In July, Renaissance Pharma bought DPT Laboratories from parent company DFB. It was a momentous acquisition, if we can judge by the volume of calls and e-mails we received about it from people in the industry. Since that’s the very definition of a “Newsmaker,” we took a side-trip after the Controlled Release Society meeting in Quebec City to interview Pierre Frechette, president and chief executive officer of Renaissance Pharma, in Montreal. Mr. Frechette discussed the process of buying DPT, his group’s philosophy regarding acquisitions and operations, and DPT’s synergies with another recent acqusition. —GYR

Contract Pharma: What’s the history of Renaissance Pharma and RoundTable Partners?

Pierre Frechette: We’re a private equity firm that focuses only on healthcare. In that area, we focus on pharmaceuticals and medical devices. It’s the space we know. We have a history in manufacturing and commercialization of products.

When the firm was created back in 2001, we made a decision to be very disciplined about what we’re looking for. We’re primarily focusing on North America. We had investments in Europe in the past, but those were also pointed toward the North American market.

We look at companies of a certain size or scale: we want profitable companies with a history of growth, not startups. We want well-managed companies with good growth potential. These companies tend to be privately owned, usually by their founders, and they may be reaching a stage where they’re looking for investors to come in and help them take the company to the next level. Our value proposition is that we will take a great company and make it even better. We’re an operating-oriented PE firm; we don’t just provide money.

We’ll only make those investments if we can acquire a majority of the company, but we like to have the current owners put some equity with our fund. We like for them to stay involved with the business, in a minority position. If they built a great business and believe in it, it’s a great place to put some of your equity!

CP: What led you to buy DPT?

PF: In the case of DPT, we’d looked at their business in the past, we’d analyzed their segment, and we had discussions over the past two years with their owners. It reached a point where they were considering making a move.

DFB’s investors [the owners of DPT] will have representation on the board and be consulted on any strategic issues about how we will take the company forward. DPT fit our profile of opportunity and after visiting and meeting the management team, we came away impressed. It’s a world-class, well-run company with great potential. There are areas of opportunities for DPT where we have some expertise.

CP: Which areas are those?

PF: Steriles, definitely. DPT’s Lakewood, NJ facility is just getting started. I have a history in the steriles segment, as do several partners in the firm. A number of us came from Baxter. I started my career in manufacturing sterile products.

CP: What’s your history with Renaissance Pharma and RoundTable Healthcare Partners?

PF: I spent 20 years at Baxter, and was a colleague with some of the partners who created RoundTable in 2001. When I left Baxter that year, I joined a platform company, Sabex, that RoundTable had established.

Sabex was eventually sold to Novartis/Sandoz. I stayed there and ran Sandoz’ business for five years, then re-joined RoundTable. We didn’t have a platform company to buy, nor an acquisition to make, so I was a CEO-in-residence, if you like. I created Renaissance Pharma and started looking for acquisition opportunities. I didn’t need to line up investors, since RoundTable would take care of equity.

CP: Were you at Baxter’s CMO business or its in-house operations?

PF: Both, actually. Over the years, I had responsibility for manufacturing operations in Canada and Europe, and then other parts of the world. Most of these operations covered both Baxter products and CMO mandates.

So we understand the steriles business. It’s a difficult segment, very operationally complex. We think we can help DPT’s Lakewood site. It’s geared up to bring on a lot of products and offer many services in highly specialized areas. But right now, it’s a fully staffed facility with little volume going through it.

There’s also an investment in small volume parenterals. That should go live by the end of 2012. That segment of the industry is in high demand, with lots of pressure from compliance issues and shortages. We feel the Lakewood facility has a huge opportunity for growth, and that we could help bring that along.

CP: Can you tell me the purchase price for DPT, or the size of the investment you plan on putting into the business?

PF: [laughs] I can’t give any numbers on that, but I’ll say that we’ll continue to make multimillion-dollar investments in all those facilities each year. There’s a lot of room for investment in Lakewood. The shell itself and the infrastructure is there, but the equipment will depend on the opportunities that arise.

Our question is, how do we increase the rate of growth? By bringing new ideas and new opportunities to these sites and attracting knowledge and talent to further complement the team that’s in place.

CP: Your group also bought Confab Laboratories in late 2010. Are you looking to integrate that company with DPT?

PF: There are basic synergies between them. The cross-selling opportunity is huge. When we look at DPT and Confab, one of the the biggest things to jump out is that the dosage form capabilities and scale are highly complementary.

Confab offers development and manufacturing of complex solid dosage forms. They have a lot of specialized equipment in that area. DPT doesn’t have that. On the other side, DPT has access to steriles, semisolids and liquids. Confab has semisolids and liquids, too, but only for small-batch/small-volume products, while DPT has the scale for large volumes. For customers, this will provide a much better offering.

Overall, there was almost zero customer overlap. That’s a great situation. All the existing DPT customers today who might have a solid oral dosage form to outsource now have a natural bridge to a provider. And that’ll go the other way, with Confab leads that could feed into DPT’s services. It’s very complementary.

Both companies will keep their sales forces, but they’ll be able to offer broader services than they could before.

CP: Any other synergies?

PF: There’s the basic purchasing synergy, for materials like excipients, packaging, and other goods that could be used by either company.

The more interesting one is the ability to do a lot of best practices exchanges. Both companies have well-established operational excellence strategies. We want to pick a few processes and figure out how to extend them and improve operations. On the technical side, each company has a lot of internal resources with experience in specialized areas that their businesses don’t necessarily cover. For example, at Confab, there are scientists with tremendous experience in injectables. There are DPT scientists with experience in controlled release formulations. So now there’s an internal pool of resources that both companies can tap.

