Catalent, Inc.

Ladies and gentlemen, good morning, my name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Catalan incorporated third quarter 2023 business update conference call today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session, if you would like to ask a question during that time simply press the star key, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. Thank you, and I will now turn the conference over to Paul Serdez, Vice President of Investor Relations. You may begin.

Good morning, everyone, and thank you for joining us today. Instead of our normal review of Catalan's third quarter 2023 financial results, Alessandro Maselli, Catalan's President and Chief Executive Officer, will provide you with a status update, and then Ricky Hopson, Senior Vice President and Interim Chief Financial Officer will discuss our capital position and our revised outlook for fiscal 23. Mr. Maselli will provide some final remarks and then we will take your questions. During our call today, management will make forward-looking statements and refer to non-GAAP financial measures. It is possible that future results could differ from management's expectations. Please refer to slide two of the supplemental presentation available on our investor relations website at investor.catalan.com for a discussion of risks and uncertainties that could cause actual performance or results to differ from what is suggested by those forward-looking statements, and slides three and four for a discussion of Catalan's use of non-GAAP financial measures. Now I will turn the call over to Alessandro, whose opening remarks will begin with slide five of the presentation. Please go ahead.

Thank you, Paul, and thank you to everyone who has joined the call today. I'll cut to the chase. This is not at all the call we expect it to have now. And we are not at all where we expect it to be.

