Catalent, Inc.

hello everyone and welcome to the catalan inc first quarter fiscal year 2023 earnings conference call my name is daisy and i'll be coordinating your call today if you would like to register a question ready for the q a session please press star followed by one on your telephone keypad i would now like to hand the call over to your host paul surdes vice president of investor relations to begin so paul please go ahead

Thanks, Daisy. Good morning, everyone, and thank you all for joining us today to review Catalan's first quarter 2023 financial results. Joining me on the call today are Alessandra Maselli, President 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 GAAP and non-GAAP financial measures. It is possible that actual results could differ for 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 an additional information on the risks and uncertainties that may bear on our operating results, performance, and financial condition. Now I would like to turn the call over to Alessandro Maselli, whose opening remarks will begin on slide six of the presentation.

Thanks, Paul, and welcome everyone to the call. We started the year with the solid results and positive momentum. As a strong cost and currency growth in excess of 25% in non-COVID-related revenues helped offset headwinds from lower COVID product demand, inflation, and unfavorable foreign exchange translation. First, I would like to highlight that the results in the first quarter were initially expected to include $54 million of revenues and adjusted EBITDA related to the resolution of take-or-pay contracts for fill and finish of the Janssen viral vector COVID-19 vaccine at our Bloomington and Anaheim sites. We agreed to an early termination of the contracts, which reflect the changing demand patterns for the COVID-19 vaccines in order to accommodate these long-standing significant customers as we set a new and strengthened framework for our growing partnership. We received the agreed payments on these settled contracts in October and now expect that recognition of the related revenue will occur in the second quarter of this fiscal year. The change in the expected timing of this revenue recognition was not a notable factor when we updated our fiscal 23 guidance, which I will cover in a few moments. Turning to our Q1 results, as shown on slide six, without including our revenues or adjusted EBITDA, the $54 million just discussed, we reported the first quarter revenue of $1,022,000,000 flat on a reported basis, or a 4% increase in cross-border currency compared to the first quarter of fiscal 22. While we also screwed acquisition and divestiture, organic revenue declined 1% measured in cross-border currency. Our first quarter adjusted bid at $187 million declined 26% as reported, or 24% on a constant currency basis compared to the first quarter of fiscal 22. When excluding acquisition and divestiture, the decline was 28%, measured in cost and currency. Turning to the business, as noted on slide 7, first quarter non-COVID organic cost and currency growth was more than 20%. The growth in our non-COVID business was driven by our cell and gene therapy offerings in our biologic segment, as well as our clinical development services in our pharma and consumer segment, which is starting to benefit from commercial synergies under the new organizational structure. As we have shared in the past, we have strategically reinvested the COVID-related returns over the past two years, which has helped to ensure we have the necessary growth levers in place to enable the future growth we are forecasting. And we will continue taking the action to keep us on a path of success. Slide eight provides a schematic timeline of substantial non-COVID related capacity we put in place during the last few years, including the new capacity that we expect to activate as fiscal 23 continues to unfold. As you can see, some of these growth drivers date back years, including our entry into cell therapy in February 2020, which was not expected to contribute meaningful revenue in its few years of ownership as we scale the business through internal investment and TACIN M&A, including for iPSCs and plasmids. We now have the right assets in place to drive future earnings growth through these new modalities. Other large expected contributors to our growth have been our organic investment to enhance our BWI gene therapy assets. A year ago, we brought online six additional SWIFTs. to bring the site's total to 10 suites, and now are running at high utilization rates. In addition, we are now opening a new building on the same campus containing eight more suites, which will progressively come online over the next 12 months as our client's pipeline progresses. Some of the other key investments we have made over the last few years include the drug product's range capacity that led to recent tech transfer wins, investments in additional single-use drug substance production capacity, and our entry into the gummy nutritional supplement market just over a year ago, among others. Laying on top of our organic growth drivers is the acquisition of Metrix contract services, which we closed on October 3rd, and is now accounted for in our updated guidance. This acquisition is just beginning to enable us to accelerate our existing plans to meet the increasing demand for fit-for-scale, high-potent drug manufacturing. Underlined growth in this business is the increasing number of pot and compounds in the oral solids market, particularly in the oral oncology pipeline. Adding pot and handling capabilities in fit-for-scale