Ladies and gentlemen, thank you for standing by and welcome to the Catalent, Inc. First Quarter Fiscal Year 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions].

Please be adviced that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Surdez, Vice President of Investor Relations. Please go ahead, sir..

Good morning, everyone, and thank you for joining us today to review Catalent's first quarter 2021 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 the 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.

Please also refer to Catalent's Form 10-Q regarding 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 prepared remarks are covered on Slides 6 and 7 of the presentation.

John?.

Thanks, Paul, and welcome, everyone, to the call. Before diving into the first quarter results, I want to remind you that our top priority during the COVID-19 pandemic continues to be keeping our employees safe and maintaining business continuity.

I'm proud of our teams for literally working around the clock to deliver high quality products and services including potential COVID-19 therapies and vaccines for our customers and our patients around the world.

I'm pleased to report we had a very strong start to fiscal 2021, which when combined with the higher levels of net demand we now expect for the back half of the year, led us to raise our fiscal 2021 revenue expectation by $130 million to $180 million and our adjusted EBITDA expectation by $40 million to $60 million. In the first quarter.

our constant currency revenue growth was 26% year-over-year, of which 20% was organic. As a reminder, we also reported more than 20% organic year-over-year revenue growth last quarter. Adjusted EBITDA of $174 million represents constant-currency growth of 35% over the first quarter of fiscal 2020, including organic growth of 23%.

Our adjusted net income for the first quarter was $78 million or $0.43 per diluted share, up from $0.26 per share in the first quarter of fiscal 2020.

The Biologics segment was by far the strongest contributor to our first quarter results as net revenue doubled over the first quarter of fiscal 2020 including 83% organic growth with margin expansion of more than 900 basis points to 28.2%.

While projects related to COVID-19 were a notable contributor to our Biologics segment growth similar to last quarter, underlying demand across the segment's offerings was very high even when excluding these projects.

Biologics continues to become a more meaningful contributor to our growth profile with the segment contributing 44% of the company's revenue in the quarter compared to 28% in the first quarter of fiscal '20.

Also adding to the quarter's performance was the Clinical Supply Services segment, which showed revenue growth after a dip in the fourth quarter of fiscal 2020 when COVID-19-related clinical trial disruptions were most abundant.

The top line growth in these two segments more than offset headwinds experienced in the Softgel and Oral Technologies and Oral and Specialty Delivery segments.

In Softgel and Oral Technologies, consumer health products had a slow start to the year, which we attribute in part to a decrease in occurrence of common flus and colds due to limited travel and social gatherings worldwide. Softgel and Oral Technologies also experienced a decrease in revenue for prescription products in North America.

Looking ahead, we believe that some of the products we manufacture that were approved earlier this year, experienced muted launches due to the COVID-19 pandemic.

We expect these products and other planned launches will see increased demand and will contribute more in the second half of the fiscal year leading Softgel and Oral Technologies to better performance than the first half.

For Oral and Specialty Delivery we saw continued revenue growth and new product momentum in our Zydis platform, which was offset by a decrease in early phase development activity due to pandemic-related mitigation efforts, including lockdowns experienced worldwide.

We continue to be very optimistic for long-term growth in the OSD segment given its 200-plus molecule pipeline, including the new novel Zydis Ultra technology, which will enable higher drug loading into each Zydis tablet.

We believe that the Zydis Ultra platform, after its commercial launch in the 2022 to 2023 time frame, will drive significant volume growth and can potentially lift the franchise to over 2 billion doses per year compared to the current annual run rate of approximately 1.4 billion.

I'd now like to provide you with a brief update on our COVID-19-related programs as Catalent continues to be a go-to company for potential COVID-19 therapies and vaccines. We've now been awarded work on more than 60 COVID-19 related compounds, including the three Operation Warp Speed Vaccine programs we previously highlighted.

We're actively working on projects across all four of our business segments with some compounds involved in projects across multiple offerings. The strategic investments we've made in biologic's capability and capacity over the last few years, including the $200 million capital additions to our U.S.

drug product and drug substance capacity we began in January of 2019 and our acquisition of the Anagni facility, were well timed to enable us to address the increased demand we are seeing from the combination of our ongoing business and our COVID-19 therapeutic and vaccine candidates.

This incremental capacity in our multi-dose vial filling manufacturing capability has facilitated our ability to manufacture potentially billions of COVID-19 vaccine doses over time while continuing work on behalf of other customers.

Our response to our customers' needs has not only raised our profile with both large pharma and biotech customers, it has also resulted in an acceleration of our strategic capacity expansion plans, which will help to support the achievement of our long-term growth targets.

To better enable us to serve all of our customers during this period of accelerated demand we recently made two additional drug product investments in Bloomington, Indiana. The first is the addition of a $50 million high-speed vial filling line that will supplement our current capacity.

Given our experience in facility and capacity expansions, we expect to accelerate this project from a typical 18-month time frame to approximately 10 months in total. We expect to bring this new high-speed vial line into our operations in the fourth quarter of fiscal 2021 to support the growing pipeline of commercial launches at the site.

The second drug product investment is the acquisition of a 23,000 square foot manufacturing facility three miles away from our Bloomington campus, where we will create a North American Center of Excellence for early phase clinical Biologics formulation development and drug product fill-finish services.

This $14 million investment, which includes the acquisition, build-out and qualification of the facility is expected to begin supporting customer programs starting in January.

The facility will enhance our OneBio drug development offering as it includes a new flexible filling line ideal for enabling rapid changeover for greater efficiency in the manufacture of clinical batches.

We also recently announced the expansion of our gene therapy campus near the BWI airport to support our growing customer pipeline and increased market demand for gene therapy products, which includes an overall investment of approximately $130 million to add five additional Phase 3 and commercial-scale manufacturing suites as well as cold-storage warehousing in the first half of calendar 2022.

When this project is completed, the BWI campus will house a total of 15 gene therapy manufacturing suites, each designed to accommodate multiple bioreactors for commercial supply.

