A business perspective from Jörg Zillies, CEO of Pharbil Industries
Jörg Zillies, is the CEO of Pharbil Industries, part of NextPharma established in 2000 by investment bank DLJ and its investment group, Global Healthcare Partners. The group is one of the largest European secondary, pharmaceutical, Contract Manufacturing Organisations (CMOs), with a total turnover of about €130 million in 2001 for its combined Biophelia, Thissen and Pharbil operations.
Pharbil has successfully built up its operations as a result of spin-offs or management buy-outs (MBOs) of sites from multinational pharmaceutical companies and also by acquiring existing contract businesses that met specific criteria. The total workforce deployed in Pharbil’s European activities is about 1,100 employees, currently.
Advances in Life Science [AiLS] discusses, with Dr Zillies, Pharbil’s experience of making the transition from a centralised, command-driven manufacturing site to a successful and independent, customer-focused business, which is now capable of competing in a marketplace driven by an unremitting demand for the highest quality of finished products at lowest cost.
Introduction
In 1991, Pharbil Group came to be founded as a result of an MBO of Rhône-Poulenc Rorer’s site in Bielefeld in Germany, following restructuring of RPR’s activities. In 1996, Pharbil Group acquired, from Gehe, its Allphamed site in Göttingen, formerly a Beecham SmithKline site, which Gehe had developed to manufacture its own-label range of generic products. Against an uncertain economic background of restructuring in an intensely competitive marketplace, Dr Jörg Zillies the Managing Director of Pharbil Group, together with his team, set about building a successful contract pharmaceutical business.
The organisation became the spearhead of a Pan-European Pharma Outsourcing platform, Pharbil Pharma, formed by Global Healthcare Partners and DLJ Merchant Banking Partners, to offer a full range of services across the customer supply chain. The range of services included process and product technology, product development, manufacturing and distribution while the firm offered formulation expertise in a wide range of product categories including micropellets, sachets, effervescent tablets, penicillins and cephalosporins.
In August 2000, Pharbil Industries, a wholly owned subsidiary of NextPharma, acquired the manufacturing site of Thiemann at Waltrop in Germany, which had been owned by Organon, a business unit of Akzo Nobel. Subsequent acquisitions of the Biophelia sites in France, at Tours and Monts, and then more recently of Laboratoires Thissen, in Brussels, now position the expanded group as one of the leading players in secondary contract pharmaceutical manufacturing in Europe. With Thissen the group has entered the interesting area of sterile cytotoxic production (including contained lyophilisation).
AiLS: "Has there been any other development more recently?"
J Zillies: "We became a partner of Pharmatis France through ownership of a 20 % stake. This organisation has been created by a management buyout of a former Boehringer Ingelheim plant in France. Quite recently, we transferred our total antacid sachet production and packaging to France. As a result of this, Pharmatis has become the Centre of Excellence for antacid sachet production and filling in Europe. At the same time we have extended our micropellet area at our former sachet plant in Bielefeld, Germany."
AiLS: "What were the critical factors that you had to address in managing the change from a manufacturing MBO to a contract operation?"
J Zillies: "The issues were complex, but essentially they fell into three broad areas of challenge for the management team: human resource issues, technical issues and strategic issues; but first we need to look at the situation as it was in 1991."
"The MBO had to be decided quickly. It wasn’t based on any long-term business plan. The main or only objective was to secure a guaranteed income by a supply agreement with the former owner, RPR. The first year gave the MBO team a narrow window of opportunity to meet its responsibility for the future salaries of the workforce by finding new and regular contract business."
"At the time, Rhône Poulenc Rorer was pursuing a new trend. They took the view was that an MBO supported by a supply contract was a better option from the point of view of the workforce and the local economy than to close down the facility, at least in the short term. There was a vague notion that an entrepreneur could add significant value to an under-utilised site by actively acquiring new manufacturing contracts."
"The site management team had the experience to run the plant from the first day. It had a fairly realistic view of the strengths, weakness, opportunities and threats that the newly independent organisation had to manage. The parent company could see a number of advantages, for example: converting its fixed costs into variable costs, reducing its asset base, securing continuity for making its products from an established source and allowing it a longer time to switch production at a later date in the future. As it turned out, all these advantages were achieved by RPR. Within the first three years, all of RPR’s products had been successfully transferred to RPR’s remaining site in Europe."
