SERVING EMERGING PHARMA
As they seek to increase business with emerging drug firms, large contract manufacturers are encountering well-entrenched competitors
Once upon a time, big contract pharmaceutical chemical makers were on top of the world. The major drug companies were growing rapidly, their new product pipelines were full, and they were outsourcing production of active ingredients and intermediates to the contract manufacturing sector.
Today, that scenario sounds like a fairy tale. Approvals of new drugs have fallen four years in a row, and generics are encroaching on existing drugs. Many big pharmaceutical companiesparticularly those that have made acquisitions--find themselves with manufacturing capacity to spare and are happy to make their own small-molecule pharmaceutical chemicals.
WELL SUITED Degussa's Raylo Chemicals unit in Edmonton, Alberta, serves emerging drug companies with facilities such as this high-potency compound suite.
Faced with this reality, top contract manufacturers like Lonza, DSM, and Avecia that once dealt mostly with major drugmakers are increasingly turning to smaller virtual and emerging drug companies as a source of new business.
Many of these companies are exciting, entrepreneurial places with rich new product pipelines. As the big contractors knock on their doors, however, they are finding that such firms are already being served by smaller contractors like Seres Laboratories, Cedarburg Pharmaceuticals, and Tetrionics that don't intend to be pushed aside.
These smaller firms have grown accustomed to serving a set of companies with a very different business rhythm than is found at the major pharmaceutical makers. Although their business model is evolving, big drug firms still typically conduct most drug development and scale-up in-house, outsourcing production only occasionally and only when commercial success seems ensured.
Emerging drug companies, in contrast, generally have limited internal production capability. Out of necessity, they will outsource small volumes of many promising compounds. Only a select few of these compounds move on to clinical trials, and even fewer survive to become successful. Many companies fail along the way. Executives with the small contract manufacturers serving these firms question whether large contractors have the patience to put up with dozens of nibbles and misses in the hopes of landing the big product that succeeds.
Charles M. Boland, executive vice president of Cedarburg, a 50-employee contractor in Grafton, Wis., explains that the typical emerging company has a big drug discovery effort, some process development capability, and very little manufacturing, quality control, quality assurance, or analytical expertise.
"Their needs are different from major pharma," he says. "They outsource many activities that the majors do internally." Companies like Cedarburg often provide regulatory expertise, quality assurance, and even the assembly of the chemistry, manufacturing, and controls sections for investigational new drug (IND) and new drug application (NDA) submissions to the Food & Drug Administration.
Boland and James G. Yarger, Cedarburg's president, are both former Amoco employees who got the idea for their company while working in Amoco's new ventures unit. They had wanted to outsource production of a compound, Boland says, and found very little competent pilot-scale capacity in the U.S. that complied with current Good Manufacturing Practices (cGMP) standards.
THEY BROKE GROUND on a facility in Grafton in July 1997, and by June 1998 they were operating a pilot plant and process development facility. Today, the company is the contract manufacturer of active pharmaceutical ingredients (APIs) for five commercial drugs and for multiple APIs in all stages of clinical trials. Boland says its customer base is roughly 70% emerging companies, 20% major pharma, and 10% generics firms.
He acknowledges that the larger companies are starting to compete more actively for emerging company business but says Cedarburg is holding its own, including winning out on projects in competition with much bigger firms. Working in its favor, Boland says, is a track record with difficult chemistry, successful cGMP production and FDA inspections, and an entrepreneurial culture similar to that of the small companies it generally serves. "Because Cedarburg is the size it is, we can be much more responsive to customer needs," he says.
Nitin Parekh, a vice president with DSM Pharma Chemicals--perhaps the largest contract manufacturer--counters that it's not size that matters so much as the perception of size. "When working with smaller companies, we must organize our larger company in a way that meets the smaller company's needs," he says. This includes naming a project manager who acts as the customer's interface with the entire DSM organization.
Although DSM's emphasis has been on commercial-scale manufacturing for the major drugmakers, Parekh notes that it has a solid history of working with emerging companies as well. He recalls calling on GelTex Pharmaceuticals, a specialist in nonabsorbing polymers, as early as 1997 when the firm had just a handful of employees.