capacity through metrics represents a continuation of our strategy to maintain a balanced portfolio of offerings that closely matches the overall industry R&D pipeline, which includes a growing number of innovative small molecules that are complex to formulate or require specialized handling. Having explained why we continue to project solid long-term growth for Catalan, I will briefly highlight factors that have led us to a more conservative orientation towards fiscal 23 and the decision to adjust our guidance for the year, including changes to the market conditions since our last call and some updated outlooks received from customers, as well as other macroeconomic and sector-specific factors. The macro factors include the further deterioration of the overall economic landscape, particularly in Europe, with increased likelihood of a recession and further tightening of capital markets. We are also beginning to see anticipated further ripple effects from either inflation which is impacting consumer confidence and discretionary spending. We are now seeing signs of lower end market demand for nutritional supplements. In addition, we are experiencing delays in the delivery of the new coming manufacturing lines due to shortages of key components at our European suppliers. We have therefore adjusted our near-term growth assumptions for our consumer health offerings within our pharma and consumer health segment. While our biopharma and consumer health pipelines remain robust, we are starting to experience signs of cash-sensitive decisions by some of our customers. This is most evident in relationship to inventory levels for finished goods or the prioritization of their candidates as they progress through the pipeline. Our adjusted focus also reflects these new trends. Finally, after several years of elevated levels of capital expenditures, we have made the fiscally prudent decision to reface some of our CapEx spending plans for this year to maximize utilization, increase free cash flow, and reload our balance sheet. Some of the capacity we initially factored into our initial fiscal 23 guidance will now be delayed into fiscal 24, but this refacing will not impact our long-term growth targets. To respond to the urgent patient demand for vaccines and therapies during the pandemic, we significantly increased our direct and indirect cost base for the past two years, negatively impacting our operating efficiency. Given the new conservative approach, the management team has been working diligently on plans to optimize the cost structure of the organization and recover our historical productivity levels. Many of these actions are already in flight and all are expected to be operationalized by the end of this calendar year. This is also reflected in the revised guidance. While we are taking the prudent step of adjusting guidance as we navigate the exit from the pandemic, I want to be clear that our underlying business still displays significant areas of strength, as some examples. we continue to focus strong growth for our overall non-COVID business. Our Zytis business continues its historic record performance. Our gene therapy business has proven out the thesis we lay out when we initially acquired the Paragon Bioservices. And our overall funnel of new non-COVID opportunities is at record high. Shifting gears, I would like to address the FDA audits over the summer that led to 483 observations. Quality and compliance are central to everything we do, and we invest constantly to assure the strength of our quality systems and the quality of our operations. And that quality is constantly audited. In fiscal 22, our facility was subject to approximately 750 inspections, including more than 50 from FDA and other drug regulators around the world, as well as hundreds of customer audits and audits by our own. independently managed internal audit staff and their outside consultants. So regulators' inspections occur routinely, and all of us, regulators, customers, and Catalan, are all working to assure that patients receive timely, safe, efficacious, and quality medicines and vaccines. We did so routinely despite the challenges of the pandemic as we provided vaccines to many millions of people around the world, and we will continue to do so. With that said, the regulatory compliance landscape is always evolving, including what is considered best practice. And so we take all observations we receive seriously and respond to them in a holistic and complete way. We believe that our responses by our Bloomington and Brussels teams will comprehensively address the recent FDA observations and have already deployed all necessary resources to implement the changes to which we have committed in a timely manner. To close this topic, and I want to highlight these, while there are some near-term negative P&L effects as we address these observations, the overall related remediation costs are not a notable factor in our revised full-year outlook. To close my remarks, We continue to be excited about the breadth of our offering and their ability to meet customer needs, which will deliver meaningful growth even in a less favorable microeconomic environment. With the sharp drop in COVID-19 vaccine demand, we pivoted to alternative future growth drivers early in the pandemic cycle and are starting to see the fruits of those investments. We remain deeply focused on executing our mission to develop, manufacture and supply products that help people live better and healthier lives, while enhancing value for our shareholders. Now, I would like to turn the call over to Tom.

