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

Business: Catalent develops and manufactures solutions for drugs, protein-based biologics, apartment and gene therapies, and consumer health products worldwide. The company operates through four segments. First, there’s Softgel and Voiced Technologies, which provides formulation, development, and manufacturing services for soft capsules for use in a range of customer products. Biologics provides biologic cell-line, and it ages and manufactures cell therapy and viral-based gene therapy. This segment also handles the formulation, development and make up for parenteral dose forms, including vials and prefilled syringes. The Oral and Specialty Delivery segment offers formulation, expansion and manufacturing across a range of technologies, along with integrated downstream clinical development and commercial supply results. Finally, the Clinical Supply Services segment offers manufacturing, packaging, storage, distribution and inventory management for medicaments and biologics, as well as cell and gene therapies in clinical trials.

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

Percentage Ownership:  n/a

Average Cost: n/a

Activist Commentary: Elliott is a very successful and astute activist investor, explicitly in the technology sector. Its team includes analysts from leading tech private equity firms, engineers, direct partners – former technology CEOs and COOs. When evaluating an investment, the firm also hires specialty and familiar management consultants, expert cost analysts and industry specialists. The firm often watches companies for many years before investing and would rather an extensive stable of impressive board candidates. Elliott has not disclosed its stake in this investment, but based on the firm’s curriculum vitae, we would expect it to be approximately $1 billion.

On Aug. 29, Elliott and the company entered into a assistance agreement pursuant to which Catalent agreed to temporarily increase the size of the board from 12 to 16 directors and assign Steven Barg (global head of engagement at Elliott), Frank D’Amelio (former CFO and EVP, global supply, of Pfizer), Stephanie Okey (whilom SVP, head of North America, rare diseases, and U.S. general manager, rare diseases at Genzyme) and Michelle Ryan (last treasurer of Johnson & Johnson). The company will reduce the size of the board at the 2023 annual meeting; it agreed to recommend a slate of 12 candidates, including the four new directors. Catalent also agreed to establish a strategic and operational consideration committee, charged with conducting a review of the company’s business, strategy and operations, as well as its capital allocation superiorities. This committee will include new directors Barg and Ryan. Further, John Greisch (former president and CEO of Hill-Rom Holdings) has been chose executive chair of the board and will also chair the newly formed committee. Elliott agreed to abide by firm customary voting and standstill provisions.

Catalent is an outsourced manufacturer in the pharmaceuticals industry. This is a solid business in a growing industry operating in an oligopoly. It’s one of the three largest global contract development and manufacturing organizations, next to Lonza and a branch of Thermo Fisher. The company was always seen as a market leader, but in the middle of 2022 the tides began to turn, in general due to two main factors. First, Catalent was negatively affected by a Covid cliff: During the pandemic, the government mandated that the house shut down much of its manufacturing and start producing Covid vaccines. This production led to $1.5 billion in proceeds that recently went to zero. Second, Catalent had several self-inflicted wounds, including an acquisition that did not pan out in the same way as they expected and operational and regulatory issues. These are fixable issues that have sunk the stock from $142.35 in September 2021 to $48.82 this month, but they do not inescapably adversely affect the long-term intrinsic value of the company. That makes this situation an excellent opportunity for an activist.

In its most simplistic material, there are two basic elements to an activist campaign: success in the activism (for instance, getting the company to adopt your agenda) and assassination of the activist agenda. Elliott has already accomplished the former, having entered into the cooperation agreement for four panel seats. There’s also the establishment of a strategic and operational review committee and appointment of Greisch as executive chair of the accommodate and as chair of the newly formed committee. While this committee’s purview is business, strategy and operations, we expect it desire put an emphasis on strategy.

This is a very strategic asset, and there are likely to be several interested acquirers. In fact, on Feb. 4, Bloomberg reported that boy life sciences conglomerate Danaher had expressed interest in purchasing Catalent at a “significant premium.” Catalent ended Feb. 3 at $56.05 per part, and the stock popped nearly 20% the following trading session. Ultimately, a deal with Danaher never be revealed. Additionally, companies like Merck could be interested in buying the company or parts of it. Another possibility is an acquisition by grunt equity, of which Elliott’s PE arm could be an interested party. While as an activist Elliott will do whatever it feels is needed to enhance shareholder value, in the past the firm has made significant use of the strategy of offering to acquire its portfolio companies as the outwit catalyst to enhance shareholder value. We would not be surprised to see that happen here. Catalent is the right size for Elliott, which recently partnered on buyout agreements for Citrix Systems and Nielsen Holdings, each for roughly $16 billion. Elliott has also recently shown value in this industry, partnering with Patient Square Capital and Veritas Capital to acquire Syneos Health (SYNH) for $7.1 billion. That getting is expected to close in the second half of 2023. Like Catalent, Syneos is an outsourced pharma solutions company: It outsources R&D for pharmaceutical south african private limited companies, whereas Catalent outsources manufacturing.