2006 was a busy year for merger and acquisition (M&A) activity in the pharmaceutical services industry, and all signs point to 2007 being at least as active. The resulting consolidation and changes in ownership are altering the face of the industry. 

 counted almost 60 deals completed in 2006, with a total value of nearly $2 billion. The deal sizes range from the $2 million that Canadian contract laboratory company 

 (Montreal, Canada) paid for the Blainville, Quebec analytical operations of 

 (Montreal, Canada) to the $567 million that a consortium of private-equity firms is paying for pharmaceutical chemical manufacturer 

 (Pompey, France). The number of deals was almost equally divided between clinical and nonclinical development and manufacturing services. 

 One deal alone promises to make 2007 an even bigger year than 2006: 

's (Dublin, Ohio) Pharmaceutical Technologies and Services (PTS) business, which Cardinal Health announced it intends to divest by mid-year, is expected to bring nearly $2 billion on its own. The industry also is waiting to learn whether the board of directors of dose manufacturer 

 (Toronto, Canada) decides to sell all or part of its operations. If it does, assets worth hundreds of millions of dollars could change hands. Add to those two events the normal flow of small, tactical deals and the likelihood of a surprise announcement or two, and 2007 should be quite a year for investment bankers representing contract-services clients. 

Even if the Cardinal Health and Patheon transactions were not looming over the industry, 2007 would probably be a busy year because the factors that drove contract services M&A activity in 2006 are still very much in place: a set of compelling business rationales and readily available financing. 

The business rationales for deal-making reflect market trends in the pharmaceutical services industry. 

Private-equity firms that own contract research organizations (CROs) and contract manufacturing organizations (CMOs)			

 The number of early-stage candidates in the drug development pipeline has grown markedly this decade—Phase I candidates are up 50% according to data from IMS, Inc.—and service providers want to make sure they have the capacity to serve them. Companies that support the development of early-stage compounds, including Phase I research, formulation, and analytical services, have been in strong demand by acquirers. 

Demand for Phase I beds has far outstripped the supply, making Phase I capacity a hot commodity in 2006. 

 (Princeton, NJ) added 11 sites and 500 beds to its network with its acquisition of the 

 (Reston, VA) gained a Phase I foothold in Europe with its acquisition of 

 adding to its existing facility in Lenexa, Kansas. 

 (Geneva, Switzerland) bought a major Phase I presence with its acquisition of 

The early-development opportunity also has been driving activity in process development and manufacturing for small-molecule active pharmaceutical ingredients (APIs). Notable deals in 2006 were the acquisition of 

 (St. Louis, MO).  Several Indian fine-chemical companies positioned themselves for the development market by buying European and US assets: 

 (Ahmedabad, India) with its acquisition of 

 The globalization of clinical research and the efforts by major pharmaceutical companies to consolidate their vendor base are major driving factors for M&A activity. Clinical trials are going global in an effort to broaden the pool of patients from which to recruit, and in anticipation of launching approved products in more markets. At the same time, major pharmaceutical companies are reducing the number of vendors they work with to gain more leverage in price negotiations and to reduce costs. These trends favor large companies with global capabilities and a broad range of services, and acquisitions are a prime vehicle for bulking up. 

's (Cincinnati, OH) acquisition of the Phase II–IV business of 

. The acquisition of the Charles River business increased Kendle's revenues by 65%, pushing it onto the list of the top 10 largest CROs.  

The acquisitions of IMFORM and Scirex allowed Premier Research to nearly double its size twice within a year. Although Premier Research is still small compared with the industry leaders (at about $75 million in revenues and 800 employees), the increased size and capabilities should help stabilize its financial performance and make it more competitive. 

 As companies have refined their corporate visions, chief executives have been aggressive in divesting businesses that they no longer consider strategic, or that they feel cannot compete profitably. This active portfolio management has put some major business assets in play. 

For instance, Cardinal Health's decision to sell the PTS business reflects the company's growing focus on the downstream pharmaceutical supply chain (from the warehouse to the bedside) and the recognition that manufacturing was not critical to its mission. Charles River sold its Phase II–IV clinical research business to Kendle because its executives realized that at just $130 million in revenues and with a limited international footprint, they would have a difficult time competing with the larger CROs for Big Pharma contracts.  

In the pharmaceutical chemical sector, similar considerations drove Rockwood Holdings to sell Groupe Novasep, 

 (Heerlen, Netherlands) to sell its South Haven, Michigan operations, and 

 to sell their pharmaceutical chemicals businesses. 

The strong impetus to make deals has been supported by the readily available financing to pay for them. The cost of capital for acquirers is relatively cheap as corporate profits are strong, stock valuations high, and interest rates low. 

The financing environment has benefited private-equity firms, which have been major players in the pharmaceutical services M&A market. They have been especially active buyers of pharmaceutical chemical businesses, and are expected to be major bidders for the Cardinal Health PTS business. They also have shown keen interest in attractive niches within the industry (see sidebar "Private-equity firms that own contract research organizations and contract manufacturing organizations"). 

