Ladies and gentlemen, thank you for standing by, and welcome to the Catalent Second Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be question-and-answer session.

[Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Paul Surdez, Vice President of Investor Relations and Treasurer. Thank you. Please go ahead, sir..

Good morning everyone. And thank you for joining us today to review Catalent Second Quarter Fiscal Year 2020 Financial Results. With me today are John Chiminski, Chair and Chief Executive Officer; and Wetteny Joseph, Senior Vice-President and Chief Financial Officer.

In addition to reviewing our second quarter earnings release issued earlier this morning, we will also refer you to our other press release issued today regarding our agreement to acquire cell therapy leader, MaSTherCell.

Please see our agenda for this call on slide 2 of our supplemental presentation which is available on our investor relations website at www.catalent.com. During our call today, management will make forward-looking statements and refer to non-GAAP financial measures. It is possible that actual results could differ from management's expectations.

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

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

Thanks Paul, and welcome everyone to the call. In addition to reporting strong Q2 results, we are excited to announce this morning our plan to further expand our biologics footprint by acquiring MaSTherCell, the leader in cell therapy development and manufacturing.

Before reviewing the strategy behind adding MaSTherCell to the Catalent family, let me summarize our financial highlights from the second quarter.

As you can see on slide 6, our revenue for the second quarter increased 16% as reported or 17% in constant currency to $721 million with 7% of the constant currency growth being organic, which is above our expectations for the long-term organic growth of our base business.

Our adjusted EBITDA of $171 million for the quarter was above the second quarter of fiscal year 2019 on a constant currency basis by 16%, with 5% being organic. Our adjusted net income for the second quarter was $72 million or $0.45 per diluted share, unchanged from the per share adjusted net income in the prior fiscal year.

Three of our four reporting segments had strong performances as Biologics, Softgel, and Oral Technologies and Clinical Supply Services each contributed to the organic revenue and adjusted EBITDA growth, partly offset by headwinds in our Oral and Specialty Delivery segment. Wetteny will detail these results later in the call.

Now moving on to the operational update. First, we announced two important executive appointments in January that provide additional depth and breadth to our leadership team.

We recruited Karen Flynn to return to Catalent after 10 years of leading operations and commercial activity for a well-respected biopharma services company to be President of our Biologics segment, and our Chief Commercial Officer.

Karen, who's replacing the retiring Barry Littlejohns, will execute our Biologics strategy and further expand our Biologics drug substance, drug product, and gene therapy businesses.

We also recruited another former Catalent executive with decades of experience in the biopharmaceutical industry, Ricci Whitlow, as our President of Clinical Supply Services in place of the retiring Paul Hegwood.

In addition to growing our CSS business with our traditional customer base, she will be focused on growing its footprint through cross selling opportunities with our Biologics and other long cycle businesses. Karen and Ricci, like Barry and Paul before them, report to our COO Alessandro Maselli.

They replace distinguished leaders who are celebrated here at Catalent for growing their businesses and for their tireless efforts to help establish our patient-first culture.

Next, last week, the Catalent Board of Directors approved the deployment of additional capital for further expansion of our gene therapy commercial facilities at BWI, which expansion will support operations on the BWI campus as well as our other gene therapy facilities in BioPark, Rockville, and Gaithersburg.

This investment is above and beyond the CapEx previously approved for the build out of the 10 suites in our BWI facility, all of which are on track to be operational at the end of this calendar year.

The additional CapEx approved last week will allow us to achieve higher revenue potential from the Paragon acquisition than anticipated at the time of the original acquisition last May, once all the projects are completed.

Additionally, early last month, we took ownership of Bristol Myers Squibb’s oral solid, biologics, and sterile product manufacturing and packaging facility in Anagni, Italy, which we had agreed to acquire in June.

This multipurpose site enhances our global network and provides us drug product sterile fill/finish capacity, and oral solid dose manufacturing in Europe and comes with an agreement to continue to manufacture BMS' current product portfolio at the site.

The Anagni facility expands our European capabilities in biologics drug product, solid oral dose manufacturing, and packaging to accelerate development programs and provides greater commercial supply capacity.

The acquisition of Anagni is another example of our progress in realizing our global biologics strategy which continues to develop and strengthen across our network.

As an additional example, I'm pleased to announce that the Bloomington site received yet another commercial product approval in January, bringing its total to 22 versus the 12 it was producing at the time of the acquisition, with several additional launches on the horizon.

The previously announced $200 million investment in Bloomington and Madison are progressing according to plan, and will help us serve the existing pipeline of late-stage clinical work and other opportunities for these high margin sites. Another important element of our biologics strategy is our entrance into the gene therapy space last year.

The acquisitions of Paragon Bioservices and related gene therapy assets provided Catalent with new expertise and capabilities in one of the fastest growing techniques for therapeutic intervention today and position us for accelerated long-term growth.

The integration of these gene therapy assets into the Catalent portfolio is progressing ahead of our expectation and has been a key contributor to our strong year-to-date financial results.

The CapEx approval I previously highlighted was supported by this early outperformance, as well as by research we commissioned from an independent third-party consultant, which indicates the gene therapy pipeline will continue to increase much more rapidly than the manufacturing assets needed to service the demand.

Paragon provided us with a platform for development of an expanded offering in biologics enabling entry into technology categories adjacent to the development and production of viral vectors for gene therapies.

The success we've experienced thus far with Paragon provides us with the confidence and blueprint to further expand our biologics offering into cell therapy, which we are announcing this morning.

Please turn to slide seven for an overview of our agreement to acquire MaSTherCell, a technology focused cell therapy development and manufacturing partner to cell therapy innovators.

MaSTherCell’s service offerings include the development and manufacturer of both autologous and allogeneic cell therapies, as well as a variety of related analytical services. It is worked with a range of therapies including those based on the so called CAR-T cells, tumor-infiltrating lymphocytes as well as T cell receptors and other cell types.

