Gil Y. Roth11.14.11
I contacted Aptuit Inc. in August to ask about the company’s sale of its clinical trial services business to Catalent and what it meant for the future of the company. The result was a lengthy and engaging conversation with Aptuit chairman and chief executive officer Timothy C. Tyson. With nearly 30 years of experience in pharma, including tenures at GlaxoSmithKline and Bristol-Myers Squibb, Mr. Tyson can offer up a long-term perspective on outsourcing trends.
It was clear from our talk that he’s ruminated about the industry’s outsourcing cycles and how Aptuit is going to ride the next major wave.
—GYR
Contract Pharma: What led to Aptuit’s decision to sell its clinical trial services business to Catalent?
Tim Tyson: The business wasn’t up for sale, but there was inbound interest. We had turned down interested parties in the past, but with the current multiples and the type of interest, we decided we would at least look in the marketplace. We received an offer that we felt represented a very good return on the business for our shareholders. We decided it made sense to sell that business to Catalent.
CP: How do you plan to employ the $410 million from the sale?
TT: We’re going to use the proceeds to pay off our debt first. That would leave us with a debt-free company with significant opportunities in the high-growth area of discovery-to-mid-phase-development. Based on those dynamics, we decided to accept the offer. Our debt is significantly lower than $410 million, so we’ll be able to reserve money for acquisitions. We’re always looking for ways to grow the business.
CP: How big was the CTS unit, in terms of annual revenue?
TT: We haven’t disclosed that, as a private company. The purchase price was a little more than 10x EBITDA.
CP: Were other companies vying for this business?
TT: We had a company express interest and we explored the market with other companies.
Market Shape
CP: Do you think we’re looking at more consolidation in CTS and other clinical services? We recently saw Patheon decide to get out of the clinical packaging business, announcing a facility shutdown and declaring that the field required scale to compete.
TT: I think in the overall outsourcing market, from the CMC side, there will be significant consolidation by the end of the decade. It’ll be similar to the wave that occurred in the clinical side in the 1990s. There will be three to five winners holding a fairly substantial position in the CMC space, and then some niche players that provide a needed service in a certain area that’s not critical, or in an area that larger companies decide they don’t need to own.
CP: Where’s Aptuit going to fit in this landscape?
TT: I think we’ll be on the of the players in that discovery-to-mid-phase-development area. As you know, when you get to Phase IIb and Phase III you’re doing registration trials and those need to be done — well, they ought to be done — in the facility where commercial manufacture is going to be done. That’s because of tech transfer requirements and Critical Path items necessary for launch, so it makes sense to have development done in facilities where commercial manufacturing is going to be done. From our standpoint, we’re focusing more on the discovery and development work, before that registration area.
CP: How are you reacting to late-stage companies that are adding earlier-phase services, in an attempt at capturing clients near the beginning of the chain and carrying through all the way to commercialization? It would seem to be an attempt at leap-frogging companies like yours.
TT: My belief is that you’ll see a bifurcated market. There’ll be the early and mid-stage development to commercial stage, because that’s how the market is looking at buying things. Right now, that’s how the market is trying to buy, and so that’s how some providers are reacting.
The late-stage discovery and early-stage development people are focused on science-based activities: formulation development, physical form characteristics and characterization, and analytical methods development. The later stage people are focused on efficiency and getting product out to patients.
I think over time we’ll see focus on two areas. Some companies will focus on that late-discovery-to-commercialization arc.
Time Frames
CP: How long have you been in the industry? You have an awfully long-term perspective and an ability to see cycles and waves that I don’t typically experience among executives.
TT: I’ve been in pharma for 30 years. There have been four major outsourced divisions. There was commercial manufacturing, which breaks down into primary and secondary. Primary went through this process in the late 1970’s and early ‘80’s, with about 50% of the market getting outsourced. Secondary manufacturing went in the late ‘80’s and early ‘90’s. This was followed by CROs in the early ‘90’s, then Contract Sales Organizations (CSOs) developed in the late ‘90’s.
Now they’re outsourcing the physical form CMC part of development. It’s been evolving as the business has evolved and companies have focused on core competencies. They want variable resources devoted to areas where they can save money, so the services market has grown as a result. I think this is another wave that will follow in that progression, to give companies choices as to whether they want internal capabilities or would rather outsource a significant amount.
CP: Is there a teleology to this? Do you think there’s a reason why CMC is the “final frontier” for outsourcing?
