Catalent, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Catalan Inc. first quarter fiscal year 2021 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Paul Srdanc, Vice President, and Faster Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today to review Catalan's first quarter 2021 financial results. Joining me on the call today are John Cheminski, Chair and Chief Executive Officer, and Whitney Joseph, Senior Vice President and Chief Financial Officer. We see our agenda for this call on slide two of the supplemental presentation, which is available on our investor relations website at www.catalan.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 three for more detail. Slides four and five discuss the non-GAAP measures, and our just-issued earnings release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Catalan's Form 10-Q regarding 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 would like to turn the call over to John Cheminski, whose prepared remarks are covered on slides six and seven of the presentation. John?

Thanks, Paul, and welcome everyone to the call. Before diving into the first quarter results, I want to remind you that our top priority during the COVID-19 pandemic continues to be keeping our employees safe and maintaining business continuity. I'm proud of our teams who are literally working around the clock to deliver high quality products and services, including potential COVID-19 therapies and vaccines for our customers and their patients around the world. I'm pleased to report we had a very strong start to fiscal 2021, which, when combined with the higher levels of net demand we now expect for the back half of the year, led us to raise our fiscal 2021 revenue expectation by $130 to $180 million in our adjusted EBITDA expectation by $40 to $60 million. In the first quarter, our constant currency revenue growth was 26% year over year, of which 20% was organic. As a reminder, We also reported more than 20% organic year-over-year revenue growth last quarter. Adjusted EBITDA of $174 million represents constant currency growth of 35% over the first quarter of fiscal 2020, including organic growth of 23%. Our adjusted net income for the first quarter was $78 million, or 43 cents per diluted share. up from $0.26 per share in the first quarter of fiscal 2020. The biologic segment was by far the strongest contributor to our first quarter results as net revenue doubled over the first quarter of fiscal 2020, including 83% organic growth with market expansion of more than 900 basis points to 28.2%. While projects related to COVID-19 were a notable contributor to our biologic segment growth, similar to last quarter, underlying demand across the segment's offerings was very high, even when excluding these projects. Biologics continues to become a more meaningful contributor to our growth profile, with the segment contributing 44% of the company's revenue in the quarter compared to 28% in the first quarter of fiscal 20. Also adding to the quarter's performance was the clinical supply services segment, which showed revenue growth after a dip in the fourth quarter of fiscal 2020 when COVID-19 related clinical trial disruptions were most abundant. The top line growth in these two segments more than offset headwinds experienced in the soft gel and oral technologies and oral and specialty delivery segments. In soft gel and oral technologies, consumer health products had a slow start to the year, which we attribute in part to a decrease in occurrence of common flus and colds due to limited travel and social gatherings worldwide. Softgel and oral technologies also experienced a decrease in revenue for prescription products in North America. Looking ahead, we believe that some of the products we manufacture that were approved earlier this year experienced muted launches due to the COVID-19 pandemic. We expect these products and other planned launches will see increased demand and will contribute more in the second half of the fiscal year, leading soft gel and oral technologies to better performance than the first half. For oral and specialty delivery, we saw continued revenue growth and new product momentum in our Zytus platform, which was offset by a decrease in early phase development activity due to pandemic-related mitigation efforts, including lockdowns experienced worldwide. We continue to be very optimistic for long-term growth in the OSD segment given its 200-plus molecule pipeline, including the new novel Zytus Ultra technology, which will enable higher drug loading into each Zytus tablet. We believe that the Zytus Ultra platform after its commercial launch in the 2022 to 2023 timeframe will drive significant volume growth and can potentially lift the franchise to over 2 billion doses per year compared to the current annual run rate of approximately 1.4 billion. I'd now like to provide you with a brief update on our COVID-19 related programs. as Catalin continues to be a go-to company for potential COVID-19 therapies and vaccines. We've now been awarded work on more than 60 COVID-19-related compounds, including the three Operation Warp Speed vaccine programs we previously highlighted. We're actively working on projects across all four of our business segments, with some compounds involved in projects across multiple offerings. The strategic investments we've made in biologics capability and capacity over the last few years, including the $200 million capital additions to our U.S. drug product and drug substance capacity we began in January of 2019 and our acquisition of the NANI facility were well-timed to enable us to address the increased demand we are seeing from the combination of our ongoing business and our COVID-19 therapeutic and vaccine candidates. This incremental capacity in our multi-dose vial filling manufacturing capability has facilitated our ability to manufacture potentially billions of COVID-19 vaccine doses over time while continuing work on behalf of other customers. Our response to our customers' needs has not only raised our profile with both large pharma and biotech customers, it has also resulted in an acceleration of our strategic capacity expansion plans, which will help to support the achievement of our long-term growth targets. To better enable us to serve all of our customers during this period of accelerated demand, we recently made two additional drug product investments in Bloomington, Indiana. The first is the addition of a $50 million high-speed biofilling line that will supplement our current capacity. Given our experience in facility and capacity expansions, we expect to accelerate this project from a typical 18-month timeframe to approximately 10 months in total. We expect to bring this new high-speed biofilling line into our operations in the fourth quarter of fiscal 2021 to support the growing pipeline of commercial launches at the site. The second drug product investment is the acquisition of a 23,000 square foot manufacturing facility three miles away from our Bloomington campus, where we will create a North American center of excellence for early phase clinical biologics formulation development and drug product fill finish services. This $14 million investment which includes the acquisition, build-out, and qualification of the facility, is expected to begin supporting customer programs starting in January. The facility will enhance our one-bio drug development offering as it includes a new flexible filling line ideal for enabling rapid changeover for greater efficiency in the manufacture of clinical batches. We also recently announced the expansion of our gene therapy campus near the BWI airport to support our growing customer pipeline and increased market demand for gene therapy products, which includes an overall investment of approximately $130 million to add five additional phase three and commercial scale manufacturing suites, as well as cold storage warehousing in the first half of calendar 2022. When this project is completed, the BWI campus will house a total of 15 gene therapy manufacturing suites, each designed to accommodate multiple bioreactors for commercial supply. As we highlighted last quarter, the first facility on the campus was recently approved by the FDA for commercial manufacturing, and we expect to have all 10 cGMP suites qualified and operational in the next few months. Five of these suites are already qualified and operational, including one suite where we accelerated startup during Q1 in order to provide drug substance manufacturing to AstraZeneca for the University of Oxford's adenovirus vector-based COVID-19 vaccine candidate. We are also expanding our footprint in cell therapy, where we opened our U.S. clinical facility in Houston earlier this year, and we continue to build out our commercial scale production and fill finish facility in Gosselies, Belgium, which is scheduled to open in late fall 2021. In addition, last week we signed an agreement with Bone Therapeutics to acquire its subsidiary with a 41,000 square foot purpose-built CGXP facility and manufacturing assets which are located next to our facility in Gosselins. Additionally, Catalin will manufacture clinical material for bone therapeutics, allogeneic osteoblastic cell therapy products. When the transaction closes, which we expect to occur this month, the additional manufacturing capacity and technical expertise from this facility and its employees will immediately expand our clinical and commercial capacity for current late-stage customers, as well as create a bigger center of cell therapy excellence for Catalan in Europe. In addition to capital investments and the addition of new facilities to our global Catalan network, we continue our innovation and partnership efforts across the company. The first example is also in our cell therapy offering, where we announced an agreement with Brainstorm Cell Therapeutics to manufacture its autologous cell therapy being investigated for the treatment of ALS, also known as Lou Gehrig's disease. Under the agreement, the new facility in Houston will undertake the transfer of the manufacturing process to provide future CGMP clinical supply for this treatment with the potential to extend the partnership to include commercial supply should the treatment be approved. We're proud to support Brainstorm in its pursuit of a solution for this critical unmet patient need. Another example is our recent partnership with Exalexis. where our Redwood Biosciences subsidiary will develop multiple antibody drug conjugates, or ADCs, for Exalexis using our proprietary Smart Tag technology over a three-year period. Under the partnership, Exalexis will provide R&D funding targeting various oncology indications, and Catalin will be eligible for development and commercial milestones and royalties on net sales of any product commercialized as part of the collaboration. The Smart Tag platform has recently demonstrated promising results in the clinic, highlighting the potential to create ADCs with significantly expanded therapeutic indices for cancer patients. Innovation at Catalan also continues to make further advancements to our soft-gel technologies, where we recently launched Opti-Gel DR, a technology for the formulation and manufacture of delayed enteric release soft gels. This new technology eliminates the coating step and solves the processing and performance challenges associated with conventionally coated delayed release soft gels and has the potential to encapsulate a wide range of ingredients. This latest evolution allows our customers to design more efficient products and bring superior pharmaceuticals and nutraceuticals to patients. Our site in St. Petersburg, Florida, is the first to offer this new technology with the capability being expanded to our other soft gel manufacturing facilities in Brazil, Canada, Germany, Italy, and Japan in the future. And finally, I'm proud to highlight that in September, Catalan was added to the S&P 500 index. I believe this designation is an affirmation of the substantial progress we've made in executing our growth strategy since our IPO in 2014. Of course, this progress would not be possible without the passion and dedication of our more than 14,000 employees whose commitment to our mission to help people live better, healthier lives has never been more critical or valued. I'd now like to turn the call over to Wetney, who will review our financial results for the quarter and our enhanced fiscal 2021 guidance.

