Catalent, Inc.

Hello all and welcome to Catalan's first quarter fiscal year 2024 earnings call. My name is Lydia and I'll be your operator today. If you'd like to ask a question during the Q&A, you can do so by pressing star followed by the number one on your telephone keypad. I'll now hand you over to your host, Paul Serdes, Vice President of Investor Relations to begin. Please go ahead.

Good morning, everyone, and thank you all for joining us today to review Catalan's preliminary first quarter 2024 financial results. Joining me on the call are John Greisch, Executive Chair of the Board, Alessandro Maselli, President and Chief Executive Officer, and Mattie Misanovic, Senior Vice President and Chief Financial Officer. 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 including as a result of the finalization of Catalan's fiscal 2023 and first quarter fiscal 2024 financial statements. 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. Please also refer to Catalan's annual report on Form 10-K for the year ended June 30, 2022 as amended, Catalan's quarterly report on Form 10-Q for the three and nine months ended March 31, 2023, and her filings with the SEC for additional information on certain of 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 John for some brief opening remarks. before handing it to Alessandro. Commentary for these two presenters is covered on slide five.

Thank you, Paul. Good morning and thanks for joining us today. Before I turn the call over to Alessandro, I want to share a few comments on the quarter and on the progress our management team and strategic and operational review committee have made over the past two and a half months toward achieving our goals. As you saw in the earnings release, and we'll hear further from Alessandro, we have delivered a solid first quarter and are confirming our full year guidance. Given the turmoil in many of our markets, we are pleased on both fronts. In addition, Matty and his team have brought a renewed focus on cash flow, and we are encouraged by already seeing benefits from improved working capital management and greater analytical rigor around CapEx spend thus far in the year. I want to reiterate that we expect to catch up on our fiscal 2023 and first quarter 2024 SEC filings later this month. We've been working tirelessly to finalize these documents over the last couple months. Maddie will go into additional detail on this topic later in today's call. Finally, I'd like to comment on the work underway by the board's Strategic and Operational Review Committee. As you will recall, we formed the committee at the end of August to conduct a thorough review of our businesses, strategies, operations, and capital allocation priorities with a view towards maximizing the long-term value of the company. Since then, the committee has made progress identifying and evaluating a number of options to maximize long-term value creation for shareholders. We continue to work closely with Elliott as we thoroughly evaluate these strategic options, and we look forward to sharing a more detailed update with all of you at a later date. Let me wrap up by emphasizing that the entire Catalan team is working hard to execute against our strategic plans in order to improve performance and create value. As you will hear today, we are confident in the value of opportunities that lie ahead and are pleased that our first quarter performance puts us on track to realize our 2024 plans. With that, I'd like to turn the call over to Alessandro.

Thank you, John. Good morning, everyone. I'm proud of the work the Catalan team has done to deliver a strong start to our five fiscal year 24. We delivered a solid financial performance in the first quarter, including a 5% non-COVID revenue growth, while also progressing on all fronts with our operational improvements. I echo John's confidence in our plan. and I'm pleased to reaffirm our fiscal 24 guidance today. While the macro headwinds that we started to call out in November of last year are still present, the strength of our pipeline is bearing fruit, allowing us to continue to guide to a meter to high things revenue growth rate this year when excluding COVID-related revenue. Key factors underpinning our confidence include continued high demand for our gene therapy services, expanded exposure to GLP-1 demand as we bring up more lines, and a very strong rate of new approvals that we have seen in the pharma and consumer health segment in this calendar year. We continue to address underutilization at some of our new facilities. foster our commercial efforts to accelerate new business wins and reduce our capital deployment in affected areas, all while focusing our capex on projects that leverage high-demand areas. We also made measurable progress in implementing operational improvements in our biologic segment, resulting in favorable performance trends over the last few months. and a quarterly sequential 1,400 basis points improvement in EBITDA margin. We are committed to demonstrating what we believe is our unrivaled ability to run the best truck development and manufacturing facilities in the world, both to our investors and our customers. To help us achieve these goals, We recently appointed David McEarlane as the group president of our biologic segment. David, previously SVP of Lonza's bioscience business, is a seasoned and highly successful business leader with a record of developing winning strategies that drive growth and create significant value. We are energized by the immediate positive impact he's already making on the business. In biologics, we have seen the impact of operational enhancement and strong commercial demand on our financial results. In the first quarter, our drug product business in Brussels and our gene therapy business in BWI each had a strong year-over-year and sequential growth, as well as margin improvements. As you know, The BWA facility serves multiple programs for our largest customer, SREPTA, as well as many programs for other customers. Our pipeline for gene therapy is healthy, including several programs in late stage, one of which was recently signed. As a reminder, the late stage programs are generally insulated from softness in the biotech funding environment. Our work class team continues to ramp operations and work around the clock to meet Sarepta's demand and manufacturing goals. Sarepta has recently confirmed their scale-up plans for calendar 2024, firming up orders, and we expect revenue from these top customers to grow approximately 65% this fiscal year. as we manufacture products for the U.S. market and the rest of the world to Sarepta and its partners. Additionally, I'm very pleased with the progress we are making on our working capital initiatives, including contract assets, of which Mahdi will provide additional details. In Bloomington, we continue to improve operational performance and we ramp up the assets needed to satisfy demand across multiple new products, including the GRP-1s. As a result of this multi-site progress, we expect to exit the fiscal 24 with the more normalized pre-pandemic margins in the biologic segment. Moving to pharma and consumer health. This segment delivered the first quarter in line with our expectations with the solid organic growth when excluding our consumer health business. Revenue growth in the consumer health business is expected to decline in the first half of fiscal 24 and then return to growth in the third quarter. This growth is driven in part by an impressive commercial win in the first quarter. a new strategic contract with one of the leading consumer health companies for our GAMIPI offering. This is in line with our strategy to leverage the Catalan brand to increase the penetration of the legacy Bettera business in the top global consumer health companies. Winning this important contract while making progress on other exciting business development activities bolsters my confidence in our ability to achieve our goals for the PCH segment performance in Fiscal 24 and beyond. Before I end the call to Mahdi, I would like to touch on some important and exciting updates about the biologics business on the commercial front. Our exposure to the GLP-1 opportunity is rapidly growing. We are now forecasting that a larger majority of our current and future prefilled syringe capacity coming online in fiscal 24 through fiscal 26 is expected to be booked soon in support of this exciting category of products, confirming our position as a leading CDMO in this space globally. We have plans to accelerate our investments in this area within our existing sterile fill and finish facility in Bloomington and Anaheim, including partnering with our customers. We believe we are only beginning to see the tailwinds from this category. Just for reference, in fiscal 24, we expect revenues of less than $100 million from GLP-1 programs. Once all these lines I just referred to are completed and running at scale, we anticipate that this product category to contribute well over half a billion dollars in revenue. As you all know, GLP-1s present an enormous opportunity for growth in the coming years. The major role that Catalan will play in bringing this important innovation to market especially so soon after our contributions during the COVID pandemic, is a testament to our unique capabilities and positioning. Catalan's board and management team remain confident in the future of our company as we continue to make strides towards improving our operations and bringing our matching performance back to pre-COVID level with urgency. while growing the exposure of the company in the most exciting areas of the biopharmaceutical service industry. We remain focused on delivering value for all our shareholders by executing on our mission to improve the lives of patients every day. I will now turn it to Madi for a discussion of our Q1 financial results.

