Patheon N.V. PTHN $19.00-$22.00
30.5
million shares Underwriters: J.P. Morgan, Morgan Stanley, Jefferies, UBS
Investment Bank, Credit Suisse, Evercore ISI, Wells Fargo Securities Co-Managers: Baird, Piper Jaffray,
Raymond James, William Blair, KeyBanc Capital Markets, Leerink Partners Proposed trade date of 7/21
They are a leading global provider of outsourced
pharmaceutical development and manufacturing, or CDMO, services.
Patheon
N.V. PTHN
- 30,487,805
shares to be offered between $19.00
and $22.00 per share
- Underwriters:
J.P. Morgan, Morgan Stanley, Jefferies, UBS Investment Bank, Credit
Suisse, Evercore ISI, Wells
- Proposed
trade date of 7/21
- Rating
= 3
Click here
to view the prospectus.
https://www.sec.gov/Archives/edgar/data/1643848/000156761916002577/s001150x5_s1a.htm
Company
Overview
Patheon is a leading global provider of outsourced
pharmaceutical development and manufacturing services. They provide a comprehensive, integrated and
highly customizable range of active pharmaceutical ingredient, or API, and
finished drug product services to their customers, from formulation development
to clinical and commercial-scale manufacturing, packaging, and life cycle
management. Their services address both small molecule and large
molecule biological drugs. They believe they are the only end-to-end integrated
provider of such services, which, combined with their scientific and
regulatory expertise and specialized capabilities, allows their customers to
partner with a single outsourced provider to address their most complex
development and manufacturing needs. They believe they have the broadest
technological capabilities in their industry, across the full spectrum of
development and manufacturing, to support their end-to-end integrated platform.
They
believe they are a critical partner for their customers who increasingly rely
on their customized formulation, development and manufacturing expertise to
address growing drug complexity, cost pressures and regulatory scrutiny. They partner with many of their customers early in
the drug development process, providing them the opportunity to continue to
expand their relationship as molecules progress through the clinical phase and
into commercial manufacturing. This results in long-term relationships with their
customers and a recurring revenue stream. They believe their breadth of
services, reliability and scale address their customers’ increasing need to
outsource and desire to reduce the number of supply chain partners while
maintaining a high quality of service.
Through their end-to-end integrated service
offering, known as “Patheon OneSource™,” they provide their customers with
comprehensive solutions for both small molecule and large molecule biological
pharmaceuticals across their three main segments, including development and
manufacturing services for API (Drug Substance Services, or DSS), formulation
development and pre-clinical and clinical drug product manufacturing
(Pharmaceutical Development Services, or PDS), and commercial drug product
manufacturing and packaging (Drug Product Services, or DPS).
Their end-to-end integrated service offering allows them
to provide a comprehensive suite of capabilities across different drug
formulations to address their customers’ needs. Their specialized capabilities
address 75% of all pharmaceutical dosage forms, with expertise and specialized
capacity in high potency, controlled substances, low-solubility, sterile,
modified release and softgel technologies.
·
DPS: They believe they are the clear drug manufacturing
partner of choice for the pharmaceutical industry. Over the last decade,
they have developed and manufactured 92 newly approved drugs, including 17 in
2015, which is more than twice the number of any other contract development and
manufacturing organization, or CDMO, and represents more than 20% of the
total outsourced NDA approvals during those periods. They produce 23 billion
solid doses and 146 million sterile doses annually, many of which address
central nervous system, oncological and other life-threatening conditions. They
believe they are among the largest providers of aseptic “fill-finish” services
for finished dose biological drug products. In addition, based on market
research, they are involved in more than 25% of the top 100 selling drugs in
fiscal 2015.
·
PDS: They are the number one global provider of
formulation development services. Their capabilities span the full breadth
of advanced scientific services from discovery to regulatory approval,
including formulation development across approximately 40 dosage forms, as well
as analytical services, and life cycle management.
·
DSS: They are a leading provider of complex small
molecule API and flexible outsourced manufacturing solutions for large molecule
biological API from early development through commercial scale production. They
believe they are one of the top three outsourced manufacturers of highly
complex biological drug substances through their four biological API
facilities. They estimate that their biologics sites serve 70% of the market.