The pharmaceutical services M&A boom is a reflection of the industry's growing maturity. The industry has demonstrated its staying power, and pharmaceutical business trends indicate steady growth in the years ahead. With the business case made, there is a need for stronger, more professionally run corporations and executive teams to drive companies ahead in the manner that industry leaders such as Quintiles, Covance, and PPD have demonstrated. M&A is a prime vehicle for achieving the next level of industry sophistication.  

 is president of PharmSource Information Services, Inc., and publisher of 

Articles

Sixty deals were completed in 2006, with a total value of $2 billion.

Mergers and Acquisition Drivers Remain in Place for 2007

The latest pacts from the pharmaceutical supply chain. 

). The partnership gives Laureate's clients access to Boehringer's manufacturing technology platform for biopharmaceutical products produced by mammalian cell culture. Clients also will have access to large-scale commercial production by Boehringer at its facility in Biberach, Germany. 

) for the manufacture of "PX107" protein vaccine for use in Phase I clinical trials for bone disorders. Cobra will manufacture the protein, and Pharmexa will carry out upstream and downstream development of the vaccine. 

) signed a three-year contract with the Department of Homeland Security (DHS, Washington, DC, 

) to develop and manufacture vaccines against foot and mouth disease. GenVec will receive as much as $6 million in program funding the first year and as much as $15 million over three years if DHS exercises its annual renewal options under the contract. GenVec will be responsible for the development, production, and regulatory approval of the vaccine, while DHS will conduct animal studies. 

News

The latest pacts from the pharmaceutical supply chain.

Agreements and Contracts

The latest regulatory and association news for pharmaceutical manufacturers and contract manufacturing organizations. 

The Synthetic Organic Chemical Manufacturers Association

) is launching a new sustainable chemistry initiative, the International Center for Sustainable Chemistry.SOCMA is the US-based trade association of batch and custom manufacturers, including contract manufacturing organizations supplying active pharmaceutical ingredients and intermediates to the pharmaceutical industry. 

The International Center for Sustainable Chemistry is the result of a partnership and memorandum of understanding between SOCMA and the US Environmental Protection Agency (EPA, DC, 

). The EPA will serve a technical advisory role in the new center, which will act as an industry conduit for green-chemistry outreach and activities. 

The Synthetic Organic Chemical Manufacturers Association (

) in response to proposed DHS regulations on chemical site security, asking DHS to take into consideration the unique nature of the specialty batch manufacturing sector. 

SOCMA is the US-based trade association representing custom and batch manufacturers. The association includes contract manufacturing organizations supplying active pharmaceutical ingredients and intermediates to the pharmaceutical industry as well as contract manufacturers supplying specialty chemical sectors. 

In late December, the DHS proposed regulations on site security for high-risk chemical facilities. The proposed regulations require that chemical facilities fitting certain profiles complete a secure online risk assessment to determine overall risk. High-risk facilities will then be required to conduct vulnerability assessments and submit site-security plans that meet the department's performance standards.  

SOCMA's comments may be found at: http://

www.socma.org/PDFfiles/gr_pdf_files/Socma_Comments_on_Chemical_Facility_Anti-Terrorism_Standards_2-6-07.pdf

The latest regulatory and association news for pharmaceutical manufacturers and contract manufacturing organizations.

Regulatory and Association News

) announced a series of promotions and shifting of responsibility in its senior management team. These changes include:  Frank J. Wright becomes vice-chairman, responsible for external value creation and global integration activities and also has been nominated to the company's board of managers. Scott L. Houlton becomes chief operating officer, with responsibility for scientific operations, business process Improvement, human resources, clinical operations, and capital development.  Michael J. Butler, president, scientific operations, will take responsibility for Aptuit's technology and innovation investment activities, including research and development.  And Robert G. Burford, managing director, has assumed additional responsibility as chairman of the management committee of Aptuit Consulting.  

) named Mary Ellen Rubinstein marketing manager with responsibility for three product lines: inhalation anesthetics; fluorochemicals; and oils, greases, and waxes. Halocarbon is a producer of specialty fluorochemicals. 

People

A roundup of manufacturing and service expansions for February 2007. 

) will invest an additional $100 million in capital projects to expand capacity, improve operating efficiency, and further align its global operations. This announcement follows its completion of two acquisitions, SSCI and EaglePicher Pharmaceutical Services, which added physical chemistry and active pharmaceutical ingredient development and manufacturing to the company's capabilities.  

) unveiled a $100-million investment program in formulation development and manufacturing services. NPIL Pharma has invested roughly $50 million over the past three years as part of its early-phase (development) and late-phase (manufacturing) formulation services in the United Kingdom and India, and plans a similar investment over 2007-2009. The investment includes a new sterile supplies pilot plant, which is scheduled to come on stream in Mumbai, India in the fourth quarter of 2007. 

The company's focus on formulation services and final-dosage forms follows the addition of capabilities in this area from NPIL's acquisition of 

) API and formulation facility at Morpeth, United Kingdom last June. As a result of the Morpeth acquisition, NPIL Pharma now has annualized aggregate drug-formulation capacity of 3 billion tablets, 500 million low RH (< 8%) tablets, 270 million hard-gelatin capsules, 180 million ophthalmic liquids, 48 million glass vials, and 30 million ampules. 

