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May 13, 2021

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Company Overview: Catalent, Inc. (NYSE: CTLT) is engaged in offering innovative delivery technologies and development solutions for biologics, drugs, and consumer health products. The company mainly operates via four reportable segments, namely (1) Biologics, (2) Softgel and Oral Technologies, (3) Oral and Specialty Delivery, and (4) Clinical Supply Services. The company produces over 74 billion doses for approximately 7,000 customer products around the world. The company employees over 2,400 scientists and technicians and retain around 1,300 patents and patent applications in advanced delivery, manufacturing, drug & biologics formulation.

CTLT Details

Higher Investments & Strategic Alliances Aid CTLT: Catalent, Inc. (NYSE: CTLT) is a worldwide provider of innovative delivery technologies and advancement and manufacturing solutions for drugs, like, cell, protein, & gene therapy biologics as well as consumer health products. The market capitalization of the company as on 12 May 2021 stood at ~$17.29 billion. The company remains on track to deploy its capabilities and expertise to generate robust organic growth and continue to support customers by working on a range of responses to the global pandemic. To weather out the effect of the virus outbreak, the company continued to invest higher in its technology portfolio to make it more innovative. The company also invested in-demand areas of drug development and manufacturing, along with capital projects to expand its capacity.

Recently, the company informed the market that it has extended its current strategic alliance with Moderna, Inc. to devote a new high-speed vial filling line for the production of Moderna’s mRNA-based COVID-19 vaccine (mRNA-1273) at CTLT’s biologics facility in Bloomington. The latest development signifies CTLT’s capabilities to offer a new high-speed filling line at Bloomington, through June 2023, which can be utilized to develop the Moderna’s COVID-19 vaccine and other investigational programs.

The company witnessed a CAGR of 13.8% and 18.7% in total revenue and net earnings, respectively, over the period of FY16-FY20. The company remains on track to deliver on its growth strategies through a diversified product portfolio and expanding geographic reach.

Key Trends (Source: Company Reports)

Notably, in 2020, CTLT invested ~$50 million into this third high-speed vial filling line at Bloomington. At the beginning of FY21, the company invested ~$130 million at its flagship commercial gene therapy manufacturing campus in Maryland to develop five further manufacturing suites. The company also continues to invest higher in the key enablers that drive the growth of its business, as well as reducing its waste and water impact and enhancing the carbon intensity of the energy. While the entire world is concentrating more on pharmaceutical companies to discover a cure for the coronavirus, drug makers are leaving no stone unturned to rush up research and development activities and production of the possible vaccine.

3QFY21 Key Highlights: During the quarter, the company reported an adjusted net income of $148.3 million, up from $82.9 million reported in the prior corresponding period. On a GAAP basis, the company’s earnings increased from $20.9 million reported in the year-ago period to $238.1 million in 3QFY21.  Net revenues for 3QFY21 came in at $1.05 billion, representing an increase of 38% on reported basis on pcp. Notably, on constant exchange rate, revenues went up ~35% year over year. Organic net revenues during the quarter went up by 35% on pcp. During the quarter, the company reported an adjusted EBITDA of $274.2 million, depicting a rise of 48% on pcp.

Key Highlights (Source: Company Reports)

Segment Highlights: During the quarter, net revenue from the Biologics segment stood at $543.7 million, up 117% year over year, owing to strong demand for global drug product, drug substance, and viral vector offerings. The Biologics segment accounted for 52% of 3QFY21 total revenues. Net revenue from the Softgel and Oral Technologies segment went up 1% year over year and came in at $243.7 million. It represented ~23% of 3QFY21 total revenues. During the quarter, net revenue from the Oral and Specialty Delivery segment was $171.7 million and represented 16% of total 3QFY21 revenues. The segment decreased ~5% on pcp, owing to unfavorable effects from respiratory and ophthalmic platform product. Net revenue from the Clinical Supply Services segment stood at $100 million in 3QFY21, up 12% year over year, owing to robust demand in manufacturing and packaging as well as storage and distribution offerings in North American region. The segment accounted for ~9% of total revenue in 3QFY21.

Business Segments Highlights (Source: Company Reports)

Key Updates: On 12 May 2021, the company entered into a partnership deal with Hofseth BioCare ASA (HBC) to develop a postponed-release formulation of HBC’s OmeGo® fish oil.

On May 6, 2021, the company bought Hepatic Cell Therapy Support SA (HCTS), a subsidiary of Promethera’s cell therapy manufacturer, which included 32,400 square-foot facility in Gosselies, Belgium.

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter, with a cash balance of $988.1 million, with long-term debt amounting to ~$3,149.6 million. Net cash inflow from operating activities for the nine months ended March 31, 2021 came in at $298.7 million, up from $267.6 million at the prior corresponding period. As of March 31, 2021, the company’s net leverage ratio stood at 2.3x, compared to 2.6x as at December 31, 2020 and 3.8x as at March 31, 2020.

In 3QFY21, gross, operating, EBITDA and net margins stood at 34.7%, 33.4%, 25.5% and 22%, higher than the year-ago figure of 31.4%, 11.1%, 22% and 2.7%, respectively. In 3QFY21, ROE stood at 5.9%, higher than the industry median of 0.4%. Debt to equity multiple in the same time span stood at 0.87x, lower than the 3QFY20 figure of 1.46x.

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 51.4% of the total shareholdings, while the top 4 constitutes the maximum holding. T. Rowe Price Associates, Inc. and The Vanguard Group, Inc. are holding a maximum stake in the company at 11.96% and 10.26%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Risk Analysis: The company’s business, financial, and operating conditions highly depend on general economic conditions and spending powers of customers. If such circumstances worsen, it may negatively impact the financial performance of the company. CTLT’s leveraged balance sheet also poses risks with long-term debt of $3,149.6 million and cash balance of only $988.1 million as of March 31, 2021. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile. Also, rising expenses may weigh on company’s financial performance, going forward. 

Outlook: The company remains on track to bolster its position in the international market. The company has raised its FY21 guidance to account for higher net underlying demand for COVID-19 vaccines and therapies. For FY21, the company now expects revenues to be in the range of $3.875 billion to $3.975 billion, up from the prior outlook of $3.80 billion to $3.95 billion. This depicts a growth rate of 25%-28%. Adjusted EBITDA is now expected to be in the range of $975 million to $1.015 billion, up from the prior outlook of $950 million to $1.000 billion. This depicts a growth rate of 30%-35%. Adjusted net income for FY21 is expected to be in the ambit of $500 million to $540 million, up from the prior view of $475 million to $525 million. This depicts a growth rate of 43%-54%.

FY21 Guidance (Source: Company Reports)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~7.2%. The stock made a 52-week low and high of $67.97 and $127.68, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at some premium as compared to its peer’s average considering the higher investment in its technology portfolio, increase in top-line and bottom-line performance in 3QFY21, encouraging outlook in FY21 and partnership synergies. We have taken peers like Pfizer Inc (NYSE: PFE), Bristol-Myers Squibb Co (NYSE: BMY), to name a few.  Considering the company’s decent 3QFY21 performance, geographical expansion, encouraging outlook, synergies from strategic alliances, and valuation, we give a “Buy” recommendation on the stock at the closing price of $101.48, down by ~2.42% on 12 May 2021.  

CTLT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.The reference data in this report has been partly sourced from REFINITIV


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