My first experience with Clive Bennett, Halo Pharma’s chief executive officer, was this past January when I was looking for a comment about the proposed Generic Drug User Fee Act. He e-mailed a well-thought-out takedown of the Act’s imposition of inspection fees on CMOs, and ended with “And you can quote me on that.” I thought, “Now that is someone I need to interview!” We sat down at his office in Whippany, NJ in April, shortly after the announcement that Halo had acquired Teva’s (formerly Ratiopharm’s) Mirabel manufacturing facility, near Montreal. When that deal closes, Halo will nearly double in both sales and staff. Mr. Bennett talked with me about his lessons learned over his 40-year pharma career, with the same unique combination of bluntness and deep consideration he showed in our GDUFA conversation.   —GYR

Contract Pharma: So where’s Halo headed?

Clive Bennett: We’re currently doubling in size by acquiring a pharmaceutical company’s site in Montreal. I see us filling up capacity in both Whippany, NJ and Montreal, QC through strong organic growth. Each of these facilities — and indeed in the future any Halo facility — will have both development and manufacturing activities. I’m clearly committed to having development capability at every manufacturing location where we operate.

CP: What’s your rationale for that?

CB: In my opinion, plants that are successful are the ones where you can develop all the dosage forms that are manufactured at the same facility. A smooth transition from Phase III development activities into commercial manufacturing is in everyone’s best interests — particularly the client’s.  Having strong scientific expertise on site for development activities is also very helpful during technical transfers for process optimization activities.

CP: Are there particular client-bases that drive that?

CB: It’s often harder to get development jobs from big pharma. In my experience their outsourcing tends to be more about late lifecycle products. Small and emerging pharma and biopharma, as well as mid-sized specialty pharma companies, tend to bring development work anywhere from Phase I to Phase III. I believe strongly that if you have the development expertise at the same site where you do commercial scale, that gives clients a great deal of comfort. In our case we can show them that we can take them from non-GMP to GMP and from 300-gram batch sizes to 120-kg batch sizes in a very controlled manner during development, and then anywhere from 120 kilo to 1.5 ton batch sizes in commercial. (Here I happen to be referring to high-shear granulate, fluid-bed drying process trains.)

When people see that you can cover that, and they can see the technical expertise that can bring their product to commercialization, they are typically impressed. It’s my experience that the successful sites are the ones that can carry a project all the way through.

CP: Does that need to be from Phase I all the way to commercialization?

CB: I certainly believe in that model.

CP: How much Phase I work is Halo doing?

CB: In dollar terms, probably 10-15% of our total business. Phase IIb to III is much larger. Obviously Phase II and III projects tend to be larger — though we don’t discriminate on any of those bases. We know the client needs technical and scientific excellence that moves quickly. That is true of all the phases, though it is easier to go fast on the very early stages when the work may not yet even be GMP.

CP: What’s your perspective on the size and shape of the CMO business?

CB: The talk around the industry years ago was that 15% of cost of goods manufactured was being outsourced, and that was going to grow. I think it’s remained around 15%; I don’t think it’s grown very much as a % of cost of goods manufactured.

When I’m talking to clients or bankers, I don’t try to sell them on the premise that the 15% is going to grow dramatically. Nor does the pharma industry have the 10% or more annual growth rates that we saw 10 to 15 years ago. It’s a relatively static period now.

CP: What do you tell them?

CB: That our growth at Halo is going to come from share. It’s still a very big market, perhaps $10 billion in size. A share of 1% would be around $100 million, which would be very healthy. My immediate job is to figure out how to deal with 1%, or maybe up to 1.5% share.  One day (when I’m old and grey) I can pass on the baton to someone who has the vision to go further than that and figure out how to avoid the downside of becoming large.

CP: Which are?

CB: Slowing down, growing less flexible, having multiple points of contact, clients losing access to senior management, and so forth. I don’t (yet) know how you avoid those traps when you get large.

I remember, during my big pharma days, going to a CMO in Canada with a job, and being told, “No, we don’t want to take that on.” Why not? “Well, we’d have to add another shift to a work-center, and we’ve already reached the size where we can manage things and provide good service, and we don’t want to compromise that.” They didn’t want to grow just for the sake of growth. Somewhere in there is the kernel of an answer: don’t grow for the sake of it, but in a way that can maintain the principles that your size enables.

