Q1 2021 Catalent Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Catalent Inc. first quarter fiscal year 2021 earnings conference call.
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After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your Speaker today, [laughter], Paul Surdez, Vice President Investor Relations.
Please go ahead Sir.
Good morning, everyone and thank you for joining us today to review Catalents first quarter 2021 financial results joining.
Joining me on the call today are John Chiminski, Chairman, Chief Executive Officer, and what the Joseph Senior Vice President and Chief Financial Officer.
Please see our agenda for this call on slide two of the supplemental presentation, which is available on our Investor Relations website at Www Dot catalog dot 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 three for more detail slides four and five discuss the non-GAAP measures at our just issued earnings release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Catalents form 10-Q regarding additional information on the risks and uncertainties that may bear on or.
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 Who's prepared remarks are covered on slide six and seven of the presentation John.
Thanks, Paul and welcome everyone to the call.
Before diving into the first quarter results I want to remind you that our top priority during the COVID-19 pandemic continues to be keeping our employees see in maintaining business continuity.
I'm proud of our teams were literally working around the clock to deliver high quality products and services, including potential cobot, 19 therapies and vaccines for our customers and their patients around the world.
I'm pleased to report we had a very strong start to fiscal 2021, which when combined with the higher levels of net demand. We now expect for the back half of the year, let us to raise our fiscal 2021 revenue expectation by $130 million to $180 million in or adjusted EBITDA expectation.
By $40 million to $60 million.
In the first quarter, our constant currency revenue growth was 26% year over year of which 20% was organic.
As a reminder, we also reported more than 20% organic year over year revenue growth last quarter.
Adjusted EBITDA of $174 million, representing constant currency growth of 35% over the first quarter fiscal 2020, including organic growth of 23%.
Our adjusted net income for the first quarter was $78 million or 43 cents per diluted share.
Up from 26 cents per share in the first quarter of fiscal 2020.
The biologics segment was by far the strongest contributor to our first quarter results as net revenue doubled over the first quarter of fiscal 2020.
Including 83% organic growth with margin expansion of more than 900 basis points to 28.2%.
Well projects related to COVID-19 were a notable contributor to our biologic segment segment growth similar to last quarter underlying demand across the segments offering was very high even when excluding these projects.
Biologics continues to become a more meaningful contributor to our growth profile with the segment contributing 44% of the company's revenue in the quarter compared to 28% in the first quarter fiscal 20.
Also adding to the quarter's performance was the clinical supply services segment, which showed revenue growth. After a dip in the fourth quarter of fiscal 2020, COVID-19 related clinical trial disruption, we're most abundant.
The top line growth in these two segments more than offset headwinds headwinds experienced in the soft gel in oral technologies and oral and specialty delivery segments.
In soft gel and oral technologies consumer health products had a slow start to the year, which we attribute in part to a decrease in occurrence of common losing called due to limited travel and social gatherings worldwide.
Saw fuel and oral technologies also experienced a decrease in revenue per prescription products in North America.
Looking ahead, we believe that some of the products. We manufacture that were approved earlier this year experienced new launches due to the COVID-19 pandemic.
We expect these products and other planned launches, we'll see increased demand and will contribute more in the second half of the fiscal year, leading soft you on oral technologies to better performance than the first half.
For oral and specialty delivery, we saw continued revenue growth and new product momentum Zydus platform.
This was offset by a decrease in early phased development activity due to due to pandemic related mitigation efforts, including Lockdowns experience worldwide.
We continue to be very optimistic for long term growth in the overseas segment, given its 200, plus molecule pipeline, including the new novels, Itis Ultra technology, which will enable higher drug loading into each site as tablets.
We believe that the Zydus ultra platform after its commercial launch in the 2022 to 2023 timeframe will drive significant volume growth and can can potentially lift the franchise to over 2 billion doses per year compared to the current annual run rate of approximately 1.4 billion.
