Catalent Inc (CTLT) 2022 Q3 法說會逐字稿

Hello, and welcome to the Catalent, Inc. Third Quarter Fiscal Year 2022 Earnings Conference Call. My name is Katie, and I'll be coordinating your call today. (Operator Instructions)

I'll now hand over to your host, Paul Surdez, Vice President, Investor Relations, to begin. Paul, please go ahead.

Good morning, everyone, and thank you for joining us today to review Catalent's third quarter fiscal 2020 financial results. Joining me on the call today are: John Chiminski, Chair and Chief Executive Officer; Alessandro Maselli, President and Chief Operating Officer; and Tom Castellano, Senior Vice President and Chief Financial Officer. Please see our agenda for today's call on Slide 2 of our supplemental presentation, which is available on our Investor Relations website at investor.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 on forward-looking statements. Slides 4 and 5 discuss Catalent's use of non-GAAP financial measures and our just-issued earnings release provides reconciliations to the most directly comparable GAAP measures.

Please also refer to Catalent's Form 10-Q that will be filed with the SEC today for additional information on the risks and uncertainties that may bear on our operating results, performance and financial condition, including those related to the COVID-19 pandemic.

Now I'd like to turn the call over to John Chiminski, whose opening remarks will begin on Slide 6 of the presentation.

Thanks, Paul, and welcome, everyone, to the call. I'm pleased to report that the positive momentum we built in the first half of our fiscal year continued in the third quarter.

Our financial results were driven by strong continued growth in our Biologics segment with additional support from our other service offerings, including our consumer-preferred gummy dosage forms for nutritional supplements, which act as an additional growth engine for the company. Our strong performance in the third quarter, coupled with continued momentum, has enabled us to increase our fiscal 2022 guidance for the third time this fiscal year, which Tom will review later in the call.

Regarding financial performance, our revenue for the third quarter was $1.27 billion, increasing 21% as reported or 23% in constant currency compared to the third quarter of fiscal 2021. When excluding acquisitions and divestitures, organic growth was 20%, measured in constant currency. Our adjusted EBITDA of $339 million for the third quarter increased 24% as reported or 26% on a constant currency basis compared to the third quarter of fiscal 2021. When excluding acquisitions and divestitures, organic growth was 26%, measured in constant currency.

Our adjusted net income for the third quarter was $188 million, or $1.04 per diluted share, up from $0.82 per diluted share in the corresponding prior year period. Our Biologics segment was again the top contributor to Catalent's financial performance as it experienced organic net revenue growth of 30%, driving an EBITDA increase of $41 million over the third quarter of last year. These strong results came from across our broad base of service offerings within our Biologics segment and were driven in part by COVID vaccine demand.

Demand remained strong in this segment, including a notable increase from several of our large gene therapy customers for viral vector manufacturing. Given the high utilization of our biologics assets as well as projections for continued demand in the years ahead, we continue to take both organic and inorganic actions to increase our footprint in drug product, drug substance and cell and gene therapy. Alessandro will walk through our latest developments in a few minutes.

In our Softgel and Oral Technologies segment, our complex oral solids offerings continued to recover from the pandemic-related headwinds as we'd anticipated. And results from this segment were again further enhanced by the acquisition of Bettera. Organic growth was very strong at 14% as year-over-year demand for both prescription and consumer health products recovered nicely over the same period last fiscal year.

Inorganically, we received another boost from the recently acquired Bettera business, which adds more than 20 percentage points of net revenue growth to this segment. The acquisition is performing even better than we initially expected and we're investing in additional capacity to meet the high demand for gummy formats from our consumer health customers.

Our Oral and Specialty Delivery segment reported 4% organic net revenue growth driven by early phase development offerings. With the divestiture of our blow-fill-seal business in March of 2021 now annualized, it will no longer negatively impact reported growth beginning in the fourth quarter of this fiscal year. Future growth in this segment will be aided by recently completed expansions of our nasal capabilities in RTP and oral solid dose GMP manufacturing suites in Kansas City as well as strong growth from commercial products in our Zydis fast-dissolve dosage format.

Viewed holistically, Catalent remains well positioned to continue delivering strong financial performance and growth. And we remain committed to providing patients around the world with life-saving and enhancing treatments. I'll now turn the call over to Alessandro, who will review various operational highlights from the quarter, including recent acquisitions and capital expenditure projects.

Thank you, John. We continue to expand our global network, invest in growth-driving capabilities, attract new talent and accelerate our progress in operational excellence. This will all be critical drivers for Catalent to deliver our long-term targets I outlined the last quarter, including the fiscal '26 targets of more than $7.5 billion in revenues and adjusted EBITDA margin of approximately 30%.

With that said, I want to address the questions we have received regarding the degree of covenant reliance on continuing COVID vaccine revenue to deliver these numbers. While our current strategic plan, which I outlined in the last quarter, does include in fiscal '26 some projected revenue from respiratory vaccine, our model assumes that it will likely be only a fraction of the revenue generated today from COVID vaccines. The strong industry backdrop and forecasted demand across multiple therapeutic categories and modalities confirm that we are not reliant on substantial revenue from COVID vaccines to achieve our targets.

We also continue to be comfortable with our overall long-term organic revenue growth of 8% to 10%. Looking to fiscal '23, we see growth in line with that range, driven by: increased utilization of recent investments across the company, including a new growth investment I will review in a moment; organic growth through current assets, including the notable uptick in commercial demand in SOT; and a shift of some of our fungible biologics assets that are currently producing COVID vaccines to other customer projects, including the newly signed large commercial tech transfer programs.

In formulating these fiscal '23 outlook, we also mitigated the future risk by assuming a considerable decline in COVID-19 product revenue in fiscal '23. So to be clear, our growth drivers are expected to be more than -- are expected to more than compensate for considerable decline in our COVID vaccine revenue, leading to top line growth in our -- in line with our long-term growth rate of 8% to 10%.

While the company is succeeding in meeting demand over the course of the pandemic, we concurrently made the strategic investment and allocated capital to other areas of the business that position our overall portfolio for long-term success. In addition, our robust global network of facility enables us to ship production based on demand and reliably supply our customers with a wide range of products they need.

Core to our CDMO business model, our service offerings across the company are generally designed to be flexible and fungible so that they might serve multiple customers, products, therapeutic categories, and in some cases, modalities, providing us with a balanced platform for growth. Let me review some of the latest growth actions.

