The document is a Q&A with the CEO and COO of Patheon Inc. addressing challenges facing the pharmaceutical industry and Patheon's role in outsourced manufacturing. Key points addressed are:
1) Pharmaceutical companies face high R&D costs and pressure to develop new drugs faster, driving mergers and outsourcing of manufacturing.
2) Outsourcing allows companies to optimize assets, gain efficiency and focus on R&D and marketing.
3) Patheon has established itself as a global leader in outsourced pharmaceutical manufacturing through strategic acquisitions and long-term partnerships with pharmaceutical companies.
1. questions and answers
Q&A
A heightened sense
of urgency is sweeping
the pharmaceutical
industry.
A host of blockbuster drugs are coming off patent. The
cost of R&D is soaring — almost doubling in the past
five years. Pharmaceutical companies, which are under
pressure to maintain and improve on historical growth
rates, are trying to find new drugs and bring them to
market faster.
The industry continues to restructure at an increased
pace, resulting in more review and simplification of
complicated supply chains. In-house manufacturing is
being consolidated around a few strategic units. And
outsourcing is becoming a viable alternative.
What are the challenges facing pharmaceutical
companies in this new economy?
What role does outsourcing play in pharma’s
strategic plans?
Why is Patheon poised to emerge as the global leader
in outsourced pharmaceutical manufacturing?
ROBERT C. TEDFORD, CHIEF EXECUTIVE OFFICER, AND
N I C K A . D I P I E T RO , P R E S I D E N T A N D C H I E F O P E R AT I N G
OFFICER, RESPOND TO THESE AND OTHER QUESTIONS.
PATHEON INC. 11
2. "Patheon thinks like a pharmaceu- "Vendors such as Patheon... have
tical company. They have estab- achieved a size that makes them
lished themselves as an integrated credible partners for pharmaceuti-
supplier of development and man- cal companies for dosage form
ufacturing services. They are totally production."
committed to their customers — DR. ENRICO POL ASTRO, SR., INDUSTRY
an attitude that permeates the S P E C I A L I S T A N D V P, A R T H U R
whole organization." D. LITTLE, BRUSSELS,
DR. JOE BLAKER, ADVISOR, CHEMICAL MARKET REPORTER,
PAT H E O N I N C . , A N D F O R M E R S E N I O R SEPTEMBER 27, 1999.
MANUFACTURING
EXECUTIVE WITH "A fully-integrated service provider
GLAXO WELLCOME. can speed the drug development
process, reduce the need for in-
house product development and
managerial experience, and facili-
tate regulatory activities."
D R . S H A B B I R T. A N I K , V I C E - P R E S I D E N T,
SCIENTIFIC AFFAIRS AND GLOBAL PDS
O P E R AT I O N S , PAT H E O N I N C .
Q What are the challenges facing pharmaceutical companies in this
new economy?
A In a nutshell, it is the huge cost of discovering and developing new drugs so as to satisfy demand for value cre-
ation by the financial markets. This is driving the merger mania that we are seeing in the industry. Companies
need critical mass to fund the accelerating costs of R&D, keep the drug development pipelines flowing and meet
their financial objectives.
Q What role does outsourcing play in phar ma's strategic plans?
A Pharmaceutical companies are reassessing their asset bases and implementing measures to improve the high
inefficiencies within their operating networks. By disposing of underutilized facilities and entering into part-
What
Q
nerships with suppliers like Patheon, these companies gain competitive advantage and optimize their overall
economic value created.
W h y i s Pa t h e o n p o i s e d t o e m e r g e a s t h e g l o b a l l e a d e r i n o u t s o u r c e d
pharmaceutical manufacturing?
A The industry is now ready to outsource more of their dosage form manufacturing. They are looking for partners
with critical mass and breadth, a global reach, guaranteed product quality and absolute reliability in terms of
delivery. They are looking to forge partnerships with suppliers that think like pharmaceutical companies and can
act as extensions of their own operations. Patheon has created such an organization, one that is capable of serving
as a credible partner to the pharmaceutical industry.
