Essay: Catalent, Inc. company analysis

1. COMPANY OVERVIEW AND STRATEGIC CHALLENGES

1.1. Company Description

Catalent, Inc. is a Contract Manufacturing Organization (CMO). It provides technologies and development solutions to other pharmaceutical companies for drugs, biologics, human and animal health products globally. The company offers four major domains of technologies in the field of softgels, biologics, oral drugs and clinical supply services. It has several patented technologies like OptiShell, OptiDose, Zydis, OptiForm etc. that offer the company a competitive advantage.

Catalent was founded in 2007 and is headquartered in Somerset, New Jersey. It is registered and traded on the New York Stock Exchange (NYSE) under CTLT. It went public in June 2014 with a stock price of $19-$22. It has almost doubled its stock price ($42) since it went public. Refer to Figure 1 in the Appendix.

The current market capitalization is 6.1Bn. Currently, Catalent has 10,700 employees globally (Catalent (NYSE:CTLT) – Share price, News & Analysis, n.d.). There is no direct competition of Catalent due to variety of services and technologies it provides. However, it has competitors in every domain mentioned above. Overall, Catalent will be compared against the Pharmaceutical Industry as opposed to each strategic unit of the company.

1.2. Problem statement

Due to low cost of manufacturing and labor, many companies are outsourcing their pharmaceutical needs to Asia Pacific. The market is changing and it can threaten Catalent’s position. In addition, the increasing price pressure within the larger CMOs is another threat to Catalent. Lack of presence in the biologics sector is detrimental for the growth of the company.

2. EXTERNAL ANALYSIS

2.1. Profitability- Past, Current and Future

The total market for CMOs had reached $71.5bn in 2015. This growth is continuing to an estimate of $105bn by 2021. Most of the market is dominated by small molecules. However, biologics are also making their way into the pharmaceutical industry. The top pharmaceutical CMOS are shown in the figure 2 in the Appendix. Catalent, Baxter and Patheon are amongst the larger CMOs (Contract Dose Manufacturing Industry by the Numbers: Composition, Size, Market Share and Outlook – 2013 Edition, n.d.).

Additionally, the figure below show the CMOs that are trading at strong EV/EBITDA owing to substantial growth in the contract manufacturing sector. Refer to Figure 3 of the Appendix. The EV/EBITDA multiples for most of the selected CMOs are between 9x to 13x. Patheon is leading the market whereas Catalent is not much far behind (Pharma & Biotech 2017– Review of Outsourced Manufacturing, 2013).

2.2. PESTEL Analysis

The PESTEL analysis was performed using the SEC filing offered by Catalent, Inc. (Catalent, Inc., U.S. SECURITIES AND EXCHANGE COMMISSION, Washington. (n.d.).

2.2.1. Political

• Low cost jurisdiction in China and India enabling competition.
• Lobbyist can bring changes in political environment
• Global operations may risk from political changes
• Changes in healthcare market access- healthcare reform, subsidizing medications 

2.2.2. Economic

• Seasonal demand of medications
• Inflation: Increase cost of raw materials to manufacture medications
• Exchange rates: Fluctuations in the exchange rate of the U.S. dollar and other foreign currencies could have a material adverse effect on our financial performance and results of operations. 

2.2.3. Sociocultural

• Increase in cost of medications can impact the sociocultural aspect of patient care. As population is aging, there is an increasing demand for medications. 

2.2.4. Technological

• Other proprietary technologies offered by competitors
• Quality product offering
• Rapid technological change outdating Catalent’s current technology 

2.2.5. Ecological

• Environmental, health and safety laws and regulations
• Green initiatives by Catalent to minimize environmental impact and manufacture product using sustainable supply chain
• Focuses on recycling and reducing energy use, water use, waste, and air emissions (Catalent Corporate Responsibility, n.d.). 