MaSTherCell which was founded in 2011, has sites in Belgium and Texas. It’s current operating facility near Brussels provides preclinical and clinical stage services and MaSTherCell is in the process of building a commercial scale production in fill/finish facility nearby, which is expected to open in late 2021.

MaSTherCell is also in the final stages of completing the build out of a preclinical and clinical stage facility near Houston, Texas, and has future plans to expand into commercial there as well.

Cell Therapy like gene therapy is attracting enormous funding, as both the number of active programs and the level of funding have rapidly expanded over the last five years. There are now more than 500 public and private companies with cell therapy programs and hundreds of active cell therapy based investigational new drug applications.

Much of the focus today is an oncology. But we're seeing applications expand in other therapeutic areas, such as autoimmune diseases. -- and neurology.

Our research indicates that the cell therapy pipeline is growing in the mid-teens range with over 800 cell therapy assets in the pipeline today, and also estimates cell therapy manufacturing to be approximately 65% outsourced, which is comparable to viral vectors.

Also similar to viral vector manufacturing, cell therapy capacity is scarce and the trend of demand outstripping supply is projected to become more acute despite investments in additional capacity being made across the industry. We see MaSTherCell as a complimentary addition to our gene therapy capabilities and the rest of our biologic’s portfolio.

We also believe that MaSTherCell will be a strong strategic fit for Catalent as we are well positioned to combine MaSTherCell’s team of experts and differentiated capabilities with our extensive resources in our significant experience in scaling new platforms to help MaSTherCell build out its development and commercial manufacturing capabilities.

Furthermore, we believe MaSTherCell rounds out our program to be the leader in gene and cell therapy, creating deeper and broader relationships with customers. And, like we've seen with Paragon, open up cross selling opportunities cross Catalent’s other technology platforms.

From a structural perspective, this is an all cash transaction with a total purchasing price of $315 million subject to customary purchase adjustments. Catalent expects to finance its’ transaction with either a partial drawdown of its revolving credit facility with a pre proceeds from a possible future incremental capital raise.

Any such raise may also include funds for capital expenditures in support of our gene therapy programs, and other strategic initiatives.

Slide eight illustrates how our actions continue to fundamentally transform our business and increase our share of the R&D pipeline by significantly increasing our exposure to the faster growing area of the industry that is biologics.

We've done this through significant organic and inorganic investments, putting to work nearly $3 billion over the last five years. In the 12-month period ended December 31, -- biologics segment represented 27% of our portfolio.

In the quarter we're reporting today, it's now just over 30% and when factoring in our long term organic revenue, growth guidance 6% to 8% combined with strategic acquisitions like MaSTherCell and Anagni, we believe we're on pace for 50% of our revenues to be driven from biologics segment by the end of fiscal 2024 with total company revenue is projected to be approximately $4.5 billion.

Given the greater margin contributions for our Biologics segment, we believe adjusted EBITDA margins in 2024, will expand to at least 28%, up approximately 300 basis points from our expected levels in 2020.

We're proud that the combination of organic and inorganic investments we're making in biologics is already delivering substantial benefits to patients.

We believe our strategy that drove us to uniquely combined capabilities to support the fastest growing areas of drug development with Catalent’s historical leadership and deep expertise in global contract work manufacturing will continue to create significant value for company, our customers and our shareholders.

Now I'll turn over the call over to Wetteny who will take you through our second quarter financial results and the details related to our updated financial guidance..

Thanks, John. I will begin this morning with a discussion on segments performance, where both the fiscal 2019 and fiscal 2020 second quarter results are presented on the basis of the revised reporting segment’s we introduced last quarter. Please turn to slide nine, which present our Softgel and Oral Technologies business.

As in past earnings calls, our commentary around segment growth will be in constant currency. Softgel and Oral Technologies revenue of $267.9 million increased 3% during the quarter, with segment EBITDA, increasing 19%.

After excluding the impact of the October 2019 divestiture of the segments manufacturing site in Braeside, Australia, segment revenue and EBITDA grew 9% and 24% respectively.

The growth primarily relates to volume increases across the consumer health portfolio within Europe as well as increased demand in the prescription product business in North America, which is partially attributable to recently launched products.

Revenue in the consumer health business also increased in North America and Latin America, due to the prior year shortage and ibuprofen API supply. Additionally, the strong segment EBITDA performance was driven by improved capacity utilization and favorable product mix across the network.

Slide 10, shows that our biologic segments recorded revenue of $225.2 million in the quarter, which is up 66% versus a comparable prior year period with segment EBITDA growing 61% quarter-over-quarter.

Note that a large portion of both the revenue and the segment EBITDA growth was in organic and driven by the gene therapy acquisitions, which contributed 56 percentage points to revenue and 49 percentage points to EBITDA growth.

Excluding acquisitions, the segment recorded organic revenue growth of 10% in the second quarter and segment EBITDA growth of 12%. Recent investments in our biologics business continued to translate into growth during the second quarter as we recorded strong growth in drug product volumes in the U.S.

As a reminder, drug substance revenue continues to be impacted by the completion of the limited duration customer contract, which had a particularly high drop-through EBITDA following the completion of the client buildout of its own capacity.

The customer strategy to move its production in house was fully contemplated when we entered into the contract, and the precise timing was less defined given typical production complexities.

We continue to expect this to be a comparison headwind for a drug substance business for another quarter as we work to onboard new customers to increase our utilization levels. Drug substance after excluding the completion of this non-cell lung clinical manufacturing contract also grew year-on-year.

As John mentioned, we just closed on the Anagni, acquisition on the first of January. As we did not know the timing of the close when we gave initial guidance in August, the site was not included in our original estimate, but is now reflected in our current guidance updated today.

As the site is multipurpose, its future financial reporting is likely to be split between Biologics and OSD segments, and we will provide you more details where we report our third quarter.

To close out the commentary on biologics, I'd like to echo John's excitement about bringing MaSTherCell’s cell therapy expertise to Catalent, which enables us to establish a position in the society new therapeutic platform and stay at the forefront of bringing new advanced therapies to scale.

