Tom Castellano - VP of Finance and IR John Chiminski - President and CEO Matt Walsh - EVP and CFO Cornell Stamoran - VP of Strategy.

Zack Sopcak - Morgan Stanley Tycho Peterson - JPMorgan Dave Windley - Jefferies Divya Harikesh - Goldman Sachs John Kreger - William Blair John Ransom - Raymond James George Hill - Deutsche Bank.

Good day, ladies and gentlemen, and welcome to the Catalent Inc. Third Quarter Fiscal 2015 Earnings Call. My name is Whitley, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions].

I would now like to turn the conference to your host for today, Mr. Tom Castellano, Vice President of Finance, Investor Relations and Treasurer of Catalent Inc. Please proceed..

Thank you, Whitley. Good afternoon, everyone, and thank you for joining us today to review Catalent’s fiscal 2015 third quarter financial results. Please see our agenda on Slide 2.

Joining me today representing Catalent are 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 a review of the key financial and operating achievements for the third quarter.

Then Matt will discuss the company’s fiscal third 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 for your questions.

During our call today, Management will make forward-looking statements including its beliefs 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 4 and 5, on the call today, we will also disclose certain non-GAAP financial measures, 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 the non-GAAP financial measure have limitations as analytical tools and they 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 third quarter earnings call. We’re pleased with our third quarter and year-to-date results highlighted by revenue growth on a constant currency basis across all of our business segments as well as strong levels of profitability.

During the quarter, we continued to position Catalent for organic and inorganic growth and to expand our footprint in the markets we serve. I would like to start by presentation on Slide 6, which highlights our key financial and operating accomplishments.

Our third quarter 2015 revenue decreased 1% as reported but increased 8% on a constant currency basis to $446.6 million. This growth was driven by increased revenue within our Oral Technologies and Development and Clinical Services segments.

For the first nine months of fiscal year 2015 our revenue was $1.3 billion, an increase of 1% as reported and 6% in constant currency. Solid year-to-date performance was driven by improvements across all of our reporting segments, but was primarily led by revenue growth with the Oral Technologies and Medication Delivery Solutions segments.

As a result of favorable product mix and improved leveraging of fixed manufacturing costs, our third quarter gross margin expanded 60 basis points to 34.1%. During the quarter, we recorded EBITDA from continuing operations of $100.1 million, an increase of 10% year-over-year.

This strong performance was driven by EBITDA improvements in our Oral Technologies and Medication Delivery Solutions segments due both to a mix shift in more profitable products and services as well as operating efficiencies. Our adjusted EBITDA increased 4% year-on-year to $110.5 million or 24.7% of revenue.

Additionally, our adjusted net income increased 48% to $57.6 million. Now, let me briefly discuss our key operating accomplishments. At the end of March, we acquired Pharmapak Technologies, a leading pharmaceutical packaging business based in New South Wales, Australia.

This acquisition enhances our ability to offer integrate solutions to the local market. It also provides regional packaging capabilities and complements our existing facility in Braeside, Victoria from which we produce oral dose products, including softgels, Vegicap capsules, and OptiShell capsules for supply through the Asia Pacific region.

Last month we announced the completion and opening of a large scale expansion in Winchester, Kentucky manufacturing facility doubling its footprint to 180,000 square feet. The expansion was completed in response to increased customer demand for the manufacturing of complex oral solid formulations.

Our Winchester facility had more than 20 years of experience in product development, technology transfer and commercial manufacturing. The site had produced over three billion tablets and capsules annually and has launched more than 100 new products into the market since its inception.

Finally, I would like to provide some brief comments regarding our market dynamics which continue to be favorable. First our customers increasingly are seeking fewer, bigger, better suppliers who have scale and global reach with an emphasis on both delivering compliance.

Given our market leading position, capabilities, regulatory track record and a history of reliable supply, this trend continues to bode well for Catalent's organic growth. The benefit of that trend to Catalent is additionally enhanced by incremental M&A that augments our offerings and scale.

Second, regarding the level of consolidation activity in the biotech and Pharma markets today, we continue to note that this activity is generally positive for Catalent due to the inherent stickiness with our service offerings for pharmaceutical and biologics products.

Catalent's Follow the Molecule strategy keeps us positioned to capitalize in such market trends in our long-term growth strategy. 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 third quarter operating accomplishments by business segment starting with Oral Technologies on Slide 7.

Our softgel business, which accounted for approximately two thirds of Oral Technologies segment revenue for the third quarter, performed well generating modest EBITDA growth at constant currency in line with prior year levels. Strong revenue and EBITDA growth in North America was driven by favorable product mix in the region.

As evidenced by the third quarter results in Asia Pacific and Latin America, the expected mix shift from prescription softgel to consumer health softgel is progressing and we think it will continue in the near term.

The Modified Release business, which accounted for roughly one third of Oral Technologies sales, continue to generate strong profit share revenues from product participation related activities. EBITDA margin across the business expanded significantly due to favorable product mix and strong product participation revenue.

The development in Clinical Services segment shown on Slide 8 also performed well during the quarter. However, Clinical Services revenue and EBITDA were modestly below the prior year's levels, due to decreased customer project activity primarily in Europe.

Revenue growth in analytical services was driven by our integrated oral solids development and supply business. However, the EBITDA growth driven by the oral solids business was more than offset by unfavorable product mix within our core analytical scientific servicing business.

