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

Tejas R. Savant - 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 Matthew Mishan - KeyBanc Capital Markets, Inc. Nina D. Deka - Piper Jaffray & Co..

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Catalent Incorporated Third Quarter Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode to prevent background noise. We will have a question-and-answer session later and the instructions will be given at that time.

Now, I would like to welcome and turn the call to the Vice President of Investor Relations and Treasury, Thomas Castellano..

Thank you, Carmen. Good afternoon, everyone, and thank you for joining us today to review Catalent's third 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, Chairman and 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 reconciliations 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'd like to turn the call over to our Chairman and Chief Executive Officer, John Chiminski..

First, we closed 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 on their 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.

Integration of Accucaps, along with Pharmatek which closed in the first quarter, is progressing well and has already begun benefiting our customers and creating value for Catalent. Next, I'd like to highlight another excellent addition to our Board of Directors.

Earlier this week, Madhu Balachandran, former Executive Vice President of Operations at Amgen is elected to the Catalent's Board. Madhu is a seasoned executive who brings a wealth of biologics and operations experience which will be extremely valuable, as we continue to execute on our growth strategy.

Finally, I want to reiterate that the dynamics of our industry and market continue to remain very favorable and our customers' needs for fewer, bigger, better development and manufacturing partners will continue to be drivers of long-term growth.

Now, I'd like to turn the call over to our Chief Financial Officer, Matt Walsh, who will take you through our third 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 a more 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 $209.9 million grew 14% during the quarter with EBITDA growing at 48%, as we saw significant strength within the Rx portfolio. We experienced strong demand for Rx products across Europe and expect this momentum to continue throughout the remainder of the fiscal year.

Our softgel consumer health initiative is complete in terms of its above-baseline impact on year-over-year sales growth, and we saw a more level consumer health volume performance in Latin America and Europe, and even had volume declines in our Asia-Pac region.

Our Beinheim softgel facility continues to be fully operational and the ramp-up of activity at the site continues to progress in line with our FY 2017 guidance. The Accucaps acquisition that we completed during the quarter also contributed to the segment's revenue and EBITDA growth.

Excluding the impact of the acquisition, the softgel segment posted organic revenue growth of 8% and organic EBITDA growth of 40%. The update for the Drug Delivery Solutions segment is shown on slide 8. The DDS segment recorded revenue of $234.6 million, which was up 27% versus the prior year with EBITDA growing 56% during the quarter.

Recent investments in our biologics business continued to translate into growth during the third quarter and 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 remains strong. We continue to believe that our biologics business is positioned well to drive further growth, as indicated by recent business development signings of 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 and it has since grown to just above 4%. The oral delivery portion of the business had a second consecutive 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 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 on its momentum from the first 6 months of the fiscal year.

Our blow-fill-seal offering recorded results during the third quarter that were modestly below the prior-year period, but market fundamentals continued to remain attractive for this key sterile-fill technology. The acquisition of Pharmatek that we completed during the first quarter also contributed to the segment's revenue and EBITDA growth.

Excluding the impact of the acquisition, the DDS segment posted organic revenue growth of 23% and organic EBITDA growth of 53%.

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 9 months ended March 31, 2017, we recorded development revenue of $112 million which is 4% above the same period of the prior fiscal year.

In addition, during the first 9 months, we introduced 112 new products which contributed $32 million of revenue, which is 23% more than the revenue contribution of new products launched in the same period of the prior 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 customer's 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 $97.5 million, which was up 44% compared to the third quarter of the prior year, driven by increased customer project activity across all of our core offerings.

Low margin comparator sourcing activity was the largest driver of the revenue growth, but storage and distribution and manufacturing and packaging were up double-digits versus the prior-year period.

Segment EBITDA increased 43% compared to the third quarter of the prior year, mostly driven by the core offering revenue growth within storage and distribution and manufacturing and packaging services. Given the low-margin of comparator sourcing activity, it only contributed modestly to the segment's third quarter EBITDA growth.

All of the revenue and EBITDA growth recorded within the Clinical Supply Services segment was organic. As of March 31, 2017, our backlog for the CSS segment was $330 million, a 1% sequential decrease. The segment also recorded net new business wins of $99 million during the third quarter, representing an 18% increase over the prior year.

