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Article / Sep 10, 2002

Outsourcing: The dust has now settled

The dust has now settled after the exciting but turbulent times 2 years ago that saw the chemical giants snapping up pharmaceutical fine chemical specialists for hundreds of millions. Almost 3 billion dollars were invested in three deals alone; the transactions listed in Table 1 add up to more than $14b (includes Gist at $6b and the recent Roche V&FC deal at $2.5).

The drivers for outsourcing of APIs remain unchanged, yet the business model adopted by the various players seems to fall clearly into two very different types – with different offerings and different strategies. Yet for all exclusive manufacturing of NCE APIs remains a roller-coaster: approvals carry high rewards, product cancellations and withdrawals mean significant disappointments.

The notable new entrants are the integrated chemical giants that have acquired or invested in GMP businesses (some of the businesses that got acquired were great brands: Archimica, ChiRex, Finorga, Gist-brocades, Laporte, Profarmaco, Raylo, Torcan…). Their original strategy was to bet on size and enter a high-margin non-cyclical business that had synergies with their existing businesses. Some articles emphasized that the acquisition of API capabilities was strategically aimed at giving them total control over the key building blocks, which could be sourced internally. BASF advertised with the slogan: "Backward integration is another form of forward thinking".

On the other hand the traditional players have remained independent and have taken no part in the M&A frenzy (FIS, Hovione, Lonza, Omnichem, Orgamol, Siegfried, Sumika). In fact, they all probably see M&A as a strength-diluting exercise, as it debilitates one of their strongest asset, namely: their company culture. Their growth, which is consistently in double digits for the past 10 years, remains purely organic – and they enjoy a stable ownership, Table 2.

The independents strongly disagree with the assumptions which formed the strategies of the new entrants:

  • Why should size matter ?
    • when most APIs are only a few tens of tons
    • when there is a trend to more highly-active compounds
    • when an API producer should be a generalist -able to do all technologies- and not the lowest-cost technology specialist
    • when the early phase clinical materials requires service, service, and more service, which traditionally is not a characteristic of large, multi-site companies
       
  • Backward integrating only adds to an already risky business; whereas the Independents have the whole world -including India and China- to source low cost raw-materials.
     
  • Buying sites from Large Pharma with supply agreements often resulted in:
    • a low-margin business,
    • a single-customer dependence,
    • an old plant, which was often not multi-purpose and certainly not designed for quick change-over and evolving compliance standards.

Furthermore with their expansion into the API business the chemical giants risk antagonizing their traditional customers who now could perceive them as competitors and no longer as supplier/partners. As an example, Hovione would prefer to discuss its new catalyst needs with Engelhard rather than Degussa or Johnson Matthey, who are now perceived to be competitors.

Neither the analysts, the board members nor the shareholders considered any of these matters – but management thought they saw opportunities for making a difference in their shareholder value and the stock-market supported them wholeheartedly.

In our view the winning model appears to be a company big enough to:

  • have the critical mass that will support the diversified portfolio necessary to mitigate risk
  • support a large process chemistry group able to develop several dozen simultaneous projects
  • have the depth and breath of know-how and technology that is necessary to support multiple process validation campaigns per year
  • assure long-term capacity.

And yet a company small enough to:

  • take decisions and communicate them quickly
  • provide extreme levels of service, flexibility and transparency

We believe the entrepreneurial, single-minded company without share-price concerns or peripheral activities to serve as distractions is likely to be a step ahead of the competition.

The constant need for large amounts of capital investment, the many years that projects take to mature from development phase to commercial scale, and the inherent risk of each project makes our business unfriendly to the stock-market. Therefore it should be no surprise that the key players have a reference shareholder able to look at the longer-term: whether it be Ajinomoto, a family or a foundation.

