The Livingston-based company is investing £3m (€4.4m) in the new production facility which will increase manufacturing capacity by 60 per cent.
The new site is expected to be up and running by June 2008.
The company specialises in formulating cytotoxic compounds that are by definition difficult to handle due to their high-potency, Joe Carey, Encap's CEO, told Outsourcing-Pharma.com.
"Lots of pharma companies now develop compounds that require high-containment, and formulating these compounds as liquid or semi solid makes them easier to handle, avoiding contamination with airborne particles for example."
The firm uses its three encapsulation technologies - DuoCap, LayerCap and Abusolve - to formulate sustained release compounds, which can predict and determine when and where in the body the drug will be distributed.
Carey said the competition was not very fierce in Scotland for encapsulation services although there are a few players in the formulation market.
According to Encap, liquid-fill encapsulation is one of the fastest growing sectors of the drug delivery market, increasing at a rate of 10-30 per cent per year.
"The market for encapsulation of liquid or semi-solid formulated compounds is fast growing mainly due to the increasing number of high-containment products and anti-cancer compounds coming through early development which are highly potent and need to be manufactured in a very restricted way," explained Carey.
He said the increasing market for biologicals was also a driver for the business.
Encap's customer base is varied, from small biotechs to established big pharma like AstraZeneca.
AstraZeneca for example has a strong in-house approach for drug discovery and development, said Carey, "but when it comes to non-core activities like manufacturing it relies heavily on outsourcing".
Most of the projects Encap is currently working on are compounds in clinical development.
"But in two to three years, these products will be in late stage clinical development and we will probably then need another facility to cope with the manufacturing requirements."
Carey said Encap will be eyeing the US and in particular the East Coast where most American big pharma are based. The company currently has 90 per cent of European customers versus 10 per cent in the US.
"We have not yet addressed the US market seriously and we are planning to do so in the next couple of years to increase our US customer base," said Carey.
Encap is manufacturing a generic product for a US pharma client and will be soon inspected by the US regulator, the Food and Drug Administration (FDA), to get accreditation.
"The FDA label will definitely give us credibility on the US market."