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Who's the Foxconn of pharma? A global battle spawns two IPOs

Friday, October 14, 2016 - 11:41
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Inside a factory in eastern China, vats of what might become some of the world's newest and most sophisticated medicines are brewing.

[HONG KONG] Inside a factory in eastern China, vats of what might become some of the world's newest and most sophisticated medicines are brewing.

The owner, Wuxi Biologics, is among a handful of companies worldwide vying to be the outsourcer of choice to drugmakers selling biologic drugs: therapies made from proteins or a combination of biological matter to treat illnesses such as cancer and inflammatory diseases.

Last year, six of the world's ten best-selling drugs were biologics, including Johnson & Johnson's arthritis drug Remicade and Sanofi's Lantus for diabetes, both blockbuster medicines. Seen as a rapidly expanding market in the decades ahead, companies are now beginning to line up to mass produce these therapies for the drugmakers developing them.

The reigning champions in the business of contract manufacturing biologics are both European: Switzerland's Lonza Group and a unit of Germany's Boehringer-Ingelheim GmbH. But two players in Asia are now racing ahead to gain a slice of the global business, with plans to raise billions in the coming months to bolster their capabilities.

Samsung Biologics, a unit of the Korean conglomerate, said last week it's seeking to raise as much as 2.25 trillion won (S$2.8 billion) from an initial public offering. And China's WuXi Biologics - a subsidiary of the recently privatized WuXi Apptec - is planning to raise about US$500 million in its own offering in coming months, according to a person familiar with the matter.

In doing so, the companies are venturing into a risky market that requires heavy investments and where global regulations are still in flux. If they succeed, they have the potential to become front runners - much in the way Taiwanese manufacturer Foxconn Technology Group became the major product assembler for Apple Inc.

"The future of biologics manufacturing is only getting bigger," said Frank Yu, head of the investment firm Ally Bridge Group which holds shares in WuXi. "It's not a potential market anymore - it's arrived and there's hard cash we're talking about here."

The business demands heavy capital investment, and pharmaceutical companies can be reluctant to build their own facilities at first, given that the payout is uncertain if the drug isn't approved.

Making a biologic begins with a cell line. One of the world's first biologic drugs, Amgen's arthritis treatment Enbrel, for instance, begins with Chinese hamster ovary cells. Master cell lines - from which a working cell bank is generated - are typically kept under stringent security. (Boehringer-Ingelheim keeps theirs in liquid nitrogen vats at sub-zero temperatures.) Unlike traditional pills made from chemicals with a specific recipe, making a biologic drug requires weeks of monitoring the growth of cells.

"It's the same situation as if you put the hinges of the door in the wrong place, you'll never be able to hang it," explains Racho Jordanov, a Genentech alum who heads up Taiwan-based JHL Biotech, which also does contract manufacturing for pharmaceutical companies.

"It's important to be precisely right."

The global biologic medicines market is projected to exceed US$390 billion by 2020, according to an IMS Institute for Healthcare Informatics report funded by drugmaker Novartis AG. Then, there is the business to be had from biosimilars, or cheaper versions that will emerge as biologic brands lose patent protection. Biologics will contribute half of the top 100 product sales by 2022, according to a September report from EvaluatePharma. That's about double the 24 per cent penetration in 2015, according to the report.

Up to US$80 billion worth of biologic drugs - including AbbVie Inc's Humira for chronic inflammatory conditions and Roche Holding AG's cancer drug Herceptin - could lose exclusivity by 2020, according to Sanjeev Kumar, life sciences industry manager for research firm Frost & Sullivan.

While that could offer another boost to manufacturers, those prospects could be dashed if lengthy litigation delays their entry. New biosimilar manufacturers face a maze of patents, many of which specifically pertain to the manufacturing process, when they seek to challenge an existing biologic drug, according to Mike Fuller, partner at law firm Knobbe Martens.

In South Korea, Samsung Biologics, part of South Korea's Samsung Group, began the construction of an 850 billion won plant in December, its third, saying it aims to be the world's biggest biologics contract manufacturer.

It has in recent years announced manufacturing agreements with companies including Bristol-Myers Squibb Co and a unit of Roche.

Meanwhile, WuXi Biologics just finished the first phase of construction of a new US$150 million factory. It now employs 1,500 people from just a dozen in 2011. The company's Hong Kong IPO is slated for the first half of 2017, according to the person familiar with the matter. Wuxi in an e-mailed statement declined to comment on its IPO.

The pharma contract manufacturers are often brought in early, as the drug is going through discovery, pre-clinical and clinical trials. In that way, Mr Yu said, they go further than a Foxconn: "Apple designs a phone and gives it to Foxconn to make. For WuXi, they would increasingly come up with even the molecules, so they're both the 'R' and the 'D' in R&D."

The incumbents are also doubling down, and have to their advantage long-standing relationships. Boehringer-Ingelheim says it expects double-digit growth for its biopharmaceutical business unit, based on market demand for contract manufacturing as well as demand from its parent company's portfolio of biologic drugs.

In addition to significantly investing in Europe and the US, the German company is building a plant in Shanghai, which will begin operations next year.

"We wanted to be present in mainland China, and Shanghai is a booming area," said Uwe Buecheler, who heads up the unit, which has a focus on contract manufacturing. Lonza declined to comment for the story.

At the same time, the contract manufacturers could face competition from the very customers they are targeting. Some drugmakers choose to make their own biologics, while others are building the capability to do so, especially once a drug has been approved.

Amgen, based in California, opened its first manufacturing site in Asia in November 2014 in Singapore - an emerging centre for biologics manufacturing.  That isn't stopping the Asian companies from dreaming big. Another Samsung entity called Samsung Bioepis is developing its own biosimilars. JHL, the Taiwanese manufacturer, has filed a biosimilar application in Europe, said CEO Jordanov, and targets to develop its own new biologics within ten years.

"We're not going to be just a CMO," said Mr Jordanov, referring to contract manufacturing organisations that are involved in mass production.

"We have bigger ambitions."

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