They
serve a highly diverse, blue chip customer base comprised of more than 400
clients in over 70 countries, including all of the top 20 largest
pharmaceutical companies, 18 of the 20 largest biotechnology companies and 15
of the 20 largest specialty pharmaceutical companies. They provide development and manufacturing services
for approximately 700 products and molecules.
They employ approximately 8,800 people, including
more than 600 scientists and technicians, at more than 25 locations in the
In July 2015, they entered into an agreement to sell
their DPx Fine Chemicals business, or DFC, which provides synthesis services to
customers in the agricultural chemical industry, maleic anhydride and many
specialty esters used in a broad range of industries and specialty products.
The DFC business, which is located at their
IPO
Detail
This is the initial public offering of Patheon
N.V. and no public market currently exists for its common stock. Patheon N.V. is
offering 30,487,805 shares of common stock as described in the prospectus. The
company expects the initial public offering price of its common stock to be between
$19.00 and $22.00 per share. The company has applied to list its common stock
on the New York Stock Exchange under the symbol “PTHN.”
|
Common stock
offered by the company |
25,609,756 shares |
|
Common stock
offered by the selling shareholder |
4,878,049 shares |
|
Common stock to
be outstanding immediately after this offering |
141,219,512
shares |
Use of
Proceeds
They
estimate that the net proceeds from the sale of their ordinary shares that they
are selling in this offering will be approximately $492.3 million. They intend
to use approximately $492.3 million of the net proceeds they receive from this
offering, together with cash on hand, to repay all of their Senior PIK Toggle
Notes and pay the related fees and expenses. The net proceeds from the offering
of the Senior PIK Toggle Notes were used to pay a dividend of approximately
$538 million to their shareholders and certain related transaction fees and
expenses related to the offering of the Senior PIK Toggle Notes. The Senior PIK
Toggle Notes mature on May 1, 2020 and the interest rate thereon is 8.75% per
annum if interest is paid in cash or 9.50% per annum if interest is paid in the
form of additional notes.
Competition
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Company |
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Stock Symbol |
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Exchange. |
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Private |
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Baxter
BioPharma Solutions (subsidiary of Baxter International Inc.) |
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BAX |
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NYSE |
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One 2 One™ (subsidiary of Pfizer Inc.) |
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PFE |
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NYSE |
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Metrics
Contract Services (subsidiary of Mayne Pharma Group Limited.) |
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MYX |
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AU |
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3M
Drug Delivery Systems (subsidiary of 3M Co.) |
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MMM |
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NYSE |
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WellSpring
Pharmaceutical Corp. |
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Private |
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Alcami
Corp. |
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Private |
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Ei LLC |
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Private |
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Mission Pharmacal Company, Inc. |
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Private |
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Market
The global
pharmaceutical industry is a large and growing market. They serve all key
sectors of the industry across both small molecule and large molecule
biological drugs, through solid dose forms, sterile products and other complex
products such as controlled substances. Revenue for the pharmaceutical
industry was $744 billion in 2015 and is expected to grow to $1 trillion in
2020, representing a compounded annual growth rate of 6.0%. Research
& developmental spend for the pharmaceutical and biotechnology industry is
expected to reach $160 billion in 2020. This growth is driven by global,
secular trends, including increasing demand for pharmaceuticals because of
expanded insurance coverage in key markets, an aging population and increased
life expectancy rates, a growing middle class in emerging markets and growth in
specialty pharmaceuticals. To illustrate this, the global population is
projected to exceed 8.1 billion by 2025, with the population aged 60 and over
projected to exceed 1.0 billion by such time. They believe these factors will
continue to drive unit growth and complexity, benefiting CDMOs such as Patheon.
The
outsourcing of API and drug product development and manufacturing by the
pharmaceutical and biotechnology industries is an important driver of growth in
their business. In 2015, the pharmaceutical industry spent approximately
$141 billion on formulation, development and manufacturing, according to
Evaluate Pharma, and they expect approximately $40 billion will be outsourced
to CDMOs such as Patheon in 2016, according to Root Analysis. Currently,
only 26% to 31% of pharmaceutical industry spending on formulation, development
and manufacturing is outsourced, and in the future it is expected that their
customer base will increase the use of outsourcing to CDMOs because of changing
industry dynamics, driving growth in their market. 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,
capabilities in which Patheon has extensive experience.
