Catalent, Inc.

Good day, and thank you for standing by. Welcome to the Catalan Third 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'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Paul Chardez of Investor Relations.

Good morning, everyone, and thank you for joining us today to review Catalan's third quarter 2021 financial results. Joining me on the call today are John Cheminski, Chair and Chief Executive Officer, and Wetney 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 the 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 expectation. We refer you to slide three for more details. Slide four and five discuss Catalan's use of 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 for additional information on the risks and uncertainties that may bear on our operating results, performance, and financial condition, including those related to the COVID-19 pandemic. Now, I would like to turn the call over to John Cheminski, whose remarks will be covered on slides six through eight of the presentation.

John Cheminski Thanks, Paul, and welcome everyone to the call. Over the past year, Catalan has been providing critical support to the healthcare industry during a time of unprecedented challenge. We've employed comprehensive safety guidelines and protocols to keep our employees safe, which have allowed us to continue our operations and increase our capacity to meet patient needs and to produce COVID-19 vaccine doses, as well as other important and critical medicines. We're very proud of the work that our employees have done to provide essential manufacturing capacity and expertise for the more than 7,000 products we produce annually on behalf of our customers. I'm pleased to report that the strong momentum we've built in our fiscal year continued into the third quarter and remains strong as we've entered the fourth quarter. Due to our continued strong results and expected higher net demand for the remainder of the year, we're raising guidance for fiscal year 2021. Whitney will go into more detail on that later in our presentation. In the third quarter, our net revenue was $1.05 billion, representing constant currency organic revenue growth of 35% year over year. Adjusted EBITDA of $274 million represents cost and currency organic growth of 44% over the third quarter of fiscal 2020. Our adjusted net income for the third quarter was $148 million, or 82 cents per diluted share, up from 50 cents per diluted share in the third quarter of fiscal 2020. The biologic segment was again the biggest contributor to Catalan's performance, and its net revenue more than doubled over the third quarter of fiscal 2020, with year-on-year margin expansion of more than 1,200 basis points to 33.1%. Demand for our drug product, drug substance, and viral vector offerings remains high, with elevated levels of work related to COVID-19 vaccines and treatments, which served as the primary growth drivers in the biologic segment. Our soft gel and oil technology segment experienced the same pandemic-related headwinds we called out in prior quarters, though the impact was much less in the third quarter than each of the first two quarters of the fiscal year. As you recall, these headwinds include a decrease in the occurrence of common colds and flu due to limited travel and social gatherings worldwide, as well as muted launches of new prescription products in the last year. We're hopeful that these issues will begin to normalize as more restrictions are lifted over time. For oral and specialty delivery, organic growth was significantly impacted by a product in a respiratory and ophthalmic platform that had a notable strong launch in the third quarter of last year and was later voluntarily recalled in September, causing a significant variance in the segment from the prior year quarter. During the quarter, we completed the two portfolio moves in the OSD segment that we highlighted last quarter. The first was the February acquisition of a best-in-class spray drying facility in the Boston-Cambridge area from Accord of Therapeutics. And the second was the divestiture of our blow-fill seal manufacturing business located in Woodstock, Illinois, which closed on March 31st. Our clinical supply services segment returned to high single-digit growth, despite a tough comparison to the third quarter of last year when we accelerated delivery of products to the clinical trial sites ahead of global lockdowns, creating a boost in related activity and revenue in the third quarter of fiscal 2020. Given the wide range of growth rates among our four business segments due to the pandemic, our M&A activity, and other factors, our business mix looks very different today than it did a year ago. In January of 2020, we first announced our projection for the relative size of the biologic segment, which then comprised a quarter of our revenue. We said then that it would come to represent half of our revenue by 2024. This projection was based on numerous long-term growth drivers for biotherapeutic and cell and gene therapy manufacturing, including faster growth rates in R&D for biologics, higher outsourcing rates, favorable supply-demand dynamics, the shift to more complex modalities such as mRNA, and the fact that the small-cap biotech model relies on CDMOs for development. The effects of the pandemic caused some of these drivers to be even more pronounced in enhancing the growth of our biologic segment while also creating higher demand for the CDMO industry as a whole. We're pleased by the continued shift in our business mix towards the higher growth biologic segment and encouraged by the continued increased volume of commercial activity unrelated to COVID that we're experiencing across all of the biologic segments offerings this year. Now I'd like to provide you with a brief update on our COVID-19 related programs. To meet our commitments to our customers and their patients, a number of Catalan facilities have been operating 24-7 for more than a year. At the same time, we've hired and trained thousands of new employees over the last year to meet the demand for production capacity. I'm proud to say that, despite the complexity and intensity of this unprecedented manufacturing effort, we're confident in our ability to continue to meet our commitments to our vaccine customers. By the end of calendar 2021, we expect to have produced more than 1 billion doses of COVID vaccines. While I won't go into detail on any individual customer program, I'll highlight a few notable recent developments regarding capacity additions that we accelerated in order to meet the increased demand required to help to fight the pandemic and to serve other growing patient needs. Importantly, COVID-19 has not only accelerated our strategic plans, but also accelerated returns on the strategic investments we've made, enabling us to put additional cash to work to continue to drive our long-term growth. In the U.S., our state-of-the-art 950,000-square-foot facility in Bloomington, Indiana, plays a critical role in the country's vaccine production efforts. The site now has two biofilling lines dedicated to the manufacture of products for two of our COVID-19 vaccine customers, including the high-speed biofilling line that we first announced last September. We recently completed this project in record time and have begun the process of ramping up the line. Our 300,000 square foot fill finish facility in Anagni, Italy is also making significant contributions to the global supply of COVID-19 vaccines for multiple customers. We recently announced that we'll accelerate the qualification and scale-up of an additional high-speed trial filling line at the site, which is