My first conversation with Jim Mullen, Patheon’s new chief executive officer, took place at last year’s CPhI/ICSE in Frankfurt. I was intrigued by the notion of a high-level biopharma executive moving to the contract service provider side of the business, and found that he had some perspectives I hadn’t encountered among CMOs/CDMOs previously. He was kind enough to make time at the end of an investors’ day in New York in April to give us this exclusive interview.

—GYR

Contract Pharma: It’s been a year-plus as CEO of Patheon. What’s the learning curve been like?

Jim Mullen: We’ve learned a lot of things, and we’ve proved and disproved some hypotheses that were held back then.

First, the fundamental thesis about the trends in outsourcing have been verified. I have a much better appreciation for how the different segments of the market think about what they’re looking for, what they want from us, and how they behave. And that’s covering the gamut from big pharma to emerging biopharma, from specialty pharma to generics.

It’s a business with a lot of competitive and cost pressures, but we’ve found that there’s a lot of opportunity to change how we do business. And that can be both internal, in terms of how we run our factories and our network, as well as the value proposition for different external models.

One of the things I was most interested in trying to understand when I came in was this: Where are the opportunities to have the conversations with, say, a generics client or a big pharma or an emerging company, about how we can help create value for them? How can we be more efficient and flexible to win more business?How can we take a problem off their plate? How can we change the nature of this business from being very transactional to being based on strategic relationships?

CP: Do you think we’ll see more strategic partnerships in the CMO/CDMO area, along the lines of what we’re seeing on the CRO side of the business? Will we see exclusive arrangements encompassing a significant array of services, among larger pharma clients?

JM: Where we see more interest in that is below the big pharma tier, more among the specialty pharmas, which don’t have as much brick-and-mortar. We’re reaching higher up in those organizations, where they’re thinking more strategically. Companies in that area are very amenable to people coming in with a different approach. They also want to spend their time focused on where they really make value in the business: development and commercialization.
They don’t want that much of their mindshare devoted to worrying about their supply chain.

Those are the companies with which we’re going to lead the way in terms of strategic partnerships. I think big pharma will follow that model after they see some success with it from other companies.

CP: How much did your experience running Biogen Idec — a large biopharma with a virtual infrastructure — prepare you for this role?

JM: We did outsource a lot of functions at Biogen, but I think it’s more important that we really understood the drug development process and the problems involved in running a pharma company.

I think I have some insights into what it’s like for those people who are pharma decision-makers, and that’s different than the perspective of people who have worked on the manufacturing side their entire career. We think more about, say, what they’re trying to manage through their clinical trials and what problems they face. A lot of those problems aren’t well understood outside of the C-suite, even within their own organizations.

At one large client, there was a situation where they brought us a product that was recently launched. Demand really outstripped the internal forecasts. We were thinking about their problem totally differently than the people we were interacting with. We were doing more research on, say, where their clinical trials were taking them and how much demand uncertainty was out there for the launch product.

I’m speaking generally, but for commercial departments, it’s not an exact science. They come up with a forecast and, depending on the product and how it rolls out — in terms of approvals, markets, labels — they could easily be off by 100%. And you don’t want to be 100% off. It’s okay if you have some spare capacity floating around your network, but that’s a huge amount of money getting left on the table.

Sometimes, they really haven’t thought through the questions, “How would I respond if the true market demand turns out to be 50% or 80% or 100% greater than the forecast? How quickly could we respond to that demand?”

CP: How do you reach the people who need to understand that? Moreover, as a CMO, how do you help them cover that spread but not expose your own operations to excessive risk? One of the stories for Patheon last year was a significant product cancellation that resulted in a large kill-fee from a client and idled capacity at a site. [Patheon signed a seven-year agreement to manufacture ceftobiprole for J&J unit Janssen-Ortho and development partner Basilea. Patheon and Janssen built a $50 million production facility for the specialized cephalosporin, which had received approval in several markets. However, the NDA was issued two complete response letters by the FDA in 2008 and 2009 based on the quality of clinical data, leading Janssen to pull the plug on the product. Patheon received a significant payment from the client.]

