) extended its manufacturing agreement with 

). SAFC will continue to provide high-potency manufacturing for the active pharmaceutical ingredient (API) in Vion's "Cloretazine," an anticancer drug. The amended contract extends the original 2003 agreement to 2009. In December 2006, Vion entered into a manufacturing agreement for Cloretazine finished drug product with Ben Venue Laboratories (Bedford, OH, 

). Ben Venue will manufacture Cloretazine finished drug product using the API manufactured by SAFC. 

), whereby Lomas will act as an authorized distributor of BASF's pharmaceutical excipients in Canada.  

Waisman Clinical BioManufacturing Facility

) to manufacture its DNA-based pre-flu vaccine. The vaccine uses DNA technology to implant a false memory of previous exposure to the virus and could offer an alternative approach to immunization. CytoDyn hopes to have clinical trials of the vaccine underway by the end of the 2008 flu season.  

) joined a consortium that focuses on developing a new oral vaccine-delivery system based on live bacterial spores. The research program will use genetically engineered spores to express vaccine determinants on their coat. 

) to establish a joint research foundation in China. The Novo Nordisk–Chinese Academy of Science Research Foundation will fund or cofund activities within the fields of biopharmaceuticals, protein chemistry, immunology, toxicology, oncology, and drug delivery. 

) to manufacture preclinical toxic material with potential for CGMP production. The agreement follows Dalton's recent receipt from Health Canada of an establishment license, which allows Dalton to manufacture sterile products and test and ship commerical products. Dalton will manufacture an antidepressant drug candidate for Affectis. 

) to offer metathesis-based scaffolds for the pharmaceutical industry. The agreement gives Peakdale nonexclusive rights to use Materia's methathesis intellectual property portfolio for the design, development, and sale of the scaffolds for research. The partners will identify target compounds, which then will be produced and distributed by Peakdale. Both companies hope to introduce two new series of scaffolds by the end of 2007. They plan to introduce more series in 2008. 

) extended its existing supply agreement with

). Lonza will continue to produce the active pharmaceutical ingredient for "Orencia," BMS's biologic agent for treating rheumatoid arthritis, through 2013. The API is manufactured at Lonza's biologics-manufacturing facility in Portsmouth, New Hampshire.  

Articles

News

The latest pacts from the pharmaceutical supply chain.

Agreements and contracts

Executives of contract research and manufacturing organizations (CROs and CMOs) are undoubtedly licking their chops over the prospective flood of business opportunities with

. (New York, NY). The opportunities are expected to arise from Pfizer's decision, announced by new CEO Jeffrey Kindler, to close down or sell five R&D sites and three manufacturing facilities and outsource more of the activities conducted at those sites. Given that in 2006 Pfizer spent nearly $7.5 billion on R&D and a similar amount on cost of goods, even a small incremental increase in the share going to contract services would be a bonanza for the pharmaceutical services industry. In fact, the plan calls for Pfizer to increase its outsourced manufacturing activity from 15% of requirements today to 30% in the next few years. 

Taken in total, Kindler's plan for fixing Pfizer amounts to a wholesale overhaul of the traditional Big Pharma business model. It entails a focus on costs that has been unusual for Big Pharma, albeit standard practice for most major industries. Consider these quotes from the Jan. 22 meeting where the Pfizer senior executive team unveiled their plan for Wall Street analysts: 					

". . . establishing a lower, more flexible cost base";

". . . establish a more flexible cost structure that can be modulated depending on our needs and opportunities at any given time";

". . . maintaining a flat R&D budget" while tripling the number of Phase III candidates by 2009;

". . . no-growth R&D budget environment";

". . . a culture of productivity and continuous improvement and continuous increases in efficiency";

". . . major development sites in Mumbai and Shanghai."

Those statements suggest that the CMOs and CROs that benefit from Pfizer's increased outsourcing activity are really going to have to work to maintain the business and keep it profitable. Clearly, Pfizer will be looking for more than just vendors: it will be looking for partners to help remake its R&D processes and manufacturing operations. The partnership role will require service providers to examine their own cost structures and business practices to find opportunities to continually deliver cost savings and performance improvements. Doing so will be wrenching for many service providers, who have become accustomed to the traditional Big Pharma way of doing business and have been quite profitable operating that way. 

