Catalent Inc

NYSE:CTLT

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the First Quarter Fiscal Year 2020 Catalent Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Tom Castellano, Vice President of Investor Relations and Treasurer. Thank you. Please go ahead, sir.

[Tom Castellano]

Thank you, Jimmy. Good morning, everyone, and thank you for joining us today to review Catalent's first quarter fiscal year 2020 financial results. Please see our agenda on Slide 2 of our Company presentation which is available on our Investor Relations website. Speaking today for Catalent are myself, John Chiminski and Wetteny Joseph.

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'd like to turn the call over to John Chiminski.

[John Chiminski, Chair and Chief Executive Officer]

Thanks Tom. And welcome everyone to our earnings call. We're pleased with our first quarter financial results which have us off to a strong start in our 2020 fiscal year. As you can see on slide 6, our revenue for the first quarter increased 20% as reported or 22% in constant currency to $665 million with 11% of the constant currency growth being organic. All four of our reporting segments recorded double-digit revenue growth during the quarter and contributed to the strong first quarter growth rates which were nicely above our long-term outlook.

Our adjusted EBITDA of $127 million for the quarter was above the first quarter of fiscal year 2019 on a constant currency basis by 28% with 13% being organic. Our adjusted net income for the first quarter was $41 million or $0.26 per diluted share which is $0.08 above the same figure from the prior fiscal year. The strong results at the profitability line also included contributions from all four of our reporting segments.

Now moving on to our operational update. First, we continue to make great strides on a biologic strategy and I'm pleased to announce that the Bloomington site recently received approval for its 21st commercial products which is up from the 12 that was producing at the time of the acquisition, with several additional launches on the horizon. We continue to manage a robust funnel of late-stage clinical opportunities across Bloomington and Madison that bodes well for future.

Additionally, the expansions supported by our $200 million investment in Biologics spanning both Bloomington and Madison are well underway and progressing according to plan. This investment will add more drug substance manufacturing and drug product still finished capacity to meet projected growth among existing and future customers. Another significant aspect of our biologic strategy is reflected in our entrance into the gene therapy space through our acquisition of Paragon Bioservices in May, 2019. Through the acquisition and the related acquisition of additional gene therapy assets in late July, we have gained new expertise and capabilities in one of the fastest growing therapeutic areas in healthcare.

These developments reinforce Catalent's leadership position across biologics and position us for accelerated long-term growth by bringing deep expertise in adeno-associated viral vectors, the most commonly used delivery system for gene therapy as well as a platform for development of an expanded offering of vectors, enabling entry into other adjacent technology categories to support the development and manufacturing of gene and cell therapies. Our gene therapy business combines this expertise with strong manufacturing capabilities and world-class facilities in order to capitalize on substantial industry tailwind in gene and cell therapy.

The integration of our gene therapy assets into the Catalent portfolio is well underway and progressing ahead of our expectations. The gene therapy business is performing well out of the gate and the expected positive impact of the gene therapy business on our future revenue and EBITDA profile will deliver highly compelling value to shareholders as evidenced by the increase in our expected long-term revenue growth outlook from 4% to 6% to 6% to 8%.

We also recently launched our one bio suite which combines our large molecule development manufacturing, fill/finish packaging in clinical Supply Solutions into one integrated and simplified service offering. Essentially, this service is designed to accelerate biologic development by leveraging all Catalent's capabilities and expertise to successfully move the customers' molecule from gene to clinic as fast as possible. There's been great interest among customers looking to trim weeks to months off standard development timelines and Catalent just signed our first one bio contract with dozens more in active discussions.

We have also seen an overall increase in cross-selling opportunities between our biologics and clinical supply businesses, which is another outgrowth of our one bio offering. The one bio suite is just one example of how Catalent continues to innovate to meet customer needs and differentiate our biologics capabilities in this exciting and fast-growing market. As a reminder, Catalent Biologics including gene therapy and our pre-existing drug substance and drug product biologics businesses can provide integrated solutions from protein and viral vector manufacturing and analytical services through clinical and commercial supply and fill/ finish in a variety of finished those forms including vials, cartridges and syringes.

Biologics represented more than 32% of the company's revenue in fiscal 2019 and will become an even larger percentage of our revenue over the next three years. The combination of organic and inorganic investments we are making in biologics is already delivering substantial benefits to patients and will continue to create significant value for the company, our customers and our shareholders. Second, we remain positioned increasingly well in an attractive robust growing market and have the strongest development pipeline since Catalent's inception with more than 1,100 active projects. Next, we remain fully committed to delivering results aligned with our fiscal year financial guidance and are reaffirming our guidance range which reflects revenue growth of 10% to 14% and adjusted EBITDA growth of 17% to 22%.

