Capsugel CEO Driesen Plots Post-Pfizer Course

Guido Driesen, president and CEO of Capsugel, says the oral dosage technology firm is having a record year after being divested by Pfizer. In an interview, he discusses the firm’s applications for OTC drugs and nutritionals, as well as Capsugel’s international expansion.

After 50 years, Capsugel is now operating independent of a pharma parent. Pfizer Inc. divested the world’s largest manufacturer of empty capsules for the pharmaceutical and dietary supplement industries to private equity firm in a $2.38 billion deal that closed Aug. 1 (Also see "Freed From Pfizer, Capsugel May Find More Market Opportunities" - Pink Sheet, 11 Apr, 2011.).

“The future is ours,” says Capsugel President and CEO Guido Driesen. A native of Belgium, Driesen began with Capsugel as a quality assurance engineer nearly 30 years ago when it was a division of Warner-Lambert Co. Pfizer acquired Warner-Lambert in 2000 and Driesen became Capsugel’s president in 2001.

Capsugel President and CEO Guido Driesen

Photo courtesy of Capsugel

Driesen now has responsibility for a global company with about 2,900 employees and an unprecedented sense of independence. While Capsugel currently remains headquartered in Pfizer facilities, it plans to relocate in January to its own offices in the Morristown, N.J., area.

In a Nov. 1 interview with “The Tan Sheet,” Driesen described Capsugel’s opportunities as a standalone entity, responded to market analysts who labeled the business “low-growth” while part of Pfizer and explained what makes KKR a good partner. Excerpts follow.

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“The Tan Sheet”: Capsugel for the first time finds itself outside of a pharma company. What does that mean for the kinds of customers you’re able to attract, and what growth opportunities do you have outside of a big pharma company?

Guido Driesen: As a standalone company, we have a much better opportunity to realize our full value and potential versus being a division of a larger organization. … Being part of a large pharmaceutical company, even if we have always done our business with the highest level of integrity and professionalism, from a competitive perspective for some companies, it’s always a problem. … We hear from customers that they are attracted by the fact that Pfizer is no longer there – even if the Pfizer “letters” were always smaller than the Capsugel letters – there’s now no longer a concern. And they have now, on many occasions, really expressed an interest in working with us in earlier phases of their development. So for us that’s great to hear and we’re looking forward to doing more of that in the future.

When Pfizer announced it was looking at possibly divesting Capsugel, market analysts called Capsugel a stable, low-growth business, and some said growth had stagnated in recent years. Do you agree with those assessments? Is Capsugel primed for more growth now?

I agree with some of the points that you mentioned and with a lot of things that analysts have said, but I disagree with some others. … This is a stable business. This is a business that has a track record over decades of continuous growth and continuous innovation. We’re known for going into new products; going into new business segments; identifying the opportunities in health and nutrition, for instance, in the 90s; identifying the generics industry segment as a huge opportunity in the 2000s; and even for identifying the capsule as an ideal preferred container for drug delivery as well as for health and nutrition.

So I agree it is a stable business. But calling it a low-growth business, I would disagree, because we have had mid-to-high single-digit compound annual sales growth rates over the past years. We have a global presence that we have developed over the years with more than 70% of our business outside the U.S. now. And also, we’re very well-positioned with some of our new capsule technologies and drug technologies. We’ve started to work on the combination of those technologies and how we can bring solutions to the whole health care segment, going from biotech all the way over to the large multinational pharma companies, but focusing also of course on generics, OTC and health and nutrition products. From that perspective, I would say that we are constantly bringing innovative new products, services and technologies to the marketplace and are well positioned for continued growth.

You mentioned 2011 being a record year. Can you share specific sales figures?

I can tell you that our sales number will be in the $850 million range … with growth over last year in the high single-digits. [Editor’s note: Pfizer reported Capsugel revenue of $752 million in 2010 and $740 million in 2009.]

“As a standalone company … we hear from customers that they are attracted by the fact that Pfizer is no longer there.”

Overall, we’re pleased with the performance of our business in different parts of the world. We’re also pleased with the progression that we have in new business segments like alternate polymer capsules and liquid-filled capsules. We see that the investments we’ve made over the years – not just to improve the quality of the empty capsules, but also to bring new drug delivery techniques to the market – are paying off. And looking forward, we will continue to see our investments in R&D, in marketing, in business development – both in the pharmaceutical and the health and nutrition markets – play a leading role in achieving results.

Could you talk about some of the new technologies you’re working with, specifically in OTC drugs and dietary supplements?

Whether it is in pharmaceuticals, OTCs, generics or health and nutrition, our customers are really looking for ways to deliver a product that not only pleases the patient or consumer, but also is effective and delivers a specific release profile or absorption profile. Those are the areas that we are focusing our new technologies on.

The combination of capsule technology and drug technology is really very powerful. For instance, some of the characteristics of the HPMC [hypromellose] capsules that we have with the Vcaps and the Vcaps Plus brands, are totally different than a hard gelatin capsule, and are helpful in providing a capsule to the health and nutrition market, particularly with our new DRcaps brand capsule that has delayed-release characteristics. Some of our customers in the last 12 months have really focused on that aspect and have been able to avoid using the expensive, time-consuming and in a certain way non-optimal coatings that they were using before.