expected to be operational before the end of this calendar year. Looking back, the $55 million purchase of the Unani site 16 months ago and our subsequent investments have quickly provided a critical component of the solution to the current global public health crisis, while simultaneously creating meaningful value for our shareholders. In addition to accelerating our global fill finish capacity, we recently announced that we completed the addition of two new suites at our Biologic Strug Substance Development and Manufacturing Facility in Madison, bringing the total number of suites at the site to five. The expansion, which we started in January 2019, is beginning to ramp and will provide additional clinical and commercial production capacity at the 2,000 and 4,000 liter batch scale. The site, with its increased capacity, will accommodate increased customer demand for drug substance manufacturing for a variety of projects, including some related to COVID-19. The completion of these projects will help transform Madison from what has historically been a development-based site to a commercial drug substance production site. Moving to our cell and gene therapy offering within the biologic segment, we discussed on previous calls our interest and ability to include plasma DNA technology and production capabilities in our cell and gene therapy service offering. In February, we formally announced our entry into the space via the acquisition of Delphi Genetics, located in Gosselies, Belgium, now part of our Cell Therapy Center of Excellence in Europe. together with the launch of Plasma DNA development and manufacturing services through an organic investment at a Rockville, Maryland facility. These two strategic actions have enabled us to establish Plasma DNA presence in both Europe and the U.S. Additionally, In April, we completed the purchase of further laboratory and clean room space in an adjacent building on the Godfrey's campus to allow for accelerated capacity expansion across our growing cell and gene therapy platform. Plasma DNA is a component in most gene therapy and gene-enabled cell therapy production processes, and the market for plasma DNA is growing rapidly. We estimate the Plasma DNA market size in five years to be well over a billion dollars at the low end. With the horizontal integration of Plasma DNA into our overall cell and gene therapy offerings, choosing Catalan will allow customers to de-risk their supply chain and optimize their programs along the entire development pipeline. viral vector manufacturing capacity continues to be in high demand for the growing number of gene therapy compounds currently in the industry's development pipeline, as well as for viral vector manufacturing for COVID-19 vaccines. With the initial 10 commercial scale manufacturing suites in the first building on our team therapy campus near the BWI airport now available to serve customers, we're focused on building out the adjacent building to include at least five CGMP suites with the ability to add additional suites, a project that remains on track for completion in calendar year 2022. In cell therapy, we're continuing to build out our commercial-scale production and built-finish facility in Gatselies, Belgium, which remains unscheduled to open in fiscal 2022. In addition to increasing our cell and gene therapy capacity, we also announced investments in our global cold storage capacity with over 200 ultra-low temperature freezers added to our cell and gene therapy and clinical supply services facilities in the U.S., U.K., Germany, and Asia Pacific, as well as investments in cryogenic storage in our clinical supply services facility in Philadelphia to support sponsors developing cell and gene therapies. These investments enable the safe handling of cell and gene therapy samples and establish capability to package, label, and distribute cryogenic materials. We implemented these initiatives to rapidly expand our capacity in order to meet growing clinical supply needs as well as future commercial demand. Before turning today's presentation over to Wetni, I'd like to bring your attention to slide eight to highlight our progress in the corporate responsibility area. A year ago, we published our initial corporate responsibility report and will soon release our second report covering our fiscal year 2020. The report will describe how we extended and deepened our corporate responsibility commitments, and we will also share some important achievements from fiscal year 2020. Some of our highlighted progress includes the development of our first human rights statement, Our commitment to new targets for waste and water reduction. The transition of six sites to 100% renewable electricity and completion of 50 energy efficient projects. The improvement of our low industry-leading recordable incident and loss workday injury rates. The doubling of the number of employee resource groups to eight, each sponsored by a member of our executive leadership team, and our largest ever philanthropic contribution total with a substantial portion of our gifts focused on our response to the interconnected COVID-19 and social inequality crises. We've also deepened the relationships we have with potential sources of talent and other HR providers to promote even more aggressive, diverse talent recruitment, engagement, and development initiatives. Finally, we're excited to announce that we will now have the counsel of Mike Barber, GE's chief diversity officer, who became a member of our board of directors last week. Mike joined GE in 1981 and has held a wide range of leadership roles in engineering, operations, and product management, including in his prior roles as president and CEO of GE's molecular imaging and computer demography business and chief engineer and COO of GE Healthcare Systems. I'd now like to turn the call over to Whitney, 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 usual, my commentary around segment growth will be in constant currency. I begin on slide nine with biologics, our largest business segment. Biologic net revenue of $544 million increased 113% compared to the third quarter of 2020, with pet-handed data increasing 238% over the same period. With the Anani and MasterCell acquisitions annualizing, all revenue growth was essentially driven organically, and EBITDA growth was slightly impacted by 1% due to costs from the recent and relatively small Scalable and Delta acquisitions as we began to scale and integrate those businesses. The robust organic growth in our biologic segment in the quarter was again driven by high demand across all segment offerings, including drug products, drug substance, cell and gene therapy, and bioanalytical services. The increase was primarily driven by COVID-19-related projects, which contributed to both development and commercial revenue growth, depending on the terms of the contract. The segment dividend margin increased significantly year-on-year to 33.1% compared to 20.8% in Q3 of last year, which is primarily attributable to increased capacity utilization and higher volumes. We continue to expect strong year-on-year growth for the biologic segment as we conclude fiscal 2021. Please turn to slide 10, which presents results from our Sol-gel and oil technology segment. Sol-gel and oil technology's net revenue of $244 million decreased 2% compared to the third quarter of 2020, with segment EBITDA decreasing 3% over the same period. The decline continues to be 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 also believe that lower prescription volumes are due to slow rollout of newer products during the pandemic, and lower consumer health demand is due to a combination