Under WSA’s IPO Scanner: Patheon N.V.

The Drug developer raised $640 million, making it the third biggest U.S. IPO in 2016

The Healthcare sector has dominated the U.S. IPO market for the third straight year, and so far in 2016 , this space accounted for 51% of the overall U.S. IPOs (28 companies). Many factors, including the oil price recovery, continued low interest rates, and the subsiding volatility during the majority of the quarter has paved the way for successful public debuts, and these have also helped rebuild confidence in the U.S. IPO market. Investors will be carefully monitoring the U.S. presidential election as well as policy decisions in the UK. In the Healthcare sector, investors are eyeing growth-oriented IPOs with proven earnings potential, especially biotech companies pursuing drug development in the areas of cancer treatment, immunology, genetic research, and rare diseases.

P1Patheon N.V., an Amsterdam, Netherlands-based contract development and manufacturing organization (CDMO), launched its IPO and began trading on the New York Stock Exchange on July 21st, 2016, under the ticker symbol PTHN. The JLL Partners-backed drug developer raised $640 million at $21 per share in its maiden offering, making it the third biggest U.S. IPO in 2016, according to Bloomberg. Based on the $21-a-share IPO price, Patheon had a market value of about $2.97 billion. Patheon’s IPO closed on July 26th, 2016.

Patheon first filed for its IPO in June 2015; however, the Company decided not to go ahead with its plans on account of the market volatility at that time.

P2Patheon was formed in March 2014 through the $2.6 billion merger deal of Canadian drug maker Patheon Inc., controlled by JLL Partners (JLL), and the drug business of Dutch vitamin maker Royal DSM. The deal generated more than a $480 million cash profit before fees to investors in JLL’s fifth buyout fund, twice the funds they had invested while starting the business in 2007. JLL again invested about $500 million for a 51% stake in the merged company in 2014. Royal DSM currently holds a 49% stake in Patheon. In 2015, Patheon paid shareholders a whopping dividend of $538 million.

CEO James Mullen, who took over the reins in 2011, has spearheaded a series of acquisitions starting with a $255 million deal for softgel specialist Banner Pharmacaps in 2012. In August 2014, Patheon also acquired Gallus BioPharmaceuticals and its first U.S. biologicals facility in the process. More recently, in March 2016, the Company signed a deal with Amgen Inc. (NASDAQ: AMGN), under which Patheon will provide flexible manufacturing solutions for Amgen.

Patheon achieved a growth spurt between FY11 and FY14, when its revenue jumped by nearly 250%. The drug contractor now employs nearly 9,000 people across 11 countries, and provides a comprehensive, integrated and highly customizable set of solutions to help customers of all sizes satisfy complex development and manufacturing needs at any stage of the pharmaceutical development cycle. Patheon swung to profits of $138.4 million on sales of $1.8 billion in the year ended October 31st, 2015, compared to a net loss of $119 million on sales of $1.5 billion in the previous year.

IPO details

As per its IPO filings, Patheon was looking to sell 25,609,756 ordinary shares, with the selling stockholder named in the prospectus to sell 4,878,049 ordinary shares. The expected initial public offering price was between $19.00 and $22.00 per share.

At the midpoint of its proposed range, Patheon would command a market value of a whopping $2.9 billion. The Company granted the underwriters a 30-day option to purchase up to an additional 4,573,171 ordinary shares.

  1. P. Morgan (NYSE: JPM), Morgan Stanley (NYSE: MS), Jefferies Group LLC (NYSE: JEF), and UBS Investment Bank were lead book-running managers and representatives of the underwriters for the proposed offering. Credit Suisse Group AG (NYSE: CS), Evercore ISI (NYSE: EVR) and Wells Fargo Securities were joint book-running managers for the offering.

Post-IPO plans

Patheon intends to use the net IPO proceeds and cash on hand to repay all of its outstanding $550 million of Senior PIK Toggle Notes, pay related fees and expenses and accrued interest. Patheon will not receive any proceeds from the sale of ordinary shares by the selling stockholder.

Key strengths

P3Patheon’s margin growth, increased sales, and the broader expansion of its offerings to the pharmaceutical industry are its key strengths. Patheon provides a comprehensive and highly customizable range of active pharmaceutical ingredients (APIs), and finished drug product services, from formulation development to clinical and commercial-scale manufacturing, packaging, and life cycle management. The Company’s services address both small molecule and large molecule biological drugs since it has the scientific and regulatory expertise as well as specialized capabilities.

Patheon’s end-to-end integrated service offering known as PatheonOneSource provides comprehensive solutions for biological pharmaceuticals across three main segments: Drug Substance Services (DSS), Pharmaceutical Development Services (PDS), and Drug Product Services (DPS).

DPS: Over the last decade, Patheon has developed and manufactured 92 newly approved drugs, including 17 in 2015, which is more than twice the number of any other CDMO and represents more than 20% of the total outsourced NDA approvals during those periods. Patheon produces 23 billion solid doses and 146 million sterile doses annually, which address central nervous system, oncological, and other disease conditions. Patheon was involved in the development of more than 25% of the top 100 selling drugs in FY15.

PDS: Patheon’s 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: Patheon is 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. Patheon’s biologics sites serve 70% of the market and have 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. Patheon provides development and manufacturing services for approximately 700 products and molecules.

Stock performance

Source: YahooFinance
Source: YahooFinance

Patheon’s stock stood at $25.23, slipping 1.02%, at the close on Friday, August 5th, 2016, having vacillated between an intraday high of $25.75 and a low of $24.99 during the session. The stock’s trading volume was at 110,357 for the day. The Company’s market cap was at $3.59 billion as of Friday’s close.

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