Expansion Trends: Trading Places

Who’s expanding via asset-transfer deals?

By Gil Roth

Contract Pharma

Asset-transfer deals — buying a pharma company’s facility for pennies on the dollar, typically with a trailing supply agreement — are a mainstay in our industry. Many contract service providers began operations through such arrangements, with a management buyout of a facility otherwise slated for shutdown.

Since the beginning of the global financial crisis, we’ve seen a number of dosage form facility acquisitions by CMOs since the beginning of the global financial crisis: Halo Pharma/ Abbott, Corden Pharma/BMS, Corden/AZ, Unither/Sanofi-Aventis (twice!), among others.

One industry expert told me that he could name at least 20 solid dosage facilities up for sale with a supply agreement right now, as well as half-a-dozen parenteral sites and ‘10 or more’ biologics-based ones. At the same time, I often receive e-mails from equipment resellers, offering never-used top-of-the-line lab and manufacturing equipment they picked up from major pharma companies.

On the API side, of course, the numbers are even more daunting. I heard that one of the majors had a booth at CPhI/ICSE devoted solely to its inventory of API facilities. And a few days before I began writing this article, I received an e-mail solicitation to bid on another company’s API facility in central Canada. (I admit, I was tempted for a moment or two.)

With major pharma companies working to reduce fixed costs, and mega-mergers providing cover for a wave of network rationalizations, are CMOs and CROs going to take the bait and buy up some underutilized assets? Will we see sites spun out as new contract manufacturers? Will providers use discrete assets to bridge gaps in their business models? Will these deals be business as usual, or are new partnership models emerging?

Or will supply agreements lapse too soon and leave providers with too much overhead from underperforming assets? If you’re a long-time reader, then you know my ambivalence about inorganic growth strategies. At heart, I’m a believer in slow and steady growth, so I’d be very cautious about a proposed “can’t-miss” facility carve-out. I’ve also never run a significant business, so I haven’t had to address the temptations of such an offer.

Continental Divide

So in our crisis = opportunity world, who’s buying in? Many of these transfer-deals have taken place in Europe, where labor laws and work councils give companies an incentive to find a buyer, rather than shut a plant down. In a DCAT presentation several years ago, Bill Wiederseim of PharmaBioSource, a consulting firm that helps broker facility transactions, contended that closing a European pharma facility costs approximately $1 million per employee. Given that “incentive,” many deals in Europe are structured to keep employees employed.

Recipharm, a privately owned CMO based in Sweden, made news in October when it acquired from Abbott a former Solvay contract manufacturing site in Parets, Spain. The purchase was Recipharm’s seventh since 2007 and third in the past year (not all were classic asset-transfers), following Cobra Biologics and Hospira’s large-scale lyo-site in Wasserburg, Germany.

I spoke with Mark Quick, Recipharm’s executive vice president of Corporate Development, about the company’s strategy of buying up pharma assets. “We have an acquisition-led growth structure, no doubt,” said Mr. Quick. “We invest in the development side of the business, with the intent of getting clients in the early stage, and moving along to commercial. When it comes to our acquisition strategy, a site has to offer us at least one of three things we didn’t previously have: a significant relationship with a client, a geographic presence, or a new technology.”

He noted that the Abbott/Solvay site in Parets — which makes solid dosage, ointments and oral liquids — brought with it a number of existing customer relationships. I asked if there were concerns about losing those clients after the change in management. “Not really,” he said, “because it’s not a change in management. Part of our due diligence is determining whether the management team should remain there.”

He stressed that the company doesn’t try to Lean its facilities into a tightly-focused network, preferring to treat sites as separate P&Ls centers, in order to foster entrepreneurialism. “We integrate the back office for some sites, but our guidance is in terms of policies, not trying to weed out costs. We don’t see the benefits to a work environment of our coming in and trashing the computer systems and the like to get everything onto a corporate standard. Our business development is integrated, but we carry low corporate overhead otherwise.”

As far as Recipharm’s other acquisition criteria go, Mr. Quick noted that the company is looking to establish a foothold in America, and that it has no presence in cytotoxics. Yet.

Dance with Who Brung Ya

From the 1990s through 2004, Patheon bought a number of former pharma sites, adding operations from Upjohn, Roche, Hoechst Marion Roussel, Novartis, and Aventis (and I’m probably missing one or two). I covered their internal growth initiatives in our previous issue, but it seems that they’re also lured by some of the assets that are shaking out of large pharma networks.

