Good day and thank you for standing by. Welcome to the Catalent Third 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] I would now like to hand the conference over to your speaker today, Paul Surdez, of Investor Relations..

Good morning, everyone and thank you for joining us today to review Catalent's third 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 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 numbers.

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 remarks will be covered on Slides 6 through 8 of the presentation..

Thanks Paul and welcome everyone to the call. Over the past year, Catalent has been providing critical support to the healthcare industry during a time of unprecedented challenge.

We've employed comprehensive safety guidelines and protocols to keep our employees safe, which have allowed us to continue our operations and increase our capacity to meet patient needs in to produce COVID-19 vaccine doses, as well as other important and critical medicines.

We're very proud of the work that our employees have done to provide essential manufacturing capacity and expertise for the more than 7,000 products we produce annually on behalf of our customers.

I'm pleased to report that the strong momentum we built in our fiscal year continued into the third quarter and remained strong and we've entered the fourth quarter. Due to our continued strong results and expected higher net demand for the remainder of the year. We're raising guidance for fiscal year 2021.

Wetteny will go into more detail on that later in our presentation. In the third quarter, our net revenue was $1.05 billion representing casting currency organic revenue growth of 35% year-over-year. Adjusted EBITDA of $274 million represents constant currency organic growth of 44% over the third quarter of fiscal 2020.

Our adjusted net income for the third quarter was $148 million or $0.82 per diluted share up from $0.50 per diluted share in the third quarter of fiscal 2020.

The biologics segment was again the biggest contributor to Catalent's performance, and its net revenue more than doubled over the third quarter of fiscal 2020 with year-on-year margin expansion of more than 1,200 basis points to 33.1%.

Demand for our drug product, drug substance, and viral vector offerings remains high with elevated levels of work related to COVID-19 vaccines and treatments, which served as the primary growth drivers in the biologics segment. Our Softgel and Oral Technologies segment experienced the same pandemic related headwinds we called out in prior quarters.

Their impact was much less in the third quarter than each of the first three quarters of the fiscal year. As you would recall these headwinds include a decrease in the currents of common colds and flu due to limited travel and social gatherings worldwide as well as muted launches of new prescription products in the last year.

We are hopeful that these issues will begin to normalize as more restrictions are lifted over time.

Our oral and specialty delivery organic growth was significantly impacted by a product in a respiratory and ophthalmic platform that had a notable strong launch in the third quarter of last year and was later voluntarily recalled in September causing a significant variance in the segment from the prior year quarter.

During the quarter we completed the two portfolio moves in the OSD segment that we highlighted last quarter.

The first was the February acquisition of a best in class spray drying facility in the Boston Cambridge area from Accorda therapeutics and the second was the divestiture of global steel manufacturing business located in Woodstock, Illinois, which closed on March 31.

Our clinical supply services segment returned a high single digit growth despite a tough comparisons of the third quarter of last year when we accelerated delivery of products to the clinical trial sites ahead of global lock downs creating a boost in related activity and revenue in the third quarter of fiscal 2020.

Given the wide range of growth rates among our four business segments due to the pandemic, our M&A activity and other factors, our business mix looks very different today than it did a year ago. In January of 2020, we first announced our projection for the relative size of the biologic segment, which then comprise a quarter of our revenue.

We said that it would come to represent half of our revenue by 2024.

This projection was based on numerous long term growth drivers for bio therapeutic in cell and gene therapy manufacturing, including faster growth rates in R&D for biologics, higher outsourcing rates, favorable supply demand dynamics, the shift to more complex modalities such as our mRNA, and the fact that the small cap biotech model relies on CDMOS for development.

The effects of the pandemic cause some of these drivers to be even more pronounced in enhancing the growth of our biologics segment while also creating higher demand for the CDMO industry as a whole.

We're pleased by the continued shift in our business mix towards the higher growth biologics segment and encouraged by the continued increased volume of commercial activity unrelated to COVID that were experienced across all the biologic segments offerings this year. Now, I'd like to provide you with a brief update on our COVID-19 related programs.

To meet our commitments to our customers and their patients a number of catalyst facilities have been operating 24/7 for more than a year. At the same time, we hired and trained 1000s of new employees over the last year to meet the demand for production capacity.

I'm proud to say that, despite the complexity intensity of this unprecedented manufacturing effort we're confident in our ability to continue to meet our commitments to our vaccine customers. By the end of calendar 2021, we expect to have produced more than 1 billion doses of COVID vaccines.

Well, I won't go into detail on any individual customer program, I'll highlight a few notable recent developments regarding capacity additions that we accelerated in order to meet the increased demand required to help fight the pandemic and to serve other growing patient needs.

Importantly, COVID-19 has not only accelerated our strategic plans, but also accelerated returns on the strategic investments we've made enabling us to put additional cash to work to continue to drive our long term growth.

In the U.S., our state of the art 950,000 square foot facility in Bloomington, Indiana, plays a critical role in the country's vaccine production efforts.

The site now has two bio filling lines dedicated to the manufacturer of products for two of our COVID-19 vaccine customers, including the high speed vile filling line that we first announced last September. We recently completed this project in record time and begun the process of ramping up the line.

Our 300,000 square foot Fill-​Finish facility in the Anagni, Italy is also making significant contributions to the global supply of COVID-19 vaccines for the multiple customers.

We recently announced that will accelerate the qualification and scale up of an additional high speed vial filling line at this site, which is expected to be operational before the end of this calendar year.

Looking back the $55 million purchase of the Anagni site, 16 months ago and our subsequent investments have quickly provided a critical component of the solution to the current global public health crisis while simultaneously creating meaningful value for our shareholders.

