Ladies and gentlemen, thank you for standing by. Welcome to today's conference call and webcast to discuss Thermo Fisher Scientific's acquisition of Patheon. At this time, all participants have been placed in a listen-only mode, and the call will be open for your questions following the presentation. To ask a question, please press star one on your telephone keypad, and to withdraw your question, press the pound key. I would now like to turn the conference over to Ken Apicerno, Vice President of Investor Relations at Thermo Fisher Scientific. Please go ahead, sir.
Thank you. Good morning, everyone. Welcome to our conference call to discuss Thermo Fisher's acquisition of Patheon, which we announced earlier today. On the call with me today is Marc Casper, our President and Chief Executive Officer, Stephen Williamson, our Chief Financial Officer, and Jim Mullen, CEO of Patheon. You'll find a brief slide presentation in the investor section of our website, thermofisher.com, under the section titled Webcasts and Presentations. We'll walk through that deck this morning. After the prepared comments, we'll open it up for Q&A. Before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors as set forth in Thermo Fisher and Patheon's most recent annual reports and current reports, which are on file with the SEC and available on our respective websites, as well as the possibility that expected benefits related to the transaction may not materialize as expected, the transaction not being timely completed, if completed at all. Prior to the completion of the transaction, Patheon's business experiencing disruptions due to transaction-related uncertainty or other factors, making it more difficult to maintain relationships with employees, customers, licensees, other business partners, or governmental entities, and difficulty retaining employees, the outcome of any legal proceedings related to the proposed transactions, and the parties being unable to successfully implement integration strategies or to achieve expected synergies and operating efficiencies within the expected time frames or at all.
While Thermo Fisher or Patheon may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Also, during the call, we'll be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP, such as adjusted EPS and adjusted operating income. We believe that the use of non-GAAP measures helps investors to gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the company's performance, especially when comparing such results to previous periods or forecasts. On slide three, you'll see references to where you can find additional information on the transaction, which is also outlined in our press release.
With that, I will now turn the call over to Marc. Marc?
Thank you, Ken. Good morning, everyone, and thank you for joining us. Turning to slide four in the presentation, we're really excited to announce our agreement to acquire Patheon. As you know, we're the leading supplier to the pharmaceutical and biotech industry. In fact, it's our largest and fastest-growing end market. Today, we support our customers in research, clinical trials logistics services, and production. Patheon's capabilities are highly complementary and will considerably strengthen our unique value proposition for these customers. Patheon gives us entry into the contract development and manufacturing services market. I'll cover this in a bit more detail in a few minutes, but this is a large and high-growth market that opens up new growth opportunities for us. This transaction is compelling from a financial perspective. A quick snapshot on the deal. This is an all-cash transaction, and we're paying $35 per share.
We expect it to be immediately and significantly accretive to our adjusted EPS. It has an attractive return on investment profile, and we expect to complete the transaction by the end of 2017. Before I get into the details, I'd like to turn it over to Jim to make a few comments about the transaction. Jim?
Thank you, Marc. I share your excitement about the combination of Patheon with Thermo Fisher. I would like to take a moment to highlight the tremendous value this transaction brings to all of our stakeholders. First, it offers immediate and significant value for our shareholders, who will receive $35 per share in cash for each share of Patheon they own. Over the past six years, we've built a leading company in the CDMO space with exciting growth prospects. This combination is all about continuing that momentum. Joining Thermo Fisher's leading global organization will enable us to expand our reach and capitalize on the tremendous success Patheon has achieved in recent years. Together, both companies will be better positioned to add scale and new value chain capabilities to expand our offerings to our biopharma customers.
I have to point out that this transaction would not have been possible without the hard work of our talented team. They've displayed an unwavering commitment to providing innovative solutions and expertise that help our customers deliver the highest quality medicines to patients. Importantly, Thermo Fisher's mission to enable its customers to make the world healthier, cleaner, and safer is very much aligned with our commitment to a healthier world delivered. We believe this transaction is an ideal fit and the logical next step in the evolution of our company. We will create more value for all of our key stakeholders as part of Thermo Fisher. With that, I'll turn it back over to Marc. Thank you.
