KKR Just Sold This Drug Delivery Company for $5.5 Billion

Fortune Brainstorm Tech 2015
Fortune Brainstorm Tech, Aspen, CO July 13th, 2015 2:50 PM 1:1 Henry Kravis, Co-chairman and Co-CEO, KKR Interviewer: Dan Primack, Senior Editor and Co-chair, Brainstorm TECH, Fortune Photograph by Kevin Moloney/Fortune Brainstorm Tech
Photograph by Kevin Moloney — Fortune Brainstorm TECH

Lonza Group announced its biggest ever acquisition on Thursday with a deal to buy Capsugel, a U.S. maker of capsule products and other drug delivery systems, for $5.5 billion in cash to broaden its product range as a pharmaceuticals industry supplier.

The Swiss company’s shares fell by over 7% on the news to around 157 Swiss francs ($154) on concerns that the acquisition, costing over 60% of Lonza’s market value, and a planned capital increase of up to 3.3 billion Swiss francs ($3.22 billion), would be hard to digest.

The share price had already fallen by 5.3% on Monday after Reuters reported Lonza (LZAGY) was in advanced talks to buy Capsugel from private equity firm KKR (KKR).

“We like the logic of the deal but think it is not a bargain,” analysts at Baader Helvea said. “The pending capital raising will weigh on Lonza’s stock.”

Lonza has long been seeking to bulk up with an acquisition and earlier this year was looking at U.S. group Catalent to give it a wider range of active pharmaceutical ingredients and drug delivery products but failed to agree on price, sources have said.

Based in Morristown, New Jersey, Capsugel manufactures empty two-piece hard capsules as well as finished dosage forms for oral or inhalable drugs to make sure that active ingredients are absorbed by the body in the right place.

Lonza Chief Executive Richard Ridinger said Capsugel’s drug delivery products—which ensure, for example, that a drug reaches the right place in the digestive tract—complements Lonza’s expertise in pharma ingredients and contract manufacturing of active compounds.


The drug industry has been working to switch some established injectable medicines to the more convenient oral route of administration to boost patient acceptance.

Lonza’s industry customers could now order “either the whole menu or a la carte,” the CEO told analysts in a conference call.

“There’s nobody on this planet who can offer that.”

But some analysts said Lonza could be neglecting the biotech drug industry, with its focus on large-molecule proteins that are typically for injection only.

“We are … surprised to see an acquisition that has synergies with chemical drug manufacturing rather than biological manufacturing,” said Carla Baenziger, an analyst at Swiss bank Vontobel.

Lonza has secured committed debt financing of $6.2 billion from Bank of America Merrill Lynch and UBS. Jefferies LLC is Lonza’s lead financial adviser, the company said, while Goldman Sachs is sole financial adviser to Capsugel.

The acquisition of Capsugel, which serves more than 4,000 corporate customers and employs approximately 3,600 people across 13 facilities on three continents, is expected to be completed in the second quarter of 2017, subject to regulatory approval and closing conditions, Lonza added.

Lonza and Capsugel recorded combined revenue of 4.8 billion francs in 2015 and adjusted earnings of 1.14 billion francs before interest, tax, depreciation and amortization (EBITDA).

The company said it expected to cut 30 million francs of annual operating costs by the third year after closing of the deal and generate 15 million francs in yearly tax savings.

By the fifth year, it expected annual savings of around 100 million francs.

Lonza said it intended to maintain its current dividend policy and net debt leverage of roughly three times EBITDA.

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