Why investors need to consider pharmaceutical manufacturing services


While the novel coronavirus has reshaped the U.S. economy and the healthcare industry, pharmaceutical manufacturing has proven resilient—both in terms of business durability and its increasingly critical role in the global response to the virus.

Enhanced Healthcare Partners has deep experience investing in pharmaceutical services, and Covid-19 has increased the firm’s commitment to the sector. We believe there are long-term, sustainable trends that will drive U.S. pharma, not only from an innovation perspective but from an operational perspective as well. For decades, the U.S. has lost capacity and supply chain capabilities abroad—but in this unique time, U.S. pharma manufacturing is poised for a resurgence.

Ironically, from a health and safety perspective, a pharmaceutical manufacturing facility is one of the best places to work during a pandemic. Everyone in the facility is fully gowned, masked and gloved. Even under normal circumstances, workers are trained to avoid touching exposed skin and meet rigorous sterility standards. Most critically, however, the pharmaceutical manufacturing sector has stepped up in these turbulent times to meet the unprecedented demand for drugs—both to combat the virus and protect U.S. supply security.

Dramatic growth in domestic production and API
At the height of the crisis, it became clear that the U.S. pharmaceutical supply lacked some critical elements for domestic manufacturing independence in moments of international crisis. Covid-19 crystalized the U.S. dependence on overseas manufacturing for finished dose products as well as the active pharmaceutical ingredients necessary to produce life-saving medications.

Already, the U.S. has taken historic steps in working to remedy this manufacturing crisis. Phlow, a Virginia-based producer of generic drugs and their key ingredients, received in May a four-year award of more than $350 million in federal grants to in-source production of critical products from China and India. This contract is eligible to be extended to a 10-year award for a total of $812 million. This is just the beginning.

U.S. pharmaceutical manufacturing production capacity is a kiddie pool, and an ocean of onshoring needs to occur. It will take decades to bring enough manufacturing onshore to ensure pharmaceutical supply chain security for the U.S.

Hospital focus on supply chain security
On the micro-level, acute care hospitals are in a constant battle with pharmaceutical distributors for access to some critical medications. Heading into the pandemic, shortages were one of the most critical issues facing hospital pharmacies and Covid-19 dramatically intensified these concerns.

EHP-backed SCA Pharma CEO Milton Boyer is leading his team in working to better address the problem. He noted, “Hospitals require access to life-saving medications. Historically, it has been challenging for them to consistently source sterile injectable drugs. We have been working diligently to increase the capacity in our licensed facilities, and we pride ourselves on our consistency of supply to the acute care facilities we serve.”

A recent research report from Sage Growth Partners showed that the supply chain is one of the leading priorities for hospital officials—second only to patient safety. When hospitals can’t get the drugs, ventilators, or protective equipment they need to care for patients, they start to look for new solutions outside of the current system. As such, we are beginning to see more disintermediation—manufacturers and brands working directly with hospitals to meet their needs and, in the process, building additional supply assurance.

“Hospitals have recognized the need for more and novel solutions to address supply chain challenges and potential shortages of critical healthcare products,” said Todd Plesko, CEO of Syft, a portfolio company of EHP.

While price always plays a role in determining drug choice, hospitals are reprioritizing their decision-making to first ensure their own access, then quality and finally ease and convenience of dispensing.

Cross-platform communication
As Covid-19 began spreading in the U.S., EHP implemented weekly calls with all portfolio company CEOs, facilitating in-depth sharing of best practices that ranged from employee communications and policies and procedures to the sharing of life-saving personal protective equipment. These discussions and practices in the early days of the pandemic helped build durability, transparency and even camaraderie across the portfolio.

As the virus progressed, portfolio companies implemented comprehensive contact tracing to adjusted workspaces and work-from-home solutions for all non-essential personnel. These measures were proven effective in fighting the spread of the virus within our work environments.

From a financial perspective, EHP took extraordinary steps to build liquidity across the portfolio. Fundamentally, we do not believe in overleveraging businesses—our firm invests in growth platforms. As a result, EHP businesses enjoyed stress-tested balance sheets entering the crisis. While no EHP business had acute liquidity issues due to Covid-19, the firm still worked diligently to build capital reserves and pursue aggressive Covid-19 policies to ensure workforce continuity and business integrity through the duration of the pandemic.

As a result of sector resiliency and strong portfolio liquidity, EHP’s focus has now turned to opportunity—seeking to capitalize on the long-term, sustainable trends in pharma services.

Fueled for expansion
EHP is three years into a five-year plan to invest over $100 million of capital into capacity expansion within our pharma services portfolio. These critical investments are aimed at meeting the needs of customers and increasing domestic production capabilities for finished dose products. All of EHP’s businesses are well-capitalized for strategic growth and resourced for any acquisition opportunities that may arise.

Aphena Pharma, a portfolio company of EHP, CEO Shawn Reilly commented on the company’s recent expansions, noting, “With EHP’s support, Aphena has broken ground on meaningful new expansion projects, building on our growth platform and enhancing it with state-of-the-art capabilities.”

Despite global economic headwinds and challenges presented by Covid-19, we are optimistic about what lies ahead for pharmaceutical manufacturing and we are truly grateful for the way EHP teams have responded during this crisis.