Thanks, Jim. Turning back to the presentation, slide five gives you an overview of the CDMO market. It's a very attractive $40 billion market that's growing in the mid-single to high single digits. The growth is driven by two key industry trends. First is the increase in demand from smaller biotech companies that are rapidly growing in number. They don't have the in-house capability, so they need outsourced support to advance their molecules from research to the commercial marketplace. The second is growing demand from larger biopharma companies that are increasing their outsourcing activities so they can focus on their core business. They're also consolidating the number of outsourced providers to fewer trusted partners like Thermo Fisher and Patheon. This is a highly fragmented industry, with the top 10 players, including Patheon, addressing roughly 35% of the market today.
Some of the other players in this market would include Lonza and Catalent. As you see, the trend is increasingly moving towards leveraging outsourcing, and Patheon has a strong competitive position. The slide also shows the three key market segments that comprise the CDMO space. Development services is about a $2 billion market. Patheon has a very strong position here and offers a full spectrum of services. The largest market is the manufacturing of active pharmaceutical ingredients, or APIs, and that's about $24 billion. Patheon is a focus player here. It provides a range of services to support the fast-growing market for biologics, as well as strong expertise in complex chemistries used in small molecule drugs. The third piece is the manufacturing of finished dosage forms, which is about a $15 billion segment.
This covers production and packaging of drugs that are ready for commercialization, including solid, liquid, and injectable forms. Patheon has built a scale position here covering a wide range of finished dosage forms. To summarize, this is an exciting high-growth market driven by customer demand for services and expertise that help to reduce the time and cost of drug development. Slide six provides a quick snapshot of Patheon, which is a leading global provider of contract development and manufacturing services. The company has revenues of $1.9 billion and adjusted operating margin of 17%. Patheon will become part of Thermo Fisher's laboratory products and services segment. The business has a very strong North American and European network to serve the biotech and pharmaceutical industry, with opportunities over time to expand further in Asia Pacific.
We've included a couple of pie charts that give you a breakdown of the business by capability and geography. Turning to slide seven. Patheon is a great strategic fit with our company. The strategic rationale for this transaction is as follows. First, it gives us entry into the large and fast-growing CDMO market. It also makes our unique value proposition for our biopharma customers even stronger by adding highly complementary development and manufacturing capabilities that will allow us to further accelerate growth. Third, as you know, we have a proven track record in successfully integrating acquisitions, and our ability to leverage that playbook is extremely powerful in generating revenue synergies, as you've seen in other transactions. With Patheon, we'll be able to leverage our industry-leading scale and commercial infrastructure to expand their customer reach. Finally, this transaction offers attractive financial benefits to create value for our shareholders.
On slide eight, as you know, one of the three key criteria in our M&A strategy is that it has to create value for our customers. In addition to giving us the opportunity to leverage our commercial scale, which I mentioned on the last slide, this slide shows you the significant customer benefits that the combination will bring. This is probably one of the most important points in my presentation. As you know, our clinical trials logistics business and our bioproduction business have historically been our fastest-growing businesses within the company, and between the two of them, they represent about $2.25 billion of our revenue. If you look at the fit between these businesses and Patheon, it is compelling. Starting with bioproduction, you know that Thermo Fisher is a clear leader in this space.
With seamless access to our bioproduction capabilities, Patheon's biologics development and manufacturing capabilities will provide even greater benefit for customers. Thermo Fisher's bioproduction business will also benefit from having an in-house world-class showcase for our technologies. Turning to clinical trials, you're familiar with our leading Biopharma Services business, which provides packaging and logistics services to efficiently and safely get clinical trial drugs to patients. Adding Patheon's formulation services as well as clinical trials manufacturing capabilities will significantly enhance our ability to help our biopharma customers accelerate innovation and enhance productivity. This is an area where the two companies have been exploring a collaboration for some time because the customer benefits are powerful. These two examples, plus the significant cross-selling opportunities we'll have with our biotech and pharmaceutical customers, will drive substantial revenue synergies from this transaction.
Let me remind you that over time, we've established our Biopharma Services business as the leading player in the industry. Over the past decade, it's become the trusted outsource provider for clinical trials logistics with clearly differentiated capabilities. We see the opportunity to do that again with Patheon. Let me now turn it over to Stephen, who will discuss how we think about the opportunities this transaction creates from a financial perspective.