As we highlighted last quarter, the first facility on the campus was recently approved by the FDA for commercial manufacturing and we expect to have all 10 CGMP suites qualified and operational in the next few months.

Five of these suites are already qualified and operational including one suite where we accelerated start up during Q1 in order to provide drug substance manufacturing to AstraZeneca for the University of Oxford's adenovirus vector-based COVID-19 vaccine candidate. We are also expanding our footprint in cell therapy where we opened our U.S.

clinical facility in Houston earlier this year and we continue to build out our commercial-scale production and fill-finish facility in Gosselies, Belgium, which is scheduled to open in late fall 2021.

In addition, last week we signed an agreement with Bone Therapeutics to acquire its subsidiary with a 41,000 square foot purpose-built CGxP facility and manufacturing assets, which are located next to our facility in Gosselies.

Additionally, Catalent will manufacture clinical material for Bone Therapeutic's allogeneic osteoblastic cell therapy product.

When the transaction closes, which we expect to occur this month, the additional manufacturing capacity and technical expertise from this facility and its employees will immediately expand our clinical and commercial capacity for current late-stage customers as well as create a bigger center of cell therapy excellence for Catalent in Europe.

In addition to capital investments and the addition of new facilities to our global Catalent network, we continue our innovation and partnership efforts across the company.

The first example is also in our cell therapy offering where we announced an agreement with BrainStorm Cell Therapeutics to manufacture it's autologous cell therapy being investigated for the treatment of ALS also known as Lou Gehrig's disease.

Under the agreement, the new facility in Houston will undertake the transfer of the manufacturing process to provide future CGMP clinical supply for this treatment with the potential to extend the partnership to include commercial supply should the treatment be approved.

We're proud to support BrainStorm in its pursuit of a solution for this critical unmet patient need. Another example is our recent partnership with Exelixis where our Redwood Bioscience's subsidiary will develop multiple antibody-drug conjugates or ADCs for Exelixis using our proprietary SMARTag technology over a three-year period.

Under the partnership, Exelixis will provide R&D funding targeting various oncology indications and Catalent will be eligible for development in commercial milestones and royalties on net sales of any product commercialized as part of the collaboration.

The SMARTag platform has recently demonstrated promising results in the clinic, highlighting the potential to create ADCs with significantly expanded therapeutic indices for cancer patients.

Innovation at Catalent also continues to make further advancements to our Softgel Technologies, where we recently launched OptiGel DR, a technology for the formulation and manufacture of delayed/enteric release Softgels.

This new technology eliminates the coating step and solves the processing and performance challenges associated with conventionally coated delayed release softgels and has the potential to encapsulate a wide range of ingredients.

This latest evolution allows our customers to design more efficient products and bring superior pharmaceuticals and nutraceuticals to patients. Our site in St.

Petersburg, Florida is the first to offer this new technology with the capability being expanded to our other Softgel manufacturing facilities in Brazil, Canada, Germany, Italy and Japan in the future. And finally, I'm proud to highlight that in September, Catalent was added to the S&P 500 Index.

I believe this designation is an affirmation of the substantial progress we've made in executing our growth strategy since our IPO in 2014.

Of course, this progress would not be possible without the passion and dedication of our more than 14,000 employees whose commitment to our mission to help people live better, healthier lives has never been more critical or valued.

I'd now like to turn the call over to Wetteny who will review our financial results for the quarter and our enhanced fiscal 2021 guidance..

Thanks, John. I will begin this morning with a discussion on segment performance. As in past earnings calls, my commentary around segment growth will be in constant currency. I will start my commentary on Slide 8 with the Biologics segment, which is now our largest business segment.

Biologics revenue of $377.1 million increased 98% compared to the first quarter of 2020. The segment EBITDA increasing 194% for the same period. Acquisitions contributed 15 percentage points to both revenue and segment EBITDA in the first quarter, compared to the prior year period.

The acquisitions that primarily contributed to revenue and segment EBITDA includes MaSTherCell, the cell therapy leader that we acquired in February 2020 and our Anagni facility, which we acquired in January 2020 from Bristol-Myers Squibb and part of which includes an expansion of our drug product business that falls within the Biologics segment.

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

The robust organic growth in our Biologics segment in the quarter was driven across all segment offerings with elevated end market demand for our global drug product substance and cell and gene therapy offerings with well over half of the organic net revenue growth in the segment being driven by projects unrelated to the COVID-19 pandemic.

Margin in the segment increased significantly both year-on-year and from the fourth quarter as our capacity utilization increased across all major service offerings and as we conducted start up activity for potential COVID-19 therapies and vaccines. We expect strong growth for the Biologics segment for the remainder of this fiscal year.

Please turn to Slide 9, which presents our Softgel and Oral Technologies segment. Softgel and Oral Technologies revenue of $221.1 million decreased 17% compared to the first quarter of 2020 with segment EBITDA decreasing 20% 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 EBITDA declined 12% and 21%, respectively. The decline was driven by reduced volumes of certain prescription products in North America and in global consumer health products.

As we mentioned on our last earnings call, we are seeing lower demand in cough, cold and over- the- counter pain relief products, which we attribute to a combination of consumers stocking in the early stages of the pandemic as well as the effect of limited social gatherings and travel due to pandemic mitigation efforts.

Margins in Softgel and Oral technologies were further impacted year-on-year by elevated operating costs related to the pandemic, including cost of Thank You bonuses, additional protective equipment and adjusted less efficient production workflows put in place to facilitate social distancing among our employees.

Note that these higher costs impacted all segments.

Looking ahead at SOT for the remainder of the fiscal year 2021, we see underlying momentum in prescription products that suggest a stronger back half of the fiscal year, including our expectation that some product launches that occurred during the lockdowns in Q3 and Q4 of fiscal '20 will experience increased volume demand as our fiscal year progresses.

Looking further out, we expect that this 41% year-on-year growth in the SOT'S development revenue will eventually lead to more new product introductions and we remain comfortable with the segment's long-term growth outlook of 3% to 5%, although we forecast the segment to perform below that level this fiscal year.