Said Geoffrey Glass, Patheon’s executive vice president of Global Strategy, Sales, and Marketing, “Patheon is actively

pursuing strategic customer deals, including asset acquisitions, in both the Development Services and Commercial Manufacturing areas. Crafting these large-scale asset transactions so that one party isn’t disadvantaged relative to the other requires the right set of circumstances and transparency by both parties. Having those factors at the same time can be hard to find, but it happens.”

Mr. Glass added that we’ll likely see more asset-transfer pacts from pharma and biopharma in the short term, “but over time the market for such deals will hit a saturation point and the number of potential buyers will shrink dramatically.”

IDO?

Aptuit, another company built from a series of acquisitions, acquired GSK’s Medicines Research Centre in Verona, Italy this past July. The site and its 500-person staff are focused on drug discovery, lead optimization, API development and manufacturing, and preclinical/clinical drug development. GSK announced plans to close the site in February 2010, but conversations among current and former Glaxovians — including Aptuit’s chief executive officer Tim Tyson — led to a deal to shift the site to Aptuit.

Colin Terry, Aptuit’s executive vice president, Commercial Operations, told me, “Now that we have Verona, we have a structure in place where we can take someone’s idea, and move them all the way from discovery to launch. We have what we call an integrated development organization, not a CMO nor a CRO.”

The transaction includes a three-year transition agreement with GSK, said Mr. Terry, “in order to take Verona from a standalone cost center to a profitable business in its own right. GSK agreed with us that that should take around three years to accomplish. During that period, they’re not obliged but they have an interest in giving us some work that would be mutually beneficial.”

Aptuit also managed to sell a minority stake in the facility to Siena Biotech, an Italian company working on a pipeline of Alzheimer’s disease, Huntington’s disease and oncology treatments. Aptuit became a preferred provider to Siena in the process. Mr. Terry noted that Siena’s chief executive officer, Giovanni Gaviraghi, was GSK’s former R&D director for Verona. “We were fortunate that both deals had a foundation in good relationships,” said Mr. Terry, who also previously worked at GSK.

Spinning R&D

GSK isn’t the only member of the New Pharma that has reduced its R&D efforts in recent years and spun off or shut down those sites. Many of the major players have pared down,focusing on certain therapeutic classes and moving out programs that could be better served elsewhere.

Research-oriented sites are a different beast than manufacturing facilities, to be sure. For CMOs, a new facility generally represents a silo of services, not necessarily something that can be leveraged more broadly across service offerings. CROs, on the other hand, may find greater value in building scale and new capabilities through former pharma sites.

In September, Covance built an “asset-transfer” deal with Sanofi-Aventis, in which Covance paid $25 million to take over a pair of sites in France and the UK, and Sanofi committed to guarantees of between $1.2 and $2.2 billion for tox, CMC and clinical trial services over the course of 10 years. Sanofi had slated the sites for closure in June 2009; Covance has committed to retaining employment at both sites for at least five years.

Historically, Sanofi-Aventis hasn’t been a strong proponent of outsourcing, so the agreement with Covance raised eyebrows. Under new chief executive officer Chris Viehbacher, the company has looked to reduce its internal R&D efforts, and this pact shows they’re serious. Like every one of its major competitors, Sanofi has major revenue shortfalls ahead, and moves like this may not only help keep earnings up, but also accelerate R&D.

Ken Getz, senior research fellow at Tufts Center for the Study of Drug Development (CSDD), said, “The third quarter of 2010 has seen an uptick in new sponsor-CRO alliance agreements, including the Covance/Sanofi-Aventis R&D partnership, and the GSK and BMS development partnerships with Parexel, PPD and ICON. All of these alliances reflect sponsor efforts to integrate their operations to better leverage outsourcing and to transfer underutilized infrastructure and noncore capabilities.”

He added, “We expect to see more partnerships announced in the coming six to 12 months between sponsors and major CROs as pharmaceutical companies vie to manage rising project volume with increasingly limited resources post industry consolidation.”

John Watson, Covance’s corporate vice president and president – Strategic Partnering & Integrated Drug Development, discussed the Sanofi transaction with me, explaining, “These two sites bring a couple of key capabilities to us: 1) CMC, which we’ve been looking at for a long time. Covance has no desire to be in Phase III or commercial manufacture, but a very good presence in integrating drug development and program management, to move from lead optimization to preclinical to proof of concept, and 2) Radiolabelled synthesis: We’re the largest provider of ADME studies in Phase I units. We used to outsource this part, and now we have it in-house.” He noted that the geographic location of the site was important,from a growth perspective, as some biotechs in France prefer to work with companies in France.