Our financial performance and operational execution have all fallen significantly short of our expectations and our February forecast. and we accept responsibility for disappointing you. We should also not be taking as this long to finalize our financial reports, even though we and our third-party advisors have been using this time to engage in a deep and thorough review of our accounts and our financial reporting processes. Because that work is ongoing, There are few specific details I can provide today regarding our financial performance, but I will share what news I can, give you a sense of how we got to where we are, and explain our path forward. As we indicated in our April 14 and May 8 business updates, a combination of operational and productivity issues as well as forecasting challenges have led us to significantly reduce both our fiscal 23 net revenue and adjusted EBITDA guidance. We are now reducing our fiscal 23 net revenue guidance to a range from $4.25 to $4.35 billion. And we are reducing our adjusted EBITDA guidance to a range from $725 to $775 million. It is important to note that these ranges reflect that a significant gene therapy product began to be treated in the third quarter as a commercial product for accounting purposes. And while our evaluation remains ongoing, we anticipate continuing to record revenue for this product entirely on a percentage of completion basis. I understand how disappointing our further revised guidance is for all of you. I share your disappointment. Catalent has established itself as a global leader in drug manufacturing and delivery, and produced exceptional results to investors and patients over the last past several years. But as your CEO, I'm responsible not only for the successes, but also for our good performance this quarter and this year. I am committed to putting CAVALET back on track to assure a stronger fiscal 2024 and that we return to building long-term shareholder values. To that end, on this call I will explain to you the operational challenges and other issues that contributed to our expected Q3 results and revised guidance. This will include walking you through The reasons why we believe that the operational challenges behind this quarter's disappointing performance and revised outlook are temporary and addressable. I'll then outline the actions we have taken to increase the rigor and discipline in our forecasting. I'll also briefly discuss the factors, including our accounting adjustments at Bloomington, that are expected to lead to the filing of an amended 10-K for fiscal 22, and that delayed the filing of our third quarter fiscal 23. Thank you. Finally, and most importantly, I remind you of our positive long-term vision. a vision that, while fully reflective of our short-term challenges, continues to look to Catalan's long-term opportunities, performance, and growth with confidence and optimism. Catalan remains a great company, and we are committed to remaining our customers' number one CDMO partner in helping pharmaceutical, biotech, and health innovators develop, deliver, and supply products that improve people's lives. Before I do that, let me reassure you regarding some concerns we have heard from investors over the last few weeks. The disappointing third quarter results we expect to report were not due to any GMP compliance issues or the loss of any customer or canceled order. Our customer supply situation remains healthy and we believe we can sufficiently service their demands. we continue to be an essential part of innovative truck manufacturing and delivery solutions that positively impact patients. We continue to win significant new business. Recent notable examples of this include the new expansion of our long-term supply agreements with both Novo Nordisk and Samsung BioEpsys. With that, Let's review the operational challenges that materially and diversely impacted EBITDA in the third quarter and our full year guidance. As we first communicated on April 14th, during the third quarter we began to identify productivity challenges and higher than expected costs at our drug product manufacturing facilities located in Bloomington and Brussels. These issues draw our EBITDA reduction in our revised guidance to be greater than our revenue reduction due to the following dynamics. First, even where revenues were delayed or missed, the majority of the labor and overhead costs remained. Second, our plans to reduce our cost base were delayed. in order to implement corrective and preventive actions following the regulatory inspections earlier in the fiscal year in our biologic segment. Finally, balance sheet adjustment and inventory reserves for soon-to-expire biomanufacturing components and raw materials procured during the height of the pandemic are having a large and abnormal one-time impact on our profitability. Our chain therapy manufacturing operations in Maryland also faced unforeseen challenges as we scaled up commercial volumes requiring a new ERP system and successfully completed three regulatory inspections. Stepping back, I believe a root cause of these challenges and increased costs are two different COVID cliffs we experienced. A revenue cliff and an unprecedented operational cliff. Allow me to explain. In the last year, when we have spoken of the COVID cliff, we usually meant the significant decline in revenue as the world emerged from the worst of the pandemic, which occurred much faster than expected or forecasted. For Catherent, that is expected to translate into slightly more than 50% decline in our fiscal 23 COVID-related revenues compared to fiscal 22. when COVID-related revenue was approximately $1.3 billion, with the well over half of these being tied to take-or-pay or related component sourcing agreements. While we expect some combination of COVID and other mRNA respiratory vaccines to remain a meaningful part of our revenue stream in the years to come, we don't have enough information at this point to forecast the expected full year impact in fiscal 24, although we are planning for a significant year-on-year reduction. But this significant drop in COVID-related revenues doesn't tell the whole story. As you know, our people did an extraordinary job expanding our operations to meet the demands placed on us by the global pandemic response. Between meeting the unprecedented COVID vaccine demand and implementing growth initiatives to capitalize on the strong longer-term growth potential in biologics, we expanded very quickly since the end of fiscal 19, including by adding approximately 7,000 more workers, roughly doubling our workforce, and investing over $3.5 billion across our network, some of which was intended to help offset the revenue gap that would inevitably emerge once the COVID crisis faded. We know now that we entered fiscal 23 overly optimistic about our current year growth. Our personal and key processes simply did not keep pace with the dramatic up and down swing caused by COVID. And not only have some of the anticipated revenue offsets not materialized as quick as expected, but it has proven much more complicated to exit the pandemic operationally at these impacted sites. Most importantly, we have not been able to reduce the cost that we added to the company, including personal, material and inventory, as rapidly as needed. This is the operational COVID cliff I mentioned. driven by the extraordinary unprecedented complexity involved in implementing the operational changes required to execute the COVID programs and then be able to produce the non-COVID programs that would offset those revenues and fuel our future growth. I believe we have made solid progress in replacing those revenues with the new sources that will ultimately produce sustainable long-term growth. However, it is now clear that we underestimated the related operational challenges, and that forecasting suffered as a result. Now that we fully recognize the depth of the challenges, we are addressing them in a rapid, focused manner. Let me transition to forecasting. Whenever actual results vary materially from our expectations and projections, Our underlying assumptions prove substantially inaccurate. It is time to reassess our forecasting rigor and discipline. This includes moderating our short-term optimism by more thoroughly assessing and integrating the negative impact of the recent macro events that event and continue to have a material impact on our business. This includes the significant contraction in biotech funding, which is especially impactful for newer modalities. At the same time, we are rebuilding the foundations of our demand planning process in our biologic segment. We have also conducted a root cause analysis of our forecasting to improve our understanding of the internal operational drivers that led us to such inaccuracies. In Bloomington and Brussels, we are more effectively awaiting the temporary impact of productivity challenges and higher-than-expected costs, including those associated with the regulatory remediation that generated adverse manufacturing variances. In Bloomington, we expected some large product tech transfers to help offset the lower COVID demand at the site. Those tech transfers turned out to be more complex and are taking longer than anticipated. resulting in overly ambitious forecasts. Most of these hurdles have now been overcome, and we expect these transfers to complete in the second half of this calendar year. On the positive side, some of these tech transfer customers are now adding an onion to Bloomington for their fill-and-finish work. Gene therapy has been our brightest post this year. including rapid growth in the first half of the year as we scaled the business. But we experienced significant unforeseen operational challenges in the business in the third quarter. These challenges have continued into the beginning of the fourth quarter as we increased the capacity to serve growing demand. As we first communicated on April 14th, One of the key issues here involved replacing BWI's prior ERP system, which was better suited for smaller clinical and development operations. While the implementation of the new ERP was critical to support the fundamentally bigger commercial operations at BWI, the challenges we experienced in the implementation delayed the ramp-up of this additional capacity until early May. These challenges were temporary and will not affect any customer, as we have previously built sufficient bright stock to support their immediate needs, and we are now producing in normal fashion. Our focus in our pharma and consumer health segment has also been too optimistic. This is a segment where we expected strong growth as we started the year. modified our expectations to much more modest growth in November and February and now tracking to flat organic revenue growth for the full year. The main headwinds here are more pronounced declines in some existing commercial high-value pharmaceutical products, delayed launches of some promising new prescription products, and lower consumer demand, particularly for gummies and other high-end nutritional supplements. We are confident that the segment will return to organic growth in the coming quarters, given the growth we see in our core development revenue, the expected rebound of a top product for the segment that experienced supply chain challenges in fiscal 23, the continuing strong demand that we see for ARTS IDIS platform, and the expected launches of 10 products recently approved by the FDA. To recap, We have reviewed the procedure with which we execute our processes to determine how macro events impacted our ability to meet our forecasts after delivering three years of exemplary performance. We are bringing back more rigor and skepticism that has known and previously unforeseen macro and internal operations drivers. At the same time, we now recognize the need to reflect better the increased level of complexity involved in this new phase of our business. While it is difficult to assign precise figures to the impact of these operational and forecasting challenges, we attribute about the same magnitude of those two items in our overall net revenue and EBITDA guidance adjustments. Concurrently, and in conjunction with the changes in our finance leadership, we have conducted an independent third-party balance sheet review at the two largest sites in our biologic segment. Bloomington and BWI. Most importantly, this balance sheet review reaffirmed its overall soundness, including our contract asset balances. In all, we expect to record a few accounting adjustments at Bloomington. One example, we expect to increase our inventory reserve by roughly $55 million related to certain raw materials and components to assure the safety stock to minimize pandemic-related supply chain shortages. We also expected to correct a $26 million recognition error related to the fourth quarter of fiscal 22. Separately, given our lower growth expectations for our consumer health business, We also expect to report a goodwill impairment in that business in excess of $200 million. Properly assessing and addressing the effect of these adjustments on our previously issued financial statements, including those in our most recent 10-K and our 10-Qs for the current fiscal year. as well as their effects on our internal control over financial reporting and disclosure control and procedures are contributing to our delay in finalizing our third quarter thank you. When our assessment is complete, we will fully explain to our investors these prior period changes and their effects, including their effects on our internal controls. We very much appreciate the patience of our shareholders as we work to resolve these issues in a timely fashion. Moving on to a review of our manufacturing operations, we have taken several corrective actions at BWI and Bloomington, including both management and operational changes, to address the root causes of the issues identified at each site. The operational challenge changes include more rigorous demand planning, deployment of additional Six Sigma Black Belt resources to recover previously experienced productivity levels, and a holistic cost review to adapt the future organizational structure to the new outlook on our demand. We expect these actions to bring us back progressively to typical profitability levels at these locations. We have also made a number of important leadership changes. We announced on April 14th that we appointed Ricky Opson to serve as our Interim Chief Financial Officer. Ricky is an experienced finance executive, an operational finance expert who deeply understands Catalan and can successfully lead our financial function through this interim period as we search for a permanent CFO. We also made other changes in the finance organization in the last month, including changing the finance directors at the sites with the greatest challenges. On the operations side, we made several executive leadership changes in our biologics segment. As just one example, we are pleased that Ricardo Zayas, a proven biologics operations leader with vast industry experience, who joined Avalanche in January, will now lead our operations worldwide across the biologics segment. In addition, in early March, we announced that Sridhar Krishnan, a 20-year industry expert in Lean Six Sigma, had returned to Catalan to recognize the Catalan Way. The Catalan Way is a company-wide system of continuous improvement and lean manufacturing with clear standards to enable more predictable and efficient processes. When I speak about rigor, it also means effectively managing costs. and cash to ensure we drive the company's expected profitability. We have developed another cost reduction plan intended to drive margins more aligned to our historical levels, with a goal to double our previous committed $75 to $85 million of analyzed run rate savings from restructuring activities. In addition, we are limiting our capex to only essential investments. We are also actively evaluating our current portfolio to ensure we have a suite of business that achieves sustainable, profitable, and capital-efficient growth that delivers superior shareholder values. I want to reiterate my disappointment in having to deliver this news. My team and I accept responsibility for falling short of your expectations and ours. We nonetheless remain committed to Catalan's long-term vision. The secular trends in our overall business and operating environment remain fundamentally strong. We operate in generally excellent markets, with industry-leading services and capabilities to meet customer needs. We are proud of our regulatory record, including this year, where in the last six months we underwent nine successful FDA inspections, only a few of which included observations, and all of those can be readily addressed. Among these successful inspections were two PAI inspections at our gene therapy sites in support of a significant product. We also see strong current and future demand for our broad platform of services. And while lower biotech funding has impacted some near-term demand for some of our offerings in the newer modalities further away from commercialization, Those assets that are closer to commercial approval or those that have already been approved, which is well over half of our revenue when combined, have continued their ordering process as expected. We have also invested hundreds of millions of dollars in assets that are getting ready to be deployed, as dictated by the market demand. This includes the additional new suites in BWI, that are now expected to be completed in fiscal 24. Two state-of-the-art sterile syringe line, one in Ananya and one in Bloomington, and an high capacity expansion of our Zyrus offering. We estimate that when we reach a planned level of utilization of this large footprint, we will be able to generate $6.5 billion in annual revenue without the need for substantial new growth capital investments. We will let you know as soon as we are ready to announce our full quarterly results and provide any necessary further details regarding revision to our prior financial statements. I will now turn the call over to Ricky for a discussion of our capital position and expected fiscal 23 results. Thank you, Alessandro.