Catalent provides MaSTherCell access to growth capital, leverages it’s functional and system expertise and provides access to additional customers.

However, given the company's early stage, MaSTherCell is not expected to provide meaningful EBITDA in the next two years, as profit generated in its current clinical services will be consumed by commercial build out. We expect to provide additional color next quarter following the expected closing of the transaction.

Slide 11 shows that are all-in specialty delivery segment recorded revenue of $143.2 million in the quarter, which is down 7% versus a comparable prior year period with segment EBITDA declining 28% quarter-over-quarter.

While we experienced growth in our orally delivered commercial products this was more than offset by decreased volumes in the segment's respiratory and ophthalmic specialty delivery platform. This business experience very strong demand a year ago as it generated revenues in anticipation of new product introductions.

However, these NPIs have not yet materialized creating a headwind for the segment this quarter, which despite expected sequential improvement, will result in a year-on-year headwind for the remainder of the year, and is factored in our new guidance.

Despite the softness we are experiencing this quarter, we believe the OSD segment continues to have a very strong development pipeline, including several late-stage free drug development programs that will drive future and long-term growth.

In order to provide additional insight into our long-cycle businesses, which includes Softgel and Oral Technologies, Biologics and Oral and Specialty Delivery, we are disclosing our long-cycle development revenue and the number of new product introductions, as well as revenue from these 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 of fiscal 2020, we recorded development revenue across both small and large molecule of $222.5 [Ph] million, which is more than 36% above the development revenue recorded in the first half of the prior fiscal year. Additional disclosure on our development revenue is included on our Form 10-Q to be filed today with the SEC.

In addition, we introduced 87 new products in the first six months of fiscal year 2020, which are expected to contribute approximately $27 million of revenue in the fiscal year.

Now, as shown in slide 12, our clinical supply services segment posted revenue of $87.9 million or 9% growth over the second quarter of the prior year, and segment EBITDA of $24 or 15% growth.

The strong growth in both revenue and segment EBITDA was driven by strong demand in the segment storage and distribution and manufacturing and packaging businesses. All of the segment revenue and EBITDA growth recorded within CSS was organic. As of December 31 2019, our backlog for the CSS segment was $390, a 4.5% sequential increase.

The segment recorded net new business winds of $104 million during the second quarter, which is a decrease of 2.3% compared to the very high level of net new business wins recorded in the second quarter of the prior year. The segment's trailing 12-months book-to-bill ratio remained at 1.2 times.

Slide 13, and 14 contain reference information for our second quarter and year-to-date segment results, both as reported and in constant currency. Slide 15 provides a reconciliation of EBITDA from operations from the most proximate GAAP measure, which is net earnings.

This bridge will assist in tying out our reported figures to our computation of adjusted EBITDA, which is detailed on the next slide. Moving to adjusted EBITDA on Slide 16. Second quarter adjusted EBITDA increased 17% to $171 million or 23.7% of revenue compared to 23.4% of revenue reported in the second quarter of the prior year.

On a constant currency basis, our second quarter adjusted EBITDA increased 18% including 5% organic growth. On slide 17 you can see that second quarter adjusted net income was $72 million, or $0.45 per diluted share, compared to adjusted net income of $65.4 million, also representing $0.45 per diluted share in the second quarter a year ago.

Slide 18 shows our debt related ratios and our capital allocation priority. Our total net leverage ratio as of December 31 was 4.2 times, which has modestly reduced on the ratio as of the end of the prior quarter.

Pro forma for completed acquisition, our total net leverage ratio was 4.0 times, which is an improvement of approximately one half of a turn compared to the ratio at the time we announced the Paragon transaction.

Given the free cash flow generation of the Company and its growing adjusted EBITDA, the Company naturally de-levers between one half and three quarters of return per year Additionally, continued investments in Biologics, including the new CapEx approved by our board last week for our gene therapy business, led us to increase our fiscal year 2020 projections for CapEx spending.

Taking into account customer funding, capital expenditures are now expected to be approximately 13% to 14% of net revenue, compared to our initial assumption of 11% to 12% of net revenue. Our capital allocation priorities remain unchanged and focus first and foremost on organic growth followed by strategic M&A.

Now we turn to our financial outlook for fiscal year 2020 on slide 19. As John reviewed in his opening comments, we are raising our financial guidance to reflect the acquisition of Anagni, and for the continued growth of the gene therapy business are also slightly tightening these ranges to reflect the passage of time.

No contribution from MaSTherCell is assumed in this revised guidance, which, regardless of when it closes, will be immaterial to our full year 2020 results. We now expect full year revenue in the range of $2.87 billion to $2.95 billion, compared to our previous guidance of $2.78 billion to $2.88 billion.

Note this new guidance continues to assume organic revenue growth of 4% to 7%. For full year adjusted EBITDA in our expected range of $711 million to $735 million, compared to our previous expectation of $700 million to $730 million. This new range continues to assume our original organic adjusted EBITDA growth assumption of 9% to 12%.

Note the greater increase in our revenue guidance relative to our adjusted EBITDA guidance will result in a somewhat lower adjusted EBITDA margin level for fiscal 2020 than our original guidance.

We now expect adjusted EBITDA margin to increase over fiscal year 2019 results of 23.8% by approximately 100 basis points at the midpoint of the new range versus the previous expectation of an approximate 150 basis point increase.

This is largely due to the addition of Anagni, which as expected, currently has lower utilization levels until it adds more customers. We are also updating our folio adjusted net income guidance to a range of $307 million to $331 million, compared to the previous guidance of $300 million to $330 million.

We now expect that our fully diluted share count on a weighted average basis for the fiscal year ending June 30, will be in a range of 160 million shares to 161 million shares, which continues to cap the preferred shares we issued in May to fund part of the Paragon acquisition as if they all were converted to common shares in accordance with their terms.

We continue to expect our consolidated effective tax rates will be between 24% and 26% for the fiscal year. Finally, Tom Castellano is also in the room with us today. And I'd like to personally thank him for the outstanding job he has done leading the investor relations function for Catalent since our IPO.