In addition to accelerating our global Fill-Finish capacity, we recently announced that we completed the addition of two new suites at our biologics drug substance development and manufacturing facility in Madison bringing the total number of suits at the site to five.

The expansion which we started in January 2019 is beginning to ramp and will provide additional clinical and commercial production capacity at the 2000 and 4000 batch scale. The site, with its increased capacity will accommodate increased customer demand for drugs substance manufacturing for a variety of projects, including some related to COVID-19.

The completion of these projects will help transform Madison from what has historically been a development phase site to a commercial drug substance production site.

Moving to our cell and gene therapy offering within the biologics segment, we've discussed in previous calls our interest in ability to include plasmid DNA technology and production capabilities in our cell and gene therapy service offering.

In February, we formally announced our entry into the space via the acquisition of Delphi Genetics, located in Gosselies, Belgium, now part of our Cell Therapy Center of Excellence in Europe, together with the launch of plasmid DNA development manufacturing services through an organic investment in Rockville, Maryland facility.

These two strategic actions have enabled us to establish plasmid DNA presence in both Europe and the U.S. Additionally, in April, we completed the purchase of [Indiscernible] laboratory and clean room space in an adjacent building on the Gosselies campus to allow for accelerated capacity expansion across our growing cell and gene therapy platform.

Plasmid DNA is a component in most gene therapy and gene-enabled cell therapy production processes and the market for plasmid DNA is growing rapidly. We estimate the plasmid DNA market size in five years to be well over a billion dollars at the low end.

With the horizontal integration of plasmid DNA into our overall cell and gene therapy offerings, choosing Catalent will allow customers to de-risk their supply chain and optimize their programs along the entire development pipeline.

Viral vector manufacturing capacity continues to be in high demand for the growing number of gene therapy compounds currently in the industry's development pipeline as well as for viral vector manufacturing for COVID-19 vaccines.

With the initial 10 commercial scale manufacturing suites in the first building on our gene therapy campus, near the BWI airport, now available to serve customers we are focused on building out the adjacent building to include at least five CGMP suites with the ability to add additional suites, a project that remains on track for completion in calendar year 2022.

In cell therapy we're continuing to build out a commercial scale production and Fill-Finish facility in Gosselies, Belgium, which remains on schedule to open in fiscal 2022.

In addition to increasing our cell and gene therapy capacity, we also announced investments in our global cold storage capacity with over 200 ultra low temperature freezers added to our cell and gene therapy and clinical supplies services facilities in the U.S., UK, Germany, and Asia-Pacific, as well as investments in cryogenic storage in our clinical supply services facility in Philadelphia to support sponsors developing cell and gene therapies.

These investments enable the safe handling of cell and gene therapy samples and establish capability to package, label, and distributed cryogenic materials. We implemented these initiatives to rapidly expand our capacity in order to meet growing clinical supply needs as well as future commercial demand.

Before turning today's presentation over to Wetteny , I'd like to bring your attention to slide 8 to highlight our progress in the corporate responsibility area. A year ago, we published our initial corporate responsibility report and will soon release our second report covering our fiscal year 2020.

The report will describe how we extended and deepened our corporate responsibility commitments and we will also shared some important achievements for fiscal year 2020.

Some of our highlighted progress includes; the development of our first human rights statement, our commitment to new targets for waste and water reduction, the transition of six sites to 100% renewable electricity and completion of 50 energy efficient projects.

The improvement of our industry leading recordable incident and loss injury rates, the doubling of the number of employee resource groups to eight each sponsored by a member of our executive leadership team, and our largest ever philanthropic contribution total with a substantial portion of our gifts focused in response to the interconnected COVID-19 and social inequality crises.

We also deepen the relationships we have with potential sources of talent and other HR providers to promote even more aggressive diverse talent recruitment, engagement and development initiatives.

Finally, we're excited to announce that we will now have the counsel of Mike Barber, GE's Chief Diversity Officer who became a member of our board of directors last week.

Mike joined GE in 1981, and has held a wide range of leadership roles in engineering, operations, and product management, including his prior roles as President and CEO of GE's molecular imaging, and computer tomography business and Chief Engineer and CEO of GE Healthcare Systems.

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 usual, my commentary on segment growth will be in constant currency. I begin on slide 9 with biologics, our largest business segment. Biologics net revenue of $544 million increased 113% compared to the third quarter of 2020, increasing 238% over the same period.

With Anagni and MaSTherCell acquisitions annualizing, all revenue growth was essentially driven organically. And EBITDA growth was slightly impacted by 1% this costs from the recent and relatively small, Skeletal and Delphi acquisitions as we began to scale and integrate those businesses.

Global organic growth in our biologics segment in the quarter was again driven by high demand across all segment operating including drug products, drug substance, cell and gene therapy and byline local services.

The increase was primarily driven by COVID-19 related projects, which contributed to both development and commercial revenue growth, depending on the terms of the contract.

The segment EBITDA margin increased significantly year-on-year to 33.1% compared to 20.8% in Q3 of last year, which is primarily attributable to increased capacity utilization and higher volumes. We continue to expect strong year-on-year growth for the biologics segment as we conclude fiscal 2021.

please turn to slide 10, which resolved from our Softgel and oral technology segment. Softgel and oral technologies net revenue of $244 million, decreased 2% compared to the third quarter of 2020. Despite EBITDA decreasing 3% over the same period.

The decline continues to be driven by reduced volumes for certain prescription products as well as lower demand for consumer health products. The [Indiscernible] over the counter pain relief products.

