Thomas Castellano - Catalent, Inc. John R. Chiminski - Catalent, Inc. Matthew M. Walsh - Catalent, Inc..

Tycho W. Peterson - JPMorgan Securities LLC Juan Esteban Avendano - Bank of America Merrill Lynch Tim C. Evans - Wells Fargo Securities LLC David Howard Windley - Jefferies LLC John C. Kreger - William Blair & Co. LLC Ricky R. Goldwasser - Morgan Stanley & Co. LLC Stephen R. Hagan - Deutsche Bank Securities, Inc. Sean W.

Wieland - Piper Jaffray Matthew Mishan - KeyBanc Capital Markets, Inc..

Good day, ladies and gentlemen, and welcome to the Catalent, Inc., Second Quarter in Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following our prepared remarks, we will host a question-and-answer session and our instructions will follow at that time.

As a reminder to our audience, this conference may be recorded. It is now my pleasure to hand the floor over to Mr. Tom Castellano, Vice President Investor Relations and Treasurer. Sir, the floor is yours..

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today to review Catalent's second quarter fiscal year 2017 financial results. Please see our agenda on slide 2 of our accompanying presentation, which is available on our Investor Relations website.

Joining me today representing Catalent are John Chiminski, Chief Executive Officer; and Matt Walsh, Chief Financial Officer. During our call today, management will make forward-looking statements and refer to non-GAAP financial measures. It is possible that actual results could differ from management's expectations.

We refer you to slide 3 for more detail. Slides 3, 4 and 5 discuss the non-GAAP measures and our just issued earnings release provides a reconciliation to the nearest GAAP measures.

Catalent's Form 10-Q, to be filed with the SEC later today, has additional information on the risks and uncertainties that may bear on our operating results, performance and financial condition. Now, I would like to turn the call over to our Chief Executive Officer, John Chiminski..

Thanks, Tom, and welcome, everyone, to our earnings call. We continue to perform in line with our financial performance expectations and are pleased to report second quarter results which include year-over-year revenue and adjusted EBITDA growth in constant currency.

As you can see on slide 6, our revenue for the second quarter increased 6% as reported and increased 10% in constant currency to $483.7 million, with 8% of the 10% being organic, and with all reporting segments contributing to the growth.

Our adjusted EBITDA of $98.1 million was above the second quarter of fiscal year 2016 on a constant currency basis by 2% primarily driven by our Softgel Technologies segment, which recorded double-digit revenue and EBITDA growth. Our adjusted net income was $34.7 million or $0.27 per diluted share for the second quarter.

Additionally, through the first six months of fiscal year 2017, we've recorded revenue growth of 5% as reported and 9% in constant currency with 8% of the 9% being organic, which is above our long-term outlook of 4% to 6% top line growth.

Now moving on to our key operating accomplishments during the quarter, first, we announced the acquisition of Accucaps, a Canadian developer and manufacturer of over-the-counter, high potency and conventional pharmaceutical softgel products.

The acquisition highlights our commitment to build upon our market-leading position in the softgel space and adds two facilities in North America to complement our softgel center of excellence in St. Petersburg, Florida. The acquisition is currently under antitrust review in Canada and we expect it to close during the third quarter.

Next, we made two enhancements to our capital structure during the quarter. We issued $380 million (sic) [€380 million] (03:12) of 4.75% euro-denominated notes and used the proceeds to pay down debt and to fund our acquisitions of Pharmatek and Accucaps. While on the market, we also re-priced both our U.S.

dollar and euro-denominated term loans resulting in an interest rate reduction of 50 basis points on the U.S. dollar tranche and 75 basis points on the euro tranche. Finally, I want to provide an update regarding the integration of the Pharmatek acquisition that we closed late in the first quarter.

As a reminder, Pharmatek Laboratories is a West Coast U.S.-based specialist in drug development and clinical manufacturing and has extensive early-phase drug development capability from discovery to clinic and bring spray drying into our already broad portfolio of advanced delivery technologies.

