Outsourcing Report: Contract Biomanufacturers Turn Conservative, but New Players Add Options

Major active pharmaceutical ingredient manufacturers are cutting back on new capital investments in facilities in response to problems with their core chemical businesses, but biopharmaceutical companies shouldn't face capacity shortages in the foreseeable future. In the meantime, new outsourcing opportunities are opening up in clinical-scale contract manufacturing.

The biopharmaceutical product pipeline is moving again, backed by renewed funding from venture capitalists, public equity investors, and major pharmaceutical companies seeking licensing deals. However, the biomanufacturing industry is not necessarily responding with the same enthusiasm as investors, forcing biopharmaceutical company executives making key manufacturing decisions to monitor developments beyond their normal purview.

The issue stems from the fact that the fortunes of major contract biomanufacturers — such as Lonza, DSM, Diosynth, and Cambrex — are bound closely to developments in their core fine chemical businesses, including custom pharmaceutical chemicals manufacturing. The always-cyclical fine chemicals industry is in the midst of a difficult period. Pharmaceutical intermediates and actives have been impacted especially hard, with many major chemical companies experiencing revenue declines of 10 to 30% in 2003 and even more drastic declines in profits. The industry has been hit by a "perfect storm" of adverse events, including overcapacity, product failures and cancellations, weak new product pipelines, the rising value of the euro versus the dollar, Asian competition, and highly-leveraged balance sheets.

In response to the crisis, the chemical companies are moving to "rebase the business," in the words of Lonza chairman Sergio Marchionne, by selling or closing down facilities, halting capital investment, and reducing staff. As much as 20% of GMP chemical manufacturing capacity will be eliminated at many companies. Management attention has turned from driving rapid growth to carefully utilizing existing capacity as fully as possible.

Reduced Biomanufacturing Investment

Despite signs of a re-energized biopharmaceutical market, biomanufacturing investments have not been spared from the conservative outlook that pervades the chemical industry's executive suites. Recent experience with chemical manufacturing has made industry executives more skeptical of rosy projections for biopharmaceutical production, and the skepticism is bolstered by major contract cancellations suffered by Lonza and Cambrex in 2003. That aversion to risk, coupled with their constrained financial capacity and the desire to fully utilize assets already on the ground, have led some companies to scale back their biomanufacturing investment plans.

A case in point is Lonza, which is completing a major expansion of its Portsmouth, NH, manufacturing facility, including the installation of three 20,000-L cell culture bioreactors. Thanks to its recently announced contract to manufacture Rituxan for Genentech, Lonza has virtually sold out its large-scale manufacturing capacity. Rather than commit to building more large-scale capacity, however, the company is looking into moving some production currently slated for the 20,000-L bioreactors to existing 5,000-L equipment. The 5,000-L bioreactors are more costly to operate on a per-gram basis, but Lonza's 5,000-L bioreactors are substantially underutilized owing to contract cancellations in 2003. Moving production to the smaller bioreactors will enable Lonza to more fully utilize existing assets while avoiding additional capital investment.

In addition, Lonza announced that it is reducing investment in its new microbial fermentation plant in Visp, Switzerland, primarily by planning to use existing downstream processing and purification capabilities rather than installing new equipment. Other companies are showing restraint in building new facilities. Industry sources report that DSM slowed its expansion of the DSM Biologics facility in Montreal, Canada, which includes installation of two 15,000-L bioreactors. Dowpharma has yet to proceed with expansion of its Smithfield, RI, facility, despite much talk of doing so in recent years.

Near-Term Capacity Sufficient

Despite the reluctance to invest, there are no indications of a looming disastrous shortfall in biomanufacturing capacity. Merck KGaA is confident enough about capacity availability to announce it will rely on contract manufacturers to supply API for two monoclonal antibody products it is developing, including the European version of Erbitux.

And new capacity is still coming onstream. Sandoz recently opened a new cell culture manufacturing facility with 13,000-L and 3,000-L bioreactors. Avecia recently completed installation of two 5,000-L microbial fermentation tanks.

"On the aggregate, the supply and demand numbers look pretty well matched right now," notes Howard Levine, president of BioProcess Technology Consultants. However, Levine warns that some companies could have problems. "Access to capacity and overall facility utilization rates would suggest that some companies could have difficulty in obtaining capacity," he says.

Longer-term, the availability of commercial manufacturing capacity will depend on process improvements as much as investments in new facilities. "If expression levels routinely reach 1 g/L (several companies are already there) and overall yields increase to 60% (again some companies claim to be there already), a 5,000-L bioreactor now produces 3 kg per batch, making it a viable scale for production of 50 kg or more per year," says Levine. In addition, higher expression levels mean companies will need to run fewer batches in larger bioreactors, which will also increase capacity.

More Clinical Opportunities

While investment in commercial capacity has slowed, capital is pouring into development and pilot-scale manufacturing, mostly from companies not involved in commercial-scale biomanufacturing. Biopharmaceutical companies now have the option of placing development projects with high-profile public companies like Cardinal Health, Baxter, and Cambrex Bio Science, or technology-driven entrepreneurial companies like Laureate Pharma, Althea Technologies, and Formatech.

The allure of bioprocess development and clinical-scale biomanufacturing seems to stem from a combination of factors, including the following.

Pipeline Revival. Thanks to the re-opening of capital markets, early-stage biopharmaceutical companies feel comfortable restarting their mothballed R&D programs. These companies lack internal capabilities and are comfortable with outsourcing their requirements, but they need mature outsourcing partners.

Getting Clients Early. Contract manufacturers view development services as an effective way to build a client relationship that can lead to lucrative commercial contracts at a later date. Even if only a small fraction of early-stage clients make it to commercial approval, the development services business can be profitable on its own — and future commercial opportunities are a nice upside. This is especially true for contractors offering fill and finish services. Cambrex Bio Science, in biomanufacturing, and DSM Pharmaceuticals, in fill and finish manufacturing, are examples of companies following this approach.

Affordability. Whereas commercial facilities require investments of hundreds of millions of dollars, development-scale facilities can be set up for under $10 million — and usually in a leased, rather than purpose-built, facility. These pilot-scale facilities often can be used for product launch until larger facilities are brought online.

Participation Opportunity. Early development services often allow contractors to gain a stake in the success of the product through royalties or other performance-based payments (usually granted in exchange for pricing concessions) or by licensing a proprietary technology that improves process performance (such as improved expression levels).

One-stop Shop. Several contract manufacturers are offering a complete manufacturing solution to clients — manufacturing both the API and the finished dosage form. This model is considered especially attractive to smaller biopharmaceutical companies and allows the contractor to capture more of the client's development spending and secure a long-term relationship. Cardinal Health and Baxter are proponents of this strategy.

Making the Right Choice

These developments in commercial- and clinical-scale biomanufacturing make it clear that development and manufacturing executives need to choose carefully when selecting contract services providers. Business considerations must be weighed equally with technical considerations: the issue is not just whether the contractor can meet your needs in the near-term, but whether the contractor will be an appropriate partner over time. Some key questions you will need to ask include:

• Is the contractor's business strategy consistent with yours? Will they make investment decisions that support your requirements?
• Does the contractor have the financial means to continue to support the business? Will they make the necessary capacity and capability investments?
• Does the value proposition make sense? Are you paying for a package that includes more services than you need? Are you locking yourselves into a business relationship that may not be appropriate to your long-term needs?

The biomanufacturing industry offers more good choices than ever, but making the right choice has become more complicated.