I'd now like to provide you with a brief update on our COVID-19 related programs as catalyst continues to be a go to company for potential COVID-19 therapies in vaccines.
We've now been awarded work on more than 60 COVID-19 related compounds, including the three operation Warp speed vaccine programs. We previously highlighted.
We're actively working on projects across all four of our business segments with some compounds involved in projects across multiple offerings.
This strategic investments, we've made in biologics capability and capacity over the last few years, including the $200 million capital additions to our us drug product in drug substance capacity. We began in January of 2019, and our acquisition of the non you'd facility were.
Well timed to enable us to address the increased demand we are seeing from the combination of our ongoing business and our COVID-19 therapeutic vaccine candidates.
This incremental capacity in our multi dose vial filling manufacturing capability has facilitated our ability to manufacture potentially billions of COVID-19 vaccine doses overtime, while continuing work on behalf of other customers.
Our response to our customers' needs has not only raised our profile with both large pharma and biotech customers. It is also resulted in an acceleration of our strategic capacity expansion plans, which will help to support the achievement of our long term growth targets.
To better enable us to serve all of our customers. During this period of accelerated demand. We recently made two additional drug product investments in Bloomington, Indiana.
The first is the addition of a 50 million dollar high speed vial filling line that will supplement our current capacity.
Given our experience in facility and capacity expansion, we expect to accelerate this project from a typical 18 month timeframe to approximately 10 months in total.
We expect to bring this new high speed vial flying into our operations in the fourth quarter of fiscal 2021 to support the growing pipeline of commercial launches at this site.
The second drug product investment is the acquisition of a 23000 square foot manufacturing facility three miles away from our Bloomington campus, where we will create a north American center of excellence for early slate phase clinical biologics formulation development and drug product fill finished.
Services.
This $14 million investment, which includes the acquisition Buildout and qualification of the facility is expected to begin supporting customer programs starting in January.
The facility will enhance our one bio drug development offering as it includes a new flexible filling line ideal for enabling rapid changeover for greater efficiency in the manufacture of clinical batches.
We also recently announced the expansion of our gene therapy campus near that.
PWI airport to support our growing customer pipeline and increased market demand for gene therapy products, which includes an overall investment of approximately $130 million to add five additional phase three and commercial scale manufacturing suites as well as.
Cold storage, where housing in the first half of calendar 2022.
When this project is completed the PWI campus will house, a total of 15 gene therapy manufacturing suites, each designed to accommodate multiple bio reactors for commercial supply.
As we highlighted last quarter. The first facility on the campus was recently approved by the FDA for commercial manufacturing and we expect to have all 10 cgmp suites.
Biden operational in the next few months.
Five of these suites are already qualified and operational including one suite, where we accelerated start up during Q1 in order to provide drug substance manufacturing to Astra Zeneca for the University of Oxford Adenovirus vector base COVID-19 vaccine candidate.
We are also expanding our footprint in cell therapy, where we opened our newest clinical facility in Houston earlier, this year and we continue to build out our commercial scale production and build finished facility in gasoline, Belgium, which is scheduled to open in late fall 2021.
In addition last week, we signed an agreement with bone therapeutics to acquire its subsidiary with a 41000 square foot purpose built CGX Pete facility and manufacturing assets, which are located next to our facility in gasoline.
Additionally, catalent will manufacture clinical material for bone therapeutics, allogeneic us steel plastic cell therapy products.
When the transaction closes, which we expect to occur this month, the additional manufacturing capacity and technical expertise from this facility and its employees will immediately expand our clinical and commercial capacity.
Current late stage customers as well as create a bigger center of cell therapy excellence for Catalent in Europe.
In addition to capital investments and the addition of new facilities to our global Catalent network, We continue our innovation and partnership efforts across the company.
The first example is also in our cell therapy, offering, where we announced an agreement with brainstorm cell therapeutics to manufacture its autologous cell therapy being investigated for the treatment of HLS also known as Lou Gehrig's disease.