We want to be large enough to have big company capability, but small enough to be agile, to remain flexible, and to grant clients the access they want to all levels of management. If we hold fast to that concept, that’ll get us to a suitable size. I also want clients to find that it is a personal pleasure to work with us. This is important work we do together, it should excite and enliven us — I believe it does.

CP: How does Halo’s acquisition of Montreal, which will double your revenues, headcount and capacity, fit into that philosophy? How are you integrating that and retaining flexibility?

CB: Even though the deal doesn’t close for another month or so, the current owners have allowed us to begin approaching clients regarding the sale of our services in Montreal. On the back office side, there are a number of facets that are superior to what we currently have internally. So the combination of these sites will be a tremendous advantage to us.

We both run SAP, but they run the full-scale version up in Montreal, and they’re handling hundreds of SKUs, while we’re running dozens. So access to that ERP system will benefit Halo. A fair bit of this integration involves adopting the best business process in each case.

Both sites have very strong people, and not really in duplicated roles. We think the skill sets will be very complementary to each other. We’re not establishing a corporate office, where one geographic area is seen as HQ. Each site will have its own P/L, and its own organizational strengths to bring to the whole, and Halo will be the sum of those P/Ls. If we add a third site working in, say, parenteral dosage forms, that will have its own P/L, too.

CP: Parenterals, huh?

CB: I’ve repeatedly said to people that if I could find the right parenteral facility, with legacy business in a relatively standard CMO model, then I would acquire it. It probably costs four times as much to build a greenfield site than to acquire one, but it has to be the right acquisition target. We have drawings and plans for how we’d build one on site here in Whippany if we can’t find a suitable steriles site.

CP: Back to Montreal: what did that site offer that appealed to you?

CB: A very professional management team, the people in general are all very accomplished. This plant immediately opens up Europe to us. There’s a mutual recognition treaty between Canada and Europe, and so Canadian inspections “count” as valid in Europe. Since the plant has passed Canadian inspections for at least 25 years now, it puts us in a position to export to those markets. Montreal also has dosage forms that we don’t have in Whippany, most notably non-sterile creams and ointments.

CP: How difficult would it be to get that European clearance for Whippany?

CB: For a CMO, it’s a bit more difficult than it is for a standalone pharma company. We have to convince a client that they should put a project in this site and be the party that gains first approval by European inspectors in a plant that previously has only been inspected by FDA. That’s a more difficult sell. I do have aspirations that, with a bit of time, we’ll be able to accomplish that for the Whippany site.

CP: Halo’s not looking to develop its own products, is it?

CB: No, we’re a pure-play provider. I believe it’s the right way to go. I think it’s a bit of a conflict of interest otherwise. Not in terms of what product gets onto the production line; if you’re a responsible manufacturer, you’ll get the client’s products on the line. However clients ask whether you have your own products, so it’s clearly in the back of their minds when they want to work with you. They’re thinking, “Are you a CMO and therefore not a competitor, or are you a pharma company that I’m going to trust my IP to and hope it won’t suddenly look attractive to you to enter my market?” and, “You are not a competitor in this therapeutic area today, but might you be next year?”

I’m not sure how viable that hybrid model is, especially for major pharma companies operating CMO businesses to utilize excess capacity. Sooner or later, I think, someone at the top always says, “We’re not in this business, “and “Explain to me why I’m spending a big chunk of sustaining capital to make other people’s products just to absorb overhead, capacity that really I should be taking out of the system.” In many ways, that person is right when they come to that conclusion. Their problem is not coming to grips with the way the plant network ought to be for the business they are in. Being in the network rationalization business, they’ll say, “What’s keeping me from getting rid of this plant, because we’re not using three-fifths of it?” And the CMO unit will say, “Well, we’re absorbing all this overhead with outside business.” But it’s not worth it; I say that coming from an operations background, and having dealt with this in the past when I was head of a big pharma global operations network.

By way of example, at one company, the head of global operations realized that 85% of the overhead of one of his parenteral facilities was being used for third party work, and 15% was being absorbed by his own products. He was being asked to spend every year on capital and upkeep and eventually to do a major upgrade to go to barrier technology, to comply with the company’s new standards. Not making the investment meant the site was being operated as an exception to the company’s global rule. He said, “Why do I have this plant, exactly?”

