Delivery technology limitations. One of the drawbacks of the delivery technology strategy is that the limited applicability of any single technology restricts its potential to enhance a CMO's bottom line. The successful application of a drug delivery technology requires the confluence of multiple factors, including market factors such as competing therapies and reimbursement potential and technical factors such as compatibility of the API with the technology and pharmacokinetics of the drug when formulated. Very few candidates clear all the hurdles, so the CMO gets very few opportunities to cash in on its intellectual property.

One solution to that problem is to have your drug development advantage be in the form of broad expertise rather than a single technology. Cardinal Health, for instance, has developed considerable expertise in formulating products with controlled-release properties using widely available excipients and processing technologies such as Wurster column coating. This expertise can and has been used over a range of APIs and dosage forms.

With the contract manufacturing industry facing a new era of competition, CMOs will be developing various competencies aimed at differentiating themselves and gaining customer loyalty. Drug delivery expertise joins supply chain management, process optimization, and operating global networks as critical skill sets for the next generation of leading CMOs.

The acquisition of Matrix Laboratories (Hyderabad, India, http://www.matrixlabsindia.com/) by Mylan Laboratories (Pittsburgh, PA, http://www.mylan.com/)serves as a reminder to Western contract manufacturers that drug manufacturers in India and China, where cost is critical but intellectual property concerns are not, probably have more attractive opportunities in the generics sector than in contract manufacturing for branded products. It is also a reminder of how brutal competition at the retail end of the pharmaceutical value chain is becoming.

Matrix is a leading global supplier of generic APIs and has been a growing presence in the contract pharmaceutical chemical industry. Mylan is acquiring 51.5% of Matrix's outstanding shares from several large investors and will tender for another 20% of the shares. When the transactions are completed, Mylan will have controlling ownership of Matrix, but the company's remaining shares will continue to trade on the Bombay Stock Exchange. Mylan expects the total value of the transaction to be approximately $736 million.

Mylan is justifying its acquisition of Matrix on several grounds. For one, it expects to achieve cost and margin advantages by owning a manufacturer of generic APIs, especially one located in a low-cost country. Currently, it only has dose-manufacturing capabilities and buys APIs on the merchant market. Furthermore, Matrix affords Mylan with greater entry into the European market through its fully owned Belgian subsidiary, Docpharma, which it acquired in 2005 as well as to markets in Asia and Africa. In addition, Mylan was attracted by Matrix's portfolio of antiretroviral products, which accounted for nearly a quarter of Matrix's 2005 revenues.

It's not clear what the acquisition means for Matrix's contract development and manufacturing services business, which accounted for only 8% of Matrix's 2005 revenues ($20 million out of total revenues of $250 million). Matrix has significant manufacturing resources that Mylan could leverage for the contract business or devote to extending its franchise in generics. Matrix's manufacturing assets include six FDA-inspected API manufacturing facilities in India; a process technology company in Switzerland (Explora Laboratories) with expertise in biocatalysis and nucleic acid chemistry; a controlling ownership of Indian biomanufacturer Concord Biotech (Ahmedabad), which has fermentation capabilities; and a controlling interest in a Chinese manufacturer of chemical intermediates, MChem (Xiamen, China).

What is most striking about the deal is that although Mylan is the buyer, Matrix is clearly the more sophisticated global player. Matrix has built a sophisticated supply chain that sources early-stage intermediates in China, converts them to APIs in FDA-approved plants in India, formulates the APIs into finished dosage forms, and sells them in Asian and European markets. Mylan, by contrast, manufactures only drug product and operates largely in the United States. Matrix's global capabilities are likely to have much greater value to Mylan in the generics and branded generics markets than they are in contract manufacturing.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, info@pharmsource.com
http://www.pharmsource.com/.