Over the past several years, a pharmaceutical industry has quietly gathered increasing momentum in the Milwaukee area. The area’s pharmaceutical industry is in the formative stages, but southeastern Wisconsin has the range and depth of pharmaceutical-related offerings to generate self-sustaining growth.
Some companies in the area, like Cambridge Major Laboratories Inc. in Germantown, make active pharmaceutical ingredients (APIs), the active ingredients in prescription and over-the-counter drugs. API producers operate as contract manufacturers, sending their products to drug companies that combine the API with other ingredients into the final product.
The metro area is also home to several emerging drug companies, dedicated to bringing new drugs to market. These companies have relatively few employees, but are working on next-generation drugs to treat neurological, cardiac and other disorders.
There are also several companies that perform drug safety testing in the Milwaukee area. These companies test new drugs that seek FDA approval in the pre-clinical and human clinical phases of testing.
Despite the recession, most companies within the pharmaceutical industry in the Milwaukee area are growing significantly.
API producers are expanding plants, dramatically increasing sales or acquiring other companies. Drug development companies have signed licensing contracts with universities, such as Marquette and the University of Wisconsin-Milwaukee, and are raising venture capital.
Spaulding Clinical Research in West Bend, a drug testing firm, is already planning to quadruple its size after being open for only one year.
While the three types of companies operate in different niches of the pharmaceutical industry, the significant growth in multiple areas marks the evolution of a self-sustaining pharmaceutical industry in the Milwaukee area, said Carl Sheeley, president and owner of Fontarome Chemical Inc., a St. Francis-based API producer.
“It’s like a nuclear reaction,” he said. “You cannot gain a crucial mass with just a little piece of plutonium. But if you build it up, all of a sudden you’ve got people, IP (intellectual property) and money from the local area.”
API producers
The most established members of the pharmaceutical industry in southeastern Wisconsin are the three API producers located here: Cambridge Major Laboratories Inc. in Germantown, Fontarome Chemical Inc. of St. Francis, and Cedarburg Pharmaceuticals Inc. of Grafton.
Cambridge, Fontarome Chemical and Cedarburg Pharmaceuticals all do business with some of the largest drug companies in the country including; New York-based Pfizer Inc., Indianapolis-based Eli Lily & Co., and Abbott Park, Ill.-based Abbott Labortories. Each company also works with much smaller drug companies, including start-up firms that have formed around one idea that could turn into a new drug or treatment.
Cambridge Major Laboratories is nearing completion of a 120,000-square-foot new facility under construction just west of its 60,000-square-foot headquarters, labs and manufacturing facility in Germantown. The $50 million new facility, which will greatly increase production, should be fully operational by September or October.
“In our existing site, we have 26 reactors, with a 3,500 gallon capacity,” said Michael Major, founder, president and CEO of Cambridge. “In phase one of the new facility, we will have 15,000 gallon capacity in our reactors; almost five times more.”
API Reactors are where the chemical mixing and processing takes place. They can range from a few gallons to more than 10,000 gallons in size.
The new facility includes an unfinished area, where about 20,000 gallons of reactor capacity will eventually be built, Major said. The company expects at least six months to one year to pass once its new facility is open before demand grows enough for the unfinished space to be filled.
Arlington Capital Partners, a Washington, D.C.-based private equity group, acquired a majority stake in Cambridge Major Laboratories in early 2007. The private equity investment made the company’s expansion possible, Major said. It also allowed Cambridge to acquire a Holland-based API producer in late 2007, which gave it European operations.
Cambridge had slightly less than $40 million in domestic revenues for 2008, and anticipates about $40 million this year. Combined with its Dutch operations, the company expects about $50 million in revenues for 2009, Major said.
Cambridge has about 100 employees in Germantown, and will soon hire workers for its new facility.
“We will add about 30 people by the end of 2009 and a total of 40 to 45 within the next year,” Major said.
In addition to API production, which makes up about 60 percent of its business, Fontarome Chemical also makes fine chemical flavors used in the food and beverage industry, Sheeley said.
Fontarome has about 70 employees in St. Francis. The company’s sales grew more than 50 percent during 2008. Sales in the fragrance and flavor areas grew 30 percent, while sales for pharmaceuticals grew more than 60 percent, Sheeley said.
Like Cambridge Major Laboratories, Sheeley and Fontarome have seen some softening in the pharmaceutical marketplace in recent months.
“2009 is a little challenging. Three months in, we were above where were (at the same time) last year,” Sheeley said. “The economy has been late in affecting drug companies. But the emerging companies don’t have as much money as they did (previously), and venture capital is hard to find for them.”
Fontarome laid off two workers during the first quarter of 2009, Sheeley said. The company does not anticipate any further reductions.
Even in a down economy, Fontarome predicts its revenues to rise about 15 percent this year.
