Executive Interview: Riccardo Trecroce
Patheon learns lessons during restructuring
by Gil Roth
Patheon, a Mississauga, Ontario-based CMO, faced a perfect storm of bad news last year: manufacturing problems and the generic switch of a major product led the company to write down more than $250 million of its $350 million acquisition of MOVA in Puerto Rico. By September 2006, a financial crunch led management to announce it was "seeking strategic alternatives."
Photos courtesy of Patheon
In March 2007, private equity firm JLL Partners invested $138 million in Patheon, and the company was able to renegotiate its debt and begin the restructuring process, which includes exiting the OTC market and selling or closing several sites. I recently spoke with new chief executive officer Riccardo Trecroce about his plans, clashing business models, and the role of public and private equity for CMOs.
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Contract Pharma: What has the company learned during the re-structuring process?
Riccardo Trecroce: We've learned that, in order to serve our clients properly, we need a strong financial foundation and a proper balance among various service offerings. We need to keep our eye on the ball in terms of serving our clients. And we need to maintain an environment where our employees can continue to grow and feel good about doing the best that they can in the work that they do. Those are some of the lessons we've learned.
CP: How did Patheon take its eye off the ball?
RT: Throughout the past decade, up through 2004, we had a very measured level of growth. We acquired one site at a time from Big Pharma companies, and concurrently entered into long-term manufacturing agreements to continue to manufacture the products that were being made at those sites. That gave us the opportunity to go out and develop additional business over a period of years, to bring business into the acquired sites. That was a very successful model for us. We acquired 10 sites over the course of a decade, following that model.
In 2004, with the acquisition of MOVA Pharmaceuticals, we went in a different direction, acquiring an ongoing business. MOVA had a different business model than ours, and was purchased at a very significant price, which caused us to leverage off our balance sheet, which is something we'd never done before.
Riccardo Trecroce was named CEO of Patheon in March 2007
So the lesson we learned from that is that what we had been doing in the past is probably something we should've continued to do.
We're quite happy to have MOVA's Puerto Rico operations within our family today and we look forward to fully integrating them and making them part of the Patheon network. There's significant business there, which will generate good revenues for us as well as good earnings, because they have a low tax rate. But the lesson is that there's a big difference between acquiring one site at a time as opposed to buying a full business.
CP: How did MOVA's business model differ from Patheon's?
RT: Patheon manufactures more than 700 products for more than 250 clients, so we have a relatively diverse client base and revenue base. There's an inherent benefit to that, from a risk-management perspective. It's a byproduct of the way we grew our business, one site at a time.
MOVA had a very different -- and successful -- model. They had fewer products, relatively speaking, which were of higher volume. Consequently, if things went well with that model, they went very well. But if things didn't go well -- if there were issues with a product, for example -- it had a bigger impact on overall operations.
CP: Then Puerto Rico remains within Patheon's long-term strategy?
RT: Very much so, yes.
CP: How would you describe that long-term strategy?
RT: Our goal is to be the world's best pharmaceutical product development and commercial manufacturing company. We want to be the company that our clients feel will be the natural choice for them when they're considering an outsourcing partner. We think we can do that by providing best-in-class services from a strong and high-quality set of plants. We want to make sure that the range of services that we provide meet our clients' needs but also meet our own financial expectations. So we're going to be focusing on growth in higher-margin opportunities, whether that's in the PDS [pharmaceutical development services] area or in more specialized capabilities, such as steriles, lyophilization, high potency and other technologies. That's going to be our focus of growth. We'll continue to have a range of conventional dosage manufacturing capacity for our clients, and we'll try to keep that in balance with our specialized capabilities.
CP: And this ties into the company's decision to get out of OTC and focus on higher end prescription products?
RT: Exactly. And this is why we've chosen to wind down operations at our York Mills facility, move operations into our Whitby facility, and sell York Mills.
CP: Now, the Whitby site manufactures an OTC product under a supply agreement with Novartis, I believe.
RT: That's correct. The agreement will end soon and Novartis will move its product back in house. That will open capacity at Whitby.