In Analytical, there’s access to a lot more scientists. That can help when you’re trying solve an issue for a client. But apart from that, we’re not going to integrate the businesses. They’ll continue to operate under their own names and management teams. Customers won’t see a difference, but we hope they’ll see additional value.

CP: What role will Paul Johnson have after the acquisition? He was serving as president and chief operating officer at DPT, and I see that he’ll be promoted to COO of both DPT and Confab.

PF: Paul’s a very experienced, seasoned individual with tremendous leadership capabilities. He’ll take over all CMO operations. The president of Confab, Nathalie Brisson, will report to Paul. That move is a great tribute to the quality of the management team at DPT.

CP: How has Confab performed in the 18 months that you’ve owned it?

PF: It’s grown, in terms of top line. It’s in a transformation period. We’ve invested tremendously in terms of talent. From a profitability point of view, we’re investing heavily right now to take it to the next level. It’s not at the same level as DPT.

Confab was a family-owned, family-run business, and those businesses typically tend to have a few key people in management. We want to run it as an operation with a strong management team and a strong process. I’m pleased with the transformation so far, and it’s starting to have significant success with major customers. We’ve provided support at RoundTable and Renaissance to help them get scientists who can fix customers’ problems. We’re building a perception of significant capability, and some larger customers are now giving Confab turnkey projects from beginning to end. They’re starting to see Confab as a company that can fix their issues.

We’ve made a decision not to scatter their efforts on many small things. We picked a few major customers whom we think Confab can grow with, and put our efforts into supporting their projects. We’re seeing the fruits of that strategy. As we deliver on those, they’re coming back for more.

CP: What other areas of the CDMO market are you interested in?

PF: When you look at what we now have, there’s not a lot that we can’t do. We can’t do cytotoxics, but we’re going to continue to look at all opportunities, both for further acquisitions and for investing in new technologies in our existing facilities.

We’re always considering the state of the market and talking to people. If we find a good fit that will complement our capabilities, we’ll go for it, but DPT is a large transaction for us and we want to make sure it’s successful. We’re in the business of investing for return, and if we find a good investment, we’ll find the financing for it.

CP: What are the strongest areas for growth in the CMO/CDMO market?

PF: There seems to be a lot of opportunity on the development side. We’re seeing a lot of interesting projects in R&D. In terms of dosage forms, steriles are important. There are new products, and there have been compliance issues for some existing manufacturers.

There’s been a trend to bring things back to domestic facilities, for a number of reasons. There’s competition from foreign facilities, so that means North American sites have to be very good at what they do. You can’t just battle those offshore sites over cost. So we focus on niche products and complex technologies at both DPT and Confab; that’s a real manufacturing strategy.

I can’t make generic Lipitor competitively at Confab. Most domestic sites can’t, and anyone in that market is probably going to be vertically integrated with the API manufacturer. That’ll get done in a low-cost market.

But I want to make all the stuff that people have trouble with: products that are difficult to make, difficult to get approved, difficult to source. I think being good at those complex things is the right growth strategy.

CP: What’s your opinion on the need for consolidation within the market?

PF: In a highly regulated market like ours, there’s a compliance barrier that comes up when you talk about consolidating. On the flip side, I’ve been hearing for years that we need consolidation, but both in-house and outsource manufacturers keep building more plants, because the volumes keep going up.

Is there excess capacity? There’s certainly excess BAD capacity out there, for easily commodified manufacturing; you don’t want to consolidate that. I think there’ll be continued consolidation in the industry, but I think the niche, complex focus of our businesses will make more investment and allow us to grow organically.

CP: Was DPT “up for sale,” or did this acquisition evolve from your ongoing conversations and relationship with management?

PF: When we talk to companies, they’re never for sale. We tend to do most of our deals in an exclusive manner. People like our model, and they want to partner with us. So we tend not to do transactions in auction-type environments. We want to make sure that our model is the differentiator. If it’s just a matter of “who’s paying the most,” we’re not going to get into that competition.

CP: And you’re not going to suffer “the winner’s curse,” either.

PF: Why do people pay huge multiples for some of these businesses? There are all kinds of reasons. In our case, we want to pay a fair price, but what we offer to sellers is our model: we keep management teams in place, we incentivize them, and we add value to the enterprise by adding investment to help them grow.

For DPT, I think the DFB people were impressed by our knowledge of their products. We have a lot of smart people who have analyzed their markets and trends. We can offer perspective on approval times, production expectations, and more. We have expertise in understanding generic launches and how they affect volumes. If you’re a CMO, you don’t always know when patents will expire for branded products that you’re manufacturing. You can get caught short when that happens. The more you can anticipate what’s going to happen, the better you can serve your client.

I believe that, in a period of change like the phama industry is going through, where companies are not growing as fast as they once did, it makes a lot of sense for them to put their attention and their cash into R&D, and let experts in the CMO field handle manufacturing. I think outsourcing is going to continue to grow. 

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Biographical Note
Pierre Fréchette has more than 27 years of experience in the health care industry in North America and Europe. Most recently he served as president and chief executive officer of Sandoz Canada, a position he held since 2004 when Sandoz, a division of Novartis, acquired Sabex Holdings Inc. from RoundTable. Mr. Fréchette had held those roles at Sabex at the time of the acquisition by Sandoz. Under Mr. Fréchette’s leadership, Sandoz Canada achieved a 20% CAGR in net sales, launched 75 new products, and implemented a global center of excellence for the development and manufacturing of sterile injectables and ophthalmics serving Canada, the U.S., Europe, and Japan.  While at Sandoz, Mr. Fréchette also acted as the chair of the Canadian Generic Pharmaceu-tical Association. Prior to his tenure at Sabex and Sandoz, Mr. Fréchette held various senior positions at Baxter International in mergers and acquisitions, business development, marketing and manufacturing.