of consumer stocking in the early stages of the pandemic, as well as the effects of limited social gatherings and travel due to pandemic mitigation efforts. I'd like to note that while the 2% revenue decline is, of course, well below our long-term expected growth rate of 3% to 5% in the SOT segment, It is a sequential improvement from the 10% decline last quarter and the 12% decline in the first quarter. Year-on-year growth in SLT's development revenue was again over 25%, which we expect will eventually lead to future new product introduction that will help drive the segment's long-term revenue growth. Lower volumes were the primary drivers to the decline in margin. Slide 11 shows the results of our oil and specialty delivery segment, which were impacted by the previously discussed voluntary recall of our single product in our respiratory and autonomic platform in September. This product had a notably strong launch in Q3 of last year and included a product participation component, creating a difficult comparison between the current quarter and Q3 of fiscal 2020. In addition, we incurred a further $15 million in costs associated with the recall in the quarter, bringing the total recall associated costs to approximately $29 million this fiscal year. With that background, DOD segment recorded net revenue of $172 million in the quarter, which is down 9% compared to the third quarter of fiscal 2020. Segment EBITDA was $31 million, a 49% decline over the third quarter of 2020. The acquisition of a quarter's spray drying facility in February had a negligible contribution to growth, and the sale of the Glowfield Steel business did not impact growth as the sale closed on the last day of the quarter. If one were to back out the revenue from the revolve product in the third quarter of fiscal 2020, the USD segment would have shown low single-digit revenue growth this quarter. The USD segment's third quarter results included continued product performance momentum in our Zytus platform, which grew nicely despite some consumer health pandemic-related headwinds. This growth was partially offset by decreased volume for non-Zytus oil-delivered commercial products. Each quarter, we disclose our long-cycle development revenue in the current year in order to provide additional insight into our long-cycle segments, which include biologics, software and oil technologies, and oil and specialty delivery. In the third quarter of 2021, we recorded development revenue across both small and large molecule products of $481 million, which is 97% of all the development revenue recorded in the third quarter of fiscal 2020. Development revenue, which includes net revenue from certain COVID-19 related products approved for emergency use, represented 46% of our revenue in the third quarter, compared to 32% in the comparable prior year period. The strong growth in the biologics business, including growth on COVID-19 vaccines and therapies approved for emergency use, was the biggest driver of these year-on-year changes. In the third quarter, our development pipeline met through 30 new product introductions, with a total of 92 in the first nine months of fiscal 2021. As shown on slide 12, our clinical supply services segment posted net revenue of $100 million, representing 9% growth year-over-year. This is a notable increase compared against the segment's strong performance in the third quarter of fiscal 2020, when customers were pulling forward Q4 shipments and distributing supplies to clinical sites ahead of lockdowns. Segment EBITDA was $27 million, a 4% increase compared to Q3 of fiscal 2020, and was driven by strong demand in our manufacturing and packaging and storage and distribution offerings in North America, partially offset by an unfavorable sales mix in Europe. Segment EBITDA margin was 27.1%, down slightly over the third quarter of last year. As of March 31st, 2021, backlog for the CSS segment was $490 million compared to $448 million at the end of last quarter, and up 24% from March 31st, 2020. The segment reported net new business wins of $137 million during the third quarter, a 43% increase compared to the third quarter of the prior year. The segment's trailing 12-month book-to-bill ratio is 1.3 times. Moving to company-wide adjusted EBITDA on slide 13, our third quarter adjusted EBITDA increased 48% to $274 million, or 26% of net revenue, compared to 24.4% of net revenue in the third quarter of fiscal 2020. On a constant currency basis, our third quarter adjusted EBITDA increased 44% compared to the third quarter of fiscal 2020. As shown on slide 14, third quarter adjusted net income was $148 million, or $0.82 per diluted share, compared to adjusted net income of $83 million, or $0.50 per diluted share in the third quarter a year ago. Slide 15 shows our debt-related ratios and capital allocation priorities. During the quarter, we took advantage of the favorable lending environment to meaningfully reduce our rated average interest rate below 3%, down roughly 70 basis points from our previous weighted average rates. We also modestly increased our debt by over $160 million at these low rates, while also pushing out our nearest maturity to 2027. The net effect of these changes will create an approximate $10 million reduction in our annual interest rate expense. Despite our additional debt and the purchase of the Accorda facility, along with other smaller acquisitions in the quarter, our net leverage decreased to 2.3 times from 2.6 times at December 31st, while the sale of our Glowfield Seal business and either of those boosted our cash position in the same period. Our cash and cash equivalents balance at March 31st was $988 million. When combined with $75 million of marketable securities, our liquid assets exceeded $1 billion. This comprises $833 million at December 31st and $608 million at March 31st, 2020. 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 our organic growth plan to meet customer demands 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 16. We are raising our previously issued guidance ranges, which remain broader than in recent years due to the increased uncertainty introduced by the pandemic. The new ranges are net revenue in the range of $3.875 billion to $3.95 billion, compared to the previous range of $3.8 billion to $3.95 billion. Adjusted EBITDA in the range of $975 million to $1.105 billion compared to the previous range of $950 million to $1 billion. And adjusted net income in the range of $500 million to $540 million compared to the previous range of $475 million to $525 million. We continue to expect that our fully valued share count on a weighted average basis for the fiscal year will be in the range of 180 million to 182 million shares, and our consolidated effective tax rate will be between 24% and 25% in the fiscal year. There are three important assumptions underlying our revised guidance. 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-off air arrangements. And third, we now attribute approximately 16 to 18 percentage points of the projected net revenue growth to net COVID-19 related revenue, versus our previous estimate of approximately 14 to 16 percentage points. As with our prior estimates, the net COVID-19 revenue 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. on 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 subgeneral technology segment, as well as impacts to some prescription products. Lastly, we continue to project that revenue from acquisitions will represent approximately two percentage points of our revenue growth rate for the year. Operator, this concludes our prepared remarks, and we would now like to open the call for questions.

