Newcomers Avoid Large-Scale And Find Success Despite Hard Times

11 August 2003 00:00  [Source: ICB Americas]

Times are tough in fine chemicals, particularly so for young companies serving the life science industry: Even as they struggle to establish their own place in the market, they must accept the fact that their customer base is either consolidating (big pharma) or coping with severely restricted resources (biotechs). And yet several are making a successful go of it. Companies just a few years old such as Scynexis, Solutia PSD and Codexis are demonstrating that there is still room for eager newcomers with something unusual to offer.

"Unusual" is key in a market plagued by overcapacity. "From day one, we have consciously stayed away from high-volume fine chemical manufacturing simply because there's already an excess of players and capacity there," says Ed Robinson, president, Solutia Pharmaceutical Services Division (PSD).

Solutia PSD was launched in February 2000 with the acquisition of CarboGen by Solutia, which had been looking for a way to diversify since the mid-1990s. Pharmaceuticals, widely hyped, seemed attractive. However, even then it was apparent that the market for large-scale manufacturing would soon be saturated with capacity, says Mr. Robinson. "People were entering, but also large pharmaceutical companies were rationalizing plants, mothballing and selling off to other people with bundled manufacturing contracts," he explains. At the other end, low-cost non-GMP players were making rapid inroads into early-stage R&D, as were large-scale manufacturers looking to capture molecules for their plants earlier in the pipeline.

Having taken the lay of the land, Solutia formulated its strategy. The company would put together an integrated portfolio of world-class services in those areas of drug development where customers identified a need for support. "We either want to be a leader, or we probably wouldn't enter a segment," Mr. Robinson says. Integration is essential, he adds. "We felt from the beginning that rather than a loose collection of services-acquire 10 companies and set up a supposed one-stop shop-our companies should be linked in the way we run our business administratively, sell and market, serve our clients, manage data and things of that sort." Finally, its activities would be confined to drug development. "We're not a discovery company. We don't serve the discovery stage of the process."

After evaluating over 70 companies, Solutia acquired CarboGen, a leader in early stage chemical process R&D and the supply of active pharmaceutical ingredients (APIs) for Phase I/II clinical trials. In March 2000, Solutia acquired another piece in Amcis, experts in process scale-up, optimization and small volume production (including commercial supply). There are relatively few world-class players in this niche, says Mr. Robinson. "It's much less intensely competitive, and it's more your capabilities, knowledge and track record than whether you have big tanks available."

Solutia PSD, which last year had revenues in the $60 million range, is beefing up these acquisitions with the construction of a new facility for highly potent active ingredients (HPAIs) in Bubendorf, Switzerland. Because of the potency of HPAIs, commercial-scale manufacturing is typically done in quantities comparable to most late-stage development projects, Mr. Robinson notes. "It fits beautifully with our experience base." There are already several participants in HPAIs, he acknowledges, but the new facility brings Solutia PSD a specialized laboratory and small-scale manufacturing equipment for the most potent compounds, category IV, which few companies are qualified to handle. A final phase of construction, to be completed in the first quarter of 2004, will accommodate larger-scale manufacturing of category III compounds.

The June 2002 acquisition of Axio Research Corp. took Solutia beyond chemistry into another unusual niche. "In our Axio business, where we're doing some CRO [contract research organization] work, we have a very strong position in biostatistics because of our longstanding relationship with the University of Washington statistics department, and we are one of the leading players in data safety monitoring committees (DMCs)." These independent review panels are becoming increasingly important in assessing the progress of clinical trials and in considering the ethical implications of beneficial new therapies in light of any side effects.

Perhaps the most unusual service is provided by Solutia Pharmaceutical Advisors. Begun in January 2002, the unit offers the advice of experienced senior professionals on all issues related to drug development. "The response of the market has been fantastic," says Mr. Robinson. "We've expanded to 14 customers very quickly, and we expect to get 20 or more by the end of this year. In a tough market where biotech management teams are having to make critical decisions without, by definition, all the skills they need in house, they recognize that an independent opinion or expert consultant can give them targeted advice, putting them on the right path."

San Francisco-based Codexis has taken a somewhat different tack, de-emphasizing assets in favor of proprietary technology to build an offering that is not just unusual but completely unique. "The thing that makes the difference in chemicals and life sciences is technology-it's the only thing that matters," says Alan Shaw, Codexis president and CEO. "People second, technology first, and assets a very poor third." He points to Chirotech, where he was managing director, as an example of a company that succeeded with such a philosophy. The company had no manufacturing assets and outsourced when needed, he notes. "The chemical industry is awash in assets, with no difference between the one and the other," he says. "The thing that makes a difference is to have a truly leveragable technology differentiation, and from that you can grow a sustainable competitive advantage for a business."

