The right chemistry

The right chemistry

The MBO that Robert Hardy and his team carried out has led in six years to an international force, exporting 95% in the highly competitive sector of pharmaceuticals.

Start a business and it may turn out a Topsy. Dr Robert Hardy’s chemistry is doing that...

“I’ll be honest,” he says, “when we first did our management buyout we weren’t looking to take over the world, as it seems now. We were looking for an acquisition of one site.” But, like Topsy, Aesica Pharmaceuticals is growing and growing. Six years on, Hardy as chief executive talks about it becoming a global principal in its league. Aesica isn’t a name you’ll see on packets of pills. Its strategy is not to move into its own products.

“We’re business to business,” Hardy explains. “We don’t want to compete with our customers. We manufacture some of the biggest products in the world now, but you won’t see our name on them. We manufacture some of the biggest drugs our customers have.”

A paying proposition: Revenue at £100m is already four times higher than projected at start-up in 2004. The company employs more than 700 staff, about 160 at Cramlington.

“We want by 2013 to treble the size of the business again,” Hardy says. “We want sales of about £300m.” He’s relaxed, a stranger to hyperbole, as he explains the trajectory. “Our buyout team had all been a while in the industry – I’ve been in it for more than 20 years.

“The first part had been very enjoyable. Later I spent a lot of time closing places, rationalising, so, as a team we wanted to build something. We saw opportunity at Cramlington, where we could buy out the site of BASF for whom we’d worked. We had people, we could take over three products and a customer list. “BASF had kept us well away from customers, though. So first, we had to get out and understand our customers.

Our products had previously gone to a big warehouse in Germany. We now had to organise all our own distribution and customer links.” This has been done. The business had been mainly about supplying active pharmaceutical ingredients (APIs) to the generic industry, and had few very large contracts with any major pharma group. The new brooms also wanted to sweep into contract manufacturing for large pharma groups. Hardy, 52, says: “You can do this organically – through your sales team moving gradually through hierarchies of big companies to get business.

But that’s a long-term process for any company without history. I’d probably have looked a lot older and a lot greyer relying on that.” Fortunately, the industry is changing. Big boys are concentrating on research, development and brand-building. “They view the middle bit now – the manufacturing and development – as non-core, since they have assets under-utilised.” So they’ve been outsourcing products and offloading some manufacturing assets. “All this played into our hands,” Hardy says, smiling. “We picked up some nice assets a lot cheaper than we couldhave built them, and with ready-made contracts to supply.”

There were then three priorities: (1) Do something about the cost base since big pharma groups, many agree, can be very extravagant on this.

(2) Grow the business in a way they can’t because they cannot sell to their competitors, whereas Aesica could sell to anyone, and..

(3) Develop firm relations with the organisation the business had been bought from. Hardy says: “That allows us to develop strategic tie-ups. So we move from no relationship to strong relationship with that organisation over two or three years.” And that’s Aesica’s model.

Having worked up the active chemical side (the API), the firm in 2006-7 diversified into making the formulated products – tablets and packaging – this through acquiring a site from Abbott Laboratories in Kent. Relations with Abbott bore fruit.

“We’ve brought lots of new business to the site,” says Hardy. “Although Abbott or any big pharma company nurture sites they own, the sites now reach a point where they no longer have a life within those larger organisations. Most assets we’ve bought have been from organisations with no further need of them. “By about 12 months ago, 95% of our business was going overseas. But all our manufacturing assets are in the UK – not a bad place to manufacture from at the moment.

“However, we’d no development ability for formulated products. We could develop processes for chemicals, upscale and manufacture chemicals, and could then tablet, bottle and pack them, but we couldn’t come up with new formulations, such as new types of tablets and new delivery systems.” Recent acquisition of R5 Pharmaceuticals in Nottingham completed the jigsaw. But Hardy realises difficulties can recur. The recent loss of a major client will bring closure next year of Aesica’s Ponders End, North London, business, costing 50 jobs if staff relocations can’t be made.

A year’s search had failed to fill the gap. But, as Hardy says, growth continues in the group otherwise. With space scarce at Cramlington, Aesica could have used surplus office space once filled by Merck Sharp and Dohme at Ponders End. Instead, 18 months ago, Aesica relocated its head office to fast-growing Quorum Business Park in Newcastle for Cramlington to concentrate on production. At Queensborough in Kent, where a majority of staff are now, a new £3m facility to package pharmaceuticals will operate from next year.

Hardy says philosophically: “We’ve a very exciting company, and I work on the principle that people will always need medicines – maybe even more if the economy worsens!” The firm has sales offices in the USA and a representative office in Shanghai, agents too in Europe, Japan and Israel.

But most of the workforce is in the UK. Hardy affirms: “It’s particularly important to get some manufacturing asset in the US. Our customers there want to talk to something more substantial than a salesman in their own time zone. Our biggest market is the US. So we’re looking for a US formulation site and have targets. But the deal has to be right.

“Also we’d like greater presence in mainland Europe – we’re looking to manufacture there too. We’ll look to expand our technology base. There’s little we can’t do from a chemistry perspective, but in formulation we’ve a narrower offer. We want to expand that. We’ll look to buy more sites from big pharma, growing our strategic relationships, and we’ll look at other businesses too.

“In generic API strategy we need some assets partnership, probably a development presence in Asia – and probably India. We’ve a plan for that. There’s tremendous scope everywhere as the industry undergoes change. In contract manufacturing’s shakeout, some big winners will result.” For firms of Aesica’s size and nature fast growth is feasible.

“It’s not just we have lower overheads,” he points out. “Small and virtual companies now account for 50% of all new products. So the R&D pipeline of big pharmaceutical companies is drying up a little. “They’ve assets maybe 30-50% empty – no new products to put in them. They can’t produce for each other. They’re globally pressed by governments also to reduce prices and increase accessibility of medicines.” Pfizer’s supply base is very fragmented. Intense consolidation is expected in the supply chain to big pharma.

But competition resulting is strong, both in the USA and Europe. “The majority of our business is with large US pharma companies,” says Hardy. “Our relationships there are probably the strongest and best we have – probably because the US tends to be at the forefront of this outsourcing. UK companies are a little behind and European companies lagging a bit more.” Aesica sees Asia, Europe and the USA as differing strands.

Hardy explains: “The Asia strategy has its own drive, will follow its own process. We’re looking closely at building a development centre in India next year. There are always issues to building and recruiting in a foreign country, but that’s out of our hands.

“The US plan, too, is out of our hands. There are two or three targets, but many things must fall into place at the same time. In Europe, there are lots of targets, more opportunity, although things there change, month to month.” Nick Jones, chief financial officer, is ex- PricewaterhouseCoopers and has been with Aesica nearly a year. He’s heading merger and acquisition activity, considering up to 10 different potential buys at a time.