Contract Pharma: What brings Catalent Clinical Development to China?
Scott Houlton: Customers!
Two or three years ago, as we went through our annual strategic planning process, which looks five years out for the company, we identified China as a place we wanted to grow. We were initially planning to start with Softgel, but as that process kicked off, a number of our multinational clinical supply customers came to us and said, “We’d really love it if Catalent were to put a clinical packaging facility in China.” These are companies that work with us in Europe and the U.S. to supply global trials, and they were telling us that they wanted us to have a presence in Asia. That prompted us to start looking at China from a clinical packaging supply standpoint.
CP: What regions in China did you explore?
SH: We looked at Beijing, Shanghai and potential partners in other areas. We settled in on building a new facility in Shanghai with our partner.
CP: What were the criteria for finding a JV partner?
SH: From a Softgel standpoint, we talked to a lot of companies. We were most interested in those that shared the same cultural values around quality and supply, which led to a shortlist. Then we looked at the facilities of those remaining companies. Some didn’t have the right footprint and we would’ve almost been starting from scratch. As we narrowed that funnel, JYT was really the standout, in terms of cultural fit, goals, and facility.
On the clinical supplies side, it was a bit different. We were interested in a partner that was in related services but didn’t overlap much, so that we wouldn’t end up in a position of competing with a partner. We also wanted a partner that was experienced with a multinational customer base.
Some companies we met with had that experience, but they also had aspirations that would have made us compete in some areas. Others weren’t as good a cultural fit; they were more China-centric and less globally aware. With ShangPharma, it’s a great mix. The leadership has a lot of experience with multinational customers, there was very little overlap in terms of what they offer and what Catalent offers, and Shanghai is a good location for us to establish our operation.
CP: What’s the timeframe for the Softgel JV to get rolling?
SH: That transaction closed in late July. We’ve been talking with customers jointly and also looking at how to stage our investments in the JYT facility in the next 12-18 months. There’s an investment plan to upgrade that facility both in terms of capabilities and capacity.
CP: What’s the company looking to achieve with Softgels in China?
SH: Being able to service products in China as well as for export. Rx is going to have a longer lead time, because of the regulatory pathway, so the early opportunities will be in VMS [vitamin/mineral supplements]. We can leverage our relationships with other multinationals to feed into the China market.
CP: How close was Catalent to China before these moves?
SH: From a Softgel standpoint, we have manufacturing facilities in Japan and Australia. But from a Clinical Development standpoint, we didn’t have any presence in the region other than a depot in Singapore. That site would receive packaged material from the U.S. or Europe and stage it for distribution across the Asia-Pac area.
We’ll continue to use the depot for that. It’s been a stable, growing business for the last four or five years. It’ll enhance our new capacity in Shanghai, where we’ll actually be able to package. In fact, we currently use a third-party depot to serve China with clinical supplies. Our Singapore operation wasn’t shipping there, so there shouldn’t be a material overlap in those two offerings.
With the regulatory changes that are going on in China, there are increasing incentives for companies to do their development of products in China, rather than doing development elsewhere and bringing a finished product in. If we offer the ability to conduct studies in country, it should allow our customers a faster regulatory approval process.
CP: How has China’s FDA received your plans to launch clinical packaging?
SH: We’ve been in communication with them throughout this process. It’s an evolving marketplace for the pharma companies that are putting capacity in place, but for multinationals like ours, there isn’t a clinical packaging facility like the one we’re building in Shanghai. So they’re receptive. They want to make sure it’ll fit into their framework of how they do controls within the regulatory marketplace, and they’re encouraging this sort of investment to be done locally, rather than imported.
CP: Historically, clinical trials have taken a while to get approved to begin in China. How’s that changing?
SH: The regulatory framework is still evolving, and it’s happening very quickly. I think they’re making very good moves and they’re trying to raise the bar on quality for their healthcare system overall. So it’s important than we stay connected to the SFDA to stay aware of what they’re thinking and what they’re planning to do, and vice versa.
CP: How easy was it to establish a relationship with the SFDA?
