Rows of glass vials in a biological laboratory in Sweden. Photographer: Mikael Sjoberg/Bloomberg
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Company: Catalent (CTLT)
Company: Catalent develops and produces drug solutions, protein-based biologics, cell and gene therapies, and consumer health products worldwide. The company operates in four segments. First are Softgel and Oral Technologies, which provide formulation, development and manufacturing services for soft capsules for use in a range of customer products. Biologics supplies biological cell lines and develops and produces cell therapy and virus-based gene therapy. This segment also provides the formulation, development and production of parenteral dosage forms, including vials and prefilled syringes. The Oral and Specialty Delivery segment provides formulation, development and manufacturing through a range of technologies, along with integrated downstream clinical development and commercial delivery solutions. Finally, the Clinical Supply Services segment provides manufacturing, packaging, warehousing, distribution and inventory management for pharmaceuticals and biologics, as well as cell and gene therapies in clinical trials.
Stock market value: $8.86 billion ($49.16 per share)
Activist: Elliott Investment Management
Percentage ownership: n/a
Average costs: n/a
Activist commentary: Elliott is a highly successful and astute activist investor, especially in the technology sector. The team includes analysts from leading technology private equity firms, engineers and operating partners – former technology CEOs and COOs. When evaluating an investment, the company also engages specialized and general management consultants, expert cost analysts and industry specialists. The company often monitors companies for years before investing and has an extensive stable of impressive board candidates. Elliott has not disclosed its stake in this investment, but based on the company’s history, we expect it to be around $1 billion.
What is going on?
On August 29, Elliott and the company entered into a partnership agreement under which Catalent agreed to temporarily increase the size of its board of directors from 12 to 16 directors and Steven Barg (global head of engagement at Elliott) and Frank D’Amelio ( Global Head of Engagement at Elliott). former CFO and EVP, Global Supply, of Pfizer), Stephanie Okey (former SVP, head of North America, rare diseases, and general manager of US, rare diseases at Genzyme) and Michelle Ryan (former treasurer of Johnson & Johnson) . The company will reduce the size of the board at its 2023 annual meeting; it agreed to nominate a list of twelve candidates, including the four new directors. Catalent also agreed to establish a strategic and operational review committee, charged with conducting a review of the company’s business, strategy and operations, as well as capital allocation priorities. This committee will consist of new directors Barg and Ryan. In addition, John Greisch (former president and CEO of Hill-Rom Holdings) has been appointed executive chairman of the board and will also chair the newly formed committee. Elliott agreed to abide by certain customary voting and standstill provisions.
Behind the scenes
Catalent is a third party manufacturer in the pharmaceutical industry. This is a stable company in a growing industry that operates in an oligopoly. It is one of the three largest global contract development and manufacturing organizations, alongside Lonza and a division of Thermo Fisher. The company was always seen as a market leader, but in mid-2022 the tide began to turn, largely due to two key factors. First, Catalent was negatively affected by a Covid cliff: During the pandemic, the government ordered the company to halt much of its production and start producing Covid vaccines. This production led to sales of $1.5 billion, which recently went to zero. Second, Catalent had several self-inflicted wounds, including an acquisition that didn’t go as expected, and operational and regulatory issues. These are solvable issues that have driven the share price down from $142.35 in September 2021 to $48.82 this month, but they don’t necessarily have a negative impact on the company’s intrinsic value in the long term. That makes this situation an excellent opportunity for an activist.
In its most simplistic form, there are two basic elements to an activist campaign: success in activism (e.g., getting the company to adopt your agenda) and execution of the activist agenda. Elliott has already achieved the first, having concluded the partnership agreement for four board seats. There is also the creation of a strategic and operational review committee and the appointment of Greisch as executive chairman of the board of directors and as chairman of the newly formed committee. While this committee’s responsibilities include business, strategy and operations, we expect it will emphasize strategy.
This is a very strategic asset and there will likely be several interested buyers. In fact, on February 4, Bloomberg reported that fellow life sciences conglomerate Danaher had expressed interest in purchasing Catalent at a “significant premium.” Catalent closed at $56.05 per share on February 3, and the stock rose nearly 20% over the next trading session. Ultimately, a deal with Danaher never materialized. Furthermore, companies like Merck could be interested in buying the company or parts of it. Another possibility is a takeover by private equity, in which Elliott’s PE arm could be an interested party. While Elliott, as an activist, will do whatever he deems necessary to increase shareholder value, the company has historically used the strategy of offering its portfolio companies as the best catalyst to increase shareholder value. We wouldn’t be surprised if that happened here. Catalent is the right size for Elliott, which recently partnered on acquisition deals for Citrix Systems and Nielsen Holdings, each for about $16 billion. Elliott has also recently shown interest in this sector, teaming up with Patient Square Capital and Veritas Capital to acquire Syneos Health (SYNH) for $7.1 billion. That acquisition is expected to be completed in the second half of 2023. Like Catalent, Syneos is a pharmaceutical solutions company: it outsources R&D to pharmaceutical companies, while Catalent outsources production.
Elliott quickly got Catalent to pursue a strategic exploration agenda, which indicates to us that there wasn’t much resistance from management. We expect this review to conclude with a sale of the company. However, it’s worth noting that Catalent has a relatively new CEO at the helm, Alessandro Maselli, who was promoted from president and COO in July 2022. Many of the operational problems happened on his watch. If this does indeed change from a strategic review to an operational review, there is no guarantee he will keep his job.
Ken Squire is the founder and chairman of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.