Finally, the press release we issued this morning describes adjustments we have made to our operating segments to better align our internal business unit structure with our follow the molecules strategy and our increased focus on our biologics related capabilities. Slide 7 shows our adjusted segment structure, the capabilities within each and the fiscal year 2019 revenue contribution from each of the segments. A revised structure which parallels in reflects how we manage our business internally provides complete transparency to the performance of our large molecule drug substance, drug product and gene therapy assets through the revised biologics reporting segment which no longer includes our specialty delivery platforms.

Our renamed Softgel and Oral Technologies segment includes the form of Softgel technology segment in its entirety, as well as our large scale commercial solid oral dose platforms that were previously included in our all drug delivery segment. Our oral and specialty delivery segment includes small molecule development technologies and supply for small to medium scale specialty oral, respiratory and ophthalmic products including our Zydus orally dissolving tablet business or spray drying capabilities and our facilities devoted to early development activities as well as analytical services.

There is no change to our clinical supply services segment. Therefore for financial reporting purposes we continue to represent four segments, Softgel and Oral Technologies, Biologics, Oral and specialty delivery and Clinical supply services. A more comprehensive description of our segments can be found in our Form 10-Q to be filed with the SEC later today.

Now I'll turn the call over to Wetteny Joseph, our Chief Financial Officer who'll take you through our first quarter fiscal year 2020 financial results.

[Wetteny Joseph]

Thank John. I will begin this month this morning with a discussion on segment performance where both the fiscal 2019 and fiscal 2020 first quarter results are presented on the basis of our revised reporting segments. Please turn to Slide 8 which presents of 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 $263.7 million increased 12% during the quarter with segment EBITDA increasing 15% due to strong performance across the entire portfolio. The segment experienced growth from prescription and consumer health volumes in North America which is partly attributable to the strong uptake from recently launched products.

The segment also recorded higher demand for consumer health products in Europe. Additionally, the strong EBITDA performance was driven by improved capacity utilization and favorable product mix across the network. All of the segment revenue and EBITDA was organic.

Additionally, in late October, we completed the sale of our Braeside, Australia, VMS Softgel facility to the Blackmores, which we announced back in April of 2018. As a reminder, the closing date of the sale was known as we entered the current fiscal year, and its impact is already reflected in our financial guidance.

Slide 9 shows that our revamped Biologics segment recorded revenue of $188.6 million in the quarter, which was up 51% versus the comparable prior year period, with segment EBITDA growing 33% during the quarter. However, most of the segment's revenue growth and all of the segment's EBITDA growth was inorganic and driven by the gene therapy acquisitions, which contributed 45 percentage points to the segment's revenue growth and 51 percentage points to the segment's EBITDA growth. Excluding acquisitions, the segment recorded organic revenue growth of 6% in the first quarter, but an EBITDA decline of 18%.

Recent investments in our Biologics business continued to translate into growth during the first quarter, as we recorded strong growth in drug product volumes across the US. But as highlighted in our last earnings call, the business has been experiencing declines in its drug substance revenue, partly due to the completion of a limited-duration customer contracts for non-cell line clinical manufacturing services, as the customer completed the build-out of its own capacity. We continue to expect this to be a headwind for our drug substance business over the next couple of quarters, as we work to on-board new customers and continuing to increase our utilization levels. However, we remain confident that our biologics business is positioned well overall to drive strong feature organic growth.

As a reminder, in June, we announced our agreement to purchase Bristol-Myers Squibb's oral solid, biologics and sterile manufacturing and packaging facility in Anagni, Italy. This transaction will enhance our global network and provide us drug product sterile fill/finish capacity and oral solid dose manufacturing in Europe, along with an agreement to continue to manufacture BMS' is current product portfolio at the site. The addition of the Anagni facility provides our European customers with great biologics and oral dose capabilities to accelerate their development programs and improve commercial supply. We anticipate completing the transaction in the next few months.

Slide 10 shows that our Oral and Specialty Delivery segment recorded revenue of $132.6 million in the quarter, which was up 21% versus the comparable prior year period with segment EBITDA increasing 51% during the quarter. 18% of the revenue and 46% of the segment EBITDA growth was organic. The strong performance was driven by increased end-market demand and favorable product mix, overall oral delivery commercial products across the US and Europe, as well as an increased intake of new molecules, which drove strong analytical and development services revenue.

Additionally, segment continues to have one of our strongest development pipelines, including several late-stage free drug development programs. This is the timing of the close of the Juniper Pharmaceuticals acquisition in the first quarter of fiscal year 2019, one month of the result is considered inorganic, which contributed 3 percentage points to the segment's revenue growth and 5 percentage points to the segment's EBITDA growth during the quarter. The results of the Respiratory and Ophthalmic business, which are now included in this segment, were in line with the prior year period, but the fundamentals remain attractive for these key sterile fill technology platforms.