Thanks, John. I will begin this morning with a discussion on segment performance. As in past earnings calls, my commentary around segment growth will be in constant currency. I will start my commentary on slide eight with the biologic segment, which is now our largest business segment. Biologic revenue of $377.1 million increased 98% compared to the first quarter of 2020, with segment EBITDA increasing 194% over the same period. Acquisitions contributed 15 percentage points to both revenue and segment EBITDA in the first quarter compared to the prior year period. The acquisitions that primarily contributed to revenue in segment EBITDA include MasterCell, the cell therapy leader that we acquired in February 2020, and our NANI facility, which we acquired in January 2020 from Bistelmeyer Scribd, and part of which includes an expansion of our drug product business that falls within the biologic segment. Note that we continue to attribute all non-BMS work, including all COVID-19 vaccine projects that we brought to the facility after the acquisition to organic growth in the segment. The robust organic growth in our biologic segment in the quarter was driven across all segment offerings, with elevated end market demand for our global drug product, drug substance, and cell and gene therapy offerings, with well over half of the organic net revenue growth in the segment being driven by projects unrelated to the COVID-19 pandemic. Margin in the segment increased significantly both year-on-year and from the fourth quarter, as our capacity utilization increased across all major service offerings, and as we conducted sort of activity for potential COVID-19 therapies and vaccines. We expect strong growth for the biologic segment for the remainder of this fiscal year. Please turn to slide nine, which presents our social and moral technology segment. Social and moral technology's revenue of $221.1 million decreased 17% compared to the first quarter of 2020, with segment needed value decreasing 20% over the same period. After excluding the impact of the October 2019 divestiture of the segment's manufacturing site in Greyside, Australia, segment revenue ended the decline 12% and 21%, respectively. The decline was driven by reduced volumes of certain prescription products in North America and in global consumer health products. As we mentioned on our last earnings call, we are seeing lower demand in cough, cold, and over-the-counter pain relief products, which we attribute to a combination of consumer stocking in the early stages of the pandemic as well as the effect of limited social gatherings and travel due to pandemic mitigation efforts. Margins in South Carolina technologies were further impacted year on year by elevated operating costs related to the pandemic, including costs for thank you bonuses, additional protective equipment, and adjusted, less efficient production workflows put in place to facilitate social distancing among our employees. Note that these higher costs impacted all segments. Looking ahead in SLT for the remainder of the fiscal year 2021, we see underlying momentum in prescription products that suggest a stronger back half of the fiscal year, including our expectation that some product launches that occurred during the lockdowns in Q3 and Q4 of fiscal 20 will experience increased volume demand as our fiscal year progresses. Looking further out, we expect that this 41% year-on-year growth in SLT's development revenue will eventually lead to more new product introductions, and we remain comfortable with the segment's long-term growth outlook of 3% to 5%, although we forecast the segment to perform below that level this fiscal year. Slide 10 shows our Sol-gel, Amphora, and Specialty Delivery segment recorded revenue of $158.3 million in the quarter, which was up 17% compared to the first quarter of fiscal 2020. Excluding the portion of the acquired Anani facility that is part of the OSD segment, revenue declined 1%. Rising in-market demand for commercial products across our Zytus or the dissolving tablet technology platform was offset by decreased demand for early phase development activities in the quarter following COVID-19 related lockdowns and clinical trial disruptions. Segment needed dot was down 26% over the first quarter of 2020, and after excluding the OSB portion of the acquired and non-e-facility, segment needed dot declined 61%. The decline of OSB segment needed dot is primarily due to a voluntary recall of a product in our respiratory and ophthalmic platform that was launched last February, which recalled out on the third and fourth quarter calls as having a product participation component. The one-time charges associated with this recall total $12 million. Corrective action plans are on the way, but a definitive timeline for product reach reduction has not been determined. Excluding these charges, EBITDA margins was approximately 21%, roughly in line with the first quarter of last year. The OSB segment continues to have a strong development pipeline, particularly in the Zytus platform, which John highlighted earlier. Turning to the remainder of our development revenue, in order to provide additional insight into our long-cycle segments, which include biologics, software and mobile technologies, and oil and specialty delivery, each quarter we disclosed our long-cycle development revenue in the current year. In the first quarter of 2021, we reported development revenue across both small and large molecule products of $372.5 million, which is 84% above the development revenue reported in the first quarter of fiscal 2020. Development revenue represented 44% of our revenue in the first quarter, compared to 30% in the comparable five-year period. The strong growth in the biologic business was the biggest driver of these year-on-year changes. In the first quarter, our development pipeline led to 30 new product introductions. Now, as shown on slide 11, our clinical supply services segment posted revenue of $92.7 million, an increase of 8% over the first quarter of the prior year, and segment EBITDA of $25 million, or a 13% increase. The growth was driven by an increase in clinical trial activity following pandemic-related delays and resulted in strong demand in storage and distribution offerings across all regions. This growth was offset partly by a reduction in demand for manufacturing and packaging