After tumultuous decade, Novasep turns the corner

When Thermo Fisher Scientific purchased a viral vector business in Belgium earlier this year, all eyes were on the drug services giant as it added a European arm to the US viral vector operation it acquired for $1.7 billion in 2019. But the real action was arguably taking place at the midsize French firm that sold the business for $875 million.

That company, Novasep, emerged from the sale with a clean balance sheet after spending nearly a decade working down debt accrued through mergers and acquisitions—a burden that nearly put it out of business.

The deal also completed the process of remaking Novasep. It is now a contract development and manufacturing organization (CDMO) emphasizing small-molecule active pharmaceutical ingredient (API) production and tightly focused on customer molecules that are in late-stage clinical trials or on the market.

Novasep managers credit that focus with delivering several months of phenomenal sales growth, resulting in a 46% increase in revenue for 2020. Exiting viral vectors a week after signing a deal to sell its manufacturing equipment unit brings Novasep’s new form into high relief as the company pivots once again to acquisition as a route to more growth.

“My head is spinning,” CEO Michel Spagnol says. “For the past 5 or 6 months we have been through massive changes to the company’s structure in terms of the divestments we’ve made and the turnaround we have seen for our business.”

Last year, Novasep reached the goal it set in 2017 of doubling profitability, says Spagnol, who came to Novasep in 2013 after leading another CDMO, Rhodia ChiRex. With pretax earnings of $77 million for 2020, Novasep hit its mark 2 years ahead of schedule. The company has a new target: to once again double profits by 2025.

Heads were spinning at Novasep long before Spagnol arrived. Launched in 1996 as a small firm specializing in continuous chromatography, Novasep grew significantly with the 1999 acquisition of Prochrom, which added API manufacturing to the firm’s services and gave it a leading position in simulated moving-bed purification. The company expanded its API business in 2003 with the purchase of Seripharm, which manufactured the cancer drug paclitaxel.

In 2004, the US firm Rockwood Holdings engineered the merger of Novasep with Rockwood’s Dynamic Synthesis unit, creating a large European player in pharmaceutical services. Within 2 years, Novasep management along with several investment partners bought the combined company from Rockwood. The team proceeded in 2009 to acquire Henogen, a Belgian bioprocess services firm that went on to enter the viral vector business.

Heavy spending caught up with Novasep in the economic downturn that year when a 10% increase in interest on the bonds it had issued to support its expansion pushed debt to about $500 million. Novasep teetered financially until 2011, when ownership passed to bondholders, including the US investment funds Tennenbaum Capital Partners, Silver Point Capital, and Pimco. The new owners’ refinancing effort saved the company, bringing debt below $200 million within a year.

The focus since 2011 has been on organic growth, according to Jean Bléhaut, president of Novasep’s Pharma Solutions business and one of the founders of the company.

Novasep has continued to invest in growing businesses such as omega-3 fatty acid APIs at a facility in Mourenx, France. Novasep became a major producer of omega-3s when it signed a contract to supply Amarin with the omega-3 in the cardiac therapy Vascepa. Novasep also invested in antibody-drug conjugates (ADCs), adding bioconjugation services to its small-molecule ADC payload business in Le Mans, France.

Although Novasep has been off the acquisition trail, its owners were willing to invest internally, Bléhaut says. “Our shareholders saw the value of the company in its ability to build long-term relationships with customers,” he says, noting that it’s unusual for financial buyers to hold on to an asset for close to 10 years. “They followed us on growth projects.”

Viral vectors, Bléhaut says, have been another major area of investment in recent years. The company poured $50 million into the Belgian operation in 2017 and 2018, bulking up production and adding fill-and-finish services.

Indeed, the fact that Novasep operated one of Europe’s largest viral vector services operations is remarkable. Few other chemistry-oriented CDMOs have ventured into producing viral vectors, cell-grown molecules needed for cell and gene therapies. Most players are specialists or, increasingly, giant firms like Thermo Fisher.

“There was a point at which this business was growing so much that it was taking the bulk of our investment capacity,” Bléhaut says. “If we wanted to remain relevant in viral vectors, we would have had to compete with Thermo Fisher, Catalent, and Lonza. At the same time we wanted to continue developing the small-molecule CDMO business.”

Spagnol says the company was similarly motivated to sell its equipment business to Sartorius. The business, which supplies resin-based chromatography equipment, was profitable, “but we are facing competition from massive companies.” Heavy investment would be required. Both viral vectors and equipment are well placed strategically with the acquiring companies, he says.

The firm’s new tack of mainly making molecules for commercial drugs and late-stage clinical trials has proved successful, Spagnol says. In 2018, drug regulators approved every molecule Novasep produced for Phase 3 trials, he says. “I’ve been in the business a long time—I’ve never seen that,” Spagnol says. “In 2019, 90% were approved, so in a 2-year span, we had 10 new products approved.”

Novasep’s next phase of growth will require new owners more willing to invest, Spagnol says. “To double in profitability again we need to find shareholders who will be ready to help the group restructure its balance sheet so we can make acquisitions,” he says. “I’m thinking of equity holders or a private equity fund. It could be strategic, a fund that already owns CDMOs.”

Spagnol says Novasep is particularly interested in acquiring manufacturing assets in the US, prompted in part by the increasing desire of drug companies in the country to secure domestic supply.

At the same time, Novasep will continue to invest in its current operations, notably ADCs. The company announced a nearly $5 million expansion of its Le Mans facility just this month. It may expand into finished-dose ADCs, Bléhaut says. And it will keep its biologics purification business, which is about 8% of sales. But overall, he says, the company will cleave to a small-molecule–oriented CDMO model.

This narrow focus makes Novasep something of a strategic outlier in the pharmaceutical services industry. The trend at many other CDMOs has been to add biologics, fill-and-finish, and dosage-form manufacturing as well as related services such as spray drying and micronization.

Spagnol says he’s satisfied with Novasep’s approach, especially given the growing demand he sees for late-stage small-molecule CDMO services. “Having a counterstrategy over the last 7 years served us well,” he says. “I’m trying to play a bit more focused. I’m not going to say smarter, but certainly more focused. We can’t allow ourselves to go back to the old days and try to do everything.”

Market watchers agree. “I think they are going in the right direction,” says James Bruno, head of the consulting firm Chemical and Pharmaceutical Solutions. He credits Spagnol for eliminating debt and focusing the company on its strengths. “They can improve on what they’re doing and let these other guys fight for all this other stuff,” Bruno says.

Jan Ramakers, a pharmaceutical chemical consultant based in the Netherlands, speculates that Novasep may not be finished exiting noncore operations such as agricultural and fine chemicals, which make up about 13% of the service firm’s business.

Bruno says Novasep is in a good position to make acquisitions but that it won’t be easy expanding from its European base. “Everybody is looking for a plant in the US,” he says. “It’s almost impossible. There isn’t a lot you can buy right now that is worth acquiring.”

Novasep may find it easier to attract new owners, Bruno says, especially an investor with similar assets. “I think it would be a good investment,” he says. “Management has cleaned up their books, they just experienced significant growth, and they’ve shed things that weren’t important. If I had the money, I wouldn’t hesitate. It’s a good opportunity.”

Critics who wrote the company off in the early 2010s had a point, Spagnol acknowledges. “I’ll even say that for the 3 years following my appointment that we had some really rough times. But we made it.” Success going forward will depend on the market and the company’s luck in positioning itself for growth under new ownership. But Novasep will not just be waiting to see what happens, Spagnol says.

“Luck,” he says, quoting a line often attributed to the poet John Milton but popularized by Brooklyn Dodgers executive Branch Rickey, “is the residue of design.”