Tom will continue to add great value to the Company in his new leadership role, as Global Vice President, Operational Finance and as the finance leader for our Biologics segment.

Tom has transitioned his IR responsibilities to Paul Surdez who joined us last month and many of you know, from his time leading Investor Relations at other public healthcare companies. Operator, we would now like to open the floor for questions..

[Operator Instructions] Our first question comes from Tycho Peterson with JPMorgan. Your line is open..

Hey, good morning. I'll start with MaSTherCell.

I know it's a smaller deal than Paragon, but I'm just wondering if you could compare and contrast the two, how do you think about kind of the cellular market versus the gene therapy market? How should we think about CapEx needs, any customer concentration risks, and then as we think about kind of the longer-term guidance of 10% to 15% for Biologics, what do you think, you know, the cellular therapy market opportunity could do to that growth rate? Thanks..

Sure, a lot there Tycho. So let me just, step -- step back and look at the big picture here. First of all, I think, our acquisition of Paragon in the gene therapy space really gave us the confidence to enter into another very fast-expanding space in cell therapy.

When we take a look at the number of cell therapy trials that are ongoing, it actually significantly exceeds those in the gene therapy area, and its growing kind of in the mid-teens growth rate.

I would say that from an acquisition standpoint, I would say that we have acquired MaSTherCell a little bit earlier in the cycle than we have from a Paragon standpoint, so obviously a smaller acquisition compared to Paragon, but I would say we're probably catching it two to three years earlier in the cycle.

So, they are still early on, they've got a very strong position. I would say they're really the leading standalone cell therapy, CDMO player, and they've got some tremendous capability.

I would say from a customer standpoint, I think it's very similar to our acquisition of Paragon where you've got a couple of marquee base customers there, but then have behind that a broad slate of overall customers both in the autologous as well as the allogeneic area.

From a CapEx standpoint, I would say that on a comparative basis to Paragon, they are smaller numbers based upon the overall technology, but I mean it’s going to require some additional CapEx for us to build out the commercial facilities that they already have started in the Belgian area as well as the preclinical and clinical facility they have in Houston, and an anticipated additional commercial facility there.

So, we've anticipated that in terms of looking at our CapEx going forward, which Wetteny can further detail out..

Yes, Tycho, the one thing I would -- I would add is, as John mentioned in his prepared commentary MaSTherCell in the midst of expanding its clinical operations with a new facility in the U.S. and in addition to a commercial facility that they're in the middle of in Europe.

So as those come on and ramp up, we would expect to attract even more customers into the business as we continue to scale it from a customer standpoint..

Okay. And then just one follow up on Oral and Specialty. You talked about the delays in product approvals and maybe some pressure there for the next couple of quarters.

I guess, should we be modeling that business down then in the next couple of quarters? And is -- when does Zydis Ultra start to kind of contribute as well? Is that going to be beneficial at all?.

Yes. So on in terms of the remainder of the year, I would say, given my – prepared commentary here, I would expect some continued headwind for the OSD segment, for the balance of the fiscal year. That's all factored into the guidance that we just gave as well for the year, just giving you some additional color there.

Although, I would expect the business to show sequential improvement quarter-on-quarter from a growth rate standpoint, it would still be a headwind for the balance of the year.

In terms of Zydis Ultra, as we've talked about, this is an exciting area for us to expand the base of our Zydis offering to be able to bring on molecules with bigger drug loading than we did before. We have gone through pilot stages proving that the technology can work.

We are in the midst of a capital expansion to upscale that to commercial levels and have already signed a number of programs with customers to leverage that technology. But this is factored into our long-term confidence in this business segment as well.

In terms of it’s ability to grow at the 5% to 7% in the long term, but those are – in terms of Zydis Ultra, we're talking further out before we’d start to see meaningful revenue from Zydis Ultra..

Okay, thank you..

Thank you. Our next question comes from Dan Brennan with UBS. Your line is open..

Great, thank you. Congrats on the quarter and the deal.

First just on Paragon, just can you give us a little flavor? It came in better than we expected this quarter, I guess not surprising given the commentary intra quarter and the overall market, but can you give us a little flavor for kind of what you're seeing there? And then secondarily, can you kind of clarify a little bit on the increased CapEx plans, kind of any -- any clarification on kind of what the future revenue contribution as you build that capacity in Paragon, because I know John, you've alluded to that in your prepared remarks..

Yes. So first of all, I would just say that it continues to be an incredibly robust, I dare say hot market from a gene therapy standpoint. We're seeing significant numbers of customers coming to us for both development programs as well as for I would say, longer term clinical and potential commercial manufacturing capacity.

So what has ended up happening since we announced the deal is that we've been able to model out the existing CapEx expenditures and capacity and with some additional supporting CapEx are going to actually be able to drive overall revenues long term into Paragon network that are above the actual deal model.

We're not specifying out here what that additional revenue potential is, but I would just say that it is meaningful. And obviously, we're looking out through over a four to five-year period. I would just say in general, again, very robust, very robust marketplace.

And I think what we're extremely excited about is that with the acquisition of Paragon, and now MaSTherCell, that we now have platforms in those areas where additional M&A isn't required for us to build out those platforms, and we're much more in control now being able to invest CapEx to drive further growth.

So I think, those really provided us some strong increase in the gene and cell therapy space. It really will position Catalent as the leader in gene and cell therapy from a CDMO standpoint..

Great. And then and then maybe just as a follow up just on MaSTherCell I know follow up on Tycho’s first question, but just -- are you disclosing anything related to financials today, whether it be, trailing 12-month or kind of any kind of forward outlook for revenues and EBITDA number one.

And then number two, can you just clarify like, what, how would you characterize what is MaSTherCell’s key, differentiated product and/our services? I mean, looking on the website, obviously looks like they are leader, but could you just speak to maybe what are the areas or areas we should focus in on is kind of where they're the leader? Thank you..