On the acquisition front, we recently announced a $44.5 million purchase of a state-of-the-art, commercial-scale cell therapy manufacturing facility in Princeton, New Jersey that we're closing -- we'll work in close collaboration with our existing cell therapy sites, particularly our cell therapy and plus with the center of excellence in Gosselies, Belgium.

We purchased the Princeton facility from Erytech Pharma and will manufacture at the site and exclusively supply its lead product candidate for the treatment of acute lymphoblastic leukemia. The 31,000-square foot site houses 16 suites designed for GMP production as well as labs for analytical development, quality control and microbial testing. We are also in the process of leasing the two other buildings nearby to enable future expansion.

Similar to the cell therapy campus we built through acquisition in Gosselies, we envision Princeton becoming a strategic campus for cell therapy development, clinical- and commercial-scale cell therapy manufacturing in North America. We also continue to invest in our gene therapy assets. And at our campus near BWI Airport, we are on track to open 8 additional suites by the end of this calendar year, bringing the total to 18 GMP manufacturing suites. Each of these suites is designed to accommodate multiple bioreactors suitable for commercial-scale manufacturing from cell bank to purify the drug substance across different modalities.

On the biotherapeutics side, we acquired the largely complete biologic development and manufacturing facility in the biomedical science hub near Oxford, U.K. We plan to invest up to $160 million to complete the facility and extend its drug substance capabilities for development and manufacture of biologic therapies and vaccines, including the mRNA proteins and other advanced modalities. It is expected that the new facility will employ at least an additional 350 people and support public and private organizations seeking to develop and manufacture biotherapeutics and vaccines.

As we are able to get this site up running on an accelerated timeline compared to the previously announced organic yield of drug substance capabilities in Anagni, we will reassess the best use of that allocated space in Anagni and focus our efforts and capital on bringing our first drug substance offering to Europe through our new Oxford site.

In the European drug product space, I was happy to be with our team, along with national and local dignitaries in Limoges, France in March for the ribbon-cutting ceremony that recognized the completion of the multimillion-dollar project that transformed the Limoges site into a European center of excellence for biopharmaceutical development, drug product fill and finish services and packaging. The site focuses on early phase integrated clinical development, including the small-scale commercial manufacturing, allowing for seamless technology transfer of projects within the Catalent network as they progress to late-stage and larger-scale commercial supply phases.

Also in Europe, our drug product facility in Brussels continues to make substantial progress, which has allowed us to begin the restart of manufacturing operations at the site while we continue in parallel to enhance our overall site operations. In the U.S., our Board recently approved a multiyear investment in Bloomington totaling $350 million to expand the biologic drug substance and drug product manufacturing capabilities, including quality control laboratories and complex automated packaging lines. The project will serve the site's robust biologics pipeline as well as the manufacturing capacity for commercially approved products in high demand.

The drug substance part of the expansion, which is expected to be completed before the end of this calendar year, is designed with the best strategy to enable the site to serve more commercial products. The expansion of the drug product fill and finish capacity, which is expected to be completed in 2024, includes the build-out of new syringe filling lines as well as new lyophilizing capacity. These investments will enable us to expand our flagship Bloomington campus and extend our leadership as one of the largest and more comprehensive global center for integrated manufacturing capabilities in North America.

With that, I will now turn the call back over to John, who will discuss how Catalent incorporates a sustainability focus as part of our long-term core business operations and planning.

Thank you, Alessandro. As detailed in Slide 8, in March, we released our third annual corporate responsibility report covering our progress in environmental, social and governance matters during fiscal 2021. At a high level, we've made significant progress in key ESG areas over the past year, such as carbon emissions, diversity and inclusion and community investment, and continue to shape our sustainability focus in alignment with our core business strategy.

Beginning with people, fiscal 2021 was a record-breaking hiring year for Catalent as we onboarded more than 4,000 colleagues while keeping their safety and well-being at the forefront of our efforts. In addition, we expanded employee resource groups and diversity among our leadership. Our employee resource group network now comprises more than 45 chapters across 8 global communities and continues to grow, thrive and positively impact our inclusive culture.

On the environmental front, we met our goal to reduce our indirect carbon emissions by 15%. This success was primarily the result of our transition to renewable electricity resources as well as continuous improvements through on-site engineering, equipment and facilities management. We've also set new science-based targets to reduce scope 1, that is direct; and scope 2, indirect emissions, by 42% by 2030 and committed to no residual active pharmaceutical ingredient in our wastewater above the predicted no-effect concentration, thus taking a leadership position in the industry from a sustainability perspective.

The fiscal 2021 corporate responsibility report also includes our first-ever Task Force for Climate-related Financial Disclosure, or TCFD reporting, underscoring our progress and commitment to best-in-class sustainability practices. Third is our focus on communities. Fiscal 2021 was a milestone year for philanthropic giving at Catalent as we distributed more than $1.2 million to support COVID-19 relief efforts, STEM education and organizations that support patients in underserved communities. In addition, since the Russian invasion of Ukraine earlier this year, Catalent and our employees have donated to over 45 nongovernmental organizations supporting humanitarian and refugee support efforts in Ukraine and Eastern Europe.

As I prepare to transition to my new role as Executive Chair, I can't help but reflect on and be proud of the substantial progress (inaudible) the last 5 years. This evolution was achieved by staying true to our values and at the same time advancing and delivering real-life solutions for people and the environment. While we're delighted by the progress we've made, we know our work in this area is far from done, and we will continue to enhance our efforts that have put us at the forefront of corporate responsibility in the CDMO industry.

Before turning the call over to Tom, I'd like to make a few comments on the overall health of our business before Alessandro begins as CEO on July 1. Given our growth history and trajectory, increased profitability and proven success with strategic execution, including the transformation of the company over the last few years as we've grown our Biologics segment and further diversified our portfolio, I'm proud of where Catalent stands today and the people who got us here. Catalent's offerings are not only balanced, they also closely match the industry's R&D pipeline. We have never been in a stronger position in the dynamic growth markets we serve.

