Ladies and gentlemen, thank you for standing by and welcome to the Catalent Fiscal 2020 Q4 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Paul Surdez, Vice President of Investor Relations. Thank you. Please go ahead, sir..

Good morning, everyone and thank you for joining us today to review Catalent’s fourth quarter and full year fiscal year 2020 financial results. Joining me on the call today are John Chiminski, Chair and Chief Executive Officer and Wetteny Joseph, Senior Vice President and Chief Financial Officer.

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 4 and 5 discuss the non-GAAP measures and our just issued earnings release provides reconciliations to the most directly comparable 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, including those related to the COVID-19 pandemic.

Now, I would like to turn the call over to John Chiminski whose remarks begin with Slide 6 of the presentation..

viral vector, nucleic acid, and protein-based. This not only illustrates our position as a go-to company for the manufacturer of potential COVID-19 vaccines and treatments, but also provides a greater sense to the wide range of products we manufacture on behalf of our customers every year.

The strategic investments we have made over the last few years, in addition to recent and ongoing investments, made in concert with certain strategic customers have enabled Catalent to be in a position to provide multi-dose vial [ph] filling manufacturing capability and capacity for potentially billions of COVID-19 vaccine doses over the next few years.

Now, I would like to provide a summary of our financial and operational highlights from the fourth quarter and full year, which are covered on Slides 7, 8 and 9.

Our revenue for the fourth quarter increased 31% as reported or 32% in constant currency compared to the fourth quarter of fiscal 2019 to $948 million, including organic growth of 22% measured in constant currency.

Our adjusted EBITDA of $267 million for the fourth quarter was above the fourth quarter of fiscal 2019 by 34% as reported or 36% in constant currency, including organic growth of 32% measured in constant currency.

Our adjusted net income for the fourth quarter was $154 million or $0.90 per diluted share, up from $0.70 per share in the corresponding prior year period.

Among the factors contributing to the strong fourth quarter results were double-digit organic revenue growth in our biologics and oral and specialty delivery segments, including 66% organic net revenue growth and 87% organic EBITDA growth in our Biologics segment, While programs related to COVID-19 created some revenue tailwinds for the Biologics segment in the fourth quarter, revenue growth in the segment when excluding COVID-19 related projects was still robust.

The Softgel and Oral Technologies segment has continued its strong performance during the pandemic, with organic revenue growth in the high single-digits in the fourth quarter.

Revenue in our Clinical Supply Services segment was flat compared to the corresponding prior year period, but significant deceleration from the mid-teens growth reported in the third quarter of fiscal 2020, but was better than anticipated as the pandemic’s disruption of clinical trials was less than expected.

For fiscal 2020, revenue and adjusted EBITDA organic growth rates came in above the high-end of our long-term targets of 8% and 11% respectively. Fiscal 2020 revenue was just under $3.1 billion and constant currency organic growth was 12% compared to the prior fiscal year.

Adjusted EBITDA was $751 million for fiscal 2020 and constant currency organic growth was 14% compared to the prior fiscal year. Notably, our integrated Gene Therapy business only contributed to our organic growth rate for the last 2 months of the fiscal year.

Before walking you through some of our operational highlights since our last call, I would like to comment on the strength of our balance sheet, which enables Catalent to flexibly invest in our business.

In June, we raised $548 million in net proceeds through our second equity offering for the fiscal year, the proceeds of which we used to repay $200 million in borrowings under our revolver that we had taken late in the third quarter out of an abundance of caution with the remainder available for general corporate purposes.

This successful equity offering combined with our strong adjusted EBITDA growth lowered our net leverage a full turn to 2.8x on June 30 versus 3.8x at the end of the third quarter with an additional $82 million of cash that was raised when the underwriter for this offering exercised its green shoe option in July.

Our current cash on hand stands at more than $1 billion. While our cash on hand position provides the flexibility to execute on strategic bolt-on opportunities that may arise, our primary plan is to use this cash to fund our growth strategy through organic investments.

Over the last 2 years, we have announced several substantial capital projects that will enable us to meet anticipated demand across our business, some of which have been recently accelerated to meet new demand created by the pandemic.

Given our strong cash position and long debt maturities, we expect to continue our elevated levels of CapEx in fiscal 2021 to enable continued strong organic growth in the future.

Our fiscal year 2021 CapEx spend is projected to be in the $0.5 billion range and is overwhelmingly directed to growth projects, particularly in our Biologics segment, including more than $150 million projects that were either accelerated for or reassigned to COVID-19 programs.

During the fourth quarter, we continue to grow and invest in our Biologics segments, including our cell and gene therapy business by integrating the premier assets we acquired and deploying our cash on hand to further build our capacity and capability.

As we have continued the substantial build-out in capacity manufacturing suites for our Gene Therapy business, we also hosted the FDA in June for the first commercial inspection of our flagship Gene Therapy manufacturing facility near the BWI airport.

Following that inspection, the site was approved by the FDA to produce commercial drug substance for AveXis’ spinal muscular atrophy Gene Therapy product.

This was a significant milestone for both Catelent and the Gene Therapy industry as a whole as we became the first CDMO to be approved by the FDA for commercial gene therapy production and we are pleased to continue to meet our commitments to support AveXis and our other customers as they deliver life-changing treatments for patients.

The Gene Therapy team has also accelerated the build out of one of the manufacturing suites located at the same facility in order to manufacture drug substance for AstraZeneca for the University of Oxford’s adenovirus vector-based COVID-19 vaccine candidate.

This dedicated suite is the fifth operational suite at the BWI site, with the remaining 5 suites expected to be ready by the end of this calendar year. And to meet the rapidly growing demand for viral vector manufacturing, our Board of Directors recently approved additional suites to be built at the BWI campus.

We plan to announce more details on this investment in the coming weeks. In February, we announced our acquisition of cell therapy leader, MaSTherCell, a complementary addition to our gene therapy capabilities.

We envisioned that the acquisition would further enhance our cross-selling opportunities across Catalent’s other advanced delivery technology platforms and our clinical supply services.

