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Amag to embrace outsourcing and close plant to cut costs

By Nick Taylor , 26-Jun-2012

Amag Pharmaceuticals is selling its manufacturing plant and cutting 45 positions as it moves to an outsourced model to save cash.

Last month Amag reported that idle capacity at its production plant in Cambridge, Massachusetts was pushing up the cost of goods sold and the company has now acted to stop the trend. Amag expects to cut 45 positions from its workforce by the end of the year as it outsources manufacturing.

Today's announcement signals a continuation of Amag's transformation into a highly focused, commercially oriented specialty pharmaceutical company,” William Heiden, CEO of Amag, said.

Amag expects to sell the Cambridge pharmaceutical production facility and has inked deals for the contract manufacturing of its oral contrast agent, GastroMark (ferumoxsil). Commercial parties that sell GastroMark in the US and Europe will now also handle production for Amag.

The shift to an outsourced drug production model is expected to lower the cost of goods sold from 2014 onwards. In the near term however, Amag will incur a one-time cost of $1.6m (€1.3m) linked to the outsourcing of production and $1.0m in charges relating to the staff layoffs and facility sale.

Cuts to staffing and infrastructure come after a year in which the Cambridge facility had an excess of idle capacity. In March Amag management said production was ramping up but last month yet again reported low capacity utilisation.

Our cost of goods sold were slightly higher than we anticipated at the beginning of the year as we had greater idle capacity than expected in our Cambridge, Massachusetts facility in the first quarter,” Scott Holmes, chief accounting officer at Amag, told investors after first quarter results last month.

Cuts follow cuts

The presence of idle capacity in 2011 was attributed to preparing the site to manufacture product for sale outside the US. This preparation, Amag said, led to fewer batches being produced at the facility.

Amag expected output to increase – and began working with a third-party manufacturer – but has now decided to sell the plant and cut its headcount. The decision comes seven months after Amag began reducing staffing levels by 25 per cent.

After making the cuts in November, Frank Thomas, then interim-CEO of Amag, said: “It became clear that the company was structured to support a much larger revenue base. The reduction in headcount is substantial but targeted.”

Weak sales also drove Amag to pursue a merger with Allos Therapeutics and – after shareholders shot down the deal – hire Jefferies & Company to look into the sale of the firm and other options.

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