The segment's trailing 12-month book-to-bill ratio was steady at 1.2. These indicators continue to support our expectation that this business should continue to grow revenues towards the higher end of our consolidated long-term outlook. The next slide contains reference information.

We've already discussed the segment results shown on the consolidated income statement by reporting segment on slide 10. Slide 11 shows in precisely the same presentation format as on slide 10, the 9-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 results parallel our third quarter results and show similar constant-currency revenue and EBITDA performance across all three reporting segments.

The year-to-date 14% constant currency revenue growth or 12% on an organic basis compared to the same period a year ago was nicely above our long-term objective of 4% to 6% organic growth revenue per year.

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

So, moving to adjusted EBITDA on slide 13. Third quarter adjusted EBITDA increased 46% to $117.8 million compared to $80.7 million for the third quarter a year ago.

On a constant-currency basis, our third quarter adjusted EBITDA increased 51%, of which 46% was organic, driven by strong performance across all three of our reporting segments, primarily Softgel and Drug Delivery Solutions.

On slide 14, you can see that the third quarter adjusted net income was $48.7 million or $0.38 per diluted share compared to adjusted net income of $26.4 million or $0.21 per diluted share in the third quarter a year ago.

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 end of the slide deck and shows essentially the same addbacks as seen on the adjusted EBITDA reconciliation slide. Slide 15 shows our capitalization table and capital allocation priorities.

As discussed on last quarter's call, in December, we were active in the capital markets to raise proceeds to fund the Pharmatek and Accucaps acquisitions as well as to reprice our term loan debt. The results were excellent on both fronts and we were able to reduce our weighted average interest rate on our debt from 4.25% to 3.91%.

Our net leverage ratio has improved and is now 4.2 as of March 31, 2017, down from 4.5 as of December 31 as a result of the 51% adjusted EBITDA growth realized in the third quarter. Note, that this leverage ratio was based on actual performance of the acquisitions completed this year.

We did not include any pro forma components for anticipated cost savings or full year adjustments of EBITDA as if we own these companies all year. So, in this way, the leverage ratio was conservatively presented. Finally, our capital allocation priorities remain unchanged and focused on organic and inorganic growth.

I'll now provide our financial outlook for fiscal year 2017 in which we are reaffirming our previously issued guidance. 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.

We expect that 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. Lastly, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression through the year.

As discussed for several years now, the first quarter of any fiscal year is generally our lightest quarter for 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..

Thank you. And our first question is from the line of Tycho Peterson with JPMorgan. Your line is now open..

Hey guys. This is Tejas on for Tycho. So I was just trying to make a little sense of the guidance here. I mean, given the top line performance this quarter. Perhaps can you talk about how it adds up because, at least for our math, I mean, this quarter was significantly above our expectations and yet you've left your top line guidance sort of unchanged.

Were there any kind of pull forward effects in play here in terms of drug delivery or clinical supply services?.

There were, Tejas. We did see that some of our third quarter growth was accelerating – growth that we had expected would occur in the fourth quarter; so that trade-off is one of the reasons why we elected to maintain guidance, where it is.

The other issue just relates to issues that we've been experiencing for the last few years now related to foreign currency translation which can be more volatile in the 90-day periods and over longer periods. So, those were the two drivers that motivated us to keep guidance where it is..

Got it. And then Matt, I mean, just following up on that, I mean, margins – at least in terms of the dollar amount I mean, the EBITDA dollar amount was pretty much in line with where you thought it would be.

So, I guess, there's only one quarter left in the fiscal year for you, so that would imply that the seasonality is a little bit off this year or, I mean, then the guidance is too conservative, right, in terms of revenue.

And I'm just trying to make sense of the math on the EBITDA as well, because it seems to imply a pretty significant step up sequentially in the fiscal fourth quarter in terms of margins because that number is also unchanged..

So, that is indeed a component of our guidance. And if you look at our historical actuals, Tejas, you'll see exactly the same thing.

Fourth quarter is significantly disproportionate from the other quarters in terms of absolute dollars and the operating leverage that follows that also drives up margins and it's – you've certainly seen that in our historical results..

Got it. Okay.

And then one final one for me, in terms of the Clinical Supply Services business, can you talk about, in terms of your backlog, what does the mix look like? And how long do you expect some of this lower margin business, which is clearly adding to the top line for that segment to be a drag on segment margins? Or do you expect the mix to evolve over the next few quarters?.

