Catalent Inc (CTLT) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Catalent Inc. third-quarter FY15 earnings call. My name is Whitley, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Tom Castellano, Vice President Finance, Investor Relations and Treasurer of Catalent, Inc.

Thank you, Whitley. Good afternoon, everyone, and thank you for joining us today to review Catalent's FY15 third-quarter financial results. Please see our agenda on slide 2. Joining me today representing Catalent are John Chiminski, President and Chief Executive Officer, Matt Walsh, Executive Vice President and Chief Financial Officer, and Cornell Stamoran, Vice President of Strategy. John will start the call with a review of the key financial and operating achievements for the third quarter. Then, Matt will discuss the Company's fiscal third quarter and year-to-date financial performance as well as update the Company's outlook for FY15. Finally, we will open the call for your questions.

During our call today, management will make forward-looking statements, including its beliefs and expectations about the Company's future results. It is possible that actual results could differ from management's expectations. We refer you to slide 3 for more details.

Please be aware that the forward-looking statements are based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be a representation of future results and are subject to risks and uncertainties. We refer you to Catalent's Form 10-K filed with the SEC on September 8, 2014 for more detailed information on the risks and uncertainties that have a direct bearing on the Company's operating results, performance, and financial conditions.

As discussed on slides 4 and 5 on the call today, we'll also disclose certain non-GAAP financial measures which we use as supplemental measures of performance. We believe these measures provide useful information to investors in evaluating Catalent's operations period over period. For each non-GAAP financial measure that we use on this call, we have included in our earnings press release issued just a few moments ago, a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure. Please note that the non-GAAP financial measures have limitations as analytical tools, and they should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Now, I would like to turn the call over to John Chiminski, President and Chief Executive Officer.

Thanks, Tom. Welcome, everyone, to our FY15 third-quarter earnings call. We are pleased with our third quarter and year-to-date results highlighted by revenue growth on a constant currency basis across all of our business segments, as well as strong levels of profitability. During the quarter, we continued to position Catalent for organic and inorganic growth and to expand our footprint in the markets we serve. I'd like to start my presentation on slide 6 which highlights our key financial and operating accomplishments.

Our third-quarter 2015 revenue decreased 1% as reported, but increased 8% on a constant currency basis to $446.6 million. This growth was driven by increased revenue within our oral technologies and development in clinical services segments. For the first nine months of FY15, our revenue was $1.3 billion, an increase of 1% as reported and 6% in constant currency. Solid year-to-date performance was driven by improvements across all of our reporting segments, but was primarily led by revenue growth within the oral technologies and medication delivery solutions segments.

As a result of favorable product mix and improved leveraging of fixed manufacturing costs, our third-quarter gross margin expanded 60 basis points to 34.1%. During the quarter, we recorded EBITDA from continuing operations of $100.1 million, an increase of 10% year-on-year. This strong performance was driven by EBITDA improvements in our oral technologies and development clinical services segments, due both to a mix shift to more profitable products and services, as well as operating efficiencies.

Our adjusted EBITDA increased 4% year-on-year to $110.5 million, or 24.7% of revenue. Additionally, our adjusted net income increased 48% to $57.6 million. Now, let me briefly discuss our key operating accomplishments.

At the end of March, we acquired Pharmapak Technologies, a leading pharmaceutical packaging business based in New South Wales, Australia. This acquisition enhances our ability to offer integrated solutions to the local market. It also provides regional packaging capabilities and complements our existing facility in Braeside, Victoria from which we produce oral-dose products including softgels, Vegicap capsules, and OptiShell capsules for supply through the Asia-Pacific region.

Last month, we announced the completion and opening of a large-scale expansion at our Winchester, Kentucky manufacturing facility, doubling its footprint to 180,000 square feet. The expansion was completed in response to increased customer demand for the manufacturing of complex oral solid formulations. Our Winchester facility has more than 20 years of experience in product development, technology transfer, and commercial manufacturing. The site has produced over 3 billion tablets and capsules annually and has launched more than 100 new products into the market since its inception.

Finally, I'd like to provide some brief comments regarding our market dynamics which continue to be favorable. First, our customers increasingly are seeking fewer, bigger, better suppliers who have scale and global reach with an emphasis on both delivery and compliance. Given our market-leading position, capabilities, regulatory track record, and a history of reliable supply, this trend continues to bode well for Catalent's organic growth. The benefit of that trend to Catalent is additionally enhanced by incremental M&A that augments our offerings and scale.

Second, regarding the level of consolidation activity in the biotech and pharma markets today, we continue to note that this activity is generally positive for Catalent due to the inherent stickiness of our service offerings for pharmaceutical and biologics products. Catalent's follow-the-molecule strategy keeps us positioned to capitalize on such market trends in our long-term growth strategy. Now, I'd like to turn the call over to our Executive Vice President and Chief Financial Officer, Matt Walsh.