The company will launch its integrated formulation capabilities to pharmaceutical customers in Europe and North America beginning in the second quarter 2007. 

) plans to collaborate for cytotoxic fill-and-finish services with the 

Center for Pharmaceutical Science and Technology (CPST) at the University of Kentucky

Under an initial agreement, CPST will provide IV formulation and sterile fill of cytotoxics and potents for clinical trial applications. The contract will be delivered through CPST's newly commissioned sterile manufacturing facility at the university's Coldstream Research Campus near Lexington. The $17-million facility opened in May 2006. 

This non-exclusive agreement with CPST completes Almac Sciences' supply chain solutions package in cytotoxics and potents, for which it already has in-house process research, development, manufacturing, and logistics capability at its Craigavon, Northern Ireland complex. Almac Sciences manufactures cytotoxic APIs in dedicated facilities.    

At InformexUSA, Almac Sciences also announced that its manufacturing site for highly potent compounds in Craigavon earned certification under the "SafeBridge" program, a review and certification program conducted by 

 (Mountain View, CA). SafeBridge conducted a 60-element review of programs, procedures, and containment of the active pharmaceutical ingredient synthesis areas at the site, and based on the quantitative results of the Potent Compound Safety Certification program, SafeBridge certifies that Almac meets current industry standards for the safe handling of potent active pharmaceutical ingredients in certain areas of its plants dedicated to handling such materials. 

), a manufacturer of fluorine products, is expanding one of its manufacturing facilities in Catoosa, Oklahoma by adding 25,000 ft

 facility. ARC produces fluorine-based compounds at two manufacturing facilities in Catoosa, one in Mexico, and two in India. The company serves multiple industries, including the pharmaceutical industry. 

) launched a new product line of enzymes for chemical synthesis developed in cooperation with 

). The 16 enzymes offered in the product line are the first products to be launched under a cooperative marketing and distribution agreement formed by the companies in late 2006. BioCatalytics has exclusive marketing rights for the new products and formulations for research and development and process development, and Novozymes will be responsible for bulk manufacturing. 

BioCatalytics also formed a chiral technology agreement with 

) under which the companies will cooperate on an exclusive basis for the development or processes and manufacture of chiral intermediates and APIs.  

) has initiated detailed engineering for an expansion at its Karlskoga, Sweden, site to increase production capacity for small-molecule active pharmaceutical ingredients. The project is scheduled to start in July 2007 for completion by early 2009 and will add a flexible, mid-sized CGMP manufacturing plant. Cambrex Karlskoga currently produces more than 20 commercial pharmaceutical products and completed over 30 clinical phase projects in 2006.  

Cambrex also plans to build new laboratory space to augment its existing high-potency facilities in Charles River, Iowa. The project will include the construction of an 11,500-ft

  facility with five new process development and kilo laboratory suites. 

) introduced "Codex" Biocatalysts Panel, a research product designed to facilitate the use of biocatalysis in pharmaceutical manufacture. The product consists of sets of diagnostic enzymes panels that can be used to screen for reactivity in process reactions. The enzymes are optimized for use in pharmaceutical manufacture. 

) formed a strategic marketing agreement for the solvent, 2-methyltetrahydrofuran (MeTHF), MeTHF-soluble organometallic reagents, organic and inorganic salts, hydrides, and alcoxides. MeTHF is a solvent alternative to tetrahydrofuran (THF).  Penn Specialty Chemicals commercially produces MeTHF and specializes in producing furfural and furan-based solvents and derivatives. Chemetall is a leading supplier of metal-based chemical applications and lithium-based products. Chemetall has shown that various organogrignard reagents are more soluble in MeTHF than THF and some reactions show improved yields. Chemetall and Penn plan to jointly sponsor scientific events centered around green chemistry and organometallic applications. 

) is creating a Synthesis-at-Speed team to operate on a 24/7 basis on kilogram and pilot-plant API development projects. The company also is commissioning a three-phase, $10-million asset upgrade and expansion program for its Holywell, North Wales, facility, with the first phase to be completed during 2007.The second phase of the new investment at Holywell, focused on enhanced cleanroom facilities at 100 kg scale, is planned for completion during 2008.   

) added "QuadraPure C" to its resin-based metal-catalyst and reagent scavenger range of products that are used to remove impurities in pharmaceutical manufacture. QuadraPure C is a synthetic, porous, high surface-area, nonfunctional carbon-based material used for adsorption of small-molecule organic containments. The product removes color, trace impurities, and odor from active pharmaceutical ingredients, intermediates, and specialty chemicals. 

) completed the initial phase of a two-stage expansion at SAFC Pharmorphix's research facility in Cambridge, United Kingdom. SAFC Pharmorphix specializes in solid-form characterization and research. The company completed a 2,500-ft

 laboratory extension, which will be followed by an additional investment in the spring of 2007 as part of a $600,000 expansion program. SAFC Pharmorphix expects to add additional X-ray crystallography equipment to the laboratory. 

 (Mumbai, India) to represent "Selectfluor" and "Deoxo-Fluor" fluorinating reagents in the Indian pharmaceutical market. The products are manufactured by 

 and are represented by Scott Medical Products, which provides reagents for low-temperature, high-yield, late-stage direct fluorination. 

