Catalent, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Catalan Inc. Second Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I'd like to hand the conference over to your speaker today, Paul Chardin, Vice President of Investor Relations. Please go ahead.

Paul Chardin Good morning, everyone, and thank you for joining us today to review Catalan's second quarter 2021 financial results. Joining me on the call today are John Cheminski, Chair and Chief Executive Officer, and Wetni Joseph, Senior Vice President and Chief Financial Officer. Please see our agenda for this call on slide two of our 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 numbers. 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 remarks are covered on slides six and seven of the presentation. John?

Thanks, Paul, and welcome everyone to the call. Before discussing our second quarter results, let me take a moment to remind you that our top priority during the COVID-19 pandemic continues to be keeping our employees safe, and by doing so, maintain business continuity. Given the wide range of the 7,000 products we produce on behalf of our customers, I'm sure many of the folks listening to our call today have been touched by one or more of these products in the last year. Products that now include COVID-19 vaccines and treatments approved for emergency use. Like me, I know you appreciate the employees at Catalan and elsewhere who are working relentlessly to help us fight our way out of the pandemic and are helping to save lives. For our frontline Catalan employees, one of the ways we've shown our appreciation is through thank you bonuses, which has totaled more than $20 million since the beginning of the pandemic for the second quarter. Now, I'm pleased to report that a strong start to fiscal 2021 continued in the second quarter. Our second quarter results, when combined with the higher levels of net demand we now expect for the remainder of the year, have led us to raise our fiscal 2021 net revenue expectation with the low end of the range increasing by $220 million and the high end increasing by $170 million. The adjusted EBITDA range was raised by $70 million at the low end of the range and $50 million at the high end. In the second quarter, our constant currency revenue growth was 24% year over year, of which 17% was organic. Adjusted EBITDA of $224 million represents constant currency growth of 28% over the second quarter of fiscal 2020, of which 22% was organic. Our adjusted net income for the second quarter was $114 million, or 63 cents per diluted share, up from 45 cents per share in the second quarter of fiscal 2020. The biologic segment was again the biggest contributor to our performance, as net revenue grew for more than 75% over the second quarter of fiscal 2020 on a constant currency basis, including 65% organic growth, with year-on-year margin expansion of more than 500 basis points to 33.5%. Demand for our drug products, drug substance, and viral vector offerings remains high, particularly due to work on potential COVID-19 vaccines and treatments, which was the primary growth driver in the segment. We saw another quarter where the contribution from biologics to our net revenue has increased, with the segment contributing 44% of the company's revenue in the quarter compared to 31% in the second quarter of fiscal 20. In our software and oral technology segment, we continue to experience some headwinds, which we attribute to both a decrease in occurrence of common flus and colds due to limited travel and social gatherings worldwide and to muted launches of new prescription products during the pandemic. We're cautiously optimistic that these will begin to normalize and we see improved performance projections in the back half of our fiscal year. For oral and specialty delivery, we saw continued organic revenue growth and new product momentum in our Zytus platform, as well as a return to growth in our early phase development, which were partially offset by lower demand for certain orally delivered commercial products. As we highlighted last quarter, we continue to be enthusiastic regarding the long-term growth prospects in the OSD segment, given its 200-plus molecule pipeline, including products based on our novel Zytus Ultra technology, which will enable higher drug loading into each Zytus tablet. We anticipate the first Zytus Ultra commercial launch in the calendar year 2022 to 2023 timeframe. Now, I'd like to provide you with a brief update on our COVID-19 related programs. We've now been awarded work on more than 80 unique COVID-19 related compounds, for potential vaccines and therapies across all four of our reporting segments, an increase of 20 compounds since we reported our first quarter results in November. Some of those vaccines and therapies have been granted emergency use authorization or similar status. The global pandemic has challenged our industry to be more creative and collaborative in all aspects of the supply chain, in order to quickly accommodate additional COVID-19 related programs. We're doing our part by accelerating some of our previously planned capacity expansion projects across our global manufacturing network to meet increased demand required to help fight the pandemic and to serve other patient needs. As some vaccines and treatments have been approved for emergency use, and we hope others will follow soon, we thought it would be helpful to provide a brief update on some of our capacity expansion projects that will be used for both COVID-19 projects and non-COVID-19 projects. It's important to note for Catalan, COVID-19 has been an accelerator for our long-term strategic plans and will position us for continued long-term sustainable growth. I'll start with capital investments in Bloomington with an update on three specific capital projects in order of their readiness timelines. The first is the addition of a high-speed vial filling line, which we first announced in January of 2019, along with other capacity expansions with expectations to complete the project within three years. This space has since become a dedicated space for Johnson & Johnson's COVID-19 vaccine candidates. We've worked closely with Johnson & Johnson since April. Through truly extraordinary efforts, coordination, and commitment by hundreds of people working tirelessly over the last nine months, this build-out was recently brought online, allowing us to meet the operational readiness and 24 by 7 manufacturing commitments