Thanks, John. First, I will briefly review our third-quarter operating accomplishments by business segment starting with oral technologies on slide 7. Our softgel business, which accounted for approximately two-thirds of oral technology segment revenue for the third quarter, performed well, generating modest EBITDA growth at constant currency in line with prior-year levels. Strong revenue and EBITDA growth in North America was driven by favorable product mix in the region. As evidenced by the third-quarter results in Asia-Pacific and Latin America, the expected mix shift from prescription softgels to consumer health softgel is progressing, and we believe it will continue in the near term.

The modified-release business, which accounted for roughly one-third of oral technology sales, continued to generate strong profit share revenues from product participation-related activities. EBITDA margin across the business expanded significantly due to favorable product mix and strong product participation revenue.

The development and clinical services segment shown on slide 8 also performed well during the quarter. However, clinical services revenue and EBITDA were modestly below the prior-year's levels due to decreased customer project activity primarily in Europe. Revenue growth in analytical services was driven by our integrated oral solids development and supply business. However, the EBITDA growth driven by the oral solids business was more than offset by unfavorable product mix within our core analytical scientific services business.

As of March 31, 2015 our backlog for the development and clinical services segment was $393 million, a 3% increase compared to the second quarter of FY15. This segment also recorded net new business wins of $114.7 million during the third quarter, representing a 10% increase year-on-year. The segment's trailing-12-month book-to-bill ratio was 1.1.

We are pleased to report that the integration of the Micron Technologies acquisition is essentially complete, and as reminder, it augments our current capabilities in highly potent and cytotoxic drug handling, integrated inhalation solutions, and analytical laboratory services with the intent of getting access to molecules earlier in the development process.

Now, on slide 9, we have the business update for our medication delivery solutions segment. Blow/Fill/Seal experienced modest revenue growth during the third quarter due to the timing of sales that strengthened the second quarter with EBITDA performance in-line with prior year. Strong revenue and EBITDA performance on a year-to-date basis was driven by increased demand and favorable product mix. Market fundamentals for Blow/Fill/Seal remain attractive with a robust new product pipeline. As we have seen in prior quarters, our product mix continues to shift to higher-margin products.

Sterile Injectables posted revenue and EBITDA below the prior-year, partially due to an overly strong third quarter in the prior fiscal year. In spite of the softer performance during the third quarter, we maintain a positive long-term outlook for this business as we continue to capitalize on the business development activities off the last two fiscal years, as well as our entry into the animal health market.

And, finally, during the third-quarter, our Biologics business posted positive revenue and EBITDA growth due to the timing of completed project milestones. Biologics year-to-date revenue growth of more than 70% validates our investments in this business including the recent acquisition of Redwood Bioscience and its SMARTag antibody drug conjugate technology. The transaction broadens the Biologics services we can offer to our customers, and we look forward to growing this business in the future.

As an indicator of our long-cycle business which includes both oral technologies and medication-delivery solutions, we are disclosing the number of new product introductions, or NPIs, and our long-cycle development revenue as directional indicators of future commercial revenue growth. Due to the inherent quarterly variability of these metrics, we will provide the numbers on a year-to-date basis. For the 9 months ended March 31, 2015, we introduced 120 new products which is essentially in-line with the number of new products introduced in the same period of the prior fiscal year.

Also, in the same year-to-date period, we reported development revenue of $97 million, an increase of 28% versus the same period of the prior fiscal year. These metrics are only directional indicators of our business as we do not control the sales or marketing of these products. Nor, can you predict the ultimate commercial success of them. However, we expect both of these metrics to provide insight into what the long-term potential organic growth of our long-cycle businesses might be.

Before I get into more details on our financial results, let me remind you that all of the segment revenue EBITDA results I will discuss in the next few slides are on a constant currency basis. Now, turning to slide 10, revenue from the oral technology segment was $284 million for the third quarter, an increase of 10% compared to the third quarter a year ago. This growth was attributable to improved performance in both of the softgel and modified release offerings as well as higher revenue from product participation-related activities. Oral technology segment EBITDA in the third quarter was $81.7 million, an increase of 20% year-on-year. This growth was primarily driven by increased profit from our product participation-related activities coupled with increased revenue from products utilizing the modified-release technology platforms.

Revenue from the development and clinical services segment was $103.7 million for the third quarter, an increase of 4% over the third quarter a year ago. This increase was related to growth in analytical services due to our integrated oral solids development and manufacturing capabilities and the acquisition of Micron Technologies, which was completed in the second quarter of this fiscal year, and partially offset by decreased demand for comparative sourcing. Development and clinical services segment EBITDA for the third quarter was $23.8 million, an increase of 8% year-on-year. This EBITDA improvement was primarily driven by the Micron acquisition and cross-dating initiatives within the segment.

