Lonza/Catalent: part 2
In previous posts, I emphasized the part of bioproduction where cell populations are grown in bioreactors and proteins extracted from those cells are purified. This is where Lonza, WuXi, and Samsung mostly play. Catalent does some of that too but their exposure to biologics is heavily tilted toward “drug product”, where the active substance is combined with excipients and dosed into vials and syringes (fill/finish) in sterile clean rooms. Their competencies at the tail end are a distant echo of their origins. Catalent was once the Pharmaceutical Technologies and Services (PTS) division of drug distributor Cardinal Health, incepted through the 1998 acquisition of R.P. Scherer, a 60-year old manufacturer of softgel capsules, and bolstered through acquisitions of other packaging technologies, like oral solid dose forms (2001) and blow-fill-seal (1999)1.
Drug Delivery Solutions: improving the bioavailability of early stage molecules and putting drug products in optimal dosage forms – prefilled syringes, vials, blow-fill-seal containers, and tablets that dissolve in the mouth. DSS also included some revenue from scaling mammalian cell lines and offering other development services for biologic drugs.
Clinical Supply Services: storing and distributing drugs developed for clinical trials.
Softgel Technologies: Catalent’s single largest dosage platform at the time, making up more than 40% of total revenue. While hardly a cutting edge technology, softgel capsule shells are made of gelatin derived from animal parts that could interact with the APIs it contains in weird ways, which according to management makes this form factor harder to master than one might think. In 2016, the company boasted 90% share of new FDA approved drugs in the softgel format over the last 25 years. Besides pharmaceuticals, Catalent’s softgels also encapsulated OTC vitamins and supplements, a lower margin, commoditized use case that let them make the most of their fixed plant assets (better to realize low margin product revenue than have equipment running at 50% capacity).
Together the 3 segments played to an “end-to-end” strategy, where Catalent would try to win 3-5 year development contracts, helping the pharma sponsor engineer molecules and optimize bioavailability and dosage form in the preclinical stages under fee-for-service arrangements, with the aim of securing decade+ long commercial fill/finish engagements much later on. This included “following the molecule” into consumer friendly softgel and dissolving tablets as the drug eventually made its way to the OTC channel after coming off patent (while non-Rx drugs like Advil are far less profitable for Catalent, with contribution margins that run 15-25 points lower, they deliver relatively steady volume that level loads plant capacity).