Catalent said today it has agreed to acquire Paragon Bioservices for $1.2 billion cash, in a deal designed to expand the buyer’s capabilities into the gene therapy field with a leading developer and manufacturer of viral vectors.

Based at University of Maryland (UM) BioPark in Baltimore, on the academic medical center campus of the University of Maryland, Baltimore (UMB), private equity-backed Paragon is a contract development and manufacturing organization (CDMO) focused on gene therapies delivered via adeno-associated virus (AAV) vectors, as well as next-generation vaccines, oncology immunotherapies (oncolytic viruses), and other complex biologics.

According to Paragon’s website, 50% of its current contracts are for gene therapy work. Paragon says it has helped develop and manufacture more than 50 different biotherapeutics and vaccines with its clients over the past 25 years.

Both companies have been in expansion mode. On Thursday, Paragon officially marked the opening of a new 200,000-square-foot facility in Harmans, Anne Arundel County, near Baltimore/Washington Thurgood Marshall International Airport. That facility—equipped with several 500 L and 2000 L single-use bioreactors for clinical through commercial material production—is expected to boost Paragon’s workforce to more than 500 people by year’s end, including the 350+ now based at UM BioPark.

A day earlier, Catalent held a ceremony marking the completion of a new 30,000-square-foot clinical supply facility in Shanghai. The new facility, expected to employ up to 100 people, offers clinical supply services including FastChain® demand-led supply, secondary packaging, clinical storage, and local distribution, as well as clinical returns and destruction services. The facility is located outside the free trade zone (FTZ) in Tangzhen, near Catalent’s existing Waigaoqiao FTZ site and China’s Shanghai Zhangjiang National Innovation Demonstration Zone, dubbed “Medicine Valley” by authorities since biopharma is among its pillar industries.

“Paragon’s unparalleled expertise in the rapidly growing market of gene therapy manufacturing will be a transformative addition to our business that we believe will accelerate our long-term growth,” Catalent chair and CEO John Chiminski declared in a statement. “Paragon brings to Catalent a complementary capability that will fundamentally enhance our biologics business and our end-to-end integrated biopharmaceutical solutions for customers.”

The expansion in gene therapy continues a series of expansion moves by Somerset, NJ-based Catalent in recent months. In January, the company said it will spend $200 million over three years to expand its biologics business by adding to its drug substance manufacturing capacity and drug product fill/finish capacity in Bloomington, IN, and Madison, WI. Last year, Catalent acquired Juniper Pharmaceuticals for $133 million, in a deal that added a U.K. center of excellence for early drug development.

‘Next stage of development’

“We are excited to join forces with the leading drug development and manufacturing partner in our industry,” added Pete Buzy, Paragon’s president and CEO. “This transaction will enable us to achieve our next stage of development and expand our capabilities and platform for the benefit of our customers and their patients.”

Upon completion of the transaction, Buzy will remain at the helm of Paragon, leading the company’s workforce of approximately 380 employees in joining Catalent. The deal is expected to close in the second quarter of 2019 subject to customary closing conditions, including the expiration of the waiting period under U.S. antitrust laws.

Catalent employs over 11,000 people, including over 1,800 scientists, at more than 30 facilities across five continents—with reported annual revenue of $2.463 billion for the fiscal year ending June 30, 2018.

Paragon’s more than $200 million in projected revenue this calendar year will mark a relatively small portion of Catalent’s total business. However, Catalent noted that nearly 90% of Paragon’s revenue target was already reflected in signed contracts, and projected that the potential addressable global gene therapy market—which the company pegged at $40 billion—is expected to see sustained growth of 25% in the medium term, with Paragon expected to outpace that level of market growth “for the foreseeable future.”

Catalent is not the only company expecting to grow along with gene therapy. Thermo Fisher Scientific signaled its intent to expand its capabilities in the field last month by agreeing to acquire viral vector CDMO Brammer Bio for $1.7 billion—while Roche still plans to snap up Spark Therapeutics for $4.8 billion despite opposition from some Spark shareholders seeking a higher price, which has compelled Roche to extend its tender offer by a month, to May 2.

The Paragon acquisition is expected to add to Catalent’s adjusted net income per share starting in the second full fiscal year after closing, and “significantly” thereafter, the company said.

Catalent added that it intends to fund the transaction with the proceeds of a $650 million incremental term loan under its existing senior secured credit facilities and $650 million from a new series of convertible preferred stock to funds affiliated with Leonard Green & Partners (LGP), although the acquisition is not subject to a financing condition.

Catalent has obtained a binding commitment for the incremental term loan facility, subject to customary closing conditions and the execution of definitive documentation, from JPMorgan Chase Bank, which will act as lead arranger for the financing. Catalent has separately entered into a definitive agreement to issue up to $1 billion of convertible preferred stock to the funds affiliated with LGP, of which Catalent intends to issue $650 million.

In connection with the investment in Catalent by the LGP funds, Peter Zippelius, a Partner at LGP, will join Catalent’s Board of Directors. Until now, Paragon’s existing investors have been NewSpring Health Capital and Camden Partners.

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