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

Julia Qin - JPMorgan Securities LLC Juan E. Avendano - Bank of America Merrill Lynch John C. Kreger - William Blair & Co. LLC Lee Lueder - RBC Capital Markets LLC Donald H. Hooker - KeyBanc Capital Markets, Inc..

Good day, ladies and gentlemen, and welcome to the Catalent First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded.

I would now like to turn the conference over to VP, Finance, Investor Relations and Treasurer, Tom Castellano. The floor is yours..

Thank you, George. Good morning, everyone, and thank you for joining us today to review Catalent's first quarter fiscal year 2019 financial results. Please see our agenda on slide 2 of our company presentation, which is available on our Investor Relations website. Speaking today for Catalent are myself, John Chiminski, and Wetteny Joseph.

During our call today, management will make forward-looking statements and refer to non-GAAP financial measures. It's 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 John Chiminski..

Thanks, Tom, and welcome, everyone, to our earnings call. Our Q1 financial results were modestly below our internal expectations. However, we view this as timing related with no impact to our full year.

We continue to have strong visibility to our long-term outlook of 4% to 6% organic revenue growth and 6% to 8% organic Adjusted EBITDA growth along with confidence in delivering our fiscal year 2019 full year financial guidance which we are reaffirming.

As you can see in slide 6, our revenue for the first quarter increased 1% as reported and increased 3% in constant currency to $551.8 million, driven by the acquisition of our Bloomington biologics business, as well as the acquisition of Juniper Pharmaceuticals.

However, the revenue results were negatively impacted by the ASC 606 revenue recognition change related to the treatment of comparator sourcing activity within our Clinical Supply Services segment, which has now recorded on a net basis as compared to a gross basis under ASC 605.

Excluding the impact of this revenue recognition change, revenue would have increased 11% in constant currency compared to the prior year, driven by the previously mentioned acquisitions. Organic revenue was down 1% year-over-year. Our adjusted EBITDA of $115 million was above the first quarter of fiscal year 2018 on a constant currency basis by 28%.

Our adjusted net income for the first quarter was $40.5 million or $0.28 per diluted share for the first quarter, an increase of $0.07 per diluted share versus the prior year.

Now moving to our operational update, first, on August 14, we closed the acquisition of Juniper Pharmaceuticals, a European early development Center of Excellence with dose form development and early manufacturing capabilities.

The acquisition builds on the addition of Pharmatek completed in fiscal year 2017 and expands and strengthens our offerings and formulation, development, bioavailability solutions and clinical scale oral dose manufacturing.

Juniper's proven solutions and capabilities will further support our strategic goal to be the most comprehensive partner for pharmaceutical innovators and help our customers unlock the full potential of their molecules with the intent to provide better treatments to patients faster.

Juniper's nearly 150 employees at their Nottingham facility have deep scientific expertise in formulation development and supply and their breadth of technological capabilities will augment our current portfolio including the development of spray-dry dispersions.

The integration of the site into the Catalent network is well underway and tracking according to our expectations. Next, as discussed in our last earnings call, we issued 11.4 million shares of common stock at a price to the public of $40.24 yielding net proceeds of $445 million.

The proceeds were used along with cash on hand to pay down $450 million of our U.S. dollar denominated term loan floating-rate debt. These strategic steps have significantly strengthened our balance sheet and give us additional capacity to continue to accelerate our strategic plans through acquisitions.

The impact of this transaction is visible in our first quarter fiscal year 2019 financial results which Wetteny will highlight later on. Additionally, we continue to make great strides with regards to our Biologics strategy.

First, the integration of the Bloomington business acquired in October of last year is progressing ahead of our expectations and is nearly complete. The business continues to deliver and we are excited to have recently celebrated one year of Catalent ownership with the Bloomington team.

I'm also pleased to report the Bloomington site recently received approval for its 20th commercial product which is up from the 12 it was producing at the time of the acquisition. Additionally, the third manufacturing train at our Madison facility is complete and began contributing revenue during the fourth quarter of fiscal year 2018.

As mentioned on previous earnings calls, we've already signed a number of customer contracts for the third train while also growing a robust funnel of late-stage clinical opportunities which together will help increase the utilization of the new capacity in fiscal year 2019 to more than 50%.

We also received approval from our board of directors for significant CapEx investments within both Bloomington and Madison to support the strong demand and growth in these businesses.

