Catalent Predicts More Demand than Capacity in the Next Five Years

On an earnings call on Feb. 6, 2017, Catalent was optimistic about the direction of the pharmaceutical outsourcing industry, saying that its dedicated biologics business was 1% of Catalent's total consolidated sales, but has now grown to 4% of total sales.

Catalent CEO John R. Chiminski noted that there will be more demand than capacity during the next five years, and the demand will likely be “positioned for the less than 5000L trains,” which is where Catalent is investing most of its capital. He said, “Our ability to lock up customers in advance for them to reserve capacity is going up and it has some of the highest margins, I would say, right now in the business, margin percent.”

Almost to capacity

In October 2016, Catalent announced the start of the construction on an extension to the company's Madison, Wisconsin biologics manufacturing facility. The company cited market demand as the catalyst to the expansion. During the call, Chiminski noted that the company's facilities are running near capacity, at an "upwards of 90%." A transformation of the business-with a focus on its biologics business-took executives by surprise, said Chiminiski, who said the company did not fully appreciate how quickly the biologics business would bring the company to almost full capacity.

An investor asked Catalent executives whether the company would have capacity in the United States should the President institute a border tax or some other tax reform that would seek to bring manufacturing operations back to the US. Chiminiski noted that while the company still has capacity in "several" of its key facilities across the US, he warned that certain tech transfers and requirements to increase capacity could take a few years to implement. In the "highly regulated" pharmaceutical business, changes to manufacturing locations-especially locations that have product registered in multiple countries-could take three to five years after accounting for capacity build, registration, and qualification, he said. And in facilities that already have capacity, it still typically takes a contract development and manufacturing organization (CDMO) two to three years to get drug production up and running after it wins the business from a pharmaceutical company.

Ownership of molecules

When asked by an investor if Catalent was a net importer or net exporter, Chiminiski said, "For our sites in the United States, we are exporting more in terms of dollars in revenues than we are buying in raw materials or services or any other factors of production from offshore." He also said that the company sources most of it API from domestic suppliers.

The question of manufacturing onshore or offshore gets complicated, said Chiminiski, because contract manufacturing organizations (CMOs) and CDMOs don't actually own the products with which they work-they are merely providing a service to enhance or alter others' products in the processing chain.

Added Chiminiski, "That'll be kind of a wrinkle that the policymakers will have to think about. And I'm not exactly sure what the impact on Catalent is there in cases where we're getting API but we're not actually buying it."

In addition, decisions to move manufacturing to areas with a lower tax jurisdiction are usually based on cash flow, not on the expertise of the labor force, noted Chiminski. Thus, there may be fewer companies to want to invert in the CMO/CDMO industry if the human capability to perform the complex processing operations remains in the US. Plus, unlike some pharmaceutical manufacturers that ship their products overseas to exploit the lower cost of labor and then ship products back, CMO/CDMOs have a different type of business. This aforementioned model is “not a feature of our manufacturing footprint as it exists today,” commented Catalent CFO Matthew Walsh.

Source: Seeking Alpha