Carlyle sees return on capsule innovation
Gelatin has been used to produce two-piece drug capsules for nearly 100 years, largely thanks to its ability to dissolve easily and be manufactured to a uniform thickness. The problem is that the manufacturing technique has never been all that kosher, nor vegetarian, because the raw materials come from animals, mostly pigs and cows.
This is why Quali-V, an animal-free polymer capsule, has been one of the most important product innovations for Japanese capsule manufacturer Qualicaps. The company has become one of two major players in the pharma-grade capsule segment, with a 20% market share.
The segment itself accounts for the majority of the global capsule market estimated to be worth around $1.1 billion.
The Carlyle Group exited the company to Mitsubishi Chemical for JPY55.8 billion ($630 million) in late December, after a seven-year holding period during which revenue and EBITDA have increased 50% and 100%, respectively. The private equity firm acquired a 100% stake in Qualicaps for JPY6.8 billion in 2005, with a view to helping the company expand its global presence in an industry with notoriously high entry barriers.
"We really appreciated the company's global nature and its very sticky client relationships, which enabled us to foresee predictable cash flow and income generation patterns," explains TakaomiTomioka, a managing director at Carlyle Japan. "Once a customer chooses Qualicaps capsules as part of approval process for launching a new drug, it is not easy to switch to another brand. So once a drug is launched we are able to predict cash flow for the next 10 years."
During its ownership period Carlyle also set about strengthening the company's operations by improving productivity and product quality.
To address productivity, the private equity firm strengthened Qualicaps' manufacturing capabilities through the roll-up acquisition of Canadian companies Pharmaphil and Technophar in 2007. The latter provides the capsule machines needed for Qualicaps to keep all it engineering capabilities in-house.
Carlyle also created a globally integrated management platform and an international marketing strategy, hiring a new CEO and CFO to lead these initiatives. "Besides those two, we have added functional leaders and built the global management team that was missing," adds Tomioka. "That is probably one of the most important infrastructure we have added, so as to unite operations in Japan, the US and Europe."
On the product quality side, it was largely a case of introducing international best practice and tracking performance indicators. With Quali-V in its portfolio, Qualicaps was already well positioned for global growth.
"This very innovative cellulose capsule is so technologically superior to other gelatin capsules so we have been able expect higher growth than our competitors and that has meant a higher value-added revenue mix" says Tomioka.
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