2.2.6. Legal

• Local, state, federal, foreign and transnational laws and regulations
• Lobbyist can bring changes in nationwide rules and regulations
• Tax legislation initiative or challenges: Depending upon the government party rules, the tax legislation can provide incentives or may prove challenging.
• Labor laws and regulations
• Patents, copyrights, trademarks and other intellectual property protections 

2.3. Porter’s Five Forces

2.3.1. Threats of New Entrants

• Outsourcing: Majority of Catalent Inc. revenue comes from the softgel business (917M). The softgel technology was developed by Catalent and they are the world leader in manufacturing softgels (RP Scherer Softgel Technologies, n.d.). However, India and China have entered the market as a low cost as well as less stringent jurisdiction market. Hence, the CDMO market is shifting from US to Asian countries.
• Economies of Scale: it makes it difficult to manufacture at a large scale and provide cost advantage. Hence, this will work against the competition.
• Capital requirement: Not a lot of pharmaceutical companies have the capital to competes directly with a large established CDMO like Catalent.
• High customer switching cost: Customers come to Catalent due to its capability of providing pharmaceutical solution to any molecule brought to them. Their strategy is to “follow the molecule” through all phases of development and product lifecycle. The cost to switch the innovator is extremely high and mostly counts towards restart of the program.
• Loyal customers and supply chain: Although Catalent was formed in 2007, it was formerly known as RP Scherer which was established in 1930s. The softgel business especially has a loyal customer and supply chain. 

Overall, the threat of new entrants is relatively low. However, to keep its position in market, Catalent needs to innovate and provide more solutions to customers.

 

2.3.2. Bargaining Power of Suppliers

• Limited number of suppliers: Catalent has limited number of gelatin suppliers for its softgel business. Additionally, the biologics business also has limited resources to procure raw materials. This provides high power to the suppliers.
• Switching costs of suppliers: Switching suppliers of a filed pharmaceutical product is difficult. The regulatory agency may ask to show stability data as well as bioequivalence data. Collection of this data can take months to years depending upon the impact to the product
• Suppliers depend upon Catalent: Gelita is one of the gelatin suppliers for Catalent Inc. Catalent is one of the biggest buyers of Gelita. If Catalent finds an alternate source of raw material, it may threaten Gelita’s revenue and market position.  Overall, the suppliers have relatively high bargaining power. 

2.3.3. Bargaining Power of Buyers

• Each buyer for Catalent is unique: Each buyer brings a molecule for development to be sold in markets. Hence, buyers rely on Catalent to provide them with solution
• Switching cost of buyers: Due to nature of pharmaceutical industry and filings, a buyer cannot switch to a new manufacturer unless absolutely needed.
• Backward integration: Catalent serves 87 of top 100 pharmaceutical companies (About Catalent, n.d.). Some of which are pharmaceutical giants like GSK, Pfizer, Novartis, Johnson and Johnson etc. These buyers have capital as well as market recourses to backwardly integrate into the industry. Overall, the bargaining power of buyers is low. 

2.3.4. Threats of Substitute Products or Services

• New technology by competitors: Catalent is continuously innovating in order to mainta
  in competitive advantage. However, other companies are also doing the same thing. In advent of a new technology that is cheaper and provides high quality will prove detrimental to Catalent’s business.

2.3.5. Rivalry among the Existing Competitors

• Intense rivalry between CDMOs: Catalent is one of the largest CDMO in the world providing multi-faceted pharmaceutical solutions to customers. The biggest rival for Catalent’s softgel business is Patheon.  Patheon is comparable to Catalent’s size and revenue. Other companies do not have the sheer size or the revenue generated by Catalent. They follow the Oligopoly where there are a few large firms that dictate price. There are high entry barriers. Overall, rivalry amongst existing competitors keeps new entrants at check raising the barrier levels. 

