Catalent Inc (CTLT) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Catalent Second Quarter Fiscal Year 2020 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Paul Surdez, Vice President, Investor Relations.

Thank you.

Please go ahead, sir.

Good morning, everyone, and thank you for joining us today to review Catalent's Second Quarter Fiscal Year 2020 Financial Results.

With me today are John Chiminski, Chair and Chief Executive Officer; and Wetteny Joseph, Senior Vice President and Chief Financial Officer.

In addition to reviewing our second quarter earnings release issued earlier this morning, we will also refer you to our other press release issued today regarding our agreement to acquire cell therapy leader, MaSTherCell.

Please see our agenda for this call on Slide 2 of our supplemental presentation, which is available on our Investor Relations website at www.catalent.com.

During our call today, management will make forward-looking statements and 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-Q, 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 would like to turn the call over to John Chiminski.

Thanks, Paul, and welcome, everyone, to the call.

In addition to reporting strong Q2 results, we're excited to announce this morning our plan to further expand our biologics footprint by acquiring MaSTherCell, a leader in cell therapy development and manufacturing.

Before reviewing the strategy behind adding MaSTherCell to the Catalent family, let me summarize our financial highlights from the second quarter.

As you can see on Slide 6, our revenue for the second quarter increased 16% as reported or 17% in constant currency to $721 million, with 7% of the constant currency growth being organic, which is above our expectations for the long-term organic growth of our base business.

Our adjusted EBITDA of $171 million for the quarter was above the second quarter of fiscal year 2019 on a constant currency basis by 16%, with 5% being organic.

Our adjusted net income for the second quarter was $72 million or $0.45 per diluted share, unchanged from the per share adjusted net income in the prior fiscal year.

Three of our 4 reporting segments had strong performances as Biologics, Softgel and Oral Technologies and Clinical Supply Services each contributed to the organic revenue and adjusted EBITDA growth, partly offset by headwinds in our Oral and Specialty Delivery segment.

Wetteny will detail these results later in the call.

Now moving on to the operational update.

First, we announced 2 important executive appointments in January that provide additional depth and breadth to our leadership team.

We recruited Karen Flynn to return to Catalent after 10 years of leading operations and commercial activity for a well-respected biopharma services company to be President of our Biologics segment and our Chief Commercial Officer.

Karen, who is replacing the retiring Barry Littlejohns, will execute our biologics strategy and further expand our Biologics drug substance, drug product and gene therapy businesses.

We also recruited another former Catalent executive with decades of experience in the biopharmaceutical industry, Ricci Whitlow, as our President of Clinical Supply Services in place of the retiring Paul Hegwood.

In addition to growing our CSS business with our traditional customer base, she will be focused on growing its footprint through cross-selling opportunities with our Biologics and other long-cycle businesses.

Karen and Ricci, like Barry and Paul before them, report to our COO, Alessandro Maselli.

They replace distinguished leaders who are celebrated here at Catalent for growing their businesses and for their tireless efforts to help establish our patient-first culture.

Next, last week, the Catalent Board of Directors approved the deployment of additional capital for further expansion of our gene therapy commercial facilities at BWI, which expansion will support operations on the BWI campus as well as our other gene therapy facilities in BioPark, Rockville and Gaithersburg.

This investment is above and beyond the CapEx previously approved for the build-out of the 10 suites in our BWI facility, all of which are on track to be operational at the end of this calendar year.

The additional CapEx approved last week will allow us to achieve higher revenue potential from the Paragon acquisition than anticipated at the time of the original acquisition last May once all the projects are completed.

Additionally, early last month, we took ownership of Bristol-Myers Squibb's oral solid biologics and sterile product manufacturing and packaging facility in Anagni, Italy, which we had agreed to acquire in June.

This multipurpose site enhances our global network and provides us drug product sterile fill/finish capacity and oral solid-dose manufacturing in Europe and comes with an agreement to continue to manufacture BMS's current product portfolio at the site.

The Anagni facility expands our European capabilities in biologics drug product, solid oral dose manufacturing and packaging to accelerate development programs and provides greater commercial supply capacity.

The acquisition of Anagni is another example of our progress in realizing our global biologics strategy, which continues to develop and strengthen across our network.

As an additional example, I'm pleased to announce that the Bloomington site received yet another commercial product approval in January, bringing its total to 22 versus the 12 it was producing at the time of the acquisition, with several additional launches on the horizon.

The previously announced $200 million investment in Bloomington and Madison are progressing according to plan and will help us serve the existing pipeline of late-stage clinical work and other opportunities for these high-margin sites.

Another important element of our biologics strategy is our entrance into the gene therapy space last year.

The acquisitions of Paragon Bioservices and related gene therapy assets provided Catalent with new expertise and capabilities in one of the fastest-growing techniques for therapeutic intervention today and position us for accelerated long-term growth.

The integration of these gene therapy assets into the Catalent portfolio is progressing ahead of our expectation and has been a key contributor to our strong year-to-date financial results.

The CapEx approval I previously highlighted was supported by this early outperformance as well as by research we commissioned from an independent third-party consultant, which indicates the gene therapy pipeline will continue to increase much more rapidly than the manufacturing assets needed to service the demand.

Paragon provided us with a platform for development of an expanded offering in biologics, enabling entry into technology categories adjacent to the development and production of viral vectors for gene therapies.

The success we've experienced thus far with Paragon provides us with the confidence and blueprint to further expand our biologics offering into cell therapy, which we are announcing this morning.

Please turn to Slide 7 for an overview of our agreement to acquire MaSTherCell, a technology-focused cell therapy development and manufacturing partner to cell therapy innovators.

MaSTherCell's service offerings include the development and manufacture of both autologous and allogeneic cell therapies as well as a variety of related analytical services.

It has worked with a range of therapies, including those based on the so-called CAR-T cells, tumor-infiltrating lymphocytes as well as T cell receptors and other cell types.

MaSTherCell, which was founded in 2011, has sites in Belgium and Texas.

Its current operating facility near Brussels provides preclinical and clinical stage services, and MaSTherCell is in the process of building a commercial-scale production and fill/finish facility nearby, which is expected to open in late 2021.

