Thomas Castellano - Catalent, Inc. John R. Chiminski - Catalent, Inc. Wetteny Joseph - Catalent, Inc..

Derik de Bruin - Bank of America Merrill Lynch Ricky R. Goldwasser - Morgan Stanley & Co. LLC Tycho W. Peterson - JPMorgan Securities LLC David Howard Windley - Jefferies LLC Dana Flanders - Goldman Sachs & Co. LLC John C. Kreger - William Blair & Co. LLC George Hill - RBC Capital Markets LLC Sean W. Wieland - Piper Jaffray & Co. Donald H.

Hooker - KeyBanc Capital Markets, Inc. Justin Bowers - Bloomberg Intelligence Steven K. Schwartz - First Analysis Securities Corp..

Good day, ladies and gentlemen, and welcome to Catalent's Third Quarter Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call may be recorded.

I'd now like to turn the conference over to Tom Castellano, Vice President, Investor Relations, and Treasurer. Sir, you may begin..

Thank you, Shannon. Good morning, everyone, and thank you for joining us today to review Catalent's third quarter fiscal year 2018 financial results. Please see our agenda on slide 2 of our accompanying presentation, which is available on our Investor Relations website. Speaking today for Catalent are John Chiminski; and Wetteny Joseph.

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, just filed with the SEC, 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 John Chiminski..

Rosemary Crane, John Greisch and Dr. Christa Kreuzburg. Their enormous collective experience in health care and pharmaceutical operations, finance and product development will be of substantial benefit to the entire board, to Catalent and to our shareholders as we continue to mature as a fully independent public company.

Lastly, I want to reaffirm our long-term revenue outlook of 4% to 6%. On our previous call, we mentioned that we would be re-examining the range as part of our annual strategic planning process, which we just completed.

The robust organic growth in our Biologics business, the addition of Bloomington, and the slower growth in our Softgel business leads us to reaffirm our revenue outlook, which aligns with the feedback we received from many of our top shareholders.

The management team has a high level of confidence in continuing to consistently deliver results within this range.

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

Now, I'm excited to turn the call over to Wetteny Joseph, our new Chief Financial Officer, who will take you through your third quarter fiscal year 2018 financial results as well as provide our outlook for the fiscal year.

Wetteny?.

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

Softgel revenue of $228.5 million grew 3% during the quarter with EBITDA declining 3% due to unfavorable product mix across the segment, partially offset by continued strength within the Canadian Softgel business acquired as part of the Accucaps deal during the third quarter of the prior fiscal year.

In the third quarter of the current fiscal year, our Canadian site continued to perform above our expectations. Excluding the effects of the acquisition, our Softgel business grew 1% organically at the revenue line, but decreased 7% at the EBITDA line due to unfavorable product mix.

The modest organic revenue growth within the business was due to lower margin volume within Latin America and Asia Pacific, but this growth was partially offset by a decrease in high-margin product participation revenue and lower consumer health and prescription volumes in North America, partly related to the ibuprofen shortage we mentioned on our second quarter earnings call.

It is important to note that we continue to expect the Softgel business to perform at revenue and EBITDA levels that are in line with the prior year.

Slide 8 shows that our Drug Delivery Solutions segment recorded revenue of $313.6 million in the quarter, which was up 29% versus the comparable prior-year period, with EBITDA growing 31% during the quarter.

A sizable portion of the segment's revenue and all of the segment's EBITDA growth was driven by the Bloomington biologics acquisition, which closed in October 2017, and contributed 26 percentage points to the revenue growth and 41 percentage points to the EBITDA growth.

In its first full quarter as part of the Catalent family, the site continues its fast start and we feel good about the immediate and long-term growth prospects of this business. The acquisition of Cook Pharmica and its Bloomington site strengthened our position as a leader in biologics development, analytical services and finished products supply.

Catalent Biologics, including both our new Bloomington site and our preexisting businesses, can provide integrated solution from protein expression through commercial supply of biologics in a variety of finished dose forms.

The acquisition filled a major gap we had in our biologics offering by adding fill/finish formulation, development and manufacturing capabilities, including lyophilization, vial filling, cartridges and U.S.-based sterile formulation and pre-filled syringe to our already strong drug substance and sterile capabilities.

As we are seeing in the numbers, the acquisition of Bloomington site significantly accelerates the already strong growth of our existing Biologics business.

As a reminder, Biologics comprised approximately 14% of Catalent's consolidated revenue in fiscal year 2017 and the acquisition of Cook Pharmica increases our Biologics percentage to 21% of the combined entities' pro forma revenue.

Please see the Form 8-K that we filed with the SEC on October 24 for important information concerning how we calculate pro forma revenue. On an organic basis, the Drug Delivery Solutions segment revenue was up 3% with EBITDA declining 10% during the quarter.

The EBITDA decline was driven by the timing of the normal maintenance shutdown of our European pre-filled syringe business, which occurred in the second quarter of the prior fiscal year, but in the third quarter of fiscal year 2018, as well as due to volume declines within our analytical development services business.