Revenue from the medication delivery solutions segment was $61.2 million for the third quarter, an increase of 2% over the third quarter a year ago. This growth was attributable to increased revenue from our Biologics offerings due to the timing of completed project milestones and modestly higher revenue from the Blow/Fill/Seal technology platform partially offset by decreased demand within our European pre-filled syringe business. Medication delivery solutions segment EBITDA was $10.9 million, a decrease of 26% year-on-year. The decrease was primarily attributable to decreased demand and unfavorable revenue mix within European pre-filled syringe and an unfavorable product mix shift within Blow/Fill/Seal partially offset by increased revenue from our Biologics offerings.

Turning to slide 11, you see in precisely the same presentation format as on slide 10, the nine-month, year-to-date performance of our operating segments both as reported and in constant currency. I won't cover every item in detail, but I will say that our year-to-date, top line results parallel our third-quarter results which show constant currency revenue and EBITDA growth across all three reporting segments. The year-to-date 6% constant currency revenue growth, or 5% growth on an organic basis compared to the same period a year ago, was in line with our financial objective of 4% to 6% organic revenue growth and represents some of the best organic revenue growth performance we've seen over recent years.

Slide 12 shows the reconciliation for the last 12 months' EBITDA from continuing operations from the most approximate GAAP measure which is earnings before loss from continuing operations. This is a mechanical computation which doesn't require much supporting commentary. It's really there for your benefit to assist in tying out the reported figures to our computation of adjusted EBITDA which is detailed on the next slide.

So, now moving to adjusted EBITDA on slide 13, third-quarter 2015 adjusted EBITDA increased 4% to $110.5 million compared to $106 million in the third quarter a year ago. EBITDA growth was attributable to strong performance within oral technologies and development and clinical services segments. As a result, our last 12 months adjusted EBITDA totaled $457.5 million, an increase of approximately 1% compared to the last 12 months EBITDA as of December 31, 2014.

Now, moving on to slide 14, our track record of adjusted EBITDA growth remains very strong. What we're looking at here is the last 12 months adjusted EBITDA for each and every quarter since June, 2009. It clearly depicts our observation that Catalent's business has grown steadily over longer analysis periods even as we have experienced slack quarters or even down quarters from time to time. The diversity and global scale of our business are key features of Catalent that have helped us deliver consistent growth historically, and we are investing in managing our businesses to continue this trend well into the future.

On slide 15, you can see that third-quarter adjusted net income of $57.6 million, or $0.46 per diluted share compared to adjusted net income of $39 million for the third quarter of the prior fiscal year. This slide also includes the reconciliation of GAAP to non-GAAP adjusted net income in a summarized format for your reference. A more detailed version of this reconciliation can be found in our supplemental information section of the slide deck where you will essentially the same add-backs as seen on the adjusted EBITDA reconciliation slide.

Now, turning to slide 16, as we have discussed previously, during the first nine months of FY15, Catalent raised over $1 billion in gross proceeds through our IPO with the net proceeds used to pay down our highest cost debt. As of March 31, 2015, our leverage ratio was 3.9 compared to 4.1 as of December 31, 2014 and 6.1 as of June 30, 2014.

Now moving to slide 17, as we mentioned in today's earnings press release, due to the impact of the continued strengthening of the US dollar against all other currencies in which we do business and its effects on foreign-exchange translation, [and two electrics sent] recent changes in our base business were lower in previous guidance for revenue adjusted EBITDA and adjusted net income. For FY15, we now expect revenues to be in the range of $1.8 billion to $1.83 billion compared to our previous guidance of $1.82 billion to $1.86 billion. We now expect adjusted EBITDA to be in the range of $428 million to $436 million compared to our previous guidance of $434 million to $444 million.

Adjusted net income is now expected to be in the range of $197 million to $205 million compared to the previous guidance of $204 million to $214 million. As a reminder, more than 60% of our revenue is recorded in currencies other than the US dollar with the majority of the exposure being from the euro and the British pound. Since the last time we provided our FY15 financial guidance in February, we've seen further weakening of the euro and British pound which fell below the rates assumed in the low end of our previous guidance range of 1.1 and 1.5 respectively. The translational impact of these movement, in addition to further weakening of several of the other currencies in which we do business, coupled with modest changes in our base business led to the decision to lower the guidance range.

Our previous guidance for capital expenditures and share count remained unchanged. We continue to expect capital expenditures in the range of $120 million to $130 million. We also continue to expect the fully diluted share count on a weighted average basis for fiscal year ending June 30, 2015 to be in the range of 122 million shares to 124 million shares.

As a final note to this slide, as we have discussed, the guidance revision we're disclosing today is prompted by foreign-exchange translation and the strength of the US dollar with a small adjustment for base business performance as we close out the year. This small adjustment doesn't cause John or me to change our thinking about the fundamental long-term outlook that we have for Catalent's revenue and adjusted EBITDA compounded annual growth rates.