JM: Part of the advantage of coming from the biopharma world is that we have a lot of contacts. We spend time internally discussing which companies Patheon has a relationship with, and assessing which of those companies may be in a position where they’re ready to talk about a strategic relationship.

How do you mitigate against something like what happened with ceftobiprole? In terms of the contract, that was already mitigated. We were made whole when the client had to cancel. It does put a lot of volatility into our earnings, but from an economic standpoint, we were made whole.

Would we do another deal like that one? Sure! You just have to recognize the value of taking on Phase III risk —

CP: — and the drug did have commercial approval in Canada and Switzerland —

JM: True, but we inherently will have registration risk and regulatory risk with any products that are in clinical development. We have to pay attention not to get overexposed to risk from any single customer or situation. In this case, I think there was too much of a bet made that that particular compound was going to pull that entire site along. On a corporate level, we were all right. On a site level, however, we weren’t diversified enough.

CP: The other significant story to come out Patheon’s recent earnings calls has been your $20 million expenditure on consultants. What are you trying to achieve with this initiative, besides implying that I went into the wrong line of work?

JM: This gets back to some of the things I believed coming into this role. Pharma manufacturing can be significantly more efficient. There hasn’t been an emphasis on it, but if you’re in the CMO world, you have no choice but to be really efficient and very high quality. There are a lot of ways to get there, but it takes hard work. It’s not miracle work; it involves a lot of training and a lot of cultural transformation throughout the business.

We had started some of this work, on a narrower, more experimental basis, in a couple of our sites in Canada, as we were developing our strategy. We came to the realization that the fastest way for us to transform our entire group of factories and our pharmaceutical development sites was to bring in a third party to create a common language and a common approach. This way, we could share best practices across the network.

An expenditure like this would be expensive for any company, but we’ve seen the fruits of those projects already in those sites. We’re seeing results today in Toronto, and Whitby, and Cincinnati, and in what we’re rolling out to the other sites. Not only are we making things more efficient, we’re freeing up critical capacity where we have customer demand today.

We’re starting to see the transformation of the culture. The strategy was dropped from the top-down on the organization, but it’ll only be a success when it’s sustained from the bottom-up and be-comes part of the culture of the company. We’ve certainly seen a breakdown of some of the silos that were there. We could’ve been operated as nine or 10 different companies before, with no sharing of best practices, and not a lot of cross-talk among the different factory. We still have a long way to go, but we’re seeing the benefits of that already.

CP: Any concrete examples of improvements you can share? How has the process worked, on an immediate level?

JM: The consultants go right into the factory floor and the labs. One of the things we learned is that you pick a well-defined project; you don’t try to change everything globally. The idea is, if you get a couple of wins on the board, it builds momentum. The people buy in and get involved, right down on the factory floor, from the outset.

We’ve freed up a fair bit of capacity that was in demand at the Toronto facility. We’ve made packaging more efficient in Cincinnati and won some pretty significant business there as a result. Those will show up in both the top line and bottom line; we’ll get more business and we’ll do it more profitably. And that’s why, in our last earnings call, we said that we’ll get that $20 million investment back within this fiscal year. We’re already seeing returns on this investment, both top and bottom line.

The consulting fees probably peaked in 1Q12, and will roll off in 3Q. They’ve already exited some of the facilities, and we’re continuing with internal resources.

CP: How difficult is it to manage a transformation like this while also maintaining business?

JM: The way you get more efficient is to have well-trained people with simple, robust processes executed with extremely high quality. That’s how you get there. It’s not by figuring out how to do something faster. You have to get everybody on that page. It can be a leap of faith for some people; they think that if you’re going to take cost out, you have to cut corners. That’s not it at all. If you look at the cost of not doing it right, that’s huge.

The big example is really not doing it right and getting a warning letter, but I’m just talking about having to reject a batch. If you look at any type of manufacturing, where they are really low-cost and highly efficient, they’re also really high quality.