The key
industry dynamics underlying CDMO industry growth include:
- Their customers are
facing growing pricing and competitive pressures, forcing them to reduce
fixed costs, reduce
time to market for their new drugs, simplify historically complex supply
chains and streamline vendor management, while ensuring reliability and
quality.
- Complex formulation
challenges presented by many new products require expertise that is costly
or impractical for pharmaceutical and biotechnology companies to build and
operate in-house. For example, more than 60% of all new
compounds entering development will need specialized manufacturing and/or
molecular profile modification according to industry research in the
American Pharmaceutical Review.
- The number of drugs
developed by emerging and mid-size companies is growing and currently
represents an estimated 80% of the drug pipeline. In 2015,
approximately $48 billion of
capital was raised to fund the development of drug pipelines of emerging
biotechnology companies. For many of these companies, outsourcing to CDMOs
such as Patheon is a critical component of their business model because
they lack in-house formulation capabilities as well as the experience and
infrastructure to manufacture the products themselves.
- The global
pharmaceutical industry faces increasing regulatory complexity and
compliance requirements, including oversight by the U.S. Food and Drug
Administration, or FDA, and its counterparts globally. They believe this
represents an opportunity for qualified and global CDMOs to expand market
share as companies are looking for a partner such as Patheon with a track
record of excellent product quality and deep regulatory capabilities, in
order to avoid the consequences of manufacturing and quality issues and
regulator-ordered shutdowns, such as drug shortages and lost revenue and
earnings.
They serve
the entire spectrum of customers, including large, mid-size and specialty
pharmaceutical and biotechnology companies, emerging biotechnology companies,
and generic pharmaceutical companies, as well as customers in other related
areas, such as consumer or over-the-counter nutritional and animal health
companies, each with a distinct outsourcing dynamic:
- Large pharmaceutical
and biotechnology companies are actively reducing their fixed asset base
and focusing on their core activities of research and development, or
R&D, and sales and marketing. These companies are increasingly recognizing that formulation
development and manufacturing are non-core activities for their
businesses. As a result, they are outsourcing instead of investing
substantial capital in building specialized capabilities in-house to
address their increasingly complex pipelines.
- Mid-size or specialty
pharmaceutical and biotechnology companies are increasingly focused on
sales, marketing, and late stage clinical development, as opposed to establishing internal
formulation capabilities and manufacturing capacity, and as a result are
outsourcing significant portions of this value chain.
- Emerging pharmaceutical
and biotechnology companies are being driven by venture and other
investors to adopt virtual business models in which the company identifies
a promising drug candidate and then relies heavily on outsourcing all
activities,
including formulation development and manufacturing. Many of these drug
candidates are ultimately licensed or sold to larger companies for late
stage clinical development and commercialization. They believe companies
such as Patheon are well-positioned to retain a molecule even if it is
licensed or sold, due to the significant cost and time involved in
switching service providers.
- Generic pharmaceutical
companies increasingly seek to outsource development and manufacturing of
complex products they cannot produce with their existing infrastructure to
third parties that have such specialized capabilities given the importance of speed-to-market for
these companies (for example, the 180-day marketing exclusivity period for
generic companies that are “first-to-file” under a patent challenge)
Relative to the
outsourcing rate for the contract research organization, or CRO, industry, the
CDMO industry is underpenetrated in most of its sub-segments, creating
significant growth opportunities for a CDMO with an end-to-end integrated
offering such as Patheon due to a growing propensity by biopharmaceutical
companies to outsource. They
believe their sector will follow a similar trajectory to the CRO industry.