A combination of the organic and inorganic investments we've already made in Biologics continue to create significant value for the company, our customers and our shareholders. I also want to provide a further update on our Softgel Technologies business, which continues to be negatively impacted by a worldwide ibuprofen API shortage.

The supply shortage is not improving at the rate we anticipated and the situation remains a challenge. Although, our delivery of products relying in ibuprofen in the first quarter of fiscal year 2019 was in line with the level of ibuprofen related products we delivered in the first quarter of the prior year.

Our ability to grow our ibuprofen franchise per plan was limited and we could have generated approximately $4 million to $5 million of incremental EBITDA in the first quarter have the API been available. We expect similar impact to the next one to two quarters and are hopeful that the API supply stabilizes by then.

Additionally, I mentioned on the last call that we will be making improvements to optimize capacity across the network and organize around Centers of Excellence to support business needs and product focus.

We anticipate that these actions will drive margin expansion across the segments over the next several years and contribute to the 160 basis points of margin expansion we've included in our fiscal year 2019 guidance.

I'm happy to report that we have seen this start to take shape in the first quarter and we will look to build off the progress we've made thus far. Lastly, I would like to discuss several factors that give us confidence in delivering our fiscal year 2019 financial guidance.

First, we have a very strong pipeline of new products that are expected to launch in the fiscal year and we already have visibility to $50 million of expected revenue from the 38 products that launched in the first quarter.

Next, our Biologics business continues to experience robust demand and we are confident in our ability to execute on that demand, including the 20 commercial products in Bloomington. Next, we've built a backlog of orders in many of our sites across the network.

And once again, we're confident in our ability to execute on that demand throughout the fiscal year. Finally, we remain positioned increasingly well in an attractive robust growing market and have the strongest development pipeline since Catalent's inception with more than 1,000 active projects.

Now, I'll turn the call over to Wetteny Joseph, our Chief Financial Officer, who will take you through our first quarter financial results..

Thanks, John. As John briefly mentioned earlier, the company adopted ASC 606, the new accounting standard concerning revenue from contracts with customers, as of July 1, 2018, using the modified retrospective method.

The reported results for the three months ended September 30, 2018 reflect the application of the new standard, while the reported results for the three months ended September 30, 2017 were prepared under the guidance of the prior standard, ASC 605.

This is especially important as I discuss the results related to our Clinical Supply Services segment where we had a change related to the treatment of our comparator sourcing activities, which are now treated on a net basis compared to a gross basis in the prior year.

Now, 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 $199.2 million, declined 6% during the quarter, with segment EBITDA declining 1% due to lower high margin product participation revenue and lower consumer health and prescription volumes in North America.

On the positive side, we experienced higher demand for consumer health products in Latin America and Europe and a favorable product mix in Asia Pacific post the divestiture of lower margin businesses in Australia and China.

The Asia Pacific divestitures negatively impacted the segment's revenue by 2 percentage points, but did not materially impact the segment's bottom line.

As John already highlighted, we estimate that we could have been able to generate approximately $4 million to $5 million of additional EBITDA in the first quarter, if more ibuprofen APIs would have been available to us.

Given the latest information we have available to us, we expect the ibuprofen shortage to continue for the next one to two quarters until the worldwide supply stabilizes.

Slide 8 shows that our Biologics and Specialty Drug Delivery segment recorded revenue of $154.6 million in the quarter, which is up 69% versus the comparable prior-year period, with segment EBITDA growing 205% during the quarter.

A sizeable portion of this segment's revenue growth and all of the segment's EBITDA growth was driven by the Bloomington biologics acquisition, which closed in October 2017 and contributed 66 percentage points of the revenue growth and 240 percentage points to the EBITDA growth.

The Bloomington site continues to perform above our expectations from the time of the acquisition announcement, and we feel good about the immediate and long-term growth prospects of this critical business.

As a reminder, the addition of our Bloomington site strengthens our position as a leader in biologics development, analytical services, and finished products supply.

Catalent Biologics, including both Bloomington and our preexisting businesses, can provide integrated solutions 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 prefilled syringes to our already strong drug substance and sterile capabilities.

As we are seeing in the numbers, the acquisition of the Bloomington site significantly accelerates the already strong growth of our existing Biologics business. Biologics comprised approximately 14% of Catalent's consolidated revenue in fiscal year 2017 and represented 26% in fiscal year 2018.