Over the last 12 months Hovione’s normal growth has been further enhanced by:

  • Satisfied customers that bring us repeat business
  • Projects that have moved beyond validation to commercial phase
  • Customers with projects in Phase III who are looking for a more reliable long-term supplier or for further capacity

Our experience indicate that Phase III projects change suppliers because:

  • They want a stable supplier for the long term, “one that does not shop itself around constantly”
  • They want assurance of capacity and of compliance – and are fed up of “getting a different color batch every time”
  • They want to be “in-the-loop”, and not be the last ones to know of problems or of process changes

The key-buying factors for our customers seem to include: a company capable developing robust processes based on sound science that deliver “right-first-time, every time”, shareholders who are committed for the long-term and a track-record of rock-solid delivery as well as open and honest communications.

Some European companies have continued to invest at a time when others are trying to sell. Orgamol is building a new pilot plant and synthesis unit in Switzerland, Siegfried has innovated dramatically in the GMP design of its own new facility. Rohner has started-up a new cGMP multipurpose plant.

Hovione has just commissioned its new Technology Transfer Centre in New Jersey, USA. This is an investment in a green-field site with kilo-lab and pilot-plant facilities within a short drive of the largest cluster of API customers in the World.

In the past few years exclusive manufacturing as an industry has been the object of far too much interest, and too many bets were placed with exaggerated expectations –and most are not pleased with their investments. The business however exists, the market continues to grow but it is just not as simple as many companies expected it to be.

Fines for non-compliance of GMPs have reached a record $0.5b, and FDA’s most recent initiative “Pharmaceutical cGMPs for the 21st Century” are but two examples that indicate that the scope for differentiation has increased yet again; and that the role of a professional independent manufacturer of APIs has never been more relevant.

Guy Villax
Chief Executive
Hovione
Loures, 11th September 2002

 

Article published at Show Daily for CPhI 2002

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The company is building out more than 200,000 square feet of space in New Jersey. In April, Contract Pharma had the opportunity to tour Hovione’s expanded manufacturing facility in East Windsor, NJ. The company is planning a formal ribbon-cutting this fall; before that, we got an inside look at some new features. Having established United States operations in 2002, Hovione now has more than 200,000 square feet of space in New Jersey. This will be developed into a large, integrated campus in the next five to ten years. Overall, the company’s recent NJ expansion, which began in 2025, has tripled its total spray-drying capacity in the U.S. Future Facility Upgrades A 125,000-square-foot greenfield acquired by Hovione at the East Windsor campus will eventually be a large-scale production site. This includes enhanced quality control and R&D capabilities. Together, all this adds to Hovione’s stable of manufacturing sites, R&D centers, and other offices spread across three continents. Key to the expansion is a targeted reduction of Hovione’s carbon footprint by 40% by the year 2030. Part of this goal is embracing new and/or changing solvent types to help meet sustainability standards. Additionally, the company says automation that has been put in place at its Portugal site will be replicated in NJ. Hovione Aligns NJ Operations At the Drug, Chemical & Associated Technologies Association (DCAT) Week in New York in March, Contract Pharma met with Hovione. There, David Basile, Vice President of Technical Operations—Americas, further illustrated the New Jersey expansion. “Hovione aims to build an equivalent manufacturing network, where clients can go to any site across the globe,” Basile said. “The design of the facility has been well-thought through with material flows [and] gravity-fed processes. It’s scalable. We call each one of these building segments a finger. You can copy and paste these fingers, and they are built to house both spray drying and drug product assets.” Ultimately, with these moves and a strategic partnership model, Hovione aims to provide customers an opportunity to co-invest and access the company’s proprietary knowledge and assets to accelerate programs and create long-term value. Read the full article at ContractPharma.com    