3. INTERNAL ANALYSIS

3.1. Profitability of Catalent

In 2014, Catalent was considered as a blockbuster IPO that was estimated to bring in $872 million at its midpoint (Catalent shoots for $872M in a blockbuster IPO, 2014). Since IPO, Catalent has used the raised capital to reduce long term debt. In 2018, Catalent underperformed (-1.5%) when compared to the Pharmaceutical industry (14.8%) and Market (10.3%) in terms of annual increase in revenue. However, it has shown steady profits since 2014 (Catalent (NYSE:CTLT) – Share price, News & Analysis, n.d.). Catalent shows promise with a 25.9% expected annual growth in earnings. Additionally, Catalent project growth shows steady growth in revenue and earnings in the next upcoming years. Refer to Figure 4 and 5 of the Appendix.

3.2. Competitive Advantage

• Leading provider of drug development and delivery technologies: Catalent has provided innovative solutions for nearly 50% of the New Chemical Entity (NCE) products approved by the FDA. Over 1000 scientists work for Catalent with a total of 1300 patents and patent applications. Their expertise is highly differentiated.
• Diversified portfolio: Unlike other pharmaceutical companies that focus on one business, Catalent has a diversified portfolio. As mentioned earlier, it offers four major domains of technologies in the field of softgels, biologics, oral drugs and clinical supply services.
• Global presence: Catalent serves customers from over 80 countries. Additionally, it has manufacturing plants globally that provide strategic solution to local customer base.
• Strategic partners for big pharmaceuticals: Catalent has always been strategic partner for big pharma and biotech companies.
• Innovation: Catalent has continuously evolved to be an innovator of new technologies that separate them from other competitors.
• Mergers and Acquisitions: Catalent has been actively acquiring strategic companies that will make Catalent’s existing portfolio stronger. They haven’t divulged from their strategies filed in the S1 filing. With acquiring Cook Pharmica, Catalent nearly doubled its biologics manufacturing (Catalent doubles down on biologics with $950M deal for Cook Pharmica, 2017). They acquired Juniper Pharmaceuticals expanding their oral technologies business (Keown, 2018). Catalent acquired Accucaps in Canada further expanding the softgel business and increasing manufacturing capacity (Catalent completes Accucaps acquisition, 2017). 

3.3. Core competencies, Resources and Capabilities Analysis

3.3.1. Tangible resources

As of June, 20th 2018, Catalent has thirty-four facilities across four continents comprising manufacturing operations, development centers, and sales offices. They have approximately 5.9 million square feet of manufacturing, laboratory and related space.

3.3.2. Intangible resources

As mentioned earlier, Catalent owns 1300 patents and patent applications. It is a leading CDMO with incomparable solution prospects. They were the innovators of the softgel technology. They have multiple other platforms under their domain like OptiShell, OptiForm, Zydis etc (Catalent – DELIVERY, n.d.). They have a multinational presence with an impeccable reputation. Catalent is a brand name synonymous with quality and innovation.

3.3.3. Core competencies

Catalent has superior pharmaceutical innovations providing solutions to other pharmaceutical companies. They have dedicated suppliers as well as satisfied customers. They were the innovators of the softgel technology (RP Scherer Softgel Technologies, n.d.). Additionally, with the acquisition of Juniper pharmaceuticals, Catalent is becoming the market leader in biologics and oral technologies. They have exceptional technological capabilities that translates molecules into finished products for market use (Catalent Completes Tender Offer for All Outstanding Shares of Juniper Pharmaceuticals, Inc. (n.d.).

3.3.4. Capabilities

In addition to the executive officers, Catalent has approximately 150 senior leaders globally to lead and direct the company. The senior leadership team hold critical positions and possess specialized talents that provide the company with a competitive advantage (Bass, 2018).

3.4. VRIO Analysis

3.4.1. Value:

Catalent offers innovative solution to its customers. Hence, the services provided are valuable.

