generics, the antibiotic doxycycline. "It is still an important product for us, and we continue to sell appreciable quantities because of the added value that Hovione gives to our clients," he says.

Graefe is also sanguine about the future. He expects more competition--in APIs from Indian firms and intermediates and fine organic chemicals from Chinese companies--but he's confident that these companies won't push into the niche products that Uetikon pursues. And if they do, Graefe says his company will be ready. "What they do with manpower," he says, "we do with equipment, technology, and customer service."

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DOWN BUT NOT OUT
Italian Generics Firms Fight Back

Italy is known as the historic cradle of the generic active pharmaceutical ingredients (API) business, but the past 10 years have been tough for the industry there.

That's due to1993 patent legislation enacted in nine European countries that, among other things, bars chemical manufacturers from producing small quantities of pharmaceutical actives for generic drug companies conducting clinical trials. In contrast, similar U.S. legislation, the 1984 Waxman-Hatch Act, allows for the production and testing of trial quantities.

The result has been a partial shift in new generic API business from Italy to countries like Israel and Spain that aren't covered by the legislation. A 1998 study conducted for the European Union warned that 13,000 jobs in the European API sector could be lost unless the legislation is revised to allow production of test quantities.

One positive outcome, though, has been a refocus of Italian company resources toward custom synthesis for large innovator drug companies. For example, at the Italian firm Zambon, generics sales were flat from 1998 to 2000 at about $45 million per year. But custom synthesis sales jumped from around $5 million in 1998 to $18 million in 2000.

Likewise, Cambrex Corp.'s Italian subsidiary Profarmaco in Paullo, Italy, has brought in innovator business to complement its roster of 60 generic APIs, according to Paolo Russolo, president of Cambrex's generic pharmaceuticals business unit.

But Italian companies are also taking steps to shore up the generics business. Russolo notes that after the law went into effect, Profarmaco started scouting for a U.S. plant where it could carry out trial-scale production. Instead, in 1994 it was acquired by Cambrex, which has since built the needed facilities at its U.S. sites.

For its part, Zambon has added laboratory-scale API synthesis capability at a company site in Spain, according to Giorgio Oberrauch, general manager for U.S. operations. He says a pilot plant will open there by the end of this year and a full-scale plant by the fall of 2003.

After a dry spell, Russolo says, Profarmaco is getting back into the new generics game. It is investing $2.5 million in R&D at the Paullo site and has been developing synthesis routes for APIs that go off patent in 2005 and beyond. "After 2005, we will be ready with a huge list of products," he says.

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