Thomas Castellano – Vice President of Finance, Investor Relations and Treasurer John Chiminski – President and Chief Executive Officer Matt Walsh – Executive Vice President and Chief Financial Officer Cornell Stamoran – Vice President of Strategy.

Tycho Peterson – JPMorgan Ricky Goldwasser – Morgan Stanley Derek de Bruin – Bank of America Merrill Lynch George Hill – Deutsche Bank Gary Nachman – Goldman Sachs John Ransom – Raymond James Dave Windley – Jefferies Sean Wieland – Piper Jaffray John Kreger – William Blair.

Good day, ladies and gentlemen, and welcome to the Q2 2015 Catalent Pharma Solutions, Inc. Earnings Conference Call. My name is Alex, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

[Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference to your host for today, Mr. Thomas Castellano, Vice President of Finance, Investor Relations and Treasurer. Please proceed..

Thank you, Alex. Good afternoon, everyone, and thank you for joining us today to review Catalent’s fiscal 2015 second quarter financial results. Please see our agenda on slide two. Joining me today representing Catalent are Mr.

John Chiminski, President and Chief Executive Officer; Matt Walsh, Executive Vice President and Chief Financial Officer; and Cornell Stamoran, Vice President of Strategy. John will start the call with the review of the key financial and operating achievements for the second quarter.

Then Matt will discuss the company’s fiscal second quarter and year-to-date financial performance as well as update the company’s outlook for fiscal year 2015. Finally, we will open the call up for your questions.

During our call today, management will make forward-looking statements including its believes and expectation about the company’s future results. It is possible that actual results could differ from management’s expectations. We refer you to slide three for more detail.

Please be aware that the forward-looking statements are based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be a representation of future results and are subject to risk and uncertainties.

We refer you to Catalent’s Form 10-K filed with the SEC on September 8, 2014 for more detailed information on the risks and uncertainty that have a direct bearing on the company’s operating results, performance and financial condition.

As discussed on slide four and five, on the call today, we will also disclose certain non-GAAP financial measure, which are used as supplemental measures of performance. We believe these measures provide useful information to investors in evaluating Catalent’s operations period-over-period.

For each non-GAAP financial measure that we use on this call, we’ve included in our earnings press release issued just a few moments ago a reconciliation of the non-GAAP financial measure to the most directly compatible GAAP financial measure.

Please note that this non-GAAP financial measure have limitations as analytical tools and it should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Now, I would like to turn the call over to John Chiminski, President and Chief Executive Officer..

Thanks, Tom, and welcome everyone to our fiscal 2015 second quarter earnings call. I’m joining today’s call from one of our facilities in Brazil where I spent the last few days meeting my local management team. Due to my robust schedule while here in Brazil, I will only be providing some opening comments and will then turn the call over to Matt.

Additionally, Matt, Kurt Niel, and Tom, will handle the Q&A portion of today’s call. We’re pleased with our second quarter results highlighted by revenue growth across all our segments with strong levels of profitability.

Additionally, during the quarter, we continued to invest on strategic initiatives which positioned Catalent for further organic and inorganic growth and offered the potential for market share expansion. I’d like to start my presentation on slide six, which highlights the key financial and operating accomplishments.

Our second quarter 2015 revenue grew 3% as reported and 8% in constant currency to $455.8 million. For the first six months of fiscal year 2015, our revenue was $874.1 million, an increase of 2% as reported and 5% at constant currency.

Revenue growth for both the quarter and year-to-date is driven by strong performance from our Medication Delivery Solutions segment and the modified release technologies business as well as increased demand for analytical services.

As a result of generally favorable product mix and our continuous focus on leveraging existing fixed manufacturing costs, our second quarter growth margin expanded 300 basis points to 34%. However, it’s important to note that market expansion of this magnitude year-over-year is typically high.

During the second quarter, our EBITDA from continuing operations was $101.7 million, an increase of 22% year-over-year.

This strong performances is driven by double-digit EBITDA improvements in our Development and Clinical Services and Medication Delivery Solutions segments due to both mix shift and more profitable products and services as well as operating efficiencies. Our adjusted EBITDA increased 21% year-over-year to $112.9 million or 25% of revenue.

Additionally, our adjusted net income nearly doubled versus the prior year to $55.9 million. Now, let me briefly discuss our key operating accomplishments.

As we already discussed with you on the previous earnings call, during the quarter we completed two strategic acquisitions including the remaining stake in Redwood Bioscience and its SMARTag Antibody-Drug Conjugate or ADC technology platform and Micron Technologies, the leading international provider of particle size engineering technologies.

Just recently we entered into a collaboration with Sanofi-Aventis to implement our proprietary SMARTag technology in the development of next generation ADCs. Under the agreement, we will develop site-specific modified antibody conjugates using Sanofi’s proprietary antibodies.

Our precision protein-chemical engineering approach will enable Sanofi to evaluate site-selective payload conjugation in order to enhance ADC pharmacokinetics, efficacy and safety.

The acquisition of Redwood Bioscience along with our collaboration agreement with Sanofi-Aventis and other customers we are working with, strengthens our position in the fast growing biologics market.