A roundup of manufacturing and service expansions for February 2007.

Expansions

A roundup of company moves and positioning from the pharmaceutical and biotechnology industries and contract service providers. 

Basingstoke, UK and Philadelphia, PA (Feb. 20)—

) for $2.6 billion. With the move, Shire gains New River's "Vyvanse" (lisdexamfetamine dimesylate), a drug to treat attention deficit and hyperactivity disorder. The deal is expected to close in April 2007.  

) acquired the active pharmaceutical ingredient (API) division of 

 (SSCL, Chennai, India). The move provides Actavis with a FDA-approved manufacturing facility in India and the ability to manufacture its own APIs, which represent the single largest cost component in the company's manufacturing activities. SSCL will also provide API research and development services to Actavis.  

) plans to introduce a new operating model for its global research and development activities that is organized around disease biology areas (DBA). Managed by disease biology area leadership teams (DBLT), they will be located in Basel; Nutley, New Jersey; and Palo Alto, California. Each DBLT will manage compounds from drug discovery through proof of concept, with oversight through to the market. 

) shareholders approved the sale of the company's bioproducts and biopharma subsidiaries to 

) agreed to merge, with the closing planned for Oct. 1, 2007. The companies reached a basic merger agreement and have set up a committee to work out the details by May. Board approval of the final agreement is scheduled for May, and a meeting for shareholders' approval is scheduled for late June.  

Under the deal, Tanabe is acquiring Mitsubishi Pharma to form a new company, tentatively named Mitsubishi Tanabe Pharma Corporation, as a consolidated subsidiary of Mitsubishi Chemical Holdings Group. Mitsubishi Chemical Holdings Group will hold a majority share of the new company.   

The combined company will have sales of 407.8 billion yen ($3.4 billion), making it the fifth largest pharmaceutical company in Japan. It will have domestic ethical pharmaceutical sales of 384.7 billion yen, ($3.2 billion).  

). Financial terms were not disclosed. The deal is expected to close in the first or second quarter of 2007. 

) agreed to acquire Arrow Therapeutics Ltd., a privately owned UK biotechnology company, focused on the discovery and development of anti-viral therapies for $150 million. The transaction is expected to close early in 2007. 

A roundup of company moves and positioning from the pharmaceutical and biotechnology industries and contract service providers.

Mergers, acquisitions, and restructuring

www.sigmaaldrich.com/SAFC/Global/bOverviewb.html

), the custom-manufacturing and fine-chemicals unit of 

), is on track to continue a high-growth strategy that saw SAFC's revenues grow nearly 10% in 2006. Following key acquisitions in 2005 to build its biosciences business, SAFC's President Frank Wicks pursued other acquisitions to expand the company's manufacturing capabilities in custom synthesis and added solid-state chemistry services. These moves come as SAFC aims for another year of double-digit revenue growth and seeks to build a manufacturing footprint in Asia to keep pace with the pharmaceutical industry's demand for lower-cost production.  

An integral part of Sigma-Aldrich's growth strategy

SAFC accounts for 27% of Sigma Aldrich's corporate sales and is Sigma Aldrich's second largest business unit. "SAFC is key to Sigma-Aldrich's growth plan," says Wick. In 2005, SAFC posted sales of $437.3 million, which included its acquisition of JRH Biosciences. With the acquisition, SAFC posted a sales gain of 11.3%, which included organic growth of 5.8%. 

SAFC's Pharmorphix site in Cambridge, United Kingdom is focused on solid-state studies.			

Serving the pharmaceutical market is an important part of SAFC's strategy. Roughly 70% of SAFC's revenues come from pharmaceutical-related businesses.  

SAFC consists of four business segments. The largest piece is SAFC Supply Solutions, which accounted for 47% of SAFC's 2005 sales. SAFC Supply Solutions offers customized raw materials to the pharmaceutical, diagnostic, and flavors and fragrances industries. SAFC Biosciences accounts for 31% of SAFC's sales and provides raw material for cell-culture manufacturing. SAFC Pharma provides custom synthesis of active pharmaceutical ingredients (APIs) and intermediates and accounts for 19% of SAFC's total sales. The last business segment, SAFC HiTech, offers high-purity inorganic materials, electronic chemicals, and custom-manufacturing services, principally to the electronics industry.   

Driven by SAFC Pharma, its API custom-manufacturing unit, and SAFC HiTech, Wicks says  SAFC hopes to achieve growth of 10% without acquisitions and 15%  growth with acquisitions in 2007.  

Building outsourcing capabilities at SAFC Pharma 

An important part of SAFC's growth strategy is to broaden its position in pharmaceutical outsourcing and the supply of raw materials to the pharmaceutical and biotechnology industries as companies seek to make their supply chains more cost-efficient and productive. 

 "The trends in the pharmaceutical market are clear," says Wicks. "There is increased pressure to reduce costs in most organizations and in most departments. We see pharmaceutical companies aggressively outsourcing research to India, although China's role in the drug discovery and development chain is not yet resolved. This increased globalization is placing increased value on supply-chain management," he says.  