Now it may already be understood, but I'd nonetheless like to make clear that this will be my last earnings call as I transition to the position of Executive Chair of the Board. I certainly appreciate the many interactions I've had with you over the years. But importantly, I am not going away and will continue to discharge important responsibilities in my new role. I look forward to continuing my work in close partnership with the Board, Alessandro and the rest of our talented team while contributing to the ongoing success of Catalent.

To reiterate from prior comments, there is no better person suited to take this company forward than my long-term colleague and friend, Alessandro, and he has my full confidence. I'd now like to turn the call over to Tom, who will review our financial results for the third quarter and our updated fiscal 2022 guidance.

Thanks, John. I'll begin this morning with a discussion on segment performance, where commentary around segment growth will be in constant currency. I will start on Slide 9 with the Biologics segment.

To highlight the company's transformation over the last 2 years, you will see that the segment represented 55% of our net revenue growth -- net revenue in Q3 of this fiscal year compared to 52% in Q3 of fiscal 2021 and 33% in Q3 of 2020. Biologics net revenue in Q3 of $698 million increased 30% compared to the third quarter of 2021. This robust net revenue growth was driven organically by broad-based demand across the segment, most notably for COVID-19-related programs, which were only ramping up in the third quarter of last year.

The segment's EBITDA margin of 31.1% was up 20 basis points sequentially over the second quarter of this fiscal year but down year-over-year from 33.1% recorded in the third quarter of fiscal 2021. The year-on-year decline is primarily driven by costs arising from the remediation efforts at our Brussels sites. In addition, component sourcing revenue, which represents more than 25% of total COVID vaccine revenue, was higher this quarter compared to the prior year quarter.

As we discussed in the past, component sourcing is where we source materials, components and other supplies for our customers. And these activities come with two opposing dynamics: increased revenue but margins well below the segment average. Looking to the next couple of quarters, we expect the Biologics segment revenue growth rate to gravitate towards its normalized growth rate of 10% to 15%.

Please turn to Slide 10, which represents results from our Softgel and Oral Technologies segment. Softgel and Oral Technologies net revenue of $324 million increased 37% compared to the third quarter of fiscal 2021 with segment EBITDA increasing 29% over the same period last fiscal year. The October 1 acquisition of Bettera contributed 23 percentage points to SOT's net revenue growth and 13 percentage points to segment EBITDA growth during the quarter. Inorganic EBITDA was adversely affected in the current quarter by a one-time accounting adjustment for inventory valuation as of the time of the acquisition.

Excluding this one-time charge, operational performance of the Bettera entity continues to meet our expectations and remain a key driver for margin expansion for the SOT segment and the company overall. The organic net revenue increase was driven by growth in both prescription products and consumer health products, particularly in cold, cough and over-the-counter pain relief products.

Slide 11 shows the results of the Oral and Specialty Delivery segment. After factoring out the net impact from the divestiture of our blow-fill-seal business and the acquisition of Acorda's spray-drying assets, both of which annualized in the third quarter of this fiscal year, net revenue grew 4% and segment EBITDA was up 64% over the third quarter of last year.

The top line growth was primarily driven by elevated demand for early phase development programs. EBITDA margin improvement was driven by favorable revenue mix as well as a favorable comparison to our third quarter of fiscal 2021, when we booked charges related to a customer's September 2020 voluntarily recall of a respiratory product.

As shown on Slide 12, our Clinical Supply Services segment posted net revenue of $101 million, representing 3% growth over the third quarter of fiscal 2021, driven by growth in our manufacturing and packaging service offerings in North America. Segment EBITDA grew 14% with favorable product mix driving the performance.

As of March 31, 2022, backlog for the segment was $529 million, unchanged from $529 million at the end of last quarter and up 8% from March 31, 2021. The segment recorded net new business wins of $111 million during the third quarter compared to $137 million in the third quarter of the prior year. The segment's trailing 12-month book-to-bill ratio is 1.1x.

Moving to our consolidated adjusted EBITDA on Slide 13. Our third quarter adjusted EBITDA increased 24% to $339 million or 26.6% of net revenue compared to 26% of net revenue in the third quarter of fiscal 2021. On a constant currency basis, our third quarter adjusted EBITDA increased 26%, all of which is organic compared to the third quarter of fiscal 2021.

As shown on Slide 14, third quarter adjusted net income was $188 million or $1.04 per diluted share compared to adjusted net income of $148 million or $0.82 per diluted share in the third quarter a year ago.

Slide 15 shows our debt-related ratios and our capital allocation priorities. Catalent's net leverage ratio as of March 31, 2022, was 2.6x, below our long-term target of 3.0x. This compares to net leverage of 2.8x on December 31, 2021, and a reported net leverage ratio of 2.3x on March 31, 2021. Our combined balance of cash, cash equivalents and marketable securities as of March 31, 2022, was $880 million compared to $915 million as of December 31, 2021.

Moving on to capital expenditures. We now expect CapEx to be approximately 13% to 14% of our fiscal 2022 net revenue compared to our previous expectation of 15% to 16%. The key factor to this change include our higher-than-previously expected net revenue, combined with some supply chain-related delays and longer lead times for some of our capital projects. To be clear, new CapEx associated with our recent acquisitions, most notably for our new Biologics facility in the U.K., is already contemplated in our new guidance. Of course, our elevated CapEx is temporarily impacting free cash flow. But we expect CapEx to return to a more normal 8% to 10% range in the next few years.

Note that our free cash flow has also been negatively impacted the last 2 years by our strategic decision at the onset of the pandemic to increase inventory levels, which continue to allow us to have the inputs we need to meet our supply obligations to our patients and customers in a timely manner. When we feel the time is appropriate and are more comfortable with the stabilization of our supply chains, we will begin to reverse course, which will have a future positive effect on free cash flow.

Now we turn to our financial outlook for fiscal '22 as outlined on Slide 16. Following a strong third quarter and a solid outlook for the remainder of the fiscal year, we are raising both the low and high end of our financial guidance ranges. We are also tightening the range since there is just 1 quarter remaining in the fiscal year. We now expect full fiscal year net revenue in the range of $4.8 billion to $4.9 billion, representing growth of 20% to 23%, versus our previous estimate, $4.74 billion to $4.86 billion. We project that net revenue growth from M&A will continue to be 2 to 3 percentage points, principally driven by the acquisition of the Bettera.

