Catalent, Inc.

Welcome everyone to the first quarter fiscal year 2022 earnings conference call. My name is Victoria and I will be coordinating your call today. If you would like to ask a question during the presentation, you may choose to have a pressing star followed by one of your telephone keypads. I'll hand over to your host, Paul Souders, Vice President of Investor Relations from Catalonia to begin. Paul, please go ahead.

Good morning, everyone, and thank you for joining us today to review Catalan's first quarter 2022 financial results. Joining me on the call today are John Cheminski, Chair and Chief Executive Officer, and Tom Castellano, Senior Vice President and Chief Financial Officer. Please see our agenda for today's call on slide two of our supplemental presentation, which is available on our Investor Relations website at investor.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 on forward-looking statements. Slides four and five discuss Catalan's use of non-GAAP financial 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 that will be filed with the SEC today 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 Chemisky whose remarks will cover slides six and seven of the presentation. John Chemisky Thanks, Paul, and welcome to the call. Catalan began fiscal 2022 with a strong start. Our first quarter financial results were driven by both our ongoing work in support of global efforts to address the pandemic, as well as our other critical work with our customers in delivering products that help people live better, healthier lives. In addition, we simultaneously continue to execute on our long-term growth strategy through organic investments and strategic acquisitions. Before I detail our specific achievements during the quarter, let me highlight our first quarter results. Our net revenue for the first quarter was just over $1 billion, increasing 21% as reported or 20% in constant currency compared to the first quarter of fiscal 2021. When excluding acquisitions and investors, organic growth was 23% measured in constant currency. Our adjusted EBITDA of $252 million for the first quarter increased 44% on both an as-reported and constant currency basis compared to the first quarter of fiscal 2021. When excluding acquisitions and divestitures, organic growth was 52% measured in constant currency. Our adjusted net income for the first quarter was $128 million, or 71 cents per diluted share, up from 43 cents per diluted share in the corresponding prior year period. The biologic segment, driven by continued high demand from COVID-19 projects, was again the top contributor to Catalan's financial performance. The segment experienced organic net revenue growth of 44%, with segment EBITDA growing 56% from the first quarter of last year. Our software and oil technology segment resumed net revenue growth following the pandemic-related headwinds it experienced over the last year. Increased year-over-year demand for both prescription and consumer health products drove a 9% increase in net revenue within this segment during the first quarter of fiscal 22, compared to the first quarter of fiscal 21, which is highly encouraging. With net revenue up over last year, yet still down compared to the first quarter of 2020, this segment is still experiencing effects from the pandemic. However, we're seeing signs that these issues are transitory, and we're looking forward to continued improvement over time. Moving on now to our oral and specialty delivery segment, where we also saw a return to organic net revenue growth after facing headwinds in fiscal 2021. As with soft-tail and oral technologies, there are improving market dynamics across our oral and specialty delivery segment, most notably this quarter in our early phase development offerings. Finally, our clinical supply services segment posted modest net revenue growth this quarter compared to the first quarter of fiscal 21, with profitability negatively impacted by the cost of opening our new full-service facilities in San Diego, California and Shiga, Japan. Both investments are poised to meet growing customer demand and are expected to be long-term growth drivers for this segment. On our last earnings call, we announced our agreement to acquire Baterra, a leading developer and manufacturer of consumer preferred gummies, salt chews, and lozenges for nutraceutical, functional, and botanical extract products for $1 billion. Following the completion of a successful debt raise, including additional term loans, whose proceeds we used in part to fund the acquisition, we closed the Viterra acquisition on October 1st, making Catalan one of the leading independent suppliers in a high-growth, capacity-constrained portion of the nutraceutical and nutritional supplement market. This acquisition enables Catalan, and specifically our soft-shell and oral technology segment, to expand our existing substantial consumer health platform by adding the fast-growing consumer preferred dose format for nutritional supplements. This expansion also meets the evolving needs of our consumer health customers who have consistently asked Catalan for new additions to our product library, including gummies and other engaging formats for the nutritional supplement and nutraceutical product concepts. As highlighted on our last call, acquiring Viterra enables us to increase our expectations for the long-term organic revenue growth rate in our software and oil technology segment from 3% to 5% to 6% to 8%. This range is driven by the strength of our current advanced offerings and product libraries and is enhanced by the 20% plus growth contribution we expect from Viterra over the next several years. This attractive growth rate from Viterra is