Catalent Inc (CTLT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Catalent Inc. third-quarter FY16 earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for the conference, Mr. Tom Castellano, Vice President Finance, Investor Relations and Treasurer. Sir, you may begin.

Thank you, Bridget. Good afternoon everyone, and thank you for joining us today to review Catalent's third-quarter FY16 financial results. Please see our agenda on slide 2 of our accompanying presentation, which is available on our investor relations website.

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.

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 the 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 2, 2015, for more detailed information on the risks and uncertainties that have A direct bearing on the Company's operating results, performance and financial condition. As discussed on slides 4 and 5, on the call today we will 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 short while 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 President and Chief Executive Officer, John Chiminski.

Thanks, Tom, and welcome, everyone, to our earnings call. I would like to start by providing an update on the Beinheim facility, which is one of 11 softgel facilities in our worldwide manufacturing network of 31 sites. Since receiving notification from the ANSM - the French pharmaceutical regulatory agency - suspending manufacturing at the site on November 13, 2015, we've been working diligently with all relevant authorities to resolve the issue.

From the outset we fully cooperated with the ANSM, as well as with law enforcement officials concerning the ongoing criminal investigations. While the resolution of the Beinheim situation took longer than originally anticipated, we're pleased to announce that on April 28, 2016, the ANSM has reinstated our license and the site is currently fully operational.

I'm extremely proud of my team and want to thank them for everything they've done to bring the issue to a successful resolution and I look forward to focusing our attention on a strong close to FY16. However, we do anticipate some continuing effect of the suspension of Beinheim into FY17 due to the changes at the facility and the business continuity plans we've implemented. These changes will be included in the FY17 guidance we will issue later this year. Matt will also provide more specifics on the financial impact of Beinheim on FY16 later in the presentation.

Moving on to key operating accomplishments during the quarter, our third quarter operational performance was adversely affected by the challenges we continue to face in our oral technology segment related to the Beinheim facility temporary suspension and MRT softness. Results were disappointing, but we believe are near-term in nature and do not change the view of the longer term growth prospects for Catalent. As you can see on slide 6, our revenue decreased 2% as reported and increased 2% organically in constant currency to $438 million.

Top line growth on a constant currency basis for the quarter was driven by strong performance from our Medication Delivery Solutions and development in clinical services segments, which was partially offset by a decrease in our oral technology segment. Also, Medication Delivery Solutions posted a robust 12% EBITDA increase compared to the prior year period. On a year to date basis, we continue to be pleased with our top line performance and recorded year and year revenue growth of 6% on a constant currency basis despite the challenges related to Beinheim and our MRT business.

Our adjusted EBITDA of $80.7 million was below the third quarter of fiscal year 2015, again primarily due to the Beinheim suspension and reduced demand for certain high margin offerings within our modified release technologies platform. Our adjusted net income was $25 million, or $0.20 per diluted share.

In conclusion, we remain encouraged by the underlying trends in softgel and we look forward to building a momentum in our other two business segments for the remainder of the fiscal year. Now I would like to turn the call over to our Executive Vice President and Chief Financial officer Matt Walsh.

Thank you, John. I'll start my presentation with a brief review of our third quarter operating accomplishments by reporting segment starting with Oral Technologies on slide 7.

Our softgel business, which accounted for approximately 70% of Oral Technologies segment revenue, was negatively affected by the temporary suspension of our Beinheim facility during the quarter. Excluding the impact of Beinheim, softgel posted robust revenue and EBITDA growth on a consent currency basis, and our softgel consumer health initiative continues to gain traction within Latin America, Asia-Pacific and Europe.

While softgel performance in North America was moderately below prior year levels, this is mainly a timing issue as the business globally has delivered significant growth year to date. We're encouraged by the positive trends in the softgel business, excluding Beinheim, and we expect to see continued improvements in both revenue and profitability in the fourth quarter.

The modified release business, which accounted for roughly 30% of oral technology sales, had another challenging quarter which is directionally consistent with our expectations, but a bit more pronounced than we had anticipated. Due to lower customer demand for certain higher margin products, revenue within controlled release declined year over year.

EBITDA margin contraction was similar to that seen in the first half of the fiscal year, due to unfavorable product mix. We believe the challenges we have seen in this business through the first nine months of this fiscal year are showing positive signs of turning around in the fourth quarter, when we expect MRT to return to growth as we enter next fiscal year.

