Activist Elliott makes inroads at Catalent to construct worth. Right here’s what might occur subsequent

Enterprise: Catalent develops and manufactures options for medication, protein-based biologics, cell and gene therapies, and client well being merchandise worldwide. The corporate operates by 4 segments. First, there’s Softgel and Oral Applied sciences, which supplies formulation, improvement, and manufacturing companies for mushy capsules to be used in a variety of buyer merchandise. Biologics supplies biologic cell-line, and it develops and manufactures cell remedy and viral-based gene remedy. This phase additionally handles the formulation, improvement and manufacturing for parenteral dose types, together with vials and prefilled syringes. The Oral and Specialty Supply phase gives formulation, improvement and manufacturing throughout a variety of applied sciences, together with built-in downstream medical improvement and industrial provide options. Lastly, the Scientific Provide Providers phase gives manufacturing, packaging, storage, distribution and stock administration for medication and biologics, in addition to cell and gene therapies in medical trials.

Inventory Market Worth: $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 briefly enhance the scale of the board from 12 to 16 administrators and appoint Steven Barg (world head of engagement at Elliott), Frank D’Amelio (former CFO and EVP, world provide, of Pfizer), Stephanie Okey (former SVP, head of North America, uncommon illnesses, and U.S. basic supervisor, uncommon illnesses at Genzyme) and Michelle Ryan (former treasurer of Johnson & Johnson). The corporate will scale back the scale of the board on the 2023 annual assembly; it agreed to appoint a slate of 12 candidates, together with the 4 new administrators. Catalent additionally agreed to determine a strategic and operational evaluate committee, charged with conducting a evaluate of the corporate’s enterprise, technique and operations, in addition to its capital allocation priorities. This committee will embrace new administrators Barg and Ryan. Additional, John Greisch (former president and CEO of Hill-Rom Holdings) has been appointed govt chair of the board and also will chair the newly shaped committee. Elliott agreed to abide by sure customary voting and standstill provisions.

Catalent is an outsourced producer within the prescription drugs business. It is a secure enterprise in a rising business working in an oligopoly. It is one of many three largest world contract improvement and manufacturing organizations, subsequent to Lonza and a division of Thermo Fisher. The corporate was at all times seen as a market chief, however in the course of 2022 the tides started to show, largely as a result of two essential elements. First, Catalent was negatively affected by a Covid cliff: Through 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 components to an activist marketing campaign: success within the activism (as an illustration, 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 evaluate committee and appointment of Greisch as govt chair of the board and as chair of the newly shaped committee. Whereas this committee’s purview is enterprise, technique and operations, we anticipate it’ll put an emphasis on technique.

It is a very strategic asset, and there are more likely to be a number of acquirers. Actually, on Feb. 4, Bloomberg reported that fellow life sciences conglomerate Danaher had expressed curiosity in buying Catalent at a “vital premium.” Catalent ended Feb. 3 at $56.05 per share, and the inventory popped almost 20% the next buying and selling session. In the end, a cope with Danaher never materialized. Moreover, firms like Merck could possibly be all for shopping for the corporate or elements of it. One other risk is an acquisition by non-public fairness, of which Elliott’s PE arm could possibly be an celebration. Whereas as an activist Elliott will do no matter it feels is critical to reinforce shareholder worth, prior to now the agency has made vital use of the technique of providing to amass its portfolio firms as one of the best catalyst to reinforce shareholder worth. We might not be stunned to see that occur right here. Catalent is the best 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 Affected person Sq. Capital and Veritas Capital to acquire Syneos Health (SYNH) for $7.1 billion. That acquisition is predicted 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 bought Catalent to pursue a strategic exploration agenda, which signifies to us that there was not lots of pushback by administration. We anticipate that this evaluate will conclude with a sale of the corporate. Nonetheless, it’s price noting that Catalent has a comparatively new CEO on 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 evaluate to an operational evaluate, 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.