In order to provide additional insight into our long-cycle businesses, which includes 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, or NPIs, as well as revenue from NPIs. As a reminder, these metrics are only directional indicators of our business, since we do not control the sales or marketing of these products, nor can we predict the ultimate commercial success of them.

For the first quarter of fiscal 2020, we recorded development revenue across both small and large molecule of $203 million, which is more than 40% above the development revenue recorded in the first quarter of the prior fiscal year. Additional disclosure on our development revenue is included in our Form 10-Q to be filed today with the SEC. In addition, we introduced these 50 new products, which are expected to contribute approximately $13 million of revenue in the fiscal year.

Now, as shown on Slide 11, our Clinical Supply Services segment posted revenue of $84.6 million and segment EBITDA of $21.6 million, both of which increased 11% compared to the prior year quarter - of the prior year. The double-digit growth in both revenue and EBITDA was driven by higher volumes of storage and distribution as well as manufacturing and packaging services. All of the segment revenue and EBITDA growth recorded within CSS was organic. On the September 30, 2019, our backlog for the CSS segment was $374 million or 2% sequential increase. The segment recorded net new business wins of $93 million during the first quarter, which is an increase of 28% compared to the net new business wins recorded in the first quarter of the prior year. The segment's trailing 12-month book-to-bill ratio remained at 1.2 times.

Slide 12 contains reference information. We have already discussed the segment results shown on this slide, and the remainder of the slide contains consolidating information necessary to compare the total segment results to our overall results.

Slide 13 provides a reconciliation of EBITDA from operations from the most proximate GAAP measure, which are a net earnings or loss. This bridge will assist in tying out the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide.

Moving to adjusted EBITDA on Slide 14. First quarter adjusted EBITDA increased 27% to $127.1 million. On a constant currency basis, our first quarter adjusted EBITDA increased 28% with 13% of the 28% be inorganic and driven by the double-digit growth across our Softgel and Oral Technologies, Oral and Specialty Delivery and Clinical Supply Services segments.

On slide 15, you can see the first quarter adjusted net income was $40.5 million or $0.26 per diluted share compared to adjusted net income of $25.4 million or $0.18 per diluted share in the first quarter a year ago.

Slide 16 shows our debt-related ratios and our capital allocation priorities. Our total net leverage ratio as of September 30 was 4.3x, which is modestly reduced from the ratio as of the end of the prior quarter. Pro forma for the gene therapy acquisition, our total net leverage ratio was 4.2x, which is an improvement of three-tenths of a turn compared to the ratio at the time we announced the transaction. Given the free cash flow generation of the Company and its growing adjusted EBITDA, the Company naturally de-levers between one half and three quarters of return per year.

Additionally, continued investments in Biologics, including gene therapy, are expected to increase our fiscal year 2020 capital expenditures to approximately 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.

Turning first to our financial outlook for fiscal year 2020 on slide 17. As John previously stated, we are reaffirming our financial guidance and continue to expect full year revenue in the range of $2.78 billion to $2.88 billion. We expect full-year adjusted EBITDA in the range of $700 million to $730 million and full year adjusted net income in the range of $300 million to $330 million. We 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 159 million to 160 million shares, counting 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.

In addition to reaffirming our guidance on revenue, adjusted EBITDA and adjusted net income, we also now reiterate that I expect - that we expect our consolidated effective tax rate to be between 24% and 26% in the fiscal year.

Lastly, let me remind everyone of the seasonality in our business and highlight our expected progression through the year. As discussed for several years now, the first quarter of any fiscal year is generally our lightest quarter by far, with the fourth quarter of any fiscal year generally being our strongest by far. This will continue to be the case in fiscal year 2020, but we expect to realize between 40% and 41% of our adjusted EBITDA in the first half of the year and between 59% and 60% of our adjusted EBITDA in the second half of the year.

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

[Operator]

[Operator Instructions]

Our first question comes from Tycho Peterson with JPMorgan. Your line is now open.

[TejasSavant]

Hey, guys, good morning. This is Tejas on for Tycho. John, I just wanted to get your perspective on a couple of things here. I mean, one. It looks like the overall top-line performance was pretty healthy, came in well ahead of at least our model, yet you left your fiscal 2020 guidance unchanged. Just trying to get a sense for what drove that dynamic. Were there any sort of one-off sort of pull-forwards that you saw in 1Q, which will result in a little bit of offset later on in the year?