Consistent with the first two quarters of the fiscal year, the segment also experienced declines in high-margin product participation revenue during the third quarter. We expect these declines to carry into the fourth quarter and they have already been incorporated into our guidance communications.

On the positive note, recent organic investments in our legacy Biologics business continued to translate into growth during the third 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 large clinical programs.

We continue to believe that our Biologics business is positioned well to drive future growth, as indicated by business development signings with Moderna Therapeutics, Triphase Accelerator, Therachon AG and Grid Therapeutics.

However, in the prior year period, we recorded a licensing arrangement related to our SMARTag technology that has partially offset the Madison growth in the current quarter. As John mentioned, the third suite at Madison is complete, online and is contributing revenue in our fourth quarter.

The oral delivery portion of the Drug Delivery Solutions business had another strong quarter with favorable end market demand for high margin offerings within our U.S. controlled release business.

Our blow-fill-seal offering within the Drug Delivery Solutions segment recorded results during the third quarter that was nicely above prior year period due to increased volume and strong levels of capacity utilization.

That being said, we continue to take steps to enhance our quality and manufacturing protocols and processes at the site where our blow-fill-seal business is based, although a majority of the major actions are now complete. Market fundamentals continue to remain attractive for this key sterile fill technology.

In order to provide additional insight into our long-cycle businesses which include both Softgel Technologies and Drug Delivery Solutions, we are disclosing our long-cycle development revenue and the number of new product introductions, 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 nine months ended March 31, 2018, we recorded development revenue of $114 million which is 2% above the development revenue recorded in the same period of the prior fiscal year.

In addition, during the first nine months of the fiscal year, we introduced 145 new products which are expected to contribute $45 million of revenue in the current fiscal year which is 40% more than the revenue contribution of NPIs launched in the first nine months of the prior fiscal year.

This is aligned with our plans and based on timing of launches in this fiscal year. We expect the fiscal year 2018 NPI launches and their revenue contribution to be in line with our long-term growth outlook.

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

Now, as shown on slide 9, our Clinical Supply Services segment posted revenue of $104.4 million which was up 1% compared to the third quarter of the prior year driven by increased customer project activity across our core storage and distribution services business partially offset by a decline in low-margin comparator sourcing activity during the quarter.

Segment EBITDA increased 8% compared to the third quarter of the prior year primarily driven by the revenue growth in our core storage and distribution services business and improved capacity utilization across the network.

Given the lower-margin of the comparator sourcing activity, it had a minimal impact on the segment's third quarter EBITDA, all of the revenue and EBITDA growth recorded within the CSS segment was organic. As of March 31, 2018, our backlog for the CSS segment was $314 million, a 3% sequential increase.

The segment recorded net new business wins of $108 million during the third quarter, representing a 9% increase year-over-year. The segment's trailing 12-month book-to-bill ratio was 1.0. It is important to note that this is a nice recovery from the declining backlog and new business wins we recorded during our second quarter.

The next slide contains reference information. We have already discussed the segment results on a consolidating income statement by segment on slide 10. Slide 11 shows in precisely the same presentation format as on slide 10 the nine-month year-to-date performance of our operating segments, both as reported and constant currency.

I won't cover the various drivers across the business, but I will highlight that our year-to-date 18% constant currency revenue growth or 7% growth on an organic basis compared to the same period a year ago was modestly above our long-term objective of 4% to 6% organic revenue growth per year.

Slide 12 provide the reconciliations of the last 12 months' EBITDA from the most approximate GAAP measure, which is earning from continuing operations. This bridge will assist in tying out the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide.

Moving to adjusted EBITDA on slide 13, third quarter adjusted EBITDA increased 18% to $139 million. On a constant currency basis, our third quarter adjusted EBITDA increased 15%, all of which was inorganic and driven by the Bloomington biologics acquisition.

On slide 14, you can see that third quarter adjusted net income was $55.2 million or $0.41 per diluted share compared to adjusted net income of $48.7 million or $0.38 per diluted share in the third quarter a year ago. This slide also includes the reconciliation of earnings from 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 add-backs as seen on the adjusted EBITDA reconciliation slide.

As a reminder, during the second quarter, we recorded a one-time net charge of $46 million within our income tax provision as an estimate of the net accounting impact of recent U.S. tax legislation. During third quarter, we recorded an incremental $5.6 million as a result of changes to our business during the quarter.

We continue to expect approximately one-fourth of the aggregate charge to be paid in cash after considering the use of certain NOLs. The payment will be made over an eight-year period and will be funded with U.S. generated cash.

Given the significant complexity of the provisional estimate we recorded in the last two quarters, it's important to reiterate that it may require a further adjustment over the next nine months. Slide 15 shows our capitalization table and capital allocation priorities.

Our total net leverage ratio on a reported basis as of March 31 was 4.5 times, which is down from the 4.8 times we recorded during the second fiscal quarter.