Thanks, Alessandro. I'll begin this morning with a discussion on segment performance, where commentary around segment growth will be in constant currency. This is the first quarter we are reporting under our new segment structure announced back in July. In both our Q1 earnings release and slide presentation, we are providing historical revenue and EBITDA results that have been recapped as if these segments had been in place for fiscal 2021 and 2022. I will start on slide nine with the biologic segment. Biologic net revenue in Q1 of $523 million decreased 2% compared to the first quarter of 2022. The decline is primarily the result of a settlement of take or pay contracts for a COVID vaccine that was not considered revenue in the quarter, but was previously expected to. We will offset the negative impact later in the fiscal year, likely in the second quarter, following the completion of an outstanding performance obligation for the client. If we were to include this amount as revenue in Q1, we would have seen growth year over year, fueled organically by strong demand for our non-COVID programs, particularly our cell and gene therapy offerings. This strong demand more than offset the decrease in revenue from COVID-related programs. The segment's EBITDA margin of 21.5% was lowered by nearly 900 basis points year-over-year from the 30.4% recorded in the first quarter of fiscal 2022. Year-over-year margin primarily contracted due to the underutilized capacity. Other factors included the remediation activity in Brussels, which is ongoing, as well as the negative carry related to the Princeton and Oxford facilities. As shown on slide 10, our farmer and consumer health segment generated net revenue of $499 million, an increase of 11% compared to the first quarter of fiscal 2022, with segment EBITDA increasing 20% over the same period last fiscal year. Both top and bottom line growth were driven inorganically from the acquisition of the Patera business. Patera contributed 10 percentage points to PCH's net revenue growth and 12 percentage points to segment EBITDA growth during the quarter. As a reminder, starting in Q2, Patera will be considered organic. The organic PCH business did see modest revenue growth driven by our wide variety of development offerings, including clinical development supply, Partial offsets to growth came from a decline in prescription drug products and the mandatory closure of our largest PCH site located on Florida's west coast due to Hurricane Ian. The site was closed for four days but did not withstand any structural damage. Moving to our consolidated adjusted EBITDA on slide 11, our first quarter adjusted EBITDA decreased 26% to $187 million, or 18.3% of net revenue. On a constant currency basis, our first quarter adjusted EBITDA declined 24% compared to the first quarter of the prior year due primarily to the year-over-year decline in COVID-related activity. As shown on slide 12, first quarter adjusted net income was $61 million, or $0.34 per diluted share, compared to adjusted net income of $128 million, or $0.71 per diluted share, in the first quarter a year ago. Note that our income tax rate was higher in the first quarter than our full year expectation because of the front-loaded weighting in higher tax jurisdictions, which we expect to normalize over the remainder of the fiscal year. Slide 13 shows our debt-related ratios and capital allocation priorities. Catalan's net leverage ratio as of June 30, 2022, was 3.2 times, slightly above our long-term target of 3.0 times. On a pro forma basis for which we assume the metrics acquisition closed on September 30th, 2022, as opposed to October 3rd, 2022, Catalan's net leverage ratio would have been 3.6 times. This compares to net leverage of 2.9 times on June 30th, 2022, and 2.1 times on September 30th, 2021. Our combined balance of cash, cash equivalents, and marketable securities as of September 30, 2022 was $345 million compared to $538 million as of June 30, 2022. Note that free cash flow still remains negatively impacted by our strategic decision to hold increased inventory levels. When we feel the time is appropriate and are more comfortable with the stabilization of our supply chain, we will begin to reverse course. As of September 30, 2022, our contract asset balance was $461 million, an increase of $20 million compared to June 30, 2022. The overwhelming majority of this increase is related to some notably large development programs, particularly within our biologic segment where revenue is recorded based on a percentage of completion versus entirely on batch release as it is for commercial programs. This difference in approach affects when we are able to invoice customers, thereby delaying cash realization and negatively affecting free cash flow. The expectation, however, is that this figure will decrease throughout the fiscal year as we make progress in shortening the cycle time. As a final point regarding our free cash flow, I note that the decrease in contract liabilities also had a negative impact. Our contract liabilities arise predominantly within our biologic segment and are linked to upfront cash proceeds related to our gene therapy programs. As these programs mature and the performance obligations are met, these balances will shift to recognized revenue, and we have already seen this play out with several large gene therapy customers over the last several quarters. Moving on to capital expenditures. We now expect our fiscal 23 CapEx as a percentage of revenue to be between 10 and 11%. down from our previous projection of 13% to 15%. This moderated rate of CapEx spend and overall more prudent approach to capital deployment as we navigate through a challenging macroeconomic environment better positions Catalan for free cash flow generation. As we have previously shared, we accelerated several planned initiatives to address the pandemic and build capabilities for new modalities sooner. This has put the company today in a position to leverage these new assets and capabilities earlier than anticipated and lead to continued strong non-COVID revenue growth. Now we turn to our adjusted financial outlook for fiscal 2023, as outlined on slide 14. This new outlook assumes the challenging macroeconomic environment will persist longer than originally expected back in August, which justifies a more conservative orientation. It also reflects our acquisitions of metrics, which closed just after the end of the first quarter. We now expect full year net revenue in the range of $4.625 billion to $4.875 billion, representing a range of 4% decline at the low end and 1% increase at the high end on an as-reported basis compared to fiscal 2022. FX continues to be a headwind with an incremental impact of approximately one percentage point on both revenue and adjusted EBITDA versus our previous guidance. As a reminder, the guidance we announced in August already included a negative FX impact of approximately three to four percentage points on our revenue and adjusted EBITDA growth. So after taking into account these considerations, A revised expected organic constant currency net revenue growth rate in fiscal 23 is expected to be essentially flat at the midpoint of the guidance range. For full year adjusted EBITDA, we now expect a range of $1.22 to $1.30 billion, representing a decline of 5% at the low end of the range and an increase of 1% at the high end of the range compared to fiscal 2022. You are familiar with the seasonal nature of our business, where revenue and EBITDA generation are each more weighted to the back half of the year, which has historically led to approximately 60% of our EBITDA to be realized in that period. In fiscal 2023, because we just started the implementation of our cost efficiency activities, we now expect adjusted EBITDA to be even more weighted to the back half of the year at approximately 63% to 64%. This also accounts for the much more pronounced year-on-year decline of COVID-related revenue we expect in the second quarter versus the first quarter. There are a number of factors that continue to negatively impact margins in fiscal 2023 that we reviewed last quarter, but that will be partly offset by our cost saving actions. The factors include headwinds from COVID-related volume declines, inflationary and supply chain pressures, startup costs related to our acquisitions of Princeton and Oxford, which we are absorbing in our organic assumptions, other pockets of underutilization across the network as we bring on additional capacity, and foreign exchange translations, as our margin profile is higher outside of the U.S., while the majority of our corporate costs are domestic. Note that swings in the euro have a greater impact on FX translation than the pound. Moving to adjusted net income. We now expect full-year ANI of $567 to $648 million, representing a range from a decline of 18% to a decline of 7% on an as-reported basis compared to fiscal 2022. The ANI decline we foresee for fiscal 23 is being driven by several items. First, the inclusion of the new debt used to fund the metrics acquisition, which closed in October. Second, servicing the full year of the new variable debt we raised in part to fund the Matera acquisition, as well as other interest-related increases in the current rising interest rate environment. Next, our expectations for our full fiscal 23 tax rate remain unchanged from prior guidance. But as a reminder, we'll experience a higher effective tax rate in the 24 to 25% range compared to the 23.4% we saw in fiscal 2022 due to the geographic mix of earnings. And finally, increased depreciation expense due to our significantly larger asset base, which is also more heavily weighted towards the U.S. We continue to expect our share count to be in the range of 181 to 183 million shares. Operator, this concludes our prepared remarks, and we'd now like to open the call for questions.