The Micron acquisition enables us to provide an unprecedented set of integrated development solutions and superior drug delivery technologies to the industry, partnering with our customers’ R&D teams earlier in the development cycle and helping them deliver better treatments to clinic and get to market faster and more efficiently.

Finally, we will be adding new coating and blister packaging equipment at our 360,000 square foot, Eberbach, Germany softgel manufacturing facility, expanding the integrated softgel solutions available to our customers.

Coating services are now operational with commercial revenue expected to be recorded in our fiscal fourth quarter, while the packaging equipment is expected to be online with the start of our 2016 fiscal year.

The new coating equipment, designed to coat softgels for controlled, enteric and targeted release, will be capable of processing more than 300 million capsules per year and complements the existing softgel coating capability at our facility in France.

Now, I would like to turn the call over to our Executive Vice President and Chief Financial Officer, Matt Walsh..

Thanks, John. First, I will briefly review our second quarter operating accomplishments by business segment starting with Oral Technologies on slide seven.

Our softgel business, which accounted for approximately 67% of the Oral Technologies segment’s revenue for the second quarter, performed essentially in line with prior year levels both at the top and bottom line. Strong softgel growth in North America and Latin America is offset by declines in Europe and Asia-Pacific.

As we highlighted during our first quarter call, we are expecting a mix shift from prescription softgel to consumer health softgel to continue in the near-term.

Our Modified Release business, which accounted for roughly 33% of the Oral Technologies segment’s revenues continue to generate strong profit share revenues from product participation related activity.

As a result of favorable product mix shift within controlled release and increased product participation revenue, EBITDA margin across the business segment expanded 400 basis points. The development in Clinical Services segment shown on slide eight also performed well during the quarter.

While Clinical Services revenue was in line with the prior year, the business posted double-digit EBITDA growth, which is driven by favorable product mix. Strong revenue and EBITDA growth in analytical services was driven by higher project volumes in U.S. and growth from our integrated oral solids development and supply business.

As of December 31, 2014, our backlog for the Development and Clinical Services segment was $381 million, a 1% decrease compared to the first quarter of fiscal 2015.

The segment also recorded net new business wins of $95.5 million during the second quarter, which decreased significantly compared to the second quarter of fiscal year 2014 mainly due to above base line new business wins in the prior year, led by several large signings that we alluded to on our first quarter call.

The segment’s trailing-12-month book-to-bill ratio was 1.0x. As John discussed earlier, the acquisition of Micron Technologies will augment our current capabilities in highly potent and cytotoxic drug handling, integrated inhalation solutions and analytical laboratory services. The Micron integration is underway and in line with our plan.

Now on slide nine, you have the business update for our Medication Delivery Solutions segment. Blow-fill-seal preformed extremely well compared to the prior year, as increased demand and timing with customer contractual obligations resulted in double-digit revenue and EBITDA growth.

Market fundamentals of blow-fill-seal remain attractive with a robust new product pipeline. Continuing the trend from prior quarters, we are seeing our product mix shift to the higher margin product. Sterile Injectables experienced a recovery after the slow start in the fiscal year, which is partially related to timing of customer order patterns.

We maintain a positive long-term outlook for this business, as we continue to capitalize on the business development activities of the last two fiscal years, as well as our entry into the animal health market.

Finally, during the second quarter, our biologics business also achieved solid revenue growth, which will be attributable to the timing of customer order patterns related to our innovative GPEx gene expression technology.

As evidenced by the completion of the acquisition of Redwood Biosciences and its SMARTag ADC technology during the quarter, we continue to invest in our biologics business. This transaction broadens biologics services we can offer to our customers and we look forward to growing this business in the future.

As we indicated of our long cycle business, which includes both Oral Technologies and Medication Delivery Solutions, we are disclosing the number of new product introductions or NPI and our long cycle development revenue as directional indicators of future commercial revenue growth.

Due to the inherent quarterly variability of these metrics, we will provide the numbers on year-to-date basis. For the six month ended December 31, 2014, we introduced 88 new products, which is essentially in line with a number of new products introduced in the same period of the prior fiscal year.

We reported development revenue of $62 million, an increase of 32% versus the same period of the prior fiscal year. These metrics are only directional indicators of our business, as we don’t control the sales and marketing of these products, nor can we predict the ultimate commercial success of them.

However, we expect both of these metrics to provide insight into what the long-term potential organic growth of our long-cycle business might be.

Before I get into the – before getting into more details on our financial results, let me remind you that all the segment revenue EBITDA results I will discuss in the next few slides are on a constant currency basis.

So now turning to slide ten, for the second quarter, revenue from the Oral Technologies segment increased 3% to $277.2 million over the second quarter a year ago.

This growth was attributable to increased demand within the modified release technologies segment and higher revenue from product participation-related activities, partially offset by lower end market demand for certain customer products using our Softgels technology platform.

Oral Technology segment EBITDA in the second quarter increased 7% to $74.7 million. The increase was primarily driven by increased profit from our product participation-related activities and higher revenue from products utilizing modified release technologies.

Revenue from the Development & Clinical Services segment increased 7% to $107.8 million versus the second quarter a year ago. This growth was attributable to increased revenue in the analytical services business, driven by the growth of our integrated oral health development and manufacturing capabilities as well as higher project volumes in the U.S.

