English - Siegfried

can tap into our site’s extensive expertise in quality management,scale-up and finishing steps, not to mention safetyand environmental issues, thereby benefiting from substantialeconomies of scale and enhanced reliability. Of course,such a partnership model requires a high degree of trustat all levels of both organizations, something we have beenprivileged to build up with Celgene over the many yearswe have worked together. We are confident that we willhave an opportunity to apply this model again for othercustomers.We are also intent on extending our service offering toglobal pharmaceutical companies that are scaling downtheir chemical capacity. This is partly a response to thefact that large pharmaceutical companies have had fewernew chemical entities approved in the past few yearswhile suffering from a surge in blockbuster drugs goingoff patent. However, this trend also reflects a growingawareness that outsourcing significant portions of theirchemical manufacturing will ultimately improve theirreturn on invested capital. In addition, they recognizethat there are numerous players to choose from andsufficient overcapacity to keep prices in check. In fact,the market for outsourced active pharmaceutical ingre -dients and intermediates is highly fragmented, with thelargest player accounting for only a 5% share.This situation is unlikely to change any time soon becauseLavoisier’s law, “nothing is lost, nothing is gained,all is transformed”, appears to apply not only to chemicalreactions but also to the facilities that trigger them. In 2006a number of our competitors were sold and this trend willcontinue in 2007. Our view is that as owners change andfacilities remain, not all service offerings will be consideredequal. Providers with a record of performance and stabilitywill be recognized as delivering the greatest value to theircustomers because the opportunity cost of a new productdelay, supply shortage or quality problem far exceeds theprice of the actual chemical ingredient.An indicator of the service level we strive to provide ourclients is illustrated by the outcome of the pre-approvalinspections we had with the US Food and Drug AdministrationFDA in 2006. One was held in Pennsville, New Jersey,the other in Zofingen, Switzerland. Both resulted in nowritten observations. This kept chemical manufacturingoff the critical path of our clients’ new drug applications.Our performance is recognized in the marketplace, whichis also indicated by the 15 new development projects wereceived in 2006, a record number for Siegfried.Our success in custom manufacturing has not blinded usto the fact that this is a volatile business, often dependenton factors outside our immediate control. Most newdrugs never make it to market. For the few that do, theinitial volume estimates will probably be wrong. There -fore, in addition to our pipeline of exclusive products, itis important that we continue to build our portfolio ofmulti-client products.Our primary focus in this segment is controlled substances,products subject to tight regulatory control because ofthe risk of diversion. We make a number of such productsin Zofingen. However, such products cannot be importedinto the United States and must be manufactured domestically.In May 2005 we acquired Penick Corporation, therebyallowing us to extend our portfolio to analgesics, in par -ticular, opiate derivatives. Over the past 18 months we havesubmitted a number of drug master files to the FDA andour customers are in the process of updating their drugfilings using our product. As they get FDA approval, we willapply for quotas with the Drug Enforcement Agency andstart shipping products. At the same time, we continue todevelop new products for our portfolio. We consider thisan attractive franchise and intend to build it up steadily overthe coming years.In 2006 our generics dossier business again deliveredstrong results. However, the generics industry is experiencingCorporate Annual Governance Report 11