In January of this year, Terry Novak was named president, commercial operations for Norwich Pharmaceuticals. I met Terry nearly a decade ago and we've had numerous illuminating conversations about the CMO/CDMO business over the years, spanning his time at DSM (executive vice president and chief marketing officer), Patheon (president and chief commercial officer) and FrontLine Pharmaceuticals (president and CEO). With his new appointment, I decided it was high time to turn on the tape recorder and share some of his observations about the state of the industry, consolidation prospects, the pros and cons of client-to-provider crossover, and more.
-GYRContract Pharma: Let's start at the deep end, Terry. You've been around the industry a while. What changes have you seen over the past decade-plus?
TN: To my mind, the contract manufacturing industry hasn't changed much in the past 10 years. Some additional capabilities have been added but the industry is still very fragmented with three big players who haven't grown much. But the perception and performance of the industry in the customers' eyes has not changed - most everyone is considered average.
I've been at Norwich Pharmaceuticals four weeks now, and my initial observations are that the company has a very solid foundation on which to build a best-in-class CDMO. There's a very experienced workforce, a long history of solid regulatory compliance, a nice customer base that needs to be expanded, and good capabilities. At Norwich, I think we're flexible enough and nimble enough to make a difference with our customer base.CP: What's your role at Norwich?
TN: My role is to grow and lead the Norwich Pharmaceutical business - that means developing and executing a strategy to add new services and new customers and ensure that we are exceeding our customers' expectations for delivery of our services. I came here for two reasons: the management team is first class, and there's a true commitment to this business. I really can't say that for other CMOs.
What I mean by that is, we're investing in our business. We're spending money to grow our business, and I really don't see that happening at a lot of other CMOs.
The best thing Norwich did was to add development capabilities and expand the pilot plant. In less than two years, we have added well over 40 projects going on right now in our development space, as well as a nice group of commercial customers. You need to have that development base, so it can lead into high-quality revenue on the commercial side when the products are approved for commercialization.CP: It's way too soon for any of the development projects to have reached commercial stage, right?
TN: Development opened two years ago, and we expect to launch some of the first products this year. As we look out over the next three years, we should see many commercial projects coming out of our pilot lab.
Development & Clinical Services
CP: Besides development services, what are the biggest growth areas for the company?TN: The development business is obviously number one. The second one, which I don't think the company has capitalized on - and which I did capitalize on in previous jobs - is growing the business from our existing customer base. You can do that by providing excellent customer service: right-first-time, on-time delivery, etc. If you do those things, you will grow the business from your existing customers. It's a heck of a lot easier to do than find new customers, since everyone else is trying to do that to fill their excess capacity.
We have a great opportunity to differentiate ourselves on the service side and grow business with existing customers. That's what I see as our biggest commercial opportunity.
As far as capabilities go, we upgraded our potent handling area so we can work with Safebridge Class 3. Our other strengths are developing and manufacturing DEA scheduled products and controlled release products using specialized technologies. Right now, this makes up a good portion of our new projects.
And on top of that, we've recently launched Norwich Clinical Services, centered on providing bioanalytical studies and pharmacovigilance services, out of our Bangalore, India facility.
CP: What's your involvement with that end? Your title says you're president of commercial operations.TN: Actually, that business reports to me!
CP: Because you don't have enough on your plate and you love visiting India?!TN: Right!
CP: How much does a broader geographic footprint matter to a company like Norwich?TN: We always look at opportunities, but our facility in the U.S. is approved by many foreign regulatory agencies so we ship globally.
There's a lot of stuff for sale in Europe, but . . .
Right now, we need to grow our business here in Norwich and support our customer base and become a preferred and reliable provider.
Sites for Sale
CP: So you're not looking at asset transfer deals with pharma companies to pick up new capabilities or expand your footprint?TN: I am definitely interested in those types of deals, but it has to be a win-win. There's a lot of talk about that in the industry. For the last year, I was working at a startup that was looking at buying plants and the products that went with them. What I saw was that big pharma companies that are selling facilities are also moving products back into their own plants that have underutilized capacity and not as much is moving to CMOs as everyone first thought.
Everybody thinks there's this great opportunity to go in and pick up products with sites, but the sites are being offered without products or supply agreements. There might be asset transfer deals out there, but we haven't seen much activity yet.
In the CRO space, we're seeing more activity in that regard, but we haven't seen it in the CMO side.CP: Why do you think that is? My untested theory is that it's easier for CROs to make this sort of deal because of their lower capital requirements and greater inherent flexibility. Why no strategic alliances for CMOs?
TN: I think you're right in that it's a different ballgame for CROs from a capital point of view, as well as from a regulatory one, compared to site transfers of commercial products.
But the other part is the lack of opportunity in those sites. They're going to take the products away from sell-off sitesin order to fill their internal capacity, before they consider outsourcing. We might see another year of that untilthey've optimized their internal networks. Once they've done that, maybe they'll start to look at broader outsourcing opportunities.