Under the agreement the new facility in Houston will undertake the transfer of the manufacturing process to provide future cgmp clinical supply for this treatment with the potential to extend the partnership to include.
Commercial supply should be a tree, which should the treatment be approved.
We're proud to support brainstorm in its pursuit of a solution for this critical unmet patient need.
Another example is our recent partnership with Exelixis, where our Redwood Bioscience is subsidiary will develop multiple antibody drug conjugates or ADC fees for exelixis, using our proprietary smartag technology over a three year period.
Under the partnership Exelixis will provide R&D funding targeting various oncology indications and catalent will be eligible for development and commercial milestones and royalties on net sales of any product commercialized as part of the collaboration.
The Smartag platform has recently demonstrated promising results in the clinic highlighting the potential to create 80 seized with significantly expanded therapeutic indices for cancer patients.
Innovation at Catalent also continues to make further advances advancements to our Softgel technologies, where we recently launched opt to gel D.R. a technology for the formulation and manufacturer of delayed in pure release soft gels.
This new technology eliminates the coding step in solving the processing and performance challenges associated with conventionally coated delayed release soft gels and has the potential to encapsulate a wide range of ingredients.
This latest evolution allows our customers to design more efficient products and bring superior pharmaceuticals, and nutraceuticals to patients.
Our site in St. Petersburg, Florida is the first to offer this new technology with the capability being expanded to our other saw fuel manufacturing facilities in Brazil, Canada, Germany, Italy, and Japan in the future.
And finally I am proud to highlight that in September Kettler was added to the S&P 500 index.
I believe this designation is an affirmation of the substantial progress we've made in executing our growth strategy since our IPO in 2014.
Of course, this progress would not be possible without the passion and dedication of our more than 14000 employees, whose commitment to our mission to help people live better healthier lives has never been more critical or value.
I'd now like to turn the call over to Whitney, who will review our financial results for the quarter and our enhanced fiscal 2021 guidance.
Thanks, John.
I will begin this morning with a discussion on segment performance.
As in past earnings calls my commentary around segment growth will be in constant currency.
I will start my commentary on slide eight with the Biologics segment, which is now our largest business segment.
Biologics revenue of $377.1 million increased 19% compared to the first quarter of 2020 with segment EBITDA, increasing 194% for the same period.
Acquisitions contributed 15 percentage points to both revenue and segment EBITDA in the first quarter compared to the prior year period.
The acquisitions, primarily contributed to revenue and segment EBITDA was faster. So the cell therapy later that we acquired in February 2020, and are announcing facility, which we acquired in January 2020 from this amount of scrip and part of which includes an expansion of our drug product business that falls within the biologics segment.
Note that we continue to attribute all non BMS work, including all COVID-19 vaccine projects that we brought to the facility after the acquisition to organic growth in the segment.
The robust organic growth in our biologics segment in the quarter was driven across all segment offerings with elevated end market demand for our global drug product substance and sales gene therapy offerings.
Well over half of the organic net revenue growth in the segment data driven by projects unrelated to the cold at night if that dynamic.
Margin in the segment increased significantly both year on year and from the fourth quarter as our capacity utilization increased across all major service offerings.
As we conduct that sort of activity for potential colonizing therapeutic vaccines.
We expect strong growth with the biologics segment for the remainder of this fiscal year.
Please turn to slide nine which presents our social mobile technology cycle.
Although technologies revenue of $221.1 million decrease seven super cycle down to the first quarter of 2020 with segment EBITDA decreasing 20% over the same period.
After excluding the impact of the October 2019 divestiture other segments manufacturing site in various items Celia segment revenue and EBITDA declined, 12% and 21% respectively.
The decline was driven by reduced volumes to certain prescription products in North America and in global consumer health products.
As I mentioned on our last earnings call, we are seeing lower demand and cough cold and over the counter pain relief products, which we attribute to a combination of consumer stocking in the early stages on the pandemic as well as the effect of limited social gatherings in travel due to pandemic mitigation efforts.