At the same time, pharmaceutical companies are facing new challenges resulting from the changing finances of new drug launches. "Blockbusters are becoming rare," he says, "and, as a result, pharmaceutical companies are required to achieve greater cost reductions and efficiencies in managing their supply chains."  

To meet those demands, SAFC is broadening its positions in different pharmaceutical-outsourcing segments. Wicks points to industry estimates that place the total market for pharmaceutical outsourcing at $25–30 billion. This value breaks down into four main segments: drug-discovery outsourcing ($5–6 billion), drug-substance outsourcing ($7–8 billion), final-formulation outsourcing ($8–9 billion), and clinical outsourcing ($9–10 billion). Outside of outsourcing, raw-material supply to the pharmaceutical and biotechnology industries is estimated at $15–20 billion. 

SAFC is solidifying its position in drug-substance outsourcing and custom synthesis, its traditional area of strength, and is looking to increase its participation in formulation-support services. SAFC built its position in drug-substance outsourcing with the 2004 acquisitions of the  contract manufacturing organizations (CMOs) 

 (Madison, WI). The acquisition of Tetrionics provided SAFC with high-potency API-manufacturing capabilities at facilities in Madison, Wisconsin. Last year, SAFC invested $18 million to double high-potency manufacturing capacity at those facilities.  

SAFC also expanded its API custom-synthesis business by acquiring from 

) a large-scale API manufacturing site in Arklow, Ireland. The move gave SAFC commercial-scale manufacturing capabilities with 90,000 L of total CGMP capacity. With the Arklow acquisition, SAFC also gained three legacy generic API production projects. SAFC acquired the facility as several of its custom-synthesis projects were reaching Phase III to commercial-scale manufacturing requirements.  

Reflecting strong demand, SAFC introduced seven-day-per-week workshift extensions at its Gillingham, United Kingdom API manufacturing site and its Manchester, United Kingdom medicinal-chemistry and development facilities.  

In October 2006, SAFC invested $12 million and opened  a new 139,000-ft

  medicinal-chemistry facility in Bangalore, India. SAFC Bangalore features more than 60,000 ft

  of production and research and development laboratory space. The facility includes manufacturing suites for chemical development and production to 50-L scale and an on-site warehouse. The operation offers preclinical, process development, and scale-up services and is designed to work in alignment with SAFC's Manchester medicinal-chemistry operations. "The Indian facility works in partnership with our Manchester facility," says Wicks. "It provides our customers with Western communication and business practices with access to Asian economics." 

Wicks says that SAFC "is looking to establish a footprint in Asia by gaining a CGMP manufacturing facility for API synthesis in India and a large-scale, flexible organics manufacturing facility in China that could provide raw materials for SAFC businesses. "For China, we are open to an acquisition or establishing a joint venture, depending on what opportunities become available," says Wicks. "For India, we are seeking commercial-scale CGMP capacity as a means to offer lower-cost production capabilities in our custom-synthesis business."  SAFC also is looking to strengthen its sales and marketing presence in Japan, with a target of two to three API projects.  

Another new piece to SAFC's drug-substance outsourcing activities is a transgenic extraction and purification facility. The $16-million facility in St. Louis, Missouri is due for completion in mid-year 2007. Wicks says the facility is one of the world's largest biologics extraction facilities and is a CGMP transgenic facility. It can process as much as 5000 kg per week. The facility is segregated for plant and animal processing. "We have already scheduled API projects for the facility," says Wicks. 

) in 2006 to add capabilities in solid-state chemistry. Research and development support services include polymorph investigation, salt selection, physicochemical property determinations, preformulation profiling, cocrystallization, classical chiral resolution, and crystallization studies that may be used in the development of building blocks, scaffolds, intermediates, and APIs. The company is in the process of expanding laboratory space in Cambridge by 25% and expects to complete the expansion by the first quarter of 2007. SAFC also is outfitting its Madison facility with equipment to perform analytical support in the United States. The Madison expansion is expected to be completed by the end of the first quarter of this year.   

SAFC Biosciences is another key piece for the company in serving the life-sciences industry. SAFC Biosciences is the fusion of Sigma-Aldrich's industrial cell-culture business and 

 which SAFC acquired in 2005. SAFC Biosciences develops, manufactures, and markets raw materials for cell-culture reagents, explains Archie F. S. Cullen, vice-president of sales and marketing for SAFC Biosciences. The company supplies CMOs, the biopharmaceutical businesses of Big Pharma companies, and small and emerging biopharmaceutical companies. Cullen points to strong growth potential in the market for human biopharmaceutical development and manufacture using mammalian cell cultures. Industry estimates expect growth of about 10–20% per year in mammalian cell-culture production, with almost 900 cell-culture projects under clinical development.  

A key trend in the biopharmaceutical market is the move to serum-free media and animal component-free products. "Early major approved therapies are being relaunched using serum-free media," says Cullen "and all new therapies are being developed and launched in serum-free media." To address this trend, SAFC, in collaboration with 

), is offering its "ExCell"  "EBx" platform, which includes "Ex-Cell EBx" viral growth and production serum-free media, designed to support the growth and productivity of viral vaccines in EBx cells, a chicken embryonic-derived stem cell line. 