[WettenyJoseph]

Hey, Tejas. It's Wetteny here. As we've consistently said in prior years, the first quarter is our lightest quarter by far, given this is now in business and the timing of when we do the majority of our maintenance shutdowns. And we tend to really, as we look at the guidance that we set out at the beginning of the year and we continue to have line of sight into, we don't really move in either direction after posting our results on the first quarter, and again given a consistent visibility that we have of course the year. So that was the case in the last several years and will continue to be the case for us.

[TejasSavant]

Got it. And then just to follow-up on margins here, specifically within the Biologics business, I think, Wetteny, you mentioned that the segment EBITDA was down about 18% on an organic basis. What does that number look like once you adjusted for that fiscal '19 completion of that limited duration contract and drug substance?

[WettenyJoseph]

Yes. So, as a reminder - look, we've completed a really strong quarter here overall with posting solid double-digit organic growth overall for Catalent as well as three of our segments posting double-digit organic growth, Tejas. Our acquisitions are really executing well for us and performing very well at or above our expectations. And as we've said during the prepared comments, we are reaffirming our guidance for the year. Now, Biologics, as you reminded here in your question, in the fourth quarter we did highlight that we have a customer that had non-cell line clinical manufacturing that we were we were performing for them over the last few years and that was a known timeframe for doing that as they were building out their own capacity in that they concluded. And if you adjust that out, the top line for the Biologics business would have been about 12% organic growth and about a 5% organic growth at the EBITDA line, as we continue to make investments in various parts of our business.

Now, as I highlighted in the last calls as well, our drug product business continues to have significant demand. Utilization across our biologics drug product manufacturing site in the US continues to ramp up quite nicely for us. And we've seen, as John mentioned earlier, the 21st commercial product approval in that business and we'll continue to see the ramp-up of utilization there.

Drug substance, however, is a business that is almost entirely in preclinical and clinical stages, and until we have a commercial product - commercial products in our US drug substance manufacturing facility, we'll continue to see some level of variability in that business. And we have certain plans to have, let's say, commercial-ready and we continue to see the programs advance in that in our pipeline for us, based the matter of time before we will have a commercial approval, which should have more less variability in the business, if you will. So those are the contributions here. But if you exclude the one customer we referenced, you'd be looking at about 12% top line growth and about 5% EBITDA growth organically in that segment.

[Operator]

Thank you. And our next question comes from John Kreger with William Blair. Your line is now open.

[JonKaufman]

Hi, good morning. This is Jon Kaufman on for Kreger, just following up on the last question here in drug substance. So, obviously, a lot of this is preclinical and clinical. Are you guys seeing significant demand volatility? Are any of your clients talking about, for example, the election cycle and how it might impact their strategies at all?

[WettenyJoseph]

Yes. So, Jon, look. We're certainly not seeing significant demand variability here. The market continues to remain really robust. I think what we're seeing here is variability on clinical cycles. So, as you know, it's not compared to a commercial drug that you know that you've manufacturing certain amount to supply the market. Clinical programs tend to have need for buy manufacturing batches from time to time and they vary depending on where they are in the cycle. One thing we are seeing, I would say, is the third suite which we launched in April of prior - previous fiscal years is about 15 or 18 months ago, that third suite, which is the largest manufacturing of site to the bioreactor, we have sort of the 2 x 2,000-liter, continues to ramp up really, I would say, above our expectations. We're seeing anywhere from 60% to 70%-plus utilization on that Phase 3, and it's really in reference to the programs that are continuing to advance and are meeting larger-sized batches. It's the smaller suites that we're seeing more variability in those would be the ones they have earlier clinical programs.

One last point I'll make is, we are starting to see some early signs of uptick in terms of its earliest part of the business, if you will, where we are doing the cell-line development of some other of - process development work which would lead to more biomanufacturing down the road. So that's a little bit more in terms of what we're seeing and what that might signal for the future for the business. But I would say that the clinical pipeline is typically more variable than commercial, and until we have commercial products transaction in that facility, we'll continue to see variability.

[JonKaufman]

Okay, great. And then one follow-up here. You guys mentioned cross-sell opportunities earlier. So where are you gaining traction in terms of - which client base is most interested or most open to using multiple of your offerings? And then how do you think about the revenue opportunity from cross-selling over the next, let's say, 2 to 3 years?

[JohnChiminski]

So, John Chiminski here. So first of all I would say that our customers in the small to medium size, who are really looking for a full suite of service, are the ones that we're getting the most traction with regards to cross-selling. Some of the simple things that we did besides launching the OneBio Suite is to put basically project managers into some of our early development sites, giving them access to the customers very early on for our Clinical Supply Services. And these, again, small to mid-size companies are really looking for end-to-end capabilities. And previously I would just say that we had not made it easy enough for them to access all of our capabilities, and I think we've got a significant focus there.

