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

Business: Catalent develops and manufactures options for medicine, protein-based biologics, cell and gene therapies, and shopper well being merchandise worldwide. The firm operates by way of 4 segments. First, there’s Softgel and Oral Technologies, which gives formulation, improvement, and manufacturing providers for tender capsules to be used in a spread of buyer merchandise. Biologics gives biologic cell-line, and it develops and manufactures cell remedy and viral-based gene remedy. This section additionally handles the formulation, improvement and manufacturing for parenteral dose kinds, together with vials and prefilled syringes. The Oral and Specialty Delivery section gives formulation, improvement and manufacturing throughout a spread of applied sciences, together with built-in downstream medical improvement and business provide options. Finally, the Clinical Supply Services section gives manufacturing, packaging, storage, distribution and stock administration for medicine and biologics, in addition to cell and gene therapies in medical trials.

Stock Market Value: $8.86B ($49.16 per share)

On Aug. 29, Elliott and the corporate entered right into a cooperation agreement 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 ailments, and U.S. common supervisor, uncommon ailments at Genzyme) and Michelle Ryan (former treasurer of Johnson & Johnson). The firm will scale back the dimensions of the board at the 2023 annual assembly; it agreed to nominate a slate of 12 candidates, together with the 4 new administrators. Catalent additionally agreed to set up a strategic and operational assessment committee, charged with conducting a assessment of the corporate’s enterprise, technique and operations, in addition to its capital allocation priorities. This committee will embrace new administrators Barg and Ryan. Further, John Greisch (former president and CEO of Hill-Rom Holdings) has been appointed government chair of the board and also will chair the newly fashioned committee. Elliott agreed to abide by sure customary voting and standstill provisions.

Catalent is an outsourced producer within the prescribed drugs business. This is a secure enterprise in a rising business working in an oligopoly. It’s one of many three largest international contract improvement and manufacturing organizations, next to Lonza and a division of Thermo Fisher. The firm was at all times seen as a market chief, however in the course of 2022 the tides started to flip, largely due to two primary components. First, Catalent was negatively affected by a Covid cliff: During the pandemic, the federal government mandated that the corporate shut down a lot of its manufacturing and start 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 example a wonderful alternative for an activist.

In its most simplistic kind, there are two primary parts 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 assessment committee and appointment of Greisch as government chair of the board and as chair of the newly fashioned committee. While this committee’s purview is enterprise, technique and operations, we anticipate it is going to put an emphasis on technique.

This is a really strategic asset, and there are seemingly to be a number of acquirers. In reality, 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 practically 20% the next buying and selling session. Ultimately, a take care of Danaher never materialized. Additionally, firms like Merck could be all for shopping for the corporate or elements of it. Another risk is an acquisition by non-public fairness, of which Elliott’s PE arm could be an celebration. While as an activist Elliott will do no matter it feels is important to improve shareholder worth, up to now the agency has made important use of the technique of providing to purchase its portfolio firms as the most effective catalyst to improve shareholder worth. We wouldn’t be shocked to see that happen right here. Catalent is the appropriate measurement for Elliott, which just lately partnered on buyout offers for Citrix Systems and Nielsen Holdings, every for roughly $16 billion. Elliott has additionally just lately proven curiosity on this business, partnering with Patient Square Capital and Veritas Capital to acquire Syneos Health (SYNH) for $7.1 billion. That acquisition is anticipated to shut within the second half of 2023. Like Catalent, Syneos is an outsourced pharma options firm: It outsources R&D for pharmaceutical firms, whereas Catalent outsources manufacturing.

Elliott shortly received 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 assessment will conclude with a sale of the corporate. However, it’s price noting that Catalent has a comparatively new CEO at the helm, Alessandro Maselli, who was promoted from president and COO in July 2022. A whole lot of the operational points occurred throughout his watch. If this does flip from a strategic assessment to an operational assessment, 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.