Thanks, Marc. I'm also very excited about the transaction, happy to review some of the financial aspects with all of you today. Turning to slide nine, as you saw in our press release this morning, we're paying $35 per Patheon share. The transaction represents a purchase price of approximately $7.2 billion, which includes the assumption of $2 billion of net debt. The transaction delivers attractive financial returns. It will be immediately accretive to adjusted earnings per share, and we expect it to deliver $0.30 accretion in the first full year. We expect to generate a total of $120 million of adjusted operating income synergies by year three following the close. This includes $90 million of cost synergies and $30 million of adjusted operating income benefit from revenue-related synergies. Cost synergies will come from eliminating redundant public company expenses and deploying our PPI business system.
In terms of revenue synergies, Marc just outlined the compelling opportunities we'll have by combining our highly complementary capabilities for biopharma customers. As I'm sure you're aware, we have a strong track record of efficiently and effectively integrating businesses, we'll follow that proven playbook. Finally, in terms of tax, as we've done in the past, we expect to significantly benefit from leveraging our combined global structure and anticipate materially lowering Patheon's tax rates. We expect that we can very quickly reduce their tax rate from approximately 25% to 10% as a result of this transaction. All in all, the financial profile for this transaction is very strong. Moving to slide 10, let me review some of the important transaction details. In terms of financing, we have a fully committed bridge in place to support our all-cash offer.
Permanent financing will be put in place nearer the close date, we expect that to be a combination of our available cash plus the issuance of new debt and approximately $2 billion of new equity. In terms of leverage, assuming no further capital deployment in 2017, we expect a pro forma leverage ratio of about four times total debt to combined adjusted EBITDA at the closing date. Given the strength of our free cash flow, we would expect to reduce that significantly over the course of 2018. We've discussed the proposed permanent financing structure with the ratings agencies, and we fully expect to retain our investment-grade rating. In terms of next steps, we will commence a tender offer. It's worth noting that we already have an agreement with the two largest shareholders who represent 73% of the 80% required to complete the transaction.
We'll also need to obtain customary regulatory approvals as well as other closing conditions. We expect to complete the acquisition by the end of 2017. Closing with the last slide, we think this transaction is a great fit for our two companies. It's highly complementary to our offering for biopharma customers and gives us access to the large and high-growth CDMO market. It's financially compelling with great short-term benefits and a long runway to drive substantial share gain opportunities that will further accelerate our growth. This transaction is another great example of our proven capital deployment strategy at work. It strengthens our strategic position, enhances our customer offering, and creates significant value for our shareholders. With that, I'll turn it back over to Ken.
Thanks, Stephen. Operator, we're ready to take questions.
At this time, if you would like to ask a question, please press star one on your telephone keypad. Again, to ask a question, that's star one, we'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Ross Muken with Evercore ISI.
Good morning, guys, congrats.
Good morning. Thank you.
Great deal. As you thought about sort of different verticals, obviously, Marc, that you could enter, this is obviously one that has really nice growth metrics and there's a lot of attractive roll-up opportunity. How are you thinking about within LPS, sort of this piece as it evolves for Thermo over time and whether this will be an area, one, obviously, that could grow above, it seems like the corporate average or at least at the upper end. Two, how are you thinking about sort of the other assets that are available outside of this in terms of the runway that you have here, not just organically, but inorganically?
Ross, thanks. A great question. Let me start from the high level about how we think about this transaction and the space that it serves, right? When you think about Patheon and the position in the CDMO market, it fits right in the sweet spot of what our bioproduction business does and what our clinical trials logistics, what we call Biopharma Services, does. If you think historically over the last number of years, those two businesses represent about $2.25 billion of our revenue and have been the fastest-growing within the whole company. This business really is hand-in-glove fit with it. From that perspective, we see it as very much a natural part of our offering. That's kind of how it fits.
