ZURICH (Reuters) - Swiss drugs industry supplier Lonza Group AG LONN.VX is courting the financial backers of biotech firms to help secure a steady stream of projects and offset some of the volatility of outsourced production contracts, a senior executive said.
The Basel-based company has seen growing demand for its outsourcing services over the past year as drugmakers invest in specialized drugs that are hard to produce, such as antibody-drug conjugates and ingredients for cell and viral therapies.
But the nature of the business is volatile, as many promising drug candidates fall at the final hurdle or increasingly cost-conscious pharmaceutical firms terminate development programs.
Establishing extensive long-term relationships with both “Big Pharma” and small biotechs is therefore vital to make sure drugmakers stick with Lonza through a drug’s lifecycle.
Now Lonza is turning its attention to the private equity groups and venture capital firms who fund biotech companies and often have a say in which projects go into development.
Earlier this year, Lonza signed an exclusive five-year agreement with Index Ventures to develop and manufacture all the biological products of biotech companies in which the venture capital firm is a major investor.
Marc Funk, head of Lonza’s pharma & biotech unit since the start of July, said the company was keen to establish further strategic partnerships with biotech’s financial backers and was in talks with other companies.
“These deals are part of our strategy to mitigate volatility and ensure that out assets are at optimized capacity,” Funk told Reuters.
Lonza makes a range of ingredients for biotech companies, including monoclonal antibodies, peptides and drug conjugates.
Biotechs often lack the know-how and the capacity to produce their own medicines in house. Moreover, many are reluctant to spend money on their own production facilities before they are sure that they have a commercially successful product in their pipeline, given the risky nature of drug development.
By signing up biotech business early on, Lonza hopes to replicate its successful partnership with Pharmacyclics Inc PCYC.O, for which it manufactures Imbruvica. The leukemia drug was approved last November and notched up $180 million in sales to the end of June.
“We worked with this company when they were a start-up and now they are one of the leading stars on the west Coast in the United States,” Funk said.
Sales at Lonza’s pharma & biotech unit rose 10.7 percent to 674 million Swiss francs ($739 million) in the first half and the company signed contracts with new and existing customers for both early and late-stage projects.
Some analysts warn, however, that a reliance on large customers with strong bargaining power could weigh on margins. Securing a steady stream of business from biotech could be a way of reducing that reliance.
Funk said an improved financing environment in 2013, when the biotech industry raised $31.6 billion in capital according to accounting firm EY, had contributed to more demand for outsourcing.
In contrast, he said Lonza had seen no impact on outsourcing from the M&A frenzy sweeping through the healthcare industry this year. In previous phases of consolidation, Lonza’s track record as a reliable partner had typically held sway when contracts were reconsidered, he added.
“When you have these kinds of large mergers and acquisitions,” he said, “securing the supply and the stability of the manufacturing process are priorities.”
(1 US dollar = 0.9124 Swiss franc)
Editing by David Holmes