Turning first to our capital position and our debt load, as discussed on slide six. which we now intend to reduce more aggressively, remains well structured and permits good flexibility. Our nearest maturity is not until 2027. Our most rigorous debt covenant is the ratio of first lien debt over the last 12 months of adjusted EBITDA at 6.5 times. This ratio at December 31st, 2022 was roughly 1.6 times. and is expected to increase for the next several quarters before diminishing again in the back half of fiscal 24. This covenant ratio is expected to remain well below the permitted level throughout this period. Our top priorities for positive cash generation and allocation of capital, which will support our efforts back towards our net leverage target of 3.0 times, include greater utilization of our asset base, completion of essential in-flight CAPEX projects that we believe will generate positive returns in the short term, activities that will reduce our cost base, and contract negotiations to reduce our cash conversion cycle. We expect to report that our contract assets as of March 31st, 2023, to be roughly flat with that of December 31st, 2022 balance. I understand the level of contract assets has been a top investor concern, so in one of my first actions as interim CFO, I initiated an independent review of the balance sheet, including contract assets at two of our largest sites in our biologic segment, Bloomington and BWI. The review reaffirmed the overall soundness of our balance sheet, including our biologics contract asset balances. some of which are related to nearly completed products, including the bright stock Alessandro mentioned earlier. Also related to contract assets, the revenue accounting treatment for complex products with long production cycles will continue to be recognized on a percentage of completion basis when contract terminology determines our work related to commercial activity. Note, In the third quarter, there was a change in contract terms to a large gene therapy program that drove a change in characterization from development to commercial activity. So the percentage of completion method we have been using all along will not change. We are looking at other contract terms that may partially modify our accounting for this product. This is one reason for the delay in finalizing our third quarter results. Finally, we now expect our fiscal 23 capex to be approximately $550 million versus our previous estimate of approximately $500 million. When taking into account the billions of dollars of capital investments we have already made in the business, in fiscal 2024, we expect to be able to reduce our capex to only the most critical projects, leading to a notably lower spend. Now we turn to our revised financial outlook for fiscal 2023 as outlined on slide 7. We now expect fiscal 2023 net revenue in a range of $4.25 billion up to $4.35 billion. We now expect adjusted EBITDA in a range from $725 million up to $775 million. We now expect adjusted net income in a range from $187 million up to $228 million. One driver of this change is that we now expect an increased tax rate of 27 to 29% for the four year compared to our previous expectation in the 24 to 25% range. This increase is a result of the lower outlook for earnings before taxes and certain tax detriment items unaffected by reduced pre-tax income. The rate is also affected by changes in our anticipated four-year geographic mix versus prior forecasts as a larger portion of our earnings or losses are projected to arise in jurisdictions that do not provide an immediate benefit for such losses and related deductions, resulting in a rate detriment. We continue to expect our share cap to be in the range of 181 to 183 million shares. Now I will provide some color on the temporary nature of the challenges impacting our margin in the second half of fiscal 23. First, in BWI, as we initially shared on April 14, we continue to expect to recover in the first half of fiscal 24 the revenue we failed to achieve this year due to our operational challenges related to the recent ERP implementation. Second, also as noted in the April 14 financement, The lost productivity in our drug product business, particularly in Bloomington and Brussels, was very significant, but we now expect those sites to ramp up towards previously forecasted productivity levels in the next few months as we execute on our backlog, including multiple tech transfer programs. We have started another enterprise-wide restructuring program with a goal to double our previous commitment of $75 to $85 million annualized cost savings. This includes costs eliminated through the completion of remediation activities in both Bloomington and Brussels. We expected the annualized impact of these activities to be roughly $100 million. Let me

Let me reiterate again my personal regrets regarding this update. However, I would like to close our prepared remarks by reaffirming three key strengths underlying Catalan's future. First, all our issues are temporary and fixes to our operations and leadership are already underway. Second, we have learned many lessons. that will increase our discipline and rigor going forward. Third, we have a strong pipeline aligned with our high-quality asset base, matching the most exciting trends in our end markets, capable of delivering up to $6.5 billion in revenue with substantially lower future capital investments. Finally, over the last several months, we have continued to see a strong support from our customers, as illustrated by some of the expanded partnerships mentioned earlier in our prior calls. As a result, Catalan will continue to play a critical role in delivering some of the most consequential therapies being developed and needing commercialization. This is a reset moment for Catalan, but what is unchanged is how important Catalan is to the delivery of global healthcare, not just for vaccines, but also for the 8,000 other products we make. Patients around the world need Catalan, and we are not going to let them down. Operator, this concludes our prepared remarks. We would like now to open the call for questions.

Thank you. And at this time, I would like to remind everyone, in order to ask a question, press star and then the number 1 on your telephone keypad. we will pause for just a moment to compile the Q&A roster. And we will take our first question from Tejas Savant with Morgan Stanley. Your line is open.

Hey, guys. Good morning, and thanks for the time here. Alessandro, Ricky, maybe just to kick things off, you know, you trimmed the revenue guide by about $450 million, the EBITDA by about $510 at the midpoint. Can you just provide some of the quantitative, the bridge essentially there in terms of, you know, perhaps the Moderna take-or-pay contract or the quality remediation cost overruns or any sort of rev rec issues related to Sarepta's drug?

Hey, Teja, this is Ricky. I'll take that question. It's a fair question. So, look, the way that we think about this dynamic of the EBITDA decline being more than the revenue decline is into a couple of categories. So first and foremost, delayed and missed revenues predominantly drop through to the bottom line. The cost of the labor remains, the cost of the overhead remains. The only cost that is really eliminated is the material. So it's a high margin drop through on those aforementioned revenues that were delayed and missed to a future period. Our forecast was overly optimistic. We had an aggressive timing of new business coming in, high margin business coming in. And our plans to reduce our cost base were delayed by the necessary corrective actions that we were taking to address the regulatory actions. And with the balance sheet adjustments that we mentioned in our prepared remarks, the inventory reserves no impact on revenue of course but impact in EBITDA so you know with the combination of those factors you get to the dynamic where the EBITDA reduction is more than that of the revenue reduction so hopefully that provides some color for you

Got it. That's helpful. And one quick follow-up on the debt covenant piece, Ricky. So is it fair to assume from your prepared remarks there that you feel very confident that you won't trip up that six and a half times debt covenant? And one for you, Alessandro, big picture. I know you talked about the new sort of expansions of the contracts with Biolapis and Novo here. You've also obviously, you know, one work with Moderna, with J&J and Sarepta and the new contract as well. But there is a fair question to be had here in terms of customers worrying about management being distracted as you look to fix all of these issues across the portfolio. How are those conversations going? And give us a flavor for how you're sort of assuring those customers that, you know, Catalan will be there for them, you know, despite all of the other noise.

