• Catalent is making a bid to strengthen its position as a contracted developer and manufacturer of gene therapies by acquiring Paragon Bioservices for $1.2 billion.
• The deal would hand Catalent two facilities that, following a planned expansion, would provide around 325,000 square feet of manufacturing space by mid-2020. Catalent also noted how Paragon offers “significant” technical capabilities when it comes to adeno-associated viruses, which are commonly used vehicles for delivering gene therapy.
• Paragon reported $101 million in revenue last year, and Catalent predicts that number will more than double in 2019. Down the line, Catalent expects the acquisition will help it achieve between 6% and 8% long-term revenue growth and between 8% and 11% long-term EBITDA growth. The companies expect their deal to close this quarter.

Biologics have been a business boon to contract manufacturers, Catalent included.

Large-molecule drugs are such a focus, in fact, that last year Catalent split its Drug Delivery Solutions segment in two, creating one unit focused on oral delivery and another on biologics and specialty drug delivery. The latter is now Catalent’s biggest growth driver, with net revenue rising 68% to $602 million during the company’s 2018 fiscal year, which ends June 30.

In its most recent annual report, the company noted how fourth quarter revenue was up around 10%, in large part because of the money streaming in from an Indiana biologics plant Catalent took over through its 2017 acquisition of Cook Pharmica.

Catalent is again using M&A to increase its capabilities — this time with an eye on gene therapy.

“We’ve been looking at the gene therapy space for almost two years now; it’s been a huge strategic part of our plans going forward,” Catalent CEO John Chiminski said on a conference call following the Paragon deal announcement.

Catalent isn’t alone on that front. A year ago, Lonza opened a 300,000-square-foot plant dedicated to cell and gene therapy production. In a recent interview with BioPharma Dive, company CEO Marc Funk said Lonza has worked on viral vectors for more than 45 customers, but noted that demand is increasing rapidly as more companies invest in gene therapy.

Thermo Fisher, another top drug contractor, just last month agreed to purchase viral vector manufacturer Brammer Bio for $1.7 billion. Michel Lagarde, president of pharma services at Thermo, noted to BioPharma Dive that many gene therapy developers “haven’t built their networks.” According to Lagarde, about 65% of the total spend in the gene therapy space is not spent on outsourcing services.

Notably, large biopharmas like Novartis, Roche and Biogen have all done gene therapy acquisitions over the last year or so.

Such deals in some cases brought gene therapy manufacturing capabilities in-house for the acquirer. Yet Catalent and others expect outsourcing will continue given that the field is still in its infancy.

“Although there have certainly been some announcements by certain gene therapy companies about building their own capacity, the fact is it’s going to take several years for some of those to come online,” Catalent’s Chiminski said.

Catalent will pay for Paragon through a $650 preferred equity investment from Leonard Green & Partners, a private equity investment firm, as well as a $650 committed debt financing. The money raised includes $100 million that is meant to “support continued growth of the business,” according to Catalent.

Per deal terms, Paragon CEO Pete Buzy will continue to oversee the business. He, along with Paragon’s leadership team and approximately 380 employees, will join the Catalent team. Peter Zippelius, a partner at Leonard Green & Partners, will join Catalent’s Board of Directors.

Catalent stock opened at $39.90 per share on Monday, up roughly 2% from Friday. Shares continued to rise throughout morning trading, however, reaching a high of $42.66.