For full year adjusted EBITDA, we expect a range of $1.265 billion to $1.305 billion, representing growth of 24% to 28% over fiscal 2021 compared to our previous estimate of $1.25 billion to $1.30 billion. Note that the continued strengthening of the U.S. dollar against both the euro and British pound is expected to negatively impact our adjusted EBITDA by an additional $3 million in the fourth quarter of the fiscal year, the effect of which has once again been absorbed into our new financial guidance.

Also absorbed in guidance is approximately $8 million of expected costs in the fourth quarter with little or no associated revenue for the cell therapy facility acquisition in Princeton and the biotherapeutics facility acquisition in the U.K. We expect full year adjusted net income of $665 million to $705 million, representing growth of 21% to 28% over the last fiscal year compared to our previous estimate of $650 million to $700 million. We continue to expect our consolidated annual effective tax rate to be 23% to 25%.

Finally, I'll close by reiterating Alessandro's comments on our initial estimate at the top line for fiscal 2023, which projects growth in line with our publicly announced long-term, organic, constant currency net revenue growth rate range of 8% to 10%. Among the factors we've considered in formulating this estimate are: increased utilization of recent investments across the company, including those highlighted earlier this call; organic growth through current assets; a shift of some of our fungible biologics assets currently producing COVID vaccines to other customer projects, including recently signed large commercial tech transfer programs; and as a risk mitigation factor, assuming a considerable decline in revenue from our COVID-19 product programs.

Operator, this concludes our prepared remarks, and we would now like to open the call for questions.

(Operator Instructions) We take our first question from Tejas Savant from Morgan Stanley.

So Tom, appreciate the color on the organic constant currency growth for fiscal '23. Is there any way you can quantify perhaps the percent decline in COVID contributions you are baking in at this stage? And how are you thinking about overall EBITDA margins trending heading into next year in light of the COVID revenue coming out as well as some of the other near-term factors you flagged weighing on Biologics margins here?

Sure, Tejas. So as you know, we intentionally, as we entered fiscal year '22, have gone away from disclosing revenue contributions related to COVID demand as we consider that part of the base business. So at this stage, we're certainly not going to backtrack on that and start to now disclose what the revenue contributions are assuming for fiscal '23. But as we said in the remarks, we have considerably derisked the overall contributions here as part of our -- as part of the fiscal '23 and continue to have a line of sight to growth despite that declining demand profile of COVID-related vaccine revenue to the 8% to 10% long-term growth target that we have in place for the consolidated company.

With regards to your question on margin, look, I would say we're not at this point in a position to provide full guidance here. This is obviously much earlier in the process than we've ever talked about, the next fiscal year, than we've done before and aren't in a position to be able to elaborate any further around the EBITDA contributions. What I will tell you is the COVID-related revenue does have a significant piece of it that's tied to lower EBITDA margins, given the component sourcing dynamic, which I highlighted in my prepared remarks.

And then lastly, obviously, we will give a more detailed read on our guidance for fiscal '23 as part of our next earnings call, including all of the usual P&L and cash flow items that we tend to disclose. The only other item I'll comment to related to EBITDA margins is we do have a long-term EBITDA margin target out there for achieving a 28% consolidated EBITDA margin by 2024 as well as near 30% EBITDA margins by 2026. And we continue to be on track to achieve both of those.

Got it. That's helpful. And a quick follow-up specific to Biologics, Tom and Alessandro, and John, feel free to chime in as well. Do you anticipate a meaningful headwind to fiscal '24 revenue? The context of the question is there's been some investor sort of concern around one of your key COVID vaccine customers leveraging this new fill/finish partnership they signed with one of your competitors. Or put another way, I mean, what underpins your confidence that you can navigate and grow through this dynamic, not just in the context of your fiscal '26 targets but also a little bit more near term, perhaps in fiscal '24?

Yes, sure. This is Alessandro, I'll pick up this one. A couple of comments here. Number one, I will state that our relationship with our COVID partners, which has been built through the pandemic, has never been stronger, remains strong and long-lasting, despite the fact that we are, as we said, mitigating the risk of COVID revenues and the outlook we provided today, we will always be there for them for whatever needs of their pipeline, COVID- or non-COVID-related, in the next few years.

With regards to Biologics specifically, I will tell you that during the pandemic, and that this was part of my prepared remarks, we were very intentional in keep investing and building and accelerating some investments in assets which we could sell in and which we could fill with the programs, which were late-stage and non-COVID-related following the different dynamics. These late-stage tech transfers are being progressed. And this is a part of the investments that we've done in our Biologics business unit. And in my remarks, I pointed out those tech transfers will be a part of the dynamics of Biologics in the next few years.

The next question comes from Luke Sergott from Barclays.

Can we talk a little bit about pricing and what you guys are seeing on the raw material side and how you are thinking about the 8% to 10% guide, how much of pricing is baked into that?

Yes, sure. Look, as you can expect, this is a very dynamic investment -- environment, where there is a significant pressure on supplies, but there is also -- we have contractual arrangements which allow us to offset some of those impacts in our relationship with our partners. At the moment, we are -- we continue to be in the position to manage these. We have deployed additional resources and task forces internally to the company in order to manage the situation.

We've been, if you like, a little bit ahead of time here. And as you've seen, and as Tom described, that we have, back in the last few months, increased our inventories, placing orders for longer lead times to get prepared for this phase. So I would tell you, look, we are prepared at our very best to navigate the current scenario and the few challenges ahead of us. And we expect to be able to go through them.

Okay. Great. And then a follow-up here is just -- I mean, you guys have done 5 deals in the last 6 weeks or something like that. Can you talk about how advanced some of these facilities are? Any additional CapEx needed to bring them up to speed? Are they all under partial coverage for the sterilization? And then more broadly, how does that change your mix going considerably from drug substance and drug product, assuming that all of them are up to full capacity utilization?

Yes. Sure, Luke. So a couple of things here. Number one, one of the results of the current supply shortages is that building from ground-zero assets has become increasingly expensive and increasingly long in terms of timeline. That was our preference for sure until a couple of years ago. But clearly, in the current climate, we saw significant opportunity here to accelerate those timelines by acquiring facilities which are either already finished, like the one in Princeton, or nearly to completion, which were like the one in Oxford. And not only this has acted as an edge towards increase of materials to build, because these facilities were built in a time when those materials were less expensive but also provided that acceleration to revenues, which is the key factor influencing returns on these green and brownfield type of investments.