We also believe that lower prescription volumes are due to slow rollout of newer products during the pandemic and more consumer health demand is due to a combination of consumer sparking in the early stages of the pandemic is one of the effects of limited social gatherings and travel due to pandemic mitigation efforts.

I'd like to note that while the 2% revenue decline is of course well below our long term expected growth rate of 3% to 5% in the SOP segment, it is a sequential improvement from the 10% decline last quarter and the 12% decline in the first quarter.

Year-on-year growth in SOP development revenue was again over 25% which frankly will eventually lead to future new product introduction that will help drive to segments long term revenue growth. Lower volumes were the primary drivers to the decline in margin.

Slide 11 shows the results of our oral and specialty delivery segment which were impacted by the previously discussed voluntary recall of a single products and our respiratory and ophthalmic platform in September.

This platform had a notably strong launch in Q3 of last year, and included a product participation component, creating a visible comparison between the current quarter and Q3 of fiscal 2020.

In addition, we incurred further $15 million in costs associated with the recall in the quarter, bringing the total recall associated costs to approximately $29 million this fiscal year. With that background year-over-year segment recorded net revenue of $172 million in the quarter, which is now 9% compared to the third quarter fiscal 2020.

Segment EBITDA was $31 million, a 49% decline over the third quarter 2020. The acquisition of [Indiscernible] facility in February had a negligible contribution to growth and the sales of local steel business did not impact growth at the sale close on the last day of the quarter.

To back out the revenue from the products in the third quarter of fiscal 2020, the segment would have shown low single digit revenue growth this quarter. USB segment third quarter results include continued product momentum in our Zydis platform, which reminds me despite some consumer health pandemic related headlines.

This was partially offset by decreased volume for non- Zydis delivered commercial products. Each quarter we dispose our long cycle development revenue in the current year in order to provide additional insight into our long cycle segments which include biologics, softgel and oral technologies, and oral specialty delivery.

In the third quarter of 2021 we recorded development revenue across both small and large molecule products of $481 million which is 97% of all the development revenue recorded in third quarter of fiscal 2020.

Development revenue which includes net revenue from certain COVID-19 related products for emergency use, represented 46% of our revenue in the third quarter compared to the 32% on the comparable prior year period.

The strong growth in our biologics business, including growth from COVID-19 vaccines and therapies approved for emergency use was the biggest driver of these year-on-year changes. In the third quarter, our development pipeline -- 13 new product introductions for total of 92 in the first nine months of fiscal 2021.

As shown on slide 12 our medical supply services segment posted net revenue of $100 million representing 9% growth year-over-year.

This is a little more increase compared against the segment strong performance in the third quarter of fiscal 2020, when customers were pulling forward for shipments and distributing supplies to clinical sites ahead of lock downs. Segment EBITDA was $27 billion, a 4% increase compared to Q3 of fiscal 21.

That was driven by strong demand in our manufacturing and packaging, and storage and distribution offerings in North America, partially offset by an unfavorable sales mix in Europe. Segment EBITDA margin was 27.1%, down slightly over the third quarter of last year.

As of March, 31 2021 backlog for the CSM segment was $490 million compared to $448 million at the end of last quarter, and up 24% from March 31, 2020. The segment reported net new business winds of $137 million during the third quarter, a 43% increase compared to the third quarter of the prior year.

The segments trailing 12-month book to bill ratio is 1.3 times. Moving to companywide adjusted EBITDA on slide 13. Our third quarter adjusted EBITDA increased 48% to $274 million, or 26% of net revenue, compared to 24.4% of net revenue and the third quarter of 2020.

On a constant currency basis, our third quarter EBITDA increased 44% compared to the third quarter of fiscal 2020. As shown on slide 14, third quarter adjusted net income was $148 million or $0.82 per diluted share compared to adjusted net income of $3 million or $0.50 per diluted share in the third quarter a year ago.

Slide 15 shows our debt, related ratios and capital allocation priorities. During the quarter, we took advantage of the favorable lending environment to meaningfully reduce our weighted average interest rate below 3% down roughly 70 basis points from our previous weighted average rates.

We also modestly increased our debt by over $160 million at these lower rates while also pushing out on maturity to 2027. The net effect of these changes will create an approximate $10 million reduction in our annual interest rate.

Despite our additional debt and the purchase of the Accorda facility along with other smaller acquisitions in the quarter, our net leverage decreased to 2.3 times from 2.6 times at December 31 while the sale of our Blow-Fill-Seal business and EBITDA growth boosted our cash position in the same period.

Our cash and cash equivalents balance at March, 31 was $988 million. When combined with $75 million of marketable securities our liquid assets exceeded $1 billion. This compared to $833 million in December, 31 and $608 million on March, 31 2020. Moving on to capital expenditures.

We continue to expect CapEx at a percentage of net revenues remain at elevated levels for the next super full year as we accelerate our organic growth plans to meet customer demands and patient needs. In fiscal 2021, we continue to expect that CapEx will be approximately 15% to 16% of 2021 revenue.

Now to our financial outlook for fiscal 2021 as outlined on slide 16. We are raising our previously issued guidance ranges which remains lower than in recent years due to the increased uncertainty introduced by the pandemic.

The new ranges are net revenue in the range of $3.75 billion to $3.95 billion compared to the previous range of $3.8 billion to 3.95. billion.

Adjusted EBITDA in the range of $975 million to $1.105 billion, compared to the previous range of $950 million to $1 billion and adjusted net income in the range of $500 million to $540 million compared to the previous range of $475 million to $525 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 180 million to 182 million shares and our consolidated effective tax rate will be between 24% to 25% in the fiscal year. There are three important assumptions underlying our revised guidance.