Development & Clinical Services segment EBITDA in the second quarter grew 21% to $21.9 million. This EBITDA improvement was primarily attributable to increased demand for analytical services and favorable product mix within clinical services.

Revenue from the Medication Delivery Solutions segment was up 38% to $73.7 million over the second quarter a year ago.

This strong performance was attributable to timing of customer order patterns, contractual settlements, increased demand for certain products utilizing our blow-fill-seal technology platform as well as increased demand for injectable products and increased revenue from Biologics mainly related to GPEx.

Medication Delivery Solutions segment EBITDA in the second quarter of 2015 more than doubled to $18.1 million. This improvement was driven by increased demand, timing of customer contractual obligations and the favorable product mix shift within Blow-fill-seal.

Turning to slide 11 of the presentation, we see in precisely the same presentation format as on slide 10 the six months year-to-date performance of our operating segments, both as reported and at constant currency.

I won’t cover every various item in detail, but I will say that our year-to-date results parallel our second quarter results, which show constant currency revenue and EBITDA growth across all three operating segments.

Slide 12 shows the reconciliation for the last 12 months EBITDA from continuing operations from the most proximate GAAP measure, which is earnings or loss from continuing operations. This is a mechanical computation which doesn’t require much supporting commentary.

It’s really there for your benefit to assist in tying out the reported figures to our competition of adjusted EBITDA which is detailed on the next slide. Now moving to adjusted EBITDA on slide 13, second quarter 2015 adjusted EBITDA increased 21% to $112.9 million, compared to $93.4 million in the second quarter a year ago.

The double digit EBITDA growth is essentially driven entirely by the strong performance within our operating segments as we just discussed. This drives our last 12-month EBITDA figure to $453 million, an increase of 4% compared to the last 12-month EBITDA as of September 30, 2014.

Now moving to slide 14, our track record of adjusted EBITDA growth remains very strong. What we are looking at here is the last 12 months adjusted EBITDA for each and every quarter since June 2009.

It clearly depicts our observation that Catalent's business has grown steadily over a longer analysis period, while we have experienced slack quarters or even down quarters in time to come.

The diversity in global scale of our business are key features or talents that has helped us deliver consistent growth historically, and we are investing in managing our businesses to continue the strength well into the future.

On slide 15, you can see that second quarter adjusted net income was $55.9 million or $0.44 per diluted share, compared to adjusted net income of $27.9 million or $0.37 per diluted share for the second quarter of the prior fiscal year.

This slide also includes the GAAP and non-GAAP reconciliation to adjusted net income in a summarized format for your reference. A more detailed version of this reconciliation can be found in our supplemental information section of the slide deck, where you’ll find essentially the same add back that’s seen on the adjusted EBITDA reconciliation slide.

Now turning to slide 16, as we discussed on our previous call, during the first half of fiscal year 2015, Catalent raised over $1 billion in growth proceeds through our initial public offerings with the net proceeds used to pay down our highest cost debt.

Additionally, during the second quarter, we added $191 million to our senior secured term loan, with the proceeds primarily used to fund the Micron and Redwood Bioscience acquisitions, with most of the remainder used to pay down our remaining highest cost debt.

Due to strength of our second quarter results, we were able to assume the traditional debt with minimal impact on our leverage ratio. As a result, our December 31, 2014 leverage ratio was 4.1 times, compared to 4.0 times as of September 30, 2014, and 6.1 times as of June 30, 2014.

Now moving to slide 17, as we have already mentioned in today’s earnings press release, due to the impact of the continued strength in the U.S.

dollar and its effect on foreign exchange translation, we are reviving our previously issued financial guidance despite that we are trending ahead of our previously issued guidance on a constant currency basis.

For fiscal year 2015, we now expect revenue to be in the range of $1.82 billion to $1.86 billion, compared to our previous guidance of $1.89 billion to $1.92 billion. To be clear, the change to our revenue guidance is due to foreign currency translation headwinds.

We now expect adjusted EBITDA to be in the range of $434 million to $444 million, compared to our previous guidance of $450 million to $460 million. Adjusted net income is now expected to be in the range of $204 million to $214 million compared to our previous guidance of $215 million to $225 million.

Again, to be clear, the change to our revenue, adjusted EBITDA, and adjusted net income guidance is due to foreign currency translation headwinds. As a reminder, more than 65% of Catalent’s revenue is recorded in currencies other than U.S. dollar, with the majority of the exposure being from euro and the British Pound.

Since we last reaffirmed our fiscal year 2015 financial guidance in November, we have seen euro weaken by approximately 14%, and British Pound weaken by approximately 10% versus the U.S. dollar.

The translational impact of these movements in addition to further weakening of the other currencies in which Catalent does business outpaces the strong base business performance and the anticipated impact of the acquisition close during the second quarter.

In addition, based on our updated operational outlook and the fact that we are moving more quickly through our slated capital projects, we now expect our capital expenditure to be in the range of $120 million to $130 million compared to our previous guidance of $115 million to $125 million.

