Morten Nielsen, CEO, NNE Pharmaplan, Denmark
The CEO of NNE Pharmaplan, the world’s leading engineering and consultancy focused in the fields of pharma and biotech, unveils the company’s current opportunities and strategy as it spreads its wings towards emerging markets.
Can you introduce our readers to NNE Pharmaplan?
We were born as a technical department within Novo Nordisk. Novo invested quite heavily in our development, and the department grew larger and larger, coming to employ several hundred people.
Eventually, Novo Nordisk’s top management team asked themselves: “Should we really have an internal group of that size? Are we sure that the group can be competitive, and commercially efficient, given such a structure?” In 1990, the decision was made to spin out this department as a separate entity, with our parent company retaining 100% ownership.
For the first decade and more of our independence, our mission did not change. We continued to work as an integrated component of Novo Nordisk. Particularly in 2000, after Novo demerged the Novozymes business and began to invest heavily in a number of projects in Denmark, we had no time to work on anything but Novo Nordisk projects.
Novo’s growth phase between 2000 and 2003 precipitated high growth in our own business. However, at the end of 2003, when the project pipeline dried, we were faced with a harsh wakeup call. We had to consolidate our business and significantly reduce our headcount. At that point in time, we realized we needed to build a sustainable business model that was not dependent on Novo Nordisk. We began to look for customers outside of our parent company—with the exception of insulin projects, which we continued to provide exclusively for Novo.
We engaged with a range of customers across a variety of geographies. We had developed subsidiaries in the U.S., France, and China. At first, all of these subsidiaries sat next door to Novo Nordisk’s own subsidiaries—but that was a great starting point for outward growth and acquisition of new customers.
In 2006, we celebrated a milestone: for the first time, our quarterly sales to external companies exceeded those to Novo Nordisk. This was a very significant step for us in our drive to limit our dependence on our parent. It also spurred us to ask how we could accelerate growth even further. Today, Novo Nordisk is still our largest customer, representing about 30 percent of our business—but that also means that 70 percent of our business comes from other sources.
In 2007, we bolstered our acceleration by acquiring Pharmaplan. In that sense, you might say that our company—in its current form—is eight years old. Pharmaplan was interesting for us because they had a similar story to our own: they were once a technical department within Fresenius, a German medical care company. They had been spun out 10 years before we ourselves reached independence, and by the time of the acquisition, a huge portion of their turnover came from external contracts.
By joining forces, we integrated 350 fantastically talented people into our organization. This team had been working on a global scale, and the combined company found itself well positioned in a large number of markets around the world. Through the Pharmaplan acquisition, we entered highly attracted geographies such as India and Russia, and reinforced our presence in markets like France and the U.S.
Pharmaplan also offered us new skills. Novo Nordisk is a biotech company, and we have always had a strong biotech tradition. Pharmaplan, on the other hand, had great strengths in traditional pharma, and the combination of these two competencies was very powerful. We could offer customers competency in both the small molecule and biotech spaces—a much more complete offering.
After 2007, the newly established NNE Pharmaplan went through a couple of tough years—because of the financial crisis, but also because the integration did not go as smoothly as we’d hoped. However, we overcame those difficulties, and today, we truly believe that if we had not accelerated our international expansion, we would not have become a significant service provider to this industry. Our development path, fortunately, has been quite successful.
One reason for that success is the fact that both of the entities that combined to form our organization came from within the industry. That heritage gives us a great deal of credibility among our customers. We are not a global engineering company that works on a diversified basis: we do not work, for instance, in the automotive sector or the oil and gas sector. Many of our competitors are engineers that developed expertise in pharma, while we come from the other direction: by heritage, we are a pharma and biotech company, which by coincidence has an interest in engineering and consulting. Many of our employees have years of experience within the industry—and not necessarily on the engineering side. Of course, we have integrated these two competence areas, but our legacy has certainly given us a head start in understanding customer challenges and strategic agendas. We know what drives their business, and we know it a little faster, and a little better, than our competitors.
That is our advantage. We will never be the cheapest provider in the industry, but we certainly can add value to their projects. We hope to follow Novo Nordisk’s own success story: a heretofore tiny Danish player that, thanks to a great leadership style and knowledge of the sector, grew throughout the Nordics, and then throughout the globe, becoming a market leader in their niche.
We want to become the market leader in pharma and biotech engineering. You might say that we are already there—and yes, we are in the top three today, and likely the number one focused company in the industry. But globally, the market is absolutely huge, and our share of it is only approximately six percent. There is still much more of the pie that we can capture.
