In this environment, we see contractor executives falling into two categories: those who are lucky and those who are smart. Executives in the lucky category are content to ride the high tide of prosperity with little thought to what happens if the market weakens, while smart executives are those who are using their current good fortune to build a basis for lasting success.Checklist
Here's how to determine whether your company's management is lucky or smart.
If your business is growing at 10% per year or less, you are more lucky than smart. Publicly traded CROs and CMOs have routinely reported revenue growth rates of 12–20% over the past two years. Service providers that are growing slower than that are doing no better than holding their own, and they may actually be losing market share. Smart executives are looking for ways to distinguish their companies so as to be able to grow faster than the market and secure lasting relationships.
If your business is largely dependent on venture capital-backed bio/pharma companies, you are more lucky than smart. Major pharmaceutical companies are concentrating their spending with the largest CROs and CMOs, so smaller service providers are increasingly dependent on the trickle down of venture capital from early stage bio/pharma companies. The level of venture capital funding fluctuates from year to year, and just the prospect of reduced funding can cause small bio/pharma companies to cut back on spending to conserve cash. Large and midsize bio/pharma companies fund their development activities internally, and their spending is more consistent.
If your company is not investing in sales and marketing because you have enough business coming in unsolicited, you are more lucky than smart. Now is the time for service providers to be investing in brand building and relationship development: the higher profit margins resulting from current business activity provide resources for advertising, trade shows, and targeted prospecting. The objective of these efforts is two-fold: to improve the quality of the current customer base and to provide a basis for sustained performance when market conditions are less favorable.
If your company is growing by over-promising and under-delivering, you are more lucky than smart. Rapid growth stresses a company's physical, project management, and executive capacity. In the current environment, many service providers are taking on more business than they can handle and disappointing clients with missed deadlines and performance promises. Clinical packaging providers seem to be especially prone to this problem, and major pharmaceutical companies are victimized almost as much as smaller companies. Poor performance erodes client loyalty, which will be critical during periods when demand is not so robust.
If your company is turning away business because it can't handle any more, you may be lucky or smart. Turning away business because you can't meet the client's requirements is a good practice—to a point. Turning away too much business can hurt a company's reputation in the market, and it may be a symptom that management isn't being aggressive enough. If a company isn't investing in more capacity to meet the growing demand, it suggests that management is too contented or too scared to take some risks necessary to make the business a long-term player in the industry.
Smart CRO and CMO executives are using the strong current market environment as an opportunity to establish a solid long-term base for their companies. They are investing in business strategies and capabilities that distinguish them from the pack and will position their companies for success even if financial support for early-stage companies declines. They want to make sure they create their own luck in the future.
Jubilant buys Hollister-Stier
The big news at this year's Interphex trade show in New York was the sale of contract injectable manufacturer Hollister-Stier, Inc. (Spokane, Washington) to the India-based Jubilant Organosys ((Uttar Pradesh, India,). The sale itself wasn't a surprise—Hollister-Stier was owned by a private equity firm and was often the subject of buyout rumors—but the price and the buyer both raised eyebrows.
Jubilant is paying $138.5 million for Hollister-Stier, representing a multiple of nearly 13 times Hollister-Stier's profits before interest, taxes and depreciation (EBITDA). That multiple is 30% greater than that paid by the Blackstone Group when it bought Cardinal Health's, Inc. (Dublin, OH) Pharmaceutical Technologies and Services business earlier this year. Large multiples are not unusual for platform acquisitions, i.e., companies that provide a base from which to build a larger enterprise through additional acquisitions, but they are unusual for niche businesses like Hollister-Stier.
No doubt Jubilant justified its bid on the prospects for Hollister-Stier's injectable CMO business. Contract manufacturing revenue accounted for just $33 million of the company's $55 million total sales (allergy products accounted for the remainder), but the CMO business grew 33% in 2006 and is expected to accelerate when the company completes installation and validation of a new high-speed filling line and more lyophilization capacity.
The emergence of Jubilant Organosys as the buyer also was a surprise because there was a presumption in the industry that an Indian company would not pay for a premium property. Indian chemical and dose manufacturers have been active acquirers of businesses in Europe and North America in recent years, but generally these acquisitions have been somewhat distressed operations that most investors have shied away from. Examples include the acquisition of Pfizer's, Inc. (New York, NY) Morpeth, UK, manufacturing site by Nicolas Piramal, and the acquisition of API manufacturer Carbogen Amcis(Bubendorf, Switzerland) from Solutia Inc., Inc. (St Louis, MO) by Dishman Pharmaceuticals and Chemicals (Gujarat, India).
However, Jubilant has been aggressive about establishing itself in the contract services space. It acquired US-based clinical CRO Target Research Associates, now known as Clinsys Clinical Research, Inc. (Berkeley Heights, NJ) in 2005, and signed a major discovery deal with Eli Lilly in 2006. Its Pharmaceutical and Life Science Products group, which includes contract services and generic API manufacturing, had sales of $232 million in its fiscal year, which ended March 31, 2007.
The acquisition market for contract services opportunities is characterized right now by many willing buyers but few willing sellers, meaning competition should drive up company valuations. The Hollister-Stier/Jubilant deal suggests that private equity companies won't have the opportunities all to themselves.
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]