First, we assume no major unforeseen external change to the current status of the COVID-19 pandemic and its effect on our business. Second, revised guidance does not assume the receipt of any vaccine or treatment order from any of our customers beyond what either has been received to-date or is deemed required under executed fee arrangement.

And third, approximately 16 to 18 percentage points as a projected net revenue growth to net COVID-19 related revenue. This is a estimate of approximately 14 to 16 percentage points.

As with our current estimates, the net COVID-19 revenue estimate is based on factors that affect multiple business segments including; updated forecasts related to business that we included previously, including some that have increased in size due to reaching certain milestones or other triggers.

Revenue not previously projected from additional work among the COVID-19 related projects in which we are engaged.

On assessment of opportunity costs, including the loss value of work that would likely have been placed in the same space as some of the COVID-19 related work, and estimated lost revenue in certain parts of the business as a result of a pandemic, such as lower demand for consumer health products in our softgel and oral technology segment, as well as impacts with some prescription products.

Lastly, we continue to project that revenue from acquisitions will represent approximately 2 percentage points of our revenue growth for the year. Operator this concludes our prepared remarks and would now like to open the call for questions..

Operator we're ready for questions..

[Operator Instructions] Your first question is from the line of Dan Brennan with UBS. Mr. Brennan your line is open..

Sorry about that. Hi, guys, congrats on the quarter. Maybe just the first question.

Thanks for all the color obviously, just I know sometimes it's hard to tease out COVID versus non-COVID book and help us think through kind of in the quarter of the really strong biologics growth, how would you characterize the COVID contribution in the quarter versus the base and again, I understand that the COVID can crowd out some of the base.

So it's not a perfect calculation but if you can help us think through that, that'd be terrific?.

Yes. Dan look as you said it's certainly not a perfect calculation and we won't separate the data. As you know, the impact of each segment is different.

We certainly have seen a driver, a primary driver for growth within our biologics segment to clear the growth of over 113% in the segments and I'll get to our guidance here in terms of the range of net COVID impacts, we expect for the year which might be helpful in terms of seeing through the non-COVID growth across the year but within the quarter, we won't give that that out.

Certainly it was a negative impacts given the consumer health and sort of muted launch for our products as well. And then for -- some impact on the dynamics and some of our consumer related products, as we alluded to during the prepared commentary as well as some of our precision products as well.

So we won't break it out on the quarter and as you said the primary driver was COVID-19. But as you can imagine, with us raising our guidance, and having a range of growth from 25% to 28% of the year, it's 16 to 18 points of that from COVID-19.

This translates to solid growth across the company and as well as obviously, for biologic now this quarter was over 50% of our revenues..

Got it. Okay and maybe help us think through the capacity expansion that you guys, you have a number of them that are coming online now, I believe in the fourth quarter of the fiscal year and as well, as we move forward into the next fiscal year.

Just how, it is possible, help us think through like the magnitude of these expansions? Have you been capacity constrained biologics at all? And kind of what these expansions could allow you to do in terms of revenue contribution in that segment?.

Yes. I will answer that one Dan and just say that we're not going to give any specifics with regards to our capacity. But I would just really point out two things. Number one is, our strategic plans really put us in a pool position as we entered COVID to have really coveted capacity online.

And then obviously, we announced other capacity expansions and the best way to think about this is one, we were putting a very strong position to accelerate our strategic plans with the capacity expansions that we announced and then I would also say that COVID actually accelerated the returns that we have from these overall capacity expansions in that the company continues to look aggressively at putting in capacity where we see future demand from overall pipeline, as well as the likely continuation of COVID vaccine related work as it's becoming more and more clear that COVID vaccines for the billions of people around the world will still need to be manufactured along with boosters and the effects of potential variants.

I would just say that our capacity plans really put us in a great position and will allow us to really continue our sustained long term growth..

Got it..

I would just add clearly across all biologics segments we have a number of offerings coming from cell and gene development and drug substance. And then when you go into drug product, we also have the capability and capacity to fill vail, syringes across a number of different locations as well and then your biomedical services.

And as you heard from multiple commentary, we've seen really solid growth across all of the offerings within our biologics business cell and gene therapy, if I might add.

So I think when you think about capacity, where we're essentially expanding across virtually every one of our operating locations within biologics, you have to think about different formats that we have as well.

So for example, in syringes where we announced the early 2019, extension of what vials and syringes are state of the art capacity for clinical syringe across the company, within all biologics to continue to meet customer demands in addition to the vial lines we are publicly announced that we're having across the network as well to continue to meet customer demands not only for COVID-19 but the non-COVID related work as well..

And then, I'm not going to sneak one more in, I know there's a lot of other topics to discuss but sorry for one more question on COVID here, but, John, I know you mentioned the billion doses by the end of calendar year 21.

Just and you've been pretty clear on past calls at June 30 kind of like COVID demand stops, it's going to persist here, anyway, to help us think through at this point, what that contribution could look like kind of going forward into your next fiscal year because I think it's an important aspect to just kind of understand how we should be thinking about both the COVID and the non-COVID growth as we cycled past the end of June 30? Thank you..

Yes. Sure. So certainly, we're not going to be providing any guidance with regards to fiscal 22. But I will reemphasize what you've already said which is we do see the ongoing need for vaccine production actually going into calendar year 22. Certainly there is billions of people that need to be vaccinated. There's the spectra for booster shots.

There is also the need to address the variance. So I would just consider that the capacity that we've built and the partnerships that we have with regards to vaccine production are likely to continue on into the future at some level..