Slide 18 walks through some of the moving pieces that we considered when determining our revised guidance. As I mentioned earlier, the change to revenue, adjusted EBITDA, and adjusted net income guidance is due to both FX headwinds related to the further strengthening of the US dollar, and to a lesser extent, [we continue] to do the base business. The first set of bars brackets the FX impact to revenue in the $12 million to $16 million range and the FX impact to EBITDA in the $4 million to $8 million range.

The second set of bars brackets the modest changes that we've seen in our base business performance. The base business revenue impact is larger than the EBITDA impact because much of the change is driven by changes in low-margin, comparator sourcing revenue. The last of bars shows the minimal impact related to the current year acquisitions that we've completed. As a reminder, all of our FY2015 acquisitions to this point are small contributors to our financial results, are strategic, and position us well for long-term growth.

Additionally, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression throughout the year. Due to the timing of our customers' annual facility maintenance periods, as well is due to the seasonality associated with budgetary spending decisions in the pharmaceutical and biotechnology industries, the first quarter of any fiscal year has generally been our lightest quarter of the year by far with the fourth quarter of any fiscal year generally being our strongest by far. Operator, we'd now like to open the call for questions.

(Operator Instructions)

Ricky Goldwasser, Morgan Stanley

Good afternoon. This is Zack Sopcak in for Ricky. I wanted to ask a question just first about the guidance revision on EBITDA just to clarify something. So, if you look in your segment performance on the medication delivery solutions on the constant currency, you had negative growth as you discussed. Is that baked into that base business decline? Or, is that further deterioration in the fourth quarter within that business that's baked into that EBITDA decline?

The changes to our EBITDA guidance, Zack, are really more as we look at the fourth quarter versus anything in the actuals

Okay, so we could think of third quarter as being kind of in line at least with what you thought from an overall perspective?

That's correct.

Okay. Got you. That makes sense. And then, just one other question. In terms of the Biologics business, it sounds like it's growing quite nicely. Is there any upcoming milestones that we should be thinking about as we are thinking about that business and how it's progressing?

I would say that the Biologics business, which is approximately 1% of our revenue on a run rate basis, will continue to make slow and steady improvements. Where we might see outside financial performance is from the Redwood Biosciences acquisition which right now is a development-stage Company. They're booking -- the kind of projects that they're booking are where our customers are exploring the technology for [accessibility]. The change that we would be looking for -- which the point of your question is when might we see a step change? The step change would occur should one of our customers decide to adopt the technology for a product that they're planning to launch, and I would say that the timing on that, Zack, is probably several years out. It could happen sooner but to try and set expectations, I would guess that that is something in the FY17 range.

Okay, great. Thank you

Tycho Peterson, JPMorgan.

Thanks. Matt, I'm going to ask you another question on the guidance adjustment. Can you maybe just give a little bit more color on the base business and adjustments? Less about the comparator sourcing comments but more about the end market demand for certain products and the softness in CSS out of Europe?

Thanks, Tycho. We have been -- I'd say at first, there's nothing new about what we're seeing here. We have discussed as part of our various analysis in prior calls that the European clinical services business has not been as strong as we would like. It has not met our expectations and so this is really in line with that prior commentary. And, the second part related to what we are seeing in Europe is really just part of the ebb and flow that we tend to experience in our product slate at any point in time. You can't trace it necessarily to any underlying macroeconomic factor. It's really just a small change that required a tweak to the guidance but nothing seems pervasive or even necessarily long-lasting by the comment that I made at the end where we don't see that any of this changes our fundamental view about the long-term growth rates in the business

Okay. And then, on softgel you've talked about the mix shift from prescription to consumer before. This is the first time I think I've really seen you call out Asia-Pac and Latin America. Was that a new dynamic OUS for that shift?

No, I think those businesses are growing and because they've always been predominantly consumer health-related businesses, it's more passive than it is active in terms of the mix shift it creates.

Okay. And then, just last one on Pharmapak. I know it's small in terms of expected revenue contributions, but maybe just give us a minute or two on the rationale there?

Sure, Tycho. As people that have followed Catalent for some time would know, we had a third-party commercial packaging business that was principally a United States and European business that we divested while we were under private equity -- under full private equity ownership. And so, the question would be so what is the motivating factor to now acquire another third-party commercial packaging business? And, that's because the Australian market is unique. It's principally an import market, and by that I mean, these innovators are manufacturing either drugs or API elsewhere and moving into the region, and when they move it in, they would really prefer a turnkey solution from companies like Catalent that can do more of what they need in-country and [fill] as a service to customers and be of more service to customers, it makes sense for us to attach a commercial -- to attach commercial packaging functionality to our primary manufacturing capabilities in softgel and other solid dose forms.

Okay. I appreciate the additional color. Thanks.

Dave Windley, Jefferies.

