StockWatch: Catalent Cuts Revenue, EBITDA Forecasts, Rattling Investors

The rise of biologics, outsourcing, and pandemic-fueled production sparked years of growth at Catalent (CTLT), which became a leading contract development and manufacturing organization (CDMO) over the past decade, reflected in increased internal activity and external acquisitions.

But in April, Catalent began warning of lower-than-expected results for its third fiscal quarter (January–March) and a scaled-back outlook for the rest of FY 2023, which ends June 30. The company also announced the departure for undisclosed reasons of its senior VP and chief financial officer, Thomas Castellano, replaced on an interim basis by Ricky Hopson, president and division head for Clinical Development & Supply.

This week, Catalent further rattled investors and analysts. The company’s stock price fell by about one-third after stating that it expected to significantly reduce its fiscal 2023 net revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance, each by more than $400 million.

That reduction lowers Catalent’s net revenue guidance range from between $4.625 billion and $4.875 billion to between $4.225 billion and $4.475 billion. The adjusted EBITDA guidance falls from between $1.22 billion and $1.3 billion to between $820 million and $900 million. Catalent plans to take a goodwill impairment of more than $200 million in its consumer health business primarily related to its 2021 acquisition of Bettera Wellness.

Catalent also delayed the release of its third-fiscal quarter results from Tuesday (May 9) to this coming Monday (May 15), saying it needed more time to review potential non-cash adjustments related to its operations in Bloomington, IN.

Shares of Catalent tumbled 26% on the news Monday, from $47.75 to a 52-week low of $35.46, and sank another 5% by Wednesday, closing at $33.59. As of Wednesday, Catalent shares skidded 50% over the past month (from $67.26 on April 10) and nosedived 68% over the past year (from $104.80 on May 10, 2022).

Derik De Bruin, PhD, and Michael Ryskin, two managing directors who cover life sciences tools and diagnostics for BofA Securities, downgraded Catalent shares from “Neutral” to “Underperform” on Monday. They concluded in a research note reported by Bloomberg News that Catalent’s reduced revenue and adjusted EBITDA forecasts were “a much steeper cut than what had been anticipated,” adding that they “lack confidence in quick recovery.”

Echoing the BofA analysts in pessimism were analysts from two other firms that lowered their 12-month price targets on Catalent stock:

• Justin Bowers, CFA, equity research analyst with Deutsche Bank, lowered his firm’s price target 24%, from $72 to $55 a share.
• Sean Dodge, CFA, healthcare technology analyst at RBC Capital Markets, lowered his firm’s price target 29%, from $58 to $41 a share.

“Can’t forecast its results”

Baird’s Evan A. Stover, CFA, senior research associate, and Nicholas Mott, research analyst, made no further price target cuts or rating changes, after both downgraded Catalent to “Neutral” and sliced their price target 35%, from $82 to $53 a share following the April warning.

“If [the] company can’t forecast its results, we doubt another chop to our estimates would be helpful to investors ahead of next week,” Stover and Mott wrote Tuesday. “We’re leaving model and price target unchanged, though bias on both is down.”

A key reason for that bias, they shared, was Catalent’s recent apparent inability to forecast its results clearly to investors: “Operational and productivity issues were disclosed a few weeks ago, but significant forecasting issues are a new item. This highlights our concern that CFO change potentially signaled broader issues.”

“Forecasting issues, yet to be fully fleshed out to investors, seem to be a big culprit, and potentially shed light on the previously announced CFO change,” Stover and Mott added.

Catalent’s gloomy forecast this week came nearly a month after it acknowledged that its results for fiscal Q3 would be “materially and adversely” impacted by productivity issues and higher-than-expected costs experienced at three of its facilities, including two of its largest manufacturing facilities.

Catalent cited in part a slower than expected ramp up of production at its gene therapy manufacturing site in Harmans, MD, near Baltimore/Washington International Thurgood Marshall Airport (BWI). “During this ramp-up, certain operational challenges, including those related to the initial deployment of a new enterprise resource planning (ERP) system at BWI, significantly reduced the expected revenue in the third fiscal quarter associated with the site, and will also impact revenue previously expected in the fourth quarter,” Catalent explained in a statement April 14.

The company could not resolve those issues in a timely fashion, it said, because it needed to focus on regulatory inspections that it said were successfully completed.

“The ERP-related challenges were operational in nature and will not impact the company’s ability to produce timely and accurate financial statements,” Catalent stated at the time.

Catalent also reported unspecified productivity challenges and higher-than-expected costs at its drug product and drug substance manufacturing facilities located in Bloomington, IN, and Brussels, Belgium. Bloomington and a second plant in Madison, WI, were expanded by Catalent in 2019.