described in our announcement last spring. The next new line scheduled to be available in Bloomington is the high-speed vial filling line we announced in early September 2020, which we expect to come online early in our fiscal fourth quarter. This line will help meet the high customer demand for vial filling at the site, including for Moderna's COVID-19 vaccine, which received emergency use authorization from the U.S. Food and Drug Administration in December. We're on track to support Moderna in meeting its commitment of 100 million doses to the United States government by the end of March and 200 million doses total available by the end of June. The third new line that will become operational in calendar 2021 in Bloomington is a high speed flexible syringe cartridge filling line, which was also announced in January of 2019. As this type of line is not urgently needed for the manufacture of COVID-19-related products, we expect the line to be completed in the back half of 2021 and to serve non-COVID-19 programs. Additional capital investment projects announced in January 2019 included increased mammalian cell culture capacity in Madison by adding the fourth and fifth manufacturing trains at the site providing additional clinical and commercial production capacity at the 2,000 and 4,000 liter batch scale. These trains are on track to come online in our fiscal fourth quarter and will help accommodate increased customer demand for drug substance manufacturing for both COVID-19 related projects and non-COVID-19 related projects. And we anticipate achieving our long awaited goal of commercial drug substance GMP production as a result of this work, thereby transforming this historical development-based site. The Anani facility, which we acquired just over a year ago and is on track to generate substantial returns in a very short period, has become a critical asset for drug product manufacturing in Europe, including for COVID-19 vaccines. Like in Bloomington, we are working on multiple high-profile vaccine projects in Anani, with plans to increase capacity to support additional customers and programs. Further enhancing our capacity in Europe, last July we announced that we would modernize our fill finish facility in Limoges, France, including the installation of high-speed flexible filling line capable of filling vials, syringes, or cartridges under barrier isolator technology. We continue to anticipate the completion of this project in calendar year 2020. Our viral vector manufacturing capacity is in high demand for the growing number of gene therapy compounds currently in the industry's development pipeline, which now totals roughly 600 assets targeting 1,600 different diseases. Adding to that demand has been viral vector manufacturing for COVID-19 vaccines, for which a portion of our newly expanded capacity and our lead gene therapy manufacturing site has been dedicated. We've now completed construction of all of the suites at the first building on the site to be developed and expect additional capacity being built out in the adjacent building to be brought online in calendar year 2022 to help meet the significant patient needs for gene therapy treatments. A year ago, we announced our entry into the adjacent cell therapy space with the acquisition of MasterCell. Cell therapy assets are rapidly growing, with recently available count of unique assets in development topping 1,500. More than a third of these involve allogeneic therapies. Since the acquisition, we've made a number of strategic investments to expand our footprint in the cell therapy business and its high growth potential, including opening and validating our U.S. clinical facility in Houston, where we're now performing work for a number of customers, continuing the build-out of our commercial-scale production and build-finish facility in Gosselies, Belgium, scheduled to open in fiscal 2022, and acquiring a purpose-built CGXP facility and manufacturing assets from Bone Therapeutics, which is located next to our existing facility in Gosselies. Given the evolving dynamics and technologies in our industry and the resulting demand for our valuable capacity and capabilities, even without considering the demand for COVID-19 related products, we've been focusing in our strategic planning on creating and expanding valuable offerings for our customers and their patients, while also considering long-term returns across our business. This process includes evaluating potential acquisitions to expand our offerings, as well as making adjustments to our existing portfolio where appropriate. In the last six weeks, we made two moves to adjust our portfolio in our oral and specialty delivery segment. The first was signing an agreement to sell our blow-fill steel manufacturing business located in Woodstock, Illinois, to SK Capital for $350 million, with potential for additional performance earnouts of up to $50 million. The sale is expected to close in the coming spring. Floatville's seal is very attractive space for the right owner. Given the opportunities for potential expansions in other areas of our business that we believe have higher potential returns and growth trajectories, we're pleased to have identified an owner with the desire to invest in the facility and create more opportunities for employees and customers in that segment. The second portfolio move is an agreement to acquire a 90,000-square-foot CGMP facility in the Boston-Cambridge area from Accorda Therapeutics for $80 million. The site includes best-in-class spray-dry capabilities and will provide Catalan with significant commercial-scale capacity, permitting the site to act as a global center of excellence for spray-dry dispersion and dry powder encapsulation and packaging. in addition to serving new customers at the site, will continue to manufacture for a quarter there as a result of a long-term supply agreement for the manufacturer of its commercial prescription product intended to treat symptoms associated with Parkinson's disease. The acquisition, which is expected to close before the end of our fiscal third quarter, complements our existing U.S.-based capabilities in metered dose and nasal inhalation and positions us for growth in the outsourced dry powder inhaler market, which we estimate at over $500 million in total and growing in the high single digits. I'd now like to turn the call over to Webby, who will review our financial results for the quarter in our enhanced fiscal 2021 guidance.

