Catalent Inc (CTLT) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience.

You've joined the fourth quarter fiscal year 2017 Catalent, Inc.

Earnings Conference Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Vice President of Investor Relations and Treasurer, Mr. Tom Castellano.

Sir, you may begin.

Thank you.

Good afternoon, everyone, and thank you for joining us today to review Catalent's Fourth Quarter Fiscal Year 2017 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, Chairman and Chief Executive Officer; and Matt Walsh, Chief Financial Officer.

During our call today, management will make forward-looking statements that refer to non-GAAP financial measures.

It is possible that actual results could differ from management's expectations.

We refer you to Slide 3 for more detail.

Slides 3, 4 and 5 discuss the non-GAAP measures, and our just-issued earnings release provides reconciliations to the nearest GAAP measures.

Catalent's Form 10-K, to be filed with the SEC later today, has additional information on the risks and uncertainties that may bear on our operating results, performance and financial condition.

Now I'd like to turn the call over to our Chairman and Chief Executive Officer, John Chiminski.

Thanks, Tom, and welcome, everyone, to our earnings call.

We're very pleased with our fourth quarter and fiscal year 2017 results, which exceeded our expectations.

For the fourth quarter, we recorded double-digit year-over-year revenue and adjusted EBITDA growth and constant currency across all 3 of our reporting segments.

As you can see on Slide 6, our revenue for the fourth quarter increased 16% as reported and increased 19% in constant currency to $616.9 million, with 11% of the 19% being organic with all reporting segments contributing to the growth.

Our adjusted EBITDA of $159.1 million was above the fourth quarter of fiscal year 2016 on a constant currency basis by 15%, of which 10% was organic.

Again, with all segments contributing to year-over-year EBITDA growth.

Our adjusted net income was $82.6 million or $0.65 per diluted share for the fourth quarter.

Additionally, through fiscal year 2017, we recorded revenue growth of 12% as reported and 15% in constant currency, with 12% of the 15% being organic, which is significantly above our long-term outlook of 4% to 6% top line growth.

However, it's worth noting that this was partially related to the low comparison point in fiscal year 2016, due to the challenges we experienced due to a temporary site suspension at one of our softgel facilities.

Now moving to our key operating accomplishments during the quarter.

First, we recently announced that continuing our successful 20-year collaboration on the development and manufacturing of Advil Liqui-Gels, we entered into an exclusive long-term supply agreement to produce the next generation of Pfizer's leading over-the-counter pain relief product with the launch of Advil Liqui-Gels Minis using Catalent's innovative OptiGel Mini technology.

This innovative product delivers the same dose of pain relief in a more concentrated pill resulting in a smaller, more convenient capsule.

Smaller capsules are easier to swallow for consumers who may have difficulty swallowing, especially for the pediatric and geriatric markets.

Advil is one of the world's leading brands of ibuprofen pain relievers and its Liqui-Gels franchise is one of the most successful dose forms in the analgesics market.

This is another example of the 180-plus new products we launch for our customers each year and speaks to our position as the world's leading softgel producer.

Next, during the quarter, we announced that we're increasing spray drying capacity at our Pharmatek San Diego facility.

The expanded capabilities are being introduced in response to market demand for solubility enhancement solutions.

To further support the development of spray dry dispersions, we've also expanded roller compaction capacity at the site.

As a reminder, we acquired Pharmatek in September 2016 to add extensive early-phase drug development capabilities, bring spray drying to Catalent's portfolio and expand our capability for handling high-potent compounds.

These strategic investments are the first of several that we plan for the San Diego facility in the near future.

The integration of this strategic acquisition is progressing well, and we're pleased with their early successes.

I also want to provide a brief update on our biologics strategy, which continues to make great strides.

The expansion of our facility in Madison is progressing well, and we continue to be on pace for engineering runs in the next few months.

Additionally, we've already signed a number of customer contracts for the third train still under construction while also growing a robust funnel of late-stage clinical opportunities, which together should quickly fill the new capacity.

Lastly, I want to reiterate that the dynamics of our industry and market continue to remain very favorable, and our customers needs for fewer, bigger, better development and manufacturing partners will continue to be drivers of long-term growth.

Now I'd like to turn the call over to our Chief Financial Officer, Matt Walsh, who'll take you through our fourth quarter and fiscal year 2017 financial results as well as provide details on our outlook for fiscal year 2018.

