Pharmaceuticals projects are ridiculously attractive: rapidly growing, secure, high-margin work immune to the ups and downs of the business cycle. The only catch is that they’re a “bloody nightmare” to get.
In August, Bovis bought an obscure pharmaceutical engineer/consultant called Tanvec. It has a turnover of only £30m, but Bovis chairman Sir Frank Lampl predicts that it will eventually boost the contractor’s annual profit from pharmaceuticals work to £10m a year – 40% of the group’s current operating profit of £24.1m.

Tanvec could do this because it gives Bovis a vital extra service, and one that its principal rivals for UK pharmaceuticals work – Amec, Shepherd and Kvaerner – already offer. This is its own in-house design and process capability, which will allow it to provide what Bovis Tanvec believes the market is crying out for: total design-and-build solutions.

Amec is similarly focused on the possibilities offered by drugs companies. In particular, the possibility that work with them could alleviate a major headache for the chief executive Peter Mason. Mason recently said in Building (30 July) that pharmaceuticals – already a core activity for the contractor’s UK capital projects division – is likely to be a key growth area for its underperforming US business, Morse Diesel. According to a recent survey carried out by the Financial Times, 42% of all drug sales are in the USA, and 14 of the top 20 pharmaceutical companies are based there.

Drugs: what’s the attraction?

Pharmaceuticals companies are extremely wealthy, and they spend a lot of that money on building laboratories and headquarters.

The UK market really kicked off in the 1990s with massive research facilities by GlaxoWellcome in Stevenage and SmithKline Beecham in Harlow. Since then, most construction work has been in updating facilities. However, a snapshot of the current market would include SmithKline Beecham’s £240m headquarters in Brentford, north London, and Pfizer’s £142m general laboratory, in Sandwich, Kent both now on site. Also, Astra Charnwood has close to £150m in the pipeline, just ahead of Zeneca’s £136m.

Drugs companies build big, expensive facilities, and they are good payers

Kevin Cammack, Merrill Lynch

Not only is the sector large – and growing rapidly – but it has a number of additional attractions for construction companies. One of these is that there is likely to be a slew of work coming up in the short to medium term. As Paul Janssenswillen, director of the international division of Bovis Tanvec, explains: “No pharmaceutical company has more than 8% of the global market, so mergers and acquisitions are the order of the day. Once they merge, they need to build ever bigger research and development and manufacturing facilities, as well as upgrading their old ones.”

Second, there may be an opportunity for more firms to secure a lucrative, long-term workload. Drugs companies tend to work with suppliers they are familiar with anyway, but this could become more formal if GlaxoWellcome’s current experiment with partnering sets a trend (Financial news, page 17). And as most big companies are global, winning work in one country improves firms’ chances of success in others.

Third, it gives contractors a chance to win brownie points with their investors. Not surprisingly, the City is keen for companies to cash in on the never-ending demand for new medicines – not least because that demand is relatively inflexible, which means that work is not subject to the peaks and troughs of traditional contracting.

Finally, as Kevin Cammack, analyst with investment bank Merrill Lynch, points out: “Drugs companies build big, expensive facilities, and they are good payers.”

So, if pharmaceuticals is such a big market with such high rewards, why doesn’t everyone get into it? Well, the barriers to entry are fairly high. “To enter the market from scratch in any serious way would be very difficult,” says Janssenswillen. “It’s very cliquey.”

Pharmaceuticals is a bloody nightmare for a construction company to get into because no one wants to be the first to try someone new

Kevin Thomas, Glaxowellcome

Kevin Thomas, head of strategic planning for UK research and development at GlaxoWellcome, agrees: “It’s a bloody nightmare to get into because no one wants to be the first to try someone new.”

And even when you have got a foothold, there is the stringent regulatory environment to deal with. Nearly every facility has to meet standards set by the industry. You will also need excellent knowledge of the R&D and manufacturing processes – such as the machines that produce tablets and the conveyor belts that transport them.

There is also some risk involved in going to the trouble of making your organisation fit with the client’s preferred procurement route – Bovis’ reason for buying Tanvec. Ron Pearson, technical director of Shepherd, points out that drugs companies can be fickle: “One moment clients are all going along the construction management route, the next they are back to D&B. And it is difficult to influence pharmaceutical clients because they have strong worldwide procurement departments that rule the roost.”

Whatever the current trend, one thing is certain. “The market is changing so fast that clients won’t work with you unless you can add some extra ingredient,” says Phil Brumby, executive director of construction management specialist Woolf.

Five things you’ll need to get work with drugs companies

1 Knowledge of the market. You will need to understand the equipment used in laboratories, as well as the pharmaceutical process. 2 Knowledge of the regulatory environment. Each facility has to meet good manufacturing practice standards. These are set by the industry in order to meet the further standards required by the Food and Drugs Administration in the USA and the European Union’s Medicines Control Agency. Without such approval, products cannot be exported. 3 Technical expertise in “clean-room” engineering. 4 Some relevant experience. Barriers to entry are high and companies are nervous about trying new suppliers. 5 Flair. As experts in supply-chain management, most big drugs firms’ procurement departments demand supplier innovation.