Catalytica Pharmaceuticals is Catalytica's current profit center. It was started several years ago as Catalytica Fine Chemicals. They had proprietary technology developed at Catalytica that increased the efficiency of producing chemicals. One major achievement was discovering ways to create selective chiral chemicals. Many chemicals when they are produced are 50:50 mixes of two chiral forms of essentially the same compound. Only one of these two forms is active or useful. Catalytica can create a process where they produce only the active form, thus eliminating the waste of the other useless form. They have expanded on this by purchasing other chiral technology patents from the University of Pennsylvania.
Catalytica's first chemical production plant was purchased from Rhone Poulenc and is located in East Palo Alto, CA. Catalytica took over production of pharmaceutical products for Rhone Poulenc and Sandoz, as well as adding new products. The company changed its name at this time to Catalytica Pharmaceuticals to better represent its commitment to providing value through catalysis to other major pharmaceutical companies.
Pfizer recognized the value Catalytica could provide and invested money, acquiring a 15% state in Catalytica Pharmaceuticals, and began work on various projects jointly.
To move into the big time, Catalytica Pharmaceuticals, with financial backing from Morgan Stanley Capital Partners, purchased a world-class pharmaceutical manufacturing facility from Glaxo-Wellcome in Greenville, NC.
A trend was just beginning in the pharmaceutical industry. Large pharmaceutical companies realized that their strengths were in drug discovery and direct marketing of these drugs to physicians using their extensive sales forces. Their pharmaceutical manufacturing facilities were relatively low margin components compared to their other business activities. They are trending more and more toward outsourcing their manufacturing needs to others who can achieve greater efficiencies. This focuses the pharmaceutical companies' management and capital resources to business segments that are the most profitable, drug discovery and marketing. The recent Smith-Kline/Glaxo-Wellcome merger highlights this thinking. The major impetus for the merger was greater research and marketing resources. It costs too much to discover and bring new drugs to market, that these companies cannot afford to have their capital tied-up in manufacturing plants. This, and other mergers likely to come, will most likely benefit outsourcers such as Catalytica Pharmaceuticals. In addition there are many new drug companies called virtual drug companies. They focus solely on drug discovery, outsourcing manufacturing and forming alliances for marketing.
Catalytica has a group working with Pfizer to develop new drug formulations and delivery systems; that is, new types of pills to accomplish such things as time release; multiple meds in a single pill absorbed by the body at different rates for optimum performance, and other things.
There is a new group focused on clinical trial material. They help with the process of gaining FDA approval for new drugs. First they design an efficient way to manufacture the compound, then they deliver clinical trial quantities prepackaged for the investigators--i.e. for a double-blinded study, making things easier for the investigators. This can be powerful because it suggests a strategy to be a preferred one-stop source for clinical trial material, which Catalytica could then produce in large quantities after FDA approval, funneling higher-revenue products to Catalytica.
In 1999 Catalytica Pharmaceuticals purchased Wyckoff Chemical, another much smaller outsourcing company. The purchase was immediately accretive to earnings and provides a larger base of customers, a base for increased capacity, easy expansion and improved efficiencies as some products can now be made at any of their three plants.
Catalytica Pharmaceuticals is already quite profitable, even though their largest facility, the Greenville plant, is still underutilized. New drugs take a couple years to begin production as FDA approvals have a long lead time. Virtually the entire capacity at the Greenville facility is already spoken for, essentially guaranteeing increasing revenues and profits going forward. But, the crown jewel of the Greenville facility is the sterile manufacturing component. Sterile facilities are fairly rare, are areas of high margin products because it takes so much work to get one up-and-running and maintained. The sterile facility is currently only working at about 30% capacity, although over the next couple years all the capacity is already spoken for. When the sterile is at full throttle, gross margins overall for Catalytica Pharmaceuticals should increase from about 20% currently to about 30%. Considering that will be on gross revenues of about $500 million, there is a fair amount of almost guaranteed growth built into the business plan. Demand is so high, in fact, that the company is right now looking at expansion of the sterile facility at Greenville.
Expect further takeovers in the industry, as size will matter. |