Earlier this month, we announced an expanded strategic relationship with Editas to help bring new CRISPR-based medicines to patients utilizing our gene therapy, cell therapy and clinical supply services offerings, exemplifying our ability to realize the benefits of multiple complementary offerings for our customers and their patients.

To-date, Catalent has undertaken manufacturing and related services for Editas at our gene therapy manufacturing facility in Baltimore.

Through the recently expanded strategic relationship, Catalent will provide further services to include development and manufacturing of Editas’ complex cell and gene medicines at BWI as well as the MaSTherCell facility in Houston.

In addition, our CSS segment will also play an integral part in delivering these vital therapies to clinical trial for administration patients. In all, our integrated support will range from supplying critical raw materials, viral vectors and engineered cell medicine production to storage and distribution of finished product for clinical trials.

We also continue to execute on our CapEx plans to enhance and expand our drug product and drug substance biologics offerings. As we reviewed last quarter through joint investments with J&J, we significantly accelerated our expansion plans at our Bloomington facility to meet the drug product needs for its leading COVID-19 vaccine candidates.

Over the summer, we also announced that Bloomington will provide vial filling and packaging capacity to Moderna as well to support production of an initial 100 million doses of its COVID-19 vaccine candidates intended to supply the U.S. market, with an opportunity to significantly expand the agreement.

Catalent is also providing clinical supply services, including packaging and labeling as well as storage and distribution to support Moderna’s Phase 3 clinical study for this COVID-19 vaccine candidate.

With two high-speed vial lines in Bloomington potentially dedicated to COVID-19 vaccine candidates, dependent upon regulatory approval for one or both vaccine candidates, our Board of Directors recently approved a capital expenditure to add another high throughput vial filling line at the site to support new and existing customer programs, which is expected to come online before the end of fiscal 2021.

We also plan to announce further details on this investment in the coming weeks. In Europe, we are also rapidly expanding our drug product capabilities. At our Anagni facility, we dedicated two vial lines at the site to drug product capacity for COVID-19 vaccine candidates for both AstraZeneca and J&J.

We have accelerated the rapid scale up of capacity to support the potential launch and round the clock manufacturing schedules for these vaccine candidates should either be approved.

In addition, we plan to invest in our facility in Limoges, France to create a European Center of Excellence for clinical biologics formulation development and drug products fill/finish services.

The modernization of the 180,000 square foot facility will include the installation of a high-speed flexible line capable of filling vials, syringes or cartridges under barrier isolator technology as well as enhancements to its analytical and quality control laboratories, with completion anticipated in 2022.

Our new Center of Excellence in Limoges will strengthen Catalent’s biologics global and European capacities and their ability to bring new biologic treatments to market faster.

We expect strong long-term revenue and adjusted EBITDA growth from our Biologics segment and we continue to target growing the Biologics segment to comprise approximately 50% of our total company revenue in fiscal 2024 compared to 38% in the fourth quarter of fiscal 2020, one-third of the total company revenue in fiscal 2020 and less than one quarter of our total company revenue in fiscal 2019.

I would like to close by reviewing some of our top goals and objectives for fiscal 2021.

In addition to delivering on our financial guidance, which reflects accelerated double-digit organic revenue and adjusted EBITDA growth and navigating issues created by the COVID-19 pandemic, including preparing for the new normal, we will focus on several critical components necessary to position us to deliver even better on our mission to help people live better, healthier lives.

First, our focus in our people, including their safety during times of pandemic or not and our patient-first culture are critical foundations for us. We are committed to a diverse and inclusive environment, where all employees feel valued, empowered, respected and inspired to do their best work.

By listening to our people and our customers and engaging their communities, we will build an even stronger company. Next, in order to bring the full potential of our complete biologics offering to the next stage, we will continue to integrate and invest in the Anagni site and our newly acquired cell therapy business this year.

We will continue to invest in new capabilities across the company and seek the right bolt-on acquisitions to strengthen our position as an industry-leading CDMO.

Finally, we will continue to invest in the key enablers that propels the growth of our business while also working toward the commitments made in our first Corporate Responsibility Report published this past April. These enablers include operational and quality excellence, commercial execution, science and technology, IT and talent.

As a leading global development and manufacturing partner for medicines, clinical trial materials and health products, our team – who are literally working around the clock to deliver life-saving products for our customers and patients around the world – know that our commitment to deliver on our mission has never been more important.

I would like now to turn the call over to Wetteny who will review our financial results and fiscal 2021 guidance..

Thanks, John. I will begin this morning with a discussion on segment performance, where both the fiscal 2020 and fiscal 2019 fourth quarter results are presented on the basis of the reporting segment’s we introduced at the start of fiscal 2020. Please turn to Slide 10, which presents our Softgel and Oral Technologies segment.

As in past earnings calls, my commentary around segment growth will be in constant currency. Softgel and Oral Technologies revenue of $291.2 million, increased 2% compared to the fourth quarter of 2019, with segment EBITDA increasing 4% over the same period.

After excluding the impact of the October 2019 divestiture of the segment’s manufacturing site in Braeside, Australia, segment revenue and segment EBITDA grew 7% and 6% respectively.

This organic growth was primarily driven by increased demand across the segment’s portfolio of higher-margin prescription products in North America as well as growth in the consumer health business in Europe, North America, and Latin America.

Margins in SOT and in all segments for that matter were impacted by elevated operating costs related to COVID-19, including thank you bonuses, additional protective equipment and adjusted production workflows put in place to facilitate social distancing.

Looking ahead to fiscal 2021, the SOT segment, for which we target long-term organic revenue growth in the range of 3% to 5%, will be facing a difficult comparison to fiscal 2020, as organic growth in 2020 was well above this long-term target growth range.

The contributor to SOT’s significant fiscal 2020 growth was due to increased demand in the consumer health business, which had a strong back half of fiscal 2020. To start 2021, we are seeing a trend which has been factored into our guidance for lower demand in consumer health, particularly in cough, cold and over-the-counter pain relief products.