Thanks, John.

Please turn to Slide 7 for a more detailed discussion on segment performance, beginning with our softgel business.

As a reminder, my commentary around segment growth will be in constant currency.

Softgel revenue of $257.1 million grew 16% during the quarter with EBITDA growing at 13%, which is primarily driven by the acquisition of Accucaps.

As a reminder, Accucaps is a Canada-based developer and manufacturer of over-the-counter, high-potency and conventional pharmaceutical softgel products, and we acquired the business during the third quarter.

In the fourth quarter, the business performed well above our expectations and contributed 14 percentage points to the segment's revenue growth and 9 percentage points to the segment's EBITDA growth.

Excluding the acquisition, our softgel business grew 2% organically at the revenue line and 4% at the EBITDA line, driven by strong prescription demand and favorable product mix in Europe.

This strength was partially offset by consumer health volume declines in the Asia Pacific region.

Our softgel North American and Latin American businesses contributed modestly to the year-over-year growth in revenue and EBITDA.

The update for the Drug Delivery Solutions segment is shown on Slide 8. The DDS segment recorded revenue of $270.2 million, which was up 16% versus the prior year, with EBITDA growing 23% during the quarter.

Recent investments in our biologics business continued to translate into growth during the fourth quarter, and it remains the fastest-growing business within Catalent.

We recorded strong revenue and EBITDA growth at our Madison facility, driven by the completion of project milestones and larger clinical programs.

The SMARTag technology continues to meet proof-of-concept milestones and customer interest remains strong.

We continue to believe that our biologics business is positioned well to drive future growth as indicated by business development signings of Roche, Moderna Therapeutics, Triphase Accelerator and Therachon AG.

The oral delivery portion of the business had a third consecutive strong quarter with favorable end-market demand for high-margin offerings within our U.S. controlled release business, which saw lower volumes throughout most of the prior year due to customer supply chain issues that have since normalized this fiscal year as we had anticipated.

Our sterile injectables business, which has been relatively flat throughout the first 9 months of this fiscal year, recorded strong revenue and EBITDA growth during the fourth quarter, driven by increased demand for injectable-filled finish services.

Our blow-fill-seal offering recorded results during the fourth quarter that were below the prior year period due to lower volumes and operational challenges, resulting from us taking steps to proactively improve our quality and manufacturing protocols and processes at the site, which we expect to continue over the next several quarters.

Strategically, market fundamentals continued to remain attractive for this key sterile fill technology.

The acquisition of Pharmatek, which we completed during the first quarter, also contributed to the segment's revenue and EBITDA growth.

Excluding the impact of the acquisition, DDS segment posted organic revenue growth of 13% and organic EBITDA growth of 21%.

In order to provide additional insight into our long-cycle business, which includes both Softgel Technologies and Drug Delivery Solutions, we're disclosing our long-cycle development revenue and the number of new product introductions as well as revenue from 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.

For the fiscal year ended June 30, 2017, we recorded development revenue of $165 million, 6% above the same period of the prior fiscal year.

In addition, during the fiscal year, we introduced 183 new products, which contributed $42 million of revenue, which is 13% more than the revenue contribution of NPIs launched in the prior fiscal year.

As a reminder, the number of NPIs and the corresponding revenue contribution in any given period depends on the type and timing of the customers' product launches, which are often driven by regulatory approvals or at the discretion of our customers and thus, these figures will continue to vary quarter-to-quarter.

Now as shown on Slide 9, our Clinical Supply Services segment posted revenue of $99.3 million, which was up 28% compared to the fourth quarter of the prior year, driven by increased customer project activity across all of our core offerings, storage and distribution and manufacturing and packaging.

Low-margin comparator sourcing activity contributed approximately 1/4 of the segment's revenue growth.

Segment EBITDA increased 34% compared to the fourth quarter of the prior year, mainly driven by the revenue growth in our core offerings.

Given the low margin of the comparator sourcing activity, it contributed only modestly to the segment's fourth quarter EBITDA growth.

All of the revenue and EBITDA growth recorded within the Clinical Supply Services segment was organic.

As of June 30, 2017, our backlog for the CSS segment was $338 million, a 3% sequential increase.

The segment also recorded net new business wins of $111 million during the fourth quarter, representing a 4% increase year-over-year.

