The sourcing professional's problems are a common story these days, as demand for development services has never been greater. Major biotechnology and pharmaceutical companies are under enormous pressure to advance their pipeline compounds, while funding for early-stage companies continues to flow. As biotechnology and pharmaceutical companies push to keep studies moving, contractor resources are being stretched as they try to meet client requirements.
Attributes of the current market environment are particularly tough on project managers. The large number of early-stage companies needing services is especially demanding because managers at those companies often have little hands-on drug development experience and depend on project managers for guidance on what needs to be done and when. As a result, the project management input for these clients is often way out of scale to the size and nature of the work that actually has been done.
As for the major pharmaceutical companies, many are using contractors to an unprecedented degree so their sourcing managers have little direct experience with contractor performance or managing outsourcing relationships. The fact that much of this work was previously done in-house may mean that the client-side managers are unaware of the cost and time implications of changes to the scope of work or project schedules. It may take all of the project manager's diplomatic skills to explain to the client that doubling the order for clinical trial supplies will increase delivery time because suite capacity already has been committed to other projects.
A further impetus comes from CRO business models built around integrated solutions that promise to get a biotechnology and pharmaceutical company's candidates into the clinic faster than if the company were using independent suppliers. The success of these "one-stop shops" will depend on the effectiveness of their project-management groups in tying the various and geographically dispersed services into a seamless offering.
Patheon (Toronto, Canada) completed its search for "strategic and financial alternatives" last month with the announcement that it would receive a cash infusion from a private equity firm. The new investor, JLL Partners (New York, NY), will invest $150 million in Patheon ($138 million after expenses) in exchange for preferred stock, three seats on the company's board of directors, and voting rights equivalent to 25% of shares outstanding. The investment is subject to shareholder approval, which is expected at a shareholder meeting scheduled for mid-April. The new funds will be used to reduce Patheon's long-term debt, which stood at $338 million at the end of January.
With the completion of the investment, Patheon's executives will turn their attention to restructuring the company's operations to improve profitability and performance. Despite 10 years of rapid, acquisition-driven growth, the company has had problems achieving sustained profitability and its cash flow has been insufficient to fund ongoing capital improvements. The problems came to a head in 2005–2006, when its Mova Pharmaceuticals operation in Puerto Rico, acquired at the end of 2004, received a warning letter from the US Food and Drug Administration and failed to achieve revenue projections. In April 2006, the company's long-time CEO was dismissed, and the company began a concerted focus on performance improvement while its board evaluated its strategic and financial options.
The restructuring efforts to date have included plant-level operating improvement campaigns, a program to generate savings in procurement by leveraging the company's buying power, and ongoing reductions in staffing. The restructuring drive is expected to pick up steam once the JLL investment is completed and its nominees join the board of directors. JLL Partners is known for investing in turnaround situations, and JLL is expected to push for more aggressive measures, including possible plant closings. Rumors to that effect are already circulating on Internet discussion sites.
Evidence from Patheon's first-quarter results indicate that the company is already seeing results from its restructuring efforts while benefiting from the strong drug-development services environment. Revenues were up almost 9%, driven by a whopping 23% jump in product development services (formulation, analytical and clinical trial material manufacturing) and 13% growth in commercial prescription drug manufacturing. A sharp decline in manufacturing of over-the-counter products prevented even stronger top-line performance. Driven by higher utilization and greater efficiency, operating profit margins rose to 13.5% from 8.9% in 2006.
The strong first-quarter results suggest that clients are sticking with Patheon despite its recent problems. Some difficult issues remain to be tackled, but indications are that the company may once again be headed in the right direction.
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, [email protected]