So, I would say that the low-margin business that we make reference to which is comparator sourcing for us is a core part of the end-to-end service that we provide in this segment.

So, it's nothing that we would choose to, let's say, deemphasize or eliminate as a revenue source because it is part of the reason why we win turnkey projects where all of the services are offered. And just as a reminder, all of the services for us can comprise comparator sourcing, manufacturing and packaging and storage and distribution.

To answer your question, what we see in the backlog is very much commensurate with what we're recognizing in our revenues to date. We don't see any significant changes coming in that regard..

Got it. Thanks so much..

Thank you. And our next question comes from the line of Derik de Bruin with Bank of America Merrill Lynch. Your line is open..

Hi, hello. Good evening. This is Juan Avendano on behalf of Derik de Bruin. I guess, I wanted to follow up on the first question. I was wondering if you could quantify the timing benefit in fiscal 3Q..

So, I would call it somewhere – my answer will be based on EBITDA now and I would say it was somewhere in the $4 million to $5 million range just as a rough estimate..

Got it.

And on the top line?.

Top line is a little bit harder to – harder to quantify. So, I won't attempt to do it. I'll just stick with the answer that I provided earlier which is EBITDA based and you could sort of back into a sales number that makes sense..

Okay, good. Then, the next question I wanted to talk about was on the animal health entry with regards to your injectables business. That was expected to take place this quarter. Just wondering, if you could offer some color on that..

Well, so this gets back to sort of a core feature of our business which is the timing of when new products will launch is one of the more difficult things that we do from a forecasting and guidance perspective. And actually, I think in the case of animal health, we'll be pretty close.

We had anticipated that we would have a Q3 launch – we'll probably launch that product in Q4. And as is also the case with Catalent, there'll never be a single product that will drive our number significantly in one direction or the other.

This New Product Introduction happens to be significant for our Brussels site which is one of the roughly three dozen sites that we have. So, we discussed it because it is an important item for our pre-filled syringe business within the DDS segment within Catalent.

But, other than that, I wouldn't encourage you to think it's a meaningful driver, for example, of whether Catalent hits our fourth guidance or not..

Okay. Great. And my last question will be on – your businesses subject to supply chain management issues by your customers. Besides, we know that within the modified release technology business that normalized.

But, are there any other areas in your portfolio that could be prone to inventory management issues that could have an adverse impact on your business?.

Well, so I've said this many times, so certain folks on the call will view this as a very familiar statement. In the long-run, Catalent manufactures dosage form to serve patients. But, in the short run, we supply our customers' supply chain. And at any point in time, they may be stocking or de-stocking inventories.

We saw a significant issue in the prior fiscal year which drove down numbers in the DDS segment, especially in this third quarter of last year. And we knew those would normalize in the current fiscal year which indeed they have. And we have not experienced any significant supply-chain-related issues like that in this fiscal year.

And that's one of the reasons why we've been able to be very predictable in our guidance. Our guidance has really – the midpoint of our guidance has not changed all year and that's one of the reasons.

Because we haven't had any supply-chain interruptions that would drive a difference between the medications that patients consume and the supply chains in the short run that we supply..

Okay. Thank you..

Thank you. And our next question is from the line of Tim Evans with Wells Fargo. Your line is open..

Thank you. Two quick ones, Matt, first of all, the contribution of Accucaps this quarter was quite a bit bigger than we were expecting.

Was there a particularly large order that was delivered there? Or like is the revenue run rate for that business really, I don't know, $80 million a year?.

So, I would say two things in response to that question. I would say that the business, upon our acquisition of it, is performing at a higher volume level than we had anticipated in our pre-acquisition modeling. So, it's true, the business is just doing well.

That said, your estimate of $80 million as a run rate for the business is really not too far off of what the business had done on an LTM basis prior to the acquisition anyway..

Okay. Great.

And then one for John, has there been any – have you sensed any change in the macro environment here? Just the behavior of your customers at all?.

No. It continues to be – I would just describe it as a very robust market. In fact, I would say if anything, things seem to be trending a little bit more upward.

I think now that we have good – we have a few large suppliers in this space now that are providing credibility to further outsourcing, and we also see some very robust demand from small and midsized pharmas where they're trying to leverage the infrastructure of a full service provider like Catalent.

