By Eric Peterson | Nov 29, 2019
Compounded sterile products, pharmaceutical outsourcing
Industry: Bioscience & Medical
Products: Compounding and manufacturing services for hospitals, ophthalmologists, and medical manufacturers
The Leiter family opened a retail pharmacy in California nearly a century ago. The business has since evolved into a cutting-edge manufacturing operation.
"In 1988, it really became focused on patient-specific compounding for the ophthalmology space," says Hoke. "In 2014, the great-grandson of the founder, Chuck Leiter, expanded the operation in San Jose and registered as what is now known as a 503B outsourcing facility. The family sold to longtime healthcare private equity group [Frazier Healthcare Partners] in 2015. That really started the evolution of the company that exists today."
The 2013 Drug Quality and Security Act (DQSA) created a new category of regulated entity: human drug compounding outsourcing facilities, or 503B facilities, and allowed hospitals to outsource production of compounded medications.
"Whenever you have such disruption and change, there's also tremendous opportunity," says Hoke. "I knew that if I could bring a very experienced pharmaceutical team to this compounding and outsourcing space, we would have an opportunity to really start to change a market and bring true quality and safety to an otherwise very challenging marketplace. The reason we exist is because Congress promulgates a new set of regulations and statutes to govern the compounding industry. That had never existed before 2013."
As hospital pharmacies dedicated more resources to patient-specific products, 503Bs stepped in to manufacture larger batches of needed drugs, but that required a diverse set of skills. "Expertise and a different way of thinking, a different mindset, was sorely needed in the space, so that provided an opportunity for myself and the team I brought in," says Hoke.
After a career primarily spent in the legal departments of large medical companies, Hoke joined in late 2016, the same year the longtime San Jose company acquired an existing compounding facility in Englewood. Leiters subsequently built out about 40,000 square feet of the 60,000-square-foot facility to serve the hospital market and moved its headquarters to Colorado.
"Our first commercial product [made in Englewood] was released in July of 2018," says Hoke. "We still operate out of San Jose as well, largely in the ophthalmology space."
Leiters now has less than 20 employees in San Jose."To operate two facilities was much more expensive than continuing to build out and reinvest in one. That facility is the state-of-the-art facility in Englewood," says Hoke. "We will ultimately move the operation and consolidate facilities in Englewood."
The investment in Englewood is largely tied to automation. "In this business, you optimize your efficiency and operation by bringing automation into the facility," says Hoke. "As that has occurred, we've increased our capacities and capabilities, allowing us to create efficiencies by combining both facilities."
Filling syringes and vials is now automated, for example. Equipment providers include M&O Perry and Bausch + Ströbel. With automation, Leiters can fill most syringes at about eight times the rate of the manual method -- about five units a minute versus 40.
"Automation also requires a certain scale," notes Hoke. "Very rarely would a company in our industry go right to automation. It's sort of a stepped process. We started 100 percent manual. As we have grown, as our volume increases, as our batch sizes increase, then you move into automation."
She adds, "That automation -- like any other manufacturing industry -- provides tremendous throughput and a higher degree of safety, because people aren't touching the product." The latter benefit is especially critical at a 503B facility like Leiters, where germ-free hoods, biocontamination systems, and fully validated cleanrooms are the norm.
"We still have a very manual operation as well," adds Hoke "People are very still involved in the processes."
She describes Leiters as "a multidisciplinary business," citing an intersection of employees from hospitals, manufacturers, academia, and pharmacies. More than three quarters of the staff works in production. "It's a highly operationally-driven business," says Hoke.
Another wrinkle is expiration dates of 90 to 180 days, leading to "a very short supply chain," says Hoke. "Customers need these products on a daily basis, and they need to know you're making the product and they're going to expect delivery."
The growth curve under Hoke's watch has been starward: Revenues doubled in 2017 and 2018, and the forecast is similar for 2019. "We expect that to continue -- slightly under doubling -- in 2020 and 2021," she says. "The market is very opportunistic for really safe, quality products."
Hoke says the company should be close to 250 employees by the end of 2020, with most of the growth occurring in Englewood. The company runs two shifts at its Colorado facility and will likely add more in the future.
Challenges: "Although you need all of the capabilities and expertise of a large sterile manufacturing, the challenge is we work in smaller batch sizes. In the traditional manufacturing world, you start one place and you grow and you scale your business. Our business is much smaller," notes Hoke. "How do we operate an efficient business with smaller batch sizes? That was actually an operational challenge, because you still need the same quality, the same testing, all of those functions that a large operation uses, but we have to use it in a smaller operation, which means your cost of goods is obviously higher. "
Another challenge is specific to Colorado operations: "The labor market is challenging," says Hoke. "People are core, and hiring, developing, and maintaining those people is critical to our success."
Opportunities: According to analyst estimates, the annual hospital market for compounded sterile products is about $5 billion in the U.S. As most hospitals still manufacture compounded medications in-house, the 503B market is about $900 million in 2019, with forecasts calling for 6 to 8 percent growth for the next five years. "Hospitals are generally going to be subject to the same rules and regulations that we are," says Hoke, so there benefits to outsourcing manufacturing at a certain scale. "The [503B] folks who have invested in their facilities and their people have a lot of opportunities to provide medicine."
She says Leiters has another opportunity to win business by working with strategic partners. The company currently manufactures for Avanos Medical of Georgia, which makes a non-opioid, pump-based pain management system. "We take the burden off a hospital pharmacy to fill those pumps," says Hoke. "That we believe is a tremendous growth area to us: pain management with the elimination of opioids."
Needs: Hoke cites an immediate need for about 30 more employees. "It's very much across all the different disciplines," says Hoke, citing openings in both the scientific and customer experience sides of the company.