In addition, the
CDMO industry is highly fragmented, with more than 600 companies worldwide,
many of which specialize in a single capability or are too small to achieve
economies of scale and benefit from customer or product diversification. As a result of growing customer demand for scale
providers with a broader range of services throughout the drug life cycle, they
believe there will be opportunities for a company such as Patheon to lead the
consolidation of the industry through strategic acquisitions and to take market
share from sub-scale competitors.
|
|
Six months
ended |
Year ended
October 31, |
|||||||||||||||||||||||||||||||||||||
|
(in millions of dollars) |
2016 |
2015 |
2015 |
2014 |
2013 |
2012 |
2011 |
||||||||||||||||||||||||||||||||
|
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Revenues |
$ |
874.5 |
|
$ |
863.9 |
|
$ |
1,774.2 |
|
$ |
1,483.5 |
|
$ |
990.6 |
|
$ |
748.0 |
|
$ |
697.6 |
|
||||||||||||||||||
|
Cost of goods sold |
|
637.3 |
|
|
604.7 |
|
|
1,215.7 |
|
|
1,096.1 |
|
|
749.5 |
|
|
589.1 |
|
|
566.4 |
|
||||||||||||||||||
|
Gross profit |
|
237.2 |
|
|
259.2 |
|
|
558.5 |
|
|
387.4 |
|
|
241.1 |
|
|
158.9 |
|
|
131.2 |
|
||||||||||||||||||
|
Selling,
general and administrative expenses |
|
148.5 |
|
|
150.9 |
|
|
309.0 |
|
|
238.7 |
|
|
156.6 |
|
|
128.6 |
|
|
120.2 |
|
||||||||||||||||||
|
Research and development |
|
1.3 |
|
|
9.4 |
|
|
14.8 |
|
|
13.7 |
|
|
9.7 |
|
|
— |
|
|
— |
|
||||||||||||||||||
|
Repositioning expenses |
|
2.5 |
|
|
18.2 |
|
|
25.1 |
|
|
51.7 |
|
|
15.8 |
|
|
6.1 |
|
|
7.0 |
|
||||||||||||||||||
|
Acquisition and integration costs |
|
10.2 |
|
|
10.2 |
|
|
19.3 |
|
|
60.3 |
|
|
9.9 |
|
|
3.2 |
|
|
— |
|
||||||||||||||||||
|
Impairment charges |
|
— |
|
|
— |
|
|
4.1 |
|
|
9.7 |
|
|
13.1 |
|
|
57.9 |
|
|
— |
|
||||||||||||||||||
|
Other operating (income) loss |
|
(3.7 |
) |
|
(0.3 |
) |
|
4.6 |
|
|
(0.1 |
) |
|
(1.5 |
) |
|
0.4 |
|
|
0.2 |
|
||||||||||||||||||
|
Operating income (loss) |
|
78.4 |
|
|
70.8 |
|
|
181.6 |
|
|
13.4 |
|
|
37.5 |
|
|
(37.3 |
) |
|
3.8 |
|
||||||||||||||||||
|
Interest expense, net |
|
86.4 |
|
|
56.6 |
|
|
141.8 |
|
|
90.5 |
|
|
47.9 |
|
|
26.5 |
|
|
25.6 |
|
||||||||||||||||||
|
Foreign exchange loss (gain), net |
|
11.4 |
|
|
7.6 |
|
|
17.8 |
|
|
8.6 |
|
|
0.6 |
|
|
0.5 |
|
|
(1.6 |
) |
||||||||||||||||||
|
Refinancing expenses |
|
— |
|
|
3.7 |
|
|
3.7 |
|
|
28.2 |
|
|
27.3 |
|
|
— |
|
|
— |
|
||||||||||||||||||
|
Gain on
sale of third party investment(9) |
|
— |
|
|
— |
|
|
(16.2 |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||||||||||||||||||
|
Other (income) loss, net |
|
(1.3 |
) |
|
0.1 |
|
|
(0.7 |
) |
|
(1.1 |
) |
|
(2.0 |
) |
|
(1.3 |
) |
|
(5.4 |
) |
||||||||||||||||||
|
(Loss)
income from continuing operations before income taxes |
|
(18.1 |
) |
|
2.8 |
|
|
35.2 |
|
|
(112.8 |
) |
|
(36.3 |
) |
|
(63.0 |
) |
|
(14.8 |
) |
||||||||||||||||||
|
Provision
for (benefit from) income taxes |
|
— |
|
|
9.9 |
|
|
0.3 |
|
|
4.3 |
|
|
(3.7 |
) |
|
43.7 |
|
|
1.3 |
|
||||||||||||||||||
|
Net (loss)
income from continuing operations |
|
(18.1 |
) |
|
(7.1 |
) |