SAFC also began beta testing in January 2007 to evaluate the impact of changes in process parameters on the performance of plant-based hydrolysates. Plant-derived hydrolysates can provide performance enhancements to the serum-free cultivation of mammalian cells, but there have been historical concerns about variability in performance. 

Customization also is an important trend in the supply of media, and SAFC offers liquid medium and dry-powder medium custom formulations, which include liquid medium dispensed in single-use disposables.  

Single-use disposable manufacturing is another key trend in biopharmaceutical manufacturing, explains Cullen. "Many companies are employing single-use disposable manufacturing units to help lessen validation and capital costs," he says. SAFC Biosciences has a collaboration with 

 (Chalmette, LA) to offer custom design and manufacture of single-use processing systems for handling, storage, and processing. SAFC Biosciences also is a member of the 

The Society of the Plastics Industry, Inc

) to promote the benefits of single-use bioprocessing. BPSA provides educational support and encourages the development of  standards and guidelines that safeguard the quality of drugs produced using this technology. 

 Given the biopharmaceutical industry's increased interest in single-use disposable manufacturing, SAFC is seeking to acquire a disposable-bag manufacturer, says Wick. SAFC now offers its "Bioeaze" disposable bioprocessing systems. 

SAFC Biosciences also is advancing an alternative to traditional clone-selection approaches through "Cell Xpress," which uses "LEAP" (laser-enabled analysis and processing) instrumentation. LEAP combines 

imaging with laser manipulation to identify, purify, and monitor expansion of high-secreting clones. The system has been validated on multiple biopharmaceutical cell lines, including Chinese hamster ovary (CHO) lines. CHO lines are used in roughly 80% of biopharmaceutical production, says Cullen.  

SAFC targets pharmaceuticals and diagnostics  

SAFC Supply Solutions is another piece of SAFC that serves the life-sciences industry. SAFC Supply Solutions complements Sigma-Aldrich's research chemicals business by offering customized raw materials to the pharmaceutical, diagnostics, and flavors and fragrances markets. As part of its custom offerings, SAFC Supply Solutions offers analytical, packaging, and quality-assurance support services.  

A key move made by SAFC Supply Solutions in 2006 was employing a customer-centric focus by organizing around markets instead of on a product basis. SAFC first launched its supply solutions for the pharmaceutical industry in February 2006 and followed with its offerings to the diagnostics markets in June 2006. It plans to launch its business for the flavors and fragrances market this year. Target revenue growth for SAFC Supply Solutions is 4–6%, notes Wicks.  

Continuing an ambitious growth strategy, SAFC eyes CGMP manufacturing capacity in India for its custom-synthesis business and seeks to gain large-scale organics manufacturing capacity in China for raw-materials supply. And, its biosciences segment seeks opportunity in single-use disposable manufacturing.

SAFC Eyes India and China and Seeks to Build Biosciences

Business and technical risks exist in outsourcing, and strategies for mitigating and sharing those risks between a pharmaceutical company and contract manufacturing organization (CMO) are critical for a successful outsourced relationship. A recent program, held in January by the 

Chemical, and Associated Technologies Association

) featured perspectives from CMOs, pharmaceutical companies, and regulatory experts on ways to mitigate and assign risk in the outsourced relationship. These perspectives include methods for optimizing the supply chain, factors to consider when outsourcing to suppliers in India and China, and insight from the 

) on the inspection process of contract facilities.  

Several risks exist in the outsourcing relationship, explains Robert Schiff, president of 

), a consultancy specializing in regulatory affairs and pharmaceutical manufacturing. Schiff  spoke at the recent DCAT program. This risk applies to outsourcing the manufacturing of raw materials, active pharmaceutical ingredients (APIs), excipients, packaging materials, and the finished drug product.  

"The pharmaceutical company outsourcing manufacturing faces a basic business risk: the potential of a CMO to fail to meet timelines and the resulting financial impact these delays would have on the pharmaceutical company's costs and profits for a given product," he said.  

The ability of the CMO to deliver relates to certain factors: the quality of its management, staffing levels, the skill and experience of the staff, the availability and quality of the equipment used by the CMO, and the capacity utilization of the facility in which the project will be performed.  

"The experience question is the most important question in the outsourced relationship," he says. "Will the CMO be learning on your dollar or does it have in place the manufacturing capability, in terms of management, staffing, equipment, and facilities, to be able to perform your project," he asks.  

"The basic technical risk is in the manufacturing process itself: the loss of control by the pharmaceutical customer in assuring the quality of the process," says Schiff. Specific types of technical risk include a lack of planning in the technology transfer between the CMO and the pharmaceutical customer, incomplete process validation, and changing specifications when outsourcing a project.  

To reduce these technical risks, a pharmaceutical company must perform due diligence on a prospective CMO, explains Schiff. This process includes: checking if a CMO has ever been issued a warning letter by FDA, reviewing the CMO's company history, obtaining third-party references, and examining specific illustrations of the CMO's experience with the particular type of product manufacture involved in the outsourced project. These steps, along with auditing a CMO's facility for compliance with 21 

 210 and 211 (1), which outline current good manufacturing practices (CGMPs), help to identify the technical risks in an outsourcing project.  