And finally, starting this quarter, we are now providing guidance for fully diluted share count on a weighted average basis for the fiscal year ending June 30, 2015, which is expected to be in the range of 122 million shares to 124 million shares. Slide 18 has been added for your reference.

We walk through some of the moving pieces that we considered when determining our revised guidance. As I mentioned earlier, the change to revenue, adjusted EBITDA, and adjusted net income guidance is due to FX translation as a result of the strengthening U.S. dollar.

The first set of bars brackets the FX impact to revenue in the $90 million to $100 million range and the FX impact to EBITDA in the $20 million to $30 million range.

The second set of bars brackets the recent strengths in our base business performance primarily as it relates to our modified release technologies business and our Blow-Fill-Seal offerings. The last set of bars shows the minimal impact related to the two acquisitions we closed in the second quarter.

As a reminder, both acquisitions are small contributors to Catalent's financial results, but are really quite strategic and position the company for further long-term organic growth.

However, as you can see, the upside in the base business and the impact of FY '15 acquisitions is not enough to combat the strong FX translation headwinds we’re currently facing. Additionally, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression throughout the year.

Due to the timing of our customer manual facility maintenance periods, as well as due to the seasonality associated with budgetary spending decisions in the pharmaceutical and biotechnology industries, the first quarter of any fiscal year is seasonally our lightest quarter of the year by far, with the fourth quarter of any fiscal year being our strongest by far.

While our fiscal third quarter is typically seasonally stronger than our fiscal second quarter, the timing of certain customer orders in the second quarter means that the seasonal trend will not be as apparent this year.

However, there is no change to the fundamental long-cycle nature of the year, and we expect our historical seasonality in fiscal fourth quarter to be consistent with prior years.

In conclusion, I'd like to summarize that Catalent had a strong quarter, as our first half financial results show revenue growth of 5% on a constant currency basis and adjusted EBITDA growth of 12%, which positions us quite well to achieve our full year financial outlook.

We're pairing organic growth with the Micron and Redwood Biosciences acquisitions that will enhance our market leadership and commitment to building value for our shareholders. Alex, we’d now like to open the call for questions..

[Operator Instructions] Your first question comes from the line of Tycho Peterson with JPMorgan. Please proceed..

I guess first on just the Sanofi deal, obviously, you’re getting some progress with SMARTag.

Can you just talk about, with the pipeline beyond the initial deal looks like and just how you are thinking about that overall market opportunity in Biologics?.

Thanks, Tycho. We are building the pipeline in the ADC business. The deal with Sanofi is similar to ongoing projects that we have with other customers. These are all early stage development type agreements. Revenue would be certainly hundreds of thousands kind of range and it will become more significant we believe over a three to five-year timeframe.

So I think the agreement with Sanofi is more significant because we are able to discuss it; then is different than any of the other relationships that we have with the customers that are trialing the technology. Generally these customers like to, like operate at a relatively low level of publicity when they are trialing new technologies.

Sanofi is an exception to it, but it does enable us to provide our markets or investors, but all our customers and the healthcare community at large of what our activities are, so we were excited to put the release out there for that reason..

And then on the CapEx, can you maybe just give us a little bit more guidance as to where that's being directed? Is that tied to Madison, I know you built up some additional capacity there and kind of [indiscernible] and is that – any of that lends up to some of the CapEx increases?.

No, Tycho, the capital related to our Biologics business was spent primarily last fiscal year – or the capital that we are seeing deployed this year is in our modified release business; in our Development & Clinical Services business as regards our integrated oral supply activities which have been grown nicely, as well as our inhalation franchise.

So these can all be terrific long term growers for us and we have been able to deploy capital faster than our initial plans.

I would say, there is no budget overruns on any of the key projects - that’s not what's driving it; it’s just, when we start the year, there is always an ambitious slate of projects that were more rate-limited just for engineering resources than we are anything else, but we've just been more successful in achieving the slate of projects that we had a little bit faster.

So that’s how I would characterize the modest uptick in the guidance which I think net-net is going to be a positive for us. We're going to be deploying earning assets faster..

Great, thank you very much..

Thank you..

Your next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed..

Yeah, hi, good afternoon, and congratulations on a very good quarter. Now you talked about stuff like the seasonal trends being mispronounced between third quarter and fourth quarter. I hope you can just narrow it down for us a little bit more.

Should we think about third quarter being flat quarter to quarter and then back to normal seasonality in the fourth quarter?.

So, Ricky, I would prefer that we talk about sort of full year. Catalent is a long cycle business. We are able to predict our revenues and traffic over longer time horizon. I mentioned that we are going to see shifting quarter to quarter.

And so that's what we are seeing in the second quarter and that we have seen more growth earlier in the year than we had anticipated. If you recall, last year, we saw more of the growth weighted later in the year. And this will happen from time to time. So our thoughts about the full year are consistent.

In fact they are up a little, but the timing of quarter to quarter movement is just something that's going to be inconsistent with the way that we manage Catelent, the way we think about it and that's kind of where I'd like to leave that question..

Okay, and just maybe that will help us.

When you think that was pulled forward, is it pulled forward from the third quarter or from the fourth quarter versus your expectations?.

