00:05 Hello and welcome to the Catalent, Inc. Third Quarter Fiscal Year 2022 Earnings Conference Call. My name is Katie and I'll be coordinating your call today. [Operator Instructions] 00:21 I'll now hand over to your host, Paul Surdez, Vice President, Investor Relations to begin. Paul, please go ahead..

00:28 Good morning everyone, and thank you for joining us today to review Catalent's third quarter fiscal 2022 financial results. Joining me on the call today are John Chiminski; Chair and Chief Executive Officer; Alessandro Maselli, President and Chief Operating Officer; and Tom Castellano, Senior Vice President and Chief Financial Officer.

Please see our agenda for today's call on slide two of our supplemental presentation which is available on our Investor Relations website at investor.catalent.com. 01:01 During our call today management will make forward-looking statements and refer to non-GAAP financial measurements.

It is possible that actual results could differ from management's expectations. We refer you to slide three for more detail on forward-looking statements, slides four and five discuss Catalent's use of non-GAAP financial 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 that will be filed with the SEC today for 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.

01:42 Now, I'd like to turn the call over to John Chiminski, whose opening remarks will begin on slide six of the presentation..

01:49 Thanks Paul, and welcome everyone to the call. I'm pleased to report that the positive momentum we built in the first half of our fiscal year continued in the third quarter.

Our financial results were driven by strong continued growth in our biologics segment, with additional support from our other service offerings, including our consumer-preferred gummy dosage forms for nutritional supplements which act as an additional growth engine for the company.

02:19 Our strong performance in the third quarter coupled with continued momentum has enabled us to increase our fiscal 2022 guidance for the third time this fiscal year which Tom will review later in the call.

02:33 Regarding financial performance, our revenue for the third quarter was $1.27 billion, increasing 21% as reported or 23% in constant currency, compared to the third quarter of fiscal 2021. When excluding acquisitions and divestitures, organic growth was 20% measured in constant currency.

Our adjusted EBITDA of $339 million for the third quarter increased 24% as reported or 26% on a constant currency basis compared to the third quarter of fiscal 2021. 03:10 When excluding acquisitions and divestitures, organic growth was 26% measured in constant currency.

Our adjusted net income for the third quarter was $188 million or $1.04 per diluted share, up from $0.82 per diluted share in the corresponding prior year period.

Our biologics segment was again the top contributor to Catalent's financial performance as it experienced organic net revenue growth of 30%, driving an EBITDA increase of $41 million over the third quarter of last year.

These strong results came from across our broad base of service offerings within our biologics segment and were driven in part by COVID vaccine demand. Demand remains strong in the segment, including a notable increase from several of our large gene therapy customers for viral vector manufacturing.

04:09 Given the high utilization of our biologics assets, as well as projections for continued demand in the years ahead, we continue to take all organic and inorganic actions to increase our footprint in drug product, drug substance and cell and gene therapy. Alessandro will walk through our latest developments in a few minutes.

04:32 In our Softgel and Oral Technologies segment, our complex oral solids offerings continued to recover from the pandemic related headwinds as we had anticipated, and results from this segment were again further enhanced by the acquisition of Bettera.

Organic growth was very strong at 14% as year-over-year demand for both prescription and consumer health products, recovered nicely over the same period last fiscal year. 05:00 Inorganically we received another boost from the recently acquired Bettera business, which adds more than 20 percentage points of net revenue growth to this segment.

The acquisition is performing even better than we initially expected, and we're investing an additional capacity to meet the high demand for gummy formats from our consumer health customers. 05:24 Our Oral and Specialty Delivery segment reported 4% organic net revenue growth, driven by early phase development offerings.

With the divestiture of our Blow-Fill-Seal business in March of 2021 now annualized, it will no longer negatively impact reported growth beginning in the fourth quarter of this fiscal year.

Future growth in this segment will be aided by recently completed expansions of our nasal capabilities in RTP and oral solid dose GMP manufacturing suites in Kansas City, as well as strong growth from commercial products in our Zydis fast result dosage format.

06:01 Due holistically Catalent remains well positioned to continue delivering strong financial performance and growth, and we remain committed to providing patients around the world with lifesaving and enhancing treatments.

06:14 I'll now turn the call over to Alessandro who will review various operational highlights from the quarter, including recent acquisitions and capital expenditure projects..

06:27 Thank you, John. We continue to expand our global network, invest in growth driving capabilities, attract new talent and accelerate our progress in operational excellence.

These will all be critical drivers for Catalent to deliver our long-term targets I outlined last quarter, including the fiscal ‘26 targets of more than $7.5 billion in revenues and adjusted EBITDA margin of approximately 30%.

With that said, I want to address the questions we've received regarding the degree of covenants reliance on continuing COVID vaccine revenue to deliver these numbers.

07:08 While our current strategic plan, which I outlined last quarter does include fiscal ‘26 some projected revenue from respiratory vaccine, our model assumes that it will likely be only a fraction of the revenue generated to-date from COVID vaccines.

The strong industry backdrop and forecasted demand across multiple therapeutic care categories and modalities confirm that we are not reliant on substantial revenue from COVID vaccine to achieve our targets. 07:40 We also continue to be comfortable with our overall long-term organic revenue growth of 8% to 10%.

Looking into fiscal 2023, we see growth in line with that range driven by, increased utilization of recent investments across the company, including the new growth investment as we review in a moment.

Organic growth through current assets, including a notable uptick in commercial demand in SOT, and a shift of some of our tangible biologics asset that currently producing COVID vaccines to other customer projects including the newly signed large commercial tech transfer programs.

08:24 In formulating these fiscal ‘23 outlook, we also mitigated the future risk by assuming a considerable decline in COVID-19 product revenue in fiscal ‘23.

So, to be clear, our growth drivers are expected to be more than -- are expected to compensate for considerable decline in our COVID vaccine revenue, leading to top line growth in our -- in line with our long-term growth rate of 8% to 10%.