Slide 10 shows our Softgel and Oral and Specialty Delivery segment recorded revenue of $158.3 million in the quarter, which was up 17% compared to the first quarter for fiscal 2020. Excluding the portion of the acquired Anagni facility that is part of the OSD segment, revenue declined 1%.

Rising end market demand for commercial products across our Zydis orally dissolving tablet technology platform was offset by decreased demand for early phase development activities in the quarter following COVID-19-related lockdowns and clinical trial disruptions.

Segment EBITDA was down 26% over the first quarter of 2020 and after excluding the OSD portion of the acquired Anagni facility, segment EBITDA declined 61%.

The decline of OSD segment EBITDA is primarily due to a voluntary recall of a product in our respiratory and ophthalmic platform that was launched last February, which we called out on the third and fourth quarter calls as having a product participation component. The one-time charges associated with this recall totaled $12 million.

Corrective action plans are under way but a definitive timeline for product reintroduction has not been determined. Excluding these charges, EBITDA margins was approximately 21% roughly in line with the first quarter of last year.

The OSD segment continues to have a strong development pipeline, particularly in the Zydis platform, which John highlighted earlier. Turning to the remainder of our development revenue.

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

In the first quarter of 2021, we recorded development revenue across both small and large molecule products of $372.5 million, which is 84% above the development revenue recorded in the first quarter of fiscal 2020. Development revenue represented 44% of our revenue in the first quarter compared to 30% in the comparable prior-year period.

The strong growth in the Biologics business was the biggest driver of these year-on-year changes. In the first quarter, our development pipeline led to 30 new product introductions.

Now, as shown on Slide 11, our Clinical Supply Services segment posted revenue of $92.7 million, an increase of 8% over the first quarter of the prior year, and segment EBITDA of $25 million or a 13% increase.

The growth was driven by an increase in clinical trial activity following pandemic-related delays and resulted in strong demand in storage and distribution offerings across all regions. This growth was offset partly by a reduction in demand for manufacturing and packaging within North America.

As of September 30, 2020, our backlog for the CSS segment was $428 million slightly higher than the $425 million at the end of last quarter and up 14% from September 30, 2019. The segment recorded net new business wins of $99 million during the first quarter, a 6% increase compared to the first quarter of the prior year.

The segment's trailing 12-month book-to-bill ratio remained at 1.1 times.

Please note that in future quarters we will continue to disclose the CSS commercial metrics in our prepared remarks and in the supplemental slide deck, including the new trended slide that we that can now be found in the appendix but we will remove the same information from our quarterly earnings release.

You may have noticed that our earnings release has been reformatted this quarter to allow for easier readability by removing commentary that can be found in the slide deck as well as the MD&A section of our 10-Q. Moving to companywide adjusted EBITDA on Slide 12.

Our first quarter adjusted EBITDA increased 37% to $174.4 million or 20.6% of net revenue, compared to 19.1% of net revenue in the first quarter of fiscal 2020.

On a constant currency basis, our first quarter adjusted EBITDA increased 35% including 23% organic compared to the first quarter of fiscal 2020 On Slide 13, you can see that first quarter adjusted net income was $78.1 million or $0.43 per diluted share compared to adjusted net income of $40.5 million or $0.26 per diluted share in the first quarter a year ago.

Slide 14 shows our debt-related ratios and our capital allocation priorities. Our cash and cash equivalents balance at September 30th was in excess of $1 billion compared to $953 million at June 30th. Our net leverage ratio was 2.6 times at September 30th compared to 2.8 times at June 30th.

Recall that last quarter, we lowered our long-term net leverage target to 3.0 times compared to our previous target of 3.5 times.

We are pleased that last week, S&P recognized our efforts to further strengthen our balance sheet as they upgraded a long-term credit rating to BB due to the rapid growth of our Biologics business, improved margin profile and lower ratio of net debt to adjusted EBITDA. Moving on to capital expenditures.

We continue to expect capex as a percentage of net revenue to remain at elevated levels for the next two fiscal years as we continue our organic growth plans.

In fiscal 2021, we are accelerating capex spending in the first half of the year to meet customer demands and expect that capex will be approximately 15% to 16% of 2021 revenue compared to our previous estimate, which reflected 14% to 15% of revenue. Now we turn to our financial outlook for fiscal 2021 as outlined on Slide 15.

We are raising our previously issued guidance to reflect first quarter performance and to account for higher net underlying demand, including increased demand related to potential COVID-19 therapies and vaccines as well as lower demand attributed to the effects of the pandemic in some offerings and certain increased costs due to the pandemic.

The guidance ranges, which remain broader than in recent years due to the increased uncertainty introduced by the pandemic, are now net revenue in the range of $3.58 billion to $3.78 billion compared to the previous range of $3.45 billion to $3.6 billion.

Adjusted EBITDA in the range of $880 million to $950 million compared to the previous range of $840 million to $890 million and adjusted net income in the range of $410 million to $470 million compared to the previous range of $390 million to $435 million.

We continue to expect that our fully diluted share count on a weighted average basis for the fiscal year will be in the range of 178 million to 180 million shares and that our consolidated effective tax rate will be between 24% and 26% in the fiscal year. The underlying assumptions for our revised guidance are as follows.

First, there is no major external change to the current status of the COVID-19 pandemic and its effect on our business. Next, in light of the uncertainties always inherent in pharmaceutical development, we are not assuming that any of our customers' COVID-19 vaccine candidates will get FDA or other regulatory approval emergency or otherwise.

Third, we have factored in projected revenue from executed take-or-pay arrangements, some of which include terms that triggered higher levels of volume based on timing or milestones. Fourth, revenue from acquisitions is projected to represent approximately 2 to 3 percentage points of our projected revenue growth rate for the year.

And finally, we attribute approximately 9 to 11 percentage points of the projected net revenue growth to net COVID-19-related revenue versus our previous estimate of approximately 5 to 7 percentage points.