At the time, GelTex had identified colesevelam HCl as a polymer that could bind and remove bile acids in the bloodstream, causing the liver to draw cholesterol from the blood to replenish the bile pool. However, GelTex was having difficulty manufacturing the complex polymer--poly(allylamine HCl) cross-linked with epichlorohydrin and alkylated with 1-bromodecane and (6-bromohexyl)-trimethylammonium bromide--in significant quantities.
DSM SIGNED a development agreement with GelTex and began experimenting with the compound by drawing on its in-house polymer expertise. "It was hard work even for DSM and required using the entire DSM organization," Parekh says. "A small company might not have been able to solve the problem."
MINI DSM's small-scale unit in Regensburg, Germany, specializes in intermediates and active ingredients for preclinical and Phase I tests.
However, DSM succeeded in scaling up the synthesis and began making the polymer in Linz, Austria, for use in GelTex' clinical trials. Colesevelam was approved by FDA in 2000 and is now marketed as WelChol by Sankyo Pharma. GelTex was acquired by Genzyme in 2000.
DSM also has a deal with Cubist Pharmaceuticals, a small biotech firm for which DSM makes the antibiotic daptomycin, intended for the treatment of infections caused by gram-positive bacteria. FDA accepted Cubist's daptomycin NDA in February under its priority review program and said it will act on the application by June 20.
Hubert Stückler, senior vice president of global sales and marketing at DSM Pharma Chemicals, says DSM pursues emerging companies not because it is interested in their clinical-trial-scale business but because it increasingly sees emerging companies' compounds becoming commercial realities--often with the help of the larger firms that are DSM's traditional customer base. "We look very carefully at the chances of success of an emerging company before we step into a relationship," he says.
The Cubist and GelTex deals notwithstanding, Stückler acknowledges that a concerted focus on emerging companies is a recent phenomenon at DSM. It was only last year, for example, that it put in place a dedicated group of account managers that focus on such firms, he says.
However, the company is moving rapidly to increase the services it can offer small companies. Last month, it acquired a 30% shareholding in Syncom, a Dutch contract research organization specializing in organic synthesis. The workforce at Syncom is expected to increase from 65 today to about 100 in 2005.
AT THE SAME TIME, DSM also announced plans to expand chemical-process research activities at a facility in Regensburg, Germany, that it acquired in 1998 from Bristol-Myers Squibb. Last year, this location became the base of a new service called ResCom--for responsive and committed--specializing in the development of intermediates and APIs used in preclinical and clinical Phase I tests. The expansion will increase employment at the site from 25 today to about 50 over the next few years, DSM says.
Ellen de Brabander, senior vice president for global R&D at DSM Pharma Chemicals and president of ResCom, points out that DSM is making these investments to add capabilities in the initial phases of drug development that were missing from its portfolio. Although smaller companies are often in need of such services, "ResCom is not focused particularly on either emerging or large companies--both can be customers," she says. "But we must approach them in different ways."
Large companies that come to DSM generally have a well-defined scale-up request that they want fulfilled, de Brabander says. Smaller companies, on the other hand, may have made the first step of discovering a pharmaceutically active molecule but still need a lot of help in developing a commercially viable synthesis.
The formation and expansion of ResCom is one of several small-scale investments in the works at large fine chemical companies that are seeking to improve their early-phase capabilities. Last June, for example, Avecia opened a new early-phase pharmaceutical pilot plant in Huddersfield, England, that has three main production lines, each with capacity up to 1,600 L, and two 50-L kilo-scale lines.
In November, Bayer opened a kilo-scale lab at its ZeTO central organics pilot plant in Leverkusen, Germany, adding the capability to provide kilogram quantities of APIs for Phase I and II clinical trials. And in July, Lonza will open a $12 million small-scale plant at its Visp, Switzerland, site intended to serve customer demands for pre- and early-clinical-phase compounds. It will house reactors up to 250 L that manufacture compounds in the range of 10 to 150 kg, complementing existing facilities with reactor volume up to 30 L.
Probably more than any other player in small-molecule custom manufacturing, Lonza has a reputation for dealing primarily with the major pharmaceutical firms. Historically, this strategy has served Lonza well: It was the largest player in contract manufacturing until the late 1990s--when it was eclipsed by acquisition-born giants such as DSM and Degussa--and many observers still consider it the industry bellwether.
Joseph Pont, a key account manager with Lonza's exclusive synthesis business, explains that the company began to study the emerging pharma market two to three years ago when its traditional business began to be crimped by the twin influences of declining new drug approvals and rising numbers of competitors.
Among Lonza's responses were the plan to build the small-scale plant, announced in early 2002, and the creation last fall of two new business development positions in the U.S. They were filled by longtime Lonza staffers--Karen Fallen on the West Coast and David Kuo on the East Coast.
Although Lonza's exclusive synthesis business is a newcomer to the emerging pharma market, Kuo maintains that the new effort is "not a tactical maneuver to fill capacity in the short term. It is a strategic development, and we are in this for the long haul."
As he calls on smaller companies, Kuo says his experience has been that about half of them are aware of Lonza as a participant in the contract manufacturing business. "Those that know about us assume we are not interested in their business; those that don't are more open," he says.
In contrast with Lonza's major pharma customers, which have more manufacturing flexibility, Kuo observes that the emerging companies he is calling on want to firm up their supply chains early on in the drug development process. This means working with them on early-phase synthesis projects of the sort that can be conducted in the new small-scale plant.
Larger firms are also potential customers of the small-scale plant, Pont notes, but they are typically "tactical" outsourcers of early-phase chemistry--using third parties selectively to supplement wide internal capabilities.
Kuo acknowledges that winning the confidence of smaller companies will be a challenge for Lonza. His ambition is modest: to patiently build relationships and plant seeds for future business. "A lot of personal trust needs to be built," he says. "But after that, Lonza has all the rest."
Less patient Lonza competitors like Degussa and Avecia have jump-started their business with emerging companies through acquisition.
For Degussa, it was the 2001 acquisition of Laporte and its Raylo Chemicals contract manufacturing unit in Edmonton, Alberta, that provided the increased exposure to the emerging pharma market.
Raylo is one of the oldest players in pharmaceutical chemical synthesis, formed in 1963 by the late Raymond U. Lemieux, then a carbohydrate chemist at the University of Alberta. Raylo started out doing research on penicillins for Bristol-Myers Squibb and later developed some of the first antiviral compounds for the National Institutes of Health. Laporte acquired Raylo in 1988.
Despite Raylo's early ties to a major drug company, Commercial Manager Greg Klak says its business today is almost exclusively with small and start-up drug companies. Degussa's European contract manufacturing sites, in contrast, are much more closely aligned with major pharma.
Klak says Degussa has maintained the Raylo name and identity because a lot of emerging pharma business is obtained by word of mouth. "It's a small world, and if you do a good job for someone, they'll tell everyone they know," he says. "If you don't do a good job, they will tell even more people."
Typical of Raylo's business is its seven-year contract with Vancouver-based QLT to manufacture verteporfin, the active ingredient in QLT's Visudyne for wet age-related macular degeneration. Visudyne was discovered by QLT scientists and championed by Julia Levy, an immunologist and QLT founder, whose mother lost her sight to the disease in the early 1990s.
Although QLT today calls itself Canada's largest biotechnology firm, Klak says it was "truly a virtual company" when Raylo began working with it in 1989, at the very earliest stage of Visudyne development. "They realized that they had a compound that looked promising, but they came to us for expertise," he says.
Visudyne entered clinical trials in 1993 and received its first approval in 1999. Marketed by Novartis, it is an injectable drug that is carried to the eye by lipoproteins in the bloodstream. When a laser is shone into the eye, the drug releases a singlet oxygen, destroying abnormal blood vessel cells and stopping damaging leakage.
In general, Klak says, smaller companies--like QLT in its early years--seek more guidance from a contract manufacturer than does a big drugmaker. Raylo doesn't tell customers how to run their businesses, he says, but it will advise them on what processes work efficiently. Some customers, in turn, actually send personnel to "live with" their project at Raylo's Edmonton site.
"For many of these emerging pharmas, the project is their only one; it's their baby," he says. "Customers rely on our expertise and experience. We help nourish and bring the baby into the world."