Thank you, Alessandro. I'd like to begin with an update regarding the status of both our annual report on Form 10-K for the fiscal year end of June 30, 2023, and quarterly report on Form 10-Q for the fiscal quarter end of September 30, 2023. While we have implemented improvements in our accounting and finance staffing and related closing processes, as we noted in our notification of late filing on Form 12-B25 filed on Monday, we were unable to file our 10-K and 10-Q on time. We require additional time to complete procedures related to management assessment of the effectiveness of our internal controls over financial reporting as of June 30, 2023, and other closing procedures. This has included procedures related to management assessment of the measurement and timing of a non-cash goodwill impairment of approximately $700 million. which relates primarily to acquisitions in the company's consumer health and bio modalities reporting units in its pharma and consumer health and biologic segments respectively. Please note that for purposes of providing our preliminary first quarter fiscal 24 earnings, we have assumed that the non-cash goodwill impairment will be included in our first quarter results. We are also incurring substantial time to review other closing procedures supporting our 10-K and 10-Q for both reporting periods. We expect to file the Form 10-K on or before November 27, and we expect to file Form 10-Q promptly following the filing of our 10-K. Additionally, based on currently available information and subject to completion of our evaluation of the potential impairment charge, as well as the preparation of our financial statements and assessment of our internal controls, we do not expect any material change to the financial results to be included in Form 10-K compared to the financial information reported in the preliminary earnings release calendar to the SEC on Form 8-K filed on August 29, 2023. We appreciate your patience as we work through and complete our closing procedures. Moving on to our preliminary first quarter results, starting with the consolidated numbers on slide six. Net revenue in the quarter was $982 million, down 4% on a reported basis and 6% on a constant currency basis compared to the prior first quarter. This decline is primarily attributed to the significant reduction in COVID revenue of approximately $85 million in the quarter. as well as a one-time $30 million licensing fee in the prior year. This was partially offset by constant currency revenue growth in the rest of biologics of 11% and 5% in PCH. The metrics acquisition, which is reported in the PCH segment and closed in October of 2022, accounted for 2% growth on a consolidated basis. Our first quarter adjusted EBITDA decreased 38% to $115 million, or a margin of 11.7% versus margin of 18.3% in the prior year quarter. On an organic basis, our first quarter adjusted EBITDA declined 45% compared to the first quarter of the prior year, primarily driven by a decline in COVID revenue. I will speak further to the major drivers of these results in the segment comics area. Adjusted net loss was $19 million, or a loss of 10 cents per diluted share, compared to adjusted net income of $61 million, or 34 cents per diluted share last year. Reconciliations from gap net earnings to each of adjusted EBITDA and adjusted net income are in the appendix to the slide deck. Excluded from adjusted net income are the non-cash goodwill impairments, totaling $700 million I just reviewed. Now I'll discuss our segment performance, where commentary around segment growth will be in constant currency. As shown on slide 7, first quarter net revenue in our biologic segment was $447 million, a 16% decrease compared to the prior year quarter. The decline is primarily driven by significantly lower year-on-year COVID demand. First quarter COVID revenue of approximately $100 million represents a decline of approximately $85 million from the prior year period. On a non-COVID basis, biologics revenue in the first quarter was in line with the first quarter of 2023. When excluding the one-time $30 million licensing fee signed in the prior year, non-COVID year-on-year revenue growth in this segment is approximately 11%. This result was driven by double-digit revenue growth in gene therapy, non-COVID drug products, and drug substance, offset by a decline in cell therapy. The bar chart on slide seven illustrates the biologic commercial and development revenue streams, where the classification of development versus commercial is driven by the contractual language, which does not always align with the regulatory status of a given product. The large drop in development revenue in the first quarter had two primary drivers. First, the year-on-year decline in COVID revenue that has been designated as development revenue. And second, a large gene therapy product whose revenue was treated as development revenue a year ago is now treated as commercial revenue. Moving to EBITDA, the biologic segment's first quarter EBITDA was down $61 million year-over-year to $52 million. but was up $64 million sequentially from a $12 million loss in the fourth quarter. The sequential improvement from the fourth quarter to the first quarter is primarily a result of improved productivity and schedule adherence in the BWI and Brussels facilities. Margin was 11.6% compared to 21.5% recorded in the prior year, and up 1400 basis points sequentially. The year-on-year drop in EBITDA margin was primarily driven by COVID declines as well as underutilization at new modality facilities, including our cell therapy business. We reduced our cell therapy cost structure during the quarter and expect improved performance in the second half of fiscal 2024. Similarly, in Bloomington, we have formalized a transformation project that will help drive margin improvement this year and in the future. When combining these prudent actions and our projected increase in revenue growth, we expect our biologic segment to improve margins on a year-over-year basis with a more pronounced impact as we exit the fiscal year. Our non-COVID, non-sarepta biologic business is expected to grow in the low to mid-teens in fiscal 24 as we launch GLP-1 production and bring on incremental capacity and improved productivity. Importantly, we have high visibility over this growth given the strong demand from customers. As a result of our unique scale and capabilities in sterile fill finish, we continue to install and qualify new pre-filled syringe lines in our global network and are excited to have more pre-filled lines on order as part of our committed CapEx spend coming online in fiscal 25 and 26. We believe this investment will drive a highly attractive return on capital for cattle over the long term as we install and validate those lines in our existing facilities. As shown on slide 8, our