Yes and I will just add that two things, one, we have made certain public announcements with press releases for certain of our programs that have been extended with our customers in terms of contract terms, are well into calendar 2022 and then the other point I'll make is this strategic relationships with a number of our customers that we're working with, have been elevated to a point where we work with them across a broad spectrum of pipeline products that they have, given the relationships that we previously had plus what we've done to this global response for this pandemic as well..

Great guy, thank you..

Your next question is from the line of Tycho Peterson with J.P. Morgan..

Hey, good morning. Just a follow up on that last point. I guess, as we think about the guidance here in the near term, obviously, you're raising it. But you do have the J&J rollout halted. I am just curious how that factored into guidance.

Is that upside to the extent that that rollout continues and then John, can you talk about what, to what degree you actually have vaccine arrangements in place for 2022/2023 or is it still a bit early on that?.

Yes, I will take that first one of the question and see what John wants to add here. We certainly won't go into any specific customer contract.

We have scores of COVID-19 programs that we've won with our customers, in addition to the 7,000 products we supply in the market, and the 1,200 development programs that we work with our customers on throughout the pipeline.

Taking all that into consideration, certainly -- factored in the latest information across all of the products and services we work with our customers on to arrive at the guidance. So all of those have been factored in. But we won't specifically with the Johnson & Johnson one as I said. So with that, I will pass it to John for any additional comment..

Yes. I really don't want to provide any additional specifics other than what we've already announced publicly with regards to any relationships that we have with the vaccine manufacturers. But then I'll just again, refer to my previous comments.

Obviously we expect that we're going to be entering into a phase where there's going to be some level of continuing vaccine requirement we work to contract with our customers in the appropriate way and we'll continue to do that..

Okay and then on the segment level, for Softgel you built s momentum here. I think you said last quarter, you had two consecutive quarters of over 40% growth and development. How should we think about that segment getting back to growth and then separately for CSS 43% net new business wins is pretty meaningful.

Can you provide some color on that?.

Yes, Tycho, look certainly the pandemic related impacts on the Softgel and oral technologies business have lasted longer than we expected and as we said, in prepared commentary, the performance of the third quarter was an improvement over the first two quarters and at the same time we are continuing to see really strong development activity in the pipeline with our customers across the segments.

If you recall, the first two quarters were about 40% growth, year-on-year on development and then in this last quarter, 25%. And so please do that.

We think long term this supports our confidence in the business and its ability to deliver between 3% and 5% long term but if you're going to this year we'll, take a look at the commercial and other development work that we've done with our customers to look at what that translates to a year on any given year.

With CSS certainly pleased with the net new business ways as well as the performance in the quarter against really a very robust third quarter last year, and to close the 9%, we are very pleased with that and just as importantly, the backlog of new business wins on number -- the business needs also very strong.

This is one of our six shorter cycle businesses. Although given the storage and distribution aspects can last if you want it to be years, of course, like clinical program business that has a shorter cycle compared to a longer cycle of businesses from sales to revenue. So that's an indicator that we like in the business as well..

Okay, and then one last one at just on capital deployment leverage 2 points returns leverage and below your long term target of three turns.

Can you just talk about that in the context of organic investments and also your appetite and willingness to do additional M&A?.

Yes. So technologists see that certainly we put a priority on our organic investments and again, I'm very pleased to say that COVID not only accelerated our strategic plans, but really accelerated the returns on strategic investments that we've made.

And we're going to continue to prioritize organic investments, which obviously means CapEx deploying, and that's clearly detailed out in this call here today.

Also state that Catalent continues to be very active from an overall M&A standpoint and if we can identify assets that will accelerate our strategic plans, both in terms of geography and capacity that will we will continue to do that..

Okay, thank you..

Your next question is from a line of Jacob Johnson with Stephens..

Hi, thanks. Good morning. Maybe first question you've added to your cold storage capabilities and CSS that seems to be aligning CSS with your cell and gene therapy capabilities.

Can you talk about your broader strategy around these cold chain capabilities? And does this growth in cold chain capabilities maybe geared towards the cell and gene therapy and market add to the growth profile of that segment potentially going forward?.

Sure. Thanks for the question, Jacob.

I see that when we take a look at our CSS business, although it's relatively small compared to our other business segments we really see it as a strategic asset that we can leverage across our other business units and clearly one of those areas is in the gene and cell therapy area where access to that cold chain really makes it a significant enabler for our customers in the gene and cell therapy area itself.

I would without putting specific numbers on it I would just agree that the strategic nature of the investments that we're making in CSS, in the cold storage area in aligning it with other business units specifically in cell and gene therapy area, really, I would say it's a positive synergy for the company..

Got it..

Yes. I would just add one quick comment. In Biologics work in general has been key elements here with respect to the need for cold storage and more specifically cell and gene therapy at ultra low temperatures given the supply chain handling is an added element here that's where the CSS is positioned to support customers’ needs..

Thanks for that one. And then maybe John, another strategic question. We've seen a CRL get into the CDMO industry recently, then Thermo acquire a CRL to add to their CDMO capabilities.

I just be curious of your view of Catalent may be moving closer to CRL work and why or why not it would make sense to operate as CRL and CDMO under one roof?.

Well, thanks for the question Jacob. I think first of all, I think it was a very interesting move with regards to thermo, acquiring PPD. And I would just make the comment that it really shows the overall importance of the pharmaceutical services industry for pharma and emerging pharma..

Got it. Thanks for the questions..

Your next question is from the line of Dave Windley with Jefferies..

Hi, thanks. Good morning. Thanks for taking my questions. So an overarching question about guidance and particularly long term guidance. John as you covered in your prepared remarks, you've hit some of those metrics now, three years ahead of plan.

