In October 2012, Mayne Pharma of Melbourne, Australia bought Metrics, Inc., a CDMO based in Greenville, NC, for $120 million (including $15 million in earn-out payments). Metrics’ sale wasn’t entirely unexpected, but the buyer came as a surprise. Announcing the deal, Mayne praised Metrics’ CDMO operations, but cited Metrics’ generics business as a key element in its push to become a global specialty pharma company. We spoke with Metrics’ co-founder and president, Phil Hodges, about the acquisition, his ongoing role with Metrics, and how to balance contract services and niche generics. —GYR
Contract Pharma: What was the timeline for the sale?
Phil Hodges: This started more than a year ago. When people ask me, “How long was Metrics for sale?,” I tell them, “About 18 years now!” That’s when we started, but the right person had not come along.
In summer of 2011, we had some great projections for the company, with a real upward slope, and we presented those to the board. They realized that, where the company was, maybe this was the time to start thinking about a sale. Also, with the Bush tax cuts potentially expiring in 2013, the value of the cash-out could drop significantly, so that was a factor.
CP: What interest did Metrics generate for a sale?
PH: One company we were working with was interested and made an early bid, but that didn’t work out. Another one that we knew came in to talk with us, but those talks didn’t progress, either.
It became apparent that we needed people with experience in this sort of deal. I’d known Neal McCarthy at Fairmount Partners for years, and always figured I’d talk to him whenever we decided to make a deal. He had met our board and we brought him in and he explained the ins and outs of selling the company, what we could expect.
We hired Fairmount in January of this year. They put a book together on us and sent it out. We had a number of parties put in firm quotes, come in and visit our site last April and May. We narrowed it down to the top four, and we talked about the pros and cons of each, and Mayne was the best strategic fit for us. It really boiled down to who we felt most comfortable with.
CP: Without slighting the other bidders, what made you less comfortable with some of their offers?
PH: Well, I wasn’t comfortable with private equity firms, for the most part. They really impressed me with a lot of their activities and knowledge of the industry, but the nature of private equity — borrowing a lot of money and paying that back through operations — and the five-to-seven-year timeline before they’d sell to another company, I just couldn’t get excited about. I just didn’t want to go through this whole process again when it was time for them to sell.
What I could get excited about was the synergy and the strategic fit we saw with Mayne.
CP: What was Mayne’s big attraction for Metrics? Was it the CDMO operations, or your generics business?
PH: They were mostly drawn in by our generics business. What people don’t necessarily realize is that Metrics started the generics business because of the CDMO business, not the other way around, like some companies have done.
We started that business in 2004. It was very much a sideline for us, but that sideline business made more money for us in 2011 than our core business did. You make money on generics from product ownership. We don’t manufacture everything in house. One of our biggest generics is a sterile ophthalmic solution, and we don’t have the capacity to make that. We developed it and filed the ANDA, and there’s a lot of value in that.
The trick to a complex generic product is good analytical expertise. We’ve got the ability to figure out exactly what is in the innovator product. We’ve got a lot of smart formulators to reverse-engineer that product.
I refer to our business as a shed full of sharp tools. We do drug development for a living, and we’re really good at it. So to take some of our expertise and put it into generic drug development was a natural for us. We bought Midlothian Laboratories, a sales and distribution company in Alabama, in May 2011. That allowed us to sell our own generics.
Seeing that we had all this in place, Mayne decided we were worth a look. They came over from Australia and brought over one of their largest shareholders. They liked what they saw, and I liked what I saw.
CP: How’d you connect with Mayne? Melbourne is a long way from North Carolina.
PH: Well, Richard Moldin, who runs our generic business, was formerly chief executive office of Purepac in the late 1990s. His business development vice president there was a guy named Scott Richards, who was named CEO of Mayne last January. They kept up with each other, and they had some conversations after Scott got that job.
After a few talks, Richard pointed out what a good fit the companies would be. Mayne had some great products with shrinking lifecycles, and needed a new outlet for growth.
CP: What opportunities does Metrics afford Mayne?
PH: They liked our CDMO business because they do some contract work themselves. And they L-O-V-E our client base. There are a significant number of clients we do development work for that they don’t reach. A bunch of those clients are virtual and figure they’ll either sell the compound in Phase III or partner with a big player to do the marketing. When the latter case happens, if it’s not a big blockbuster, then the Australian market tends to get overlooked. Now, we can introduce those clients to Mayne, which can handle sales and distribution in Australia.