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The podcast "The Next Discovery" is a six-episode series created by Observador, a leading Portuguese digital newspaper and radio station, in partnership with Hovione.   From hospitals to patients’ homes, discover the solutions that make it possible to administer high-dose biologics with greater comfort, less pain, and more freedom in treatment. What if some of the scientific breakthroughs that could improve the lives of millions of people were happening right now in Portugal? The Next Discovery. Listen to the last episode of the podcast here, featuring João Pires and Joana Cristóvão from Hovione’s Research and Development Center. [English transcription] Nelson Ferreira (NF): Welcome to the sixth and final episode of The Next Discovery, a podcast series in which Hovione opens the doors to its world to share the global impact of innovation developed in Portugal. I’m Nelson Ferreira, and throughout this journey we have explored chemical processes, ultrafine particles, and revolutionary production lines. Today, we look directly at the future of medicine. After exploring the world of small molecules, we are now entering a new therapeutic dimension: biologic medicines. Based on larger and more complex molecules, these treatments are opening new possibilities for addressing a wide range of diseases. To explain how this field is evolving and how science can make these treatments more effective, stable, and accessible to patients, I’m joined by João Pires and Joana Cristóvão from Hovione’s Research and Development Center. NF: Welcome to you both. João, let me start with you. For someone who has never heard this term before, what exactly are biologic medicines, and what sets them apart from small-molecule drugs, which are more closely associated with traditional chemistry? João Pires (JP): If we think about the medicines we find in pharmacies today, most of them are indeed composed of small molecules. These are simpler structures that are still highly effective and that we can design and manufacture through what we call classical chemistry, a field that has developed its knowledge over the last 150 to 200 years. Biologics are completely different. Because of their complexity, larger size, and structure, they differ mainly in their origin. They are produced from living organisms, such as cells, which, under the right conditions, can function as biological factories. Just as in our own bodies, they allow us to produce and extract substances that can have a significant therapeutic effect for certain diseases. In that sense, biologics benefit from millions of years of evolution, something classical chemistry simply does not have. NF: Biology is what carried out that evolution. JP: Exactly. Biology. That’s part of the beauty of it. NF: Nature carried out that entire process for us. NF: Joana, since these medicines are created from living organisms, can we say they are, in a way, more “intelligent” and have greater therapeutic potential? Joana Cristóvão (JC): In some cases, they do have tremendous therapeutic potential. One of the advantages of these molecules is their remarkable specificity. You can think of it as a key fitting into a lock. It has to be the right key. Biologics, because they speak the same biological language as our bodies, have this advantage. However, that does not mean they are better than small molecules. It means that, because they are produced by living microorganisms, they are highly complex and would be very difficult, and in some cases impossible, to produce through traditional chemical synthesis. Their great strength lies in their specificity. Examples of biologics include proteins that facilitate communication within the body and monoclonal antibodies that identify specific targets. These functions are particularly suited to biologics and less common among small molecules. NF: João, as I understand it, this is still an emerging field worldwide. How did Hovione, a company historically linked to chemical synthesis and small-molecule particle engineering, decide to embrace the challenge of biologics? JP: Honestly, it has been a very natural transition. Over the years, Hovione has developed highly specialized expertise in chemistry, particle engineering, and formulation science. When we look at biologics, despite their greater complexity, the underlying challenge is very similar. These medicines still require materials, processes, and controls to ensure they reach patients safely, consistently, and effectively. NF: But is there real potential? JP: Absolutely. Not only is there potential, but there are also significant challenges. This leads to the second point: curiosity. Throughout Hovione’s history, starting with our founder, there has always been a drive to embrace increasingly complex challenges. That curiosity is part of our DNA, particularly within our Innovation and Development Center. It is also one of the most rewarding aspects of working at Hovione: being part of this transition. NF: And it is not that far removed from Hovione’s history either. JP: Exactly. NF: Joana, in which therapeutic areas have biologics already had the greatest impact? Are there diseases where they have clearly transformed patient treatment? JC: There are several areas. NF: So this is no longer science fiction. It already exists in practice. JC: Exactly, and it has existed for quite some time in some fields. In oncology, for example, antibodies are used to target and kill cancer cells with high specificity. Instead of attacking cells broadly, these treatments target the disease’s underlying mechanisms. NF: Which I assume reduces side effects. JC: It does. Cancer is also a very clever disease. It evolves rapidly and often hides from our immune system. There are biologic