Integration of the business is progressing well and is already benefiting our customers and creating value for the company. Now I'd like to turn the call over to our Chief Financial Officer, Matt Walsh who will take you through our second quarter and year-to-date financial results and provide details on our outlook for fiscal year 2017..

Thanks, John. Please turn to slide 7 for more a detailed discussion on segment performance beginning with our Softgel business. As a reminder, my commentary around segment growth will be in constant currency.

Softgel revenue of $201.9 million grew 14% during the quarter with EBITDA growing at 32% as we saw a significant strength across both the Rx and consumer health portfolios. We experienced strong demand for Rx products across Europe and expect this momentum to carry into the second half of the fiscal year.

Our Softgel consumer health initiative is essentially complete in terms of its above base line impact on year-over-year sales growth. However, we did see marginally higher consumer health volume growth in our key geographies outside the U.S.

namely Latin America and Europe which was partially offset by consumer health volume declines within the Asia Pacific region. Our Beinheim softgel facility continues to be fully operational and contributed $13.3 million of this segment's year-over-year revenue growth and $5.5 million of the EBITDA growth during the second quarter.

Additionally, the ramp-up of the activity of the site continues to progress in line with our FY 2017 guidance. The update for Drug Delivery Solutions segment is shown on slide 8. The DDS segment recorded revenue of $214 million which was up 8% versus prior year.

But EBITDA was down 16% due to a favorable $12.5 million onetime resolution of a volume commitment recorded in the prior year. Excluding this event, revenue grew 15% and segment EBITDA grew 6%.

Recent investments in our biologics business continue to translate into growth during the second quarter, and it remains the fastest-growing business within Catalent. We recorded strong revenue and EBITDA growth at our Madison facility driven by the completion of project milestones and larger clinical programs.

The SMARTag technology continues to meet proof-of-concept milestones and customer interest remained strong. We continue to believe that our biologics business is positioned well to drive future growth as indicated by recent business development signings with Roche, Moderna Therapeutics and Triphase Accelerator.

As a reminder, at the time of the IPO, our dedicated biologics business was approximately 1% of Catalent's total consolidated sales which has since grown to nearly 4%. The oral delivery portion of the business had a strong quarter with favorable end-market demand for high-margin offerings within our U.S.

controlled release business, which saw lower volumes throughout most of fiscal year 2016 due to customer supply chain issues that have since normalized this fiscal year as we had anticipated.

The development and analytical services business, which we abbreviated DAS, recorded increased revenue and EBITDA driven by higher levels of customer project activity and continued to build upon its momentum from the first quarter.

Our blow-fill-seal offering recorded results during the second quarter and were in line with the prior year period and market fundamentals continued to remain attractive for this key sterile-fill technology.

In order to provide additional insight into our long-cycle business which includes both Softgel Technologies and Drug Delivery Solutions, we're disclosing our long-cycle development revenue and the number of new product introductions or NPIs as well as revenue from NPIs.

As a reminder, these metrics are only directional indicators of our business, since we do not control the sales or marketing of these products nor can we predict the ultimate commercial success of them.

For the six months ended December 31, 2016, we recorded development revenue of $73 million, which was in line with the same period of the prior fiscal year.

Also, during the first six months, we introduced 73 new products which contributed $43 million of revenue, more than double the revenue contribution of new products in the same period of the prior fiscal year.

As a reminder, the number of NPIs and the corresponding revenue contribution in any given period depends on the type and timing of our customers' product launches which are often driven by regulatory approvals or are at the discretion of our customers and thus, these figures will continue to vary quarter-to-quarter. Now, on slide 9.

Our Clinical Supply Services segment posted revenue of $77 million which was up 8% compared to the second quarter of the prior year driven by increased customer project activity related to our storage and distribution business.

However, EBITDA was negatively impacted by the mix shift to lower margin storage and distribution revenue from manufacturing and packaging revenue, and thus, down 2% from the prior year. We also experienced increased administrative costs within this segment.