This estimate is based on factors that affect multiple business segments including changes to the take-or-pay arrangements we had previously taken into account, including some previously considered arrangements that have increased in size based on reaching certain milestones.

Revenue not previously projected from additional projects amounting to COVID-19 related projects in which we are engaged, opportunity costs including work that would likely have been placed in the same space and estimated loss revenue in parts of the business due to the pandemic such as lower demand for consumer health products as well as impacts to some prescription products.

Regarding our quarterly progression throughout the year, let me take a moment to remind you or share with those newer to Catalent's story, this is a novelty in our business.

From a net revenue and adjusted EBITDA perspective, the first quarter of any fiscal year is generally the lightest quarter by far and generally increasing each quarter throughout the fiscal year.

This seasonal effect has led to roughly 40% of our adjusted EBITDA being recognized in the first half of the year and 60% recognized in the back half of the year.

In fiscal 2021, we expect a slight change to that mix with adjusted EBITDA contribution from the first half of fiscal '21 being approximately 41% to 42% of our expected full-year adjusted EBITDA. Operator, this concludes our prepared remarks. I would now like to open the call for questions..

[Operator Instructions] Your first question today comes from Dave Windley from Jefferies. Please go ahead..

Hi, good morning. Thanks for taking my question. Very impressive Biologics growth, again this quarter.

I was hoping I could attempt to break it down a little bit, I think from comments that you made the acquisitions contributed, maybe just under $30 million, about $28 million and then I think Wetteny, you talked about kind of non-COVID related programs driving the majority of growth.

So wondered if could we kind of guess that the COVID contributed, call it maybe $90 million, so is that right? And then of the remaining, call it $60 million, $65 million something like that, of growth year-over-year.

Is that pretty balanced across gene therapy and the Bloomington business and the Madison business or is there one that's really driving that kind of core organic growth? So just again trying to understand the contributors to Biologics growth. Thanks..

Yes so, Dave, first of all, we're very pleased with the growth in our Biologics business for the quarter. You can see for the second quarter in a row very strong growth coming from the segment.

I'll remind you a couple of things and indeed, significantly more than half of the organic growth in the quarter in the segment, which was 83% clearly more than half of that coming from non-COVID-related activities. So this will be the second quarter in a row we're seeing substantial growth coming from this segment.

I will note that in Q1 last year, I would say it was a relatively weaker comp, as we got off to a slower start in the segment across particularly our coating and nucleic acid offerings here as compared to our gene therapy and cell therapy areas and so we're very pleased with the growth and well above half of that coming from non-COVID-related but still posting 82% organic growth on the quarter against, I would say, relatively weaker comps.

Also the gene therapy side and cell therapy side of the business were significant contributors to the organic growth but we won't go down to specifics.

To give enough color around this is to triangulate around a rough estimation around the COVID-related programs but what I would say is there is not -- it's difficult to get precision here when it comes to COVID-19.

And some of the color I would add here is that clearly from a development perspective, we have a fair amount of start-up activities across this segment in particular, from a development standpoint, some of our highly skilled personnel in our sites who are working around the clock on development activities, which is somewhat difficult to segregate them what they would have been doing, had they not been doing this work clearly, they would have been engaged in other activities.

So I think there are some prioritizations and trade-offs that are happening in the business that makes it difficult to get the precision here, but we believe directionally what we've provided should be hopefully helpful in understanding that the core growth in the business was still well above the long-term expectations we have for this segment in the quarter, even when you take out the COVID-19 programs..

Got it. If -- just a quick follow-up then. One of the questions that we get pretty often is trying to understand how much the take-or-pay agreements that you were including in guidance, kind of how much do those represent of what would be the volume if one or more of your clients' vaccine candidates gets approved.

Is there any context that you can provide to help us understand? It sounds like it's more than development but it's only a fraction of what your commercial revenue could be and just kind of where is that breakpoint for the take-or-pay agreements? Thanks..

Yes, what I would say here, Dave, is there are too many variables to really pinpoint what the exact effect would be, the timing of such approval if it does happen and how much is left in the year etc., how many doses per vial? There are lots of variables but what I would share with you in terms of the take-or-pay agreements in the way that they work and how they're factored into our guidance is that we have not factored in any approvals in our guidance here.

So we are including take-or-pay arrangement, which would largely fall, whether it's the volume we need to produce or the take-or-pays that will take effect, to be mostly in the second half of our year, not the first half.

So it is not -- other than start-up activities, the first half of the year is largely not impacted by take-or-pay arrangements and they start to come in, in the second half.

And if there is an approval, with all the variables that I described, it's difficult to to give even sort of a sense around what that might mean for us in terms of what the volume might be. We're not factoring any approvals, as we said in the prepared commentary and our guidance here..

Our next question comes from John Kreger from William Blair. Please go ahead..

Thanks very much. Wetteny, just a follow-up on Dave's last question.

If an approval would happen, let's say in the January time frame, would that cause the 9% to 11% contribution in your view to likely change or is that more of fiscal '22 event for Catalent?.

Yes. So what I would say is yeah, and there are too many variables to determine whether that would change or not. The way we've approached the guidance, including just the take-or-pays means that we've only put in what is contractually bound.

If there are -- if the variables can include items such as the [acquittal] of the drug product billing, will the customer be able to get sufficient substance internally or from elsewhere to enable us to do more than the take-or-pays.

You understand that there are too many variables for us to venture into any sort of guesses as to what that could mean depending on when it happens, which product, which jurisdictions is it going through, what the actual demand is.

So if all those things were in the lineup and the volume necessary is above the take-or-pay minimums, then sure, that could potentially mean more volume coming from those programs than the take-or-pay.

These are some of the reasons why including being in a pandemic, why we have a wider range in our guidance where no point is more certain than another and I think we'll continue to do that as the year unfolds..

Okay, thanks. And then a follow-up, John, for you on terms of kind of the M&A strategy and capital deployment.

I think in the past you guys have said you don't really like dealing client facility deals but you've done two in the last year, is your thinking about that opportunity changing?.