At Bloomington and Brussels, Catalent said, it could not achieve anticipated productivity levels and associated revenue “due in part to the continued need to implement enhancements to its operational and engineering controls following regulatory inspections that occurred earlier in the fiscal year.”

“Productivity levels in Bloomington are expected to be restored to previously forecast levels in that quarter,” Catalent said—though it acknowledged that the issues were also expected to affect its results for the fiscal fourth quarter ending June 30.

Deal speculation

Three days after Catalent’s warnings, Bloomberg reported based on unnamed sources that Danaher (DHR) had shelved plans to acquire the company. Speculation about a possible deal, touched off by another Bloomberg news report February 4, sparked a 19.5% jump in Catalent’s shares, from $56.05 to an even $67 a share.

The cascade of April news caused analysts at four firms to lower their price targets or ratings of Catalent stock. In addition to Baird, William Blair healthcare analyst Max Smock downgraded the company from “Outperform” to “Market Perform,” while Deutsche Bank’s Bowers dropped its price target 18%, from $88; and Barclays’ Luke Sergott, director-healthcare equity research, down 43%, from $70 to $40.

As for Castellano, Catalent only disclosed in a regulatory filing that his departure as CFO “is not due to any disagreement with any of Catalent, its Board, or its management”—and that the change of officers from Castellano to Hopkins “is not reflective of any concern with the Company’s audited financial statements.”

In a press release, Catalent president and CEO Alessandro Maselli thanked Castellano for 15 years of service to the company, including an “integral role” in its 2014 initial public offering (IPO), and added: “We wish Tom well in his future endeavors.”

Catalent’s future endeavors as recently as earlier this year included planning for growth.

The company on April 6 trumpeted the start of construction for a $20 million, 32,000-square-foot expansion of its clinical supply facility in Schorndorf, Germany, set to be completed next year. The project is designed to add capacity for storage and handling of clinical trial supply materials at temperatures between 15 and 25 degrees Celsius. The expansion was designed to create space in the original building to install a new, fully automatic bottle filling line, and a dedicated area for Catalent’s FastChain^® demand-led supply service, according to Catalent.

In March, Catalent expanded its UpTempo(SM) platform process for the development and CGMP manufacturing of adeno-associated viral (AAV) vectors. The expansion included an in-house, clonal HEK293 cell line, and off-the-shelf plasmids, both intended to support a supply chain that reduced timelines to first-in-human clinical evaluation.

Leaders & laggards

• Acorda Therapeutics (ACOR) shares soared 77% on Monday, from 49.5 to 88 cents, after the company joined Hangzhou Chance Pharmaceutical to announce distribution and supply agreements to provide Inbrija^® in Greater China (China, Taiwan, Hong Kong, and Macao). Inbrija is indicated in the U.S. for the intermittent treatment of episodic motor fluctuations (OFF episodes) in adults with Parkinson’s disease treated with a levodopa/dopa-decarboxylase inhibitor. Chance agreed to pay Acorda $2.5 million upfront, an up-to-$6 million “near-term” milestone payment, $3 million upon regulatory approval, up to $132.5 million in sales milestones, and a fixed fee for each carton of Inbrija supplied to Chance.
• CTI BioPharma (CTIC) shares zoomed 85% on Wednesday, from $4.11 to $8.93, after Swedish Orphan Biovitrum (SOBI) agreed to acquire the company for approximately $1.7 billion cash. Through the acquisition, Sobi aims to expand its U.S. commercial footprint and grow its hematology portfolio by adding CTI’s marketed adult myelofibrosis drug Vonjo^® (pacritinib). CTI would become a wholly owned subsidiary of Sobi upon closing of the deal, which is expected in the third quarter. Sobi shares on the Stockholm Stock Exchange fell 14.5%.
• Enanta Pharmaceuticals (ENTA) shares skidded 26% on Tuesday, from $34.33 to $25.52, the first trading day after the company reported a net loss for the first quarter of $37.7 million, compared with a $33.6 million net loss for Q1 2022. Total revenue fell 5% year over year, to $17.8 million from $18.7 million a year earlier, with revenue consisting entirely of royalties from worldwide net sales of AbbVie’s hepatitis C virus (HCV) regimen Mavyret^®/Maviret^® (glecaprevir/pibrentasvir). Last month, however, Enanta sold 54.5% of its ongoing Mavyret/Maviret royalties from AbbVie for $200 million upfront from OMERS, one of Canada’s largest defined benefit pension plans.

The post StockWatch: Catalent Cuts Revenue, EBITDA Forecasts, Rattling Investors appeared first on GEN – Genetic Engineering and Biotechnology News.

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