The segment's trailing 12-month book-to-bill ratio was 1.1.

These indicators continue to support our expectation that this business should continue to grow revenues towards the high end of our consolidated long-term outlook.

Now the next slide contains reference information.

We've already discussed the segment results shown on the consolidated income statement by reporting segment on Slide 10.

So moving to Slide 11.

This shows in precisely the same format as on Slide 10, the fiscal year 2017 full year performance of our operating segments both as reported and in constant currency.

I won't cover the various drivers in detail since our full year results parallel our fourth quarter results and show similar double-digit constant currency revenue and EBITDA performance across all 3 reporting segments.

The full year 15% constant currency revenue growth or 12% on an organic basis compared to the same period a year ago was nicely above our long-term objective of 4% to 6% organic revenue growth per year.

Slide 12 provides the reconciliations of the last 12 months' EBITDA from continuing operations from the most proximate GAAP measure, which is earnings from continuing operations.

This bridge will assist in tying out the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide.

Moving to the adjusted EBITDA slide, Slide 13.

Fourth quarter adjusted EBITDA increased 12% to $159.1 million, which is a record quarter for Catalent.

On a constant currency basis, our fourth quarter adjusted EBITDA increased 15% of which 10% was organic, driven by strong performance across all 3 of our reporting segments, primarily Drug Delivery Solutions and Clinical Supply Services.

On Slide 14, you can see that fourth quarter adjusted net income was $82.6 million or $0.65 per diluted share compared to adjusted net income of $64.9 million or $0.52 per diluted share in the fourth 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.

A more detailed version of this reconciliation is included in the supplemental information section at the end of the slide deck, which shows essentially the same add backs as seen on the adjusted EBITDA reconciliation slide.

Slide 15 shows our capitalization table and capital allocation priorities.

Our total net leverage ratio has improved and is now 4.0 as of June 30, 2017, down from 4.2 as of March 31.

The ratio is also down from 4.3 as of the end of fiscal year 2016 and down from our recent high of 4.5, which we recorded during the first and second quarters of this fiscal year.

The improvement was driven by the strong adjusted EBITDA growth realized during the year.

Note that this leverage ratio is based on actual performance of the acquisitions completed this year.

We did not include any pro forma components for anticipated cost savings or full year adjustments of EBITDA as if we owned the companies all year.

However, the total incremental debt added to fund the acquisitions is included.

So in this way, the leverage ratio is conservatively presented.

However, if we did the calculation on a pro forma basis with the only adjustment being to account for the full year EBITDA of the 2 acquisitions as if we'd owned them for the full year, our total net leverage ratio would have been 3.9.

We're also very pleased with the amount of free cash flow the business generated this year.

We defined free cash flow as cash flow from operations less CapEx.

And using this calculation, we converted more than 85% of fiscal year 2017 adjusted net income to free cash flow.

Finally, our capital allocation priorities remain unchanged and focused on organic and inorganic growth.

I'll now provide our financial outlook for fiscal year 2018.

As seen in Slide 16, we expect full year revenue in the range of $2.16 billion to $2.24 billion.

We expect full year adjusted EBITDA in the range of $477 million to $497 million and full year adjusted net income in the range of $192 million to $212 million.

We expect in the range of $145 million to $155 million for capital expenditures.

And we expect that our fully diluted share count on a weighted average basis for the fiscal year ending June 30, 2018, will be in the range of 127 million to 129 million shares.

Slide 17 walks through some of the moving pieces that we considered when determining our fiscal year 2018 revenue and adjusted EBITDA guidance.

The first set of bars brackets the changes that we expect to see in our base business performance, which as I mentioned earlier, aligns with our constant currency's long-term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth.

The second set of bars adjusts FY '18 for the full year impact of the 2 acquisitions we completed this year.

Pharmatek was competed at the tail end of Q1 of FY '17 and Accucaps was completed in Q3 of FY '17.

The third set of bars highlight the headwind we're facing as we enter into FY '18 with respect to product participation revenue.

As we've discussed in the past, this revenue stream for Catalent is small at less than 3% of consolidated revenues but very high margin.

In FY '18, absent new product participation signings, we'll see a wind down of product participation revenue within our softgel and DDS segment as some of our larger product participation arrangements move towards the end of their life cycle.

The last set of bars brackets the positive FX translation impact to revenue and adjusted EBITDA year-on-year, principally driven by the recent strengthening of the euro and pound sterling in relation to the U.S. dollar.

