Catalent was recently acquired by Novo Holdings for $16.5 billion. This deal is slated to close later in 2024. As part of the deal, Novo Nordisk has agreed to acquire three fill-finish sites from Novo Holdings for $11 billion—the sites are in Italy, Belgium, and Bloomington, IN, in the U.S.

The financial details

Novo Holdings will acquire, in an all-cash deal, all outstanding shares of Catalent for $63.50 per share. This purchase price represents a 16.5% premium on the closing price of Catalent’s stock as of February 2, 2024, which was the last day of trading prior to the public announcement of the acquisition. This is also a 47.5% premium to the 60-day volume-weighted average price as of February 2, 2024 (ibid.).

Not just another acquisition

The storied history of biopharma is one that is liberally punctuated by mergers and acquisitions (M&A). As is always the case, these can be beneficial, neutral, or deleterious in the long run for both parties, depending on how well due diligence was conducted, the nature of the M&A activity, and external market dynamics (e.g., clinical trial progress, patient demand for therapy, cost, etc.).

But what this situation between Novo Nordisk and Catalent represents is NOT business-as-usual. Catalent is a top-tier supplier of outsourcing services to the industry, wherein they provide skills to hundreds of clients with whom they are contracted as a supplier. So, this current news represents a situation where the industry is watching very closely to understand how this acquisition of Catalent will ultimately affect and influence all of these contract client relationships in the long run. There are certainly pros (benefits) for Novo Nordisk, potential cons (drawbacks) for how Catalent has functioned, and a whole spectrum in-between of legal, ethical, and economic considerations that will need to be ironed-out to derive maximum value with minimal adverse consequences.

For example, Eli Lilly’s chief financial officer, Anat Ashkenazi, said on their recent earnings call that, “We intend on holding Catalent accountable to their contract with us.”

Why the need?

Novo Nordisk was at the vanguard of development of the GLP-1 class of drugs, specifically, semaglutide—branded as Ozempic and approved December 5, 2017; Rybelsus—approved in Septmeber 2019; and Wegovy—approved June 4, 2021.

If “Seen on TV” advertisements for weight loss products (both diet and exercise) have taught us anything over the past several decades, it’s that there’s always a market for vanity; and that easier beats harder every time. 20 Minute Abs became 7 Minute Abs. Products that demanded “hard work” and “sweat” for results have been largely usurped by products which tout “easy to do,” “convenient,” and “fun.”

The GLP-1 agonist drugs were of course developed to meet a very legitimate medical need, which is the medicinal control of blood glucose. But of course, what was easy to spot in the clinical trial results for all of these products, was weight loss in excess of 15% to 20% of bodyweight while on-therapy. A signal too important to miss.

GLP-1 drugs: A brief primer

GLP-1 is an acronym for Glucagon-Like Peptide-1 receptor agonist, which is a synthetically derived peptide that mimics the function of endogenous metabolic hormones (called incretins) in the human body that have a wide variety of functions. Principally, they provide glycemic control (decrease in blood sugar), and reduce the production of glucagon, the hormone that increases gluconeogenesis and glucogenolysis—the synthesis of new glucose and the release of stored carbohydrates from the liver, respectively. And mediating the function of these pathways leads to supratherapeutic effects like better blood glucose control, management of HbA1c, reduction of hunger, concomitant weight loss, et cetera.

Just like it didn’t take a big logic leap to go from Robert Goddard’s first powered rocket flight on March 16, 1926 to realizing this kinetic technology could be used for wartime applications (and the Saturn V rocket 43 years later), interfering with the body’s natural homeostatic mechanisms and blood sugar control is a short mental walk to the idea of quick weight loss and medicalized “fitness.” And so it goes that now we’re witnessing, in real-time, a situation where a drug’s blockbuster success is influenced by patient demand through word-of-mouth and social media, and not by sales and marketing attempts to boost sales. There is, looking at it from afar, almost unrestricted potential demand for the GLP-1 class of drugs, which makes exciting-looking elasticity of demand model charts for economists to pore over.