In 2007, Sheeley purchased a 3.5 acre parcel to the east of Fontarome’s facility in St. Francis. The company will likely need to build an expansion facility on that land in 2010.
“We’ve got some options. We’ve had beginning discussions with several companies in the pharmaceutical industry, and it would be for manufacturing opportunities for something larger that we want to do,” Sheeley said. “We’re kind of entertaining ideas now.”
Cedarburg Pharmaceuticals Inc. is an API producer like Cambridge and Fontarome. However, the company specializes in making APIs in much smaller quantities, said Tony Laughrey, president and CEO.
“Many new drugs require complex chemistry – they’re very active,” he said. “The dosage requirements are very low. A little bit goes a long way. These drugs are high value added, tough to make and low volume because you don’t need much.”
Because of the complexity that its chemists frequently undertake, most of the drugs made at Cedarburg are not likely to be outsourced to India or China, Laughrey said. As a result, the company’s reactors, which are much smaller than Cambridge’s and Fontarome’s, are portable and can be configured for many different processes.
“We see the competition for large-volume manufacturing of APIs getting greater,” Laughrey said. “We’ve chosen the high value added (route). We like complicated chemistry, and our clients want to bring complicated processes to market.”
Cedarburg Pharmaceuticals has about 90 employees. About 45 of its workers are in Grafton and Milwaukee, while the remaining 45 are in Denver. Cedarburg acquired InB: Hauser Pharmaceutical Services, a Denver-based company, in March. The acquisition was aided by Signet Healthcare Partners, the private equity firm that owns a majority share in Cedarburg.
In late March, Cedarburg laid off about 25 percent of its workforce because of slowing in the economy, Laughrey said. Based on orders the company has received in recent weeks, Cedarburg may be able to re-hire at least some of those workers by the end of the year.
“We intend to staff back up the minute the business climate improves,” Laughrey said. “We went into the year anticipating a staffing increase.”
Cedarburg’s revenues have tripled over the last two years, Laughrey said, and the acquisition should double them again in 2009.
“We intend to improve our profitability, even in a business environment like this,” he said.
Drug producers
Promentis Pharmaceuticals Inc., a Milwaukee company formed to create new drugs to treat schizophrenia and other neurological disorders, was started in 2006. The company hopes to have its first drug compound well into human trials within six years.
Promentis was formed around a theory of how to chemically treat neurological disorders, and was developed by David Baker, a neuroscience professor at Marquette University, Daniel Lawton, president and CEO of Promentis said. Baker later partnered with James Cook, a chemistry professor at UW-Milwaukee.
“Baker has an understanding of the normal physiology of the brain and how disfunction might look, and how chemistry might adjust that,” Lawton said. “In terms of a key and a door, Baker understood the nature of the lock. He went to Jim Cook and UWM to get help with the chemistry, and to have him design a number of keys.”
Lawton, Steve Pollack and Dr. Klaus Veitinger have been named as the business leaders of Promentis. The company is now raising funds to continue work on its chemicals, Lawton said.
Lawton, Pollack and Veitinger worked together previously at the U.S. headquarters of Monheim, Germany-based Schwartz Pharmaceutical, which was acquired by UCB, a Belgian company, in 2006.
While the company is raising funds, Baker, Mantsch and Cook are continuing to refine the company’s chemical compounds, Pollack said. Promentis has received an SBIR grant from the National Institutes of Health, and a grant from the Wisconsin Biotech Alliance, which have helped fund its small operations.
“A lot of work is being done to prepare the types of studies needed to look at the compounds coming out of UWM,” Pollack said. “We’re making the drug (compounds), synthesizing and testing them.”
By the time that Promentis’ drug compound has proceeded into phase two human trials, the company expects that established pharmaceutical companies will want to purchase a license to bring the drug to market.
“The spotlight of interest from the established pharma sector is on R&D in schizophrenia and related disorders,” Lawton said. “If we are successful, we believe that our project and approach will be what Big Pharma is looking for.”
In their previous careers at Schwartz Pharma, Lawton, Pollack and Veitinger oversaw the in-licensing of numerous drug compounds, so out-licensing one of Promentis’ compounds will take them down familiar territory.
“We’re very encouraged by the (interest) we’re seeing in this general space including acquisitions with pre-clinical (compounds),” Lawton said. “There is a very broad range of opportunity for an interesting compound and target in this space.”
Physiogenix, a Milwaukee-based company, is also in the process of developing its own drug compounds. The company is now working to license several compounds from UW-Milwaukee and Marquette University, Brian Curry, CEO of Physiogenix said.
“We’ve decided to pick up drugs in the central nervous system involving memory and cognition,” Curry said.
Physiogenix may also pursue additional compounds related to bio marking and alcohol abuse.
