We are reiterating our "buy" rating on Catalent (CTLT), a manufacturing and development partner for biotech and pharmaceutical companies, asserts David Toung, an analyst with Argus Research, a leading independent Wall Street research firm.

Catalent has become a key collaborator for companies working on vaccines and therapies for COVID-19, including three of the leading vaccine developers, Oxford and AstraZeneca (AZN), Johnson & Johnson (JNJ), and Moderna (MDNA).

Reflecting its substantial manufacturing capacity and expertise, Catalent has been awarded work in more than 50 programs related to COVID-19.

In January 2020, the company acquired a facility in Italy that expands manufacturing capacity for biologic and sterile medicines and oral solid dose products. The facility will also help Catalent to better serve the European market. It has scaled up two dedicated production lines to produce vials for the COVID-19 vaccine candidates being developed by AstraZeneca and J&J.

In February, Catalent acquired MaSTherCell Global Inc., providing expanded capacity for developing and manufacturing cell and gene therapy products. MaSTherCell has facilities in Gosselies, Belgium and Houston, Texas.

Catalent’s expansion efforts also include adding capacity at existing manufacturing sites. Its Harmans commercial scale facility meets the standards of CGMP (current good manufacturing practice). This facility was recently approved by the FDA to produce commercial drug substance for AveXis’ gene therapy product for spinal muscular atrophy.

This was a significant milestone, as the Harmans facility became the first CDMO (contract development and manufacturing organization) to be approved by the FDA for commercial gene therapy production. The Harmans facility is being scaled up to enable multiple production lines to run in parallel, and will produce drug substance for the Oxford/AstraZeneca vaccine candidate.

The company is also expanding capacity at its Bloomington, Indiana facility, which will provide vial filling and packaging capacity for Moderna’s vaccine candidate.

It will also support the production of an initial 100 million doses of the vaccine for the U.S. market if it receives approval. Catalent should have an opportunity to significantly expand its agreement with Moderna.

The company issued new guidance for FY21. It expects revenue of $3.45-$3.60 billion, representing annual growth of 12%-16%, and adjusted net income of $390-$435 million, representing growth of 11%-24%. It also expects adjusted EBITDA of $840-$890 million, implying growth of 12%-19%.

Based on the company’s strong 4Q20 performance and the strength of its COVID-19 and cell and gene therapy programs, we are raising our FY21 adjusted EPS estimate to $2.36 from $2.15. For FY22, we are establishing a new estimate of $2.77. Our five-year EPS growth rate forecast is 12%.

We are raising our target price to $110. We believe that the stock merits a premium valuation based on its large addressable market in manufacturing vaccines and other biologic drugs, its ability to gain and expand manufacturing agreements with COVID-19 vaccine developers, and its strong long-term growth prospects.

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