NASDAQ:SCTL
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It’s an oft-repeated cycle in healthcare – businesses mature, needs change, and new sectors develop to fulfill those needs. Innovation is alive and well in the pharmaceutical space, and post-COVID, pharmaceutical companies are looking for ways to improve their innovation efficiency – through development partnerships, acquisitions and outsourcing. Contract development management organizations (CDMOs) are a prime beneficiary of these trends.
In particular, investor interest has centered on the largest CDMOs or CRO/CDMOs (e.g., Lonza (SIX:LNN), Catalent (NYSE:TMO)). These companies are seeing record business demand, particularly from demand for bioprocessing/production capacity from both large and emerging biopharmaceutical companies. Over the past two years, shares of the leading players are up anywhere from 15-45%.
The CDMO industry is diverse both in range of services, and target molecules. While large molecule (e.g., biopharmaceuticals) has garnered much attention, we see opportunities in the small-molecule segment. We believe that there is an opportunity for mid-cap CDMO companies focusing on specific niches (customer and capabilities) primarily in more mature segments of the business because they will have less exposure to both competitive and innovation risk.
Societal CDMO (NASDAQ:SCTL) is an established small-molecule CDMO taking steps to position itself as a high-touch choice compared to the larger CDMOs for both established and emerging drug companies. In the past year, Societal has expanded its capabilities, capacity and diversified its customer base, focusing across the pharmaceutical development lifecycle from supplying product for clinical trials, through the regulatory process to commercial scale production. Barely a year into its transformation, Societal has a very specific business plan — built on wisdom, experience, constant operating assessment, and establishing long-term customer relationships – which we believe will mitigate many of the challenges of carving out a bigger share in an industry dominated by large, deep-pocketed companies.
FINANCIALS. Our model is based on SCTL’s current business; it does not include any future acquisitions, moves outside of its core small molecule solid-dose oral formulation and injectables business, or the addition of adjacent services (e.g., cGMP consulting). We forecast top line growth of 18% in 2022, based on gains in new business as well as the impact from the IriSys acquisition in 2021. For 2023 – 2031, we forecast top-line growth of 12% slowing to 7%, for a CAGR of 8.6%, slightly ahead of the ~6% top-line growth expected for the CDMO group as a whole. We look for revenues of $90.4 million in 2022, up 20%. We forecast a net loss of $(13.4) million.
By 2026, we forecast revenues of $142.2 million, a 9.5% CAGR. We forecast operating income of $18.2 million in 2026, compared with $0.4 million in 2021. We expect SCTL to be breakeven on a GAAP basis in 2025, as operating income gains offset interest expense.
VALUATION. Our 10-year DCF model builds to sales of approximately $201 million by 2031. We model terminal sales with an EBIT margin of 14% and a 15% tax rate. We assume a terminal revenue growth rate of 2% and a 11% discount rate. Under these assumptions, we arrive at an intrinsic value of $4.13 per share.
SENSITIVITIES. At the most basic level, demand for CDMO services is tied to pharma R&D pipeline trends, and decisions by pharma companies whether to outsource drug development and/or production as part of their corporate strategy. Several factors may affect forecasts and results over the next several years including: outsourcing and asset optimization trends, bio/pharma funding, size and pace of clinical development, supply chain disruptions, etc.
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