Hi. Thanks for taking the question. Could you give us an update on Micron as it relates to your evaluation of their many customer or compound touch points, and the action plan to go after those compounds or clients for cross-selling opportunities?

Hey, Dave. John Chiminski here. First of all, I would say that from the strategic nature of the acquisition that so far it is meeting and exceeding our expectations. We quickly got out of the gate and went in with our team to analyze the slate of molecules that they have at their disposal. And, I would say we went through several hundred and have filtered them down into, I would say, in the tens of categories of products that we believe are capable of then getting on a Catalent platform for long-term commercial use. We put in place, I would say, strong operating mechanisms and processes to do that, and they are only going to be strengthened as we move forward.

So, I think as we look back at the strategic rationale we're really thrilled with what we've picked up. The asset continues to perform as we expected from a base business standpoint so the upside for us is really those molecules that now have the opportunity to be proliferated through the Catalent ecosystem. So, we really feel terrific about it.

Right. And, to augment what John was saying, David, in terms of timing, and I've said this before but if bears repeating. The first change we would see is in our long-cycle businesses. Catalent booking development revenue projects on these molecules that are being pulled over, and we now have multiple wins that will result in development revenue related to these projects. But, it continues to be a long-cycle business and landing a multi-year commercial manufacturing relationship for one of the products would still be several quarters to a year or two out.

But, we knew that going in, and we've seen really terrific participation and cooperation from the Micron folks in this effort because for years they've been losing opportunities for revenue because they couldn't offer the kinds of add-on services that now Catalent is able to provide. So, we are really out of the gate very well on this, and we are definitely ahead of our expectations.

Got it. So, Matt, thanks for the add-on there. Relating that back to your comments that development revenue would relate to the $97 million, up 28% year-over-year that you commented on, correct?

Yes, that is correct. I would tell you the Micron contribution to that is very small in year-to-date numbers so that 28% increase that you're seeing is on -- that's really a same store growth number

Okay, can you frame -- John, you talked about tens of potential projects. Can you frame for us what the development of revenue value of one of those projects would be Could this layer on an amount of revenue and development revenue that continues a 20% or 30% growth? Or, is it much more bigger in magnitude than that.

So, I talked about it, Dave, and you probably followed through the IPO process and maybe even through some of the [buckstruth] that we've had that the way to think about our follow-the-molecule strategy is that when we capture a high-value molecule, we can earn anywhere from on an annual basis $1 million to $2 million per year in development revenue. Certainly, we've booked higher than that on some molecules but consider that to be an average, $1 million to $2 million worth of development revenue through -- I would say, typical if you will. So, the opportunity to add, I would say, somewhere between [5 and 10] certainly could be meaningful for the Company.

Our development revenue as I think we again talked about during the IPO process, we are just -- disclose those numbers on a year-to-date basis. But, looking back in history, it has been growing almost at a 10% CAGR year-over-year which is one of the reasons that we continue to see strong, I would say, organic growth developing into the ADT business. It will take a while for those tens of projects to ultimately be converted into real development revenue because just to remind everyone, people first come to Micron to do micronization because they want to solve the problem and hopefully stop there. So, micronization is the first stop in solving that solubility or bioavailability problem. But, we also know that that is the first tool they use and then when that doesn't work, they move on.

So, over the next two to three years, and quite frankly, for Catalent timeframe, that is short. The next two to three years we would hope that that's going to be a meaningful contributor to our overall development revenue, but then most importantly, the development revenue has a higher opportunity to be turned into long-cycle commercial manufacturing. That's the whole gain for Catalent -- long-cycle commercial manufacturing. Bring them in. Capture that molecule. Get development revenue, and then hopefully, have a win through the development cycle with the product that gets approved by the FDA.

Thank you for the answer. I will cede the floor.

If you can't tell, I'm excited about that business because really lines up with our follow-the-molecule and really has potential. Thanks, Dave.

Excellent. Thanks.

Gary Nachman, Goldman Sachs.

Hi. This is Divya Harikesh on behalf of Gary Nachman. I have a couple of questions. Number one on your softgel dynamics you are seeing in North America. You said you're seeing some favorable product mix. How sustainable do you think that is? Are you seeing that mix stalling or you see the mix shift slowing down? And how does this compare to the mix shift you are seeing in the Asia-Pacific and Latin America regions. And, secondly, your gross margins are improving quite nicely. How sustainable are those? And, how much is that a factor in offsetting some of the top line impact you're seeing in the base business?

Okay. The first part of your question. Year-to-date in the softgel business, we have seen a favorable mix shift within North America. Just as a backdrop, when we tend to see mix shift, it's typically not volatile. They will go in cycles that can last for half a year to two years. I will tell you -- when you say mix shift being favorable in North America, that should persist. Then, relative to the comment that we made regarding the mix shift from prescription to consumer internationally, at least internationally in Asia-Pacific as well as Latin America, these were already principally consumer health markets anyway. And, it's just by virtue of sales growing in these markets that consumer health comprises a larger part of the -- of our global softgel mix. So, just some different dynamics at play there that would require two different answers to your question which I hope I provided.