The cornerstone of Codexis' activities is a set of proprietary directed molecular evolution technologies that originated at Maxygen, a spin-off of Affymax. Maxygen has retained rights to these technologies for use in drug discovery, but Codexis was granted an exclusive license for use in development and manufacturing when it was itself spun off from Maxygen in October 2002.

Trademarked as MolecularBreeding, these technologies can be used to rapidly discover and develop new or improved processes for chemical synthesis with enzymes and fermentation. One variant is generically known as gene shuffling. Very few companies compete in this area, according to Mr. Shaw. "There are other technologies to get to the same endpoint, but ours is quicker and, we believe, superior," he says. "We're the only people with commercial genes producing tonnage products and getting royalties."

Codexis also practices a second variant, genome shuffling, an area that the company has all to itself, Mr. Shaw believes. "We only just announced the three-year program with Lilly, but the results are excellent," he says. In December, Codexis and Eli Lilly and Company entered into a multi-year collaboration focused on developing improved fermentations for several of Lilly drugs using Codexis' whole genome shuffling strain improvement technologies. "The bottom line is, whole-genome shuffling is what will make the difference between us having a market cap of a couple hundred million dollars and one of maybe half a billion dollars." The company has announced ongoing partnerships with other companies as well, including Pfizer, DSM and Novozymes.

The company's focus is currently on improving the processes used to manufacture mature pharmaceutical products, a concern to innovators and generics companies alike. At the top of its list of offerings is intellectual property (IP)-the bacterial or fungal strains and enzymes that Codexis provides to its customers are unique, backed by a strong and extensive portfolio of patents, says Mr. Shaw. "Anything we do is by its nature novel and proprietary," he notes. These biocatalysts or bioprocesses can be used to lower the cost of goods and to improve plant utilization by removing steps from a synthetic pathway, thus releasing plant capacity. They can be used to improve or circumvent existing patents, a feature of special interest to both innovators and generics manufacturers. They can also improve product specifications. "That is worth its weight in gold to a major innovator looking at a drug coming off patent five years out," he says. "If we can increase the ee [enantiomeric excess] or reduce impurities, then we can help them raise the hurdles to keep generics at bay."

Codexis has essentially fashioned itself as a life-cycle management company, a business model that Mr. Shaw considers an ideal platform for growth in the current extremely competitive environment. "Five or ten years ago, pharmaceutical companies couldn't have cared less about protecting a drug beyond the obvious. They accepted losing 50 percent of sales in the first year [after patent expiry]. They don't do that anymore. Pharmaceutical companies are very focused now on life cycle management, and it's worth almost as much to them as a new drug."

That is certainly true for Codexis-there is much less risk to working with a drug that is already on the market, Mr. Shaw notes. "That's fundamental for us." Revenues should grow significantly over the next two to four years, he projects. "I'd be disappointed if after four years we were not at the $40 million to $50 million sales level."

Mr. Shaw believes it is the solidity of this strategy and the proven value of the company's technology that brought Codexis $25 million by the end of its first round of financing in October 2002. "The most important part of our business is that we are real. We have been able to take a technology we know works and prove it in an industrial setting," he says, noting a partnership with Pfizer that led to an improved synthesis of doramectin. "We saved them significant amounts of dollars. It was a huge project for us, very successful." To support expanding business, the company has invested millions in the construction of a new bioprocessing facility. Codexis each year puts together a capital budget in the double-digits versus revenue.

For investors in Scynexis, it is the company's mixed model-both service company and biotech-that has made it attractive, says Yves Ribeill, president and CEO. In September 2000, Scynexis raised $13 million, and in June 2002, another $29 million. "2002 was a tough year, but we were one of the two or three largest-funded companies in North Carolina because we were coming with a different scenario, [that] of a company that is using a big part of its revenues generated through big contracts with pharmaceutical companies to fund partially their research. It was not simply a pure technology platform at the time; we already had compounds. It was not completely a product company going through clinical phases asking for a lot of cash, either," he explains. "The magic word 'revenue' helped us quite a lot."

Mr. Ribeill believes the investment situation may be improving. "It's still very difficult to raise money, and almost impossible now if you are truly a technology platform." He suggests that for companies with compounds in Phase II or Phase III, "it is pretty easy" to get some funding, and there are investors prepared to fund early validation. "But if you are in the second round of funding and you have no revenues and no product moving quickly into Phase II or III, the market is still pretty tough."

