By Louis Garguilo, Chief Editor, Outsourced Pharma
Regarding Monday’s striking news of the purchase of Catalent by Novo Holdings, the seminal question that we all needed a more definitive answer to is:
What specifically is planned for Catalent as a CDMO (minus the three fill-finish facilities that will become part of Novo Nordisk)?
Definitive is that the CDMO will be taken private by the investment firm, and three large-scale fill-finish facilities will become part of Novo Nordisk.
Clarified was who/what Novo Holdings is (see part one), and its relationship to the Big Pharma with which it shares a name.
But left less clear was whether Catalent would continue to operate as a leading, integrated global CDMO (now with 47 facilities/sites around the world).
“Customers have been calling me continuously,” said one Catalent executive I spoke with shortly after the news broke.
“They want to know definitively if their projects will be affected, and if we are still interested in obtaining new projects.”
The answer he gives to these concerned customers is current projects will not be negatively impacted, and Catalent is emphatically open for future business.
Customer fears would be natural in any similar situation, but the overall questioning of the future of Catalent points to the fact the communication to the world of this deal could have been better conceived.
Because there was no, “Catalent the CDMO remains fully open for business!” type of statement, eyebrows were raised around the world.
Could it be the future makeup of the company is yet to be fully decided? Would the company break apart, and/or individual sites sold off – to other Pharma or CDMOs?
All this is plausible.
If, for example, I look at the combined operations under the Catalent Cell and Gene group, it would make a highly competitive standalone company.
So in an attempt to put such conjecture aside, I reached out to Catalent employees. Here’s what I learned.
The entire Catalent-employee universe was informed of the news via email the morning of the public announcement.
I asked a few of the rank-and-file employees of the company if it came as a shock. Their replies were telling.
One said while the specific details were surprising, that something monumental was afoot had been sensed by employees for some time.
In hindsight, all of us could see the writing on the wall:
Layoffs; widely reported financial woes due to plant inefficiencies; a languishing stock price; activist Elliot Investment Management gaining board seats and demanding drastic actions; a lull in biotech investing overall.
And thus, “The announcement was a surprise way to start the week, but without knowing all the details, I think it will be a very positive decision,” is how one employee took the news.
An executive I spoke to at Catalent (who had no prior knowledge), said she saw this as a long-term positive for the company to operate as a CDMO.
But she also confirmed that “right now there's a lot of misconception.”
“People heard ‘Novo’ and started suggesting we’d now be operating under a Big Pharma company, and have to prioritize Novo Nordisk projects.”
The reality, she continues, is Novo Nordisk got exactly what it wanted – full ownership of the fill-finish facilities.
“And we get relieved of the burdens of a public company, and a return to being private.”
From her perspective, one of those major burdens was activist investors Elliot Investment Management pressuring the company.
“This deal solves that; those activists investors go away. We can think more medium-term strategy for what we're trying to accomplish.”
What I heard next put our earlier conjecture on its head.
This executive wasn’t worried about parts of Catalent being separated, but instead foresees a future of rejuvenated assets.
“Pure speculation on my part,” she says, “but I wouldn't be surprised if we don't again add fill-finish capabilities.”
“Obviously, we now leave ourselves with only Limoges [France] as a fill-finish capability to supplement drug substance. I wouldn't be surprised if we add another asset or two to the portfolio.”
I also heard this positivism:
“I wouldn't be surprised if several years from now, when the market improves, we launch again in another IPO – as a re-energized CDMO.”
Therefore, to answer as of today the question we started off with – Will Catalent remain open for business? – employees of the CDMO seem assured it will.
But even more, they’re projecting a future brighter than the present.
And with that, we might have to also say that Elliot (and all others involved, including stockholders) are to be congratulated …
A Difficult Business
Can we take this case as a message to the entire outsourcing industry that your CDMOs are better off privately held (like the lion’s share of them are)? That, moreover, they are better able to serve the best interests of customers?
Either way – private or public – a CDMO needs to be profitable and so do its investors, whoever they are.
But as one interlocutor told me, “the CDMO business [meaning sales] is ‘lumpy’ to begin with; it’s just the nature of the business. Market and customer dynamics change.
“So I think it's easier to operate when you're private as compared to public. It's a different beast from almost any other business out there. It takes a lot to do this successfully, and grow.
“But even then, it’s never going to be an ideal business model – smooth, predictable sales, revenues, and profits. Batches fail, products fail, biotechs go under, funding dries up; new technologies emerge and others get transplanted.”
Add another elemental challenge when it comes to running successful CDMOs – private or public: Employees.
Not everyone is a fit for the multitasking, and balancing of different masters and projects coming and going. This leads to attrition, even a higher burnout rate, perhaps, than other biopharma industry roles. Not to mention, all the poaching of the professionals who do excel in a CDMO environment.
All told, “It’s just very difficult to be stable, and consistent, and predictable, and shareholders of public CDMOs may have little patience for such variances."
Catalent started out and became a leading CDMO as a private company. Ten years ago, it went public.
I don’t believe anyone is specifically saying that IPO was the cause of some serious challenges the past years; the post-COVID economic environment has been painful for so many companies in our industry.
So while it is only natural to register disappointment as yet another of your service providers undergoes acquisition and uncertain change, and important fill-finish assets disappear from the outsourcing world, perhaps in the end you will witness a resurrection of sorts of a new and stronger Novo-Catalent.