Happy Birthday — If Siegfried were to actually light all of the candles on its birthday cake this year, the company might get a visit from plant fire department. The Swiss custom manufacturer can look back on 140 years of history, from its beginnings in a pharmacy close to the train station in the small town of Zofingen to becoming a world-recognized CMO with production sites on three continents. Brandi Schuster spoke to CEO Dr. Rudolf Hanko about the company's biggest milestone - the transformation from a pharma company to a CMO - and how customer manufacturing has evolved over the years.

CHEManager Europe: Siegfried is celebrating its 140th anniversary this year; what do you consider to be the biggest milestones along the way?
Rudolf Hanko: Siegfried has been a pharmaceutical company for 100 years out of these 140; from there we transformed into a custom manufacturing organization.  I would say this has been the biggest milestone so far.

Was it a slow transition where the company recognized there was a lot of need for CMOs?
Rudolf Hanko: It was more of a realization that the pharmaceutical business was going into a global consolidation phase; this was something Siegfried anticipated about 10 years before it actually happened. Back then, in the 1970s, the company was still largely family owned; the family realized that in order to follow the industry transformation, they would either have to invest large amounts of money or team up with another company. The family didn't want to go for either option, which is why they decided to do something else - that something else being becoming a CMO.

Quite a risky undertaking.
Rudolf Hanko: It was very visionary; the CMO industry didn't exist at all back then, and the anticipated consolidation of pharma hadn't yet begun.  That transformation was definitely Siegfried's biggest challenge throughout the company's history. Everything changed, from the value chain to the company's place in the world: We went from being a part of the pharma industry to becoming a supplier, from running a product-driven business to a service-driven business. The way the entire organization operated had to be refurbished, a lot of roles had to be changed and company culture had to adapt.

How do you think the role of custom manufacturing has evolved over the years?
Rudolf Hanko: Custom manufacturing started as kind of an extended workbench for the pharmaceutical industry. New APIs were being developed that required advanced chemical technologies compared to historic APIs and not all pharmaceutical companies had that know how. Also, the pharmaceutical industry was booming in a way that some were simply running out of capacity.  But over the years, CMOs have evolved from being an extended workbench to an insurance system for the pharma industry.

How did that change come about?
Rudolf Hanko: The risk in in pharmaceutical drug development has increased tremendously from the 1980s. The old paradigm was a drug had a 15% chance of making it to market once it was in phase I. Now companies can be happy if their drug has a 3% chance at that stage, meaning the risk has increased fivefold.

Also, companies have to put a lot more money on the table for drug development than they did 30 years ago. This is where the CMO comes into play; companies don't have to invest millions of dollars in a manufacturing plant for a drug that might never even see the light of day. CMOs can produce for the companies; while we can't eliminate the risk of an API not making it to market, we can mitigate the risk of running an empty plant much better than a pharma company can. CMOs have 30-40 pharma companies as customers, where a pharma company only has itself.

The CMO industry has been able to transform itself from such an opportunistic beginning to taking over a strategic role within the industry.

What is Siegfried's role as a custom manufacturer for your customers? Would you consider it to be more of a partnership or more of this service-providing role?
Rudolf Hanko:  It's both; a company can only be a service provider as a partner, and a company can only be a partner by providing good service. There is no alternative of partnership vs. service provider; a CMO relationship intimately links the companies together.

For example?
Rudolf Hanko: Just look at the regulatory element of it.  Just because a drug gets approved doesn't automatically mean the pharma company is allowed to manufacture it. The pharma company has to make sure they are compliant in order to have that drug manufactured by their CMO. The same applies if a company wants to change CMOs; it's not a roll-on, roll-off kind of business where a company can change CMOs from one day to the next; this is simply impossible under the legal framework. Also, a pharma company needs to know that its CMO will be around five years from now. 

Siegfried currently produces in Switzerland, the U.S. and Malta. What advantages do you have by being a solely "Western" manufacturer?
Rudolf Hanko: A solely Western manufacturer always has the advantage of being free of allegations and suspicions with respect to quality and intellectual property protection issues. However, we are not able to compete on the cost side with Asian suppliers. Being only Western or only Eastern has its obvious pros and cons. We try to integrate the best of both worlds with our horizontally integrated value chain. Cost-sensitive parts of the chain that have a lower impact on quality and IP are done in the East; other parts of the value chain with more sensitive quality issues and IP are done in the West. This is why we are building up our infrastructure in China.

What does that mean specifically? Do you do a lot of cooperation or JVs? Are you looking at acquisitions or greenfield investments?
Rudolf Hanko:  We don't do greenfield investments, and we don't go alone. In China we have partnered with the Nantong Economic & Technological Development Area Administrative Committee, which runs an industrial park in Nantong, which is northwest of Shanghai. Here, we recently broke ground for an API and intermediates plant; we will probably be technically ready for production in Q2 2014.  

And can your customers expect a change in the costs then?
Rudolf Hanko: Yes, of course.

What are your expectations for the next 140 years?
Rudolf Hanko: Over the last 140 years, we've seen the pharma industry emerge from basically nothing to a $1 trillion dollar business. My expectation for the next years - maybe not 140 years, but certainly for the next decades - is that we will see higher growth in the CMO sector than we see in the pharmaceutical sector.

Visit Siegfried at the CPhI 2013 in Frankfurt from Oct. 22-24 in hall 3.1, booth H25