Market Implications: Thermo Fisher Completes $7.2-Billion Buy of Patheon

Thermo Fisher Scientific has completed its $7.2-billion acquisition of Patheon. So what is the impact for Thermo, Patheon, and the pharma outsourcing market?

The acquisition of Patheon provides Thermo Fisher with small- and large-molecule development and manufacturing capabilities as well as formulation development and drug- product manufacturing and will become part of Thermo Fisher’s Laboratory Products and Services Segment. DCAT Value Chain Insights examines the combined businesses and the market implications.

Inside the deal
Thermo Fisher Scientific completed its previously announced acquisition of Patheon for $7.2 billion, inclusive of approximately $2.0 billion of net debt. The companies had first announced the acquisition in May 2017.

Patheon, which has approximately 9,000 employees worldwide, generated 2016 revenue of approximately $1.9 billion and will become part of Thermo Fisher’s Laboratory Products and Services Segment. Thermo Fisher expects to realize total synergies of approximately $120 million by year three following the close of the deal, consisting of approximately $90 million of cost synergies and approximately $30 million of adjusted operating income benefit from revenue-related synergies.

The acquisition of Patheon provides Thermo Fisher with small- and large-molecule development and manufacturing capabilities as well as formulation development and drug product manufacturing. Thermo Fisher’s products and services support research, clinical trials, and production and includes clinical trials logistics services.

For Patheon, its acquisition by Thermo Fisher continues a multiyear process in which the company has been pursuing a strategy of becoming an end-to-end contract services provider of active ingredients (both small molecules and biologics) and its historical core competency in formulation development and drug product manufacturing. The key deal for Patheon dates back to 2014 with the formation of DPx Holdings B.V., privately owned by the private-equity firm JLL Partners (51%) and Royal DSM (49%), which was the result of a $2.65-billion deal between the Patheon and DSM, first announced in November 2013 and completed in March 2014. JLL contributed $500 million in equity to DPx Holdings B.V., and DSM contributed DSM Pharmaceutical Products and received approximately $115 million in cash and $75 million of preferred partnerships interest, thereby valuing DSM Pharmaceutical Products at $670 million. DPx Holdings B.V. then effected a Plan of Arrangement pursuant to the Canada Business Corporations Act with Patheon under which DPx Holdings B.V. acquired Patheon for $9.32 per share resulting in a total enterprise value for Patheon of approximately $1.98 billion and a combined deal value of $2.65 billion.

Since 2012, Patheon has been active on the acquisition front with key acquisitions to build both its active ingredient service capabilities and formulation development and drug product manufacturing capabilities: Banner Pharmacaps, DSM Pharmaceutical Products, Gallus BioPharmaceuticals, Agere Pharmaceuticals, and IRIX Pharmaceuticals.

In 2015, Patheon acquired IRIX Pharmaceuticals, a Florence, South Carolina-headquartered company, specializing in making difficult-to-manufacture active pharmaceutical ingredients (APIs) for drugs from early and late development, through commercial launch. With the acquisition, Patheon secured additional API development and manufacturing services in the US, including high-potency (SafeBridge Class IV certified) and controlled substances (Schedule 1-4) and commercial API manufacturing at sites in Greenville and Florence, South Carolina. Also in 2015, Patheon acquired Agere Pharmaceuticals, a privately held CDMO, headquartered in Bend, Oregon, specializing in solubilization technologies and related science to improve the bioavailability of drugs. The acquisition of Gallus BioPharmaceuticals, a contract manufacturing company specializing in biologics, was completed in September 2014, and provided Patheon with US-based biologic drug substance sites in the US and complemented Patheon’s two existing biopharmaceutical production sites in Groningen, the Netherlands and Brisbane, Australia, which the company secured through the DSM transaction. Banner Life Sciences, which Patheon acquired in 2012 (then called Banner Pharmacaps), provided the company with proprietary products and technology primarily based on soft gelatin capsules.

Earlier this year, Patheon added to its small-molecule development and manufacturing capabilities by acquiring Roche’s API manufacturing facility in Florence, South Carolina, which Patheon announced in November 2016. The Florence site adds a 300,000 square-foot facility with manufacturing capacity for APIs ranging from development to commercial manufacturing. The addition of this site expands Patheon’s capacity for manufacturing highly potent compounds and adds capabilities to support solid-state chemistry, micronization (small and large), and future commercial spray drying. The site will serve as Patheon’s flagship US API operation for commercial-scale and mid-scale API production.