Operator, we're ready for questions.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for just a moment while we compile the Q&A roster. Again, that's star one. Your first question is from the line of Dan Brennan with UBS. Mr. Brennan, your line is open.

Oh, sorry about that. Hey, guys, congrats on the quarter. Maybe just the first question. Thanks for all the color, obviously. Just I know sometimes it's hard to tease out COVID versus non-COVID, but can you help us think through kind of in the quarter, the really strong biologics growth, how would you characterize the COVID contribution in the quarter versus the base?

And, you know, again, I understand that COVID can crowd out some of the base, so it's not a perfect, you know, calculation. But if you can help us think through that, that would be terrific.

Yeah, Dan, look, as you said, it's certainly not a perfect calculation, and we won't separate the data. As you know, the impact in each segment is different. We certainly have seen a driver, a primary driver for growth within our biologics segment, but clearly with growth of over 113%. in the segment, and I'll get to our guidance here in terms of the range of net COVID impact we expect for the year, which might be helpful in terms of seeing through the non-COVID growth across the year. But within the quarter, we won't break that out. For FOT, certainly it was a negative impact, given the consumer health and some of the muted launch for RX products as well. And then we've seen some impact from the pandemic from some of our consumer-related products, as we alluded to during the prepared commentary, as well as some of our prescription products as well. So we won't break it out on the quarter. As I said, the primary driver was COVID-19, but as you can imagine, with us raising our guidance And having a range of growth from 25% to 28% on the year, the 15 to 18 points of that from COVID-19, this translates to solid growth across the company, as well as obviously for biologics, which is now this quarter was over 50% of our revenues.

Got it. Okay.

And maybe you can help us think through the capacity expansions that you guys You have a number of them that are coming online now, I believe, in the fourth quarter of the fiscal year and as well as we move forward into the next fiscal year.

Is it possible to help us think through, like, the magnitude of these expansions? Have you been capacity-constrained in biologics at all and kind of what these expansions could allow you to do in terms of revenue contribution in that segment?

I'll answer that one, Dan, and just say that, You know, we're not going to give any specifics with regards to our capacity, but I would just really point out two things. Number one is our strategic plans really put us in a pole position as we entered COVID to have really coveted capacity online. And then, obviously, we announced other capacity expansions online. And the best way to think about this is, one, we were put in a very strong position to accelerate our strategic plans with the capacity expansions that we announced. And then I would also say that COVID actually accelerated the returns that we have from these overall capacity expansions, and that the company continues to look aggressively at putting in capacity where we see future demand from overall pipeline as well as the likely continuation of COVID vaccine-related work as it's becoming more and more clear that COVID vaccines for the billions of people around the world will still need to be manufactured along with boosters and the effects of potential variants. So I would just say that Our capacity plans really have put us in a great position and will allow us to really continue our sustained long-term growth. I would just add, you know, clearly across our biologic segment, we have a number of offerings coming from satellite development to drug substance. And then when you go into drug products, we also have... the capability and capacity to fill wild syringes, lyophilized, across a number of different locations as well. And then we have by-line local services And as you heard from all the great commentary, we've seen really solid growth across all of the offerings within our biologics business, and then in syringe and therapy as well, I might add. So I think when you think about capacity, where we're essentially expanding across virtually every one of our operating locations within biologics, you have to think about different formats that we have as well. So, for example, in syringes, where we announced in early 2019 extension of both vials and syringes we have state-of-the-art capacity uh for people syringe across the company uh within our biologics to continue new customer demands in addition to the vial lines that we've publicly announced that we're adding across the network as well to continue to meet our customer demands not only for covert 19 but for non-covered related work as well and then i'm going to speak one more and i know there's a lot of other topics to discuss but Sorry for one more question on COVID here. But, John, I know you mentioned the billion doses by the end of calendar year 21. And you've been pretty clear on past calls, you know, at June 30th. It's not like COVID demand stops. It's going to persist here. Any way to help us think through at this point? what that contribution could look like, you know, kind of going forward into your next fiscal year, because, you know, I think it's an important aspect to just kind of understand, you know, how we should be thinking about, you know, both the COVID and the non-COVID growth as we cycle past the end of June 30th.

Thank you.

Yeah, sure. So certainly we're not going to be providing any guidance with regards to fiscal 22, but I will reemphasize what you've already said, which is we do see the ongoing need for vaccine production actually going into calendar year. Certainly, there's billions of people that need to be vaccinated. There's the specter for booster shots. There's also the need to address the variant. So I would just consider that the capacity that we've built and the partnerships that we have with regards to vaccine production are likely to continue on into the future at some level. Yeah, and I'll just add, Dan, two things. One, we have made certain public announcements with press releases for certain of our programs that have been extended with our customers in terms of contract terms well into calendar 2022. And then the other point I'll make is the strategic relationships with a number of our customers that we're working with have been elevated to a point where We work with them across a broad spectrum of pipeline projects that they have, given the relationships that we previously had, plus what we've done through this global response for this pandemic as well.

Great, guys. Thank you.

Your next question is from the line of Michael Peterson with J.P. Morgan.