While the company succeeded in meeting demand over the course of the pandemic, we concurrently made strategic investment in allocated capital to other areas of the business that position our overall portfolio for long-term success.

09:13 In addition, our robust global network of facility enables us to shift production based on demand and reliably supply our customers with a wide range of products they need.

Core to our CDMO business model, our service offerings across the company are generally designed to be flexible and fungible, so that they might server multiple customers, products, therapeutic categories and in some cases, modalities, providing us with a balanced platform for growth. 09:43 Let me review some of the latest growth actions.

On the acquisition front, we recently announced our $44.5 million purchase of a state-of-the-art commercial scale cell therapy manufacturing facility in Princeton, New Jersey, that we are closing -- we are working in close collaboration with our existing cell therapy sites, particularly our Cell Therapy and Plasmid Center of Excellence in Gosselies, Belgium.

10:09 We purchased the Princeton facility from Erytech Pharma. We will manufacture at the site and exclusively supply its lead product candidate for the treatment of acute lymphoblastic leukemia. The 31,000 square foot site houses 16 suites designed for GMP production as well as labs for analytical development, quality control and microbial testing.

We are also in the process of leasing 12 buildings nearby to enable future expansion. Similar to the cell therapy campus we built through acquisition in Gosselies, we envision Princeton becoming a strategic campus for cell therapy development, clinical and commercial scale cell therapy manufacturing in North America.

11:02 We also continue to invest in our gene therapy assets and that campus near BWI Airport we are on track to open eight additional suites by the end of this calendar year, bringing the total to 18 GMP manufacturing suites.

Each of these suite is designed to accommodate multiple bioreactors suitable for commercial-scale manufacturing from cell bank to purify the drug substance across different modalities. On the therapeutic side, we acquired the largely completed biologics development, and manufacturing facility in the biomedical science hub near Oxford, UK.

We plan to invest up to $160 million to complete the facility and extend its drug substance capabilities for development and manufacture of biologics therapies and vaccines including mRNA, proteins and other advanced modalities.

It is expected that the new facility will employ at least an additional 350 people and support public and private organizations seeking to develop and manufacture biotherapeutics and vaccines.

12:14 As we are able to get these sites up and running on an accelerated timeline compared to the previously announced organic build of drug substance capabilities in Anagni, we would reassess the best use of best allocated space in Anagni, and focus our effort and capital on bringing our first drug substance offering to Europe through our new Oxford site.

12:39 In the European drug product space, I was happy to be with our team along with national and local dignitaries in Limoges, France in March for the ribbon cutting ceremony that recognized the completion of the multi-million dollar project that transformed the Limoges site into a European center of excellence for biopharmaceutical development, drug product finished services and packaging.

The site focuses on early phase integrated clinical development, including the small scale commercial manufacturing allowing for seamless technology transfer of projects within the Catalent network as they progress to late stage and larger scale commercial supply basis.

13:23 Also in Europe, our drug product facility in Brussels continues to make substantial progress, which has allowed us to begin the restart of manufacturing operations at the site, while we continue in parallel to enhance our overall site operations.

In the US, our Board recently approved a multi-year investment in Bloomington, totaling $350 million to expand the biologic drug substance and drug product manufacturing capabilities, including quality control laboratories and complex automated packaging lines.

The project will serve the sites robust biologics pipeline as well as the manufacturing capacity for commercially approved products in high demand. 14:12 The drug substance is part of the expansion, which is expected to be completed before the end of this calendar year is designed with facility to enable the site to serve more commercial products.

The expansion of the drug product and finish capacity, which is expected to be completed in 2024, includes the build-out of new syringe filling lines, as well as new lyophilizing capacity.

These investments will enable us to expand our flagship Bloomington campus and extend our leadership as one of the largest and more comprehensive global center for integrated manufacturing capabilities in North America.

14:51 With that I will now turn the call back over to John, who will discuss how Catalent incorporates a sustainability focus as part of our long-term core business operations and planning. .

15:03 Thank you, Alessandro. As detailed in slide eight, in March we released our third Annual Corporate Responsibility Report covering our progress in environmental, social and governance matters during fiscal 2021.

At a high level, we've made significant progress in key ESG areas over the past year, such as carbon emissions, diversity and inclusion and community investment and continue to shape our sustainability focus in alignment with our core business strategy.

15:37 Beginning with people, fiscal 2021 was a record-breaking hiring year for Catalent as we on-boarded more than 4000 colleagues, while keeping their safety and well-being at the forefront of our efforts. In addition, we expanded employee resource groups and diversity among our leadership.

Our employee resource group net worth now comprises more than 45 chapters across eight global communities and continues to grow, thrive and positively impact our inclusive culture. 16:13 On the environmental front, we met our goal to reduce our indirect carbon emissions by 15%.

This success was primarily the result of our transition to renewable electricity resources as well as continuous improvements through on-site engineering, equipment and facilities management.

We've also set new science-based targets to reduce Scope 1, that is direct and Scope 2 indirect emissions by 42% by 2030 and committed to no residual active pharmaceutical ingredient in our wastewater above the predicted no-effect concentration, thus taking a leadership position in the industry from a sustainability perspective.

The fiscal 2021 Corporate Responsibility Report also includes our first ever Taskforce for Climate Related Financial Disclosure or TCFD reporting underscoring our progress and commitment to best-in-class sustainability practices.

17:23 Third is our focus on communities, fiscal 2021 was a milestone year for philanthropic giving at Catalent as we distributed more than $1.2 million to support COVID-19 relief efforts, stem education and organizations that support patients in underserved communities.

In addition, since the Russian invasion of Ukraine earlier this year, Catalent and our employees have donated to over 45 non-governmental organizations supporting humanitarian and refugee support efforts in Ukraine and Eastern Europe.

