The Health Care M&A Monthly: Pharma Outsources Manufacturing--

Sells Plants To Focus On Higher-Margin Activities

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Big pharma companies wondering where their next innovative blockbuster is coming from are having no difficulty in figuring out what to do with their manufacturing units. They’re selling off some of their nuts-and-bolts operations to generic pharma companies or manufacturers of APIs so they can concentrate on higher-margin aspects of their business, such as development, intellectual property and marketing. For the production of the drugs they once manufactured in house, they will now rely on outsourcing with contract manufacturing specialists. While these are not the sort of deals we ordinarily include in our databases or statistics, they are indicative of a strategy that established pharma companies are adopting to cut costs, rationalize operations by a division of labor and realize economies of scale.

Wyeth (NYSE: WYE) recently sold its drug product manufacturing and packaging plant in Rouses Point, New York to Akrimax Pharmaceuticals, an emerging branded pharmaceutical company. During a transition period that terminates at the end of 2009, Akrimax will lease the property back to WYE so WYE can continue manufacturing its products while Akrimax integrates its own products into the facility. To capitalize on any excess capacity at the plant, Akrimax also intends to bring additional business through contract manufacturing agreements with third parties.

Across the border in Ontario, Pfizer (NYSE: PFE) has sold its manufacturing facility in Arnprior to PharmEng International (TSX: PII). Concurrently, PharmEng subsidiary, Keata Pharma, will enter into supply agreements with PFE for the exclusive manufacture of certain Pfizer products for Canada for a period of three years. Keata will also manufacture products at the Arnprior location for two other major pharma clients with multi-year supply contracts.

It’s not just IT divisions and call centers being outsourced to Bangalore. Pfizer and India’s Hikal (BO: HIKA) have signed a long-term deal under which Hikal, based in the bustling capital of Karnataka, will manufacture and supply bulk drugs to Pfizer. HIKA already has a contract to supply Alpharma (NYSE: ALO) with a bulk supply of a drug for veterinary products. To get in on the trend to outsource manufacturing, Albany Molecular Research (NASDAQ: AMRI), which provides contract chemistry R&D services to assist in drug discovery and production, recently expanded its presence in India with the acquisition of FineKem Laboratories Pvt. Limited, a manufacturing facility in Aurangabad. AMRI paid less than $2.0 million.

Big pharma is realizing that the true value of its drugs resides in the instructions on how to make them, not on where they are made, and, once they are made, on seeing that they reach consumers. These companies figure that the costs of outsourcing and transportation to and from lower-cost countries will still be lower than the costs of maintaining a plant locally. While they retain the all-important intellectual property and marketing divisions, they can sell off the real estate, plant and equipment and get a one-time bump in revenue from the proceeds and an enduring benefit in not paying locally high wages or taxes on the plant. And as pharma utilizes more sophisticated biotech platforms and methods, making the industry even more knowledge-intensive, the trend to outsource manufacturing should accelerate accordingly.
 

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