TT: It’s logical, if you consider how the industry sees itself. The pharma industry’s core values are in science, meaning discovery and development. The as-sumption over the years has been that you need to own your development organization for efficiency’s sake, because they contain proprietary information and they enable you to focus your resources on whichever areas you feel are most important.
What companies are finding is that none of that is absolutely necessary. With the incredible pressure on companies’ financial structures, people are finding other ways of doing business. So it’s logical for this to be the last area.
The holy grail has always been discovery, the unit that finds new compounds. Now, many drugs are coming from small biotech and being in-licensed or bought.
CP: So you consider in-licensing to be a de facto form of “discovery outsourcing”?
TT: Absolutely.
Providers of Choice
CP: How significant has Aptuit’s acquisition of GSK’s Verona site, in terms of this outsourcing future you outlined?
TT: We believe Verona is critical to this phase. What’s happened in the past is that outsourcing was focused on late-stage discovery and early development. Smaller and emerging companies would outsource development because they were discovery-focused and didn’t have expertise beyond that.
But now the market is evolving, courtesy of the rationalization going on throughout the pharma industry. Along with reducing their number of facilities and people, these major companies are also reducing their number of suppliers. One company went from 102 suppliers down to three. As you make that shift, it means you’re going to do more work with those remaining three, and those providers need to have integrated capabilities to accomplish that work. Companies that are used to having integrated capability in-house prefer having that integrated model at hand with providers.
Verona gave us the opportunity to have that integrated capability under one roof. Most companies in the outsource space can provide integrated capability, but must go from facility to facility to achieve that. We bought a state-of-the-art facility with highly competent, proven scientists already doing work in the international pharmaceutical space and who understood the integrated process because that’s how they were operating.
CP: There’s also a “provider of choice” partnership with Siena Biosciences connected to the site, correct?
TT: Provider of choice partnerships are the kind we like to have, of course. We have a good relationship with Siena, and they’re a perfect company to partner with: several hundred people, a number of promising molecules, and based in Italy. It’s an example of a strategic partnership to take molecules through integrated activities based on success.
CP: Are there other public relationships like that one?
TT: No. There are a number of other companies with whom we have a strong partnership, and others with whom we have ongoing contracts. We’ll focus on developing strategic relationships, as they’re going to be key to the future.
CP: We’ve seen several preferred provider announcements on the CRO side recently. Do you think they’ll also become prominent in your area? What form will they take?
TT: Absolutely. Major companies are looking for strategic partnerships and also niche areas. It’s largely out of necessity. If you divest half of your facilities and take 15,000 people out of a 30,000-person organization, but keep much of your pipeline, then you’re going to have to outsource some of that work.
Multiplication Tables
CP: When pharma companies slash their R&D budgets, how much of that do you consider to be “R&D fat”, in terms of fixed costs? That is, to what extent are R&D rationalizations an endorsement of the notion of an “outsourcing multiplier,” in which variable dollars go a lot further than fixed dollars?
TT: I believe that multiplier exists. The future of the industry will always be innovation. However you get the innovation — whether you outsource/in-license, develop it yourself, discover it and have others help with the process — there’s going to be a continued focus on new molecules, new formulations and new processes.
I believe there’ll be a reduction in overall R&D spend, but it will result from a focus on efficiency. Even with all the activity we’ve had, all the progress, the mapping of the genome and the like, most discovery work is still serendipity. So you still have to have a “shots on goal” mentality. To have success, you can’t just pick one and hope it gets through. You have to pick 10 or 20 and hope one (and maybe more) make it.
Within the big companies, there are still going to be pipelines of 150 to 200 molecules, and some of them will be outsourced.
CP: When I interviewed someone at Lilly R&D recently, she mentioned that the company has moved from “shots on goal” to “shots in goal.”
TT: I think Lilly does a great job with this, but the reality is that luck has to play a role. We all want the shots to go in the goal, but the question is, how do you get ‘em there?
I’ve been in this industry 30 years, as I said. In 1990, the goal was two New Chemical Entities each year, by increasing R&D efficiency. Unfortunately, it still comes down to serendipity.
CP: Are there other investments Aptuit is looking to make?
TT: We’ll be looking at adding to the capability to go from lead optimization to mid-phase development — perhaps adding some broader sterile capability — and supplementing some of the spaces where we might be light. It’s mainly a matter of capacity. We have strengths in a number of phases and areas: analytical development, solid-state chemistry, toxicology and metabolism, formulation development, API medicinal chemistry. We could add capacity in those areas, as well as the high-potency product management space.