We expect FX impact related to currencies other than the euro and pound sterling to be generally neutral during FY '18.

Lastly, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression through the year.

As discussed for several years now, 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.

And we expect that this will continue to be the case in fiscal year 2018, where we expect to realize approximately 40% of our adjusted EBITDA in the first half of the year and 60% of our adjusted EBITDA in the second half of the fiscal year.

Operator, we'd now like to open the call for questions.

(Operator Instructions) Our first question comes from the line of Tycho Peterson of JPMorgan.

This is Tejas.

Just one quick question on guidance here.

Obviously, very strong growth on the top line here, but your guidance still seems to suggest slightly muted EBITDA margin expansion.

I mean, relatively flattish at the midpoint in 2018.

Is that all due to the product participation revenue dynamic that you touched upon, Matt?

Yes, Tejas.

That is a key driver.

The other driver being the acquisitions that we added during FY '17 do come in at lower margins than Catalent's average.

But you've hit on the -- you've hit on 1 of the 2 key drivers there.

And the margin accretion that we baked into our guidance is approximately 50 basis points at the midpoint, just to be clear.

Got it.

Makes sense.

And then in terms of Beinheim, what exactly is the metaphen guidance for fiscal '18?

Are you still on track to reach pre-suspension levels of revenue and margin in this fiscal year?

That was never the expectation, Tejas.

We have been pretty candid in saying that with the enhanced safety and security protocols that we implemented at Beinheim as we brought it back online, that the facility would be expected to run at a steady state level at approximately half of its former level of profitability, and it did so in the FY '17 fiscal year.

Our expectations for FY '18 are quite similar.

Got it.

Makes sense.

And one final one here for me on the Zydis quick-dissolve platform.

You sort of highlighted that possibility a little bit earlier this quarter in terms of eliminating the need for injection-based delivery of vaccines.

How big do you think this opportunity could be for Catalent?

And when do you think we should start to see some early commercial scale adoption from your customers?

The opportunity to deliver vaccines in a Zydis format could potentially be a very large market opportunity.

The reality of the situation now is that the R&D for this kind of project will take time.

We would not expect to see material revenues from this in any time sooner than, let's say, 3 years out.

So it's a terrific -- this is a terrific example of the relevance and viability of our various technology platforms but it will move at the pace of health care approval cycles, which would suggest nothing sooner than 3 years.

Our next question comes from Tim Evans of Wells Fargo Securities.

Matt, my guidance question is a little bit more philosophical in nature.

If I'm looking at kind of the base business organic growth that you have on Slide 17, it's pretty much dead in line with your long-term guidance, which leaves me to wonder are you kind of doing this from a top-down place where you say, look, the fundamentals out there in the market will support something consistent with what we have put out there for long-term?

Or you're really building this bottoms up.

Here are the projects that we expect to be delivered this year and that just happens to come in right in line with that long-term goal?

Our FY '18 guidance is predicated upon detailed bottoms up budgeting processes that we undertake throughout the company.

We -- when we the supplement that with the results of a strategic planning exercise that we do once a year, and that is a combination of those 2 things, Tim, with the budget being very much a bottoms up exercise.

The long-term planning work that we do was a combination of bottoms up and top-down.

Both of those work streams inform the guidance that we have.

And yes, it's true, our organic growth rates have been running hotter than that 4% to 6% long-term outlook.

We have thought carefully about raising those long-term outlook numbers, and may do so in the future.

But for this particular communication, we thought it best to keep our long-term outlook at the 4% to 6% that we've been saying since the IPO.

But certainly, the underlying strength of the business is encouraging to us.

And as we think about our long-term outlook and when we communicate on it, we're certainly leaning towards moving that number up in the future versus holding it flat.

And what would be the factors, the kind of structural factors that would create that potential upside just qualitatively?

Whenever we -- so from a top-down perspective, when you think about how Catalent grows, we go into every year with very good revenue visibility into the long cycle parts of our business.

That's the 7,000 products.

And that will grow somewhere between, let's say, 2 and 5 points per year.

We supplement that each year with new product introductions, which will generally yield about 2 more points of growth in the year that the products are launched.

And then every year, we lose about a point of sales for products that just reached the end of their life cycle.

We say products fall off the back end.

