Catalent is growing, mostly from outside sources.
Best known for its contracted manufacturing work, the drugmaker on Tuesday said fourth quarter revenue, recorded from April to June, was 6% higher than it was in the same period a year prior. The quarter also outpaced Catalent's full 2019 fiscal year, which runs from July 1 through June 30 and saw 2% revenue growth.
The stronger performance was the result of added business brought in by three recent acquisitions. Like other contract manufacturers, Catalent has pursued M&A to quickly build scale and meet greater outsourcing demands from large pharmaceutical companies.
Yet those acquisitions, while helpful to the bottom line, may also be masking problems. Jefferies analyst David Windley argues Catalent executives have been too bullish on the company's core small molecule business, which was dinged over the last couple years by supply issues and weaker product royalties.
"Put differently, if not for the acquisitions and their continued strong performance, revenue growth would be noticeably below the previous 4-6% range," Windley wrote in an Aug. 27 note to clients.
Catalent has been on an M&A tear as of late. It bought Cook Pharmica, a fellow contract manufacturer that specializes in biologics, for $950 million in 2017. The following year it purchased Juniper Pharmaceuticals for $130 million to expand its service offerings, specifically in areas such as drug formulation and oral dose manufacturing.
By April of 2019, Catalent had agreed to a $1.2 billion acquisition of gene therapy developer Paragon Bioservices. And most recently, the company took over production sites from Bristol-Myers Squibb and Novavax.
The Cook, Juniper and Paragon deals were responsible for much of the growth Catalent realized both in the fourth quarter and across its last fiscal year. They also help to offset a change in accounting practices that negatively affected the company's clinical supply services revenue.
In fact, full-year revenue would have been up just 2% under constant currency — versus the 5% Catalent is reporting — had the company excluded those three acquisitions and the accounting changes.
Paragon and Cook, which is now known as Catalent Indiana, were particularly bright spots. Catalent reported that revenue from its Biologics and Specialty Drug Delivery segment grew to $742 million in fiscal 2019, an increase of 23% that was comprised, in part, from a 12 percentage point increase in the Catalent Indiana business and a 5 percentage point increase in the Paragon business.
With Paragon added to its arsenal, Catalent revised its long-term organic growth expectations, raising them to between 6% and 8% from a range of 4% to 6%. The guidance comes as more companies — and notably more big pharmas — are investing in gene therapy development.
"The market for gene therapy work at Paragon is extremely robust. They're winning and gaining new customers and new programs on a regular basis," Catalent CEO John Chiminski said on the company's Aug. 27 earnings call.
According to Windley, Catalent's "refashioned" portfolio has increased its biologics exposure to around 32%, up from 10% five years ago.
For fiscal year 2020, Catalent is forecasting between $2.78 billion and $2.88 billion in revenue and between $300 million and $330 million in adjusted net income.
Investors seem to appreciate the path Catalent is on, as share value has risen more than 70% since the beginning of the year.
Even some of the company's more prominent challenges, like a lingering ibuprofen supply shortage that crimped sales in its Softgel segment, appear to be easing.
Still, Windley is cautioning investors not to get entirely swept up by the newfound revenue from acquisitions.
Catalent "is a consolidator, so we aren't suggesting acquisitions don't count," he wrote, adding that the company's portfolio has "much better blended growth" than it used to.
"We simply take a conservative view on the core [long-term growth]," he wrote.