MaSTherCell is also in the final stages of completing the build-out of a preclinical and clinical stage facility near Houston, Texas and has future plans to expand into commercial there as well.

Cell therapy, like gene therapy, is attracting enormous funding as both the number of active programs and the level of funding have rapidly expanded over the last 5 years.

There are now more than 500 public and private companies with cell therapy programs and hundreds of active cell therapy-based investigational new drug applications.

Much of the focus today is in oncology, but we're seeing applications expand in other therapeutic areas, such as autoimmune diseases, cardiology and neurology.

Our research indicates that the cell therapy pipeline is growing in the mid-teens range with over 800 cell therapy assets in the pipeline today and also estimate cell therapy manufacturing to be approximately 65% outsourced, which is comparable to viral vectors.

Also, similar to viral vector manufacturing, cell therapy capacity is scarce, and the trend of demand outstripping supply is projected to become more acute despite investments in additional capacity being made across the industry.

We see MaSTherCell as a complementary addition to our gene therapy capabilities and the rest of our Biologics portfolio.

We also believe that MaSTherCell will be a strong, strategic fit for Catalent as we're well positioned to combine MaSTherCell's team of experts and differentiated capabilities with our extensive resources and our significant experience in scaling new platforms to help MaSTherCell build out its development and commercial manufacturing capabilities.

Furthermore, we believe MaSTherCell rounds out our program to be the leader in gene and cell therapy, creating deeper and broader relationships with customers, and like we've seen with Paragon, open up cross-selling opportunities across Catalent's other technology platforms.

From a structural perspective, this is an all-cash transaction with a total purchasing price of $315 million subject to customary purchase adjustments.

Catalent expects to finance this transaction with either a partial drawdown of its revolving credit facility with proceeds from a possible future incremental capital raise.

Any such raise may also include funds for capital expenditures in support of our gene therapy programs and other strategic initiatives.

Slide 8 illustrates how our actions continue to fundamentally transform our business and increase our share of the R&D pipeline by significantly increasing our exposure to the faster-growing area of the industry that is biologics.

We've done this through significant organic and inorganic investments, putting to work nearly $3 billion over the last 5 years.

In the 12-month period ended December 31, our Biologics segment represented 27% of our portfolio.

In the quarter we're reporting today, it's now just over 30%.

And when factoring in our long-term organic revenue growth guidance of 6% to 8%, combined with strategic acquisitions like MaSTherCell and Anagni, we believe we're on pace for 50% of our revenues to be driven from Biologics segment by the end of fiscal 2024 with total company revenues projected to be approximately $4.5 billion.

Given the greater margin contributions from our Biologics segment, we believe adjusted EBITDA margins in 2024 will expand to at least 28%, up approximately 300 basis points from our expected levels in 2020.

We're proud that the combination of organic and inorganic investments we're making in biologics is already delivering substantial benefits to patients.

We believe our strategy that drove us to uniquely combine capabilities to support the fastest-growing areas of drug development with Catalent's historical leadership and deep expertise in global contract drug manufacturing will continue to create significant value for our company, our customers and our shareholders.

Now I'll turn over the call over to Wetteny, who will take you through our second quarter financial results and the details related to our updated financial guidance.

Thanks, John.

I will begin this morning with a discussion on segment performance, where both the fiscal 2019 and fiscal 2020 second quarter results are presented on the basis of the revised reporting segments we introduced last quarter.

Please turn to Slide 9, which presents our Softgel and Oral Technologies business.

As in past earnings calls, my commentary around segment growth will be in constant currency.

Softgel and Oral Technologies revenue of $267.9 million increased 3% during the quarter, with segment EBITDA increasing 19%.

After excluding the impact of the October 2019 divestiture of the segment's manufacturing site in Braeside, Australia, segment revenue and EBITDA grew 9% and 24%, respectively.

The growth primarily relates to volume increases across the consumer health portfolio within Europe as well as increased demand in the prescription product business in North America, which is partially attributable to recently launched products.

Revenue in the consumer health business also increased in North America and Latin America due to the prior year shortage in ibuprofen API supply.

Additionally, the strong segment EBITDA performance was driven by improved capacity utilization and favorable product mix across the network.

Slide 10 shows that our Biologics segment recorded revenue of $225.2 million in the quarter, which is up 66% versus the comparable prior year period, with segment EBITDA growing 61% quarter-over-quarter.

Note that a large portion of both the revenue and the segment EBITDA growth was inorganic and driven by the gene therapy acquisitions, which contributed 56 percentage points to revenue and 49 percentage points to EBITDA growth.

Excluding acquisitions, the segment recorded organic revenue growth of 10% in the second quarter and segment EBITDA growth of 12%.

Recent investments in our Biologics business continued to translate into growth during the second quarter as we recorded strong growth in drug product volumes in the U.S. As a reminder, drug substance revenue continues to be impacted by the completion of a limited-duration customer contract, which had a particularly high drop-through of EBITDA, following the completion of the client build-out of its own capacity.

The customer's strategy to move its production in-house was fully contemplated when we entered into the contract, and the precise timing was less defined given typical production complexities.

We continue to expect this to be a comparison headwind for our drug substance business for another quarter as we work to onboard new customers to increase our utilization levels.

Drug acceptance, after excluding the completion of this noncell line clinical manufacturing contract, also grew year-on-year.

As John mentioned, we just closed on the Anagni acquisition on the 1st of January.

As we did not know the timing of the close when we gave initial guidance in August, the site was not included in our original estimate, but is now reflected in our current guidance updated today.

As the site is multipurpose, its future financial reporting is likely to be split between Biologics and OSD segments, and we will provide you more details when we report our third quarter.

To close out the commentary on Biologics, I'd like to echo John's excitement about bringing MaSTherCell's cell therapy expertise to Catalent, which enables us to establish a position in this exciting new therapeutic platform and stay at the forefront of bringing new, advanced therapies to scale.

Catalent provides MaSTherCell access to growth capital, leverages its functional and system expertise and provides access to additional customers.