Thanks, John. I will begin this morning with a discussion on segment performance. As in past earnings calls, my company will be in constant currency. I will start my commentary on slide eight with Biologics, which is now our largest business segment. Biologics' net revenue of $404 million increased 76% compared to the second quarter of 2020, with segment EBITDA increasing 109% over the same period. Acquisitions contributed 11 percentage points to revenue and 5 percentage points to segment EBITDA in the second quarter compared to the prior year. The acquisitions that primarily contributed to revenue and segment EBITDA growth include the addition of the Anani facility in January 2020 and MasterCell in February 2020. In Anani, which expanded our drug product business that falls within the biologic segment, we continue to attribute all non-BMS work, including all COVID-19 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, including drug products, drug substance, and cell and gene therapy, and was primarily driven by COVID-19-related projects. The segment's EBITDA margin increased significantly both year-on-year and from the first quarter to a record level of 33.5% for the segment, which is primarily attributed to increased capacity utilization and higher volumes. We expect strong year-on-year growth for the biologic segment for the remainder of this fiscal year. Please turn to slide nine, which presents our Sol-gel and oil technology segment. Sol-gel and oil technology's net revenue of $247 million decreased 10% compared to the second quarter of 2020, with segment EBITDA decreasing 31% over the same period. The decline was driven by reduced volumes for certain prescription products, as well as lower demand for consumer health products, particularly for cough, cold, and over-the-counter pain relief products. We continue to attribute the lower prescription volumes to slow rollouts of new products during the pandemic and the lower consumer health demand 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. We see some of these headwinds subsiding in the next six months and expect improvement in revenue growth in the back half of our fiscal year. Year-on-year growth in SOT's development revenue was over 40% for the second consecutive quarter, which we expect will eventually lead to future new product introductions that will help drive the segment's long-term revenue growth. Lower volumes were the primary drivers to the decline in margin, which was also affected by elevated year-on-year 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. Slide 10 shows that our all-accessible delivery segment recorded net revenue of $170 million in the quarter, which is up 17 percent compared to the second quarter of fiscal 2020. Excluding the portion of the acquired and 90 facility that is part of the OSV segment, your annual revenue increased 2 percent. rising in market demand for commercial products across our Zytus Oily Dissolving Tablet technology platform, and a return to growth for early phase development activities in the quarter, but partially offset by lower demand for non-Zytus prescription products. Segment Avidar increased 31% over the second quarter of 2020, of which the OASD portion of the acquired and non-in-facility contributed 22 percentage points. Segment Avidar margin increased by nearly 300 basis points. 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 oral and specialty delivery, each quarter we disclosed our long cycle development revenue in the current year. In the second quarter of 2021, we recorded development revenue across both small and large molecule products of $370 million, which is 68% above the development revenue recorded in the second quarter of fiscal 2020. Development revenue, which includes net revenue from products approved for emergency use, represented 41% of our revenue in the second quarter, compared to 30% in the comparable prior year period. The strong growth in the biologic business was the biggest driver of these year-on-year changes. In the second quarter, our development pipeline led to 32 new product introductions, for a total of 62 in the first six months of fiscal 2021. Now, as shown on slide 11, Our clinical supply services segment posted net revenue of $94 million, an increase of 4% over the strong results in the second quarter of the prior year. Segment EBITDA was $25 million, or a 2% increase, and segment EBITDA margin was 27.1%, down slightly over the second quarter of last year. Margin was impacted by sales mix in Europe. The CSS business is adjusting to some new realities imposed by Brexit. In response, We have implemented the process to close the segment facility in Bolton, UK, and consolidate into our existing facilities in Backgate, UK, and Schoendorf, Germany. An important consideration for this action is our investment in higher growth areas for the business, including Asia Pacific, where we are fitting out our newly acquired 60,000 square foot facility in Shiga, Japan, and North America, where we are starting construction on a new 25,000 square foot facility in San Diego that will be co-located with our existing oil and specialty delivery early phase development facility. As of December 31st, 2020, our backlog for the CSS segment was $448 million compared to $428 million at the end of last quarter and up 15% from December 31st, 2019. The segment recorded net new business wins of $118 million during the second quarter, a 13% increase compared to the second quarter of the prior year. The segment trailing 12 months book to bill ratio is 1.2 times. Moving to company-wide adjusted EBITDA down slide 12. Our second quarter adjusted EBITDA increased 31% to $224 million, or 24.5% of net revenue, compared to 23.7% of net revenue in the second quarter of fiscal 2020. On a constant currency basis, second quarter adjusted EBITDA increased 28 percent, including 22 percent organic growth compared to the second quarter of fiscal 20. On slide 13, you can see that second quarter adjusted net income was $114 million, or 63 cents per diluted share, compared to adjusted net income of $72 million, or 45 cents per diluted share, in the second quarter a year ago. Slide 14 shows our debt-related ratios and our capital allocation priorities. Our cash and cash equivalence balance at December 31st was $833 million compared to roughly $1 billion at September 30th and $189 million at December 31st, 2019. Our net leverage ratio was 2.6 times at December 31st, the same as September 30th, and down from 4.2 times at the end of December 31st, 2019. Recall that in August, we lowered our long-term net leverage target to 3.0 times compared to our previous target of 3.5 times. 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 accelerate organic growth plans to meet customer demand and patient needs. In fiscal 2021, we continue to expect that CapEx will be approximately 15% to 16% of 2021 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 second quarter performance and to account for higher demand, primarily related to COVID-19 projects. 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 $3.8 billion to $3.95 billion, compared to the previous range of $3.58 billion to $3.78 billion. Adjusted EBITDA in the range of $950 million to $1 billion compared to the previous range of $880 million to $950 million. And adjusted net income in the range of $475 million to $525 million compared to the previous range of $410 million to $470 million. We expect that our fully-reloaded share count on a weighted average basis for the fiscal year will be in the range of 180 million to 182 million shares, and that our consolidated effective tax rate will be between 24% and 25% in the fiscal year, compared to a previous estimate of 24% to 26%. There are important assumptions underlying our revised guidance, including, first, we assume no major unforeseen external change to the current status of the COVID-19 pandemic and its effect on our business. Second, the revised guidance does not assume the receipt of any vaccine or treatment order from any of our customers beyond what either has been received to date or is deemed required under executed take-home pay arrangements. Third, revenue from acquisitions is projected to represent approximately two percentage points of our revenue growth rate for the year. Our guidance assumes that the acquisition and divestiture in the OSD segment that John highlighted in his opening remarks closed as anticipated in the coming months. And finally, we now attribute approximately 14 to 16 percentage points of the projected net revenue growth to net COVID-19 related revenue versus our previous estimate of approximately 9 to 11 percentage points. This estimate is based on factors that affect multiple business segments, including Updated forecasts related to business that we included previously, including some that have increased in size due to reaching certain milestones or other triggers. Revenue not previously projected from additional work among the COVID-19 related projects in which we are engaged. An assessment of opportunity costs, including the lost value of work that would likely have been placed in the same space as some of the COVID-19 related work. and estimated lost revenue in certain parts of the business as a result of the pandemic, such as lower demand for consumer health products in our self-general technology segment, as well as impacts to some prescription products. Operator, this concludes our prepared remarks, and we would like now to open the call for questions.