So we continue to see our Clinical Supply Services business as a critical asset to provide that end-to-end capability, it's the business unit that has that is probably closest to our customers in patients, given that we're literally shipping our clinical supplies directly to the patients. So being able to access those customers early on is they're doing early development for their molecules and providing them access to our Clinical Supply Services project banners here is a big deal. And I would just say overall, given the broad capabilities that Catalent has as customers look to partner more and have fewer bigger, better suppliers, it's really an opportunity for us to do a lot more overall cross-selling. And again, we specifically designed an offering through OneBio to be able to do that through our Biologics business, but are certainly in a position to do that more frequently and improve outcomes for also our Oral businesses.

[Operator]

Thank you. And our next question comes from David Windley with Jefferies. Your line is now open.

[DavidWindley]

Hi, thanks for taking my questions. John, I wanted to follow up on your Follow the Molecule commentary and just to understand that in a little more depth from a couple of standpoints. One, as I look at the descriptions around the segmentation now as you're presenting that, I see that like manufacturing of oral solid dose is in a couple of different segments, and so want to understand how that's consistent with - I figure I must not understand the Follow the Molecule is that doesn't seem obvious to me.

And then broadly, I think in the past you guys have talked about the financial presentation really mirroring the way you're managing the underlying business, and this is I think at least the third, maybe the fourth time that has changed since you came public. And so if you could talk about kind of the Catalent for the change and the stability of the underlying org chart and the managers of these businesses to the extent that kind of the segmentation is changing as frequently as it is, I'd appreciate it. Thank you.

[JohnChiminski]

Yes. No, that's a good question, David, and I'll start with that. If you take a look at where we were from an IPO standpoint to where we are today, we've had significantly transformed the business. We started with the business at the time of the IPO that was only exposed to biologics at about 10% of our revenue, and where we're sitting now is about 32%. The second thing is we went through a pretty significant transformation actually putting in place in early development platform for the company, which was missing I would say that we were much more of a late-phase company at the time of the IPO with - although we have the Follow the Molecule strategy, we didn't have enough early development assets. So we added Pharmatek, the acquisition of Juniper, and then also repositioned our Somerset site.

And then in addition to that, we launched a pretty significant activity to get into spray drying because of those early development activities. So if you take a look at the transformation of the business over the last five years, we now have a very substantial biologics business. We have a substantial early development business that we didn't have at that time that's bringing in over a 100 molecules and we still have the late-phase commercial business. So, though, I would say from an alignment standpoint you can look at it and say it's not perfect work from an internal standpoint, what we've done is, number one, we've now completely - I'll put into one contained business unit biologics, which contains our biologics and gene therapy business unit that doesn't have the specialty dose forms in it before. So that's the way we're now running it internally. I think, obviously from an investor standpoint, it gives you complete visibility into that.

Because of the growth of those early development - that early development platform is you now take a look at our Oral and Specialty Delivery group, it contains those assets combined with, I would say our other assets that are basically more tuned into small in mid-size capacity and then now in our - I would say our ultimately phase commercial business being Softgel, we've now added into that several of our large commercial late-stage tech transfer assets into it. The one point where you may think it to be inconsistent is in the commercial of - the commercial manufacturing of our Zydus, which is in the Oral and Specialty Delivery, but that dosage form Zydus is purely an organic growth business, meaning we bring in molecules in development and there is no opportunity for a tech transfer in. And so I think what we've done is continued to optimize our business unit organizations to mirror the transformation of the business.

And so again, as you take a look at that transformation over time, we feel as though we've now really have tuned in right now the right business unit structure that is aligned with the new assets that we've brought on board and our growing, and that's with our teams are going to be able to drive on. I'm so very comfortable with it. And as you take a look at some specific units, I think again it provides additional transparency. Even as you take a look at our Softgel and Oral Technologies, 75% of that business unit will still continue to be Softgel. The performance for this quarter roughly mirrors the Softgel performance. So I think, again, it's very helpful for us to continue to modify our organization as we continue to transform the business and we're providing, I would say, improved visibility to those segments with this reporting structure externally.

[DavidWindley]

Yes, thanks for that. That's helpful. If I could follow up on just drug product, the commentary, certainly you have had great success on drug product approvals in Biologics I'm speaking to. As you've seen those products launch, have you now progressed to a point, particularly the ones have been approved since the acquisition, are they progressing to a point where you are getting repeat orders and you're kind of seeing a stability? Are you to some degree in that void of waiting for the launch quantities to be exhausted before the reorders come back? Thanks.

