Outsourcing, Industry Consolidation Drive Growth for Grand River Aseptic Manufacturing
Monday, July 13, 2015
Written by John Wiegand
Amid a period of intense volatility in the consolidating global drug industry, one Grand Rapids-based manufacturer of sterile injectable products has capitalized on the pharmaceutical sector’s push to outsource production to control costs.
The bulk of the business for Grand River Aseptic Manufacturing Inc. comes from two sources, according to President and CEO Tom Ross. Ahead of clinical trials, many customers turn to GRAM for help with the initial drug development and with manufacturing methods as they scale up for commercial production, a process that can take up to four years.
“It’s so expensive to develop a product that what happens is that fairly large companies outsource their work to smaller companies to get the approval,” Ross told MiBiz.
In other cases, pharmaceutical companies that already have approval for their products will approach GRAM to help them manufacture it at a larger scale.
While GRAM was founded in 2010 as a joint venture of Van Andel Institute and Grand Valley State University, the company was able to rapidly scale up its production after receiving certification from the U.S. Food and Drug Administration in 2013 to manufacture approved drugs for larger pharmaceutical companies.
“That FDA approval was essential for getting further penetration into the marketplace,” Ross said. “Since that time, we’ve signed new contracts with new customers, expanded and opened a new facility last year.”
Shortly after receiving FDA approval, GRAM doubled the size of its manufacturing facility to 11,400 square feet, added additional clean room capacity and purchased “millions of dollars of equipment,” Ross said. Later in September 2014, GRAM broke ground on a new 28,000-square-foot drug-finishing facility with “substantially larger labs,” Ross said.
GRAM has grown to between $10 million and $50 million in annual revenues last year and is on track to increase its sales 300 percent by the end of 2015 due to a series of large contracts that the company recently won, Ross said.
As a result, the company has needed to quickly scale-up its workforce. GRAM currently employs 90 workers, up from 55 last year. Ross expects to hire another 30 employees over the next three years.
GRAM’s experience echoes a larger trend in the biosciences industry where larger pharmaceutical companies turn to contract manufacturers to offset hefty production costs, said Stephen Rapundalo, president and CEO of MichBio, the state’s biosciences industry association.
“Groups like GRAM can manufacture products for much less money because of their internalized overhead,” Rapundalo said. “That’s just been a general trend across the board for all aspects of R&D from the earliest stages and as you approach clinical development. GRAM sits right there on that interface. I think their business is picking up as a mirror reflection of the broader trends in the industry.”
For a time, large pharmaceutical companies turned to overseas production to ease cost pressures, Rapundalo said. However, similar to the experience of manufacturers in the automotive industry, pharmaceutical companies ceased most overseas production in favor of reshoring to domestic companies because of quality issues. At the same time, domestic manufacturing costs have also come down.
“In the U.S., folks like Grand River Aseptic have become much more cost-competitive so they’re seeing the interest in them grow,” Rapundalo said.
Global pharmaceutical sales are expected to grow from $1.23 trillion last year to $1.61 trillion in 2018, according to a 2015 global life sciences outlook report published by Deloitte.
CONSOLIDATION DRIVES GROWTH
While some large pharmaceutical firms have outsourced production to other companies to save on overhead expenses, others have taken a different approach by acquiring smaller contract manufacturers to bring their capabilities in-house.
Typically, large pharmaceutical firms tend to acquire contract manufacturers they already do business with. When that happens, it removes a competitor for GRAM and gives the company more opportunity to seek out new business, Ross said.
“When a big pharmaceutical company acquires a particular contract manufacturer, that forces supply out of the market and actually increases the opportunity for GRAM,” Ross said.
Despite the increase in M&A activity, Ross doesn’t see either a buy-side or sell-side deal in GRAM’s future.
“It’s just not something in our life cycle that we’re attracted to at this point,” he said.
While GRAM has benefited from industry consolidation in pursuing new business, the barriers to entry and increased demands from customers have forced the company to make significant ongoing capital investments, Ross said.
“As a result (of consolidation), there are a limited number of competitors, so you have to continually reinvest in systems and people,” he said.
The company secured $9.8 million in investment in 2014 in a round led by the Municipal Employees’ Retirement System of Michigan, a capital infusion that allowed GRAM to make the needed investments take on contract manufacturing business, as MiBiz reported at the time.
Meanwhile, consolidation among pharmaceutical companies has been ramping up across the industry, including among some of its largest players.
That activity has even touched West Michigan companies. In April and May of this year, Perrigo Co. plc, which is based in Dublin, Ireland but maintains its headquarters in Allegan, spurned a series of unsolicited buyout offers from England-based Mylan N.V., which is now preparing to take its $32.7 billion bid directly to Perrigo shareholders in a tender offer that could occur this summer, as MiBiz previously reported. Shortly after making its initial offer for Perrigo, Mylan too became the target of an unsolicited buyout offer from Israel-based Teva Pharmaceutical Industries Ltd.
AN ISSUE OF COST
Rapundalo of MichBio credits the increase in M&A activity to significantly rising health care costs that are causing uncertainty among large pharmaceutical companies. New immunotherapies and oncology treatments can cost upwards of $100,000 per year, which has caused pushback from consumers, he said.
“It’s been a messy time, but all of it in one way or another ties back to the uncertain health care landscape,” Rapundalo said. “Everybody is trying to figure out where it is all going to land.”
Rapundalo predicts it will take five years before costs in the health care market begin to stabilize.
Going forward those same health care costs are likely to temper the earnings of companies such as GRAM, Rapundalo said.
“I think health care costs are going to be the biggest issue,” Rapundalo said. “That’s going to drive how much R&D will or will not occur (and) is going to have a trickle down on companies like GRAM. If there’s not business to be had, then there’s going to be a lot of companies fighting for smaller opportunities.”
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