2023-03-20 09:28:59 ET
Summary
- Catalent’s COVID-19 related revenues have fallen, but cushioned by growth in other areas and they continue to expand their activities.
- A lawsuit over accusations of misleading investors is ongoing that could grow to be a headache.
- After a year of falling stock price, it may be at a more attractive price for further growth.
Main news
I have covered Catalent (CTLT) previously and recommended them as a good option to consider. Since then, they have had success with contracts producing biologic medications and COVID-19 related products and they enjoyed a good year of revenues. The COVID-19 related revenues have begun to tail off as expected, however their Q2 earnings call presentation remains optimistic.
Key earning report findings
Catalent is a contract development and manufacturing company ((CDMO)), offering manufacturing and bottling services for numerous pharmaceutical entities. They have grown quickly to becoming a major player in the field and remain optimistic for future growth. Recently, they entered into an agreement with Incannex to develop the formulation, generate regulatory data and establish cGMP manufacturing for their psilocybin based psychotherapy drug. They have also expanded their partnerships with Moderna across products in North America and Europe, and with Sarepta across products including gene therapy for treatment of Duchenne muscular dystrophy . Most recently they announced a partnership with the German pharmaceutical company Grünenthal for a drug in development.
Catalent has continued to expand and grow their activities. They significantly increased their addressable market over the past few years, from $35 B in 2019 to $72 B now in 2023, and an estimated $100 B in 2026.
An important consideration when comparing activities from the latest quarter to the previous year is the tailing off of COVID-19 related activities. COVID-19 related activities are estimated to be around $600 M in the financial year 2023, compared with ~$1.3B in financial year 2022 and ~$850M (gross) in 2021. Overall, there has been a slight decrease in revenue across in Q2 2023 compared to the previous year. Net revenue fell from $1,217 M to $1,149 M from Q2 2022 to 2023, while net earnings fell from $97 M to $81 M over the same period.
Their biologics segment, the fastest growing segment last year, showed significant growth, particularly in their gene therapy areas, which helped to offset some of the decreases in COVD-19 related earnings. Net revenue fell by 10% however from Q2 2022 to 2023.
The pharma and consumer health segment remained fairly constant, falling by only 1% from Q2 2022 to 2023.
Quarter ended Dec 31 2022 | Quarter ended Dec 31 2021 | % change total | |
Biologics | $580 M | $641 M | (10%) |
Pharma Consumer Health | $570 M | $577 M | (1%) |
Combined total (Minus revenue elimination) | $1,149 M | $1,217 M | (6%) |
Debt and CapEx
Catalent remain keen on growth. Their capital expenditure for 2023 is expected to be around 10%, to drive organic growth, pay debts and potentially support merger/acquisition activities. This is down slightly from 14% in 2022, and from the high of 17% in 2021. Since my first post on Catalent in 2021, their long-term net-leverage remains relatively unchanged at 3.0x, from 2.8x in 2021. Their total net debt, however, has increased from $3.3 B in December 2021 to $4.3 B in December 2023. This has pushed up their net secured debt/adjusted EBITDA ratio up from 0.4x to 1.3x over the same period.
As I mentioned in my other article, this debt maybe slightly higher than some would like, but with no significant maturities expected until 2023 and revenue streams looking steady, this should not present any immediate concern.
Risks
As you may have seen, Catalent is facing a potential class-action lawsuit over accusations they overstated their revenues and COVID-19 related activities. News of these claims first arose in August 2022, and share price fell significantly in response to this and reports of manufacturing challenges. The lawsuit is therefore aiming to reclaim these loses on behalf of investors who lost money. Indeed, the share price has shown some wide swings over the past year. It is currently trading at around $67, down from $110 in August 2022.
The true extent of this lawsuit will take some time to be realised but it could be a headache if the suit grows. This lawsuit of course also raises questions about the company. Catalent are still growing and expanding their partnerships. But with the accusations of overstating earnings still causing headaches, it gives a slight tempering to the positive reports.
Concluding thoughts
Catalent is a company focused on growth and one I see as relatively well suited to achieve this, as they have continued to expand their activities and strike new deals. However, their growth over the next few years will likely be slower than the previous two, which were largely boosted by their success from on COVID-19 related contracts. Their stock price has fallen over the past year, although much of this is likely due the tailing off of the COVID-19 activities as well as the important hit from the lawsuit that could easily become a headache. The company admittedly does appear to be in the same strong position as it was at the time of my first writing, where they were riding the highs of acquisitions, new factories and COVID-19 contracts. However, they are still showing steady growth, forming new partnerships and are on track for further growth and I think the company show good potential. The price looks more reasonable now from their previous high, which could make it an attractive longer-term investment. But the lawsuit that is gaining attention could easily discourage investors and ultimately slow price increases.
Note, I would like to disclose that I hold a small position in Catalent. I am not intending to sell at the moment, and plan to hold for now or slightly increase my position over the coming months.
For further details see:
Catalent: Ready For Growth Despite A Tough Year, Falling Revenues And A Lawsuit