18:05 As I prepare to transition to my new role as Executive Chair, I can't help but reflect on and be proud of the substantial progress we've made in corporate responsibility, particularly in the last five years.

This evolution was achieved by staying true to our values and at the same time advancing and delivering real life solutions for people and the environment.

While we're delighted by the progress we've made, we know our work in this area is far from done and we will continue to enhance our efforts that have put us at the forefront of corporate responsibility in the CDMO industry.

18:47 Before turning the call over to Tom, I'd like to make a few comments on the overall health of our business before Alessandro begins as CEO on July 1.

Given our growth history and trajectory, increased profitability and proven success with strategic execution, including the transformation of the company over the last few years as we've grown our biologics segment and further diversify our portfolio, I'm proud of where Catalent stands today and the people who got us here.

Catalent offerings are not only balanced, they also closely match the industry's R&D pipeline. We have never been in a stronger position in the dynamic growth markets we serve.

19:34 Now it may already be understood, but I nevertheless like to make clear that this will be my last earnings call as I transition to the position of Executive Chair of the Board.

I certainly appreciate the many interactions I've had with you over the years, but importantly, I am not going away and will continue to discharge important responsibilities in my new role.

I look forward to continuing my work in close partnership with the Board, Alessandro and the rest of our talented team, while contributing to the ongoing success of Catalent.

20:11 To reiterate from prior comments, there is no better person suited to take this company forward than my long-term colleague and friend Alessandro, and he has my full confidence. 20:23 I'd now like to turn the call over to Tom, who will review our financial results for the third quarter and our updated fiscal 2022 guidance.

Thomas Castellano 20:33 Thanks, John. I'll begin this morning with a discussion on segment performance, where commentary around segment growth will be in constant currency. I will start on slide nine with the biologics segment.

To highlight the company's transformation over the last few years, we will see that the segment represented 55% of our net revenue growth -- net revenue in Q3 of this fiscal year compared to 52% in Q3 of fiscal 2021 and 33% in Q3 of 2020. 21:01 Biologics net revenue in Q3 of $698 million increased 30% compared to the third quarter of 2021.

This robust net revenue growth was driven organically by broad-based demand across the segment, most notably for COVID-19 related programs, which were only ramping-up in the third quarter of last year.

The segments EBITDA margin of 31.1% was up 20 basis points sequentially over the second quarter of this fiscal year, but down year-over-year from 33.1% recorded in the third quarter of fiscal 2021. 21:38 The year-on-year decline is primarily driven by costs arising from the remediation efforts at our Brussels site.

In addition component sourcing revenue, which represents more than 25% of total COVID vaccine revenue was higher this quarter compared to the prior year quarter.

As we discussed in the past, component sourcing is where we source materials, components and other supplies for our customers and these activities come with two opposing dynamics, increased revenue, but margins well below the segment average.

Looking to the next couple of quarters, we expect the biologics segment revenue growth rate to gravitate towards its normalized growth rate of 10% to 15%. 22:22 Please turn to slide 10, which represents results from our Softgel and Oral Technologies segment.

Softgel and Oral Technologies net revenue of $324 million increased 37% compared to the third quarter of fiscal 2021 with segment EBITDA increasing 29% over the same period last fiscal year.

The October 1 acquisition of Bettera contributed 23 percentage points to SOT net revenue growth and 13 percentage points to segment EBITDA growth during the quarter. 22:56 Inorganic EBITDA was adversely affected in the current quarter by a one-time accounting adjustment for inventory valuation as at the time of the acquisition.

Excluding this one-time charge, operational performance on the Bettera entities continues to meet our expectations and remain a key driver for margin expansion for the SOT segment and the company overall.

The organic net revenue increase was driven by growth in both prescription products and consumer health products, particularly in cold, cough and over the counter pain relief products. 23:33 Side 11 shows the results of the oral and specialty delivery segment.

At the factoring out the net impact from the divestiture of our Blow-Fill-Seal business and the acquisition of the Acorda's spray drying assets, both of which annualized in the third quarter of this fiscal year, net revenue grew 4% and segment EBITDA was up 64% over the third quarter of last year.

The top line growth was primarily driven by elevated demand for early phase development programs. 24:04 EBITDA margin improvement was driven by favorable revenue mix, as well as a favorable comparison to our third quarter of fiscal 2021, when we booked charges related to a customer’s September 2020 voluntarily recall of a respiratory product.

24:20 As shown on slide 12, our clinical supply services segment posted net revenue of $101 million, representing 3% growth over the third quarter of fiscal 2021, driven by growth in our manufacturing and packaging service offerings in North America. Segment EBITDA grew 14% with favorable product mix, driving the performance.

As of March 31, 2022 backlog for the segment was $529 million, unchanged from $529 million at the end of last quarter and up 8% from March 31, 2021. The segment recorded net new business wins of $111 million during the third quarter, compared to $137 million in the third quarter the prior year.

The segment's trailing 12 month book-to-bill ratio is 1.1 times. 25:15 Moving to our consolidated adjusted EBITDA on slide 13, our third quarter adjusted EBITDA increased 24% to $339 million or 26.6% of net revenue, compared to 26% of net revenue in the third quarter of fiscal 2021.

On a constant currency basis, our third quarter adjusted EBITDA increased 26%, all of which is organic compared to the third quarter of fiscal 2021.

25:46 As shown on slide 14, third quarter adjusted net income was $188 million or $1.04 per diluted share, compared to adjusted net income of $148 million or $0.82 per diluted share in the third quarter a year ago. 26:05 Slide 15 shows our debt related ratios, and our capital allocation priorities.

Catalent's net leverage ratio, as of March 31, 2022 was 2.6 times below our long-term target of 3.0 times. This compares to net leverage of 2.8 times on December 31, 2021 and the reported net leverage ratio of 2.3 times on March 31, 2021.