Looking ahead, we're extremely pleased with another strong quarter of backlog and book-to-bill metrics. As of December 31, 2016, our backlog for the CSS segment was $334 million, an 8% sequential increase. The segment also recorded net new business wins of $105 million during the second quarter, representing a 31% increase year-over-year.

The segment's trailing 12-month book-to-bill ratio was 1.2x. These positive indicators support our expectations that this business should continue to grow revenues towards the high end of our consolidated long-term outlook which we expect to see in the second half of the fiscal year. The next slide contains reference information.

We've already discussed the segment results shown on the consolidated income statement by reporting segment which is on slide 10. Slide 11 shows in precisely the same format as slide 10 the six-month year-to-date performance of our operating segments, both as reported and in constant currency.

I won't cover the variance drivers in detail since our year-to-date top line results parallel our second quarter results and show constant currency revenue growth and similar EBITDA performance across all three reporting segments.

The year-to-date 9% constant currency revenue growth or 8% growth on an organic basis compared to the same period a year ago was nicely above our long-term objective of 4% to 6% organic revenue growth per year.

Slide 12 provides a reconciliation to last 12 months EBITDA from continuing operations from the most proximate GAAP measure, which is earnings from continuing operations. This bridge will assist in tying out our reported figures to our computation of adjusted EBITDA which is detailed on the next slide.

Moving to adjusted EBITDA on slide 13, second quarter adjusted EBITDA decreased 3% to $98.1 million compared to $101.1 million for the second quarter a year ago due to the favorable onetime resolution of volume commitment of $12.5 million as recorded in the prior-year period.

On a constant currency basis, our second quarter adjusted EBITDA increased 2% to $103.2 million. Excluding the onetime item in the prior year, adjusted EBITDA would have increased 16% driven by strong EBIT performance across our Softgel and Drug Delivery Solutions segments.

On slide 14, you can see that the second quarter adjusted net income was $34.7 million or $0.27 per diluted share, compared to adjusted net income of $38.9 million or $0.31 per diluted share in the second quarter a year ago.

The decline in both ANI and EPS in the quarter can be traced back to the favorable onetime resolution of volume commitment recorded in the second quarter of the prior fiscal year. This slide also includes the reconciliation of earnings from continuing operations to non-GAAP adjusted net income in a summarized format.

A more detailed version of this reconciliation is included in the Supplemental Information section at the back of the slide deck, and shows essentially the same add-backs as seen on the adjusted EBITDA reconciliation slide. Slide 15 shows our capitalization table and capital allocation priorities.

As John mentioned earlier, in December, we were active in the capital markets and made two enhancements to our capital structure. First, we issued €380 million of euro-denominated senior notes with an eight-year maturity in what we believe is an attractive coupon of 4.75%. We used the proceeds to pay down debt and to fund the Pharmatek acquisition.

The remainder was taken to the balance sheet and will be used to fund the Accucaps acquisition when it closes later this fiscal year and for general corporate purposes.

The transaction was leverage neutral and had several additional benefits including diversifying and extending the maturity profile of our debt, reducing interest rate risk and better aligning our debt currency mix to that of our operating cash flows.

Second, while in the market, we re-priced our term loan portfolio and reduced the USD tranche interest rate by 50 basis points and the euro tranche interest rate by 75 basis points. As a result, we were able to reduce our weighted average interest rate across all of our debt from 4.25% at September 30, 2016 to 3.91% as of December 31, 2016.

As I mentioned earlier, the enhancements to our capital structure were leverage neutral. Our net leverage ratio continues to be 4.5x as reported and 4.4x pro forma for the Pharmatek acquisition. Our capital allocation priorities remain unchanged and focused on organic and inorganic growth.

We're updating our financial outlook for fiscal year 2017 solely due to the passage of time. As a result, we're narrowing our range for expected revenue, adjusted EBITDA and adjusted net income. Our base business continues to perform in line with our expectations with headwinds from foreign exchange translation due to the strengthening of the U.S.

dollar versus the British pound and the euro, essentially being offset by the contribution of the Pharmatek acquisition and the anticipated contribution of the Accucaps acquisition. As seen on slide 16, we expect full year revenue in the range of $1.94 billion to $1.98 billion.