accompanied by core EBITDA margins accreted to the segment. Combined, these factors lead us to expect the acquisition to be accreted to adjusted net income per share in the first year after close and significantly accreted thereafter. Our workstreams integrating Viterra and supporting and accelerating its existing growth plans and the transition of approximately 500 experienced employees are now in full flight. As we integrate these new capabilities and its robust library of ready-to-market products, we're further solidifying Catalan's place as a partner of choice for consumer health companies across the globe. As we've already experienced significant customer interest in engaging in these new capabilities, we are considering accelerating our organic investment plans for these new and exciting offerings. Next, I'll provide updates on a few organic investments in our biologic segments that have progressed since our last call. First, with respect to our biotherapeutics offerings, we previously detailed many of our upgrades that are going campus in Bloomington, Indiana. These upgrades have served as the key growth driver for Catalan, and it played a critical role in the global effort to bring the pandemic to an end, allowing us to quickly scale high speed billing lines on behalf of our COVID-19 vaccine customers. Just recently, we completed the addition of a new high-speed syringe filling line at the site, a project that we first announced in January 2019. This line is an additional source of growth for our biologic segment, and like all of our existing syringe filling lines, can be leveraged for a wide range of biologic products, including COVID-19 vaccines. Given the strong demand for biotherapeutic manufacturing, we'll continue to invest in additional drug product and drug substance capacity at a Bloomington campus. Similarly, we continue to make organic investments at our 300,000 square foot facility in Anani, Italy, which we originally purchased in January of 2020. When we acquired the site, it already benefited from years of steady investments that now support our biologics capabilities, as well as other assets and capabilities for oral solid dose forms, including high-capacity blister packaging and bottle cartoning solutions. Since the acquisition, we've made significant investments in Ananyi to meet growing customer demand for biologics capacity. In 2020, we took action to meet the needs of multiple vaccine innovators, including several enhancements to existing capacity to improve productivity and output. In February of this year, we began the rapid build out of an additional high speed biofilling line, which has been qualified and will soon begin manufacturing. In addition to drug profit investments, we announced a $100 million expansion project at our 90 facility over the summer. The expansion will allow us to add biologics drug substance manufacturing capability at the site, establishing our first drug substance capacity outside of the U.S. to support the growing European market demand for biologics manufacturer and supply. Ultimately, the expansion will house multiple single-use bioreactors totaling 16,000 liters of total flexible manufacturing capacity, with the initial 4,000 liters expected to be completed in late fiscal 2023. The growth in investment at our 90-site demonstrate how the COVID-19 pandemic has not only accelerated our strategic plans, but has also accelerated the return on investments we've made, enabling us to put additional cash to work to drive continued long-term growth. We also recently announced additional investments at our gene therapy campus in Harmons, Maryland, near the BWI airport. Early this calendar year, we completed construction in one building on campus, which now contains 10 multi-room, commercial-scale manufacturing suites. Given the high demand for manufacture of the growing number of gene therapy compounds and other products addressing new modes of treatment in the industry's development pipeline, we're increasing the number of manufacturing suites planned for the adjacent building from the five suites we initially announced to add three more commercial-scale advanced biologics manufacturing suites. This latest expansion will also include the construction of new storage capabilities for just-in-time inventory space, ultra-low temperature freezers to support a larger set of compounds, and an expansion of overall infrastructure. When completed at the end of calendar 2022, the campus will house a total of 18 CGMP manufacturing suites, each designed to accommodate multiple bioreactors up to 2,000 liter scale and enable the execution of commercial manufacturing from cell bank to purified drug substance. Given the growing scope of investment made to support the campus, the total size of this project to be spent over a multi-year period starting last year is now expected to be $360 million, up from the $130 million initially projected. This increase in investment was already factored into our initial fiscal 2022 CapEx plans discussed on our last earnings call. Finally, through the acquisition of RhineCell in August, we expanded our cell therapy offerings to include proprietary iPSC GMP cell lines and technology to boost our current development and manufacturing capabilities to bring iPSC-based cell therapies to scale. We are receiving a good number of customer inquiries with this exciting new offering, and integration is tracking to our expectations. I'd now like to turn the call over to Tom, who will review our financial results for the first quarter and our fiscal 22 guidance, which we're raising to reflect the closing of the Patera acquisition, as well as our increased organic growth forecast for the remainder of the year.

