catalent (ctlt) equity report

1

Thesis & Recommendation Summary

Key Investment Driver #2


Catalent is the global leader in the Drug Development and manufacturing industry. Their client position allows the company to gain significantly from the sector growth

Unparalleled Business Strategy leading to increased demand and contracts from leading life sciences companies, resulting in long-term stable and growing revenues

As the global industry leader, Catalent maintains this status through innovation. They have developed proprietary solutions and hold around 1,300 patents, allowing them to gain in their industry through size and revenue

DATE: MM/DD/YY

NYSE: CTLT

Sector: Life SciencesIndustry: Drug Development & Manu.Associate: Leon Stempert

BU Finance & Investment Club

The industry is growing substantially and Catalent is positioned to make gains from this growth and continue to lead in its industry. Headwind: Pricing pressure on Life Sciences companies could slow the expected growth of the industry

Key StatisticsMarket Cap $ 3,627.3652-Week Range $ 18.92 – 34.40Enterprise Value $ 5,348.8 Revenue (LTM) $ 669.3EBITDA $ 450.8Beta (against RTY) 0.72

Margins & RatiosP/E (LTM) 1.14xD/E Ratio 0.52ROE 155.74%EBITDA Margin 22.88%Profit Margin 11.60%Dividend Yield 0.00%

Recommendation

Current Trading Price: $29.13(As of x/xx/20xx) Recommendation: BUYTarget Price: $35.99Upside/Downside (%) 23.6%

8/18/14 2/18/15 8/18/15 2/18/16-20.00%

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20.00%

30.00%

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CTLT vs. RUT vs. PSCH

CTLT Russell 2000


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INDUSTRY TRENDS & PRIMARY RESEARCH

INDUSTRY OVERVIEW

DATE: MM/DD/YY

Development and Manufacturing: Biosimilar Drug, Etc.This industry group consists of companies that either discovers, develop, or manufacture chemically based therapeutic and preventive medicine, and medicinal products. Companies included in this industry tend to collaborate with other pharmaceutical companies

Industry Definition

BU Finance & Investment Club

Overview: Growth in Life Sciences companies are driven by a healthy economy, growing GDP and Global Healthcare Spending. Factors: Aging Population, Rising Consumer Wealth (Emerging Countries), Proliferation in chronic diseases (Longer life expectancies, etc.) Growth: Most sub-industries are expected to grow by 6-10% each year through 2020, and Increased Acquisitions in the entire sectorIndustry Characteristics: High R&D Costs, high capital intense, High Entry Barrier, Medium Competition (On Focused Researches)

Industry Summary

Growth by Segment: Pharma Segment sales have slowed in certain global markets, but are expected to maintain 6-8% to 2020Biotech sales are expected CAGR of 9.02% through 2020Generics and biosimilars Segment is expected to grow at a CAGR of 10.03% through 2017All other Life Sciences sub-industries are expected to grow within 6-10%Growth Drivers: Increased trend towards Universal healthcare policies (Global Trend), Aging Population Impact on Company: Catalent end consumers are top pharmaceutical, Biotech, Generics, biosimilars, and Medtech companies. Which each segment in high growth stage, Catalent stands to gain and grow in the long-term

Trend #1: Optimistic Sector Growth

1831

15871398

2408

402

Revenue of Peer Group ($mm)

Catalent ICON Charles River PAREXEL AMRI

2016 2017 2018 2019 2020$0.00

$1,000.00

$2,000.00

$3,000.00

$4,000.00

Expected High Growth Revenues

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INDUSTRY TRENDS & PRIMARY RESEARCHDATE: MM/DD/YYBU Finance & Investment Club

Outlook: M&A has been increasing in this sector over the years. Deal value in 2014 was $351 billion, a 113 percent growth rate from 2013. The first half of 2015 saw 304 pharma deals valued at $221 billion, compared $62 billion same period 2014.

Key Drivers: Pricing Pressure; strengthening existing product portfolios; replenishing pipelines depleted by patent expiry; deepening capabilities in priority areas, entering and/or emerging markets, and acquiring innovative technologies to leverage current assets or generate cost-saving synergies

Impact on Company: Catalent has a unique business model that focuses on development, delivery, and supply. This makes the company look like a promising acquisition target. This activity also indirectly affects the company positively through stronger customers that are growing.