And it's the -- what we tend to have the hardest time, the biggest challenge forecasting is the new product introductions.

So we had both in number and dollar value.

We've had better performance out of NPIs than we would have thought a couple of years ago.

But betting that, that will continue, it would be nice to have a little bit more data in the trend before we would think about upping the 4% to 6%.

But those data points are aligning and accumulating now.

Our next question comes from Ricky Goldwasser of Morgan Stanley.

I want to follow up on the new product introduction.

When we think about the 2018, just confirming because it seems that in '17, new products are about 2.3% contribution to growth.

So new products are already factored into the 2018 guidance?

Or should we think about them as upside?

We have factored new product introductions into our FY '18 guidance at about the level that we've seen for the past few years.

And when we think about kind of these new products, what areas are they coming from?

And what percent of them are coming from biologics?

The new products that we disclosed, the 183, for example, for this year, comes from all end markets that we pursue.

So it's prescription, generic, over-the-counter, VMS.

These are the 4 major classes of products that we track.

In terms of biologic new product introductions, I would say the answer there would mirror the characteristics of the rest of our business, which is it's growing but it's still underrepresented in terms of where we would like it to be in terms of mirroring the industry.

And what do you think is -- or kind of like holding you back?

Well, so the range of advanced delivery technology platforms that we have can certainly accommodate biologic products, but many biologics are delivered in prefilled syringe or vials.

And Catalent is not a significant player in either of those delivery forms today.

We have an injectables business that's relatively small.

We don't have a significant vial presence yet to speak of.

And so I'd say, Ricky, that's what holds us back.

As we think about organic growth and inorganic growth, we're certain -- we certainly know where we need to expand, and we are focusing on those areas.

Okay.

So just last question as it relate to that.

Just kind of like your thought about -- for M&A and capital deployment for fiscal year '18?

Our philosophy on M&A going into '18 has not changed.

We continue to look for acquisitions that enhance our technical differentiation and value to customers.

We happen to find 2 deals in FY '17 that met our criteria.

We executed on those.

We believe that there are numerous opportunities for us to grow inorganically.

And as I said, we will continue to be quite thorough and aggressive in trying to identify acquisition targets that can enhance our rate of organic growth.

Is there sort of a sweet spot that we can think about in terms of how much you're willing to spend on acquisition for what type of contribution to top line?

We don't constrain ourselves that way, Ricky.

It's really the slate of opportunities that we are -- that we would find actionable in FY '18 that would -- that we would respond to versus Catalent trying to overlay some predetermined criteria or program on top of that.

You have to be flexible in this market if you're going to grow through acquisition.

I think we've -- we have recognized that, and we would see ourselves as being quite flexible in terms of completing the kinds of acquisitions that will create real value.

Our next question comes from Derik De Bruin of Bank of America.

The weakness for OTC softgels in APAC, could you just go a little bit more detail on that?

I'm just wondering if that's tied to any sort of issues in some of the Indian markets.

There's been some discussions about maybe some drawdown of inventory and some other issues between the manufacturers.

I'm sort of curious into what you're seeing.

So that -- your particular business line, general meds and some broader thoughts on the overall international markets.

Derik, John here.

I would just tell you that if we were to go back 2 years ago, we had some significant strength with regards to our, I would say, our nonprescription softgel business mainly driven by really fast growth that we're seeing out of China from a couple of large customers.

And we really rode on the backs of that growth and then there were some regulatory changes that happened in China that literally flipped that situation completely around this past year.

So I would say we've responded to it.

It was lower-margin product for us.

So although when we had some strong tailwind again significantly driven out of China, it's primarily revenue driven.

That's gone away but it's also again then lower-margin business.

It's starting to modulate now.

And I would just say that the strength of Catalent continues to be our overall diversification across all markets and across all products.

Great.

And just a bigger picture question.

I mean, in the last 6 months, we've seen a ton of consolidation in the CDMO market.

Lonza, Capsugel, AMR went private and Thermo's about to close on the Patheon deal.

I guess, could you sort of talked about like the broader CDMO landscape and sort of your general feel on the market and any early indications of changes in customer behaviors?

Or just new changes now that there are some new owners to these businesses?

Yes, sure.

I would just say, first and foremost, that it just talks to the very robust and dynamic nature of the marketplace.

That's the most important conclusion that you can draw from it.