Now for the second part of your question, I would agree with your observation that gross margins have been expanding faster than we would have expected at the start of the year. I think part of that is due to selling into available capacity, right. Our constant currency sales growth is up. Combined with the sales growth we're seeing, a portion of that is in product participation-related activities which are inherently higher margin.

How sustainable do you think this is?

The revenue that we're talking about in product participation should be a change that we would see persisting into the future. So, that will certainly be a feature of our reporting going forward, and our ability to sell into unused capacity is also something that should persist into the future so we can continue to grow sales. We're not approaching any meaningful cliffs in our available capacity especially in light of the Winchester expansion now that we've doubled the size of our controlled release facility in Winchester

Very helpful. Thank you

John Kreger, William Blair.

John, if you think about the commercial long-cycle wins that you have had year-to-date, can you give us a sense about what trends you're seeing, if any, in terms of mix across the different delivery modalities that you've got?

Sure. So, first of all, I would say that in general there's no lack of business out there if I can just be blunt. I would say that the dynamics continue to be incredibly favorable. Not to repeat what I said during my comments, but we're seeing a lot of our customers continue to seek a supplier like Catalent where they want bigger, better, fewer suppliers that can stay out of regulatory harm's way and have really global scale and reach. In general, I would say the number of opportunities that we're getting to participate in continues to be extremely robust across all of our delivery technology businesses, if you will.

In terms of trends, I would say there's a lot of positives that are happening. I think Matt showed some extremely robust Biologics numbers. Don't mistake his comment around slow and steady Biologics growth. We are growing really fast with that business, and now what we see is every time we put in additional capabilities or capacity that the opportunity pull for us continues to increase. We see a lot of favorability in a lot of our most technology advanced businesses. I would say that the platforms that have -- I would say, are not your standard, [white] compressed dosage form which is Catalent's forte. In both our Blow/Fill/Seal business, we see extremely robust market for both inhalation, ocular, and other type of products that go into that business.

We see a lot of customers looking for additional modified release capacity which -- why we're so excited about the Winchester business. And, something that we're extremely enthusiastic about is really one of the crown jewels of the Company, their Zydis platform and the opportunity set that we now have in this fast-release technology have grown dramatically over the last several years.

On somewhat of a headwind standpoint is that what we are also seeing is that the molecules that are coming to us are generally for smaller population pools and indications that I would say are not as expansive that we've had in the past. So, we've got great capabilities in the orphan drug states which bodes well for Catalent, but again, you're dealing with smaller population pools. In our softgel business, we probably have the most robust pipeline we've ever had in the history of that business, but the volumes that we have -- although at great margins -- the volumes that we have in that business I would say are smaller than some of the bigger blockbuster products that we've had in the past.

The last comment that I'll make is that a lot of our large Pharma customers that are Pharma and consumer health customers are really going aggressively after the consumer health space. So, you know that we have a stated goal to expand more aggressively our reach within consumer health space certainly within softgel, and we see a lot of our large Pharma customers coming to us to innovate for them in the consumer health space, whether it be for VMS or analgesic products. And, when you land one of these, they're large, big-branded, sustainable products that are really terrific and provides a substantial -- I can only say base-loading for the business.

So, generally speaking, all the trends certainly across our advanced delivery technologies are very positive. Albeit with the one modest headwind which is we're winning more but in some cases, certainly in softgel, the indication aside for those populations are smaller than we've had in the past again, but again, at great margins. Lot of stuff there, but I think the net of it is we're seeing a very robust market for the Company.

The only thing I would add, John, is that the kind of growth we're seeing through technology platform by technology platform is where we think we would be seeing it, so it's meeting our expectations. Which all that underpins the organic growth -- the long-term organic growth rate outlook that we've been talking about. There's nothing that has surprised us in the way the wins are progressing which I thought was maybe part of your question

Yes, that is. Thanks. One quick follow-up. Given that it sounds like you're starting to get more traction in the Biologics business, what is your current thinking on API production as a business for large molecule Biologics?

So, first of all, I would say, I will separate the two points. First of all, in general, from an API space as we take a look at inorganic opportunities certainly with the operating platform that we have within Catalent, there are some API businesses that may be a good fit within our platform if they're appropriately specialized, not commoditized and have a strong customer base that can easily be transferred out of those APIs. So, that's something that's on our screen, and we continue to take a look at that.

With regards to our view of Biologics and where we participate, really where Catalent plays within Biologics and where we are going to continue to play is really in the protein improvement, if you will, and really improving biologics drug use which is why we have our [Tepex] platform. We got into the agency which really is a conjugation technology so we're not producing antibodies, we're producing the conjugate, if you will, for the antibodies which would be done somewhere else.

