Asian CMOs becoming global leaders

February 1, 2008
Jim Miller
Pharmaceutical Technology Europe

Volume 20, Issue 2

As globalization of drug development and manufacturing gathered steam in the early part of this decade, many pharmaceutical companies in the newly-favoured regions of Asia, Eastern Europe and Latin America added contract services as adjuncts to their generic API and dosage form businesses. These new units, which in India are known under the unfortunate acronym of CRAMS (contract research and manufacturing services), were opportunistic responses to the growing outsourcing trends. Unfortunately, in many cases, they were not truly strategic commitments to the services business.

As globalization of drug development and manufacturing gathered steam in the early part of this decade, many pharmaceutical companies in the newly-favoured regions of Asia, Eastern Europe and Latin America added contract services as adjuncts to their generic API and dosage form businesses. These new units, which in India are known under the unfortunate acronym of CRAMS (contract research and manufacturing services), were opportunistic responses to the growing outsourcing trends. Unfortunately, in many cases, they were not truly strategic commitments to the services business.

As 2007 came to a close, the division between the long-term strategic players in contract services and the near-term opportunists became clear. Asian CMOs and CROs delivered strong financial performances, with contract service revenues up 44% from the previous year thanks to organic growth and the impact of key acquisitions, such as the acquisition of Hollister-Stier Laboratories (Spokane, WA, USA) by Jubilant Organosys (Noida, India). The best performances came from companies with business models that focused intently on contract services, rather than those that viewed contract services as an excess capacity business. This strategic group of high performers in India includes Jubilant Organosys, Nicholas Piramal (Mumbai), Shasun (Chennai), Dishman Pharmaceuticals and Chemicals (Ahmedabad), and Wuxi PharmaTech in China (Shanghai). Several companies also had huge success on the capital markets.

For many of the other well-known Asian pharma players, generics continue to be the main focus. Granules India (Hyderabad, India), Strides Arcolabs (Bangalore, India), Aurobindo Pharma (Hyderabad, India) and ScinoPharm Taiwan Ltd (Tainan, Republic of China), all offer contract manufacturing, but are primarily focused on expanding the reach of their generics businesses. Often these companies don't bother to report contract revenues separately.

Strategic commitment

One sign that opportunities for contract services are more fully appreciated than they were just a few years is the intention of several companies to establish their contract services businesses as separately-traded entities from their proprietary products businesses. Piramal has announced its intention to turn its new chemical entity development unit into separate company, and Biocon (Bangalore, India) is planning to spin-off its Syngene contract chemistry business and Clingene clinical research unit, possibly as initial public offerings. Meanwhile, Shasun is believed to be looking to sell its generic API business to focus on contract manufacturing.

A second sign of commitment and development is the willingness of Asian CMOs to pay substantial premiums for bases of operation in Europe and North America. In 2007, Jubilant Organosys committed approximately US$150 million (€102 million) to acquire the contract injectables manufacturer Hollister-Stier Laboratories (Spokane, WA, USA), valuing the company at nearly twice its revenues. At the end of 2007, Wuxi PharmaTech signed an agreement to acquire AppTec Laboratories, Inc. (St. Paul, MN, USA) for US$160 million (€109 million), which is more than twice AppTec's revenues of US$71 million (€48 million). These deals followed the pathways that were pioneered by Dishman, Nicholas Piramal and Shasun when they bought Europe-based operations in 2006.

The willingness of Asian CMOs to acquire Western assets reflects the sophistication of their strategic thinking: they understand the global nature of the business and realize that they must have operations located in Europe and North America where their clients are located. Simultaneously, they are able to divide the value chain into those components that are high value and can support the higher costs of European and North American operations, and those operations that can benefit most from the costs advantages of India and China. For example, Piramal has begun to transfer mature products from the UK and Canada to India, and has talked openly about its UK and Canadian sites being feeders for its Indian operations. Also, companies such as Shasun and Dr. Reddy's Custom Pharma Services (Hyderabad, India) posted significantly stronger financial results from their Indian facilities than from their European and North American sites.

Attracting capital

Asian companies continue to attract foreign capital, with strong interest coming from private equity investors. ShangPharma, the parent of the discovery and process chemistry CROs Shanghai ChemPartner and Shanghai ChemExplorer (a joint venture with Eli Lilly), raised more than US$30 million (€20 million) from TPG, a private equity group based in Texas (USA), and WuXi PharmaTech raised over US$155 million (€105 million) through a floatation on the New York Stock Exchange in August 2007.

In India, GVK Bio (Hyderabad, India), which recently launched a 5-year agreement with Wyeth (NJ, USA) to provide discovery services on a full time equivalent (FTE) basis, received a US$30 million (€20 million) private equity infusion from Sequoia Capital, a private equity investment firm with an office in Bangalore, India. Granules India raised US$17 million (€12 million) from three different foreign investors earlier this year.