Tejas, I'll just address the first point of your question, which was around the debt component, and the answer to that is yes, we feel very confident.

Hey, Tejas, hi. Alessandro here. Thanks for the question, a very good one. Overall, as I said in my remarks, the customers remain very, very supportive of the covering story. Our supply situation remains very healthy. Clearly, when we enter some periods in which we are preparing for some change, we have a number of contingency plans. for those changes and so we are prepared to face potential challenges without the risk of impacting our customers. So I personally spend a significant amount of my time speaking with those customers, providing them the color of those challenges Some of them have been very, very close to what happened during the pandemic. I'm not surprised or shocked by what is happening in terms of how difficult sometimes is to turn some of these operations from a period of high growth back to normal world. So I would characterize those conversations as very supportive, very understanding, and the proof is the expanded relationship that we continue to sign.

Got it. Thanks, guys. Appreciate the time.

And we will take our next question from Jacob Johnson with Stevens. Your line is open.

Hey, thanks. Good morning. I know it's probably too early to comment on FY24, but obviously it's a focus for investors and you guys talked a little bit about the outlook for leverage in the deck. But as we think about the 725 plus million of EBITDA in FY23, the comments you made about leverage peaking in FY24, the middle of the year, And then also the potential for significant approval. There's a few puts and takes here. So can you just talk about what the key swing factors are of whether or not FY24 EBITDA could be higher or lower next year? Like is this a trough number in FY23?

Yeah, sure. Look, thanks for the question. Look, I believe that we, it's clearly early to speak about the fiscal 24. in May, but I understand the nature and the relevance of the question you're asking. Look, when you look at some of the prepared remarks we have provided today, we have tried to give some color around the temporary nature of the cost challenges. When I look at your whole picture, and notwithstanding the fact that we entered into this fiscal year with more ambitious expectations for our top-line growth, but our non-COVID revenues this year, even with the current device guidance, will still be in the mid-single-digit growth, given that the overall situation of the market is somewhat aligned. I believe that we don't have necessarily a demand problem here. We have a cost. problem related also to execution challenges uh we have provided uh enough uh believe i believe enough color to pass out what of these costs are temporary in nature and how to think about them going forward into the next fiscal year and so being able to to cut them out from the current outlook okay that's helpful thanks alessandra and then maybe

A bigger picture question. I appreciate the 6.5 billion kind of revenue potential at Catalan. And you just talked about some of the kind of near-term cost dynamics, and I think guidance implies depressed EBITDA margin in the back half of this year. But as we think about the long-term, you know, I think once upon a time, you guys were targeting 30% EBITDA margins. But say you get to 6.5 billion of revenue, what do you think is a reasonable EBITDA margin profile on that level of revenue?

So look, I believe that the answer is pretty much connecting the dots all you mentioned there. So what we are sharing is that we already have an asset base that has the potential of 6.5 billion dollars, which means that in many ways our operating leverage at the moment is pretty low. So there is a lot of potential by driving higher level utilization into the assets that we have created and we have built. Clearly, when we made decisions of these investments, the biotech funding environment was different than it is today. Some of the environments we were living in were a little bit different, but we believe that those trends, when you look more in the long term, are still valid. So that operating leverage that we were expecting, we continue to expect that to come back. And so we do see a significant potential of expanding our margin going forward and surely getting more aligned to the flight plan that we were discussing only a few months ago.

Okay, got it. Thanks for taking the questions.

And we will take our next question from Julia Quinn with JP Morgan. Your line is open.

Hi, good morning. Thanks for taking a question here. So first of all, regarding your ongoing customer conversations, Alessandra, I heard you reiterate these customer relationships remaining relatively stable here. But just curious, have there been any changes in terms of pricing or contracting terms as you work to kind of stabilize or maintain these customer relationships? And are those any potential changes reflected in your updated guidance?

So, look, clearly the pricing environment is a very difficult answer to give, the pricing environment, given that the diverse portfolio that we are running, and surely in the last year, has been a key point of negotiation with customers in terms of When you live in such a high inflationary environment, you need to give the customers some prices to offset the inflationary costs. environment. In general, I would say that there has been no substantial change to our contract terms. The reality is as we look into the future and across the different modalities, the pricing power that we have continues to be very different. In general, I believe that in the segments where we were seeing an healthy level of demand, we have mentioned multiple times the pre-field syringes and in general fill and finish premium services, we continue to see some healthy level of pricing there. So I would say that in general I don't see the environment changing dramatically from a pricing standpoint.

Got it. Very helpful. And then regarding the organizational changes that you mentioned earlier, Could you give us more color on the extent of any additional personnel departure and whether or not they're in functions that could further impact your production capacity? And if you could give us a sense of where your current production capacity is compared to normal levels, and how quickly do you think you can refill those positions and get back to normal productivity?

Yeah, sure, sure. So first part of the question, look, I probably, you know, it's faster for you to consult our website, which shows some of the, you know, the changes that happen at least at the executive level, but clearly there were several of those. All I can tell you is that in these periods where The job is to regain the past performances. It's very helpful to be able to tap in known leaders that have been with the companies already, have been in these positions already, and can be redeployed to restyle what was there before. So I was very pleased to have the opportunity to have those leaders available to make the changes in a very fast fashion. going for solutions that would define known entities with a proven track record. So I'm very confident that the changes we've done, together with the addition of Riccardo Zayas and Sridhar, which I mentioned in my remarks, we have now the team that is needed to really correct the course and establish the performance of the company. I would also mention that I have a lot of trust in Ricky. He knows the operational finance of the company like nobody else and our segments and markets very well. So he's going to be very helpful in this interim period in rebuilding some of the forecasting processes that especially in the newer parts of our business are not as strong as they are in our legacy assets. With regards to your question around productivity levels, the work, as I said, is already underway. We are addressing these with the speed and pace. The way I would characterize this, it will take a lot of work and some time, but we are already making progress, and I can already see, notwithstanding that we're not in the position to give necessarily quarterly phasing, but I can share that I already think Q4 progress is the best for Q3.

Got it. That's helpful. And then last one from me. You mentioned opportunities for portfolio adjustment in your prepared remarks. Are there any preliminary thoughts you can share with us at this point? And will you be pursuing those portfolio strategy efforts simultaneously as you all work on the other issues? That's all from me. Thank you.