So we are very, very happy that we were able to get our hands on those assets, which are both in very high demand. I believe that both, with regards to the cell therapy and -- in Princeton and the investments we've done in Oxford, both of them are way more increasing our presence in drug substance and drug product. In fact, almost entirely those assets would be classified as drug substance assets. And very, very important because these are filling two areas where we had the need for strength: one was our presence in drug substance in Europe, which we've been announcing for some time; on the other hand, these facilities in Princeton completes our North America footprint in terms of commercial-scale cell therapy capabilities, where we see significant opportunities with the recently approved products.

The next question is from Jacob Johnson from Stephens.

And John, congrats on all the accomplishments over the years. Maybe just, first, following up quickly on Luke's question, on these recent acquisitions in the Biologics segment, it sounds like there, quasi-organic investments, buying facilities that were underway or already built. Can you just talk about the revenue contribution from those deals and how we should think about that maybe over the next 12 to 18 months?

Right. So I will give to Tom a little bit more the possibility to chime in with some more color around that. I would tell you these two investments are very, very strategic. Clearly, as always, you defined them so very well, which are nearly organic investments, which again were deployed because they are world-class, premium facilities, very high standards, so meeting the customer expectations nowadays, but also very close to completion of one of which is already completed and there is some business already into it, which is the one in Princeton.

So we expect that the revenue growth is going to be fairly rapid. But of course, it's going to take some time to get this asset to full utilization, which is good news because it's going to give us a runway in the next -- at least for the next 2, 3 years and be able to continue to grow our Biologics segment over and beyond the utilization of the current assets.

And Jacob, I'll just add here, as Alessandro mentioned, there is a very small -- certainly a material revenue contribution that will come from the Princeton asset. There will be no revenue in fiscal '22 associated with the U.K. asset. And as I noted in my comments around our revised fiscal 2022 guidance, there's a significant amount of costs that we're inheriting as well as continuing to invest in here that is absorbed in our fiscal '22 guidance. That was approximately an $8 million headwind between the two deals at the EBITDA line that's included in our new fiscal '22 guidance. And we'll give more specificity around the contributions of these two additional sites as part of fiscal '23, when we update our guidance. We'll provide more specificity around our guidance in the August call.

Got it. And then I guess, the follow-up, you guys called out strength in gene therapy in the quarter. Can you just talk about what's driving that? I think there's some commentary about demand from large customers. Is this commercial demand? Do you have some customers nearing commercialization? Just any context around that.

Yes, sure. Look, we have commented on this a few times. And the reality is that our pipeline is strong, but it's also maturing. So there are assets that are transitioning to later stages of the pipeline. And those assets going in later stages, they require much higher quantities of viral vectors, which drive growth. This is pretty normal in assets which are primarily serving clinical work at this point in time. I believe the profile of the customers is more skewed to mid- to large organizations in the later stage. And we also have a good pipeline in early stage, which we are progressing.

The next question comes from Julia Qin.

So I know a bulk of the growth in the future is coming from drug substance and then prefilled syringes on the drug product side. I'm curious how the supply and demand dynamics looking like for regular fill/finish capacity. And do you expect to sustain high utilization for regular fill/finish facilities even with COVID roll-offs? And for next year, what are you assuming in terms of fill/finish pricing dynamics?

Yes, sure. Look, clearly, we are investing heavily in this area. We see significant demand in front of us. I believe there are two factors here. Number one, when you look at the pipeline and the expected bigger products, which are going to be going commercial in the next few years, a significant share of these products are relying on stellar presentations, so to speak, so which primarily is going to be prefilled syringes. So that's one dynamic.

The other dynamic is more of a technological one. As regulatory expectations continue to increase, there will be much more demand in products going towards underregulated technology which, of course, will continue to move the demand towards this more modern, higher containment assets and with better syringe assurance. And this dynamic as well is going to be a significant one going towards the assets we've been building over the years.

The last dynamic in fill and finish is about lyophilization. We continue to see significant opportunity there. There will be products that will continue to require lyophilizing activities to increase stability and shelf life. And as such, as we described, that we are investing also in this area. So there are a number of different dynamics, the pipeline itself, the movement towards underregulated technology and lyophilizing or products requiring lyophilizing, which are surely creating a significant tailwind for our demand in that product, besides what we experienced in vials in the last couple of years.

With regard to drug substance, I'm going to tell you, we always look at our assets in that area to be very fungible and very redeployable, if you like, across the different modalities. And particularly, this is very true for the new facility in Oxford, where we plan to be able to serve out of that facility across several different modalities, including messenger RNA, classic mammalian cells and others. The facility was intentionally designed and built to be able to serve across many different modalities. And that's why it was so attractive to us.

That's great. And for my follow-up, I know you previously said you expect many COVID customers to stick around post pandemic. Curious to what extent have your COVID customers made commitments to you beyond COVID projects? Or are you right now mostly filling capacity with new non-COVID customers? And in general, how fast do you expect the transition from COVID to non-COVID projects to be?

Sure. Look, there are some customers where we have -- we don't call it a supply relationship, but we call them the partnership, which means that with these customers, we have a portfolio approach, where we offer them capacity across all the pipeline that they are coming through. So on one hand, we have visibility on that pipeline. On their end, they have the visibility on the capacity we create, and we have some contractual arrangements that created the opportunity on both sides to continue the collaboration in a productive way going forward.

I believe that the base of all of this is there is a very strong and successful relationship that has been created during the pandemic. We've been together in very difficult times, providing significant relief to the world in terms of vaccination. And that has strengthened the relationship to a level that makes us feel comfortable about the future prospects with these partners.

The next question comes from Sean Dodge from RBC Capital Markets.

Maybe just going back to the comments around the longer-term margin outlook. On Bettera, you said margins there running mid-20s now. And I think you said over time, you can get back -- you can elevate those to more like Biologics level, so something in the 30s. Now that we're a couple of quarters into that acquisition, can you just give us an update on what should be the main contributors or drivers behind that? And over what timeline do you think you can drive that?