You need to break down some of the traditional silos that exist in pharma. The cGMPs in the 1970’s set up the notion that quality should be separate function from operations. You have to keep them that way to some extent to satisfy regulators, but if you play that game, you don’t get to the right answer. You have to get the process scientists worrying about the robustness and the quality of the process from the beginning. You have to get the quality guys down on the shop floor. You have to get all these parties together for one process goal: making it right the first time robustly.

There can’t be a cops-and-robbers mentality of the quality guys overseeing manufacturing, inspecting things once they’re all set up and done. That doesn’t work.

We’re focusing our attention on the unregulated part of the process. I don’t mean non-cGMP; I mean all the planning and setup activities to get ready to make product, and all the cleanup and changeover activities when you’re done, to get ready for the next product. There were huge inefficiencies there. Sometimes we had to determine which shift handled certain tasks best and most robustly. In some cases, we took tasks that had been done in sequence and asked whether they could be done in parallel. It’s a lot of little things, not just one
problem to solve. But the results are there.

CP: Where do you think the company can differentiate itself from its competitors?

JM: We have to keep the quality record up. We have to be more agile in our ability to react to customer or market circumstances. This can be the ability to ramp up or do tech transfer and get something into production for a client quickly.

We’re looking to fill out some of the gaps in our offerings. We’re focused on oral solid dosage forms and parenterals. We filled in a gap in softgels recently, in a fairly creative way. We’re going to invest more where we can increase capacity in some service offerings, like prefilled syringes.

We had an idea when I was on a tour with our head of marketing and sales, Geoff Glass. We talked to a number of VCs and discovered that they had two issues. See, VCs don’t want to spend a nickel on anything on the capital side. They’d be happy to outsource it all, and they’re going toward more project-based investments rather than companies.

The other thing is, just like us, VCs are really looking for access to advice. In our case, it’s when we’re considering a project or when we have a manufacturing problem, for them, it’s exercising diligence. So we came up with the Certified Consultants program.

This was Geoff’s idea, and it involved bringing together nearly a dozen consultants in niches across the industry. We gave them orientation about what it is we do at Patheon, but the key is that they’re independent consultants. We’ve created a network for our customers that’s independent of us, so that they’re not simply there to say, “That’s why you need to use Patheon’s services.”

It gives them access to high-quality resources. Sure, the consultants know us and our services, but they’ll give independent advice. It’s more important that our service build trust and goodwill from our clients, rather than trying to point everything our way.

For the VCs and other customers, when they’re doing diligence on a product they want to license or buy, these consultants are the kinds of people they want to speak to, because we have all these areas covered. It saves them from having to go through their own networks to find the right consultant to engage in a diligence exercise.

CP: What other business adjacencies is Patheon looking at? Are you considering expansion into other service areas or geographical plays, while you’re in the midst of this network transformation?

JM: We’re expanding and investing in the early development area. That helps us reposition the company to add more value on the science end. It also gets us involved with molecules earlier. They’re sticky; if you work with these companies early, chances are they’ll stay with you.

We made the ProCaps deal, which allows us to put a very credible offering out there for softgels. That was a nice filling-out.

We’re looking at other things in the value chain, both in technologies and geography, but I’m not going to signal those in a magazine . . .

CP: [Sighs.] How different is the early development / discovery business from the rest of Patheon? To me, it looks like a very different beast from even your development services offerings, much less your commercial unit, given the sheer amount of attrition at that stage of the game, and the resulting amount of project management and business recruiting that would be necessary to feed into the later stages of your offerings.

JM: I don’t think the numbers are an issue. Our client base is around 150 companies. What’s different about early development is what you have to do and what pace you’re working. When clients come in, they don’t want to go through a long bid-proposal process and start a project three months later. When they come to you, they may want to start the work next week.

You have to be set up to do business more quickly. You have to have decision-makers on the front line; there’s no time to go back to corporate to run everything through a quotes process. It’s a more dynamic business, with more unknowns on the technical side. You have to be able to go quickly where the science and the issues take you. It has to be a lot more agile and flexible in terms of how you staff, oversee, and execute than when you get further into clinical development, where things become more routine and timeline-based.

CP: What are the early returns on that business?