Thank you. If you want to ask a question, please press star followed by one on your telephone keypad. If you wish to remove your question, please press star followed by two. We'll briefly pause while questions are now being registered. Our first question comes from the line of Luke Sergot of Barclays. Luke, please go ahead.

Luke, please kindly unmute your line and please proceed with your question.

Sorry, operator. Let's move to the next question.

Of course. Our next question comes from Tejas Savant of Morgan Stanley. Tejas, please go ahead.

Hey, guys. Good morning and appreciate the time here. Perhaps, Alessandro and Tom, just to kick things off on the guide, can you help us just build a bridge between the old and the new outlook at the midpoint? It sounds like you trimmed your top line by about 350 mil and EBITDA by 90%. And I'm assuming the COVID payment should have no impact and the Hurricane Ian impact, I'm assuming, can also be recaptured down the road. But I was just curious in terms of, you know, what are your new growth assumptions that you're embedding for non-COVID biologics, as well as the PCH segment growth in addition to the metrics deal?

So thanks Tejas for the question. Alessandro here. I will cover quickly part of it and then I'll hand over to Tom. Look, you know, as you see in the first quarter we recorded a non-COVID growth as we expected in the range of 20% plus and we expect this to continue through the year. Tom, would you like to go give a little bit more details?

Sure. So good question, Tejas, related to the guidance. I think your assumptions related to both the timing of the revenue recognition item as well as the hurricane are not impactful in terms of the full year guidance. Both of those we view as timing related. The macroeconomic backdrop and the worsening conditions we're seeing there are much more of the driver here of the call down. I would say as we look at consumer confidence and discretionary spend and the impacts we're seeing there, related to our consumer health business, I would say that's probably 25 to 35% of the call down related to those items. I would say that the cash sensitive decisions that we're seeing from some of our customers is not only related to biologic related customers, we're seeing that on the farmer and consumer health side as well, especially as it pertains to levels of safety stock inventory that customers are willing to hold at this point in time if they take what we view as a more cash preservation approach to managing their overall supply chain, as well as how they're thinking about the prioritization of some of the candidates that they have in their pipeline, as well as the timing of the progression of those. So those are, I would say, the larger factors that we continue to see here. Your comments also around metrics, that acquisition did close in October. That is included. in our guidance now as well, as well as the further strengthening of the U.S. dollars that we're seeing here. Those two things I would say nearly offset, maybe not quite exactly, but they are directionally in the same approach. And the macroeconomic landscape obviously has just given us a much more conservative orientation to look at the remainder of the fiscal year.

Got it. That's super helpful. And then as sort of an unrelated follow-up, Alessandro, two questions, one on the quality front and one on your CapEx decision to trim the spending outlook here. So on the quality front, you noted that both Brussels and Bloomington are now operational. Can you just share any update, particularly in terms of your confidence in your ability to ramp manufacturing for customers at the site, irrespective of what happens with some of these 483 letters that you receive and the activities you're taking to address them, as well as any sort of customer conversations around future projects? Has any of this noise had any impact on that? And second, on CapEx, with the decision to pull back CapEx here a little bit, given the macro, can you just talk to us about your ability to continue to meet demand, at least over the near term, given the push out to fiscal 24?

Yeah, sure. Look, on the first question, I would say that what we provided in the prepared remarks is pretty comprehensive in terms of describing the status there. I will for sure add any more calls to that because I believe that it's pretty comprehensive. For sure, we continue to keep a fully transparent approach with our customers and share with them updates. But at this point in time, as we said, we are confident that our responses are addressing the observation as expected. With regards to your question on CapEx, that's a very good question. Look, the reality, when you go to slide eight of our presentation, that slide really illustrates what we have already done, what we have in flight. As you will recall, in one of the conversations you and I had a few weeks ago, I did tell you that we were in the mode of making sure that we had excess capacity across the board to make sure that there was never the concern of not having enough capacity. I believe given the current macroeconomical environment, we decided that the capacity, our assessment is the capacity that we have is more than enough for the runway that we have in front of us for the next several quarters. And there will be plenty of time as we face the capex more in fiscal 24 to be in the same very position to continue to drive long-term growth. So that is really not affecting our long-term outlook here.

And I'll just add, Tejas, in the near term, really the only two CapEx projects that we have that I would say would have an impact on our fiscal 23 year decision to delay both related to Oxford and Princeton, those are now expected to come online during fiscal 24 and contribute revenue in that period versus in the current fiscal year.

Very helpful. Appreciate the color, guys. Thank you.

Thank you. Our next question is from Sean Dodge from RBC Capital Markets. Sean, your line is open. Please go ahead.

Good morning. Maybe just staying on the guidance for a moment. The changes there from the cash-sensitive decisions you're seeing from some customers, just to clarify, is that something you're seeing in Europe only or is that happening in the United States too? And then, Tom, you said happening both on biologics and the PCH side. Is there any more context you can give us there? Is that smaller clients making these decisions or larger ones too? And then maybe any more kind of pockets or characterization you give us of the cash-sensitive decision.