However, given the company's early stage, MaSTherCell is not expected to provide meaningful EBITDA in the next 2 years as profit generated in its current clinical services will be consumed by its commercial build-out.

We expect to provide additional color next quarter following the expected closing of the transaction.

Slide 11 shows that our Oral and Specialty Delivery segment recorded revenue of $143.2 million in the quarter, which is down 7% versus the comparable prior year period, with segment EBITDA declining 28% quarter-over-quarter.

While we experienced growth in our orally delivered commercial products, this was more than offset by decreased volumes in the segment's respiratory and ophthalmic specialty delivery platform.

This business experienced very strong demand a year ago as it generated revenues in anticipation of new product introductions.

However, these NPIs have not yet materialized, creating a headwind for the segment this quarter, which despite expected sequential improvement will result in a year-on-year headwind for the remainder of the year and is factored in our new guidance.

Despite the softness we are experiencing this quarter, we believe the OSD segment continues to have a very strong development pipeline, including several late-stage quasi-development programs that will drive future long-term growth.

In order to provide additional insight into our long-cycle businesses, which include Softgel and Oral Technologies, Biologics and Oral and Specialty Delivery, we are disclosing our long-cycle development revenue and the number of new product introductions as well as revenue from these 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 first 6 months of fiscal year 2020, we recorded development revenue across both small and large molecule of $422.5 million, which is more than 36% above the development revenue recorded in the first half of the prior fiscal year.

Additional disclosure on our development revenue is included on our Form 10-Q to be filed today with the SEC.

In addition, we introduced 87 new products in the first 6 months of fiscal year 2020, which are expected to contribute approximately $27 million revenue in the fiscal year.

Now as shown on Slide 12, our Clinical Supply Services segment posted revenue of $87.9 million or 9% growth over the second quarter of the prior year, segment EBITDA of $24 million or 15% growth.

The strong growth in both revenue and segment EBITDA was driven by strong demand in the segment's storage and distribution and manufacturing and packaging businesses.

All the segment revenue and EBITDA growth recorded within CSS was organic.

As of December 31, 2019, our backlog for the CSS segment was $390 million, a 4.5% sequential increase.

The segment recorded net new business wins of $104 million during the second quarter, which is a decrease of 2.3% compared to the very high level of net new business wins recorded in the second quarter of the prior year.

The segment's trailing 12-month book-to-bill ratio remains at 1.2x.

Slide 13 and 14 contain reference information for our second quarter and year-to-date segment results, both as reported and in constant currency.

Slide 15 provides a reconciliation of EBITDA from operations from the most approximate GAAP measure, which is net earnings.

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

Moving to adjusted EBITDA on Slide 16.

Second quarter adjusted EBITDA increased 17% to $171 million or 23.7% of revenue compared to 23.4% of revenue reported in the second quarter of prior year.

On a constant currency basis, our second quarter adjusted EBITDA increased 18%, including 5% organic growth.

On Slide 17, you can see that second quarter adjusted net income was $72 million or $0.45 per diluted share compared to adjusted net income of $65.4 million, also representing $0.45 per diluted share in the second quarter a year ago.

Slide 18 shows our debt-related ratios and our capital allocation priorities.

Our total net leverage ratio as of December 31 was 4.2x, which has modestly reduced from the ratio as of the end of the prior quarter.

Pro forma for completed acquisitions, our total net leverage ratio was 4.0x, which is an improvement of approximately 1/2 of a turn compared to the ratio at the time we announced the Paragon transaction.

Given the free cash flow generation of the company and its growing adjusted EBITDA, the company naturally delevers between 0.5 and 0.75 of a turn per year.

Additionally, continued investments in Biologics, including the new CapEx approved by our Board last week for our gene therapy business, led us to increase our fiscal year 2020 projections for CapEx spending.

Taking into account customer funding, capital expenditures are now expected to be approximately 13% to 14% of net revenue compared to our initial assumption of 11% to 12% of net revenue.

Our capital allocation priorities remain unchanged and focus first and foremost on organic growth followed by strategic M&A.

Now we'll turn to our financial outlook for fiscal year 2020 on Slide '19.

As John reviewed in his opening comments, we are raising our financial guidance to reflect the acquisition of Anagni and for the continued growth of the gene therapy business and are also slightly tightening these ranges to reflect the passage of time.

No contribution from MaSTherCell is assumed in this revised guidance, which regardless of when it closes will be immaterial to our full year 2020 results.

We now expect full year revenue in the range of $2.87 billion to $2.95 billion compared to our previous guidance of $2.78 billion to $2.88 billion.

Note, this new guidance continues to assume organic revenue growth of 4% to 7%.

Full year adjusted EBITDA -- for full year adjusted EBITDA, we now expect a range of $711 million to $735 million compared to our previous expectation of $700 million to $730 million.

This new range continues to assume our original organic adjusted EBITDA growth assumption of 9% to 12%.

Note the greater increase in our revenue guidance relative to our adjusted EBITDA guidance will result in a somewhat lower adjusted EBITDA margin level for fiscal 2020 than our original guidance.

We now expect adjusted EBITDA margin to increase over fiscal year 2019 results of 23.8% by approximately 100 basis points at the midpoint of the new range versus the previous expectation of an approximate 150 basis point increase.

This is largely due to the addition of Anagni, which, as expected, currently has lower utilization levels until it adds more customers.

We're also updating our full year adjusted net income guidance to a range of $307 million to $331 million compared to the previous guidance of $300 million to $330 million.

We now expect that our fully diluted share count on a weighted average basis for the fiscal year ending June 30 will be in the range of 160 million to 161 million shares, which continues to account the preferred shares we issued in May to fund part of the Paragon acquisition as if they all were converted to common shares in accordance with their terms.

We continue to expect our consolidated effective tax rate to be between 24% and 26% for the fiscal year.

Finally, Tom Castellano is also in the room with us today, and I'd like to personally thank him for the outstanding job he has done leading the Investor Relations function for Catalent since our IPO.

Tom will continue to add great value to the company in his new leadership role as Global Vice President of Operational Finance and as the finance leader for our Biologics segment.