Yes, I would say it is, John. I mean first of all, when we are getting -- if you look historically, I would say there is kind of a significant exiting of facilities by pharma over the last, call it 10 to 15 years, that was just them basically whittling down their overall capacity.

But what we have found is that when we can find a facility that has the capabilities in the geography that we're looking for and can secure meaningful business with that -- with the owner of that facility that we're willing to engage in it.

So certainly, we're not in the mode of, I would say, either consulting the industry or just picking up as many facilities as we can but if you take a look at the Bone Therapeutics and you take a look at the Anagni facility, they both were added to our capabilities and overall capacity where we needed them.

So just the recent announcement here on Bone Therapeutics with a facility that's just walking distance from our Gosselies -- our current Gosselies operation provides us immediate capacity for potential late phase customers that could get approvals and will meet that overall capacity.

And then in Anagni, I have to say this is probably one of the most fortuitous acquisitions that we look to further build out our European CDMO business where we happen to have an asset that had two vial filling lines and the capacity to -- or the footprint to be able to add even additional capacity at the time -- at the front end of this pandemic.

So I would say that it's more in our mix, right now, but we have a very clear criteria if you will, in terms of what we're looking for and I think you see two really good examples in both Anagni and also in the Bone Therapeutics facility. And then maybe just to expand on your question just with regards to overall M&A.

Certainly we've been executing on an extremely strong strategic plan that has us growing the company organically however, we continue to be very active in the M&A space where we can add additional capability and capacity to accelerate our strategic plans in an area that we continue to, I would say, hunt is -- in drug product and drug substance capacity in Europe where we would like to continue to build-out our footprint.

We certainly have a great footprint in the U.S. that continues to get even better. We'd also like to expand the Anagni facility in Europe..

Our next question comes from Tycho Peterson from J.P. Morgan. Please go ahead..

Hey, good morning. John, I want to start with Oral and Specialty Drug Delivery. You noted decreased demand in early phase development programs, can you maybe just touch on that dynamic? I mean the funding environment has been better, we've seen kind of a pickup from some of your peers on the early stage side.

And then, when do you expect that segment to turn, if --you talked about it picking up in the back half of -- end of the year? And then I think you noted new product launches have also been impacted by the pandemic, so can you touch on that as well?.

Yes, so,Tycho, I'll unpack a few questions that you have in there. First of all, with regards to our OSD segment, the development revenue and development pipeline is generally a shorter cycle business and early on in the pandemic, we saw people not knowing what was going to happen.

In our Oral and Specialty Delivery, we service a lot of small venture-backed companies that early on they didn't know where the pandemic was going and they basically, I would say, sat still a little bit. So we didn't pick up early on in the pandemic.

Let's just call it kind of through the March through May, June time frame, we just didn't have the same sort of wins that we normally would. And obviously, that impacted a little bit the development revenue in the OSD segment.

That being said, we're now in, I would say, a stable part of the pandemic as it continues to develop where people really do understand their funding, they still continue to operate and we're starting to see those wins, if you will, pickup.

And then I would just say, the OSD segment as Wetteny alluded to in his prepared comments, really has one of the strongest overall pipelines in the business over 200 molecule.

So again with our Follow the Molecule strategy, I mean we're working on these items all the way through getting development revenue and hoping to get our customers all the way through launch. So again, very strong pipeline there.

Now the other question you had was with regards to prescription demand and that's in our SOT business and what we saw is that we had product launches in our SOT segment that quite frankly, the launches were, the words I used in the prepared comments were, muted meaning with the pandemic the ability for those customers to fully launch and get their sales teams out into the doctor's offices and hospitals to be able to promote those products and in some cases, they literally just stopped on the promotion until they had better clarity on when they could actually deploy some of their overall resources.

However, we do believe that we have some launches planned here for the second half and we also expect that the muted launches that we had and some of these launches in the SOT segment should gain momentum in the second half again, as we've seen -- we are running into the later phases of the pandemic and people know how to deal with it and were moving along.

So that's the way I would answer that question if that's helpful, Tycho..

That is, that is. And then just thinking a little bit about case loads going back up here.

I'm just wondering is there incremental risk on Softgel potentially getting worse in the next quarter or two and then also CSS returned to growth and trials have been back up and running but is there any risk there as cases go back up of that going back in the negative territory?.

First of all, I would say this is not prepared comments, this is John Chiminski, but right now we know that cases aren't really correlated, if you will, to death rates in the U.S. In fact we see that there is -- we have rises in cases.

And so it's not necessarily impacting mortality rates and we're also seeing that although we have a tightening of some measures in certain areas, we're not seeing wholesale lockdown.

So we're not seeing the same sort of clinical trial holdback that we did early on where you didn't have the actions -- access, if you will, to the clinical trial patients and so forth.

So I don't anticipate that unless things take a dramatic turn and we actually do get to additional lockdowns that's a very strong doubt but CSS business should continue to go ahead and perform.

There was a second part of that, Tycho?.

Well, similarly on Softgel.

I mean, does that get worse sequentially here or do you think we've kind of reached a bottom?.

Yes, I think that the thing I would mention on Softgel is that part of the slowdown we saw was really in the consumer health area and that's kind of a crazy thing but the flu season is virtually non-existent and people developing cough and cold.

So we're seeing -- we saw demand really here in the quarter just very, very low on the consumer health products. I mean, just as a little bit of a trivia they literally had hundreds of cases of flu in Australia compared to the normal thousand. So it's pretty much a non-existent season.

So the only thing that we'll need to watch out for in Softgel is if we have continued low consumer health demand based upon the social distancing and lack of social gatherings and lack of travel ban really predicated us having some challenges in the consumer health.

So that's really one of the areas that we'll watch out and maybe I'll ask Wetteny, if he wants to jump in here also..

Yes, just a couple of quick points with respect to SOT. As you know Tycho, we don't get into specifics in terms of guidance by segment. But largely speaking I would expect the SOT first half to look a lot more like the first quarter with improved performance in the back half versus a very strong prior year.