A basic risk-management program involves risk assessment, risk evaluation, a process for making those risk assessments and evaluations, and the process of deciding whether to accept the risk or take steps to reduce the risk, explains Schiff.  

"Risk assessment first begins with identifying all the events that can go wrong, then determining the likelihood and probability of occurrence of those events, and then evaluating the consequences of not acting on those possible risks," explains Schiff. "When evaluating the risk, one should compare the identified and analyzed risk to standardized criteria and then consider the evidence for what can go wrong, the likelihood that it will go wrong, and the consequences if the potential risk were to occur."  

Risk management in the outsourced relationship

Given that some form of business or technical risk is inherent in the outsourced relationship, the next critical step is deciding how that risk should be incorporated into the outsourced relationship.  

"The basic point here is that the contract should not be the principal risk-management tool," says Jim Miller, president of 

 who also spoke at the DCAT program. "Risk management is part of the sponsor's cost of doing business, and both the sponsor and the CMO have to have realistic expectations of the value and risk that each party assumes."  

the potential failure of a drug moving through the drug-development process to commercial manufacture and the sales of that drug in the marketplace) are assumed by the sponsor or the pharmaceutical company.  

"The pharmaceutical company cannot load that business risk on the CMO," explains Miller. "The CMO's business model is not designed to take on the risk of drug development; its margins cannot absorb high levels of risk," he says. "Not understanding that issue can lead to protracted negotiations and relationship problems between the CMO and sponsor."  

In turn, a CMO should limit its risk exposure to its ability to meet value-added process, regulatory, schedule, and service-performance goals. "CMOs play a role and bear a certain share of the risk, but it is a small part of the overall process," says Miller.  

It therefore becomes critical for the sponsor or pharmaceutical company to use the full range of risk-mitigation tactics as outlined in Table I. These tactics include avoidance, prevention, redundancy, separation, transfer, and retention, and may be used to reduce a sponsor's exposure to risk. 

 Table I: The full range of risk-management tactics.			

Miller also emphasizes the need to perform due diligence on a prospective CMO. "Adverse business developments in the CMO are more likely to be catastrophic than compliance or technical problems," he says. Despite this tendency, a recent survey showed that only 17% of sponsors actually review their contracts financially on an annual basis (3).  

Miller points to key parameters when evaluating the CMO's business strategy and its business risk. "See if the company is successful and has a track record of profitability and growth." he says. "See if the company can support its growth by looking to see if it has positive and increasing cash flow and what the company's debt capacity and obligations are. Also, see if the company remains dedicated to the contract business. Look for signs that may show the owners' intentions for selling or exiting the business."  

Another important risk-mitigation tactic is to put contract conditions up front in the request-for-proposal (RFP) process. "Risk-management issues are often more contentious and expensive than price," says Miller. "Issues such as who takes responsibility for blown batches, order lock-ins, indemnification, and take-or-pay conditions are important in the RFP process. It is better to take the time to access these costs and to factor them in the RFP process than to attempt to switch vendors or contractors late during the project's execution, which may threaten the timelines for the project."  

Given the rising influence of India and China in the global pharmaceutical supply chain and these countries' demand potential as high-growth pharmaceutical markets, a basic question arises. Which is the greater risk: the risks associated with outsourcing or the risk in not participating in those markets?  

To answer those questions, Stephen Hannon, director of marketing for 

), a manufacturers' representative, provided insight into his company's perspective on conducting business in India and China.  

"The common perception is the reason to outsource to India and China is price," says Hannon. "But price alone is not a reason to outsource to manufacturers in those countries. You outsource to people and companies that provide the service, quality, and price that you require. If you are not building relationships and meeting person-to-person, you are not outsourcing."  

To illustrate the risks on deciding to outsource based on price alone, Hannon offers the following example. A US-based chemical manufacturer decided to source from China, communicated by e-mail, and received samples from the Chinese company in a timely manner. The samples were tested and were of excellent quality. Before proceeding to buy the product at a competitive price, however, the purchasing company visited the site. An on-site inspection revealed that the company did not have a system for labeling and assigning product- or lot-identification numbers. Moreover, an inspection of the facilities revealed many deficiencies, including open reactor vessels, open filtration systems and centrifuges, and poor ventilation.  

"It is obvious that the cost savings achieved from the pricing of the product alone did not override the risk of bringing such product into the company's supply chain," says Hannon. "There is no substitute for building relationships when outsourcing a project or purchasing raw materials. E-mails are not a substitute, and telephone communication is good only for maintenance. It takes work, time, travel, and exposure to the CMO, no matter where it is based, to evaluate and mitigate the risks."  

In offering practical advice about doing business in India and China, Hannon points to key differences among manufacturers in those countries. "In general, Indian manufacturers tend to be fully integrated. That is, manufacturers have their own research-and-development [R&D] capabilities," he says. "Chinese manufacturers tend to manufacture only, and their R&D expertise resides in academic or institute laboratories." 