These are very robust businesses that -- they're sticky, they're enduring, they're associated with a highly regulated business.

That means that not everybody can play in those categories.

And we've also been talking about for a long time that the market wants to move towards fewer, bigger, better suppliers like Catalent, again because of the regulatory environment, because of the requirements of our customers for reliable supply, the ability to partner with someone from an overall development and formulation standpoint as they try to variabilize their costs or maintain, I would say, a virtual standing as a company and then leverage someone like Catalent.

So that's probably the main thing that I would draw from what's happening in the marketplace.

I will tell you that on -- our customers in this space really do not like uncertainty.

So while there's changes afoot in some of the consolidation that may, in the very near term, impact some buying decisions by customers but generally speaking, longer term, those things tend to settle out.

We certainly experienced that as we went private from Cardinal Health into Blackstone.

Great.

And then just one housekeeping question.

Tax rate guidance for the year and any changes in that?

So we are advising folks to think about a 2018 effective tax rate for Catalent in the 28% to 29% range.

This is substantially lower than what we've guided to previously.

And it results from some of that tax planning work that we've been doing on an international basis of somewhat exceeding our expectations in terms of the overall productivity of it.

So 28% to 29% for FY '18.

Our next question comes from John Kreger of William Blair.

John, can you talk a little bit more about just the long cycle of market pipeline that you're seeing?

If you think about the mandates that you've won or lost in the last year, what were the lessons learned?

Is the level of competition changing at all from your perspective?

Yes.

So I would say, first of all, the pipeline continues to grow.

We've talked about this a lot with all of our investors.

The pipeline is up.

I think something like 50% over the last 5 years from 8,000 molecules to somewhere over 12,000.

And we're starting to see a little bit of a move from 40% of those molecules being biologics to over the next, I guess, 3 or 4 years, it's going to move to 60% of those being biologics.

I would tell you that although there has been consolidation in a few more bigger players, it's still fragmented enough such that we do not really see a significant increase in the overall competitive environment.

Customers, first and foremost, are going after premium suppliers.

They are looking for quality and reliable supply.

They are looking for partner formulation expertise and then probably fifth and sixth down the list is generally price.

And as you know, John, given the fact that a lot of the business that we're in are in the advanced delivery dosage forms that are forcibly outsourced, we were just kind of a natural player.

We are seeing heightened competition in our Clinical Supply Services group.

This is a part of our business that is less differentiation.

In fact, there's little differentiation beyond the service excellence that you can provide.

And that's also becoming, I would say, a much more demanding space as the trials get smaller and we just see generally more demanding for just-in-time kind of environment.

Just in general, I would say, John, it just continues to be very, very robust.

And it's my previous comments to Derik around what some of this consolidation has done is again, our customers don't like a large -- any degree of uncertainty to be honest with you.

And in those cases, we find ourselves being in a modestly improved competitive situation but that those things tend to sort themselves out again maybe over the course of several years or so forth.

I don't know if that answers your question, John.

That's probably the way I think about it.

It does.

Maybe just 1 quick follow-up.

Again, if you think about the business you've won or lost, what sort of pricing trend are you typically seeing?

Is it about neutral?

Or maybe kind of CPI?

It's hard to say that way.

First of all, I won't say that we're experiencing pricing pressure again outside of our more competitive business of the clinical trial supplies business.

In fact, generally just what we're seeing is we're winning a lot of business that tends to be of extremely higher value that's out there because as you know, we kind of price to the value we bring versus something that's "CPI-ish." So we certainly have CPI escalators in our contracts and execute on those.

But upfront, when we're winning the business, we're maximizing the value of that particular piece of business, and there tends to be a little bit higher-value business out there because it's moving towards hormonal biologics.

There's again, I would say, more advanced delivery forms that's driving that.

So we don't necessarily think about price maybe the way traditional businesses do.

On a year-on-year basis with our existing business, it feels like we get maybe 1% price because of our escalators.

But in the businesses that we win, we continue to be in a, I would say, a premium pricing environment for our technologies.

Great.

And one last one.

If you think about the biologics business and all the growth you're seeing in the market in general, are you seeing that across the spectrum of sort of the size of products?

Or is the outsourcing, so to speak, more tilted towards smaller versus larger-volume products?

If you're referring to on the biologics front, John, I would say that certainly the small and midsized companies tend to be really the ones outsourcing, but we're also seeing the large pharm also doing outsource there -- outsourcing there.