Sure. Luke, as I -- sorry, Sean, as I said in the prepared remarks, margin expansion is something we continue to be very focused on. We're on track towards our '24 and '26 long-term outlook. And we went out of our way to specifically call out the Bettera business as being one of the drivers of the margin expansion opportunity. As you rightfully pointed out here, we do have line of sight to this business operating at margins that are closer to that of Biologics. I would say we're in only our second quarter here with the Bettera business part of the Catalent portfolio, and it's already tracking at an EBITDA margin that is north of what we see from our SOT segment overall.

In terms of the phasing of the margin expansion opportunity there, I would say we continue to be in early innings. As I said, this is only the second quarter that this business has been part of the portfolio. And I think through operational efficiencies, running the sites more Catalent-like as well as further operating leverage from continued and improving higher levels of utilization within that business, that is one of the key drivers that would help drive the margin expansion. The pricing dynamic in this business also remains extremely robust. That's another contributor to the potential increase in the margin profile here.

And when we highlighted a 28% EBITDA margin in fiscal '24, the Bettera business was not part of the Catalent portfolio at that time. So this just gives us even more confidence in being able to deliver on that 20% -- 28% by 2024 and then ultimately the 30% or so that we've talked about by fiscal '26. And we'll give more specificity around the margin profile of the business in fiscal '23. But as I said, from the 26.6% we're at today, continue to have line of sight to 28% by 2024.

Okay. That's great. And then where -- if we think about -- Tom, you mentioned capacity utilization being one of the primary drivers. How does capacity utilization across the Bettera footprint average maybe to like what you'd see across the rest of SOT? Is there a meaningful difference?

Okay. It's a very dynamic picture there because there is the physical capacity and the staff capacity. As out of the gate, we could surely free up additional capacity and serve more demand through increasing our ship part and our staffing levels and surely through applying the, what we call, the Catalent way, which is our operational excellence, if you like, playbook to these assets, where applying these to changeovers and reducing downtime, improving efficiencies in deals, we will be able to unlock some additional capacity.

In the mid-term, there are ongoing significant investments in terms of additional lines which will create significant additional capacity. These investments are ongoing, well underway. Some of them actually started under previous ownership, which will continue to give us enough capacity to serve the high demand we are seeing in that area.

Our next question comes from Dave Windley from Jefferies.

Regarding the '23 initial guidance -- initial revenue guidance commentary that you've given, can you comment on what your expectations for growth are, specifically in Biologics? I think, Tom, you mentioned kind of a glide path down to the 10% to 15% long-term range. But I wasn't sure if that was applicable specifically to '23.

So Dave, look, I think we're not in a position to provide fiscal '23 guidance at this stage at the segment level, given how early in the process we are. As I said in my remarks, we're already speaking around next year at a much earlier point than we ever have historically. That being said, we've clearly laid out 4-or-so key drivers of the fiscal '23 revenue growth of 8% to 10%, including increased utilization of recent investments across the company, which we talked about on this call, that are very much Biologics-focused.

In addition, we also called out a shift from some of our fungible biologics assets currently producing COVID vaccines to other customer projects, including recently signed large-scale commercial tech transfer programs. Those two bullets specifically are related to the Biologics segment. That being said, I'm not going to quantify the growth range of that. We'll give more specificity around that again as we give more clarity around our fiscal '23 year and a full guidance as part of our August release. But I think that color should be enough here around some of the assumptions around Biologics next year.

That is very helpful. The other question I had was just around Brussels and the remediation there. Is that on track to your expectations to be remediated and back to operation? And then you call it out as a margin compression factor in the segment. Would you be able to quantify how much that impacted margin in the quarter?

So first of all, Alessandro here, I would tell you, we are pleased with the progress and incredible work done by our teams in addressing the 483 as we stated in previous calls. 483 need CAPAs by definition. And some of those CAPAs require the facility to be paused in terms of manufacturing because they are more invasive and require engineering changes and some others don't.

So I would say that our progress in terms of addressing those requiring engineering changes and manufacturing pause have progressed well. As described in our prepared remarks, we are -- we have restarted manufacturing operations, which is good, especially for patients. But at the other end, we continue to work diligently on all our CAPA plan on that. With regards to the margin, I'll pass it to Tom.

Yes. I'll chime in here, Dave. So look, we did see a 200 basis point decline in margin versus where we were in the third quarter of last year. We don't quantify contributions from individual facilities within the Catalent network. But I will tell you, in addition to component sourcing as well as some further investments that we're making in some of our smaller-scale, less-mature businesses that have recently been acquired within Biologics, the Brussels remediation efforts are absolutely the bulk of the margin compression that we saw in comparison to the prior year levels.

The next question comes from John Sourbeer from UBS.

Congrats on the quarter. I know you aren't quantifying the COVID revenue dollars. But I guess, have you started to see any of that drop-off in COVID revenues currently? And is this reflected at all in the fiscal 4Q guidance? And then as there is a continued shift to lower-dose vials, any way to think about the cadence of that drop in fiscal '23?

Look, I won't provide the specifics and details around how the COVID volumes are shifting across the current guidance for Q4. I would tell you that we are definitely, at the moment, seeing the transition from the pandemic into the endemic use of the vaccines. But there are many dynamics out there which are kind of interesting. Number one, as everybody knows in the public news, there is an ongoing -- there are ongoing trials for reformulation of vaccines or for an updated version of vaccines. But it's something that we're going to continue to work on.

There are projects for the transition to lower-dose vials. And as we shared, we continue to work on those projects as we speak as well as continue to supply the legacy presentations. So it's -- there are so many, many dynamics at play here. And we continue -- that's why we have taken the decision of sharing the fiscal '23 guidance in which we decided to mitigate the risk of these revenues as we look into the future.

Got it. And I guess just as a follow-up on the preliminary guidance for next year, any way to think about what is baked in on cell and gene therapy in Paragon? And as this becomes more of a meaningful driver to maybe make up some of that decline in COVID revenues, any way to comment on how Catalent's portfolio is growing maybe in line with some of the market growth rates?

Yes. I would just say here again we're not going to get to the specific assumptions around segments or subsegments even, John. As part of our fiscal '23 outlook, obviously, again I'll reiterate that we'll get more covered here in August around this. But I will say, I think it's been mentioned several times in the remarks today, including John and Alessandro's section, around the continued strength that we see around the cell and gene therapy business.

I think recent and current investments that we're making around this segment speak to the demand profile that we see, particularly with some very large customers that are, I would say, seeing a good progression of the pipeline, moving closer and closer to commercialization. So absolutely a robust part of our business, one we continue to be excited about and invest in and certainly will be a contributor to growth next year.