Since 2000, Physiogenix has specialized in pre-clinical testing for other drugs. That expertise will help it bring drugs to market, Curry said.
“We hope to have our lead compound in clinical trials with people this year,” he said. “We’ll be bringing in a chief medical officer with patient expertise to tell us how to set up studies.”
Physiogenix hopes to sell its compounds to large pharmaceutical companies once they have gone through several stages of human trials, which could occur in the next two to three years, Curry said. The company now has 10 employees, but could grow to up to 17 employees in the next several years as it takes its compounds through the testing stages.
Like Promentis, Physiogenix plans to raise venture capital funding in the near future. The company hopes to raise both local and out-of-town funds.
“We’d like to do it locally, but when we go out for the larger amounts of money, we will have to go to the coasts,” Curry said. “We’ve been talking to them for a couple of years (out there) and they’ve heard our story. We’ve also gotten to know some VCs from the (testing side).”
Drug testing
Before drugs can be brought to market, they must gain FDA approval following many tests, using human volunteers and animals, that have proven the drugs’ safety and effectiveness.
Physiogenix has been operating as a contract research organization (CRO), performing pre-clinical drug testing for new treatments for metabolic disorders such as diabetes, obesity and hypertension, since 2000. Physiogenix does not test any substances on humans.
“We can test ‘does it work?’ as well as how (the compound) is metabolized and how it is excreted from the body,” Curry said. “Our founders are experts in renal physiology and genetics experts, so we’ve been able to match up the tests, the research model and do the studies.”
West Bend-based Spaulding Clinical Research opened about one year ago in the shuttered 200,000-square-foot former St. Joseph Community Hospital building in West Bend. The company has gotten its start with Spaulding’s own finances, as well as a $2 million investment raised with the help of BizStarts Milwaukee, a local nonprofit firm dedicated to connecting startup companies with angel, venture and other growth capital.
Unlike Physiogenix, which does pre-clinical testing, Spaulding Clinical performs phase one human trials. Phase one trials are the earliest human trials and are designed to make sure that the drug is safe for human consumption, said Randy Spaulding, founder and CEO of the company.
“Phase one is all about safety and does little on the effectiveness,” he said. “Before the FDA will let you test (a drug) on sick people, you have to be sure it’s safe in healthy people.”
Spaulding’s services are relatively new in the drug testing field – the company specializes in testing the effects of a drug on a patient’s heart and cardiovascular system.
“In the 1990s and early 2000s there were drugs on the market that did wonderful things and the FDA had approved them as safe, but the data said they weren’t doing their homework on their effects on the heart,” Spaulding said.
After problems emerged with FDA-approved drugs like Vioxx and Celebrex, the FDA received significant criticism and responded by strongly recommending extensive cardio safety testing for new drugs. Spaulding and several former colleagues saw an opportunity.
Today, Spaulding Clinical occupies about 60,000 square feet of the former hospital in West Bend and has 48 beds for volunteers. This summer, the company will build-out room for another 48 volunteer patient beds in about 40,000 square feet. By summer 2010, it plans to have room for about 200 volunteer patients.
The company now has 21 full time employees and about 40 part-time workers. By the end of summer, it will have 25 to 26 full time employees and 50 to 60 part time, Spaulding said.
Volunteer patients, who are paid for their participation in clinical studies, stay at the facility for several days to several weeks, depending on the study.
Spaulding Clinical purchased the former hospital in April, 2008, but did not land its first client for a clinical trial until this February. Due to a confidentiality agreement, Spaulding was not able to discuss the study, but he did say it required a high degree of sophistication that only a few other testing firms in the world could offer.
“We’ve got a whole different model for how we do it. It’s completely different than what others are doing,” Spaulding said. “We’re working with a number of other pharma firms on some big deals. We’re jumping right to the top of the market in terms of expertise.”
Region’s emerging biotech industry
The three developing sectors of the pharmaceutical industry that are emerging in metro Milwaukee will eventually be part of the biotechnology industry that the state and region need for future job and economic growth, Sheeley said.
“In Milwaukee there is an evolution going on (in the biotech industry),” he said. “It’s going to happen really gradually – it’s like the evolution of biological organisms.”
Other developments within the industry, especially among the companies formed to create new drugs, show that evolution is speeding up.
“We’re in a really tough field, kind of competing with Silicon Valley,” Curry said. “A lot of us are helping each other out more, calling each other more, asking for referrals and telling each other best practices. We’re starting to get some momentum to work together. That’s really the only way we’re going to make it.”
The industry’s evolution could speed up even more with a “cataclysmic event” similar to an asteroid smashing into the Earth, Sheeley said.
“Milwaukee could use a ‘cataclysmic event’ similar to what allowed humans to develop,” he said. “That would be a big (pharma) company locating or building a facility here. And that company would need high tech suppliers and everything related to the industry.”