We expect full year adjusted EBITDA in the range of $435 million to $450 million and full year adjusted net income in the range of $168 million to $183 million. We expect in the range of $130 million to $135 million for capital expenditures.

And we expect our fully diluted share count on a weighted average basis for the fiscal year ending June 30, 2017 will be in the range of 126 million to 128 million shares.

It's important to note that the revenue and adjusted EBITDA ranges which we're guiding are consistent with our constant currency long term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth, adjusted upward for the recovery of Beinheim this year versus the prior year.

Lastly, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression throughout the year.

As discussed for several quarters now, the first quarter of any fiscal year is generally our lightest quarter of the year by far with the fourth quarter of any fiscal year generally being our strongest by far, and this will continue to be the case this fiscal year. Operator, we'd now like to open the call for questions..

Yes, sir. Our first question will come from the line of Tycho Peterson with JPMorgan. Please proceed..

Okay. Thanks. First on Clinical Supply, the mix shift dynamics, you called this out for a couple of quarters now.

Can you maybe just talk about when you think about that normalizing? And then are you still confident, longer term that segment can grow at the high end of the top line growth range given some of the cancellations we've seen?.

I'll start with the second part of the question, Tycho, which is we do see the recent growth that we've experienced in CSS. We do believe that will continue, so, yes, we see it continuing to grow towards the high end.

In terms of the mix of business, from what we're able to see in our backlog, it would seem to be case that we'll probably see mix that is slanted towards storage and distribution for the remainder of this fiscal year, but we do see that normalizing beyond the six-month window..

And then, on the biologics side with the capacity addition at Madison, can you give us a sense as to maybe interest from customers in terms of locking down some of that capacity coming on line in early 2018? How quickly do you think you can kind of ramp it there?.

Yeah. Sure, Tycho, John Chiminski here. First of all, I just wanted to say the biologics business continues to be really growing in an incredibly fast rate. Just to remind you, the revenue from our core business was up nearly 250% over the last three years and EBITDA was up over 80%.

And currently, as to factories running, we're running near capacity, I would say, upwards of 90%. And we have the third train basically slated towards engineering runs coming up in October, and that's the $34 million investment that we're currently in process of. We currently have our business development teams with a very active funneling.

You can imagine with us being at 90-plus percent of our current capacity that we're making, I would just say good headway with a very strong pipeline in terms of allocating capacity in advance. And in fact, it's going to be coming in line, I would say, just in time given where our capacity is at with the current slate of business that we have there..

Okay. Thank you..

Thank you. Our next question will come from the line of Derik de Bruin with Bank of America. Please proceed..

Hi. Hello, good evening. This is Juan Avendano on behalf of Derik.

I was wondering if I could – can you please, I guess let us know what the M&A contribution was in this fiscal quarter from Pharmatek overall, and what is expected from Accucaps once that is closed?.

The contribution from M&A in the current quarter was approximately 2 points of revenue and about 1 point of EBITDA. And the acquisition of Accucaps is similarly-sized. So, that's what we expect the impact to be..

The same about 1% to 2% as Pharmatek on a quarterly basis?.

Quarterly or annually. Yeah. Yeah, since we're talking about percentages..

Good.

And then as a follow-up, I guess my next question would be regarding the pending acquisition of Capsugel by Lonza, can you tell us how that might affect the CDMO competitive dynamics and any impact to Catalent?.

I would just say that it's very early days with regards to the Lonza and Capsugel acquisition, if you will. And we certainly haven't seen any specific competitive dynamic changes in the marketplace due to that acquisition..

Thank you..

Thank you. Our next question will come from the line of Tim Evans with Wells Fargo Securities. Please proceed..

Thanks. Matt, I believe last time you guided back in November the euro was at $1.30 and now I believe you're guiding with the euro at $1.05.

Can you quantify how much FX headwind you're absorbing into your new guidance here?.

The new guidance, Tim, relative to the original guidance at the beginning of the year, has about $15 million of FX impact at the EBITDA line..