As of March 31, 2015, our backlog for the development and clinical services segment was $393 million a 3% increase compared to the second quarter of fiscal year 2015. This segment also recorded net new business wins of $114.7 million during the third quarter, representing a 10% increase year-on-year.

The segment's trailing 12 month book-to-bill ratio was 1.1.

We’re pleased to report that the integration of the Micron Technologies acquisition is essentially complete and as a reminder it augments our current capabilities in highly potent and cytotoxic drug handling, integrated inhalation solutions and analytical laboratory services with the intent of getting access to molecules earlier in the development process.

Now on Slide 9, we have the business update for our Medication Delivery Solutions segment. Blow-fill-seal experienced modest revenue growth during the third quarter due to the timing of sales that strengthened the second quarter with EBITDA performance in line the prior year.

Strong revenue and EBITDA performance on a year-to-date basis was driven by increased demand and favorable product mix. Market fundamentals for Blow-fill-seal were mainly attracted with a robust new product pipeline. As we have seen in prior quarters, our product mix continues to shift to higher margin products.

Sterile Injectables posted revenue and EBITDA below the prior year partially due to overly strong third quarter in the prior fiscal year.

In spite the softer performance during the third quarter we maintain a positive long-term outlook for new 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.

And finally during the third quarter, our biologic business posted positive revenue and EBITDA growth due to the timing of completed project milestones.

The biologic year-to-date revenue growth of more than 70% validates our investments in this business including the recent acquisition of Redwood Bioscience and its SMARTag Antibody-Drug Conjugate technology. The transition brought biologics services we can offer to our customers and we look forward to grow this business in the future.

As a indicator of our long cycle business which includes both oral technologies and medication delivery solutions. We are disclosing the number of new product introductions or MTIs and our long cycle development revenue as directional indicators of future commercial revenue growth.

Due to the inherent quarterly variability of the metrics, we will provide the number on a year to date basis. For the nine months ended March 31, 2015 we introduced 120 new products which potentially in line with the number of new products introduced in the same period of the prior fiscal year.

Also when the same year to date period we recorded development revenue of $97 million, an increase of 28% versus the same period of the prior fiscal year. These metrics are only directional indicators of our business as we do not control the sales and marketing of these products. We often predict the ultimate commercial success of them.

However, we expect both of these metrics to provide insight into with the long term potential organic growth of our long cycle businesses might be. Before I get into more details on our financial results, let me remind you that all the segment revenue, EBITDA results I'll discuss in the next few slides are on a constant currency basis.

Now turning to Slide 10, revenue from the oral technology segment was $284 million for the third quarter, an increase of 10% compared to the third quarter a year ago. This growth was attributable to improved performance in both of the softgel and modified release offering as well as higher revenue from product participation related activities.

Oral technology segment EBITDA in the third quarter with $81.7 million and increase of 20% year-on-year. This growth was primarily driven by increased profit from our product participation related activities couple with entry to revenue from products utilizing the modified release technology platforms.

Revenue from the Development and Clinical Services Segment was $103.7 million for the third quarter an increase of 4% over the third quarter a year ago.

This increase was related to growth in analytical surfaces due to our integrated oral solid development and manufacturing capabilities and the acquisition of Micron Technologies, which was completed in the second quarter of this fiscal year, was partially offset by decreased demand for comparative sourcing Development in clinical services segment EBITDA for the third quarter was $23.8 million an increase of 8% year-on-year.

This EBITDA improvement was primarily driven by the Micron acquisitions and cost saving initiatives within the segment. Revenue from the Medication Delivery Solutions segment was $61.2 million for the third quarter and increase of 2% over the third quarter year ago.

This growth was attributable to increased revenue in a biologics offerings due to timing of completed project milestones and modestly higher revenues in the blow-fill-seal technology platform partially offset by decreased demand within our European pre-filled syringe business Medication Delivery Solutions Segment EBITDA was $10.9 million a decrease of 26% year-on-year.

The decrease was primarily attributable to decrease demand in unfavorable revenue mix within European pre-filled syringe and an unfavorable product mix shift within blow-fill-seal partially offset by increased revenue from a biologics offerings.

Turning to Slide 11, we see precisely the same presentation format is on Slide 10 the nine month year-to-date performance of our operating segment both as reported and in constant currency.

I look up every item in detail, but I will say that our year-to-date topline results parallel our third quarter results which show constant currency revenue and EBITDA growth across all three reporting segments.

The year-to-date 6% constant currency revenue growth or 5% growth on an organic basis compared to the same period a year ago was in line with our financial objective of 4% to 6% organic revenue growth and represents some of the best organic revenue growth performance we've seen over recent years.

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 there for you benefit to assist in tying out the reported figures to our computation of adjusted EBITDA which is detailed on the next slide. So now moving to adjusted EBITDA on Slide 13, third quarter 2015 adjusted EBITDA increased 4% to $110.5 million compared to $106 million in the third quarter a year ago.

EBITDA growth was attributable to strong performance with enrolled technologies and development clinical services segment. As a result, our last 12 months adjusted EBITDA totaled $457.5 million, an increase of approximately 1% compared to the last 12 months EBITDA as of December 31, 2015.

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

It clearly depicts our observation that Catalent business is growing steadily over longer analysis period, even as we had experienced flat quarter or even down quarters though time to time.

The diversity and global scale of our business are key features of Catalent that helps us deliver consistent growth historically and we're investing and managing our businesses to continue this trend well into the future.