"However, the new Pharbil started without any management capability or expertise in contract business. Its expertise was based on the kind of GMP and technical capabilities usually found in pharmaceutical manufacturing sites that are typical for a multinational company. Customer focus or flexibility of service had never been operational or training issues within the organisation."
"The Bielefeld plant specialised in manufacturing and sachet packaging of high volumes of antacid suspensions. The buildings and the suspension equipment were state of the art. However, unique technical skills or production know-how were not available at that time."
"Based on this starting position the newly formed company was under enormous pressure to use its newly found freedom to develop its market and new business in other areas. However, in order to move successfully from being part of an R&D-based multinational company to becoming an independent, generic manufacturer and contractor, many completely new issues, especially in the area of technical and human resources had first to be considered and analysed."
AiLS: "That sounds like a formidable challenge when just on the starting line."
J Zillies: "It was steep learning curve and there were many more problems that had to be resolved as we moved forward. It was important to address human resourcing early on. At the risk of over-simplification, the issues we had to address could be summarised within a broad aim to:
- Implement flexibility within the context of contract manufacturing,
- Maintain the motivation of the team during continuous transition,
- Create an organisation that would be attractive for such people, as had technical expertise and relevant communication skills,
AiLS: "How did you tackle the technical or operational implications that flowed from this?"
J Zillies: "In an effort to develop efficiency, we had to avoid having a large amount of underused production capacity, otherwise, there would have to be action to shut down certain operations. Therefore we aimed to develop full service capabilities. In order to do that, we had first to define areas of competence and to identify our ’Centres of Excellence’. In this way, we aimed to develop what we called ’sparring partner’ abilities."
AiLS: "That brings us to the third area of challenge, the strategic issues. What were those?"
J Zillies: "You have to appreciate that contract manufacturing, like a lot of traditional manufacturing, is a high volume and low margin business. Therefore one needs to have sufficient critical mass and staying power to build a robust business for survival and growth. In the short term, flexibility is important. For the longer term outlook, the business has to build up a reputation for absolute reliability."
"From the beginning of our strategy, moving ahead we used a phased approach. This allowed us firstly to assess our vision of the future and then to develop an approach, which could be implemented. Our strategy development adopted a phased approach in which we first needed to get a clear picture of the market dynamics and the evolution of industry, then identify what were the features of an ideal CMO, based on our own experiences at Pharbil. This allowed us to identify perceived gaps in the market and the strategic options to fill them by setting out an action plan and putting it into operation."
"We could discuss these separately. Firstly our vision of the market and then the evolution of this industrial sector. As we had only limited experience of contract business at the beginning, we had to assess our vision a number of times and then to reformulate it more stringently, especially in the first few years. Firstly, it was important to understand the way the industry was evolving and from that define the needs of our customers."
The world market for contract manufacturing and needs of the industry
"At the time, about 18 billion US$ (30% of all manufacturing) was estimated to be outsourced. About 50% of primary, as compared with about 20% of secondary, manufacturing was done by contractors. Secondary manufacturing seemed to be the area that was most likely to grow provided enough credible contractors could emerge."
"Pharma companies had long believed success was built on discovering and then selling new compounds. Management attention was market-driven; production strategies, as far as any were available, were short term and very limited. Until the early 90’s manufacturing efficiency and effectiveness had not been within their main focus. In addition, a wave of M&As had led to an increase in manufacturing capacity among the larger companies. Running two or three plants, at least in important European countries, was for many multinationals the consequence of merger activity."
"In Europe, local management and site managers preferred to cover the whole range of different formulations within their own production brief. This was mainly dictated by tactical considerations, to please local authorities. Their idea was to provide jobs and local investment in exchange for gaining marketing licences and better reimbursement conditions. Also, there was a tendency for country managers and site managers to increase their sphere of influence by enlarging their own production. This contributed to a process of inflating the number of manufacturing sites."
"The key drivers on the supply side, world-wide, were then, as now:
Then, many pharmaceutical companies began reassessing their manufacturing operations and policies to adjust to a new competitive environment. This was driven by:
For most companies a significant amount of assets and inventory had been tied up in the supply chain. Duplication of resources and low return on capital assets, especially due to excess capacity could be tolerated no longer. Competition for secondary manufacturing increased as excess capacity was closed."
"The main reasons for restructuring in secondary manufacturing and packaging were:
- High capital requirements
- Low asset turnover
- Underused capacity
- Too many ’non-specific’ manufacturing sites
We recognised that the industry looked for support and cooperation as regards the following key issues, so they could implement their restructuring plans. They needed to find ways to tackle such problems as:
- What, why and where to produce?
