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


Photographer: Mikael Sjoberg/Bloomberg

Bloomberg Creative Photographer: Mikael Sjoberg/Bloomberg

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Company: Catalent (CTLT)

Business: Catalent develops and manufactures solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products worldwide. The company is divided into four segments. Softgel and Oral Technologies is the first segment, providing formulation, development and manufacturing services of soft capsules that can be used in a variety of products. Biologics develops and produces cell therapy, viral-based gene therapies and biologic cell-line. This segment is also responsible for the formulation, development, and manufacturing of parenteral dosage forms such as vials and syringes prefilled with medication. Oral and Specialty Delivery offers formulation, design and manufacturing solutions across a variety of technologies. It also provides integrated downstream clinical supply and commercial development solutions. Finally, the Clinical Supply Services segment offers manufacturing, packaging, storage, distribution and inventory management for drugs and biologics, as well as cell and gene therapies in clinical trials.

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

Activist: Elliott Investment Management

Percentage Ownership: n/a

Average Cost: n/a

Activist Commentary: Elliott is a very successful and astute activist investor, particularly in the technology sector. The team includes analysts and engineers from top tech private equity firms as well as former technology CEOs, COOs, and operating partners. The firm hires a variety of consultants to evaluate an investment. These include general and specialty management consultants, cost analysts, and industry experts. The firm has a large pool of board candidates and often monitors companies for years before making an investment. Elliott has not disclosed its stake in this investment, but based on the firm’s history, we would expect it to be approximately $1 billion.

What’s happening?

On Aug. 29, Elliott and the company entered into a cooperation agreement pursuant to which Catalent agreed to temporarily increase the size of the board from 12 to 16 directors and appoint Steven Barg (global head of engagement at Elliott), Frank D’Amelio (former CFO and EVP, global supply, of Pfizer), Stephanie Okey (former SVP, head of North America, rare diseases, and U.S. general manager, rare diseases at Genzyme) and Michelle Ryan (former treasurer of Johnson & Johnson). The company agreed to reduce the board size at its 2023 annual meeting. It will nominate 12 candidates including the four new members. Catalent agreed to create a strategic and operation review committee. The committee will be responsible for reviewing the company’s operations, strategy, and business. It will also review its capital allocation priorities. The committee will be comprised of new directors Barg, and Ryan. John Greisch, the former president and CEO at Hill-Rom Holdings, has also been appointed as executive chair and will chair the newly-formed committee. Elliott agreed to abide by certain customary voting and standstill provisions.

Behind the scenes

Catalent is an outsourced manufacturer in the pharmaceuticals industry. This is a stable company in a growing market that operates in an oligopoly. This is one of three global contract manufacturing and development organizations after Lonza and Thermo Fisher. In the middle of the year 2022, the company’s market position began to change, due in large part to two factors. Catalent suffered a Covid Cliff: the government ordered the company to shut down a large part of its production and begin producing Covid vaccines during the pandemic. The $1.5 billion revenue from this production has recently been reduced to zero. Catalent also suffered from self-inflicted injuries, such as an unsuccessful acquisition and operational and regulatory problems. The stock has fallen from $142.35 to $48.82 in the last month. These issues are fixable, but do not affect the intrinsic value of the business. This is a great opportunity for an activist. Elliott has already achieved the first, by entering into a cooperation agreement to secure four board seats. Greisch will also be appointed as the executive chair of both the board and the newly formed strategic and operational review panel. While this committee’s purview is business, strategy and operations, we expect it will put an emphasis on strategy.

This is a very strategic asset, and there are likely to be several interested acquirers. Bloomberg reported on February 4, that Danaher, a fellow life sciences conglomerate, had expressed an interest in purchasing Catalent for a “significant” premium. Catalent’s stock ended the trading day of Feb. 3 at $60.05 per share. The following session, the stock rose nearly 20%. A deal with Danaher was never finalized. Merck, for example, could also be interested in purchasing the company or certain parts of it. A private equity acquisition could also be a possibility, in which Elliott’s PE division may be interested. Elliott, as an activist, will do anything it deems necessary to increase shareholder value. However, the firm’s strategy in the past has been to offer to buy its portfolio companies to maximize shareholder value. This is not surprising. Elliott is the perfect size for Catalent, as it recently partnered with Citrix and Nielsen Holdings to buy them out for each other for approximately $16 billion. Elliott also showed interest in the industry recently, partnering up with Patient Square Capital and Veritas Capital for a $7.1 billion acquisition of Syneos Health. This acquisition is expected close in the second quarter of 2023. Like Catalent, Syneos is an outsourced pharma solutions company: It outsources R&D for pharmaceutical companies, whereas Catalent outsources manufacturing.

Elliott quickly got Catalent to pursue a strategic exploration agenda, which indicates to us that there was not a lot of pushback by management. This review is expected to conclude with the sale of Catalent. Alessandro Maselli is the new CEO of Catalent. He was promoted to CEO from President and COO back in July 2022. Many of the operational problems occurred during his tenure. There is no guarantee he will keep his job if this review turns from a strategy review to an operation review.