Our combined balance of cash, cash equivalents and marketable securities as of March 31, 2022 was $880 million compared to $915 million as of December 31, 2021. 26:48 Moving on to capital expenditures, we now expect CapEx to be approximately 13% to 14% of our fiscal 2022 net revenue, compared to our previous expectation of 15 % to 16%.

The key factor for this change include our higher than previously expected net revenue, combined with some supply chain related delay and longer lead times for some of our capital projects. To be clear, new CapEx associated with our recent acquisitions, most notably for our new biologics facility in the UK is already contemplated in our new guidance.

27:28 Of course our elevated CapEx is temporarily impacting free cash flow, but we expect CapEx to return to a more normal 8% to 10% range in the next few years.

Note that our free cash flow has also been negatively impacted in the last two years by our strategic decision at the onset of the pandemic to increase inventory levels, which continue to allow us to have the inputs we need to meet our supply obligations to our patients and customers in a timely manner.

When we feel the time is appropriate and are more comfortable with the stabilization of our supply chains, we'll begin to reverse course, which will have a future positive effect on free cash flow. 28:10 Now we turn to our financial outlook for fiscal 2022 as outlined on slide 16.

Following a strong third quarter and a solid outlook for the remainder of the fiscal year, we are raising both the low and high-ends of our financial guidance ranges. We are also tightening the range, since there is just one quarter remaining in the fiscal year.

We now expect full fiscal year net revenue in the range of $4.8 billion to $4.9 billion, representing growth of 20% to 23% versus our previous estimate of $4.74 million to $4.86 million. We project that net revenue growth from M&A will continue to be 2 percentage points to 3 percentage points, principally driven by the acquisition of Bettera.

28:58 For full-year adjusted EBITDA, we expect a range of $1.265 billion to $1.305 billion, representing growth of 24% to 28% over fiscal 2021 compared to our previous estimate of $1.25 billion to $1.30 billion.

Note, that the continued strengthening of the US dollar against both the Euro and British pound is expected to negatively impact our adjusted EBITDA by an additional $3 million in the fourth quarter of the fiscal year, the effect of which has once again been absorbed into our new financial guidance.

29:38 Also absorbed in guidance is approximately $8 million of expected costs in the fourth quarter with little or no associated revenue for the cell therapy facility acquisition in Princeton and the biotherapeutics facility acquisition in the UK.

We expect full year adjusted net income of $665 million to $705 million, representing growth of 21% to 28% over the last fiscal year, compared to our previous estimate of $650 million to $700 million. We continue to expect our consolidated annual effective tax rate to be 23% to 25%.

30:20 Finally, I'll close by reiterating Alessandro's comments on our initial estimate at the top line for fiscal 2023, which projects growth in line with our publicly announced long-term organic constant currency net revenue growth rate range of 8% to 10%.

Among the factors we've considered in formulating this estimate are increased utilization of recent investments across the company, including those highlighted earlier this call, organic growth through current assets, a shift of some of our fungible biologics assets currently producing COVID vaccines to other customer projects, including recently signed large commercial tech transfer programs and as a risk mitigation fact there, assuming a considerable decline in revenue from our COVID-19 product programs.

31:18 Operator, this concludes our prepared remarks and we would now like to open the call for questions..

31:25 Thank you. [Operator Instructions] We take our first question from Tejas Savant from Morgan Stanley. Please go ahead..

31:48 Hey guys, good morning and appreciate the time here. So, Tom, I appreciate the color on the organic constant currency growth for fiscal 2023.

Is there any way you can quantify perhaps the percent decline in COVID contributions you are baking in at this stage? And how are you thinking about overall EBITDA margins trending heading into next year in light of the COVID revenue coming out, as well as some of the other near-term factors you flagged weighing on biologics margins here?.

32:18 Sure, Tejas. So, as you know, we intentionally as we entered fiscal year ‘22 have gone away from disclosing our revenue contributions related to COVID demand as we considered that part of the base business.

So, at this stage, we're certainly not going to backtrack on that and start to now disclose what the revenue contributions are assuming for fiscal 2023.

32:44 But as we said in the remarks we have considerably derisked the overall contributions here as part of the fiscal 2023 and continue to have line of sight to growth despite that declining demand profile of COVID related vaccine revenue to the 8% to 10% long-term growth target that we have in place for the consolidated company.

33:09 With regards to your question on margin, look, I would say we're not at this point in a position to provide a full guidance here. This is obviously much earlier in the process than we've ever talked about the next fiscal year than we've done before and aren't in a position to be able to elaborate any further around EBITDA contributions.

What I will tell you is, the COVID related revenue does have a significant piece of it that's tied to lower EBITDA margins, given the component sourcing dynamic which I highlighted in my prepared remarks.

33:45 And then lastly, obviously we will give a more detailed read on our guidance for fiscal 2023 as part of our next earnings call including all of the usual P&L and cash flow items that we tend to disclose.

The only other item I'll comment to related to EBITDA margin is, we do have a long-term EBITDA margin target out there for achieving a 28% consolidated EBITDA margin by 2024, as well as near 30% EBITDA margins by 2026 and we continue to be on track to achieve both of those..

34:22 Got it. That's helpful. And a quick follow-up, specific to biologics Tom and Alessandro and John, feel free to chime in as well.

Do you anticipate meaningful headwind to fiscal 2024 revenue? The context for the question is, there has been some investor sort of concern around one of your key COVID vaccine customers leveraging this new fill finish partnership they signed with one of your competitors? Or put another way, I mean, what underpins your confidence that you can navigate and grow through this dynamic, not just in the context of your fiscal 2026 targets, but also a little bit more near-term perhaps in fiscal 2024?.

35:03 Yeah, sure. This is Alessandro. I'll pick up this one. A couple of comments here. Number one, I will state that our relationship with our COVID partners, which has been built through the pandemic has never been stronger, it remains strong and long lasting.