within North America. As of September 30, 2020, our backlog for the CSS segment was $428 million, slightly higher than the $425 million at the end of last quarter, and up 14% from September 30, 2019. The segment recorded net new business wins of $99 million during the first quarter, a 6% increase compared to the first quarter of the prior year. The segments trailing 12-month book-to-bill ratio remained at 1.1 times. Please note that in future quarters, we will continue to disclose the CSS commercial metrics in our prepared remarks and in the supplemental slide deck, including the new trended slide deck that can now be found in the appendix. But we'll remove the same information from our quarterly earnings release. You may have noticed that our earnings release has been reformatted this quarter to allow for easier readability by removing commentary that can be found in the slide deck as well as the MD&A section of our thank you. Moving to company-wide adjusted dividend by 12. Our first quarter adjusted dividend increased 37% to $174.4 million, or 20.6% of net revenue, compared to 19.1% of net revenue in the first quarter of fiscal 2020. On a cost and currency basis, our first quarter adjusted EBITDA increased 35%, including 23% organic compared to the first quarter of fiscal 2020. On slide 13, you can see that first quarter adjusted net income was $78.1 million, or $0.43 for the loaded share, compared to adjusted net income of $40.5 million, or $0.26 for the loaded share in the first quarter a year ago. Slide 14 shows our debt-related ratios and our capital allocation priorities. Our cash and cash equivalence balance at September 30th was in excess of $1 billion compared to $953 million at June 30th. Our net leverage ratio was 2.6 times at September 30th compared to 2.8 times at June 30th. Recall that last quarter we lowered our long-term net leverage rate target to 3.0 times compared to our previous target of 3.5 times. We were pleased that last week S&P recognized our efforts to further strengthen our balance sheet as they upgraded our long-term credit rating to BB due to the rapid growth of our biologics business, improved margin profile, and lower ratio of net debt to adjusted EBITDA. Moving on to capital expenditures, we continue to expect CapEx as a percentage of net revenue to remain at elevated levels for the next two fiscal years as we continue our organic growth plans. In fiscal 2021, we are accelerating CapEx spending in the first half of the year to meet customer demands and expect that CapEx will be approximately 15% to 16% of 2021 revenue compared to a previous estimate, which reflected 14% to 15% of revenue. Now we turn to our financial outlook for fiscal 2021 as outlined on slide 15. We are raising our previously issued guidance to reflect first quarter performance and to account for higher net underlying demand, including increased demand related to potential COVID-19 therapies and vaccines, as well as lower demand attributed to the effects of the pandemic in some offerings and certain increased costs due to the pandemic. The guidance ranges, which remain broader than in recent years due to the increased uncertainty introduced by the pandemic, are now net revenue in the range of $3.58 billion to $3.78 billion, compared to the previous range of $3.45 billion to $3.6 billion. Adjusted EBITDA in the range of $880 million to $950 million, compared to the previous range of $840 million to $890 million. and adjusted net income in the range of $410 million to $470 million, compared to the previous range of $390 million to $435 million. We continue to expect that our fully diluted share count on a rated average basis for the fiscal year will be in the range of 178 million to 180 million shares, and that our consolidated effective tax rate will be between 24% and 26% in the fiscal year. The underlying assumptions for our revised guidance are as follows. First, there is no major external change to the current status of the COVID-19 pandemic and its effect on our business. Next, in light of the uncertainties always inherent in pharmaceutical development, we are not assuming that any of our customers' COVID-19 vaccine candidates will get FDA or other regulatory approval, emergency or otherwise. Third, we have factored in projected revenue from executed table pay arrangements. some of which include terms that trigger higher levels of volume based on timing or milestones. Fourth, revenue from acquisitions is projected to represent approximately 2 to 3 percentage points of our projected revenue growth rate for the year. And finally, we attribute approximately 9 to 11 percentage points of the projected net revenue growth to net COVID-19-related revenue versus a previous estimate of approximately 5 to 7 percentage points. This estimate is based on factors that affect multiple business segments, including changes to the take-home pay arrangements we had previously taken into account, including some previously considered arrangements that have increased in size based on reaching certain milestones. Revenue not previously projected from additional projects among the COVID-19 related projects in which we are engaged. Opportunity costs, including work that would likely have been placed in the same space, and estimated lost revenue in parts of the business due to the pandemic, such as lower demand for consumer health products, as well as impacts to some prescription products. Regarding our quarterly progression throughout the year, let me take a moment to remind you, or share with those newer to Catalan's story, the seasonality in our business. From a net revenue and adjusted EBITDA perspective, the first quarter of any fiscal year is generally the lightest quarter by far, and generally increasing each quarter throughout the fiscal year. This seasonal effect has led to roughly 40% of our adjusted EBITDA being recognized in the first half of the year and 60% recognized in the back half of the year. In fiscal 2021, we expect a slight change to that mix with adjusted EBITDA contribution from the first half of fiscal 21 being approximately 41 to 42% over our expected full year adjusted EBITDA. Operator, this concludes our prepared remarks. I would now like to open the call for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. Your first question today comes from Dave Lindley from Jefferies. Please go ahead.