Consider a traditional practice such as "take-or-pay" contracts, which obligate a customer to pay for capacity regardless of whether the capacity is used. These have long been standard practice in the pharmaceutical outsourcing industry, especially for services in which capacity is viewed as being tight, and they are quite popular today in the preclinical toxicology segment. Nonetheless, take-or-pay deals would seem to be contrary to Pfizer's objective of keeping costs flexible. How will service providers balance their own needs to maintain capacity utilization against Pfizer's needs to keep costs flexible? 

Pfizer's insistence on maintaining flat R&D expenditures while increasing the number of development projects will challenge CROs and CMOs even further. Profit margins will undoubtedly come under pressure, especially as the company explores sourcing options in Asia and as it insists on continuous improvement in pricing and performance each year. Those pressures also will force service providers to manage their businesses more effectively and also may lead to a rush of innovation as companies seek to squeeze costs out of the development process. 

Kindler's 2008 target for closing the facilities and realizing the cost savings suggests that contractors should start harvesting the windfall from Pfizer spending by the second half of 2007. The initial efforts are likely to hit some significant rough spots, given the large number of projects and the challenges of overcoming Pfizer's preference in recent years to work in house. The current industry environment, characterized by high utilization and tight capacity at most development services operations, also will be challenging for Pfizer. 

It's difficult to gauge how far reaching the effects of Pfizer's restructuring will be on the pharmaceutical services industry. Much depends on whether, and to what extent, other major pharmaceutical companies follow Pfizer's lead. In fact, other major pharmaceutical companies with their backs against the wall have been changing their traditional ways of doing business: witness 

's new willingness to outsource manufacturing and 

's efforts to restructure its R&D processes. Most major pharmaceutical companies, however, are still run by company veterans for whom the traditional business model is deeply ingrained. If Kindler's remodeling effort is successful, it may encourage the boards of other Big Pharma companies to look outside for new leadership with a fresh perspective. That could really shake up the CRO and CMO business. 

The other big outsourcing industry news in January was 

's (Dublin, OH) announcement that it will sell its Pharmaceutical Technologies and Services (PTS) unit to 

(New York, NY), a very large private equity firm, for $3.3 billion. PTS has capabilities in packaging, oral drug delivery, and sterile products manufacturing, with more than 30 sites worldwide. 

The sale of PTS was not itself a surprise because Cardinal Health had announced its intention to sell the business in November 2006. The surprise was that PTS never went to auction: Blackstone was able to pre-empt other potentially interested parties with its bid, which is 1.8 times PTS's revenues of $1.8 billion and 10 times its earnings before interest, taxes, depreciation, and amortization (EBITDA) of $320 million. 

Undoubtedly, Blackstone was willing to bid so aggressively for PTS because it knows the business and industry so well. Its senior advisor on the deal is Alex Erdeljan, the former CEO and chairman of 

, the softgel manufacturer that was bought by Cardinal Health in 1998 and forms the core of PTS's oral drug delivery business. After the R.P. Scherer sale, Erdeljan was a managing director with Global Healthcare Partners, a part of CSFB Private Equity Group, which owns contract manufacturer 

In addition, just a week after the deal was announced, Blackstone announced that George Fotiades, the former CEO of PTS and COO of Cardinal Health, would join the board of the new PTS. Fotiades is also an R.P. Scherer veteran. 

Although the price paid for PTS is significant, it is practically "chump change" for Blackstone. Right after announcing the PTS deal, Blackstone won the bidding war for Equity Properties, a company that owns a large commercial real estate portfolio. The deal, the value of which will exceed $38 billion, is said to be the largest private equity deal of all time.  

Blackstone's other pharma-related properties include 

 an Indian pharmaceutical business with activities in API manufacturing; developing branded formulations and biotech products; 

 a mid-sized specialty pharmaceutical company headquartered in Denmark; and 

 a manufacturer of specialty glass products used in packaging in the pharmaceutical, cosmetic, and specialty food and beverage industries. 