pharma and consumer health segment generated net revenue of $535 million, an increase of $23 million, or 5% compared to the prior year first quarter. With segment EBITDA of $101 million, down $10 million, or a 9% decline over the same period. The segment's revenue growth was primarily driven by the prior year's acquisition of metrics. On an organic basis, the segment declined 1% as growth in prescription products and clinical supply services was outweighed by softness in consumer health. We expect consumer health to decline in the first half of fiscal 24 and return to year-on-year growth in the second half of the year in part due to the recently signed substantial contract with their premier consumer health company. Adjusted EBITDA margin of 18.9% was lower by 280 basis points year-over-year from the 21.7% recorded in the prior first quarter. The decline was primarily related to underabsorbed capacity in the gummy network and the impact of a one-time $10 million insurance benefit received in the first quarter of fiscal 23. PCH has strong underlying fundamentals and continues to perform at a high level. Slide 9 discusses our debt, debt maturities, related ratios, and CapEx plans. Our debt load remains well structured and allows for good flexibility. Our nearest maturity is not until 2027. Our primary debt covenant is the ratio of net first lien debt over the trailing 12 months adjusted EBITDA. The covenant requires this ratio to remain below 6.5 times, and the September 30th actual level was 3.4 times. Catalan's overall net leverage ratio as of September 30th, 2023 was 7.4 times, a sequential increase from the fourth quarter at 6.4 times, driven by the lower year-on-year last 12 months adjusted EBITDA. Because the EBITDA portion of the net debt leverage ratio is calculated on an LTN basis, We expect this ratio to peak at the end of the second quarter due to the significant decline in COVID revenue on a year-over-year basis and then rapidly improve in the second half of the fiscal year back to the June 30, 2023 level as our adjusted EBITDA recovers to more normalized levels. One of our top priorities remains reducing our leverage. And as we disclosed last quarter, we are taking a number of steps to achieve this. including reducing working capital, ensuring that capex spend is aligned with our strategic initiatives with shorter payback periods, and maximizing EBITDA with revenue growth and cost structure alignment initiatives. With these initiatives underway, including the recent finalization of a contract amendment with one of our large customers in gene therapy, we expect to significantly improve our cash flow generation as we substantially reduce the level of contract assets. we now expect free cash flow to be in excess of $100 million in fiscal 24 versus our initial expectation of initial. We continue to identify opportunities to drive further free cash flow generation for the year. Our combined balance of cash and cash equivalents as of September 30th, 2023 was $209 million, a decrease of $71 million from June 30th, 2023. The decrease in cash was driven primarily by an increase in contract assets in the quarter related to the ramp of production to meet customer demand. As of September 30th, 2023, contract assets had a balance of $543 million, a sequential increase of $107 million and up $82 million year on year. Importantly, we expect the contract asset balance to decrease going forward. At September 30th, we had one strategic customer, a majority of whose business relates to our gene therapy platform that represented 30% of our $1.4 billion in aggregate net trade receivables and contract assets. We continue to convert the contract assets to accounts receivable and receive timely payments from the customer. As such, we are very confident about the collectability of our contract asset balance, the reduction of which will accelerate as a result of the previously mentioned contract amendment. The same customer represented approximately 16% of consolidated revenue in the first quarter of fiscal 24, or approximately $155 million. We expect revenue contribution from this customer to also be approximately 16% of total consolidated revenue for the full fiscal year. We have clear line of sight into this outlook, given already committed orders. Finally, CapEx in the first quarter was $84 million. We continue to expect CapEx in fiscal 24 to be in the range of 8% to 10% of revenue, representing approximately $400 million. Please now turn to our financial outlook for fiscal 24 as outlined on slide 10. With a third of the fiscal year behind us, we are confident in reiterating our fiscal 24 guidance, which includes net revenue in the range of $4.3 to $4.5 billion, representing growth of 3% at the midpoint, adjusted EBITDA range from $680 million to $760 million, and adjusted income in the range of $113 to $175 million. Our underlying assumptions are largely the same, with the exception that we now expect COVID revenue of approximately $180 million, $50 million more than our previous expectation of $130 million. Roughly offsetting the COVID revenue increase are unfavorable effects rates in the Euro and British Pound. As a reminder, our non-COVID business is expected to continue to deliver strong performance with full year revenue growth in the mid to high teens for the company. This is driven by roughly 30% growth in our non-COVID biologics portfolio. including approximately 65% revenue growth from our largest customer, which at this point of the year is largely contracted. Non-COVID, non-surreptive biologic segment growth is expected to be low to mid-teens, driven by tech transfer activities. In PCH, we continue to expect mid to high single-digit growth. As we ramp up our non-COVID business and align our cost structure, we expect margins for the company and the biologic segment to recover towards historical annual EBITDA margins. As we exit fiscal fiscal 24, we forecast roughly two thirds of consolidated adjusted EBITDA to be generated in the second half of the year. As shared in our last call, the overall expected revenue split is more balanced with approximately 55% expected in the second half of 2024. In closing, Our priorities for fiscal 24 remain intact. To improve our margins by supporting productivity and cost alignment plans. To deliver incremental free cash flow by lowering the company's working capital intensity and maximizing commercial opportunities. And finally, to strengthen our internal controls and processes over financial reporting and forecasting. With thorough, careful analysis and disciplined execution of our cost structure, We are making steady progress against these initiatives and are optimistic in our continuously improving performance throughout fiscal year 2024. Operator, this concludes our prepared remarks. We'd now like to open the call for questions.

