'Uniquely Positioned' Catalent Notches KeyBanc Upgrade

Catalent Inc CTLT is poised to grow revenue by 6 percent and adjusted EBITDA by 8-10 percent through 2020, according to KeyBanc Capital Markets. 

The Analyst

Analyst Donald Hooker upgraded shares of Catalent from Sector Weight to Overweight with a $48 price target.

The Thesis

Three factors — namely a slew of new drug approvals expected in the coming years, elevated clinical trial activity from emerging biotech firms and a rising prevalence of "value-based contracts" — should be positive for Catalent, Hooker said in a Wednesday note. (See the analyst's track record here.) 

By virtue of its role in helping drug companies identify and manufacture optimal dosing formulations, Catalent is likely to benefit from the potential for an elevated volume of product introductions, driven by government efforts to ease the norms for regulatory approvals for new and generic drugs, the analyst said.

The FDA released guidelines this year to reduce the number of reviews for approving a generic drug.

KeyBanc projects $200 million of incremental run-rate revenue upside in biologics production over the next three-plus years, with high EBITDA margins of 40-plus percent.

Catalent is likely to benefit as medication adherence increasingly becomes a commercial issue in a value-based reimbursement environment, Hooker said. Over time, biotech firms will be paid based on how well their drugs generate outcomes in the real world, rather than on a unit shipments basis, the analyst said. 

In such an environment, drug dosing and formulations are vital considerations, he said. 

"CTLT is uniquely positioned here with intellectual property to help clients develop 'patient-friendly' formulations." 

Price Action

Catalent shares were up about 40 percent over the past year through Tuesday. The stock was up 3.43 percent at the time of publication Wednesday. 

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