Hey, good morning. Just to follow up on that last point, I guess as we think about the guidance here in the near term, obviously you're raising it, but you do have the J&J rollout halted. So I'm just curious how that factored into guidance. Is that upside to the extent that that rollout continues? And then, John, can you talk about to what degree you actually have vaccine arrangements in place for 2022, 2023, or is it still a little bit early on that front?

Michael, I'll take that first part of the question and see what John wants to add here. We certainly won't go into a specific customer contract. We have scores of COVID-19 programs that we've won with our customers in addition to the 7,000 products we supply in the market and the 1,200 development programs that we work with our customers on. throughout the pipeline. Taking all that into consideration, certainly, sitting here today, we factored in the latest information across all of the products and services we work with our customers on to arrive at the guidance. So all of those have been factored in. But we won't specifically discuss the Johnson & Johnson one as a possession.

So with that, I'll turn it to John for any additional comments.

Yeah, I really don't want to provide any additional specifics other than what we've already announced publicly with regards to any relationships that we have with the vaccine manufacturers. But then I'll just again refer to my previous comments. Obviously, we expect that we're going to be entering into a phase where there's going to be some level of continuing vaccine requirement. We work to contract with our customers in the appropriate way, and we'll continue to do that.

Okay. And then on the segment level, for soft gel, you're building momentum here. I think you said last quarter you had two consecutive quarters of over 40% growth and development. How should we think about that segment getting back to growth And then separately for CSS, 43%, you know, net new business wins is pretty meaningful. Can you just provide some call on that?

Yeah, Michael, look, certainly the pandemic-related impacts on the software and technology business have lasted longer than we expected. And as we said in the prepared commentary, the performance in the third quarter was an improvement over the first two quarters. And at the same time, we are continuing to see really strong development activity in the pipeline with our customers across the segment. If you recall, the first two quarters, we were above 40% year-on-year on development. And then in this last quarter, over 25%. And so we're pleased with that. We think long-term, this supports development. our confidence in the business and its ability to deliver between 3% and 5% long-term. But as we go into each year, we'll take a look at the commercial and other development work that we've done with our customers to look at what that translates to on a year, on any given year. With TSS, certainly pleased with the net new business ways as well as the performance in the quarter against really a very robust third quarter last year and took close to 9%. We're very pleased with that. And just as importantly, the backlog as well as the new business wins. A number of folks in the business is also very strong. This is one of our shorter cycle businesses, although given the storage and distribution aspects can last between one and three years, of course, with the clinical program, this is a business that has a shorter cycle compared to our longer cycle businesses from sales to revenue. So that's an indicator that we like in the business as well.

Okay. And then one last one, just on capital deployment and leverage, you know, 2.3 turns leverage is below your long-term target of three turns. Can you just, you know, talk about that in the context of, you know, organic investments and also your appetite and willingness to do additional M&A?

Yeah, so Tyco, I'll just say that certainly we put a priority on our organic investments. And again, I'm very pleased to say that COVID not only accelerated our strategic plans, but really accelerated the returns on the strategic investments that we've made, and we're going to continue to prioritize our organic investments, which obviously means CapEx deployment, and that's clearly detailed out in this call here today. I'll also state that, you know, Catalan continues to be very active from an overall M&A standpoint, and if we can identify assets that will accelerate our strategic plans, both in terms of geography and capacity, that we will continue to do that. Okay, thank you.

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

Hey, thanks. Good morning. Maybe first question, you've added to your cold storage capabilities in CSS that seem to be aligning CSS with your cell and gene therapy capabilities. Can you talk about your broader strategy around these cold chain capabilities, and does this growth in cold chain capabilities maybe geared towards the cell and gene therapy end market add to the growth profile of that segment potentially going forward?

sure thanks for the question jacob i i'd say that you know when we take a look at our css business although it's it's relatively small compared to our other business segments we really see it as a strategic asset that we can lever uh leverage across our other business units and and clearly one of those areas is in the team and so there cell therapy area where access to that cold chain really makes it a significant enabler for our customers in the gene and cell therapy area. So without putting specific numbers on it, I would just agree that the strategic nature of the investments that we're making in CSS in the cold storage area, in aligning it with our other business units, specifically in the cell and gene therapy area. Really, I would say it's a positive synergy for the company. Yeah, I would just add one big comment. Biologics work in general has been a key element here with respect to the need for cold storage and then more specifically cell and gene therapy at ultra-low temperatures given the supply chain handling is an added element here that we're very pleased with where the CSS is positioned to support customers with those needs.

Thanks for that, Wendy. And then maybe, John, another strategic question. We've seen a CRO get into the CDMO industry recently, then Thermo acquire a CRO to add to their CDMO capabilities. I'd just be curious of your view of Catalan maybe moving closer to CRO work and why or why not it would make sense to operate a CRO and CDMO under one roof.

Well, I'll answer the question this way, Jacob. I think, first of all, I think it was a very interesting move with regards to thermo acquiring PPD, and I would just make the comment that it really shows the overall importance of the pharmaceutical services industry for pharma and emerging pharma.

Got it. Thanks for taking the questions.

Your next question is from Alana Maidman with Jefferies.

Hi, thanks. Good morning. Thanks for taking my question. So an overarching question about guidance and particularly long-term guidance.

John, as you covered in your prepared remarks, you've hit some of those metrics now three years ahead of plan.