Thank you. Ladies and gentlemen, as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your questions, just press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Dan Brennan with UBS. Your line is open.

Hey, guys. Great. Congratulations on a strong quarter and everything you guys are doing, obviously, to get the economy going here. Maybe the first question would just be if we could dig in on COVID. So can you just break out what was the impact on the quarter? I know you basically said it was the biggest contributor to biologics growth, but if you could just – Help us on that front, A. And then, B, just you gave us the math, Whitney, right at the very end. But just kind of walk us through, implicit in your updated guidance, kind of how do we think about, I mean, I could do the math but didn't have time here. How do we think about the change in what you're thinking about the base business ex-COVID in the full year?

Yeah, sure, Dan. Look, first, in terms of the COVID impact on the quarter, Clearly, we're pleased to see the progress on the various vaccines and therapeutics we're working with our customers on. As you know, we have 7,000 products across the company, 200 development programs, and across over 1,000 customers. I just want to remind everyone of the, you know, impact across the COVID programs and therapeutics, which is, I would say, not a precise science, and quite frankly, at this stage, given the various parts of the business and the impact that we described in laying out our guidance earlier, it becomes increasingly difficult to really bifurcate COVID-19 versus non-COVID-19, which is why we're not going to a level of precision here. Then what we can say is the biologics business had 65% organic growth in the quarter. And just to remind everyone, the COVID activities that we're doing are also organic and occupy some of our top scientists across the company who arguably could be working on other projects as well as quality professionals, et cetera, in some of the space that we use. One more comment I'll make then is that, you know, in some cases we have programs that we're working on prior to the pandemic with our customers within our current business that now become good therapeutics or candidates for the COVID-19 And so it makes it, again, not a precise science to count those as purely COVID-19 versus not. What we can say is compared to the first quarter, a significant portion, the majority of the growth was coming from COVID-19. We still saw very good growth in our biological business, but we're saying on the 65 percent, a significant portion of it came from COVID-19 in this case, and therefore for the company as well. Moving on to the base business, as you might see, if you really take the midpoint, for example, of our guidance range, we increased that by about seven points. But we added about five points to the COVID-19 range that we gave, taking it from 9 to 11 to now 14 to 16. So that would imply about five of the seven is coming from COVID-19 and the remainder coming from the base business. So hopefully that gives you a sense in terms of where we see the resistance versus the rest of COVID-19. And again, I'll remind everyone, the COVID-19 activities are organic in nature.

And then maybe just one follow-up, and Don, that was a tremendous amount of detail, obviously updating us on all the manufacturing expansion plans and timing, if you will. But when we think about, you know, the things coming on in this kind of fiscal year and then in this calendar year, How does your guidance account for the expansion that's ongoing this year? Meaning, have you left open room with this new capacity expansion coming online at different points in the year that we could see further step-ups? Or have you already incorporated largely in your guidance for the year benefits and customer demand that is occupying some of that new expansion plans? Thank you.

Yeah, so first of all, obviously, our updated guidance includes all of the assumptions with regards to the capacity and the programs that we currently have in place. But one thing that I want to emphasize that's really important is that covid has really been an accelerator of catalan's strategic plans uh you know we have pulled in our capacity that we were planning for and we've also put in place additional capacity that would have been within our strategic plans so when we take a look at the impacts of covid on catalan certainly we're seeing an impact in our fiscal year 21, and we'll see ongoing impacts into our fiscal year 22. But importantly, we've been able to really accelerate our strategic plans, which is really going to help drive our continued long-term sustainable growth. Thanks, Dan.

Great. Thanks, guys.

Your next question is from the line of John Cracker with William Gurr. Your line is open.

Hi, thanks very much. John, I think I saw yesterday an interesting article that Moderna is kicking around the idea of putting more doses in vials to expand their overall capacity. Is there a way for you to comment on this? Maybe not specific to Moderna, but is that feasible from your perspective, and is that the kind of change that you could implement quickly and alleviate some of the capacity constraint? Thanks.

Yeah, thanks for the question, John. And I'll just say that I can't comment on that. That's really something for Moderna to opine on. What I can tell you is in the current configuration of the vials that we have that we are committed to delivering what Moderna has put into their press release, which is really 100 million doses by the end of March and then a total of 200 million by the end of June. Thanks for that question, John.

Okay, great, thanks. And then a follow-up, you know, given the unprecedented spike in COVID work, how are you handling disruptions to non-COVID clients? Can you comment on the degree to which some programs have had to be back-burnered, and how are you sort of mitigating those disruptions for them? Thanks.

Yeah, no, thanks, John. And what I will say is that Although a challenging situation with, you know, I would say a handful of customers that we have to manage specifically in our Bloomington site, we see that really being alleviated really kind of in our fourth quarter as we're bringing on a new vial capacity, a new high-speed vial line that I discussed in my prepared comments. So certainly we're working very closely with all of our customers, and they certainly understand the situation and urgency from a capacity standpoint for COVID-related programs. But I will say that although challenging, Certainly, we're able to mostly manage that situation and definitely see relief as we approach our fourth quarter of this fiscal year with the additional capacity coming online. So we don't see this as, you know, any long-term impact of pipeline for the company.

Great. Thank you.

Your next question comes from the line of Tyco Peterson with J.P. Morgan. Your line is open.

Hey, thanks. John, I actually want to pick up on that last point about capacity. We've gotten a question about Defense Production Act, and if you could get kind of strong-armed. I know you're doing the 100 million mRNA doses for the government by March and then 200 million by June, but is there a risk that the government could actually request for you to divert further capacity and create an issue, or do you feel like with the new high-speed viral line, you've got enough cushion there?