So the first part of the answer is that this is not surprising. I've already signaled that I do believe that at any point in time we need to conduct assessment to our portfolio to understand what are the right assets for government and if at any point in time we are the right owner for other assets. I do believe that as we have built the company in the last few years and right now to more than 50 sites, we have some significant opportunities probably in getting for some of the assets, thinking about better ownership, given the phase those assets are in. So it's an ongoing evaluation that we do continuously. Clearly, I cannot deny that the current, you know, updates we had on the outlook surely have accelerated some of those evaluations. So we are The simple answer to the second part of your question is that yes, we are doing these as we also look at improving the productivity levels at our more critical sites.

We will take our next question from Dave Lindley with Jefferies. Your line is open.

Hi. Thanks. A couple. I heard Ricky talk about $100 million annualized number that I think was targeted at costs and the additional restructuring. So my first question is, how much of the original 75 to 85 has already been harvested and is reflected in the new EBITDA guidance that you're giving today? versus how much of what I guess would now be like $160 million target would still be targeted to take out beyond that guidance, above and beyond that guidance?

Yeah, that's a good question, Dave. So I would say when we announced and made the cost reduction changes in November 2022, we remain on track to deliver approximately half of that in the second half of our fiscal. The second cost reduction exercise that we're embarking on now, we would expect to see the majority of that come through in our fiscal 2024.

Okay, helpful. Thank you. And then secondly, a little broader question. Kind of in invoking the contract asset review, appreciate the comments there and the guidance and the magnitude of change. So correct me if I'm wrong, but it seems like in your saying that you've reviewed contract assets and it seems like you're particularly pointing at Baltimore and Bloomington, the big sites, that that would say that revenue recognition related to percentage of completion accounting through the December balance sheet date you're saying you're comfortable with. That certainly gives some assurance around previous REVREC. It does then say that the $510 million of EBITDA that you're taking out is essentially all second half EBITDA, that this is all kind of from a chronological standpoint fiscal second half of the year impact. Is there anything about that that I should think about differently as I think about the run rate that is implied by the second half EBITDA X these cuts?

You're thinking about that correctly. But when you think about the second half, also consider what we alluded to in terms of the one-time costs that impacted the second half run rate. The full 500 is related to the second half. It's not related to the first half, but as I said, a number of one-time non-recurring items in that second half.

Okay. Understood. And then I guess bigger picture question about the $6.5 billion, the productivity, expectations. I guess what in this review, I understand some of this is still in flight. I guess, Alessandro, what I'm really interested in is what gives you the confidence, given that last answer, what gives you the confidence that you can get up to or back to target margin slash productivity levels in light of, you know, some factors that, you know, if we exclude the one-time items, factors that make the margin in the second half look, you know, really, really bad. Help me understand your confidence in the long-term productivity.

Yeah, sure, sure. So, look, we need to go to the root causes to get to the confidence, right? When you look at the root causes, and this is primarily related to my commentary around the operational COVID grief. So you're talking about doubling the workforce over all the scattering, but this was very much concentrated in very few locations, okay? So that was, of course, you know, needed and necessary for the mission we were on. But unwinding these costs and these headcounts in the middle of... implementing, you know, remediation actions for CAPAs related to foreign fees is not the easiest of the task. And I'm not searching for excuses here. I'm just saying that it's highly, highly complex, and surely we have underestimated that complexity. We surely had the plans to realign the cost structures to the reality of the product mix and the portfolio, but we had to make some decisions and trade off in delaying those. We don't implement EFP systems every day, and we don't do them to the extent we do it every day. This was necessary to be done, and we were mindful that we had to do it early enough before a potential approval to have time to recover if something was not going quite as expected. So there were decisions being made. There are things that are very, very special to this fiscal year, many firsts and many first-timers. As I said, we learned a lot. but I also recognize that some of those elements will reverse as we go into the next few quarters. As I said, I already see the recent performance better than the most performance. The other element that you need to think of, we have built a significant number of assets in the new modalities which have a very low level of absorption and utilization at this point in time. Now, as I said before, our expectation and focus was to fill those assets primarily in the self-therapy space much faster than what really happened, and that's a combination of many items. Some are environmentally related. I believe some are self-reflection that we need to do on our go-to-market strategy. But the overall appeal of those areas remains. So as we, and to be honest with you, all these assets are at the moment heavily margin dilutive to the organization. And the latest element, looking at the portfolio considerations, is also a consideration around what are the assets that are at the moment non-strategic and dilutive, and these are the assets also that we need to look at. So I hope I gave you all the elements, Dave, to get the same level of confidence I have that the fundamental pricing of the business remains the same, the fundamental demand profile remains the same, the fundamental technologies we use are the same,

so all when you consider all took this together we will get back the matching that where where what needs to be that's very helpful I appreciate I want to ask one last quick one and that is on the contract asset Ricky coming back to that can you understand that's across I believe that's applied to your development stage work and could you comment then on like an aging of that from an ar standpoint so i know you can't bill for it yet but like how long are how long dated are some of those contract assets how far back do they date thank you uh yeah dave look um it's something that we obviously we look at uh we assess

But at this stage, it's not something that concerns me in terms of the aging profile of those contract asset balances. If there is any ink in there greater than one year, it would be deemed on the balance sheet a long-term contract asset. But just to clarify one point, the contract asset is not just for development, as I've mentioned in the prepared remarks, the large gene therapy program, which is now being treated as a contract asset as well from a development standpoint.

So maybe I will add some other information which we have already shared, so this is like repeating what has already been made known. Clearly, as we got into these new modalities, Dave, we didn't realize how long the production process might be, also due to some of the intermediate testing that is required. So there are several steps of the process, but between steps, there are very long testing times in which you essentially cannot progress the process until such testing is completed. And that time is measured in quarters, so it's not measured in months. So, of course, we know much better now what the process ended up to be on some of these new modalities, and we are actively discussing also with our customers around how we can look at this from a contractual standpoint to avoid us having too much working capital tight with these assets as we go forward in the future. So it's very much not lost on us that it is creating an inefficiency from a working capital standpoint and we need to find ways to address it. But that is a big contributor to this contract asset and it's a big contributor also of the aging of it because you have several quarters worth of production at any point in time that is waiting to be finalized with the last steps of the process by design.

Understood.

Dave, just to make the point also, the balance sheet review that we conducted did confirm the overall sadness of our contract assets, which included the agent profile of those balances.

Understood. Very much appreciate the answers. Thank you.

We will take our next question from Paul Knight with KeyBank. Your line is open.

Hi, thanks for taking the time. So in effect, are you going to have to reprice in the future cell therapy projects? Do you think that was, and also the method by which you're doing the percentage of completion recognition, does that have to be adjusted, both how you price it and the method of the recognition?