If you recall, in fiscal '20 our SOT business, where we expect long-term growth in the 3% to 5% range, was actually both more than twice that in the fiscal year last year.

So it's a combination of a tougher comparable for the segment as well as some of the COVID- 19-related headwinds that we've already talked about that are impacting the segment and I would expect the first half, again to be more like the first quarter and improved performance in the back half.

The other point I would make is with respect to CSS to your point around increased cases etc. What you may recall is a previous occurrence of this led to actually ramp up in CSS before before it went down.

We're very pleased with the net new business wins we're seeing in the business throughout the pandemic, continued to stay healthy which bodes well for long term performance of the segment. And we won't predict what could happen here in the event of increased lockdowns, etc.

but certainly a prior occurrence led to a pick up in Q -- in our third quarter fiscal last year before you saw it draw down in the fourth quarter..

Okay, that's helpful. And then one quick one before I hop off. In the vaccine work, I know your guidance doesn't assume any approvals, I'm just curious how much lumpiness and volatility you think there will be once you have approvals.

Obviously, there have been government contracts and stockpiling or do you think it will be relatively smooth when it comes to the scale up? Thanks.

Again, Tycho, we have take-or-pays that are in place and those take-or-pays do contemplate a certain amount of capacity utilization.

And so I think the area where I think there could be and I wouldn't call it lumpiness but I would say, increased demand is with regards to therapies that they get approved and depending on what the uptake of those are that scenario where we would have to obviously respond to.

And the only other thing with regards specifically to the vaccines is whether or not there would be volumes above and beyond the take-or-pays that we already have in place..

Our next question comes from Juan Avendano from Bank of America. Please go ahead..

Hello. Congrats on the quarter.

I might have missed this but what was the COVID net revenue that you realized in the quarter across the whole company and not just Biologics?.

Juan, we didn't get precision on this but our estimation around the quarter is as follows. We've delivered 20% organic growth in the quarter across the company. And even if you were to exclude COVID-19 impacts you'd still have a double-digit organic growth performance for the company.

Another reminder I would give you is when you think about the activities we have both across therapeutics and vaccines here for COVID-19, the volumes and related take-or-pays really took effect more toward the back half of our year than the first half.

So really mostly, we have start-up activities that are happening now that are contributing to the performance and so I would expect, as we saw in Q4 as well as in Q1, most of the performance here is not related to COVID-19. So this is two quarters of double-digit organic growth excluding COVID-19 for the company..

Got it. I definitely appreciate the quarter given that you did provide guidance for net COVID related revenue for the whole year, contributing 9 to 11 percentage points.

I just wanted to know how much was in the bag or realized in 1Q and how much was left? Any quantitatives that you could share on that?.

What I will tell you is directionally, the versus 9 to 11 on the year, the first quarter is substantially below it. Again yeah, 20% organic growth on the company and we still had well into double-digits excluding COVID-19.

Again, I won't give you precision here given all the factors we already discussed but as I said, the take-or-pays that are factored into our guidance mostly take effect toward the back half of the year not the first half, so I would stand to reason that the first quarter would be largely non-COVID related when we think about organic growth..

Okay, thank you. And switching gears a little bit. We've seen a few clinical holds and terminations on the gene therapy development projects in the last couple of months.

Has this changed the confidence of sponsors or your own confidence on the potential opportunity from gene therapy going forward?.

No, not at all. I would say there's very specific factors involved in a couple of those cases that came out and doesn't change either our outlook on the space or the activity that we have in the gene therapy business..

Our next question comes from Jacob Johnson from Stephens. Please go ahead..

Hey, just one for me and maybe following up on that last question, can you just give us an update on how MaSTherCell's performing? Obviously it was a small revenue base when you bought it, but as we look out the next couple of years, how should we think about the revenue ramp here? And also can you just talk about how you're integrating MaSTherCell with Paragon along with some of the other acquisitions you've done here, and maybe how these companies work together?.

Yes, sure. Thanks for that question, Jacob. First of all, we're super excited to be able to get our hands on this premier cell therapy asset and as I've said before, we kind of caught this acquisition a little bit earlier in the cycle than we did for example, with Paragon or even Bloomington.

So over the next several years, we don't expect significant revenue and EBITDA compared to the overall company, but we expect fairly strong growth. You can see that we made some pretty astute investments already both from a capex standpoint as well as from a facility acquisition standpoint.

So we're investing in MaSTherCell at a facility that's down the street from Gosselies that is going to have commercial manufacturing capability. In addition to that, we've invested capex in the Houston facility, which is just recently opened.

And then finally with the Bone Therapeutics acquisition of their subsidiary got our hands on a substantial facility and capabilities that are going to be able to have us more quickly, being able to go commercial with potentially some of the late-phase programs that we have within cell therapy. The integration is going extremely well.

I can tell you that we're off to, I would say, a strong wins rate as we're kind of exiting the overall calendar year and obviously, we just talked about the recent fairly significant win that we had with the company that's going to be able to -- that is fighting ALS.

So I think putting all those things together, the acquisition is going very -- the integration is going very well. We've also acquired some very good talent into that facility. The other thing is, is that we also see significant synergies between our gene therapy and cell therapy business.

In that, a lot of the companies have both gene therapy and cell therapy programs, so that's able -- we're able to work across those facilities. And then also point to the Editas partnership that we have within our cell therapy business actually expanding all the way through our clinical trials. So I feel very, very good.

Again, we caught this one a little bit earlier in the cycle, which means that we're going to be able to enjoy that future growth from, I would say 10 years from now we're going to see really an explosion of cell therapy products and approvals that should happen, which will be very exciting for patients around the world..

Our next question comes from Jack Meehan from Nephron Research. Please go ahead..

Thank you. Good morning. I was hoping you could elaborate a little bit more on the strength of the development work within the Biologics segment that in addition to COVID seemed to drive a lot of the segment performance.