Well, you know, first, I just want to qualify that, you know, the Defense Production Act, which really, you know, gets down to what's called a rated order, are not the government on Catalan, but for our customers, which then flows down to us just for that clarification. And I will say that we have put in place the necessary capacity between the dedicated Johnson & Johnson line that I described in my prepared comments along with the additional line that's going to be coming in in our fourth quarter. More precisely, you know, we'll probably be a little bit more early in that fourth quarter. We're comfortable that we're going to have the capacity necessary to meet vaccine required production as well as the production of our customers through non-COVID related customers through the remainder of our calendar 2021.

Yeah, I'll just add here, Tycho, that we and our customers are certainly responsible for delivering many non-COVID-19 medicines that are critical to patients. And so we continue to work closely with our customers and government agencies to balance those priorities with COVID-19 pandemic needs, as well as other items that are impacting to patients and using patients first, if you will, mindset and culture as a guiding principle along those lines.

And then maybe shifting over to soft gel and then oral tech, you know, still down double digits. I guess, you know, what gives you confidence that it can get back to growth, you know, in the back half of this fiscal year, especially with the lighter flu season and, you know, all the stocking that happened at the beginning of the pandemic?

Yeah, Tycho, as we said all along, after our first quarter results, we expected the second quarter to be roughly in line with where the first quarter landed. And we already then saw uh the back half being uh um improved uh from where the first half was so the business continues to uh uh really uh perform as we as we thought it was it was keep in mind our social business is a relative to the rest of our segments a lower upline growth business but generates significant amount of cash flows uh which is one of the reasons we love this business and it contributes to the growth that we're in the expenses we're making across the rest of our segments It also has the majority of our long cycle, if you will, commercial products, which gives us an opportunity to see and interact with our customers in terms of looking at what they're forecasting, what they're starting to see. And so as we enter into the second year, as John said in his opening remarks, we're cautiously optimistic with what the business will deliver in the second half, and we certainly see improvement in the business versus where the first half was.

Okay, and there's one last one. Is the divestiture of Blowfield Seal kind of a one-off, or is there more portfolio shaping as you shift toward biologic cell and gene therapy? How do you think about potential future divestiture?

What I would just tell you on this one is that strategy is everything in Catalan, and we're constantly updating and driving our strategic plans, which include constantly looking at our portfolio businesses, and understanding what is the best mix of businesses for cattle and for long-term sustained growth, high growth, higher margins. And so, you know, this was a case where we had been looking at this for a while, and we were able to find the right owner for this business. But you can count on Cattle and continuing to, you know, adjust its portfolio going forward strategically as it makes sense to drive higher growth and higher margin for the business. The other part is that when we looked at our Blokeville Seal business, it was requiring a certain amount of CapEx investments that when stacked up against the returns of CapEx investments in other parts of our business, specifically biologics, cell and gene therapy, It was a situation where we weren't going to be able to make the best investments into Woodstock because we knew we would get better returns in other areas of our business. So we'll continue to use that very strong discipline, not only in our acquisitions, but also in looking at our portfolio for potential investors.

Okay. Thank you.

Your next question is from David Windley with Jefferies. Your line is open.

Thanks for taking my questions. I was trying to do some back of the envelope. Would it be reasonable to say that in your new guidance and what you're expecting for COVID that year to date you've recognized maybe something like 40% to 45% of that number? Is that kind of trying to figure out have you recognized more in the first half or do you still expect more in the second half? The higher percentage of the total that is.

yeah um let me see if i can give uh you know some some help with that first we're very pleased with the strong starts of the fiscal year right um which continued with global organic growth in the in the second quarter uh and and put us in position to raise our guidance given the the increased outlook that we see for the remainder of the year as well as you recall the first quarter uh was primarily on largely non-covered related we saw you know, robust growth across biologics and for the company in the first quarter. And the second quarter, we're seeing primarily COVID, but we still saw very, very good growth across the biological business again, and so on. And we saw the growth in our OSD, et cetera. So I think given the timing of some of the, you know, relatively speaking, higher volumes, some of the emergency use authorizations and so on, Those will be mostly in the second half of the year. So that would be the lion's share of the COVID-related impact on the year would fall on the back half versus the first half of the year as well. And as a reminder, we just raised our guidance as far as the second half of the year, adding seven points to the growth. with about four or five of those being COVID-related. So that would also infer that the lion's share would fall in the back half, but I won't take it down to a precise number.

Okay. John, I appreciate your detailed discussion on the capacity ads. and noted the specific companies. I appreciate that detail, too, by the way, the specific companies. There are a couple that I think you've had press releases, at least one I'm thinking of, AstraZeneca, that you've had some press releases about that you have relationships for that you did not specifically identify in your commentary. And relative to Tycho's question about capacity, just wanted to kind of broaden the question a as you're answering the high-speed filling line that you're adding, if we get additional approvals beyond J&J and the dedicated line there, are you still okay to kind of service everybody, presuming others get approval as well?

Yes. Thanks for the question there, Dave. And I would just say that we're in a position to meet our commitments with all of the with all of the COVID vaccine manufacturers that we have signed up with. Specific to AstraZeneca, we're not just using assets in Bloomington. We're also using assets in our newly acquired gene therapy business, which, by the way, is a very welcoming development because now viral vectors are not just being used for gene therapy, but they're also being obviously validated and used for for vaccine work. So with regards to AstraZeneca, we're doing work primarily out of our gene therapy business on the drug substance side and then our 90 facility, which again was a very fortuitous acquisition that came online at a point when that capacity became coveted. And so perhaps AstraZeneca will be doing drug product work there. So again, back to the essence of your question, we're comfortable that even with additional approvals, that we will be able to meet our commitments to our customers, also noting that our customers have a wider network than just Catalan. They're using a multitude of CDMOs and other assets to be able to meet those commitments. So we're very comfortable with what we've committed to our customers and the capacity that we have or will be bringing online.