Thanks, John. I'll begin this morning with a discussion on segment performance, where commentary around segment growth will be in constant currency. I will start on slide eight with the biologic segment. To highlight the company's transformation over the last two years, you will see that the segment represented 53% of our net revenue in Q1 of this fiscal year compared to 44% in Q1 of fiscal 2021 and 28% in Q1 of fiscal 2020. Biologics net revenue in Q1 of $546 million increased 44% compared to the first quarter of 2021, with segment EBITDA increasing 55% over the same period. This robust net revenue growth is organic and is driven by high demand for drug product and drug substance offerings in the U.S. and Europe, most notably for COVID-19-related programs, which continue to contribute to both development and commercial organic revenue growth. The segment to EBITDA margin increased significantly year-over-year to 30.3% compared to 28.2% in Q1 of the prior year, which is primarily attributable to increased capacity utilization and higher manufacturing volumes. We expect the biologic segment growth rate to decelerate as the year progresses because we will begin to compare against the higher levels of demand from the back half of our last fiscal year. Please turn to slide nine. which presents results from our soft-gel and oil technology segment. Soft-gel and oil technology's net revenue of $243 million increased 9% compared to the first quarter of 2021, with segment EBITDA increasing 9% over the same period. The increase was driven by growth in both prescription products and consumer health products, mainly in cloth, cold, and over-the-counter pandemic products. It is encouraging to see the start of a strong return for commercial demand, which despite growing 9% year over year, is still below the segment's pre-pandemic level in the comparable first quarter of 2020. Development revenue continued to perform robustly as it has throughout the pandemic period and is a strong indicator for long-term growth in the segment. Segment EBITDA grew 9% and EBITDA margin was in line with the first quarter of the prior year. Slide 10 shows the results of the oral and specialty delivery segment. Net revenue growth in the segment was again impacted by a challenging comparison against the prior year, where we had recorded revenue associated with a single product in our respiratory platform that was voluntarily recalled in September of 2020. However, EBITDA had a favorable comparison due to the $12 million of recall-related costs incurred in the first quarter of 2021. As the recalled product did not generate revenue after it was voluntarily recalled, this will be the last quarter for which it will impact the net revenue comparison in the segment. Those favorable segment EBITDA comparison will likely continue as recall costs extended throughout fiscal 2021. With that background, Segment recorded net revenue of $146 million in the quarter, which was down 10% compared to the first quarter of fiscal 2021. Segment EBITDA was $33 million, a 48% increase over the first quarter of 2021. When factoring out the net impact from the Presenter Chair of our global field business and the acquisition of recorded spray drying assets, organic net revenue grew 3% and Segment EBITDA more than doubled. The top line growth is primarily driven by elevated demand for early phase development programs. You may recall that a year ago, we called out lower demand for early phase development programs as a result of pandemic related lockdowns. So this bounce back is another good indicator of a return of pre-pandemic activity. As shown on slide 11, our clinical supply services segment posted net revenue of $96 million, representing 2% growth over Q1 prior year. This was driven by strong global demand in manufacturing and packaging services, partially offset by a decline in demand for storage and distribution services in Europe. North America saw an increase in storage and distribution demand in the quarter. During the quarter, we opened two new full-service clinical supply facilities, one in San Diego and the other in Shiga, Japan. Costs related to these openings had an adverse impact on segment EBITDA and the segment EBITDA margin. As of September 30th, 2021, backlog for the segment was $515 million compared to $501 million at the end of last quarter and up 20% from September 30th, 2020. The segment recorded net new business wins of $109 million during the first quarter, a 10% increase compared to the first quarter of the prior year. The segment's trailing 12 months, book-to-bill ratio is 1.3 times. Moving to our consolidated adjusted EBITDA on slide 12, our first quarter adjusted EBITDA increased 44% to $252 million, or 24.6% of net revenue compared to 20.6% of net revenue in the first quarter of fiscal 2021. On a constant currency basis, our first quarter adjusted EBITDA increased 44% compared to the first quarter of fiscal 21, while organic EBITDA growth was higher at 52%. As shown on slide 13, first quarter adjusted net income was $128 million, or 71 cents per diluted share, compared to adjusted net income of $78 million, or 43 cents per diluted share in the first quarter a year ago. Slide 14 shows our debt, related ratios, and our capital allocation priorities. At the end of September, the company raised $1.1 billion in gross proceeds through occurrence of an incremental term loan and issuance of new senior notes at an attractive overall average rate of approximately 3%. We used most of the net proceeds to fund the Matera acquisition, which was completed on October 1st. This capital raise drove our cash, cash equivalents, and marketable securities balance at September 30th, just before the closing, to be in excess of $2 billion compared to $957 million at June 30th. Our net leverage was 2.1 times at September 30th compared to 2.2 at June 30th. However, our reported cash balance and corresponding leverage ratios is artificially favorable due to the timing of the closing of the Terra acquisition. When adjusting for this, our pro forma cash, cash equivalents, and marketable securities balance as of September 30th would have been approximately $1 billion, and our pro forma net leverage ratio would have been 3.0 times, which aligns with our long-term leverage target. From here, we will naturally lever, providing us with significant flexibility to continue to pursue organic and inorganic growth opportunities. Moving on to capital expenditures, we continue to expect CapEx to be approximately 15% to 16% of our 2022 net revenue expectations, driven primarily by growth investments in our biologic segments, including the investments that John detailed earlier. Now we turn to our fiscal outlook for fiscal 2022 as outlined on slide 15, which has been updated to reflect the October 1st acquisition of the Terra. as well as an increase in organic growth we are now forecasting in about half of the year. We now expect full year net revenue in the range of $4.62 to $4.82 billion, representing growth of 16 to 21% versus our previous estimate, $4.3 to $4.5 billion. We now project that net revenue growth from M&A will be two to three percentage points driven by the acquisition of the Terra. Recall that our original guidance for M&A activity reflected a negative one to two percentage point impact as a divestiture of the Glowfield Steel business more than offset the expected upside from the multiple smaller acquisitions we completed in fiscal 2021. We continue to project organic net revenue growth in each of our segments to be within or above the long-term growth range we have previously disclosed for each segment. For full-year adjusted EBITDA, we expect a range of $1.225 to $1.295 billion, representing growth of 20% to 27% over fiscal 2021, compared to our previous estimate of $1.13 to $1.20 billion. We expect full year adjusted net income of $630 to $695 million, representing growth of 15% to 27% over the last year, compared to our previous estimate of $585 to $650 million. We continue to expect our fully diluted share count on a weighted average basis for fiscal 2022 to be in the range of 181 to 183 million shares. This projection counts our series A convertible preferred shares as if all were converted to common shares in accordance with their terms. Finally, we also continue to expect our consolidated effective tax rate to be between 23% and 25% for fiscal 2022. Operator, this concludes our prepared remarks, and we would now like to open the call for questions.