Yeah, Sean, I would say this is not just the dynamic we're seeing in Europe. We're seeing it across both, I would say, our European and U.S.-based customers. And I did say that this is a dynamic that is crossing both our pharma and consumer health and biologic segments. I would say on the pharma and consumer health side, it's more related to commercial products and consumer health products. And I think it's really driven by cash decisions, I believe, that our customers are making in terms of how they're managing their supply chain. And it's not just tied to smaller customers either. I mean, I think our approach as a large company in terms of looking at things from a more conservative cash flow position is exactly what we're seeing from some of our customers do as well as they look to manage working capital and supply chain in this macroeconomic backdrop. So much more across the board, both large and small customers, and also across biologics and the farmer consumer health. The only other thing I'll add is related to the examination of their pipeline and progression of their pipeline and some of the slowdown we're seeing there. That's more attributable to the biologics side of the business. but again i wouldn't say it's it's only uh tied to small customers we're seeing some larger customers that may not be in phase three but in you know more earlier phase one and phase two programs just looking to slow play uh them as they navigate through the macroeconomic environment okay and then just thinking about some of the factors that give you visibility on this new guidance if we go back to the tech transfers you all talked about before is there anything

else you can share that give us some sense of how meaningful those should be in aggregate to the year, maybe like the incremental contribution or revenue from those? Does that cover a quarter of what you need to hit the new guidance, or is it more or less than that?

There's been no change, I would say, with regards to the assumptions around those tech transfer programs. They continue to be a meaningful contributor to us in the fiscal year. There are several of those that will be ramping on through the fiscal year here. So, you know, we're not going to quantify those, Sean, in terms of what their contributions, you know, we don't talk about individual customers or products. And, you know, so I would just say that that continues to be a driver of improved capacity utilization as well as revenue growth as we get into the second half of the year.

Yeah, and that would add, look, when you look at the drivers that give us conviction about the non-COVID growth pointing to this tech transfer, but also Gene Therapy, which was a strong contributor to our performance in Q1. We continue to see to have a good visibility into the trends in these areas of the business. So the visibility on these assets to continue to perform is good.

Okay, great. Thanks again.

Thank you. Our next question is from Dave Windley from Jeffrey. Dave, your line is open. Please go ahead.

Hi, thanks. Good morning. Thanks for taking my questions. My first question is kind of similar to one of Sean's around revenue mix. I'm wondering if you could, I'm trying to get a better understanding of the relative balance of the impact of the items that you're calling out that drive the reduced guidance across biologics and PCH. It kind of sounds to me like maybe more of it is PCH leaning than biologics, but I don't want to over-assume there. Could you give us some help?

Sure, Dave. So I would say the de-risking approach we've taken and the more conservative approach we've taken to guidance here really spans both PCH as well as our biologics segment. I wouldn't necessarily say it's overly weighted. towards the PCH side of the segment. I think where we're seeing the bulk of the impact of PCH is related to the consumer confidence, discretionary spend, given the macroeconomic inflationary environment that we're seeing. That has a more immediate impact, particularly on the consumer health side of the business, the gummies business, but also just, I would say, the soft gel business associated with with OTC and consumer products. I mentioned in one of my earlier responses, so I think it was Tejas, about 25% to 35%, I would say, of the revenue call-down was related to that consumer confidence or consumer spend dynamic that, again, is more impactful around the PCH side of the segment. The remainder, though, is really just in terms of positioning of our customers across both the biologic side as well as the PCH side and their cash-sensitive decisions and just slow down an overall pace around new programs that we're seeing again on the PCH and biologic side. So part of that is on the PCH side. Again, that in addition to the consumer spend gets you to probably a little less than half of the impact being on the PCH side of the business and the rest of it being on the large molecule side.

Super. That's helpful. Thank you. If I then focus in biologics, I'm wondering if you might help us to understand how the relative modality growth within biologics is driving that business. You've called out gene therapy a couple times in your prepared remarks and answers. I guess I'm just wondering, like the tech transfers, have you shared with us that those are specifically in sterile fill finish or not? And as we think about kind of the mix of your biologic modalities in 23 versus 22, does that change materially?

I would say it doesn't change materially, Dave. And we have said that the tech transfer programs are going to be meaningful contributors in the second half growth, part of the second quarter, but into the second half growth as they really start to ramp. We have said that those are drug products related and tied to our sterile fill finish assets on past quarters. The comments we made around the first quarter and some of the growth that we've seen on the gene therapy and cell therapy side is expected to continue. So that is a business that saw strong performance in the first quarter, will throughout the fiscal year as well.

So look, you know, Alessandro here, I will tell you that we need to, you know, clearly here is very, very important that we make evaluations on an all-in basis and a non-COVID basis, clearly, because biologics is surely the segment that is most impacted by the COVID volume reduction, as you all know, and particularly the fill-and-finish side of the business. I will tell you, though, that across all the modalities, when you look at them and the prospects of growth, ex-COVID, on all of them, we are pretty excited about the dynamic there, even after our more conservative approach to guidance, which is reflecting some macro factors which led us to be having a more conservative orientation here. But even with that conservative orientation, we feel very, very excited about the opportunities we see in gene therapies, you know, the expected, you know, tipping point for other and also in the tech transfer. So in biologics, you know, on an ex-covid basis, we continue to be excited.