[JohnChiminski]

I would say that across all of those 21 launch products; it is provide a level of visibility and consistency that we love. These products have not been, I would say, volatile as you've - in the previous commentary that we had from Wetteny with regards to our drug substance, which is primarily a clinical-based business, and you can have some quarter-to-quarter variability with the large number of commercial products that we have in our drug product business for Biologics sort of Bloomington. What we're seeing is just consistent strong uptake with - quite frankly, it gives us a sense of urgency for those additional assets that we're bringing on board over the next year and a half to double the capacity there for drug products. So couldn't be more pleased with the way the drug product is progressing.

And then on the drug substance side, we're aggressively working to be commercial-ready and acquire that first customer. And I think we should have some good visibility to that over our calendar year '20, and that will I think put it in position to be as consistent and strong performing as we have now on the drug product side. So I would just say green light on both fronts feel very good about it.

[Operator]

Thank you. Our next question comes from Juan Avendano with Bank of America. Your line is now open.

[JuanAvendano]

Hi, thank you. I believe you said that organic growth for the company came in at 11%. Relative to our estimate, I think the organic beat was primarily driven by the Oral and Specialty Delivery segment. And so can you - were there any non-recurring or timing-related benefits that drove the beat - an organic growth of I believe 18% in that segment? And was that due to particularly the business, Zydus continuing to do well, or did you have a rebound on the specialty drug delivery business that was struggling for the most part of fiscal year '19?

[WettenyJoseph]

So, Juan, first of all, the organic performance in the quarter was really driven not only by the Oral and Specialty but across our Softgel and Oral Technologies and our CSS. All three have been delivered double-digit organic growth both on the revenue and adjusted EBITDA line. With respect to OSD in particular posting 18% organic top line growth, 46% on the EBITDA, I would say across the business we saw strength in the first quarter.

The latter part of your question with respect to ophthalmic respiratory that was really not a driver in the quarter. I would say that was roughly in line with what the business wrote down in the prior year for that part of business. Across our development, and then all the services we saw strength as well as our commercial end of the spectrum, including what you mentioned, which is our Zydus platform. So I would say relatively speaking, if you recall, just to reminder, in terms of how last year transpire in the first quarter, it was in relative terms a weaker for that segment certainly. So as we look at this organic performance, I would not expect that to be the level of performance of the business for the year. Our visibility is strong across the business and all those things have factored into the guidance that we started with and we just reaffirmed today.

[JuanAvendano]

Okay. I guess related to that question, given that you have reorganized your reporting segments once again, can you share with us your normalized growth expectations organically for each of the segments as they are now?

[WettenyJoseph]

Yes. So Juan, what I would say is, first of all, we don't give segment-level guidance, right. So I just want to remind you we factor all of our businesses and our visibility and our guidance certainly from an annual basis. But we have shared and will continue to share what our expectations are for segments in long term. And so from a long-term perspective, I would say that what we are now calling Softgel and Oral Technologies, SOT, the legacy Softgel business we said was a 2% to 4% grower long term. And I would say - look, the portion that we've now moved into the segment is roughly 20%, 25% of that segment. So not large enough to move it substantially, but I would say probably at a point on both ends of that so that than 2% to 4%, you're probably looking at 3% to 5% for that segment long term.

And then our Oral and Specialty segment, well, would be - previously we've said it should be performing at the higher end of the former 4% to 6%. So we were saying the business that should grow in that 6 to 8 percent-ish if you were long term. I would say, with the pieces that we've moved out, it's probably about the same to slightly maybe 50, 60 basis points below that. So I would put it probably in that 5% to 7% range long term is what I would say. So you add a point to the sort of SOT business and you take 1 out from the OSD. So those are the primary moves.

If you look at Biologics, we've now removed the ophthalmic and respiratory from that segment. That was a slower end of the spectrum, if you will. So previously we said the SDD business had 60% core Biologics with the remaining 40% in the specialty. Have we removed that portion, we still have our injectables business in Europe, which is largely a small molecule but are long-term plans of the - continue to transform that will be more Biologics focus? But if you were to take this segment now, I'd say it's about 90% - 85% to 90% biologics-focus, which we would expect long term to be growing in the team with that latter 15%, if you will - 10% to 15% being more in the 4% to 6% range. So hopefully that gives you a sense from a long term what we expect from our various segments and obviously CSS remains unchanged. We would expect that to be, again, in a more along the lines of a 6% to 8% grower, long term clearly above that right now given the recent uptick we've seen in new business wins, which we are now seeing execute and burning through their backlog, which were very favorable.

[Operator]

Thank you. Our next question comes from Dan Brennan with UBS. Your line is now open.