Hi, good morning. Thanks for taking my question. Very impressive biologics growth again this quarter. I was hoping I could attempt to break it down a little bit. I think from comments that you made, the acquisitions contributed maybe just under $30 million, about $28 million. And then I think, Wetney, you talked about kind of non-COVID related programs driving the majority of growth. So wondered if, could we kind of guess that COVID contributed, you know, call it maybe 90 million? So is that right? And then of the remaining, call it 60, 65 million, something like that, of growth year over year, is that pretty balanced across gene therapy and the Bloomington business and the Madison business, or is there one that's really driving that kind of core organic growth? So just, again, trying to understand the contributors to biologics growth. Thanks.

Yeah. So, Dave, first of all, we're very pleased with the growth in our biologics business for the quarter. You can see for the second quarter, a very strong growth coming from the segment. I'll remind you of a couple of things. And indeed, significantly more than half of the organic growth in the quarter in the segment, which was 82%. So you're hearing more than half of that coming from non-COVID-related activities. So this would be the second quarter in a row we're seeing substantial growth coming from the segment. I will note that in Q1 last year, I would say it was a relatively weaker comp as we got off to a slower start in the segment across particularly our protein and nucleic acid offerings here as compared to our gene therapy and cell therapy areas. And so we're very pleased with the growth and well above half of that coming from non-COVID related but still posting 82% organic growth on the quarter against, I would say, relatively weaker comps. I would say the gene therapy side and cell therapy side of the business were significant contributors to the organic growth, although we won't go down to specifics. We're giving you enough color around it to triangulate around a rough estimation around the COVID-related programs. But what I would say is it's difficult to get precision here when it comes to COVID-19. And some of the color I would add here, is that, you know, clearly from a development perspective, and we have a fair amount of startup activities across this segment in particular, from a development standpoint, some of our highly skilled personnel around our site are working around the clock on development activities, which is, you know, somewhat difficult to segregate from what they would have been doing had they not been doing this work. Clearly, they would have been engaged in other activities. So I think there are some prioritizations and trade-offs that are happening in the business that makes it difficult to get to precision here, but we believe directionally what was provided should be hopefully helpful in understanding that the core growth in the business was still well above the long-term expectations we have for the segment in the quarter, even when you take out the COVID-19 programs.

Got it. Just a quick follow-up then. One of the questions that we get pretty often, is trying to understand how much the take or pay agreements that you are including in guidance, kind of how much do those represent of what would be the volume if one or more of your clients' vaccine candidates gets approved? Is there any context that you can provide to help us understand you know, it sounds like it's more than development, but it's only a fraction of what your commercial revenue could be, and just kind of where is that break point for the take-or-pay agreements? Thanks.

Yeah, what I would say here, Dave, is there are too many variables to really pinpoint what the exact effect would be, the timing of such approval if it does happen, and how much is left in the year, et cetera, how many you know, their doses per vial. There are lots of variables here. But what I would share with you in terms of the paper pay agreements and the way that they work and how they're factored into our guidance is that we have not factored in any approvals in our guidance here. So we are including take-away arrangements, which would largely fall, whether it's the volume that we need to produce or the take-aways that would take effect, would be mostly in the second half of our year and not the first half. So it's not other than startup activities. The first half of the year is largely not impacted by table pay arrangements, and they start to come in the second half. And if there is an approval, with all the variables that I described, it's difficult to give any sort of sense around what that might mean for us, you know, in terms of what the volume might be. But we're not factoring any approvals, as we said in the prepared commentary in our guidance here.

Great. I appreciate those answers. Thank you.

Our next question comes from John Krieger from William Blair. Please go ahead.

Thanks very much. Wendy, just to follow up on Dave's last question, if an approval would happen, let's say, you know, in the January timeframe, would that cause the 9% to 11% contribution, in your view, to likely change, or is that more of a fiscal 22 event for Catalan?

yeah so what i would say is again there are too many variables uh to determine whether that would change or not uh the way we've approached the guidance uh including uh just to take a phase uh means that uh you know uh we've only put in what is um contractually bound if they're again the variables can include uh items such as if we're doing the drug product filling Will the customer be able to get sufficient substance internally or from elsewhere to enable us to do more than the table pays? You understand that there are too many variables for us to venture into any sort of guesses as to what that could mean, depending on when it happens, which product, what jurisdiction is it going to, what the actual demand is. So if all those things were to line up and the volume necessary is above the take-or-pay minimums, then sure, that could potentially mean more volume coming from those programs than the take-or-pay. These are some of the reasons why, including being in a pandemic, why we have a wider range in our guidance, where no point is more certain than another. And I think we'll continue to do that as the year unfolds.

Okay, thanks. And then a follow-up, John, for you in terms of kind of M&A strategy and capital deployment. I think in the past you guys have said you don't really like doing client facility deals, but you've done two in the last year. Is your thinking about that opportunity changing?