So can you just elaborate how much of that is coming from COVID maybe versus gene therapy, and then how did that impact segment margins in the quarter or how the development margins compared to the commercial work?.

Yes, sure. We're very pleased with the performance of the Biologics business overall. As I mentioned earlier, well above half of the 83% organic growth in the segment was non-COVID related and also gene therapy was a significant contributor to the growth in the business from revenue perspective.

I think when you look at the EBITDA margin expansion year-on-year, it would bode well for the level of capacity utilization we have across the segment here as we are near capacity with respect to some of our areas particularly around vial capacity, etc.

and as you know, we have new expansions that are on the way that will be up and running in the next few months in those areas for remaining customers as well as those that are pursuing COVID-19 vaccines and therapies.

So all those are contributors to the performance here from a margin perspective in the quarter, which we're very pleased with in COVID-19 while contributing to the performance wasn't substantially less than half.

Development revenue continues to be a large proportion of this segment as we have maturing pipeline of programs that we're working with customers across the protein and nucleic acid side, the gene therapy, cell therapy across all offerings within Biologics.

And so -- which again in the future, would bode well as those programs get commercially launched in the future and we get closer to a balance in development. And in commercial, the development revenue continues to be strong.

We're seeing several quarters of growth in development revenue, which is why you see about 44% of our total revenue to be in development in this quarter versus roughly 30% a year ago..

Our next question comes from Dan Brennan from UBS. Please go ahead..

Thank you. Thanks for taking the questions.

So just on COVID, could you give us some sense of the split between drug products and drug substance within your COVID revenues and when we think about some of your customers potentially getting approvals, is that all upside or does some of the take-or-pay contracts only include capacity build out that incorporate like the volumes that could occur.

And then just one other -- one on COVID.

If you mind if some of your larger customers that you've reserved space for and are working with, if those companies don't get vaccines approved, what should we think about the capacity being allocated toward those customers?.

Yes, maybe I'll start with the last part of your question and then work my way back.

Certainly, the capacity that we have here that is positioned to work on COVID-specific programs is not specifically COVID-19 like we -- part of the reason that we we're -- of those two companies here is because we have capabilities, traditionally we've had in the company as well as it was added over the last several years around a drug product, drug substance gene therapy, etc.

as well as capacity that we already had in flight before COVID-19. Hence the capacity wasn't specifically contemplating this pandemic nor is it unique to manufacturing COVID-19 therapies and vaccines.

And so the long term prospects of fill-finish, gene therapy, viral vector manufacturing drug substance for Biologics all points with strong growth over a long-term, which is why we were pursuing these extensions to begin with.

I'll remind you, January 2019 given the pipeline of products that we have in front of us in our Biologics drug product fill-finish facility in the U.S.

by way of example, we could foresee the maturing pipeline requiring more and more capacity to the point that we anticipated by 2021, we will be running out of capacity across vials and closely so, across syringes.

So at that point, we announced an expansion of capacity for the facility as we stand today, particularly with the COVID-19 programs as well. As we mentioned, we're near capacity and our vials would be -- with more capacity coming on board over the next few months to relieve that.

So I think that's spells that this capacity is very fungible plus the offerings we have within the segment are not specific to COVID-19 and have confidence in their use beyond the need for us.

With respect to the take-or-pays, clearly the factors with our customers that reflects what we anticipate the volume needs might be in the event of an approval as well as the timing of those approvals and we in turn have been hiring and training and onboarding resources to position ourselves in addition to the start-up activities to be able to manufacture those volumes.

So I think you would anticipate that the customers' expectations with volumes are already somewhat reflected here, but lots of variables could impact those as we go forward and we won't venture to guess as to what that might be, but some of these are certainly already contemplated in those take-or-pay arrangements.

And then lastly, the first one question is around drug substance and drug product.

We announced some of these programs already in terms of the work regarding vaccines and therapies including there are sort of programs that we're working on and we have not ventured to announce for various reasons, but we are looking at 60 -- over 60 compounds across the organization with majority of those in our Biologics business.

And they do span across both drug product, drug substance and I would add gene therapy viral vector manufacturing as well. So we're very pleased with the activities we have not only in Biologics but elsewhere across the company, which again is why we say we are a go-to company for COVID-19..

Thanks, Wetteny. And maybe just one follow-up just on Paragon. So the capacity that you're building out today, I mean, to the extent some of the programs you are working on go from clinical to commercial success. How do we think about the capacity that you're planning and kind of what's the way to think about the revenue impact for Catalent? Thanks..

So as we continue to expand in the suites, as John mentioned in our prepared commentary, in the next few months we'll have 10 suites operational. A number of customers have a subset of those suites under capacity reservations including certain minimum volumes, which are again take-or-pay types of arrangements.

And so we anticipate volume increases across the segment and the pipeline continues to mature, not only what we have within Catalent but at large, and we expect to continue to on-board new customers and continue to drive programs through those that are in the pipelines for commercial use.

So I think as volumes go through a factory of the company that has the skill that we do at the upper end of utilization, those can drive meaningful margin performance in the business, which we would anticipate over time.

One last point I'll make is, as we discussed last quarter, our gene therapy offering is now the only CDMO operation in the world with a commercial license to produce gene therapies, which positions us well to continue to not only perform for the customers we are engaged with now but potentially more as the pipeline of gene therapy continues to expand..

Our next question comes from Sean Dodge from RBC Capital Markets. Please go ahead..

Hey, good morning. This is Thomas Kelliher on for Sean, thanks for taking the questions. I'll try and keep it a little brief. It has been answered earlier but the kind of longer-term EBITDA margins for the Biologics segment is targeted around 35%.

You guys are still anticipating reaching this by fiscal '24 or maybe exceeding it or is there any change to this target that's -- within those last few months?.

Yes. So look, our margin expectations for this segment remain unchanged. We've given companywide margin expectations as we expand and we have said that as we grow in Biologics, which you saw this quarter is 44% of our revenues. In Biologics, being higher margin will propel the company margins to expand. So we continue to expect that long term.