therapies designed to help our natural defenses do their job by removing the “invisible cloak” that some tumors use to evade detection and progress rapidly. Another classic example is diabetes. Insulin has been the most common treatment for diabetes for decades. Before biotechnology, insulin was extracted from animals, making production limited. With biotechnology, we gained the ability to produce human insulin, known as recombinant insulin, using living microorganisms. This transformation made the treatment available to far more people and has saved countless lives. NF: Two clear examples where biologics are already making a difference. João, these medicines are on the market today, but I imagine developing and stabilizing them in the laboratory presents major technical challenges. What are they? JP: Because these molecules are highly complex and, as Joana described, quite elegant, they are also extremely sensitive, almost like greenhouse flowers. Biological evolution has optimized them to survive under very specific conditions, conditions that often do not exist during manufacturing, transportation, or administration. As a result, they are highly sensitive to heat, air, pressure, and even prolonged contact with one another. When these molecules interact too much, they can lose their structure and unfortunately their therapeutic effect as well. This is where we come in. Clients often approach us with molecules that have tremendous therapeutic potential but are still only proof-of-concept projects. Our role is to take those early experimental results and develop the controls, processes, and formulations needed to scale production to thousands or even millions of doses while maintaining impeccable quality and stability. NF: Joana, how are these medicines administered? Are they different from conventional drugs? Traditionally, many biologics require intravenous administration in a hospital setting. Is that still the case? JC: Traditionally, yes. Most biologics are administered directly into a vein through an infusion, similar to receiving an IV drip. However, the pharmaceutical industry is not only focused on treating diseases. It is also increasingly focused on the patient experience. These treatments require hospital visits and can take time to administer. For chronic illnesses, this process repeats throughout a patient's life. The industry's goal is to develop alternative treatments that are more comfortable and give patients greater independence. NF: So they would no longer need to go to the hospital. JC: Exactly. The ultimate objective is to create injectable solutions that patients can administer themselves. Achieving this requires innovation in technology, formulation development, and medical devices. NF: João, this is where high-concentration formulations come in. What does that mean in practice? Could we eventually administer these medicines ourselves without the help of a nurse? JP: We certainly hope so. The concept of high-concentration formulations is relatively simple: fitting as much medicine as possible into the smallest possible volume. Ideally, that volume is small enough to fit into something like an auto-injector that can be carried in a pocket. NF: A pen-like device. JP: Exactly, a pen. Thanks to newer treatments, particularly in areas such as obesity, these devices have become much more familiar to the public. Technically, it sounds simple: more medicine, less liquid. But as we discussed earlier, these molecules are highly sensitive. As concentration increases and the molecules become more crowded together, challenges emerge. In addition to stability concerns, there is the issue of viscosity. This is easy to visualize: the more concentrated something is, the thicker it becomes. NF: Which makes it harder to inject. JP: Exactly. And greater viscosity generally means greater pain during administration. That directly contradicts the goal of developing treatments that are more convenient and patient-friendly. This is one of the major challenges facing the industry today: finding ways to overcome dose limitations and reduce administration volumes without compromising therapeutic effectiveness, convenience, or patient acceptance. NF: Joana, before we finish, what do scientists feel when they look toward the future and see Hovione’s work helping bring medicine closer to solutions that are increasingly personalized, convenient, patient-centered, and comfortable? JC: I think it is a tremendous responsibility, and that responsibility is also a major source of motivation. Medicine is becoming increasingly personalized and focused on the biological mechanisms that cause disease rather than simply treating symptoms. It is incredibly rewarding to be part of teams contributing to this journey toward a better future, one that places patients at the center. NF: João, is the future biological? JP: Not exclusively, but certainly in part. Biologics allow us to dream bigger. They open the door to better, more personalized, and more effective medicines, creating possibilities that were difficult to imagine until now. NF: João Pires and Joana Cristóvão, thank you for opening the doors to the future of medicine. With this look toward tomorrow, we conclude the first season of The Next Discovery. Over the course of six episodes, we traveled from a basement laboratory in Lisbon in 1959 to global technological leadership that now touches the lives of more than 80 million people every year. These conversations have shown that with curiosity, rigor, and talent, the next great scientific breakthroughs can indeed bear the signature of our country. To listen to all episodes of this series, visit observador.pt or your favorite podcast platforms. Until the next discovery.

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