The hedquarters of NNE Pharmaplan in Copenhagen
What is your largest market today?
Our largest market is still Denmark, and Denmark still houses the majority of our employees. This is due to our ongoing relationship with Novo Nordisk. Broadly, if we look at the Nordics, we have 70-75 percent market share.
We currently work across five key regions: Nordics, Central Europe, China, North America, and what we call the Emerging Markets, including India, Brazil, Russia, Indonesia, and others. Of those regions, China is second for us after the Nordics. China generates 10 percent of our business—and in China, we are a clear market leader.
A likely offshoot of the fact that Novo Nordisk was an early mover in China—correct?
That is absolutely right. In close collaboration with our parent, we entered China in 1995. We were one of the first companies of our kind to acquire a business license in the market. There are many regulatory hurdles in China, if an engineering provider wants to operate outside of relationships with local design institutes. It is a great benefit that we entered the market so many years ago.
Focus Reports met Hooker Cockram in China, and their local managing director commented a great deal on the regulatory struggles his team faces in the market. What are your thoughts on this?
Indeed! China is a major challenge, and from what we see, conditions are only becoming more complex.
On the subject of regulatory hurdles, the U.S. FDA has continuously raised the standards bar for pharmaceutical manufacturing operations in recent years. How does NNE Pharmaplan adapt to ever-changing regulation?
Actually, we are in a strong position in this sense, because we have the privilege of being involved in the change process itself. We have some influence with regulatory authorities, based on a long-term relationship with agencies like the FDA and the International Society of Pharmaceutical Engineering (ISPE). Currently, the global chairman of the ISPE is Danish, and an employee of ours—and the same can be said of the former chairman!
This engagement is an investment from our side, but it is something we are very proud of. If you want to be a leader in this industry, you must takeleadership positions, and demonstrate leadership.
That means that you should also strive to influence the direction of change, and help set the bar where it ought to be. We have co-authored certain recent procedures, and some of our team members also take a hand in training FDA inspectors who will look to uphold those procedures.
So, we are very much involved in setting the bar, and also in ensuring regulations are applied. We bring that home to our customers, and help influence their validation strategies, their qualification strategies, and how they should position themselves in applying for approvals.
After all, if our employees are training FDA inspectors, surely they can offer something when our customers are devising how they will position themselves for inspection! In this way, we recoup our investment in working with regulators, and merge the two worlds to the benefit of the customer.
What regions do you expect to drive your future growth?
The growth engine for us is the emerging markets and China. In these regions, we expect sustainable growth of more than 10 percent.
However, we do expect Europe and North America to play a strong role in our business—for the simple reason that those two markets are still the two largest regions for the industry. I think we will have to wait three-five years before China has a chance to exceed North America as a location for infrastructure projects in the pharma space. North America is declining a little bit, and China is growing considerably, but in absolute terms, North America still edges China out. In some time, we believe the two will grow closer and closer to each other—at least within our market, i.e. demand for consulting and engineering services in the pharma industry.
This trend makes sense. With a burgeoning middle class in China and other emerging markets, many of our customers want to position themselves to benefit from imminent growth. In fact, some of the countries in question are developing requirements that demand pharma companies to put part of their value chain in place locally—especially in Russia.
We will be there to help our clients. One question that consistently pops up in these markets is business ethics—pharma players may be weary of offering work to certain local providers that have a questionable track record. In cases like these, they prefer to turn to a company they can really trust—and with our history of uncompromising ethical standards, NNE Pharmaplan is such a company. In the emerging markets, this is an integral part of our competitive advantage.
We have found that the right strategy for us in these markets is sometimes to simply say ‘no.’ When a client approaches us for a project, we inform them that we are more than happy to participate—but if the moment comes when we are asked to participate in activities like bribery, we will put all of our operations on hold, and refuse to take part. We believe that any customer that does not share our values in that sense is not a
good customer, and as pharma companies should strive to be highly ethical, they actually have a very serious internal problem as a business if they think that way.
Sometimes, in these markets, not cutting corners means that your project will get delayed—but that is something we are willing to accept. However, by being very clear up front—not just with customers, but also with authorities—we have not had any problems. This approach is feasible, and it is the only feasible approach for our company.
How do you ensure that this approach is implemented not only from the top down, but also from the bottom up? I.e., how do you ensure that local contractors that you work with, who may be used to a certain way of doing business, share and implement your values?