[DanBrennan]

Great, thank you. Thanks for taking the questions. Let me just back to the guidance question. I know Wetteny answered it earlier that you - or maybe John, I apologize. I think you mentioned post Q1 given it's heavily weighted to the back half of the year I guess your policies into raise. But just to seek the low end of your guidance, it would imply kind of 1% growth for the remaining three quarters. I just want to understand like is that a plausible outcome, or is it really just steadfast your policy is after Q1 you guys don't change the guidance?

[WettenyJoseph]

Look, I would say first of all, again, the first quarter represents about anywhere from 16% to 18% of our year typically what we see in the first quarter. So it's not a substantial in terms of proportional portion of the year where we would change our guidance unless we see something material in our visibility, which we continue to be confident in what we see in the business across both our long-cycle on our short-cycle parts of the business across our segments. So we just tend to have to not shift or thinking on the guidance.

The other thing I would just remind you of in terms of the buildup of the guidance that we issued, I would reference you back to the prior quarter where we laid out our guidance, including the Australia facility which we just closed, that one is, if you take out about $34 million to $37 million of revenue of the top line, $3 million to $4 million of the EBITDA line, so I just want to make sure, as you might allow - you are taking those things into consideration - and keep in mind we also take the organic, the Paragon acquisition, it was inorganic for the year. So that would not be included in the commentary given from an organic perspective. So look, we're pleased with the start of the year as a solid first quarter.

We continue to have strong visibility as we look out for the rest of the year and are confident in delivering what we reaffirmed today, but we just tend to not - again, unless there is a material shift that we're seeing, which is going to change our outlook for the rest of the year.

[DanBrennan]

Got it, Okay. And then maybe just on Paragon. It was slightly better than we expected. Can you just comment on, to the expectation for 2020 that's implicit in your reported revenue versus organic, it's basically - I know it was 200 to - I think $220 million to $225 million. So just confirm that's the right kind of area that we should be thinking about for Paragon? Is that change? And then any comments you can provide on demand trends and visibility, how they look for this year. And as well any revenue commitments - I'm not sure what you've discussed previously, but any revenue commitments you kind of look out beyond this year for Paragon?

[WettenyJoseph]

Yes. So when you look at Paragon, the guidance we provided, you're correct in terms of the column in the buildup were in that range. It does not include the portion that is organic. As you may recall, we closed the deal in the middle of the fourth quarter. So, all in, it represents closer to $260 million at the top line, roughly $75 million of EBITDA line is what's embedded in the overall guidance. With respect to what we're seeing in the business, we continue to see really robust demand across the sleeve visibility. I would say for a business that's largely in the clinic, the visibility is I would say a higher than we would normally see, given the amount of contracted portion of what we're seeing for the year.

I'll say this is a business that continues to perform at or above our expectations and we haven't seen any change in terms of what the outlook looks like in terms of demand. And you may recall, when we announced the deal, we took our growth rate from a long-term perspective from on organic growth rate of 4% to 6% of the top line to 6% to 8% for the overall Catalent picture. So I think you can back calculate what that implies from a long-term perspective for the Paragon business and we continue to have that as part of what we expect from the business and are seeing to execute to.

[Operator]

Thank you. And our next question comes from Evan Stover with Robert Baird. Your line is now open.

[EvanStover]

Hi, thank you. Kind of going to continue on Paragon a little bit. If I run the math on the quarter, it looks like the EBITDA margin was in the mid 20s. I think your guidance implies around 30% EBITDA margins for the year. I know you opened up new facility around BWI Airport and you're filling up capacity. Is that the primary function that you expect to get some leverage on for the rest of the year? Can you just talk generally about the EBITDA margin trends from here in that business?

[WettenyJoseph]

Yes, Evan, you're about right. I think when you look at the Paragon business again continues to perform, I would say above our expectations, we did announce and closed the acquisition of certain assets from Novavax early in the quarter. We continue to make investments there as we onboard those individuals in those new sites, which really expand our front end, I would say, for the business and our ability to continue to attract more and more programs into the gene and cell therapy business to Paragon. So we're very pleased with how that integration is going, and it is part of the picture here as you look at the first quarter with respect to what the business deliver is a bit of that investment I would say that Novavax assets were marginally dilutive to what we've seen in the first quarter, and it's what we expected. When we gave our guidance, we had certain visibility into that and continue to be in line with what we expect.

[EvanStover]

Okay, thank you. And the second one on Paragon. Can you confirm that the fiscal '20 outlook there doesn't include any significant commercial stage revenue? And I just asked that knowing that you put out a press release saying you are one of the suppliers of Zolgensma even if it's a secondary supply. I'm just kind of wondering if there is any commercial in the equation there for Paragon this year.