CP: Is there concern that, while pursuing these higher margin products, you might have to cover underutilized capacity?
RT: The Niagara-Burlington sites are dedicated OTC site. So our decision to get out of manufacturing OTC was consistent with selling those sites. Whitby, on the other hand, is a mixed site, handling both prescription and OTC. As Novartis takes its Theraflu line back in house, the OTC business at Whitby will be gone. So we'll be able to dedicate the facility wholly to prescription.
This is consistent with our long-term strategy to exit the OTC business. The stars aligned, basically. Novartis pulling back its OTC products was part of the equation. The sale of Niagara-Burlington was another part. Moving the prescription business from York Mills to Whitby deals in part with the capacity-utilization issues at Whitby. So the various pieces of the puzzle fell into place.
CP: What services does Patheon plan to focus on?
RT: We want to continue to provide a wide range of services to our clients. The only area we're exiting is OTC. But we're going to focus our efforts on those areas I mentioned earlier: PDS, assisting clients with launching new products, continuing to grow sterile and lyophilization capabilities, providing conventional capabilities such as high potency sustained release. Those are areas where we're going to continue to grow our business.
CP: Is PDS involved in developing any royalty-based, IP-focused offerings, or is it fee-for-service?
RT: We continue to provide our services on a fee-for-service basis. We're involved in around 175 projects right now, with a range of potential dosage modalities.
We're exploring specialized technologies and are developing relationships with companies that have them, but it's very early in that process.
CP: How do you gauge the "right size" for this company?
RT: We don't have a view on what that right size is. We do want to make sure that, as we grow, we grow in a smart way. So we'll continue to grow, but we'll do so in a way that's consistent with our strategy. We want to make sure that we're meeting our objectives of providing best-in-class services at high quality sites, at margins that provide an attractive return to our investors. We don't have a limit on what our size is.
CP: Speaking of investors, Patheon recently received a large private equity investment [$138 million] from JLL Partners.
RT: We're quite happy to have JLL as a significant investor in our company. They're very experienced, savvy investors. They're managing $3.2 billion in capital and they see real value in Patheon. They are going to be engaged, having three representatives on our board. We look forward to having them help in the oversight and management of our business.
By virtue of the fact that they have a wide range of investments in different fields, including healthcare, we think we'll benefit from their experience and knowledge.
CP: Is this their first investment in pharma manufacturing?
RT: Yes. Their healthcare investments have been in a pharmacy benefit management, hospital groups, and a managed care organization. They also invested in a company called Kendall International, a manufacturer and distributor of disposable medical products. That's probably the closest to this investment.
CP: With this private equity investment, how does Patheon regard its position in the public equity markets, which can be subject to the fickleness of shareholders?
RT: Patheon's been a public company for 10 years. We're quite comfortable with being in the public space. When you're a public company, you have very very high standards of public accountability. We're comfortable with that, with reporting our results quarterly. We understand that it's very important that investors have a clear understanding of our objectives, goals and challenges, so their expectations are in line with our reality.
As long as investor expectations are in line with reality, there shouldn't be a problem. It's when there's a disconnect between investor expectations and the company's actual situation that you see frustration on the part of the investors.
CP: Investors aren't the most rational of creatures. How do you mitigate the "lumpiness" of the business?
RT: Our shareholders have gone through a difficult period in the last two years as our share price has deteriorated due to the issues we had to face after the MOVA acquisition. There's been a significant level of dilution as a result of the JLL investment, and a significant loss of share price, but our objective today is to build a company that will be a long-term, financially strong, best-in-class player. That won't happen overnight, but we'll see steady progress.
CP: How would you characterize staff morale among the rank and file during this process?
RT: I am so impressed with our management team and our employees throughout the organization. We've had a very difficult year, but our employees have been incredibly dedicated and focused on making sure our clients receive their products with the quality and timeliness they've come to expect from Patheon. It's a real testament to the strength of our organization and the quality of our people that we continued to serve our clients very effectively and bring in new business during this past year. I'm very proud of our team, and I'm very confident that we have the right people to continue to grow.