In terms of the organic prospects for the business, this is a mid-single digit to high single-digit growth business, and therefore, will be accretive to the organic growth rate of Thermo Fisher over time as well once we anniversary the first year, because it doesn't count in organic, as you know, in the first year. That's obviously a strong positive that goes with it. In terms of the broader landscape, as you and others have heard us say many times, our industry is quite fragmented and over time, there's opportunities to continue to build out the life science tools and diagnostics market, and there's also opportunities to continue to expand on Patheon's leadership in the CDMO space.
Right now, the team is fully focused on working through the integration plan and closing the transaction, and executing well, and over time, you'll see us continue to add to our capabilities.
Just quickly as a follow-up. Normally, in these type of transactions, the risk is always on the transition in terms of customer reaction. My guess is, given your relationship, particularly with the biopharma space, while Patheon obviously a great reputation, you do obviously as well, and my guess is there'll be quite a bunch of enthusiasm on you now owning the asset. Talk to us about the outreach you'll do over the next months, after you close or I guess, next year, in terms of how you'll communicate the breadth now of your Biopharma Services offering versus where you were before and what you expect the customer feedback to be.
Yeah. The short term and then midterm. From a very short-term perspective, as soon as the press release went out this morning, that's what I spent from 7:15 to 8:00 was literally sending notes to our customers, and I'll continue to do that during the course of the day as well, I know Jim and the teams around the world, because it's a very exciting transaction. Right now, obviously, we're two separate companies, but once we close, we will look to leverage the strengths of each company to accelerate growth, right? There are companies or customers that Patheon has incredibly strong positions with, and that will create new opportunities for our Biopharma Services business, for our bioproduction business or any part of Thermo Fisher and vice versa.
Just given the scale of our thousands of sales reps around the world, just opening doors more seamlessly for Patheon will be a great opportunity. It will play out over time. From a commercial reach and cross-selling, we think it'll be a terrific opportunity from that perspective.
Thank you.
Thanks, Ross.
Your next question comes from the line of Tycho Peterson with J.P. Morgan.
Hey, thanks. Marc, wondering if you can talk a little more on the revenue synergy opportunity, how much of this is on the development side of the business, with some of your existing pharma services businesses, and are there advantages here to adding a longer cycle business here with typically 5 to 7-year manufacturing contracts, maybe for other parts of the existing Thermo business?
Yeah. When I think about the revenue synergies, the cross-selling will fall in both companies, right? If you think about the cross-selling piece of the $90 million of revenue and $30 million of adjusted operating income that comes from it, you have a certain portion that just comes across our portfolio. The vast majority of the synergies are going to come within both for Patheon's CDMO offering as well as for our clinical trials logistics business. When I think about it, the smaller customers, the biopharma customers or the biotech customers that don't have these capabilities, it's incredibly compelling because we're in at the earliest stage from the research side. The ability to help the customer go from research all the way through manufacturing, that's going to be a big part of the synergy.
The exact numbers on each is probably a level of detail we won't get into today, but a very large opportunity. Obviously long term, the geographic footprint is an opportunity. We actually didn't put it into the model, in terms of Asian expansion, but we see that as an interesting upside longer term.
Can you talk on the cash flow side of things for Patheon? Do you see an opportunity to improve that? It's obviously a CapEx-intensive business in terms of adding new capacity, but are there opportunities from your perspective that you flag to maybe improve the cash flow?
I'll start and then Stephen may comment, but the PPI business system that we've employed here for the last 15 years has done a really strong job of improving the working capital management within the company. I had the opportunity to visit some of the Patheon plants and, obviously, the team visited the network, and this is a well-run company. Where I'm excited is that clearly PPI will be a benefit from Patheon, but the Patheon way will bring some new tools to our toolkit as well, and the combination will be incredibly compelling. I see this as one where we'll take the best thinking for both companies and improve the cash flow characteristics of the combined business.
Sure. Just add to that, Patheon's made some significant capital investments over time and has also done some great transactions to bring in capacity to help fuel the growth. We'll continue to look for opportunities like that to expand the capacity footprint for the business.
Okay, then just one last one. Can you give us a sense of how large Patheon is as a customer for Thermo today, just in terms of supplying bioproduction services and equipment?
Order of magnitude is about a $50 million customer. 50.
Okay. Thank you.
Your next question comes from the line of Derik de Bruin with Bank of America.
Morning, Derik.
Are you on mute, Derik? Okay. We'll come back to you, Derik.