Tom has transitioned his IR responsibilities to Paul Surdez, who joined us last month and many of you know from his time leading Investor Relations at other public health care companies.

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

(Operator Instructions) Our first question comes from Tycho Peterson with JPMorgan.

I'll start with MaSTherCell.

I know it's a smaller deal than Paragon, but I'm just wondering if you could compare and contrast the 2. How you think about kind of the cellular market versus the gene therapy market?

How should we think about CapEx needs?

Any customer concentration risks?

And then as we think about kind of the longer-term guidance of 10% to 15% for Biologics, what do you think the cellular therapy market opportunity could do to that growth rate?

Sure.

A lot there, Tycho.

So let me just step back and look at the big picture here.

First of all, I think on our acquisition of Paragon in the gene therapy space really gave us the confidence to enter into another very fast-expanding space in cell therapy.

When we take a look at the number of cell therapy trials that are ongoing, it actually significantly exceeds those in the gene therapy area, and it's growing kind of in the mid-teens growth rate.

I would say that from an acquisition standpoint, I would say that we have acquired MaSTherCell a little bit earlier in the cycle than we have from a Paragon standpoint.

So obviously, a smaller acquisition compared to Paragon, but I would say we're probably catching it 2 to 3 years earlier in the cycle.

So they're still early on.

They've got a very strong position.

I would say they're really the leading stand-alone cell therapy CDMO player, and they've got some tremendous capability.

I would say from a customer standpoint, I think it's very similar to our acquisition of Paragon where you've got a couple of marquee base customers there, but then have behind that, a broad slate of overall customers, both in the autologous as well as the allogeneic area.

From a CapEx standpoint, I would say that on a comparative basis to Paragon, they're smaller numbers based upon the overall technology, but it is going to require some additional CapEx for us to build out the commercial facilities that they already have started in the Belgian area as well as the preclinical and clinical facility they have in Houston and an anticipated additional commercial facility there.

So we've anticipated that in terms of looking at our CapEx going forward, which Wetteny can further detail out.

Yes.

Tycho, the one thing I would add is, as John mentioned in his prepared commentary, MaSTherCell is in the midst of expanding clinical operations with a new facility in the U.S. in addition to a commercial facility that they're in the middle of in Europe.

So as those come on and ramp up, we would expect to attract even more customers into the business as we continue to scale it from a customer standpoint.

Okay.

And then just one follow-up on oral and specialty.

You talked about the delays in product approvals and maybe some pressure there for the next couple of quarters.

I guess should we be modeling that business down then the next couple of quarters?

And is -- when does Zydis Ultra start to kind of contribute as well?

Is that going to be beneficial at all?

Yes.

So in terms of the remainder of the year, I would say, given my prepared commentary here, I would expect some continued headwind for the OSD segment for the balance of the fiscal year.

That's all factored into the guidance that we just gave as well for the year, just giving you some additional color there.

Although I would expect the business to show sequential improvement quarter-on-quarter.

From a growth rate standpoint, it would still be a headwind for the balance of the year.

In terms of Zydis Ultra, as we've talked about, this is an exciting area for us to expand the base of our Zydis offering to be able to bring on molecules with bigger drug loading than we did before.

We have gone through pilot stages, proving that the technology can work.

We are in the midst of a capital expansion to scale that to commercial levels and have already signed a number of programs with customers to leverage that technology.

But this is factored into our long-term confidence in this business segment as well in terms of its ability to grow at the 5% to 7% in the long term.

But those are -- in terms of Zydis Ultra, we're talking further out before we'd start to see meaningful revenue from Zydis Ultra.

Our next question comes from Dan Brennan with UBS.

Congrats on the quarter and the deal.

First, just on Paragon, just -- can you give us a little flavor?

It came in better than we expected this quarter, I guess, not surprising given the commentary intra-quarter and the overall market.

But can you give us a little flavor for kind of what you're seeing there?

And then secondarily, can you kind of clarify a little bit on the increased CapEx plans, kind of any clarification on kind of what the future revenue contribution as you build-out the capacity in Paragon?

Because I know, John, you've alluded to that in your prepared remarks.

Yes.

Yes.

Yes.

So first of all, I would just say that it continues to be an incredibly robust, I dare say, hot market from a gene therapy standpoint.

We're seeing significant numbers of customers coming to us for both development programs as well as for, I would say, longer-term clinical and potential commercial manufacturing capacity.

So what has ended up happening since we announced the deal is that we've been able to model out the existing CapEx expenditures and capacity.

And with some additional supporting CapEx, we're going to actually be able to drive overall revenues long-term into Paragon that are above the actual deal model.

We're not specifying out here what that additional revenue potential is, but I would just say that it is -- it's meaningful, and obviously, we're looking out through over a 4- to 5-year period.

I would just say, in general, again, very robust, very robust marketplace.

And I think what we're extremely excited about is that with the acquisition of Paragon and now MaSTherCell, that we now have platforms in those areas where additional M&A isn't required for us to build out those platforms, and we're much more in control now being able to invest CapEx to drive further growth.

So I think those really provided us some strong anchors in the gene and cell therapy space.

It really will position Catalent as the leader in gene and cell therapy from a CDMO standpoint.

Great.

And then maybe just as a follow-up, just on MaSTherCell, I know -- follow up on Tycho's first question.

But just are you disclosing anything related to financials today, whether it be trailing 12 month or kind of any kind of forward outlook for revenues and EBITDA, number one?

And then number two, can you just clarify, like how would you characterize what is MaSTherCell's key differentiated product and their services.

I mean, looking on the website, obviously, it looks like they're a leader.

But could you just speak to maybe what are the areas we should focus in on as kind of where they're the leader?

Sure.

So I'll first start off and say that MaSTherCell has deep scientific expertise as it pertains to cell therapy in the areas of multiple cell types and for both autologous and allogeneic.

So as you know, autologous is basically where you take a patient's own materials, you modify them and you grow them and then ultimately reintroduce them into the patient.

So it's basically one batch, one patient, if you will.

