Not all about that base: Catalent organic downside offset by M&A

Biologics now represent 32% of Catalent’s revenues, but unfavorable product mix, plant maintenance and a customer moving drug substance in-house hit the CDMO’s pre-existing business in Q4 FY2019.

For the fourth quarter fiscal year 2019, Catalent reported revenue of $726 million (€662 million) across all its business units.

While the contract development and manufacturing organization (CDMO) saw an 18% increase in sales year-on-year to $231 million within its Biologics and Specialty Drug Delivery segment, removing revenues from the recently acquired Paragon BioSciences gene therapy firm puts growth at just 4% and a decline in EBITDA of 15%.

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“Recent investment in our Biologics business continued to translate into growth during the fourth quarter as we recorded strong growth in drug product and drug substance volumes across the US,” said CFO Wetteny Joseph, “but the pre-existing business experienced revenue declines in Europe along with unfavorable product mix, partially due to the timing of the annual maintenance shutdown at one of our facilities, which negatively impacted segment’s bottom line.”

Joseph also told stakeholders on the conference call that the business was impacted by the end of a contract for non-cell line clinical drug substance manufacturing services due to the customer completing the build-out of its own capacity.

“This [was] a patient specific production for a customer that is in the realm of messenger RNA loaded lipid nanoparticles, so it’s not our core of what we do in the business and we fully expected this to be a fixed duration contract, knowing that the customer is building out their own capacity in this regard.”

In-house vs outsourcing

Neither Wetteny or CEO John Chiminski said this event is evident of any changing trends in the space.

“When I look at the base of the business, we continue to see a market that is growing robustly,” said the CFO. “We continue to see a ramp up of our third manufacturing train, which we launched at the end of last fiscal year. And so I would say the market dynamics in combination with our capabilities and quality, we expect long-term to continue to see growth in this business and this particular instance is not an indication that we see of a trend in the business.”

Chiminski added that for Catalent’s main business in drug substance manufacturing “there is no trend to build in-house capability, certainly not for the small and mid-sized customers that are a large part of what we’re doing there.”

Biologics vs small molecules

Happily, the impact of M&A activity in the biologics space is driving the sector and slowly tipping the balance of Catalent’s business away from small molecules.

“Biologics comprised approximately 14% of Catalent’s consolidated revenue in fiscal year 2017 and represents more than 32% of the Company’s revenues today,” said Chiminski. “The combination of organic and inorganic investments we’re making in Biologics continue to create significant value for the Company, our customers and our shareholders.”

Along with the completion of the $1.2 billion Paragon deal, the CDMO acquired a fill/finish facility in Italy from Bristol-Myers Squibb in the quarter, and has laid down expansion plans at Paragon.

Meanwhile, the firm has announced plans to invest $200 million at its biologics sites in Madison, Wisconsin, and at its Bloomington, Indiana plant, picked up through the acquisition of Cook Pharmica in September 2017.