Excellent. That's helpful. My last question. is around kind of general margin bridge, I guess goes back to Tejas' question a little bit. But you're taking revenue down, as you said, more conservative. We would normally expect some, you know, decrementals in a high fixed cost business. So that is a baseline expectation. You also have remediation costs related to the quality issues that you raised in your remarks. You know, inflation and other things that are, you know, there are challenges. your margin forecast for the new guidance is essentially the same as the old guidance. So I'm looking for help on the cost levers that you're able to pull to mitigate the decremental on the revenue drawdown.

Yeah, no, good question, Dave. And look, I think our margins are looking to be flat this current year in the new guidance in comparison to where they were the prior year. The cost savings initiatives that we have underway that we've already started to take action, all of those will be operationalized by the end of the calendar year. So we'll be seeing full impacts in the second half of the year related to those. I think the dynamic that we're seeing around the underutilization is certainly playing into the margin situation here in the quarter as is the material. piece of the business when we think about the component sourcing side of things, the startup costs related to Princeton and Oxford ramping up, also margin dilutive in the period. But the cost actions that we have underway running the business in a much more efficient way, looking at things from a span and layer standpoint in terms of how we operationalize our large sites are meaningful, meaningful cost savings actions that we have that we have the ability to utilize here and lever that we absolutely are pulling.

Okay, great. Thank you.

Thank you. Our next question is from Julia Kim from J.P. Morgan. Julia, your line is open. Please go ahead.

Hi, morning. This is Amy on for Julia. Thank you for taking my question. So I have a follow-up on the CAPEX, the slowdown of the CAPEX. you tell me a little bit about which capacity or areas that you guys are cutting down like is this a reflection of financial prudence or you're concerned about over capacity and the topic related to that is can you also add more colors on the push out of the princeton and oxford plans into 2024. well sure look i wouldn't call necessarily these caps in our spend you know as we said that this is a refacing it's a different timing in which we're going to bring online

this capacity and clearly our job as CDMOs is always to keep our utilization rates at reasonable levels to continue to drive margin and as such cash flow. So this is a combination when you look at how much we have brought online, which is on slide 8, which is a very exciting picture, if you like, in terms of how much we have brought online, which is not COVID-related, and how many levers we have to continue to drive growth in the industry in areas that continue to be very exciting from a pipeline standpoint. We feel pretty good about what we have already built. And looking into the future, given our more conservative approach to guidance, we thought it was prudent to slow down a little bit the additional capacity coming online so that we could keep the level of absorption as expected, but also not jeopardizing the long-term growth prospects of the company. So these all result in a fiscally prudent approach, which I believe, given the environment, is the right thing to do.

Thank you. I have one question and then we'll hop off. So can you share some visibility about the non COVID based business ramp into the 2023 under new guidance, especially in the biologic sectors? Like what percentage of the revenue will come from customers that stick around after COVID? And what support your confidence into the rest of the year, the second half of the year? Thanks.

So, look, we're very pleased with the start we had fiscal 21 here on a non-COVID basis. We mentioned in Alessandro's prepared remarks as well as mine that we saw more than 20% growth across the company on a non-COVID basis in the first quarter. Our guidance assumes we continue to see growth around those levels. We haven't disclosed what the split out will be between the farmer and consumer health side of the business. versus that of the biologics side of the business. But many of the growth drivers we have are related to modalities that were not impacted by COVID-related volumes. Just think about the cell and gene therapy strengths that we saw in the first quarter and the expectations that that continues here into the second half of the fiscal year. So, again, we're just really looking at things to continue to trend on a non-COVID basis. in line with what we saw in the first quarter in the more conservative view of our guidance that we presented today.

Thank you.

Thank you. Our next question is from Derek De Bruin from Bank of America. Derek, please go ahead. Your line is open.

Hi, good morning. So I've got a few here. Can you just elaborate a little bit more on what you mean by the slowdown in pacing starting programs. I would assume it's not still finished. Is it more drug substance? And then on the consumer side, just what you're saying, just a little bit more color around what exactly and where it's being impacted.

So, Derek, I would say it's really very widespread. I mean, we're seeing it, as I mentioned, not only in the biologic side of the business, but on the farmer and consumer health side. We're seeing it across both commercial products where customers are willing to appear to manage the supply chain to a more conservative level here and not run on the same levels of inventory here as they look to manage working capital. But I would say that the pace is more around some of the development programs that we have now, you know, phase three programs that are full blown into clinical trial activity are not the types of programs that we're talking about here, but we have plenty of programs across the network, both on the biologics and PCH side in development that I would say in that phase two range where we are seeing maybe some temperate expectations in terms of the pace in which customers are moving through there as they look to potentially manage their care situation. So again, going back to comments I made earlier, really across both farm and consumer health and against the commercial products and development side of things. So just a more conservative approach to guidance from our standpoint was necessary based on some of these trends we're seeing across the customer base.

Okay. And a couple of just housekeeping questions. So what is, given the new debt and the increased interest rates, what is your expectation for net interest expense for the year, how big is your macro-sensitive, what you would consider macro-sensitive portion of the business, particularly on the interest side?

Sure, so the slide in the deck has a good view of the capital structure, Derek, for you to take a look at. I would say about 25% of our debt, when you take into consideration the debt that's been borrowed, on the revolver to fund the metrics acquisition is floating and more tied to the rising interest rate environment with about 75% of that being considered fixed. So hopefully that can be helpful as you look to model this.

Okay, and do you feel like you've appropriately de-risked the COVID enough, the COVID exposure for this year?