What about on the revenue line?.

It would be I would say approximately $25 million, plus or minus..

Okay.

And are you including anything for Accucaps in the updated guidance here today?.

Yes, we are..

Okay. The last thing I wanted to ask you about, can you comment on the corporate tax reform proposals that are currently being discussed in Washington.

Particularly curious, are you guys a net import or net exporter, and how do you think some of those dynamics might play out for you?.

Well, Tim it's obviously very early days for the company to be guiding on the impact of any potential tax changes, because we just don't know where it's going to land.

In response to the second part of your question though, which is a little bit more specific and easier for me to respond to, Catalent would be more considered to be a net exporter versus importer as far as the U.S. is concerned, given that we are shipping from our U.S.

sites across borders, while most of our inputs are sourced domestically within the U.S..

Thank you very much..

Thank you. Our next question will come from the line of Dave Windley with Jefferies. Please proceed..

(22:38) John, I was curious on the Accucaps acquisition. Is your (22:46) for you to elaborate on the opportunity there – is your thought that this (22:53) already have or cost synergy rationale or was maybe the (23:01-23:06) competitors? Curious on (23:08)..

Yeah. Sure. So, Dave, I apologize. You were breaking up a little bit here. But I got the gist of your question with regards to Accucaps and rationale.

I would say the reason that we were excited about bringing the two facilities in Canada from Accucaps into the Catalent network is because they actually have a slate of business that's very complementary to what we're doing in North America.

They have a slate I would say of both high potent generic pharmaceutical products, and then also they have an OTC slate of business and also – that would allow us to, I would say, tap into some markets that we had previously foregone in North America because we were at capacity in our St. Pete's facility.

And this is going back nearly a decade, where they made some strategic choices about what business they would and wouldn't do and they primarily focused on the prescription business.

So, by bringing these two facilities and their book of business into the company, it allows us to further expand our footprint in North America, specifically as it relates to some OTC products and some additionally for some pharmaceutical products.

And again, we always – although we are by far the largest player in the softgel market, we really want to continue to keep our very strong position there..

Thank you. Our next question will come from the line of John Kreger with William Blair. Please proceed..

Hi. Thanks very much.

John, just following up on that question, where across your portfolio, other than within Madison, are you capacity constrained at this point? And if we think about your sort of CapEx budget over the longer term, should we assume that can kind of grow with revenues or might it have to expand faster?.

So, I would tell you that one of the most important things we do in the company, John, is our five-year strategic plans where we're constantly looking at the capacity across all of our facilities.

And the most significant constraints that we've had over the last several years, we knew it in advance specifically in Winchester where, as you know, we doubled our footprint there, or capacity there with a $52 million investment. And that was the capacity that was running, I would say, at capacity.

And then, our biologics business, I would say, it was a transformation of the business, and we did not really appreciate how quickly that would be taking up, which has driven us to that 90% capacity. I would say elsewhere in the network that we are well balanced and are ahead of any big CapEx requirements.

And I would expect us to continue to spend kind of in that 6% to 7% of revenues for CapEx going forward..

Great. Thanks.

Matt, can you update us on the free cash flow outlook for the full year, has that changed at all?.

It has not changed, John. We continue to believe that we will generate free cash flow in the range of 60% to 70% of adjusted net income. No changes there..

Great. Thanks. And then one last quick one.

The new business environment and your long-cycle business, how is that going in particular? Are you seeing any changes in the competitive pricing landscape?.

John, you said a word I didn't understand. You said bond cycle, can you repeat that again? The competitive landscape....

I'm sorry. Yeah. Just the competitive landscape and the long-cycle business (26:57)..

I'm sorry, John. Yeah. No. First, all I would say is that the marketplace continues to be incredibly robust. The pipelines have increased something like 50% over the last several years. And they continue to grow. So, I would say, from a long-cycle business, we continue to win at or above previous year rates.

We expect to have another, I would say, record business development year in Catalent the way that we count internally for our sales team, our business development team. So, I'd say, the overall marketplace continues to be very robust.