However, as John mentioned earlier, if you calculate our leverage ratio on a pro forma basis for the Bloomington biologics acquisition, which would include a full 12 month of earnings rather than owning for the 5 1/2 months we own the business, our total net leverage ratio will be 4.3 times which is below the pro forma total net leverage ratio of 5 times discussed at the time of the acquisition announcement.

We continue to believe that given the strong free cash flow generating ability of the combined entity, Catalent plus our new Bloomington biologics business, we will be able to de-lever back down to pre-transaction levels faster than previously communicated.

Finally, our capitalization – capital allocation priorities remain unchanged and focus first and foremost on organic growth. Slide 16 sets forth our current guidance which remain unchanged from the prior quarter. We expect full year revenue in the range of $2.42 billion to $2.48 billion.

We expect full year adjusted EBITDA in the range of $537 million to $557 million, and full year adjusted net income in the range of $212 million to $232 million.

We expect in the range of $152 million to $165 million for capital expenditures, and we expect that our fully diluted share count on a weighted average basis for the fiscal year ending June 30, 2018 will be in the range of 133 million to 135 million shares.

In addition to the guidance we just provided on revenue, adjusted EBITDA, and adjusted net income, we also wanted to reiterate our expectations related to our consolidated effective tax rate given the tax legislation signed at the end of calendar year 2017. As a result of the U.S.

corporate tax rate decreasing to 21%, we continue to expect our fiscal year 2018 consolidated effective tax rate to be between 27.5% and 28.5% due to the partial year impact of the rate change. As we enter FY 2019 and beyond, we expect our consolidated effective tax rate to be between 26% and 28%.

Operator, we now would like to open the call for questions..

Thank you. Our first question comes from Derik de Bruin with Bank of America. You may begin..

Hi. Good morning. Hey, can you talk a little bit more about some of the headwinds you're seeing in the Softgel business? And I'm just real curious what was sort of the net impact from lower levels of the consumer health and the ibuprofen shortage.

I'm just wondering, I mean, I know there's some impact – there's definitely some EBITDA impact, but I'm just curious in terms of....

Sure..

...was there anything sort of impacting the top line core on that business?.

Yeah, sure. So first of all, we love our Softgel business, let me start with that. This has been a consistent earning business for the company for decades, continues to be the leader in Softgel with four times more share than next leading provider, so it's a great business.

The business has been growing below our 4% to 6% long-term growth rates for the company, growing really at about 2% to 4% for the last couple of years. Specifically, this year, the headwind – one of the major headwinds that we're feeling is the ibuprofen shortage.

And just to put it in perspective that basically had about a 2% to 3% impact in EBITDA growth for the year. And we expect that that transitory issue should resolve itself by the end of this calendar year. So that was the most significant driver, if you will.

With regards to OTC, the OTC business continues to be strong for us, specifically with regards to the acquisition of the Accucaps business that brought in a portfolio of OTC products that are allowing us to enter into the North America market, so that's very strong, but as we kind of lap the Accucaps acquisition, if you will, we're not seeing the same level of growth that we saw during the periods just after the Accucaps acquisition.

And then the final thing is that the new product introductions from Softgel although we continue to have a very robust pipeline. The molecules when they come to market and get approved, which is being approved at a lower rate than we had hoped for, those are for smaller disease states.

So they're coming out although at very good margins at obviously lower volumes than we've had with previous launches. So putting all those things together, we're going to continue to see Softgel, again, great business or a strong cash earner, strong ROIC for the business, it will continue to grow below our 4% to 6% growth rate.

So maybe little bit overly comprehensive answer for you, Derik, but I think that covers all bases on Softgel..

Yeah. I mean, that I was sort of – the next question was going to be is just like when do you think would be the early as you can see a rebound in the business? And then, I have one follow-up on that..

Yeah. No, Derik, for us – I mean, I've now 10 years in the business. I mean, the business has really been – outside of a few quarters and a few years, it's really been growing below that 4% to 6% long-term growth rate. So we're a highly diversified business. We love it.

But I think as we go forward, certainly in the near term of our upcoming strat plan, we still continue to see growth in that 2% to 4%. Like I said transitory issue with the ibuprofen, although as I said, it did have a 2% to 3% EBITDA growth impact in this year, we're going to see that through calendar year 2018.

And then, the NPIs that we have for Softgel, we're excited about the products, but again, they're just for smaller disease states, so just won't bring in the same kind of growth that we have in other parts of our business..

Got it. That's helpful. And then, I just want to do a quick biologics question. So, we're getting a lot of questions from investors, I guess, in the sense that there is – almost every day, you see a headline about somebody adding capacity there and somebody adding capacity there..

Sure..

Can you sort of talk about the balance between sort of like supply and demand for biomanufacturing?.

Sure..

And then, on a follow-up to that, just any sort of – anything going on the biopharma supply chain that you've seen? Are customers still managing inventory pretty aggressively, any deliberate de-stocking that you're seeing?.

Sure. Sure. So, first of all, I would tell you that demand continues to be incredibly robust in all of the work that we've done over the last several years, leading up to the Madison investments as well as the Bloomington investment, show that demand is going to outstrip supply for about the next five years.