So, if anything, I would just say the environment seems to be very, very robust. No significant changes, but maybe trending upwards a little bit..

Great. Thank you..

Thank you. And our next question is from the line of Dave Windley with Jefferies. Your line is open..

Hi, thank you. Good evening. First question from me is, if you could give us some sense of the mix of your NPIs relative to maybe what they've been last year or last couple of years. What I'm looking for is kind of the contribution of larger Rx OTC opportunities versus BMS opportunities..

I would say that this year we've had a relatively higher contribution from Rx products. It's one of the reasons why the revenue number has been driven up, David, compared to the last 3 or 4 years..

Okay. Great. Second question, John, in terms of your faster growing areas, do you have capacity to service incremental volume in all those areas? I'm thinking, for example, biologics where you've made some CapEx investments, et cetera.

Is capacity kind of well positioned or do you have some areas where you're kind of topping out on utilization?.

So, there's nowhere that we're currently having revenue constraints in the business due to capacity. I would say that we're feathering in just in time the capacity needs that we're going to have from a biologics standpoint. We're running near or at capacity and expect to do our first engineering runs in October.

So, the best way to describe it is we're feathering that in. Winchester, as you know, we made a significant investment there and that is, I would just say, starting to progress nicely in terms of the business that we've won in there.

And we plan on, now, adding some additional CapEx into Winchester from an equipment standpoint to meet the demand that's there, but it's no longer constrained by the lack of facility space.

So, I would just say right now, other than the feathering in of the fast growth that we have within biologics, I think we're comfortable from a capacity standpoint. And, Dave, as you and I've discussed before, given the long-cycle nature of the business, we really need to get ahead of this.

Our capacity planning really takes a look out 3 and 5 years, so that we don't really get caught with the inability to grow revenue because we've maxed out in capacity. So, I would personally say that I'm very comfortable. Certainly, our fourth quarters are always the biggest by far in the year, so we get to really see what the network can do.

But, we're well positioned, I would say, right now and we're positioned going forward..

Got you. Last question from me. On the tax rate and NOL contribution, maybe based on the way we're looking at things now, it's less meaningful but it would be meaningful for cash flow. Just remind me where you are in exhaustion of NOLs..

So, we re-look at this every quarter, David, and our latest look suggests we're consuming the NOLs a little bit more slowly than we have thought. So, our latest estimate is that we'll fully through the NOLs by the end of FY 2018, so the end of next fiscal year.

We continue to believe that our effective tax rate for book purposes is in that 31% to 32% range and that will be our cash tax rate when those NOLs expire..

Got you, very good. Thank you..

Thanks, David..

Thank you. And our next question is from the line of John Kreger with William Blair. Your line is now open..

Hi thanks. John, just go back to the macro question from a few minutes ago.

As you think about the mandates that you're competing for recently, what does that tell you about the mix of sort of modalities and clients? Are you seeing a pretty even spread across your portfolio? Are there particular areas where the demand is much more robust?.

Well, so first of all, I would say, across our long-cycle businesses, we continue to have, I would say, the most robust pipeline that we've ever had. We're seeing strength, I would say, across all the complex dosage forms in general.

I do have to just continue to highlight the biologics piece; that really is a fairly robust area for the company; we continue internally to actually beat our own targets from a budgeting standpoint within that business.

And that's where we continue to see a lot of demand and we talked about this before, the demand for this very large pipeline of I would say, specialized biologics molecules is really sitting in the sweet spot for folks that are manufacturing in the 5,000 liter or less kind of commercial scale, ultimately for those molecules.

So, that area continues to be very robust. The analytical business that complements the biologic business is extremely robust. And then, I would just say, in general, the desire for development and clinical batches for complex dosage forms continues to be pretty robust. So, you can just continue to see relative strength there..

Great. Thank you. Matt, could you just give us update on cash flow.

Where do you stand year-to-date and how do you think you'll end up for the whole year?.

So, through the third quarter, well, let me take a step back and say our expectation for the year was that free cash flow would be 60% to 70% of adjusted net income. I think in third quarter, year-to-date we're probably ahead of that I think we're probably well north of 70%.

But, our full year expectation continues to remain the same that free cash flow will be in the 60% to 70% range which should say that we should be nicely in excess of $100 million of free cash flow for the year before acquisitions..