On an organic basis, the Biologics and Specialty Drug Delivery segment revenue was up 3%, but with segment EBITDA decreasing 35% or approximately $3 million during the quarter.

Recent organic investments in our legacy Biologics business continued to translate into growth during the first quarter and it remains the fastest growing business within Catalent.

We recorded strong growth in drug substance driven by the completion of project milestones and larger clinical programs and higher volumes related to our European drug product business. We continue to believe that our Biologics business is positioned well to drive future growth.

As John mentioned, the third suite at Madison is complete and online and it contributed revenue during the quarter.

However, the strong performance in Biologics was offset by our respiratory and ophthalmic business, which saw lower volumes in the first quarter and was negatively impacted by a combination of unfavorable product mix and lower than expected capacity utilization levels.

It's important to note that market fundamentals continue to remain attractive for these key sterile fill technology platforms. Slide 9 shows that our Oral Drug Delivery segment recorded revenue $130.1 million in the quarter, which was down 3% versus the comparable prior-year period with segment EBITDA declining 29% during the quarter.

But these results were positively impacted by the Juniper Pharmaceuticals acquisition that contributed 6 percentage points to the segment's revenue growth and 9 percentage points to the segment's EBITDA growth during the quarter.

The organic revenue decline of 9% and EBITDA decline of 38% was primarily driven by volume declines for a few high margin products within our U.S. oral solids business in which one customer has moved volumes in-house to leverage unused internal capacity.

That being said, we continue to have a strong pipeline of development products within the segment, and feel good about the future growth prospects, although we could continue to see this headwind persist into the second quarter.

We also experienced volume declines within our analytical development services business, but this performance did improve from the prior quarter, which we anticipated due to the changes we've implemented. It is important to note that declines in the performance of both our U.S.

oral solids business and our analytical services businesses we expected and incorporated into our fiscal year 2019 financial guidance.

In order to provide additional insight into our long-cycle businesses, which include Softgel Technologies, Biologics and Specialty Drug Delivery, and Oral Drug Delivery, we are disclosing our long-cycle development revenue and a number of new product introductions, NPI, 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 first quarter ended September 30, 2018, we recorded development revenue across both small and large molecule of $144 million, which is 37% above the development revenue recorded in the prior fiscal year.

Additional disclosure on our development revenue, which is now calculated in accordance with ASC 606 revenue from contracts with customers is included in our 10-Q as recently filed with the SEC.

In addition, we introduced 37 new products which are expected to contribute $51 million of revenue in the fiscal year, which is nearly four times more than the revenue contribution of NPIs lost in the first quarter of the prior fiscal year.

This is especially important as it gives us additional confidence in our ability to deliver our fiscal year 2019 financial guidance after a slower start to the year than anticipated.

Now as shown on slide 10, our Clinical Supply Services segment posted revenue of $77.7 million, which was down 29% compared to the first quarter of the prior year, driven by the ASC 606 revenue treatment of comparator sourcing activity on a net basis, compared to a gross basis in the prior fiscal year.

Excluding the impact of ASC 606, segment revenue increased 1% due to increased volume related to core storage and distribution services.

Segment EBITDA increased 22% compared to the first quarter of the prior year primarily driven by revenue growth in our core storage and distribution services business, favorable product mix and improved capacity utilization across the network. All of the revenue and segment EBITDA growth recorded within CSS was organic.

As of September 30, 2018, our backlog for CSS segment was $302 million and 11% sequential increase. The segment recorded net new business wins of $73 million during the first quarter, which is an increase of 9% compared to the net new business wins recorded in the first quarter of the prior year.

The segment's trailing 12 months book-to-bill ratio is 1.0 times. It is important to note that the backlog and net new business wins figures that I just disclosed have been adjusted for the ASC 606 change in revenue accounting and now include comparator revenue on a net basis. The next slide contains reference information.

We have already discussed the segment results shown on the consolidating income statement by reporting segment on slide 11. Slide 12 provides a reconciliation to the last 12 months of EBITDA from operations from the most proximate GAAP measure, which is net earnings or loss.

This bridge will assist in tying up the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide. Moving to adjusted EBITDA on slide 13, first quarter adjusted EBITDA increased 27% to $115 million.