And certainly, you do continue to see people, I would say, following suite to Catalent in terms of going single-use bioreactor and going sub-5,000.

So, you do see those type of announcements, but putting things in perspective with all of the capacity that that we have and we're contemplating putting online through our strategic plans, we'll still be in the kind of 20,000 to 30,000 liter capacity arena, which is very small compared to the overall capacity.

And so, I really have no concerns that Catalent at some point will ever be caught in a overcapacity situation because, again, with that modest amount of capacity, we're going to be able to continue to pick and choose our customers. With regards to downstream and inventory management, that's not something that we see at all.

The large part of our drug substance customers are all pre-commercial. They're in a clinical phase. So there's no inventory management that's happening to service those clinical trials. And we continue to see incredibly robust demand on our drug product side, now that we have the Bloomington business.

So that may be something that you're hearing about, I would say, on the pharma biotech side. It's felt from a CDMO standpoint in Catalent..

Great. Thank you very much. I'll get back in line..

Thanks, Derik..

Thank you. Our next question comes from Ricky Goldwasser with Morgan Stanley. You may begin..

Hi, Ricky..

Hi good morning. A couple of questions here. So, just when we think about the long-term growth rate that you're reiterating and we think about the different parts of the business, so for the core, what do you now call organic, you came in at modestly below long term.

Is this the new run rate? And then, on the Biologics side, how should we think or how do you think about steady state growth rate once you anniversary the acquisition?.

Yeah. So, first of all, there's no new normal with regards to our organic growth rate. We did have a very strong first half, as you know, and our overall growth rate organically for the year will be in the range of 4% to 5%. So there's no new, I would say, tooling down of our organic growth rate.

We did have some specific headwinds from an organic standpoint. We've talked about some challenges that we had in our Woodstock business that have been modulating. We also had some challenges in our analytic business, if you will.

And then just the overall performance, I would say, Softgel getting back down to its normal long-term growth rate just kind of what got us here. But as we look forward, I would say that we're going to continue to have organic growth rate as we've stated in that 4% to 6%.

And the thing, as we look forward to fiscal year 2019, as we continue to talk about our long-term growth rates, our fiscal year 2019 will continue to be, again, within those range. We'll talk about that when we release our earnings for the year.

But at the same time, our 2019 will have those kind of growth rates while absorbing a change from a revenue accounting standpoint on our comparator business, which is nearly 4 points. So that'll just talk about the robust nature of our overall organic growth rate.

With regards to our Biologics business, specifically the Madison and Bloomington, I would tell you that there's no ebbing of those growth rates for the foreseeable future.

As we forecast out during our strat plan, again, we'll talk about this more in our fourth quarter and guidance for fiscal 2019, we continue to see very robust demand in the strategic plans that we just presented to the board.

We're going to have substantial investments both, again, in Madison as well as Bloomington that will continue the growth rate that they have now will be, again, continued throughout our strategic plan. So, I don't see any ebbing of that Biologics growth rate, continues to be very strong. We feel really good about it.

And so far out of the gate, Bloomington has exceeded our expectations for now two quarters in a row and hopefully, we'll continue on that trend..

Okay, and then, two follow-up. One, how much did Accucaps contribute to Softgel EBITDA in the quarter? And in the prepared remark, you talked about de-levering down faster than you previously expected. If you can give us some more details on timing..

Accucaps is roughly 4% on the top line and about 2% of the Softgel EBITDA on the acquisition, which as a reminder, we anniversaried that acquisition in the third quarter. In terms of our leverage ratio, overall as we mentioned, we're at 4.3 times. We continue to expect about – and the business has demonstrated we can de-lever about 0.5 to 0.75 points.

And so, we would expect by the end of this fiscal year to be roughly at 4.1 times leverage by the end of fiscal year.

In terms of the next year looking at full year of Bloomington acquisition, as well as underlying EBITDA performance of the business, we would expect over the next 18 months to get back to the pre-acquisition levels, which are in the 3.7 range in terms of leverage..

Okay. Thank you..

Thanks, Ricky..

Thank you. Our next question comes from Tejas Savant with JPMorgan. You may begin..

Hey, guys. It's actually Tycho. Can you maybe, John talk about, you mentioned shifting over the fourth and fifth trains from Madison to Cook. Can you maybe just talk about that decision and does that accelerate the timelines....

Yeah..

...relative to greenfield expansion?.

Yeah. Sure, Tejas (sic) [Tycho]. And again, we haven't unbundled our full strat plan and probably components of it that we'll share with you guys in our fiscal year 2018 earnings release and as we look to provide guidance for fiscal year 2019.

But actually where this has landed is that we're probably going to work towards both meaning I think we're moving forward with a fourth and fifth train in Madison – I shouldn't say I think, we're doing the engineering study right now and have had those conversations with our board.

And then we're also looking at additional capacity probably 2x2,000 within Bloomington. So, this is one where interestingly enough where we're at with regards to the terrific capacity of Bloomington with the momentum that we have in Madison, we're actually going to do both.