Okay. Last question for me. Appreciating that folks are acting responsibly and not trying to profiteer in this environment, I'm thinking about the basket of margins are really good, utilization is, I'm sure, relatively high, but you are also putting this capacity in place that is ramping or not being fully used until EUAs or extended things like that that would perhaps dampen utilization in the short run. How is the pricing environment for the services that you are offering, particularly in biologics?

Dave, this is Whitney here. As we've shared previously, we would put the pricing for the services that we're performing for COVID-19 roughly in line with similar work that we do for non-COVID-19 related activities. And so clearly with our mission being to help people live better, healthier lives, we're in position to demonstrate and be energized, quite frankly, across our network for our employees working around the clock to deliver robustly on these commitments and do so in record time. So we'll continue to do that. And by the way, we are dedicating assets in some cases. We're accelerating capacity to be online in time to deliver for our customers and patients worldwide. So the pricing is roughly in line. I would point that you might have seen a nice increase in capital margins, for example, in our social business. in the quarter. And whenever, as a manufacturer, whenever you get to high levels of throughput and utilization in any part of the business, it's going to translate into higher margins. And we're starting to see those happen. As a reminder, back half of last year, as well as through the first half of this year, we continue to add significant amount of resources, not just hard capacity, but also people headcount that have had an impact on all of our margins. And as we see volume come through, you see that increase. And we would anticipate continuing to see, particularly in the parts of the business where volumes are increasing significantly, see that translated to better margins as well. So it's not purely on the pricing point. It's also the throughput in the factory.

Okay. Thank you.

Your next question is from the line of Jacob Johnson with Defense. Your line is open.

Hey, thanks. Maybe a big picture question. You talked about $4.5 billion in revenues by 2024, 50% of that coming from biologics. As we think about the cell and gene therapy component within biologics, how large could that business be by 2024? Or maybe ask it another way, how should we think about the long-term organic growth profile of your cell and gene therapy assets?

Yeah, so I'll first thank you for the question. I'll first answer just from maybe a big picture strategic standpoint. So first of all, the market for gene therapy and cell therapy continues to be incredibly robust. If you take a look at the cell and gene therapy, as I had in my prepared comments, you have roughly 500 assets that we expect to grow to more than 1,500 assets over the next five to six years. And then when you take a look at the cell therapy space, you've got about 1,500 assets you know, assets right now that it's going to grow to, you know, probably double in that overall size. So there continues to be, I would say, a very robust end market for these services. We see really demand outstripping supply throughout this whole period of Something else that I want to maybe highlight, I stated in our JPM presentation at the beginning of the year that we first introduced that chart about us being $4.5 billion with 50% of our revenues coming from biologics at that time at 28% margins. At the time that we actually introduced that chart, we had envisioned both organic growth as well as inorganic growth, contributing to getting to that $4.5 billion. With the additional moves that we've made and capacity expansions and the purchase of Anani and a capacity expansion there, as well as our acquisition of our of master cell in the cell therapy space. What I now stated at the JPM conference this year is that we do not see any additional substantial M&A required to get to that $4.5 billion target at 50% coming from biologics. And when I use the word substantial, it means it would be material enough where for an acquisition we would state the revenue and EBITDA. So I'll leave that as kind of the big picture comments and see if Whitney wants to round it out with any other specific details.

No, John, you covered really well. Clearly we see long-term sustainable growth across our biologic business broadly. We won't get into specific contribution of the growth rate from gene therapy or cell therapy, et cetera, but overall we feel great about the business and where we are on that trajectory. And as John said, we expect the business to be roughly 50% of our revenues by 2024, and you can see us making some instant progress towards that.

Got it. Maybe just one quick follow-up. You're selling the blow-fill seal operations for $350 million. Is there any way to frame up the financial impact to Catalan from that sale in terms of the revenues or margins of that business?

Yeah, look, I think as we said in the prepared comments, we were able to raise our guidance here for the remainder of the year, given the very strong start, as well as the programs in the pipeline and increased outlook that we can see. That includes, by the way, reflecting the divestiture in the guidance that we just that we just gave and just released. So we won't go as far as to quantify the exact amount coming from both OSEAL, given the vast number of products that we have across the network and so forth. But if I should just say the guidance that we just issued already reflects that based on the timing, we expect that legislature to close.

Got it. Thanks for taking the questions.

Your next question is from Ricky Goldwasser with Morgan Stanley.

Your line is open. Hi this is Rongli for Ricky and congratulations on the quarter. I wanted to follow up on the guidance. Can you help us understand how much of the increased vaccine demand in the guidance comes from the orders that have been received from the already approved vaccine versus the take or pay agreements? I mean given the nature of the J&J contract, should we think about the J&J opportunity already embedded in the current guidance or there is more room for upside once it is approved and what our data points should be working for?

Yeah, so look, in terms of how we treat the COVID-19 impact and our guidance has been very consistent from the beginning. We effectively reflect in our guidance any portion of our contractual elements with our customers, where it's basically a take-or-pay required volume that they have to give us within the timeframe that falls within the fiscal year. I will remind everyone that our fiscal year ends at the end of June, and so we only have roughly five months left in the fiscal year. So to the extent there is work that we're doing with our customers, and those require certain volumes throughout the calendar year, perhaps maybe even getting into the following calendar year, those would fall into our next fiscal year, which we'll talk about in August as we give guidance for that fiscal year. But our fiscal year ending in June will reflect it in there. Anything that's already on order that's been given to us by the customer that is effectively firm or a contractual commitment, effectively a take-or-pay that requires the customer to give us that volume by the end of the fiscal year, to produce by the end of the fiscal year, whether they have actually given that order or not. So that's what's reflected to the extent that a customer gives additional orders above that minimum from year forward, that would potentially provide some level of upside to the year. But again, it's a limited amount of time remaining in our year.