- Outsourcing - yes or no?
- Reduce the number of plants by divestment or closure
- Rationalise the high number of non-strategic suppliers
- Increase dependence on few close partnerships with preferred suppliers
There was no doubt whatsoever that for the future, moving forward, the main needs would be to transform former multinational facilities and/or close down sites. One wondered at the time: how could alliances or other external relationships move assets outside the company without threatening quality or control? It was a simple question, but the industry had been slow to pose it."
"Furthermore, some companies had experiences that were unsatisfactory. These were derived from their assessment of test projects with suppliers or with MBO solutions for single sites. There’s another possible explanation for their reluctance to outsource. That may be found from analysis of the somewhat immature and highly fragmented market for third party pharmaceutical manufacturing."
Limited capabilities of available Contractor Manufacturing Organizations
"Until the early 90’s, pharma companies could find few manufacturers that were capable of taking on large chunks of their manufacturing, and even fewer willing or even capable of entering into the complex deal structures involved. Although this changed gradually, potential clients still had few choices, or found the search process difficult, or they incurred enormous transaction costs simply because of the absence of any standardised customer-contractor relationship."
"Traditional secondary manufacturing pharma contractors were characterised as an industrial sub-sector with a poor image, lacking credibility or defined core competencies, limited service and financial capabilities, using the pricing structure as a key driver for competition, short-term outlook and a national focus.
The main drivers for newly created MBO organisations were their contracts and a close relationship with their former owners. It follows that when the original supply contracts reach maturity, it becomes a critical point for their longer-term stability and reliability.
This industrial sub-sector was then and to some extent still is highly fragmented, despite some consolidation. Less than half of Europe’s leading secondary manufacturers rely on contract business alone as the others derive revenue from manufacturing their own-label products."
AiLS: "What was your vision for the future of contract manufacturing?"
Pharbil’s vision
J Zillies: "Looking at the available data for market size, while taking into account some fundamental changes that were taking place in the industry, we saw outsourced manufacturing as an evolving market. The confidence of entering into close partnerships among multinational companies or networks between multinational companies and their suppliers was limited by the competence, the reliability and the robustness of such traditional contract manufacturers as were available."
"Within the contract pharma manufacturing industry, there has been some fairly substantial concentration and consolidation. This has followed a pattern, which has been analogous to the car and the electronics industries. Within this trend, we saw Pharbil as a strategic supplier and a dominant player with full service capabilities playing an important role in a more consolidated European contract manufacturing industry."
AiLS: "What, in your view, constitutes an ideal CMO?"
J Zillies: "I will try to explain that, if I may, by drawing on our own experience and the actual position taken by Pharbil.
The ideal, non-traditional Contract Manufacturing Organisation
Based on our research of the actual needs of the industry for implementing their strategic outsourcing procedures, we considered a reliable supplier had to prove its truly competitive position with reference to quite a demanding set of criteria:
- Core competence to produce different formulations and presentations
- High standards and systems to ensure quality
- A client focused structure designed to ensure effective ’one-to-one’ communication
- Financial capability and stability
- Outsourcing and alliance experience
- Differentiating such skills as:
Taking account of these factors, while bearing in mind the escalating fixed costs and operating hurdles, one would need to achieve a critical mass with sales of 200 million US$ at least. In Europe, turnover among the existing CMOs rarely exceeded 50 million US$. Therefore, consolidation had to continue leading inevitably to tightly concentrated supplier groups."
"These companies would be able to meet the technical requirements and possess the regulatory and quality infrastructure for producing pharmaceuticals on a European-wide basis. In future, only this kind of CMO would have the necessary ability to transform former multinational facilities into customer oriented, profitable service operations, as part of a European supplier network."
"Outsourcing and alliance experiences, based on successful contract manufacturing and the flexible and effective choice of deal structures, can demonstrate that the contractor’s strategic direction is consistent with the objectives of a preferred relationship."
"I think the ideal contractor has a focus on pharmaceutical manufacturing that is 100% dedicated to outsourcing. This helps to prevent conflicts of interest, which may occur with a contractor being part of an organisation producing its own-label products, even if it has separate sales and marketing operation."
AiLS: "Where does Pharbil stand today?"
To come up with an answer to that, it’s necessary to describe the current reality, the experience of Pharbil and the progress, which had been made since 1991.