Margins in softer Eleanor technologies were further impacted year on year elevated operating costs related to the pandemic, including costs. What thank you bonuses efficient effective equipment and adjusted less efficient production workflows put in place to facilitate social distancing among our employees.
Note that these higher costs impacted all segments.
Looking ahead esselte for the remainder of this fiscal year 2021, we see underlying momentum in prescription products that suggests a stronger back half of the fiscal year, including our expectation that some product launches that occurred during the 1000 Q3 and Q4 of fiscal point will experience increased volume demand as our fiscal year progresses.
Looking further out we expect that the 41% year on year growth in ESL Chief development revenue will eventually lead to more new product introductions, and we remain comfortable with the segments long term growth outlook of 3% to 5%, although we forecast the segment to perform below that level this fiscal year.
Slide 10 shows our saw Joel I'm, Paula and specialty deliveries segment recorded revenue of $158.3 million in the quarter, which was up 17% compared to the first quarter.
Fiscal 2020.
Excluding the portion of the acquired the non facility that is part of the deal as the segment revenue declined 1% right.
Driving end market demand for commercial products across our guide us all the dissolving tablet technology platform was offset by decreased demand for early phased development activities in the quarter. Following uncoated 19 related locked down and clinical trial assumptions.
Segment, EBITDA was down 26% over the first quarter of 2020 and after excluding the oil as the portion of the acquired a 90 facility segment EBITDA declined 61%.
The decline over although as the segment EBITDA is primarily due to a voluntary recall the product in our respiratory.
Tomich platform that was lost last February, which we called out on the third and fourth quarter calls as having a product participation component.
The onetime charges associated with this recall totaled $12 million.
Corrective action plans on the way, but a definitive timeline for product reintroduction has not been determined.
Excluding these charges EBITDA margins was expanded to 21% roughly in line with the first quarter of last year.
They were as the segment continues to have a strong development pipeline, particularly in the slightest platform, which Sean highlighted earlier.
Turning to the remainder of our development revenue in order to provide additional insight into our long cycle segments, which include biologics. So I'll hit on all technologies and all our specialty delivery each quarter, we disclose our long cycle development revenue in the current year.
In the first quarter 2021, we reported development revenue across both small and large molecule products of $372.5 million, which is 84% above the development revenue reported in the first quarter fiscal 2020.
Development revenue represented 44% of our revenue and fish in the first quarter compared to 30% in the comparable prior year period.
The strong growth in the biologics events was the biggest driver of this year on year changes.
In the first quarter, our development pipeline led to 30, new product introductions.
Now as shown on slide 11, our clinical supply services segment posted revenue of $92.7 million, an increase of 8% over the first quarter of the prior year and segment EBITDA was $25 million or 13% increase.
The growth was driven by an increase in clinical trial activity following pandemic related delays and resulted in strong demand in storage and distribution offerings across all regions.
This growth was offset partly by a reduction in demand for manufacturing and packaging within North America.
As of September 32020, our backlog for the CSS segment was $428 million slightly higher than the 400 quite a couple million sales at the end of last quarter and up 14% from September Thirtyth 2019.
The segment recorded net new business wins of $99 million during the first quarter, a 6% increase compared to the first quarter of the prior year.
The segment's trailing 12 month book to Bill ratio remained at 1.1 times.
Please note.
That in future quarters, we will continue to disclose the CSS commercial metrics in our prepared remarks and in the supplemental slide deck, including the new trended slide that we can now be found in the appendix.
But we will remove the sina permission from our quarterly earnings release.
You may have noticed that our earnings release has been reported this quarter to allow for easier readability by removing commentary that can be found in the slide deck as well as the Mdna section of our 10-Q.
Moving to company wide adjusted EBITDA by 12, our first quarter, adjusted EBITDA increased 37% to $174.4 million or 20.6% of net revenue compared to 19.1% of net revenue in the first quarter of fiscal 2000 point.