On Slide 15, you can see that third quarter adjusted net income of $57.6 million or $0.46 per diluted share compared to adjusted net income of $39 million for third quarter of the prior fiscal year. This slide also includes the reconciliation of GAAP and non-GAAP adjusted net income in its summarize format for you reference.

A more detailed version of this reconciliation can be found in our supplemental information section of the slide deck where you find the essentially the same that, as seen on the adjusted EBITDA reconciliation slide.

Now turning to slide 16 as we have discussed previously during the first nine months of fiscal year 2015 Catalent rate - $1billion in gross proceeds to our IPO if the net proceeds due to the paid down our highest cost debt. As of March 31, 2015 our leverage ratio was 3.9 compared to 4.1 as of December 31, 2014 and 6.1 as of June 30, 2014.

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

dollars against all other currencies –business this effects on foreign exchange translation into the lesser extent we continue in our debate business were lower in previous guidance our revenue adjusted EBITDA and adjusted net income.

For fiscal year 2015 we now expect revenues to be in the range of $1.8 billion to $1.83 billion compared to our previous guidance of $1.82 billion to $1.86 billion. We now expect adjusted EBITDA to be in the range of $428 million to $436 million compared to our previous guidance of $434 million to $444 million.

Adjusted net income is now expected to be in the range of $197 million to $205 million compared to the previous guidance of $204 million to $214 million. As a reminder, more than 60% of our revenue is recorded in currencies other than U.S. dollars with the majority of the exposure being from the Euro and the British Pound.

Since the last time, we provided our fiscal year 2015 financial guidance for February, we’ve seen further weakening of the Euro and British Pound which fell below the rate assumed in the low end of our previous guidance range of $1.1 million and $1.5 million respectively.

The translational impact of these movements in addition to further weakening of several of the other currencies in which we do business, coupled with modest changes in our base business led to the decision to lower the guidance range. Our previous guidance for capital expenditures and share count remain unchanged.

We continue to expect capital expenditures in the range of $120 million to $130 million. We also continue to expect the fully diluted share count on a weighted average basis for fiscal year ending June 30, 2015 to be in the range of 122 million shares to 124 million shares.

As a final look to this slide, which we have discussed the guidance revision that we’re disclosing today is prompted by foreign exchange translation and the strength of the U.S. dollar with small adjustment for base business performance that we closed out the year.

This small adjustment doesn’t cost John – change our thinking about the fundamental long-term outlook that we have for Catalent’s revenue adjusted EBITDA compounded annual growth rates. Slide 18 shows some of the moving pieces that we considered when determining our revised guidance.

As I mentioned earlier, we changed a revenue adjusted EBITDA and adjusted net income guidance due to both FX headwinds related to the further strengthening of the U.S. dollar and to a lesser extent weakened changes in the base business.

A first set of bars brackets the FX impact to revenue in the $12 million to $16 million and the FX impact to EBITDA in the $4 million to $8 million. The second set of bars brackets the modest changes as we’ve seen in our base business performance.

The base business revenue impact is larger than EBITDA impact because much of the changes driven by changes in all margin competitive sourcing revenue. The last set of bars shows the minimal impact related to the current year acquisitions that we completed.

As a reminder, all of our fiscal year 2015 acquisition at this point are small contributor to our financial results are strategic and position us well for long-term growth. Additionally, let me remind everyone that 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 has generally been our lightest quarter of the year by far, with the fourth quarter of any fiscal year generally being our strongest by far.

Operator, we would now like to open the call for questions. Revenue growth in analytical services was driven by our integrated oral solids development and supply business. However, the EBITDA growth driven by the oral solids business was more than offset by unfavorable product mix within our core analytical scientific servicing business.

As of March 31, 2015, our backlog for the development and clinical services segment was $393 million a 3% increase compared to the second quarter of fiscal year 2015. This segment also recorded net new business wins of $114.7 million during the third quarter, representing a 10% increase year-on-year.

The segment's trailing 12 month book-to-bill ratio was 1.1.

We’re pleased to report that the integration of the Micron Technologies acquisition is essentially complete and as a reminder it augments our current capabilities in highly potent and cytotoxic drug handling, integrated inhalation solutions and analytical laboratory services with the intent of getting access to molecules earlier in the development process.

Now on Slide 9, we have the business update for our Medication Delivery Solutions segment. Blow-fill-seal experienced modest revenue growth during the third quarter due to the timing of sales that strengthened the second quarter with EBITDA performance in line the prior year.

Strong revenue and EBITDA performance on a year-to-date basis was driven by increased demand and favorable product mix. Market fundamentals for Blow-fill-seal were mainly attracted with a robust new product pipeline. As we have seen in prior quarters, our product mix continues to shift to higher margin products.

Sterile Injectables posted revenue and EBITDA below the prior year partially due to overly strong third quarter in the prior fiscal year.

In spite the softer performance during the third quarter we maintain a positive long-term outlook for new 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.

And finally during the third quarter, our biologic business posted positive revenue and EBITDA growth due to the timing of completed project milestones.

The biologic year-to-date revenue growth of more than 70% validates our investments in this business including the recent acquisition of Redwood Bioscience and its SMARTag Antibody-Drug Conjugate technology. The transition brought biologics services we can offer to our customers and we look forward to grow this business in the future.

As a indicator of our long cycle business which includes both oral technologies and medication delivery solutions. We are disclosing the number of new product introductions or MTIs and our long cycle development revenue as directional indicators of future commercial revenue growth.