As we look at that very special and value-adding area that we are participating in with Biologics, we certainly see the opportunity for some further, I would say, upstream -- going upstream a little bit in terms of participating in potentially conjugation-type of business. But, I think as we've told folks before, we are not really looking into getting into the big stainless steel area of Biologics where there's plenty of capacity out there. And, quite frankly, a lot of stuff is now going more toward what we've done. For example, at our Madison facility with 1,000-liter, single-use bioreactors. It turns out now people are thinking differently about these massive 20,000-liter bioreactors and thinking about how you can put trains together of these smaller [SUBs].

I think what's good about that is we know where we're playing in Biologics. We think it's a big value-add. I think Catalent is becoming much more known as not only a pharmaceutical solutions provider but also a biopharmaceutical solutions provider, and we don't see us again getting into a big CapEx gain where there's a lot of capacity already. We like to play in areas where we can get high margins, niche, and participate in an Advanced Technology way. I said a lot there, but it helps give you a flavor for the Company and how we think.

That's great. Thank you.

John Ransom, Raymond James.

Smart questions have been asked. My dumb follow-on. Your balance sheet is in pretty good shape. Your M&A activity to this point and your public life has been pretty small bore. What are the odds you would put if you were a betting man? I'm not saying you are, but you might do something a little more substantial? Or, should we expect you'll continue on the current path?

Good question, John. Obviously, it's impossible for us to predict what the deal flow is going to be. I would just make the commentary that our space is highly fragmented. You correctly know that our balance sheet is very well positioned for both small deals and large deals. We are agnostic as to size. And, we're just far more focused on what sort of value we can create with the deals that we are doing.

We've happened to come across smaller deals in the nine months of this fiscal year. There are larger deals out there, and we're certainly looking at them and trying to do them if they have the right characteristics. So, there's no stated intent to do small deals. There is a stated intent to continue to be a leader in our space, and that will probably -- history will probably see us doing both large deals as well as small deals as time rolls on.

Obviously, there's a lot of consolidation and [spec line] and generics. Did that dynamic, in and of itself, change your approach to market, or not?

First of all, I'll refer back to the comments that I made about the current dynamics of consolidation within our customer base. As you've noted, some of the specialty Pharma. So, the generics -- from a Catalent perspective generally speaking, I would say those are positives for us from the standpoint that when some consolidation occurs because Catalent really is sticky with the molecule we go with when that consolidation happens.

And, generally speaking because the consolidation is happening, those products may generally end up in strategic, intense hands that are probably going to do better with those products than in the existing hands. And, we see that time and time again. In fact, I will tell you many of our biggest products started off as very small products with small companies that ultimately got acquired by bigger companies, and we have many products that have changed hands three or four times since I've been here. It has only boded well, I would say, for Catalent in general.

So, that's really how that dynamic really I would say impacts us, but the consolidation that's happening in spec Pharma and also in the generic space doesn't necessarily have an impact about how our space tends to want to consolidate. Other than the fact that I can assure you that I hear consistently from our customers as well as many of our team members do, that they continually want to reduce the size of their supply base. They want more suppliers of the scale and capability and regulatory track record of Catalent.

That brings a lot more deals to us, and when we do acquisitions such as even Micron, I get calls of congratulations and thank you. We loved them before. We love them more now because we know they're in a safe pair of hands. So, I think to the extent that we can have -- a deal fits our strategy. There's a willing seller and it's at the right economics, you are going to see Catalent continue to be very smart and astute in the space and continue to build on our leadership position here. I hope that answers your question

That's great. My other question -- I know you don't want to talk about individual products, but is there any product on the horizon that's going branded generic? So, for example, Abilify, Nexium, and the OTC. Do these present opportunities? Or, are they present risk? Or, is it agnostic with some of the calendar issues this year?

I would just say specifically to the list you provided, they provide opportunities. But, I would just say that we talked about this again. I know a lot of you are getting to know the Company a lot better. But, for us, generally speaking there are many opportunities for Catalent to have shots on revenue goals, both when a product gets approved and then also when it goes OTC and generic. So, generally, when it's in an advanced dosage form like a softgel or Zydis or something like that, those molecules generally stay on that dosage form. And then, as that product goes either over-the-counter or generic, they generally represent more opportunity for the Company.

And, in some cases -- for example, there was a product that was going generic where we had, I think, more than four or five of the ANDA filers were -- we had done deals with them to actually do those products. So, not to make it seem like everything is an opportunity for Catalent, but certainly I think with where we've positioned ourselves in these advanced delivery technologies, we are not really looked at purely as an outsourcing shop but there's a real level of stickiness. That being said, because of our customers looking for bigger, better, fewer suppliers, we also are a normal port of call for some of those bigger opportunities like you were mentioning.