To adapt to those differences, Hannon advises that in India, the sponsor of the outsourced technology must partner with a manufacturer with demonstrated strength in both R&D and in manufacturing the core technology of the given project. "In China, the sponsor can outsource the R&D to a qualified development group and then transfer it to a qualified manufacturer. It is important that the sponsor retain the key technology control within the R&D group." 

Hannon also points to practical concerns when importing product from India and China. Obtaining export licenses from India and China can be time-consuming and unpredictable, and the documentation process in customs is variable, both in terms of the quality of the paperwork and the time needed to process a shipment.  

He also describes differences in business practices. On a practical basis, contracts and legal agreements are used more to specify the work requirements of a project rather than to establish a binding agreement enforceable in domestic judicial proceedings in India or China.  

Also, the rapid pace of growth in the pharmaceutical markets in India and China, estimated at 15–25% per year, has created mobility in the labor pool in those countries. "The rapidly changing labor pool is an important consideration when outsourcing a project, since the sponsor of a project needs to know that the staffing levels and expertise, particularly with certain chemistries, can be maintained during the course of the project."  

Views from emerging pharmaceutical companies

Risk management is a particularly critical issue for emerging pharmaceutical companies, which may rely more heavily on CMOs to meet demand for ingredients and finished-dosage manufacturing. Vito LaVopa, senior manager for supply chain at 

), spoke at the DCAT program and offered insight into mitigating the risks in the pharmaceutical supply chain. 

"In supply-chain risk assessment, identify potential risks, rank by considering the probability and impact, and focus on the risks that you can control," says LaVopa. "Assess the overall supply chain by mapping the process and identifying the weak link in the supply chain, taking into consideration the ingredients being delivered or service being outsourced, and other inputs such as equipment, staffing levels, and expertise of the CMO."  

This process takes into consideration the need for independent supply chains and the use of multiple vendors to ensure the delivery and quality of the supply of a particular product, says LaVopa. "It is important not to overlook the actual delivery of the product and the factors that affect that process," he says.  

Issues to consider in this process are the transportation mode and costs, inventory management at the CMO (which can include the length of time a product is stored and the product's storage conditions), and the replacement value (full or partial) of product that potentially could be lost in the shipping cycle. 

A common question that arises in the supply chain is whether it is less risky to split shipments, which is particularly important during product launch and for products with lengthy lead times for replacement. "It all depends on the particular product and the shipping conditions under which that product is being shipped, which could even include weather conditions and the actual route being taken to deliver the product," says LaVopa.  

"Also, when importing product offshore, it is also important to fully understand the customs procedures and practices to ensure security in the supply chain," he says. He points to the importance of knowing who has access to material, when this access is available, and at what points in the supply chain. This may involve, for example, verifying the procedures for on-site sampling of the product by customs, the process for sealing a drum, and the associated labeling and identification process when the drum is sealed, such as using serialized tags. 

Jean Poulos, vice-president of quality and regulatory operations at 

), points to risk-management issues for the finished-good manufacturer.  

"Risk increases on marketed finished products, and the continued product performance is influenced by ingredient quality," she says. "Any change, therefore, in the ingredient may cause a negative effect on the finished product." Changes in ingredients may involve starting materials, intermediates, process optimization, equipment, facilities, and containers. And, an unknown change in an ingredient can cause it to be used in the finished product without adequate evaluation. 

"To minimize that risk, ingredient manufacturers must have a vigorous change-notification process," says Poulos. "It is better for the sponsor or the pharmaceutical company to be overinformed than underinformed. There must be open communication regarding changes," she says. "The finished-product manufacturer needs to identify significant conditions of approval concerning the API or excipient and be able to communicate those to the ingredient supplier. The supplier needs to have a strong technical understanding of the impact of changes that the API or excipient will have on the finished product, and be able to communicate that back to the client."

She also emphasizes the need for ingredient suppliers to have an open door to client audits and having the ability to provide long-term reserves of material if preapproval is needed.

To illustrate the importance of those issues, Luitpold offered some examples of ingredient changes. An API manufacturer changed the site of manufacture, which was allowed within the drug master file, and validation was completed. This change was not reported to the client. Although the process did not change, the move to a new manufacturing location caused a slight change in pH. Since there was no specification for pH, this change went undetected until the ingredient was used in the finished product, causing it to fail. Corrective actions were put in place to add pH as part of the specifications of the API process and to add the manufacturer's site address as part of the reporting requirements.  

The relationship between the CMO and sponsor is critical not only in meeting the commercial goal of a given project, but also in meeting the regulatory requirements of the manufacturing process. The sponsor or pharmaceutical company is ultimately responsible for the manufacturing process, whether externally or internally provided.  

"All facilities involved in the manufacturing or testing of drug substance or a drug product are required to adhere to the portion of the CGMPs that apply to their operations," explains Nancy Rolli, preapproval manager and investigator for FDA, who also spoke at the DCAT conference. "FDA considers contract facilities as an extension of the manufacturer's own facility."  

As the supply-chain strategies of the pharmaceutical industry evolve, managing risks in outsourcing takes on greater importance. A recent program by the Drug, Chemical, and Associated Technologies Association examined approaches to mitigating risk and improving the pricing-and-cost model in the outsourced relationship.

PTSM: Pharmaceutical Technology Sourcing and Management-02-28-2007