Pfizer Restructuring a Boon to CMOs and CROs - Pharmaceutical Technology

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Pfizer Restructuring a Boon to CMOs and CROs
As big pharmaceutical companies restructure and reevaluate the way they do business, contract research and manufacturing organizations could reap greater financial rewards.


Pharmaceutical Technology



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Kindler's 2008 target for closing the facilities and realizing the cost savings suggests that contractors should start harvesting the windfall from Pfizer spending by the second half of 2007. The initial efforts are likely to hit some significant rough spots, given the large number of projects and the challenges of overcoming Pfizer's preference in recent years to work in house. The current industry environment, characterized by high utilization and tight capacity at most development services operations, also will be challenging for Pfizer.

It's difficult to gauge how far reaching the effects of Pfizer's restructuring will be on the pharmaceutical services industry. Much depends on whether, and to what extent, other major pharmaceutical companies follow Pfizer's lead. In fact, other major pharmaceutical companies with their backs against the wall have been changing their traditional ways of doing business: witness Merck's new willingness to outsource manufacturing and Wyeth's efforts to restructure its R&D processes. Most major pharmaceutical companies, however, are still run by company veterans for whom the traditional business model is deeply ingrained. If Kindler's remodeling effort is successful, it may encourage the boards of other Big Pharma companies to look outside for new leadership with a fresh perspective. That could really shake up the CRO and CMO business.

Cardinal PTS Goes to Blackstone

The other big outsourcing industry news in January was Cardinal Health's (Dublin, OH) announcement that it will sell its Pharmaceutical Technologies and Services (PTS) unit to The Blackstone Group (New York, NY), a very large private equity firm, for $3.3 billion. PTS has capabilities in packaging, oral drug delivery, and sterile products manufacturing, with more than 30 sites worldwide.

The sale of PTS was not itself a surprise because Cardinal Health had announced its intention to sell the business in November 2006. The surprise was that PTS never went to auction: Blackstone was able to pre-empt other potentially interested parties with its bid, which is 1.8 times PTS's revenues of $1.8 billion and 10 times its earnings before interest, taxes, depreciation, and amortization (EBITDA) of $320 million.

Undoubtedly, Blackstone was willing to bid so aggressively for PTS because it knows the business and industry so well. Its senior advisor on the deal is Alex Erdeljan, the former CEO and chairman of R.P. Scherer, the softgel manufacturer that was bought by Cardinal Health in 1998 and forms the core of PTS's oral drug delivery business. After the R.P. Scherer sale, Erdeljan was a managing director with Global Healthcare Partners, a part of CSFB Private Equity Group, which owns contract manufacturer NextPharma Technologies (Surrey, UK).

In addition, just a week after the deal was announced, Blackstone announced that George Fotiades, the former CEO of PTS and COO of Cardinal Health, would join the board of the new PTS. Fotiades is also an R.P. Scherer veteran.

Although the price paid for PTS is significant, it is practically "chump change" for Blackstone. Right after announcing the PTS deal, Blackstone won the bidding war for Equity Properties, a company that owns a large commercial real estate portfolio. The deal, the value of which will exceed $38 billion, is said to be the largest private equity deal of all time.

Blackstone's other pharma-related properties include Emcure Pharma-ceuticals, an Indian pharmaceutical business with activities in API manufacturing; developing branded formulations and biotech products; Nycomed, a mid-sized specialty pharmaceutical company headquartered in Denmark; and Gerresheimer, a manufacturer of specialty glass products used in packaging in the pharmaceutical, cosmetic, and specialty food and beverage industries.


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