Your next question comes from the line of Jack Meehan with Barclays.
Good morning. Congratulations on the deal, guys.
Thanks, Jack.
Marc, I was hoping you could elaborate a little bit more on the biologics opportunity. As you sized up the options on the market, what was it about Patheon's capabilities that drew you to the portfolio, and how do you see where you're going to be able to generate the opportunity with your bioproduction assets?
Yeah. When you think about the biologics market, obviously we are a leader in the single-use technologies for the small to mid-scale production of biologics, and that is Patheon's strategy in terms of where they are strong in the marketplace. That relationship that Tycho just has, a big part of that is the relationship in bioproduction. The companies collaborate well, and that will create new opportunities because effectively, we'll become smarter as a bioproduction producer by having a sister business that is doing this every day. We'll have a showcase facility to demonstrate for customers, and the biologics business will have access to our technologies and capabilities to make sure that they are most competitive in the market. It's a really unique opportunity, and obviously, that will play out over time.
Great. Then you hinted at the opportunity around Asia Pac. Could you just talk about how you execute upon that? Is that something where you think it's just a market maturity, where the region is at this point? How do you see it fitting in with your broader strategy in the region? Thank you.
Jack, in terms of Asia Pacific, the way to think about it is, it's very logical on why Patheon's network is set up the way it is, because the vast majority of the pharmaceutical and biotech market today is in the U.S. and in Europe. There's a lot of growth in Asia Pacific. It's very hard for a company to get started without any scale, right? We've been in the markets there for 30 plus years. The ability to build a facility or scale up a facility is much easier when you are licensed to operate, have a team, know how to do the business practice at all the legal entities. We are a tremendous accelerator. We're trusted by our customers from that perspective. It's just a question of where it is on the priority list. It's certainly not a day one priority.
Over time, when we pick the right geography, we'll be able to scale up in that region and leverage our infrastructure to do so.
Great. Thanks.
Thanks, Jack.
Your next question comes from the line of Tim Evans with Wells Fargo.
Thanks. Marc, you talked a little bit about the working capital plan. I wanted to talk about the CapEx plan a little bit. Your CapEx is just shy of $500 million, but Patheon's much smaller business is up there, $200 million-ish. Does this change your capital deployment outlook to where there's going to be more investment in the business and maybe less return of capital to shareholders or anything like that?
From a capital investment standpoint, the business is fairly similar, basically, to our bioproduction business and our Biopharma Services business. We have a mix of businesses in terms of capital intensity. A lot of what we observed over this period is that a lot of the network has been built out and the capacity is there. There'll still be many investments to make, but a lot of the big investments that Patheon was making has already been done. I don't think it changes our strategy whatsoever from a return of capital in the midterm. Obviously, between now and through 2018, we're going to be focusing on executing this transaction and de-levering. Other than our dividend, we're not going to be focused on our return of capital in the next 18 months, but after that, it'll be back to a return to normal.
Okay.
Tim, of that $200, approximately $50 of that is customer funded. That's a gross number in terms of how Patheon's been running the business.
Right. Fair enough. Lastly, you said Patheon's tax rate was going to be 10%. What would the combined company tax rate be after this deal closes?
We're at 13.3 for the rest of the company. It'll come down slightly, probably 20 basis points.
Got it. Okay. Thank you.
Thanks.
Your next question comes from the line of Derik de Bruin with Bank of America.
Hi, Derik.
Sorry about that. Morning. Sorry about that. Hey, Marc. The CDMO business is a lot lumpier, you're subject to the timing of commercial launches and changes in customers. Also, it exposes Thermo to more developmental risk and manufacturing risk. I guess, how do you think about the risk profile of Patheon versus your traditional businesses, and how do you look to sort of mitigate that?
Yeah, Derik, great question. When you think about the risk profile of the business, I put them in two different buckets, right? The development side of the equation, the business gets paid for, meaning that if the plan for all of these products is that they make it to market, if they don't, the business makes money along the way. That's the nature of the development side of it. There's not really a risk there other than on a particular project, you may not get all the growth, but you get paid for the work that you've done.
