The PharmSource Blog by Jim Miller

Jubilant Organosys' decision to enter the contract injectables market through the acquisition of Hollister-Stier Laboratories comes at quite a price. The $138.5 million price tag represents a hefty multiple of nearly 13 times Hollister's EBITDA, a 30% premium when compared to the multiple that the Blackstone Group paid to acquire Cardinal Health's PTS unit.

Certainly, fierce competition for Hollister drove up price, but this wasn't an acquisition funded by just cash or stock; by using Hollister's debt capacity to fund a portion of the acquisition price, this deal resembles a leverage buy-out. Jubilant and Blackstone (which also used considerable debt) prove that cheap money is readily available to borrow. And when money is cheap, private equity companies are not far behind.

This leads us to ask: will the Hollister deal set a new benchmark for valuations of pharma services companies? Or is this a one time event by an Indian company eager to expand its global reach? Presumably, Jubilant can justify paying more for Hollister than a PE firm because Hollister fits into Jubilant's larger business strategy of creating a "one stop shop" for pharma and biotech companies. But, not all buyers will be so motivated and not all properties will be valued as so strategic.

When prices are high they have the effect of attracting more sellers looking to cash in while they can. High valuations can change the outlook of even the most strategic owners. For instance, will Thermo Fisher Scientific be tempted to offer up its clinical packaging unit to the highest bidder even though it claims not to be a seller?

And what effect do these high prices have on acquisition strategies like that of Aptuit? It all makes us wonder, how big of a hangover will buyers have a few years down the road when they realize they overpaid?

ThermoFisher recently lifted the veil of secrecy surrounding its Fisher Clinical Services business unit, at least a little bit. The company has traditionally not revealed much about its development services businesses, beyond alluding to their strong performance and strategic importance. The businesses include Fisher Clinical Services, which is generally thought to be the largest provider of clinical packaging services and Lancaster Laboratories, one of the top brand names in analytical services.

At a recent meeting for stock analysts that follow the company, company executives revealed some of its plans and expectations for FCS. Most importantly, they announced they are building a new clinical packaging facility in India, to be ready in 2008. The new facility reflects their expectation that 20-25% of clinical trial patients will be in India by 2010.

During the analyst meeting, ThermoFisher showed a slide indicating that services represented 9% of the $5.4 billion of revenues in its Laboratory Products and Services segment, or nearly $490 million. Execs didn't provide a more detailed breakdown, but we believe that most of that revenue came from Fisher Clinical Services and Lancaster Laboratories. Some would have also come from Acro Organics, ThermoFisher's customer chemical manufacturing business, and possibly some other service lines. Analysts were told that the services business is growing at a 15-20% annual rate, and is consuming most of the company's capital investment, especially for clinical packaging.

Company execs also said their preference is to focus on organic growth, although there is "some room for acquisitions." Management is not concerned about mergers in the pharmaceutical industry, noting that while there is some initial slowdown in two quarters.

The presentation to analysts confirmed many of our notions regarding the size and direction of Fisher Clinical Services, especially relating to size and rapid growth. The investment in India and the comment about packaging soaking up a significant amount of capital spending indicates that the company is committed strategically to the business. While many observers think of the clinical services as a strong private equity acquisition target thanks to its growth and market-leading position, this seems unlikely today.

Just when it looked as if Patheon had turned the corner and started to right the ship, they face generic competition for one of their key products. Both Sandoz and Lupin have launched generic versions of Abbott's Omnicef, an antibiotic drug manufactured at Patheon's cephalosporin facility in Puerto Rico. Omnicef was a major source of headaches for Patheon last year, when the FDA issued a warning letter citing the company for GMP compliance violations in its manufacture. Now, analysts estimate that generic competition could erode about 50% of Omnicef's market share.

Stock analysts say that the launch of generic Omnicef will result in two key Patheon products facing intense generic pressure. The other, Levothyroxine (the generic version of Synthroid) has multiple generic and branded competitors and has suffered declining volumes in recent quarters. Omnicef and Levothyroxine combined contributed about 30% of Patheon's revenues in Puerto Rico, and at least one analyst thinks that the erosion of Omnicef could wipe out $4-5 million of EBITDA.

Patheon's management has been proactive in recent months to correct the company's financial and operating issue, and we can assume that the generic competition for Omnicef figured into one of their scenarios. Still, the development puts pressure on the company to get new products into Puerto Rico.