Thank you. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. If you change your mind or your question has already been answered, you can withdraw your question by pressing star followed by the number two. Our first question today comes from Teja Savant of Morgan Stanley. Your line is open.

Hey, guys. Good morning, and thanks for the time here. Alessandro, one on Sarepta for you to kick things off. You've talked in the past of not peaking in the label expansion for Elevitus into your forecast. Sarepta, I think, as you alluded to, said they want to manufacture in anticipation of the unrestricted label ahead of that FDA decision. So how should we think about the implications of that in terms of, you know, perhaps potential upside for you in your FI24 guide? Does the 700 million or so that you're baking in for Sarepta, the midpoint, factor this in, in light of your comments that I think you said you're starting to get orders, you know, from Sarepta now for that incremental production? And then in terms of the potential downside to fiscal 25, if the FDA doesn't allow for label expansion, any sort of framework that you can help us, you know, think through that dynamic here?

Sure. Hi. Hi. Hi, everyone. Look, this is a good question. I would tell you overall, the way I would characterize the relationship with the director, there is a lot of positive momentum there. into the relationship. When you think about our performance, our Q1 performance was really underpinned by a strong operational performance at our BWI facility where we support Even these amounts have been even more reassuring that we are on the right path from an operational performance standpoint. The contract amendment that Matti mentioned, which will really allow us now to normalize more the time to cash profile of these important contracts, which in turn will reduce contract assets and improve cash flow. and really also the firm demand that we've seen in the recent weeks. So going to your question, really, look, our job is to continue to leverage the capacity that we have deployed, the suites with which we are supporting the customer, and continue to now sustain this very good level of performance, which is the one that will allow us to satisfy this demand. And in terms of your last part of your question, in terms of you, I will not speculate, of course, on the label expansion of FDA. It's not my place to do so. But in terms of making your model and working through your model, I will remind that, as we disclosed in these, 50% of the revenues are pass-through revenues coming at fairly low margin with a mid to high single digit margin. These are materials and testing services we buy on behalf of the customer. So this could, I believe it can be helpful in modeling this out.

Got it. That's actually helpful. And then I want to ask one on just, you know, ex-COVID, ex-Syrepta growth on a sequential basis. you know, just doing some quick math here. It sounds like you guys had about, you know, $235 million in biologics revenue last quarter. That went to about, you know, maybe $185-ish this quarter. And so, can you just walk us through the moving pieces there? I know you gave color year over year, but just sequentially. And I know you got the fill-finish capacity, you know, utilization for COVID here. Did that play a role in this, or was it sort of some of the cell therapy work declining? And then, On your comment on the significant GLP-1 ramp over the next couple of fiscal years for you here, any color on the slope of that increase and at the cadence at which you expect this new capacity to come online?

Yeah, sure. Look, I got to cover the GLP-1 and then hand over to Maddy to give you some help for reconciling Q1. So when it comes to GLP-1, I would say for this fiscal year, it's fundamentally a a second half of the story. The second half is really when the commercial production is going to start counting on some of the new assets. I will also add that, as I said, we expect significant new capacity coming online between fiscal 24 and fiscal 26. And probably, you know, the way you should be thinking about these is probably that each of these given years, you know, we're going to more than double the capacity that is going to be deployed against the GLP-1, so any given year. So there are a lot of lines that are already installed and they have been qualified. So some of them will come to the end of this fiscal year, full strength the next year. That is the phasing. The next year is really going to be a full year story, not only H2. And so I believe that assuming that there will be more than doubling the capacity available for this demand and the fact that we have a very strong visibility to the demand can be helpful for you to understand the ramp.

Yeah, so biologics, non-COVID revenue, and then stripping out the $30 million licensing fee from the prior year quarter, we're up 11%. So I think I put that in the script, and I think I talked about that, but maybe you didn't pick it up. But we can reconcile.

I was just talking about the sequential trends there, Matty. What happened in 4Q versus 1Q, not year over year?

Oh, so fourth quarter, so, you know, clearly our BWI business has really kind of come, has bounced back, and then Brussels continued to improve. And so those are the two primary businesses, and, you know, with BWI being the gene therapy business with our ramp up, as I discussed in the script, you know, obviously our BWI gene therapy business is well up.

Got it. Thank you.

Our next question today comes from Luke Sergot of Barclays. Your line is open.

Great, thanks. I just kind of want to dig in here on the overall gene therapy franchise and how big this is for you. I know that you have, you know, you guys have always bucketed it as your, you know, MABS and the other drivers of indications. that would kind of be helpful as you think about the rest of the gene therapy business outside of the, you know, Sireptin 9-0-0 or Elevitas drug.

Hi, look, thanks. This is Alessandro. Look, first of all, let me clarify. Our MAPS protein business is not classified under gene therapy. We call it a drug substance. And thanks for the question because we are having a very good year in drug substance. And I do believe that it's good momentum going forward there. We had a lot of seeding happening in that business over the last several years and now it seems that the harvest time is coming with a significant amount of late stage program heading towards commercialization, some of them very exciting. have been acquired by Big Pharma, so they've extended patient populations. So very exciting areas for us, drug substance, and it will be a great contributor as we go forward. In terms of the gene therapy business, as I said, we have a pretty balanced portfolio. Number one, you know, with SREP as well, we have several programs with them, some of them very exciting. But also there is, I've seen some good momentum there. Some programs getting some early, very good clinical data, which made customers more bullish in moving full steam ahead in scaling up. So, look, the biotech funding environment, it is what it is. We were the first one to call it out one year ago. It remains a little bit uncertain, but when you look at our own portfolio and our own pipeline, I feel pretty good about it. The cell therapy story remains a little bit, you know, one where we have reviewed our outlook there. We have reassessed our outlook. And so, as Madi said, we've taken an opportunity to really rebalance the absorption there. And this will be a driver of margin improvement going forward because now we're going to suffer by much less underutilization and negative impact there. hopefully this gives you a little bit of color across all the different sub-segments.