And we’re also opportunistic. You can focus on something, but occasionally something will drop in your lap and have to make decisions.
Gil Roth has been the editor of Contract Pharma since its debut in 1999. He can be reached at gil@rodpub.com.
It was clear from our talk that he’s ruminated about the industry’s outsourcing cycles and how Aptuit is going to ride the next major wave.
—GYR
Contract Pharma: What led to Aptuit’s decision to sell its clinical trial services business to Catalent?
Tim Tyson: The business wasn’t up for sale, but there was inbound interest. We had turned down interested parties in the past, but with the current multiples and the type of interest, we decided we would at least look in the marketplace. We received an offer that we felt represented a very good return on the business for our shareholders. We decided it made sense to sell that business to Catalent.
CP: How do you plan to employ the $410 million from the sale?
TT: We’re going to use the proceeds to pay off our debt first. That would leave us with a debt-free company with significant opportunities in the high-growth area of discovery-to-mid-phase-development. Based on those dynamics, we decided to accept the offer. Our debt is significantly lower than $410 million, so we’ll be able to reserve money for acquisitions. We’re always looking for ways to grow the business.
CP: How big was the CTS unit, in terms of annual revenue?
TT: We haven’t disclosed that, as a private company. The purchase price was a little more than 10x EBITDA.
CP: Were other companies vying for this business?
TT: We had a company express interest and we explored the market with other companies.
Market Shape
CP: Do you think we’re looking at more consolidation in CTS and other clinical services? We recently saw Patheon decide to get out of the clinical packaging business, announcing a facility shutdown and declaring that the field required scale to compete.
TT: I think in the overall outsourcing market, from the CMC side, there will be significant consolidation by the end of the decade. It’ll be similar to the wave that occurred in the clinical side in the 1990s. There will be three to five winners holding a fairly substantial position in the CMC space, and then some niche players that provide a needed service in a certain area that’s not critical, or in an area that larger companies decide they don’t need to own.
CP: Where’s Aptuit going to fit in this landscape?
TT: I think we’ll be on the of the players in that discovery-to-mid-phase-development area. As you know, when you get to Phase IIb and Phase III you’re doing registration trials and those need to be done — well, they ought to be done — in the facility where commercial manufacture is going to be done. That’s because of tech transfer requirements and Critical Path items necessary for launch, so it makes sense to have development done in facilities where commercial manufacturing is going to be done. From our standpoint, we’re focusing more on the discovery and development work, before that registration area.
CP: How are you reacting to late-stage companies that are adding earlier-phase services, in an attempt at capturing clients near the beginning of the chain and carrying through all the way to commercialization? It would seem to be an attempt at leap-frogging companies like yours.
TT: My belief is that you’ll see a bifurcated market. There’ll be the early and mid-stage development to commercial stage, because that’s how the market is looking at buying things. Right now, that’s how the market is trying to buy, and so that’s how some providers are reacting.
The late-stage discovery and early-stage development people are focused on science-based activities: formulation development, physical form characteristics and characterization, and analytical methods development. The later stage people are focused on efficiency and getting product out to patients.
I think over time we’ll see focus on two areas. Some companies will focus on that late-discovery-to-commercialization arc.
Time Frames
CP: How long have you been in the industry? You have an awfully long-term perspective and an ability to see cycles and waves that I don’t typically experience among executives.
TT: I’ve been in pharma for 30 years. There have been four major outsourced divisions. There was commercial manufacturing, which breaks down into primary and secondary. Primary went through this process in the late 1970’s and early ‘80’s, with about 50% of the market getting outsourced. Secondary manufacturing went in the late ‘80’s and early ‘90’s. This was followed by CROs in the early ‘90’s, then Contract Sales Organizations (CSOs) developed in the late ‘90’s.
Now they’re outsourcing the physical form CMC part of development. It’s been evolving as the business has evolved and companies have focused on core competencies. They want variable resources devoted to areas where they can save money, so the services market has grown as a result. I think this is another wave that will follow in that progression, to give companies choices as to whether they want internal capabilities or would rather outsource a significant amount.
CP: Is there a teleology to this? Do you think there’s a reason why CMC is the “final frontier” for outsourcing?
TT: It’s logical, if you consider how the industry sees itself. The pharma industry’s core values are in science, meaning discovery and development. The as-sumption over the years has been that you need to own your development organization for efficiency’s sake, because they contain proprietary information and they enable you to focus your resources on whichever areas you feel are most important.