PATHEON INC. 12
3. questions and answers
"Until very recently, pharmaceutical "...Patheon is following a tried and
companies kept their dosage form true model that has worked suc-
manufacturing in-house so as to cessfully both within and outside
maintain control over quality and the pharmaceutical industry... buy
availability of product. But now existing, underutilized facilities
they are increasingly incorporating with an experienced workforce at
outsourcing in their business a discount price, get long-term
strategies so as to limit their capital contracts to continue manufacturing
investments, increase manufactur- products already at the facility, and
ing efficiencies and reallocate acquire new business to fill the
resources to R&D and marketing." facility and replace old business
ALDO BRACA, GENERAL MANAGER — when contracts expire..."
E U RO P E A N O P E R AT I O N S , JIM MILLER, PUBLISHER,
PAT H E O N I N C . BIO/PHARMACEUTICAL OUTSOURCING
R E P O R T, J A N U A R Y 2 0 0 0 .
How
Q Who is your competition?
A Our biggest competition is the pharmaceutical industry itself. Some large industry players like Pharmacia
& Upjohn, Abbott Laboratories and Schering-Plough are still actively pursuing opportunities to provide
manufacturing outsourcing services to third parties as they attempt to fill excess capacity.
In the U.S., Catalytica Pharmaceuticals, Inc. is a large publicly-owned contract manufacturer that competes
with us in the dosage manufacturing segment. There are also a large number of privately-owned companies
providing a limited range of capabilities and capacity.
Why
In Europe, the competitive landscape is also highly fragmented and almost wholly in the hands of private firms.
Few competitors provide services in more than one European country, and we don't know of any service com-
panies providing manufacturing in both North America and Europe as Patheon does.
Q Price/earnings multiples of clinical research organizations (CROs)
declined significantly in 1999. Given that you are a closely related
o u t s o u r c i n g p l a y, w h y s h o u l d Pa t h e o n s h a r e s c o n t i n u e t o t r a d e
at a premium valuation relative to those of CROs?
A We think that the growth prospects of manufacturing outsourcing and the greater certainty of revenue streams
from long-term contracts for the production of pharmaceuticals are significant factors to be considered in assessing
Patheon's prospects.
PATHEON INC. 13
4. Q I n o r d e r f o r Pa t h e o n t o b e c o m e i n c r e a s i n g l y p r o f i t a b l e , y o u m u s t
increase capacity utilization. What is your track record in this area?
A Since we acquired the Toronto Region Operations (Syntex Court) in January 1997, we have increased capacity
utilization from virtually zero to the 40% to 50% range. In fiscal 1999, we grew commercial manufacturing
revenues in this facility by 42%, and achieved an internal growth rate of 24% for our North American Operations
as a whole.
Q What opportunities do you have to grow the business?
A Growth will come from additional business from both new and existing clients, as well as from the acquisition
of new sites that meet our acquisition criteria.
Subsequent to year-end, we completed our largest acquisitions to date with the purchase of two sites in Europe
from Hoechst Marion Roussel (HMR). The new contracts entered into with HMR with the acquisition of these
sites should generate annual volumes in excess of $100 million over the initial five-year life of the contracts.
We anticipate internal growth rates to be above 20%.
Q D o e s Pa t h e o n h a v e t h e r e s o u r c e s , i n c l u d i n g m a n a g e m e n t d e p t h ,
experienced employees and capital, to handle its rapid growth?
A In the last five years, Patheon's revenues have increased at a compounded annual growth rate (CAGR) of 41%.
Net earnings before unusual items have grown at an annual compounded rate of 52%. We expect our revenues
to double in fiscal 2000, which will increase our five-year CAGR to about 60%. We have carefully developed
a core management group to manage this growth and are adding key executives with extensive experience in
pharmaceutical manufacturing and development activities, experienced marketing, sales and business manage-
ment people and high quality financial talent. We have financed our growth strategy using both public equity
and private debt.
Q What are the most important challenges facing management going
forward ?
We are a services company providing manufacturing and development services to arguably the highest quality
and highest regulated industry in the world. Our challenge is to attract, teach and retain highly trained people
who want to be part of a team delivering these services to the pharmaceutical industry while meeting the quality
and regulatory needs of our clients every step along the way.
PATHEON INC. 14