And then -- and on the allogeneic front, it's where you can take, I would say, donors' materials and then do that modification and scale up and then provide multiple doses for multiple patients.

So you can imagine that the scientific expertise to be able to do that is fairly significant.

And MaSTherCell is doing that at a preclinical and also at the clinical level.

So we really do believe that we have acquired the leading stand-alone cell therapy CDMO business.

And again, we're positioned with Paragon and now MaSTherCell to be the leader -- leading CDMO from a cell and gene therapy standpoint.

And I'll let Wetteny weigh in on with regards to the financial questions.

Yes.

So a couple of things.

One, in terms of what differentiates the business, in addition to what John just laid out, working across both autologous and allogeneic, I would say not only do they have the technical capabilities, but the versatility to work across a number of different formats that are, I would say, going after some of the leading cell therapies out there.

And I think their versatility is what MaSTherCell is well-known for in terms of their customers.

With respect to revenue, we're not giving any additional guidance.

What I would say here is, we'll give more after we close this transaction, which we would anticipate by the time we connect again for earnings call for the third quarter.

But as I said in the prepared comments, even if we were to close -- regardless of when we close the transaction, it will not have meaningful impact on this year.

From an EBITDA standpoint, it won't for the next [few] years.

So I would put it as a relatively small revenue number and EBITDA number for the year.

And maybe just one quick one.

Wetteny, on the outlook for organic growth this year, did that change at all in the midst of your raising the revenue guidance?

No.

While we raised guidance in total, driven largely by our gene therapy business and its continued growth that we see in addition to adding Anagni to the totals, the organic estimate remains the same in terms of growth rate.

And as a reminder, from a revenue standpoint, that's 4% to 7%.

And from an adjusted EBITDA standpoint, it's 9% to 12%.

Our next question comes from Ricky Goldwasser with Morgan Stanley.

So a follow-up on your response to Dan's question.

As we think about the goals to achieve 50% of revenue mix being Biologics, which you reiterated today, should we interpret your comments as with the assets that you have now, you think that you can achieve it just through organic growth?

If you can talk a little bit about where is the market growing and versus your growth rates?

Yes.

So first of all, in terms of the 50%, that is correct with the businesses we have today and the organic capital deployment.

And just as a reminder, we not only have capital deployment in our base drug product and drug substance businesses, which we announced just over a year ago.

We also have the Paragon gene therapy business, which we continue to deploy capital into in terms of driving and responding to the demand that we see in the market from a gene therapy perspective.

And now with the MaSTherCell announcement today, we'll be continuing to have a larger proportion of our growth stemming from our now broad biologics offerings.

And so as we look today, based on the organic growth across the business, we can see Biologics representing approximately 50% of our revenues 5 years out.

Now as John said, to get to the estimate of $4.5 billion by 2024, that contemplates not only organic growth, but also certain strategic inorganic investments.

But the percentage of Biologics, we can see us -- or we do to that from the organic growth of the current businesses.

I just want to say in terms of what we see in the markets today, the second part of your question, I think, clearly, given the confidence that the Board has to approve yet more CapEx to go into gene therapy, I would say the demand there is even better than we saw heading into the acquisition.

And now with MaSTherCell, we'll have even more capabilities across the modalities that are driving quite a bit of R&D spending and clinical programs to hopefully lead to even more commercial in the future.

So I would say from a demand standpoint, we see strength there.

I would say, in our legacy businesses, you can see that we've gotten off to a very strong start in the first half of the year, which positions us very well to deliver on the year at growth rates across our base businesses that I would say are above the levels, at least for the first half year, that we would have said for those base businesses when you don't factor in Paragon.

So I just wanted to finish that, and then I'll take your next question.

So when we think about the rest of business and we think about Softgel, I think 8% adjusted organic growth rate, so can you just talk about how this compares to your expectation heading into the year?

And what percent of that growth is coming from year-over-year comparison versus sustainable demand?

Yes.

So our Softgel and Oral Technologies segment has posted very strong growth here in the first half of the year organically.

We've said that this is a business, having moved a couple of facilities into this segment last quarter, we said this is a business that would, long term, deliver between 3% and 5%.

So that's up from 2% to 4% we were saying for Softgel.

I would say that we've seen strength, and it's stemming from how we ended last fiscal year.

Having had some very good launches on the prescription side of the business, we continue to see strong growth from a consumer perspective across Europe and Latin America, which we would have anticipated coming into the year.

So I would say, this is slightly above our expectations, but some of this work we saw coming.

In terms of comparison, in the second quarter compared to last year, if you recall, we were really facing into headwinds related to the worldwide ibuprofen shortage.

And the second quarter was, I would say, the most pronounced impact.

And so when you compare this year, second quarter versus last year, I would probably put about 2 points of growth coming from a comparison related to that issue itself.

And so you would still be with a business that's growing above long term what we would expect the business to be in the quarter.

But again, those long-term growth rates are just that.

They're expected to be long term, and any quarter can be in that range, above or below it, which is our expectations given the long cycle of the business and what we expect that we're giving.

But we're very pleased with the performance of the SOT business.

But again, much of that we anticipated as we entered the year.

Our next question comes from John Kreger with William Blair.

Wetteny, thanks for updating the CapEx plans.

As we think about -- obviously, I would assume you're going to have elevated CapEx for a little bit given all of the expansion in Biologics.

Should we think about that total kind of growing in line with overall revenues or maybe growth in the Biologics segment?

So yes, we have taken our CapEx expectations now from 11% to 12% up to 13% to 14% given what we've already discussed around the demand we're seeing across our gene therapy business and increased capital deployment to capitalize on that.

And so I would -- while we're not giving guidance for next year yet, we will do so when we post our results for the full fiscal year.

One can anticipate, given that these are 1- to 2-year -- closer to 2-year expansion projects for the most part, that we'll continue to see this level for another year here.

In terms of what that translates into for growth, I think we've already given what we said around the growth rates that we expect of our Biologics business long term.

We're already at fairly robust growth expectations for the business.

These capital deployments tend to run a couple of years and then there's a time to ramp up as well.