And I'll just reemphasize that it continues to tilt more towards the biologics area which is again, the reason that we continue to invest aggressively given the large number of molecules that are in that pipeline and continue to grow..

Great. Thank you..

Thank you. Our next question will come from the line of Ricky Goldwasser with Morgan Stanley. Please proceed..

Yeah. Hi. Good afternoon and a couple of questions here.

So, just circling back on the questions around tax reform, and we know that it's still early days, but just kind of like when we step back and you think conceptually about the border tax reform or border adjustments, can you help us understand how you're thinking about this? Is this a potential opportunity if biopharma manufacturers need to move production to the U.S.? Do you have a capacity here that can help you gain share or is this a potential headwind?.

Yeah, sure, Ricky. I'll take this one. First of all, again, as Matt stated earlier, it's very early days. But with regards to any potential border tax, I think it's important that everybody understands that for most all of our customers, they take ownership of the product from the time it leaves our dock.

So, where they ship it to, and for our plants, they may be shipping it to a consolidating area, a packaging area where it then goes to somewhere upwards of 60 or 70 different countries. They have the complete ownership of that and have control of that.

So, in terms of any impact for Catalent, there is no Catalent shipping into the United States, if you will, as an owner of that product, enduring some sort of tax. So that is on our customers. The other part of this question is, well what if that incurs more costs for your customers, and are they going to come back to you for that.

And we point to the fact that the one, we have very strong and enduring contracts. And second of all, we're a very small part of the overall cost of goods that we don't even come close to having any meaningful impact on a large border tax. The third is, we certainly have capacity in several of our key facilities across the U.S.

I'd point most significantly to our expansion in Winchester where we would readily take on those products. But in the pharmaceutical world, tech transfers can be a multiyear process and if there has to be a capacity build it could be even longer.

So, I think as anything happens from a potential tax standpoint, they're going to have to think through the implications in a very highly regulated business that has product registered in tens of countries that, again, could take from three to five years if you are looking at a build plus registration – qualification and the registration of those products across the board.

So, obviously we're thinking of these things, but given our position, specifically with regards to border tax and the way our customers take control of those products, there's really relatively little for us to worry about. And then we're certainly willing to take on additional capacity in the U.S. if that opportunity affords itself..

Okay. And then my follow up question is just kind of like trying to better understand organic growth. You mentioned that each of the acquisitions that you've completed should contribute around 2% to revenue growth, 1% to EBITDA.

So, when we think about the business, organically, in fiscal year 2017 and obviously the acquisitions don't contribute to the full year. But it seems that the new guidance implies organic growth somewhere at the context (31:35) like 3% or 5%.

Is that fair and are these kind of like more of kind of like how we should think about the base business organically in longer term?.

So, the guidance that we've issued implies organic growth that's really squarely in the middle of the 4% to 6%, Ricky, so it would be on the upper end of your 3% to 5%.

And our long-term outlook for the business has not changed at all with respect to Catalent thinking that we can grow the business organically 4% to 6% at constant currency for the foreseeable future..

Okay. Thank you..

Thank you. Our next question will come from the line of George Hill with Deutsche Bank. Please proceed..

Hi. It's Stephen Hagan on for George. I was just wondering, how does the current utilization of Beinheim compare to prior to the shutdown and what are you expecting for the contribution from wining back additional business there..

Well, our expectations for the recovery of Beinheim are largely proceeding per our original guidance for the year, and that has Beinheim operating at about half of its former level of utilization. And we believe that that will be the case for the foreseeable future..

Okay.

And then just one quick other question, can you update your interest expense forecast for the year, kind of given the December credit re-pricing and the acquisitions you've done?.

The interest expense number actually is we're not changing it. Our expectation has been about $92 million of interest expense for the year. And so, what we achieved with the refinancing, even though we've got higher gross debt, it comes at a lower weighted average interest rate, those about offset..

Okay. Thank you..

Thank you. Our next question will come from the line Sean Wieland with Piper Jaffray. Please proceed..