On a constant currency basis our first quarter adjusted EBITDA increased 28%, most of which was inorganic and driven by the Bloomington biologics and Juniper Pharmaceuticals acquisitions. One item worth noting is an add-back related to the cumulative effect of the change in accounting for ASC 606 that impacted our first quarter results.

This add-back of $15.1 million is primarily related to the cancellation of a key contract related to our pre-filled syringe business within our Biologics and Specialty Drug Delivery segment.

Given the timing of the notification from the customer and our adoption of ASC 606, this item was recorded through retained earnings on our first quarter 2019 balance sheet for U.S. GAAP purposes with no impact to the Catalent consolidated or BSDD segment P&L.

Therefore, we are adding it back to our calculation of adjusted EBITDA to reflect the accurate cash earnings of the company.

As you recall from prior earnings releases, cancelations of contract are ordinary across revenue streams and would normally be included as part of our reported results, but the timing of notification in this instance required different treatment.

To further clarify, the transactions did not qualify for revenue recognition under the old rules, ASC 605 as of June 30, 2018 because although we were notified by the customer if settlement was not reached. Therefore, we could not and did not report it in the prior year.

The new rules ASC 606, which we adopted effective July 1, 2018 now indicate this was a prior-period item and therefore cannot be recognized in the current fiscal year P&L. This creates a unique situation in which this transaction and the revenue associated with it lost revenue will never be recorded in the P&L.

This resulted in us adding the earnings from the lost revenue back through adjusted EBITDA to create an accurate depiction of the cash earnings of the company and aligned with how results were recorded in the prior periods.

However, going forward, it is our expectation that any future contract cancellations or settlements will be included in our reported results.

On slide 14, you can see the first quarter adjusted net income was $40.5 million or $0.28 per diluted share compared to adjusted net income of $27.1 million or $0.21 per diluted share in the first quarter a year ago. This slide also includes the reconciliation of net earnings or loss 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. Slide 15 shows our capitalization table and capital allocation priorities.

Our total net leverage ratio on a reported basis as of September 30 was 3.5 times, which was down from the 4.2 times we reported during the prior quarter and the lowest level in Catalent's history. As a reminder, we proactively paid down $450 million of our U.S.

dollar denominated term loan in July with the proceeds from the equity offering and also closed the Juniper acquisition on August 14. The impact from both transactions is reflected in this quarter's leverage ratio. Finally, our capital allocation priorities remain unchanged and focus first and foremost on organic growth followed by strategic M&A.

Turning to our financial outlook for fiscal year 2019, and on slide 16, we are reaffirming our previously issued guidance. We continue to expect full-year revenue in the range of $2.5 billion to $2.59 billion.

We expect full year adjusted EBITDA in the range of $597 million to $622 million and full-year adjusted net income in the range of $260 million to $285 million.

We expect in the range of $175 million to $185 million of capital expenditures and we expect that our fully diluted share count on a weighted average basis for the fiscal year ending June 30 will be in the range of 146 million to 147 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.

federal statutory corporate tax rate decreasing to 21%, we expect our fiscal year 2019 consolidated global effective tax rate to be between 25% and 27%.

We also expect interest expense in fiscal year 2019 to be approximately $112 million to $114 million, which is reflective of both the recent debt pay down as well as an updated LIBOR curve for our floating rate debt.

Additionally, 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 by far, with the fourth quarter of any fiscal year generally being our strongest by far.

This will continue to be the case in fiscal year 2019, where we expect to realize approximately 40% of our adjusted EBITDA in the first half of the year and 60% of our adjusted EBITDA in the second half of the year, which is only a modest change compared to the 42% first half and 58% second half that we communicated on the last earnings call.

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

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

Hi, good morning, guys. This is actually Julia on for Tycho today. Thanks for taking the question. So maybe to start us off, with Softgel, I know you pointed out a number of factors that affected the performance this quarter.

So could you maybe just talk about your updated Softgel outlook for the full year and what needs to happen to get to the low end of 2% to 4% that you previously talked about? Thanks..

Hi, Julia, John here. So, first of all, I would say – outside of the kind of worldwide shortage that we're seeing with ibuprofen, I would say, that Softgel is really operating in line with our expectations for the year.

Obviously, there was a couple of headwinds, specifically on the revenue front with regards to a couple of facilities that we had dispositioned, one in DY (24:26), another one in Haining. There is a little bit of softness that we've been seeing in our Rx portfolio in our St.