Thank you. And next, I wanted to touch on the cell and gene therapy manufacturing because recently we've heard some discussions on biotech and manufacturers running in-house over time, given the various quality considerations. So what's your view on the sustainability of the outsourcing trends of cell and gene therapy based on your recent conversations with the clients?

Yeah, this is John here. I would say that we actually see outsourcing rates increasing across the cell and gene therapy space. over the next five to seven years. You have to understand for gene therapy, a majority, gene and cell therapy, a majority of the customers are small biotech customers where the decision to put in capacity for relatively few assets that could actually cure the disease, dramatically reduce their volume doesn't really make a lot of sense. So it actually lends itself much more towards outsourcing. And so as we looked at specifically the gene therapy space, our de novo research that we did showed that today about 65% of the gene therapy manufacturing was outsourced. And we actually saw that growing to nearly 75% again over the next five to seven years. So we still are very bullish on both the gene and cell therapy space as it relates to capacity requirements from CDMOs like Catalan.

Great, that's helpful. And lastly, on the soft gel segment, on the margin side, the segment margins still came a bit below our expectations. So what are the puts and takes if we need to see the margin coming back to the pre-COVID levels?

Yeah, so across our businesses, particularly where we have high levels of capacity and uh and where in social technologies as i said uh a good portion of our 7 000 uh products that we supply are in that business uh you can have an outsized effect in both directions uh when volumes go uh down versus when volumes uh come up uh in in that sort of business you can see the impact even in our biology business we see volumes increase you see an outside effect in terms of margins increasing we're pleased to see uh margin expansion um in uh in the quarter across the company our guidance uh if you just take the midpoint of our guidance for example you'll see about 80 basis points margin extension year-on-year in the business despite uh what uh we were you just uh describing your question with respect to ourselves technology's business we have very good visibility in that business and reflected uh that in our current guidance already uh with the second half of the business coming in better than the first half obviously, and all that reflected in what we've described today and what we've included. So we are delivering margin extension in the year, which we're very pleased with despite that, and we would expect as volumes come through in the business for that to reverse in terms of the impact on margins as well.

Thank you.

Your next question is from Sean Dodge with RBC Capital. Your line is open.

Thanks. Good morning. Maybe, John, going back to the insourcing versus outsourcing decisions, if we set gene therapy aside for a moment, are you seeing any evidence the added strain these new COVID projects are putting on the available supply? Is that changing kind of the thought processes around insourcing, outsourcing? Maybe not for everyone, but for the larger guys, do you think this encourages some of them to think a little bit more critically about building their own internal capacity now?

Actually, what I would tell you is that what has happened because of COVID is I think pharma and biotech in general has really understood the strategic nature and partnership of CDMOs. In fact, the challenge put in front of all pharma and biotech with regards to COVID-19 would not have been able to be realized by, I would say, pharma companies that were totally vertically integrated 20 years ago. If you take a look at what has happened during COVID, it has allowed pharma and biotech to focus on what they do, which is to develop these novel vaccines and treatments and run their clinical trials with their partners and then using CDMOs for the strategic capacity build-outs, which Catalin has done on our part and well noted through my opening comments. So I think the strategic nature of CDMOs partnered with pharma and biotech has really come to bear strongly throughout COVID, and I believe that those partnerships will continue and actually probably increase overall outsourcing in the future, specifically with regards to the large pharma companies that, again,

real uh really uh got into a mode of partnering with cdmo to be able to address this challenge okay that's helpful thanks and then going back to the question around uh loading more covet doses into vials if that is feasible and they do go ahead with it does that affect the economics of the contract at all for you i i guess do you get paid on a per dose or a per vial basis

We won't get into specifics across our programs. What I would say is, again, what we reflect in our guidance is what is contractually required as contractual minimums from our customers, or if they have in-place orders for something above that, we reflect the dose. And so, it's very unusual for us to come down to individual doses. But I won't go into, and contracts vary as well in terms of how they're constructed with our customers. So they're not all one and the same. But I would just say across, whether it's COVID or not, it is unusual to have contracts for us that come down to an individual dose for patients. So I'll just give you that as an added point.

Okay. Fair enough. Thanks again.

Your next question is from Juan Aguilino with Bank of America. Juan is open.

Hello. Thank you for squeezing me in. Based on some of the comments by other COVID-19 supply chain players, vaccine manufacturing activities in the early innings, and this could continue into calendar 2022. So my question is, I guess, do you agree with this view? And given that your fiscal year ends in June, why couldn't we conservatively expect a similar COVID-19 revenue contribution in fiscal year 2022?

Juan, look, I think you're probably looking at some of the same information that we are. I would probably turn that question to our customers who essentially are working with us and working with them to deliver on what they see that they're going to need. um and as that as the need arises whether it's multiple different um strains or what have you uh the impact of those will be you know first and foremost be seen by our customers who will work with us to determine what we need to assist with in terms of our our role in this process um in terms of our next fiscal year as i said earlier our fiscal year in june therefore as we talk about and see some of these programs get to the point of very good data to potentially emergency use authorization and then eventually potentially you know full commercial approvals these the impact is limited in terms of how much time we have left on the current fiscal year and you would imagine some of those would fill into the following year that starts on july 1st and we'll give guidance more specifically as we get as we get to the as we get to the point of giving guidance for the next year.

Juan, maybe I'll just say that we're going to learn a lot more about vaccine requirements and effectiveness in the coming months. These learnings are going to aid our thinking as we formulate our guidance for fiscal year 22 later this year. That said, I'd say that we do anticipate manufacturing vaccines into our fiscal year 22, which begins on July 1st, and likely through calendar year 22 also.

