Contract Pharma: What were the biggest challenges you faced when Capsugel was spun off from Pfizer?
Guido Driesen: Capsugel has a long history as an independent organization. It was always a division of a larger pharmaceutical company, beginning with Parke-Davis, then Warner-Lambert, then Pfizer. They were all great to us, and the leadership teams we met with over the years treated Capsugel with a lot of respect. That has enabled us to become a market leader in hard capsules, with more than 50% market share in volume, and close to 60% in dollar terms.
It also enabled Capsugel to have its own culture, to be a company that can stand for customer relationships and partnerships, quality and innovation, and be a truly global organization that adds value to its customers and the larger healthcare industry.
So, when Pfizer announced that it was looking for strategic alternatives, my first objective was to lead the organization through that period, including the auction and transition period.
CP: How did you feel about the decision to spin off Capsugel?
GD: It’s everybody’s dream to be an independent company, isn’t it? Capsugel had the size, the credibility and the vision and strategy to get this done. When KKR came out as the winner of the auction, we met with them and made sure we had a common vision for the company.
CP: How would you characterize that common vision? What did KKR bring to the table?
GD: It’s all about growing this company, from “good” to “world-class,” from a company that was focused on its core business — hard capsules — into a growth company that can do other things. The new Capsugel has more than hard capsules, with our newly formed Dosage Form Solutions business unit.
We’ve also built up a stronger organization with leaders who have expertise in the areas in which we need to grow: IT, procurement, finance. These are the areas that Pfizer had been taking care of, and are now our responsibility. This is not about saving money and trying to optimize cash flow. It’s about making sure we’re a strong global company that takes on new, innovative tasks, and continues to build on its experience and expertise with quality products and services.
CP: Tell me about the Dosage Form Solutions business unit. What led you into that area?
GD: Dosage Form Solutions is a business unit that we formed recently. It includes liquid-filled capsules, both softgels and our proprietary Licaps liquid-filled hard capsule technology, together with new formulation technologies and new developments in hard capsules, such as controlled release. We’re very excited about that last one; it’s still in R&D and prototype phase, but we’re making tremendous progress.
CP: Is that the highest value area for Capsugel?
GD: I think one of our advantages is that we’re growing in different areas, so it’s not a one- or two-story company. We’re more diversified than we’ve ever been. On a geographical basis, we’re growing by double-digits in emerging markets like India, China and Brazil. But it’s also important that we have high-single-digit growth in developed regions like Europe, in spite of the economic problems that they’re having. Our U.S. growth is close to 10%. Over time, that makes us a much better company.
CP: How do you foster growth in a crisis-strewn area like Europe?
GD: It really does come down to quality and innovation. Segmentation is also important. We’re growing in Europe in health and nutritionals, as well as generics. We have strong relationships with companies and in important segments in Western Europe which helps drive growth. Within EMEA [Europe, Middle East and Africa] I see strong opportunities in places like Turkey, South Africa, and areas in the Middle East. We’re also looking at strategies to accelerate our growth in Russia.
CP: How critical is the Asia-Pacific region for Capsugel?
GD: It’s very important. We’re very pleased with our performance in China the last few years. We’ve built a very strong factory and a strong team there and are now making one of our biggest investments in China. We’re adding close to 70% more capacity (over time) there.
We started in China in 1988 and we’re #1 in that country’s domestic market. We’re also looking at using our factory in China for sales to the rest of the Asia-Pacific area.
The good thing for our investors is that our growth in those regions hasn’t brought our margins down.
CP: How do you manage quality standards in that region?
GD: We have a global network with nine manufacturing locations. All those sites work to the same global specifications and requirements. We don’t have different quality levels depending on where the capsules come from. This is a highly regulated market, so it’s important to have uniformly high quality standards. That’s where it really helped that we were always part of a very large pharma company; we understand compliance and integrity.
It’s clear that in each part of the world, we have a great history of producing capsules. We also have a great history of working with customers, both regionally and globally. One of the things our customers value is proximity. We can touch the markets they’re trying to reach, with teams in place. We play a bigger role than simply supplying products and services.
When we invested in the ’80s in China and in India in the new century, we were there to serve the local domestic market, as well as the market to export from those regions. Those companies want a provider that has a record of integrity and can supply products globally.
One thing to underline here is that capsules, as a product, do not travel well. They’re vulnerable to temperature and humidity. They’re also a relatively voluminous container for a low-volume product, so proximity matters.