Yeah, I would say it is, John. I mean, you know, first of all, when we're getting, you know, if you look historically, I would say there was, you know, kind of a a significant exiting of facilities by pharma over the last, call it 10 to 15 years. And that was just them basically whittling down their overall capacity. But what we have found is that when we can find a facility that has the capabilities in the geography that we're looking for and can secure meaningful business with that facility, with the owner of that facility that we're willing to engage in it. So certainly we're not in a mode of, I would say, either consolidating the industry or just picking up as many facilities as we can. But if you take a look at the bone therapeutics and you take a look at the Anani facility, they both were additive to our capabilities and overall capacity where we needed them. So just the recent announcement here, on bone therapeutics with a facility that's just, you know, walking distance from our Gosselies. Our current Gosselies operation provides us immediate capacity for potential late phase customers that could get approvals and will need that overall capacity. And then in Ananias, I have to say this is probably one of the most fortuitous acquisitions as we look to further build out our European CDMO business where we happen to have an asset that had two vial filling lines and the capacity to, or the footprint to be able to add even additional capacity at the front end of this pandemic. So I would say that it's more in our mix right now, but we have a very clear criteria, if you will, in terms of what we're looking for. And I think you see two really good examples in both Anani and also in the bone therapeutics facility. And then maybe just to expand on your question just with regards to overall M&A, certainly we've been executing on an extremely strong strategic plan that has us growing the company organically. However, we continue to be very active in the M&A space where we can add additional capability and capacity to accelerate our strategic plans in an area that we continue to, I would say, hunt is in drug product and drug substance capacity in Europe where we'd like to continue to build out our footprint. We certainly have a great footprint in the U.S. that continues to get even better. We'd also like to expand that beyond the Anani facility in Europe.

Very helpful. Thank you.

Our next question comes from Tycho Peterson from J.P. Morgan. Please go ahead.

Hey, good morning. John, I want to start with oral and specialty drug delivery. You noted decreased demand in early phase development programs. Can you maybe just touch on that dynamic? I mean, the funding environment's been better. We've seen kind of a pickup, you know, from some of your peers on the early stage side. And then, you know, when do you expect, you know, that segment to turn? I think you talked about it picking up in the back half of the year. And then I think you noted new product launches have also been impacted by the pandemic. So can you touch on that as well?

Yeah, so Tycho, I'll unpack a few questions that you have in there. First of all, with regards to our OSD segment, the development revenue and development pipeline is generally a shorter cycle business. And early on in the pandemic, we saw people not knowing what was going to happen in our oral and specialty delivery. We service a lot of small venture-backed companies that early on, you know, they didn't know where the pandemic was going and they basically, I would say, sat still a little bit. So we didn't pick up early on in the pandemic. Let's just call it kind of through the March through May, June timeframe. We just didn't have the same sort of wins that we normally would. And obviously that impacted a little bit the development revenue in the OSD segment. That being said, we're now in, I would say, a stable part of the pandemic as it continues to develop where people really do understand their funding. They still continue to operate. And we're starting to see those wins, if you will, pick up. And then, you know, I would just say, you know, the OSD segment, as Wetney alluded to in his prepared comments, really has one of the strongest overall pipelines ever. uh in the business uh over 200 molecules so again you know with our follow the molecule strategy i mean we're working on these these items uh all the way through getting development revenue and hoping to get our customers all the way through launch so again very strong pipeline there now the other question you had was was with regards to uh prescription demand and that's in our sot business and what we saw is that we had product launches uh in our sot segment that quite frankly the the launches were uh the words i used in the prepared comments were muted meaning meaning with the you know the the the pandemic the ability for those customers to fully launch and get their sales teams out into uh you know out into uh uh the doctor's offices and hospitals to be able to promote those products and in some cases they they literally just stopped on the promotion until they had better you know better clarity when they could actually deploy some of their overall resources however we do believe that uh you know we have some launches planned here for the second half and we also expect that that the muted you know launches that we had on some of these launches in the sot segment should gain momentum in the second half again as we've seen you know we're running into the later phases of pandemic and people know how to how to deal with it and we're you know, moving along. So that's the way I would answer that question, if that's helpful, Tycho.

That is, that is. And then just thinking a little bit about, you know, caseloads going back up here, I'm just wondering, you know, is there incremental risk on, you know, soft gel potentially getting worse, you know, in the next quarter or two? And then also, you know, CSS return to growth and trials have been back up and running, but is there any risk there, you know, as cases go back up of that going back in the negative territory?

Well, you know, first of all, I would say, you know, this is not prepared comments. This is John Cheminski. But right now, we know that, you know, cases aren't really correlated, if you will, to death rates in the U.S. In fact, we see that there's, you know, you have rising cases. And so it's not necessarily impacting, you know, mortality rates. And we're also seeing that although we have a tightening of some a tightening of some measures in certain areas. We're not seeing wholesale lockdown. So we're not seeing the same sort of clinical trial pullback that we did early on where we didn't have the access, if you will, to the clinical trial patients and so forth. So I don't anticipate that that unless things, you know, take a dramatic turn and we actually do get to, you know, additional lockdowns that are very strong, that the CSS business should, you know, should continue to go ahead and perform. There was a second part of that, Tycho?

Well, similarly on Softgel. I mean, does that, you know, get worse sequentially here, or do you think we've kind of reached the bottom?

Yeah, I think that the thing that I would mention on Softgel is that, you know, part of this slowdown we saw was really in the consumer health area. And, you know, that's kind of a crazy thing. But, you know, the flu season is virtually nonexistent. And, you know, people, you know, developing cough and colds. So we're seeing, you know, we saw demand really here in the quarter just very, very low on the consumer health products. I mean, just as a little bit of a trivia, they've literally had hundreds of cases of flu in Australia compared to the normal thousand. So it's pretty much a non-existent season. So the only thing that we will need to watch out for in soft shell is if we have continued low consumer health demand based upon the social distancing and lack of social gatherings and lack of travel that really predicated us having some challenges in the consumer health. So that's really one of the areas that we'll watch out. And maybe I'll ask Whitney if he wants to jump in here also.