Peter Jackson, vice president for pharmaceutical products at Avecia, explains that as a one-time unit of ICI and sister to the Zeneca drug business, his company is rooted in the world of big pharma. That connection was cemented with Avecia's 1999 spin-off from AstraZeneca, he says, because AstraZeneca took all the early-phase chemistry infrastructure, leaving Avecia mainly with facilities geared toward late-phase clinical trials and commercial production.
However, Avecia soon became determined to pursue the early-phase business and began studying how to replicate that infrastructure for itself. "The question was whether to build or buy, and we concluded that the necessary flexibility and speed of response would be difficult to build," Jackson says. The result was Avecia's 2000 acquisition of the Canadian chemical development house Torcan.
At the time, 95% of Avecia's small-molecule synthesis business was with major drug companies, Jackson says. Torcan's customer base, in contrast, was virtually all start-up firms and small companies. He sees synergy occurring, as evidenced by the $6 million scale-up in Huddersfield of a small company's product that was first made by Torcan. "It's one of several that we see feeding through in the next few years," he says.
Although Avecia's new early-phase plant in Huddersfield houses small-scale equipment similar to that at Torcan, its typical customer is the major drug company that wants to see a development process quickly translated into clinical-trial quantities of a pharmaceutical intermediate or active. What the two facilities have in common, Jackson says, is a full plate of projects and chemists fully booked well into the second half of the year. "It's an opportunity-rich environment in early phase," he says.
One of the pioneers of the early-phase business is Jan Oudenes, who joined Torcan in 1982 as one of its first employees. He became president in 1990, when Torcan had a staff of 30, and oversaw its subsequent growth into the 150-employee firm that Avecia purchased. Oudenes left last year and is now head of Alphora, a consulting firm that helps emerging drug companies move products out of the research lab and into the marketplace.
Oudenes says that for large companies like Degussa and Avecia to make their acquisitions pay off, they must maintain the service-oriented culture that made their new units successful suppliers of early-phase chemistry in the first place. This is no easy task, however, because the early-phase services required by emerging companies are fundamentally different from the late-phase and commercial manufacturing that major drug firms outsource.
"Early phase is about service at every level," Oudenes says. "It requires a flat organization in which lots of people have direct contact with the customer. The mentality is to be able to do another product every week. Large-scale manufacturing requires a top-down model, often with a single point of contact. Economies are important, pricing is important, planning and scheduling are important, long campaigns are important."
LARGE CONTRACTORS argue that customers want a "one-stop shop" where they can buy both kinds of production. Plus, the large firms are counting on leads from the early-phase business to become big projects in their commercial business.
But Oudenes points out that there is a clear transition point between Phase II and Phase III of the drug development process. Emerging companies that make it to Phase II often look for major pharma partners to take them through Phase III and commercial launch. "That point is a natural place for manufacturing to switch," he says--either to one of the partner's plants or out to bid. "It's all about the right development at the right time."
Oudenes does acknowledge that large companies can provide benefits to small customers. For example, they may have access to technology that can help emerging firms develop difficult compounds. And they can introduce a rigor to the development process that some emerging firms desire. But he cautions that an early-phase services business must be kept at arm's length in a big company. "Unless it's carefully managed, the model won't work," he says.
In an effort to nurture a separate culture for its relationships with emerging companies, Siegfried Ltd., a Swiss contract manufacturer, took a novel approach: In 2000, it formed a new stand-alone business unit called Siegfried Ventures.
Richard F. Haldimann, director of business development for Siegfried Ventures, is based in San Diego, heart of the West Coast biotechnology universe (see page 67). Haldimann explains that Siegfried opened the new business out of necessity.
"Siegfried Ventures grew out of the realization that emerging pharma would drive innovation," he says. "We saw that if we wanted to be in contract manufacturing, we had to focus on this area. But although Siegfried had dealt with global pharma for 25 years, we didn't understand emerging pharma."
Just a few people work in Siegfried's San Diego office, but Haldimann says being in the region is helping the company learn the market, adjust its services to serve it, and build credibility with potential customers. Earlier this month, the company hosted a two-day symposium in San Diego on drug development in the biotech industry. Speakers came from big drug companies such as Pfizer and Wyeth as well as start-ups like Targacept and Momenta Pharmaceuticals.