So, sometimes that's hard to tell. What I can tell you is, we have seen it pull forward into the second quarter from the second half..

Okay. And then, on the margin expansion, I think John mentioned in his prepared remarks that the margin expansion is not typical.

Can you talk about the sustainability of those margins?.

When he talks about margin expansion in the business, it has been related to execution of operating leverage principally. While we may talk about product mix shifts within any business over the graph of Catalent, they tend to normalize.

And so we talked about margin expansion of 300 basis points in the company generally speaking being available over a five-year timeframe. Our thinking along those line hasn't changed. We happen to have a spike in a quarter, but that doesn't change our longer term outlook on margin expansion due to operating leverage..

Okay. And then, I mean, obviously, you reiterated your M&A strategy.

When you think about kind of like your leverage ratio, which is kind of like shy of 4 now, and taking into account just kind of like internal capacity constraints, what is your appetite for executing an M&A in the second half of the year?.

Well, I wouldn't think about – in answering that question, I wouldn't think about the internal capacity constraints. We are taking a very broad look with respect to acquisitions in our space. The pharma services space is consolidating. Catalent as well as other players in it are active.

We believe that there are advantages and shareholder value creation that Catalent is among the more active in the sector. So, what I can tell you, Ricky, is that we have expanded our internal capabilities to execute on M&A.

We have an internal corporate development group that is as large as it has ever been and we are very actively looking to grow through acquisition in our space and we don’t see significant limits on that except for those that we might self-impose on ourselves related to the criteria for deals that we will do. We are very disciplined.

We understand quite well that return on invested capital is the metric that we should be paying attention to and all deals should be measured against that higher hurdle, the accretions I mentioned. And that would probably be more of a limiter than our balance sheet or available capital or anything, the other considerations that you might think about.

The management team here at Catalent had been in place for most of the transformation. John, six years; myself, seven years; and we look at the ELP, we've got the same sort of tenure. So we certainly know our business well, we know the industry well and we know where we can play and win.

And we will be, as I said earlier, we'll be actively and are actively looking at acquisition opportunities to grow the company..

Okay, thank you..

Your next question comes from the line of Derek de Bruin with Bank of America Merrill Lynch. Please proceed..

Hi, good afternoon..

Hey, Derek..

Hey, so can you give me – can you give us the specific M&A contribution to the quarter? Revenue?.

It would be very low, Derek. We would remind you that Redwood Bioscience is a development stage company, and so its revenue base is small. We talked about, in the last call, Micron being about 1% of Catalent’s consolidated revenues on a run rate basis, and we acquired that halfway through the quarter.

So we are talking about minimal contribution from acquisitions for the quarter..

Great. That's what I thought.

So, can you talk a little bit about the implied organic revenue growth guidance? Is it still sort of in the mid single-digit to high single-digit range? Or is the strength of the quarter flagging it up a little bit?.

Yeah, so I would say that we continue to have confidence in our full year look at the business, which implies that mid single-digit organic revenue growth – I think, it's great that we had a relatively stronger second quarter, and as we discussed in some of the prepared comments some of that’s timing, and so it's not enough to move us off of what our full year thinking is on a constant currency basis.

I think the numbers are coming in a little bit stronger, but we still believe that we're quite good at forecasting the business on an annual basis. And this quarter, while good, doesn't motivate us to change that thinking..

Great.

And could you talk a little bit more about the Medication Delivery Solutions and the strength in that business? And particularly I’m curious on the internal of that growth [ph] business and you know is that strength of [indiscernible] products and just a little bit more color on what's driving demand?.

Sure. I think really the strength in the MDS business is really more related to the blow-fill-seal. We certainly saw strength pretty broadly across this segment, but the driver in the second quarter was more blow-fill-seal than it was injectibles.

And what we are seeing in blow-fill-seal is good performance in terms of volume out of the product slate that we have. The products that are due now tend to be our higher margin products. And so not only do we get good asset utilization in an environment like that, but you do get favorable margins just because of the mix.

We saw that in blow-fill-seal for the quarter. The other thing that we saw, we alluded to it in the prepared comment, was some contractual activity which resulted in accelerated income for us.

So one of the features of our business, which we talk about on a regular basis is the contractual strength that we have because of our proprietary technology platforms. So in the second quarter, we had a contract termination that resulted in accelerated recognition of revenue and cash in the quarter, which drives the timing comment that I made.

Now had that contract not terminated, we would have seen revenue and profit shift due to the manufacturing of the product in the third and fourth quarter, so we had some acceleration.

It's not a significant driver – or we think only saying by any stretch that drove the performance you saw in MDS, but it was a contributor, and it's one of the factors that's leading us to say, we still like where we are thinking about the business on a full-year basis..

Great. That's very helpful. Thank you very much..

Your next question comes from the line of George Hill with Deutsche Bank. Please proceed..

Hey, good afternoon, guys and congrats on a good quarter. I have kind of two quick questions. Number one is can you quantify the contract settlement component, the contribution to mid-delivery in the quarter? And then the other one is the Sanofi deal.

I guess is the Sanofi deal kind of net expense from your perspective or is it net revenue generating, although it would kind of detain you guys for the co-development? Thanks..