Okay. Thanks so much.

(Operator Instructions)

George Hill, Deutsche Bank

Good afternoon. Thanks for taking the question. John, I'm going to stay on your follow-the-molecule theme. You launched it recently so it's probably not generating revenue yet. But, can you talk about the opportunity in the new global quality and regulatory segment? How big should we think of that opportunity as being? And, what will you be doing different in regulatory that we see from some of the other research-focused companies?

First of all, thanks for the question because I think this is an opportunity for me to really clarify some things for the folks on the phone. I know that Catalent throws a lot of acronyms at you, and it may be difficult to follow everything that is going on. But, let me start with the fact that the follow-the-molecule strategy that Catalent has actually is been a business strategy for many decades. Because of Catalent's -- in fact, we give examples.

One example that we give when we're talking about follow-the-molecule is that in really over-the-counter respiratory product that has been on the market for over 20 years, and we captured that molecule, if you will, did development work, earned those development revenues that I talked about earlier that got launched into the Rx space. It then transitioned over to OTC. We continue to make it. They asked us to make it also in softgel. We've been doing that for well over 20 years.

First of all, I'd say our follow-the-molecule strategy is a core part of our business within our advanced delivery technologies. And, as I was talking before where it sounds like everything is an opportunity for Catalent, it is because of that general stickiness that we have given our technology base that once we are in a product with our advanced delivery technologies -- it just lasts for a long, long time. Many times, throughout the whole life of that molecule.

The second part of your question is really with regards to the fact that we launched actually a new organization within Catalent. It is not a business unit. It is actually a functional organization. Prior, we had a standalone R&D function, research and development, although I would tell you Catalent is much bigger in Development than it is in Research. It is really a huge development powerhouse for us. So, for example, this year we're going to launch over 200 new products into the marketplace. Matt had given you our year-to-date numbers in terms of the number of products that we've already launched.

And, because of that increasing nature of product launches that we've had over the last three years, the processes for which we do product launches within the Company really needed to be more closely integrated with both our quality and operations. Because you have to do development, and then ultimately, you launch it into your commercial manufacturing.

So, we have a terrific 30-year veteran of the pharmaceutical space in Sharon Johnson, and we had created a new organization. She previously was the leader for our quality and regulatory organization, and we promoted her into a new organization that is quality, product development, and regulatory. We have received just a tremendous positive response from our customers. In fact, I would tell you Catalent is absolutely leading the way. I would say, in general, the product development and new product introduction processes within Pharma are extremely challenging. I wouldn't say anybody to date is purely a best practice, and the fact that Catalent launches more products per year than any single Pharma, biopharma Company and many of them combined -- we need to be extremely good at it.

So, by integrating product development -- which were the prior R&D resources -- which again were mostly, was a large key in development into our quality and regulatory into a new organization we can now will be able to more seamlessly launch those new product introductions. Catalent is an NPI, new product introduction, Company. We are launching again hundreds of products for our customers per year, and those products ultimately become -- our product launch today becomes future revenues tomorrow.

So, as we build a massive pipeline of projects we have -- I don't know -- over 550 projects within the Company which blows away any number of projects that you have in any of big Pharma. You've got a be really good at doing that. So, to clarify -- I'm over-answering your question because it's a good one because when the press release came out about this QPDRA, I can see how you might have felt that it was another business unit. But, what it really is is a functional platform by which we can really continue to accelerate our growth through the launch of all of our new product introductions.

That's a great clarification. I guess I was unclear as to whether or not that was a new service offering, you were looking to take to clients, but it sounds like it's more of an internal function to ensure that the business that you're already executing continues to execute flawlessly.

You got it, and I would say Catalent is leading the way. I would say this is organizational innovation really at its peak here, and we just had the right person positioned to be able to do it, and the moves that we've already made are going to -- I already feel better about our ability to launch our products. I'm glad you asked the question because I think it clarified for a lot of people that QPDRA organization that we launched.

All right. Thank you.

There are no further questions in queue. I will now turn the call back over to management for closing remarks.

Okay, excellent. Well, first of all, I just want to thank everybody for your participation. Great questions and strong engagement. Personally, from my standpoint, I can tell you it's terrific to see how this group of folks has really grown in your understanding and appreciation of Catalent. It is a complex organization, but I think it also is a terrific Company that as you really start to understand the nuances of it you can understand why we are able to predictably talk about our growth rates for the future in terms of top line as well as EBITDA.

So, in conclusion, I'd just say I'm really pleased with Catalent's progress this quarter. We will continue to capitalize on our recent acquisitions of Micron, Pharmapak, and Redwood Bioscience, as well as to continue to invest in our organic growth. I'd like to thank all of you for joining us today, and we look forward to updating you again on our next conference call. Thanks again for your time. Terrific engagement by everybody on the call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.