What companies are finding is that none of that is absolutely necessary. With the incredible pressure on companies’ financial structures, people are finding other ways of doing business. So it’s logical for this to be the last area.
The holy grail has always been discovery, the unit that finds new compounds. Now, many drugs are coming from small biotech and being in-licensed or bought.
CP: So you consider in-licensing to be a de facto form of “discovery outsourcing”?
TT: Absolutely.
Providers of Choice
CP: How significant has Aptuit’s acquisition of GSK’s Verona site, in terms of this outsourcing future you outlined?
TT: We believe Verona is critical to this phase. What’s happened in the past is that outsourcing was focused on late-stage discovery and early development. Smaller and emerging companies would outsource development because they were discovery-focused and didn’t have expertise beyond that.
But now the market is evolving, courtesy of the rationalization going on throughout the pharma industry. Along with reducing their number of facilities and people, these major companies are also reducing their number of suppliers. One company went from 102 suppliers down to three. As you make that shift, it means you’re going to do more work with those remaining three, and those providers need to have integrated capabilities to accomplish that work. Companies that are used to having integrated capability in-house prefer having that integrated model at hand with providers.
Verona gave us the opportunity to have that integrated capability under one roof. Most companies in the outsource space can provide integrated capability, but must go from facility to facility to achieve that. We bought a state-of-the-art facility with highly competent, proven scientists already doing work in the international pharmaceutical space and who understood the integrated process because that’s how they were operating.
CP: There’s also a “provider of choice” partnership with Siena Biosciences connected to the site, correct?
TT: Provider of choice partnerships are the kind we like to have, of course. We have a good relationship with Siena, and they’re a perfect company to partner with: several hundred people, a number of promising molecules, and based in Italy. It’s an example of a strategic partnership to take molecules through integrated activities based on success.
CP: Are there other public relationships like that one?
TT: No. There are a number of other companies with whom we have a strong partnership, and others with whom we have ongoing contracts. We’ll focus on developing strategic relationships, as they’re going to be key to the future.
CP: We’ve seen several preferred provider announcements on the CRO side recently. Do you think they’ll also become prominent in your area? What form will they take?
TT: Absolutely. Major companies are looking for strategic partnerships and also niche areas. It’s largely out of necessity. If you divest half of your facilities and take 15,000 people out of a 30,000-person organization, but keep much of your pipeline, then you’re going to have to outsource some of that work.
Multiplication Tables
CP: When pharma companies slash their R&D budgets, how much of that do you consider to be “R&D fat”, in terms of fixed costs? That is, to what extent are R&D rationalizations an endorsement of the notion of an “outsourcing multiplier,” in which variable dollars go a lot further than fixed dollars?
TT: I believe that multiplier exists. The future of the industry will always be innovation. However you get the innovation — whether you outsource/in-license, develop it yourself, discover it and have others help with the process — there’s going to be a continued focus on new molecules, new formulations and new processes.
I believe there’ll be a reduction in overall R&D spend, but it will result from a focus on efficiency. Even with all the activity we’ve had, all the progress, the mapping of the genome and the like, most discovery work is still serendipity. So you still have to have a “shots on goal” mentality. To have success, you can’t just pick one and hope it gets through. You have to pick 10 or 20 and hope one (and maybe more) make it.
Within the big companies, there are still going to be pipelines of 150 to 200 molecules, and some of them will be outsourced.
CP: When I interviewed someone at Lilly R&D recently, she mentioned that the company has moved from “shots on goal” to “shots in goal.”
TT: I think Lilly does a great job with this, but the reality is that luck has to play a role. We all want the shots to go in the goal, but the question is, how do you get ‘em there?
I’ve been in this industry 30 years, as I said. In 1990, the goal was two New Chemical Entities each year, by increasing R&D efficiency. Unfortunately, it still comes down to serendipity.
CP: Are there other investments Aptuit is looking to make?
TT: We’ll be looking at adding to the capability to go from lead optimization to mid-phase development — perhaps adding some broader sterile capability — and supplementing some of the spaces where we might be light. It’s mainly a matter of capacity. We have strengths in a number of phases and areas: analytical development, solid-state chemistry, toxicology and metabolism, formulation development, API medicinal chemistry. We could add capacity in those areas, as well as the high-potency product management space.
And we’re also opportunistic. You can focus on something, but occasionally something will drop in your lap and have to make decisions.
Gil Roth has been the editor of Contract Pharma since its debut in 1999. He can be reached at gil@rodpub.com.