If you work in the pharma industry, you know the name Catalent. If you have a medicine cabinet at home, you’ve probably taken one of the drugs they’ve made.

Catalent Pharma Solutions is one of the industry’s largest global providers of drug delivery technology and development solutions for drugs, biologics and consumer health products. Headquartered in Somerset, NJ, it operates 35 locations across five continents and makes more than 70 billion doses annually for nearly 7,000 customer products—one in every 20 doses taken each year by patients and consumers around the world.

This year marks the 10th Anniversary of the Catalent brand, which was originally created through a series of acquisitions by Cardinal Health. In 2014 the company went public and is listed on the New York Stock Exchange.

Today Catalent boasts its ability to increase customers’ speed to market and its participation in nearly half of new drug entities approved by the FDA in the last decade. It currently holds approximately 1,100 patents and patent applications in advanced delivery, drug and biologics formulation, and manufacturing. Customers include 85 of the top 100 branded drug marketers, 23 of the top 25 generics marketers, 23 of the top 25 biologics marketers, and 22 of the top 25 consumer health marketers globally.

As the company continues to expand its offerings through investments in emerging technologies, M&A has also been an important part of its growth strategy, evidenced by the recent $950 million deal to buy Cook Pharmica.

In 2009 John Chiminski stepped into the chief executive role after spending 20-years at GE Healthcare. He’s led the company ever since, watching the company grow as the industry continues to evolve and change. He was kind enough recently to sit down with Contract Pharma and talk about the company as well as industry trends and challenges.

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Contract Pharma: In terms of outsourcing in general how do you see the health of the market for finished dose form production?
John Chiminski: The marketplace for finished dosage forms and pharmaceutical services is extremely robust. Pipelines have increased significantly. Ten years ago we had the first wave of genericization and the pharmaceutical industry had to deal with rightsizing facilities and their R&D budgets to make up for the genericization that was happening. It took literally billions of contribution margin dollars out of their pockets. I think there was a little bit of a re-orienting over that period. Since then it’s just kind of more robust. If you look at the R&D pipelines over the past five years it is basically up 50 percent.

Also, if you look at the number of molecules in the pipeline it’s certainly gone up from roughly 8,500 molecules five years ago compared to right now where there are about 12,000 molecules in the pipeline. With this many more molecules in the pipeline, it allows for a lot more shots on goal to get products approved and get them to the marketplace.

The other thing is right now the biologics market just continues to grow extremely aggressively. If you look at the proportion of products that are in the pipeline, today about 60 percent are small molecule and 40 percent are large molecule. Over the next five years or so, that’s going to flip to 40 percent small molecule and 60 percent large molecule. That doesn’t mean the death of the small molecule, which is itself extremely robust, because again pipelines have grown 50 percent. You’re still having small molecules grow aggressively but now you also have the large molecule growing pretty aggressively too.

CP: On the heels of the deal to buy Cook, the large molecule space is something that is obviously very big on Catalent’s agenda.
JC: It’s a big strategic push for us, which led to the deal to acquire Cook Pharmica for $950 million in September to expand our capabilities. The combined biologics development, biomanufacturing and fill-finish capabilities of Catalent and Cook will provide biopharmaceutical firms with a single, integrated partner supporting a wide range of clinical and commercial needs. Our plan is to invest aggressively at the Cook’s facility in Bloomington, IN, as well as in our rapidly expanding Madison, WI, facility, where we are currently in the process of a $34 million investment, and in the rest of the Catalent Biologics network to build a true global leader in the biologics market and help us to improve the lives of patients around the world.

CP: What appealed to you about Cook as an acquisition target?
JC: What was a great fit for Catalent with Cook Pharmica is that, under one roof, it houses extensive biomanufacturing capacity and deep expertise in sterile formulation and fill/finish across liquid and lyophilized vials, prefilled syringes, and cartridges, augmenting Catalent’s expertise in cell line engineering, bioconjugate development, analytical services, biomanufacturing, prefilled syringe, and blow/fill/seal technologies. We look forward to having the deal completed and welcoming its 750 employees, including its experienced executive team, to Catalent’s existing network of more than 30 sites and our 10,000-team members.

CP: What are some other general trends you see?
JC: Another trend today is we’re seeing a lot of VC-backed small cap companies. In fact, 75 percent of what I think is in the pipeline is mostly coming from these small and mid-sized companies. They don’t have the resources of large pharma and so they’re really looking for someone who can be their partner. Because they’re a virtual company they need the hard assets from a company like Catalent.

These companies are looking to use our formulation expertise and to use our clinical trial supplies. And they’re looking at obviously using our finished dosage form manufacturing of that product if it ultimately gets approved. So we see a much stronger partnership environment that didn’t exist a decade ago. At that time, contract manufacturers were purely contract manufacturers. Companies now are looking for a true partnership that is going to help them in the discovery and formulation phases, and then ultimately hope to help them do the final manufacturing. In fact, that’s a trend that is increasing from a finished dosage form outsourcing standpoint. It’s going to jump from about 30 percent to 40 percent by the year 2020. That’s what our statistics show and that’s a big change.

