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.