Contract drug developer and manufacturer Patheon (TSX:PTI) is being taken private and merged with part of Dutch firm Royal DSM in a $2.6 billion deal that creates a new global pharmaceuticals manufacturer.

Under the deal, the new, yet-to-be named company will acquire all shares of Durham-based Patheon for $9.32 per share, or $9.72 cents Canadian, a 64 percent premium over Patheon’s closing stock price on Monday. The deal values Patheon at $1.4 billion. New York-based private equity firm JLL, which owns 55.7 percent of Patheon’s restricted voting shares, will own 51 percent of the new company and DSM will hold the rest.

Current Patheon CEO Jim Mullen will lead the new company.

Combining Patheon’s revenue with the DSM unit, the new company is projected to have annual sales of approximately $2 billion with a global footprint spanning 23 sites across North America, Europe, Latin America and Australia employing about 8,300. The deal is expected to close in the first half of 2014.

Patheon’s core business has been as a contract drug manufacturer – making drugs for pharmaceutical companies after those drugs have received regulatory approval. Patheon expanded its drug manufacturing capabilities last year with its $255 million acquisition of Banner Pharmacaps, a company that specializes in developing and manufacturing easier-to-swallow soft-gel drug formulations.

In recent years, particularly under Mullen’s leadership, Patheon has put greater emphasis on growing the company’s pharmaceutical products services business, which makes drugs for testing in clinical trials. That strategy shift has come with growing pains as restructuring led to the shuttering of some Patheon locations and layoffs. But it fits the strategy of DSM and JLL. They’re betting that combining assets will create an all-encompassing manufacturing and services company with the resources to tackle projects from the research stage to clinical trials and marketing of the products. The deal may create a more formidable competitor to Indian and Chinese manufacturers of active pharmaceutical ingredients.

“It’s clear we needed a partner who was strong in China,” DSM board member Stefan Doboczky told Bloomberg News. “There’s nothing like this company that we’re creating here.”

For DSM, the venture ends a search for a partner for a division that it has overhauled to lower costs, yet still lacked sufficient scale. The deal values DSM’s pharmaceutical-products business at $670 million.

‘Financially Sound’

“We see a good strategic rationale for the partnership, while the deal seems financially sound,” said Filip de Pauw, an analyst at ING.
DSM climbed as much as 2.13 euros to 60.10 euros and was up 3.5 percent as of 9:20 a.m. in Amsterdam, valuing the company at 10.9 billion euros. Before today, the stock had gained 27 percent this year.

The drug-ingredient market is growing at 7 percent to 10 percent depending on the subsegment, Doboczky said. Pharmaceutical companies such as GlaxoSmithKline (NYSE:GSK) are harnessing increasing amounts of their resources on developing new drugs and innovating, rather than the more capital-intensive facilities needed to manufacture them.

Combining assets will also help the enlarged company accelerate expansion in the more profitable segments of the market, including lozenges, steriles and soft cells, Doboczky said.

Potential Exit

DSM has no immediate plans to exit the business, and may contemplate exiting its stake five or six years down the line, should it make sense strategically, he said.

JPMorgan Chase & Co. is advising DSM while Morgan Stanley and Jefferies are advising JLL, according to the statement.

JLL has committed financing for $1.65 billion from banks including JPMorgan to fund the acquisition, according to the statement. JLL will invest $489 million in cash and DSM will contribute the health-care division as well as receive a seller note of $200 million, the statement shows.

JLL Partners, with more than $4 billion in assets under management, typically invests in the health-care, financial services and industrial sectors mostly in North America, according to its website.

(Bloomberg News contributed to this report).