Thanks, George.

For the first one, we are not in a position to quantify the contract settlement issue precisely because it would -- net net, it would be a difference between what the settlement was and what our forecasted production would have otherwise been, which ends us seeing a low to mid single-digit number in terms of revenue and EBITDA in the millions..

Okay..

And so, when you look at the performance year over year, it's a contributor, but once again not a driver..

That’s fair enough..

And the second question related to Sanofi, I would say the entire business right now is a development stage business. And so it has a staff of 14 and it incurs annual operating costs in the mid single-digit millions.

And so we don't look at contract performance on a variable basis, we look at what are we working on that moves the technology forward and the milestones that we have set for ourselves. So this is one where we staked out a commitment to this technology, and we are looking at opportunities to develop the technology.

And the more opportunities we have with customers like Sanofi, that will be the key determinant to whether this will be a long-term viable business for Catalent.

So the notion that we would look at the profitability of a contract is sort of short-term thinking in my view and we are taking a very long-term perspective with where the SMARTag business can go..

That’s good color. I appreciate it. Thank you..

Your next question is from the line of Gary Nachman with Goldman Sachs. Please proceed..

Hi, good afternoon. Nice quarter, Matt. I appreciated the explanation of the guidance revision and FX impacts really driving it.

I just want to better understand why are you taking down guidance that much with such a strong quarter where you absorbed the FX headwind pretty comfortably in 2Q? You said, it’s just currency, but maybe the year is turning out to be more front-end loaded. And you realize I just want to confirm, there is nothing else in there.

And is there a way maybe to better hedge FX?.

So, thanks, Gary. The notion that we are frontloading growth this year versus for example how we performed last year where it was more backend weighted, I think is indeed the case. So, I wouldn’t dissuade you from thinking that the approach, the thinking is incorrect. So, we are seeing growth, but it’s frontend loaded this quarter.

But once again, we started the year with a certain view of what the full year would look like and it hasn’t changed. We are just seeing the growth a little bit earlier.

And I’m sorry, Gary, the second part of your question was?.

Well, I mean, it has to do with just the guidance revision and FX. Because it seems like you absorbed it pretty well in the second quarter. So, I guess I’m a little surprised that you've had to takedown the full year that much and also just about hedging; I guess there’s a better way to maybe do that..

Yeah, so in our earlier guidance, we were able to absorb the translation impact with the superior performance of the business. But in the back half, especially given the 14% and 10% decline that we mentioned over a six months period covering about $900 million of revenue that’s – the math – that’s the way the math works, Gary.

And it is translational only; we are very well balanced on a cash basis. We don't need to move or translate vast amounts of foreign currency from one to another and that’s where we would see actual realized issues within FX and we historically don't see that.

So, for example, in our second quarter, which saw a pretty significant weakening of currencies against the dollar, just the way that our cash management is going to work, we actually saw small FX gains on a realized basis.

And that tends to be very random because that is generated by timing differences between when invoices are issued and when cash is collected from customers, or when we receive invoices from suppliers and when we pay suppliers. So it really is an FX translation issue.

And from where I’m sitting, I have a hard time justifying hedging the translation issue with actual cash resources that the company would deploy.

And I’d rather sit here and try and explain to you what the translation issues are and that it doesn't impact us economically and hope that I can do that versus then having to hedge the balance sheet and the P&L so that we can have reported earnings that look more buffered but would cost the company $5, $10 million in cash to produce..

Okay. Now, that’s fair. And one other question on softgel, it seems like, based on your comments that you actually saw some growth in North America and the declines were in Europe and Asia-Pac. So maybe just comment more broadly on when you think we are going to see more of a turnaround there in terms of the benefit from the conversion to OTC? Thanks..

Thanks, Gary. I would say that our business development activities in the consumer health space will be seen on a shorter time horizon than what we would experience in the Rx or generic space. But business development activity typically start in the consumer space with a development project tech transfer.

So, I would tend to be thinking about next fiscal year, seeing the impact to commercial revenues as the – as voluntarily pursuing more consumer health business. It’s not a current fiscal year impact that we would see. And the only other thing I would point out is, we are generally known as a softgel company.

But when you look at the growth that we produce in the quarter and on a year-to-date basis, mainly in all of our other technology platforms which I think speaks to the diversity of the business and all the things that we were talking about when we were introducing the company to our new shareholder..

Okay, great, thanks..

Your next question comes from the line of John Ransom with Raymond James. Please proceed..

Are there any generic cliffs coming up that impact your particular book of business, so will conversely give you an opening, thinking about, for example, next gen?.

The way that we see the generic versus Rx landscape, John, it’s pretty balanced. We had mentioned that for any Rx products, branded products that we have, we are not precluded from working on the generic, and we often do and we are doing more of it and that will help buffer us from any volume downside that we might see in our branded portfolio.

But in our current view of the landscape, there is nothing that need a lever in the Rx to generic activity that we might see. We see a balance between pluses and minuses..

Great. And just the consolidation and increasing regulation of the generic industry, thinking we ever see the NDA manufacturers.

How does that – as you look at the cesspool, how do you factor that in, if at all?.