So we're seeing it, I would say, on both ends with the fact that I think we know that most of the pipeline, 75% of the pipeline is really commercial going to be in this 5,000 liters or less.

And then there's a certain part of the pipeline that's going to be 50,000 liters and more.

And this is probably for some of the biosimilars and so forth.

So I would say from a biologic standpoint, it works on both ends, if you will.

And Catalent strategy certainly has been to remain focused on the 5,000-liter or less, where we can make some very reasonable CapEx investments and get significant growth as we've seen in our Madison facility.

Our next question comes from Dave Windley of Jefferies.

I want to focus on softgel primarily and first of all, on Accucaps.

So Matt, I think when -- upon acquisition, we talked about Accucaps being a 1% contributor to revenue, which would have been, call it, circa $40 million.

I think then after the last quarter, when it performed better than that, we're talking about $80 million.

And now this quarter's contribution would annualize at $120 million.

I'm guessing that your all's diligence was a lot more precise than that portrays.

And I guess, I just want to understand, are we seeing the heavy seasonality in that business that makes this quarter so large?

Or is it really just a lot bigger business than you thought it was when you bought it?

So just to revisit the commentary.

When we were onboarding Pharmatek and Accucaps, when I was saying 1 to 2 points of growth, that's -- those were all the EBITDA line.

And yes, it's true that especially Accucaps has pretty far outstripped that.

And I would say what we've seen is just a combination of really strong volumes out of the gate that has enabled us to realize not just top line numbers but their level of capacity utilization has brought in this revenue at EBITDA margins that were not quite double what we were modeling but certainly in excess of about 60% to 70% of what we were modeling.

So volumes are just strong out of the gate.

I don't -- I wouldn't necessarily ascribe it to seasonality.

I think it's just -- they just had a couple of their good products.

The order patterns have just been strong, and I don't know that it will always be that way, but it's certainly been that way out of the gate, David.

Okay.

So I guess as a follow on to that, then understanding that as you just said, they may not continue to be that strong but you're thinking about your guidance bridge and your M&A.

I think Accucaps was part of 2017 to the tune of somewhere between 4 and 5 months.

And so if I annualize that revenue alone, it's an excess of $45 million.

And then you've got another at least quarter of Pharmatek add in there as well.

Help me understand why the acquired revenue contribution to the bridge is not going to be well in excess of $45 million.

So Dave, this is Tom.

I think one of the things we did when we sat down and try to figure out the impact to M&A was to get things back down towards the level that the business was running at prior to acquisition and what we expected it to run at when we acquired it through the levels of the deal model.

As Matt said, I don't know that the levels that we're seeing out of Accucaps primarily is necessarily sustainable.

So we didn't -- annualizing what we've seen through the first 4 or 5 months as what that business is going to run at into next year, we feel is a little aggressive.

So we've taken that back in the guidance.

I think is it conservative?

Potentially.

There may be an opportunity there for a little bit of outperformance, but I certainly wouldn't expect this business to continue to run at the levels that we've seen through first 5 months of ownership, and that's what the guidance assumes.

Okay.

On the NPIs to an earlier question.

I want to revisit my understanding there.

You had a very, what, you might call bumper crop or whatever of NPIs in 2017, both I think in terms of number and also in terms of the revenue contribution, which I would intuit to mean that the 183 were perhaps a richer mix of, say, Rx and the generic OTC as opposed to VMS relatively compared to prior years.

If you get a -- if -- I guess, first of all, is that right?

And then secondly, if you get kind of prescription-rich mix of NPIs, could we safely project forward that, that vintage, that crop continues to be an outsized contributor into their subsequent years?

Okay.

So Dave, John here.

Just 2 parts to that question.

First of all, I would tell you that we certainly have seen accelerating numbers of NPIs.

So we've been kind of accelerating towards this 180-plus number, if you will, over the last couple of years, and we should have similar, if not higher, total numbers this year.

Although if you were to take a look at the actual revenue that we've gotten from those NPIs over the last couple of years, this year was certainly higher than it was last year, but it was with a similar number of NPIs.

They just happened to have higher contributions and a little bit higher revenue.

And part of that comes from when do they actually get launched within the year.

So I would say this year was slightly better than previous years but mostly from when we were actually launching those, which we got a higher number of -- higher revenue contribution starting earlier in the year than prior years.

