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

Seeking Alpha: Lonza Targeting Significant Internal Improvements

Back in December I thought biopharma manufacturing and specialty chemical company Lonza (OTCPK:LZAGY) looked like a "middling" investment opportunity on the basis of a rich valuation and so-so organic growth prospects. Since then, the shares are up about 25% as investor interest in immuno-oncology has swelled, free cash flow generation has improved faster than expected, and management has laid out ambitious targets for profit growth and returns. I'm reluctant to call Lonza an uninspiring pick again, particularly as pharmaceutical manufacturers often get generous valuations, but the valuation does seem to factor in good progress on management's goals.

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Lonza Targeting Significant Internal Improvements

Seeking Alpha: After A Big Rally, What Propels Lonza Now?

I've always been a little surprised at how willing investors can be to bid up the manufacturers of pharmaceutical components. While these are fine specialty chemical businesses, nothing about the revenue or margins (or the persistence of either) is particularly outstanding. Be that as it may, investors have certainly taken a more positive view on Switzerland's Lonza (OTCPK:LZAGY) over the past 18 months as the company has digested its Arch Chemicals acquisition and a new CEO who appears more focused on margins and returns than growth for the sake of growth.

On one hand, I do like Lonza's capabilities in small molecules, peptides, and monoclonal antibodies. On the other hand, recent contract wins by Samsung Biologics highlight that there is no particular shortage of competition in pharma/biotech contract manufacturing. Even if I give the company a higher multiple than specialty chemical/materials companies typically get, nothing in the valuation suggests a substantially undervalued stock.

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After A Big Rally, What Propels Lonza Now?

Seeking Alpha: Innospec Looking To The Next Run

Specialty chemical company Innospec (IOSP) has been quite the stock over recent years. Up almost 40% over the last year, over 60% over the past two years, and over 600% over the last five years, Innospec has done a good job of leveraging its solid share in fuel additives and surfactants used in personal care products. Along the way, Innospec has also uncovered a pretty interesting growth opportunity in drilling/oilfield chemicals that could ultimately increase its addressable revenue opportunities by several times.

The only "but" in the story is the valuation. As strong as the markets have been, this is a familiar lament (particularly from value-oriented investors like me) and certainly not exclusive to Innospec. On one hand, I do recognize that this company is well-positioned to out-grow the average specialty chemicals company and continue to generate good margins and returns on capital. On the other hand, you do have to stretch the growth estimates and/or multiples to generate an attractive price target today.

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Innospec Looking To The Next Run

Seeking Alpha: With New Management, Teva Seeks To Reclaim Past Glories

To the credit of Teva Pharmaceuticals' (TEVA) board, if you underperform in the top spot there, you will be replaced. Recent years have seen the company struggle to deliver the sort of performance that shareholders had come to expect, and missteps in manufacturing and clinical development didn't help matters. Now the company has a new CEO, strong generic candidates, a growing branded business, and perhaps a chance to regain past esteem.

A Fairly Solid Q4
Teva's fourth quarter results were solid, if not radically ahead of expectations. Revenue rose about 29% as reported, with the inclusion of Cephalon adding a significant amount of revenue growth. Revenue from generic drugs and ingredients rose 12% overall, but were down 5% in the U.S. Branded drug sales rose 68% as reported or about 25% on an organic basis, with Teva's key multiple sclerosis drug Copaxone up 11%.


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With New Management, Teva Seeks To Reclaim Past Glories