Patheon's Execution Needs To Match Its Potential

Contract drug manufacturing is a large, growing, and attractive business. Smaller companies are making up an increasingly large percentage of new drug approvals, and many of those companies are choosing to outsource manufacturing rather than investing the capital in what could be regarded as a non-core function. Even larger companies find value in outsourcing, as providers like Patheon (NYSE:PTHN) and Catalent (NYSE:CTLT) can offer valuable, and difficult-to-replicate expertise, as well as efficient scale and "swing capacity."

However attractive a market may be, execution still matters and Patheon has had its challenges so far as a public company. Though the sources of the revenue shortfalls have been understandable and don't point to long-term strategic or competitive issues, you'd like to see a company make a better debut after its IPO. In any event, while Patheon is one of the largest players in the CDMO space and offers a rare breadth of services, the company also has a lot of debt, aggressive and well-run rivals, and a robust valuation.

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Patheon's Execution Needs To Match Its Potential

Lonza Tied To Attractive Markets

Lonza (OTCPK:LZAGY) has done well since I last wrote about this Swiss specialty chemicals company, with the shares up 100% as the company has continued to see solid performance in both its pharma/bio and specialty chemical operations. While the acquisition of Capsugel is a big one, the expansion into finished oral doses (hard capsules) for the pharma/consumer health industries makes sense and should add value despite a hefty price tag.

Lonza's shares are a so-so value proposition, and there are risks that Capsugel's expense structure won't offer as many synergy opportunities as hoped. That said, the growth opportunities in biologicals, ADCs, advanced pharmaceutical ingredients, cell therapies, nutriceuticals, and hygiene are significant and can support today's valuation.

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Lonza Tied To Attractive Markets

Catalent's Price Is A Little Hard To Swallow

It's frustrating to find a company/stock combination where you really like the basic business and where the stock has underperformed, but where the shares also still look too expensive. Such seems to be the case with Catalent (NYSE:CTLT). I like the pharmaceutical contract manufacturing business, and I like Catalent's strong leadership across multiple formulation technologies and its efforts to grow the biologicals business, but it is hard to model a credible outlook that leads to the conclusion that the shares are too cheap today.

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Catalent's Price Is A Little Hard To Swallow