Slide 11 shows our Biologics segment recorded revenue of $367.8 million in the fourth quarter, which is up 102% compared to the fourth quarter of 2019, with segment EBITDA growing 93% over the same period.

While the significant growth within the segment was substantially due to organic revenue and EBITDA growth, acquisitions contributed 36 percentage points to revenue and six percentage points to segment EBITDA growth for Biologics segment in the fourth quarter compared to the prior year period.

The acquisitions contributed to revenue and segment EBITDA include our initial Gene Therapy acquisition, which occurred in May of 2019, so it only contributed to inorganic growth for part of the quarter.

Our MaSTherCell Cell Therapy business, which we acquired in February 2020; and for our Anagni facility, which we acquired in January 2020 from Bristol-Myers Squibb, and part of which included an expansion of our drug product business that falls within the Biologics segment.

Note that we did and will continue to attribute all non-BMS work, including all COVID-19 vaccine projects that we brought to the facility to organic growth in this segment.

The record organic revenue growth in our Biologics segment in the quarter was in part driven by strong demand for both drug substance and drug product in North America, and these offerings also expanded margin nicely compared to the fourth quarter of 2019.

While a portion of this growth is attributable to new COVID-19-related programs, which was roughly $20 million, organic revenue growth was still over 50% excluding these projects. Another key contributor to organic revenue growth in our Biologics segment was our gene therapy business, which became part of our organic growth calculation in May 2020.

However, despite significant growth in the Biologics segment this quarter, there were several factors that negatively impacted margin contribution from segments in the fourth quarter compared to the prior year period.

In addition to elevated costs required to safely operate manufacturing facilities during the pandemic, the activities related to our continued strategic investments to build out capabilities and capacity in certain of our facilities and related headcount additions and lower margin component sourcing services, all of which we expect to drive superior future growth in the Biologics business also negatively impacted margin contribution in the quarter.

I would like to draw your attention to the bar chart on Slide 11, which shows the amount of Biologics revenue generated in the fourth quarter by development services on the one hand and manufacturing and commercial product supply on the other.

Over the last year, development revenue in Biologics has grown approximately 150% and in the fourth quarter represented over 70% of the segment’s revenue. As we noted last quarter, development programs serve as the strong foundation for future organic growth, because a portion of them will eventually move to commercialization.

However, the increase in the proportion of development revenue compared to manufacturing and commercial revenue will lead to somewhat less predictability and financial performance and greatest swings in quarter-to quarter fluctuations as we saw throughout fiscal 2020.

As we embark on fiscal 2021, we expect that global demand for COVID-19 therapies and vaccine candidates will drive high levels of demand for both drug product and drug substance manufacturing capacity in our North American and European facilities.

Looking at fiscal 2021 and beyond, we foresee that the revenue attributable to Catalent’s procurement and of raw materials and components for the manufacture of products in the Biologics segment may affect segment margin.

We currently expect the impacts of margins to increase as commercial product manufacturing volumes increase within the Biologics segment. Catalent component sourcing comes with two distinct dynamics, high revenue and low margin.

For each program sourced by Catalent, the cost of Catalent to procure the materials, components and other supplies have generally formed the substantial portion of the fee Catalent has been able to charge to our customers for these complex services.

Indeed, the margins associated with the sourcing activity are generally well below the segment average, typically averaging in the high single-digits. Note any commercial production for one or more of the COVID-19 candidates in our Biologics segments may involve sourcing and mask the margin otherwise attributable to this revenue.

Slide 12 shows that our Oral and Specialty Delivery segment recorded revenue of $218.7 million in the quarter, which is up 24% compared to the fourth quarter of fiscal 2019, with segment EBITDA, up 38% over the fourth quarter of 2019.

A portion of the Anagni facility that is part of the OSD segment contributed 13 percentage points to revenue and 9 percentage points to EBITDA growth. As discussed last quarter, Anagni’s margins are expected to be below the segment average until new customers on-boarded into the facility over time.

Organic revenue growth of 11% and organic adjusted EBITDA growth of 29% in the segment compared to the fourth quarter of 2019 were driven by recent product launches in the segment’s respiratory and ophthalmic delivery platforms, including one product where we benefited from product participation components.

As a result of the COVID-19 pandemic, there is a general increase in demand for respiratory products. In addition to the contribution from our respiratory and ophthalmic business, the segment also benefited from strong end-market demand for all commercial products across our Zydis fully dissolving tablet technology platform.

The OSD segment continues to have a strong development pipeline that is expected to drive future long-term growth.

In order to provide additional insight into our long-cycle segments, which includes Softgel and Oral Technologies, Biologics and Oral and Specialty Delivery, each quarter we disclose our long cycle development revenue in the current year.

In fiscal 2020, we reported development revenue across both small and large molecule of $1.02 billion, which is 59% of both the development revenue recorded in the fiscal 2019 and represents 33% of our revenue compared to 25% in fiscal 2019.

In addition to our quarterly disclosures of development revenue, we also provide the total number of new product introductions as well as revenue from these NPIs in the current year. We introduced 163 new products in fiscal 2020, which contributed approximately $51 million of revenue in fiscal 2020.

As a reminder, these metrics are only directional indicators of our business since we do not control the sales and marketing of these products and we cannot predict the ultimate commercial success of them.

Now, as shown on Slide 13, our Clinical Supply Services segment posted revenue of $83.6 million flat over the fourth quarter of the prior year and segment EBITDA of $21 million or 6% decline.

As noted last quarter, we saw accelerated backlog burn for our storage and distribution services in the early stages of the pandemic as some work was pulled forward from the fourth quarter by our customers.

In the fourth quarter, the disruption of clinical trials due to the COVID-19 pandemic impacted the distribution and packaging businesses, but this was partly offset by growth in the storage business. As with the other segments, elevated costs related to the pandemic also impacted CSS margins.

As of June 30, 2020, our backlog for the CSS segment was $425 million, up 7% from $396 million at March 31. The segment reported net new business wins of $104 million during the fourth quarter, a 10% increase compared to the fourth quarter of the prior year. The segment’s trailing 12-month book-to-bill ratio remained at 1.1x.

