David Jonas doesn't like to sit idle. He plays tennis, not golf. He's an early riser, often starting his day with a run of 4 to 5 miles on an empty stomach. When he retired from Baxter International after 25 years, he started a new company. It just sold for $2.58 billion.
“Some people have hobbies,” says Jonas, 72, sitting in the suburban office of the investment firm that he and his son Jonathan run. “I like the challenge.”
In 2003, his challenge was to turn around a money-losing business that Baxter no longer wanted. That business, PharMEDium Healthcare, is now a leader in the niche industry of compounding, or mixing drugs that hospitals can't get from the traditional pharmaceutical market. Health systems generally used to make these medications themselves. But the work can be expensive, time-consuming, wasteful and even dangerous. As a result, hospitals have begun outsourcing the task.
Specialist suppliers face the same challenges. A bad batch of steroid injections distributed by a competitor, New England Compounding Center, caused meningitis and other infections in 2012 that killed more than 60 people and sickened more than 750, according to the Centers for Disease Control and Prevention. The suburban Boston business closed and its executives face criminal charges.
Today, Lake Forest, Ill.-based PharMEDium has about 70% of the market, with much of the rest shared by a few thousand mom-and-pop outfits and regional players, according to analyst and research reports. It's a hard industry to break into. The compounding business requires a heavy investment in equipment and facilities, an obsession with sterile procedures and a reputation for getting it right, all while under tougher review by the U.S. Food and Drug Administration.
“I just don't think that there's really a meaningful competitor in the space today,” Gordon Pan says of PharMEDium. The Chicago-based Baird Capital managing partner invested in PharMEDium in 2003.
Jonas, a director, owned 9.1% of the company, according to a filing with the Securities and Exchange Commission. That would put his proceeds from the sale to AmerisourceBergen at $234 million. (New York private-equity firm Clayton Dubilier & Rice owned 89% of the company.)
PharMEDium produces more than 2,000 compounds and focuses on drugs for pain management, surgeries and epidurals for women in labor; they're available in a range of concentrations and containers, including syringes and IV bags. The company, which started with $22 million in hospital contracts, is on track to generate $465 million in revenue in 2015.
In an Aug. 31 filing for an initial public offering, PharMEDium touts its financial picture (sales increased 35% a year from 2012 to 2014, while gross margins averaged 36.4 percent) and stability (a more than 90% customer retention rate). It had about 3,000 hospital customers and 1,100 employees as of June 30, with four compounding facilities nationwide.