IPO Lockup Expiration: Catalent

Jan. 15, 2015 11:16 AM ETCatalent, Inc. (CTLT)1 Comment
Don Dion profile picture
Don Dion


  • January 27 concludes the 180-day lockup period for Catalent. At this point, major pre-IPO shareholders will have a chance to sell their shares.
  • The potential for a sudden increase in shares available in the open market may cause a significant decrease in the price of Catalent and open a short opportunity.
  • Research has shown negative returns as large as (-5.8%) for IPO lockup expirations in the period of days (-11, 9) days surrounding the event day (0).
  • Given Catalent's early market success, insiders could be ready to sell.

Catalent Inc. (NYSE:CTLT) - Sell or Short Recommendation - $26.75

January 27, 2015, concludes the 180-day lockup period for Catalent Inc.

When the lockup period ends for Catalent, its pre-IPO shareholders, directors and executives will have the chance to sell their 74.8 million shares. The potential for a sudden increase in shares available in the open market may cause a significant decrease in the price of CTLT and open a short opportunity for savvy investors.

Business Summary: Provider of Development Solutions and Delivery Technology for Consumer Health Products, Biologics and Drugs

Headquartered in Somerset, New Jersey, Catalent Inc. provides development solutions and delivery technology for consumer health products, biologics and drugs. The firm's Development and Clinical Services division provides packaging, storage, manufacturing and inventory management services for biologics and drugs in various stages of clinical trials. Additionally, this division offers analytic testing for biologics, regulatory consulting, analytical chemical and cell-based testing, respiratory product manufacturing, and other scientific services.

Its Medication Delivery Solutions division provides development, formulation and manufacturing services for prefilled syringes and other injectable methods of delivery. Its Oral Technologies division develops oral dose delivery solutions, including formulation and manufacturing services for prescription and over-the-counter products. This division offers development, formulation and manufacturing solutions for immediate and modified release hard capsule medications, soft gelatin capsules, fast-dissolve tablets, and other proprietary controlled release products.

Catalent operates its biotechnology, pharmaceutical and consumer health businesses across five continents, in more than 100 markets, and its clients include 48 of the top 50 pharmaceutical companies and 41 of the top 50 biotech firms. They employ over 1,000 scientists, and their global sites package or manufacture more than 100 billion units yearly. They hold over 1,200 patents and patent applications.

For further details, see CTLT's S-1 filings, along with our prior articles here and here.

Fourth Quarter Fiscal Year 2014 Highlights

Catalent reported the following financial highlights for the fourth quarter:

  • Total revenue reached $519.6 million, an increase of 3% (or 2% on a constant currency basis) from fourth quarter 2013.
  • Net income hit $27.2 million, representing an increase of 66% from Q4 2013.
  • Adjusted EBITDA increased to $150.7 million (+ 18% compared with Q4 2013).
  • Earnings ticked in at $0.36 per share.
  • The company launched ADVASEPTTM, an aseptic technology for glass-free delivery of injectable drugs.
  • Catalent also revealed plans to open a lab in Japan to provide proof-of-concept support and feasibility studies for the proprietary Zydis platform.

Global Competitors, Well-Versed Management Team

Catalent faces competition both globally and domestically from other firms in the biotechnology, pharmaceutical and consumer health products and services sectors. They operate in North America, South America, Europe, and the Asia Pacific region, and major competitors include PPD Development, Hospira, Covance, Praxel, and LabCorp.

At present, given CTLT's market performance (see below), the competition is not dragging down the firm, perhaps bolstered by solid management.

President and CEO John Chiminski has served in his position since March 2009. Prior to joining Catalent, Mr. Chiminski held positions for over 20 years at GE Healthcare in operations, engineering and senior leadership roles. From 2007 to 2009, he was President and CEO of GE Medical Diagnostics. Mr. Chiminski holds a BS from Michigan State University and an M.S. from Purdue University, both in electrical engineering as well as a Master's Degree in Management degree from the Kellogg School of Management at Northwestern University. He is on the Board of Trustees for the HealthCare Institute of New Jersey, and also is a director of DJO Global, Inc.

EVP and CFO Matthew Walsh has been in his position since December 2012. Previously, Mr. Walsh was SVP and CFO at Catalent since April 2008. His prior experience includes Escala Group and GenTek. Mr. Walsh received a B.S. in chemical engineering and an MBA from Cornell University. He is a CFA charter holder.