Yeah, it helps. And then I guess on the biologics, you know, there's elevated pass-through coming through here. You have the GLP-1, you have the PENS, you know, also with the Sarepta, you guys kind of called that out. Can you update, like, how much of the of the business comes from the sourcing, and then are you seeing a similar margin that you have in the past there, or is this going to be elevated like we saw with the COVID sourcing?

When you think of the biologics business and the pass-through revenue, Sarepta has about a 50% pass-through content, and that's materials and testing. The balance of the business is between, I would say, 15% to 20% is where it sits. from a pasture perspective. And the margins are a little bit different. Margins are pretty low, as we articulated on the – as Alessandra articulated on the Sarepta piece. They're probably, you know, I would say mid-single digits to mid-teen digits on the margins on the balance of the business of that 15% to 20%.

I just would add one other element of color there. A drug product is very different from drug substance in general when it comes to material pass-through. Not necessarily the materials are, you know, less expensive, but most of the time they are bought by the customers, not by us. So they really don't affect our revenues. They don't affect our margin.

Great. Thanks.

Our next question today comes from Dave Windley of Jefferies. Your line is open.

Hi. Thanks for taking my question. I hope you can hear me. I'm in a hotel basement. Can you hear me?

You sound good. You sound good, Dave.

Okay. All right. Thank you. So my question is maybe a follow-on to Teja's earlier question. but a broader one. The company, let's call it pre-pandemic, used to talk about the diversity of the platform, 7,000 products, no one product really makes up a substantial percentage of revenue, doesn't move the needle necessarily. And you're moving into a period where not two products very substantially move the needle. I guess what I'm also thinking is that Again, related to Tejas' question, Sarepta has a label expansion kind of optionality element to it, and the GLP-1s have oral delivery of GLP-1 data readouts coming out. So how do you think about the concentration of those revenue streams in your business and risk mitigating that in the potential that both of them could see headwinds from developments in the pipeline. Thank you.

Yeah, sure. So, David, a couple of things. First of all, you're calling out two of the key, I would say, dynamic of our industry overall, surely GLP-1B1. And I feel very proud and look excited that Catalan was able to have such an exposure to that. So I don't see that necessarily under negative terms is great and it's something that can be applied across several therapeutic dynamics, therapeutic areas as dynamics across different geographies. So I would say it's a little bit of a different element compared to the gene therapy program that you have mentioned. Also going forward, because of the different therapeutic areas, the different potential indication, extension of indications of GLP-1, I don't see that category to be a significant element of volatility, so to speak. Our job there, I believe, is to continue to do a great job for our customers and continue to bring the capacity online. pretty much as a consequence. I don't believe personally that Toral will be a significant competitor of injection for the time being. When you think about that in the current form like peptides, the bioavailability is not that high, so there is a lot of API there. There are studies out there that are showing a much more API you need in the oral delivery versus the injectable. So I do believe that it's going to be, for the time being, an injectable story, personally. And with regards of how we are approaching these, look, for me, the important thing is that we understand the dynamics, we understand the market, that we position ourselves a little bit in the middle of the range. We don't expect, you know, in our projections, everything to be going in the right direction and leaving the debt as an upside. And we position ourselves in a, I would say, prudent way when it comes to these dynamics so that we have a good set of different options to continue to grow the company in line with expectations.

That's great. Thank you for that.

Thank you. Our next question comes from Justin Bowers of Deutsche Bank. Your line is open.

Hi, thank you, and good morning, everyone.

So just wanted to get a little clarity on some of the prepared remarks. With respect to GLP-1s, I think you said 100 million This year, is that incremental over next, sorry, over last year, or is that total? And can you sort of give us a sense of what the order of magnitude was in FY2023? And then I think you said sort of a 500 million run rate number, and is that sort of like the targeted exit rate? in FY2026, or is that sort of the contribution from the incremental capacity coming online? And then I think you said most of that you have firm orders for. So do you have protection for that, i.e., some sort of take or pay arrangement?

Great question. So first of all, Yeah, look, you know, we said that this year is going to be below $100 million. We didn't say $100 million. for sure one of the contributors of the non-COVID, non-serrepta growth in biologics, right? So because, you know, so far there's been more tech transfer work and now it's becoming commercial work. So first of all, it's contributing to our growth outlook, and as I said, it's more an H2 story than an H1 story. So it's also helping with what you see as a ramp, H2 versus H1. With regards of the long-term outlook, I said, that is going to be well over half a billion. I gave a little bit of a color around the timeframe. And to be quite honest, with your question around the demand, I see for this franchise the capacity because of the constraint factor rather than the demand. So it's going to be really depending on our ability to bring capacity as fast as possible. We are seeing a very high level of interest and demand for these assets and really is one where capacity is going to be the constraining factor on all the fronts. And I believe that the runway goes beyond the 26 timeframe that we have highlighted here. So all in all, it's a very exciting space to be in.

Thank you. And then just a quick follow-up on the gene therapy franchise. Can you talk a little bit about the dynamics, Xtrepta, i.e., are there other programs in your pipeline that are advancing through different stages? And then with respect to the top customer, are you ramping up additional production throughout the year, or is this just sort of a conversion of things in flight with the existing outlook. Thank you.