We are seeing a return towards more normal levels of demand for our clinical supply services following global lockdowns experienced earlier this calendar year in addition to new clinical trials related to COVID-19 therapy and vaccine candidates. As a result, we expect the CSS segment to resume growth in fiscal ‘21.

Although it is not expected to be a noteworthy contributor for CSS growth in 2021, our July 1 acquisition of Teva Takeda Pharmaceuticals’ clinical packaging facility in Shiga, Japan will add to our clinical trial capability and growth in the Asia-Pac region as it builds the customer base over time.

Moving to company-wide adjusted EBITDA on Slide 14, our fourth quarter adjusted EBITDA increased 34% to $267.4 million or 28.2% of revenue compared to 27.5% of revenue reported in the fourth quarter of fiscal 2019.

On a constant currency basis, our fourth quarter adjusted EBITDA increased 36%, including 32% organic compared to the fourth quarter of fiscal 2019. Fiscal 2020 adjusted EBITDA increased 25% to $750.9 million or 24.3% of revenue compared to 23.8% of revenue in fiscal 2019.

On a constant currency basis, fiscal 2020 adjusted EBITDA increased 26%, including 14% organic compared to fiscal ‘19. On Slide 15, you can see that fourth quarter adjusted net income was $154.4 million, or $0.90 per diluted share compared to adjusted net income of $102.9 million or $0.70 per diluted share in the fourth quarter a year ago.

Fiscal 2020 adjusted net income was $349.8 million or $2.11 per diluted share compared to adjusted net income of $264.9 million or $1.81 per diluted share in fiscal ‘19. Slide 16 shows our debt related ratios and our capital allocation priorities.

As John mentioned earlier, since our last call, we raised net proceeds of $548 million through a common stock offering in June. We used $200 million of the proceeds to repay borrowings we had made in abundance of caution in the early days of the pandemic under our $750 million revolving credit facility.

The remainder was added to our balance sheet for general corporate purposes, including funding our organic growth plans and possible future M&A activity. After the end of the fourth quarter, the underwriter exercised its greenshoe option, generating a further $82 million of net proceeds, which we again added to our balance sheet.

Our cash and cash equivalents balance at June 30 was $953 million compared to $608 million on March 31 and $345 million at the end of fiscal ‘19. As of today, our cash and cash equivalents are over $1 billion.

The June equity offering and our growing adjusted EBITDA drove our net leverage ratio down to 2.8x at June 30, a full turn lower than the 3.8x at March 31, 2020 and compared to 4.4x at the end of fiscal 2019. As John discussed, we are lowering our long-term net leverage target to 3.0x compared to our previous target of 3.5x.

Moving on to capital expenditures in fiscal 2020, our total CapEx was $466 million, representing approximately 15% of revenue before customer contributions, roughly double our historical levels of spending as we build out our capability and capacity for our service offerings, particularly within the Biologics segment.

We expect capital expenditures as a percentage of revenue to remain at elevated levels for the next 2 years as we continue our organic growth plans. In fiscal 2021, total CapEx is expected to be approximately $500 million or roughly 14% of the midpoint of the guidance range we are providing today regarding our fiscal 2021 revenue.

CapEx for our COVID-19 related programs, including those reassigned or accelerated from previous plans is expected to be in excess of $150 million.

Free cash flow in fiscal 2020 was approximately negative $50 million due to our increase in CapEx spending and the cost of new pandemic related precautions such as increased inventory levels and other supply chain mitigation efforts, which more than offset the high level of EBITDA generated in the year.

Free CapEx cash flow was $415 million in fiscal 2020, a 44% increase year-on-year despite working capital headwinds related to supply chain mitigation. In fiscal 2021, as a result of our continued expansion plans and risk mitigation efforts for our supply chains, we again expect free cash flow to be much lower than historical levels.

Given investor interest in our capital expenditures, I want to repeat some general comments regarding the composition of our CapEx that I made last quarter, which generally fall into three categories. First, roughly 3% to 4% of revenue spent every year to maintain our facilities and to meet the rigorous regulatory requirements for GMP manufacturing.

Second, based on our insights regarding our basket of development programs and careful consideration of long-term expected demand, we build capacity with high confidence that a substantial portion of new capacity will be engaged to meet expected customer demand.

Finally, due to the natural attrition inherent in pharmaceutical development programs, we typically protect our interest and do not invest capital speculatively for individual product launches, but we generally do not deploy our own capital to meet the anticipated needs of a single product.

When we do, we require a mix of customer contributions and take-or-pay arrangements to offset the risks associated with any single product. Now, we turn to our financial outlook for fiscal 2021 as outlined on Slide 17. The assumptions underlying our guidance include the following elements.

First, we assume no major external change to the current status of the COVID-19 pandemic and its effects on our business. Second, we are not assuming that any of our customers’ COVID-19 vaccine candidates will get FDA or other regulatory approval.

However, we are including the effect of all executed take-or-pay arrangements, so revenue from any commercial volume of approved products that is at or below the take-or-pay levels would be already factored into guidance.

Third, revenue from pre-existing acquisitions is projected to represent approximately 2 percentage points of our projected revenue growth for the year. Regarding Anagni revenue, remember that only revenue in the first two quarters and only from work for BMS is considered inorganic since we acquired Anagni on January 1.

Fourth, as with past years, we continue to expect revenue and adjusted EBITDA to be weighted more heavily towards the back half of the fiscal year.

However, current forecast expect this to be somewhat less pronounced in fiscal 2021 given the revenue for programs related to COVID-19 therapy and vaccine candidates that will materialize in the first half of the fiscal year.

Finally, we expanded our ranges this year compared to past years to account for the increased uncertainty introduced by the COVID-19 pandemic, including the uncertainty regarding the future course of the COVID-19 response products we are working on.

After taking these assumptions into account, we expect full year revenue in the range of $3.45 billion to $3.6 billion, representing growth of 12% to 16% compared to fiscal 2020.