Those won't be linear as we add capacity and we add resources that are highly trained. There are highly complex and exacting processes that we have. As we do so, those will add some variability across our margins and keep in mind also that we have a large proportion of development programs, which tend to be more variable than commercial manufacturing.

So I think over time, we expect margins to expand and stabilize across the segment as we add capacity, as we get at the higher end of capacity utilization, margins will go up, as we add new capacity they will add a bit and then long term, our expectations remain unchanged.

Last quarter, I did highlight the drawback that we see potentially continue, particularly as we potentially still can manufacture large volumes of COVID-19 vaccines essentials, which is component sourcing materials that are used in those might start to increase.

And those we see as additive to the top line growth for the company, there is a portion of our revenues that are where the component sourcing, but to the extent they grow faster than the rest of the revenues that could have, I would say, short-term impacts related to margins.

But as I said, those are additive to the business and won't change our long-term expectations..

Our next question comes from Evan Stover from Baird. Please go ahead..

Yes. Hi, thanks for taking my question. You mentioned the slower than expected uptake of some new product launches but I wanted to ask from a slightly different angle, the actual NPI, new product introduction themselves.

There were 30 in the quarter and I know there's ebbs and flows there but that was a little bit I think lower than what we've seen per quarter looking back to last year or two.

So the question would be, in addition to the slower product launches, are you seeing just some changes in customer behavior overall maybe holding back on launching a product period in this environment, and is that something that you expect to change as we move through the pandemic?.

Yes, Evan, first part of your question with respect to a slower update to product launches and the NPIs being 30 in the quarter, we have -- NPIs, the timing of them isn't something that we necessarily control whether you are in a pandemic or not.

There are regulatory pathways and other variables that are involved and the customers are more in control of those. As you know with Catalent, we have over 1,000 development programs and those launch NPIs for us every year bedrock our long term growth.

Any given quarter, those numbers may move around but if you look at this first quarter versus last year first quarter for example, we had 30 this year, we got 15 in terms of NPIs last year.

So not that those two years are not necessarily presented but I think with 30 NPIs in the quarter when we expect to do somewhere in the ballpark of 150, give or take any given year, I'd say it's an average quarter probably. Again, higher than the number of NPIs a year ago.

With the second, customer behavior, I would say we're seeing meaningful changes. I think we've talked about lower early phase development programs with respect to clinical programs, you saw some of that in our CSS business in the fourth quarter last year. You see some of that in our OSD segment this quarter.

So I think if you look at across Catalent, May the late-phase programs tend to be more in terms of proportion of development programs that we have and again timing of launches is not something that we necessarily control nor do we see any meaningful or significant change in customer behaviors around those.

I think as products do get launched and a fewer visits to -- physically to doctor's offices with respect to the sales in general of our customers that may have an impact of the how fast the uptake is and we saw some of that in our SOT segment from launches over the last two or so quarters..

Yes, makes sense. Final question from me. Can you help us decode exactly what's going on with the OSD voluntary recall that you mentioned, obviously Catalent has 7,000 products, always dangerous to focus on one but it's just a little bit notable that you called out product participation in FY2H '20 and then the negative impact from this recall.

Trying to figure out how those are connected, and maybe if there is anything else to call out on what exactly happened there?.

Yes, so first of all, thank you for highlighting the fact that Catalent is a highly diversified company with 7,000 products and 1,000 development programs as well that are contributing meaningfully to our revenues each period, and more and more we are more exposed to Biologics representing a greater proportion of our revenues, which is on a faster growing end.

And despite, this part that you referred to, which we did highlight in the second half of our prior year in the third and fourth quarter, we delivered a solid quarter in Q1 and are pleased to be in position to be increased in our guidance for the year.

Having said that, within OSD, you have this one product, which had an impact in the quarter, we expected a $12 million cost that we saw in the quarter.

And if you look at the rest of the year, the product you are referencing with the second half launch activity, and so we see that being more of a comparable challenge in Q3 and Q4, but as we look at the OSD segment and we take out this -- if you assume, you neutralize year-on-year, taking out this product you would still see a segment that's delivering close to what we would or in line with what we would expect it to do long-term, which is roughly 5% to 7%.

So we're pleased with this segment, we're pleased with the growth that we're seeing, particularly in our guidance or the resolving franchise within the business. And the pipeline that we have for Zydis as well as non-Zydis within this segment is -- bodes well for the long-term growth of this segment.

So we're very pleased with the performance of this segment. If you take this product out, it does have a product participation feature in it and -- which contributed to the second half of last year, and as we said, will have an impact this year on a year-over-year basis.

Although, I won't venture to give more than we did in our prepared commentary, which is there are activities underway with this program and we do not yet have an estimation as to when or if that product will be coming back..

This concludes our question-and-answer session. I'll turn it back for any 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 highlighting a few key points we covered today. First, we're very pleased with a very strong start to fiscal 2021 including 20% organic net revenue growth and 23% organic adjusted EBITDA growth.

Our first quarter results combined with our increased forecast in the back half of the year led us to raise our fiscal '21 net revenue growth expectation by approximately 5 percentage points and our adjusted EBITDA expectation by approximately 7 percentage points.

Next, the transformative acquisitions we've made over the last several years combined with our strategic internal growth investments across the Company were well timed to enable us, not only to address the increased level of R&D innovation across a broad range of therapeutic categories, but also to position Catalent to play an important role in the efforts to create therapeutics and vaccines to combat COVID-19.

We are accelerating our strategic capex plans in our Biologics business, which will help meet near-term demand as well as have the effect of sustaining our long-term growth targets.

Last January, we announced our plan for Biologics to become 50% of our overall net revenue by 2024 and this quarter we are nearing our target faster than expected with our Biologics segment accounting for 44% of our net revenue.

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

We continue to be thankful for our 14,000-plus 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 of those counting on us to deliver, be it for a potential COVID-19 therapy or vaccine or the 7,000 other products we produce every year for customers.

Thank you..

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