Yeah, look, first part of the question, as I said in my prepared remarks, the pipeline is healthy, both with the additional program with our biggest customer, but also with other customers. As I said, we signed very recently another late-stage program And the clinical data on that program look very, very exciting. And impact on patients, it could be great. So it's also in line with our core value of patient first. So I would define the pipeline in gene therapy as healthy. And I will also tell you that in gene therapy, the capacity it's easier to redeploy compared to other technologies. Normally, in gene therapy, you have a suite, but you have most of the units are mobile units. So it's very easy to reconfigure the capacity compared to other technologies, at least for the way we have designed our facility. We make them very, very fungible across different type of products. And with regards to the profile of these, look, you know we we that is the physical capacity and that is the productivity uh that you can achieve uh we are ramping right so our physical capacity is fully deployed fully staffed fully equipped but clearly we are not ramp for productivity as as you know we come from a very difficult spot during the spring because of some of the challenges we have disclosed. And now we have an exciting ramp. So I will tell you that we are ahead of the ramp that I had in mind at the beginning of this fiscal year, but there will continue to be progress as we go through the year. So the more we improve our output, the more demand we will be able to satisfy for our customers. As we said, the The visibility on this demand is pretty high at this point of the year, as Maddy shared.

Thank you, Alessandro. I appreciate the time.

The next question in the queue today comes from Jack Meehan of NIFRON Research. Your line is open.

Thank you. Good morning. First, I was wondering if you could just elaborate on the factors that are leading the strategic review to take a bit Longer, at least, versus what I was expecting. Last quarter, the word urgent was used multiple times, and, you know, I was expecting some sort of update here. Can you just maybe talk about anything you can share? Thank you.

Yeah, Jack, this is John. So if you think about the committee that we formed a couple months ago, we've got two new directors and two of our legacy directors plus myself on it. I'd say the three top priorities of the activities of the committee have been to focus on operational improvements along with Alessandra and the team, focus on cash flow improvements, and focus on capital structure improvements over time. As you saw and heard in the comments, Alessandra and the team continue to drive operational performance and cash flow improvements. Um, you know, in, in, in a way that gives us a lot of confidence for the rest of this year. So like the first two priorities were to get the company, you know, back on track out of the surprise mode, which we've been in for the last several quarters and deliver on, on the commitments that the teams laid out. I think they've done a heck of a job doing that as we start fiscal 24. Uh, the committee, along with our partners at Elliott. are evaluating several strategic options to address the capital structure improvements over time. With a sense of urgency, we've spent a heck of a lot of time getting everybody up to speed on where we are. It's an area where we don't want a ready-fire aim. And with the operational improvements and the cash flow improvements, you know, we're We're out of what may have been perceived by some as crisis mode and in a position where we can thoughtfully evaluate those options going forward. In addition to the committee and the full board, Alessandra and I spent a lot of time with our partners at Elliott evaluating those options. And we don't have anything to announce today. But as noted, we'll provide updates if and when specific decisions are made by the board. So I think the near-term operational improvements, cash flow improvements, you heard from Maddie, we've improved our pre-cash flow outlook for the full year. And they've made some great moves along those lines, as well as the operational improvements you heard from Alessandro. Those are on track. Capital structure over time, we'll address it. But we're not ready to announce any decisions today. But we'll do so once the board and Alessandro team make those decisions.

Okay, I appreciate that feedback. And a question for Maddie. On the GLP-1s, can you talk about the returns you're expecting on this additional pre-filled syringe full finish capacity you're adding? I'm having investors email me for a little bit more detail on that. I know you said it would be attractive, but just any context would be great.

I really can't. I mean, I think Alessandro laid it out. We're in the stage of trying to book that business, and so I think it would be a good idea for me to disclose the returns and what we're looking at from a pricing perspective. But I can tell you that it will be very attractive for Catalan overall.

I would also say that, you know, we have configured these franchises with – lines which are twin of each other so our ability to continue to deploy the product across multiple lines is on an accelerated fashion because we're just going to somewhat copy and paste what we have learned in the first time transfers so so you can expect that the ram to revenues on the new assets are coming online is going to be it's going to be faster and that's the number one factor that affects your return and the margin but as maddie said we expect the margin to be

The thing I'd say is from a ramp-up perspective, I think the company has proven itself. If you look at what it did with COVID and the ramp-up of COVID and meeting the COVID demand, the company has a proven track record to ramp up quickly and ramp up its facilities quickly to deliver. And I think leveraging that experience of the company into this GLP-1 opportunity is significant.

Next question, operator.

The next question comes from John Sauerbeck of UBS. Please go ahead. Your line is open.

Morning, Anne. Thanks for taking the question. Two questions here. First one on COVID. Just any way to quantify, you know, what the COVID margin contribution was in the COVID quarter? And, you know, COVID came in quite a bit ahead of our expectations. You know, you raised the guidance there. Any color on just the pacing there for the remainder of the year?

COVID will have a somewhat negligible impact in the back half of the year. So I think it's going to come down. The first half of the year is when we'll experience most of the COVID demand. There is some demand in the back half of the year. And as for margins, that's not something that we've disclosed historically. It's not something we want to disclose, the margins on the COVID business. So I'd say that that's about as far as I can go from a COVID perspective. But COVID is becoming a less and less important part of the business for us.

Yeah, I would just add, look, you know, compared to pandemic levels, surely not as attractive because, you know, the portfolio is more complex. The level of absorption because of the volume is much lower. So the current level of the margins from COVID are surely not even close to where they were in the pandemic times.

Thanks. Appreciate it. And, you know, second question here also, I guess, on margins. And, you know, you gave some color earlier on, you know, Sarepta margin. But I guess when you remove, you know, the raw material pass-throughs there, maybe just on the gene therapy or drug substance business in general, how do we think about the, and you remove the other pass-throughs, how do we think about the margin profile on gene, you know, drug substance versus fill finish and any differentials there?