We attribute approximately 5 to 7 percentage points of the revenue growth for COVID-19 related revenue after factoring in the amount of executed take-or-pay agreements against other work that would likely have been placed in the same space as well as estimated loss revenue in parts of the business due to the COVID-19 pandemic, such as distribution revenue in our CSS segment.

For full year adjusted EBITDA, we expect a range of $840 million to $890 million, representing growth of 12% to 19% compared to fiscal 2020. We expect full year adjusted net income of $390 million to $435 million, representing growth of 11.4% compared to fiscal 2020.

We also expect our fully diluted share count on a weighted average basis for fiscal 2021 will be in the range of 178 million to 180 million shares. This projection counts our Series A convertible preferred shares as if all were converted to common shares in accordance with their terms.

We expect our consolidated effective tax rate to be between 24% and 26% for the fiscal year. Operator, this concludes our prepared remarks and we would now like to open the call for questions..

Thank you. [Operator Instructions] And our first question today comes from the line of Daniel Brennan from UBS. Your line is open..

Great. Thank you. Thanks for the question and congrats guys on a strong quarter and managing a lot of things here, but really exciting. I guess my question is going to focus in on the Biologics side of the equation. I know, Wetteny right at the end there, you discussed implicit – in the fiscal ‘21 guidance I think you said 5 to 7 points from COVID.

I was hoping maybe you could then – because I haven’t done the math yet, I was hoping maybe you can give us a sense of what’s baked in within your fiscal ‘21 guide for Biologics? Could you just separate out what the impact is from COVID and from the base business? And could you also maybe walk us through on drug product and drug substance as well from COVID like how we are thinking about those? And then related to that, you discussed, I think 100 programs that are in – that you are in discussions with.

And you also mentioned that you’re not baking in any impact obviously from successful vaccines.

But any way to think about, as we begin to get data in over the coming months here on some of your bigger programs, how do we think about as these programs transition from the development side to the commercial side and what that impact could be? Thank you..

what happens with any potential successful programs from a regulatory approval perspective? It is not that our guidance does not include any amounts for those programs it is that our guidance factors in take-or-pay contracts within the current fiscal year for programs regardless of whether they are commercially approved.

And so, if there is a commercial approval and depending on the volumes for that and the timing of that approval – of such approval, if the demand or volumes are at or lower than the take-or-pay would require, then there would be no further adjustment to our guidance.

Should the – should an approval come through and the volume is above the take-or-pay, clearly, that would have potential upside to what we have discussed, all else being equal of course across the business. And so that’s just one clarifying point I want to make around your question in terms of successful – if there is a successful program on that..

Okay, great. Thank you, guys..

And our next question comes from the line of Tycho Peterson from JPMorgan. Your line is open..

Hey, thanks. Another follow-up on the COVID, particularly on the vaccine opportunity, obviously the FDA is talking about bypassing Phase 3 going straight to EUA for some of the vaccine programs.

I am just wondering how you would manage that dynamic to the extent you are involved with any of those programs in terms of scale up?.

Yes. Look, I mean, this is really something that’s more for sponsors.

The various companies we are working with, John highlighted work we are doing with various, 3 of the 4, I would say large programs that are being pursued, we are engaged with our sponsors on and the regulatory pathway is really dependent on their work with the regulatory agencies, whether it’s the FDA or others around the world.

So, we won’t necessarily comment on that. What I would say is that we are working around the clock both in the U.S. as well as in Europe to ready our capacity and resources and ramping up to be in position to execute and manufacture with the same rigor in terms of quality that we do with every product to deliver when that – and if that time comes..

And then on the guidance, Wetteny, just two quick follow-ups on Softgel, you are kind of guiding to flattish growth there reflected by the comp, but also slower demand for consumer products.

I am wondering why that wouldn’t pick back up in the fall with flu season and maybe another wave of COVID cases? And then on CSS last quarter, you talked about a surge in storage and distribution services.

I am wondering to what extent that’s carrying through and then as clinical trials pick back up, to what extent CSS could see some recovery? Thanks..

Yes. So within Softgel and Oral Technologies as we reminded at the beginning of last fiscal year, we did adjust our segments, and so there are some non-Softgel elements in that segment. We are, first of all, very pleased with the growth the business posted in fiscal ‘20.

As a reminder, our Softgel business – Softgel and Oral Technologies rather delivered 8% organic growth. Our expectation for the business long term is to be in the 3% to 5% range. So, first thing I would say, SOT is up against some relatively difficult comparison in the prior year.

In terms of what we would expect in terms of the fall, what we are actually seeing is to some extent perhaps related to social distancing, etcetera, the cough and cold season, we’re expecting to be a little bit lighter than you would normally see, and that’s what we reflected in our prepared commentary here as far as expectations for the business.

Again, the reminder is that long-term we expect 3% to 5% growth for this segment, which has posted well above that in the year which just ended, and we are anticipating some of this headwinds as we described for the current year, and we will look as we execute throughout the year how that goes, but all that’s already factored into our guidance in terms of what we laid out today for the overall company.

For CSS, at the onset of the pandemic as customers anticipated lockdowns in various locations, they actually accelerated some of the execution of work, particularly for distribution work to get products out into the clinics for patients. We saw that drive double-digit top line organic growth for the business in our fiscal third quarter.

And as we said on the last call, we saw bit of a reversal of that in the fourth quarter. I would say, the business ended better than we anticipated for the fourth quarter and we are starting to see a trend towards more normal levels although not quite at pre-pandemic levels yet.

And we also are benefiting from some of the work that the segment is doing on the larger COVID-19 programs as John alluded to in the prepared commentary.

So, we are seeing a return to growth in this fiscal year from this segment and we are also as you saw in terms of the backlog and book-to-bill ratios, etcetera, I would say the business is positioned well for future growth given our signings and new business wins that we have recorded in the segment..

Okay, thank you..

Our next question comes from the line of Dave Windley from Jefferies. Your line is open..

Hi, thanks. Good morning and congrats on a great quarter.