For one, we have not made any acquisitions yet in the emerging markets—we do not want to acquire any entity with bad habits. Our strategy is clear: we recruit our own people. We will be limited by organic growth, but that is one way of protecting our business. We select employee after employee on an individual basis, and ensure that they understand our ethical vision. Of course, we must also be strict from a leadership perspective.
We also tend to mix locals with expatriates from other parts of the NNE Pharmaplan organisation. In China, for instance, as we grew from ten people to over 400, we retained an expatriate percentage of ten percent. In this way, we ensure that employees who have build up solid experience in maturemarkets can offer their competences and help drive the development of the team. In emerging markets, , some of the local talent may simply not have enough experience with global quality standards required by the industry, and we look to provide our people with the education and skills they need to represent this company, no matter where they are in the world.
Finally, we invest in a higher standard of safety and quality. Some construction projects in the emerging markets have procedures and use materials that put people at risk. We do not accept those standards—and we communicate the same to our customer, up front. This means, again, that our price will be higher. But—again—we are not looking to compete on price, but rather added value. Our global customers appreciate that, because safety is very, very high on their own agenda when they enter these geographies.
NNE Pharmaplan had an 11 percent increase in turnover in 2012, and tripled profits. Can you comment?
Firstly, it is perhaps easier to triple profits when your profits in the previous year were quite low! Engineering, by nature, is not a very profitable business. The best in the business achieve EBIT of five percent. Our profits rose from 22 million Danish Krone to 66 million Danish Krone—and the latter figure represents a profit margin of close to four percent. For us, that was a huge step forward. Growth of 11 percent is a figure we are quite proud of as well, because the overall market is growing at five-six percent globally. Outgrowing the market means we took additional market share, and that is great. Doing so on a profitable basis is even better.
The recipe here has been to use our people better, and to deliver better projects. That has been our short-term focus. In the future, our ambition is to go from four percent profit, to eight percent—and to do so, we believe we need to understand our customers better, and focus most on the customers that truly value our offer.
We can take the analogy of a restaurant: if you walk into a restaurant and you are very hungry, you might take whatever is on the menu, no matter whether it is good for you of bad for you. That is not our approach. If you can bring your relationship with your customer to a higher level, they will open their books, and they will be interested in working with you for the long-term. When that happens, you can afford to be a bit more selective—because you know what is in your partners’ pipelines, what aspects of that pipeline are attractive for you, and how you can work with your partners to mutual benefit.
In addition to what I mentioned already—the rather obvious elements like using our people better and delivering better—selectivity is part of our recipe going forward. We don’t want to work with anybody, anywhere. We want to form strategic alliances wherein we value the customer, and they value us. We see a clear link, as well, between our most profitable projects, and our deepest customer relationships.
What is the future of this company?
Recognition from our customers and employees is our most important goal. We do not have an ambition of becoming a company of X people with revenue of Y amount. This is not our driver. To draw an analogy to a company we admire, I would say that if we could become the McKinsey of engineering and consulting within pharma and biotech, we would be very happy. Businesses like McKinsey are not the biggest, but they are consistently rated among customers and employees as top-notch. If a company has a real difficulty before them, or find themselves in a situation of survive-or-die, they turn to the McKinseys of the world. Their employees, in turn, know that if they want to become true top-notch consultants, their years with McKinsey will be enormously beneficial.
Various industries are dragged into McKinsey’s orbit—despite the fact that, if you ask a typical person in the street, they may have never heard of the company. Our vision is to build a similar brand within our area of expertise.
Growth is important to us. But growth has to be based on something that is real and dear to the heart of the customers and employees we serve.
Is this what drives you personally?
Absolutely. I am not driven to come to work by my salary or my option program—I am driven by the fact that I believe that my work makes a real difference to customers and to our team.
Moreover, when we build pharma plants, we are building something that is highly beneficial to society—something that saves and improves lives. That is important work. I am passionate about it, and I am extremely proud to do it.
I am also proud to work for a company with uniquely Danish roots. If you look at what our parent company has achieved, it is remarkable. Coming from a country with a population of only five million people, Novo Nordisk has edged closer and closer to the top ten pharma companies in the world—and in terms of creating value, I believe that it is without question that the company has been a top three player throughout the last ten years. This is attributable to the Danish mindset and management style. We fear complacency. We have very, very strong corporate charters. As NNE Pharmaplan, we embody and build on that heritage every day.
This is my dream job, and I feel very fortunate to steer this ship!