Due to the inherent quarterly variability of the metrics, we will provide the number on a year to date basis. For the nine months ended March 31, 2015 we introduced 120 new products which potentially in line with the number of new products introduced in the same period of the prior fiscal year.

Also when the same year to date period we recorded development revenue of $97 million, an increase of 28% versus the same period of the prior fiscal year. These metrics are only directional indicators of our business as we do not control the sales and marketing of these products. We often predict the ultimate commercial success of them.

However, we expect both of these metrics to provide insight into with the long term potential organic growth of our long cycle businesses might be. Before I get into more details on our financial results, let me remind you that all the segment revenue, EBITDA results I'll discuss in the next few slides are on a constant currency basis.

Now turning to Slide 10, revenue from the oral technology segment was $284 million for the third quarter, an increase of 10% compared to the third quarter a year ago. This growth was attributable to improved performance in both of the softgel and modified release offering as well as higher revenue from product participation related activities.

Oral technology segment EBITDA in the third quarter with $81.7 million and increase of 20% year-on-year. This growth was primarily driven by increased profit from our product participation related activities couple with entry to revenue from products utilizing the modified release technology platforms.

Revenue from the Development and Clinical Services Segment was $103.7 million for the third quarter an increase of 4% over the third quarter a year ago.

This increase was related to growth in analytical surfaces due to our integrated oral solid development and manufacturing capabilities and the acquisition of Micron Technologies, which was completed in the second quarter of this fiscal year, was partially offset by decreased demand for comparative sourcing Development in clinical services segment EBITDA for the third quarter was $23.8 million an increase of 8% year-on-year.

This EBITDA improvement was primarily driven by the Micron acquisitions and cost saving initiatives within the segment. Revenue from the Medication Delivery Solutions segment was $61.2 million for the third quarter and increase of 2% over the third quarter year ago.

This growth was attributable to increased revenue in a biologics offerings due to timing of completed project milestones and modestly higher revenues in the blow-fill-seal technology platform partially offset by decreased demand within our European pre-filled syringe business Medication Delivery Solutions Segment EBITDA was $10.9 million a decrease of 26% year-on-year.

The decrease was primarily attributable to decrease demand in unfavorable revenue mix within European pre-filled syringe and an unfavorable product mix shift within blow-fill-seal partially offset by increased revenue from a biologics offerings.

Turning to Slide 11, we see precisely the same presentation format is on Slide 10 the nine month year-to-date performance of our operating segment both as reported and in constant currency.

I look up every item in detail, but I will say that our year-to-date topline results parallel our third quarter results which show constant currency revenue and EBITDA growth across all three reporting segments.

The year-to-date 6% constant currency revenue growth or 5% growth on an organic basis compared to the same period a year ago was in line with our financial objective of 4% to 6% organic revenue growth and represents some of the best organic revenue growth performance we've seen over recent years.

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 there for you benefit to assist in tying out the reported figures to our computation of adjusted EBITDA which is detailed on the next slide. So now moving to adjusted EBITDA on Slide 13, third quarter 2015 adjusted EBITDA increased 4% to $110.5 million compared to $106 million in the third quarter a year ago.

EBITDA growth was attributable to strong performance with enrolled technologies and development clinical services segment. As a result, our last 12 months adjusted EBITDA totaled $457.5 million, an increase of approximately 1% compared to the last 12 months EBITDA as of December 31, 2015.

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

It clearly depicts our observation that Catalent business is growing steadily over longer analysis period, even as we had experienced flat quarter or even down quarters though time to time.

The diversity and global scale of our business are key features of Catalent that helps us deliver consistent growth historically and we're investing and managing our businesses to continue this trend well into the future.

On Slide 15, you can see that third quarter adjusted net income of $57.6 million or $0.46 per diluted share compared to adjusted net income of $39 million for third quarter of the prior fiscal year. This slide also includes the reconciliation of GAAP and non-GAAP adjusted net income in its summarize format for you reference.

A more detailed version of this reconciliation can be found in our supplemental information section of the slide deck where you find the essentially the same that, as seen on the adjusted EBITDA reconciliation slide.

Now turning to slide 16 as we have discussed previously during the first nine months of fiscal year 2015 Catalent rate - $1billion in gross proceeds to our IPO if the net proceeds due to the paid down our highest cost debt. As of March 31, 2015 our leverage ratio was 3.9 compared to 4.1 as of December 31, 2014 and 6.1 as of June 30, 2014.

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

dollars against all other currencies –business this effects on foreign exchange translation into the lesser extent we continue in our debate business were lower in previous guidance our revenue adjusted EBITDA and adjusted net income.

For fiscal year 2015 we now expect revenues to be in the range of $1.8 billion to $1.83 billion compared to our previous guidance of $1.82 billion.

[Operator Instructions] Our first question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed..

Hey good afternoon, this is Morgan Stanley in for Ricky. I wanted to ask a question just first about the guidance provision on EBITDA just to clarify something. So if you look in your segment performance on the medication delivery solutions on the constant currency, you had negative growth as you discussed.

Is that baked into that base business decline or is that further deterioration in the fourth quarter within that business that's baked into that EBITDA decline?.

The changes to our EBITDA guidance Zack are really more as we look at the fourth quarter versus anything in the actuals..

Okay.

So we could think of third quarter is being kind of in line at least with what you thought from an overall perspective?.