At what cost comes limitless success?

As the First Law of Thermodynamics* is here to remind us, there is no “free lunch.” You can’t get more out of a system than you put into it. More poetically put by the late computer scientist Fred Brooks, “You can only get something for nothing if you have previously gotten nothing for something.”

Outsized demand—unpredicted and surge demands, for example—brings with it difficulties in planning and scheduling, scale-up needs, supply chain problems, distribution headaches, soon-to-be uncountable lawsuits, and more. Of course, the hope on the supply side is always that the overall system’s value will continue to outstrip the list of drawbacks, ultimately returning more value to shareholders. But this isn’t always the case.

But what is clear is that the current acquisition of Catalent creates a clear and present need for clarity of business structures which prevent conflicts of interest and business protocols that maintain free competition of their existing and future clients. Why? Because:

In a complex system, everything is connected

Complex systems** all have several things in common. A couple of which are that they’re interdependent and connected to the entities within them.

Here’s an example: How will Novo Holdings’ acquisition of Catalent negatively impact gene therapy manufacturing in the industry? Maybe it won’t. In a fully-leveraged free market economy, other competitors will fill the void of demand. But Catalent stands as one of the top gene therapy CDMOs in the world. So, if manufacturing capacity is dedicated to GLP-1s under the oversight of one parent company (Novo Holdings), might the future of availability of gene therapy services and manufacturing capacity (vis-à-vis Catalent’s clients) be constrained or impacted by the acquisition? If so, to what degree?

This situation could also be a direct threat to Lilly and their GLP-1 drug tirzepatide (Mounjaro and Zepbound)*** if there is current or intended use of Catalent for their CDMO activities for GLP-1 therapies.

All of this, for Catalent’s calculus, is also a subset of the economics principle of opportunity cost: Making decisions always involves a trade-off. To do more of one thing necessarily means choosing to do less of something else. But they’ll need to tread very (very) carefully in this regard, as this is where the legal and ethical quagmires are stickiest and most fragile in this situation.

There’s also the potential for GLP-1 drugs to have an impact on other diabetes management options, such as reducing the demand for infusion pump insulin devices (like wearables), which could impact the market share of those therapeutic options. Medtech stocks have responded erratically as a result of varying opinions of this potential competitive dynamic.

Parting thoughts

This acquisition—whether handled very well, or very poorly—could almost equivalently make for nearly limitless examples for case studies in business schools for the near future. The industry players, the investors, the clients of Catalent, the public (patients), and of course, Novo Holdings, will have all-eyes on this situation over the next many months. There are a few situations and outcomes that are probabilistically more likely to be part of the outcome than others but rest assured that many larger firms are watching very closely to see how well the strategy is managed, and whether something similar is in their future best interests. As the saying goes, “The future shall occur tomorrow, but won’t feel like it until the day after.”

* The First Law of Thermodynamics states that in a closed system, energy cannot be created or destroyed (conservation of total energy). Meaning for our purposes you cannot get more energy out of a system than you put in. Contrast this with perpetual motion machines, which are always a sham.
** For more on Complexity Theory, see Miller, John H., and Scott E. Page (2007). Complex adaptive systems: An introduction to computational models of social life. Princeton University Press.
*** In a 2021 study sponsored by Eli Lilly, they found that tirzepatide was superior to semaglutide when used once weekly as an add-on to metformin in people with Type 2 diabetes, though semaglutide appeared to have fewer serious adverse events (NEJM, Aug 2021).

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Ben Locwin is a speaker and author, and writes Contract Pharma’s Clinically Speaking column. He is a pharmaceutical executive and has been involved in many mergers and acquisitions, as well as conducting industry and company-level forecasts and due diligence for investors. He has been featured in The Associated Press, Forbes, The Wall Street Journal, USA Today, NPR, Axios, and other top-tier media.