Okay, thank you. That's helpful color. And a quick follow-up. I mean, if we look at the publicly disclosed COVID-19 manufacturing partnerships that Catalan has, Most of them are on the drug product side, with the exception of the drug substance for AstraZeneca. But keeping this in mind, what is the state of the drug substance vaccine API supply? And are you seeing any bottlenecks that would prevent you from doing the drug product side that you've been summoned to do?

One thing I would say, Juan, first of all, we have more than 80 vaccines. COVID-19-related programs that we're working with our customers on that's been across our business segments, across drug product and drug substance. Indeed, we have only announced a relatively small number of those, and you're making references to those. But just keep in mind, there are many more that we have been working with our customers on that may spend across drug product and drug substance, as well as therapeutics that are not in our biologic segments. So that's the first point. In terms of what drug substance looks like, clearly the supply chain is relatively complex. There are instances where we're manufacturing drug products for a customer that's coming from multiple different places from a drug substance perspective. And we want to speak to those, and I would reserve those questions for our customers in terms of what that means as they look at the overall supply chain. For us, we tend to have, you know, again, contracts that fill out what our requirements are and what we need to deliver to our customers. And if that hinges on the customer providing drug substance to us, we still have the contract to write in terms of the volumes that they've committed to for us and gives us a level of confidence in terms of what we include in our guidance and what we're prepared to execute for. Alan, John, if you want to add anything to that. Thank you. Thank you.

And now our last question comes from Jack Meehan with Nephron Research. Your line is open.

Yeah, thank you for taking the questions. Just a couple of cleanup ones. On soft gel and oral tech, I know you talked about the expectation that growth is going to start to improve in the second half. Can you just talk about, you know, what you're hearing from customers in terms of demand and You know, whether there could be some lingering impact from the pandemic, kind of what kind of growth rates are you thinking about for the segment?

Yeah, thanks for the question. Look, we've reflected in our guidance not only what has already taken shape clearly in the first half, but what we expect in the second half. And what we've said is what we expect improvement in the growth in the segment is still going to be substantially below a reason. that the business would do long-term from a top-line perspective. Again, those have all been reflected. We do have regular communications with our customers, obviously, who are providing us forecasts. in many instances, those forecasts on a rolling basis all the way out to a year. And so we get a sense from them in terms of where they are, as well as in our commercial contracts, we tend to have about a 90-day period in general where the forecast becomes firm. So that gives us a certain level of clarity, clearly, in addition to the additional information they're providing to us from a forecast perspective. So this is a business that has a very good level of visibility clearly in it, given the commercial products that we supply. And indeed, we have seen some impact from COVID-19, which we described in our prepared commentary. But we are expecting the business to improve in the back half, again, still substantially below what we would take the business to do long term. and all reflected in our guidance that we gave.

Great. And then two follow-ups on COVID. The incremental projects you're working on, now up to 80 since last quarter, can you just give us a sense, are any of these high profile, similar to the ones that you have publicly announced? And then also, I'm sorry if I missed this earlier, but of the guidance increase for the full year embedded within that, what is the expectation for COVID?

Yeah. So in terms of what we haven't announced, I mean, there are reasons that we haven't announced these, so we won't go into any particular detail on these programs, including some of the more spotlighted programs that are vaccine-related and so on. There's a fair amount of public information on those. And I'll just remind you, when we look at the business, we have a strategic you know, point of view that, particularly when you look at our biologics business and the number of development programs we're working with our customers across a number of different modalities, gene therapy, cell therapy, monoclonal antibody, et cetera. to need to deploy capacity to add the scale necessary for these programs as they get late phase and require more volume and potentially commercially accrued and require more as well. So we are accelerating capacity builds across the business that are initially necessary for COVID-19 programs in some instances. But long-term, this is capacity we would anticipate adding and that are perfectly in our strategic viewpoint as well. So this is why we say this is allowing us to accelerate our strategic plans in terms of adding capacity to meet those needs, whether they're COVID programs we've announced, haven't announced, or non-COVID-related programs, essentially across our biologic segment in particular.

And within the guidance, was there an amount that this represented in terms of the raise? Yes.

In terms of the COVID impact in terms of the rates?

Correct. Yep.

Yeah. So our guidance, we've increased, if you take just for any other point, just the midpoint of our guidance range, we've increased it by about seven points. But we've increased the COVID-19 net contribution by about five points. So hopefully that gives you some level of clarity there.

Yeah. Thank you.

There are no further questions. I turn the call back over to John Tuniski for closing remarks.

Thanks, Operator, and thanks everyone for your questions and for taking time to join our call. I'd like to close by highlighting a few key points we covered today. First, our strong results in the second quarter, including 17% organic net revenue growth and 22% organic adjusted EBITDA growth, combined with our increased forecast for the back half of the year, have led us to raise our fiscal 2021 net revenue growth expectations by approximately six percentage points and our adjusted EBITDA growth expectations by approximately seven percentage points. Next, we've been accelerating our strategic CapEx plans in our biologics business in order to help meet near-term demand for both COVID and non-COVID products. As a result of some of these actions, we're now producing COVID-19 vaccines and treatments They're being used at this moment to help fight the pandemic. Importantly, COVID-19 has been an accelerator for our long-term strategic plans and will position us for continued long-term sustainable growth. The biologic segment continued to report exceptional growth in the second quarter with organic net revenue growth of 65% and organic segment EBITDA growth of more than 100%. The biologic segment constituted 44% of our overall net revenue in quarter compared to 31% a year ago and is the key driver for cattle and to meet its 2024 revenue target of $4.5 billion, which we believe can be met without any large new acquisition. 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 COVID-19 therapy or vaccine or the 7,000 other products we produce every year. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you, everyone, for joining. You may now disconnect.