We think on a long-term basis, this plays well for Catalent. The U.S. has always been a very high compliance environment. We are clearly inspected by the FDA and when they come in to our sites, it’s not a one-day inspection, it’s a week and sometimes more. And it’s a through, soup to nuts examination that we receive.

Other countries are getting more and more stringent, so the global regulatory and compliance environment is getting tougher, it’s getting more expensive. That will accrue benefits for the folks with the bigger platforms, as we’ve got the resources to be able to comply.

And we believe that as tough as it is for all companies to make the increase in shrinking guidelines, we believe we are better positioned than smaller, less well capitalized companies to be successful..

Okay. And I think what [indiscernible] sometimes is your OTC business.

Are there any – and I’m going to look out [indiscernible] – are there any trends going on in the OTC business that we need to be mindful of that are shrinking that are [indiscernible] cesspool how you think about going to market?.

There hasn’t been any significant changes, John, since the pre-IPO marketing period and the kind of descriptive information that we have out there whether it’s in the F1 or any of our Ks - nothing significant.

The observation we would have is that the OTC business and the vitamins, minerals supplement side of the business tends to be, faster the market for us and as we pursue – I mean we are pursuing all of the prescription and generic business we have..

Right..

And so, we sell out our marketing activities with, now increasing amount of concentration on the OTC and DMS space. That business can be faster onboarded.

That said, I would go back to the earlier answer I gave noting that it’s probably not an FY 2015 impact that we would see because there is still tech transfer work and commercialization work that precedes the actual introduction and filling of supply chains, which results in commercial revenue for us.

So this is more of a FY 2016 phenomenon versus 2015..

And just finally, there is some people who might think that this dollar-euro is not just a blip, but maybe more of a secular trend.

At what point would the pay threshold get sufficient, or you might think about making some strategic changes, or is that not really something you guys are thinking about?.

Well, the way we think about it, there is large volume of customer demand that we had in the regions that are right now not doing so well versus the dollar, but we have productive capacity, sales and marketing infrastructure in those countries.

And as long as we are – as long as the economies are not hyperinflationary and we have enough inventory of cash, which is an inventoriable commodity just like anything else, in my view.

We can operate economically at a point where we can still generate returns on capital that can be commensurate with our prior performance than what we would deem as attractive. So I don’t see that changing in the near-term – and I know what you are talking about, John, right.

And you’ve got some people out there predicting that parity between the euro and the dollar at some point, whether it’s in FY 2015 – whether it’s in the 2015 calendar year or 2016 – that wouldn’t cause us to change much because what we are making in the euro region, we are selling in the euro region..

Right..

Generally speaking, we are not moving that much material, what for us would be currency bonus if you will..

Right.

So, I guess I should think about you making more there and sell more here, is that a possibility if we get to that – you are moving some production over there or is that kind of [indiscernible]?.

I would say that that kind of arbitrage, if that's the word, could potentially happen at the margin, but it wouldn’t be something that drives the business because there are compliance documents in place that dictate that we are going to make product A in facility X and....

Right..

So it becomes very costly to change..

That's it. Okay, thank you..

Thanks, John..

Your next question comes from the line of Dave Windley with Jefferies. Please proceed..

Hi, good evening, thanks for taking my questions. I have joined later, apologize if you touched on this, but last quarter you talked quite a bit about Micron and the opportunity for downstream selling there, the 400 and some compounds that they see being somewhat similar to the total number of projects that you have.

So on that front, I’m wondering if in the short period of time if you have had some traction or if you could give some color on the traction that you would anticipate getting in the relative near-term..

So, we are as you speak actively triaging their portfolio and we are portioning it according to the technology platforms that are most applicable for each molecule. We're deploying business development resources as we speak. We didn’t really have any revenue contribution specifically for the quarter, David.

And I think if you think about timing of this, we will start to see development revenue first from the cross-selling opportunity and those will occur probably toward the end of the second half and will be stronger in FY '16..

And just to reaffirm, well, I think I heard you say that those would be opportunities that would show up in DCS first, or would they not be in that segment?.

It would be a combination.

We would see some analytical and formulation and development revenue in analytical, but we would also see it within our long cycle businesses, who have their own and very specific formulation and development resources, which are specifically geared towards generating commercial revenues and having long-term contracts in products that would be in the portfolio for many, many years.

So we'll actually pursue it both ways and that – so it gives us sort of two ways to win when we think about cross-selling with Micron..

Got it.

And the development activities that are embedded within the long cycle businesses, are those revenue generating activities? Or do you do that work based on an expectation of getting the commercial manufacturing business down the road?.

Those are revenue generating activities for us. Those scientists are doing scientific work on a fee-for-service basis. And that is the number that we actually disclosed. I disclosed it my prepared comments and we will be doing it on a year-to-date basis.

So, for example, I’ll just review with you, we had $62 million of formulation and development revenue in the long cycle businesses and it’s actually up 32% over prior year, none of that is from the Micron yet.

But I would tell you that in our rack and stack across the industry and the formulation and development revenues that we get between our Dev and Clinical segment and what’s embedded in our long cycle segment, Catalent is number one in the industry in terms of formulation and development revenue and solving those customer challenges, which can be very difficult with a proprietary platform.