THE OFFICES are complemented by a $25 million pilot plant that opened last summer at Siegfried's Zofingen headquarters. Dennis Bauer, vice president of U.S. business development, says the pilot plant eliminates a bottleneck, providing the sort of early-stage manufacturing capability that big drug companies enjoy but that many emerging firms lack.
||INNER WORKINGS Ancillary equipment is isolated at Siegfried's new pilot plant in Zofingen, Switzerland.
Bauer adds, however, that the pilot plant doesn't signal an effort by Siegfried to become a player in the business of making small quantities for the very early phase market. The firm's bread and butter remains commercial manufacture. "A quick 300 g for a toxicity test--can we do it? Yes," Bauer says. "Is that the target of our sales and marketing efforts? No."
Although Siegfried Ventures is only three years old and accounts for less than 1% of overall Siegfried sales, Haldimann considers it a success. Its emerging company customers include Targacept, a spin-off of R. J. Reynolds Tobacco Co. that is developing drugs that act on neuronal nicotinic receptors, and Juvantia, a Finnish company that is developing a treatment for levodopa-induced dykinesia in Parkinson's disease.
Juvantia's drug, fipamezole, was granted fast-track designation by FDA in November and is now in Phase II studies at NIH in Bethesda, Md. Siegfried is one of the few contract manufacturers to offer finished-dosage-form production and is in discussions with Juvantia to provide this service as well.
Small companies that have their production plans worked out, Haldimann notes, are in better shape when it comes to the licensing or acquisition negotiations with major pharma firms that often seem inevitable in the drug business. "If you control manufacturing, you control the fate of your drug," he says.
In contrast to many of the other large companies active in contract manufacturing, Dow Chemical has taken no special steps to cultivate ties with emerging small-molecule drug companies other than to concentrate resources in this area. But according to Nick Hyde, business director for Dowpharma, that's because Dow already had strong bonds to such firms.
He attributes this to Dow's past ownership of the drug company Marion Merrell Dow. Although MMD was sold in 1995 to what was then Hoechst, Dow kept its plants, chemists, and engineers. When Dow launched a contract manufacturing business later that year, Hyde says, it attracted smaller U.S. drug companies because it was a local supplier and it had experience with final APIs and the quality assurance, quality control, and regulatory issues that go along with making them.
"We understand the drug development process and the importance of building parallel paths of commercial scale-up into the project pipeline," Hyde says. "We make clinical supplies available and plan for scale-up contingencies if drugs are successful."
The typical contract manufacturer, in contrast, is a European fine chemicals firm that started working with multinational drug companies. Hyde notes that these big drugmakers handle their own regulatory affairs and generally contract out only production of advanced intermediates, keeping the final reaction step to themselves. Developing an API for a small company without regulatory expertise is no small leap for such a contract manufacturer. "Our competitors have had to figure out things we've been doing for 20 years," he says.
Today, Hyde says, more than half of Dowpharma's business is with smaller companies. Examples include GelTex, for which Dow makes RenaGel, a polymeric phosphate absorber for kidney dialysis patients; Human Genome Sciences, for which Dow used chelation technology to help develop a protein-based drug that can deliver radioisotopes to malignant cells; and CV Therapeutics, for which Dow makes ranolazine, the active ingredient in Ranexa, a treatment for chronic angina. FDA accepted CVT's new drug application for Ranexa last month.
Although there's no doubt that the biggest players in contract pharmaceutical manufacturing are pursuing business with emerging drug firms, smaller contractors maintain that they aren't being scared off. Case in point is Tetrionics, a 45-employee firm based in Madison, Wis., that has focused on virtual and emerging companies almost exclusively for the past two years.
THE IRONY, according to Michael Czarny, vice president for business development, is that Tetrionics got its start supplying Abbott Laboratories, one of the drug industry's heavyweights.
NURTURING Although Tetrionics serves mainly small firms, it built up expertise working with the major player Abbott Laboratories.
Tetrionics was formed in 1989 to build on expertise in vitamin D chemistry developed at the University of Wisconsin, Madison, laboratories of Hector F. DeLuca, now chair of the school's biochemistry department. Abbott approached Tetrionics in 1990 for help in scaling up production of paricalcitol, a vitamin D analog that Abbott had developed for treatment of hyperparathyroidism.