|
34.9 |
|
|
(117.1 |
) |
|
(32.6 |
) |
|
(106.7 |
) |
|
(16.1 |
) |
||||||||||||||||||
|
Net (loss)
income from discontinued operations |
|
(3.1 |
) |
|
19.7 |
|
|
103.5 |
|
|
(2.1 |
) |
|
(3.5 |
) |
|
(0.3 |
) |
|
(0.6 |
) |
|
|||||||||||||||||
|
Net (loss) income |
$ |
(21.2 |
) |
$ |
12.6 |
|
$ |
138.4 |
|
$ |
(119.2 |
) |
$ |
(36.1 |
) |
$ |
(107.0 |
) |
$ |
(16.7 |
) |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Cash and cash equivalents |
$ |
184.7 |
|
$ |
96.6 |
|
$ |
328.7 |
|
$ |
73.4 |
|
$ |
56.8 |
|
$ |
39.4 |
|
$ |
33.4 |
|
|
|||||||||||||||||
|
Total assets |
|
2,628.1 |
|
|
2,526.3 |
|
|
2,615.0 |
|
|
2,393.4 |
|
|
1,077.1 |
|
|
746.0 |
|
|
823.2 |
|
|
|||||||||||||||||
|
Total liabilities |
|
3,549.5 |
|
|
2,918.9 |
|
|
3,479.2 |
|
|
2,785.8 |
|
|
952.5 |
|
|
618.3 |
|
|
586.8 |
|
|
|||||||||||||||||
|
Total
members’ (deficit) / shareholders’ equity |
|
(921.4 |
) |
|
(392.6 |
) |
|
(864.2 |
) |
|
(392.4 |
) |
|
124.6 |
|
|
122.7 |
|
|
236.4 |
|
|
|||||||||||||||||
Target
Markets
Leverage
their end-to-end platform and global scale to extend their position as the
leading integrated CDMO. The
highly customizable services they provide throughout the product life cycle
afford them significant opportunities to respond to growing customer demand for
supply chain simplicity, development and manufacturing speed, and quality. Their
PDS capabilities allow them to partner with their customers early in the
development process of their molecules, providing a pipeline of molecules for their
commercial manufacturing services as the molecules progress through the
clinical phase and into commercial manufacture. In fiscal 2015, they had PDS
projects for 562 drugs in clinical development, including 225 Phase 1 projects,
106 Phase 2 projects and 231 Phase 3 projects. During their evolution over
the past five years, they have aligned their sales, marketing and management
functions, on all organizational levels, to cross-sell the breadth of their
capabilities and market the “Patheon OneSource” service offering. They
believe this strategy will continue to drive business across all customer
segments, and represents a high-dollar value, high-margin growth opportunity.
Continue
their operational excellence initiatives to optimize capacity and efficiency,
reduce costs and drive outstanding financial performance. Their organization-wide OE Program efforts focus
on improving manufacturing efficiency and quality, driving cost savings,
increasing capacity and creating value throughout the manufacturing chain and
has saved them over $259 million since 2012. They intend to continue
maximizing revenue growth and margin expansion through their resulting expanded
capacity and facility utilization. For example, they have increased capacity by
21% since 2011, and their current utilization of 49% allows them to continue to
launch new projects without significant investment in new facilities. They
believe that this continuous focus on OE will drive margin improvements and
support robust revenue growth on an annual basis, which should result in
significant operating leverage.