Maybe a two-parter on the COVID vaccine related activity, I am wondering if you could clarify whether the – Wetteny, to your point on the take-or-pay arrangements, should we think about those as roughly paralleling what the government stockpiling orders might look like? And then secondly, as a related kind of broader question, do you – would you have the capacity in so much as you’re putting more CapEx against capacity – it sounds like in Bloomington, do you have the capacity to support additional large programs in your facilities beyond the three that you’ve highlighted this morning? Thanks..

Sure, Dave. First of all, I wouldn’t necessarily draw a – derive a specific correlation to the government stockpiling approach. These are reflecting contracts, although we won’t talk about any specific ones, but overall contracts we have directly with our customers.

As I mentioned in terms of our approach for capital deployment, we have either redirected accelerated or otherwise earmarked capacity for our production and we are ramping up resources to do so.

And therefore, we want to make sure we protect those capital deployments to make sure that we ensure return from those and have entered into contracts that have certain take-or-pay arrangements for customers that would say we would receive a certain minimum volumes accordingly.

And so, those are what we’re alluding to in terms of the COVID-vaccine programs. To the latter part of your question around whether we have additional capacity; first of all, we have 1,100 development programs across the company, across all of our segments that we’re working on and some of which are late fees.

There are programs that have recently been launched to commercial that we have commitments with our customers to make sure that we have the capacity – not just in Biologics but elsewhere – to make sure that we’re able to deliver on those commitments.

As John alluded to, the Board has recently approved additional capital, not only for gene therapy, but also in our, obviously, base Biologics business, which we will detail in the coming weeks, but also to make sure that either non-COVID related programs, again, that are in our pipeline or otherwise, we have capacity to do or if there are more programs including out of the 100 or so that we are still in active dialog with our customers on, if any of those should be contracted that we will be able to be in position to deliver on the commitments that we’ve made accordingly.

So, it’s – we can’t predict exactly what or when, potentially who it may happen. But certainly, we are working throughout our business segments to make sure that we have the capacity to necessarily deliver for customers and patients..

Okay, thank you..

Our next question comes from the line of John Kreger from William Blair. Your line is open..

Thanks. Hey, Wetteny, could you just go back and clarify some of the margin comments you made around the Biologics segments? What is your outlook for EBITDA margins in fiscal ‘21 and longer term given some of the puts and takes you have got? Thanks..

So, just to clarify my points in terms of how the margins for fiscal ‘20 which just ended, and again, I won’t give specifics in terms of margin expectation for a segment for a given year, but I will repeat what our expectations are overall for the Biologics segment going into the future.

When we peer back and look at fiscal ‘20 margins within the segment, there are three main themes that you’re going to see. First, overall margins in the segment declined for the year as we are deploying and expanding in our, particularly from the acquisitions that we have made.

As we said at the onset, within our expectations, our cell therapy acquisition is expected to be margin dilutive in the first few years. We expected our Anagni acquisition, which is partly in Biologics, to also be margin dilutive, but clearly strategically important and well-positioned to drive growth in the fiscal year and beyond.

And so, we believe long-term, those were the right moves for the business.

So, if you parse out the impact of – and not to mention in our Gene Therapy business as we are ramping up significantly, not only CapEx to build out the suites, but also the highly skilled employees that are needed across our Biologics segment in particular to be able to execute on that added capacity and expansion is frontloaded, if you will, ahead of the volumes that they will be executing on.

So, those are all deliberate moves that we are making that had an impact on overall margins of the business.

If you separate out and look at our organic execution across the business, in Biologics, I would say margins were slightly negative to the tune of about 30 basis points and that’s largely due to component sourcing that we are seeing start to increase in the business as we execute on larger programs, commercial programs.

And so component sourcing are materials that we buy on behalf of our customers to go into production, we see that as all else being equal additive to the base services and manufacturing that we do at very high margins for the business and I will get to long-term expectations before I wrap up the answer to this question.

And so if you look at our services that we perform excluding component sourcing, margins actually in the segment extended to the tune of about 125 basis points – 125 to 130 basis points expansion if you look at the base Biologics business, excluding acquisitions and including the impact of component sourcing.

So, as we go forward, again, we are anticipating both in our base Biologics as well as any potential large volume commercial production for COVID-19 programs, we believe those will potentially come with more component sourcing, which we see that as an additive element again all else being equal adding to both revenue and EBITDA are clearly in the high single-digit margin for component sourcing that will be masking what is – what I just described, which occurred in fiscal ‘20, which is the base business actually expanded its margins over 100 basis points yet the overall margin picture looked like it was negative organically.

So, that’s what we are trying to convey. Long-term, the Biologics business, given the complex nature and the premier assets we have in sterile fill/finish, this is a business that can sustain margins again for our core services in the 30% – mid-30s range.

That’s our long-term expectation for the business and we are very pleased with the execution on that front and we will continue to take advantage of the opportunity to deliver additional revenues, whether its component sourcing or otherwise albeit masking what underneath is a very healthy margin picture..

That’s helpful. Thank you..

And our next question comes from the line of Juan Avendano from Bank of America. Your line is open..

Hi, thank you. My question is on capacity and I would appreciate a quantitative answer as much as possible.

And so what was your total fill/finish capacity in Bloomington in 2019 that is excluding the capacity expansions that are ongoing? How many doses did you make last year? And second, what is your anticipated total fill/finish capacity across Bloomington and Anagni, including the capacity expansions and ramp-up activities that are taking place right now? And so, I am interested in the fill/finish dose run-rate that you anticipate to have by the end of fiscal year ‘21?.

First of all, Juan, what I would say is I won’t give you that level of specificity in terms of the fill/finish capacity, where as we have said – as you mentioned Bloomington, in particular, we now have Bloomington as part of the Catalent family since October 2017 and over that period of the time, we have seen an increase in terms of the utilization of our capacity, whereas initially we were in the 40% range.

We have added more shifts to our operations to access that capacity even more so and yet over that time period, we have gone all the way to around 75% utilization of that capacity, but we also, a year and a half ago, announced expansions that are well underway and have actually been accelerated in order to meet the demands for potential commercial volumes for COVID-19 programs.

So, we are very pleased with how the business is executing, the progress that we are making on the expansion that will continue to meet our customers’ demands albeit also with various take-or-pay arrangements, that again protect our investment.