Sure. So I'll first start off, and say that MaSTherCell has deep scientific expertise as it pertains to cell therapy in the areas of multiple cell types and for both autologous and allogeneic.

So as you know, autologous is basically where you take a patient's own materials, you modify them, and you grow them and then ultimately reintroduce them into the patient. So it's basically one, one batch, one patient, if you will.

And then and on the allogeneic front, it's where you can take, I would say, donors’ materials, and then do that modification and scale up and then and then provide multiple doses for multiple tape patients. So, you can imagine that that the scientific expertise to be able to do that is fairly significant.

And MaSTherCell is doing that at a preclinical and also as at the clinical level.

So we really do believe that we have acquired, the leading standalone cell therapy, CDMO business and again we're positioned with Paragon, and now MaSTherCell to be the leader, leading CDMO from a cell and gene therapy standpoint, and I'll let Wetteny weigh in on with regards to the financial questions..

Yes. So a couple things, one in terms of what differentiates the business in addition to what John just laid out working across both autologous and allogeneic.

I would say, not only do they have the technical capabilities, but the versatility to work across a number of different formats that are obviously going after some of the leading cell therapies out there. And I think their versatility is what MaSTherCell is well known for in terms of their customers.

With respect to revenue, we’re not giving any additional guidance. What I would say here is, we’ll give more after we close this transaction, which we would anticipate by the time we connect again, for earnings call for the third quarter.

But as I said in the previous comments, even if you were closed When we close the transaction, it will not have meaningful impact on this year from an EBITDA standpoint, it won't for the next year. So I would, I would put it as a relatively small revenue number and EBITDA number for the year..

And maybe just one quick one, Wetteny on the outlook for organic growth this year, did that change at all, in the midst of your raising the revenue guidance?.

No, while we raise guidance in total, driven largely by our gene therapy business and its continued growth that we see, in addition to adding Anagni to the totals. The organic estimate remains the same in terms of growth rate, and as a reminder, from a revenue standpoint, that's 4% to 7%. And from a adjusted standpoint that’s 9% to 12%..

Okay, thank you..

Thank you. Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open..

Yes. Hi, good morning. So a follow up on your response to Dan's question as we think about the goals to achieve 50% of revenue mix being biologic what you reiterated today.

Should we interpret your comments as with the assets that you have now you think that you can achieve it just through organic growth? If you can talk a little bit about where is the market growing and versus your growth rates? Thank you..

Yes. So first of all, in terms of the 50%. That is correct, with the businesses we have today, and the organic capital deployment. And just as a reminder, we not only have capital deployment in our base, through our product and drug substance businesses, which we announced just over a year ago.

We also have the Paragon gene therapy business which we continue to deploy capital and to -- in terms of driving and responding to the demand that we see in the market from a gene therapy perspective.

And now with the MaSTherCell announced that today we'll be continuing to have a larger proportion of our growth stemming from our now broad biologics offerings. So, as you look today, based on the organic growth across the business, we can see biologics representing approximately 50% of our revenues five years out.

As John said, to get to the estimate of $4.5 billion by 2024 that contemplates not only organic, but also certain strategic inorganic investments. But the percentage of biologics we can see us or we do to that from the organic growth of the current businesses..

So, when you think about that or -- yes, go ahead, sorry..

No. I just want to say, in terms of what we see in the market today, that was a second part of your question.

I think clearly given the confidence that the board has to approve yet more CapEx to go into gene therapy, I would say, the demand there is embedded than we saw heading into the acquisition and with MaSTherCell we have even more capabilities across the modalities that are driving quite a bit of R&D spending and clinical programs to hopefully lead to even more commercial in the future.

So I would say from a demand standpoint we see strength there.

I would say, in our legacy businesses you can see that we've gotten off to a very strong start in the first half for the year which positioned us very well to deliver on the year at growth rates across our businesses that, I would say, are above the levels at least for the first half year that we would have set for those businesses when you don't factor in Paragon.

So, I just wanted to finish that, and then I'll take your next question..

So when you think about the rest of business and we think about softgel, I think 8% adjusted organic growth rate.

So can you just talk about how this compares to your expectation heading into the year? And what percent of that growth is coming from year-over-year comparison versus sustainable demand?.

Yes. Our Softgel and Oral Technologies segment had posted very strong growth here in the first half of the year organically. We've said that this is a business having move a couple of facilities into the segment. Last quarter, we said this is a business with long-term deliver between 3% and 5%. So that's up from 2% to 4% we're seeing for softgel.

I would say, that we've seen strength, and its stemming from how we ended last fiscal year having had some very good launches on prescription side of the business. We continue to see strong growth from our consumer perspective across Europe and Latin America which we would have anticipated coming to the year.

So I would say, this is slightly above our expectations with some of this work we saw coming. In terms of comparison, in the second quarter compared to last year, if you recall, we were really facing into headwinds related to the worldwide ibuprofen shortage and the second quarter was -- I would say the most pronounced impact.

So when you compare this year second quarter versus last year, I would probably put about two points of growth coming from a comparison related to that issue itself and so you would still be with the business that's growing above long-term where we would expect the business to be in the quarter. But again the long-term growth rates are just that.

They're expected to be long-term, and any quarter can be in that range, above or below it, which is our expectations given the long cycle the business than what we expect that we're giving. But we're very pleased with the performance of the SOT business, but that again much of that we anticipated as we entered the year..

Thank you..

Thank you. Our next question comes from John Kreger with William Blair. Your line is open..

Hi. Thanks very much. Wetteny, thanks for updating the CapEx plan. As we think about, obviously, I would assume you're going to have elevated CapEx for a little bit given all of the expansion in biologics.

So we think about that total kind of growing in line with overall revenues or maybe growth in biologics segment?.

So, yes, we have taken our CapEx expectations now from 11% to 12% up to 13% to 14% given what we've already discussed around. The demand we're seeing across our gene therapy business and increased capital deployment to capitalize on that. And so I would -- we're not giving guidance for next year yet.

We will do so when we post our results for the full fiscal year. One can anticipate given that we -- these are one to two-year, closer to two-year expansion project for the most part that we'll continue to see this level for another year here.