So let's put the, if I understand well your question was around the pricing of cell therapies, or maybe, I would say, look, probably you're asking both cell and gene therapy, so I'm gonna give you a little more broader answer. I don't believe that on gene therapy there is any pricing significant changes into the future. I do believe that on cell therapies we are still finding the right process to produce these therapies in an efficient way. It's not lost on the industry that we need to make sure that these therapies are made available to a wider group of patients because they have a significant impact. We are really working with our customers and some of our key partners from a component standpoint to try to find the solutions to have more efficient processes that doesn't necessarily mean then only the price, but also the cost of those processes to be addressed. So yes, I believe that in cell therapies over the next few years that you're going to see changes in those regards, but I believe it's a good thing because they will allow more patients to access these therapies, and as a result, will have more volumes for us to manufacture. With regards of your second question, can you specify the question? I want to understand exactly what you're asking.

The milestones needed to achieve revenue recognition Have you learned in this process that those need to be modified?

I don't necessarily believe that it's a matter of milestones. I believe that what we learn is that sometimes, you know, probably the invoicing triggers along the process could be different. And so that, you know, you move faster. These value you create from contract asset to AR, from AR to cash in the bank. So I believe this is the learnings. And I believe we are trying to address those learnings, attacking them from different angles. On one hand, I believe that we have opportunities to make the process much leaner, much faster, especially when it comes to the testing element of it. And on the other part, I believe that we can address these also together with the customers.

And what Alessandro is referring to is the balance sheet aspect, the working capital aspect, no change from a P&L perspective, from a revenue recognition.

okay and then the last question is regarding Bloomington and Brussels did you expand beyond of course you did the work to comply with a 483 but did you expand facilities in those locations as well going above and beyond the 483 needs and they are running now is that correct look I would tell you that

Expanding the footprint, especially in Bloomington, yes, as we mentioned many times, we're having additional lines being installed in there. If the question is around did we go over and beyond what was necessarily in the 48, look, every regular inspection is a checkpoint and an opportunity to reflect what can be improved. And the Catalan has always had a very holistic approach to these situations. And so, yes, we go over and beyond because we are here for the long haul. And whenever we have the opportunity, we need to make sure that we address everything at the same time in a holistic fashion, no matter what the pain is in the short term.

Okay, thank you.

And we will take our next question from Derek DeBroom with Bank of America. Your line is open.

Hi, good morning. Just some clarifications on some things. So how much revenue from fiscal 23 is getting pushed into fiscal 24, right? And specifically, I'm curious about the gene therapy drug that's going commercial. What was that push? And, you know, we've heard, you know, there's some fairly big numbers out there on what that contribution could be to the company. I would appreciate any sort of like clarity on how to think about that and the margin flow through.

Look, this is Alessandro. I appreciate your question. I really understand the reason why you're asking it. I would tell you, though, that it's premature for us to make any comment for fiscal 24. It's not at the time evading the question i understand the reason so we're going to try to give this quantification in your course as soon as possible uh but you know it's a complicated equation because there is the demand but there is also the additional scale up of capacity you want to do to catch up on that demand how fast you can do it where it's going to happen the first half of fiscal 24 second half of fiscal 24 It's not that I don't want to answer. It's just that we need some more work to make that quantification. And I can promise that as soon as we can have that available, we're going to share this with you guys.

Right. But to clarify this, you've got product that you've already made that can supply patients that are expected to be dosed with that drug for the next six to 12 months.

Absolutely, absolutely. If you like, part of the reason why we have the contract asset that we have is because part of that contract asset is what we call the price stock. Let me explain it. It's a stock that can be converted in final product with only few remaining steps of the process. And you do it once some final uh you know uh information is available market labels and and so forth so yes we were well well aware that this ramp up might be might have been uh more complex than than others because it's a new processes is new modalities and there is erp implications and so forth So we were very much mindful of building the stock ahead of the time so that we could have periods of adjustments without impacting supply. I can definitely reaffirm very, very clearly because this is important to me, it's important to the patients out there, that there is no risk to supply of any of these products.

And have you recognized revenue on that product?

to some percentage of completion, you know, according to our policies, yes.

Okay. Let me try something else then. So, how much do you think of your revenue miss is tied to the biotech issues? And just because, I mean, one would argue that's not going to come back next year. I'm also just curious, you know, you had a 6% to 10% guide for the PCH business longer term. That seems to be arguably off the table now, given some of the asset write downs and things there. Can you just sort of talk about how you're thinking about that?

So, sure. Look, the biotech funding is clearly a situation that is still very volatile. I would say volatility there continues to be fairly high. I believe we were the first one speaking openly that there would have been a challenge in November. But, you know, it continues to be a little bit of a challenge, especially for early stage programs and especially new modalities. I want to stress that in the new modalities, because of the nature of them, we have a high level of exposure to the biotech industry and as such to the biotech funding. So I believe that the first half or the second half of this calendar year will continue to be a period of volatility. and we need to continue to observe what is happening there in terms of understanding the time for recovery. There are some elements, though, that are more in our control in that regard, which is the late-stage programs, which are less affected by that because they are so close to potential commercialization, which are not really affected by the funding because you're going to progress those. And I believe that on those ones we have more visibility and we are more optimistic. With regards of the PCH segment, when you look at what was in the script, there were three elements that really affected our outlook this year and made this business, which was expected to be a contributor of growth this year, to a more flat-ish story. was that we had some delayed approvals. That's the business with it, right? Sometimes you have years or periods where you have the approvals all together and periods where they just get delayed. The first half of this year was disappointing because many of these approvals were, in fact, delayed, and as such, the launches, all of a sudden, in the last few months, we received 10. Sometimes you don't control those events. The good news is that now they've happened, and so as we look into the fiscal 24, those are going to be launches that are actually going to happen. I believe this year we suffered from higher than expected erosion of some of our portfolio in the prescription business. The erosion was expected to happen, happen a little bit faster. I believe it's now bottoming to the levels for these products that will be sustained going forward. We have resolved some supply, meaning the raw material challenges for one key product we have in that segment. So during the summer, we expect to be back on the supply of those ones. With regard to the consumer, I'm going to tell you a little bit the same response that I gave before the biotech. I believe it's still a volatile environment. We're still monitoring it. We continue to convert the portfolio to larger, bigger, more diverse customers. But, you know, that's an environment where we'll continue to observe in the next six months how it goes. I hope this call helps you.

It does. Thank you. And just one final one, just to be clear. Do you need any restatements, do you think, beyond fiscal 22? Basically, just if you go back and you look at the pre-COVID numbers before you started adding on capacity, are those Are those numbers safe from what you've recorded?

I would say that we just continue to assess and address the effect of these adjustments that we discussed earlier in our previously issued financial statements. When the assessment is complete, we'll be back and fully explain to our investors these prior period changes and their effects on our financial statements.

Thank you.

And we will take our next question from Luke Serga with Barclays. Your line is open.

Great. Thanks for the questions. So before the operational challenges, you guys were doing about $300 million plus or minus in EBITDA per quarter. And so outside of the next few quarters, and you're clearly a bit below that level, but when do you guys expect to, or when can we reasonably think about when we'll get back to those types of levels? Is that back half at 24, or is it more going to be like a 25 issue?