Hi. Thanks. Maybe one more on the Washington rhetoric, can you maybe be a little bit more specific on what percentage of your business are drugs manufactured offshore that are destined for the U.S.

market?.

I don't know that we have that number and I'd go back to say, I mean, we can give you the split of revenues outside the U.S. versus in the U.S. But again, we manufacture products in those plants. And in those plants, our customers take control of those products and then may ship upwards of 60 or 70 different countries.

So, that's a question that our customers know, and again, would bear the brunt of any border tax effect that's implemented..

Okay.

I mean maybe, is there a way you can get us into the ballpark, like is it more than half or less than half?.

It's....

I wouldn't even guess, Matt..

Yeah..

I wouldn't even guess. I mean, again, we're making – most of the products in our plants are single sourced through those plants.

And so, you'll have a large pharma customer that will take that product and they will allocate it to the markets around the world that they're shipping into, and we do get detailed forecast but they're generally giving us – because we produce product in bulk.

We're not the end-packager, so we wouldn't have visibility to all the countries of destination. We just know where the product is actually registered in but we don't know what percent of that allocation, at a macro level, is destined for the U.S. And again, I go back to my point, the customer owns that product FOB from Catalent..

Okay. You mentioned your API is sourced domestically which surprised me a little bit.

Does that – any of the changes here possibly make you more interested in getting into the API business?.

So, let's just make sure we're in the same place. One of the questions was, is Catalent a net importer or net exporter? And I said – my answer to that was, for our sites in the United States, since we seem to be concerned with U.S. tax policy.

For our sites in the United States, we are exporting more in terms of dollars in revenues than we are buying in raw materials or services or any other factors of production from offshore. That doesn't necessarily say that that's just API, Sean. So, that's just a general high-level comment about our United States footprint.

So and in many cases, that API is the customer's property to which we're adding value – intellectual property, and otherwise as we are in the processing chain. That'll be kind of a wrinkle that the policymakers will have to think about.

And I'm not exactly sure what the impact on Catalent is there in cases where we're getting API but we're not actually buying it. So the short answer after that long answer is that it doesn't necessarily change our view on the attractiveness of an API target for M&A purposes..

Okay. One more quick one, you talked about the Madison facility being close to capacity here.

Does this give you any pricing power in that market?.

I would just say, in general, pricing is strong. I think we've given a statistic before that our data shows that there will be more demand than capacity in the industry for the next five years. And most of it will be positioned for the less than 5,000 liter trains which is where Catalent is really putting all of our investment into.

And so, I would say that pricing is strong. Our ability to lock up customers in advance for them to reserve capacity is going up and it has some of the highest margins, I would say, right now in the business, margin percent..

What percent?.

The highest margin percent. I didn't give an exact percent..

Okay. All right. Thank you..

Thank you. Our next question will come from the line of Matthew Mishan with KeyBanc. Please proceed..

Hey. Good afternoon. Thank you for taking the questions. I just wanted to start off – I just wanted to make sure I got it right that you included a contribution from Accucaps in the updated guidance even though it hasn't closed yet..

That is correct. We included a small contribution..

And then, just going back to the organic growth conversation.

If the contribution from Beinheim is intact and that's at the same as you expected, is the incremental contribution from acquisitions above the incremental headwind from FX and essentially the base organic growth is down a little bit?.

In fact it's just the opposite. The base business is performing better than our expectations. And so, FX is being offset by that and to a lesser extent acquisitions..

Okay. It's a good thing I clarified that then. And then, you changed the cadence of EBITDA weighted more towards the back half, a little bit more to the back half last quarter. I believe it was due to some timing of new products.

Can you give us an update on how those are tracking?.

Given that our guidance is essentially unchanged, all we've done is narrow the range. I think it's safe to assume that our expectations about overall timing of new product introductions in dollar magnitude is mostly unchanged..

Okay. And then last one. You have a tax shield, I believe, that helps you on the free cash flow side.

How should we be thinking about that going into 2018 as far as the timing of when that fully expires or is fully utilized?.

So, the way to think about is we will be continuing to utilize net operating losses at the federal level in the United States through the end of our 2018 fiscal year. That's our best projection at this point..

