Pharmaceutical Commerce - November/December 2016 - 12


Business/Finance

A conversation with

Jim Mullen,
Patheon

Patheon is one of the leading contract development and
manufacturing organizations (CDMOs) in the world, having
come together through a merger of the same-named company
(at the time privately held by JLL Partners) and the pharma
manufacturing assets of Royal DSM N.V. in 2014. This past
summer, it had a successful IPO, returning to the public-capital
market and currently has a market value of around $4 billion. Both before and after the IPO, it has held discussions to acquire additional
manufacturing sites; there are 24 sites in North America, Europe and Asia currently.
Jim Mullen, CEO, joined the company in 2011, coming from the CEO position of Biogen Idec, and SmithKline before that. Pharmaceutical
Commerce sat down with Jim to learn about the outlook for contract services to pharma; here's what he had to say.

1

Patheon has recently successfully completed an IPO,
becoming a publicly traded company again. What
can you say about the IPO process, and what should
Patheon clients expect from the company as a result?

There were two primary purposes for the IPO: First,
as we get larger and have more strategic conversations
with the large pharma companies, having transparency
of financial health is increasingly important to those
customers. Second, we still have significant ownership
represented by the private equity firm JLL and by Royal
DSM, which contributed significant assets to the company a
couple of years ago. Both companies view this as a financial
investment-that's what private equity does-but also for
Royal DSM, they need a pathway over time to monetize
this asset. A tertiary benefit is simply the capital that is now
available: we have been acquisitive in the past and we intend
to continue to be acquisitive going forward. Being public
gives us one more tool toward that end.
There was some luck in the timing of going public; in
theory we were ready to go last fall, but it was a horrible
environment, and not much better in Q1-Q2 this year. But
this summer, we had the kind of company that investors
were more comfortable with-there are earnings, there's
growth and a valuation that will trade on fundamentals
such as earnings per share.
We started the process a while ago, educating potential
investors about our story. The good news is, most of the
people we were talking to understood that this story was
not brand-new and were able to get their arms around it.
We were met with enthusiasm; in the end our book was
oversubscribed 12X, and that led to a successful IPO.

2

What is that 'story?' How does Patheon position
itself in the industry today and going forward?

Our contention is that there ought to be bigger
players in the pharma development and manufacturing
space. One of the things that has hindered the industry
growth of CMO space is that very few companies have the

necessary breadth of offerings and scale. When we talk to
customers, whether the big guys or the medium guys, a
common refrain is, "My supply chains are too complicated
and getting too hard to manage. I'd like to consolidate
my supplier base." But these customers run into a math
problem: there are not enough big guys. We think two or
three companies need to emerge out of today's environment.
We're one of the bigger players, and we think the industry is
at a tipping point. With the right kind of scale, pharma
companies can now engage in a more strategic conversation
about where they are going with their supply chains. In
2011, when I came to the industry, all the conversations
were very transactional-product-by-product. Now it will
make more sense to have a strategic conversation.
The legacy of the pharma industry is that it was a very
vertically integrated business; outsourcing was a relatively
new concept to the industry, although most of today's
companies are quite experienced now. So it's time to look
at the pipelines that pharma companies are working on
today and what will be required to commercialize their
products. The future doesn't look like the past, and
internal manufacturing networks are going to have to be
significantly modified over the next number of years.
Second, the industry is seeing more pricing pressure and
more pressure on the entire P&L statement-return on
capital from manufacturing assets is about zero. Pharma
doesn't get paid for their manufacturing assets; they get
paid for IP, clinical insights and great commercial capability.
What I call an 'asset heavy' model is moving toward an 'asset
light' model that is more capital efficient. Being asset heavy
is what we have to be-that's our business model-but
do these guys really need the heavy assets that they have
beyond R&D?
Here's the big-picture perspective: our industry is
around $40 billion today, very fragmented with many
specialized players, and most successful companies growing
in the low single digits. Our breadth of services is relevant
to about $30 billion of that market. The contract research

12 Visit our website at www.PharmaceuticalCommerce.com November | December 2016

organization (CRO) space is about the same scale, with the
leading players each owning 10-15% share of the market.
Our long-term goal, if you will, is to be at that scale, which
is 2-3 times what we are now.

3

If at least some of that growth will come through
acquisition, what assets are you looking for now?

We have done technology acquisitions to fill
in our portfolio. One area of interest is small molecule
formulation and production. It's pretty clear that a
majority of products coming through pipelines will require
specialized formulation technology. There are not too many
simple white pills that you granulate, blend, compress
and take to market. Having a full suite of formulation
technologies is essential, so we've filled that in.
In biologics, we're one of a few companies that runs
every platform that's used in biotech-perfusion, batch fed,
a variety of formats, we have made strategic investments
in this area. Biologics pipelines continue to increase both
in absolute numbers and as a percentage of pipeline. And
the sterile or aseptically filled parenteral products market
is very tight. We continue to invest in our own facilities,
but if we could find another parenteral or biologics facility
that's high quality, we'd be interested. Geographically, we're
strong in North America in oral solids, while in Europe we
are not so strong in oral solid dose capacity. We'd like to
expand our footprint in Europe.

4

Patheon has an unusual range of clients,
from Big Pharma to small biotech startups.
What can you say about the complexity of
handling such a wide range-and globally-of clients
successfully? What are the problems of working with
emerging companies as opposed to established ones?
What's the typical onboarding process for a client?

Our clients range from Big Pharma to small startups,
but there is a common theme to the onboarding process:
tech transfer. While we have every one of the Top 20 firms


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Table of Contents for the Digital Edition of Pharmaceutical Commerce - November/December 2016

Table of Contents
Pharmaceutical Commerce - November/December 2016 - Cover1
Pharmaceutical Commerce - November/December 2016 - Cover2
Pharmaceutical Commerce - November/December 2016 - Table of Contents
Pharmaceutical Commerce - November/December 2016 - 4
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Pharmaceutical Commerce - November/December 2016 - Cover4
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