Thank you very much. So as a reminder, if you'd like to ask a question, please press star five by one on your telephone keypad. If you do change your mind, please press star followed by two to withdraw your question. Also, please ensure that when preparing a question, your telephone is unmuted locally. Our first question comes from Tyjo Peterson from JP Morgan. Tyjo, please go ahead.

So my first one is pretty significant raise here after an inline first quarter. You know, if we take out the $150 million of Baterra this year, that still leaves around $170 million of organic upside to the prior top line guide. So just wanted to get your thoughts on the organic piece. You know, is this a raise a function of seasonality within the business, or are there other factors such as vaccine boosters, you know, that's driving this, you know, the raise? Yeah, sure. I'll take this one. You know, we did mention that the terror acquisition, in addition to the first quarter beat that we saw, along with continued strength from an organic perspective in the back half of the year, I would say, you know, as we look across the business unit, certainly our biologics continues to be performing extremely well, given tailwinds related to COVID-19. vaccines that we mentioned we expect to see as multi-duration revenue streams for us. But we've also seen, I would say, positive recovery as we highlighted in the prepared remarks around OSD and our SOT segments as well, particularly around the consumer health side of the businesses, which were certainly challenged in fiscal 21 as a result of the global pandemic. So as we look across the portfolio, I would really say we continue to see strength across all four of our segments, especially the three that I highlighted here, that are all contributing to the guidance raised on an organic basis. Gotcha. And then my last question would be, you know, can you just elaborate on the demand environment for the organic soft gel business? I think it was mentioned that some of the headwinds, sorry, that you guys have seen are starting to abate, you know, but we're still at pre-pandemic levels here. So can you just, or below pre-pandemic levels, so can you just sort of elaborate on the demand environment there? Thanks. Sure. Yeah, no, we continue to be very pleased with what we're seeing out of the SOT segment. This is the second consecutive quarter where we've seen a return to organic growth. We saw organic growth of 9% in the first quarter, which is nicely above the long-term outlook of that segment. And I would say that demand profile remains positive, as I mentioned. That was certainly one of the factors that we took into consideration when raising the guidance for the second half of the year. The fact that we're still below where we were in 2020, I think, you know, provides us even more confidence that there's still growth to come here on the horizon. And we're certainly, you know, as I said, seeing strength across this business on the consumer high as the recovery continues. So expecting a strong back half of the year from this business.

Operator, next question, please.

Yes, thank you very much for your question. And our next question comes from Jacob Johnson from Stevens. Jacob, your line is open.

Hey, thanks. Good morning, everybody. Maybe first a bigger picture question for John. In his recent book, Scott Gottlieb talked about CDMOs having incremental excess manufacturing capacity.

uh to support vaccine and therapeutic manufacturing in case you know another pandemic presents itself is this something that would make sense for catalan would you be interested in it and maybe what would it take for you to participate in something like that well let me just say one of the major drivers behind the cdmo industry is having the right capacity and the right capability it's a significant driver for for the business And when we came into the pandemic, we were in the enviable position of having built out our strategic plans and we're putting in place significant capacity for our biologic visits, both on the drug substance side and the drug product side. What I can tell you without responding directly to the question with regards to vaccines and Scott Gottlieb's book, I will just tell you that we're constantly looking at the market, we're constantly looking at what our customers' needs are, And as a management team working closely with our board, we're looking out in the future to understand what strategic investments that we need to make so that we will have the capacity necessary for our customers and their pipelines. And obviously demonstrated itself in how Catalan was able to play a significant role in the manufacture of vaccines for multiple customers.

Got it. Thanks for that, John. And then maybe on the note, non-COVID side, you know, a lot of focus on BWI, Anangi, and Bloomington. So maybe I'll ask one just on Madison. Can you just update us on your efforts there? And then can you remind us, are you supporting any commercial therapies out of that location yet?

Yeah. So a key strategic priority for us is to bring in a commercial therapy uh product into our madison site as you know we've completed out both our fourth and fifth trains at the site we have a very robust pipeline there. We were hopeful that one of the products that we actually had there for a COVID therapy would actually get emergency use authorization. That has not happened yet, but we're very confident over the next 12 to 18 months we should be able to secure a commercial product there. We have very good business there, but as you know, when you're only Working in the clinical space, the work there can be somewhat lumpy depending on the clinical trial. So really the desire for us to have a commercial product at the site is just to make sure that we have that stable base load, if you will, and we're confident that we'll be able to get it soon.

Got it. Thanks for taking the questions.

Thank you very much, Jacob, for your question. And our next question is from David Windley from Jefferies. David, please go ahead.

Hi, good morning. Thanks for taking my question. You called out, John and Tom, you called out in your prepared remarks development acceleration in both SOT and OSD, the development activity seems to be robust and attractive there. And then you also have 20% year-over-year backlog growth in the CSS segment. So all of those seem to point toward a nice future revenue opportunity. I was hoping you could shine maybe a little bit more light on that in terms of cycle time and your guidance. You commented on the guidance that you know, kind of alludes to that, but perhaps you could talk about how that unfolds over the next several quarters?

so uh dave good to hear from you i would just say that you know both of these businesses are businesses where we do significant development work both for sot and osd and that usually is a precursor for uh you know potential products going commercial so we can't call whether it's going to be you know within the next you know quarter or two over the next year but what we're increasingly confident is that we're seeing a return to the the long-term growth rates that we expect out of both of these businesses. As you know, the SOT business was The one business that we had within Catalan that really was affected by the pandemic as it had slower prescription launches and also we had our consumer health business was not seeing demand as people were in lockdowns and not traveling and not purchasing their normal cough cold and other products. And so that is starting to come back combined with, I would say, more activity from a development standpoint than we see both in SOT and OSD. So we're confident that we're going to be able to continue with the long-term growth targets that we have for both of those businesses. And as you know, we're going to take up our long-term growth target for the SOT business from 3% to 5% to 6% to 8% with the acquisition of Batera. So that really does significantly enhance that segment.

That's helpful. Thank you. My follow-up is around your gene therapy business and the BWI facilities. Your CapEx costs for the incremental three suites that you're talking about today is, you know, the simple math would suggest that it's quite a bit more, that each of those are quite a bit more expensive. You mentioned storage and some ultra-low temp freezers and things like that. Is that what drives up the extra cost, or are these suites going to be more specialized in what they can do? I wondered if you could talk about the extra costs for the incremental.