Our Development and Clinical Services segment, shown on slide 8, posted strong organic revenue growth in the third quarter, aided by organic growth within Analytical Services. The improvement in clinical services was driven by increased customer project activity as well as lower margin compare and resourcing activities.

EBITDA was negatively affected by the mix shift towards lower margin comparative revenue. Revenue growth from the Analytical Services business was driven by increased projects, however unfavorable mix of the projects from our integrated oral dose supply business negatively affected profitability.

As of March 31, 2016, our backlog for the Development and Clinical Services segment was $455 million, a 5% sequential increase. The segment also reported net new business wins of $129 million during the third quarter, representing a 15% increase year over year. The segment's trailing 12 month book to bill ratio was 1.1.

Now, on slide 9, turning to the Medication Delivery Solutions segment, we continued to see strong revenue growth within our blow-fill-seal offering across the core business during the third quarter. However, EBITDA performance was negatively affected by unfavorable product mix. Market fundamentals for blow-fill-seal continue to remain attractive.

Within the Sterile Injectables business, revenue was in line with the prior year but EBITDA improved due to more favorable product mix in this area. Sterile Injectables continues to be well positioned for near-term growth with the entry to animal health pre-filled syringes, for which we anticipate commercial sales beginning in the middle part of next fiscal year.

Finally, recent investments in our biologics business continue to translate into growth during the third quarter and it remains the fastest growth business within Catalent. We recorded strong revenue and EBITDA growth at our Madison facility, which was driven by the completion of project milestones.

The SMARTag technology continues to meet proof of concept milestones and customer interest remains strong, as evidenced by our announcement of the research collaboration with Roche earlier this year. We continue to believe that our biologics business is well-positioned to drive future growth and comprise an increasing percentage of our overall business.

Once again, and in order to provide additional insight into our long cycle business which includes both Oral Technologies and Medication Delivery Solutions, we are disclosing our long cycle development revenue and the number of new product introductions, or NPIs. As a reminder, these metrics are only directional indicators of our business since we do not control the sales or marketing of these products, nor can we predict the ultimate commercial success of them. We do, however, expect these metrics to offer insight into long-term organic growth potential of our long cycle business.

Due to the inherent quarterly variability of these metrics, we provide the numbers on a year to date basis. For the nine months ending March 31, 2016 we recorded development revenue of $108 million, an increase of 11% versus the same period of the prior fiscal year. Also in the same year to date period, we introduced 125 new products, which is an increase of 4%, compared to the number of NPIs launched in the same period the prior year.

As a reminder, the number of NPI's in any given period depends on the timing of our customers' product launches, which are often driven by regulatory -abiding approvals or otherwise at the discretion of our customers, and thus this figure will continue to vary quarter to quarter.

I'll now provide more details on our financial results for the third quarter. As a reminder, all the segment revenue and EBITDA year over year variances I will discuss on the next few slides are in constant currency.

So turning to slide 10, revenue from the Oral Technology segment was $260.8 million for the third quarter of FY16, a decrease of 3% compared to the third quarter a year ago. This performance was attributable to the temporary suspension of operations of our facility in Beinheim, lower demand for certain higher margin offerings within our modified release technologies platform, partially offset by higher consumer health volume within softgel. Oral Technology segment EBITDA for the third quarter of FY16 was $55.6 million, a decrease of 25% versus the third quarter a year ago.

The decrease was primarily attributable to the temporary suspension of operations at Beinheim and reduced demand for certain higher margin offerings within our modified release technologies platform. This was partially offset by higher sales and more effective absorption of fixed costs through higher capacity utilization within our softgel operations.

Revenue from the Development and Clinical Services segment was $112.6 million for the third quarter, an increase of 11% over the third quarter a year ago. This growth was primarily driven by our clinical services offerings, attributed to increased lower margin comparative sourcing volumes, as well as improved performance of Analytical Services in the US.

Development and Clinical Services segment EBITDA for the third quarter was $19.7 million, a decrease of 15% year over year. The decrease was primarily due to a shift to lower margin comparative sourcing volume and increased costs related to site consolidation efforts to further streamline the clinical services operating platform.

Revenue from the Medication Delivery Solutions segment was $68.3 million for the third quarter of FY16, an increase of 12% over the third quarter a year ago. We saw strong performance across the range of technology platforms in this segment, led by increased demand for our biologics offerings followed by higher demand in blow-fill-seal as well as increased demand for our injectable products at our European pre-filled syringe operations.

