Pharma Might Learn About M&A Integration From The CMO World

By Louis Garguilo, Chief Editor, Outsourced Pharma

The urge to merge in the pharmaceutical industry has been strong in 2014. However, the ability to get a deal done and successfully integrate those that transpire is far from guaranteed. This might ring true particularly with the kind of high-profile deals we are seeing recently. Pharma might benefit from some insight into one such deal from the provider side of the business.

This spring Jim Mullen became CEO of DPx Holdings B.V., formed in a $2.65 billion transaction combining JLL Partners’ assets Patheon and Banner Life Sciences, with Royal DSM’s Pharmaceuticals Products business. Mullen previously held the title of CEO of Patheon. This was a large deal in the service provider sector. In a recent interview with Outsourced Pharma, Mullen walked us through some of the key elements that allowed the deal to transpire.

According to Mullen, if the constituent components clearly match up to form a new company, like they seem to with the three brands now under DPx Holdings – Patheon Pharma Services, DSM Fine Chemicals and Banner Life Sciences – gaining an understanding of the inherent value that will result from a merger is not the difficult part.

Jim Mullen, CEO, DPx Holdings B.V.

“Our primary focus was on bringing assets together. We can now do API, biologics and drug product development. We have a strong footprint in North America and Europe, as well as a very broad base of customers. The logic behind this deal is not hard to understand from an industry and market point of view,” said Mullen.

On the other hand, Mullen said, “getting the moon and the stars to line up so that everybody was motivated at the right moment in time to do something, and you could actually work this out, was relatively complicated.”

In the case of DPx Holdings, Mullen and others in his organization had the luxury of thinking through a possible combining of assets for a few years, all the time keeping a trained eye on industry trends and dynamic customer preferences. They also had the benefit of rapport between executives at JLL Partners and Royal DSM. To compare a few recent pharma deals, this appears to have been similar to the relationship in the GSK and Novartis combination, but certainly not with Pfizer and AstraZeneca. In cases such as the latter, initially it looks more like a fight than a dance.

“We were a private equity owned company, even though we were a public company, and those have their own life cycle. We were getting near the end of that life cycle. It wasn't an emergency, but within a couple of years we needed to make some strategic decisions,” said Mullen about the thinking at Patheon at the time, and the private equity parent, JLL Partners.

Meanwhile, as they entered 2013, Royal DSM had already gone public about its desire to locate a strategic partner for their pharmaceuticals products division, DPP. Mullen knew that DPP was very much in the middle of that process, “and so those two things intersected at the right moment in time.”

“There was an interest to explore it on their half, and the timing was right on our half, plus there was enough distance after our acquiring and integration of Banner Life Sciences. The conditions were correct.”

As is often repeated, in all parts of life and business, timing is everything. But the will needs to be there, too. “Now, what has to occur to make this happen is to really understand, longer term, what everybody's different motivations are,” says Mullen.

Is This What The Market Wants?

There is no use in going through the trials and tribulations of merging independent businesses if it doesn’t provide value to customers. Both JLL Partners and Royal DSM had been reading the same tea leaves as many in the outsourcing industry: Pharma is looking for more strategic, multi-service relationships with fewer vendors. In fact, this was becoming as clear as if it were written on billboards in North Carolina and in the Netherlands.

“Well, I think before this, we'd already seen a lot of change of ownerships and combinations going on,” says Mullen.  “The question was, is this a real trend? I think it continues for a couple reasons. The big one, it is driven by the customers (pharmaceutical sponsors).”

Mullen said that customers were talking to him about their desires. “They say, ‘Look, we intend to do more outsourcing, but we're concerned about the complexity of supply chains. So we're looking to do more, but with fewer vendors with broader capabilities.’ From a customer point of view, that's the logic that drives our combination, the ability to offer a breadth of capabilities. It also helped us evaluate some of the specific factories and capabilities that DPP brings.”

That's one side of the equation. On the other side are the needs of the merging partners themselves to be productive and profitable. Mullen said in this environment, scale is vitally important to grow the customer base. “Scale is going to be important for two reasons. One is it just makes economic sense.”

Mullen explained that considering overhead structures and costs in the 10 to 15% range, if you double the size of the company, you do not double the overhead. “You pick up profitability, provided you do this well, simply by combining.”

Perhaps less intuitive but just as important, according to Mullen, is “diversification of the scale.” Mullen explains: “You've got to get these companies and individual plants and assets past the point where they're overly dependent on a single product or a single company, and they don't have sufficient control of their destiny. With the scale that we have, we've got a very broad customer base, and the combined entity provides us very little concentration of risk.”

Who Owns What and Level of Involvement

Returning to the making of the deal itself, Mullen said that over a number of conversations, it became clear that Royal DSM wanted to remain an important part of the business going forward. JLL Partners was interested in this combination, and both management groups liked working together.

According to Mullen, Royal DSM actually came up with the ownership and the resultant capital structure that pushed the deal through: 51% JLL Partners and 49% Royal DSM.  Sounds simple enough, but these were well thought-out numbers. “This is what their mission was for their investors. We had to satisfy the public shareholders with a good return. A lot of math went into what's an appropriate premium for the public shareholders to get behind this deal.”

The final pieces included requirements in Canada that were “very prescriptive governance items.” There were independent committees of directors, independent bankers, and of course legal advisors. Other processes included getting the deal through antitrust in both the U.S. and Europe, and the Canadian court system. By November of last year, these and other items came together, and the official press release for the launch of the company went out the beginning of March.

If you enjoyed this article, please check out the first next two parts: Part 2 and Part 3