The biopharmaceutical industry has seen steady growth over the past decade, especially as the COVID-19 pandemic highlighted the importance of continuous investment into drug and medical research.

Recent discoveries in Alzheimer’s diseases research, weight-loss drugs, and DNA research have set the stage for a wave of innovation in the industry. 

Avantor (AVTR) plays a key role in the biopharmaceutical space as it is a leading distributor of equipment for the life sciences and advanced technology industries. The company sells products across two segments: Laboratory solutions and bioscience production. 

Despite being a key player in its industry, the life sciences firm has underperformed in recent years as its revenue and returns have declined. 

Due to this underwhelming performance, activist investor Engine Capital has pushed Avantor’s board to either fix its business or consider looking for a buyer. 

Considering this business once generated 50% Uniform ROA and now only generates 37%, the involvement of activist investors is unsurprising.

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The biopharmaceutical industry has seen steady growth for the past decade. In 2014, it was valued at $163 billion. Since then, this valuation has doubled to $452 billion in 2024 as new therapies and drugs were discovered.

While more than doubling in 10 years for most industries is considered a major milestone, the biopharmaceutical sector is still set for a massive wave of innovation due to recent medical breakthroughs.

The pandemic underscored the importance of continuous investment in drug research, as various studies proved to be crucial in the development of vaccines. Aside from this, recent breakthroughs have been made in Alzheimer’s disease research, weight loss drugs, and DNA research.

The biopharma industry is on track to almost double in the next five years, reaching $850 billion by 2030. Recent developments in artificial intelligence (“AI”) can help further accelerate growth..

AI has many use cases in biopharma research, from speeding up early-phase research and drug development to full-scale drug production. 

In the midst of all this industry-wide developments, life sciences firm Avantor (AVTR) has potential as a key player in the sector.

The company supplies everything needed to research and deliver biologic therapies. It’s also a leading supplier of laboratory consumables and one of the largest suppliers of biomaterials for drug production.

Avantor provides lab equipment to some of the largest pharmaceutical companies and its compounds are found in 85% of the top biologic products on the market today.

Yet, despite its market penetration and the current tailwinds in its industry, Avantor has struggled in recent years. 

In 2022, annual revenue amounted to $7.5 billion. In 2023, it was $6.97 billion, a 7% decrease, before falling again in 2024 to $6.79 billion.

The company has continued to struggle this year, generating $6.67 billion in sales over the past twelve months, resulting in its stock declining nearly 50% in that timeframe. 

In the face of these lackluster results, activist investor Engine Capital, which has a roughly 3% stake in the life sciences firm, released an activist shareholder letter on August 11 to Avantor to make changes to its business.

In its letter to Avantor’s leadership, Engine Capital highlighted the issues the company has faced over the last five years which included repeated forecast cuts and failure to meet investor expectations.

Likewise, the activist investor stated its belief that the life sciences firm should either pursue a sale or make changes such as a board refresh, an expanded stock buyback program, cost-cutting measures, or divesting noncore assets.

Considering this company’s market positioning and its tailwinds, Engine Capital’s unrest appears justified, especially when looking at this business through the lens of Uniform Accounting. 

This business once generated a Uniform return on assets (“ROA”) of 50% in 2020 and was able to maintain similar levels of returns in 2021 and 2022.

However, in the past 2 years, the company’s returns declined to 37%.

Avantor has shown in the past its potential to generate 50% returns. Consistent struggles in recent years have forced an activist’s hands, hoping to restore this business to its past levels.

Activist shareholders seldom take action when things are going well for a business. When one gets involved, it can be worth an investor’s time to keep an eye on how it can impact a business. 

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research