Medication Delivery Solutions segment EBITDA $12.1 million, an increase of 12% year over year. The increase was primarily attributable to increased profit generated by our biologics offering, as well as increased volume and favorable revenue mix shift from our injectable products at our European pre-filled syringe operations.

Turning to slide 11, we see, in precisely the same presentation format as slide 10, the nine month year to date performance of our operating segments both as reported and a constant currency. I won't cover every variance item in detail, but I would point out that the year to date 6% constant currency revenue growth, or 5% growth on an organic basis compared to the same period a year ago, is consistent with our constant currency long-term objective of 4% to 6% revenue growth per year.

Slide 12 shows the reconciliation to last 12 month EBITDA from continuing operations from the most proximate GAAP measure, which is earnings from continuing operations. This is a mechanical computation which does not require much supporting commentary. It's 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.

Moving to adjusted EBITDA on slide 13, third quarter adjusted EBITDA decreased 27% to $80.7 million, compared to $110.5 million for the third quarter a year ago. Excluding the impact of foreign exchange translation, our third quarter adjusted EBITDA declined 21% to $87.2 million, as higher profitability in the Medication Delivery Solutions segment was more than offset by declines in Oral Technologies related to the Beinheim suspension and the MRT high margin product slake.

On slide 14, you can see that third quarter adjusted net income was $25 million, or $0.20 per diluted share, compared to adjusted net income of $50.5 million, or $0.40 per diluted share in the third quarter a year ago. This slide also includes the reconciliation of earnings from continuing operations 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'll find essentially the same add backs as seen on the adjusted EBITDA reconciliation slide.

It's important to point out that in response to a recent regulatory focus on non-GAAP performance metrics, we have revised the calculation for adjusted net income. We are making one change to the calculation and it pertains to the treatment of income taxes.

We are moving away from our prior convention, which included cash income taxes and replacing it with book income tax expense as adjusted for discrete items. We are adopting the convention that we will apply income tax expense at statutory rates to the pre-tax income in the period as well as to any adjustments in arriving at adjusted net income.

In today's earnings release we applied a new computation of adjusted net income to the prior year end and all interim quarterly periods of the current fiscal year. The revised adjusted net income guidance that we will be discussing in a few minutes also incorporates the revised methodologies. Please note that our GAAP reported net income, EBITDA from continuing operations, and non-GAAP adjusted net income are not impacted by this and have not changed.

In summary, the change to the adjusted net income calculation presents a more conservative view of adjusted net income because the new formats assumes that our results are taxed at statutory rates, including in the US, where we are not a cash taxpayer, have not been since 2008, and are not projected to be until FY18 due to the utilization of net operating losses.

Now turning to slide 15, as of March 31, 2016 our leverage ratio was 4.4, compared to 3.9 as of June 30, 2015, and our debt capital structure was essentially unchanged during the third quarter.

On slide 16, we detail out our revised and narrowed FY16 guidance, which reflects lower profitability compared to our previously issued financial guidance, primarily as a result of the extension of the Beinheim facility suspension past our previous mid-March assumption. Adjusted EBITDA is now expected in the range of $400 million to $410 million, compared to the previous range of $410 million to $435 million. Adjusted net income is now expected in the range of $145 million to $160 million, compared to the previous range of $185 million to $205 million.

With respect to revenue, we're narrowing our guidance range and now expect revenue to be in the range of $1.8 billion to $1.84 billion, compared to the previous range of $1.78 billion to $1.84 billion. We are reiterating our previous guidance with respect to capital expenditures in the range of $125 million to $135 million and fully diluted share count in the range of 125 million to 127 million shares on a full-year weighted average basis. It's important to note that our guidance still aligns with our long-term organic revenue growth expectations of 4% to 6%, despite the Beinheim facility suspension.

Slide 17 bridges our previously issued FY16 adjusted EBITDA guidance to our revised FY16 guidance. As you can see, the primary change to guidance is being driven by the Beinheim temporary suspension with a smaller contribution from the mixed impacts we have seen around the business this year but mostly within modified released technology.

Lastly, 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 as seasonality associated with budgetary spending decisions in the pharmaceutical and biotechnology industries, the first quarter of any fiscal year is generally 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 like to open the call for questions.

Thank you.

(Operator Instructions)

Our first question is from Tycho Peterson, JPMorgan.

