DSM plans to merge pharma business with Patheon

The merger – plans for which were announced earlier today – will see JLL Partners taking a 51% stake in the new entity with DSM holding the remaining 49%.

Under the agreement JLL will contribute $489m to the new entity while DSM will receive a seller note worth €200m. Current Patheon CEO Jim Mullen will be head of the new organisation when the deal completes.

DSM has been seeking a partner for DSM Pharmaceutical Products (DPP) for three years according to CFO Rolf-Dieter Schwalb who told Outsourcing why the firm has finally decided to team up with Patheon.

“We announced that we wanted to go for a partnership in 2010​” Schwalb said, explaining that DPP “was too small to become a profitable operation on its own​.” He went on to say that the search took a long time because the contract manufacturing sector “is very fragmented​.”

This echoes what he said earlier this month during DSM’s third quarter conference call, when he announced that the search was continuing and cited the 50:50 JV the firm formed for its anti-infectives business with Sinochem as one possible structure.

At the time Schwalb also said the ideal partner would be one that can help DPP grow in Asia, which he reiterated today telling us that DSM had been looking for a firm that "either had manufacturing capacity in Asia or one that was interested in establishing operations in the region​."

According to its website Patheon has a sales office in Tokyo, Japan, but no manufacturing capacity in Asia.

Integration plans​

When Patheon bought Banner Pharmacaps earlier this year it closed manufacturing facilities, which is something that may or may not occur with the new JV according to Schwalb.

“I would not exclude facility closures, but no decisions have been made​,” Schwalb said adding that “we still have to think of a good name for the joint venture​.” He did confirm that any ongoing restructuring activities being carried out by Patheon and DPP will continue.

According to Schwalb the merged company will have four core operations: finished product contract manufacturing, which will combine existing DSM and Patheon operations; pharmaceutical development services, which will be based largely on Patheon's capabilities; Patheon's capsule business, recently established through the Banner acquisition; and DSM's active pharmaceutical ingredient (API) production business. 

He predicted that the units will generate 50%, 15%, 10% and 30% of the joint venture's revenues, respectively.

Patheon performance​

Unlike DPP, Patheon has performed well of late. In June the firm reported a 40% increase in second quarter revenues, citing returning customer demand and reduced operating costs.

Speaking to Outsourcing-pharma.com at CPhI in Frankfurt last month Harry Gill, SVP of quality and continuous improvement at Patheon, said the firm's 2013 performance marked a considerable turn around and attributed much of the improvement to the positive impact of consulting group McKinsey.

The proposed merger has the support of the Patheon board members who - along with JLL - hold a 66% stake in the Durham, North Carolina, US-headquartered contractor. The deal is expected to close in the first half of 2014.