That’s correct..

Okay, got it. That makes sense and then just one other question in terms of the biologics business it sounds like it’s growing quite nicely.

Is there any upcoming milestones that we should be thinking about this or thinking about that business and how it’s progressing?.

I would say that the biologics business which is approximately 1% of our revenue on a run rate basis will continue to make slow and steady improvement.

Where we might see outsize financial performance is from the Redwood Bioscience’s acquisition which right now is a developing stage company, they’re booking the kind of projects that they’re booking or where our customers are exploring the technology for credibility.

The change that we would be looking for fully refreshes when might we see a step change, a step change would occur should one of our customers decide to adopt the technology for product that they’re planning to launch.

And I’m going to say that the timing on that Zack is probably several years out, it could happen sooner but to try and set expectations, I will guess that that is something in the FY '17 range..

Okay. Great. Thank you..

Your next question comes from the line of Tycho Peterson with JPMorgan. Please proceed..

Hey thanks, Matt I’m actually going to ask you the question on the guidance adjustment.

Can you maybe just give a little more color on the base business adjustments and what should comparator sourcing comments more just about the end market demand for certain products and the softness in CFS out of Europe?.

Thanks Tycho. These leads -- we have been -- so I would say first there is nothing new about what we are seeing here.

We have discussed a quarter of various announcements in prior calls that the European clinical services business has not been as strong, we would like it not met our expectations and so this is really in line with that prior commentary.

And the second part related to what we’re seeing in Europe is really just part of the ebb and flow that we tend to experience in our product suite at any point in time.

We keep necessary to underline macroeconomic factor, it’s really just small change that requires a tweak to the guidance but nothing pervasive or even necessarily long lasting but the comments that I made at the end of John ceded any of its changes our fundamental view about the long-term growth rates in the business..

Okay. And then on softgel, I mean you talked about the mixed shift from prescription to consumer before for instance that typically called Asia Pac and Latin America, was that kind of a new dynamics of U.S.

that shift?.

No I think those businesses are growing and because they’ve only been predominant the consumer health related businesses, it’s more passive than it is active in terms of the mixed shift it creates..

Okay.

And then just last one on Pharma pack, I know it's small in terms of expected revenue contribution but maybe just give us a minute or two on the rational there?.

Sure Tycho. As people that have followed Catalent for some time would know, we had a third party commercial packaging business that was principally in United States and European business that we divested while we were under private equity, under full private equity ownership.

And so the question would be so what's the motivating factor that now acquire another third party commercial packaging business and that’s because the Australian market is unique.

It's principally an import market and by that the innovators are manufacturing either drugs or API elsewhere and moving into the region and once they move it in, they would really prefer a turnkey solution from companies like Catalent that can do more of what they need in country and so as a service to customers and be of more service to customers it makes sense for us to attach commercial packaging functionality to our primary manufacturing capabilities in softgel and other solid dose lines..

Okay. I appreciate the additional color. Thanks..

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

Hi thanks for taking the question.

Could you give us an update on Micron as it relates to your evaluation of their many customer or compound touch points and kind of the action plan to go after those compounds or clients for our cross-selling opportunities?.

Yes, hey Dave it's John Chiminski here, so first I would say that from a strategic nature of the acquisition that so far it is meeting and exceeding our expectations.

We quickly got out of the gate and went in with our teams NOI slate of molecules that they have at their disposal and I would say we went through several hundred and have filtered them down into I would say in the tens of categories products that we believe are capable of then getting on a Catalent platform for long-term commercial use.

We put in place I would just say strong operating mechanisms and processes to do that and they are only going to be strengthened as we move forward. So I think as we look back at the strategic rational, we're really thrilled with what we've picked up. The asset continues to perform as we expected from a base business standpoint.

So the upside for us is really those molecules that now have the opportunity to be proliferated through the Catalent ecosystem. So we really feel terrific about it..

Right and just to augment what John was saying David, is in terms of timing and I've said this before, that there is a feeling the first change we would see is in our long cycle business with Catalent positing development revenue projects on these molecules that are being pulled over and we now have multiple wins that will result in development revenue related to these projects.

But it continues to be a long cycle business and landing a multi near commercial manufacturing relationships to one of the products would still be several, several quarters to really a year or two out, but we knew that going in and we we've seen really terrific participation and cooperation from the Micron folks in this effort because for years they've been losing opportunities for revenue, but it's if they couldn’t offer the kinds of add-on services that now Catalent is able to provide.

So we've really added negate very well on this and we're definitely ahead of our expectations..

Got it. Thanks for the add-on there.

So relating back to your comments that development revenue would relate to the $97 million, up 28% year-over-year that you commented on correct?.

Yes, that is correct, yes, that is correct. I would tell you the Micron contribution to that is very small in year-to-number. So that 28% increase that you're seeing is -- that's really a same-store growth number..

Okay.

And can you find I guess John tens of potential projects, can you find for us what the development revenue value of one of those projects would be and could this layer on an amount of revenue and development revenue that continues a 20% or 30% growth or is it much bigger a magnitude than that?.

So I talked about Dave and then you probably file through the IPO process and maybe even through some of the bus tours that we had that the way to think about our Follow the Molecule strategy is that when we capture high value molecule, we can earn anywhere from an on an annual basis $1 million to $2 million per year.

In development revenue certainly we put higher than that and some molecules to consider that to be an average $1 million to $2 million worth of development revenue to kind of I would say typical if you will. So the opportunity to add I would say somewhere between five and 10 certainly could be meaningful for the company.