To that end, our supply chain models have been honed very well. We supply some of our health and nutrition customers in 24 to 48 hours.
With Dosage Form Solutions, it’s the same idea. If we invest in places like India, China and Indonesia, it’s because we believe in those markets and the customers that are there.
CP: How different is Dosage Form Solutions from the capsule supply segment? They seem like quite different models; how do you balance them?
GD: What brought us from being the #2 company 25 years ago to our #1 position is innovation and quality. By innovation, I mean the alternate polymer products we brought to market in the 1990s, our collaborations with health/nutrition and generics customers, as well as in technologies and product quality.
We saw Dosage Form Solutions as an opportunity to add more value by not just working on the shell but also working on the contents. We didn’t want to become a CMO or a CRO. We wanted to make sure we had IP and expertise around technologies like liquid-filled capsules and sealing or fusion of those capsules. We’ve worked on softgels in a different way. We combined alternate polymers with liquid-filled capsules, bringing true vegetarian alternatives to the marketplace.
Customers have encouraged us to look broader than just supplying capsules. It’s accelerated as we’ve become independent. In a certain way, being part of Pfizer limited us. Being the largest pharma company, Pfizer was perceived as a potential competitor to some of our customers. KKR understood that becoming an independent company would immediately benefit us, in terms of being able to work with companies more deeply on unique technologies and applications.
We’re also doing more with biopharma customers. In fact, some of the technologies that we’ve developed and patented have the potential to improve oral delivery of biologics.
CP: That’s still the holy grail.
GD: We’ve made progress in these technologies, both in terms of R&D and execution. What we were missing a little bit is to have all that together in a single business unit. That’s what we’ve done over the past six months. I’m very pleased to have Amit Patel as part of our team, leading the Dosage Form Solutions business unit. He has a very broad experience with generic and specialty companies and pharma in general.
CP: Do you see Capsugel bordering on CMO/CDMO territory, as you integrate further with customers on formulations?
GD: We don’t want to do things that other people can do and have been doing for decades. What we want to do in this area is bring in another approach: we want to combine our know-how on the shell — where we can play with the composition and make different formats — with our formulation know-how.
There are three segments where everybody is trying to improve: stability, absorption, and controlled release profiles. One of our big projects is developing an enteric capsule.
We facilitate. Over the years, we have developed a significant amount of IP and trade secrets that can aid development in a way that’s beneficial for everybody.
CP: What new technologies are you working on?
GD: Around 15 years ago, nearly 100% of our revenues came from hard-shell gelatin capsules. Around 2000, we developed a portfolio of alternate polymer capsules. Those now comprise around 15% of our total sales. That was partly driven by the vegetarian lifestyle, partly by issues with use of gelatin, and partly by compounds that needed something other than gelatin for their stability. Some hygroscopic ingredients would just extract the water out of a gelatin shell, which drove the need for HPMC capsules.
Within Dosage Form Solutions, our first focus was on poorly soluble drugs. That led to our Licaps technology, where we found a way to better formulate these drugs into a liquid or semisolid and then fill into a capsule and fuse it to retain product integrity.
We also developed solid lipid pellets (SLPs) that help with delivering drugs and nutritional products that have poor solubility. These technologies can improve absorption and reduce dosages, and that can have an impact on a product’s safety profile.
When I talk about innovation, these technologies are only one aspect of it. There’s also internal innovation, in terms of our manufacturing process. When I started at Capsugel 30 years ago, we made fewer than one million capsules each day on a production line. Now the latest generation of our lines is fourfold of that, and quality is immensely higher.
Customers expect that the 200 billion capsules we make and sell every year all have the top quality standard. In order to guarantee that, you need to keep innovating and deploy the best technologies, like the new vision systems we’ve developed which will provide our customers with even higher quality printed capsules.
There’s also innovation in the way we communicate with our customers. I’m very proud of the business development group, because they understand their markets and their customers and can bring ideas for future opportunities, particularly in health and nutrition.
CP: What other areas are growing quickly for Capsugel?
GD: Our alternate polymer line, within the hard-capsule business unit, is growing at double-digits. Dosage Form Solutions is also showing double-digit growth, and we expect it will accelerate in the next three to five years. We’re very excited about some of the projects we’re involved in.
CP: You said you’re not interested in getting into the CMO space, but is there a sense of competing with the big CMO players that are in, say, the softgel market?
