Thermo Fisher Scientific Inc. will acquire drug development and delivery services provider Patheon NV for $7.2 billion, including $2 billion of debt assumption. Diagnostics and laboratory-focused Thermo Fisher expects that the addition of the Durham, N.C.-based contract development and manufacturing organization (CDMO) will add to its offerings for biopharmaceutical customers.
The Waltham, Mass.-based company anticipates the deal will be accretive to adjusted EPS by adding $0.30 in the first full year after deal close, which is expected to be before year end. The $35 per share price tag was about a 35 percent premium to the Friday close for Patheon (NYSE:PTHN).
"As you know, we are the leading supplier to the pharmaceutical and biotech industry. In fact it's our largest and fastest growing end market. Today, we support our customers in research, clinical trials and logistic services, and production," explained Thermo Fisher president and CEO Marc Casper on a conference call about the deal. "Patheon's capabilities are highly complementary and will considerably strengthen our unique value proposition for these customers. Patheon gives us entry into the contract development and manufacturing services market."
Patheon will become part of Thermo Fisher's Laboratory Products and Services business. It has about 9,000 employees with facilities mostly in North America and Europe. It had about $1.9 billion in 2016 revenue.
Thermo Fisher hopes to cash in on a consolidating CDMO market, which currently is worth about $40 billion a year and growing at a mid-single to high-single digit annual rate. It noted that the segment is highly fragmented, with even the top 10 players comprising only about 35 percent of the market.
"Joining Thermo Fisher's leading global organization will enable us to expand our reach and capitalize on the tremendous success they have achieved in recent years. Together, both companies are better positioned to scale a new value chain capabilities to expand our offerings to our biopharma customers," said Patheon CEO James Mullen.
Patheon is focused on a trio of business segments: development services including formulation; active pharmaceutical ingredient (API) manufacturing for small and large molecules; and finished dosage form manufacturing to make tablets, softgels and injectables.
Thermo Fisher revenue during the first quarter was up 11 percent from the prior quarter a year earlier to almost $4.8 billion; only 4 percent of that was organic with the remainder driven by acquisitions. That was predominantly driven by the acquisition of FEI Co. in September 2016, and its addition to the Analytical Instruments segment. The Laboratory Products and Services business had $1.7 billion in revenue during the first quarter, an increase of 3 percent.
Last quarter, Thermo Fisher completed two deals that it describes as "strategic bolt-on acquisitions." These were for bioproduction measurement, control company Finesse Solutions and cloud-based digital science company Core Informatics.
Thermo Fisher expects the Patheon deal will enable it to upsell its existing biopharmaceutical customers. Casper outlined the anticipated strategic benefits, "First, it gives us entry into the large and fast growing CDMO market. It also makes our unique value proposition for our biopharma customers even stronger by adding highly complementary development and manufacturing capabilities that will allow us to further accelerate growth."
"Third, as you know, we have a proven track record in success with integrating acquisitions and our ability to leverage that playbook is extremely powerful in generating revenue synergies as you have seen other transactions," Casper added. "We'll be able to leverage our industry leading scale the commercial infrastructure to expand their customer reach. And, finally, this transaction offers attractive financial benefits to create value for our shareholders."
Thermo Fisher expects $120 million in synergies within three years after the deal closes, with about $90 million in cost synergies and another $30 million in adjusted operating income benefit from revenue-related synergies.
It plans to pay for the acquisition with about $5.2 billion in debt and an additional $2 billion in equity. Thermo Fisher already has the holders of 73 percent of Patheon shares on board with the deal with major shareholders JLL Partners and Royal DSM having entered tender and support agreements.
Wall Street gave the deal a tepid embrace, sending Thermo Fisher (NYSE:TMO) shares up 0.4 percent on the news, but its shares have gained a whopping 22 percent this year, largely on strong first quarter earnings. Shares closed at $172.26.