Yeah, just a couple of quick points. With respect to SOT, as you know, Taiko, we don't get into specifics in terms of guidance by segment, but largely speaking, I would expect the SOT first actually look a lot more like the first quarter with improved performance on the back half versus a very strong prior year. If you recall earlier, In fiscal 20, our SFC business, where we expect long-term growth in the 3% to 5% range, was actually above more than twice that in the fiscal year last year. So it's a combination of a tougher comparable for the segment as well as some of the COVID-19-related headwinds that we've already talked about that are impacting the segment. And I would expect the first half, again, to be more like the first quarter and improve performance on the back half. The other point I would make is with respect to CSF, to your point around increased cases, et cetera, what you may recall is previous occurrence of this led to actually a ramp up in CSS before a ramp down. Now, we're very pleased with the net new business, which we're seeing in the business throughout the pandemic, continue to stay healthy, which goes well for long-term performance of the segment. And we won't predict what could happen here in the event of increased lockdowns, et cetera, but certainly a prior occurrence led to a pickup in third quarter for school last year before you saw a drawdown in the fourth quarter.

Okay, that's helpful. And then one quick one before I hop off on the vaccine work. I know your guidance doesn't assume any approvals. I'm just curious how much, you know, lumpiness and volatility you think there will be once you have approvals. Obviously, there are big government contracts and stockpiling. Or do you think it will be relatively smooth in terms of the scale-up?

Thanks. You know, again, Tycho, we have taker pays that are in place. And those taker pays, you know, do contemplate a certain amount of capacity utilization. And so I think the area where I think there could be, and I wouldn't call it lumpiness, but I would say increased demand is with regards to therapies, if they get approved, and depending on what the uptake of those are, that's an area where we would have to obviously respond to. And the only other thing with regards specifically to the vaccines is whether or not there would be volumes above and beyond the take or pays that we already have in place. Okay. Thank you.

Our next question comes from Juan Evandeno from Bank of America. Please go ahead.

Hello. Congrats on the quarter. I might have missed this, but what was the COVID net revenue that you realized in the quarter across the whole company, not just Biologics?

Juan, we didn't get precision on this, but our estimation around the quarter is as follows. We've delivered 20% organic growth in the quarter across the company. And even if you were to exclude COVID-19 impacts, you still have a double-digit organic growth performance for the company. Another reminder I would give you is when you think about the activities we have both across therapeutics and vaccines here for COVID-19, uh the volumes and related table page really took effect more towards the back half of our year than the first half so really most we have startup activities that are happening now that are contributing to the performance and so i would expect as we saw in q4 as well as into one most of the performance here is not related to a cover 19 so this is two quarters of double digit organic growth excluding cover 19 for the company

Got it. No, I definitely appreciate the quote. Given that you did provide guidance for net COVID-related revenue for the whole year of contributing 9 to 11 percentage points, I just wanted to know how much was in the bag or realized in one queue and how much was left. Any quantitatives that you could share in that?

What I would tell you directionally, the person's 9 to 11 on the year, the first quarter is substantially below that. Again, you have 20% organic growth on the company, and we still had well into double digits, excluding COVID-19. Again, I won't give you precision here, given all the factors we already discussed. But as I said, the take-off phases are factored into our guidance, mostly take effect towards the back half of the year, not the first half. So it would stand to reason that the first quarter would be largely non-COVID-related when you think about organic growth.

Okay, thank you. And switching gears a little bit, we've seen a few clinical holds and terminations on the gene therapy development projects in the last couple of months. Has this changed the confidence of sponsors or your own confidence on the potential opportunity from gene therapy going forward?

Yeah, no, not at all. I would say there's very specific factors involved in a couple of those cases that came out. and doesn't change either our outlook on the space or the activity that we have in the gene therapy business. Okay, thank you.

Our next question comes from Jacob Johnson from Stevens. Please go ahead.

Hey, just one for me and maybe following up on that last question. Can you just give us an update on how MasterCell is performing? Obviously, it was a small revenue base when you bought it. But as we look out the next couple of years, how should we think about the revenue ramp here? And also, can you just talk about how you're integrating MasterCell with Paragon, along with some of the other acquisitions you've done here, and maybe how these companies work together?

Yeah, sure. Thanks for that question, Jacob. First of all, we're super excited to be able to get our hands on this premier cell therapy product. And as I've said before, we kind of caught this acquisition a little bit earlier in the cycle than we did, for example, with Paragon or even Bloomington. So, you know, over the next several years, we don't expect, you know, significant revenue in EBITDA compared to the overall company, but we expect fairly strong growth. You can see that we've made some pretty astute investments already, both from a CapEx standpoint, as well as from a facility acquisition standpoint. So we're investing in MasterCell at a facility that's down the street from Gosley's that is going to have commercial manufacturing capability. In addition to that, we've invested CapEx in the Houston facility, which has just recently opened. And then finally, with the Bone Therapeutics acquisition of their subsidiary, got our hands on you know, a substantial facility and capabilities that are going to be able to have us more quickly being able to go commercial with potentially some of the late phase programs that we have within cell therapy. The integration is going extremely well. I can tell you that we're off to, I would say, a strong wins rate as we're kind of exiting the overall calendar year. And obviously we just talked about you know, the recent fairly significant win that we had with a company that's going to be able to, you know, that is fighting ALS. So I think, you know, putting all those things together, the acquisition is going very, the integration is going very well. We've also acquired some very good talent. into that facility. The other thing is that we also see significant synergies between our gene therapy and cell therapy business in that a lot of the companies have both gene therapy and cell therapy programs so that we're able to work across those facilities. And then I'll also point to the Editas facility know the eddies tus partnership that we have within our our cell therapy business that's actually expanding all the way through our clinical trials so i feel very very good again we caught this one a little bit earlier in the uh in the cycle which means that you know we're going to be able to enjoy that future growth um i would say 10 years from now we're going to see really a an explosion of cell cell therapy products and approvals that should happen, which will be very exciting for patients around the world.

Got it. Thanks for taking the questions.

Our next question comes from Jack Mann from Nefron Research. Please go ahead.

Thank you. Good morning. I was hoping you could elaborate a little bit more on the strength of the development work within the biologic segment that, you know, in addition to COVID, seemed to drive a lot of the segment performance. So can you just elaborate, you know, how much of that is coming from COVID maybe versus gene therapy? And then how did that impact segment margins in the quarter? You know, how did development margins compare to the commercial work?