Despite the fact that we are, as we said, mitigating the risk of COVID revenues in the outlook we provided today, we will always be there for them, for whatever needs or their pipeline, COVID or non-COVID related in the next few years.

35:42 With regard to biologics specifically, I would tell you that during that the pandemic, and that this was part of my prepared remarks, we were very intentionally in keep investing and building and accelerating some investments in assets that we could sell in and which we could fill with the programs, which were late stage a non-COVID related following different dynamics.

These late stage tech transfers are being progressed and this is a part of the investments that we've done in our biologics business unit as in my remarks I pointed out those tech transfers will be a part of the dynamics of biologics in the next few years..

36:33 Thanks guys. I appreciate the time..

36:40 The next question comes from Luke Sergott from Barclays. Please go ahead, Luke..

36:46 Great, thanks for the questions.

Can we talk a little bit about pricing, what you guys are seeing on the raw material side? And how you are thinking about the 8% to 10% guide, how much of pricing is baked into that?.

37:02 Yeah, sure. Luke, as you can expect this is a very dynamic environment where there is significant pressure on supplies, but there is also, we have contractual arrangements which allow us to offset to some of those impacts in our relationship with our partners.

At the moment, we continue to be in the position to manage these, we have deployed additional resources and task forces internally to the company in order to manage the situation.

We've been, if you like, a little bit ahead of time here and as you've seen and as Tom described that we back in the last few months increased our inventories, placing orders for longer lead times to get prepared for this phase.

So I would tell you Luke, we are prepared at our very best to navigate the current scenario and the few challenges ahead of us and we expect it to be able to go through them..

38:23 Okay, great. And then follow-up here is just, I mean, you guys have done five deals in the last six weeks or something like that.

Can you talk about how advanced some of these facilities are? Any additional CapEx needed to bring them up to speed? Are they all under partial coverage for the sterilization? And then more broadly, how does that change your mix going considerably from drug substance and drug product, assuming that all of them are up to full capacity utilization?.

38:56 Yeah, sure Luke. So, again, a couple of things here. Number one, one of the results of the current supply shortages is that building from ground zero assets is become increasingly expensive and increasingly long in terms of timeline.

That was our preference for sure until a couple of years to go, but clearly in the current climate, we saw significant opportunity to accelerate those timelines by acquiring facilities, which are either already finished like the one in Princeton or nearly to completion, which -- like the one in Oxford, not only these acted as an edge towards the increase of materials to build, because these facilities were built in a time where those materials were less expensive, but also provided us acceleration to revenues, which is the key factor in financial returns on these Green Brownfield type of investment.

39:56 So we are very, very happy that we were able to get our hands on those assets, which are both in very high demand.

I believe that both with regards of the cell therapy and in Princeton and in the investments we've done in Oxford, both of them are way more increasing our presence in drug substance and drug product, in fact almost entirely those assets would be classified as drug substance assets.

40:25 So - and very, very important because these are filling two areas where we had a need for strength, one with our presence in drug substance in Europe, which would be amounting for some time.

On the other hand, this facility in Princeton completes our North America footprint in terms of commercial scale cell therapy capabilities, where we see significant opportunities with the recently approved products..

40:54 Great. Thank you..

40:59 The next question is from Jacob Johnson from Stephens. Please go ahead..

41:05 Hey, thanks, good morning. And John, congrats on all the accomplishments over the years. Maybe just first following up quickly on Luke's question, on these recent acquisitions in the biologics segment, it sounds like there quasi organic investments buying facilities that were underway or already built.

Can you just talk about the revenue contribution from those deals and how we should think about that maybe over the next 12 to 18 months?.

41:32 Right. So I will give to Tom a little bit more the possibility to chime in with some more color around that. I would tell you these three investments are very, very strategic.

Clearly as always you define them, so very well which are nearly organic investments, which again were deployed because they are world-class training facilities, very high-standards, so meeting the customer expectations now-a-days.

But also very close to completion, one of which is already completed and there is some business already into it, which is the one in Princeton.

42:12 So, we expect that the revenue growth is going to be fairly rapid, but of course, it's going to take some time to get these assets to full utilization, which is good news, because it is going to give us runway in the next -- at least for the next two, three years and be able to continue to grow our biologics segment over and beyond the utilization of the current assets..

42:34 And Jacob, I'll just add here, as Alessandro mentioned, there is a very small certainly a material revenue contribution that will come from the Princeton asset, there'll be no revenue in fiscal 2022 associated with the UK asset.

And as I noted in my comments around our revised fiscal 2022 guidance, there is a significant amount of cost that we were inheriting as well as continuing to invest in here that is absorbed in our fiscal 2022 guidance, that was approximately an $8 million headwind between the two deals at the EBITDA line that's included in our new fiscal 2022 guidance and we'll give more specificity around the contributions of these two additional sites as part of fiscal 2023, when we update our guidance, we'll provide more specificity around our guidance in the August call..

43:29 Got it. And then I guess the follow-up. You guys called out strength in gene therapy in the quarter, can you just talk about what's driving that? I think there is some commentary about demand from large customers, is this commercial demand? Do you have some customers nearing commercialization? Just any context around that..

43:47 Yeah, sure. Look we have commented on this a few times. And the reality is that, our pipeline is stronger, but is also maturing. So there are assets that are transitioning to later stages of the pipeline and those assets going in later stage you do require a much higher quantities of viral vectors which drive growth.

This is pretty normal in assets, which are primarily serving clinical work at this point in time. I believe the profile of the customers is more skewed to need to large organizations in the later stage and we also have a good pipeline in earlier stage, which we're progressing..

44:41 Got it, thanks. I'll leave it there..

44:47 The next question comes from Julia Qin. Please go ahead. Julia..

44:52 Hi, good morning and thanks for taking the question. So I know a bulk of the growth in the future is coming from drug substance and then prefilled syringes on the drug product side.