Our development revenue as I think we again talked about during the IPO process and we're disclosing seven-years basis, but looking back in history and growing at a 10% CAGR year-over-year, which is one of the reasons that we continue to see strong I would say organic growth developing into the ADT business.

So it will take a while for those tens of projects to ultimately be converted into real development revenue because just to remind everyone, people first coming to Micron to do micronization because they want to solve the problem and hopefully stop there.

So micronization is the first step in solving it's solubility or bio availability problem, but we also know that, that is kind of the first tool that used and that doesn’t work, they move on. So over the next two to three years and quite frankly for Catalent timeframe that's short.

Over the next two to three years we hope that that's going to be a meaningful contributor to our overall development revenue, but then most importantly the development revenue has as higher opportunity to be turned into long cycle commercial manufacturing and that's the whole game for Catalent, long cycle commercial manufacturing.

So bring them in, capture that molecule through development revenue. May hopefully we have a win through the development cycle with a product that gets approved by the FDA..

Got it. Thank you for the answer. I will seize the floor..

Yes, if you can't tell I am excited about of that because it really just lines up with our Follow the Molecule and really have potential, but thanks Dave..

Excellent, thanks..

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

Hi, this is Divya Harikesh on behalf of Gary Nachman. I just have a couple of questions. Number one, on the softgel dynamic all you're seeing in North America, you said you're seeing some favorable product mix. How sustainable do you think that is, i.e.

are you seeing that mix installing or you see the mix shift slowing down and how does this compare to the mix shift you're seeing in Asia Pacific and Latin America regions? And secondly, your gross margins are being improving quite nicely.

How sustainable are those and how much is that a factor in offsetting some of their topline impact you're seeing in the base business?.

Okay. So the first part of your question, so year-to-date in the softgel business we had seen a favorable mix shift within North America just as a backdrop when we tend to see mix shift, it's typically not volatile. They will go in cycle backing last for half a year to two years.

I will tell you so when you say mix shift in favorable North America that should persist. Then relative to the comment that we made regarding the mix shift from prescription to consumer internationally it means internationally in Asia Pacific as well as Latin America, these were already principally you can see more health markets anyway.

And it's just by virtue of sales growing in these markets that consumer health comprises a larger part of our global softgel mix. So some different dynamics at play there that would reply your two different answers to your question which I hope I provided.

Now for the second part of your question, I would agree with your observation that gross margins have been expanding faster than you would have expected at the start of the year.

I think part of that is due to selling into available capacity right, our constant currency sales growth is up, combined with the sales growth we're seeing, a portion of that is in prior participation related activities which are inherently higher margin..

And how sustainable do you think this is?.

The revenue that we're talking in product participation should be of change that we would see persisting into the future. So that will certainly be a feature of our reporting going forward and our ability to sell into our new capacity is also something that should persist into the future assuming we can implement to grow sales.

We're not approaching any meaningful clips in our available capacity especially in light of the Winchester expansion now that we've doubled the size of our controlled release facility at Winchester..

Very helpful. Thank you..

Your next question comes from the line of John Kreger with William Blair. Please proceed..

All right. Thanks very much.

John, if you think about the commercial long cycle win that you had year-to-date, can you give us a sense about what trends you're seeing if any in terms of mix across the different delivery modalities that you got?.

Yes sure, so first of all I would say that in general, there is no lack of business out there if I can just be blunt.

I would say that the dynamics continue to be incredibly favorable, not to repeat what I said during my comments, but we're a lot of our customers continue to seek a supplier like Catalent where they want bigger, better fewer suppliers that can stand out of regulatory harm's way and have really global scale and reach.

So in general, I would just say the number of opportunities that we're beginning to participate in continues to be extremely robust across all of our delivery technology businesses if you will. In terms of trends, I would say, there is a lot of positives that are happening. I think Net shows some extremely robust biologics numbers.

Don't mistake it's coming out slow and steady biologics growth. We're growing really fast with that business and now that we what we see is every time we put in additional capabilities or capacity that the opportunity call for us, continues to increase. We see a lot of favorability in a lot of our most technology advanced businesses.

I would say that the platforms that have I would say are not your standard white compressed dosage form which his tablets forte in both our Blow-fill-seal business we see extremely robust market for both inhalation, ocular and other type of products that go into that business.

We see a lot of customers looking for additional modified release capacity which is why we're so excited about the Winchester business and something that we're extremely enthusiastic about is really one of the crown jewels of the Company there's IOs platform and the opportunity set that we now have in this fast release technology had prone dramatically actually over the last several years.

And somewhat of a headwind standpoint is that what we're seeing that the molecules that are coming to us are generally for smaller population pools and indications that I would say are not as expensive that we've had in the past.

So we've got great capabilities in the orphan drug space which bodes well Catalent, but again you're dealing with smaller population pools in our softgel business.

We probably have the most robust pipeline we had in the history of that business, but the volumes that we had although a great margin, the volumes that we have in that business I would say are smaller than some of the bigger blockbuster products that we've had in the past.

And the last comment that I'll make is that a lot of our large Pharma customers that are Pharma and consumer health customers are really going aggressively after the consumer health space.

So you guys know that we have a stated goal to expand more aggressively reach within consumer health space certainly within softgel and we see a lot of our large Pharma customers coming to us to renovate for them in the consumer health space whether it be the VMS or analgesic products and when you land one of these, they are large, big branded, sustainable products that are really terrific and provides a substantial I can only say base loading for the business.