As a service company, Research Triangle Park (RTP), N.C.-based Scynexis supports the chemistry side of drug discovery, including everything from in silico chemistry to the synthesis of directed libraries, lead optimization, process development, small-scale cGMP manufacturing and radiochemistry, plus some pharmacokinetics. The company has developed several proprietary technology platforms, most notably the "Medchem-Factory," which originated in work done by Rh"ne-Poulenc at RTP. That site was to be closed when Rh"ne-Poulenc merged with Hoechst to form Aventis in December 1999, but 24 employees arranged a buyout, licensed the technology, and have since brought it to its current form: a process for synthesizing large numbers of compounds in parallel; and a high-throughput system that purifies, analyzes and plates these compounds for screening, freeing chemists to spend their time on synthesis. "This way we increase the productivity of the chemist by one hundredfold [versus] what existed with the traditional way of doing medicinal chemistry," says Mr. Ribeill. Scynexis does about 1,000 compounds per day in the factory, so named because the amount of solvent and the systems used is enormous. The associated software plays a very important role, he adds. "Collecting all the data and all the analysis, it is quite a challenge."

The Medchem-Factory addresses the bottleneck now choking the pharmaceutical pipeline: an insufficient supply of new chemical entities to match the many new targets coming out of the human genome project. "There has not been a paradigm shift in the chemistry area," says Mr. Ribeill, "and this is where Scynexis comes into play. Not only do we offer a completely integrated service in chemistry, not only do we have experts internally, most from big pharma, but we have also developed technologies to increase the productivity of our medicinal chemists."

Success for Scynexis has meant increasing the number of employees to 120, of whom 45 serve at a second site near Cambridge, UK, where a new Medchem-Factory was recently completed. The company has announced many partners, including Roche, Plexxicon, and Molecular Engines Laboratories. Last month, Scynexis announced that Merck had broadened the scope and extended the term of a multi-year research collaboration initiated last year to discover and develop novel anti-infective compounds.

Business began slow this year, says Mr. Ribeill. Major pharmaceutical companies, which comprise about 80 percent of Scynexis' clients, were careful about signing new deals given the geopolitical situation, but he has seen a revival of demand from big pharma. "This has not yet occurred in the biotech sector," he observes. "A lot of them are very careful about their burn rate, and contracting out is one of the first areas they cut. In biotech, 2003 has been even tougher than 2002." While he expects continued consolidation in that sector for the next two years, he also expects increased outsourcing as the pressure to demonstrate a pipeline builds. "Luckily most of our business is with big pharma. As we have long-term relationships with these companies, we are a little bit more protected."

Solutia PSD's Mr. Robinson also points to funding as the main culprit in slowing the drug pipeline. "The pipeline is actually quite robust," he says. "Many of our biotech customers have said they have a project they'd like to do with us, but they need six months before they can decide, or they can only go so far because that's all the money they can realize for now." Fewer indications are being considered in clinical studies for the same reason.

However, Mr. Robinson expects a recovery just around the corner. "The minute money begins to flow more freely again, and investors and managers of biotech companies are more confident, I think you're going to see a release of that pent up pipeline and a number of projects will move forward. It will not go back to the frenzy of 1999/2000, but we are already seeing a re-emergence of customer confidence," he says. "I think it is a reasonable projection that over the next six to 12 months, market conditions will return to a more normal level of activity, and with the ongoing rate of technological development around the world, it would not be unreasonable to project that pipeline development will continue, and service companies with valuable offerings, high quality services and so on will see their bookings and demand return to normal or historic levels. Certainly that's what we're gearing up for."

The situation may be more difficult for large-scale manufacturers, suggests Mr. Robinson. "The disadvantage for them is that the major pharmaceutical companies are still consolidating, still rationalizing production. There will be more plants going out of production and potentially coming onto the toll or contract manufacturing marketplace. And of course they're at the end of the chain. If you have a six-year developmental pipeline still in front of you, you're not going to sign a contract with one of them for several more years."

Codexis' Mr. Shaw-once chief operating officer at BTP's Archimica and later a member of the executive management team at Clariant Life Science Molecules after its acquisition of BTP-expects these companies to continue consolidating. Recent entrants, he believes, did not understand the requirements and cost implications of cGMP manufacturing. More-over, he adds, "fine chemicals is tough-all the risk of pharma but a fraction of the returns. That has never been more real than now. Companies with a lot of debt could go under." At least one more year of hard times lies ahead, he says, but once that is past, Codexis' services will be especially valuable. "What these companies are not able to do at the moment is invest in technology," he says. "The leading fine chemicals companies will come out of the nadir, and then they'll be looking to work with companies like us because they'll need a pipeline and differentiation. For now they are focused on survival."

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