On the basis of its past history, Blackstone is likely to hold on to PTS for three to five years, perhaps acquiring additional businesses to add to its offerings. With the favorable industry market conditions and PTS's major investments nearly completed (especially in sterile manufacturing), Blackstone is entering the contract manufacturing and development business at an especially propitious time.  

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

Outsourcing

As big pharmaceutical companies restructure and reevaluate the way they do business, contract research and manufacturing organizations could reap greater financial rewards.

Pfizer Restructuring a Boon to CMOs and CROs

While the market for active pharmaceutical ingredients (APIs)  has been highly profitable, it faces key challenges. Increasing regulatory forces, the stronger bargaining power of buyers, rising costs, low-cost competition from Asian suppliers, delayed drug approvals, and drug failures are creating challenges for  research-driven pharmaceutical companies, generic drug firms, and contract manufacturers. These changes require more than just compliance with specifications. Process understanding is the key to moving  from corrective actions to more efficient continuous improvements. 

To address thee changes, we developed a reference model (OPEX) to effectively implement the modern principles of operational excellence. This reference model was developed by analyzing current integrated production systems from the automotive industry and adapting them to the pharmaceutical industry. The OPEX model consists of three parts: total productive maintenance (TPM), total quality management (TQM), and just-in-time (JIT) inventories.  

The main objective of the TPM system is to provide efficient management of fixed assets and to effectively use new process technologies. The goal of the TQM system is to significantly increase quality performance (

., reduce variability, scrap rates, and complaint rates). And JIT focuses on reducing  working capital by simultaneously increasing service levels. In the OPEX model, the management system has to support all activities supporting operational excellence. Only by coordinating all these elements (TPM, TQM, and JIT) can an API manufacturing site reach top performance. 

Twenty-one API plants were benchmarked using the OPEX model (see Figure 1). The average site from the sample operated with 150 employees and had costs of goods sold of EUR 107.5 million. The average of the three highest and lowest performing sites of each category was compared to evaluate areas for improved performance and potential cost-savings. 

 Figure 1: Twenty-one active pharmaceutical ingredient plants were analyzed using an operational excellence (OPEX) model. 			

 All of the API sites analyzed seem to struggle with maintenance and asset utilization (see Figure 2). Low-performing sites with a smaller overall equipment effectiveness (OEE) had an overproportional level of unplanned maintenance. Consequently, the maintenance cost-per-volume dependent (v.d.) employees and the total number of maintenance employees rises significantly if the API site struggles in unplanned maintenance and in OEE. Discussions with benchmarking partners revealed that a strong OEE focus can be attributed to high-technology equipment. In addition, product mix (single product 

 multipurpose production) seems to be directly linked to the OEE. 

Figure 2: Savings potential in total productive maintenance.			

Cost savings from quality assurance and control

. Quality assurance and control is a second area for potential savings (see Figure 3). API sites face a trade-off between low customer complaint rates and low rates of rejected batches. This fact was observed in prior studies and reveals how crucial process understanding is for sustainable improvements. Low-performing sites had more than double the ratio of quality assurance and control costs/total costs than high-performing sites. And low-performing sites were unable to reach the outcomes of high-performing sites. 

Figure 3: Savings potential from quality-assurance (QA) and quality- control (QC) costs. 			

The study showed that the total number of employees is not directly correlated with results in quality assurance and control. Quality cannot be inspected into a product. In contrast, built-in quality, which is a process improvement, leads directly to lower scrap rates. Consequently, costs are decreasing, and value is being added. 

. The costs of inventories were related to the performance of an API site (see Figure 4). There was an alarming discrepancy between the three top-performing and low-performing sites in average changeover time. While there was a narrow performance gap among the top- and low-performing sites at the rate of raw-material turns, the performance gap at finished-good turns was very significant. The study showed that there is great room for improvement in volume flexibility for low-performing sites. Service level, however, was excellent throughout the whole sample. 

Figure 4: Savings potential from just-in-time inventories. 			

The study also showed that key performance indicators (KPIs) at API plants either were missing or not clearly defined. Only by implementing operational excellence initiatives and controlling them through KPIs can API sites be prepared for the challenges facing API manufacturers. If the culture and management, however, does not support these improvement activities, even the best initiatives will fail. 