In this case, one of the company’s major competitors wound up having to buy the facility just to maintain their supply of product coming out of that plant. They weren’t happy campers I can assure you. Bottom line: big pharma just does not belong in the CMO business long term.

CP: You mentioned coming from an operations background. How did you make the transition to an executive role? How much ‘stepping back’ did that require?

CB: I spent 30 years at big pharma, and I have been running sites for all but the last five years. My career was unusual. Somewhat by chance, I was building and running a site in Mexico nine months after I’d graduated in the UK. All of my experience was Operations. I gradually managed larger and larger plants, then groups of plants, then a global network. In the second half of the ‘90s, when I was running pharmaceutical plant operations for Hoechst-Marion-Roussel, we had 77 plants around the world, so I wasn’t very close to the floor anymore when it came to individual issues at individual sites, (though I always loved solving plant issues). So that ‘graduation’ from day-to-day operations to a general management role started the transition to general management.

Then I spent a couple of years in the UK after I left HMR, running a biotech company in the Oxford Science Park. I was raising second-round financing to get some molecules from Phase I to Phase II. During that period, I spent most of my time visiting VCs, to convince them to invest in our protein drugs. I put on the roadshow for investors, along with our medical director and the head of R&D. I gained other perspectives in that role, outside of my manufacturing background.

One of the big contributions I made, besides raising the money, was pointing out that the  non-GMP baculovirus protein expression system we were using wasn’t going to scale up to GMP. We were able to switch over to E.coli, which was scaleable and raised yields a hundredfold. In the span of six weeks, we moved to gram instead of milligram quantities.

After that, I went into contract manufacturing at a major CDMO and loved it. At big pharma, manufacturing is just one of the things that sales and marketing people need to have done, thanks to the results of the outstanding R&D people. But manufacturing is only really regarded as a potential downside risk not as something of strategic importance that can make the company top tier.

A CEO I reported to in big pharma once said to me, “We can never become the world’s best pharmaceutical company based on how well you do your job, no matter how good you are at manufacturing. We can be top tier based on how well we do R&D and sales/marketing.” That’s sort of discouraging if you’re in manufacturing at a big pharma company, though he meant it intellectually and  kindly (and he was and is a good guy.)

But during my six years at my previous CMO, I saw that it’s the reverse situation in contract manufacturing. Manufacturing is at the heart of the enterprise, not an unfortunate thing that has to be done. It’s the raison d’etre of a CMO, and a very important thing for the CDMOs. I found that extremely and personally fulfilling after my time at big pharma.

CP: Do you think we’ll see a major pharma externalize all of its manufacturing network, and just focus on R&D and sales/marketing?

CB: Actually, toward the end at big pharma, I tried to make the play to spin out all manufacturing into a separate, standalone company.

CP: Really? How’d that go over?

CB: I got fairly far down that road. We were generating P/Ls that showed numbers for the spun-off company and the remaining pharma unit: capital utilization, break-evens, and so forth. We’d actually arrived at the stage where we had two separate teams negotiating manufacturing and supply agreements. The CEO and CFO eventually decided they didn’t want to go through with it, because the additional risk they felt they would be taking on — loss of direct control in favor of arm’s length control — was not worth the improvement they’d see in the balance sheet and P&L, though there was a clear improvement.

CP: What were your main arguments for the split? This would’ve taken place in the ‘90s, before the CMO industry really had large scale.

CB: Manufacturing was not seen as strategic then. The move would have given us the opportunity to spread overhead more broadly, like a CMO/CDMO, driving down the cost of goods. To have a company that was solely dedicated to manufacturing, that would enable the remaining company to take a vast quantity of inventory and hence working capital off the books, it would allow senior management to focus on R&D and sales/marketing, and let manufacturing people focus on what they do best in their own environment.

CP: But losing control over supply chain security was their big worry?