So generally speaking all the trends certainly across or advance leverage some technologies are very positive albeit with the one modest headwind, which is we're winning more but in some cases certainly have been softgel the indication or size of those populations are smaller than we've had in the past and again at great margin.

So a lot of stuff there, but I think the net of it is we're seeing a very robust market for the company..

Yes, and the only thing I would add John is that the kind of growth that we're seeing sort of technology platform by technology platform is where we think we would be seeing it those meeting our expectations which all that underpins the organic growth. The long term organic growth rate outlook that we’ve been talking.

So nothing that has surprised us in the way the wins are progressing, which I thought was maybe for your question..

Yeah, that is thanks, one quick follow up, given that it sounds like you’re starting to get a bit more traction in the biologic business, what is your current thinking on API production as a business for large molecule biologics..

Well, so first of all I would say, I'll separate the two points.

First of all in general from an API phase, as we take a look at inorganic opportunity certainly with the operating platform that we have within Catalent there are some API businesses that maybe a good fit within our platform as they're appropriately specialized net commoditized and have the strong customer base that can easily be transferred out to those API.

So that’s something that under screening and we continued to look at that. With regards to our view of biologics and where we participate, really what Catalent plays within biologics and where we're continue to play is really in kind of the protein improvement if you will and really improving a biologics use which is why we have our GPEx platform.

We got into the ADC which really is a conjugation technology. So we’re not producing antibodies. We're producing the conjugate if you will for the antibodies which will be done somewhere else.

As we look at that very special and value adding area that we're participating in with biologics, we certainly see the opportunity for some further, I would say upstream -- going upstream a little bit in terms of participating in potentially conjugation, conjugation type of business.

But I think as we told folks before we're not really looking getting into the big stainless area of biologics where there is plenty of capacity out there and quite frankly a lot of stuff is now going more towards what we've done for example in our management facility with the 1,000 liter single used bio reactors.

It turns out now, people are kind of thinking differently about these massive 20,000 liter of kind of bioreactors and thinking about how you can put trains together of these smaller SUB. So I think what's good about that is we know we’re playing in biologics. We think it’s a big value add.

I think Catalent is becoming much more known as not only a pharmaceutical solutions provider, but also a biopharmaceutical solutions provider and we don’t see us again getting into a big CapEx gain, where there is a lot of capacity already having that.

We like to play in areas where we can get high margins niche and participating in advanced technology kind of way. I said a lot there but it helps to give you a flavor for the company how we think..

That’s great. Thank you..

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

Hi, John..

Yeah, smart questions have been asked so might be one follow on, your balance sheet is in pretty good shape, your M&A activity at this point, and your public life has been pretty small.

What are the odds you would put if you were betting in, not say in the environment but you might do something a little more substantial or should we expect to continue on the current path?.

Good question, John. Obviously it’s impossible for us to predict what the deal flow is going to be. I would just make the commentary that our space is highly fragmented, you correctly know about our balance sheet is very well positioned for both small deals and large deals.

We are agnostic emphasize and we’re just far more closely as on what sort of value you can create with the deals that we are doing. We happened to come across smaller deals and within 9 months of this fiscal year. There are larger deals out there and were certainly looking at in client to do them if they have the right characteristics.

So there is no stated intent to use more deals. There is a stated intent to continue to be a leader in our space and that will probably hit the problem in both large deals as well as small deals as time rolls on..

So, I mean obviously there is a lot of consolidation and inspect engineer, does that dynamic in and of itself change your present approach to market or not?.

Well so first of all, I'll kind of refer back to the comments that I made about the current dynamics of consolidation within our customer base as you noted kind of some of the specialty Pharma and also the generics in.

From a Catalent perspective generally speaking, I would say those are positive for us from the standpoint that when some consolidation occurs because Catalent really is sticky with the molecule.

We go when that consolidation happens in generally speaking because the consolidation is happening, those products may generally end up in strategic intense hands that are probably going to be better with those products than in the existing hands and we see that time and time again.

In fact I will you many of our biggest products started off as very small products with small companies that ultimately got acquired by bigger companies and we’ve many product that have changed hands like three or four times. Since I've been here and it is only boded well I would say for Catalent in general.

So that’s really how that dynamic really, I would say impacts us, but the consolidation that's happening at Spec Pharma and also in the generic space, doesn’t necessarily have an impact about how our space tends to want to consolidate other than the fact that I can assure you that I here consistently fill our customers as well as any of our team members do that they continually one to reduce the size of their supply base.

They want more suppliers, so the scale and capability and regulatory track record of Catalent that brings a lot more deals to us and when we do acquisitions such as Micron I get calls of congratulations and thank you. We loved them before and we love them more before, because we know they're in a safe pair of hands.

So I think to the extent that we can have a deals fits our strategy there is winning seller and it's at the economics, you’re going to see Catalent continue to be very smart in student state for continuing to build on our leadership position here. Yeah, I hope that answers your question..

And my other question, I know you don’t want to talk about your products, but is there any product on the horizon that’s going branded generics so far example Blow-fill-seal and ADC do these present opportunities or are they projects risks or is it agnostic with some of the calendar as you see this year?.