Target
high-growth, high-value areas of the pharmaceutical and biotechnology
industries. Their
customers increasingly seek complex drug formulations and delivery technologies
that exceed their own in-house capabilities. They intend to use their broad
range of specialized dosage and formulation solutions, which include high
potency, softgel, controlled substance, modified release and sterile dosage
forms, to serve this market segment. For example, their acquisition of
Gallus BioPharmaceuticals provided them with capabilities for complex clinical
and commercial scale biologics manufacturing in the key
Selectively
pursue strategic investments and acquisitions to support expanding customer
needs and complement their existing platform. As a customer-driven company, they have invested in
new specialized technologies, expanded capacity in high-demand capabilities,
and broadened their capabilities in high value-added product and service
offerings in response to market demand. For example, in response to growing
demand for pre-filled syringes to deliver biological molecules, they completed
construction of a new production line in a European sterile facility in late
2013. In addition, they have acquired five companies since 2012, including three
acquisitions between September 2014 and March 2015, each of which provided new
or expanded capabilities and scale for their end-to-end integrated offering. They
plan to continue adding complementary, high-value technological and operational
capabilities and service offerings to meet customer needs through investment,
acquisitions and collaborations. They expect Patheon will continue to be an
active, disciplined consolidator of the fragmented CDMO industry to complement
their organic growth strategy.
Company's
Unique Strengths
Sector-leading
performance driven by continuous operational excellence improvement. Over the last five years they have implemented a
major initiative to drive operational efficiencies across their global network
of facilities and rapidly and effectively integrate acquisitions. Their OE
Program, which is deeply embedded in their operations and culture, is aimed at
aligning their operations and incentives around the key customer metrics of RFT
and OTD. As a result, their on-time performance for delivering customer
projects increased from 86% in 2011 to 95% in 2015, to which they believe their
customers ascribe significant value. In addition, through efficiency gains
they have increased capacity by 21% over this period without significant
capital investments and generated substantial cost savings from improvements to
both existing operations and acquired businesses. They believe these
continuous efforts will continue to unlock capacity, reduce costs and help
drive margin improvements annually.
End-to-end
integrated capabilities. They
provide a comprehensive, integrated and highly customizable range of API and
finished drug product services to customers, from formulation development to
clinical and commercial-scale manufacturing, packaging, and life cycle
management. Their services address both small molecule and large molecule
biological drugs. They believe they are further differentiated by the wide
range of formulation and manufacturing services they provide to their
customers, which encompass 75% of all pharmaceutical dosage forms, and by
providing specialized capabilities that their customers are increasingly
seeking such as high potency, controlled substance, low-solubility, aseptic
manufacturing, modified release and softgel formulations. Their breadth of
technologies spanning development and manufacturing further support their
end-to-end integrated platform, increasing product development speed and
reducing costs for their customers by avoiding the time, regulatory burden and
cost required to transfer a molecule to other service providers.
Extensive
and long-term relationships with their customers from development through
commercial manufacturing driving a recurring, highly-visible revenue stream. Their end-to-end integrated platform allows them
to capture customer molecules early in the development process and retain them
through full-scale commercial manufacturing, while efficiently and reliably
maintaining quality in a complex supply chain. Once won, this business is
highly stable due to regulatory requirements, lengthy and costly product
transfer processes, and customers’ need to ensure uninterrupted supply. For
example, in 2015 37% of their commercial manufacturing new product launches
originated from their formulation and development projects. Their drug product
commercial manufacturing contracts generally extend five or more years and at
least 90% of the products they currently manufacture are under contract through
2016 and approximately 65% are under contract through 2018. Based on current
signed contracts across all segments, more than 90% of revenue for 2016 is
associated with ongoing programs that have already been initiated.
Industry-leading
reputation for quality and reliability across their global network. They are an industry leader in product quality and
regulatory compliance. They have a culture of continuous improvement in
quality, with internal standards and targets that exceed regulatory rules and
customers’ internal standards. As a result, they believe they have one of
the best track records in the industry for both pharmaceutical companies and
outsourced service providers. Increased regulatory scrutiny has resulted in
industry supply disruptions or facility shutdowns, contributing to the recent
record levels of drug shortages, including for numerous life-saving drugs. As
regulatory requirements have increased, many pharmaceutical companies have
migrated to CDMO providers with a demonstrated ability to consistently meet
quality and compliance standards. They complement their industry-leading
quality systems with a global network, which allows them to validate their
customers’ products across multiple manufacturing lines within a facility and
across multiple facilities within their network to ensure supply security.
In addition, their focus on RFT and OTD metrics underpins their position as an
industry leader for customer service.
Company's
Unique Risks
Their
services and offerings are highly complex, and if they are unable to provide quality and timely offerings to their
customers, their business could suffer.