Petersburg facility, but it's being offset, I would say, by strength in our OTC portfolio for the year. So, net-net, I think the biggest challenge that we have, really, is the continuing shortage of ibuprofen.

We had highlighted this earlier in the calendar year and we're hopeful that we would be through the significant issues near the end of this year; and, unfortunately, those issues haven't abated and, to some extent, I would say that it just ended up being worse than we expected.

And as we've highlighted in our statements here that, had it not been for ibuprofen, we would have been able to deliver an additional $4 million to $5 million of EBITDA within the quarter. And again, we expect to see, I think, in the next quarter and, potentially, the quarter after, continuing impact from this shortage.

Again, I stated that, outside of that, Softgel really is operating within our expectations. We've always said that this was going to be really a 0% to 2% year for our Softgel business, and then moving back more towards its historical growth rate of 2% to 4% in our fiscal year 2020..

Just one quick item I'll add is, first of all, we don't provide guidance by segment.

But if you recall, we did indicate that we expected one more quarter of product participation headwind within our Softgel business, which again, is part of what we factored into our guidance for the year and what we're seeing here in addition to the APAC divestitures and ibuprofen, which John already mentioned..

Okay. Thank you. And then, separately, on Oral Drug Delivery, I know you talked about decreased end market demand for certain higher margin products.

So could you just maybe give a little bit more color on that? Was that all due to that one customer insourcing? And if that's the case, I guess, can you talk to the degree in which you're confident that this is a pretty isolated event rather than a broader trend, and how should we think about the impact throughout the rest of the year? Thank you..

Well, so first of all, I'll start off with the fact that a significant strength of the company is in our diversification in more than 7,000 products that we have. But we do have, I would say, a handful of products that are fairly significant.

And specifically within ODD, we entered the year knowing that we would have a challenge specifically with regards to one product that a customer was going to be insourcing due to internal capacity that they had.

We didn't know exactly what the timing of that would be, and whether or not some of our other product launches would be able to backfill that in time. But I would say, net-net, where we're at right now, this is not a systemic issue, this is really that one large single product. We've got a great pipeline in the ODD business.

And right now in terms of our overall full-year guidance that we're providing, we have that taken into account..

Great..

I'll just add a couple of quick things. Our Oral Drug segment has a broad scope in terms of the products that are available. If you look at the number of approvals in terms of Oral Drug more than 90% of them would fall within the format that we offer within our Oral Drug Delivery segment, the segment that the market is growing around 6%.

So the pipeline of products that we have in this segment is very robust and we expect it to return to the normalized long-term growth rates, which we believe to be in line with the overall Catalent level..

Great. Thanks..

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

Hi. This is Juan for Derik.

And so a follow-up on the ODD segment, it's perhaps high single to a low double-digit decline, the way that we should think about this business in the near-term?.

So we haven't provided guidance within the year by segment, as I mentioned earlier, Juan, but I would say, I would expect that level as we're into the second quarter, as we mentioned, we expect this headwind to continue through the second quarter. Beyond that, we're not providing any particular segment-by-segment guidance.

What I would say is that the product that we discussed earlier, we're actually in talks with the customer now about getting some of that volume back, which would have impact into the second half of the year of us..

Got it. And my follow-up question is on the Biologics segment, BSDD.

Can you give us an update on the capacity utilization at Catalent Indiana and the number of products that have been launched out of there?.

Sure. Within Bloomington, we – actually this has really been a terrific story for the company because when we acquired Bloomington, we had 12 products that were commercialized with visibility to a dozen or so more that we thought would be commercialized over the next, I would say, 24 months.

And as we sit here today, we already have 20 products that are commercialized. With regards to the capacity, I would say that on a pure capacity calculation standpoint, we're probably sitting at around 50% maybe we're even approaching 60% of capacity utilization in Bloomington.

But the challenge for us now is effectively allocating that capacity to the actual demand that is there. So we're currently working through making sure that we're doing more than allocating capacity we have and trying to fulfill the very strong robust demand that we have.

I'll also just highlight the fact that I mentioned in my remarks that we recently had our board approved significant CapEx both for Madison and Bloomington.

These are projects specifically for Bloomington that is going to double the capacity of that facility kind of in a 2021 timeframe, and then within Madison, it's going to add a fourth and fifth train.