Look, I believe that, as I said, will require some time and some work. I have confidence that we're going to get back there. It also depends on the top line, so there are many variables attached to it. And of course, as you know, we have a pretty consequential event on the horizon in the next few weeks. So I believe it's hard to make a prediction, but I believe that if you assume calendar 24, you're not far from where we expect to be.

Okay, great. And then I guess on the approval, can you, for the gene therapy, I mean, you guys were scaling up to, I think it was like a 16 or 18 suites. Can you update us on what that manufacturing capacity, do you guys need to build out additional suites because it's clearly taking more of the, you know, materials and inventory to make the drug than what was earlier anticipated?

Look, as we said, the BWI facility is a facility with a lot of capacity, and we believe that we are creating capacity for our current needs, but that facility can continue to serve the demand in gene therapy for years to come after the expansions that we have done. So there is a lot of capacity available there. We feel very comfortable. It's a premium facility. It's commercially approved. This is very recently to more successful PAI inspections. It is still a jewel in the crown of government, notwithstanding some of the short-term challenges we discussed with our ERP implementation. Very, very pleased with that facility and very optimistic about the future.

Okay. And then lastly here on the sticking with the percentage of completion, how do you plan to do that through actually after the drug is approved, assuming it does get approved? I mean, how does that work?

Yeah, so we've concluded on the accounting with regards to that product. It will be continued on a percentage of completion basis, but as we share during our prepared remarks with such a complex agreement, we are looking at other contract terms that could prospectively modify accounting for that product going forward.

Yeah, right. I mean, it gets approved. It's commercialized. It's no longer development, right? So it would have to be recognized in batch commercialization, right?

No. No, no. That's the point, is we will continue to recognize it if It is approved and it's a commercial product on a percentage of completion basis.

Gotcha. All right, thanks.

We will take our next question from Jack Meehan with Nefron Research. Your line is open.

Thank you. Good morning. So my question is simple. Can you grow EBITDA in 2024? Based on the transitory impacts you've talked about, can you just confirm 2023, what you've laid out, is this going to be the trough?

So look, clearly this question requires some, you know, you make these answers based on assumptions.

So based on some assumptions of these, I would say that this is a credible expectation.

Great.

And some key assumption is also regarding some expected approvals in the next few months.

Okay.

And then I believe I heard you mentioned the COVID forecast down 50% year over year. So it sounds like you maintained it at over 600 million for the fiscal year. Could you confirm that and what's embedded for the second half of 2023?

It's about right. Yeah, we pretty much expect it to be the number. You know, maybe a little bit different than the phasing, but yes.

Yeah, yeah, we can. No change to our previous estimates around that number, a little more than $600 million.

Great. And one final, what was the $26 million impact in the fourth quarter of 22 you called out?

So, yeah, as a result of the balance sheet review, that we are still ongoing. One of the reasons why we are late in our Q3 financial statements The review did lead to some accounting adjustments, and one that we shared here today was to correct a $26 million revenue error related to fiscal 2022. But overall, I'm very pleased with the pace, the depth, the overall quality of the review that we're doing to make sure that we don't leave any stone unturned.

Thank you.

And we will take our next question from Max Smock with William Blair. Your line is open.

Hi, thanks for taking our questions. Just wanted to follow up on an earlier question, the point from the deck around net leverage peaking in the middle of fiscal 2024. I know you said it's a little too early to give a guide on next year, but can you just confirm that net leverage peaking in the middle of fiscal 2024 means adjusted EBITDA in the first half of next year will be down year over year?

Again, we have not completed a full assessment of Fiscal 24 myself.

I'm getting up to speed here on all financial matters at Kaplan. My focus has been around Q3, financial reporting commitments, and at this stage, we don't have a fully built FY24.

Yeah, I would say, look, that being said, our ratio is always calculating on LTM basis, right? So it's not necessarily only the next couple of quarters. It always looks at four quarters back. So there is an averaging factor there.

Okay, got it. Maybe just a couple quick ones on Sarepta. There was a lot of focus last week during their adcom on the ratio of empty capsids. Can you just discuss what's going on there, why you changed the manufacturing process to one that has higher empty capsids and did not add steps to address this issue, and then whether or not there could be some CMC issues moving forward as a result, even though the FDA has already completed its inspections at your BWI facilities?

First of all, look, there is not necessarily a change of the process. Sometimes when you develop drugs, there are processes that are suitable for the early clinical stage. and that they are not necessarily suitable for larger clinical production, commercial production. And so, this sometimes uses different technologies with this process. I don't believe that there was any comment around these. It's more in and around, it's in the nature of what we do. Bench scale is not the same on the industrial scale. It is an industrial what we use here. It is an industry standard process that is used for this type of therapy used in many other programs. And I believe the data continue to be pretty sound also with regards of the use of these processes. That being said, you know, we in an industry where we always look at opportunities to further enhancing processes, but as it stands today, this is an industry standard. It's more suitable for the large commercial volumes, and the data are supporting the use of these processes.

Okay, got it. Thank you. Maybe just one final one from me on Sarepta. You mentioned already having product for initial dosing of patients, and I understand that SRP901 is a big opportunity moving forward, but how should we think about the potential revenue in fiscal 2024, given Sarepta said during the adcom that it only expects to treat about 100 patients in the first six months post-launch? Does this mean that we could actually see a step down in revenue from this program in fiscal 2024, especially considering Thermo could be up and running by then? Thank you.

So look, if on the basis that the product is approved or received accelerated approval, I want to be more specific, surely I do not expect that there would be a reduction.

Okay, perfect. Thank you for taking our questions.

We will take our next question from John Sauerbeer with UBS. Your line is open.

Hi, thanks for taking the question. You know, I just wanted to dig in a little bit deeper on some of the emerging biotech that you mentioned earlier. I guess, you know, some of your peers have provided what percentage of revenue is there exposed? You know, would you be willing to provide that and maybe even, you know, X Repta and gene therapy? What does that look like for your customer base? And then, you know, you mentioned that there were no customer cancellations, but assuming that, you know, some of these companies have no capital,

do you think that maybe these assumptions here are a little bit more too optimistic and that you know there could be cancellations here moving into next year yeah i mean when i when i of course whenever i make a commentary i'm making comments around the sizable notable cancellations in our business because we are in the clinical world in different universities that are all the time cancellation just because of the nature of the business that some of the most of these programs do fail as they go through the clinics so I just want to caveat that I was referring to large, notable commercial supply agreements that were potentially being canceled and can have a material impact on the company. With regards of your comment around optimism, I believe we've been pretty humble and open here. in saying that, yes, we've been optimistic. I don't believe necessarily on the rate of cancellations. I believe we've been optimistic around the amount of assets which would have been entering the clinic or progressing through the clinic in these last, call it nine months. And the pace at which this was happening now is very, very different from what it was in 2021 and 2022. I would say mid-2020 to mid-2022. It's been a sharp correction. what we've seen from our observation standpoint. But, you know, the science is still there, and the potential, the unmet need for patients is still there. And the efficacy and safety profiles of these are still there. So these are all elements that will bring this back at some point. So, yes, we were optimistic. Yes, now we have learned and we have a more realistic outlook. But, yes, we continue to be bullish about the long-term prospects of these modalities.