I'm curious how the supply and demand dynamics looking like for regular fill-finish capacity? And do you expect to sustain high utilization for regular fill-finish facilities even with call-bit roll off? And for next year, what are you assuming in terms of fill-finish pricing dynamics?.

45:23 Yes, sure. Look, clearly we are investing heavily in this area, we see significant demand in front of us. I believe there are two factors here.

Number one, when you look at the pipeline and the expected bigger products which are going to be going commercial in the next few years, a significant share of these products are relaying on stellar presentations, so to speak. So which primarily is going to be prefilled syringes. So that's one dynamic.

45:57 The other dynamic is more of our technological one as regulatory expectations continue to increase there will be much more demand in products going towards under isolative technology, which of course, will continue to move the demand that works for these more modern a higher containment assets and with the better reassurance and this dynamic as well is going to be a significant one going towards the asset we've been building over the years.

46:28 The last dynamic in fill and finish is about the localization, where we continue to see significant opportunity there and there will be products that will continue to require localizing activities that increases stability and shelf life. And as such, as I described that we are investing also in this area.

So there are a number of different dynamics in the pipeline itself, the movement towards under regulated technology and localizing of -- product requiring localizing which are surely creating a significant tailwind for our demand in fact in the drug product besides what we experienced in buyouts in the last couple of years.

47:10 With regards to drug substance, I'm going to tell you, we always look at our assets in that area to be very tangible and very redeployable if you like, across the different modalities.

In particularly, this is very true for the new facility in Oxford where we plan to be able to serve out of that facility across several different modalities including messenger RNA, classic mammalian cells and others. The facility was intentionally designed and built to be able to serve across many different modalities.

And that's why it was so attractive to us..

47:49 That's great.

And for my follow-up, I know you previously said you expect many COVID customers to stick around post pandemic, curious to what extent have your COVID customers made commitments to you beyond COVID projects? Or are you right now mostly selling capacity with new non-COVID customers? And in general, how fast do you expect the transition from COVID to non-COVID projects to be?.

48:16 Sure. Look, there are some customers where we have -- we don't call it a supply relationship, we call them the partnerships, which means that, with these customers we've a portfolio approach where we offer them a capacity across all the pipeline that they are coming through.

So on one end, we've a visibility on that pipeline, on other end they have a visibility on the capacity we create and we have some contractual arrangement they created the opportunity on both sides to continue the collaboration in a productive way going forward.

48:53 I believe that the base to all of these is there is very strong and successful relationship that has been created during the pandemic.

We've been together in very difficult times, providing significant relief to the world in terms of vaccination and that has spread the relationship to a level that makes us feel comfortable about the future prospects with these partners..

49:18 Okay. Thank you very much..

49:24 The next question comes from Sean Dodge from RBC Capital Markets. Please go ahead..

49:30 Hi, thanks. Good morning. Maybe just going back to the comments around the longer-term margin outlook. On Bettera, you said margins there running mid '20s now and I think you said over time you can get back -- you can elevate those more like biologic levels is something in the 30s. In another words, a couple of quarters into the acquisition.

Can you just give us an update on what should be the main contributors or drivers behind that and over what timeline, do you think you can drive that?.

50:05 Sure. Luke, as I -- I'm sorry, Sean. As I said in the, in the prepared remarks, margin expansion is something we continue to be very focused on, we are on track towards our ‘24 and ‘26 long-term outlooks and we went out of our way to specifically call out the Bettera business as being one of the drivers of the margin expansion opportunity.

As you rightfully pointed out here, we do have line of sight to this business operating at margins or closer to that of biologics, let’s say, we're in only our second quarter here with the Bettera business as part of the Catalent portfolio and it's already tracking at an EBITDA margin that is north of what we see from our SOT segment overall.

50:58 In terms of the phasing of the margin expansion opportunity there, I would say we continue to be in early innings.

As I said, this is only the second quarter that this business has been part of the portfolio and I think through operational efficiencies running the sites more Catalent like as well as further operating leverage from continued and improving higher levels of utilization within that business, that is one of the key drivers that would help drive the margin expansion.

51:32 The pricing dynamic in this business also remains extremely robust. That's another contributor to the potential increase in the margin profile here. And when we highlighted a 28% EBITDA margin in fiscal ‘24, the total business was not part of the Catalent portfolio at that time.

So this just gives us even more confidence in being able to deliver on that 28% by 2024 and then ultimately to 30% or so that we've talked about by fiscal ’26. And we'll give more specificity around the margin profile of the business in fiscal 2023. But as I said, from the 26.6% we're at today, continue to have line of sight to 28% by 2024..

52:12 Okay, that's great.

And then where -- if we think about -- Tom, you mentioned capacity utilization being one of the primary drivers, how does capacity utilization across the Bettera footprint average maybe to like what you would see across the rest of SOT? Is there a meaningful difference?.

52:33 Look, it is a very dynamic picture, because there is the physical capacity and the staff capacity.

And out of the gate, we could surely free up additional capacity and serve more demand through increasing our ship partners, our staffing levels and surely through applying what we call the capital way, which is our operational excellence if you'd like, a playbook to these assets where applying these to changeovers and reducing downtime, improving efficiencies and yields we will be able to unlock some additional capacity.

In the mid-term, there are ongoing significant investments in terms of additional lines, which will create significant additional capacity. These investments are ongoing well underway. Some of them actually started under previous ownership, which will continue to give us enough capacity to serve the high demand we are seeing in that area..

53:36 Okay, very helpful. Thanks again..

53:42 Our next question comes from Dave Windley from Jefferies. Please go ahead..

53:47 Hi, good morning. Thanks for taking my questions. Regarding the ‘23 initial guidance, initial revenue guidance commentary that you've given.