On a constant currency basis, our first quarter, adjusted EBITDA increased 35%, including 23% organic compared to the first quarter fiscal 2012.
On Slide 13, you can see that first quarter. Adjusted net income was $78.1 million or 43 cents per diluted share compared to adjusted net income of $40.5 million or 26 cents per diluted share in the first quarter a year ago.
Slide 14 shows our debt related ratios and our capital allocation priorities.
Our cash and cash equivalents balance at September Thirtyth was in excess of $1 billion compared to $953 million at June Thirtyth.
Our net leverage ratio was 2.6 times at September Thirtyth compared to 2.8 times at June Thirtyth.
Recall that last quarter, we lowered our long term net leverage ratio target to 3.0 times compared to our previous target of 3.5 times.
We are pleased that last week S&P recognized our efforts to further strengthen our balance sheet as they have created a long term credit rating to bill will be due to the rapid growth of our biologics business improved margin profile and lower ratio of net debt to adjusted EBITDA.
Moving on to capital expenditures, we continue to expect Capex as a percentage of net revenue to remain at elevated levels for the next two fiscal years as we continue organic growth class.
In fiscal 2021, we are accelerating capex spending in the first half of the year to meet customer demands and expect that capex will be approximately 15% to 16% of 2021 revenue compared to our previous estimate which reflected 14% to 15% of revenue.
Now, we turn to our financial outlook for fiscal 2021 as outlined on slide 15.
We are raising our previously issued guidance to reflect first quarter performance and to account for higher net underlying demand, including increased demand related to potential combination therapy, the vaccines as well as lower demand attributed to the effect of the pandemic and some offerings and certain increased costs due to the pandemic.
The guidance ranges, which remain broader than in recent years due to the increased uncertainty introduced by the indirect are now net revenue in the range of $3.58 billion to $3.78 billion compared to the previous range of $3.45 billion to $3.6 billion.
Adjusted EBITDA in the range of $880 million to $950 million compared to the previous range of $840 million to $890 million.
And adjusted net income in the range of $410 million to $470 million compared to the previous range of $290 million to $435 million.
We continue to expect that our fully diluted share count on a weighted average basis for the fiscal year will be in the range of 178 million to 180 million shares and that our consolidated effective tax rate will be between 24%, 26% in the fiscal year.
The underlying assumptions for our revised guidance are as follows.
First derica.
Theres no major external change to the current status of the COVID-19 pandemic and its effect on our business.
Next in light of the uncertainties always inherent in pharmaceutical development, we are not assuming that any of our customers galvanizing vaccine candidate will get FDA or other regulatory approval emergency or otherwise.
Third we have factored in projected revenue from executed they will pay arrangements. Some of which include turns that trigger higher levels of volume based on timing on mosfets.
Fourth revenue from acquisitions is projected to represent approximately two to three percentage points of our projected revenue growth rate for the year.
And finally, we attribute approximately nine to 11 percentage points of the projected net revenue growth to net culminating related revenue versus our previous estimate of approximately five to seven percentage points.
This estimate is based on factors that affect multiple business segments, including.
And just to take or pay arrangements, we have previously taken into account, including some previously concern.
Considered arrangements that have increased in size based upon reaching certain milestones.
Revenue not previously projected from additional projects among with overnights and related projects in which we are engaged.
Opportunity costs, including work that would likely have been placed in the same space.
And estimated loss revenue in parts of the business due to the pandemic such as lower demand for consumer health products as well as impacts to some prescription products.
Regarding our quarterly progression throughout the year, let me take a moment to remind you of share with those newer to Catalent story. This is now the in our business.
From a net revenue and adjusted EBITDA perspective, the first quarter of any fiscal year is generally the lightest quarter by far been generally increasing each quarter throughout the fiscal year.