So that just again talks to the robust opportunity we have within both Biologics and our forecasts for future demand..

And in Madison, you called out some challenges with the first few batches.

I mean, is that just kind of part and parcel for ramping up a new line or was there something more material that you had applied there?.

What I would say is this was not related to the equipment or this new suite itself, this was just the component filter that we use in the process, which we were able to get down to the root cause and get through that issue and now operational..

Okay.

And then one last one, on Drug Delivery, 3% organic growth, was that below your expectations and can you maybe just talk more on the analytical development services weakness that you flagged?.

Sure. What I would say is there are few headwinds within our Drug Delivery business, which we pointed out, particularly the product participation as we've been discussing throughout the year and have already factored into our guidance for the year. We expect to get to the bottom of that by the end of this fiscal year.

And so that was certainly an element of the organic growth that you saw within the Drug Delivery business.

And then in terms of analytical services, this is, as a reminder, a relatively short-cycle business which we can cycle through fairly quickly any issues that we see there, and this is primarily a sort of a commercial sales challenge that we've come across.

And again, a short-cycle business that we – similar to our clinical business that we can get through rather quickly. This is not a fundamental shift in the business by any way, and we'll be working through that shortly..

Yeah. I would just say, DDS continues to be a great and strong business for us. We don't have a base business problem. We definitely had several headwinds that went through and again outside of the product participation, which we've been forecasting the kind of the fall off of that, the rest of the business continues to perform.

And certainly as Woodstock continues to heal, if you will, with the operational and compliance efforts that we've put in there, should see strong – strong normal performance out of that business unit..

Okay. Thank you..

Thank you. Our next question comes from David Windley with Jefferies. You may begin..

Hi, good morning..

Good morning, David..

Thanks for taking my questions. Hope you're well. On product participation, I think, I've certainly noticed you're calling that out a couple of quarters for sure and particularly in DDS, I don't know if I remember seeing a call out on that in Softgel. And so I wanted to understand that a little bit better.

Is that – are we going to be lapping that for several quarters in Softgel? And then more broadly, are those types of contracts still interesting or compelling to clients or is kind of the product participation like contract something of the past?.

First of all, we do have product participation headwinds within Softgel business as well and similar to our DDS business. As I explained earlier, we expect to reach further tail-end of those by the end of the fiscal year, again, those are all factored into our guidance and are in line with our expectations.

Broadly speaking product participation was more of a feature of our business in prior years when we've had scheme of revenue – relatively high-margin revenue come through those agreements towards the end of their lifespan.

And should there be any opportunities in the future, I will certainly be optimistic about those, but they're not a current feature of our core business today..

Okay..

Dave, the only other thing I would add there in terms of more specifics around the timing. The product participation related to Drug Delivery Solutions will – we will lap beginning in fiscal 2019 on day one. Within Softgel, we started talking about this for the first time during our second quarter, so our last quarter within fiscal 2018.

So, we will probably see another quarter headwinds around that going into fiscal 2019 on the Softgel side..

Yeah. Okay. Thank you. And then shifting to Biologics, John, you've talked about adding some capacity, to Derik's question, you also talked about kind of more broadly thinking about Catalent's capacity relative to industry still being small enough to pick and choose.

I guess, I'm trying to understand like thread the needle between those two comments as to how big a part of the overall Catalent business you foresee Biologics becoming. And then, the balance between drug substance and then your sterile fill-finish final dosage form activities that might also fold into the Biologics business overall. Thanks..

Yeah. Good question, Steve. So first of all as you know we kind of popped up to a pretty high amount going from, I guess, it's 14% to 21% right, Tommy..

Yeah..

And in terms of overall impact of revenue from Biologics. And as we look out towards our strat plan, we're going to be in the 30% to 35% range in terms of overall Biologics. And that actually, I believe, is going to be at the EBITDA level. So, pretty compelling from a strategic standpoint in terms of our entry into Biologics.

And in terms of where we're playing, I don't want to minimize at all the level of capacity that we're putting in place because when you take a look at those players in the sub-5,000 area, so even though we'll be in that range, I guess, I mentioned somewhere between 20,000 and 30,000 liters, that will make us one of the leaders in the **sub-5,000 liter category.

With regards to the split, I haven't done the math precisely, but when I just think about it, broadly speaking, I believe that our drug substance and drug product, they'll probably be somewhere between 60/40 with the drug product being about 60% because we also have to include the Biologics switch that we plan on doing also in our Brussels facility that also was a prefilled syringe.

One of the interesting aspects as we've literally told Bloomington to act as though they've acquired Brussels, which our prefilled syringe and to basically put it on the same flight path, if you will, as Bloomington. I just had a conversation with the business development we do there and we have ongoing discussions.

So, that's what the split will be, I mean, whether it lands 60/40 or 50/50, I don't know, but it will be between the two. But the cool thing about that, David, is that gives us end-to-end, right.

So, everything from cell line development, which is where we really got our toehold in terms of being a leader in biologics development through the cell line development with GPEx through drug substance.

