Patheon says buyout of Roche API plant gives it border tax protection

Roche Florence S.C. plant
Patheon says with the pickup of this Roche API plant in South Carolina, it will be well positioned if the Trump administration were to follow through with a border tax on drugs.

Jim Mullen, CEO of CDMO Patheon, said the company and its clients are wondering what the Trump administration’s tax proposals will mean for them but if a border tax were to be imposed, its $1 million pickup of a former Roche API plant in the U.S. puts it good shape to face it.

The tax discussion came during the company’s analyst call last week after the contractor reported first-quarter 2017 earnings in which revenue was up 13% to $457 million and EPS on continuing operations was $0.19 a share. The company also guided lower for 2017, saying that some expected contracts had shifted and revenue from them would be realized in 2018.

With the buyout last quarter of a Roche API plant in Florence, South Carolina, Mullen said in the call that the company now has API sites there and in Greenville, North Carolina, and development activities in South Carolina and Europe, creating a 50-50 split between the two markets.

“But let's assume there's the border tax, and there's pressure to bring stuff back into the U.S.,” Mullen said, according to a Seeking Alpha transcript (reg. req.) of the call. Patheon will be “very well positioned with our North American sites, particularly U.S. drug products on both the oral solid side and the sterile products side, so I think we are–if it comes back-–we're going to be the beneficiary in the U.S.,” he said.

Before the purchase of the Roche plant, the company was at full capacity and very constrained in API production. “(W)e have opened that funnel right up,” Mullen said.

President Michel Lagarde explained that with the plant deal, Patheon got a $30-million-a-year take or pay contract for APIs Roche was making there. That, he said, pays for the upkeep of the plant, but Patheon believes it can ramp revenues up to more than $100 million with work for other clients.

When Patheon announced the deal for the 1,100-acre, 300,000-square-foot facility and its 200 employees, terms of the deal were not provided. In the call, the company said there was a $100 million upfront payment. It has also said it intends to expand the plant’s capacity for manufacturing highly potent compounds, while adding micronization capabilities and commercial spray drying. 

Roche announced in 2015 that it would close the Florence plant, along with plants in Clarecastle, Ireland; Leganes, Spain; and Segrate, Italy, as part of a cost-saving plan that would remove about 1,200 jobs from its payroll. It took a charge of about $1.6 billion for the closures.

The Swiss drugmaker said in June that Greek contract manufacturer Famar had struck a deal to take the Leganes plant and to supply Roche with APIs.