I’m sorry for the sales picture, I guess I have to let you know that..

Okay. I wanted to – just quickly on DCS and the backlog, I know we don’t want to get overly focused on book-to-bill different for your business than others. But what – just thinking about growth there and what you need to be on the produced growth, I saw in the slide that you talk 1.0x trailing book-to-bill.

Is that adequate? Or are you expecting that to accelerate perhaps for some of the reasons you just mentioned?.

We would expect it to accelerate. Our second quarter performance was on the low side of what we expected. And I think that we expect it to accelerate in the second half of the year. And it would need to be in excess of 1.0 for us to be able to achieve the kind of growth that we want to achieve in the business.

And for this quarter, we’re just down on the low side.

But this will happen from time to time especially because there are certain core enigma -- you know this very well David from your coverage of the CROs, sometimes things that you put into your portfolio in prior quarters and maybe large signs, the customer just cancels the contract and then the project goes nowhere and it draws down your net and business volumes and we had a little more of that than we expected to see.

Okay. And my last question just coming back to – I think Gary might have asked this question earlier, but in terms of your frontend/backend load, last quarter on the call you are fairly clear about the business typically having back in revenue load and back in revenue growth load.

And I guess I’m thinking that will straightaway roll into the 2Q and now you are saying that you can forecast the year better than the quarter, but I guess I just want to get a little bit better understanding and why the pull forward into 2Q wasn’t more visible three months ago?.

We’ve got a broad and diverse, David. And the combination of customer order pattern and how the products are due in the market, sometimes clouds my crystal ball, if you will, and can result in short-term changes. But generally, level out over time. It’s really the best explanation I can provide..

Okay. Thank you for that..

Thanks..

Your next question comes from the line of Sean Wieland with Piper Jaffray. Please proceed..

Thanks. So I want to continue on that.

I mean can you point to any micro drivers or externality that would cause this year to be more frontend loaded than last year or is it just pretty much luck?.

Our performance in any fiscal year is always much more tied to what our product fleet is doing versus what the industry is doing. And that is just the nature of the proprietary platforms that we have and the specialization of products that are on this.

So I can’t point to a macro trend, for example, ObamaCare or some exogenous industry – sort of a macroeconomic factor that would be impacting the phasing of our business for this year.

And your second question?.

Yes, so the second part then is, let’s just say that what would preclude first half of 2016 business within getting pushed up into the second half of 2015?.

There is a possibility of that happening. There can always be shifts of business either into or out of the quarter depending on, as I said, the end market demand for these products or supply chain considerations of our customers. So, in the long run, Catalent sells medicine to patients, right, and there are people in the middle.

In the short run, we sell to our customer’s supply chain..

Got it..

Right. The dynamic there can differ..

All right. Thanks for the thoughts..

Thank you..

And your last question comes from the line of John Kreger with William Blair. Please proceed..

Thanks very much. And, Matt, actually just a follow up on that last point. So at least in the U.S. if you look at IMS script trends, they had a pretty nice uptick in the last several months.

When, if at all, would you see that filter into higher volume orders from your clients at least for your domestic production?.

That will depend on how many days of inventory our customers have in their supply chains for the products that we are selling. And that difference [ph] driven product and even for a consistent product, our customers need to change that quarter-to-quarter depending upon their view of – their reading of IMS and other data.

And so it’s a very difficult question for me to answer, even if I were to try and take a broad average, let’s say, for example, at time zero there is some uptick in IMS script trends that’s imperial when does that – when can you see that – learning Catalent’s number, it’s a function of all the 7,000 products that we have and the supply chain strategy for each of them and it’s difficult for me to be here to be able to come up with an answer that you would find useful, John.

I don’t if Cornell has anything to add..

The only other thing I would say is thinking back over time script – NRx, TRx trends don’t necessarily translate the same in volume, the actual caps necessarily when we talk about [indiscernible] generics which increase access to coverage versus what those more limited Medicaid or Medicaid volume plans are covering.

So it’s the script trends by themself may not be representative of what’s happening to the overall -- every product in the marketplace. So really it’s about the specific products we touch over their trails [ph]..

Great, thank you. And another thing to clarify, the new business metric that you gave 95 million for Dev Clin.

On a book-to-bill basis long-term, would it be reasonable to expect may be like a 1.1x book-to-bill? I know you said, it needs to be north of 1.0x, but could I get you to just be a little bit more specific on the type of number that you need to see longer term?.

I would say, John, that if we are at 1.1x, 1.2x in that range, this is something that will result in the kind of growth that we believe the business of capable of, which is mid to high single-digit. We believe that correlation exist..

Great, thanks. And just one last one, your medication delivery performance was quite a bit higher than what we would have thought.

In you view, is that just sort of seasonal variation? Or is your longer term thinking on the underlying growth of that business are perhaps inching up?.

Our long-term perspective on the business haven’t changed. We happen to have a great quarter. We are happy that we did. But it doesn’t cause us to move our long-term thinking about the business..

Great. Thank you..

Thanks..

Well, if there is no further questions, we just like to thank everyone for joining us today and we look forward to updating you again on our next conference call. Thanks for your time..

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day..