Beyond the peak: Catalent prepped for two-third cut in COVID revenues

Increased cell and gene therapy, drug product, and drug substance demand will offset the considerable decline in COVID-19 revenues in FY 2023, says CDMO Catalent.

The contract development and manufacturing organization (CDMO) reported its results this week, with its Biologics division – which represents over 50% of its business – pulling in $667 million in Q4 (up 14% year-on-year) and $2.55 billion for the full fiscal year 2022 (up 34%).

Catalent’s Biologics segment includes the development and manufacturing for biologic proteins, cell, gene, and nucleic acid therapies, as well as plasmid DNA, iPSCs, and vaccines.

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Much of the growth was attributed to COVID-19 related work. At one stage during the pandemic, Catalent said it had been awarded more than 80 COVID-19-related projects, including supporting commercial vaccines from both Johnson & Johnson and Moderna. However, the peak of COVID-related revenue has been and gone, and the firm is now bracing itself for “headwinds from COVID-related volume declines,” according to Catalent management.

“Our fiscal 2022 third quarter marked the peak in our COVID-19-related revenue with Q4 down both sequentially and year-over-year,” CFO Tom Castellano told stakeholders on a call yesterday.

“We have taken a two-thirds haircut to the volumes we saw in fiscal 2022 in our fiscal 2023 guidance,” he continued, “and just given that decrease in volume and the absorption impact related to running at high levels of utilization on COVID dedicated lines, there [will be] a relative impact to our overall margin profile.”

Jefferies analyst David Windley placed the expected COVID revenue gap in FY 2023 to be around $700 million. “Calling the COVID bottom has been fool’s gold, although $300-$400 million in FY23 feels like we’re getting close for Catalent,” he wrote in a note. “Regardless, investors are focused on FY23, and absorbing a ~$700 million COVID gap to still hit > mid-single-digit % top-line growth seems daunting.”

Increased demand, increased capacity

Daunting or otherwise, Castellano said on the call that increased demand for cell and gene therapy, drug product, and drug substance offerings, “more than offset lower year-over-year revenue from our COVID-19-related programs” in the quarter, and will continue to grow the business into the next fiscal year as the firm continues to de-risk its COVID-19 programs.

Newly installed CEO Alessandro Maselli said the projection of fiscal 2023 revenue growth is driven by non-COVID business, expected to grow organically by more than 25%. He said this is due in part to several factors, including capacity expansions in Bloomington, Indiana and Europe that have recently come online, as well as the build-out of cell, gene, and plasmid DNA capabilities.

“The large commercial tech transfer programs in our drug product assets we discussed on our last earning call and, later in fiscal 2023, our two new facilities currently completing construction: our commercial cell therapy facility in Princeton and our drug substance facility in Oxford will start to generate meaningful revenue.”

The Princeton, New Jersey plant was acquired from Erytech Pharma for $44.5 million in April, while the same month the CDMO snapped up the UK’s Vaccine Manufacturing & Innovation Centre (VMIC) in Oxford and is converting it into a drug substance facility.

Windley was skeptical on how quickly these capex projects will bridge the COVID-related gap in revenue, saying “we have seen from peers that filling capacity for complex biologics can take time even when the demand is there.”

However, according to Maselli, the high demand for COVID vaccine and therapy capacity will swiftly be overtaken by a high demand for biologics in other disease areas, specifically diabetes, neurological disorders, and oncology.

“The newly approved cell therapies for the oncology pipeline are pretty remarkable, and this is an area where we see opportunities. So all these assets were primarily built to meet this demand coming from these indications and therapeutic areas.”