Do you have an inclination to revisit that long term guidance anytime soon? Just thinking about one more quarter before the end of your fiscal year and what we might expect the fiscal year end?.

Yes. So certainly, we're not going to be, we provided long term guidance upgrading only regionally and then we also talked about a $4.5 billion revenue goal our increased margins, and also the percent of biologics that we'll have, as part of the overall business.

I'd say we're extremely pleased with the progress that we've made against that overall long term goal, and that we're going to continue to monitor the performance of the company with regards to our strategic plans and what we see for the future. But there's nothing going to happen with regards to short or long term guidance, as of now..

Okay. Thanks for that. And related to that earlier I think Dan's question on capacity expansion, maybe to come at a slightly different way. It seems like you're investing a lot in cell and gene therapy among other places, but certainly there. And that space we continue to hear is growing 30% plus.

I guess the question is, could you devote even more CapEx to that space, build out more suite faster and capture more businesses like, as fast as you are growing that capacity could you grow it faster, and gain even more share?.

Well, first of all, I would just say that you're right. This is an extremely fast growing space. Second, in the prepared remarks, we noted the fact that we've completed the 10 suites. We've got an additional five suites with the capability for even additional suite.

So this is an area that we continue to work at room an overall strategic standpoint to build out that capacity and clearly, we have our sights on being the leader from a CDMO standpoint, from an overall gene and cell therapy space. But we've many times pointed out the imbalance between the overall supply and demand in this specific space.

We've talked about the overall outsourcing rate, which is extremely high in the gene therapy area, specifically given the dynamics of potentially curable therapies combined with many small companies not being able to devote the resources necessary to build the overall infrastructure.

And we actually see the outsourcing rate increasing from where it is today. So certainly the aggressive approach that Catalent has taken towards building out capacity in gene and cell therapy area is going to continue to get.

I'll just refer you to the remarks that we had here with the 10 suites going with an additional 5 and the capability to do more. So we're going to continue to monitor the expansion of the space the overall demand and what Catalent does is we work to put capacity in plates ahead of demand and pipeline that we've seen..

Got it. Thanks and the last one for me, in your prepared remarks, you made a comment about inclusion of revenue related to COVID in development versus commercial supply, depending on the terms of those contracts. And I think including a comment around UAE approvals being development.

So I guess what I wanted to clarify since I think all the vaccines in the market have yet to be formally approved and are in UAE status should we think about all your COVID revenue has been included in development services in the biologics segment at this point. Thanks..

Yes Dave, thanks for that. What we're seeing here is that you're quite right. Among the vaccines that have been approved across the U.S. and across Europe they're all under emergency use authorization.

What we're saying is that depending on the terms of the contract, which is the elements in terms of how they get classified, you could have elements in both commercial as well as development..

Okay. Thank you..

Your next question is from the line of Sean Dodge with RBC Capitals Markets..

Hey, good morning. This is Thomas on for Sean. Thanks for taking the questions. You guys all mentioned the acceleration of multiple capacity expansions to accommodate in the vaccine related demand.

How does the expansion impact some of the kind of initial take or pay arrangements? Are those adjusted or are those adjusted at the start of fiscal 22 or what happens to this?.

Yes. So I'll take that. Indeed, we have a number of occasions throughout the business and particularly across the biologics offerings. Those essentially are supported by pipeline products that we’ve with our customers demand, both for COVID and non-COVID acceleration of certain capital that as we look at our strategic plans, we will be adding anyway.

Not all programs have fair elements associated with them to the extent they do they are reflected in the current year guidance that we've given that we've expressed throughout the year.

We won't be pulled out in any way other than to say it's a combination of timing in terms of database and volumes that we actually produce across the business for four businesses.

I would point out the majority of our contracts across the company and then we have 7,000 products that we supply for customers in addition to 1,200 development goals as you can imagine, the vast majority of them don't have these take-or-pay elements associated with them..

Okay, thanks. And then one more.

Have you all been able to alleviate some of most of the projects that were set aside in favor of the vaccine production? You mentioned, seeing some relief here with new capacity and fiscal fourth, but any updates on how widespread that issue is or isn't?.

So I would just say that we've continue to work under rated order environment with regards to our Bloomington site, I think, which is seen the greatest amount of that work, if you will, which flows down from our overall customers.

Certainly here through the first quarter of the calendar year and I would say, going into late spring and summer, we continue to manage capacity between rated orders and non-rated orders for other customers expect that to alleviate here in the coming weeks and months..

Okay. Great. That's all from me. Thank you..

Your next question is from the line of Ricky Goldwasser with Morgan Stanley..

Hi, this is Ronnie for Ricky. Just two questions on the biologics business.

On the margin side, can you help break down the drivers of the margin expansion in a segment for this quarter? And how should we think about the margin from the vaccine versus the base business? And what needs to happen if we can see the biologics segment margin staying at the mid 30s range for your long term guidance?.

Yes. I'll will take that. Look we are already pleased with the margin expansion in the business here year-over-year. I would say the primary driver margin and this is going to be level volume and throughput across utilization across the network, which you can see that translating to margins in the order of 33%.

Having said that, certain vaccines versus based businesses which I said on prior calls we won't talk about any specific programs but the work that we do across vaccines are similar in terms of pricing and economics to lifetime work that we'd be putting on vaccines.

And so I think really what you are looking at here is principally an element of the throughput position across the network that strengthens the margins that you see which are aligned with what we expect for the business long term albeit not necessarily in the area as we said in the press..

Great, and then following up on the cell and gene therapy.

Can you talk about the client mix between the small versus large cell pharma? And what's the pipeline looking like in the second half and do now have more visibilities for fiscal 22 and beyond?.