And now with Bloomington, drug products so that end-to-end capability is something that we didn't have, which is why Bloomington was such a strategic acquisition for us. And I think, with that, I think I answered those two questions anyway..

Yes, you did. Thank you very much. If I could just slide one more in, and that is still in Biologics.

Do you see clients approaching you for both the drug substance and the final dosage form work? And then in regard to kind of development stage versus commercial, do you anticipate being able to follow the vast majority of your clients out of development stage and into commercial production presuming they get approved; I mean, in other words, while you have the capacity to support their commercial production? Thanks..

Yeah. Simple answer is yes and yes. So, what are the challenges that we had, just for more explanation is that in Madison, we had many customers that wanted us to go from drug substance through to drug product.

It was actually a detractor for us winning even more business because they didn't want to – they'd go from drug substance and then have to find another supplier for drug products, and we're only able to do it at very small scale down in our RTP facility. So now, we literally have that drug substance to drug products.

So, very much a core demand by our customers with regards to commercial, absolutely, in fact, if I get my numbers correctly correct, I believe it's 13 or – Tommy, is it 14? Okay. It's now 14 products have been – are commercially approved in Bloomington. So we're already in commercial manufacturing.

And they have a dozen or so that have the potential to go commercial this year.

So, one of the beautiful things that we got with Bloomington is we've always talked about the fact that we don't want a facility, we need a pipeline, which is why you don't see Catalent jumping after castaway pharma plants, right? This place built up a juggernaut pipeline over the last 15 years.

So, that – in fact, their focus was to make – to some extent filtering customers where they wanted to make sure that it was – it had the potential to go from clinical to commercial and actually de-prioritizing customers that might have only been clinical.

So, very robust business, they're teaching us a few things to do even better within Catalent, and that end-to-end capability is really a huge competitive advantage for us now and one of the reasons that we continue to be able to forecast the strong double-digit growth well into the future of our strat plan..

Thank you for that. Thanks, John..

Yeah. Thanks, David..

Thank you. Our next question comes from Dana Flanders with Goldman Sachs. You may begin..

Hi. Thank you very much for the questions. My first just on Cook, so you've talked about utilization being at about 40% and now that you just have your hands on that business, maybe just an update on how quickly you think you can fill that capacity and drive growth there.

Is that two years, three years? I know you've mentioned the business has been exceeding expectations in the past two quarters, would love an update on how you see that capacity filing? And then given the growing importance in size of your Biologics business, are there any thoughts on breaking that out and reporting that as a separate business unit going forward?.

First of all, on Bloomington in terms of capacity utilization, I would say, we're roughly about 45% capacity utilization right now. The way we think about Bloomington and similarly to our Madison facility with the third train is that they have the potential to double their capacity of roughly 40% to 45% to about 80% in roughly four years.

Now, the pipeline of products that are going through the clinic and the speed that those happen as well as leveraging across both of those facilities may give us an opportunity to accelerate that somewhat, but it's roughly a four-year timeframe that we look at in terms of how long.

To your second question, as far as separating out to a separate unit, I would say that's something that we are evaluating. As you know, we're required to report our segments similar to how we run the business internally. And should we decide to do that, we will certainly inform you and provide an update at that time..

Yeah. Okay, great. And maybe just a quick follow-up, I know last quarter, you've talked about some Softgel's weakness in Asia Pac. Maybe just an update there and some of the steps you're taking to turn that segment around or fix some of the issues that you're facing in Asia Pac. Thank you..

Sure. So, first of all, just a reminder, a lot of what we're doing in Asia Pac over the last several years was to really drive revenue as we had a waning pipeline prior to purchasing Accucaps, both on the OTC front as well as the Rx front. Had some strong growth two or three years ago in Asia Pac.

A lot of that was driven by China, Alibaba, strong contracts that we have with a significant customer there. But as I would see Softgel got Accucaps as well as continues to execute on the pipeline that they have, we deemphasized some of that along with regulatory changes that happened in China.

And as a matter of fact, we had announced some strategic changes with regards to Asia Pac where we've entered into an agreement with regards to our largest customer there, is actually we've signed an agreement for them to take over that facility and they will close in over probably an 18-month period as we transfer some of those products back into the rest of our Softgel network.

So, I think, we've played Asia Pac very well over the last several years and now we're kind of repositioning into the core businesses within Europe as well as the United States. Japan continues to be a key market for us and we're committed to that facility there..

Thank you. Our next question comes from John Kreger with William Blair. You may begin..

Hi. Thanks very much..

Hey, John..

Hey, John.

Hey, could you maybe expand a little bit more on the findings of your strategic review? Does it cause you to rethink any of your investment priorities or maybe other areas that you'd like to add to the portfolio in the coming years?.

So, again, we haven't talked about how much of our strategic plan we'll be sharing broadly with the analysts and investors, but I will say that there's significant continuity from last year's strategic plan to this year's strategic plan with more emphasis, I would say, specifically on Biologics.

So last year, we talked about accelerating our focus on Biologics. And this year, with the acquisition of Bloomington now behind us, we're actually going to accelerate and expand our investments in Biologics.