Trend #3 Changing Demographics & Policy

Changing Factors: Aging Population, Growing Prevalence of Chronic Diseases, Rising consumer wealth, and Universal healthcare programs

Outcome: These factors are expected to boost healthcare spending and demand for life sciences products in 2016+

Impact on Company: Catalent supplies drug products to pharma's and ultimately the consumers. This changing environment will positively affect the sales of its services through increased healthcare spending/demand.

Trend #2: M&A and Collaborations

0

200

400

600

800

1000

1200

Aging Population (Census Report)

(in th

ousa

nds)

CAGR: 3.26%

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

0

10000

20000

30000

40000

50000

60000

Noncommunicable Diseases (NCD)

(In th

ousa

nds)

CAGR: 1.88%

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COMPANY OVERVIEW

DATE: MM/DD/YYBU Finance & Investment Club

Catalent offers a range of life sciences services. From drug and biologic development services to delivery technologies to supply solutions. With over 80 years of experience, Catalent has the deepest expertise, the broadest offerings, and the most innovative technologies to help Life Sciences companies get more molecules to market faster, enhance product performance, and provide superior, reliable manufacturing results.

Business Overview

Drug Development & Formulation Services: With our broad range of expert services, we drive faster, more efficient development timelines and produce better products (Biologics Cell Line, Formulation, Solid State Services, Etc.)

Drug Delivery Technologies: Offers better treatments and more value for patients, payers, and innovators with our innovative delivery technologies and dose forms. (Versatile SOFTGEL Solutions, Controlled Release, Inhalation, Injectable, and Oral Fast Dissolve)

Supply Services: Offers global, reliable supply from our world-class manufacturing and supply network and integrated solutions

Core Products & Services

ICON is a global provider of outsourced development services to the pharmaceutical, biotechnology and medical device industries.

Charles River Laboratories International, Inc. is an early-stage contract research company, which provides essential products and services to help pharmaceutical and biotechnology companies, government agencies and academic institutions around the globe to accelerate their research and drug development efforts

PAREXEL International Corp. is a biopharmaceutical services company. It provides clinical research, medical communications, consulting, commercialization and informatics, and technology services to pharmaceutical, biotechnology, and medical device industries

Albany Molecular Research, Inc. engages in research and manufacturing organization providing customers drug discovery, development, and manufacturing services.

Competitors & Competitive Positioning

2009 2010 2011 2012 2013 2014 2015

274.00314.00

354.00388.00 413.00 432.00 443.00

Adjusted EBITDA

CAGR: 8.4%

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COMPANY OVERVIEW


Catalent generates its revenues through three main segments. Development and Clinical Solutions, Medication Deliveries Solutions, and Oral Technologies.

Revenue Generation

Finished Product/Service Back to Company

Drug Manufacturing Supplies

Pharmaceutical Raw Material

Supplies

Performed by Industry Firms

Outsourced$$$

Drug Development & Formulation

Services

Drug Delivery Technologies

Supply & Supply

Management Services

Biotech Companies

Pharmaceutical & Biopharmaceutical

companies

Generics & Biosimilar

Companies

2012 2013 2014 2015$0.00

$250.00

$500.00

$750.00

$1,000.00

$1,250.00Historical Segment Revenue

Development and Clinical Solutions Medication Deliveries SolutionsOral Technologies & Others

2011 2012 2013 2014 2015$0.00

$400.00

$800.00

$1,200.00

$1,600.00

$2,000.00

$2,400.00

$2,800.00

Total Revenue

CAGR: 3.63%

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MANAGEMENT OVERVIEW


Management Profiles

John Chiminski -- Holdings: 363,000 shares – No recent activityMatthew Walsh – Holdings 88,000 shares – No recent activity

Management Ownership & Insider Trading

John Chiminski, CEO• More than 30+ Years of Experience in the Industry• Hired as CEO of Catalent in 2009• Former CEO of GE Medical Diagnostics from 2007-2009, but with GE for over 20 years• Masters Degree from Kellogg School of Management; BS and MS in Electrical

Engineering at Purdue University

Matthew Walsh, CFO• Over 8+ Years of Life Sciences Sector experience• Hired as CFO of Catalent in 2008• Former CFO of Escala Group, Inc. (Global Collectibles Network and Precious Metals

Trader)• MBA from Cornell University; BS in Chemical Engineering at Cornell University

Steve Leonard, SVP - Global Operations• More than 30+ Years of Experience in the Industry• Promoted to SVP – Global Operations of Catalent in June of 2009• Former GM of Global Operations at GE Healthcare’s Medical Diagnostics Business• BS in Mechanical Engineering at Drexel University

Holding SummaryInstitutional Holdings 77.5%Total number of holders 260Total shares held 97,605,000 Total value of holdings $2,388,394,350

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MANAGEMENT OVERVIEW


Exhibit X: Insider Trades Summary

COMPANY TRENDS: INVESTMENT THESES

Thesis: Catalent’s client position exposes it to the future significant growth expected in the life sciences sector. As more companies look to cut cost due to pricing pressure by government and R&D, this will drive growth of Catalent’s financials

Aggressive investments to expand their sales and marketing activities has led them to grow their client accounts.