Another change is Big Pharma, in a very broad sense, is really looking at ways to variablize their costs, and any chance that they can do this by having an external partner is better than investing in a lot of big fixed assets. Because generally, what happens is they get a drug approved, they’ve got a seven to 10-year window of exclusivity and then it’s gone. And you know, as humans you think of seven to 10 years as a long period of time, but it’s really the clock cycle of this industry from discovery to approval. That’s the pace at which it moves. Also, you’ve got up to $2 billion dollars on average being spent per molecule. When you blink in this industry another decade is gone and another slew of molecules has come and the other ones have gone generic. So, to the extent pharma companies can create variable costs instead of having fixed costs is important because fixed assets are 30 to 40-year assets, they’re not 10-year assets.

CP: What is one of the biggest changes you’ve seen in the industry since arriving at Catalent?
JC: I would say pharma companies are really looking at contract manufacturers much more as partners. That’s been the biggest shift in the industry. When I first came to Catalent, we were simply referred to as a ‘contract manufacturer.’ Not in a derogatory way, but it also wasn’t complimentary either. While being labelled a contract manufacturing organization (CMO) is a proper term, the idea is you’re just a third-party manufacturer. You make our stuff. That’s it. I would say the biggest thing that I’ve done from the mindset of our customers and then within our team is to say look, we’re a pharmaceutical services provider. We’re doing formulation, we’re doing development. With our recent acquisition of Pharmatek, we’re also now in the preclinical space, helping customers make fast decisions about whether a molecule is going to stay in the pipeline or be killed.

We have technologies that our customers don’t have, which is ultimately why they’re coming to us. So, they’re really relying on us. We are thought of as a partner and this idea of partnership is what has led the industry to adopt the term contract development and manufacturing organization (CDMO). The “D” is a very important part. If you’re just a pure CMO doing a solid oral dose that a customer can do internally or externally and you just happen to have the capabilities, you’re truly a CMO. In Catalent’s case, our strategy is to capture the molecule from the customer, meaning we partner with you to try to solve the molecule’s problem. This could be solving bioavailability issues, poor solubility, or choosing the right dosage form. How can we help make this be a dosage form that will lead to higher patient compliance? You work on that product with the customer to help them supply it for their clinical phase 1, 2 and 3 trials and then ultimately do the manufacturing. That’s what Catalent does.

CP: When did that shift happen at the company from being a pure contract manufacturer to a CDMO?
JC: It hasn’t been a shift in strategy for Catalent. It’s been an emphasis all along. I’m in my ninth year here as CEO. When I arrived in 2009, Catalent was a series of a dozen or so acquisitions and most of those companies had 30 to 40-year histories. If you took a look at those dozen or so acquisitions their model was to follow the molecule. They had these unique technologies to solve problems, like our Zydis platform, which went into a lot of fantastic products. Within our businesses, we had this model of working with customers in formulating their molecules with their unique dosage forms and taking it to fruition. Our strategy is really in advanced delivery technologies and development. The model we have is to make sure that we have the broadest suite of services that will help us to attract companies to solve problems for their molecules.

CP: The pharma industry has evolved and diversified from the blockbuster era. We’ve seen the rise of virtual companies and specialty companies, the advent of precision medicine driving niche drug products, etc. How have these trends diversified competition amongst service providers?
JC: There are two sides to this from my perspective. On one side, it turns out that the industry wants fewer, bigger and better suppliers. Partners that you know are going to be around for a long time and can endure and meet the increasing regulatory compliance requirements. On the other end, you’ve got a lot of folks that are going into a lot of different specialized areas and there can be even more competition that arises from smaller players with unique offerings. Moving forward we’ll continue to see the creation of smaller specialized providers, manufacturers, and technologies, but you’re also going to have the constant consolidation of those guys with some of the bigger players because they can’t survive in this environment by themselves.

So ultimately in my opinion it comes back to fewer, bigger and better suppliers. That’s the biggest trend with the industry. The regulatory rigor in our space is significant and continues to grow. The regulatory bodies are getting even better at what they do and oversight in the industry requires significant investments by companies, both in terms of people and processes, equipment, and facilities, and you can’t do all those things as a small company.

At Catalent we’re spending 7-8 percent of our topline on CapEx. We’re going to spend more than $135 million in CapEx this year alone. These are mega-projects. Some of them are for compliance, some of them are for expansion,.