I would just say specifically to the list you provided, they provide opportunities but I would just say that and we've talked about this again I know a lot of you’re getting to know the company a lot better, but for us generally speaking, there is many opportunities for Catalent to have shots on revenue goals both when a product gets approved and then also when it goes OTC in generic.

So generally when it's in an advanced dosage form like softgel or guidance or something like that, those molecules generally extend their dosage form and then as that product goes, is over the generic.

We generally within more opportunity for the company and in some cases for example there was a product that was going generic where we had, I think more than four or five of the ANDA filers where we had been deals with them to actually do those products.

So not to make it seem like everything’s in opportunity for Catalent, but certainly I think with where we position ourselves in these advanced delivery technologies we’re not really looked at purely as an outsource shop, but there is real level of sticking. That being said, because of our customers looking for bigger, better, fewer suppliers.

We also are a normal protocol for some of those bigger opportunities like you’re mentioning..

Okay. Thanks so much..

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

Yes, good afternoon, guys. Thanks for taking the question.

John I am going to say on your Follow the Molecule theme and you guys launched your recent issues probably not generating revenue yet, but can you talk about the opportunity in new global quality in regulatory segment? I guess how big should we think of that opportunities being and what will you guys be doing different in regulatory that we see from some of the other research focused companies?.

Well, so first of all thanks for the question because I think this is an opportunity for me to really clarify some things for the folks.

I know that Catalent throws a lot of acronym value and it may be difficult to follow everything that's going on, but let me start with the fact that the Follow the Molecule strategy that Catalent has actually is and a business strategy for many decades. Because of Catalent's -- in fact we give examples.

One example that we give when talking about Follow the Molecule and really kind of an over the counter respiratory kind of a product that's been in the market for over 20 years and we kind of captured that molecule if you will in development work or in those development revenues that I talked about earlier on launching for the RM space and then transition over the OTC.

We will continue to make it in the absence to make it also in softgel, we've been doing that for well over 20 years. So first of all I would say our Follow the Molecule strategy is a core part of our business within our advanced delivery technologies and as I was talking to forward, it sounds like everything is an opportunity for Catalent.

It's because of that general stickiness that we have given our technology base that once we are in a product with our advanced delivery technology, it's just last for a long, long time many times throughout the whole life of that molecule.

The second part of your question is really with regards to the fact that we launched actually a new organization within Catalent and it was not a business unit. It was actually a functional organization.

Prior we had a standalone R&D function, research and development although I will tell you, Catalent is much bigger indeed and it is in our, it is million or a huge development powerhouse force.

So for example this year we're going to launch over 200 new products into the marketplace and Matt had given you our year-to-date numbers in terms of the number of products that we've already -- we've already launched and because of that increasing nature of product launches that we had over the last three years that -- the processes for which we do product launches within the company nearly needed to be more closely integrated with both our quality and operational.

Because you have to do development and then ultimately you launch it into your commercial manufacturing.

So we have a terrific 30-year veteran of the pharmaceutical space in Sharron Johnson and we had created a new organization who previously was the leader for our quality and regulatory organization and we promoted her into a new organization that is quality, product development and regulatory and we have received just a tremendous positive response from our customers.

In fact I would tell you, Catalent is absolutely leading the way, I would say in general the product development and new product introduction processes within Pharma are extremely challenging.

I won't say anybody to date is surely a best practice in the fact that Catalent launches more products per year than any single Pharma, BioPharma company and many of them combined. We need to be extremely good at it.

So by integrating our product development, which were the prior R&D resources which again were mostly the largely in development into our quality and regulatory into a new organization we can now -- we'll be able to more seamlessly launch those new product introductions. Catalent is an NPI, new product introduction company.

We're launching again hundreds of products for our customers per year and those products ultimately become -- our product launch today become future revenues tomorrow. So as we built the massive pipeline of projects we have I think 550 projects within the company which bodes well any number of projects that you have in any big Pharma.

We've got to be really good at doing that.

So to clarify and over answering your question because it's a good one because when the press release came out about this QPDRA I can see how you might have thought that it was another business unit, but we're really is a functional platform by which we can really continue to accelerate our growth through the launch of all our new product introductions..

Yes, that's really a great clarification. I guess I was unclear as to whether or not that was a new service offering you guys are looking to take the clearance, but it sounds like it's more of an internal function to kind of ensure that the business that you're already executing continues to kind of execute flawlessly..

You got it and I would just say Catalent is leading the way. I would say this is organizational innovation really at its peak here and we just have the right person and physician to be able to do it and the moves that we've already made are going to, I already feel better about our ability to lunch our products.

So anyway I am glad you asked the question because I think it clarified for a lot of people that QPDRA organization that we launched..

All right. Thank you..

There are no further questions in queue. I'll now turn the call back over to Management for closing remarks..

Okay. Actually, well first of all I just want to thank everybody for your participation, great questions and strong engagement.

Personally from my standpoint I can tell you it's terrific to see how this group of folks have really grown your understanding and appreciation of Catalent and it is a topline organization, but I think it also is a terrific company that as you really start to understand the nuances of it, you can understand why we are able to predictably talk about our growth rates for the future in terms of topline as well as EBITDA.

So in conclusion, I would just say I am really pleased with Catalent’s progress this quarter. We'll continue to capitalize on our recent acquisitions of Micron, Pharmapak and Redwood Bioscience as well as to continue investing our organic growth.

I would like to thank all of you for joining us today and we look forward to updating you again on our next conference call. Thanks again for your time and engagement by everybody on the call..

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day..