Can you comment on what your expectations for growth are, specifically in biologics, I think Tom you mentioned kind of a glide path down to the 10% to 15% long-term range, but I wasn't sure if that was applicable, specifically to ‘23?.

54:11 So, Dave I think we're not in a position to provide fiscal ‘23 guidance at this stage at the segment level, given how early in the process we are. As I said in my remarks, we're already speaking around next year at a much earlier point than we ever have historically.

That being said we've clearly laid out four or so key drivers of the fiscal ‘23 revenue growth of 8% to 10% including increased utilization of recent investments across the company, if you talked about on this call that are very much biologics focused.

54:52 In addition, we also called out a shift from some of our fungible biologics assets currently producing COVID vaccines to other customer projects, including recently signed large-scale commercial tech transfer programs. Those two bullets, specifically are related to the biologics segment.

That being said, I'm not going to quantify the growth range of that, we'll give more specificity around that again as we give more clarity around our fiscal ‘23 year and a full guidance as part of our August release. But I think that color should be enough here around some of the assumptions around biologics next year..

55:35 That is very helpful, thank you for that Tom. The other question I had was just around Brussels and the remediation there. Is that on track to your expectations to be remediated and back to operation? And then you call it out as a margin compression factor in the segment.

Would you be able to quantify how much that impacted margin in the quarter? Thank you..

56:05 So, first of all, Alessandro here. I would tell you, we are pleased with the progresses and incredible work done by our teams in addressing the 483.

As we stated in previous calls, 483s need campus by definition and some of those campus require the facility to be both in terms of manufacturing, because they are more invasive and require intermediate changes and some others don't.

So I would say that our progress in terms of addressing those requiring intermediate changes and manufacturing tools have progressed well. 56:45 As described in our prepared remarks, we have restarted manufacturing operations which is good, especially for patients, but at the other end we continue to work diligently on all our cap plan on that.

With regards of the margin, I'll pass over to Tom..

57:06 Yeah. I'll chime in here, Dave. So while we did see a 200 basis point decline in margin versus where we were in the third quarter of last year.

We don't quantify contributions from individual facilities within the Catalent network, but I will tell you, in addition to component sourcing, as well as some further investments that we're making in some of our smaller scale, less mature businesses that have recently been acquired within biologics, the Brussels remediation efforts are absolutely the bulk of the margin compression that we saw in comparison to the prior year levels..

57:44 Okay, helpful. Thank you..

57:50 The next question comes from John Sourbeer from UBS. Please go ahead, John..

57:56 Good morning and congrats on the quarter.

I know you aren't quantifying the COVID revenue dollars, but I guess have you started to see any of that drop off in COVID revenues currently? And is this reflected at all in the fiscal 4Q guidance? And then as there is a continued shift to lower dose vials, any way to think about the cadence of that drop in fiscal 2023?.

58:18 Look I won't provide the specifics and details around how the COVID volumes are shifting across the current guidance for Q4. I will tell you that we are definitely at the moment seeing the transition from the pandemic into the endemic use of the vaccines. But there are many dynamics out there which are kind of interesting.

The number one, as everybody knows in the public news there is an ongoing -- there are ongoing trials for reformulation of vaccines or for an updated versions of vaccines. But you know, it's something that we are going to continue to work on.

There are projects for the transition to lower bills buyouts and as we shared, and that we continue to work on those projects as we speak, as well as continue to supply the legacy presentations.

59:21 So it's -- there are many, many dynamics that play here and we -- that's why we have taken the decision of sharing our fiscal ‘23 guidance, in which we decided to mitigate the risk of these revenues as we look into the future..

59:43 Got it.

And I guess just as a follow-up on the preliminary guidance for next year, any way to think about what is baked in on cell and gene therapy and Paragon and as this becomes a more of a meaningful driver to maybe pick-up some of that decline in COVID revenues, anyway to comment on how Catalent portfolios growing maybe in-line with some of the market growth rates?.

60:05 Yeah. I would just say here, again, but we're not going to get to the specific assumptions around segments or sub-segments, even John as part of our fiscal 2023 outlook.

Obviously, again, I'll reiterate that we'll get more color here in August around this, but I will say, I think it's been mentioned several times in the remarks today, including John and Alessandro section around the continued strength that we see around the cell and gene therapy business.

60:30 I think recent and current investments that we're making around the segment speak to the demand profile that we see, particularly with some very large customers that are, I would say, are seeing a good progression of the pipeline moving closer and closer to commercialization.

So absolutely a robust part of our business, one we continue to be excited about and invest in and certainly will be a contributor to growth next year..

61:01 Thanks for taking the question..

61:06 We take our next question from Justin Bowers from Deutsche Bank. Please go ahead, Justin..

61:13 Thank you. Good morning and appreciate all the detail in the prepared remarks. I was just hoping to understand some of the tech transfer projects you have underway.

Is that rescue work or new sponsor or existing sponsor projects? And what type of modalities or technologies in – are there any considerations we should take into account in terms of timing or duration for switching lines?.

61:44 Yeah, sure. Look at these are projects that we started already few quarters ago, of course, tech transfers do not happen overnight. We do see opportunities -- with regards of our drug product business, which is the one where it's more likely that you're going to tech transfer into the biologics space.

I would tell you that there are several therapeutic areas which are interesting to us, one is oncology, which is mostly encompassing monochrome antibodies and therapeutic categories.

There are other like diabetes and there a lot of other like neurologic disorders and so on, and so these are all areas where we look with great interest which have interesting, got a good combination of late-stage products as well approved products, very commercially approved product.

62:44 So, we were very intentional and very strategic in engaging with the customers in those spaces and planning the right capacity and capabilities to serve those therapeutic categories and we are pleased with the success that our commercial team had in securing those new contracts..

63:09 Okay.

And then, as a follow-up, in terms of the 2023 growth outlook, is there a way to help us understand how much of that is coming from existing capacity versus some of the new capacity coming online? And then with the EBITDA headwinds that you called out in the fourth quarter, how does that phase out over the next few quarters?.