I would say there's been very little change to our assumptions around COVID, just given the contractual obligations that we have. Here, much more of the call-down was related to non-COVID business and the macroeconomic environment that we're in here. So nothing else to note around the COVID side of things.

Okay, thank you.

Thank you. Our next question is from Max Smock from William Blair. Max, your line is open. Please go ahead.

Hi, thanks for taking our questions. Just the first one for me here. You've called out a number of factors really behind the reduced guide for this year, but one of the things we haven't touched on is the ability for you to change over from COVID to non-COVID work and whether or not that factored into the results in the quarter as well as your outlook for the year. So just trying to get a sense for know whether or not this transition has maybe been a little harder than you expected, or it's part of the issue here, or if you've been able to kind of make that shift in line with your expectations.

Now, look, you know, Alessandro here, I look, as we said multiple times, most of the non-COVID work is executed on assets which are unrelated to the COVID execution. So the two things don't tend to interfere with each other. As we have said, even the settlement released into the quarter was something that was somewhat planned for. Given our approach that we shared multiple times, that our approach is holistic and looking at the partnership with important customers, which have much more than just a COVID relationship with us. I wouldn't say that this has had any interference with our ability to execute on the non-COVID work. And look, I always go back to the point that in our Q1, we were able to deliver a non-COVID growth of 20% plus, which is a remarkable performance.

Got it. Yeah, that's helpful. As a follow up, I mean, one of the things you mentioned last quarter was that non-COVID growth benefited a little bit from some backlog going through the system related to some projects that maybe had suffered a little bit as you prioritize COVID. Just wondering if there's any way to quantify whether or not this had an impact in the quarter. And if so, is the backlog now largely worked through or should we expect this kind of to be somewhat of a tail end, I guess, for the business throughout fiscal 2023?

Well, there are some areas where we continue to be a little bit capacity constrained when you look at the demand. So I would say that overall the backlog in terms of demand that we need to still clear out does not change dramatically in terms of the picture. There are maybe some areas of the business where we're seeing even more success than what we anticipated in terms of demand. Like I named Zyrus as one notable item in our in our business where we are trying to build additional capacity at speed. But I would say overall that the backlog situation has not changed dramatically.

I'll leave it there. Thank you.

Thank you. Before our next questioner, I would just like to kindly ask everyone if they could limit themselves to one question to allow everyone the chance. Our next questioner is Justin Belbert from Deutsche Bank. Justin, please go ahead. Your line is open.

Hey, good morning. Just on the settlement you described, is that a good kind of quarterly run rate that we should assume with the exception of kind of like the true up that you're going to have in 2Q? And then the comments on reduced utilization, is that correct? You know, how does that split between biologics and PCH? It seems like it's more weighted to PCH. And then on PCH, what's kind of like lead time for lots of discretionary? And I'll stop there. Thank you.

So just to take your comment, Justin, around the timing of COVID related to the settlement. There's no quarterly phasing here that I would read into the recognition related to this in terms of a run rate. This was a settlement related to one customer. As you know, there are two major customers in which we have COVID-related volumes for here. I will say the comments I made are that the COVID-related headwind that we see during fiscal 23 is going to be more pronounced in the second quarter that it was in the first quarter, and I would say it will be equally as pronounced in the third quarter. Our second and third quarters are the quarters in which we were most expected to see COVID-related volume declines as we head through the fiscal year. In terms of the comment related to capacity utilization, I would say as you look at the slide on the materials, here in slide eight where we talk about new capacity that has come online or is in the process of coming online. Many of those are biologics related assets. So the assumption that some of the underutilization and capacity that we're going to see in fiscal 23, which we've alluded to before given the timing of bringing on this new capacity as well as the ramping associated with starting to fill that is much more of a biologics dynamic than it is a farmer and consumer health dynamic. Next question, please.

Thank you. Our next question is from Jacob Johnson from Stevens. Jacob, your line is open. Please go ahead.

Good morning, everyone. This is Mack on for Jacob. Just a quick question from me. As it relates to your cell and gene therapy business, I think you have at least one commercial customer and another potentially coming. How should we think about the size of a given commercial cell and gene therapy customer or looking at it in another way? What is the potential revenue capacity of a suite at BWI?

So you can't look at the suite to BWI on a revenue basis. No programs are equal. There's a lot of different things I would say that factor into how you would look at the potential revenue here. I think your comments are spot on. We have had a commercially approved program. We have several programs that I would say are in later stage. I think you're probably referring to one specific. Look, I think that continues to be a meaningful customer for us. It's assumed in our guidance in fiscal 23 that it will continue to be. And it's difficult to comment on any specific customer or individual programs as well as the revenue, I would say, attached to it. But the progress of the pipeline that we have within gene therapy, the fact that we've been investing here to bring on additional suites, which we'll have 18 suites here as we get through fiscal 23, up and running, as well as 150 different development programs that we have on the gene therapy side of the business here. So a very robust pipeline that continues to mature.

And I just would add a more helicopter view. We believe that our BWI asset with the gene suite will be one of the largest, if not the largest, viral vector monitoring assets out there. And that clearly is going to be a meaningful contributor of our growth story in the next few years, given also the strength of the pipeline that we're seeing with the customers progressing to late stage and potential approval.

All right. Next question, operator.

Thank you. Our next question is from John Sauber from UBS. John, your line is open. Please go ahead.