In terms of what that translates into for growth, I think we've already given what we said around the growth rates that we expect of our biologics business long term. We're already at a fairly robust growth expectations for the business. These capital deployments tend to run a couple years and then there's a time to ramp up as well.

So I'm not going to give any further guidance from a revenue perspective other than what we said for this current year and what we've said for long-term. And as we get into each year we'll be in position to give you more clarity on the upcoming year..

Great, thanks. And a follow-up to that.

Can you talk a little bit about kind of the order backlog nature of both gene therapy and cell therapy? Can we think about these new capital expansion plan is being effectively pre booked?.

So I think, the way described this business is really -- you have largely programs that are still in the clinic here. And those can be, as you know, a variable -- some variability and lumpiness around clinical programs in the typical stages.

But what we're seeing particularly in the gene therapy of business is the extreme tightness of supply is driving customers to enter into contracts with a essentially reserved capacity. And that gives it a little bit of a longer visibility and increased booking as a percentage what we expect in the business that starts to feel almost quasi-commercial.

So, our visibility here, I would say is much better than we would typically see in a typical business that is largely the clinical. And as we enter into the year or at any point in time, looking out over the next quarters to come, we have we have better visibility than we would typically see in a clinical program..

Great. Thanks. And one last one on MaSTherCell.

So, how long do you think it'll take to get that asset to be generating margins that would be sort of typical for the biologics segment?.

So look, I think we just announced the deal. So we won't provide a ton more color at this point. But over the next several quarters, once we close the deal and we get to announcing expectations for the following year, we can give you more color.

But one thing we have said is that while the business generates a certain amount of EBITDA in its clinical operations that exists today that EBITDA has been reinvested in the -- in what I'll call the startup costs for the commercial operations that it's building in Europe, as well as the new clinical site that is growing in the U.S.

So, for the next two years, we're just not expecting meaningful EBITDA at all from this business. And I just won't give you much further than that.

I think certainly given the highly technical and position that we see master cell has, which John and I described earlier, we certainly anticipate that this is highly valuable to our customers and this is a business that should generate healthy EBITDA margins in the long term. But we just won't give you any more precision in that today..

Great. Thank you..

Thank you. Our next question comes from David Windley with Jefferies. Your line is open..

Hi, good morning. Thanks for taking my questions. One of the focus that I wanted to try to focus on the performance, bridging the performance that we're seeing in biologics now to some of the more powerful impacts that can have over the long term.

So first of all, I think you've talked about biologics getting to 50% of revenue prior, and today, you're kind of putting more emphasis on the higher growth rate in gene therapy, you're adding cell therapy.

I'm wondering if those are given the recency of providing that guidance, if those are just not enough to kind of extend beyond the 50% that you've already said? Or can we anticipate that that is possible?.

Look, five years out, we're giving you our estimate in terms of what we see based on the businesses today, as we just announced the MaSTherCell deal today, and we're yet to close that, certainly, as we look to deploy more capital into our gene therapy businesses which are projects that as I said, will take better part of some years to execute.

We will we will have more clarity out five years. But at this point, given we've just recently, given that estimate, roughly around the time we made the Paragon acquisition was the first time we said look, we can see ourselves getting to 50% of our revenues in biologics in five years time.

We're not prepared today to move off of that estimate, but as we again execute on the capital expansions, and we continue to see what the demand is in the business we'll have more clarity. And one more point I'll make is, we are not looking to become a solely a biologics company.

So we are also making investments in our small molecule businesses across Softgel and Oral Technologies and OSD business. As we do that those also have the potential to perform in certain ways that would influence what their percentage is overall.

And so again, in both instances we'll give you more clarity as we have it, but we've only recently given you the estimate of 50%. We're not prepared to move off of that at this point..

Right. That segues really nicely and my follow-up, which is, you mentioned earlier, I think John mentioned that the $4.5 billion does include some inorganic strategic investment.

Can you -- would you be willing to quantify that how much is do you anticipate to be an organic? And to the point that you just made, would you expect that to be balanced across small and large molecule? Or is the bias a little bit more toward large molecule as it has been with the last couple of transactions?.

So, look, first of all, in terms of looking at potential acquisitions and how we get to $4.5 billion, I think you can even do some calculations here, if you assume just the midpoint of our six to eight organic growth rate from where we will end this fiscal year.

And you can start with the midpoint of revised guidance we just gave today that get you to a number. Again, you have other ends -- both ends of the spectrum you can calculate, but if you take the midpoint, and I know, we've just announced the MaSTherCell deal. So you would factor that in as well.

It gives you to a number that you can back into what the rest would be from an M&A standpoint. In terms of where we're looking, certainly as we evaluate potential assets, we're looking at them across both small and large molecule.

We would have, I would say, bias towards the faster growing into the market which tend to be in biologics where we would also see higher margins as well. But I would not say that we're exclusively looking at large molecule biologics. But given now we have a great platform with Paragon. We've now getting ready to add MaSTherCell to that.

I think there are a number of other areas, related areas that we would be very interested in both from an organic perspective as well as inorganic. And those could include lentivirus, plasmids, and other areas that we've discussed previously, that will continue to influence where we get to five years out..

Got it. Last question on margin. In biologics, the longer term focus there I think has been that, with the demand environment, with the growth and the utilization continuing to grow, that margins could be well into the 30% range. We're certainly not seeing that. I think there's some transient costs.

But wondered if you could specifically talk to, like in the Paragon acquisition kind of running below the model margin in the first couple of quarters reported, what are some of those transient costs? And how long will they last?.

Yes. Look, I would say, first of all, if you look across biologics, there are a few things to point to. We are giving long term ranges as to where we expect the business to be from a EBITDA margin perspective. And we continue to have confidence in the business being able to do that. And the mix, again, driving towards more biologics.

That's point number one. In terms of near-term, and what we've seen over the last couple quarters in particular, I'll remind you that right after we made the acquisition of Paragon, we also acquired two facilities from Novavax to augment our front end and allows to bring more programs into the business.