Do you have an inclination to revisit that long-term guidance anytime soon, just thinking about one more quarter before the end of your fiscal year and what we might expect at the fiscal year end? Yeah, so certainly we're not going to be – we provided long-term guidance, upgrading it only recently, and then we also talked about our $4.5 billion revenue goal, our increased margins, and also the percent of biologics that we'll have as part of the overall business. I'd say we're extremely pleased with the progress that we've made against that overall long-term goal and that we're going to continue to, you know, monitor the performance of the company with regards to our strategic plans and what we see for the future. But there's nothing going to happen with regards to our long-term guidance as of now. Okay. Thanks for that.

And related to earlier, I think Dan's question on capacity expansion, maybe to come at that a slightly different way, um it seems like you know you're you're investing a lot in cell and gene therapy among other places but certainly there and that space we continue to hear is growing 30 plus uh i guess the question is could you devote even more capex um to that space build out more suites faster and capture more businesses like as fast as you are growing that capacity could you grow it faster and gain even more share?

Well, first of all, I would just say that you're right. This is an extremely fast-growing space. Second, in the prepared remarks, we noted the fact that we've completed the 10 suites. We've got an additional five suites with the capability for even additional suites. So this is an area that we continue to work at from an overall strategic standpoint. standpoint to build on that capacity. And clearly, we have our sights on being the leader from a CDMO standpoint from an overall gene and cell therapy space. But we've many times pointed out the imbalance between the overall supply and demand in this specific space. We've talked about the overall outsourcing rate, which is extremely high in the gene therapy area, specifically given the dynamics of potentially curable therapies combined with many small companies not being able to devote the resources necessary. to build the overall infrastructure. And we actually see the outsourcing rate increasing from where it is today. So certainly the aggressive approach that Catalan has taken towards building out capacity in the gene and cell therapy area is going to continue. And again, I'll just refer you to the remarks that we had here with the 10 suites going with an additional five and the capability to do more. So we're going to continue to you know, monitor the expansion of the space, the overall demand. And what Catalan does is we work to put capacity in place ahead of demand and pipeline that we see. Got it. Thanks. The last one for me, Whitney, in your prepared remarks, you made a comment about inclusion of revenue related to COVID in development versus commercial supply, depending on the terms of those contracts. And I think including a comment around EUA approvals being development. So I guess what I wanted to clarify, since I think all the vaccines in the market have yet to be formally approved and are in EUA status, should we think about all your COVID revenue as being included in development services in the biologic segment at this point? Thanks. Yeah, Dave, thanks for that. Look, what we're saying here is that you're quite right. Among the vaccines that have been approved across the US and across Europe, they're all under emergency use authorization. What we're saying is that depending on the terms of the contract, which is the elements in terms of how those get classified, you could have elements in both commercial as well as development. That's what we're saying. Okay. Okay. Thank you.

Your next question is from the line of Sean Dodge with RBC Capital Markets.

Hey, good morning. This is Thomas Keller on for Sean. Thanks for taking the questions. You guys all mentioned the acceleration of multiple capacity expansions to accommodate some of the vaccine-related demand. How did these expansions impact some of the kind of initial take-or-pay arrangements? Are those adjusted? Are those adjusted at the start of fiscal 22, or what happens to those?

Yeah, so I'll take that. Indeed, we have a number of extensions throughout the business, and particularly across the biologics offerings. Those extensions are supported by pipeline products that we have with our customers, demand, both for COVID and non-COVID, acceleration of certain capital that, as we look at our strategic plans, we will be adding anyway. Not all programs have take-a-pay elements associated with them to the extent they do. Those are reflected in the current year guidance that we've given and that we have experienced throughout the year. We won't break those out in any way other than to say it's a combination of timing in terms of pay-to-pays and volumes that we actually produce across the business for our businesses. But I would point out the majority of our contracts across the company. And again, we have 7,000 parts that we supply. for customers in addition to 1,200 development programs, which you can imagine the vast majority of them don't have these take-away type elements associated with them.

Okay, thanks. And then one more. Have you all been able to alleviate some of the projects that are set aside in favor of the vaccine production? You mentioned seeing some relief here with new capacity and fiscal force, but any updates on how widespread that issue is or isn't?

So I would just say that, you know, we've continued to work under a rated order environment with regards to our Bloomington site, I think, which has seen the greatest amount of that work, if you will, which flows down from our overall customers. Certainly here through the first quarter of the calendar year and I would say going into late spring and summer, we continue to manage capacity between, you know, rated orders and non-rated orders for other customers, but expect that to alleviate here in the coming weeks and months.

Okay, great. That's all from me. Thank you.

Your next question is from the line of Ricky Goldwasser with Morgan Stanley.

Hi, this is Roni for Ricky. Just two questions on the biologics business. On the margin side, can you help break down the drivers of the margin expansion in the segment for this quarter? And how should we think about the margin from the vaccine versus the base business? And what needs to happen if we can see the biologics segment margin staying at the mid-30s range per your long-term guidance?

Yeah, I'll take that. Look, I'm very pleased with the margin extension in the business here year over year. I would say the primary driver of margin in the business is going to be the level of volume and throughput across utilization across the network, which you can see that translating to margins in the quarter of 33%. Having said that, with respect to vaccines versus base businesses, as I've said on prior calls, we won't talk about any specific programs, but the work that we do across vaccines are similar in terms of pricing and economics to like-kind work that we do for non-vaccines. And so I think really what you're looking at here is principally an element of the throughput and utilization across the network that's trending into the to the margin that you see, which are aligned with what we expect for the business long-term, albeit not necessarily linear as we have said in the past.

Great. And then following up on the cell and gene therapy, can you talk about the client mix between the small versus large biopharma, and what's the pipeline looking like in the second half, and do you now have more visibility for fiscal 22 and beyond?