So with the addition of Bloomington, the capability to transform our Brussels facility more towards Bloomington on a Drug Delivery standpoint, the investments that we now have in Madison, there's going to be a significant amount of our CapEx that will go in towards Biologics. We've got some great investments on our long-cycle business.

And then, I think we haven't talked about it, but you've certainly probably sensed it, especially with my conversation right now about the dispositioning of our Braeside facility in Australia.

We continue to look at our network to make sure that our network is lined up with where we want to maximize our growth, our return, and quite frankly, our leadership efforts. So strong continuity between last year and this year with, I would say, enhancements based upon what our business is doing.

I would also just say that from a macro standpoint, the market continues to be very, very strong and robust, continues to tilt towards Biologics, but 50% of what's in the pipeline is still going to be small molecule, which is, obviously, a sweet spot that we've had for many, many years.

So, again, overall, I would say strong continuity with us making some important tweaks, especially on the Biologics front as we go forward, which will require even more investment to continue to keep the party going with the strong growth rates..

Thanks. That's helpful. One thing to clarify, a few minutes ago, you mentioned that in 2019 you'll have to absorb about a 5% revenue hit from the new accounting standards. Were you saying that you think you can still be in the long-term revenue range despite that, or should we be thinking about -.

Yes. I guess what I'm saying, so first of all, you know that our comparator business – I mean, if I were to just do it on a percentage growth basis, it still looks like you're almost going to lose 4% roughly, if you will. We'll still continue to grow in the 4% to 6% range, while absorbing in our fiscal year 2019 that revenue recognition change.

I'll just look to Tom to make sure that my numbers are rough and correct, if I'm wrong..

Yeah. That's close. I mean, obviously, we'll provide guidance in 2019 on our next earnings call, but those are good estimates right now..

That's helpful. Thank you..

Thank you. Our next question comes from George Hill with RBC. You may begin..

Hey. Good morning, guys. And I think most of my questions have been asked and answered already. I'll just kind of attack the biologics question one more way.

And I guess, John or Wetteny, I guess, can you talk about what is the lag time between capacity coming to market and when you typically see an impact on price, just because we've seen a lot of companies announce that they're bringing biologics capacity to market? Just trying to get a sense for when – how long do you see price competition on the market – like, how far ahead this price competition impact capacity being bought online?.

So, George, first of all, what I would say is, we continue to see very good dynamics in the market from a Biologics perspective and when you look at supply and demand imbalance. And that's going to continue to support an attractive pricing environment, and we think that will be at least another five years.

So, as new capacities coming on stream now both from us and others, we don't see that tilting again for about a five-year horizon. And so, we expect to continue to see attractive pricing environment in Biologics..

Okay. That's all I got. Thanks, guys..

Thanks, George..

Thank you. Our next question comes from Sean Wieland with Piper Jaffray. You may begin..

Hi. Thank you.

And also, I have a pricing question but on the Softgel side, how is pricing holding up in Softgel? And are there any levers that you can pull there relative to the growth in that business?.

So, what I would say in Softgel is relatively stable pricing environment, a little bit of pressure in some areas within Softgel. I would say that more of the challenge will be a mix between higher margin prescription in North America as we saw in this current quarter versus VMS or other consumer health that may come through the facility.

So by and large, I would say, there's – I would not say there's significant headwind from a pricing perspective, although there are some. I would say it's more of a mix challenge within Softgel.

In terms of performance of the business from a profitability perspective, we expect to continue to drive utilization across our sites which certainly helps, but also for productivity projects and initiatives that we have as we went through the strategic planning exercise organically to continue to deliver at the current levels or better from a EBITDA margin perspective for the Softgel business..

Yeah.

In fact, I think that's worth for me just emphasizing that one of the outputs of our strategic plan is, I guess, the firm recognition that Softgel, again, great business that's been growing slightly below our 4% to 6% long-term growth rates of the company back in the private equity days, we were really trying to turn every business into a high growth business.

And the fact is where we're at within Softgel is that it's a great business, we're the leader.

And what we've realized is with the pipeline that they have and the mix of business that we have that we've put in place, I would say, some very strong productivity enhancement programs of the business that will allow it to continue to be a strong cash generator for the business which it has done over the last couple of decades, but I expect that to be enhanced even more as we go forward..

Okay. Thanks very much..

Thank you. Our next question comes from Donald Hooker with KeyBanc. You may begin..

Great. Good morning. So, a lot of questions have been asked here, I guess, just one lingering one for me is, I guess, the Accucaps business continues to perform well.

What does the growth rate look like that going forward versus the other Softgel businesses? Is that going to go negative potentially? Is there a wind-down there potentially?.

What I would say is, we anniversaried the Accucaps acquisition in the current quarter. I would just put it together with the rest of the Softgel business, and say, historically, Softgel has performed towards the low end of the range of our long-term total consolidated range for revenues, so I would say, 2% to 4%.

And Accucaps will just be supporting that growth rate from a Softgel perspective going forward..