And those as we said, we would expect to be margin dilutive for the first few quarters - few quarters out of the gate as we ramp up and bring on more customers into those facilities. But statistically, absolutely the best move for us to do, again, for the gene therapy business and for the biologics segment at large.

So as we expand, which we are doing in Paragon, and we're doing across our, again, legacy, biological businesses and drug products and drug substance, and we make those expansions, not only the capital that we put in, it's also the labor and other costs that we bringing ahead of the volume coming in for those and would expect that to have an impact in terms of where we see in the short term from a margin perspective and certainly within our expectations, but it's also within our expectations long-term as we ramp-up utilization across those expanded capacity, that we will get to the margins that we've said that the business will get to..

Helpful. Thank you..

Thank you. Our next question comes from Juan Avendano from Bank of America. Your line is open..

Hi. Thank you. On the MaSTherCell deal, can you talk to us about how did you go about vetting their cell therapy manufacturing capabilities at large scale, given that the drug product facility in Belgium and their facility in Texas, I believe are yet to be validated.

And then can you call out by name perhaps who are some of the biopharma customers with whom MaSTherCell is working with? And how customers have fully validated their cell therapy capabilities?.

So first of all, we don't discuss individual customers and won't do here, but I will say that like Paragon we have several well-known marquee customers that have come there, which I also used as a way to validate the capabilities from both the scientific standpoint, as well as from an overall manufacturing standpoint.

First, let's remember that, and what we're doing right now in cell therapy at MaSTherCell is at the preclinical and the clinical stage.

That being said, they're doing preclinical and clinical work for allogeneic, not just autologous, about half the customers at the top of their list, if you will, from Pareto standpoint are working on allogeneic, and those are done at higher scales. But they're already being done at a clinical level to be able to prove that out.

So they have not yet fully built out their commercial manufacturing.

It's -- they're building it out on the potential for a couple of customers that have several targets that could get approval after going through the clinical phase 1, or at least go into that clinical Phase 2, not approval, but go into a larger scale, and that is ultimately what will go into their facility.

I'll also say that they've designed the facility from a flexible standpoint so that depending upon whether or not they get approval for the larger scale, and when we talk larger, it's modestly larger from autologous to going to allogeneic if some of those allogeneic targets don't hit that they're going to be able to repurpose it for autologous.

So they'll have a somewhat, I would say, modestly lower revenue ramp, but ultimately, they're tuned into being able to do both. Last comment I'll make is that Catalent has a history of successful acquisitions. And that success is driven by the very thorough due-diligence that we do on all of these assets.

And I would say, this is no different than what we did with Paragon, Bloomington, Juniper. Accucaps, you can go down the entire list. So, in addition to our own experts, we also had engaged some and done some third-party work, some original work to be able to vet out the overall industry.

And I would just say that I'm highly confident that we've gotten a great team and a great asset for the company that's going to be a new platform..

Thank you. Appreciate the color. And then another one on one of your leading indicators. Can you talk to us about the trends that you're seeing in your MPI mix? I believe the revenue was -- MPI related revenue was $27 million cumulatively this year, which is down a little bit over 50% on a year-over-year basis.

And so, if you could talk to us about the outlook that you see based on this directional indicator, given the mix trends that might be happening there?.

Yes. Juan, so look, as typical, we only give the estimate of what the revenue contribution would be for the MPIs we have launched so far. So that's contribution for the totality of the year. As we go through each quarter and we launch more policies we can give more clarity around what those products will do for the year.

The $27 million I will put it right in the middle of the average for the company over the last few years in terms of the contribution that we would have seen. Again, I wouldn't necessarily take that and analyze it. But the rate that we're seeing right now is in line what we typically see from those NPI contributions.

Last year was an abnormally high contribution, given some of the bigger programs were launched earlier in the year and had a bigger impact on the individual year. So I think when you look at that metric, again, it's just a -- it's a directional indicator.

You also have to take into consideration the timing of relevant products and launches in terms of their relative size, you can have an impact on year-over-year, which is not necessarily an indication of healthier or less healthy sort of product slate.

So again, last year was an abnormally high year, and so the contribution for NPIs this year, I will put in more on the average, which is typically somewhere between $40 million and $60 million. What we've seen in terms of contribution from NPIs in any given year, last year it was closer to $100 million. So I'll cap it at that..

Thank you..

Thank you. Our next question comes from Donald Hooker with KeyBanc. Your line is open..

Hey, great. Good morning. In terms of -- to help us model your businesses out, can you maybe provide a little bit more clarity on sort of the EBITDA margin trends at the biologics segment? So it look like -- I'm just trying to do some quick math in terms of the contribution of Paragon. It seemed like that might have been dilutive to the margin.

I mean, what's the right EBITDA margin for the gene therapy component there? And is that additive?.

Yes.

So let me give you a couple -- I referenced earlier a couple of things within the biologics business, particularly when you're looking at gene therapy that contributed to some margin dilution as we brought on two facilities that we bought Novavax, that we said, would be the dilutive in the first few quarters out as we ramp-up business in those facilities.

So, I would say, that's in line with our expectations as what we're seeing from a gene therapy perspective, which continues to increase in terms of EBITDA margin.

As a reminder, if you look at what we've said publicly in 2018 calendar year, the business would have generate somewhere in the teens in terms of EBITDA margin and then for 2019 it would be in the mid to high 20s. And we expect the business to continue to climb in the long term, to be in line with our biologics expectations overall.

So, the business is performing as we expected. A little bit of dilution from those facilities that we brought on. But the other thing I would say is, our EBITDA margin expectations when we give them whether it's for the year or for the long-term, do not necessarily indicate that each quarter will be exactly in line with that.

And in particularly keep in mind that our business tends to have our preventive maintenance set downs in the summer.

And as we as we execute through the year, the third and fourth quarter in particular tend to be where we have the most significant throughput in our factories, and we tend to drive higher EBITDA margins in the fourth quarter than we do in any other quarter.