3.4.2. Rarity:

There is no other CDMO that has the capability of providing a multi-faceted solution. No other CDMO owns biologics, oral delivery, softgels as well as clinical supplies business. Catalent has created a unique strategic position for itself. Hence, the services provided are rare.

3.4.3. Imitability:

Due to the number of patents and innovative technologies, it is difficult to replicate the services offered by Catalent without a significant capital investment. Hence, the services are not imitable or replicable.

3.4.4. Organization:

Catalent is highly organized. Additionally, it has strategically acquired businesses that will strengthen its current portfolio.

Summary of VRIO, Competitive Implications, and Economic Implications

Valuable?

Rare?

Costly to Imitate?

Organized Properly?

Competitive Implications

Economic Implications

Yes

Yes

Yes

Yes

Sustained Advantage

Above Normal

4. ALTERNATIVE STRATEGIES

The biggest threat to Catalent’s future is emerging market in Asia Pacific. Although, Catalent has a site in China, low cost leaders are emerging in countries like India that provide cheaper pharmaceutical solution. Additionally, the price pressure has increased amongst the US based comeptitors. For Catalent to maintain its strategic position in market, it needs to adopt following strategies.

4.1. Vertical Integration for the Softgel Business

In the current scenario, Catalent’s softgel business is highly dependent on procuring gelatin from Gelita. However, countries like India are emerging to be a threat to the softgel business. By vertical integration, Catalent can control the cost of raw materials and hence it can reduce the overall cost of manufacturing. Acquiring one of the gelatin manufacturing companies that meet regulatory needs could take Catalent to new strategic level. However, vertical integration is associated with high risk and the strategy will be hard to reverse (Bass, 2018). Risks associated with the acquisition include disruption of distribution channels, unprofitable venture, change in regulatory rules involving gelatin procurement (for example, FDA may ban entry of foreign gelatin raw materials due to presence of Salmonella or prion proteins (Bass, 2018)), new technological advances (softgel can be an obsolete business). Before venturing into vertical integration approach, Catalent must assess the procuring vs making costs and determine whether this is profitable.

4.2. Expanding the Biologics Business

Biologics is the future of pharmaceutical business. It is the fastest growing sector with total revenues reaching $163bn. On an average, pharmaceutical industry grows by 4% annually. Biologics have surpassed the regular annual growth by two-fold (8% increase) (Davis, 2017). Although Catalent has been acquiring companies that produce biologics, none of the acquisition is providing them a strategic differentiation as compared to other leading biotech companies. Cook Pharmica’s acquisition gave Catalent a boost. However, in order to be a market leader in biologics, Catalent needs to take strategic decision on its future acquisitions. They need to acquire companies with high innovation and novel therapeutic approach. For example, they can acquire companies that master the CRISPR technique. CRISPR is the new gene editing technology that is going to revolutionize personalized medicine (Scott, 2018). An acquisition of this magnitude will not only differentiate Catalent from others, it will also place Catalent amongst the top companies that manufacture biologics. There are inherent risks associated with acquiring biologics as the technological advances in this field are rapid making the current technology obsolete.

5. RECOMMENDATIONS

After evaluation of both strategies, it is recommended to expand the biologics business. Vertical integration will require large capital and low initial returns. The vertical integration is suggested to reduce costs. The cost benefits might occur years after acquisition. Additionally, volatile nature of regulations on raw materials especially cow derived materials can be detrimental for the company. Softgel technology has been around since 1930s. Rapid development of other technologies like veggie capsules provides higher differentiation to the companies as the capsule is vegetable derived and poses much less FDA restrictions (Bass, 2018).

Biologics on the other hand are showing a rapid growth. As mentioned earlier, biologics have shown a growth of 8% which is unusual for the pharmaceutical industry. Strategic acquisition of booming technologies that can affect the future of biologics (for example CRISPR technology). Additionally, this will not change Catalent’s filing strategy as biologics is one of business Catalent owns. Horizontal integration may be a way for Catalent to be a market leader.