Catalent accused of cutting corners in production to meet COVID demand

CDMO Catalent has also been charged with misleading investors by artificially inflating revenues and demand post-pandemic in a shareholder-led lawsuit filed last week.

The shareholder derivative action (Husty v. Catalent, Inc. et al) filed in the US District Court for the District of Delaware accuses current and former officers and members of the Company’s Board of breaching “fiduciary duties, unjust enrichment, waste of corporate assets, and violations of Sections 10(b) of the Securities Exchange Act of 1934.”

The allegations center around statements, omissions, and actions relating to COVID-related work taken on by the contract development and manufacturing organization (CDMO) between August 30, 2021 through October 31, 2022. According to the complaint, Catalent “performed work on more than one hundred COVID-19 related products for more than sixty customers, including filling syringes with COVID vaccines.” Vaccine customers during the period included Moderna, AstraZeneca, and Johnson & Johnson.

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“To keep up with the rapid growth, however, the Company began cutting corners on safety and control procedures at its key production facilities,” the action states. “During the Relevant Period, the Individual Defendants would make or cause to be made materially false and misleading statements concerning the Company’s adherence to regulatory rules at these facilities.”

Specifically, current good manufacturing practices are called into question with “alarming bacterial growth, faulty air filtration systems, subpar equipment maintenance, and control procedure problems” cited at two of Catalent’s key facilities: the drug product filling and finishing located in Bloomington, Indiana and a syringe filling facility in Brussels, Belgium.

Both plants received US Food and Drug Administration (FDA) Form 483s following inspections during the relevant period (here and here). Production issues persist with another inspection at Bloomington undertaken in April and May this year resulting in another 483 with three observations.

As demand for COVID-19 vaccines began to dwindle, senior management was also accused of artificially inflating reported revenues “through fraudulent accounting and channel stuffing schemes to mislead investors into believing that Catalent was generating sustainable revenue growth.

Specifically, the five-count lawsuit claims Catalent failed to disclose “material weaknesses in its internal controls over financial reporting relating,” all the while falsely represented demand for its products.

During its full fiscal year 2022 conference call in August 2022, the firm warned of the approaching drop-off of COVID-related demand, causing the firm’s stock price to fall 7.4%. The plaintiff describes this as when “the truth began to emerge,” but claims individuals continued to make materially false and misleading statements related to revenue and earnings, as well as the product demand, for many months after.

Company CEO Alessandro Maselli, former CEO John Chiminski, and former CFO Thomas Castellano are among those cited as breaching fiduciary duties.

The lawsuit follows a turbulent time for Catalent. Beyond the regulatory issues at Bloomington and Brussels, the CDMO has suffered from ramp-up delays at a gene therapy plant in Maryland and forecasting issues. Twice delayed fiscal year 2023 third quarter results in June, meanwhile, revealed a 32% year-on-year drop in biologics sales.

A Catalent spokesperson told this publication: “Catalent does not comment on active legal matters.”