Hello. It's [Dave Ason] for Tycho. I want to get a better sense for the (inaudible) dynamic in the quarter result of Beinheim? In terms of the lingering impact now that the facility is open, can you share some color on that dynamic?

The facility at Beinheim will undergo a progressive re-start from April 28, 2016, now through the end of this fiscal year. So we'll be gradually bringing the facility back online, that is incorporated in the guidance that we just discussed.

You shouldn't think about it as a flip of a switch and everything is back to pre-November levels. We are grooving new operating mechanisms at the site and that will take some time.

Is there any shift, Matt, in terms of your expectations for the ramp relative to the last time you issued guidance on the last call? Do you think it's going to be a slower ramp? If so, why? Is it a similar ramp but it started at the end of April versus the middle of March?

I actually think it's a little bit of both. Our expectations in terms of the slope of the ramp are more modest than they were in the prior guidance.

Got it. And then finally, in terms of key lessons you've learned from the Beinheim episode - have you rolled out similar safety and control measures to the rest of your facilities or are you planning to do so at some point down the road?

Yes. So John here. I would say that certainly there's a lot of lessons that we have learned from the Beinheim situation. Obviously there was a bad actor within the facility that was, I would say, the crux of the problem. But we also identified when the ANMS came in some other issues that we needed to remediate and we have now gone across our facilities to understand where other changes, from lessons learned at Beinheim, will be rolled out.

We'll probably not be rolling at the same level of security measures that were required at Beinheim, given the specific situation there. So I don't see significant cost impacts with the Company but there's certainly very good lessons learned that even with Catalent's great reputation and reliable supply we can take it to the next level. We're already in the process of rolling some of those things out and we also have our senior management team meeting in the next several weeks where we're going to take that even further with all of the top 150 people within the Company.

All right. Great. Thank you so much.

Our next question is from Ricky Goldwasser with Morgan Stanley. Your line is open.

This is Mark Rosenblum, on for Ricky. Could you just go into a little more detail on the margin headwinds in DevClin -- it looked like it was down, margins were down over 7% year over year. I just wanted to get a little more detail on that.

Sure. There's really two things driving that. The first, is that we recorded relatively more comparator revenue in the quarter than we did in the prior year period. Comparative revenue is really a sourcing -- its a procurement sourcing service that the company provides, and it's more priced off of a fee for service than it is a margin on the actual products.

So this is -- but because we are in the chain of title for the materials, we are required, according to GAAP, to gross it up in our top line sales number. So this is low to mid-single digit margin business substantially below the other revenue-producing activities of the division so it can cause revenue and it can cause revenue volatility that doesn't necessarily translate down to the gross margin line -- that's one impact.

The other impact is we had relatively less oral solid development and manufacturing work than we had in the prior year period, and that is relatively higher margin activity than the other fee for service scientific activities which comprised the division, as well as the straight manufacturing and packaging and storage and distribution revenue activities in the clinical supply business. So it's a revenue mix issue.

Got you. Going forward, do you expect it to move back to the 25% or so margins that we have seen before? Or is 17% to 20% the new normal?

We do expect margins to normalize. What we just saw in this 90-day period is not representative of what you would see over longer time horizons when the comparator figure -- when the comparator sales numbers averaged over the entire business. These can be lumpy revenue events when they occur, and we had a rather large lump, if you will, in the third quarter this year than what we saw in the third quarter last year.

The manufacture -- the oral solids developments and manufacturing activities are on an upswing. This business is growing within the company. It just didn't look that way in this relatively narrow 90-day period.

Got you. And then one final question -- on the new guidance, net income declined significantly more than EBITDA and I think part of that is the new tax methodology. A, is that right, and if so, can you break out the impact of taxes versus the decline in guidance?

Sure. So the impact, just solely due to the change in computational methodology for taxes is $22 million. And the remainder is [days] business, once again, most of which is Beinheim-related.

Okay. That's very helpful. Thank you.

Dave Windley, Jefferies. Your line is open.

Hi, thank you for taking the question. So just to follow up on that last one, Matt, the $22 million, that was the cash tax change impact for the fiscal year?

That's correct, for the entire fiscal year as we move from cash taxes to a book tax expense as adjusted for discrete items -- $22 million, correct.

Got you. And so the change -- the change in treatment for the fiscal third quarter would -- what would -- I guess what impact would it have had on numbers? How would they compare, you know, if we were thinking about trying to view those apples to apples to the way we would have expected you to report prior to the change?

