Ahead of the game

The money's big, but so are the risks. The pharmaceutical industry is the financial powerhouse of the process sectors, generating more profits than all the other sectors combined, and often seen as the safest bet in an uncertain economy - after all, people will always need medicines. But for the people at the sharp end of the industry, where huge investment decisions can turn on a disappointing clinical trial, nothing's completely certain.

Alan Cumming, vice-president for customer relationships at AK Pharmaceuticals, part of the Aker Kværner Group, knows just how uncertain the business can be. 'I worked on a project in Denmark recently, a large one - in excess of $100million. Their drug failed phase three clinical trials, which is very unusual, and the share price of the company halved in the course of a day.'

Cummings sees the pharmaceutical industry as 'recession resistant, not recession-proof.' Despite that, he says, it's a remarkably healthy sector, growing on average 8 to 12 per cent per year, globally. Split by region, growth shows a similar pattern to the other large process sectors - the European market is worth some $108billion and is growing at around 8 per cent per year; the US, which dominates the market is worth some $170billion and grows at 10 per cent per year. Growth rates are far faster in the emerging markets, but they are still far smaller: Asia represents a market in excess of $20 billion, growing at 44 per cent and Eastern Europe is worth less than $10billion, with 50 per cent annual growth.

The favoured locations for investment reflect these trends, but companies go where there is a financial advantage. 'Ireland, Singapore and Puerto Rico are key areas of new spend,' Cumming says, 'and it's mainly because of the tax benefits.' This has led to some difficulties for both the operators and their contractors, he says. 'The ability for Ireland to respond to these new facilities is a challenge in itself for them, from the perspective of civils, infrastructure, travel, ability or availability of skilled resource to actually maintain and operate these facilities. Puerto Rico and Singapore have similar problems. The work of the Investment and Development Agency (IDA) has to be commended in helping to resolve these issues.'

New markets, new locations

Despite the benefits of an industry-friendly tax regime, in-country expertise is a vital criterion in siting a plant, and is likely to be important for the next wave of new builds. The current locations, particularly Ireland, will remain important, Cumming says, but producers are likely to turn their attention to Eastern Europe as well. 'I see Eastern Europe as an area that could grow rapidly, particularly with the likes of Poland and the Baltic countries coming into the EU,' he says, 'but from a cost of labour viewpoint, Hungary, Poland and Romania and the Czech Republic, probably Hungary more than any of them, are going to be fairly attractive to the pharma companies.'

To help improve their attractiveness, the Eastern European governments could do worse than look to Scandinavia, where the area around Copenhagen and in Southern Sweden, known as Medicon Valley, is a haven for biopharmaceutical research and manufacture. 'One thing we saw in this region was the link-up between government, acedemia and industry to support the biotech arena,' Cumming says. 'So there's lots of small biotech companies there, all aiming to grow. We see the Baltic countries feeding off the Scandinavian R&D due to their lower cost base.'

However, the biotech industry hasn't grown as fast as expected, with the financiers and venture capitalists not receiving the returns they had anticipated and not supplying funding from new businesses. 'Only one in ten of the companies survive in biotech and the ones that do, go on to really perform,' Cumming says. 'Our US office is working on the second-generation large-scale biotech facilities, and we see the trend of those size of facilities continuing into Europe.'

Leaving it later

Another trend that's beginning to be seen is leading contractors to find ways of speeding up their operations. 'You can generally judge when a project's going to come through by the progress of the drug in clinical trials,' Cumming explains.

'So round about the end of phase II clinical trials, beginning of phase III, when they go from 100-300 people taking the drug to 3000-5000, the project process has to start - buying the land, investigating the location and so on. The time the project's up and running should hopefully tie in with the FDA approvals of the product.'

But because of uncertainties with the trial process. market forecasts for drug sales, and the movements in FDA policy, companies would prefer to leave the decision to build a plant as late as possible.

'We need to be smarter in doing things quicker and doing things in a compliant manner, because obviously the FDA rules are changing all the time,' he says. 'We need to keep our eye on the ball as to where those movements are and where we expect them to move, because if you don't know the direction and the stance they are taking, you could get caught out in the middle of a design.'

The key to working with the FDA is in collaboration, Cumming believes. 'You need to closely monitor and understand the rules,' he says. 'At the beginning of the job, sit down and talk with them if you can, and try to keep them involved and communicate with them.'

Technology, of course, changes as fast as regulations, if not faster. The trend in APIs (Active Pharmaceutical Ingredients) towards continuous processes rather than batch systems has been apparent for some time, as it has definite advantages for the way pharma companies have to operate. 'When you've got campaigns and batches, you've got cleaning and clearing validation at the changeover of products. From their point of view, it takes time, they're not making as much product and it's taking time to satisfy the authorities as well.'

Another way that contractors can help make pharma companies' lives easier is in standardising their processes. 'In an ideal world, it would be great for each customer at each site to have a pump arrangement that's exactly the same as at each of their facilities, so they have one set of standard operating procedures, one maintenance instruction, and any operator can move from site to site easily,' says Cumming. 'Although that's an ideal vision, that's what a lot of companies are trying to move towards, and they're standardising design solutions as well.'

The most important trend, however, is one that's proving to be a boon for the contractors. 'We're seeing that a lot of companies are starting to shed engineering staff to get their headcount and fixed costs down,' Cumming says.

In this, they're following the lead of the mature process industries, chemicals, oil and gas. The trend has been slower to take off in pharma, however, because of the added complexity of regulatory compliance.

'Ideally, in my opinion, they would rather not be manufacturing at all and they'd rather not be doing engineering. They want to focus more on their key business of research and development and selling drugs. But they feel that they need to retain control, a lot of control, and ensure that they stay in compliance with the FDA.' Aker Kværner, among other companies, is working hard to build levels of trust and confidence, so that pharma clients feel that they can entrust more of their operations to them. But at the moment, 'the customers themselves are our biggest competitor, without a doubt,' he adds.

Once again, Cumming says, the key is in communication. 'We've come up with solutions that'll improve our customers' business and do it in a predictable manner,' he says. 'The key issues are people, honesty, and in having a process that's systematic and will ensure that there's continuous improvement and fair and equitable relationships through the supply chain.'

Honesty extends to an unwillingness to cut prices for the sake of contracts. 'We're seeing a more aggressive stance from the customers on terms and conditions, which is influenced by lawyers in the States,' Cumming says. 'The big issue is, are you a commodity or a value-added service? We're not a commodity, where the cheapest guy gets the job. And we're not going to lie about that.'

Aker Kværner is also keen to use this trust to build long-term relationships with its pharma clients. 'We're not going to do any more one-off transactions where we do a project with a customer we don't know,' he says. 'What we're after is the next project, and the next one, and one after that. We want love, not sex!'

So what's the future for this affair? The marketplace changes, Cumming says, and not always to the contractors' advantage. 'Pfizer took over Pharmacia and both companies stopped spending for a period, and that's the biggest pharma company in the world. There have been other acquisitions where both companies stopped spending. But next year's going to be better without a doubt.

From our point of view, it's good news that the customers are starting to outsource, but we have to make sure that we've got the right product at the right time, and we're going to take it one step at a time to make sure we can deliver on each promise. It might not be a quick win, but it is the right direction to move in the long-term. Our aim is not to be the biggest - just the one which is the most wanted.'