First it was gene therapy. Now, drug manufacturer Catalent (CTLT -1.09%) is moving into cellular medicines. 

The company paired the announcement of fiscal second-quarter 2020 operating results with news that it intended to acquire MaSTherCell for $315 million. The acquisition of the contract development and manufacturing organization (CDMO) would give Catalent a presence in the growing field of cellular medicine, which includes engineered products such as chimeric antigen receptor T cells (CAR-T) and natural killer (NK) cells.

Investors with a long-term mindset should be intrigued by the company's aggressive pursuit of biologic drugs, which provide higher margin and growth opportunities. However, due to financing transactions required to pay for Catalent's move into gene therapy last year, an increasing share of profits is going to preferred shareholders. That's something individual investors in the growth stock can't overlook.

A man calculating numbers.

Image source: Getty Images.

By the numbers

Catalent turned in a solid performance in the fiscal first half of 2020 (the six-month period ending Dec. 31, 2019). All four of the company's business segments reported year-over-year growth in revenue, while three of the four reported year-over-year growth in EBITDA in the comparison period.

The biologics segment delivered the strongest performance. That's not too surprising. At the end of May 2019, Catalent closed the $1.2 billion acquisition of Paragon Bioservices, which specializes in manufacturing gene therapies. Catalent expected Paragon to generate $200 million in revenue in calendar year 2019. The acquisition contributed for the entire fiscal first half of 2020, but didn't contribute at all for the year-ago period. 


Fiscal First Half 2020

Fiscal First Half 2019

Change (YOY)

Softgel revenue

$528.5 million

$503.3 million


Biologics revenue

$413.8 million

$262.1 million


Oral drug delivery revenue

$275.8 million

$265.3 million


Clinical supply revenue

$172.5 million

$158.5 million


Softgel EBITDA

$110.9 million

$96.0 million


Biologics EBITDA

$98.8 million

$66.1 million


Oral drug delivery EBITDA

$60.8 million

$64.9 million


Clinical supply EBITDA

$45.6 million

$41.2 million


Data source: SEC filing. YOY = year over year.

On the one hand, the acquisition of Paragon Bioservices immediately anointed Catalent a leader in gene therapy manufacturing. It's also fueling revenue and operating income growth for the company as a whole. 

On the other hand, the way the company paid for the acquisition is hurting individual investors right now. Catalent raised $650 million under its existing secured credit facilities and another $650 million by issuing preferred stock to certain institutional investors. The holders of the preferred stock earn a 5% dividend paid directly from net income. As a result, the net income attributed to the holders of common stock (read: individual investors) is reduced. 

Many companies issue preferred stock, so that isn't unusual. But individual investors cannot overlook the impact when it comes to Catalent. While operating income increased 25% in the year-over-year period, the net income attributed to common shareholders actually decreased 23%. 


Fiscal First Half 2020

Fiscal First Half 2019

Change (YOY)


$1.39 billion

$1.17 billion


Gross profit

$410 million

$350 million


Operating income

$123 million

$98.6 million


Net income

$45.6 million

$34.6 million


Net income paid to preferred shareholders

($18.7 million)



Net income attributable to common shareholders

$26.9 million

$34.6 million


Net earnings per share




Data source: SEC filing. YOY = year over year.

Put another way, individual investors aren't actually benefiting from the acquisition of Paragon Bioservices because the financing required to close the transaction is siphoning off a significant amount income.

To be blunt, the gene therapy manufacturing assets have only contributed for six months. It's possible that Catalent can grow the business over the long haul to make up for the existence of preferred shares (or redeem the shares with more shareholder-friendly financing), but individual investors definitely need to keep an eye on the effect of the preferred shares.

A drawing of a big fish attempting to eat smaller fish.

Image source: Getty Images.

How would the MaSTherCell acquisition impact the business?

Catalent intends to fund the $315 million acquisition of MaSTherCell with cash, which will come from existing credit facilities or "future capital-raising activity." Of note, when the business issued $650 million in preferred shares to complete the acquisition of Paragon Bioservices, it was actually granted permission to issue up to $1 billion in preferred stock. Individual investors will need to await further details for the proposed transaction. 

Aside from that, investors should be intrigued by the potential. MaSTherCell is a CDMO focused on cellular therapies. It has experience working with CAR-T products, T cell receptors (TCR), tumor-infiltrating lymphocytes (TIL), and mesenchymal stem cells (MSC). That list comprises many of the cell types in clinical trials throughout the industry today, including several nearing possible market launches.

MaSTherCell operates a 25,000 square-foot facility in Belgium focused on clinical services. The company is constructing a 60,000 square-foot facility adjacent to the existing building that will focus on commercial-scale manufacturing and development. It's expected to be completed by the end of 2021. 

Meanwhile, the company is constructing a 32,000 square-foot facility in Houston, Texas, that will focus on development-scale projects when it opens by the end of 2020. For reference, the development of cellular therapies progresses from lab scale (basic research and development), to pilot scale (such as the existing clinical services facility), to development scale (working out kinks in manufacturing processes), to commercial scale (regulator-approved manufacturing process). 

The move makes sense for Catalent. For starters, it already has a presence in Belgium, which provides regulatory familiarity and should ease the financial integration of MaSTherCell. The acquisition also fits in well with Catalent's stated goal of furthering its presence in biology-based technologies, which are increasingly driving innovation in healthcare.

Although specific numbers for MaSTherCell weren't given, Catalent told investors it expects the biologics segment to generate half of total revenue in fiscal 2024. The segment was responsible for roughly one-quarter of total revenue in fiscal 2019. 

Moving in the right direction

As the proposed acquisition of MaSTherCell demonstrates, Catalent is staking its future on biologic drugs and isn't afraid to make big, bold moves to do so. The company's diverse business segments provide a stable and profitable foundation to build upon, which certainly helps to de-risk recent acquisitions. 

That said, investors cannot ignore how the acquisitions are being funded, as preferred shares are chipping away at the earnings trickling down to shareholders of common stock. In the long haul, the idea is that revenue and earnings growth will make dividends paid on preferred stock a minor issue. Catalent deserves the benefit of the doubt for now, but investors should keep a close eye on the income statement.