Yeah, sure, Dave. Tom here, I can jump in. I will say, well, first of all, I would say that the new amount, $360 million, is taken into consideration in the outlook we gave related to our CapEx investments in the fiscal year, that 15% to 16%. So no change to that as a result of this, and this will be investment that has already started so had you know contribution in fiscal 21 will continue in fiscal 22 as well as fiscal 23. uh to answer on the increase in cost i would say we've certainly improved the layout of these suites which have substantially increased the cost of it but also have given us more and more flexibility in uh in being able to meet the needs of our customers I'd also say that there are additional investments related to warehouses, to parking garages, and things that we need to be able to make sure we can keep up with the pace of growth and hiring that's going to be needed at the site that's also contemplated in that investment. So those are the types of things that are driving the cost up to that 360 that, as I said, already contemplated in the outlook we've given around CapEx there.

Yeah, and, Dave, just as a follow-on to that, so one side of it is the CapEx investment that you're querying on. The other side is what are the drivers behind it? And what I would tell you is we just continue to see and experience very robust demand for our gene therapy business. If we just take a look at the overall pipeline, there's more than 300 new gene therapy assets that entered into the pipeline. in 2021, and we see that pipeline growing, you know, from about 900 assets to about 2,900 assets if you were to go all the way out to 2027 with the kind of work that we do in understanding the overall pipeline. So we feel really good about these investments, and clearly it's going to make us a leader in the overall gene therapy development and manufacturing area. Appreciate the perspective there. Thank you.

Thank you very much, David, for your question. And our next question comes from from Morgan Stanley. the line is open.

Hey, guys. Good morning. Maybe I'll start with one on Batera for you, Tom. Is about sort of $150 million contribution a fair way to think about it in terms of what's embedded for the three quarters in this fiscal year? And now that Batera is closed, can you give us some color on early customer conversations? John, I believe in your prepared remarks, you mentioned something about a planned acceleration of investments there. Is that – can you just shed some color on that, and is that sort of expected to weigh on margins here a little bit?

Sure. Thanks for the question, Tejas. We haven't split out the increase of the $320 million to the guidance. between what is the Patera contribution and what is the base business. However, I will say directionally, you are in the right place in terms of how you're thinking about this. We were very pleased to be able to get the acquisition closed on October 1st and expected to see a full nine-month contribution here. And as we said, around this business, when we announced the acquisition, Back in August, this is a business that is growing at 20-plus percent organically at EBITDA margins in the near 30% or low 30% range approaching that of our biologics business. So hopefully that's enough color to give you, to be able to help you model the contributions. And just as a reminder, as we report our results for the second quarter, we will be calling out for the Terra acquisition here as part of our SOP segment that will be treated as inorganic.

And Tejas, just as I did with Tyco, I'll provide you a little backdrop to the overall dynamics. We continue to see with the Terra and the overall, you know, gummy soft chew laws in the area that there's a significant demand that is currently outpacing capacity. There just isn't enough capacity out there for the demand that you have. I mean, gummies have grown to a 30 billion dose marketplace here in the U.S. So as we got our hands on the Terra product, One, we've had significant reach-outs from, I would say, very well-known, high-profile customers who are looking to Catalan to really help them continue to build out their franchises or get into the franchise. And so in my prepared remarks, what I'm alluding to is the fact that As we move forward with this integration, we may even accelerate some of the investment plans that we had contemplated during our due diligence period because now that we're into this month or so, we have even more visibility to the customer demand. and needs of that business so this is one where we can very effectively deploy additional capex and quickly gain market share as well as grow the business potentially faster than our original business case so we're extremely excited about this it really enhances and transforms our sot business segment, and we look forward to continuing to do the integration and, as I said, potentially accelerate the investment plans that we had contemplated before the acquisition.

Got it. Very helpful. And, Tom, another quick one for you on the guide. Can you give us a sense to what extent you're baking in any supply chain disruptions or inflationary pressures and wages, as well as a strong flu season here?

Yeah, so all of those items are certainly, I would say, are taken into consideration, take us in the guidance. I would say, you know, we've been very conservative in what we've assumed from a wage inflationary perspective in this guidance. We certainly continue to see material challenges. We've done a very good job, I would say. internally by staying ahead of those and obviously, you know, we're able to pass some of that on where we have the ability to. So everything reflected, as we know today, related to inflationary pressures included in the guidance wouldn't expect any further headwinds to be talked about through the remainder of the year around this based on, you know, the approach we've taken and what we've included. The other thing related to a question around strong sleet season, I would say this is You know, certainly part of maybe a little bit of the strength we're seeing within the consumer health side of the business within SOT, where we talked about a little bit of the recovery around cough, cold, pain medications that we've seen here. But that's really it in terms of the contribution and tailwind that's already, again, contemplated and reflected in the revised guidance with the strength in the second half across the SOT segment.

And T-Hot's just, again, bringing it up to a higher level on the overall supply chain. Certainly, you now have most of the world talking about supply chain issues. I would say Catalan was out in front very early in the pandemic doing the work that we needed to do to secure our materials throughout the pandemic and going forward. I will tell you it continues to be. a relative challenge for us, but we put in place very strong operating mechanisms. We have engagement at the highest levels of management, working with our suppliers to ensure that we get the components that we need. You probably have heard people talk about single-use components specifically on the drug product and drug substance side being a challenge, but again, we have strong-looking relationships with everyone. But when we look at the overall supply challenges, we, along with most CEOs, see the supply chain challenges continuing out through probably the second half of 2022. From a catalog perspective, this also means that we've had to make additional investments from an overall standpoint. inventory standpoint, which obviously impacts our working capital, but they're the right investments, if you will, necessary to ensure that we continue to reliably supply across all fronts from vaccines through the 7,000 other products that we manufacture.

