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Sagent buys full control of China plant

Consolidation, nature of shortages convince it to open first manufacturing plant
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Sagent Pharmaceuticals ($SGNT) went the partnership route in China so it could lean on an experienced Chinese company to help it get a sterile injectables manufacturing plant built and approved there. The foundation of Sagent's model is in partnerships, but drug shortages and industry consolidation are changing the nature of the business and the U.S. company decided it wanted complete control of the $50 million plant, its first foray into owning a facility.

"We sometimes need to be able to change our production forecast on a dime to get partners the products they need, and vertical integration allows us to do that," CEO Jeffrey M. Yordon said Monday in telephone interview.

To nail that down, the Schaumburg, IL-based Sagent will pay its partner, Chengdu Kanghong Pharmaceuticals, $25 million to get the 50% interest in the 300,000-square-foot, FDA-approved facility in Chengdu it does not currently own. Sagent will make payments through September 2015, when Kanghong Sagent (Chengdu) Pharmaceutical Corp. will become a wholly-owned subsidiary of Sagent, the company said Monday. The plant received its Establishment Inspection Report last week and should be manufacturing product later this year. The news came the same day the rapidly growing generic drugmaker reported first-quarter earnings of $9.8 million on revenues of $60.2 million, up 57% from the same quarter a year ago.

Yordon said Sagent expects 80% of its production needs to be continued to be filled by partners, even when the new plant is fully operational. The company has relationships with 48 partners in 23 countries, so it can tap the expertise it requires at any given time. But if any of those relationships change--M&A action has recently altered some of its long-time relationships--the plant will give Sagent flexibility to react. For example, Sagent will be parting ways with Watson Pharmaceuticals after 2014, a result of Watson's merger with Actavis ($ACT), Yordon said.

A second motivation to have its own facility is the nature of drug shortages these days, Yordon said. When a shortage crops up, one client might buy all of Sagent's product on-hand so as not to be caught without a supply if the shortage persists. When that happens, Sagent has to go to the back of the line with its supplier to get more. With a plant, it potentially could just crank up production.

Yordon said the plant in China currently has one "state of the art" isolator filling line, but the facility, as is, has enough space to handle four more lines. The labs and utilities have enough capacity to handle up to 10 lines, and there is plenty of room on the site to grow. The plant, which currently employs 138 workers, is set up to run any type of injectable drug except cephalosporins, beta lactams and penems, which require dedicated manufacturing facilities. The plan is for it to initially manufacture drugs for the U.S. market but eventually to crank out products for China and other high-growth markets. He said the company "scoured the earth" for the right location and decided on China because it could build a plant there that it could never have afforded in the U.S. or Western Europe. "We picked up free land. We were able to negotiate an incredible tax rate and we got some subsidies," Yordon said. "The average sterile injectables facility in the U.S. is over 40 years old. We have a brand new plant with an isolator line that is almost entirely robotic and with tremendous capacity to add to. Compare that with the much older facilities in the U.S. that have consistently been running into regulator problems."

- here's the China release
- here's the earnings release

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