Yeah, look, the cell and gene therapy business is a key part of that offering within our biologics segment. We haven't broken that out as it is part of the organic picture. Obviously, we work with a broad spectrum of customers across Catalan, including our biologics offerings and within our students' cell and gene therapy offerings. And so we won't necessarily give a Greek benefit of what the customer profile looks like other than to say that it is across a broad spectrum. But if you look at the pipeline of cell and gene therapy, there's a number of small-cap biotechs that are driving the integration and that we partner with in terms of the work that we do across the business. It won't give a breakdown of what the second half looks like versus any other point in time in the business, other than to say the overall circular trends continue and the pipeline continues to expand if you look across gene therapies, with 600 active assets going to 1,600 by 2020. and then on cell therapy side as well, even more assets in the pipeline expected to grow accordingly. So no specifics in terms of the profile of the customer, and we say it's a fairly broad spectrum that we work with across biologics.

Thank you.

Your next question is from the line of John Krieger with William Blair.

Hi, thanks very much. My question relates to Madison. Have you guys validated the two new trains that you said were completed, and is that facility now in any form of commercial production at this point, or is it still clinical?

Go ahead, Lenny. Yeah, we had just completed the fourth and fifth suite in Madison. As you know, part of the strategic pathway for the business is to become a commercial site. And with this capacity, we are not capable of handling products across the developer pipeline and commercial. But today, all of the activities in the site remain development-based programs. I don't know, John, if you want to add anything to that. Nope.

Great, thanks. And then, John, maybe a broader one. It seems like your biologics business is now kind of, you know, three or four big buckets with cell and gene therapy, mammalian or monoclonal production and sterile fill. Can you help us kind of better understand those drivers? Are they comparable in size? And what's your sort of longer-term view on growth rates across those buckets? Thanks.

Yeah, so first of all, I would just say that we certainly see extremely strong growth rates in biologics, period, in the double-digit growth range. From a just relative size standpoint, I would say our drug product is the more significant of our biologics revenues. with drug substance being a smaller component, but obviously incredibly important. I think we've been very clear that we're focused on the sub-5,000-liter segment, where today we're a relatively small but important player. I would say that we continue to look for good assets, both in the U.S. and Western Europe, with regards to drug products. and drug substance. We certainly created a strong foothold now from a drug product standpoint in the Anani facility that we purchased from BMS, but we certainly have our eyes set on also growing in that sub-5,000-liter area in our existing assets as well as finding the right asset in Europe from an overall drug substance standpoint. Again, focus on that sub-5,000 liter. But all the areas that we've mentioned between our biotherapeutics, our cell and gene therapy, the fact that we've entered into the plasma DNA space, I think we're really building out a very strong overall biologics platform for the company that is now, as we've stated in the prepared remarks, exceeding 50% of the overall company's revenues.

That's helpful. Thank you.

Your next question is from the line of Juan Abadano with Bank of America.

Hi. Hello. Good morning. Thank you for the question. Given the manufacturing setbacks that one of your competitors has faced in a facility that is geographically close to one of the plants that you have around Baltimore, do you foresee perhaps an opportunity to engage with that COVID vaccine developer in discussions to do drug substance work for them, given the geographical proximity and your capabilities on drug substance? Do you see an opportunity to essentially help and gain share of wallet within that customer?

Yeah, again, when I can't answer that very, very specific question, I would just say that, you know, Catalan is in dialogues with many of the vaccine manufacturers to provide support on either a drug product or drug substance standpoint.

Okay, thanks. And then a quick follow up around the potential COVID vaccine booster. opportunity. Have you renewed any take or pay contracts to extend beyond the original timeframe upon the initial grow out of the vaccines? How much, you know, are you segregating and actively allocating capacity around COVID-19 in 22? Go ahead, John.

Yeah, no, I would just say, clearly, from a Catalan standpoint, you know, our goal is to have contracted volumes now and into the future, so we're regularly working with customers. I will also note that, you know, capacity in specifically in the drug product area has been very, very tight throughout the entire pandemic so that it put Catalan in an overall uphold position, if you will. And the final comment I'll make is that we do see, you know, production needs for vaccines beyond calendar year 2021. And certainly, you it's, you know, there's going to be some role to play with regards to booster shots and variants. So there will likely be some level of continued vaccine manufacture.

Okay. Thank you. Appreciate the insights and looking forward to chatting with you at the Bank of America Healthcare Conference next week. Thank you. Thank you.

Your next question is from the line of Jack Meehan with NITRON.

Thank you. Good morning. I was wondering if you, you know, obviously very strong growth across the business, especially in biologics. I was wondering if you could talk a little bit about the supply chain and whether you're seeing any pressure points from any of your suppliers and just how you're managing through that.

Yeah, what I would just say is that from an overall supply chain standpoint, certainly the pandemic has stressed the overall supply chain across the industry. I'm proud to say that Catalan was extremely proactive in the early time of the pandemic. in terms of actually placing demands all the way throughout calendar year 2020, back when the pandemic hit, so that we were able to structure the supply chain and understand what the overall availability is. And then we continued that on an overall rolling basis. To date, we've been able to manage any supply demand. supply chain constraints, but it continues to be something that we monitor and are going after proactively.

Thank you. And then one follow-up on the COVID commentary within guidance. You look at the way that the biologics business has been trending as well as the rate of growth in development services. It looks like the gross contribution from COVID is trending kind of a lot higher than the net that you flagged within guidance. Is there any, you know, would you mind giving some additional color around the gross versus net and what you're assuming there?