Their
pharmaceutical development services projects are typically for a shorter term
than their pharmaceutical manufacturing projects, and any failure by them to maintain a high
volume of pharmaceutical development services projects, including due to lower
than expected success rates of the products for which they provide services,
could have a material adverse effect on their business, results of operations
and financial condition.
Because a
significant portion of their revenues comes from a limited number of customers, any decrease in sales to
these customers could have a material adverse effect on their business, results of operations and financial condition. For
the six months ended April 30, 2016, their top 10 customers and products
accounted for 38% and 18%, respectively, of their revenues. While no
customer accounted for more than 7% of their revenue for the six months ended
April 30, 2016, they have customer concentration that increases credit risk and
other risks associated with particular customers and particular products.
They may
not be able to successfully offer new services. In order to successfully compete, they will need
to offer and develop new services. Without the timely introduction of
enhanced or new services, their services and capabilities may become obsolete
over time, in which case, their revenues and operating results would suffer.
Technological
change may cause their offerings to become obsolete over time. A decrease in their customers’ purchases of their
offerings could have a material adverse effect on their business, results of
operations and financial condition.
Certain of
their pension plans are underfunded, and additional cash contributions may be
required, which may reduce the cash
available for their business. Certain of their employees in
Their
substantial indebtedness could
adversely affect their ability to raise additional capital to fund their
operations, limit their ability to react to changes in the economy or in their
industry, expose them to interest rate risk to the extent of their variable
rate debt and prevent them from meeting their obligations under their
indebtedness. Following this offering, they will continue to have a significant
amount of debt. As of April 30, 2016, on a pro forma as adjusted basis
giving effect to this offering and the use of proceeds therefrom, they would
have had approximately $2.2 billion of indebtedness. In addition, they would
have had approximately $187.7 million of availability under their $200.0
million revolving credit facility.
They are
subject to environmental, health and safety laws and regulations, which could subject them to liabilities, increase their
costs or restrict their operations in the future.
Upon the
listing of their ordinary shares on the NYSE, they will be a “controlled
company” within the meaning of the rules
of the NYSE and, as a result, will qualify for, and intend to rely on,
exemptions from certain corporate governance requirements. You will not have
the same protections afforded to shareholders of companies that are subject to such
requirements. JLL and DSM have entered into a shareholders’ agreement with them,
which will become effective upon completion of this offering, pursuant to which
each of JLL and DSM will be entitled to nominate a certain number of
designees for election to their board of directors and have agreed to vote in
favor of each other’s nominees. Upon the listing of their ordinary shares
on the NYSE, they will be a “controlled company” under the rules of the NYSE.
The
shareholders’ agreement entered into among JLL, DSM and them which will become
effective upon completion of this offering contains, to the extent permitted by applicable
law, provisions renouncing their interest and expectation to participate in
certain corporate opportunities identified by or presented to certain of their
existing directors and officers.
Bottom Line
Their
revenues were $697.6 million, $748.0 million, $990.6 million, $1.48 billion and
$1.77 billion and their net income (loss) was ($16.7 million), ($107.0
million), ($36.1 million), ($119.2 million) and $138.4 million in 2011, 2012,
2013, 2014 and 2015, respectively. In the first half of 2016, their revenues
increased 1.2% to $874.5 million and their net income fell from a $12.6 million
gain to a $21.2 million loss.
They provide
a comprehensive, integrated and highly customizable range of active
pharmaceutical ingredient, or API, and finished drug product services to their
customers, from formulation development to clinical and commercial-scale
manufacturing, packaging, and life cycle management. Their services address
both small molecule and large molecule biological drugs. They believe they are
the only end-to-end integrated provider of such services. Over the last decade,
they have developed and manufactured 92 newly approved drugs, including 17 in
2015, which is more than twice the number of any other contract development and
manufacturing organization. They are the number one global provider of
formulation development services. They are a leading provider of complex small
molecule API and flexible outsourced manufacturing solutions for large molecule
biological API from early development through commercial scale production. They
serve a highly diverse, blue chip customer base comprised of more than 400
clients in over 70 countries, including all of the top 20 largest
pharmaceutical companies, 18 of the 20 largest biotechnology companies and 15
of the 20 largest specialty pharmaceutical companies.
