The contract manufacturing world was roiled in August when Lonza (Basel, Switzerland), a market leader in manufacturing large-and small-molecule active pharmaceutical ingredients (APIs), announced an offer to acquire Patheon (Research Triangle Park, NC), the second largest contract manufacturer of drug products. Lonza offered to buy shares of Patheon for $3.55 per share, valuing the company at about $700 million (market capitalization plus debt).
Most industry participants were stunned by the audacity of the move: Lonza was wading into an intense battle for control of Patheon already being waged by the private equity firm JLL Partners (New York, NY) and a committee of independent directors representing non-JLL shareholders. JLL had been Patheon's white knight two years ago when it needed to restructure its finances, providing $150,000 in exchange for preferred shares of the company. Earlier this year, JLL offered $2 for the outstanding shares of Patheon, and now owns 57% of the company (including the conversion of its preferred shares to regular shares). That tender offer triggered a series of public relations and courtroom skirmishes with Patheon's independent directors over the value of the company. The independent directors, believing the company is worth more than $2 per share, have welcomed Lonza's offer.
Beyond that initial reaction, however, the industry is questioning Lonza's stated rationale for wanting to acquire Patheon. Lonza has been quite clear for some time about its interest in adding formulation development and dose manufacturing to its service mix. The aim is to make Lonza into a turnkey supply chain solution for bio/pharma companies, able to deliver both the API and finished drug product in the major pharmaceutical markets. As recently as July, Lonza's CEO Stefan Borgas stated that the company had $1 billion available to spend on acquisitions, and that dose manufacturing was a principal target area for acquisitions.
To the degree that strategy makes sense, acquiring Patheon would enable Lonza to implement it on a large scale. The contract manufacturing organization (CMO) already has the following advantages:
- Patheon is the second-largest dose manufacturer, with $570 million in revenues from manufacturing commercial products.
- It has manufacturing operations in five countries on two continents (three facilities in the US, three in Canada, and four in Europe including two in Italy, one in France, and one in the UK) spanning most major dose forms.
- It has one of the largest drug development operations, with revenues of $130 million.
- It has successfully completed a painful restructuring process that has driven a lot of cost out of its operations and positioned it for significant revenue and profit growth.
QUESTIONING THE RATIONALE
However, Patheon's attractiveness as an acquisition candidate aside, there are still a lot of questions about the viability of the one-stop manufacturer strategy. Among the major objections that might be raised about the strategy are the following:
- There are no critical scientific or technical links between API and dose manufacturing that might be enhanced by putting the two operations together. To the extent that issues like solubility, stability, or particle size require interaction among API and dose manufacturers, that interaction can be handled as readily between two entities as within two operating units of the same CMO.
- Custom API manufacturing is a high value-added activity, where process development and proprietary technology can confer significant competitive advantage and command price premiums. Dose manufacturing in most cases involves more conventional off-the-shelf technology and is more commoditized.
- Dose manufacturing has proven to be an activity with low barriers to entry. In particular, the effort by major bio/pharma companies to sell off redundant facilities has allowed too many competitors into the industry and kept too much capacity on the market. Pricing is often the major competitive variable, even for supposedly higher-value activities like lyophilization and syringe filling.