CMOs Join Pharma Facility Swap Meet

Contract manufacturers slim down to improve profitability.
Sep 02, 2007
Volume 31, Issue 9

Jim Miller
Forced into a corner by lagging product development, patent expirations, and insurers unwilling to pay the price of new drugs, major pharmaceutical companies have undertaken a wave of restructuring efforts designed to improve their efficiency and bolster profitability. One of the most tangible components of those restructuring efforts has been the divestiture or closure of underused manufacturing facilities. According to William Wiederseim, founder and president of PharmaBioSource Inc. (Blue Bell, PA), a consulting firm for pharmaceutical companies on facility divestitures as well as a broker for pharmaceutical properties, there are currently 20 million-ft2 of pharmaceutical space for sale in North America alone.

In the recent past, facility divestitures by major pharmaceutical companies have driven the growth of the contract manufacturing industry. Most contract manufacturing organizations (CMOs) got their start or built their networks by buying redundant Big Pharma facilities, especially in Europe and Canada. Buying existing facilities provided low-cost capacity (because facilities could be acquired at a fraction of their replacement value) and immediate revenues from contracts to continue producing products made at the acquired facilities. Examples of CMOs that entered the industry or grew their capacity through facility acquisitions include Patheon (Toronto, Ontario), NextPharma (Surrey, UK), Norwich Pharmaceuticals (Norwich, NY), Recipharm (Stockholm), Nicholas Piramal (Mumbai, India), and Draxis Pharma (Montreal, Quebec).

In an interesting reversal of the past trend, CMOs are now joining the list of sellers. Earlier this year, Patheon announced plans to sell its solid and semi-solid–liquid dose operations in Burlington and Fort Erie, Ontario, where it manufactures over-the-counter (OTC) products. More recently, Catalent, formerly Cardinal Health Pharmaceutical Technologies and Services, put its Albuquerque, New Mexico, facility on the market. PharmaBioSource is representing Catalent for sale of that site.

Table A: Recent facility sales
Like their Big Pharma brethren, the two CMOs turned to selling their operations as a means of improving financial performance by getting rid of underperforming assets. Patheon's OTC business, run largely from the Burlington and Fort Erie sites, has experienced declining revenues and profits for several years. The operations are still profitable, but the company's executives and new private-equity investors see no place for them in their ongoing restructuring efforts. Catalent's Albuquerque facility, which was once owned by Pharmacia, has been plagued by operating and regulatory problems despite substantial investment during the past five years.

A tough sell?

Despite the rapidly increasing inventory of pharma assets that are for sale, Wiederseim of PharmaBioSource predicts that both the Patheon and Catalent operations are likely to find buyers. He notes that the Patheon facilities have contracts, which will give a buyer an immediate revenue stream.

In Albuquerque, injectables manufacturing operations may prove to be attractive because injectables capacity is much sought after, driven by new biologics in the pipeline and a growing number of injectable generic and branded generic products coming to market. There were about seven injectables facilities on the market in the United States, according to Wiederseim, but several were sold in recent months. Abraxis BioScience (Los Angeles, CA) recently announced it will buy a facility in Phoenix, Arizona, from Watson Pharmaceuticals (Corona, CA); while a start-up venture, JHP Pharmaceuticals, is buying the King Pharamceuticals facility in Michigan. Both properties are older and have a history of regulatory problems, but the lack of alternatives combined with the high cost and long timeframe of green field construction made them attractive options. Abraxis has been a particularly active buyer, having acquired injectables facilities in Puerto Rico and Illinois in the past year, as well as the Phoenix operation.

According to Wiederseim, specialized capabilities are central to successfully selling a facility in today's market. Biologics and injectables manufacturing facilities are in great demand, he says, as are pharmaceutical-chemical manufacturing facilities with high-containment capabilities. Deals that include products (as does the JHP deal) or manufacturing contracts also have a greater chance of success.

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