Early Market Performance: Strong Start, Steady Performance

CTLTs IPO priced at $20.50, at the mid-point of its expected price range of $19 to $22. The stock closed on its first day of trading slightly lower at $19.99. However, it has climbed steadily since that time, rising to a high of $29.42 on December 10. Currently, the stock trades at $28.13 (after-market 1.13).


Conclusion: Short Opportunity At Hand

Given Catalent's early market success, with a volume of trades at ~400,000 shares/day on average, the firm's major pre-IPO insiders could be ready to get in on the action. (As noted in the introduction, the shares have been restricted from public sale.)

Insiders, including majority holder Blackstone, Genstar Capital, and seven-plus additional executives, directors, and officers, are likely take at least some profits. If this occurs, the extra supply of shares available for trading could effect a significant price decrease. The number of shares initially offered was just ~42 million, while insiders currently hold nearly double that figure at ~74 million.

Our published research has shown negative returns as large as (-5.8%) for IPO lockup expiration plays in the period of days (-11, 9) days surrounding the event day (0). Our updated sample includes 345 companies whose IPO lockup expirations fell in 2013-December 2014. Prior studies from Harvard and Duke Universities, the Univeristy of Kentucky, and NYU support these findings.

We suggest experienced investors consider this a short opportunity.

This article was written by

Don Dion profile picture
Don Dion is the CEO of Inland Management, a company focused on acquiring, subdividing, developing and marketing large tracts of land on the fringes of major metropolitan markets. Inland Management has sold land in all 48 contiguous states totaling billions of dollars. As CEO, Don is responsible for helping to maintain and enhance the firm’s strong financial position and identifying opportunities for growth. In addition to his role at Inland Management, Don Dion is the Chief Investment Officer of DRD Investments, LLC. Based in Naples, FL. and Williamstown, MA., DRD Investments is a family office focused on managing a long/short hedge fund, real estate, venture capital and various other financial assets for the Dion family. Don also serves as the trustee of the Dion Family Foundation, which focuses on helping individuals with tuition assistance at Catholic Institutions for grammar school, high school, and college education. The foundation also helps individuals by supporting Massachusetts General Hospital. Don is on two leadership boards and advisory committees at Massachusetts General Hospital and the Home Base Program (a partnership between Mass General and the Red Sox Foundation). He consults with Saint Dominic's Academy and serves as a trustee of Saint Michael’s College. Previously, Don was the founder and CEO of Dion Money Management, a fee-based investment advisory firm for affluent individuals, families and non-profit organizations. Founded in 1996 and based in Williamstown, MA. and Naples, FL., Dion Money Management managed approximately one billion in assets for clients in 49 states and 11 countries. While at Dion Money Management, Don was responsible for setting investment policy, creating custom portfolios, and overseeing the performance of client accounts. Don sold the firm to NYC-based Focus Financial Partners (FOCS) on September 1, 2007 and no longer manages money for other families or institutions. Don remains a shareholder of Focus Financial Partners (FOCS). Don is also the retired publisher of the Fidelity Independent Adviser family of newsletters, which provided a broad range of investor commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With nearly 100 thousand subscribers in the United States and 29 other countries, Fidelity Independent Adviser published two monthly newsletters and one weekly newsletter. The flagship publication, Fidelity Independent Adviser, was published monthly for 16 years and reached over 60,000 subscribers. In 2011 Don and his daughter Carolyn co-authored the Ultimate Guide to ETFs, available on Amazon.com. Prior to founding Dion Money Management, Don co-founded Litchfield Financial Corp. (LTCH) with Summit Partners. Don served as Chairman and CEO of Litchfield, which was listed on the Nasdaq in 1992 and acquired by Textron Corp. (TXT) in 1999. Don was also the Executive Vice President, CFO and General Counsel for Patten Corporation (BGX) from 1986 to 1988, where he played a critical role in the company’s successful initial public offering on the New York Stock Exchange. From 1983 to 1985, Don was a corporate lawyer with the Boston Law Firm of Warner and Stackpole. Before joining Warner and Stackpole, Don worked as a C.P.A. for Ernst and Young from 1979 to 1983. Don graduated with honors from Saint Michael’s College in 1976 with a B.S. degree in Economics and Business Administration. He received his J.D. from the University of Maine Law School in 1979 and his LL.M. from Boston University Law School in 1982. Don can be reached at donalddion@gmail.com

Disclosure: The author is short CTLT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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