Lilly of the Greenfield

One industry figure involved in facility sales remarked to me, “Lilly stands alone in this field. They’ve probably done more than anybody, when it comes to finding a way to monetize an R&D asset.”

Lilly has been at the center of three significant asset-transfer deals: Covance took over its Greenfield, IN central lab in August 2008, Evonik acquired its Tippecanoe API site in October 2009, and Fisher Clinical Services took over CTM supplychain responsibilities — and a Lilly site on its main campus — in March 2010. The transactions included supply agreements (or their analog) of 10 years, nine years and five years, respectively. For more on the Fisher transaction, and its “insourcing” model (no outside clients will be brought into their Lilly CTM building), see my Newsmakers interview with the two companies in our May 2010 issue.

Judy Kay Moore, a spokesperson for Lilly, told me, “Our partnerships with Covance, Thermo Fisher Scientific and others are designed to improve productivity in R&D and exemplify how Lilly is transforming the ways it does business in order to drive down the cost of drug development. These strategic partnerships increase our flexibility and agility, and give us much greater access to ideas, expertise and resources that will help us bring a contiguous flow of innovative new medicines to patients.”

Mr. Watson at Covance remarked, “When our Lilly partnership was announced, it was like a shot heard ‘round the world.” He said that some considered it a symptom of “what was wrong” at Lilly, but two years later they’re looking at the arrangement more seriously and trying to figure out how to build something comparable.

He noted that Covance has more than 50 clients conducting work at the Greenfield facility today. “We inherited 260 Lilly employees in 2008, and we’re over 400 now,” he said. At its peak, the site once employed more than 1,200 Lilly staffers. “So we have room to grow.”

The Big Picture

It remains to be seen how well Lilly’s competitors will strike the balance between cost and productivity. Pfizer, in the midst of shrinking its network after the Wyeth acquisition of 2009, announced plans in May 2010 to shut down operations at eight manufacturing sites in Ireland, Puerto Rico and the U.S. by the end of 2015, with additional plans to reduce operations atsix other plants in Germany, Ireland, PR, the UK, and the U.S. A visit to the website of PricewaterhouseCoopers (http:// www.pwc.co.uk/eng/issues/corporate_finance_pfizer.html) showed a half-dozen Pfizer sites for sale, running the gamut from oral solid dosage to state-of-the-art biologics, but not all of them with supply agreements.

I asked Tony Maddaluna, senior vice president, Strategy and Supply Network Transformation for Pfizer Global Manufacturing (PGM), which dosage forms or geographies may be more appealing to CMOs than others, in terms of facility carve-outs. He replied, “The success of a site sale is largely dependent upon the right balance in the value proposition between the buyer’s business needs and the particular capabilities of the site being offered.If the buyer can leverage these capabilities and grow its business, it is a win-win for everyone, especially our colleagues.”

Mr. Maddaluna added, “The economy has not impacted Pfizer’s extensive, thorough and well-established site exit process. This process supports our plant network strategy and advances its end goal — to be a globally competitive make-or-buy network.In other words, how do we optimize our supply network to be competitive, innovative and flexible enough to respond to emerging cost pressures and other industry shifts?Maintaining our competitive advantage — which is as much about quality and security of supply as it is about cost — is essential moving forward.”

We’re Practically Giving It Away!

As large pharma continues to devolve its infrastructure, we’re sure to see more assets up for grabs, in both manufacturing and R&D. It remains to be seen whether these transactions will tend more toward innovative partnering efforts between sponsors and providers, or conventional capacity/geography plays.

Or, to quote one industry expert, “There’s not a lot of bandwidth on the provider side to take in all these facilities. In some instances, owners are going to have to make some fairly brutal decisions and shut sites down for the good of the industry. Selling a facility on the cheap so that it’s limping along doesn’t help anyone. It just leads to the new owners selling services cheap to fill capacity, and that’s damaging to the overall health of the industry. We need large pharma to be realistic about the facilities that are worthwhile assets, and we need providers to understand when a deal really is too good to be true.”

Gil Y. Roth has been the editor of Contract Pharma since its debut in 1999. He can be reached at gil@rodpub.com