Pharbil decided in the beginning to be totally dedicated to outsourcing business. We defined secondary manufacturing, product development, laboratory, and logistics services as core business activities.
Pharbil successfully managed the process of implementing flexibility and of motivating the workforce to accept a state of continuous transition consistent with its policy to make the customers’ needs paramount. One of the biggest steps was to introduce flexible production time schedules instead of the single shift. Employees and workers had to be persuaded to accept a complete change in their working hours.
Pharbil created a new structure, still in accordance with such technical requirements as good manufacturing practice (GMP), but also one that facilitated customer-focused communications (one to one contacts, from expert to expert). We set up a well-trained sales and customer service department. Different areas as ß-lactam antibiotics, pellets, logistic services, etc., are working as separate Centres of Excellence, using a system of responsible gatekeepers and technical networks.
Pharbil became a flexible organisation, trying always to be prepared for the unexpected and being aware of the limited reliability of forecasts by its clients. Flexibility meant that the decision making power devolved to the lowest possible point in the organisation.
Pharbil successfully replaced its original business with the former parent company, RPR, by creating new business relationships with more than 75 pharmaceutical companies. We built those relationships with multinationals, generic organisations and smaller local companies.
Pharbil effectively supported the transfer of RPR’s products to RPR’s remaining sites within the first three years. Since 1996, therefore, business with our former parent company RPR fell below 3% of our total annual turnover. We achieved an effective alliance in order to get a strong market position in a selected niche technology -- formulation and packaging of antibiotics.
Pharbil created new unique business opportunities by acquiring technologies , like extrusion pellet production or handling cytotoxic formulations, and increased its critical mass by acquiring such experienced Contract Manufacturing Organisations as Laboratoires Thissen, Biophelia and Allphamed.
Pharbil focused its resources on a limited number of carefully selected activities as an important condition for becoming competitive. Wherever possible we eliminated duplication of activities in the technical and administrative areas of different sites, at least as far as it was practical. This was achieved by closing or transferring activities. All these actions were taken only after we had defined our core competence and minimum critical size within the different technical areas.
Pharbil, therefore, has shown proven abilities and management know-how in its ability to transform former multinational manufacturing sites into successful, customer focused CMOs."
AiLS: "What do you see as the key issues for change management in CMOs"
"Today our focus remains on our customers. Our success has been derived from quality, timeliness, communication, strong relationships, and effective project management. We have become a learning organisation in the sense that we have to learn from our mistakes straight away and implement safeguards not to repeat them. We are driven by our relationship to the customer. If the customer isn’t satisfied and complains about our service, we are in the danger of losing our business and our reputation. This means that within our organisation, there’s an unending search for improvement."
"The progress we achieved depended on implementing a new mentality and a new spirit within the management and workforce. The issue was to create a clear understanding that the customer is permanently assessing our performance and service."
"In the world of multinational manufacturing the customer is far away; priorities are mainly driven by internal technical procedures with limited flexibility. The new challenge in contract manufacturing was to give the customer the feeling of being unique and important."
"At first, it was difficult for our organisation to accept that customers don’t like surprises or unexpected results without offering some suggestions from our side as to how to solve an unexpected problem. Today we understand the importance of effective communication with our customers. We are aware that all our responses have to be honest and careful."
AiLS: "Are there other ingredients that go into making a successful CMO?"
"To be successful as a contract manufacturer, it’s necessary to identify and to develop the entrepreneurial skills of key people and to give them business responsibilities within the different areas. An atmosphere and a framework stimulating entrepreneurial activities have to be created by the top management. In addition there is the permanent challenge to provide talented people with reasons to join and to stay."
AiLS: "Given the current climate, what do you see as the future challenges for contract manufacturing and your vision of the future from the present position?"
J Zillies: Today about 25 % of all the products produced in our plants come from our formulation development areas, developed in collaboration with our customer, on their instructions. There is a clear trend that indicates within the coming years this proportion will increase consistently.
If we want to go on to sell contract manufacturing and packaging successfully, we have to cover the entire range of supporting services, including formulation development, clinical trial supplies, analytical services, etc. This means we have to offer more than just the right types and sizes of plants and production technologies. For all our technologies, we have to offer the complete range of development services.
Our main focus within the next two to three years will be the creation of a formulation development facility a ’Centre of Excellence’ in accordance with market needs and consistent with the highest possible technical standards.
Keywords : Contract Pharma Manufacturing Europe MBO Change Management
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