In addition to this benchmarking study for the pharmaceutical and API industries, the understanding of operations in pharmaceuticals may be deepened by several research and industry projects such as implementing customized integrated productions systems for pharmaceutical plants. Experiences of other industries and discussions with site leaders show that implementing only single tools such as Six Sigma and total productive maintenance does not lead to sustainable success. Integrated production systems and the interdependencies of key performance indicators are crucial success factors. These lessons are important for Western pharmaceutical companies in reaching operational excellence and achieving future competitive advantage.  

Thomas Friedli, PhD, is a professor, and Thomas Gronauer* and Daniel Tykal are research associates, Institute of Technology Management at the University of St. Gallen, Dufourstrasse 40a I CH-9000 St. Gallen, Switzerland,  tel. +41(0)71 224 7269 ; fax +41(0)71 224 7311, 

 *To whom all correspondence should be addressed 

Global Feature

Improving performance at an active pharmaceutical ingredient manufacturing plant involves an integrated approach that incorporates methods for optimizing total production management, quality control and assurance, and inventory management. The authors analyze results from a recent benchmarking study to evaluate the critical success factors in high-performing API manufacturing plants.

How to Improve Operational Excellence at API Sites

is a new contract manufacturing organization (CMO) focused on producing oral-dosage forms in small quantities for use in Phase I and II trials. The CMO was established on the BioCity campus in the United Kingdom. It expects to expand to sterile injectables in the near future.  

), the human and animal health businesses of 

Last year, Akzo Nobel divested its human and health businesses into a separate company, Organon BioSciences, with the plan to partially float the company on the European stock exchanges. With the deal, Akzo Nobel no longer will proceed with the partial initial public offering.  

Organon, the human-health pharmaceutical business of Organon BioSciences, had sales of $3.4 billion in 2006. Schering-Plough's proposed move adds to the company's position in central nervous drugs, women's healthcare products, and  biologics capacity for developing human vaccines. With the completion of the deal, Schering-Plough will gain five drugs in Phase III development.  

Schering-Plough expects to achieve annual costs savings of $500 million over the next three years. The deal is expected to close by the end of 2007.  

) completed a financial restructuring that includes new equity and term facilities totaling nearly $50 million. The company is implementing a multiyear plan that includes a $15-million investment to add chemistry and biological laboratories to its site in Concord.  

) agreed to acquire the neuroscience drug-discovery and -development company 

). The deal is scheduled to close in the first quarter of 2007.  

) agreed to acquire 75% of the issued share capital of Turkish company Eczacibasi Generic Pharmaceuticals for EUR 460 million ($608.3 million). The move positions Zentiva as the third largest generic drug company in Turkey, says Zentiva.  

) agreed to acquire nine generic prescription dermatological products and four pipeline products from 

). The transaction totals $56 million in cash, plus other considerations for future research and development collaborations.  

) will integrate the activities of its pharmaceutical division with those of the newly acquired Schering AG, resulting in the elimination of 6100 jobs. The staff reduction includes 1000 in the United States and 3150 in Europe. Some 1850 production positions and 1400 global research and development functions will be cut by 2009. Bayer estimates the move will save approximately EUR 700 million ($918 million). Berlin will remain the headquarters and largest location for the newly formed 

) under which JLL will purchase $150 million of convertible preferred shares of Patheon. 

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

Mergers, acquisitions, and restructuring

Pharmaceutical Research and Manufacturers of America 

). In addition, Richard Clark, CEO and president of 

) was elected chairman-elect of PhRMA's board. David Brennan, CEO of 

) was elected treasurer of PhRMA's board. 

) Chairman and CEO Jeffrey Kindler was made a member of PhRMA's board of directors.  

) named Jonathan D. Evans vice-president of pharmaceutical development and manufacturing. He will be responsible for AMRI's chemical development, small-scale CGMP manufacturing, quality control and assurance, and large-scale manufacturing.  

—James M. Robinson was appointed vice-president of technical and quality operations for 

Sanofi Pasteur, where he was responsible for the company's sterile manufacturing operations. 

—Robert DuFresne was appointed president and chief executive officer of 

). DuFresne joins Pacgen from Zelos Therapeutics, Inc., where he was chief executive officer. He was also president and CEO of ConjuChem Inc. 