Both of these are significant CapEx, they're both – one in Madison, it's just under $100 million, the one in Bloomington is just over $100 million that will be spent over the next three years in those build outs keeps us within our 7% to 8% CapEx spend as a percent of revenue.

But it also talks through the confidence that our board has and the demand that we're seeing both on the drug substance side for Madison as well as the drug product for Bloomington..

Thank you..

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

Hey, thanks very much. So I guess the question relates a little bit to the revenue outlook over the next three quarters. You talked about starting the year a little bit slow but reaffirmed the top line.

So you just maybe talk about which parts of the business, which segments are you comfortable will show some sequential improvement over the next few quarters?.

Sure. I think, first of all, I would say, throughout the organization, if you look at the NPIs that we highlighted in our prepared comments, they are really across all of our segments.

But in particular, if you look at our Biologics business which as John just highlighted just the demand profile across the business and our opportunity to execute against and deliver in the remainder of the year, I would expect the Biologics BSDD segment to continue to show and have sequential growth as we execute through the balance of the year.

And then the last point John mentioned in his prepared comments was that really throughout the network, we have built backlog. We specifically highlight backlog with respect to our Clinical business, which you can see the net new business wins lifting and are building up our backlog. You saw the sequential increase in backlog that we reported for CSS.

But also elsewhere in our long cycle businesses, we've build backlog that we'll be able to execute again across both certainly Softgel as well as our BSDD segment..

Great. Thank you. And John you mentioned a minute ago both Madison and Bloomington are now getting ready for some significant CapEx. Are those two groups operating kind of independently at this point? Are you seeing collaboration such as cross-selling and load balancing and the like? Thanks..

All right. Thanks, John. First of all, I would say that the collaboration is good and continues to improve. Clearly, we now have end-to-end biologics capability from drug substance in Madison, all the way through drug products in Bloomington. Bloomington did have some drug substance capability, but it was primarily around 2x2500 stainless steel.

They have a much smaller suite of drug substance customers at that site, I would say, in fact just the rough numbers the Madison slate of customers they pool from – for drug substance is about 10 times that that we have in Bloomington.

So now on the ability for our drug substance customers in Madison to also have full capability end-to-end for drug product has significantly increased, plus, I would say, the cross-selling between the slate of customers that we have for drug product in Bloomington, compared to the slate of customers that we have in drug substance in Madison is also plussing up, if you will, the overall pool of folks that we get to talk to.

I specifically know of a great example for a very large customer in the Indiana region that we had a great relationship, but had not been using the drug product capabilities of Bloomington.

And once we have brought the two companies together, our relationship with that customer has led to significant opportunities that we wouldn't have otherwise had within Bloomington and that's happening across a slate of customers.

So I couldn't really be more pleased with how our teams are working together, how the overall end to end capabilities are really reinforcing each other and really providing for much more robust business in what is a very robust environment for Biologics.

Again, accentuating the point around the significant CapEx that our board just reviewed and approved which again talks to the confidence that we have in both those businesses, the demand and the pipeline that we have..

Very helpful. Thank you..

Thank you. And our next question comes from the line of Lee Lueder with RBC. Your line is now open..

Hey, guys, thanks for taking the questions. It looks like EBITDA margins in the Biologics segment came down significantly on a sequential basis and was little below consensus expectations as well.

Can you explain what caused that and when do you expect those margins to rebound?.

Yeah, so in our prepared comments we discussed actually having growth in our core Biologics businesses, but within our Blow/Fill/Seal and sort of opthalmic business, we saw declines year-over-year, which really drove that.

Just another point is that – and this is true across Catalent, the first quarter is our sort of lowest quarter across the year and you tend to see EBITDA margins be the lowest as well, as we have shutdowns and other items throughout the network.

And I think if you look at the quarterly spread across historically, the first quarter would be the lowest quarter. But those are the two points within Biologics and Specialty..

Yeah. The only thing that I'd also say is that there is potential for a launch within that segment where we're spending a lot of base costs, I would say, in advance of a potential approval that is weighing on margins slightly; and, again, that's outside of the core Biologics area.

And I get back to our first quarter, in terms of, I would say, our lower level of activity compared to the back half of the year; in fact, we're splitting it now, 40%, 60%. So you are bearing a little bit of the burden of the base costs in those folks (38:08) in advance of the more significant volume that we get in the second half of the year..

