Medica is a producer of secondary pharmaceutical packaging – the cartons used to house blister packs or equivalent for prescription and other drugs – and has a proud tradition of serving this niche since being a part of the Wellcome Trust at its inception, still operating from the same site in Crewe. As a sector this is very different to other packaging, such as food, with regulatory barriers and short-run production dynamics, and therefore the providers are also different. However over time consolidation had left the UK market with two major global players, and Medica as the only serious number three, in a market which has always valued dual supply. During this time Medica itself had also been neglected under the ownership of a food packaging company using Medica as an over-run facility. Sullivan Street saw a unique opportunity to focus the number three in a stable, growing, high margin market.
Notwithstanding this potential, the prior ownership of Medica had left it in this incredibly unusual position where its food packaging parent had used the site as an overspill factory to keep it afloat. This meant even the immediate parent was unaware of, and therefore unable to provide, reliable revenue data for the company we would acquire. Furthermore the risk-averse nature of the customer base meant there were significant concerns regarding customers’ view of a small standalone company in this space.
Although this deterred others we were able to produce bottom-up analysis of the customer product lines through direct customer engagement and benchmarking to equivalent plants across Europe, sourcing difficult to find comparable data. By combining this with our understanding of the generic stickiness of the customer and specific promises elicited from customers, we considered the risk of the unknown revenue line, as well as the risk of a customer exodus following the removal of the parent, to be mitigatable. These mitigations, crucially alongside with providing an initially strong balance sheet, meant Sullivan Street could accept the risks in exchange for an attractive entry price.
Since our involvement Medica has been turned around from being significantly loss-making to being profitable at an EBITDA level, even after substantial operating cost investments in sales personnel and the recruitment of a strong management team. We initiated and maintained transformational improvements in production, production planning and waste levels, along with selective withdrawal from unprofitable product lines. Once on a stable financial footing, we shifted Medica to focus on growing its revenue, organically and by absorbing a small competitor and creating a clear focus on two key customer niches – as a secondary supplier to large pharmaceutical companies and primary provider to smaller companies neglected by the multinationals. Simultaneously we used the cash generative nature of the business to upgrade the capital equipment in the plant, transform the other physical aspects of the factory, and redress historically lagging compensation structures in the business.
The result of all this is a Medica which bears a night and day contrast to its previous existence. Medica now has not only a strong, but a motivated, workforce, an excellent revived reputation, and with the capital investment in the last 18 months has a market leading facility in Crewe, benefiting also from the efficiencies put in place early in our ownership. We believe there is capacity to double the size of the business in terms of both supply and demand, but the pharmaceutical packaging business is extremely sticky and slow-moving (which Medica has benefited from as is has rung significant internal changes) and so our approach as an owner of a standalone site would need to be patient and long-term. We are constantly looking to absorb smaller plants and in due course will look at larger opportunities for new sites, but for the time being we are backing a strong management team to take the revenue forward one step at a time.