Yeah, sure. We're very pleased with the performance with the biologic business overall. As I mentioned earlier, well above half of the 83% organic growth in the segment was non-COVID related. And also gene therapy was a significant contributor to the growth in the business. From a revenue perspective, I think when you look at the EBITDA margin expansion year on year, it would bode well for the level of capacity utilization we have across the segment. Here, as we are near capacity, with respect to some of our areas, particularly around our vial capacity, et cetera, and as you know, we have a new EXPENSIONS THAT ARE ON THE WAY THAT WILL BE UP AND RUNNING IN THE NEXT FEW MONTHS IN THOSE AREAS FOR REMAINING CUSTOMERS AS WELL AS THOSE THAT ARE PURSUING COVID-19 VACCINES AND THERAPIES. SO ALL THOSE ARE CONTRIBUTORS TO THE PERFORMANCE HERE FROM A MARGIN PERSPECTIVE IN THE QUARTER WHICH WE'RE VERY PLEASED WITH AND COVID-19, WHILE CONTRIBUTING TO THE PERFORMANCE, WASN'T within substantially less than half. Development revenue continues to be a large proportion of this segment, as we have a maturing pipeline of programs that we're working with customers across the protein and nucleic acid side, the gene therapy, cell therapy, across all offerings within biologics. And so, which, again, in the future would bode well as those programs get commercially launched. And in the future, and we get closer to a balance between development and commercial, but development revenue continues to be strong. We've seen several quarters of growth in development revenue, which is why you see about 44% of our total revenue being development in this quarter versus roughly 30% a year ago.

Thank you, Whitney.

Our next question comes from Dan Drennan from the UBS. Please go ahead.

Thank you. Thanks for taking the questions. So just on COVID, could you give us some sense of the split between drug products and drug substance within your COVID revenues? And when we think about some of your customers potentially getting approvals, is that all upside or does some of the take or pay contracts already include capacity build out that incorporate, you know, like the vines, what could occur. And then just one other one on COVID. Just remind us if some of your larger customers that you've reserved space for and are working with, if those companies don't get vaccines approved, what should we think about the capacity that you allocated towards those customers?

Yeah, maybe I'll start with the last part of your question and then work my way back. Certainly, the capacity that we have here that is positioned to work on COVID-specific programs is not specific to COVID-19, right? Part of the reason that we're a go-to company here is because we have capabilities. Traditionally, we've had in the company as well as capabilities we added over the last several years around drug product, drug substance, gene therapies, etc., as well as capacity that we already had in flight before COVID-19. Hence, the capacity wasn't specifically contemplating this pandemic, nor is it unique to manufacturing COVID-19 therapies and vaccines. And so the long-term prospects of cell fill finish, gene therapy, manufacturing, drug substance for biologics, all point with strong growth over a long term, which is why we were pursuing these extensions to begin with. I'll remind you, January 2019, given the pipeline of products that we have in front of us in uh a biologic strip product finished facility in the u.s by way of example uh we could foresee the maturing pipeline uh requiring more and more capacity to the point that we anticipated by 2021 uh we would be running out of capacity across vials uh and and closely store across syringes and so at that point we announced an extension of capacity for the facility as we spend today particularly with the COVID-19 programs as well, as we mentioned, we're near capacity involved with more capacity coming on board over the next few months to relieve that. So I think that spells that this capacity is very functional across the offerings we have within the segment and not specific to COVID-19 and have confidence in their use beyond the need for this. With respect to the table of page, clearly there are factors with our customers that reflect what they anticipate the volume needs might be in the event of a of an approval as well as the timing of those approvals. And we, in turn, have been hiring and training and onboarding resources to position ourselves, in addition to the startup activities, to be able to manufacture those volumes. So I think you would anticipate that the customer's expectations of volumes are already somewhat reflected here, but lots of variables could impact those as we go forward, and we won't venture the guess as to what that might be. But some of those items certainly are already contemplated in those days of pay arrangements. And then lastly, the first question is around drug substance and drug products. We've announced some of these programs already in terms of the work we're doing on vaccines and therapies. Clearly, there are certain programs that we're working on we have not ventured to announce for various reasons. We are working with over 60 compounds across the organization, with the majority of those in our biologics business, and they do spend across both drug product, drug substance, and I would add gene therapy, biodegradable manufacturing as well. So we're very pleased with the activities we have not only in biologics but elsewhere across the company, which, again, is why we say we are a go-to company for COVID-19.

Thanks, Whitney. And maybe just one follow-up just on Paragon. So the capacity that you're building out today, I mean, to the extent, Some of the programs you're working on go from clinical to commercial success. How do we think about the capacity that you're planning and kind of what's the way to think about the revenue impact for Catalyst? Thanks.

So as we continue to expand and the suites, as John mentioned in our prepared commentary, in the next few months we'll have 10 suites operational. A number of customers have a subset of those suites under capacity reservations. including certain minimum volumes, which are, again, take-or-pay type arrangements. And so we anticipate volume increases across the segment, and the pipeline continues to mature, not only what we have within Catalan, but at large, and we expect to continue to to onboard new customers and continue to drive programs through the guidelines to commercial use. So I think as volumes go through a factory as a company that has the scale that we do, at the upper end of utilization, those can drive meaningful margin performance in the business, which we would anticipate over time. One last point I'll make is, as we discussed last quarter, our gene therapy offering is now the only CDMO operation in the world with a commercial license to produce gene therapies, which positions us well to continue to not only perform for the customers we are engaged with now, but potentially more as the pipeline of gene therapy continues to extend.

Great. Thank you.

Our next question comes from Sean Dodge from RBC Capital Markets. Please go ahead.

Hey, good morning. This is Thomas Keller on for Sean. Thanks for taking the questions. I'll try and keep it a little brief. It may have been answered earlier, but the longer-term EBITDA margins for the biologics segment, I think it was targeted around 35%. Are you guys still anticipating reaching this by fiscal 24 or maybe exceeding it? Or is there any change to this target that's come out in the last few months?