Client Breakdown:• 82 of top 100 Branded drug marketers• 19 of top 20 generic marketers• 40 of top 50 biologics marketers• 23 of top 25 consumer health marketers

globally• Key Customers: Pfizer, J&J, GlaxoSmithKline,

Novartis, Roche, Actavis, and Teva

Investment Thesis #1: Global Leader in Drug Development

3 Months 6 Months02468

1012141618

Number of Shares Bought

Number of Shares Sold

John (CEO) Matthew (CFO) Khichi Samrat Morel Donald E. JR-0.02%

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%Insider Share Change

% Change

2011 2012 2013 2014 2015

233.188414977886

268.3

404.8412.2 438.8

Drug Development Revenues

CAGR: 13.47%

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Investment Thesis #2: Unparalleled Business Model

Investment Thesis #3: Patented Proprietary Solutions

Thesis: Catalent business strategy has gained significant demand leading to increased contracts and contract revenue.

Catalent has an unrivalled and unique Business Strategy by providing advanced delivery technologies and development solutions, as well as, supply solutions. These three major solutions allow Catalent to capitalize on demand from businesses looking to market their products faster and grow their business, while reducing the cost.

Thesis: Catalent continues to innovate and develop proprietary solutions to sustain a competitive advantage in the industry.

Currently, they have over 1,300 patents in advanced drug delivery and biologics formulations and technologies, manufacturing, nutritional and pharmaceutical dosage forms, mammalian cell engineering, sterile manufacturing services, and others.

Notable Patents: Vegicaps and Optishell capsules, and GPEx Technology

COMPANY TRENDS: INVESTMENT THESES

2011 2012 2013 2014 2015

175.3

268.3

404.8412.2 438.8

Contract Generated Revenue

CAGR: 20.14%

2011 2012 2013 2014 20150.0

100.0

200.0

300.0

400.0

500.0

19.00%

20.00%

21.00%

22.00%

23.00%

24.00%

25.00%

EBITDA & EBITDA Margins

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GROWTH OPPORTUNITIES & PROJECTIONS


Revenue Summary & Forecast

Growth as per a proxy for revenue

Revenue is expected to grow with the sector through increased healthcare spending, pricing pressure, and demand from Pharmaceutical, Biotech, Biosimilar, Generics, Consumers, etc.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

175268

405412 439 467 499 533

570610

Drug Development Revenue

CAGR: 13.29%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

224 219 246 262 279 297 317 339

363

Medication Deliveries Revenue

CAGR: 5.52%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

1,203

1,176 1,169

1,130 1,107

1,096 1,096 1,107

1,118

Oral Technologies RevenueCAGR: -0.80%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

1,532 1,695 1,800

1,828 1,831 1,853 1,892 1,947 2,017 2,092

Total Revenues

CAGR: 3.17%

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VALUATION: DISCOUNTED CASH FLOW ANALYSIS


Catalent is a leader in its industry. The industry is expected to grow by ~ 6-10% and Catalent is in the position to see revenues grow as a result.

Assumptions

WACC CalculationRisk-Free Rate 1.83%Equity Risk Premium 6.70%Size Premium 0.94%Beta 0.72Cost of Equity 7.62%Cost of Debt 2.27%WACC 5.62%

Historical Forecasted 2012 2013 2014 2015 2016 2017 2018 2019 2020Revenue Growth 10.6% 6.2% 1.5% 0.2% 1.2% 2.1% 2.9% 3.6% 3.7%COGS (% of Revenue) 59.42% 59.39% 59.96% 59.43% 58.70% 58.70% 58.70% 58.70% 58.70% 58.70%EBITDA Growth 2.07% 11.76% 6.97% 2.98% -1.33% 2.08% 2.89% 3.62% 3.71%EBITDA (% of Revenue) 21.8% 20.10% 21.10% 22.30% 22.90% 22.3% 22.3% 22.3% 22.3% 22.3%EBIT Growth -1.54% 8.31% 15.70% 5.38% -7.06% 0.86% 1.64% 2.35% 2.42%EBIT (% of Revenue) 14.0% 12.40% 12.70% 14.40% 15.20% 13.90% 13.80% 13.60% 13.40% 13.30% NWC 372.2 126.4 162.4 160.1 187.2 204.1 208.4 214.4 222.2 230.4