We take our next question from Justin Bowers from Deutsche Bank.

And appreciate all the detail in the prepared remarks. I was just hoping to understand some of the tech transfer projects you have underway. Is that rescue work or new sponsor or existing sponsor projects? And what type of modalities or technologies? And are there any considerations we should take into account in terms of timing or duration for switching lines?

Yes, sure. Look, these are projects that we started already a few quarters ago. Of course, the tech transfers don't happen overnight. We do see opportunities -- with regards of our drug product business, which is the one where it's more likely that you're going to see tech transfer into the Biologics space, I would tell you that there are several therapeutic areas, which are interesting to us, which one is oncology, which is mostly encompassing monoclonal antibodies and therapeutic proteins.

There are other like diabetes. There are other like neurologic disorders and so on. So these are all areas where we look with great interest, which have interesting -- a good combination of late-stage products as well as the approved products and very commercially approved products. So we were very intentional and very strategic in engaging with the customers in those space to -- with the -- and planning the right capacity and capabilities to serve those therapeutic categories. And we are pleased with the success that our commercial team had in securing those new contracts.

Okay. And then as a follow-up, in terms of the 2023 growth outlook, is there a way to help us understand how much of that is coming from existing capacity versus some of the new capacity coming online? And then with the EBITDA headwinds that you called out in the fourth quarter, how does that phase out over the next few quarters?

So I'm going to cover the first part, the second part, I'll leave it to Tom. Look, it's always a combination. But I would tell you, when you look into the fiscal year '23 in terms of having a material impact on the top line, normally those assets are already being qualified or already qualified. So you should be looking at mostly this coming from all the investments we've done in the last couple of years on which we've been keeping everybody up to date in terms of how this capacity was coming online.

I refer to the additional drug substance trains that came online earlier this year on -- in the Madison campus. Some additional capacity is coming online, as we described, in our gene therapy campus in Baltimore and the BWI Airport, the additional capacity that came online in Limoges, some expansions we've done in Anagni. There are a number of different assets in which we've been announcing investments, which came online the last few months, which will be surely instrumental to the progression of the company into fiscal year '23 and beyond.

And with regards to the cost-related headwinds we see at both of these acquisitions that have been announced, Justin, it's difficult for me to give you any more specifics around what the contributions will look like in next year, other than to say I would not expect the combined two facilities to get to a positive EBITDA next year. I do think there will be a negative burn associated with this. But we'll give a lot more again specificity around the individual contributions here as part of our full guidance in August.

The next question comes from Jack Meehan from Nephron Research.

I had another follow-up question on the COVID-19 demand. So your guidance for 2023 contemplates this considerable decline. I was curious what you're hearing from customers around demand, whether this is really kind of the base-case scenario around boosters. And if demand does persist at current levels, would you now consider that upside to the 8% to 10% target you laid out?

Look, as I said that there is a lot of dynamics out there, but I'm going to tell you, we still see some dynamics with our customers. So we took the stand and decided that in terms of giving an update on our current outlook on fiscal '23, we decided to mitigate the risk of those revenues in our guidance. That being said, as in the next few months, some of those dynamics will get clearer. And as some of them could get clearer during the summer, we will continue to provide updates on this one as we get into our next call, which is in August.

Yes. I would just add, Jack, I think the way you're interpreting this is exactly right. Line of sight to 8% to 10% was a considerably declining profile around COVID. And if we were to see COVID contribute at the levels in which we're at today, there would absolutely be upside to the 8% to 10% we expect to see for next year.

Great. And as a follow-up, Tom, CapEx for the year, just the aggregate revenue dollars are lower, like $650 million at the midpoint versus closer to $750 million previously. Can you just talk about maybe some of the projects going a little slower than you might have thought previously? And just any thoughts on level of CapEx in 2023, I know it's early, just would be helpful.

Yes. I think '23 remains an elevated year for us from a CapEx perspective, especially given some of the carryover that we'll see from 2022. As you mentioned, we did lower our 2022 CapEx outlook really based on some of the delays we're seeing and longer lead times for some key items necessary in order to execute as well as just labor-related challenges. So the challenges that we see on the supply chain side that are impacting the ability to get necessary components also impacts the ability to get what you need to execute around CapEx. So that is having a little bit of an adverse effect here and one of the reasons why we've lowered the '22 outlook.

I would expect the '23 outlook to be, as I said, elevated. We're not going to give specifics to what that means in terms of a percentage of revenue. But we did purposely say in my section in the prepared remarks that we do need to get back to an 8% to 10% normalized level in the years to come. And we absolutely will do that. The level of capital intensity we're seeing in the business is based on the demand profile, the progression of the pipeline and the strategic initiatives that we're undertaking. But it's not the new normal for the company from a longer-term perspective.

Yes. I would add to this one. Look, it's true that you're seeing the CapEx numbers per se which is lower. But I would put us back on the comment a bit before that some of these acquisitions are really -- that we have announced, are really needed to be seen as an accelerated CapEx deployment in terms of organic growth. So as Tom referred to, there are some areas of the supply with regards of the building material

(technical difficulty)

opportunity. And we took a little bit of a pause in our spend in Anagni and trying to understand how we best to deploy that part of investment. So in many ways, there is a movement of some cash from what you classified as CapEx into the acquisition. And a little bit of that also goes to the Princeton facility, where we decided to go there because we saw a much faster access to the market compared to some of inorganic play in our CapEx projection for the fiscal year.

We move our next question to Derik De Bruin from Bank of America.

Just a couple of questions. You commented on some inventory builds. I'm also wondering, it's like, have you seen stocking at your customers? And I've got a couple of follow-ups to that.

I'll ask Alessandro to jump in here as well. But I'm certainly not hearing or seeing that. I think when you think about stocking of raw materials and consumables being very different than stocking of finished dose forms, given shelf life dynamics and other things that come into play, Derik, so not something I'm seeing or hearing across the business. I don't know, Alessandro, anything there?

No, I would say that we are not seeing that happening across the board. I believe that this is also due to the fact that many areas, at the end, the demand of the market is really strong. So we are now refocusing on making sure that the market is served with all capacity that we are deploying in those high-demand areas.