Yeah, so look, our margin expectations for this segment remain unchanged. We've given company-wide margin expectations as we expand, and we have said that as we grow in biologics, which you saw this quarter, it's 44% of our revenues in biologics being higher margin that will propel the company margins to expand. So we continue to expect that long term. Those won't be linear. As we add capacity and we add resources that are highly trained. These are highly complex and exacting processes that we have. As we do so, those will add some variability across our margins and keep in mind also that we have a large proportion of development programs which tend to be more variable than commercial manufacturing. So I think over time we expect margins to expand and stabilize across the segment as we add capacity. As we get at the higher end of capacity utilization, margins will go up. As we add new capacity, they'll ebb a bit, and then long term, our expectations remain unchanged. Last quarter, I did highlight The development that we see potentially continuing, particularly as we potentially start to manufacture large volumes of COVID-19 vaccines, et cetera, which is component sourcing materials that are used in those might start to increase. And those we see as additive to the top line growth for the company. There's a portion of our revenues that are where the component sourcing, but to the extent they grow faster than the rest of the revenues that could have uh i would say uh short-term impacts uh related to uh to margins but as i said those are additive to the business and they don't change our long-term expectations okay that's very helpful thank you our next question comes from evan stower from baird please go ahead yeah hi thanks for taking the question um you uh you mentioned um

You mentioned the slower-than-expected uptake of some new product launches, but I wanted to ask from a slightly different angle. The actual NPI, new product introductions themselves, there were 30 in the quarter, and I know there's ebbs and flows there, but that was a little bit, I think, lower than what we've seen per quarter looking back the last year or two. So the question would be, in addition to the slower product launches, are Are you seeing just some changes in customer behavior overall of maybe holding back on launching a product period in this environment? And is that something that you expect to change as we move through the pandemic?

Yeah, Evan, first part of your question with respect to slower update to live launches and the MPIs being 30 in the quarter. MPIs, the timing of them isn't something that we necessarily control, whether you're in a pandemic or not. There are regulatory pathways and other variables that are involved, and the customers are more in control of those. As you know, with Catalina, we have over 1,000 development programs, and those launch MPIs for us every year that drive our long-term growth. Any given quarter, those numbers may move around. But if you look at this first quarter versus last year's first quarter, for example, we had 30 this year. We had 15 in terms of MPIs last year. So not that those two years are necessarily representative, but I think with 30 MPIs in a quarter, when we expect to do somewhere in the ballpark of 150 give or take in a given year, I'd say it's an average quarter probably. Again, higher than the number of NPIs a year ago. With respect to customer behavior, I would say we're seeing meaningful changes. I think we've talked about lower early phase development programs with respect to clinical programs. You saw some of that in our CSS business in the fourth quarter last year. You see some of that in our OSD segment this quarter. So I think if you look at, of course, Catalan, mid and late phase programs tend to be uh more of the proportional development that we have and again timing of launches is not something that we necessarily control nor do we see any uh meaningful significant change in customer behaviors around those i think as products do get launched and um a few visits to physically to to doctors offices with respect to the sales engine of our customers that may have have an impact of how fast the uptake is and we saw some of that in our sop segment from launches over the last two or so quarters.

Yep, makes sense. Final question for me. Can you help us decode exactly what's going on with the OSD voluntary recall that you mentioned? Obviously, Catalan has 7,000 products, always dangerous to focus on one, but It's just a little bit notable that you called out product participation in FY2-H20 and then the negative impact from this recall. I'm trying to figure out how those are connected and maybe if there's anything else to call out on what exactly happened there.

Yeah, so first of all, thank you for highlighting the fact that Cadillac is a highly diversified company with 7,000 products and 1,000 development programs as well that are contributing meaningfully to our revenues each period. And more and more, we are more exposed to biologic, representing a greater proportion of our revenues, which is on a faster-growing end. And this body that you referred to, which we did highlight in the second half of our prior year, in the third and fourth quarter, we delivered a solid quarter in Q1 and are pleased to be in position to be increasing our guidance for the year. Having said that, within OSD, you have this one product which had an impact in the quarter, which was the $12 million cost that we saw in the quarter. And if you look at the rest of the year, the product that you're referencing was the second half launch activity, and so we see that being more of a comparable challenge in Q3 and Q4. But as we look at the ORZ segment and we take out this, if you assume you neutralize year on year taking out this product, you would still see a segment that's delivering close to what we would, or in line with what we would expect it to do long term, which is roughly 5% to 7%. So we're pleased with the segment, we're pleased with the Growth that we're seeing, particularly in our Zytus, all the dissolving franchise within the business. And the pipeline that we have for Zytus as well as non-Zytus within the segment is both well for the long-term growth of the segment. So we're very pleased with the performance of the segment if you take this product out. It does have a product participation feature in it, which contributed to the second half of last year. And as we said, we'll have an impact this year on a year-over-year basis, although I won't venture to give more than we did in our prepared commentary, which is there are activities underway with this program, and we do not yet have an estimation as to when or if that product will be coming back.

Thanks, Latney.

That concludes our question and answer session. I'll turn it back for any closing remarks.

Thanks, operator, and thanks, everyone, for your questions and for taking the time to join our call. I'd like to close by highlighting a few key points we covered today. First, we're very pleased with a very strong start to fiscal 2021, including 20% organic net revenue growth and 23% organic adjusted EBITDA growth. Our first quarter results combined with our increased forecast in the back half of the year led us to raise our fiscal 2021 net revenue growth expectation by approximately five percentage points and our adjusted EBITDA expectation by approximately seven percentage points. Next, the transformative acquisitions we've made over the last several years, combined with our strategic internal growth investments across the company were well-timed to enable us not only to address the increased level of R&D innovation across a broad range of therapeutic categories, but also to position Catalan to play an important role in the efforts to create therapeutics and vaccines to combat COVID-19. We are accelerating our strategic CapEx plans in our biologics business, which will help meet near-term demand, as well as have the effect of sustaining our long-term growth targets. Last January, we announced our plan for biologics to become 50% of our overall net revenue by 2024. And this quarter, we are nearing our target faster than expected with our biologic segment accounting for 44% of our net revenue. Finally, our mission to develop, manufacture and supply products that help people live better and healthier lives has never been more important. We continue to be thankful for our 14,000 plus employees who live our patient-first culture and have worked hard to carry out the great responsibility we have to maintain business continuity for all of those counting on us to deliver, be it for a potential COVID-19 therapy or vaccine or the 7,000 other products we produce every year for customers. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.