Yes. That would be about $5 million to $6 million.

And net income would be improved by $5 million to $6 million?

In the prior computational methodology, yes.

Sorry, so which one would be higher, the prior way or the current way?

The prior way would be higher. The newer methodology -- the reason why I described it as conservative - it will be uniformly lower than just about any quarterly or year to date or full-year period, I can think of.

Okay. Okay. We were confused on that because there was a flat line approach to the way you were accruing the cash tax impact on a prior basis.

Right.

So moving on, the Beinheim, I think I heard you talk about the Beinheim impact for the full year. I didn't hear you, if you did call out the Beinheim impact specifically in the third quarter.

We didn't make reference to the Beinheim impact specifically in the third quarter, David - now that the facility is back up and running we're going to return the focus of our IR communications to business segments versus individual sites.

Okay. Is there -- sticking with the development and clinical solutions, the bull-ish you talked about on comparator revenue -- and acknowledging you just said you want to talk about segments, but can you give us a relative size on that? What I'm thinking about is -- revenue was down sequentially, up a little bit year over year.

I don't know -- I don't have a great sense to what extent you expected to have that big bullish of comparative revenue and if it had not come through, where revenue would have landed for DCS in the quarter.

So the bull issue that we saw through this quarter on a year on year basis is something in the $7 million to $9 million range of revenue, at low to mid-single digit gross margins. If that helps.

Okay. That does. And then the last question I'll have and I'll drop is -- I'll throw it out there and if you can't comment, fine, but there have been reports on potential M&A between yourselves and a European company and I wondered if you could comment on that - confirm or deny in any way? Thank you.

Thank you, David. We don't comment on M&A specifications.

So it's still just speculation?

It's just speculation that you have read in the press.

Okay. Thank you.

Tim Evans, Wells Fargo Securities, LLC - Analyst.

Hi, this is Sara Silverman on for Tim. I was wondering if you could comment on the OTC mix shift. Do you expect this will be a meaningful factor for EBITDA margin in FY17? Or do you think that mix has reached kind of a steady state at this point?

When the -- when we conceived the initiative, what we had expected to see was relatively nominal impact to our margins, because there is a capacity utilization - an asset utilization play that offsets the naturally lower margins of consumer health business versus the branded pharm and generic pharm side of our business. That has largely played out in the numbers. Of course everything is overshadowed by the temporary suspension at Beinheim, as well as what is going on in the MRT business within the overall reporting segments.

And I think as we look forward to next fiscal year, we expect to see the same dynamic.

Okay. Great. That's helpful. Thank you.

Derik de Bruin, BofA Merrill Lynch.

Hi. This is [Juan Avendano] for Derik DeBruin. If I may possibly get a feel for FY17? I'm just curious -- I know the Beinheim essentially, you know, the start-up is going to be gradual.

Just curious, how much of the sales lost in France do you expect to recoup in FY17? That's the first question.

Sure. So we're in the process of creating our FY17 guidance as we speak. So that number -- those numbers for FY17 will be released in the future, so it's difficult to speak with any specifics at this time.

I will add, from my opening comments that we do expect that the changes to the facility that were made necessary to secure the supply chain along with business continuity planning that we had put in place will lower the numbers from what they had previously been going into the November 13, 2015. We have not yell fully precised what that number will be, but for modeling purposes you should assume they are lower and again that we'll be putting that out in the FY17 guidance following our earnings for Q4.

Got it. Thank you. And I guess before, you had guided for cash taxes of $42 million -- $46 million? In FY16, I was wondering if you could provide what the guidance would be for the new way you calculate taxes?

Well, in terms of the cash taxes for the year, that $42 million to $46 million range -- we'd be thinking about the lower side of that, given the results of the third quarter. But the cash tax figure would not be -- we wouldn't be proposing a new range for that.

Okay. Got it. And anything that you are doing to get the tax break lower going forward?

So we, on a regular basis, do what we can within the bounds of international tax laws to optimize our global tax position. That is an ongoing effort at the company, and that has largely gone through smaller magnitude initiatives here and there. There's no big bang kind of outcome that would dramatically change things for Catalent in the absence of any significant merger and acquisition activity.

Okay. And SG&A picked up in the quarter, is that going to be a new run rate maybe as you implement corrective measures in Beinheim and deal with some SG&A improvements?

