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.