Analysts downgrade Catalent on back of ‘productivity issues’ and CFO change

Catalent’s stock price dropped 26% as capacity ramp-up delays at a gene therapy plant in Maryland add to ongoing operational issues at sites in Indiana and Belgium.

In a business update, contract development and manufacturing organization (CDMO) Catalent said “productivity issues and higher-than-expected costs experienced at three of its facilities” will affect its upcoming third quarter FY2023 and full-year results. The firm’s share price dropped from $63.29 to $46.50 Friday.

Specifically, the firm cited delays in increasing capacity for a customer at its Harmans, Maryland facility – the primary facility of gene therapy maker Paragon, acquired in 2019 – due in part to the deployment of an enterprise resource planning (ERP) system at nearby Baltimore/Washington International Airport.

Image: DepositPhotos/
Irina_drozd

The firm stressed these issues will not adversely impact the quality or commercial launch quantities of any product made at the site, but “revenue from the unproduced batches cannot be made up for in this fiscal year due to manufacturing capacity constraints.”

However, Jefferies’ analyst David Windley said the snafu with ERP deployment could restrict the production of SRP-9001, Sarepta Therapeutics’ Duchenne muscular dystrophy (DMD) gene therapy, which could be approved by the US Food and Drug Administration (FDA) on May 29. Catalent expanded its supply deal with Sarepta in January, and with Friday’s business update Windley wrote: “The importance of Sarepta to Catalent’s future certainly is becoming very clear.”

Meanwhile, Catalent has also admitted “productivity challenges and higher-than-expected costs at its biomanufacturing facilities in Bloomington, Indiana and Brussels, Belgium, where the Company was unable to achieve anticipated productivity levels and associated revenue due in part to the continued need to implement enhancements to its operational and engineering controls following regulatory inspections that occurred earlier in the fiscal year.”

Both the Bloomington and the Brussels plants received FDA 483s last year, highlighting manufacturing deficiencies.

Productivity levels at the larger Bloomington site are expected to be restored in the fourth quarter, but revenues will be affected.

Downgrade and M&A potential

Baird Equity Research associate Evan Stover said these operational challenges degrade confidence in Catalent’s fiscal year 2024 FY24 and its long-range planning (LRP), and as such downgraded the CDMO from to ‘neutral’ with a revised price target of $53.

Meanwhile, Windley questioned whether Catalent, which was subject to takeover speculation by life sciences giant Danaher in February, may still be deemed an attractive acquisition.

“With the stock down as much as 20% premarket, and no visible catalysts, we struggle with whether potential acquirors are more or less interested. The problems are more protracted. A buyer would have to be concerned about customers’ patience. On the other hand, run more smoothly, the capabilities and contracts are in place to take advantage of longer-term trends in biologics. We lean toward the latter at this point.”

CFO goes

Catalent also announced a C-Suite change, with the departure of CFO Thomas Castellano. The former Lehman Brothers AVP has been at Catalent for 14 years, but will be replaced in the interim by Ricky Hopson, who had been serving as Catalent’s president, division head for Clinical Development & Supply.

Windley suggested Castellano is “the casualty of the repeated problems,” but Stover asked: “If issues were simply related to near-term operational challenges at three of Catalent’s 50+ sites, is that enough to make a leadership change?”

Catalent did not provide further comment when approached, but will present its third quarter FY 2023 results on May 9.