This seasonal effect has led to roughly 40% of our adjusted EBITDA being recognized in the first half of the year and 60% recognized in the back half of the year.
In fiscal 2021, we expect a slight change to that mix with adjusted EBITDA contribution from the first half of fiscal 2001 being approximately 41% to 42% of our expected full year adjusted EBITDA.
Operator. This concludes our prepared remarks, I would now like to open the call for questions.
Thank you.
As a reminder to ask a question given the depressed I hope one on your telephone.
To try your question please press the pound or hash key.
Your first question today comes from gains when pay from Jefferies. Please go ahead.
Hi, good morning, Thanks for taking my question.
Very impressive biologics growth again.
This quarter I was hoping I could move because attempt to break it down a little bit.
I think from comments that you made the acquisitions contributed maybe just under $30 million about $28 million and then I think when you talked about kind of noncovered related programs driving the majority of growth.
So wondered if you could.
Could we kind of gas that the covance contributed to call it maybe 90 million.
So is that right and then of the remaining and call. It 60 65 million something like that.
Gross year over year is that pretty balanced across gene therapy, and the Bloomington business in the Madison business or is there one that is really driving that kind of core organic growth.
So just again trying to understand the contributors to biologics growth. Thanks.
Yes so.
Dave first of all we're very pleased with the growth in our biologics business.
For the quarter, you can see for the second quarter in a row.
No.
Very strong growth coming from from the segment I'll remind you of a couple of things and indeed.
Significantly more than half of the organic growth in the quarter in this segment, which was 82% and the more than half of that.
Coming from non core related.
Activities. So this will be a second quarter new role, we're seeing substantial growth.
Coming from that segment I will note that in Q1 last year I would say it was a relatively weaker comp.
We got off to a.
For restart in the in the segment across stuff, particularly are focusing in the clinic asset offerings here compared to our gene therapy and saw therapy areas.
So we'll.
We're very pleased with the growth.
And.
Well, well above half of that coming from non cold weather related, but still posting 18% organic growth.
On the quarter against the us a relatively weaker comps.
So the gene therapy side and.
So every side of the business were significant contributors to the organic growth that we want of ounces.
Thanks for listening in color around is to triangulate around a rough estimation of the cold related programs, but what I would say is.
There's not it's difficult to get precision here when it comes close by team and some of the color I would add here.
Is is that clearly from a development perspective, when you have a fair amount of startup activities across this segment in particular.
Development standpoint, some of our highly skilled.
No. The sites are working around the clock on development activities, which is.
So difficult to segregate them, what they would have been done had they not been doing this we're clearly.
Would have been engaged and other activities. So I think there are some prioritizations in trade offs that are happening in the business.
That makes it difficult to to get to precision here, but we believe directionally will provide.
Good.
Should be hopefully helpful.
Understanding that the.
Core growth in the business was still well above the long term expectations, we have for the segment.
In the quarter, if and when we take out the corporate matching programs.
Got it just a quick follow up then one of the questions that we get pretty often.
Is trying to understand.
How much the take or pay agreements that you are including in guidance kind.
Kind of how how much do those represent.
Of what would be the volume if one or more of your clients vaccine candidates gets approved is there is there any context that you can provide to help us understand.
It sounds like it's more than development, but it's only a fraction of what your commercial revenue could be and just kind of where is where is that breakpoint for the take or pay agreements. Thanks.
Yes, what I would say here David.
There are too many variables to really pinpoint what the exact effect will be the timing of such approval if it does happen and.
And how much is left in the year et cetera, how many nodes.
Versus doses for a while there are lots of variables here, but what I would share with you in terms of.
Take or pay agreements in the way that the work and how that factored into our guidance.
Is that.
We have not factored in any approvals in our in our guidance here. So we are including take or pay arrangements, which would largely fall whether it's the volume and we just we need to produce all of the take or pays that will take effect will be mostly in the second half of our year in that the first vessel.
[music].
Other than start up activities.
The first half of the year is largely.