That's great, Kalar. Thanks so much, guys.

Thank you so much. Pleasure for your question. And now we will move on to John Quaker from William. John, your line is open.

Hi, thanks very much. Guys, could you just give us an update on your latest thinking on vaccine production? I know you don't want to get into this specifically, but just curious if you're thinking about this as a business that grows further in the coming year, levels off or declines a bit.

Yep. So, hi, John. I would just say that, you know, as I've said on previous calls, it's increasingly clear that the vaccines are going to be here to stay for quite a while. There's still a large part of the population that needs to be vaccinated. There's the need for boosters. There are now new formats. that are coming out compared to where we were at the beginning of the vaccine distribution. And also we see that there's a potential for the COVID vaccine to be married with an annual flu vaccine. So I would say that from a Catalan perspective, we see this as really a new franchise. for the company. And we think, you know, advanced vaccines in general, with the advent of, you know, two approved mRNA vaccines, so advanced vaccines are going to be, you know, again, an important franchise for the company going forward. So I hope that that clears things up a little bit for you.

It does, thanks. And maybe as a follow-up, if you think about the different sort of buckets within your biologics business, I know you've said demand is quite good across the board. Where are you seeing the greatest sort of lead times as clients bring you new orders, and sort of what are the plans to alleviate that?

yeah well again i'll just go go back to the fact that the strategic planning within catalan i think is literally top four tile if not you know top ten percent in terms of our market landscaping our understanding of what our customer needs are in the capacity that we need to put in place You know, we're guiding to, you know, about 15%, 16% of our CapEx is going to be, 15% to 16% of our revenue is going to be deployed towards CapEx this year. And we're in constant dialogue with our board. Every board meeting has some component of the strategic capacity needs and CapEx that we'll need to follow on. So we're in regular dialogue there. And I would just say Catalan's doing an excellent job, just as we did before the pandemic, having that was coveted, making sure that we continue to have the right capacity for our customers on a go-forward basis. Sounds good. Thank you.

Perfect. Thank you, Jack, for your question. And the next question comes from Meehan from Nefron. Please go ahead. Your line is open.

Thank you. Good morning. Just opening at your thoughts, how did the quarter play out versus your expectations? Obviously, 23% organic growth is nothing to scoff at when you're raising the full year organic growth, but the quarter revenue did come in a little below our forecast in the street. Was there anything that came in a little lighter than expected or any timing dynamics you would call out?

I would just say the quarter was really very closely aligned to our internal expectations. As we look at the first quarter historically and into the future, it has and will continue to be our seasonably lightest quarter from a volume perspective, given many of the months as part of the first quarter are in the middle of those summer months where we see shutdowns at our facilities, shutdowns at the facilities within our facilities. uh customers uh network uh as well i would say you know as we look at the performance here now what we saw from a margin expansion perspective in the first quarter was uh we were very pleased with um you know we were expecting 120 basis points of margin uh expansion at the midpoint of our guidance on a full year basis and we've had the strongest first quarter margin we've ever had uh as a company so I don't think, as I look through things, there was anything that came in necessarily lighter than where we expected, and this was really right down the middle of the fairway in terms of management.

Well, Jack, let me maybe just put a really clear, bold sharpie on this one. This was an extremely strong start to our Fiscal year, and as Tom said, you know, it was really what we had from an overall expectation standpoint. And having been in the seat for 12 years, I would say, again, this was the strongest start to a fiscal year that we've had. So we're very pleased with the results.

Great. And then, you know, just one more follow-up on the COVID contribution. Within guidance, was that portion kind of unchanged within the core guidance raise? And I'm just looking at the development sales within biologics. We're down 20 million sequentially. Was that related to COVID? Any dynamics there you would call out?

Yeah, Jack, we're going to stay away from giving any more specifics around COVID and what the contributions were in the second half of the year. As I said, the strength that we saw in the first quarter, the demand profile we continue to see across both development and commercial programs, drug substance and drug product, as well as viral vector manufacturing within biologics. gave us the confidence and comfort to be able to increase the organic growth rate we expect to see in the second half of the year. And as John said, to be able to start the year in fiscal 22 from a first quarter, a seasonally lightest quarter perspective, the way we have, gave us that much more confidence in being able to increase the full year outlook as part of guidance. In addition, as I mentioned earlier as well, our SOT and OSD segments continue to perform well and that was taken into consideration from a fiscal 22 guidance increase standpoint as well. Got it.

Thank you, Tom.

Perfect. Thank you, Jack, for your question. And now we will move on to Paul Knight from KeyBank Capital Markets to ask his. Paul, please go ahead.

Thank you. John, could you talk about the proportion of business and biologics that fill and finish? Would it not be fair to assume the barriers to entry in that part of the market are probably picking up your need for CapEx?