FCFF Calculation Forecasted 2016 2017 2018 2019 2020 EBIT $258.38 $260.60 $264.87 $271.09 $277.64 - Taxes $90.43 $91.21 $92.70 $94.88 $97.17 $348.81 $351.81 $357.57 $365.97 $374.81 + D&A $154.85 $161.24 $169.15 $178.64 $188.76 - CAPEX $196.39 $199.48 $216.46 $235.47 $249.30 - Δ in NWC $16.94 $4.25 $6.01 $7.76 $8.23 Unlevered FCF $290.33 $309.32 $304.24 $301.38 $306.03 Net Present Value $1,285.34

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VALUATION: DISCOUNTED CASH FLOW ANALYSIS


Terminal Value Calculation

Catalent is about to release its latest fiscal year data in the coming weeks. The data used to calculate the intrinsic value is a bit stale, however, using the relative value multiple, a more accurate implied price

becomes apparent.

Key Takeaways

DCF ValuationGrowth Rate 2.00%Undiscounted TEV $ 8,620Discounted TEV $ 6,558 Implied Exit Multiple 10.20xEnterprise Value $ 7,843Equity Value $ 6,122 Implied Share Price $ 49.17

WACC/Growth Rate Price SensitivityWACC

$49.17 4% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6%

Growth Rate

3.0% $181.03 $121.09 $ 89.47 $ 69.97 $ 56.76 $ 47.23 $ 40.05 $ 34.44

2.5% $123.49 $ 91.26 $ 71.37 $ 57.90 $ 48.19 $ 40.86 $ 35.15 $ 30.57

2.0% $ 93.08 $ 72.80 $ 59.07 $ 49.17 $ 41.70 $ 35.87 $ 31.20 $ 27.39

1.50% $ 74.27 $ 60.27 $ 50.17 $ 42.55 $ 36.61 $ 31.85 $ 27.96 $ 24.73

1.00% $ 61.49 $ 51.19 $ 43.42 $ 37.36 $ 32.51 $ 28.55 $ 25.25 $ 22.47

0.50% $ 52.24 $ 44.32 $ 38.14 $ 33.19 $ 29.15 $ 25.78 $ 22.95 $ 20.52

3.5% $283.42 $178.90 $127.52 $96.96 $76.70 $62.29 $51.51

Valuation Output: 1yr Price Target $ 35.99Current Price $ 29.13 Upside Potential 23.6%Recommendation BUY

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VALUATION: COMPARABLE COMPANIES ANALYSIS


- Comps Comparable, but not identical. Some comps have different segments

- More accurate representation of the implied share price than intrinsic approach

Key Takeaways Name TKR

ICON ICLRCharles River Labs CRLPAREXEL PRXLAlbany Molecular Research AMRI

Wide Comparable Companies

Wide CompCo Results EV/Sales EV/EBITDATarget 8.0x 11.9xMax 8.0x 11.9xMean 6.1x 10.2xMedian 5.7x 10.0xMin 4.6x 9.1x

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VALUATION SUMMARY & RANGE ANALYSIS

Catalent looks to be positioned to take advantage of growth in the industry. My price target seems fairly reasonable. Consider investing into a company and industry the fund doesn’t have much exposure to.

Key Takeaways

Methodology Price / Share Weight

Discounted Cash Flow

Perpetuity Growth $16.53 50%

Exit Multiple $25.56 25%

Comparable Company

EV/Sales - Core $16.73 5%

EV/EBITDA $22.35 10%

P/E $19.49 10%

Target Price/Share $35.99

Valuation Summary

>>Income Approach (75%)• The overall growth expected for the industry is

driving the intrinsic valuation assumptions

>>Market Approach (25%)• EV/EBITDA more of an appropriate metic for

this industry• Comps are good comparables, but have other

segments

Assumptions: change weights to fit your analysis

Valuation Football Field

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Appendix 1: Income Statement

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Appendix 2: Balance Sheet

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Appendix 3: Cash Flow Statement

catalent (ctlt) equity report

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