Activist Elliott makes inroads at Catalent to build value. Here’s what could happen next

Rows of glass vials in a biologics laboratory in Sweden. Photographer: Mikael Sjoberg/Bloomberg

Bloomberg Artistic | Bloomberg Artistic Images | Getty Photographs

Firm: Catalent (CTLT)

Enterprise: Catalent develops and manufactures options for medication, protein-based biologics, cell and gene therapies, and shopper well being merchandise worldwide. The corporate operates by way of 4 segments. First, there’s Softgel and Oral Applied sciences, which offers formulation, improvement, and manufacturing providers for tender capsules to be used in a variety of buyer merchandise. Biologics offers biologic cell-line, and it develops and manufactures cell remedy and viral-based gene remedy. This phase additionally handles the formulation, improvement and manufacturing for parenteral dose varieties, together with vials and prefilled syringes. The Oral and Specialty Supply phase provides formulation, improvement and manufacturing throughout a variety of applied sciences, together with built-in downstream medical improvement and business provide options. Lastly, the Medical Provide Companies phase provides manufacturing, packaging, storage, distribution and stock administration for medication and biologics, in addition to cell and gene therapies in medical trials.

Inventory Market Worth: $8.86B ($49.16 per share)

Activist: Elliott Funding Administration

Share Possession:  n/a

Common Price: n/a

Activist Commentary: Elliott is a really profitable and astute activist investor, significantly within the know-how sector. Its workforce consists of analysts from main tech non-public fairness companies, engineers, working companions – former know-how CEOs and COOs. When evaluating an funding, the agency additionally hires specialty and basic administration consultants, skilled value analysts and trade specialists. The agency typically watches corporations for a few years earlier than investing and have an in depth secure of spectacular board candidates. Elliott has not disclosed its stake on this funding, however based mostly on the agency’s historical past, we might anticipate it to be roughly $1 billion.

What’s taking place?

On Aug. 29, Elliott and the corporate entered right into a cooperation settlement pursuant to which Catalent agreed to quickly enhance the dimensions of the board from 12 to 16 administrators and appoint Steven Barg (international head of engagement at Elliott), Frank D’Amelio (former CFO and EVP, international provide, of Pfizer), Stephanie Okey (former SVP, head of North America, uncommon illnesses, and U.S. basic supervisor, uncommon illnesses at Genzyme) and Michelle Ryan (former treasurer of Johnson & Johnson). The corporate will cut back the dimensions of the board on the 2023 annual assembly; it agreed to appoint a slate of 12 candidates, together with the 4 new administrators. Catalent additionally agreed to determine a strategic and operational overview committee, charged with conducting a overview of the corporate’s enterprise, technique and operations, in addition to its capital allocation priorities. This committee will embrace new administrators Barg and Ryan. Additional, John Greisch (former president and CEO of Hill-Rom Holdings) has been appointed govt chair of the board and also will chair the newly shaped committee. Elliott agreed to abide by sure customary voting and standstill provisions.

Behind the scenes

Catalent is an outsourced producer within the prescription drugs trade. This can be a secure enterprise in a rising trade working in an oligopoly. It is one of many three largest international contract improvement and manufacturing organizations, subsequent to Lonza and a division of Thermo Fisher. The corporate was all the time seen as a market chief, however in the course of 2022 the tides started to show, largely as a consequence of two important elements. First, Catalent was negatively affected by a Covid cliff: In the course of the pandemic, the federal government mandated that the corporate shut down a lot of its manufacturing and begin producing Covid vaccines. This manufacturing led to $1.5 billion in income that just lately went to zero. Second, Catalent had a number of self-inflicted wounds, together with an acquisition that didn’t pan out like they anticipated and operational and regulatory points. These are fixable points which have sunk the inventory from $142.35 in September 2021 to $48.82 this month, however they don’t essentially adversely have an effect on the long-term intrinsic worth of the corporate. That makes this case a superb alternative for an activist.

In its most simplistic kind, there are two primary components to an activist marketing campaign: success within the activism (for example, getting the corporate to undertake your agenda) and execution of the activist agenda. Elliott has already completed the previous, having entered into the cooperation settlement for 4 board seats. There’s additionally the institution of a strategic and operational overview committee and appointment of Greisch as govt chair of the board and as chair of the newly shaped committee. Whereas this committee’s purview is enterprise, technique and operations, we anticipate it can put an emphasis on technique.

This can be a very strategic asset, and there are prone to be a number of acquirers. Actually, on Feb. 4, Bloomberg reported that fellow life sciences conglomerate Danaher had expressed curiosity in buying Catalent at a “important premium.” Catalent ended Feb. 3 at $56.05 per share, and the inventory popped almost 20% the next buying and selling session. In the end, a take care of Danaher by no means materialized. Moreover, corporations like Merck might be excited by shopping for the corporate or elements of it. One other risk is an acquisition by non-public fairness, of which Elliott’s PE arm might be an occasion. Whereas as an activist Elliott will do no matter it feels is important to boost shareholder worth, up to now the agency has made important use of the technique of providing to amass its portfolio corporations as the very best catalyst to boost shareholder worth. We’d not be stunned to see that occur right here. Catalent is the appropriate measurement for Elliott, which just lately partnered on buyout offers for Citrix Techniques and Nielsen Holdings, every for roughly $16 billion. Elliott has additionally just lately proven curiosity on this trade, partnering with Affected person Sq. Capital and Veritas Capital to amass Syneos Well being (SYNH) for $7.1 billion. That acquisition is predicted to shut within the second half of 2023. Like Catalent, Syneos is an outsourced pharma options firm: It outsources R&D for pharmaceutical corporations, whereas Catalent outsources manufacturing.

Elliott rapidly obtained Catalent to pursue a strategic exploration agenda, which signifies to us that there was not a number of pushback by administration. We anticipate that this overview will conclude with a sale of the corporate. Nevertheless, it’s value noting that Catalent has a comparatively new CEO on the helm, Alessandro Maselli, who was promoted from president and COO in July 2022. A variety of the operational points occurred throughout his watch. If this does flip from a strategic overview to an operational overview, there isn’t any assure that he retains his job.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

Leave a Reply

Your email address will not be published. Required fields are marked *