So, look, I would tell you that across the board of the drug substance business, the gene therapy, protein, mubs, margin are pretty much in the same zip code where you carve out the material pass-through clearly. Where you have such an idea pass-through, the overall thing gets, you know, lower, but on the pure services side, I would say that there is a pretty much good alignment across the drug substance. I would say the drug product has a little bit of a different dynamic where the margin really depends. Being a very high volume commercial industrial production system is very, very dependent on absorption. And so the margin itself of the products, I would say of the products we run, it's pretty, I mean, it's not big the range, but there are products like the vaccines or the GLT-1s that because of the volume, they can drive a lot of absorption and a lot of margin uplift.

Thanks for taking the questions.

Our next question today comes from Max Smock of William Blair. Your line is open.

Hey, good morning. Thanks for taking our questions and congrats on the nice update. Just looking through Sarepta filings, it seems like R&D on Alevitus has been about four times as much as R&D on some of their other gene therapy programs. Just wondering if based on this, is it fair to assume that something like 75% of total Sarepta revenue for you is tied to Alevitus? And then in terms of that Elevitus spend, is there any detail you can give us around what your fiscal 2024 revenue outlook that's tied to Elevitus translates to from a dose perspective? I think there's quite a bit of uncertainty still out there in terms of how much it costs to manufacture the annual or the actual gene therapy. So, any context there would be great. Thank you.

So, I have one. I'll take the first one. So from an overall perspective, we disclosed the Sarepta revenue, and you can get to the math if you use the script, but it's about 90% of the revenue is Elvis, so it's 9,001. So it's the lion's share, by far the lion's share of the revenue from Sarepta. We do have other programs that are being developed and are in development, and we'll begin to grow more rapidly as we go forward. As far as doses and patients, that's not something that we've commented on, and I don't think it's, and I'll start it, I'll defer to you, but, you know, we fill an order, we fill an order that we're given by a customer, and that customer, or that's what we do now. You know, we study the market, we do look, you know, we do look around corners and we do assess it, but that's not something I think we're going to discuss today. Well said.

Understood. Thank you. Just to clarify, you said 90% Alevitus?

90%, yeah. You can get to that math. Yeah.

Okay, perfect. And then just following up a clarifying one, you mentioned a couple minutes ago that it's easy to reconfigure the gene therapy capacity, and that capacity is pretty fungible. I just wanted to confirm, you're saying it's easy to reconfigure for other gene therapy programs, right? And then while that may be the case, given some of the macro headwinds we've seen, which I think you know, most people would acknowledge have had an outsized impact on the broader cell and gene therapy space. How should we think about your ability to backfill that capacity if Sarepta's label doesn't actually end up getting expanded? Thank you.

Yeah, look, first of all, I personally don't see, you know, these Sarepta as a binary dynamic as you guys are depicting either extended or not extended, you know, but I leave it like that. You know, I believe there is a spectrum there that, you know, is more than just binary. That's been said. Truly, the most fixed part of infrastructure are the suites. And the suites are designed in a way that can serve a number of different processes. What defines the processes are the manufacturing units that are within the suites, and they are mostly mobile. So you can reconfigure them pretty easily. So fundamentally, it's one of those facilities that we have in the network which have the highest grade of easiness to reconfigure and to be redeployed towards other programs. Should we need to do so? At the moment, honestly, I don't have any visibility that we have to do so because we remain focused working around the clock to satisfy the demand of SRETA.

Understood. Thanks again for taking the questions and congrats again on a good quarter.

Our next question comes from Derek DeBruyn of Bank of America. Your line is open.

Hi. Good morning. Thanks for taking my question. Just a Just one clarifying question to start with, and I've got a couple of others. So what was embedded originally in your guide for 2024 for Sarepta from a dollar amount and sort of like what's the incremental that's here now? Just wanted to get some maps a little bit all over the place. So that's the first part.

From our original guide to today, it's remained unchanged.

So you'd already assumed that was going in. Great. Okay. That's what I thought. Just wanted to make sure. And how should we think about PCH margins progressing from here? A little bit lower than we thought in the quarter. How should we think about that moving?

PCH margin sequentially will go off through the year. There's a natural seasonality to the business model that they run and the business they bring in. In addition, we do have some cost structure initiatives going into PCH. And we also noted this new Gumby contract that was one with a very substantial contract that was one that will launch in the third quarter and be in our run rate in the fourth quarter. So we do believe that we've got the opportunity to generate those margins on a sequential improvement basis.

Great. And then just one final one. So I'm looking at the consensus estimates for fiscal 25. The street roughly has you increasing EBITDA by 35%. So that's call it a 16% margin at the midpoint of your current guide. That's 21-ish percent for fiscal 25. I mean, is that sort of 500 basis point gain in EBITDA margins realistic for next year, given where you see the business right now? And I ask this just because I was certainly thinking the margin contribution on the Sarepta business was going to be a lot higher than it actually turns out to be. So just wondering any thoughts on how we should sort of think about EBITDA margin progression as we're exiting 2024.

We talked about our exit run rate being more in line in our fourth quarter, more in line with our historic average. And so I think that's the best guidepost I can give you. We're not going to give a 25 update today or kind of look beyond the full year here today, fiscal year 24. But I think that's a good guidepost to use if we get to that exit run rate that we talked about. You can use that as a benchmark to jump off from.

And one point I'm going to reiterate once again. Our margin reduction this year is not due to a portfolio shift. It's due to an operational dislocation, which we have shared multiple times. And as John said, we have shared in these remarks, we are making – very good progress in addressing that, and probably progress that are faster than our initial expectations. So when you combine these two factors, you can make your own assessment. Great.

Thank you very much.

The next question today comes from Paul Knight of KeyBank. Your line is open.

Hi, thanks for the question. Regarding Sarepta on next year, a lot is booked through your fiscal year ending June. When does the second half of 24 get booked? Meaning, when do we get your FY25 Sarepta booked? Is it starting now? What visibility do you have beyond June of 2024 on Sarepta?