So I'm not going to give any further guidance on a -- from a revenue perspective other than what we said for this current year, and what we've said for long term.

And as we get into each year, we'll be in position to give you more clarity on the upcoming year.

Great.

And a follow-up to that.

Can you talk a little bit about kind of the order backlog nature of both gene therapy and cell therapy?

Can we think about these new capital expansion plans as being effectively prebooked?

So I think what -- the way I've described this business is really -- you have largely programs that are still in the clinic here.

And those can be, as you know, variable -- some variability and lumpiness around clinical programs in the typical stages.

But what we're seeing, particularly in the gene therapy business, is the extreme tightness of supply is driving customers to enter into contracts with a essentially reserve capacity.

And that gives it a little bit of a longer visibility and increased booking as a percentage of what we expect in the business that starts to feel almost quasi-commercial.

So our visibility here, I would say, is much better than we would typically see in a typical business that is largely clinical.

And as we enter into a year or at any point in time looking out over the next -- the quarters to come, we have better visibility than we would typically see in a clinical program.

Great.

And one last one on MaSTherCell, how long do you think it will take to get that asset to be generating margins that would be sort of typical for the Biologics segment?

So look, I think we've just announced the deal, so we won't provide a ton more color at this point.

But over the next several quarters, once we close the deal and we get to announcing expectations for the following year, we can give you more color.

But one thing we have said is while the business generates a certain amount of EBITDA in its clinical operations that exist today, that EBITDA has been reinvested in the -- in what I'll call the start-up costs for the commercial operations that it's building in Europe as well as the new clinical site that it's growing in the U.S. So for the next 2 years, we're just not expecting meaningful EBITDA at all from this business.

And I just won't give you much further than that.

I think, certainly, given the highly technical and position that we see MaSTherCell has, which John and I described earlier, we certainly anticipate that this is highly valuable to our customers and this is a business that should generate healthy EBITDA margins in the long term.

But we just won't give you any more precision than that today.

Our next question comes from David Windley with Jefferies.

Wanted to focus -- I wanted to try to focus on the performance, bridging the performance that we're seeing in Biologics now to some of the more powerful impacts that, that can have over the long term.

So first of all, I think you've talked about Biologics getting to 50% of revenue prior.

And today, you're kind of putting more emphasis on the higher growth rate in gene therapy.

You're adding cell therapy.

I'm wondering if those are, given the recency of providing that guidance, if those are just not enough to kind of extend beyond the 50% that you've already said?

Or could we anticipate that, that is possible?

Look, 5-years out, we're giving you our estimate in terms of what we see based on the businesses today.

As we've just announced the MaSTherCell deal today, and we're yet to close that, certainly, as we look to deploy more capital into our gene therapy businesses, which are projects that, as I said, will take better part of some years to execute, we will have more clarity out 5 years.

But at this point, given we've just recently given that estimate roughly around the time we made the Paragon acquisition, it was the first time we said, look, we can see ourselves getting to 50% of our revenues in Biologics in 5 years' time.

We're not prepared today to move off of that estimate.

But as we, again, execute on the capital expansions and we continue to see what the demand is in the business, we'll have more clarity.

And one more point I'll make is we are not looking to become solely a biologics company.

So we are also making investments in our small molecule businesses across Softgel and Oral Technologies and our OSD business.

And as we do that, those also have the potential to perform in certain ways that would influence what the percentage is overall.

And so again, in both instances, we'll give you more clarity as we have it, but we've only recently given you the estimate of 50%.

We're not prepared to move off of that at this point.

Right.

That segues really nicely into my follow-up, which is, you mentioned -- earlier, I think John mentioned that the $4.5 billion does include some inorganic strategic investment.

Can you -- would you be willing to quantify that?

How much do you anticipate to be inorganic?

And to the point that you just made, would you expect that to be balanced across small and large molecule?

Or is the bias a little bit more toward large molecule as it had been with the last couple of transactions?

So look, I -- first of all, in terms of looking at potential acquisitions and how we get to $4.5 billion, I think you can do some calculations here.

If you assume just the midpoint of our 6% to 8% organic growth rate from where we will end this fiscal year, and you can start with the midpoint of the revised guidance we just gave today, that will get you to a number.

Again, you have other ends -- both ends of the spectrum you can calculate.

But if you take the midpoint, and I know we just announced the MaSTherCell deal, so you would factor that in as well, it gets you to a number that you can back into what the rest would be from an M&A standpoint.

In terms of where we're looking, certainly as we evaluate potential assets, we're looking at them across both small and large molecule.

We would have, I would say, a bias towards the faster-growing ends of the market, which tend to be in biologics, where we would also see higher margins as well.

But I would not say that we're exclusively looking at large molecule biologics.

But given now we have a great platform with Paragon, and we're now getting ready to add MaSTherCell to that, I think there are a number of other areas, related areas, that we would be very interested in, both from an organic perspective as well as inorganic.

And those could include lentivirus, plasmids and other areas that we've discussed previously that will continue to influence where we get to 5 years out.

Got it.

Last question on margin.

In Biologics, the longer-term focus there, I think, has been that with the demand environment, with the growth and the utilization continuing to grow, that margins could be well into the 30% range.

We're certainly not seeing that.

I think there's some transient costs.

But wondered if you could specifically talk to, like in the Paragon acquisition kind of running below the model margin in the first couple of quarters reported, what are some of those transient costs?

And how long will they last?

Yes.

Look, I would say, first of all, if you look across Biologics, there are a few things to point to.

We're giving long-term ranges as to where we expect the business to be from an EBITDA margin perspective, and we continue to have confidence in the business being able to do that, and the mix, again, driving towards more Biologics.

That's point number one.

In terms of near term and what we've seen over the last couple of quarters, in particular, I'll remind you that right after we made the acquisition of Paragon, we also acquired 2 facilities from Novavax to augment our front end and allow us to bring more programs into the business.

And those, as we said, we would expect to be margin dilutive for the first few quarters, a couple or few quarters out of the gate as we ramp up and bring on more customers into those facilities.