63:39 So I’m going to cover the first part and the second part I leave it to Tom. Look, it's always a combination. But I would tell you, when you look into the fiscal year ‘23, in terms of having a material impact on the top line, normally those assets are already being qualified or already qualified.

So you should be looking at mostly these coming from all the investments we've done in the last couple of years, on which we've been keeping already up to date in terms of how these capacity was coming online.

I refer to the traditional drug substance strains that came online earlier this year in the Madison campus, some additional capacity is coming online as we described in our gene therapy campus in the Baltimore and the BWI airport, the additional capacity that came online in Limoges, some expansions we've done in Anagni, there are a number of different assets on which we've been announcing investments which came online in the last few months which will be surely instrumental to the progression of the company into fiscal year ‘23 and beyond..

64:52 And with regard to the cost related headwinds we see at both of these acquisitions that have been announced, Justin, it's difficult for me to give you any more specifics around what the contributions will look like in the next year, other than to say, I would not expect the combined two facilities to get to a positive EBITDA next year.

I do think there will be a negative burn associated with that this. But we'll give a lot more again specificity around the individual contributions here as part of our full guidance in August..

65:30 Appreciate it. I'll hop back in queue..

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

65:41 Thank you. Good morning. I had another follow-up question on the COVID-19 demand.

So your guidance for 2023 contemplates this considerable decline, I was curious what you're hearing from customers around demand? Whether this is really kind of the base case scenario around boosters? And if demand does persist at current levels, would you now consider that upside to the 8% to 10% target you laid down..

66:12 Look, I said that there is a lot of dynamics out there. But I'm going to tell you, we still see some dynamics with our customers and we took the trend and decided that in terms of giving an update on our current outlook on fiscal, today we decided to mitigate the risk of those revenues in our guidance.

That being said, there is -- in the next few months, some of those dynamics will get clearer and some of them could get clearer during the summer. We will continue to provide updates on this one as we get into our next call, which is in August..

66:59 Yes, I would just add, Jack. I think the way you're interpreting this is exactly right, line of sight of 8% to 10% with a considerably declining profile on COVID and if we were to see COVID contributed the levels in which we're at today, we would absolutely be upside to the 8% to 10% we expect to see for next year..

67:15 Great. And as a follow-up, Tom, CapEx for the year, just the aggregate revenue dollars are lower, it's like $650 million at the midpoint versus closer to $750 million previously. Can you just talk about, or maybe some of the projects going a little slower than you might have thought previously.

And just any thoughts on level of CapEx in 2023? I know it's early, just would be helpful..

67:43 Yes, I think ‘23 remains an elevated year for us from a CapEx perspective, especially given some of the carry over that we'll see from 2022.

As you mentioned, we did lower our 2022 CapEx outlook, really based on some of the delays we're seeing and longer lead times for some key items necessary in order to execute, as well as just labor-related challenges, so the challenges that we see on the supply chain side that are impacting the ability to get necessary components also impacts the ability to get what you need to execute around CapEx.

68:18 So that is having a little bit of an adverse effect here and one of the reasons why we've lowered ‘22 outlook.

I would expect the ‘23 outlook to be, as I said elevated, we're not going to give specifics to what that means in terms of percentage of revenue, but we did purposefully say in my section of the prepared remarks that we do need to get back to an 8% to 10% normalized level in the years to come and we absolutely will do that.

The level of capital intensity we're seeing in the business is based on the demand profile, the progression of the pipeline and the strategic initiatives that we're undertaking. But it is not going to be normal for the company from a longer-term perspective..

68:58 Yes, I would add to this one. Look, it is true that you're seeing a CapEx numbers per se, which is lower, but I would put us back on the comment before that some of these acquisitions have really that we have announced are really need to be seen as an accelerated CapEx deployment in terms of organic growth.

So as Tom referred to there are some areas of the supply and with regards of the building material [Technical Difficulty] opportunity.

And we took a little bit of a pause in our spending in Anagni and trying to understand [Technical Difficulty] productive and a more stable cell lines in a shorter timeframe and this is what our technology providing them. So the, the pipeline is very, very robust, is driving the growth. So we are pleased with the Madison assets.

70:21 But I would also would like to remind the significant investments we are doing Bloomington drug substance, we've essentially doubled the capacity there which combined with our Oxford new facility is significantly increasing the reach of Catalent into the drug substance and in general, new modalities..

70:47 I now will turn the call back to John Chiminski for final remarks..

70:53 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. The trajectory of Catalent remains as strong as ever.

This demonstrated by our ability to increase our fiscal ‘22 guidance for the third consecutive time this fiscal year and by our ability to confidently provide robust projected growth targets out to fiscal 2026. Including expected net revenue growth in fiscal 2023 in-line with our long-term growth target range of 8% to 10%.

71:36 So far this fiscal year, we've been able to achieve an impressive level of success due to our highly talented employee base, the continued execution of our long-term strategy rooted in a patient first culture and best-in-class sustainability and delivering for our customers and their patients when they need us most.

In addition, we remain encouraged by the positive growth trends across the CDMO industry, as well as the prospects for the investments we've made in other therapeutic areas and modalities, which provide a foundation for Catalent to continue expanding and enable us to pursue new opportunities for partnership.

72:20 Catalent remains the global leader in enabling its health care partners to optimize product development, launch a full lifecycle supply for patients around the world.

Further, the broad diversity of our products as well as our substantial scale and expertise in development, sciences, delivery technologies and multi-modality manufacturing continue to make us the industries preferred partner.

72:51 I firmly believe that we have the right people, leadership, processes, technologies and long-term strategy in place to help our customers and we're proud to see how our work continues to improve the lives of millions. Thank you..

73:13 This now concludes the call. Thank you all for joining. Please, disconnect your lines..