I think that's part of the answer. So you are correct in that compliance costs which have generally been increasing for pharma services companies like Catalent are comprising an increasing portion of our overall SG&A, but specific issues regarding Beinheim certainly impacted the numbers for the quarter, as well as the second quarter and the year to date numbers. We also had some significant M&A activity in the quarter that shows up in our reported numbers.

We adjust it out. This is M&A spending that the company did for deals which did not close. As everybody knows, we're very actively -- we're very active in our search for acquisition candidates in our space and we are very active in the quarter, expenditures did go out although no closed deals in the third quarter.

Were these deals that you were acquiring or have been a target for?

These were deals where we were looking at acquisition targets as we the acquirer.

Thank you.

John Kreger, William Blair & Company.

Thank you very much. Matt, one other tax break question for you, longer term. Is it reasonable to expect something in the high 20%s, 27% or 28%, going forward?

I would estimate something a little higher, John. I think it's 30% to 31%, would be an effective tax rate ETR for long-range planning purposes.

All right. Thank you very much. Another Beinheim question - once the facility is fully back up do you think we'll have the same revenue and EBITDA production capacity as it had before the suspension or do you expect any sort of permanent change in upgrading efficiency?

Yes. So this is John. I would tell you that if you asked this question three months ago, we believed that the facility would be more or less coming up to its previous revenue in EBITDA generating capacity.

After the six-month closure and the remediations that we had to put in place into the facility, basically zero tolerance for any malintent and so forth, and some of the business continuity plans that we put in place to move certain products out at the request of customers will pretty much ensure that the revenue and EBITDA generation capability of Beinheim will be lower than prior to the November 13, 2015 suspension. Some of those business continuity requests by our customers will keep -- are keeping the products within the Catalent network but no longer at the Beinheim facility. We're not giving you the exact details because we're still in the process of working that out for FY17, especially as we see the ramp of the facility coming up, but we're certain that it will be lower both our revenue and EBITDA net, yet not precised.

Thank you. And, John, if you think about the NPI, and I think you said those introductions were up about 4% versus a year ago, what does the mix tell you about those new products, if anything? Any shifts?

The mix actually has been pretty constant with regards to our Rx and OTC products. I would say they generally range anywhere from 35 to 55 in a given year - that's what I've seen and it's been pretty consistent. We are seeing some very strong VMS growth that is contributing to those numbers, but overall we're just seeing positive momentum I would say across the board and we're operating in a pretty robust marketplace.

I think the number of projects that we have now within the company is north of 700. Which is, you know, significantly up over several years back, so the good news is we're not seeing a mix down, I would say, in our NPIs because the relative value still is in the OTC and Rx space and those have been a very strong base, really good projects there. We're seeing somewhat higher BMS projects but because they are relatively lower value they don't mix us down, if you will.

The long way of saying that, we feel very good about the mix and have a strong amount of Rx and OTC projects coming out and in the pipeline.

Great. Thank you.

(Operator Instructions)

Michael Baker, Raymond James.

Can you give a sense as to whether or not there's been any customer retention issues as a result of the Beinheim as we think about 2017?

John here again. This has not had an impact with regards to customer retention. We have had individual customers who have wanted to move their products outside of Beinheim as we went through an extended period of that shut-down.

But generally in the dosage forms that we operate in, we have very, very sticky customers so we don't -- there's not a customer switching issue that we're having here or customer retention issue. There are individual products at the site that on a go-forward basis, customers have decided that the work necessary to get them restarted in the facility was not a good payback compared to the performance of those products. And that was a very small number, if you will, just actually a few.

So the bigger issue here obviously is the six-month suspension and the financial impact of the company and then some stack-out situations for our customers, that's in immediate effect. But I would say no long-term retention issues for our customers. The other thing I'll note, this is one of 11 softgel sites, so what our customers appreciated was we did have opportunities to move these products to other of our softgel sites which also makes Catalent a natural choice given the fact that there are risks operating in this highly regulated space.

And then on a different topic, Matt, he talked about continuing to pursue targets out there. What are some of the key gating factors in term of getting the deal done? Is it pretty much price at this point?

I would say that as we survey the landscape of potential opportunities multiples in the industry are high. We are pretty disciplined buyers and we are looking for acquisitions that can add value we are -- our screening criteria includes like return on invested capital which create high hurdles, these things but metrics like.

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