Got you. In terms of – and then, just real last quick one, you continue to expand at Bloomington and Madison.

What are sort of the maintenance? How do you tease out sort of think about maintenance CapEx versus the incremental CapEx to expand capacity? What are sort of the maintenance CapEx for those two facilities at this point?.

Yes. Okay. I would say, beyond adding capacity to the site over time, we've talked about the fourth and fifth train and so on, excluding that, it's roughly $10 million worth of maintenance CapEx, I would say, annually to support the ongoing business..

Great. Thank you..

Okay..

Thank you. Our next question comes from Justin Bowers with Bloomberg Intelligence. You may begin..

Hi. Good morning. Just a couple on the Biologics business, and was wondering if you could characterize the late-stage candidates you mentioned at Bloomington whether by therapeutic area, maybe fast track drugs, and innovative versus biosimilar..

Yeah. No, we don't provide that level of detail, obviously, for confidentiality with our customers. I would just say that we really like the mix of business that we have there. Bloomington brought in, I would say, a different mix of customers than we had had in our Madison facility.

There are some very strong marquee names that you would recognize and it's obviously evident by the fact that they have already 14 commercial products in manufacturing there with about a dozen more that are slated potentially over the next 12 to 18 months if they get approved.

You can imagine that with the large number of customers we have both in Madison and Bloomington that they're hitting all the key important therapeutic areas that people are – that are, I would say, currently in the news. And I apologize for not being able to be more specific on that front, Justin..

Sure.

And then just more broadly in terms of biosimilars, how much of that has been a driver for growth just across the portfolio Madison and Bloomington?.

Yeah. It's been minimal. The way we've played in biosimilars is through our design of about a dozen-plus biosimilars that we out-license to other, I would say, these are non-U.S., other countries where the customers take those products and then fully develop them to put on the market.

In terms of other customers coming to us with biosimilars, it's not really a factor in any of our facilities right now..

Okay..

What I would say, Justin, just to add briefly to that is, by and large, we've selected to play in a sub-5,000 liter market segment, which doesn't necessarily attracts significant amount of biosimilars, although we do participate in biosimilars particularly in developing, selling, et cetera.

So, that is the underpinning why you won't see significant amount of biosims within our Biologics business..

Yeah. For sure, makes sense. I was more around – I was thinking more on the development side. Definitely been hearing some commentary from some other CDMOs in this industry around that.

And then, just maybe kind of a left field question, where are you guys in serialization? And I know that there's – the FDA has pushed back and forth some of that one year. So....

Yeah. Simple answer is we're on track to....

Okay..

...to meet all the requirements for serialization. It's actually been a very significant investment of time, effort, and capital. Some of it shared with customers to reach our serialization.

And for anybody that understands this piece knows that it's been pushed off several times, but Catalent is well-positioned to be able to meet the serialization requirements..

Yeah. And just my follow-up to that is, are you guys – I know there's a lot of players out there that are just not as along the curve as you are.

Are you seeing any revenue-generating opportunities for that or any outsourcing from other, I guess, peers or competitors?.

All I would say is, our customers – our existing customers expect that we'll be able to do it and customers that are coming to us new expect that we'll have it. So, it's more of a requirement within the industry.

And I can't say that we've been seeing any additional growth because we've had it, but I do know others will be challenged if they don't have a level of resources that Catalent has from an operations quality standpoint..

Okay. That's it. Thank you..

Thank you very much, Justin..

Thank you. Our next question comes from Steven Schwartz with First Analysis. You may begin..

Hey. Good morning, gentlemen. Just one question, John, can you give us a little bit more color on the weakness in the analytical services in DDS? And just as a backdrop to the nature of my question, it seems like a number of both small and large entities are spending capital to expand our capabilities in that area.

And then, the second point is it usually seems that those services are associated with larger project awards. So, just kind of wondering what's going on with the volume decline there..

Yeah. I mean, purely – pure and simple, I would say, that our issue in analytical is purely execution in leadership. There is robust demand in the business. Generally speaking, we've taken all comers there. And part of the leadership issue has also been not firmly defining from a business perspective where we want to play in the analytical space.

So, we had again execution and leadership issues which are being remediated now. So, we don't have concerns that that's a long-term problem but certainly has reared its head this year..

Okay. Very good. Thank you, John..

All right. Thanks, Steve..

Thank you. This concludes the question-and-answer session. And now I would like to turn the call back over to John Chiminski for closing 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 important points.

First, we are confident and committed to delivering fiscal year 2018 results consistent with our financial guidance and are focused on continuing to drive organic growth across our overall business.

Second, we're committed to building world-class biologics business for our customers and for patients, and look forward to continued strong revenue and EBITDA growth from our core biologics offerings.

Third, the continued successful and efficient integration of our new Bloomington biologics business into the Catalent family is a top priority for the management team as we look to swiftly capitalize from the benefits of having both drug substance and drug product capability under one roof.

Last but not least, operations, quality, and regulatory excellence are at the heart of how we run our business and remain 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. Thanks, everyone..

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day..