The Riverside buyback highlights another problem for bio/pharmaceutical companies trying to sell or divest redundant facilities:
namely, that large legacy pharmaceutical manufacturing sites may not be financially viable for a CMO to operate, especially
in today's business environment. Large sites such as Riverside have a lot of fixed assets that must be maintained and operated
whether or not they are being utilized. Cherokee had to maintain a 340-acre site that includes three commercial-scale synthesis
plants, two good-manufacturing-practice kilo laboratories, a fermentation facility with 43 fermentors, 10 warehouses, and
laboratory space; little of that capacity was utilized. At almost $100 million in revenues, Cherokee would have been considered
a substantially sized API manufacturer, but the cost of maintaining all of these facilities probably overwhelmed the revenue
generated by the legacy Merck contracts.
Cherokee is certainly not the first pharma-to-CMO deal not to work out well. Keata Pharma, a Canadian dose CMO, filed for
bankruptcy within a year of buying its facility in Arnprior, Ontario, from Pfizer. Inyx, a UK-based CMO, went into receivership
soon after buying a facility in Puerto Rico from sanofi-aventis (Paris); sanofi-aventis had to retake the facility much like
Merck has. Elaiapharm (Nice, France) went through receivership and is now owned by the Danish pharmaceutical company Lundbeck.
This is not to say that there will be no pharma-to-CMO/CRO deals in the near future. There are often good strategic reasons
to complete these transactions, including filling a hole in a company's service offerings or extending a strategic relationship
with a key client. In fact, in several recent deals, companies were able to achieve both of these objectives simultaneously.
When Covance (Princeton, NJ) acquired Eli Lilly's (Indianapolis, IN) site in Greenfield, Indiana, it gained a 10-year services
contract and some critical discovery-related technologies. Similarly, in its recent acquisition of the R&D site in Verona,
Italy, from GlaxoSmithKline (London), Aptuit (Greenwich) gained discovery capabilities while enhancing a key client relationship.
These deals show that a bargain price is no longer an adequate incentive for acquiring a redundant facility from a major bio/pharmaceutical
company. There must be a strong strategic rationale and an adequate revenue stream for the facility to achieve standalone
viability. Executives we spoke with say they have walked away from many offered facilities because the economics and strategic
rationale were missing. The global bio/pharmaceutical companies may get offers from small and mid-sized bio/pharmaceutical
companies for their redundant facilities, but CMOs and CROs are not lining up to buy them.
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, email@example.com