)—Thomas L. Feldman was appointed president, chief executive officer, and a member of the board of directors of 

). Feldman was previously president and chief business officer at COTHERIX, Inc. 

) appointed Jean Pierre Tirouflet CEO. He formerly was chairman and CEO of the specialty-chemicals company Rhodia. 

) appointed Himadri Sen president of research and development for generics and NDDS. 

9)—Norbert W. Bischofberger, PhD, was appointed executive vice-president of research and development of 

). In addition, John F. Milligan, PhD, was promoted to chief operating officer. Bischofberger and Milligan both joined the company in 1990. 

 promoted Ian Fitzpatrick to manager of manufacturing innovation in North America. Fitzpatrick previously held a project management role at Inventech's Australian offices. 

) promoted Paul V. Campanelli to president of its generics division. Campanelli joined the company in 2001 after holding positions at Dr. Reddy's Laboratories, Inc., and Reddy-Cheminor, Inc. 

—Victor Diaz  was appointed senior vice-president of global manufacturing and supply chain management for

). Diaz previously served as vice-president of global operations at Teleflex Medical. 

) appointed board member Terrance H. Gregg president and chief executive officer. Gregg, formerly the president and chief operating officer of MiniMed Inc., succeeds David G. Elsley. 

) announced the departure of executive vice-president of science and technology Walter Blattler, PhD. Until a replacement is found, Blattler's responsibilities will be assumed by John Lambert, PhD, senior vice-president of pharmaceutical development; Pauline Ryan, senior vice-president of corporate development and operations; and Mitchel Sayare, PhD, chairman and CEO of ImmunoGen. 

—David A. Broecker was promoted to president and chief executive officer of 

). Broecker has served as Alkermes's president since 2001 and was appointed chief operating officer in 2002. 

—John F. Crowley returned to his position as president and chief executive officer of 

). Crowley took a leave of absence in order to complete a six-month tour of duty with the US Navy. 

) appointed James Carignan vice-president of quality assurance and regulatory compliance for its Beijing operations. Carignan formerly was responsible for directing the quality-assurance program at Novartis. 

People

 as the initial base for its new Innovation Center China (ICC). The ICC is part of a larger $100-million investment package that the company announced in May 2006. The center will focus on research for developing drugs with an initial focus on cancer for Chinese patients, biomarkers, and genetics. The facility will open in mid-2007. It will provide a base to build capabilities and skills in China before establishing a permanent site.  

) opened a new process research and development (PR&D) laboratory at its research and development center in Bangalore, India. The $15-million facility covers 8000 m

 plot and can accommodate as many as 75 process scientists. The facility will focus on developing new chemical entities. This new facility is AstraZeneca's fourth PR&D facility and the only one outside of Europe. It also has two PR&D facilities in the United Kingdom and one in Sweden.  

) is expanding its research and development capabilities in India. BMS is increasing the scope of its existing relationship with 

) to further develop integrated capabilities in India in medicinal chemistry, biology, drug metabolism, and pharmaceutical development. Bicon, through its subsidiary Syngene International, will work with BMS to establish a research facility in Bangalore that will be able to house more than 400 scientists to help advance BMS's drug discovery and early drug development. Groundbreaking for the new facility was scheduled for March 2007.  

 a pharmaceutical-manufacturing subsidiary in Hatfield, United Kingdom. The subsidiary is the company's first manufacturing facility in Europe and will be the base for quality assurance and supply-chain management of Eisai's European operations. The operation is targeted for launch in 2008.  

) will expand its research and development facilities in Amsterdam. The expansion will add 2500 m

) of laboratory and office space, more than doubling the company's current capacity. The expansion is expected to be completed in the first quarter of 2008. Avantium specializes in high-throughput experimentation, including combinatorial catalysis, for the pharmaceutical and chemical industries.   

A roundup of manufacturing and service expansions for March 2007.

PTSM: Pharmaceutical Technology Sourcing and Management-03-30-2007

Agreements and contracts

Pfizer Restructuring a Boon to CMOs and CROs

How to Improve Operational Excellence at API Sites

Mergers, acquisitions, and restructuring

People

Expansions