I think our biggest synergy is one of Mayne’s top drugs, which is going to go generic in the U.S. in a few years. It is a difficult formulation and they have a U.S. manufacturer lined up to make a generic, but they were going to have to find a marketing partner and manage product development from 12,000 miles away, which is no easy task. So we will help them manage that process, file the ANDA, and market the product.
The merger gives them a U.S. presence and allows them to sell products through us. Generics in this market are a big opportunity for them. They’ll need U.S. marketing partners for their innovative products, but as they go generic, we can be the distributor.
CP: What did you like about meeting the Mayne team?
PH: They were very sincere people, who wanted to continue to transform Mayne into a global specialty pharma company. I really liked the CEO, the CFO, and the board member who visited along with them.
Mayne’s market cap makes them a little smaller than Metrics, actually, but they’re a public company, so they could raise the money for an acquisition. Richard Moldin and I went over to Australia in September to help them with that. We went to Sydney and Melbourne and had 28 meetings in four days: 24 face to face and four conference calls.
CP: That’s a lot of work, especially with the jet-lag!
PH: Tell me about it! But we got very good response from the fund managers we talked to. One manager said, “It’s really good to hear about investing in something that isn’t being dug out of the ground.” In Australia, a lot of money’s in mining right now.
CP: How does Mayne plan to manage Metrics from so far away?
PH: They’ve said they’re not interested in making any real changes to Metrics. They’re delighted that I’m willing to stay on as president, and that Richard will stay on to run the generics business. The management team is staying in place.
CP: How big can the generic segment get for you?
PH: One of them has potential to be a very big generic, by our terms. Our largest product did around $8 million last year. It’s a tough formulation, with a difficult shelf life. We’re one of two generic suppliers. That generic is not available in Australia, so that’s a potential market for us.
CP: In comparison, how’s the CDMO business performing?
PH: Like everyone, we had a tough time in 2008-09, but we bounced back. Our client base is a little different now.
CP: How so?
PH: More large clients. Before, around 85% of our client base was virtual pharma. Now, at least half are larger companies, some of which still operate in virtual modes. Some are biotech companies that are biologics-focused, but have a small molecule in their pipeline. They’ll come to us to help develop those, rather than build in-house capabilities.
The key reason that the client base changed is because those earlier clients were running out of money. As we all saw, analytical work became much more of a commodity. Metrics’ space is in development: we believe there’s nobody better to come to for first-in-man. We’ll get you in the clinic faster, with solid analytical and manufacturing procedures that are scalable.
But part of the challenge has been keeping clients with us once their molecules progress. They would think of us in terms of development, not commercial manufacturing, even though we have that ability. I don’t think you can be all things to all people, but for some people, you can be all things. There are some clients for whom we’ve developed their products, and they’re in Phase III and planning to stay with us for commercial manufacturing. We like the idea of being a full-service provider to our clients, but mostly for the guy who needs 10 batches of 30kg a year. I like managing that more than the three-shifts-a-day, seven-days-a-week sort of work.
CP: Are you thinking in terms of Mayne doing larger scale commercial manufacturing for some of your CDMO clients?
PH: Mayne brings some interesting technologies to the table. They have controlled release products using solvent-sprayed beads. It’s a neat technology and we don’t do a lot of it. We don’t have large-scale solvent-coating technology. We like that we’ll be able to offer that to our clients.
We’re really good at matrix tablets. It depends on the drug, what sort of technology the clients need. I like that we’re complimentary in our sustained release capabilities.
CP: One last thing: the acquisition announcement included mention of a $15 million earn-out, on top of the $105 million in upfront payments. What are the earn-out milestones?
PH: Most of that is in Mayne’s filing papers, so I’m not revealing anything proprietary. The first $10 million comes if Metrics’ EBITDA (on a U.S. GAAP basis) reaches $14.5 million for the 12 months ending June 30, 2013; it was $12.8 million last year. The rest of it is a “knock it out of the park” goal: if we bring EBITDA to $18.0 million, we’ll get that other $5 million.
We really feel this a great deal for Metrics. We give them an outlet to the U.S. market; they can market our products in Australia. As we develop products in future, we’ll have both markets in mind.
Mayne’s got a lot of capabilities for marketing products around the world. We’ll offer them a lot of products that they can market.
As president of Metrics, Phil Hodges is responsible for guiding the strategic direction and growth of the company. Since founding Metrics in 1994, Mr. Hodges has overseen its transition from a start-up analytical laboratory with four employees to a pharmaceutical development laboratory with more than 200 employees. Throughout his tenure, Metrics has experienced double-digit annual revenue growth. Prior to starting Metrics, Hodges worked for 11 years at Burroughs Wellcome Co. (which eventually became part of GlaxoSmithKline) in the development and validation of analytical methods.