Got it. And then I guess just on the Brussels facility, the previous press release didn't provide a timeline there. I just want to confirm just the timelines and when you think that these productivity issues would be resolved. Just from a high level, can you remind us on an overview there, what percentage of that facility is dedicated to Novo and Wegovy?

On the last question, I cannot give you that information. It's just simply that we're not authorized to share without our customers. I can tell you that for Brussels, the facility is now finally fully up and running after some periods of of challenges, and especially when you restart from these long periods, it's complicated to reach the efficiency levels that you experienced before. I would say, in total honesty, it's still a while. We are now at the full absorption. It's still a work in progress. I still believe that in Brussels we're going to have to do more work and will require some more time. to be honest with you. But, you know, the good news there is that we have all the demand that we want because we have to recover on a low backlog. So the absorption and the utilization is not going to be a problem. It's just recovering the manufacturing consistency that we had before. And we're making very good progress in that direction. But this is something that just doesn't happen overnight when you experience the challenges that we've experienced.

Thanks for taking the questions.

And we will take our next question from Sean Dodge with RBC Capital Markets. Your line is open.

Yep. Thanks. Alessandra, you said with the Bloomington Tech transfers, the couple that you've won there and working to launch, they're a little more complex and taking longer than expected. Did I hear correctly those are done now and up and running? And then as we think about how meaningful those are, could you I don't know, maybe compare the size of those relative to the COVID work in Bloomington that you're working to backfill?

Sure, that's a great question. So, first of all, I believe that the technical challenges and hurdles that we experience, the cause of the experience delay to the final steps of the validation of this program have been overcome now. So now is completing the last steps and waiting for the regulatory timing that is required to get ourselves in the position to do full commercial production. So as we said in our remarks, we expect now this to be a second calendar year 23 impact in terms of these. These are meaningful products. So I can tell you that at this point in time, our biggest concern is to have enough capacity, more than demand. an effort of filling up and installing additional capacity there so that we can support what we envision to be very high demand products because the end market is very strong and at the moment is not fully satisfied. It's difficult to make a parallel to the COVID times because these are very different products. I can tell you from a profitability standpoint, we are aligned in terms of the margin Clearly, you need to understand that there is no product in the world that will ever be produced in one billion doses in 18 months. The debt is never going to repeat in terms of what we've done in Bloomington. I believe that was a little bit of a unique situation, but net of debt, which we are now already washed out of our numbers, is a very healthy portfolio that we have found there.

Okay, great. And then you pointed out that you all continue to win new business, including an expansion with Novo. When was that expansion signed? And maybe is there any more color you can provide there? Is this kind of involving you working with them on more products, or is this expanding what you're doing with them beyond the Brussels facility?

Yeah, yeah, sure, sure. Look, it's clearly, as we bring the new assets online, we give, and these assets are in high demand, as you can expect. We said repeatedly, and also some of our competitors are giving same information, right? So when you look at these assets, Clearly, when you have these new assets coming online, the first thing you do, you offer them to your existing partners with which you have a very healthy, established, and fruitful discussion. And many times, more times than not, in the recent years, uh in the recent months those customers have picked up on the on the offer to to to go in some other sites and to go to some other capacity and bigger capacity so um i believe that that's that's very very exciting for us uh the fact that customers continue to give us confidence and continue to want to serve from us it's uh it's probably the best best thing that can happen to us okay all right great thank you guys

And we will take our final question from Justin Bowers with Deutsche Bank. Your line is open.

So, it's two questions, one related to gene therapy and then one just related to the guide down. With respect to gene therapy, you talked about bringing new capacity online. I'm just curious if the timing, is that through the end of this year and is that related to BWI and all eight suites that you've sort of talked about before? Part two of that is you also said that you have sort of seven quarters of production, I believe, waiting to be released in the contract assets. I don't want to paraphrase, but I just want to clarify that that is what you said. So that's related to gene therapy, and then I'll come back with the second one on the guide.

Let's address the last one. I didn't say several quarters. A few, I mean, so I just was saying that it's not, it's not the process.

The length is not 3 months is is is more is longer than that. It depends on a few things, but you need to think about the process client from the start to finish somewhere. In the in the several months, the type of type of timeframe, and we are working actively to to reduce that. With regards of the suites, yes, it is BWI, the ones we were referring to. You don't have to think about these as a binary event. They told us that you have all these suites. So these suites have the ability to come online progressively in same couples, so call it, because the facility allows that to happen. So you have two, then another two, another two, and over the next few months, we're going to bring online these additional capacities.

I understand and that makes sense and was was that 1 of the inspections. Well, 1 of the inspections related to those suites as well and then. Just the other parts that in terms of the contract terms, since you're still doing it on percentage of completions, it sounds like the amendment that you're looking for is. Maybe around invoicing is that is that fair?

So, so the 1st part of the, the, the question.

Um, look, the, the inspection is never by suite. You expected the whole facility and for us from a regular standpoint belongs to the same campus. So you need to look at these when you get expected inspection is relevant to the entire campus. So, that's the, the, the answer to your 1st, part of the question. So very, very pleased that those inspections were successful because again. It's it's an impact that, uh, you know, these are inspection related to that, but they have, uh, they have, uh, you know, an impact on the overall facility. So, very, um. Very pleased with that outcome. Um, and, uh, with the regards of the of the terms, the local, you know, probably a little bit of a clarification here. Um, Ricky was referring to some other terms of the contract with the gaps of our revenue recognition mechanisms there beyond the percentage of completion. I do believe that we have an opportunity to, and we are already making progress in terms of setting the different milestones for invoicing of these contract assets going forward that we're going to continue to work against these objectives.

Okay. And then just quickly, on the change in the guide, it sounded like of the 500 that 400 was related to forecasting, and then the other 100 was related to sort the one-timers. I just want to clarify that. And then of the one-timers, you guys did spike out sort of $55 million in inventory markdown. Is that one of those one-timers, and is that running through the P&L with the new guidance? Thank you.

Yeah, if I take that, Alessandro, I would say that you're right about the $55 in terms of being one of the one-timers. But after that one timer, I would estimate it to be roughly equally 50-50 between the forecasting challenges that Alessandro referred to, And the operational and productivity challenges being the, the 2nd issue for the, for the call down on our guidance.

Yeah. And I would add that, you know, when you think about 1 timer, Ricky refers to 1 timer, if you like more from a financial accounting standpoint, but even also in the execution challenges, there are issues that we deem temporary nature, which we are addressing. We don't we don't believe the big. that will affect long-term the business performance from a profitability standpoint.

Okay. Appreciate the time.

Ladies and gentlemen, that concludes the question-and-answer portion of today's call. I will now turn the call back to Mr. Alessandro Maselli for closing remarks.

Thank you.

Thank you, everyone, for taking the time to join our call and your continued support of CADRENT.

Ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.