Excellent. Thanks. And then one last one, just kind of thinking about maybe the outlook for 2018 and beyond. Can you sort of give us a bridge between, you say in the press release, you continue to think the business will grow 4% to 6% top line, I believe, organic, yet you put up much better growth than that this quarter.

So, just sort of connect that if you can?.

Well, so I would say it's a little bit early for us to be talking about FY 2018. We're in the middle of our internal budgeting process now, that process informs significantly what our guidance will be. And I would – so absent having that knowledge, it's a little bit hard to make prognostications about FY 2018.

Our long-term outlook of 4% to 6% organic revenue growth for the company is based on a lot of years of history. And while we are cycling some of our focus on more higher growth entities, I think, until we see what the impact of all that is, I'll probably refrain from any comments about FY 2018 at this point, John..

All right. Great. I figured I'd try. Thank you..

Thank you, John..

Thank you. And our next question is from the line of Ricky Goldwasser with Morgan Stanley. Your line is open..

Yes, hi, good evening and congrats on a very good quarter. Most of our questions have been asked already. So, a couple of thoughts.

John, you talk about a very robust marketplace with nice demand; can you talk a little bit about how do you think you're doing versus your competitors? And do you think that you are gaining share, now that you have kind of like this portfolio that you've put together, it's just that your performance is quite striking versus what we've heard from some other in the space last quarter? And then, the second follow-up is, I know there was a question about the supply chain but just specifically within, there were some specific concerns around API supplies.

Is there anything that you're seeing in the marketplace around that?.

Sure. So, let me kind of hit the first question, and Ricky you know that our business, although we have competitors that were somewhat marked against, I would say that Catalent really has its focus on these advanced delivery technologies.

So, by default, we're not gaining share in outsourcing our products already, per se, outsourced, right if you're doing Softgel, if you're doing a Zydus format, any of our other complex dosage forms. So, generally what we're trying to do is get a higher share of molecules versus a higher share of outsourcing.

So, to some extent, there's a little bit of apples and oranges going on between us and maybe some of the competition because they may be seeing some stronger growth rates with regards to outsourcing compared to our growth rate as one of capturing molecules and then ultimately the growth rate is somewhat dependent on those getting approved and getting commercially launched.

I'll also remind that on a constant-currency basis, our growth rates have continued to accelerate from our IPO. But, because of the foreign currency impact on a reported basis, it was up virtually eliminated, showing a company that looks like it had flat growth while we were growing actually at about 6% and 7% on a constant-currency basis.

So, against the higher growers, just a couple of points off. So, I would just say that the share regain isn't just capturing those molecules and getting them released. So, I would just say, in general, in those advanced dosage forms, we continue to be a market leader across almost every segment that we're in.

With regards to your question, with regards to supply chain and API, I'll just offer the following. In the many years that I've been in this business, since I'm now on my ninth year as a CEO, I've never had an individual quarter or year impacted by lack of delivery from API.

We have had points in time that it was somewhat tight and that usually happens if there is a regulatory action at a specific supplier delivering our API.

But, you have to remember that our customers are making 10x and many more multiples than we are, and they're highly motivated that when they do place an order that the API and the supply chain behind it is tuned in. So, I would tell you from where we sit, we don't see any broad-based API issue within the industry.

And again, based on the reason behind it, I'm telling you that I have not experienced that personally within the business in terms of impacting a quarter..

Okay.

And just lastly, just when you think about kind of like your appetite for more M&A?.

I would say that we continue to be very active in the space in terms of making sure that we're looking at opportunities that fill out our strategic goals. I mean, our main purpose for M&A is to accelerate our strategic goals faster than we could organically.

And then also, we do it if we think we can add significantly more value through those M&A activities. We certainly are active across all of our business units with a particular attention towards biologics assets of scale, if we can bring those into accelerate the normal organic investments that we're making in our Madison facility..

Thank you. And congrats again..

Thank you. And our next question comes from the line of Matthew Mishan with KeyBanc. Your line is open..

Great. Thank you for taking my questions. I just wanted to go back to the quarterly performance for DDS and Clinical Supply Services.

Is it right to think that on the Clinical Supply Services that maybe a vast majority of the outperformance, because, you really on an organic constant currency revenue, you really haven't done above 10% in that business, at least, since I've been tracking it.