Excellent. Thank you very much..

Thank you. We have a follow-up question from the line of Tycho Peterson with JPMorgan. Please proceed..

Hey, thanks. Just one quick one, sterile injectables, your calling for a pick-up in the back half of the year.

Is that a function of some of the new animal health syringes or were there other dynamics there?.

You've got it right, Tycho. It is the animal health business and that is a significant enough product for that relatively small business segment to be the sole driver of the growth..

Okay. Thanks..

Thank you. We have a follow-up question from the line of Derik de Bruin (sic) [Juan Avendano] (41:43) with Bank of America. Please proceed..

Hi. Thank you. This is a question also regarding some of the political rhetoric, but not from a tax perspective, but President Trump is, based on a conference that he had, he seemed to be willing to put some pressure on pharma to bring back manufacturing back to the U.S.

And so, while there haven't been a lot of details, can you discuss how this could impact Catalent, if there's a negative for the overall CDMO space?.

Again, this is where you have to sort through the rhetoric and talk about what is real and pragmatic.

And any buildup of a pharmaceutical capability would take many years and a significant amount of investment, and some, I wouldn't say regulatory hurdles as much as, again most of these facilities have single-sourced in those facilities meaning that they have to be registered in upwards of 60 or 70 different countries.

And even when we win a job or when we win business from a pharmaceutical company, to do a tech transfer into our facility, it's a two to three-year process in a facility that already have capacity. So, I think from my perspective and I'm stating opinion here, that if there is future choices about where to allocate manufacturing for new products.

Those products or builds would probably get a first look at the U.S. if those capabilities are there, and it's best positioned. But I don't foresee anything that we'd be shutting plants down externally and building new plants into the U.S. So, I'm looking at this purely from a practical standpoint for a very long cycle business that's highly regulated.

So, I think it's more about what happens to where choices are made for future build versus anything else. And I'll just make the final comment which is most of these choices are not based upon labor cost.

They're based upon, in the pharmaceutical industry, generally capabilities and then as we've seen over the last 5 or 10 years, based upon tax jurisdictions for cash flow reasons, which is why we've had so many people wanting to invert.

So, I think you'll have less people wanting to make those decisions to go to a lower tax jurisdiction and making future decisions about making their products, again, where the capability is and where they have the best opportunity for a return..

The only other thing I would add to John's answer is that the rhetoric around manufacturing seems to be focused on companies that have outsourced their manufacturing to other countries to realize lower cost of labor, but then ship those same products back to the United States.

That's really not a feature of our manufacturing footprint as it exists today, where we have plants outside the U.S., where those plants are generally servicing local markets. Or like in the case of Swindon, for example, our Zydis technology, we do that in just one place in the world.

So the rhetoric, as it's being – as it's coming out of Washington, is focused on companies that are far different than the way Catalent is organized in terms of how we manufacture..

Thank you. Appreciate the color..

Thank you. There are no further questions. So, now I'd like to hand the conference back over to John Chiminski, Chief Executive Officer for closing comments or remarks.

Sir?.

Thanks, operator, and thanks again, everyone, for your questions, and for taking the time in joining our call. I'd like to close by reminding you of a few of our key priorities for fiscal year 2017.

First, we're confident and committed to delivering fiscal year 2017 results consistent with our financial guidance, which is in line with our long-term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth.

Next, we're committed to building world-class biologics business for our customers and for patients, and look forward to another year of double-digit revenue and EBITDA growth from our core biologics offering. Operations, quality, and regulatory excellence is at the heart of how we run our business. It remains a constant focus and priority.

We support every customer project with deep scientific expertise, and a commitment to putting the patient first in all we do. Lastly, we're well-positioned to capitalize on our industry-leading partnerships, and the potential for consolidation.

We continue to target tuck-in acquisitions that we can integrate swiftly and efficiently in order to maximize value to our shareholders as evidenced by both Pharmatek and Accucaps. Thank you..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program. And you may all disconnect. Everybody have a wonderful day..