Patheon Files for IPO

Patheon has filed a registration statement on Form S-1 with the US Securities and Exchange Commission (SEC) relating to the proposed initial public offering (IPO) of its common stock. The number of shares to be offered and the price range for the offering have not yet been determined. J.P. Morgan, Morgan Stanley, Jefferies and UBS will act as joint book-running managers for the proposed offering.

Patheon’s decision to file for an IPO follows a series of acquisitions for the company to expand its pharmaceutical development and drug product manufacturing services as well as add capabilities in drug substance development and manufacturing, both biologics and small molelcules to become an end-to-end contract service provider. The key deal was 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 two entities, 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. Taken from the Patheon perspective alone, since 2012, the company has invested $1.4 billion to acquire five companies: Banner Pharmacaps, DSM Pharmaceutical Products, Gallus BioPharmaceuticals, Agere Pharmaceuticals, and IRIX Pharmaceuticals.

Patheon posted 2014 revenues (fiscal year ending October 31, 2014) of $1.7 billion and a net loss of $119 million. The US and Europe are the company’s largest geographic markets, respectively representing 55% and 37% of revenues, based on first-quarter fiscal year 2015 revenues. The company employs approximately 8,700 people at more than 25 locations in the US, Canada, Europe, Australia, Japan, and China.

The company’s business has four main segments. Drug Product Services (DPS), which provides manufacturing and packaging for approved prescription, over-the-counter, and nutritional products, accounted for 60% of the company’s total revenues in fiscal 2014. DPS operations are located at 11 facilities in North America and Europe. Pharmaceutical Development Services (PDS), which 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, accounted for 10% of the company’s total revenues in fiscal 2014. The company operates nine development facilities in North America and Europe.

Drug Substance Services (DSS), which provides development and manufacturing for the biologically active component of a pharmaceutical product from early development through commercial production, accounted for 11% of the company’s total revenues in fiscal 2014. The company operates two small-molecule active pharmaceutical production facilities, located in Linz, Austria and Regensburg, Germany, and four biologics active drug substance development and manufacturing facilities, located in: St. Louis, Missouri; Princeton, New Jersey; Groningen, The Netherlands; and Brisbane, Australia. DPx Fine Chemicals (DFC), which provides synthesis services to customers in the agricultural chemical industry and maleic anhydride and many specialty esters used in a broad range of industries and specialty products, generated revenues of $167.8 million and accounted for 10% of the company’s total revenues in fiscal 2014.

According to the company’s S-1 filling, the company provides development and manufacturing services for more than 800 products and molecules and produces 24 billion solid doses and 150 million sterile doses annually.Over the last decade, the company has developed and manufactured 86 newly approved drugs, including 11 in 2014. Patheon says this represents 41% of the total outsourced approvals during this period. It has a customer base of 400 significant customers in over 60 countries, including all of the top 20 largest pharmaceutical companies, seven of the 10 largest biotechnology companies. and seven of the world's 10 largest specialty pharmaceutical companies, according to the company’s S-filing. Over the last three years, 33% of the company’s commercial manufacturing new product launches originated from its formulation and development projects. Since 2013, of the 27 PDS projects that received regulatory approval, 74% remained with Patheon for commercial manufacturing. The company noted in its S-1 filing that drug-product commercial manufacturing contracts generally extend five or more years, and at least 90% of the products it currently manufactures are under contract through 2017. In fiscal 2014, the company had PDS projects for 618 drugs in clinical development, including 235 Phase I projects, 110 Phase II projects, and 203 Phase III projects.

On the manufacturing front over 2014 and 2013, to improve profitability, the company restructured its Puerto Rican operations as part of its efforts to eliminate operating losses and develop a long-term plan for itsbusiness in early 2014 and announced the closure of its facility in Venlo, The Netherlands in July 2014. As part of those restructuring efforts, the company incurred $53.5 million in repositioning expenses in fiscal 2014 that related to the DPP integration activities, the shutdown of the Venlo, The Netherlands and Caguas, Puerto Rico facilities, reduction of workforce at its Swindon, UK facility, outsourcing of certain back-office functions, and other operational initiatives. In fiscal 2013, the company incurred $15.8 million in repositioning expenses, of which $5.2 million related to the closure of the Olds, Alberta, Canada facility that was acquired as part of the Banner Acquisition and the shutdown of the Caguas, Puerto Rico facility, with the remainder related to the plan of termination associated with the Swindon, UK facility.

In offering a market view, Patheon in its S-1 filing, said that in 2014, the pharmaceutical industry spent approximately $140 billion on formulation, development, and manufacturing, according to Evaluate Pharma, and approximately $40 billion is expected to be outsourced to contract development and manufacturing organizations (CDMOs) in 2015, according to estimates from Root Analysis. Patheon offered industry data that estimates that only 25% to 30% of pharmaceutical industry spending on formulation, development, and manufacturing is outsourced. Industry sources indicate that the CDMO industry's annual growth rate is expected to be higher than the growth rate in the overall pharmaceutical industry, with overall CDMO growth in the mid- to high-single digits, and higher for finished dosage formulation services, specialized technologies such as solubility solutions, and pharmaceuticals requiring sterile production such as biological drugs.

Source: Patheon (S-1 filing)

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