Great. In the OSD segment, the organic revenue growth rate there was a little bit lower on a stack basis than I would have thought. Is there anything specific going on? I would have thought it would have been a little bit faster, given the comp this quarter.

No. Look, I think this is a business that should be, Derik, probably performing in the long-term outlook range that's maybe 100 basis points or so above what we saw in the quarter here. I would say where we've seen growth has been from an early phase development program standpoint. I don't think there's anything underlying in the business.

I think our long-term outlooks are meant to cover longer analysis periods, more like years and year-to-date looks than simple 90-day periods. So we're not seeing anything here. The pipeline remains robust as do the end market dynamics. So we're not seeing anything here that causes us for any concern based on the sort of low to mid-single-digit growth we saw in that business in the third quarter.

No. The only color I would add there is that in one big piece of our OSD business unit is Zydis. That has an element of seasonality in terms of the mix of the products that are parts of the seasons where you tend to go more in prescription products for immunotherapies and some other therapeutic areas or some others more consumer health-focused. So depending on these cycles, the revenues can go -- not necessarily the volumes, the revenues can be -- can have a little bit of a dynamic there.

So there is a little bit of cyclical dynamic there. And surely, as we emerge out of the pandemic, we've seen a significant demand for some consumer health products, which were really not in high demand during the pandemic because of that specific area of the market has been not used. So there is a little bit of that dynamic, nothing structural. It's a business that has some of those cycles.

Great. And one final one, if I can. When you look at your contracts that are rolling off for COVID, like how many of these are in like the take-or-pay nature? That is, I mean, if customers aren't being able to fulfill what they originally thought or take what they originally thought, are they still being charged for it? Basically, this question being is like is it sort of helping you sort of like make the transition into this healthy EBITDA margin profile?

Look, I will tell you that these contracts that's called -- they're called take-or-pay for a reason. That being said, we always look at our partnerships with our clients in a holistic fashion. And we normally have a such a wide relationship with these customers, we always try to find that we're actually successful to find win-win situations in those -- if those situations should present themselves. So we are not concerned about the fact to have to navigate through if they would, in fact, present some of those situations. Because again, with those customers, we have a portfolio approach as opposed to just a relationship or one specific treatment of product.

The next question comes from Paul Knight from KeyBanc.

Alessandro, could you talk to your cell and gene therapy market outlook? Specifically, your CapEx is robust, obviously. Is this coming from anticipated approvals or label expansions on the cell and gene therapy as part of your business?

So I would always keep separating the gene therapy from cell therapy primarily. These are two businesses that are in a different stage of the life cycle. With regard to gene therapy, it's already a sizable, I wouldn't call it mature, but at a scale business, where we built over the years a significant pipeline of different customers and treatments. And so it's a very rich pipeline. Some -- what is driving the dynamics in the short term in the next few quarters there is that this pipeline is, in fact, maturing. So some of the assets that we've been

(technical difficulty)

in that business, we've been very, very purposeful in the past to select organization with our portfolio of products and not necessarily one product with one customer and also well-funded organizations.

So this allowed those organizations to have more shots on goal, so to speak, in terms of late-stage assets but also to progress the assets through later stage of the pipeline. And then as those assets arrive in Phase II, Phase III, the quantities of viral vectors require this significantly to be higher, and that by itself, even without onboarding new programs and new customers to drive growth. With regards of the cell therapy, I would tell you, I see more opportunity there from

(technical difficulty)

as opposed to mainly related to pipeline. Both these businesses, at the moment, have processes which don't take much to be saturated in terms of capacity.

So when you look at a facility or a number of suites that have been fully utilized, looking at tens of products that can be easily saturated with the one, two programs. So it is indeed an area of the business where we are seeing those dynamics. And we feel very, very comfortable with the prospects of the cell and gene therapy, which if you like, has been one area of the business in the last couple of years where we were more in building mode as opposed to be in harvesting mode. And we are pleased that the phase is changing now.

We'll take our final question then from Christine Rains from William Blair.

I'll keep it short. I think we covered a lot of ground, so just one for me. I was wondering if there's any update on drug substance on the monoclonal antibody production side? Specifically outside of out of Madison, is there any products nearing commercialization there?

So look, I would tell you that we are very, very pleased with the performance of our Madison site. Now the site has grown significantly. This was a greenfield investment for Catalent. And now this arrived to have a significant amount of capacity and should be now the full

(technical difficulty)

We've seen a lot of success in terms of continuing to build our pipeline there thanks to our technology. We continue to be a technology differentiator in the drug substance. Our purpose is to provide customers will be more productive, more stable cell lines in a shorter time frame. And this is what our technology is providing them.

So the pipeline is very, very robust. It's driving growth. So we are pleased with the Madison assets. But I would also would like to remind the significant investment we're doing in Bloomington drug substance, which we've essentially doubled the capacity there, which combined with our Oxford new facility, is significantly increasing the reach of Catalent into the drug substance and, in general, new modalities.

I now turn the call back to John Chiminski for final remarks.

Thanks, operator. And I'd like to close by highlighting a few key points. The trajectory of Catalent remains as strong as ever, as demonstrated by our ability to increase our fiscal '22 guidance for the third consecutive time this fiscal year and by our ability to confidently provide robust projected growth targets out to fiscal 2026, including expected net revenue growth in fiscal 2023 in line with our long-term growth target range of 8% to 10%.

So far this fiscal year, we've been able to achieve an impressive level of success due to our highly talented employee base. The continued execution of our long-term strategy rooted in a patient-first culture and best-in-class sustainability and delivering for our customers and their patients when they need us most. In addition, we remain encouraged by the positive growth trends across the CDMO industry as well as the prospects for the investments we've made in other therapeutic areas and modalities, which provide a foundation for Catalent to continue expanding and enable us to pursue new opportunities for partnership.

Catalent remains the global leader in enabling its health care partners to optimize product development, launch a full life cycle supply for patients

(technical difficulty)

products as well as our substantial scale and expertise in development, sciences, delivery technologies and multi-modality manufacturing, continue to make us the industry's preferred partner. I firmly believe that we have the right people, leadership, processes, technologies and long-term strategy in place to help our customers. And we're proud to see how our work continues to improve the lives of millions. Thank you.

This now concludes the call. Thank you all for joining. Please disconnect your lines.