Yeah, so first of all, I would say that in our biologics business, clearly, for I would say our non-gene therapy business that the drug product is the largest proportion of our overall revenues comparing drug product to drug substance but when you take a look at our gene therapy business in the totality of our drug substance it has a significant amount of drug substance uh drug substance capacity and obviously my prepared remarks we we detailed out the fact that we have 10 suites now there and that we were adding a uh another five suites but we're now moving that up to a total of eight suites so between that and our our uh uh investments that we're making in nani which again i detailed out in my prepared remarks We are now starting to have, I would say, a lot more of our drug substance in the future. I'm sorry, a lot more of our biologics revenues in the future will start coming from that drug substance. But the drug product is the largest part of that overall revenue in the segment. And I would just say again that from a drug product standpoint, getting a filling line up and running is difficult. Usually, best case, a two- to three-year endeavor, depending on whether or not you have room in an existing facility or you need to build out a greenfield facility. Then you need to have an advance order on a line, which can take, again, up to two years, and then you have to go through the installation process. and the overall qualification. So getting out ahead of that drug product capacity is a very big deal. And we do see very strong demand going forward in the future, apart from the vaccines, given the very strong biologics drug product roadmap, which is increasing at very, very strong double-digit rates, the overall pipeline is. So again, it's a constant dialogue, both internally from a market landscaping standpoint, a strategic standpoint, knowing what capacity we have to put in place, And then strong dialogue with our board in terms of supporting the overall CapEx and what I can assure you from an overall growth standpoint that Catalan knows what it needs to do to put on online capacity and ensure that we have the capacity that our customers need for their overall pipelines. And then I'll just remind you that the capacity that we've purposed for the vaccine work clearly is fungible for other biologic drug product filling. So we feel really good about the assets that we've put in place and are going to put in place. And the final comment is that we continue to state that for us, you know, COVID and the vaccine work really accelerated our strategic plans, and it also accelerated the returns on those investments, allowing us to put even more of that cash to work organically and even inorganically. So I hope that answers your question.

Yeah. On you had mentioned earlier, the new formats and vaccine is the COVID vaccine, plural, are they going to single dose formats?

So they're certainly going down to lower dose formats within the vials. They want to take it down from, you know, the higher number of doses to lower number of doses if you have you know uh it becomes more challenging for them to you know basically do the cause and then uh use the the vaccines and the vials in a in a short period of time so they're going down to lower number of doses and then certainly they're also going to uh you know single dose pre-full syringe format so again that's ongoing work by our customers. And clearly, Catalan is looped in there. And I can't really detail out more than that. I would just say that there is continuing change within the format. And as I said, we even hear discussions about a combination of the COVID vaccine with flu vaccine. So there could be an annual COVID vaccine from that standpoint.

Yeah, thanks.

Perfect. Thank you, Paul, for your question. We will now move on to Sean George from RBC Capital Markets. Sean, please go ahead. Your line is open.

Hey, good morning. This is Thomas Keller. I'm for Sean. Thanks for taking the questions. So maybe going back to gene therapy, as you guys continue to build up this new capacity and sort of thinking over the longer term and given the relative complexity involved in the manufacturing, what kind of EBITDA margins do you expect gene therapy to contribute relative to the 30% or so we're seeing across all of biologics today? Basically, how do you expect those margins for gene therapy to look relative to the rest of biologics?

Yeah, Tom, a level of disclosure. It's a little bit below what we've talked about publicly. I will say, you know, our biologics business continues to have the most robust EBITDA margins that we really have across the portfolio in the low to mid-30s with the potential of expanding north of that. We've talked about the company overall being able to drive towards 28% EBITDA margins by fiscal 2024. I'd say we're well on pace for that, and margin expansion opportunity across our biologic segment inclusive of the cell and gene therapy business is certainly going to contribute and be probably one of the main drivers of that margin expansion that we'll see across the company. So hopefully that gives you some direction as you think about the margins of some segment of the biologic business.

Okay, that's all right. And then you all mentioned plans to hire additional technical and operational expertise over the next few years to support some of the investments in gene therapy. What is the typical profile you're looking for? Does everyone need to be kind of a highly sought-after scientist or expert, or are you able to kind of leverage a lot of the existing talent and expertise you already have?

Yeah, so I'll first state that Catalan, over the last couple of years in a row, has hired more than 4,000 people from the outside. So we are constantly recruiting into Catalan. the necessary resources we need to run the business, and we've been very effective at doing that. Also note that we have very high internal referral rates. When we take a look at our last year's external hires of about 4,500 people, we had about a third of those, or 30% of those came from internal referrals for an external candidate. When we specifically look at our business, we really have kind of two sets of people that we need to hire. First are those that are experienced and qualified from an overall biopharma, GMP standpoint. with regards to, I would say, everything from biologists to chemists to microbiologists, folks within our quality organization, which has a very high demand, and then obviously those that are actually doing the innovation and product development, which are at a much higher level. These are at the Ph.D., you know, an advanced degree level, and certainly those that have experience. And we have, obviously, a strong pool of those candidates that are in the U.S. And I would just say that Catalan's overall brand has made us an employer of choice for them. On the other side, we also need to have, I would say, capable operators. These are folks that in some cases do not need to be degreed, but in some cases actually do need to be degreed, depending on the work that they're doing from a gene therapy standpoint. So we actually have them in the suites and operating. And again, these can be degreed and in some cases non-degreed, depending on the overall work. It's a huge operational effort from a talent and acquisition standpoint that I would say Catalan is well positioned for, given the amount of hires that we've had over the last several years and will continue to have into this year. And so far, we've been able to meet those needs, quite frankly, at a lower cost, I'm sure, than many in terms of acquiring that talent.

Jordan, thanks, John. That's all for me.

Perfect. Thank you, Sean, for your question. Our next question comes from George Hill coming from Deutsche Bank. George, please go ahead. Your line is open.

Good morning, guys, and thanks for taking the question. John, just wanted you to think about biologics capacity in M&A. If we look at like the last decade or so, we've seen a lot of would-be biologics manufacturers kind of build out their own capacity. Does a lot of this capacity become fit for purpose if you guys want to buy it? Is it too fragmented and kind of doesn't speed you guys to market from a capacity perspective if you look to kind of buy capacity in place versus build and kind of, I'd love to hear you just kind of talk about the opportunity to buy capacity from field biotech companies.