So I would just keep that in mind, which I would hold true across our biologics offerings as well in terms of how you would see that. Again, I would not expect each quarter would be exactly in line with our long-term.

I would also point out that within our biologics business, we have more clinical programs, which tend to be a bit more variable than you see in a more commercial operation that could drive different throughput from one quarter to the next as well.

We continue to be very confident in what the business will do long-term, as well as what we've stated, the business will do in the current fiscal year..

Super. And then maybe a follow up on the biologics segment. Last quarter, you commented around sort of the creation of a new marketing strategy, kind of stitching all these different offerings together, and now you're adding cell-based therapies to that. I guess you called it the OneBio Suite.

It sounds like that could maybe two plus two equals five here where there could be some cross selling and additive kind of having all these pieces together.

Can you talk about maybe some reaction from some clients around sort of your ability to maybe cross selling traction or anything kind of around any different trajectory in that segment from the OneBio Suite?.

Yes.

The launch of our OneBio Suite offering, which leverages our capabilities across not only a biologics segment, which includes end-to-end solutions from cell lines all the way through the drug product, finished dose seeking [ph] and dosing patients, but it also includes our capabilities across bio analytical and what we do in our clinical supply business where we are able to take those therapies all the way to the clinic to dose the patients.

So across the board we've demonstrated that we're able to help customers save time, which is extremely valuable to our customer base. And so far, the reception is in very, very positive. We've even signed programs under this offering already with customers and I would say it is still a long -- this is a long cycle business.

And I would expect over the long period of time for this to be more meaningful for us, but we're very pleased with the initial reaction we're seeing so far..

And maybe real quick one. On the development revenue, looks like it was up. I think you commented 36% year-over-year.

How much of that is organic?.

We don't have a split for you, but I would say that is a healthy portion of that that is inorganic given the Paragon is all inorganic, and Paragon is largely working with programs that are in the clinic.

So I would say that our acquisitions, particularly in gene therapy here and now, once we close MaSTherCell that will continue to contribute towards that development revenue buckets.

So, while I don't have a split for you, I would say there's a large part of that that is inorganic, although organically, it's growing and I was probably just estimated to be in line with the overall organic growth that you're seeing in the business..

Okay, super. Thank you..

Thank you. Our next question comes from Jacob Johnson with Stephens. Your line is open..

Hey, thanks for taking the questions. Just one for me. Just on the outlook for viral vectors, there appears to be no shortage of demand right now. But there was an announcement of a fairly significant investment in the space a few weeks ago.

It sounds like we're extremely supply constrained in the near term, but this would be interested in your latest thoughts on the outlook for the supply and demand of viral vectors as we look out over the next couple of years?.

So look, certainly the demand that we're seeing with our current customer base in addition to work that we have done here with consultants, really digging into the demand profile and what's anticipated in terms of clinical programs and potentially commercial.

We see a substantial difference between supply capacity today and what's anticipated based on announcements versus what the demand will be across on this segment. So it certainly of no surprise that others want to enter into this space, and the announcement that you are referring are being one of those..

was:.

Got it. Thanks..

Thank you. Our next question comes from Evan Stover with Robert W. Baird. Your line is open..

Hi. Thanks for squeezing me in. A couple of have been asked on CapEx, but I I just wanted to make sure I wasn't missing anything here. The CapEx goes up this year from 11% to 12%, to 13$, to 14%. I think that's another $50 million to $60 million of CapEx. But correct me if I'm wrong.

I didn't actually hear any disclosure on this next Paragon investment as to actual the total slug of capital being allocated to this? Or the number of suites that we're expanding beyond 10? And I'm just wondering if I missed that or if that's just something you're not disclosing, because this is more of an open ended type of authorization that you have from the board on this next round of Paragon investment?.

So, what I would say is you didn't miss anything. We didn't specifically disclose the amount. Although you can certainly as you have already, calculate what that translates into for the current year.

As we get into guidance for fiscal year 2021, which we will do when we issue our annual report, we will provide more colors in terms of weather translates to for next year inclusive of gene therapy, but the rest of our business as well. I wouldn't say this is an open ended authorization.

We did see an opportunity to deploy more capital into the current BWI campus that would allow us to get more throughput through that, through those suites.

And that incremental capital is something that has been authorized by the board to execute and will continue to reevaluate where else we would deploy additional capital in the business and come out with more color on that.

But yes, we have raised our CapEx expectations for this year from 11% to 12%, to now 13% to 14%, again, largely driven by the incremental capital we're deploying in our gene therapy business..

Okay. Thanks. Last one for me. Can you talk about the free cash flow expectations previously 30% to 45% of adjusted net income that was stronger operating cash flow quarter.

So I'm wondering if that -- does that still hold despite the higher CapEx spend?.

Yes, with the incremental CapEx spend we are now estimating our percentage of free cash flow as percent of adjusted net income to be between 20% and 35%. Whereas before, we're saying between 30% and 45%. So that's the revised number solely from the increased CapEx that we have discussed here today. All right..

All right. Thank you very much..

Thank you. I’m not showing no further questions at this time.

I’d like to turn the call back over to John Chiminski for closing remarks?.

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're pleased with the performance of our acquisitions which drove the increase in our guidance.

We're committed to delivering fiscal 2020 results consistent with our updated financial guidance, and we're focused on continuing to drive organic growth across all of our segments.

Second, it’s a top priority to grow our world class biologics business and effectively integrate the premier assets we're acquiring and deploy CapEx to further build out our capacity and capability to help improve the lives of patients and meet our customers demand. As demonstrated with MaSTherCell, we continue to evaluate acquisition targets.

to round out our capabilities. We look forward to continuing strong revenue and adjusted EBITDA growth from our biologic’s offerings. Third, expanding the adjusted EBITDA margin of our overall business is a key focus area for this management team, as we drive towards expanding our margins to at least 28% in 2024.

Finally, 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, the deep scientific expertise, and a commitment to putting the patient first in all we do. Thank you..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..