JM: We’re in the learning curve right now, in terms of pricing the business, getting clients in, responding quickly to changes, etc. We have some business going on in that segment.

CP: Do you see it eventually as a standalone business at Patheon, or will it remain a piece of PDS?

JM: It’s part of PDS, but we’ve organized it to be a separate part within PDS. We do recognize that how you execute that business and access scientific talent for early development runs on a different time scale than PDS. Also, the contracts are smaller, so there’s less at risk with any one assignment.

CP: What fallout have you seen from Ben Venue’s departure from the CMO market?

JM: Ben Venue had a huge capacity out there in pre-filled syringes, lyo products, sterile liquids and cytotoxics. Their issues have created some concern in the industry. We’ve seen a lot more interest and inquiries, and we’ve gotten some business directly from products that are coming out from Ben Venue’s site.

CP: Are you looking to expand into other areas of BVL’s expertise? Anything going on in cytotoxics?

JM: In cyto, we established a partnership in 2008 with BSP Pharma, in which we took a minority share. BSP is really well set up in the cytotoxic area, so we’re covered there.

CP: How important is scale in the CDMO/CMO business?

JM: If you look down the road and ask, “Who are the winners going to be?”, it’s going to be companies that have scale and a global footprint. You need to have assets in North America and Europe, but you also have to have factories and development capabilities in India, China, and South America.

I think scale’s important for a couple of reasons. You can get to the cost basis you need. You can get best practices to proliferate through a broad network. You can add increments of capacity relatively inexpensively.

When you listen to what big pharma says it wants to do — going from 100 or 200 CMOs down to 10 or 20 — it only works if there’s a handful of fairly large, sustainable companies. It’s not going to work if there’s a bunch of $20 million or $50 million outfits; they’re sub-scale.

CP: What timeframe do you envision for a sustainable business environment for CMOs and CDMOs?

JM: It’s sustainable now. We can do it. Catalent can do it. It’s a question of what the small guys are going to do. Unless they have a unique technology or capability niche, the generalists are going to go away.

CP: Where do you see Patheon in five years?

JM: The winners are going to be larger companies that invest in expertise in manufacturing. We’ll have manufacturing at a good cost base, with extremely high quality.

The long-term survivors are going to have an outstanding quality reputation, not just “getting by.” What could kill a lot of companies at the bottom is the race to keep up with regulatory systems. Those groups that are operating in India and China today may think, “I have a big enough home market here, I don’t have to hit western quality standards,” but they’re wrong. Those standards are all going to rise toward western standards. Standards aren’t going to drop toward those lower levels; they’re going to rise to American and European standards.

In China, they have a lot of foresight and strategy. In the process of bringing their industry up to western standards, they’re being very careful to squeeze out low quality domestic producers, without causing a lot of drug shortages. It’s clear that they’re going to western standards.

That’s an opportunity for a company like ours. It’s a disadvantage that we’re not there today, but it’s an advantage that we know how to operate to the standards where everybody’s going.

CP: Do you think other CMOs are going to look to former big pharma/biopharma CEOs to run their companies, as opposed to, say, operations guys?

JM: Well, most of my old colleagues thought I was crazy when I took this job, so I’m not sure there’s a long list of us looking to go into the business!

Biographical Note
James Mullen is Patheon’s chief executive officer. He was most recently with Biogen Idec, Inc., where he held the position of CEO and president for 10 years. Biogen Idec was formed from the merger, led by Mr. Mullen, of Biogen, Inc. and Idec Pharmaceuticals, to form one of the world’s largest biotechnology companies. Prior to the merger, Mr. Mullen was the CEO and president of Biogen from 2000 to 2002, and chairman, CEO and president until 2003. Prior to that, Mr. Mullen held various operating positions at Biogen, including vice president, Operations, and several manufacturing and engineering positions over a nine-year period at SmithKline Beckman. Mr. Mullen’s 30-year career includes extensive experience in pharmaceutical and biotech manufacturing, engineering, sales, marketing, mergers and acquisitions. His breadth of industry experience includes biotechnology, pharmaceuticals and specialty chemicals.

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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.