Revenue for
the pharmaceutical industry was $744 billion in 2015 and is expected to grow to
$1 trillion in 2020, representing a compounded annual growth rate of 6.0%.
Research & developmental spend for the pharmaceutical and biotechnology
industry is expected to reach $160 billion in 2020. . In 2015, the
pharmaceutical industry spent approximately $141 billion on formulation,
development and manufacturing, according to Evaluate Pharma, and they expect
approximately $40 billion will be outsourced to CDMOs such as Patheon in 2016.
Currently, only 26% to 31% of pharmaceutical industry spending on formulation,
development and manufacturing is outsourced, and in the future it is expected
that their customer base will increase the use of outsourcing to CDMOs because
of changing industry dynamics. 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, capabilities in which Patheon has extensive experience.
Relative to the outsourcing rate for the contract research organization, or
CRO, industry, the CDMO industry is underpenetrated in most of its sub-segments,
creating significant growth opportunities for a CDMO with an end-to-end
integrated offering such as Patheon due to a growing propensity by
biopharmaceutical companies to outsource. In addition, the CDMO industry is
highly fragmented, with more than 600 companies worldwide, many of which
specialize in a single capability or are too small to achieve economies of
scale and benefit from customer or product diversification.
The highly
customizable services they provide throughout the product life cycle afford
them significant opportunities to respond to growing customer demand for supply
chain simplicity, development and manufacturing speed, and quality. Their
organization-wide OE Program efforts focus on improving manufacturing
efficiency and quality, driving cost savings, increasing capacity and creating
value throughout the manufacturing chain and has saved them over $259 million
since 2012. They believe that this continuous focus on OE will drive margin
improvements and support robust revenue growth on an annual basis, which should
result in significant operating leverage. Their customers increasingly seek
complex drug formulations and delivery technologies that exceed their own
in-house capabilities. They intend to use their broad range of specialized
dosage and formulation solutions, which include high potency, softgel,
controlled substance, modified release and sterile dosage forms, to serve this
market segment. They expect Patheon will continue to be an active, disciplined
consolidator of the fragmented CDMO industry to complement their organic growth
strategy.
Over the last
five years they have implemented a major initiative to drive operational
efficiencies across their global network of facilities and rapidly and
effectively integrate acquisitions. . In addition, through efficiency gains
they have increased capacity by 21% over this period without significant
capital investments and generated substantial cost savings from improvements to
both existing operations and acquired businesses. They provide a comprehensive,
integrated and highly customizable range of API and finished drug product
services to customers, from formulation development to clinical and
commercial-scale manufacturing, packaging, and life cycle management. Once won,
their customer’s business is highly stable due to regulatory requirements,
lengthy and costly product transfer processes, and customers’ need to ensure
uninterrupted supply. They believe they have one of the best track records in
the industry for both pharmaceutical companies and outsourced service
providers.
Their
services and offerings are highly complex, and if they are unable to provide
quality and timely offerings to their customers, their business could suffer.
Their pharmaceutical development services projects are typically for a shorter
term than their pharmaceutical manufacturing projects, and any failure by them
to maintain a high volume of pharmaceutical development services projects,
including due to lower than expected success rates of the products for which
they provide services, could have a material adverse effect on their business,
results of operations and financial condition. Because a significant portion of
their revenues comes from a limited number of customers, any decrease in sales
to these customers could have a material adverse effect on their business.
Without the timely introduction of enhanced or new services, their services and
capabilities may become obsolete over time, in which case, their revenues and
operating results would suffer. Technological change may cause their offerings
to become obsolete over time. Certain of their pension plans are underfunded,
and additional cash contributions may be required. They have substantial
indebtedness. Giving effect to this offering and the use of proceeds therefrom,
they would have had approximately $2.2 billion of indebtedness. In addition,
they would have had approximately $187.7 million of availability under their
$200.0 million revolving credit facility. They are subject to environmental,
health and safety laws and regulations. Upon the listing of their ordinary
shares on the NYSE, they will be a “controlled company”. Rating = 3