In terms of lumpiness, this is a business that is pretty predictable on the annual cycle. Certainly things are lumpy within quarters and we have a number of businesses within the company that's like that, and it levels out when you get to the scale of Thermo Fisher. This business represents roughly 10% of our total company sales. From that perspective, we always think about the revenue line really on an annual basis and understand that quarter to quarter, as you know how we think about guidance, we don't get too focused on the movements between quarters from that perspective. The other areas, you have to be great at managing quality in a regulatory landscape. The industry expects it. The production of biotech and pharmaceutical products are highly regulated.
Thermo Fisher as well is highly regulated in our Biopharma Services business, as well as in our specialty diagnostics business. You will see a continued, incredibly focused commitment to doing a great job from a quality and regulatory perspective. Our commitment is there, as has Patheon's commitment been over the years.
Great. Just one follow-up, if I can.
Of course.
How do your PPI initiatives play into the manufacturing business? Also, making sure that you retain the people that you need to at Patheon, just given that it's a different channel than what you're normally used to doing in terms of selling instruments and reagents.
Sure.
I'll cover the PPI one first, Derik. When I think about the Biopharma Services business, we've been able to take a PPI business system methodology, which we've used largely in more manufacturing type of operations, and bring that to bear to a service business in a very impactful way. We've seen that translate incredibly well, and it's not just in the manufacturing and packaging side, but I think just in terms of the back office piece as well. I think that's going to translate very well.
I think the thing that's interesting, Stephen's going to talk about it Wednesday when we have our Analyst Day a little bit, is the better run an operation is, the bigger the impact is from the PPI business system. When we went through the manufacturing plants at Life Technologies at the operations level, actually they were quite well run back in 2013 at the factory floor. If you look at how rapidly they adopted the methodology and the impact that they drove, it's really incredible. Stephen will highlight a little bit in a couple of days. That's how I would think about Patheon. It's basically giving a skilled team additional tools, they'll be able to apply them very aggressively, I think it's very powerful from that perspective.
Great. Thank you.
Thanks, Derik.
Our next question comes from the line of Doug Schenkel with Cowen.
Good morning, guys.
Good morning, Doug.
I guess a few financial questions. You've had a few on the CapEx profile of the business. Could you give us an update on your free cash flow conversion target subsequent to close? I'm not sure how you want to answer this one, but how long until you can get back to a debt-to-EBITDA ratio of three times? Really what I'm trying to get at there is when you think you would be back at an acceptable leverage level to deploy capital pursuant to additional M&A.
In terms of the leverage ratio, we'll be four times at close.
Yeah
Very rapidly paying that down over the course of 2018. I don't think it precludes us from M&A in terms of additional small bolt-ons. The other question was around, so I've completely blanked.
Free cash flow conversion.
Free cash flow conversion. When I think about this business and the company going forward, after integration, we will be operating at 90% conversion of adjusted free cash flow, adjusted net income into free cash flow.
Okay
more in line with the rest of the company.
Okay. Another one, Stephen. We mathematically can get to $0.30 in year one accretion with no sales synergies, under 9% of target OpEx cost synergies, which usually we can get to with just looking at overlapping public company and administrative costs and then the improved tax rate. The point is, it seems like you can get to your $0.30 accretion target in year one without doing a whole lot differently operationally in the first year. Again, just cutting out overlapping cost and layering in the tax. Is that the right way to think about this, at least in the context of your guidance?
The exact timing, in terms of the year one accretion of $0.30, yes, there's an element of the public company costs going away straight away, the tax rate happening very soon. Synergies ramp, approximately $30 million of synergies in year one, and they ramp over the three-year period fairly linearly. Costs coming in and getting executed a little quicker and revenue being more back-end loaded in that three-year period. Exact accretion coming up in 2018, we'll let you know when we produce guidance for 2018 in terms of the full impact.
Okay. Last one, you indicated that you expect the deal to close by year-end. Given the concentrated ownership of Patheon and the fact that you have most of those folks, if not all of those folks, on board with the deal, it would seem on the surface that this could get done sooner than late in the year. Can you just walk us through the logic and maybe comment on the possibility that this gets done a bit more quickly than, say, seven, eight months from now?