Yes. Look the cell and gene therapy business is a key part of that offline within our biologics segment. We haven't broken that out as it is part of the organic picture. Honestly, we work with a broad spectrum of customers across Catalent including our biologics offerings, and within our cell and gene therapy offerings.

And so, we don't necessarily give a big -- look like other than to say that it is across a broad spectrum. But if you look at the pipeline of cell and gene therapy there is a number of cap biotechs that are driving the innovation, and then we partner with in terms of the work that we do across the business.

We won't be the breakdown on what the second half look like versus any other point in time in the business other than to say the overall secular trends continue and the pipeline continues to expand.

If you look across gene therapy with 600 active assets going to 1,600 by 2026 and then on cell therapy side as well, even more assets in the pipeline expected to grow accordingly. So no specific in terms of the profile of the customer and it's a fairly broad section that we work with across biologics..

Thank you..

Your next question is from the line of John Kreger with William..

Hi, thanks very much. My question relates to Madison.

Have you guys validated the two new trends that you said were completed and is that facility now in any form of kind of commercial production at this point or is it still clinical?.

We believe, go ahead Wetteny..

Yes. We have just completed but fourth and fifth suite in Madison, as you know, part of the strategic pathway for businesses to become a commercial site in this capacity.

We are not capable of handling products across the development pipeline and commercial but today, all of the activities in the site remain development stage programs, and John if you want to add anything to that..

No..

Great, thanks. And then John, maybe a broader one.

It seems like your biologics business is now kind of three or four big buckets with cell and gene therapy, mammalian or monoclonal production and sterile fill, can you help us kind of better understand those drivers? Are they comparable in size? And what's your sort of longer term view on growth rates across those buckets? Thanks..

Yes. So first of all I would just say that we certainly see extremely strong growth rates in biologics period in the double digit growth range. From a just relative size standpoint, I would say our drug product is the most significant of our biologics revenues with drugs substance being a smaller component but obviously incredibly important.

I think we've been very clear that we're focused on that sub-5,000 liter segment where today we're a relatively small but important player. I would say that we continue to look for good assets both in U.S. and Western Europe with regards to drug products and drug substance.

We certainly created a strong foothold now from a drug product standpoint in the Anagni facility that we purchased from BMS, but we certainly have our eyes set on also growing in sub- 5000 liter area in our existing assets as well as finding the right asset in Europe from an overall drug substance standpoint again, focus on that sub-5000 liter but all the areas that we've mentioned between our biotherapeutics our cell and gene therapy, the fact that we've entered into the plasmid DNA space, I think we were really building out a very strong overall biologics platform for the company that is now as we've stated in the prepared remarks, exceeding 50% of the overall company's revenues..

That's helpful. Thank you..

Your next question is from the line of Juan Avendano with Bank of America..

Hi. Hello. Good morning. Thank you for the question.

Given the manufacturing setbacks that that one of your competitors has faced in a facility that is met that is geographically close one of the plants that you have around Baltimore, do you foresee, perhaps an opportunity to engage with that COVID vaccine developer in discussions to do drug substance work for them given the geographical proximity and your capabilities on drug substance? Do you see an opportunity to essentially help and gain share of wallet within that that customer?.

Yes. I didn't want, I can't answer that very specific question. I would just say that Catalent is in dialogues with many of the vaccine manufacturers to provide support on either a drug product or drug substance standpoint..

Okay, thanks. And then a quick follow up around the potential COVID vaccine booster opportunity.

Have you renewed any take or pay contracts to extend beyond the original timeframe upon the initial rollout of the vaccines? How much are you segregating and actively allocating capacity around COVID-19 in 22?.

Yes. I would just say, clearly from a Catalent standpoint our goal is to have contracted volumes now and into the future. So we're regularly working with customers. I will also note that capacity in specifically in a drug product area has been very-very tight throughout the entire pandemic. So that put Catalent in an overall hold position if you will.

And in the final comment I'll make is that we do see production needs for vaccines beyond calendar year 2021. And it's certainly there is going to be some rules play with regards to booster shots and variants. So there will likely be some level of continued vaccine manufacturer..

Okay, thank you. Appreciate the insights and looking forward to chatting with you at the Bank of America Healthcare Conference next week. Thank you..

Your next question is from the line of Jack Meehan with Nephron..

Thank you. Good morning. I was wondering if obviously, very strong growth across the business, especially in biologics. I was wondering if you could talk a little bit about supply chain and whether you're seeing any pressure points from any of your suppliers and just how you're managing through that..

Yes.

What I would say is that, from their overall supply chain standpoint, certainly the pandemic has stressed the overall supply chain across the industry and I'm proud to say that Catalent was extremely proactive in the early time of pandemic in terms of actually placing demands all the way throughout calendar year 2020 back when the pandemic hits where we're able to stress the supply chain and understand what the overall availability is and then we continue that an overall rolling basis.

To-date we've been able to manage any supply chain constraints but it continues to be something that we monitor and are going after proactively..

Thank you. And then one follow up on the COVID commentary within guidance. You look at the way that the biologics business has been trending as well, as the rate of growth and development services. It looks like the gross contribution from COVID is trending kind of a lot higher than the net that you flagged within guidance.

Is there any, would you mind giving some additional color around the gross versus net what you're assuming there?.

Yes. So Jack clearly, this is a fairly complex and integrated set of offerings that we have as well as capacity. As we said in the previous commentary that we look across operating segments with varying impacts from COVID-19.

