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Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report.
CMOs face market realities and exit some businesses.
The new year is often a time for new beginnings. Several contract manufacturers started the year by announcing strategy changes and restructuring efforts that might be called "new endings," which underscored the tough and competitive market for active pharmaceutical ingredient (API) manufacturers.
The biggest news was the decision by DSM N.V. (Heerlen, Netherlands, www.dsm.com) to shut down its generic API manufacturing operations in South Haven, Michigan, and its biomanufacturing facility in Montreal, Canada. The South Haven site will close in the second quarter of 2007, resulting in the elimination of 142 jobs; products made at the site will be transferred to DSM's operations in Linz, Austria and Venlo, Netherlands. The Montreal facility was closed at the beginning of 2006, with the loss of 85 jobs. DSM will take a write-down of 57 million for the closings, but expects to add 20 million to its bottom line annually once both facilities are shut.
DSM characterized both moves as steps to implement its "Vision 2010" business strategy, which it announced in October 2005. In "Vision 2010" DSM recognized the inevitable migration of generic API and early-stage intermediate manufacturing to India and China, and said it would boost production and sourcing in emerging economies to take advantage of lower costs. The company has since announced several sourcing initiatives and joint ventures in India and China, and more are expected soon.
The other key element of DSM's "Vision 2010" is its emphasis on the role of product and process innovation in driving long-term growth. In biomanufacturing, DSM executives believe that improvements in process yields will ultimately trump the need for more production capacity. That's why the closing of the Montreal facility was coupled with an announcement that DSM and Crucell (Leiden, Netherlands, www.crucell.com) will boost their alliance to promote Crucell's PER.C6 cell culture expression technology.
DSM and Crucell will work together to expand the number of licenses for PER.C6 in the production of recombinant proteins and mono-clonal antibodies, with a particular focus on North America. Their announced goal is to ultimately generate $1 billion annually in royalties from PER.C6 licenses issued under the joint venture by capturing 25% share of the market for proprietary expression technologies. The companies will establish a joint research and development center with facilities in the United States and the Netherlands and develop an enhanced PER.C6 production package.
DSM's position closely mirrors that of Dowpharma (Midland, MI, www.pharma.dow.com), a business unit of Dow Chemical, which decided this past year to close its biomanufacturing operations in Smithfield, Rhode Island, and focus its efforts on its PFenex microbial expression technology. Just days after the DSM–Crucell announcement, Dowpharma announced that Cambrex Bio Science (Baltimore, MD, www.cambrex.com) had agreed to become its first manufacturing partner for the PFenex technology. The two companies said they will develop a standardized technology transfer package to facilitate adoption by contract manufacturing clients.
Rhodia out of pharmaceutical chemicals
A second "new ending," announced in early 2006, was Rhodia's (Paris, France, www.rhodia.com) move to sell its custom pharmaceutical chemical manufacturing business to Shasun Chemicals and Drugs Ltd. (Chennai, India, www.shasun.com). Details of the sale price and which facilities will be involved in the sale have not been disclosed.
Completion of the sale, which is expected to occur by the end of the first quarter of 2006, would bring to a close an excruciatingly difficult period for Rhodia. Rhodia Pharma Solutions was created largely through the acquisition of ChiRex, Inc., in 2000. Rhodia paid more than $500 million for ChiRex, which had annual revenues of nearly $120 million at the time and manufacturing sites in the United States and the United Kingdom. The deal was made at the very peak of the custom manufacturing boom of the 1990s, and the market began its sharp spiral down right after the deal was closed. The acquisition was a disaster for Rhodia, and was a major contributor to the financial problems that plagued the company in the early part of the decade.
The Rhodia–Shasun sale is just the latest in a string of deals in which Indian API manufacturers have acquired Western assets at highly favorable prices. Other recent examples include the acquisition of Avecia's GMP chemical manufacturing operations by Nicholas Piramal (Mumbai, India, www.nicholaspiramal.com) and the acquisition of UK process development firm Synprotec by Dishman Pharmaceutical and Chemicals (Ahmedabad, India, www.dishmangroup.com).
Cambrex to focus on Bioproducts
The most intriguing "new ending" of early 2006 was the announcement by Cambrex (East Rutherford, NJ, www.cambrex.com) in which the company said it would discontinue its efforts to develop proprietary pharmaceutical products and focus its resources on its Bioproducts business. Cambrex had initiated a strategy to develop proprietary dermatology products on the basis of its capabilities in cell therapy.
Cambrex made it clear the Bioproducts business will be the main driver of the company's future growth. "In order to maximize shareholder value, the company will concentrate its resources going forward on the Bioproducts segment," the announcement said. The human health segment, which manufactures generic and custom APIs, and the biopharma segment, which provides contract biomanufacturing, will receive minimal additional investment.
De-emphasizing the small molecule API and biomanufacturing businesses seems to make good business sense for Cambrex. Bioproducts has enjoyed significant growth in recent years, driven by a growing portfolio of products used in drug discovery, biopharmaceutical manufacturing, and laboratory analysis. The growth rate of the small molecule API business is in the single digits and declining, and the business is faced with growing competition from Asian generics and its own high-cost manufacturing base (its manufacturing facilities are in Norway and Iowa). Revenues in the biomanufacturing business have been declining as the unit has been hit by the cancellation of several products that were on the verge of commercial approval, and the business has been a drag on corporate earnings.
The most intriguing item in Cambrex's announcement was the statement that "The company also intends to retain an investment banker to examine strategic alternatives including the potential sale of certain assets." No mention of which particular assets might be subject to sale: speculation ranges from just the company's proprietary drug candidates and drug delivery assets, to all or part of the assets in the biomanufacturing and API manufacturing businesses.
Jim Miller is the president of PharmSource Information Services, Inc., and the publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, firstname.lastname@example.org.