Yeah, so, Jack, clearly this is a fairly complex and integrated set of law things that we have, as well as capacity, as we said in the prepared commentary. that we look at across our operating segments with varying impacts from COVID-19. We won't dive into or delve into details on the growth versus the net. Suffice it to say that we've taken into account not only the offsets within some of our businesses where COVID-19 has actually slowed progress with respect to certain newer product launches or consumer health, products and over-the-counter pain medications and so on to arrive at the net COVID-19 range that we're giving. We did increase that. Obviously, as we have previously during the year, I was saying out of the 25% to 28% top-line growth for the company, between 16 and 18 points would be for net COVID-19, and no two points within those two ranges are necessarily correlated, so we can fall anywhere within those other zones. Thank you, Wendy. Sure.

Your next question comes from the line of Evan Stover with Bayard.

Yeah, thank you. So this is obviously an oversimplification, but as I think about how COVID vaccines have rolled out globally, it's kind of led by U.S. and Western Europe. markets as far as uptake. So the question is, I guess, as I roll that forward and kind of think about the rest of the globe really picking up its COVID vaccination efforts, for Catalan, as you think about your site network, where you're making vaccines and also your current commercial arrangements with partners on COVID vaccines, is there any reason to believe that catalent would be more or less equally levered as we kind of see vaccines pick up across the rest of the globe for catalent to kind of maintain its share of what's being produced in the market?

I would just make the comment that, you know, obviously billions of doses are going to be needed to really make a dent in the overall world population from a vaccine standpoint. Catalan certainly has some very important assets from a drug product standpoint that have been used in the fight against COVID. And I would just expect that, you know, we would continue to play with the partners that we have in some way. I would think that. The other thing to consider here, Evan, is beyond initial dosing, as you referenced in the U.S., and then following the U.S. and Europe, the potential for boosters in those markets as the rest of the world receives vaccine is another element to consider in terms of how this might play out now. Ultimately, we don't control the destination of the product we manufacture. We manufacture based on orders and demands from our customers, and they determine where those products end up in the market.

Thank you. Second final question for me. You've got an elevated CapEx outlook for the next two fiscal years. My question requires you to put on a longer-term hat and think beyond that. And obviously, Catalan's business mix has changed markedly in a few years, but your outlook, I think, used to be high single-digit CapEx to percent of revenue. Has your business mix changed to any significant extent where you would now expect that level of ongoing capital investment to be higher to hit your long-term 6% to 8% growth targets? Just wondering if you can give me a longer-term view on CapEx.

Look, as you said, we are at a more elevated level of CapEx as a percentage of our net revenues. Historically, we've operated in the high single digits. We expect long-term to migrate towards that level. To the extent that we remain at these elevated levels for a longer period of time, it's going to be driven by demand from our customers, including the scaling of pipeline that we have as those go from development to commercial. And we'll continue to evaluate those and make sure that the returns in the business spaces are appropriate, as we always do in the business. I wouldn't say that there's necessarily a sort of structural element in the business that has changed that would mandate maintaining a higher level of capital as a percent of our revenues in order to achieve our long-term growth rates. I would say that across the business, depending on which segment and what area that you're looking at, some of the inorganic moves that we've made, for example, also bring capability to the company that necessitates scaling of those businesses, and therefore you see that impact from an organic perspective. So that's really a follow-on to inorganic, if you follow. And some of that dynamic is what you're seeing playing out now, and as we look further out, we'll continue to evaluate the demand from our customers to determine where we deploy capital, all at the same time being mindful of returns.

Very helpful. Thank you.

Your final question comes from the mind of George Hill with Deutsche Bank.

Good morning, guys, and thanks for squeaking me. And I wanted to follow up on Dave Lindley's question talking about the cell and gene therapy market. There don't seem to be a lot of third-party commercial solutions out there. So do you guys have a good sense of your market share and the competitive environment? And I guess, do you feel like it's better? Is this an environment where it makes more sense to acquire kind of tangential players or continue to build your own capacity?

Yeah, I would just say that, first of all, we do see extremely strong demand in the space where demand is going to outstrip supply. We really like adding organic capacity through the assets that we have in the overall Baltimore area. Again, I'll refer you to my prepared remarks with regards to the 10 suites that we brought online, which I believe at the time of the acquisition, we had one suite up and running with a second suite coming online. We've now built that out to 10 suites. We announced an additional five suites with a capacity for more. So we love having, I would say, that concentration of capability, both in terms of people and capacity there. Certainly, if high-quality assets would make themselves available, we would continue to consider those. But we really do like the path that we're on right now. And not only in COVID, but in chemotherapy, we love accelerating returns on organic investments.

Thank you.

That concludes today's Q&A session. I would now like to turn the call back over to John Cheminski for 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 encouraged by our strong results in the third quarter. The 35% organic net revenue growth and 44% organic adjusted EBITDA growth show the success of our strategy and the continued strength of the business enhanced by COVID-19 related demand. We've expanded our biologics business at an unprecedented pace in order to help meet demand for both COVID and non-COVID products. We're proud that the acceleration of our capacity build-out has played a key role in the fight against the COVID pandemic, and we will continue to aggressively build capacity that will also position us for sustainable long-term growth. The biologic segment continued to report exceptional growth in the third quarter, including more than doubling its revenue. The segment comprised more than half of our overall net revenue in the quarter compared to roughly one-third a year ago and continues to be the key growth driver for Catalan as we increase capacity and invest in innovation. Finally, we couldn't be prouder of our thousands of dedicated employees across the globe who demonstrated our patient-first culture, placing patients at the center of everything that we do. The importance of their tireless efforts to develop and supply products that help people live better and healthier lives is now more evident than ever before. We're grateful for their commitment to ensure the safe and reliable supply of the more than 7,000 products that we're responsible for delivering each year. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference call. We thank you for your participation and ask that you now disconnect.