So, without giving you specific fill/finish capacity, what I would say is, in terms of the commitments we have made to our customers and the pipeline that we have that we are working with of development programs, we are comfortable and confident with our ability to meet those demands, as well as overall growth that we see in the pipeline broadly with respect to Biologics.

Let me just add one – a couple of more things. In our prepared commentary we talk about the Anagni facility, which was added to Catalent in the middle of fiscal 2020.

As you know, when we buy facilities, which – from pharma, it typically comes with a fair amount of capacity which is why we said we expect the business to be at the lower range of margins initially, but position us well as we add other customers to the facility.

And clearly, that’s happening with respect to the programs that we are working on now for COVID-19 specifically, but not exclusively as we continue to pursue additional customers to go into facility. And last but not least, we also announced the addition of fill/finish your product capacity for Limoges, France facility in Biologics.

So as you can see, throughout three of our premier centers of excellence across Biologics, we have expansion plans on the way to add capacity to meet customer demands and we will continue to monitor both our pipeline that we have as well as the broader market demand here to make sure we are in position given our premier assets to capitalize on demand from our customers..

Alright. Thank you..

And our next question comes from the line of Jacob Johnson from Stephens. Your line is open..

Hey, thanks. Congrats on the strong 4Q, and clearly a lot of exciting things going on at Catalent. Maybe on the non-COVID front, Paragon largely focused on AAV today.

But are there any other cell and gene therapy capabilities you would like to add to either Paragon or MaSTherCell? I guess, maybe any thoughts on plasmids sort of lentivirus vectors in particular, and are these capabilities that you think you could add organically or could this be an area for bolt-on M&A?.

Yes. So, thanks, Jacob, John here. So first of all, I just want to say we have really acquired some premier assets in Paragon and MaSTherCell, really giving us an incredible entry into this very fast-growing area, where literally we are going to be manufacturing miracles.

And I am very proud to say that in our Paragon facility, we are the first CDMO approved by the FDA for gene therapy commercial manufacturing. So, I think Catalent is in a terrific position.

I also mentioned that Paragon has been in the business of vaccine development and using, I would say, multiple platforms for many years before they focused on the AAV platform.

But as we move forward and now that we have the acquisition of MaSTherCell – clearly, the ability for us to get into – to grow our capabilities from a lentivirus standpoint are there, because as you know, for cell therapy, lentivirus is more of a preferred platform.

So again, we see the synergies between our gene therapy business and also our cell therapy business. Also, looking very closely at and doing work to develop our own capability for plasmid DNA development and manufacturing, this is a key source component, as you know, for gene therapy.

And we clearly have the capability for that in-house and our ability to control that raw material is going to be important.

So, I would just say, in general, Catalent has a very robust science and technology roadmap that envisions further expanding our capabilities in the gene and cell therapy areas to include other viral vectors and also include plasmid DNA..

Great. Thanks, John..

Our next question comes from the line of Ricky Goldwasser from Morgan Stanley. Your line is open..

Yes. Hi, good morning.

Can you just kind of guide us to how should we think about the cadence of earnings in fiscal year ‘21? And when we think about the high and low end of the guidance range, it’s broader than historically, considering that there is no upside or that there is optionality associated with the vaccine and that there is more visibility associated with the pay and play.

What are you factoring into low-end of the guidance versus high-end of the guidance?.

Ricky, this is Wetteny here. In terms of the cadence, we alluded to first half, second half. But I think the core of your question is really in terms of the range. We came out with a wider range than typical. Clearly, we are still in an active pandemic, which remains fluid.

As John alluded to in his prepared commentary, we have put a number of actions in place to plan and mitigate any potential issues around our supply chain, but we have to remain somewhat cautious in terms of continuing to execute across those.

The other point I would make – two more points, Ricky, on this is, as you saw, our development revenues are an increasing percentage of the overall revenue base, which tend to drive a little bit more variability compared to commercial revenue. So, we do take that into consideration, and particularly in the Biologics segment.

Certainly, as we discussed, what we have included here from a COVID-19 program perspective are purely the take-or-pay.

So, clearly, that gives a certain level of certainty within the range around our ability to deliver the results that we have highlighted in our guidance range here, but we are also coming off of a year – just to remind you, for overall Catalent for fiscal 2020, organic top line growth was 12%, well above the 6% to 8% range that we have discussed.

So, we were off, I would say, against tougher comps. In that regard, we are very pleased to be in position to deliver solid growth again in fiscal ‘21 between 12% and 16%, depending on where you fall on the range. So, we have a wide range for a reason.

No point in that range anymore, I would say, higher probability than any other, hence the reason for range. I would say, within the COVID-19-related piece that we highlighted 5% to 7% versus the overall range, they are not necessarily correlated.

So, the high end of the COVID-19 range doesn’t necessary correlate to the high end of the overall company range, so we are going to fall anywhere in that regard.

The last point I will make, Ricky, is, it’s very – we are not giving any specific estimation to look across 7,000 products that we supply in the market in terms of any potential impact those may have in terms of demand across the marketplace. We discussed the SOT segment in terms of consumer health.

We will see little bit of slowdown compared to where the business posted in fiscal ‘20 which are well above the long-term range that we have discussed. So, all of those things are factored into the guidance. And we are still early yet in the fiscal year, so we will continue to look at how the year is executing as we go forward..

Thank you. And can I just have one follow-up, when we think about the potential opportunity with vaccine, should we look at what the manufacturers are saying, should we, as it relates to you guys, think about the U.S.

quantities or global?.

I would say, look, as we have highlighted and John covered, we are doing work across the board, the U.S. and Europe for our sponsors, those companies that we highlighted, plus the ones that we haven’t also specifically put any sort of announcements on.

As a reminder, we signed 50 programs both on the therapy side as well as on the vaccine side and those will be global in nature across those. We are doing work in the U.S., for both U.S. and outside the US, as well as in Europe for Europe and outside Europe.

So, I would look at those numbers as more global in nature, not necessarily for each and every customer global, but across some of the larger programs..