So I think that plays out if you were to go back and look at our first and second quarter earnings release, we kind of talked directly about that.

As you know, we operate with most products generating $1 million to $2 million worth of revenue, so we're generally not looking for any 1 single blockbuster.

But if we do have an outsized starting year that bumper crop, as you call it, tends to contribute a lot going forward, but we've been talking about the range of $40 million, if you will, and that's not going to come in at a doubled the rate or so forth.

Ours was just a game of collecting as many molecules as we can during development and then launching them.

And what changes our quarterly predictability is the volatility of the launch when it launches within the year and so forth.

And that's why we have some of this quarter-to-quarter volatility.

But in general, I would tell you that we are seeing increasing NPI launches, modestly increasing NPI revenues as we start to launch more of those at the beginning of the year versus just at the end of the year, and it continues to be a bellwether for, I would say, the long-term growth aspects or prospects for the business.

Okay.

The only other thing I would add to John's answer, John referenced timing when in the year this product launch.

The other piece that really comes into play is how our customers strategize for the launch.

Some of them really fill the pipeline on the anticipation that the product will be very successful.

Some of them do soft launches where they don't stock heavily and they're going to wait and see how the product gets off in terms of scripts being written.

So just another point as to the difficulty in trying to forecast the revenue contribution from NPIs.

It's the toughest thing that we do from a forward-looking perspective.

Our next question comes from Sean Wieland of Piper Jaffray.

So I'm curious about your views on the opioid abuse deterrence like the Acella contract that you announced during the quarter.

I guess more broadly, what do you see is your role in addressing the opioid abuse crisis?

And how do you think you're positioned there?

I would just respond that obviously the opioid crisis is an urgent issue here in the U.S. Catalent advance delivery technologies has opportunity with some of our abuse deterrent technologies.

We have something that's called OptiGel Lock.

We have partnered to or try to win business and do development on abuse deterrent technologies.

Catalent sees this as, again, another important dose delivery mechanism that we have within the company.

Okay.

And then maybe a quick one on the Advil Liqui-Gel.

Is that an incremental revenue or margin opportunity from that?

Or is that -- does that kind of cannibalize the existing revenue source?

Well, so we don't talk about margins of individual products but for something like Advil, we would envision that there may be some incremental economics here but there will be a considerable amount of swapping, if you will, from the current size to the Mini.

Well we're in sort of wait-and-see mode, some of this will depend on how Pfizer markets the 2 dosage forms, but we would expect that there would be some pretty significant replacement.

But the overall economics for Catalent should be fine to improving.

Our final question comes from Michael Baker, Raymond James.

I was wondering given the ramp in the biologics business, if you could give us an updated view on your margin expectations in that segment relative to the base?

And how it's shaping up so far relative to those expectations?

The DDS segment as a whole has the highest margins of any reporting segment within Catalent.

Biologics is certainly above that average.

What we have found over the past couple of years is increasing margins on capacity utilization.

So Madison was built new and commissioned in 2015.

And as we fill that site, the benefits of utilization saw increasing margins.

Overall though I would say in the marketplace, there's certainly a situation where customer demand is exceeding supply across the industry.

That tends to lead to some favorable pricing dynamics here in the near term, which has been helpful to our margins, and that is factored into our FY '18 guidance already.

Thank you.

At this time, I'd like to turn the call back over to Mr. Chiminski for any closing remarks.

Sir?

Thanks, operator, and thanks, everyone, for your questions and for taking the time to join our call.

I'd like to close by reminding you of a few of our key priorities for fiscal year 2018.

First, we're confident and committed to delivering fiscal year '18 results consistent with our financial guidance, which is aligned with our long-term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth.

Next, we're committed to building a world-class biologics business for our customers and for patients and look forward to another year of double-digit revenue and EBITDA growth from our core biologics offering.

Operations, quality and regulatory excellence are at the heart of how we run our business and remains a constant focus and priority.

We support every customer project with deep scientific expertise and a commitment to putting the patient first in all we do.

Lastly, we're well positioned to capitalize on our industry-leading partnerships and the potential for consolidation.

We continue to target tuck-in acquisitions that we can integrate swiftly and efficiently in order to maximize value to our shareholders as evidenced by the acquisitions completed during fiscal year 2017.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and have a wonderful day.