So we really see that, working with the alternate polymers – polymer science is a large part of our R&D at the moment – gives us the opportunities to really improve and help customers. On the other hand, we also acquired technology about a year ago called solid lipid pellets. … Lipids help absorption and also help with the delivery of the product to the part of the body where it needs to be. So we see solid lipid pellets as a further extension of our Licaps lipid-filled capsule technology that we have developed over the past years, particularly for poorly soluble drugs.

Dietary supplement firms especially are interested in alternative delivery formats like drink-mix powders and dissolvable strips. Are those areas you’re looking at as well?

We try to make sure that we don’t get into every technology. Our objective is to be a leader in the areas that we operate in. So strips, for instance, we’re not really looking at. But we are looking at different release profiles of capsules. We have an enteric capsule, very well-progressed in the development cycle, and we see those kinds of opportunities not just for the pharmaceuticals but also for OTC consumer health customers, since they have products that they want to deliver to the small intestine, too.

Besides that, we’re looking at combination drugs, like powders and liquids together. We have a new technology called FlexTab that we think will offer a good solution for companies looking to deliver multiple ingredients in one dose. Working closely with customers in both pharmaceutical and health and nutrition companies really provides us with good insight on what the market needs are. And in order to be successful, you start with the needs of the customer.

Analysts who called Capsugel a low-growth business perhaps saw Capsugel reaching market saturation in many areas. Where do you see Capsugel’s biggest opportunities for growth?

You can look at the way that analysts looked at the capsule market and really only limit yourself to the hard capsules. Of course we have, over the years, built more than 50% market share in that area. However, the way we’ve been running the business with the leadership team and the way we’ve been approaching our customers is that this is not just about the capsules; … it’s about oral dosage forms. In some cases even with biotech, we see opportunities to have parenteral drugs being transferred into oral dosage forms. Oral dosage forms historically and today have been a preferred dosage form, from a cost perspective, health care compliance perspective, and portable container perspective, and we intend to build on that by helping our customers understand the benefits and continue to expand use of capsules in the industry.

The other point, I think, that the analysts have underestimated … and that might be forgotten somehow is the emerging markets. We have a presence in China with a factory there. We’re seeing very high volume in India, very high sales in Brazil, in Indonesia. We see continuous growth in Turkey and Eastern Europe. Growth in those areas over the last five years has been very high single-digits. So there is a lot of opportunity in these emerging markets that we are going after.

“The way we’ve been running the business with the leadership team and the way we’ve been approaching our customers is that this is not just about the capsules; … it’s about oral dosage forms.”

The analysts’ other focus point was to look explicitly at 2009, which was a difficult year. We still grew the top line, but much lower than average because of the overall economic situation. Remember, this was the worst recession in more than 70 years. That’s where I would say this is definitely a business that has great growth potential, and that’s also what KKR saw in it.

Is the majority of your growth coming from emerging markets at this point?

Not the majority, but they are growing faster. We have also continuous growth in Western Europe and the U.S. And part of the objective, in fact, is not to become just an international player, but really be a player with more opportunities than just in emerging markets.

Could you talk about what KKR is allowing you to do and what kind of guidance they’re providing?

KKR really positions themselves as a partner; you saw them say that immediately after the deal in the press release, and they’ve lived up to their promise. Their expertise and experience is really in these kinds of carve-outs – working with the management team and trying to find ways, first of all, to set up corporate functions like finance, IT, procurement and HR. But also taking a quality company that was a smaller division within a large corporation and really focusing on growing that company and optimizing all its growth potential. … They’re not the management team and they’re not part of the management team, but they’re working very closely with us.

Has there been much internal reorganization at Capsugel since the deal closed?

We’ve built up the organization in many ways, most notably in adding corporate functions that were previously handled for us by Pfizer. And while Capsugel might not be very well known to everybody, especially outside the health care industry, KKR is known to everybody. So we have been able to attract very good talent in areas such as finance, procurement and IT. But we also took the opportunity to reinforce some areas, for instance, our marketing and business development functions. Overall, this was a successful team, but we realized this is an area where we had an opportunity to really enhance what we’ve been doing in order to help the business grow even more than we have in the past.

Has trimming Capsugel’s costs been a priority for KKR?

The objective is not around cost-cutting, but around profitable growth. With the current cost environment, we are definitely looking at opportunities to make sure we have the best business objectives and approaches in place. For example, we didn’t have a globalized procurement function, and sourcing efforts were small compared to the volume handled by a corporation like Pfizer. So we’ve identified ways to take more advantage of our global network to improve that function’s ability and ultimately reduce costs. With 10 plants around the world, there are always operational efficiencies that can be found.

It’s also clear that, in the feedback we got from the strategic review process, people, including our customers, recognize the quality and value that Capsugel brings to the table. And that was good to hear; we were very pleased with that.