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JLL expects to buy more CMOs

Fragmented industry offers chances for more deals
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Contract manufacturing is a growing piece of the industry as drugmakers turn to outside operators to keep a lid on their own manufacturing investments and costs. But the industry looks inefficient to Paul Levy, cofounder of the investment group that just announced a $2.6 billion deal to buy DSM Pharmaceutical Products and merge it with Patheon ($PTI). He sees opportunity in rolling up more players into a larger company. But with other private investors in the market, he may find competition looking over the same targets. 

"The pharmaceutical manufacturing industry is highly fragmented," Levy told Reuters. "We'd like to think we'll have some good opportunities to build the business through some modestly-sized acquisitions over the years."

Levy's JLL Partners last week announced the deal, which creates a pharmaceutical services company that will have sales approaching $2 billion a year. It said it would lay out $489 million in cash and give DSM a $200 million note for 51% ownership in the new company. It will also contribute Patheon, the Canada-based contract manufacturer that it has been invested in since 2007. It valued Patheon at $1.95 billion.

The combined entity, which for now will go by the literal name of NewCo, will have 23 drug development and manufacturing sites in North America, Europe, Latin America and Australia, where DSM just opened a biologics manufacturing facility. It will have the capabilities to make everything from active pharmaceutical ingredients to finished dose products, and it will have 8,300 employees and an expertise in softgel capsule manufacturing, a specialty of Patheon.

The new company will be run by Jim Mullen, who became Patheon's chief executive in 2011 after 7 years as CEO of the biotech Biogen Idec ($BIIB). Levy said Mullen's experience is one reason the group feels confident in quickly building up NewCo. "Running a $2 billion revenue business for Jim Mullen is not a new challenge," Levy said. "We've had a terrific working experience with Jim. He's proven his turnaround experience and so we feel comfortable with him. And we see some significant opportunities with the new assets we're acquiring, to improve those as well."

JLL is not the only private investor that likes the growth potential in contract manufacturing and is out there buying. In October, CML merged with CMC specialist AAIPharma Services, a Wilmington, NC-based company that is owned by Water Street Healthcare Partners. In January, Warburg Pincus paid $195 million to buy JHP Pharmaceuticals, the majority of which was owned by Morgan Stanley Principal Investments. JHP is a sterile injectable drug manufacturer in Parsippany, NJ. There were a number of deals last year as well, like BC Partners shelling out €500 million-plus (about $620 million) for Germany's Aenova Group. 

- read the Reuters story

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