Is the majority of the outperformance there, that timing-related comparator sourcing? And then on DDS, if you just can go back and try and help me understand what you may have pulled forward from the fourth quarter or what may have been like one-time in nature? I'm just trying to better understand the really outsized quarterly performance..

Sure, so let's start with CSS. So, we did happen to have a particularly strong quarter this quarter for comparator shipments. But, the base business – or the core operations of the manufacturing and packaging and storage and distribution did grow nicely as well, closer to that range that we're talking about.

If Catalent as a total entity is going to grow 4% to 6% top-line, we've always said that CSS should be at the upper end or even a little bit above the upper end of that. And we did see that and I think the outsized performance of comparator volumes is probably what is maybe a little bit out of kilter with your model, Matt.

On the DDS side, there wasn't really anything special that the company can point to in terms of the quarterly performance. In any near-term window, like a quarter, we are filling the orders that we get.

We strategically impact the business over much longer timeframes, as John alluded to, with molecules that we win and the dosage forms and technologies that we're trying to emphasize. So, summing that all up, DDS had a good quarter because we had the orders and we executed operationally without hiccups to fill those orders. It's that simple..

Okay. That's very helpful. And going back to CSS, I think your largest competitor had a large customer drop a Phase III trial and hurt them on the margins.

Have you seen them like be more aggressive in trying to replace that business over like the last quarter or two?.

Well, Matt, I will tell you, we have terrific competitors in the clinical business. And the services that we offer, the largest competitors in this space are all quite similar. We competitively differentiate ourselves or try to with operational excellence, execution and error-free performance on our customers' behalf.

That said, clinical trials sometimes get canceled for reasons beyond our control and things our customers can't even control. So, it's a little bit tough for us to comment on a call like this. I don't know the particular circumstances of that cancellation.

I guess, I would say that it would be unlikely for Catalent to make a comment like that in one of our quarterly calls because there aren't significantly large trials, one or two or a small handful, that would drive their performance of this segment.

It behaves a lot like the long-cycle business within Catalent which when you talk about the 7,000 products that we make, there's never going to be a single driver..

All right. Thank you very much, guys and nice quarter..

Thank you..

Thanks..

Thank you. And next question is from Nina Deka with Piper Jaffray. Your line is open..

Hey, guys. Thanks for taking the question..

Hey, Nina..

Hi, Nina..

So, how much would you say, of your business that you signed this year came from existing accounts who are expanding their business with you, versus brand new accounts? And how has that ratio evolved over the last 2 years?.

That is an excellent question, Nina. When we look at the 1,000 customers that we have, it's seldom a question of who don't we do business with versus who we do. It's really how can we do more business with the customers that are in the portfolio that we have.

I'll tell you that this is not data that we track to the point where I would have it at my fingertips. But, it feels like we are sort of holding steady in terms of the number and amount of new business wins that we have with current customers versus wins that come from brand new customers to the company in the year that we first have revenue.

So, while it's hard to answer your question quantitatively, I can tell you on a feel basis, it doesn't feel different this year than it has in years past..

That works. Thank you..

Okay..

And I have another question.

Do you have any updates on your – the Redwood Biosciences, the linker (44:24) technology? Has any new milestones been achieved?.

Nina, I would just tell you that Redwood, it's a early development. It's an early development investment that we've made that's brought in some terrific technology in and we've signed some excellent customers and they continue to meet the milestones and the plans that we've had. So, we're very pleased with it.

I mean, we've talked most recently about the CD22, which was a license to Triphase which is really exciting. That's actually a Catalent developed molecule with our ADC technology and our GPEx, so it's pretty interesting.

So, I would just tell you that, it continues to add value to our customers and they continue to meet the milestones along their very long development path..

Great. Thanks..

Thank you. And ladies and gentlemen, this concludes our Q&A session for today. I would like to turn the call back to John Chiminski for his final remarks..

Okay, great. Thanks, operator, and thanks, everyone, for your questions and for taking the time to join 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 aligned with our long-term outlook of 4% to 6% revenue growth and 6% to 8% adjusted EBITDA growth.

Next, we're committed to building a 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 are at the heart of how we run our business and 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, this concludes our program for today. You may all disconnect. Have a wonderful day..