Well, as you know, ketamine has a very strong overall inorganic or M&E activity. So we're constantly looking and know the assets that are available out there. And generally speaking, on the drug substance side, these can be somewhat fungible assets versus highly specific. These are I would say similar to things that can't be repurposed. From a Catalan perspective, we've discussed the fact that we'd love to find the right answer on drug substance side outside of the U.S., Western Europe. where we don't have a position today. And ultimately, in our 90 facility, we're building that out. I would also say that, obviously, valuations and multiples are extremely high in the marketplace. So we have to weigh out, making sure that we buy. The asset literally has to be somewhat close to perfection, if you will, given the high multiples. And then the alternative is obviously putting our own capital to work from an organic standpoint. And on the drug substance side, that has really been our preferred mode of going after it. I'll also mention that, you know, from a drug substance standpoint, we're really focused on that sub-5,000-liter category where more than a majority of the current biologic pipeline, about 70%, if those molecules get approved, given the, I would say, smaller nature of the disease populations for the indications that they're going after, will require 5,000 liters or less drug substance manufacturing if those products get approved. So that's really the category that we continue to go after. That being said, as we continue to bring on more drug substance and work these trains effectively, we certainly will be able to take on, I would say, even higher volume drug substance. But again, we continue to look for the right assets, but we've been very effective in our strategic and growth plans building out organically on the drug substance side.

That's helpful, John. Thanks.

Great. Thank you, George, for your question. We will now move on to Derek Debrin from Bank of America. Derek, your line is open.

Hi, good morning. Hey, you guys have some pretty tough comps in the second half of fiscal 22. And just sort of philosophically on this one, I mean, well, not philosophically, but I guess, can you just, are you expecting to see positive organic revenue growth in the back half of the year when it's all in, just given the comp situation?

So, Derek, I think you're right. We certainly will see some more challenging comps around the third quarter and the fourth quarter, given the strength we saw in those businesses in the prior year as we started to really see the emergency use authorization volume for COVID-related vaccines start to start to pick up. We did mention specifically in our prepared remarks that we would not expect to see, if we get into the back half of the year, the biologic segment continue to grow at the levels that we saw in the fourth quarter of last year, the first quarter of this year. However, I will say, you know, we do continue to see strength within our SOT and LSD businesses that we expect to carry into the back half of the year from an organic growth perspective. So, you know, the last thing I'll maybe highlight here is a typical year for cattle, and it's 40-60 in terms of revenue contribution this year, maybe fields of A little bit more balance, not quite 50-50, but a little bit more balance there. So hopefully I've given you enough color to maybe solve the equation there. But, you know, I think we'll fall short of letting you know what the revenue expectations and growth is going to be in the back half of the year as we go. you know guide first half second half specifically or quarterly um but but we will certainly see a deceleration of the revenue growth from the levels we've seen here uh in the first quarter the other thing we did highlight though to give you and the street a little more comfort is um the results uh of of raising our fiscal 22 guidance is not only related to the Terra acquisition and the strength we saw in the first quarter, but that we do continue to see a more accelerated organic growth in the back half of the year versus what we thought, you know, 60 days ago when we put out our previous fiscal 22 guidance.

And as you think about the long-term growth rate in biologics, it's at 10% to 15%. If you look into... If you think about the long-term guide is 10 to 15 percent for the biologic segment. If you look at If you think about going into fiscal 23, and once again, it's sort of a comp question again. I mean, would you expect to the 23 levels to be somewhere in that range of that, or is there a potential step down just going to give them the comps? Once again, it's a question on just can you turn this existing COVID capacity that you have now and flip that over to other projects, or do you expect this sort of like the overall category to continue to grow?

Yeah. So, Derek, obviously we're not in a position at this time to be able to comment on more specificity around 0.3 guidance and what that will look like. I'll continue to highlight that we did raise our long-term growth outlook from 6% to 8% to 8% to 10% last quarter as a result of the robust demand situation. that we see across the business. I will say we do have additional capacity that's going to be coming online across the business here in late fiscal 22 and into that fiscal 23 year, which we certainly think will help us continue to see strong performance in fiscal 23. We're going to fall short of giving you more specifics in terms of quantifying that. But again, you know, continue to see COVID demand as having a multi-year duration. We're still in very early stages in terms of worldwide vaccine populations and, you know, what we're seeing from a booster demand perspective as well as you know, younger age populations getting approved for the vaccine, et cetera, you know, continue to give us, you know, confidence that this is going to be around for a multi-year duration, including into the fiscal 23 year.

Great. Thank you very much.

Thank you, Derek. We have no further questions, and I will now pass on to John to find the 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. We're proud of our performance this quarter and of our skilled and dedicated employees who have allowed us to successfully execute our long-term growth plans. In fiscal 2022, we now expect stronger revenue and EBITDA growth than our initial guidance, driven by continued growth in our biologic segment as well as renewed growth in our soft gel and oral technologies and oral and specialty delivery segments. Because of the investments we've made over the past few years, which included high-growth franchises like those we have acquired in our biologic segment, and most recently with the growth expected as a result of the Viterra acquisition, of millions of patients around the world. Building on this, we're on track to deliver over 1 billion doses of COVID-19 vaccines, as well as millions of COVID therapeutic doses by the end of the calendar year, playing an important role in addressing the COVID-19 pandemic. As we continue to support global efforts to address the pandemic and plan for the future, we remain fully confident