We won't dive into or delve into details on the growth versus the -- suffice it to say that we've taken into account not only the offsets within some of our businesses where COVID-19 is actually slow progress with respect to certain newer product launches and consumer health products and over the counter pain medications and so on to arrive at the net COVID-19 range that reviews.

We did increase that. Obviously, we have previously during the year that we're saying out of the 25% to 28%, top line growth for the company between 16 and 18 points would be for net COVID-19. And loyalty points between those two ranges are necessarily correlated. So you can find anywhere within those level..

Thank you, Wetteny.

Sure..

Your next question comes from the line of Evan Stover with Baird..

Yes. Thank you. So this is obviously an oversimplification. But as I think about how COVID vaccines have rolled out globally, kind of led by the U.S. and Western Europe, markets as far as uptake. So the question is, I guess, as I roll that forward, and kind of think about the rest of the globe, really picking up the COVID vaccination efforts.

For Catalent as you think about your site network where you're making vaccines and also your current commercial arrangements with partners on COVID vaccines.

Is there any reason to believe that Catalent would be more or less equally levered as we kind of see vaccines pick up across the rest of the globe for Catalent to kind of maintain its share of what's being produced in the market..

We just think in the comments that obviously, billions of doses are going to needed to really make a dent in the overall world population from a vaccine standpoint. Catalent certainly has some very important assets from a drug product standpoint that have been used in the fight against COVID.

And I would just expect that we would continue to play with the partners that we have in some way..

Yes, I will just add, to consider here, beyond initial dosing as you reference the U.S. and then following the U.S. and Europe. The potential for boosters in those markets as the rest of the world receive vaccine is another element to consider in terms of how this might play out.

Now, ultimately, we don't control the destination of the policy manufacturer on the orders and demands from our customers and they come in where those products end up falling in the market..

Thank you. Second final question for me. You've got an elevated CapEx outlook for the next two fiscal years. My question requires you to put on a longer term hat and think beyond that and obviously Catalent business mix has changed markedly in a few years. But your outlook, I think used to be high single digit, CapEx 2% of revenue.

Has your business mix changed to any certain any significant extent where you would now expect that level of ongoing capital investment to be higher to hit your long term 6% to 8% growth targets. Just wondering if you can give me a longer term view on CapEx..

Look as you said, we are at the more elevated level CapEx as a percentage of our net revenues. Historically, we've operated in the high single digits.

We expect long term to migrate towards that level to the extent that we remain and as we go, the levels for a longer period of time is going to be driven by demand from our customers, including the scaling of pipeline that we have as those go from development to commercial, and continue to evaluate those and make sure that the returns to the business cases are appropriate as we always do in the business.

I wouldn't say that there is necessarily a sort of structural element in the business that had changed that would mandate a higher maintaining higher level of capital as a percent of our revenues in order to achieve our long term growth rates.

I would say that across the business, depending on which segment and what areas that you're looking at some of the inorganic moves that we've made, for example, also bring capabilities to the company that necessitate scaling of those businesses and therefore, you see that impact from an organic perspective.

So that's really a follow on to the inorganic, if you follow, and some of that dynamic is that you've seen playing out now and as we look further out we'll continue to evaluate the demand from our customers to determine where we deploy capital all at the same time while being mindful of returns..

Very helpful. Thank you..

Your final question comes from George Hill with Deutsche Bank..

Good morning, guys and thanks for squeezing me in. I wanted to follow up on Dave Windley's question talking about the cell and gene therapy market. There don't seem to be a lot of third party commercial solutions out there.

So you guys have a good sense of your market share and the competitive environment and I guess, do you feel like it's better? Is this an environment where it makes more sense to acquire kind of tangential players or continue to build your own capacity?.

Yes. We just see the first of all, and we do see extremely strong demand in the space where demand is going to outstrip supply.

We really like adding organic capacity through the assets that we have in the overall Baltimore area to get over for -- prepared remarks with regards to the 10 suites that we brought online which I believe at the time of the acquisition we had one suite up and running with the second suite coming online. We've now built that out to 10 suites.

We announced an additional five suites with a capacity for more. So we love having, I would say that concentration of capability both in terms of people and capacity there. Certainly if high quality assets would be considered self available we continue to consider those. But we really do like the path that we're on right now.

And not only until we put cell and gene therapy, we love accelerating the returns on organic investments..

Thank you..

That concludes today's Q&A session. I will now like to turn the call back over to John Chiminski for closing remarks..

Thanks, operator and thanks, everyone for your questions and for taking the time to join our call. I'd like to close by highlighting a few key points we covered today. First, we're encouraged by our strong results in the third quarter.

The 35% organic net revenue growth and 44% organic adjusted EBIT growth showed the success of our strategy and the continued strength of the business enhanced by COVID-19 related demand. We've expanded our biologics business at an unprecedented pace in order to help meet demand for both COVID and non-COVID products.

We're proud of the acceleration of our capacity build out has played a key role in the fight against the COVID pandemic and we will continue to aggressively build capacity that will also position us for sustainable long term growth.

The biologics segment continue to report exceptional growth in the third quarter, including more than doubling its revenue. The segment comprise more than half of our overall net revenue in the quarter compared to roughly 1/3 a year ago and continues to be the key growth driver for Catalent as we increase capacity, and invest in innovation.

Finally, we couldn't be prouder of our 1000s of dedicated employees across the globe who have demonstrated our patient first culture, placing patients at the center of everything that we do. The importance of their tireless efforts to develop and supply products that help people live better and healthier lives is now more evident than ever before.

We're grateful for their commitment to ensure the safe and reliable supply of more than 7000 products that we're responsible for delivering each year. Thank you..

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you for your participation and expect you now disconnect your lines..