But strategically, absolutely the best move for us to do, again, for the gene therapy business and for the Biologics segment at large.

So as we expand, which we are doing in Paragon, and we are doing across our, again, legacy Biologics businesses and drug product and drug substance, and we make those expansions, it's not only the capital that we put in, it's also the labor and other costs that we're bringing ahead of the volume coming in for those.

I would expect that to have an impact.

This is where we see in the short term from an EBITDA margin perspective and certainly within our expectations.

But it's also within our expectations long term as we ramp up utilization across those expanded capacity that we will get to the margins that we've said that the business will get to.

Our next question comes from Juan Avendano with Bank of America.

On the MaSTherCell deal, can you talk to us about how did you go about vetting their cell therapy manufacturing capabilities at large scale, given that their drug product facility in Belgium and their facility in Texas, I believe, are yet to be validated?

And then can you call out by name, perhaps, who are some of the biopharma customers with whom MaSTherCell is working with?

And how these customers have fully validated their cell therapy capabilities?

So first of all, we don't discuss individual customers and won't do here.

But I will say that like Paragon, we have several well-known marquee customers that have come there, which I also used as a way to validate the capabilities from both a scientific standpoint as well as from an overall manufacturing standpoint.

First, let's remember that what we're doing right now in cell therapy at MaSTherCell is at the preclinical and the clinical stage.

That being said, they're doing preclinical and clinical work for allogeneic, not just autologous.

About half the customers at the top of their list, if you will, from a Pareto standpoint are working on allogeneic, and those are done at higher scales, but they're already being done at a clinical level to be able to prove that out.

So they have not yet fully built out their commercial manufacturing.

It's -- they're building it out on the potential for a couple of customers that have several targets that could get approval after going through clinical Phase I or at least go to that clinical Phase II, not approval, but go into a larger scale, and that is ultimately what will go into their facility.

I'll also say that they've designed the facility from a flexible standpoint so that depending upon whether or not they get approval for the larger scale.

And when we talk larger, it's modestly larger from autologous to going to the allogeneic.

If some of those allogeneic targets don't hit, that they're going to be able to repurpose it for autologous, so they'll have a somewhat, I would say, modestly lower revenue ramp.

But ultimately, they're tuned into being able to do both.

Last comment I'll make is that Catalent has a history of successful acquisitions, and that success is driven by the very thorough due diligence that we do on all these assets.

And I would say this is no different than what we did with Paragon, Bloomington, Juniper, Accucaps, you can go down the entire list.

So in addition to our own experts, we also had engaged some -- and done some third-party work, some original work to be able to vet out the overall industry.

And I would just say that I'm highly confident that we've gotten a great team and a great asset for the company that's going to be a new platform.

Appreciate the color.

And then another one on one of your leading indicators.

Can you talk to us about the trends that you're seeing in your NPI mix?

I believe the revenue was -- NPI-related revenue was $27 million cumulatively this year, which is down a little bit over 50% on a year-over-year basis.

And so if you could talk to us about the outlook that you see based on this directional indicator given the mix trends that might be happening there?

Yes.

Juan, so look, as typical, we only give the estimate of what the revenue contribution would be for the NPIs we have launched so far, so that's the contribution for the totality of the year.

As we go through each quarter and we launch more products, we can give more clarity around what those products will do for the year.

The $27 million, I would put it right in the middle of the average for the company over the last few years in terms of the contribution that we would have seen.

Again, I wouldn't necessarily take that and annualize it, but the rate that we're seeing right now is in line with what we typically see from those NPI contributions.

Last year was an abnormally high contribution given some of the bigger programs were launched earlier in the year and had a bigger impact on the individual year.

So I think when you look at that metric, again, it's just -- it's a directional indicator.

You also have to take into consideration the timing of relevant products and launches, in terms of their relative size, can have an impact on year-over-year, which is not necessarily an indication of a healthier or less healthy sort of product slate.

So again, last year was an abnormally high year in terms of contribution from NPIs.

This year, I put it more on the average, which is typically somewhere between $40 million and $60 million what we've seen in terms of contribution from NPIs in any given year.

Last year was closer to $100 million.

So I'll cap it at that.

Our next question comes from Donald Hooker with KeyBanc.

In terms -- to help us model your businesses out, can you maybe provide a little bit more clarity on sort of the EBITDA margin trends at the Biologics segment?

So it looked like -- I'm just trying to do some quick math in terms of the contribution of Paragon, it seemed like that might have been dilutive to the margin?

I mean what's the right EBITDA margin for the gene therapy component there?

And is that additive?

Yes.

So let me give you a couple -- I referenced earlier a couple of things within the Biologics business, in particular when you're looking at gene therapy, that contributed to some margin dilution as we brought on 2 facilities that we bought from Novavax that we said would be dilutive in the first few quarters out as we ramp up our business in those facilities.

So I would say that's in line with our expectations.

This is what we're seeing from a gene therapy perspective, which continues to increase in terms of EBITDA margin.

As a reminder, if you look at what we've said publicly in 2018 calendar year, the business would have -- generate somewhere in the teens in terms of EBITDA margin.

And then for 2019, it would be in the mid- to high 20s, and we expect the business to continue to climb in the long term to be in line with our Biologics expectations overall.

So the business is performing as we expected, a little bit of dilution from those facilities that we brought on.

But the other thing I would say is our EBITDA margin expectations when we give them, whether it's for the year or for the long term, do not necessarily indicate that each quarter will be exactly in line with that.

In particular, keep in mind that our business tends to have our preventive maintenance shutdowns in the summer.

And as we execute through the year, the third and fourth quarter, in particular, tend to be where we have the most significant throughput in our factories, and we tend to drive higher EBITDA margins in the fourth quarter than we do in any other quarter.

So I would just keep that in mind, which I would hold true across our biologics offerings as well in terms of how you would see that.

Again, I would not expect each quarter to be exactly in line with our long term.

I would also point out that within our Biologics business, we have more clinical programs, which tend to be a bit more variable than you see in a more commercial operation, and that could drive different throughput from 1 quarter to the next as well.

We continue to be very confident in what the business will do long term as well as what we've stated the business will do in the current fiscal year.