Tetrionics worked with Abbott through the 1990s, performing process development, analytical method development, and validation work on the drug's 27-step synthesis. It added regulatory and quality-control departments as the drug entered clinical trials. And in 1996, it moved into new facilities at the University of Wisconsin Research Park that provided isolated manufacturing and R&D areas.
The drug, trade named Zemplar, was approved by FDA in 1998, and Tetrionics remains Abbott's exclusive API supplier. But since the approval, Czarny says, the company has moved again--to even larger quarters--and has pursued new business mainly with emerging companies; it has roughly 25 of them as customers today.
According to Czarny, those customers are a broad cross-section of the emerging pharma landscape. "We get everything from a structure on the back of an envelope to a 6-inch binder," he says of the technology packages that Tetrionics receives. "Some customers have a good understanding of the regulatory requirements and the steps they must take, and others are not so experienced."
Tetrionics President Peter O. Johnson argues that because the company is located near the University of Wisconsin and draws top chemistry graduates, it enjoys the resources and brainpower necessary to serve a start-up drug company. Top students generally have their pick of employers. Graduates that choose Tetrionics, he says, are looking to work in an entrepreneurial environment that "lets people make things happen early in their professional careers."
Czarny adds that this spirit is held in common with emerging pharma companies, some of which are wary about working with a larger outsourcing partner. He relates an instance in which Tetrionics was competing against a big custom manufacturer for the business of an emerging oncology drug company. "The executive vice president told me that his people were concerned about getting lost in a large company," Czarny says.
In the end, though, he says Tetrionics won the business the old-fashioned way: by offering advantages on the price of the project, the quality of the product, and the timetable under which it could get the job done.
Mark Frishberg, vice president for business development at Seres Laboratories, a 20-employee custom synthesis firm in Santa Rosa, Calif., agrees that speed of response is a natural strength of a small company. He relates an experience from the recent Informex trade show in New Orleans in which an executive he knew from a small pharmaceutical company approached him with information on a compound it had licensed and wanted to have made.
"We contacted his lawyer and within 10 minutes had signed a confidential disclosure agreement with changes," Frishberg relates. "In 10 more minutes, he had our feedback on the technical package. A big company usually can't do that."
And Frishberg should know, having joined Seres in July 2002 after a long career in R&D and business with Eastman Chemical. Having worked both sides of the fence, he says his experience is that a large company can overcome its natural inertia and successfully serve emerging drug companies--as long as top managers are committed.
In the decade or so before Eastman Chemical was spun off, Eastman Kodak operated a small-scale contract manufacturing business in Rochester, N.Y., and a commercial business in Kingsport, Tenn., and Batesville, Ark. Frishberg says the pilot-scale business had managers that assumed the risk and found a way to make money by developing projects and passing the successful ones on to the commercial unit.
THE CATCH, he says, is that it can take years and many ups and downs for an emerging firm to be successful, and managers in big companies often don't have the patience and stomach for that kind of wait. "Big firms have the resources and capabilities to succeed, but do they have the continuity of management and purpose? Will they consistently put the priority on a project when a small company needs it?" Frishberg asks. "The answer is generally no."
On the other hand, small projects are a small firm's bread and butter. Frishberg notes that about 70% of Seres' business is with emerging companies whose needs can be met with Seres' up to 100-L scale equipment.
Since joining Seres, Frishberg says he has been enjoying his interaction with a wide range of emerging companies that have an equally wide-ranging knowledge about scaling up pharmaceutical chemical production. Some of these companies bring syntheses, developed in academic settings, that use hazardous solvents or include steps that simply won't work on the kilogram scale, Frishberg says. Or their processes make heavy use of chromatography, which can be expensive or impractical in a commercial-scale manufacturing process.
At the same time, he attests to a heightened sense of responsibility in his new job. Many of his customers are developing compounds that, while perhaps small in volume, are intended to cure untreatable diseases. And some of these firms don't have a lot of margin for error.
"When it comes to service, both big and small companies want it yesterday," Frishberg observes. "But if a big company doesn't get it yesterday, it can adjust. If a little company doesn't, it can be out of business."