Catalent's growth blemished by weaker Softgel performance
- Contract manufacturer Catalent touted the early success of its new Biologic and Specialty Drug Delivery unit on a Tuesday earnings presentation, which helped the company achieve 19% revenue growth for its 2018 fiscal year that ended June 30.
- Catalent created the unit through a corporate restructuring that split its Drug Delivery Solutions business into two, with the other piece being Oral Drug Delivery. Respectively, the units brought in $196 million and $154 million during the fourth quarter.
- Though investors seemed pleased with Catalent's yearlong performance (share value rose about 5% by market's close Tuesday), analysts pressed the company about the path forward for its Softgel segment, revenue from which fell 7% year over year. Catalent said the decline was due to weaker high-margin product participation and lower consumer health and prescription volumes in North America and Europe.
In the search to reduce production costs, an increasingly popular play among pharmas has been contracting the work out to service providers. The trend has in turn pressured contract manufacturers to expand their operations, either through millions of dollars of internal investment or through M&A.
New Jersey-based Catalent has been particularly fond of the latter. It acquired clinical manufacturing company Pharmatek Laboratories in September 2016, biologics manufacturer Cook Pharmica for $950 million a year later, and drug developer Juniper Pharmaceuticals for $130 million in July.
Catalent expects those latter two acquisitions in particular to help beef up its biologics manufacturing capabilities. Already, the Bloomington, Indiana site brought on through the Cook Pharmica deal was responsible for nearly three-quarters of the revenue growth seen in the Biologics and Specialty Drug Delivery segment during Catalent's 2018 fiscal year.
But while its biologics business booms, Catalent is facing problems elsewhere.
Net revenue from the Oral Drug Delivery Segment declined year over year when factoring in foreign exchange. The Softgel Technologies segment was also hit late in the year, with fourth quarter revenue down 7% to $241 million under constant currency.
Catalent executives noted on their Tuesday earnings call the company's Softgel business traditionally has 2-4% annual revenue growth, but was closer to the low end of that range in 2018 because of headwinds like weaker product participation revenue and a shortage of the ibuprofen active pharmaceutical ingredient.
What's more, CEO John Chiminski said Catalent has noticed a "shift by our prescription pharmaceutical customers to lower volume new product launches targeting smaller patient populations."
With the ibuprofen shortage unlikely to resolve in 2019, Catalent expects the Softgel unit to continue to grow on the lower side of its historic range, yet still prove valuable for cash flow.
"[W]e are going to continue to lean on a cash flow generation of the Softgel business on a go-forward basis to really continue to fund our growth in the higher growth, higher margin businesses of biologics," Chiminski said on call.
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