SH: They’ve been receptive to having meetings and talking to us about our plans and those of our customers. It’s not that a single meeting is going to change everything; it’s much more about building up a relationship.
We’ve had the opportunity to host some SFDA staff on our sites for tours and visits, which has been great to facilitate the knowledge transfer between us.
CP: Is there some reason no one’s built this capacity in China before?
SH: There have been a number of depots for storage and distribution. There’s been a pretty rapid growth in the number of patients in the region, a trend we see continuing. Historically, it was more economic to package in bulk for a global clinical trial, and ship, say, 50 kits into China. But with more patients locally, the economics have become more favorable to do packaging for the region in China.
CP: Will the new facility serve only the Chinese market, or will it distribute to neighboring countries?
SH: It’ll serve China and other countries. That’s why we located the new facility in the Free Trade Zone. This way, we can bring materials into the FTZ without having to “clear customs.” Then we can package the materials and supply the region. Let’s say we package 10,000 patient kits in the new facility, and 8,000 are meant for other countries. Then only 2,000 would need to clear customs into China and we could direct-ship out to the other countries from the Free Trade Zone. So that was our motivation in picking this location.
CP: Are you getting any interest from China-based companies, or is the demand mainly from multinationals at this point?
SH: Most of the awareness is from multinationals that know Catalent. We don’t have a footprint or legacy business with local China companies. Also, there’s the issue of price. If you’re only going to be supporting in-China trials for a Chinese pharma company, I’m not sure they’ll pay for a western multinational provider like us.
We have seen interest from local companies not so much to supply China but to supply other markets. They’re looking at us as an avenue to ship outside of China, while the multinationals are looking at us as an avenue to get into China. I hope we can use that two-way road to increase our business.
CP: What have the cultural challenges been like?
SH: Things move very quickly. The process of the facility build-out has been incredibly fast, and in a very high-quality manner. I think when it’s done, it’ll show as well or better than any of our existing facilities, because it’s brand-new.
One shift is making sure we don’t apply our western practices to the Chinese marketplace. In a sense, it’s the difference between the western notion of seeing rules as something to be followed pretty strictly, versus the Chinese way of seeing rules as guidelines that are to be examined and interpreted based on your situation. That’s a difference in how we approach business.
We need to understand how to navigate the channels when the expectation of the local market is that you will navigate, that you’ll have a dialogue, that you’ll say, “This is what I’m trying to accomplish, and the rulebook hasn’t covered every possible scenario.”
They want to understand the spirit of what you’re trying to accomplish, and that might differ from the letter of how you’re trying to accomplish it. They’re very interested in meeting our objective, but they might not think to go about it the way we would. As long as we get to the same endpoint, that’s the most important thing.
CP: With regulatory compliance.
SH: Of course! Another important thing is that we make sure that employees that we’re hiring in China are comfortable voicing their opinions. There’s a sense of hierarchy culturally, where people don’t feel comfortable questioning authority. At Catalent, we’re actively soliciting feedback and engagement from our employees, regardless of level.
CP: What mechanisms are in place for that?
SH: We have weekly and monthly Operating Mechanisms, which are the core of what we do at Catalent. We have a monthly OpMech for our entire operation in China, including our CEO John Chiminski, the entire executive leadership team, plus the China leadership. It’s a real working team.
We also have weekly reviews on staffing and buildout for China while that’s ongoing.
CP: Are there plans to have Catalent western ex-pats help with the first year or so of operations in China?
SH: There may be one or two for the Softgels side, but for clinical development, we’re not planning on having an ex-pat assignment. We’ve been able to hire much of our team, starting with Jackson Zhu as country general manager for China, and Yufeng Cao as site operations director, in addition to our finance lead, quality, project management, logistics, import/export, and more.
CP: Were any of the team Catalent veterans?
SH: Not a one! But we’ve built a team of Chinese nationals with relevant experience, and we’ll certainly augment that with visits to our sites in the U.S. and UK, as well as having people go over to Shanghai periodically for training and other things. Those won’t be ex-pat assignments.
We do have a number of Chinese people in our clinical packaging network around the world who have volunteered to work at the new site. Several have expressed interest in going over for the first six months to help get the business up and running.