One challenge facing Indian and Chinese CROs and CMOs is similar to that faced by their European competitors: the appreciation of the rupee and yuan against the US dollar has squeezed profit margins and hurt competitiveness. Revenues earned in dollars yield fewer rupees or yuan because of the dollar devaluation, and profits are hit because these lower revenues don't offset the locally-denominated costs. Biocon revealed that growth in its research division Syngene had dropped from 60% to 43% in 2007 when the exchange rate was factored into the equation.

However, the rising buying power of the rupee does make foreign acquisitions more affordable. Dishman Pharmaceuticals and Chemicals Ltd, Biocon and Granules India are all scouting for companies and/or facilities to acquire in the US, Europe, China and South Africa.

Here is a closer look at some of the leading Asian CMOs and CROs:

Nicholas Piramal India Limited (NPIL). NPIL has begun to migrate business from its UK facilities, including the former Pfizer site in Morpeth, to Indian facilities, and has increased revenue at Indian facilities more than four-fold. The Pharmaceutical Development & Scale-up (PDS) segment saw a strong increase in Phase II and III business and is now working on 120 molecules, up from 93 at the end of FY07 (31 March 2007). The company has also announced plans to spin-off its proprietary R&D unit into a separate company.

Jubilant Organosys. Contract revenues grew more than 50% at year end, thanks in part to the contribution from the recently acquired Hollister-Stier parenteral manufacturing operations in the US. Organic contract revenue growth has been more than 30%, but contract manufacturing remains the main revenue driver for Jubilant, especially in the custom synthesis segment and Hollister-Stier. However, drug discovery and development services (DDDS) is emerging as a growth engine for the company, and provides 7% of total revenue. Although noncontract operations continue to grow, management has made it clear that the strong momentum in contract services will be the main driver for future growth, which currently represents approximately 60% of total company revenue.

Biocon. Contract research revenue rose 80% in its most recent quarter. The company announced that its subsidiary Syngene International, which provides discovery and process chemistry services, would be spun-out into an independent public company within the next 2 years. However, management inferred on a conference call that both Syngene and its sister subsidiary Clingene International could be listed on Indian or foreign exchanges. A demerger of the contract service subsidiaries would be in line with recent efforts to build Biocon's biopharmaceuticals business. The company sold its enzymes business to Novozymes for US$115 million (€78 million) and says it will use part of the proceeds for acquisitions to grow its pipeline of novel biologics and biogenerics.

Shasun Chemicals & Drugs Ltd. Contract services revenues have been a source of significant growth, as contract revenues at Indian facilities have more than doubled in the last year. Shasun is rumoured to be interested in selling its generic API business, a unit that contributes approximately half of the company's overall revenue. A sale of the API business could fetch up to US$100 million (€68 million) and would allow management to focus on growing the CRAMS business. Funds from the sale will provide management with the necessary capital to fulfill the promise of: "making significant investment for future expansion both in the Indian and UK operations."

Dishman Pharmaceuticals and Chemicals Ltd. Contract manufacturing revenues jumped by 72% to US$35.6 million (€24.2 million) and accounted for 75% of total revenues in the last quarter. The company recently announced that it has set aside US$50 million (€34 million) to acquire US and European companies to support the contract manufacturing business. Management's tone implies that there will be multiple acquisitions of smaller companies and facilities. Already the company has acquired Solvay Pharmaceuticals' fine chemicals and vitamin D businesses, which include three facilities in India.

Dr. Reddy's. The company's Custom Pharma Services (CPS) suffered from undisclosed problems at the Mexico facility (acquired from Roche in 2005), but revenues at Indian CPS facilities have more than doubled. CPS revenues account for less than 10% of overall company revenues, but do have dedicated facilities and business development staff.

The globalization trend in R&D and manufacturing is expected to continue to accelerate as major pharmaceutical companies conduct more clinical trials, and source more of their requirements from suppliers, in Asia, Latin America and Eastern Europe. The quest for lower drug development costs, the need to find larger pools of subjects for clinical trials, and the desire to exploit new market opportunities created by the expanding wealth of the major Asian and South American economies will be key drivers.

Western CMOs, with a few exceptions, have been slower than their Asian competitors to realize the implications and opportunities of these globalization trends. Albany Molecular Research and Lonza are notable examples of companies that have made sustained commitments to establishing Asian bases of operations. While it is undoubtedly more difficult for Western companies to get established in Asia, because of cultural and regulatory factors, companies that plan to be in the services business long-term need to make the investment and incur the costs of learning how to do business there.