Doug, the key thing from the regulatory pathway is the E.U. from a regulatory review perspective, our experience is things in May don't make it through the funnel through the summer holiday. That's been our historical experience, that's one of the gating factors here. From the tender offer, it's a Dutch transaction. It's a little bit more complicated, but nonetheless, the two main shareholders have signed up for the transaction. We'll go through that process and targeting to be done by year-end.
Okay. Last one. Could you just comment on when you would expect to raise, I think you have to do, is there a $2 billion equity raise component? I guess, in terms of going to the market to raise additional capital, any thoughts, anything you can share on timing there?
Yes, there's an assumption of a $2 billion equity component to this in terms of the overall funding.
Yep.
We're still looking at our different alternatives in terms of equity raise or placement. We'll finalize that over the coming week.
Okay. Thank you again.
Thanks.
Thanks, Doug.
Your next question comes from the line of Matthew Michon with KeyBank.
Thank you for taking the questions.
Morning, Matthew.
Yeah. On the API business, I think that's one of the big differentiators for Patheon versus its peers. It's a sizable piece of the CDMO market. How do you view their exposure there? Do you view that as something you're looking to add to or be a little bit more careful with?
Jim, maybe spend a moment just framing it, I can add some comments.
Sure. Matthew, you're right. The small molecule API is a big segment. We have focused our business on the most complex chemistry in the most regulated parts of the value chain. We're typically working on either very complex chemistries that few or others will work on or very newly launched or late-stage clinical development molecules. What we do is we have a whole global network of suppliers underneath that we use for acquiring common intermediates or any kind of commoditized product. What you will see us do, which is what we've done over the past couple of years, is as a product matures, we'll take the opportunity to really outsource some of the earlier parts of the chemistry, while we continue to do the finishing chemistry, if you will, of the regulated steps.
That allows us really to stay in the highest value part of that pyramid.
Right. As we looked at the strategy, it makes sense on what Patheon's doing because certain parts of that value chain on the lower end doesn't make a lot of sense for us to be producing. We like the space that they've carved out.
Okay, great. Then last quarter, Patheon had to lower some kind of the lower guidance for organic growth from high single digit to a mid-single digit rate. First off, have some of those headwinds for Patheon abated as it's moved through the year? Then secondly, what do you view as a long-term growth target for this business now?
Yeah. In terms of the trajectory for this business, we've had good visibility through the diligence process, both to what was going on in the first quarter, what's happening currently, and what the outlook is for the year. We understand the dynamics there. From an organic perspective, this should be a consistent mid-single digit to high single digit organic growth business going forward. That's how we think about the outlook, Matt.
All right. Thank you very much, Marc.
Thanks. Operator, we have time for one more.
Your final question comes from the line of Isaac Ro with Goldman Sachs.
Good morning, guys. Thank you. Hey, guys. Marc, quick question on just the structure of the industry. Can you give us a sense of what % of the market is currently outsourced? And if we look over maybe five or 10 years, what that number can be?
Yeah. Today, about 30% of the market is outsourced, and it's probably going to 50% over the long term, is where it's going, which creates obviously meaningful growth opportunities. That's not going to happen overnight, but the trend is clearly in the favor of moving towards more outsourcing. Over the last decade, we've played that trend out within the Biopharma Services. What we've seen is actually the trends accelerating. We went from a relatively low penetration of outsource to a much higher, and actually if I look at the speed of where customers are looking today, it's actually picking up. We think that plays out in the CDMO market as well.
We're obviously an incredibly trusted partner of our customers, which is why we really truly are dominant number 1 in the Biopharma Services business, and we see over time the opportunity to expand Patheon's market position.
Got it. Just to follow up for Steve, what are you guys assuming for cost of debt?
Cost of debt assuming 2.5% in terms of the permanent financing.
Okay. Got it. Thank you, guys.
Great. Thanks, Isaac.
Thanks, Isaac, and thank everyone for joining us today. It is clearly very exciting news for Thermo Fisher and Patheon. We look forward to working with Jim and the Patheon team to kick off the integration planning and efficiently complete the transaction. Of course, we look forward to seeing you in New York for our Analyst Day meeting on Wednesday. Thank you, everyone.
This concludes today's conference call. You may now disconnect. Have a wonderful day.