Okay, got it. Thanks. And you talked a little bit about the investments at Bloomington and Madison.

Are there any changes to your long-term (38:20) expectations around margin expansion in the segment?.

I would say our expectations remain the same in terms of the margin expansion that we have baked-in to our long-term plans of 200 basis points to 300 basis points improvement over the next three to five years. And obviously, we still have our long-term guidance of 4% to 6% on the revenue line and 6% to 8% on the EBITDA line..

Okay, thanks..

Thank you. And our next question comes from the line of Donald Hooker with KeyBanc. Your line is now open..

Great, good morning. So in the Softgel segment, you mentioned that there are some headwinds from divestitures last year in the Asia Pacific area. I think you guys are also talking about – or you had talked about more divestitures going forward. I guess these are these lower margin VMS facilities.

Can you update us on any future divestitures as you look ahead in the near term?.

Sure. I'll just sort of remind what we have already announced or executed. So we did divest two facilities, one in China, the other one in Australia. Those two had about a 2 percentage point downward impact on the top line for the Softgel segment. We also announced a third divestiture, which is a facility we have, also, in Australia.

That one is actually about 12 months out in terms of closure, as we are transferring certain products out of that facility, elsewhere in the network, which will certainly aid in terms of the throughput in other factories and operational margin lift, as well, from that activity. So that one has not closed, yet, but it was announced.

Other than that, we have not announced any other divestitures. But, clearly, we have a broad network across the various segments, which we continue to execute demand from and we'll – as always, we'll evaluate those, but we have not announced any other divestitures other than those three..

Yeah.

I'm sorry, I was scribbling down notes, but did you say what – there's sort of another maybe emerging headwind as you divest that other facility, maybe no impact to profitability, but maybe another little bit of headwind, maybe next year, you're saying to profitability? How much would that be?.

Those – that facility, as I mentioned, we'll be moving products from that facility elsewhere in the network..

Okay..

We have not disclosed any particular headwind related to that. What I would say is significant number of products are actually going to be remaining with us elsewhere in the network..

Okay. Great. And I'll just ask one more. Thanks for your time.

Just going back, looking at the sort of Pharmatek acquisition and thinking about Juniper kind of bringing more products into the funnel, have you seen any revenue synergies or any kind of commercial conversion of anything from Pharmatek as of yet, and any updates? I know it's early for Juniper, but....

Yeah. So we're actually extremely pleased. We actually internally refer to this as the superhighway from Pharmatek to our – either our Kansas City or our Winchester facilities that we have. And this will also be the same, although it might have to be a super tunnel, I guess, across the Atlantic from Nottingham.

But if my memory serves correctly, I believe, there is already eight products from Pharmatek that we have transferred over for higher scale into our Kansas City facility. So the strategy is absolutely working on both of these facilities, both Pharmatek as well as the Juniper facility in Nottingham. These were early development houses.

They've got great expertise in working with customers early on with regards to our formulation development, early molecule development, if you will. However, they did not have the ability to go into further clinical Phase I and on manufacture.

So our ability to take them further in the Catalent network is significant and there is some other – they brought a spray-dry dispersion technology in both of those facilities, and now within the Catalent network, we're looking to scale up internally with some additional potential CapEx for that spray drying.

So overall I would say, strategically Pharmatek has absolutely met, if not exceeded our expectations and we expect the same for Juniper. So both of them have been really terrific strategic acquisitions for the company..

Great. Thank you very much..

Thank you. And I show no further questions at this time. I would like to turn the call back over to John Chiminski for closing remarks..

Thanks, operator, and thanks, everyone for your questions and for taking time to join our call. I'd like to close by reminding you of a few important points.

First, we're confident in and committed to delivering our fiscal year 2019 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 from our Biologics offerings.

Third, the continued successful and efficient integration of Bloomington biologics as well as the integration of the Juniper Pharmaceuticals business into the Catalent family are top priorities as we look to swiftly capitalize on our recent inorganic investments.

Next, expanding the EBITDA margin of our business is to keep focused area for this management team, as we drive towards 200 basis points to 300 basis points of further expansion over the next three to four years.

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

Ladies and gentlemen, thank you for participating on today's conference. This does concludes today's program and you may all disconnect. Everyone, have a great day..