Thanks for taking the question. Maybe just one here and some of the comments you mentioned on the inflationary pressures in the updated guide. Can you talk a little bit just on pricing? Are you starting to see now more pushback from customers, maybe more specific on biotech customers on some of the price increases with the inflationary pressures in the market? Thanks.

Yeah, sure. Look, I do believe that we have been successful in levering the price as appropriate. Clearly, it's not a one-size-fits-all around the different offerings. There are different market positions. Clearly, on your more commercial business where you have long-standing contracts and there are mechanisms and relationships and so forth, it tends to be more uh easier and more aggressive stand on the other places where you know you are competing to win business you you really need to be careful around where the market is going but we have a very good pulse of uh without the areas of opportunities and we are pushing doing everything we can on every other opportunity there to make sure that we offset as much as we can at the inflationary pressure that we are seeing

All right. Thank you. Next question, Daisy.

Our next question is from Jack Meehan from Nefron Research. Jack, the line is open. Please go ahead.

Good morning. Alessandro or Tom, can you provide color on cancellations? How are they in the quarter relative to historical periods?

Look, I wouldn't say we've seen much in the way of cancellations in the current quarter here. That wasn't an impact of the results in first quarter. I would say we've seen a handful of cancellations as we think about the remainder of the fiscal year, but I wouldn't necessarily say it's any different than what we're seeing, what we've seen historically. I would say, though, the overall progression of not things that are being canceled, but just the pace in which customers are are willing to move is where we're seeing the slowdown, right? So this isn't programs that are being necessarily canceled, but certainly a slowdown. And that slowdown, both on the pharma and consumer health side, as well as the biologic side, was what was contemplated in the more conservative view of guidance.

Yeah, look, I would call it more selectivity, right? Selectivity on both sides, our side, the customer side, in terms of understanding how we're going to progress the business going forward, given the cash situation.

Thank you. Our next question is from Evan Stover from Baird. Evan, your line is open. Please go ahead.

Yeah, I want to make sure I understand how consumer spending habits actually impact your business. So earlier in the question and answer, you said that the change in consumer spending was about 30% of the guidance cut, or my math, that's about $100 million. And also, if I look at what that would relate to, Your consumer health and OTC business is about a $700 million business in fiscal 22. I guess $800 million if I fully impacted with Batera. I mean, I just put those two together and it's a $100 million cut on a $700 or $800 million business. It's, you know, strong double digits impact for that business for a change in consumer spending behavior, which seems like a big change in end market demand. So I just want to make sure I really understand how that consumer spending impacts your business.

Well, look, I will refer to some of the specifics. I'm going to tell you that you don't have to look at these only on an end market event standpoint, right? There are at times two compounding effects. One is the end market, and the other one is the stock levels. And, you know, there are temporary consequences Our demand is the combination of the end demand and how much inventory our customers want to carry about each individual offering. And clearly, when there is more uncertainty and surely the orientation towards the end market demand tends to be a little bit lower, there is surely in a capital-tight market as we are running today, there is more a conservative approach, how much inventory you want to carry. So these are, the inventory piece is a temporary effect that tends to balance off in a few months period because at some point once the destocking has happened, you're really serving the end market demand. But I believe these are the two effects that compounded probably explain better the dynamic around your question.

Thank you.

Our last question today is from Luke Sergot from Barclays. Luke, your line is open. Please go ahead.

Great. Thanks for sneaking me in at the end here. So as you think about the, can you guys give us a sense of the guidance methodology and, you know, how you guys factor in potential approvals from some of those cell and gene therapy businesses? And then can you give us a sense of or just give us a size of the business of cell and gene therapy and how that's been growing?

So, sure, Luke, I'll give you some directional color here. We haven't quantified the cell and gene therapy business in terms of its size, but I'll rank our revenue contributors biologics overall here, and I would definitely dissect both cell and gene therapy because they're two very different businesses at different stages of maturity. Our drug product business around biologics is our largest revenue contributor here, but our gene therapy, I would say, is a close second to that in terms of its contributions to the $2.5 billion of biologics revenue that we would have annually. I would say from there, it's our drug substance business and then our cell therapy, and then you start getting into some smaller revenue contributions from plasma DNA, iPSCs, et cetera here. So our gene therapy is the number two contributor to overall biologics revenue in terms of absolute dollars. It's the area where we're seeing fastest growth right now, for sure, and a big reason of why we saw the growth we did in the first quarter across the company of more than 20% on a non-COVID basis. In terms of assumptions here, look, we're not going to take an overly aggressive approach to regulatory approvals, which are outside of our control and in many cases in most cases outside of our customers' control as well. So, you know, we're not assuming any significant impacts from commercial approval down the road here that factors into us being able to achieve our guidance, especially a guidance that's been built now with a much more conservative orientation than what we previously had discussed.

Maybe I'll add just one comment in terms of adding additional follow-up to the dynamics here. You need to think about the potential commercial approval not only as a dynamic to serve the commercial approval, but it is also a dynamic that precedes that, that is a more launch stock build-out, which you do normally for sizable approvals, on which we have a little bit more confidence around what the impact could be. So with that said, I would like to wrap up the call. I guess we are done with questions. So thanks, everyone, for taking the time today to join our call and for your continued support of covering. Thank you, everybody.

Thank you, everyone, for joining today's call. You may now disconnect your lines and have a lovely day.