Yeah, I think we've discussed, you know, at a high level, we've had customer conversations around it, but we've discussed how we actually booked the production. Our production's booked on a rolling six-month basis, so that's why we feel really confident about how 24 is going to finish. And as we think about this REAP to readout, and Alessandro may come to his view on this REAP to readout, where is not maybe as binary as some are thinking. So I do think that's the comments I can give you on it. But just fact-specific, we give the order just on a rolling six-month basis. As we work through this year, we'll get further orders that roll into 25. OK.

And then regarding Brussels, you commented that that was improving. Is that due to the biotech demand? Is it GLP-1s? Is it cell therapy? What's making Brussels improve?

So Brussels is a product facility, right? And yes, there is a GLP demand there. It's no secret. It's public available information. I believe that in general, as we said before, the site is sitting on a very high level of demand because it has been paused in production for some time in the last fiscal year. It was a big drain on our margin last year and is going back. It's fully utilized because we have a backlog to recover on. It's going to take significant time. a lot of GLP demand, and I would tell you that the site is performing really well in satisfying the demand.

Okay. Thank you.

The next question comes from Eric Caldwell of Baird. Please go ahead.

Thank you very much. Good morning. I wanted to hit on two topics. The first is coming back to the COVID revenue. Sorry if I missed this, but did you comment on how the $100 million of Q1 revenue compared to your prior expectations or what was originally embedded in street guidance? And then what changed to drive that upside and or the increase for the full year on the COVID side?

I think when we guided for COVID, I think we took a fairly conservative assumption on COVID, not knowing where the season was going to go, number one. But we don't provide, as you know, individual guidance from a court perspective. But I'd say that it's come in stronger. It'll come in stronger in the first half, as I mentioned. It's just not as important in the back half of the year from a COVID perspective, from a court revenue perspective than what we're seeing today. As the season plays out this year, that's going to dictate demand at the end of our fiscal year, our fourth quarter, our second quarter calendar year next year. And we will be able to have more visibility as we work through the tail end of the COVID season here in our second quarter and calendar year fourth quarter. And I think it will dictate the season for next year.

Okay. And then on second topic on the Gummy Award, hoping we could get a little more on the nature of the award. Was that an expansion with an existing customer, a new relationship with a new customer? Was it a competitive takeaway from external or internal manufacturing? And finally, are these new launches from the partner or, you know, maybe that ties back to where this production is coming from that you have been awarded? Any additional details on timing or sizing? I know you said 3Q start, but Sounds like a pretty substantial deal for a segment that's been challenged, so I'm surprised it hasn't gotten a little more attention today.

Yeah, the gummy market's been down. It continues to trend down. The underlying market continues to trend down. This is a share gain. This is a new business for us from this customer. It's an already existing product, and it's going to fit in perfectly into our network. We don't know if they add any SG&A per se on top of it, and it fits into the existing company network that we have and the open capacity that we have. So it's kind of what I'd say is a no-brainer. It's got reasonably good margins from a business perspective, and it's got a very quick payback. So I think overall it's a big win. It doesn't require much capacity to go in, so it's pretty impressive.

Thank you.

Our next question comes from Rachel Vanto of JP Morgan. Please go ahead.

Great. Good morning. Thanks for putting me in. Just one for me on PCH. So last year, you continuously flagged some of the inventory, destocking, consumer discretionary spending headwinds. So can you walk us through, are you still seeing some of those headwinds impacting that business? And then just to follow up on the earlier question around that commercial win on the gummy side, if we exclude that commercial win, how should we think about growth and consumer this year? Thank you.

So, look, let me cover the first part of the question in terms of the headwinds. As we said in the prepared remarks, some of the macro environments that we have highlighted in November last year are still present. And we continue to see some, you know, prudent spend on the side of our – especially the early stage, right? The early stage customers are very prudent in progressing assets through the pipeline, given the biotech funding environment. The consumer environment, you know, is still, you know, not as it was before. But, you know, the reason why we have in our own shop, you know, excitement about the way we're going to continue to grow the company on an ex-COVID basis is twofold, really, right? So, first of all, is the pipeline, right? In PCH, we had a lot of products that have been approved, some very recently, which will drive a lot of growth in our pharmaceutical commercial business. and share gain, right? We knew that over time, our existing relationship with the large consumer company, which were not necessarily the natural market for Petera, those customers, because of the relationship we had with Catalanet and our brand, will end up coming with us. So, you know, we have a little bit of a trend that is better than the market because of these main dynamics. BCH and that's why we are confident about the ramp and the profile of the business as we go through the fiscal 24.

Our last question today comes from Sean Dodge of RBC Capital Markets. Please go ahead, your line is open.

Hey, good morning. This is Thomas Keller. I'm Prashanth. Thanks for taking the question. And apologies if these are covered. I got disconnected earlier. But I wanted to go back to the tech transfers in Bloomington. Should we just consider these complete or are there still some hurdles you need to clear to get these into full production? Any more detail here would be helpful.

Well, first of all, I never said the Bloomington, right? And we already said in previous calls that some of those relationships are extended and expanded. So I would say that now this is something that is really touching all our network when it comes to sterile product. And we feel pretty good about it because it's really the way we want to serve our customers with a network approach, not a side approach, which gives us a lot of flexibility and a lot of optionality for customers. So first of all, it's a cost network. And yes, I do believe that those tech transfer activities could be deemed largely done, of course, on the first line. So there will be more coming on the additional lines. But as I said, it's much easier because these are like-for-like assets to the current ones. And so, yeah, we're now going to start in the second half of the year in in ramping up commercial volumes and really giving more supply to our customers.

Thank you. We have no further questions in the queue, so I'll turn the call back over to CEO Alessandro Muffelli for any closing remarks.

Thank you everyone for taking the time to join our call today. We are pleased to have delivered the solid financial performance this quarter while making operational improvements. At the same time, the strength of our pipeline and new commercial wins increase our confidence in fiscal 24 guidance, which we have reaffirmed. We remain focused on restoring Catalan's historical margins while driving the sustainable and profitable growth, increasing shareholder value, and executing on our mission to improve the lives of patients every day. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your line.