Many businesses have been forced to recalibrate in response to the new uncertainties created by the coronavirus pandemic. That includes drug manufacturing partner Catalent (CTLT -0.57%), although the company has been relatively lucky so far.
A diverse footprint of operating facilities and customer contracts has spared the business from a severe slowdown. In fact, Catalent has reported more of its customers are expecting an increase in demand than a decrease in demand due to circumstances relating to the coronavirus pandemic. Nonetheless, the company was forced to reduce fiscal full-year 2020 net income guidance 4% from previous projections due to the uncertainty of the situation. Here's what investors need to know about the latest operating results.
Image source: Getty Images.
By the numbers
Catalent is a development and manufacturing partner for customers in the pharmaceutical, biopharmaceutical, and health products industries. The business helps to design and optimize manufacturing processes for drug and healthcare products and supply volumes of drug products suitable for clinical trials or commercial markets. It operates more than 40 facilities across the globe that support over 7,000 products and development services for more than 1,000 projects.
The significant value provided to customers, the geographic diversity of operations, and the diversity of the product portfolio have combined to insulate the business from a severe slowdown during the coronavirus pandemic. In the fiscal third quarter of 2020 (the three-month period ended March 2020), Catalent reported a 23% increase in revenue and a 53% increase in operating income compared to the year-ago period. Net income attributable to common shareholders decreased 63% in that span.
Changes in all three metrics can be explained by recent acquisitions and the funding transactions executed to complete them. Catalent's expansion into gene therapy and cell therapy manufacturing has greatly increased revenue and operating income, but the issuance of preferred shares -- which earn a healthy dividend -- has diverted an increasing portion of net income away from shareholders of common stock.
The trends in revenue growth and the income-siphoning effect of preferred stock were clearly visible in the first nine months of fiscal 2020, too.
|
Metric |
First Nine Months Fiscal 2020 |
First Nine Months Fiscal 2019 |
Change (YoY) |
|---|---|---|---|
|
Revenue |
$2.15 billion |
$1.79 billion |
20% |
|
Gross profit |
$649 million |
$549 million |
18% |
|
Operating income |
$224 million |
$164 million |
36% |
|
Interest expense |
$106 million |
$80 million |
32% |
|
Net income |
$66 million |
$66 million |
0% |
|
Net income attributable to common shareholders |
$39 million |
$66 million |
(42%) |
Data source: SEC filing. YoY = Year over Year.
Individual investors have largely accepted dwindling net income (their share, anyway) as the price of growth. There's an argument there. After all, Catalent's expansion in the nascent and fast-growing fields of gene therapy and cell therapy figure to provide significant growth opportunities in the long run. That should pave the way for higher overall earnings in the long run -- or even allow the business to buy back the preferred stock.
That concern is likely to take a backseat to the uncertainties of the coronavirus pandemic. Fortunately, Catalent is well positioned to navigate the ongoing turbulence while helping customers to expedite development of SARS-CoV-2 treatments and vaccines.
To see the business's relatively strong position, individual investors should look at revenue generation by operating activity instead of business segment. Here's how it broke down in the first nine months of the last two fiscal years:
|
Metric |
First Nine Months Fiscal 2020 |
First Nine Months Fiscal 2019 |
Change (YoY) |
|---|---|---|---|
|
Manufacturing and commercial product supply revenue |
$1.22 billion |
$1.11 billion |
10% |
|
Development services |
$666 million |
$452 million |
47% |
|
Clinical supply services |
$261 million |
$236 million |
11% |
Data source: SEC filing. YoY = Year over Year.
Clinical supply services are the most likely to be impacted by the coronavirus pandemic, especially given all of the clinical trials that have been delayed across the industry. But those activities represent only 12% of total revenue, which suggests investors are unlikely to feel much pain from reduced demand.
By comparison, nearly 33% of total revenue is generated from manufacturing softgel and oral delivery capsules -- a market that shouldn't see much disruption from the coronavirus pandemic or stay-at-home orders.
Meanwhile, manufacturing biologic drugs (11% of total revenue) and developing biologic drugs (20% of total revenue) have been the fastest-growing sources of revenue. While Catalent expects to see increases and decreases in demand on a customer-by-customer basis, it reported that the changes in demand have largely offset each other to date. Recent acquisitions also position the business to step up to respond to the coronavirus pandemic.
Image source: Getty Images.
Catalent's response to COVID-19
As of early May, Catalent had been approached with roughly 100 projects related to treatments and vaccines for the SARS-CoV-2 virus. On the latest earnings conference call, CEO John Chiminski estimated that represented roughly 45% of all drug development currently under way in response to the health crisis. Investors know of two high-profile projects.
In late April, Catalent and Johnson & Johnson announced a manufacturing partnership. Catalent will be the U.S. manufacturing partner for the healthcare giant's lead SARS-CoV-2 vaccine candidate and expects to reach full operational readiness by January 2021.
That was followed days later by a similar announcement with Arcturus Therapeutics (ARCT -1.29%). Catalent will lead manufacturing activities of the partner's mRNA-based SARS-CoV-2 vaccine candidate. Both expect to have up to millions of doses available by the end of 2020 and potentially scale production to hundreds of millions of doses annually.
Not immune from uncertainty, but well positioned for success
Catalent is confident it can leverage a diverse operational footprint, both in terms of geography and customer relationships, to navigate the current market uncertainty relatively well. The business remains profitable, exited March with $608 million in cash, and only reduced fiscal full-year 2020 net income guidance by 4% from its previous estimate.
Therefore, investors with a long-term mindset should be reassured that the company's growth trajectory remains intact, even if there's some turbulence in the next few quarters.