CB: So it seems. I believe the difference between pharma and other industries that have successfully done these spin-offs of manufacturing, like electronics and automotive, lies in the different gross margins. Branded prescription pharmaceuticals are sold based on value to life and to quality of life, and based on the cost of R&D (and to some extent, sales/marketing). They’re not really based on a markup of cost of goods manufactured. Everyone knows that the actual cost of goods manufactured is a relatively small number, for pharma. If you have a molecule where the cost of goods is 5%, so 95% is gross margin coming out of your plants, and it’s a $2 or $3 billion product, then 95% is an awful lot of money that must fund huge amounts of R&D into new molecules for the future. To gain on that 5% by outsourcing means you really have to trust the guy you’re giving that work to.

If those numbers reverse, and your gross margin is only 5%, then it’s a different dynamic and you look for the external manufacturer who can slice away a chunk of the 95% of revenue that cost of goods represents.

Then there’s the regulatory environment, which really makes pharma a unique industry. You have to trust your third party to keep its regulatory house clean. Trust is absolutely critical between a client and a CDMO.

CP: How did your experience from dealing with CMOs in your big pharma days inform your current role?

CB: It taught me that trustworthiness is all-important. Product quality and regulatory compliance are far and away first, delivery service is second, and financial stability is a close third, in terms of what you have to provide as a CDMO. If I was going to trust a very valuable molecule to a CMO, those are the things I was looking for. That’s what I’m looking to provide now.

As far as what those days taught me, I remember getting into trouble with one CMO (who let me down) back in my big pharma days. They let me down from a regulatory perspective 20 years ago, and regulatory problems have plagued them since then. I moved away from that company then and never went back. They were just recently taken out of the industry by a regulator.

You know what it looks like when you lose trust in a CMO. At Halo we aim to always warrant the trust every client puts in us.

On the M&A Treadmill CP: What’s your take on the pharma mega-merger wave and the devolution that we’re starting to see? CB: I think big mergers within big pharma are simply a public acknowledgement of a failed R&D strategy. Companies are valued based on their pipeline, rather than current operations. If they’re not seeing future value, then senior management has a problem. They can’t bring along enough molecules to impress analysts, so the default position is to merge with another company that has a similar problem, but with a somewhat complementary pipeline. When you put those together, you take some percentage of expenses out of the system. Typically around 7% or so of total expenses gets cut. Of course, a disproportionate amount of that comes out of manufacturing. Sales/marketing takes a hit, but two quarters later, the company is reinvesting and adding staff there. R&D takes a short-term hit, but then there’s new investment going into new programs. Which means manufacturing has to take a big chunk of the 7% that was supposed to be distributed across the entire company. The biggest problem with mergers as a solution is that everybody loses focus for a period that feels like three years or so. From the time the merger’s announced, it’s 12 months before it’s closed. You can guarantee people are losing focus during that span. For the next 12 to 18 months, everyone in R&D is trying to figure out what the organizational chart’s going to look like, who’s going to stay and who’s going. They’re looking at the combined IP pipeline to figure out what’s going to get jettisoned. Before you know it, you’re getting on three years from the first announcement and nothing’s been achieved. At one point, companies were on a three- to five-year cycle of mergers. It’s almost self-perpetuating at that point. If it takes you three years to get over one of these things, you can’t be on a five-year cycle to escape the loop. Otherwise, big pharma remains on a treadmill.

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Gil Y. Roth has been the editor of Contract Pharma since its debut in 1999. He can be reached at gil@rodpub.com.

Biographical Note
Clive V. Bennett’s multinational 40-year career in the pharmaceutical industry includes seven years with Fisons Limited in the UK and Latin America, and 23 years with Hoechst Marion Roussel (now Sanofi), where he served in a variety of Quality, Production, Materials Management and Product Development roles. After a succession of responsibilities for individual manufacturing units and then regional groups of sites, he became Senior Vice President of Operations and Head of Global Drug Product Supply for HMR from 1995 until 2000. In that role he was responsible for the entire company’s dosage manufacturing network of 77 sites and 12,500 employees.

Mr. Bennett was chief executive officer of the UK biotech company Evolutec from 2000 to 2002, raising V.C. funding and moving the company’s protein drug candidates from preclinical to Phase II.

Upon his return to Canada in 2002 he joined the CDMO Patheon and was appointed Executive Vice President Operations in January 2002 (with responsibility for European facilities), and he was appointed President of Patheon U.S. in 2006. He started work with Halo in November 2008. He holds a Bachelor of Science (Hons.) in Chemistry from Bath University (U.K.).