CP: From your perspective as a business leader, what does the industry need to be doing better?
JC: I’ve been in the industry for about 10 years now and from my vantage point I would say that, first and foremost, the cost of developing drugs is just too expensive. I don’t know what the latest number is. It might be up to $1.7 billion per drug if you look at drugs approved compared to the R&D budgets. But it’s just way too expensive for those drugs to be developed. I think what the industry has got to do better is to be able to focus on the highest probability molecules for success against the most important disease states. I think they’re getting better at that because they do talk about “fail fast” and getting to a “go” or “no go” as fast as they can. We learned through our Pharmatek acquisition that a big part of why customers come to them in the preclinical phase is they want a “go/no go” on a molecule. Can it be formulated? Is it a molecule that’s going to survive? So I think cost is the biggest thing with the industry where there’s got to be constant improvement.

The other thing is the industry is getting a lot better at becoming less insular. If you look at the pharmaceutical companies over the last couple of decades that have excellent resources and a lot of pride in what they do. The problem traditionally is they’re not willing to look at other models or believe that other people could also have good ideas.
I think that’s where the industry is changing. Pharma is coming to companies like Catalent and other service providers who have people that are 25 and 30-year vets of the industry and often times from those pharmaceutical companies. They have good capabilities and good ideas about how to do things better and differently. It’s not just the small and mid-size virtual companies that are looking for hard assets from companies like Catalent. You also have the larger pharma companies looking for more partnerships. I can tell you this because that’s what we see in terms of what comes in the door at Catalent.

CP: Why the change in attitude towards service providers?
JC: In general, over the last 10 years, pharmaceutical services companies have become much more credible partners as our quality, reliability, operational excellence and capability to innovate has improved. We’ve really matured into an industry that is much more credible, which is why you see the outsourcing of finished dosage forms jumping from 30 percent to 40 percent. I also think that pharma has matured with us in terms of certain projects and wanting to improve their performance, whether it’s getting molecules to market faster or variablizing their costs.

Another interesting topic is that the dosage form is really starting to matter much more. If you were to look back 20 years, if you had something that could reduce cardiovascular disease or death rates, I don’t think it mattered what form it came in. But when you look at where we are today, the dosage form really is becoming important. If you look at diabetes, again 20 years ago we were just happy to be providing insulin and to be able to measure people’s blood sugar. Now it’s a matter of “how can I live a normal lifestyle with diabetes.” We now have wearable devices, real-time monitoring of blood sugar, and a lot more auto injectors. One of the big investments that we’re making and will continue to make in our Brussels facility, is in auto injector capability. It’s not just EpiPen kind of stuff. I’m talking about being able to self-administer drugs for a multitude of reasons. There are cardiovascular statin drugs that are going to be injectables and so forth. So again, the dosage form really does matter more.

CP: What makes Catalent unique today?
JC: In many ways, we’re a new product introduction company. This last year we launched over 180 products, as well as the year before. I would say about 40 to 50 of those are in the high value category of prescription or over-the-counter products. The remaining are in the cosmetics and nutritional space. That’s the rhythm by which we’re launching products for our customers and the product launches that we have today are because of molecules that we brought into the business five to seven years ago. In many ways Catalent is a macrocosm of the pharmaceutical and consumer health industry. Between our consumer health, small mid-sized VC biologics, oral technologies, etc., we really have a unique view of the industry and really see a lot.

CP: What can we expect from Catalent moving forward?
JC: There’s growth in every aspect of our business and biologics is an extremely fast growing part of Catalent. Once the deal with Cook is completed, we need to integrate the business into our existing network. It’s an important part of our strategy going forward, but it’s not at the detriment of the rest of our businesses. Today, if you look at our biologics business, it’s basically about 13 percent of our overall revenues. If you look at our specific drug substance and analytical services in the core business, it’s only about 4-5 percent. However, that’s up from 1 percent going back four years ago. We have literally more than tripled our revenues in the focused areas of drug substance and analytical services and that came from significant investments, which we’re going to continue make, starting with the $27 million investment in Madison.

We’re also in the process of another $34 million investment in Madison. We’re putting in a third train and we may be spending upward of $50-100 million over the next two to three years after that to build it up further. The campus in Madison is just booming and has grown significantly. We’re also investing heavily in the analytical space of biologics because you don’t want to just have the drug substance capability, you also need the analytical skills for that, which we do, but we’re investing there even more aggressively.

At the same time our drug delivery solutions business, which is basically all our non-softgel technologies, including our injectables business, has multiple facets that are growing very aggressively. One continues to be the modified release area. A technology area where things are moving much more from instant release to modified release formats. We spent about $50 million in our Winchester facility and we’re in the process of spending about another $20 million filling out additional equipment for the growth we’ve had there. We may spend an additional $30-40 million over the next three years there. That’s a big chunk of change and again in a year we’ll spend more than $135 million of CapEx, or 7-8 percent of turnover.

This is a business where your main growth needs to be organic. Meaning that, we do M&A to help fill out technologies and capabilities that we don’t have, but we are a company that starts with a molecule and then works on it for 7-10-years and hopefully it gets approved. That organic growth model is really what has been the driver for us—that new product introduction culture of the company. For us that also requires significant investment and we will continue to aggressively invest from that standpoint.