I still see big opportunities in the specialty pharma space, in the smaller, emerging companies. Dealing with big pharma, the problem is that the products might be gone tomorrow, because they decide that there's some space available internally to make it.
In a previous life, my company was second source to a big pharma's product; their own site was the primary source. Then they told us, "You know what? You're only going to get nine batches this year, and next year, there's none."
That's why you have to diversify your portfolio, work in development, and make sure you're bringing in high-quality NCEs.CP: How big an opportunity are generics clients for you?
TN: We have a lot of experience with generic clients at Norwich and expect that to continue making up a portion of our business, especially from our parent company. I expect the generic companies to be a very big client base for our clinical service offerings. For one thing, there's a cost advantage with doing these services in India and we have a lot of experience in that area. We're seeing a very high interest early on.
In fact, I was meeting a customer this morning who was a generic manufacturer. I mentioned the Clinical Services unit and he said, "I want some information by the end of today."CP: Geez! Well, I don't want to keep you!
TN: I'll get back to him right after this!
CP: Are we looking at consolidation in the CMO area?TN: I think we might see some private equity firms enter the field, by picking up a plant for sale. But when they look at the financials, they start to realize that being a basic CMO isn't an alluring position. If you don't have really special capabilities and you don't have IP, like Catalent has with ODT,then it's tough to generate cash. If you have something like sterile injectables or controlled release, you can justify a premium price.
As far as consolidation goes: the CMOs who could benefit from it don't have the cash to do it. The one thing we're waiting to see is whether a CRO will buy a CMO.CP: Boy, that'd bring us back full circle!
TN: Yeah, so I don't see CMOs gobbling up other CMOs unless it's purely about a capability they don't have. I don't think they'll buy for the sake of scale, just like I don't think any of the established CMOs will buy a Merck or Pfizer plant if it's just going to add capacity to an already underutilized network.
The Devil You Know?
CP: You've worked at several CMOs over the years, and our industry is relatively small. Have you come across - or brought in - any of your old compatriots at Norwich? And is there a value in working with people you trust from past experience?TN: Actually, I did bring in one of my old colleagues and have talked to others. Right now, I'm still assessing my current staff to make sure I have the right people on the bus and in the right seats on the bus. It's interesting, the role reputation plays. It's a small industry, as you said, and I've found that if you keep up a good reputation, it makes a difference.
Most of Norwich's customers were my customers at previous companies. So they know me and, believe it or not, that's helped in my first four weeks here. They've shown confidence because they know I've done this successfully before and they know my passion for providing outstanding customer service.
It's the same thing when I bring on some staff. They've done it before and they have a good reputation. That really is key. I always have to look back and ask, "Did I make anybody really that mad?"
CP: Along those lines, what effect do you think it has when we see displaced pharma employees landing at CMOs and CDMOs? Does the trust they had with co-workers at their old company tend to carry over when they're on the contractor side of the equation?TN: That's an interesting question. I'm on the fence about it. What I've found in 10 years on the service side is this:bringing in someone from the client side is successful around half the time. A lot of them don't like no longer being the client. I know one guy who went from pretty high up at a major pharma over to a major CMO, and he hated that first year. He hated the fact that someone who had been four levels below him at his old company now chewed him out over a deadline.
For some, it's hard to make the adjustment. Others do okay. Peter Bigelow [who served as interim CEO at Patheon; see his Newsmakers interview from our January/February 2011 issue.--ed.] has made a very good adjustment at Patheon. I think the operations guys make the transition more easily and effectively. They know how to come in to a scene and assess it.
Sometimes, the big pharma guys just aren't used to the nimbleness and flexibility that CMOs have to have. On the flipside, when generics people come into a CMO, they know what to do. They know they have to be efficient, they have to deliver on-time and right-first-time, because in their generics experience, you lose market share if you don't. Our chief operating officer, Ellen Gabriel, comes from Teva and Actavis. Those generics people can be very helpful when they cross over to a CMO.
But when you buy a big pharma plant, you've got a lot of streamlining to do. They're overloaded; there's more quality people than you'll need as a CMO.
It's a big adjustment. There's no cutting corners or anything like that, but you learn to be much more efficient when you're a CMO and to do more with less. Big pharma's tried to do that with manufacturing, but they haven't succeeded yet. When you buy a big pharma plant, you can see they haven't streamlined or leaned it out as much as they say they have. They've certainly come a long way in the last few years, but there's still plenty of fat at their facilities.CP: What about bringing in client-siders to the business development end?
TN: There, I think they have a lot of "a-ha!" moments. Once they're on the CMO side, there's often lightbulb going on and the moment of "So that's why you do things this way!"CP: I know it's only been four weeks, but what's your five-year perspective for Norwich?
TN: Well, less than two years from now, I expect us to be talked about as a premier U.S.-based CDMO. Five years, I think we'll have much greater capabilities. We have a lot of land to expand with. I think we'll have more in controlled release and more of our own IP and technology. I think that's really critical to growing our business.