Super.

And then maybe a follow-up on the Biologics segment.

Last quarter, you commented around sort of the creation of a new marketing strategy, kind of stitching all these different offerings together and now you're adding cell-based therapies to that.

I guess you called it the OneBio Suite.

It sounds like that could maybe 2 plus 2 equals 5 here, whether it could be some cross-selling and additive -- kind of having all these pieces together.

Can you talk about maybe some reaction from some clients around sort of your ability to maybe cross-selling traction or anything kind of around any different trajectory in that segment from the OneBio Suite?

Yes.

The launch of our OneBio Suite offering, which leverages our capabilities across not only our Biologics segment, which includes end-to-end solutions from cell lines, all the way through the drug product, finished dose seeking and dosing patients; but it also includes our capabilities across bioanalytical and what we do in our clinical supply business, where we are able to take those therapies all the way to the clinic to dose the patients.

So across the board, we've demonstrated that we're able to help customers save time, which is extremely valuable to our customer base.

And so far the reception has been very, very positive.

We've even signed programs under this offering already with customers.

And I would say it is still a long -- this is a long-cycle business.

And I would expect over the long period of time for this to be more meaningful for us, but we're very pleased with the initial reaction we're seeing so far.

And maybe a real quick one.

On the development revenue, it looked like it was up, yes, I think you commented 36% year-over-year.

How much of that is organic?

We don't have a split for you, but I would say there is a healthy portion of that, that is inorganic given the Paragon is all inorganic, and Paragon is largely working with programs that are in the clinic.

So I would say that our acquisitions, particularly in gene therapy here, and now once we close MaSTherCell, that will continue to contribute towards that development revenue bucket.

So while I don't have a split for you, I would say there's a large part of that, that is inorganic.

Although organically, it's growing probably just estimated to be in line with the overall organic growth that you're seeing in the business.

Our next question comes from Jacob Johnson with Stephens.

Just one for me.

Just on the outlook for viral vectors, there appears to be no shortage of demand right now.

But there was an announcement of a fairly significant investment in the space a few weeks ago.

It sounds like we're extremely supply-constrained in the near term, but just would be interested in your latest thoughts on the outlook for the supply and demand of viral vectors as we look out over the next couple of years.

So look, certainly, the demand that we're seeing with our current customer base in addition to work that we have done here with consultants, really digging into the demand profile and what's anticipated in terms of clinical programs and potentially commercial, we see a substantial difference between supply capacity today and what's anticipated based on announcements versus what the demand will be across this segment.

So it's certainly of no surprise that others want to enter into this space and the announcement that you are referring to being one of those.

We continue to be very pleased with what we're seeing.

And in fact, the Board has approved additional CapEx in this business given that demand.

I would say that this is a highly technical business in terms of execution.

And our capabilities here with respect to Paragon, in particular, and their ability to really execute on the product development as well as the actual process of attaching the genes to the vectors is a particular area of strength in terms of go to market, and that's something that I would say is far harder to build than the actual physical capacity build out, which may take a couple of years.

But this strength that I referred to from the development side, coupled with commercial scale, which we are continuing to add in the business, I would say is a unique combination that, we believe, provide us a great position in the market to grow either at the overall demand in the market or better, and we're not surprised to see others enter into the space.

Our next question comes from Evan Stover with Robert W. Baird.

A couple have been asked on CapEx, but I just wanted to make sure I wasn't missing anything here.

The CapEx goes up this year from 11% to 12% to 13% to 14%.

I think that's another $50 million to $60 million of CapEx.

But correct me if I'm wrong, I didn't actually hear any disclosure on this next Paragon investment as to actual the total slug of capital being allocated to this or the number of suites that we're expanding beyond 10.

And I'm just wondering if I missed that or if that's just something you're not disclosing because this is more of an open-ended type of authorization that you have from the Board on this next round of Paragon investment.

So what I would say is, you didn't miss anything.

We didn't specifically disclose the amount, although you can certainly, as you have already, calculate what that translates into for the current year.

As we get into guidance for fiscal year '21, which we will do when we issue our annual report, we will provide more color in terms of what that translates to for next year, inclusive of gene therapy, but the rest of our business as well.

I wouldn't say this is an open-ended authorization.

We did see an opportunity to deploy more capital into the current BWI campus that would allow us to get more throughput through that -- through those suites.

And that incremental CapEx is something that has been authorized by the Board to execute, and we continue to evaluate where else we would deploy additional capital in the business and come out with more color on that.

But yes, we have raised our CapEx expectations for this year from 11% to 12% to now 13% to 14%, again largely driven by the incremental capital we're deploying in our gene therapy business.

Okay.

Last one for me.

Can you talk about the free cash flow expectations, previously 30% to 45% of adjusted net income, that was a stronger operating cash flow quarter.

So I'm wondering if that -- does that still hold despite the higher CapEx spend?

Yes.

With the incremental CapEx spend, we are now estimating our percentage of free cash flow as a percent of adjusted net income to be between 20% and 35%, whereas before, we were saying between 30% and 45%.

So that's the revised number solely from the increased CapEx that we have discussed here today.

I now show no further questions at this time.

I'd like to turn the call back over to John Chiminski for closing remarks.

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 important points: First, we're pleased with the performance of our acquisitions, which drove the increase in our guidance.

We're committed to delivering fiscal 2020 results consistent with our updated financial guidance, and we're focused on continuing to drive organic growth across all of our segments.

Second, it's a top priority to grow our world-class Biologics business and effectively integrate the premier assets we're acquiring and deploy CapEx to further build our capacity and capability to help improve the lives of patients and meet our customers' demand.

As demonstrated with MaSTherCell, we continue to evaluate acquisition targets to round out our capabilities.

We look forward to continuing strong revenue and adjusted EBITDA growth from our Biologics offerings.

Third, expanding the adjusted EBITDA margin of our overall business is a key focus area for this management team as we drive towards expanding our margins to at least 28% in 2024.

Finally, operations, quality and regulatory excellence are at the heart of how we run our business and remain 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.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.