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Can the Novo Holdings-Catalent deal set a new standard for Pharma M&A?

On February 4, Catalent announced its acquisition by Novo Holdings, the investment arm of the Novo Nordisk Foundation, and Novo Nordisk would acquire three fill-finish sites in the deal. The deal valued at $16.5 billion is quite special in the biopharma industry where pharma companies do not usually venture into direct ownership of Contract Development and Manufacturing Organizations (CDMO). The Merger raised concerns from competitor Eli Lilly which has contracts with Catalent for the production of its GLP-1 drug. But what does this deal represent for the industry?

Ramping up GLP-1 production

The deal includes the sale of three Catalent fill-finish sites acquired by Novo Holdings to Novo Nordisk for $11 billion. The three sites located in Italy, Belgium, and Bloomington, Indiana, are currently involved with Novo Nordisk for the production of the company’s obesity drug Wegovy.

This acquisition is expected to have a low negative impact on Novo Nordisk’s operating profit growth for 2024 and 2025, highlighting the importance of expanding its manufacturing capabilities for Wegovy and Ozempic. The fill-finish process, essential for the sterile preparation of injection pens, has been a bottleneck in Novo Nordisk’s supply chain, particularly for Wegovy, which Catalent has been supplying. The strategic acquisition of these sites is a key move to alleviate these bottlenecks and improve the supply chain for these drugs​​​​.

According to Sergey Jakimov, founding partner of Longe VC, this deal is an example of how the success of one drug, or drug class, can now drive a billion-dollar acquisition strategy. “While AI drug discovery often gets more of the spotlight for future potential earnings, the biggest driver of revenue in this instance is still physical manufacturing infrastructure,” Jakimov said.

Tim Opler, managing director at Stifel’s global healthcare group describes the move as brilliant. In his opinion, Catalent’s failure to perform and keep their sites in good shape has had some catastrophic financial consequences for Novo Nordisk. “Novo Holdings did something that they rarely do, which is making a transaction for Novo Nordisk and Novo Holdings in the same go, allowing Novo Holdings to gain full ownership of Catalent and Novo Nordisk to acquire sites that are already being used to make Wegovy, but not in the best way possible,” said Opler.

Opler compares this deal to buying a house slightly dilapidated and getting it fixed up.

“Strategically, it is much more important for Novo Nordisk than it is to Catalent to run those sites in a 100% high-quality way. It is very expensive to run a manufacturing site flawlessly, it is worth it for Novo Nordisk, it is not for Catalent, hence the transaction”

Tim Opler, Managing Director, Stifel’s Global healthcare group

This deal is Novo Nordisk’s answer to the overwhelming demand for GLP-1 drugs and the supply shortage it is facing with Wegovy and Ozempic.

Are Eli Lilly’s concerns justified?

The situation with GLP-1 drugs is quite unique; in 2023 all eyes were on these drugs. The demand for GLP-1 drugs is skyrocketing with the principal actors of this spree being Novo Nordisk’s Ozempic and most importantly Wegovy and Eli Lilly’s Mounjaro, approved by the FDA in November 2023. As a result, both companies are facing supply shortages in their obesity treatment supplies.

If Tim Opler sees the acquisition of Catalent as a brilliant move, that sentiment is not shared by Eli Lilly’s chief executive officer (CEO), David Ricks, who calls for scrutiny of the deal by competition regulators. “We need to understand the impact of this transaction on medicines and in particular some of those sites are used for diabetes and obesity, so it does raise questions,” Ricks said to the Financial Times. Eli Lilly has contracted at least with one of the sites Novo Nordisk acquired in the deal and more that Novo Holdings now owns, still according to the Financial Times.

However, in Opler’s opinion, Eli Lilly doesn’t really have a leg to stand on with this move to call for anti-trust scrutiny: “On the one hand, Novo Holdings is a very ethical organization dedicated to delivering nonprofit services to the world. On the other hand, all the groups that have business with Catalent have contracts, so it is in Catalent’s interest to do good by its clients, including Eli Lilly, to make sure they don’t jeopardize the investment or get themselves into legal problems,” Opler said.

Jakimov agrees Novo Nordisk wouldn’t force out Catalent’s existing commitments to competitors like Eli Lilly but wonders what might be the competitor’s answer. “It does, however, make it more likely that Eli Lilly will be pursuing a similar blockbuster-level deal to try to ramp up their capacity as well,” said Jakimov.

While Novo Holdings did say to Endpoint News its priority was for Catalent’s employees and customers to remain unaffected by the deal and that Novo Holdings was operating independently from Novo Nordisk, the outcome once these contracts expire is uncertain. Eli Lilly and other competitors might weigh in on the costs of switching to other CDMOs. However, the risks and time it would take to make such changes might be too much of a setback.

Could Novo Nordisk acquisition of Catalent set a trend in the industry?

David Ricks qualified the deal as unusual in the industry, but is it a unique transaction or just the first of a bigger movement in the biopharma landscape? Tim Opler does not think of the Catalent acquisition as setting a trend, or a unique move for that matter. “This type of move is not unprecedented. An example outside the biopharma industry would be Coca-Cola buying their bottlers over time. The company that is making the most money out of a piece of intellectual property will naturally further integrate its process,” Opler said.

What makes this move an unusual one-off event is that, for now, it is far more common to see companies get out of the manufacturing side of business by relying reasonably on CDMOs.

“I don’t see this becoming a trend in the industry because the number of situations where a pharma company is unwisely dependent on a CDMO that can’t perform is not that common. Most companies, when manufacturing is really important, tend to internalize that function anyway.”

Tim Opler, Managing Director, Stifel’s Global healthcare group

Catalent’s acquisition by Novo Holdings would then just be the right answer to a unique situation where Wegovy’s demand has surpassed everyone’s expectations.

However, Jakimov thinks this transaction could motivate similar deals, from Novo Nordisk or competitors: “Even with this increase in production, I don’t believe Novo will even come close to exhausting market demand for these treatments. This may not be the last manufacturing deal they make this year. This one acquisition could be the catalyst for several other billion-dollar deals soon. We should be paying attention to the power of one class of drugs to drive an entire acquisition strategy for Big Pharma.”

Jakimov also believes AI will increase this production squeeze: “AI only makes it more likely that another winning and revenue-driving treatment will be discovered soon. We are entering a new era of pharmaceutical business where it is faster to find a new drug candidate than it is to build up a production infrastructure to capitalize on it.”

Is the Catalent deal an opportunity beyond GLP-1 for Novo Nordisk?

It is still very early to say, since the merger is not yet completed, but it is interesting to raise the question of whether GLP-1 supply is the only motivation behind Novo Nordisk’s acquisition of the three Catalent fill-finish sites.

Novo Nordisk does indeed possess other businesses such as Dicerna. The company focusing on RNAi-therapeutics was acquired in 2021 by Novo Nordisk for a total value of approximately $3.3 billion. “Dicerna requires rather complex manufacture of certain types of oligonucleotides. I wouldn’t be surprised to learn that some of the sites Novo Nordisk bought can also make that. I don’t know that to be the case, but time might tell if it is,” said Opler.

While the evident reason behind this deal is to increase Novo Nordisk’s GLP-1, Wegovy and Ozempic’s supply, the acquisition of these Catalent sites could gain another dimension in the future.