GD: I believe the choice is always there for customers to go with softgel or not. We focus on what we do best while trying to understand what future needs will be. Softgels are a good technology, but not appropriate in every situation. Bringing customers the choice between Licaps liquid-filled hard capsules and softgels, the choice between gelatin and HPMC hard capsules — that’s important.
We’re focused on adding value to customers. It’s not just about enhancing our financial figures. Of course, that’s important, but it should result from Capsugel doing something better than anybody else does it. It should result from uniqueness that Capsugel brings to the table. It should result from better execution than anyone else can do. In those areas, I feel that we’re very well positioned. We’re focused. We don’t want to be everything for everybody. We’re here to serve three groups: customers, employees and investors. You have to have a good balance among those three and make decisions that benefit all three.
CP: Does KKR have a timeline or an exit strategy in mind?
GD: We’re focused on building a strong company, but we’re also making sure we’re ready for the next step for the business, and that’s why we’re putting together this team of experienced executives. We’re not just building for today.
CP: “Next step”?
GD: The next logical step is an initial public offering. An IPO would be good for the company, the management team, and KKR. I don’t see why it wouldn’t be on the horizon.
The question is: what does a company need to do to be ready for an IPO?
- It needs to have a great track record: So we’re focused on bringing the financial results, growth in both top and bottom line, while staying a world-class company.
- Future value proposition: With hard capsules, we would be a good investment. With hard capsules and Dosage Form Solutions, I think we’re building something unique. If we can play an important role in developing pharma products, that’s a high value proposition.
- Team: As we’ve built out the organization, we added some people and made changes to make this team stronger than ever before. And our headquarters in Morristown, NJ is built out to accommodate our shift to a more global structure.
When you’re bought by a private equity company, you’re starting with a leveraged situation. Strong cash flow and disciplined operations have enabled us to de-leverage very quickly, which has made the investing community happy.
CP: How do you plan to continue to build Capsugel?
GD: We need to bring change while building on our very strong foundation. We introduced tremendous change into this company in the past 18 months, but we’ve done it without destroying the past. It’s about changing while keeping continuity, paradoxical though that sounds.
CP: Before Pfizer brought up the notion of a spin-off, what plans did you have for growing Capsugel? I mean, did you have growth plans in place if you had remained part of Pfizer?
GD: Over the years, much of our growth had been organic. We had 6-7% annual growth under Warner-Lambert and Pfizer. We had a great relationship with Pfizer in the last years, and Pfizer is still an important customer of ours.
That said, it would have been difficult to create the Dosage Form Solutions business unit if we were within a large pharmaceutical company.
CP: Where do you see things growing from here? You recently added a new QC lab in South Carolina and you mentioned big manufacturing plans in China. Are there other major investments on the horizon?
GD: In every location, we’re expanding and investing. If you grow revenue by 7-8%, you need to invest in capacity, in new technologies, in quality improvements. Specifically, we’re investing in a new Licaps line in Japan for formulating and filling health and nutrition products. In China, we’re investing to add a building to boost capacity and meet long term customer needs.
In Indonesia and India, we have a project to expand capacity and to bring in some newer technology. So we’re working on plans and ultimately investing in every location. The larger the plant, the more automation and investment is needed.
For the Dosage Form Solutions area, it’s not just an investment in capital, but an investment in clinical trials. We have product development centers in Cambridge, MA and Strasbourg, France where customers can come with their products and work with us on formulations.
That’s a picture of what’s happening in terms of organic growth. There’s also the opportunity for alliances and M&A activity. We’re clearly in an improved position for both of those.
CP: You mentioned M&A . . .?
GD: We see some opportunities for bolt-on acquisitions. We’re not going to change the dynamic of this company by suddenly leveraging ourselves highly, but we see places where we could add geographically and in different technologies, especially in the Dosage Form Solutions area. In some instances, a company has great technology in its region, but doesn’t have global reach. Could they benefit by being part of Capsugel? That’s what we have to look at.
It’s not a must. It shouldn’t leverage us too much or dilutes our margins. We go into M&A pursuits in a very disciplined way.
Guido Driesen joined Capsugel in 1983 as a quality engineer and has held a number of operations positions over the years in various locations. He was responsible for the manufacturing start-up of Capsugel’s joint venture in Suzhou, China. From 1990-1994, he served as plant manager in the company’s Bornem, Belgium, facility before becoming general manager of Capsugel France and subsequently vice president of Europe, Middle East, and Africa. Mr. Driesen took over as president of Capsugel in July, 2002 and became the president and chief executive officer after its sale to KKR in August 2011.