Under New Ownership

The CMO industry is undergoing a wave of ownership changes, including acquisitions, divestitures, and initial public offerings (IPOs). Ownership changes can lead to significant changes in a company’s strategy, focus, and prospects, so it is important for bio/pharmaceutical companies to review the implications of a key supplier’s change in ownership.

Recently announced ownership changes read like a veritable “Who’s Who” of the CMO industry:

• Catalent Pharma Solutions (Somerset, NJ, USA) will become a publicly traded company after completing an IPO later this year. Catalent has been owned by a group of private equity firms, led by Blackstone Group.

• Recipharm (Stockholm, Sweden) will also float an IPO, according to European press reports.

• Patheon (RTP, NC, USA) and DSM Pharmaceutical Products (DPP
  Parsippany, NJ, USA) will be merged into an as-yet unnamed new private company owned by private equity firm JLL Partners and DSM N.V.  Patheon has been a public company while DPP has been a strategic business unit of publicly-traded DSM N.V.

• JHP Pharmaceuticals (Parsippany, NJ, USA) is being acquired by Par Pharmaceuticals.

• Cangene bioPharma (Baltimore, MD, USA) is being acquired along with its parent Cangene Corporation by Emergent BioSolutions.

• Haupt Pharma (Berlin, Germany) has been acquired by private equity-backed CMO Aenova Group (Pahl, Germany). Haupt was previously owned by a private equity firm.
  

Potential benefits
These changes in control are generally a positive development for the industry.  They indicate faith in the long-term prospects for the CMO business model (at least some version of it) and, by assuring investors that they can realize the return on investments at some point, they attract further capital into the industry.

The change in ownership can also mean greater transparency into the performance and health of the CMO, which is a major benefit to CMO customers.  Public companies must report not only financial performance; they must also disclose potential threats and risks to their business, something private companies may not do.  

However, the transparency benefits will be muted in the recently-announced IPO events. Catalent and Recipharm already have been reporting their financial results, in Catalent’s case because they issued publicly-traded debt. Cangene has regularly revealed its CMO revenues in its earnings report but Emergent may not. With Patheon going from a public company to a private one, most disclosure will be lost.

Changes of ownership are also good for the CMOs and their customers because they often mean improved access to new capital for investment.  Public companies can sell more equity to fund investments or acquisitions, or may obtain debt more readily because of their greater financial transparency.  Where a CMO has been sold from one private equity firm to another, the new owner may be more willing to fund additional capital spending than a previous owner that was reluctant to invest as it neared the end of its holding period.

Public companies can also use their stock to make acquisitions that add new capabilities or remake the company in other ways. In the current environment, publicly held CMOs may make acquisitions that add more proprietary products to their business models.

Strategic risk
Probably the greatest risk stemming from change of ownership is a change in strategy. A new owner could decide to re-dedicate manufacturing capacity for internal purposes (i.e., to manufacture proprietary products). Existing contracts would be honored but not renewed, forcing current customers to enter into a costly search for a new manufacturer and re-incur the costs of tech transfer and process validation.  New contracts would not be pursued.

The withdrawal of capacity following an acquisition could have significant consequences for the industry.  It would mean tighter capacity in the industry as new deals chased reduced industry capacity, just as current CMO customers were being forced to look for alternative sources. While the exit of capacity would hardly be felt in solid-dose manufacturing, the implications would be significant for injectables manufacturing, where demand is rising and exits of large CMOs (notably Ben Venue Laboratories) have left little margin for a further demand surge.

It’s important to note that, initially at least, none of the announced changes in ownership are likely to have negative implications for current CMO customers or the capacity balance in the industry. Both Par Pharmaceuticals and Emergent BioSolutions have stated their appreciation of the value of the CMO businesses they are acquiring and their intention to maintain the CMO business.  That is important because while both Cangene bioPharma and JHP Pharmaceuticals are small players in terms of CMO revenues, their injectables capacity would be missed in the overall market.

The other risk that CMO customers should be mindful of is the possibility that management objectives will change even if the underlying strategy does not. Whereas private-equity owners are often willing to invest for long-term results and can withstand near-term volatility, public shareholders are usually looking for stable, predictable earnings and revenue growth. That is a challenge for the CMO business in particular, where revenues are often unpredictable since the CMO has no control over demand for the products it manufactures. Also, investors may prefer to see cash returned to them rather than funding the continuous investment that the capital-intensive CMO business requires.

More to come
The recent spate of ownership changes are not exclusively a reflection of the state of the CMO industry.  The CMO business undoubtedly was not the driver for the JHP-Par and Cangene-Emergent BioSolutions deals: it was JHP’s proprietary products and Cangene’s biodefense products that drove those acquisitions.

Still, changes in ownership in the CMO industry are hardly a surprise.  After all, private equity firms buy companies fully intending to sell them or take them public at some point after a reasonable holding period. We expect several more ownership changes to be announced in the next three months, and bio/pharma companies should expect that change in ownership will be a fact of life for them. It’s generally not something to be feared, and will often be something to welcome.  But it will be good risk management for bio/pharmaceutical companies to be fully aware of the ownership structure and intent of the companies providing their goods for sale.

About the Author
Jim Miller is president of Pharmsource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, [email protected]