CP: What other parts of Catalent do you think would benefit from a China expansion like this one?
SH: For the moment, we’re fully engaged on the Softgel and clinical packaging businesses. We’re definitely seeing more development activity in China. Some of that will be done in house, but some developers will be looking for high-quality, trusted development partners, so there’s an opportunity.
There’s clearly a lot of preclinical business, as well as API, but we’re probably not looking to venture out of our core businesses. There’s likely more for us in other development activities and some of our formulation areas, down the line. But right now, we’re focused on successfully launching these two initiatives.
CP: I always hear China is all about relationships. What role did your CEO play in arranging these partnerships?
SH: John Chiminski spent a fair amount of time laying down the foundation for this, establishing relationships and looking at potential partners in China. David Heynes, president of our Softgel business, and I helped close in on the final partner list. It’s been a multi-year endeavor and involved the efforts of a lot of people, starting at the top, to make sure we do this correctly.
CP: How will the new clinical packaging facility incorporate lessons from your other sites?
SH: We had the opportunity to build out of (essentially) a shell. We had the general managers and the operation leads from our other facilities help us design this one, in terms of flow and fit-out. We asked them what worked well in their facility and what they would change if they could build their own facility over.
Since we acquired Aptuit’s CTS business 18 months ago, we’ve been harmonizing the way in which we run a clinical packaging facility. The goal is that if you go into any of our facilities in our network, they’ll have a consistent look and feel. So we picked a lot of best practices from the flow and storage fit and finish across the network, in a variety of sites.
CP: What management challenges does it present, having a facility running 12 time zones away from your headquarters?
SH: Because we’re not able to run things from NJ, it means we had to hire a high-caliber management team with the ability to make decisions within a Catalent framework. The local team has the ability to run its region, and that’s not dissimilar to how we run our Latin America markets, or Australia, or Japan. Anywhere that’s remote, it needs to have a leadership in place that’s capable of running in the Catalent way locally.
CP: When’s the clinical packaging site expected to be up and running?
SH: We’re on track to be operational by the end of September. It’s truly amazing, how fast things go in China. We’ll be done, validated and welcoming customers. If they want to do a paper audit or a physical one, we’ll be ready to schedule them.
For our customers who are familiar with how we run clinical packaging and how we audit our sites, they should be comfortable pretty quickly with this facility. Some of them are calling to ask if we’re still on track for September, so I’m inclined to think they’re very eager to place work there.
CP: How much will the clinical site cost?
SH: I can’t give that out, but I can tell you that we’re making a substantial investment. This isn’t a go-cheap entry into the market. We had an opportunity to go with a much smaller facility than this, and we chose to go with one that we thought would be able to meet our needs for the longer term.
CP: Do you have room for expansion if the business really takes off?
SH: Yes. The facility is just over 30,000 sq. ft. and it’s fairly high bay, so we have good utilization. We should be able to get three to five years of capacity in there, based on our growth projections. We’re using about half of the building that we’re in, and we have right of first refusal on the other half, should we want or need to expand.
CP: What have you learned from your visits to China?
SH: I’m amazed by the pace of change in terms of adopting where research is being done, and how decisions are made. Many of our customers have established R&D centers in China, and they’re moving more and more of the decision-making into that region.
I thought more of the customer decisions would be driven by the U.S. or European headquarters of those multinationals, but I think we’re going to see more local demand from these divisions. There’s much more of a sense of autonomy, just as we’re setting up our own China team to operate.
The other thing I’ve learned is that there’s a tremendous amount of talent in China. It’s a competitive market, of course, but there is really good talent available.
Scott Houlton has served as Catalent’s group president, Development and Clinical Services since August 2009. Previously, Mr. Houlton was chief operating officer of Aptuit, responsible for Scientific Operations, Business Process Improvement, Human Resources, Clinical Operations and Capital Development, and served as a director for Aptuit Laurus. Prior to Aptuit, Mr. Houlton held a variety of leadership roles in other companies including vice president of Clinical Supplies at Quintiles Transnational Corporation. Earlier in his career, he was with Cardinal Health, Inc. where he served as director of International Business Development.