Sterile injectables: the capacity that takes three years to build

Sterile injectable manufacturing is the tightest capacity in the generic pharmaceutical supply chain. A new aseptic filling line costs US$40 million to US$70 million, takes 18 to 24 months to build and commission, and then takes a further 12 to 18 months to obtain the manufacturing licence and the product-by-product approvals that allow it to sell. Three years from decision to revenue is the norm. Post-pandemic supply chains have not shortened it. The firm's Investment Banking division has advised on three such projects since 2022.

The Mexico City office, which opened in the first quarter of 2024, exists because the country's licensed manufacturers sit between North American demand and a regulatory regime that recognises inspection outcomes from several major jurisdictions. That recognition shortens the approval path for exports. The firm holds three pharmaceutical positions in Mexico at May 2024, entered at between US$6 million and US$18 million each. Two are contract manufacturers with sterile capacity. One is a generic producer adding a lyophilisation line.

The financing structure has to match the timetable. Growth capital for a sterile line is drawn over 24 months and earns nothing for a further 12. The firm structures these positions as convertible preference capital with a coupon that accrues rather than pays until the first commercial batch is released. The conversion price is set at entry against a valuation that assumes the line is licensed. If the licence is refused, the preference ranks ahead of the founders' equity. The founders accept this because bank debt is not available for an unlicensed asset.

Regulatory diligence is the core of the work. The firm reviews the manufacturer's inspection history, its deviation and corrective-action records, and the qualifications of its quality unit before it reviews the financial model. An inspection with critical observations in the prior three years adds 12 months to the assumed approval timetable in the model. A quality head with fewer than five years in sterile manufacturing is a condition precedent to fix. These are not soft factors. They set the date on which revenue begins.

Buyers for these assets are few and specific. The firm's sale processes for licensed sterile capacity have drawn shortlists of four to six bidders, all of them strategic acquirers or specialist funds with an existing licensed footprint. Financial buyers without a licensed operator do not bid, because they cannot take over the licence. The firm's advisory work therefore begins with a buyer map before it begins with a valuation. The map decides whether the asset is saleable at all, and at what point in the licensing cycle.

The arithmetic favours patience. A licensed sterile line in a jurisdiction with mutual recognition of inspections has sold at eight to eleven times operating profit in the processes the firm has run. An unlicensed line sells at replacement cost less a discount. The three years of construction and approval are the barrier that creates the multiple. Capital that enters at the decision point and holds through licensing captures the difference. That is what the firm's pharmaceutical origination is for.

Published 2024-05-14 by the Investment Banking division. Research is prepared for eligible counterparties and does not constitute advice.