[WettenyJoseph]

Yes. So look, Evan, first of all, certainly there are things that our customers have put out in the public domain rather than us putting out, but I would say, again with respect to Paragon, our visibility level in the businesses is I would say higher than what you would expect for business that's largely in the clinic, given the contracted revenues, the sort of take-or-pays and things like that that our customers may have in place. As we model the business and the acquisition, we certainly modeled what is contracted, not necessarily any significant uptake, if you will, on their banking on any particular commercial programs that we work with our customers to get those products approved and launched and so forth. So I'll cap it there in terms of any further detail I will give on Paragon. The $260-ish million of revenue and $75 million of EBITDA, all in, including the portion of inorganic as well as the portion of organic, is something that I would say we have fairly high visibility into.

[EvanStover]

Okay. A separate topic and final question from me. I might have missed it, but I didn't hear any commentary on ibuprofen API supply. I know we're moving past side a little bit, but can you kind of wrap that up and tell us where you stand on availability of that product and if we're now growing on that ibuprofen issue in fiscal 2018?

[WettenyJoseph]

Yes. So as we said throughout last year, this is really a worldwide shortage that we grappled with and we've put in plans to get alternative suppliers so that we can mitigate on a go-forward basis, and we continue to have to have those mitigation plans in place and are working according to our expectations. Just in terms of how the year went last year and what this year looks like in relation to that, last year, the first quarter was not a particularly challenging ibuprofen quarter for us.

The second quarter was far more pronounced in terms of the impact of ibuprofen on the year than the first quarter. So as we look out versus prior year, I would say it was a meaningful driver. In fact, I think it was roughly in line with what we've seen last year for ibuprofen business has been in the first quarter. The second quarter becomes where last year was bigger impact. So I would say it's hard to say precisely where our customers been in terms of replenishing their supply chains, but this is a business that's far more stable this year than we saw certainly throughout last year and some of those mitigation plans continue to work for us.

[EvanStover]

Okay. Just to clarify, you're saying the comparisons on ibuprofen get easier over the next couple of quarters versus fiscal 1Q?

[WettenyJoseph]

Yes, I would say that's roughly right particularly Q1 versus Q2.

[Operator]

Thank you. And our next question comes from Joe Munda with First Analysis. Your line is now open.

[JoeMunda]

Good afternoon, guys. I'm sorry. Good morning, guys. Thanks for taking the questions. A lot of questions have been answered, but I guess my question focuses on the Clinical Supply business and just I was wondering the backlog is growing nicely here, can you give us some sense of the types of projects that are in the backlog, the length of time for these projects, and if that book-to-bill ratio you think is going to hold true going forward? Thanks.

[JohnChiminski]

Yes. So look, our Clinical Supply business is a bit of a shorter-cycle business than the rest of our segments, and we're able to see timing wise from when we start to book business to when we started executing on those anywhere from two to three quarters or so. And so visibility is fairly very strong and you would have to go back to a year ago to have seen that uptick in terms of net new business wins that is not translating into the growth that you're seeing in that business. So in terms of the types of projects we're seeing here, they are I would say typical Clinical Supply Services projects where we are.

[WettenyJoseph]

Engaging in, whether it's one Phase I all the way through Phase III, we are performing in the manufacturing and packaging for those projects as they - and then we handle the drugs as they go through the clinic and gets delivered through the clinics that goes to patients. We're actually seeing a nice uptick in terms of the packaging part of the business, and so it's a good balance in packaging and I would say the logistics part of it. We also see good demand across Biologics trials as well, which the handling of those tend to be more cold chain, etc. and good level in terms of margins for those. So nothing, I would say, out of the ordinary in this business. The book-to-bill ratio of 1.2 is a fairly good indicator, I would say, for what we would expect from the business. And every quarter we do provide visibility into what the new business wins are and you'll see the fluctuations on that book-to-bill ratio accordingly.

[Operator]

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to John Chiminski for any closing remarks.

[John Chiminski, Chair and Chief Executive Officer]

Thank you and thanks everyone for your questions and for taking the time to join our call. I would like to close by reminding you of a few important points. First, we're committed to delivering FY '20 results consistent with our financial guidance and are focused on continuing to drive organic growth across all of our segments.

Second, we will continue to grow our world-class Biologics business as demonstrated by our fiscal 2019 gene therapy acquisitions in hundreds of millions of dollars of CapEx being deployed to further build out capacity and capability there and, in our Madison, and Bloomington sites. The continued successful and efficient integration of the gene therapy businesses into the Catalent family remains a top priority. We look forward to continued strong revenue and enhanced high-margin EBITDA growth from our Biologics offerings.

Third, expanding the adjusted EBITDA margin of our business is a key focus area for this management team as we drive toward 200 to 300 basis points of further expansion over the next two to three years.

Last, but certainly not least, 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.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect.