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Searchlight Pharma was founded in 2015 by chief executive officer Mark Nawacki, pictured, and two fellow former executives from Montreal specialty drug company Paladin Labs Inc.Carlos Osorio/The Globe and Mail

Apotex Inc. has bought fast-growing specialty pharmaceutical supplier Searchlight Pharma Inc., a significant shift by the generic drug powerhouse to diversify its business ahead of an expected initial public offering.

Canada’s largest domestic drug manufacturer didn’t disclose the value of the transaction, but three industry sources said the deal likely valued Montreal-based Searchlight at more than $500-million. The Globe and Mail is not identifying the sources as they are not authorized to comment on the matter.

Apotex sells generic versions of off-patent brand name drugs in more than 75 countries. It also sells biosimilar biologics, which are treatments developed from blood, proteins, viruses or living organisms similar to other regulated products in market. The company employs more than 7,000 people.

Searchlight is a different type of business – a specialty pharmaceutical company that sells patented drugs exclusively in jurisdictions where it has licensed that right from foreign pharmaceutical companies. It sells 60 products, such as allergy treatments, pain management drugs and several women’s health treatments including estrogen hormone replacements. More than 90 per cent of Searchlight’s sales are in Canada. The company is light on physical assets: Searchlight doesn’t do its own manufacturing, typically receiving finished goods from its licensors that it then distributes, and contracting out manufacturing of a few products.

The company, which generates about $150-million in annual revenue, has also bulked up with three acquisitions, such as a deal last year to buy publicly traded Miravo Healthcare for $91.4-million including assumed debt. Its investors include Fonds de solidarité FTQ, Canada’s top domestic life sciences financier, and the private equity arm of French bancassurance giant Crédit Mutuel.

The addition of Searchlight changes the profile of Apotex, adding a growth driver to its business and making it more attractive should it go public, one of a handful of likely outcomes for a private equity-owned asset.

“With this acquisition, we have found a complementary platform to drive our branded products franchise while continuing Apotex’s leading market position in generics and biosimilars and leveraging our strong Canadian footprint” for further licensing and acquisition deals in the Americas, Apotex spokesman Francesco Tallarico said in an e-mail.

Searchlight was founded in 2015 by chief executive officer Mark Nawacki and two fellow former executives from Montreal specialty drug company Paladin Labs Inc. a year after that company’s sale to Endo International PLC. Mr. Nawacki had been the main architect of Paladin’s global expansion, leading corporate development including mergers and acquisitions and licensing, and decided to keep building something similar.

“They are nimble, entrepreneurial go-getters and represent aggressive growth in important unmet needs in specialty pharma,” veteran Montreal biopharma executive Lloyd Segal said of Searchlight’s leadership. He said Apotex was likely looking to “bolt on growth capabilities” to create value particularly as slower-growing generic drug makers face market pressure. “Investors are looking for growth, and you don’t get a premium for a company that has flat growth.”

Apotex was acquired last spring by New York private equity giant firm SK Capital Partners following the 2017 killings of founder and CEO Barry Sherman and his wife Honey. The high-profile case remains unsolved.

Mr. Nawacki said in an interview that his company was not for sale nor interested in a deal when Apotex came calling. But he said he was won over by SK and Apotex’s new management team, led by industry veteran Allan Oberman and “the fact our visions match up in terms of what we want to accomplish” by keeping the combined company Canadian-based, not “plucked up by multinationals,” which is often the fate of Canadian drug makers. “It’s about trying to build a real Canadian pharmaceutical champion.”

Searchlight will become Apotex’s Canadian-branded pharmaceutical unit and “there’s no change in our model or desire to continue to build,” Mr. Nawacki said. “This is putting rocket fuel in the engine – we’re just swapping out shareholders.”

Mr. Tallarico said the deal “aligns with our strategy to enter high-value product categories.” It comes two months after Apotex licensed treatments for conjunctivitis, dry eyes and other eye ailments from Nashville-based Harrow Inc. to sell in Canada. “We believe this acquisition only increases our ongoing commitment and strategic focus to improve access to diverse, innovative medicines and health products that can serve patients at every step along their health journey,” he said.

Deutsche Bank and Bloom Burton Securities Inc. acted as financial advisers to Apotex and Searchlight, respectively.

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