Thank you..

Our next question comes from the line of Donald Hooker from KeyBanc. Your line is open..

Great. A lot of information provided here. I will sort of ask a simple one. You may have hit this, but just scribbling down notes here, keeping up with your comments. In terms of the debt target, it looks like you took down your debt target to 3x. You have done a good job taking that debt ratio down.

Can you elaborate a bit on sort of the thinking behind reducing that net debt ratio target?.

Sure. Don, look, certainly, we have listened to our investors in terms of their look on capital structure and debt levels. We have been very pleased with the successful equity raises this past fiscal year and well positioned with the net leverage ratio at 2.8x as we sit today.

I also think it’s a reflection of the maturity of the company as we continue to grow and have the ability to execute on organic as well as inorganic opportunities that we are in position to set a long-term target of 3.0x.

As in the past, we would take that leverage up to execute on inorganic strategic acquisitions of course, as long as we have visibility into getting back to that long-term target within a certain timeframe, which typically we look to – to be able to be in position to do so within about an 18 months to 24 months period.

So, our long-term target at 3.0x, we will pick that up temporarily to execute on strategic acquisitions. Clearly, you can see what that implies to the firepower from where we sit today for any potential inorganic opportunities, but certainly well positioned to execute on the organic ones as well.

But we are pleased to be able to take that long-term target down from 3.5xto 3.0x..

Thank you..

Our next question comes from the line of Sean Dodge from RBC Capital Markets. Your line is open..

Thanks. Good morning.

Maybe going back to margins, Wetteny, can you put some bookends around the magnitude of the COVID-related costs you are incurring right now and not necessarily the investments you are making to ramp the manufacturing vaccines, but I am thinking more of the elevated cost to operate facilities and then the things like the Thank You bonuses? And then any thoughts on when or if we should expect to see those begin to unwind?.

Sure. Look, as John alluded to both this time and last quarter, we had about $5 million in the first thank you bonus round and an incremental $9 million now in this second round of thank you bonuses to our employees. We won’t put specific bounds around what the rest of the cost might be around the network from COVID-19.

We have made adjustments to our shifts and work approaches to ensure that our employees are safe and have social distancing between them. Certainly, those have applications. Additional PPE that we are buying and using in execution of our work across the network have an impact as well.

But I would say there are some items that go the opposite direction too. For example, less travel and entertainment, means lower cost for those. And in some instances, you may see lower cost of health and welfare too. So, it’s not all going in one direction. I would say the one piece we have quantified is the Thank You bonuses.

I would say the rest also would fall in net cost, but there are some offsets as well as I just gave you some examples..

Got it. That’s helpful. Thank you..

Our next question comes from the line of Jack Meehan from Nephron Research. Your line is open..

Thank you. Good morning. I had two follow-ups on COVID-19. In the near-term, you are trying to compress what usually would be years of work in just a few quarters.

So, I was curious how you feel about the efficiency at the rate at which you are scaling up these vaccines and what impact that might have on the margins in the way you have contracted? And then longer-term, we have also accelerated a lot of investment just to support some of these projects. So, I know you just recently raised your long-term targets.

But I was wondering how you feel about the durability of some of the revenue contribution you are seeing in the near term and what that might mean for the longer-term trajectory?.

Sure. Look, first part of your question, Jack, in terms of efficiencies, clearly, we at Catalent have large scale capacity, where we deliver over 70 billion doses a year and various programs depending on the length of runs etcetera., can have positive effects on our margins.

The bigger the program, the longer the runs, etcetera, naturally inherently are, so to the extent that we get to a point where we are manufacturing large volumes of any program, whether it’s COVID-19 or not, it would have positive implications.

But also keep in mind, there are development activities that we are engaging in currently that don’t necessarily lend themselves to that same level of, I would say, operating throughput. So, I think, on balance, these programs would feel a whole lot like most of the work we are doing in this space versus anything nuanced in that regard.

But certainly – but again, if there are certain approvals that drive high level of throughput in a short period of time, those could be beneficial in terms of operating throughput.

In terms of investments, acceleration of those, of course, they will have a – we have highlighted the impact it will have on free cash flows etcetera., and that we will be well positioned both to deliver the growth expectations we have across the company, but also across Biologics.

As a reminder, for the company, our long-term growth rate is 6% to 8% with Biologics being in the mid-teens in terms of long-term. You have seen us posting numbers above that in fiscal ‘20.

And given the tailwind related to the COVID-19 programs and other baseline programs we are doing, our business is positioned well to deliver on those kind of numbers or above. But looking at long-term targets that we have, those are sort of 5-year type targets that we have in terms of long-term.

And while we are positioned to deliver as a go-to company here related to COVID-19, in particular, with a very healthy pipeline, 1,100 development programs; certainly, especially while we are still in the midst of a pandemic, it is not the time that we would be taking another look at our long-term target of 6% to 8%, which we believe is well supported given the base assets that we have and the investments that we are making..

I would now like to hand the call back over to John Chiminski for closing remarks..

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

First, the transformative acquisitions we made over the last several years combined with our strategic internal growth investments across the company, let us to deliver double-digit organic revenue growth in fiscal 2020 and also positioned us to forecast another year of double-digit organic revenue growth in fiscal 2021.

Next, continuing to build out our world-class Biologics business and integrating the premier assets we have acquired remain a top priority. The COVID-19 pandemic has increased the demand for these offerings and led us to accelerate and reassign some of our CapEx plans to meet these customer and patient needs.

We continue to expect strong revenue and adjusted EBITDA growth from our Biologics segment and target the Biologics segment to make up approximately 50% of our total revenues in fiscal 2024 versus approximately one-third of revenue in fiscal 2020.

Finally, our mission to develop, manufacture and supply products that help people live better and healthier lives has never been more important.

It all starts with our 14,000 employees who live our patient-first culture and have worked hard to carry out the great responsibility we have to maintain business continuity for all those counting on us to deliver, be it for potential COVID-19 vaccine or treatment or the 70 billion doses we produce every year across thousands of our customers or their products.

Thank you..

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