Patheon, which became a publicly traded company in 2016, has three main segments: Drug Product Services, Pharmaceutical Development Services, and Drug Substance Services. Drug Product Services provides manufacturing and packaging for approved prescription, over-the-counter, and nutritional products. Pharmaceutical Development Services provides a wide spectrum of advanced formulation, production, and technical services from the early stages of a product’s development to regulatory approval and beyond, as well as for new formulations of approved products for lifecycle extension. Drug Substance Services provides development and manufacturing for the biologically active component of a pharmaceutical product from early development through commercial production.

In June 2017, Patheon announced a $45-million investment to expand its capacity and capabilities. At its API development and manufacturing site in Florence, South Carolina, Patheon will be adding commercial spray-drying capabilities to complement the existing development capabilities at the company’s low-solubility center of excellence in Bend, Oregon. The 15,000-square-foot dedicated suite will contain two spray dryers for development- and commercial-scale spray-dried dispersion (SDD) services. The suite is expected to be on line in 2019.

At its Bend, Oregon site, the company plans to expand existing development SDD capabilities with a new cGMP analytical lab, manufacturing suite, and additional development-scale spray drying.

In addition, Patheon has invested in a new commercial sterile-product manufacturing facility at its site in Monza, Italy. The facility will house three, 40-square-meter lyophilizers with associated eight-headed integrated filling equipment for both lyo and liquid formulations for small and large molecules in a range of vial specifications. The equipment will have full cleaning-in-place/sterlization-in-place systems and auto loading for the lyophilizers contained in full restricted barrier access systems (RABS).

Patheon also plans to expand its sterile-product Pharmaceutical Development Services (PDS) at the Monza facility. The sterile suite will contain two 7-square-meter lyophilizers and an associated sterile vial-filling line and analytical laboratory. This new facility will provide development services for both small- and large-molecule injectable products (liquid and lyo formulations) and will be operational in mid-2019. All of Patheon’s PDS sterile suites are co-located within facilities with commercial-scale capabilities to ease the transition from clinical supply to commercialization.

Patheon will also expand its packaging and serialization capabilities at its site in Greenville, North Carolina. The company has built a new filling and packaging suite and upgraded another of its packaging lines with new technology to improve efficiency and reduce change-over time. The newly constructed 4,800-square-foot suite will come on line this fall and features a filling and packaging line equipped with an Optel serialization system. The system includes cameras, pharma proof stations, line master, and bottle and bundle tracker equipment.

Patheon’s Greenville manufacturing site is a large multi-purpose pharmaceutical manufacturing and packaging campus. The facility provides both solid dose form manufacturing/packaging and sterile dose manufacturing, filling, and lyophilization of biopharmaceuticals and small molecules and also has a continuous manufacturing suite.

Competitive landscape
The outsourcing of product development by the pharmaceutical industry is an important driver in the future combined company. In 2015, the pharmaceutical industry spent approximately $141.0 billion on formulation, development and manufacturing, according to Evaluate Pharma, and approximately $40.0 billion was expected to be outsourced to CDMOs in 2016, according to Root Analysis, as cited by Patheon in its 2016 annual report. Currently, only 26% to 31% of pharmaceutical industry spending on formulation, development and manufacturing is outsourced, and the outsourced pharmaceutical manufacturing market is expected to grow at approximately 7% to 8% annually in the foreseeable future, noted Patheon in its report, with services for products requiring specialized capabilities (e.g., sterile production, solubility solutions) growing at a higher rate than the overall market. According to Boston Consulting Group, a global management consulting firm and advisor on business strategy, the API small-molecule market for chemical API manufacturing totaled approximately EUR 20.0 billion ($22 billion) in 2012 and was expected to see growth of approximately 7.9% annually through 2016. According to Datamonitor, a business intelligence information provider, the API large-molecule market for mammalian biologics pharmaceutical contract manufacturing totaled approximately $1.9 billion in 2012 and may experience growth of approximately 9.4% annually through 2017, according to information from the report.

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