Not impacted by take or pay arrangements and they start to come in in the second half and if there is an approval with all the variables I described as the folks who.
To give any sort of.
Since about what that might mean for.
Yes.
In terms of what the volume might be but we're not factoring any approvals as we said in the prepared commentary.
In our guidance here.
Great I appreciate those answers thank you.
Our next question comes from John Kreger from William Blair. Please go ahead.
Thanks, very much much out when you just to follow up on Dave's last question, if an approval would happen let's say.
In the January timeframe would would that cause that 9% to 11% contribution.
In your view to likely change or is that more of a fiscal 22 event for catalent.
Yes, so what I would say is yes, there are too many variables to deter.
And whether that will change we're not all.
The way, we've approached the guidance, including just to take or pays.
Means that.
Ill.
We've already put in what is contractually bound if they are in the variable can include.
Items, such as if we're doing the drug product selling while the customer I'll be able to get sufficient yes substance internally or from elsewhere to enable us to do more in the take or pays you understand that there too many variables book to venture into any sort of.
Guesses as to what that could mean, depending on what happens which product what your assumption is it going to what the after the man is so if all those things where the lineup and the volume necessary is above the take or pay minimums then.
Then ensure that could potentially mean more.
More volume coming from those programs than the take or pay.
These are some of the reasons, why including including being epidemic why we have a wider range.
Items were no point is more certain than than another.
And I think okay.
We'll continue to do that as the year unfolds.
Okay. Thanks, and then a follow up John for you on terms of kind of the M&A strategy and capital deployment I think in the past you guys have said you don't really like doing client facility deals that youve done two in the last year as you're thinking about that opportunity changing.
Yes, I would say it is John I mean first of all on when when we're getting.
If you look historically I would say there was kind of a.
Of significant.
Excluding a facilities by by pharma over the last call. It 10 to 15 years and that was just them basically whittling down their overall capacity, but what we have found is that when we can find a facility that has the capabilities in the geography that were looking for and can't secure.
Our.
Meaningful business with with that.
With the owner of that facility that we're willing to engage in it. So certainly we're not in the mode of I would say either consolidating the industry or just picking up as many facilities. We as we can but if you take a look at the bone therapeutics and you take a look at the non need facility. They both were added to.
Two our capabilities in overall capacity, where we needed them. So just the recent announcement here.
Bohn therapeutics with the facility, that's just walking distance from our gas leaves our current got sleeves operation provides us immediate capacity for potential weight based customers that could get approvals in.
And it will be down overall capacity and then in the non yes I have to say this is probably one of the most fortuitous acquisitions be look to further build out our European CDMO business, where we happen to have an asset that had two vials solely lines and the capacity to or the.
The footprint to be able to add even additional capacity at the time as the front end of this of this pandemic. So I would say that it's more in our mix right now, but we have a very clear criteria. If you will in terms of what were looking for and I think you see two really good examples in both a 90 and also in.
In the bone bone Therapeutics facility and then maybe just to expand on your question just with regards to overall M&A certainly we've been executing on an extremely strong.
Strategic plan that has us growing the company organically however.
We continued to be very active in the M&A space, where we can add additional capability and capacity to accelerate our strategic plans in an area that we continue to I would say client is in.
Product in drug substance capacity in Europe, where we'd like to continue to build out our footprint. We certainly have a agree.
Great footprint in the us that continues to get even better we'd also like to expand that beyond the NRG facility in Europe.
Very helpful. Thank you.
Yes.
Our next question comes from taken Peterson from JP Morgan. Please go ahead.
Hey, good morning, John I want to start with oil and specialty drug delivery. You noted decreased demand in early stage development programs can you, maybe just touch on that dynamic and the funding environments and better we've seen kind of a pickup from some of your peers on the early stage side and then when do you expect that segment to turn I think you talked about picking up in the back half of the year and.
New product launches have also been impacted by the pandemic show can you touch panel.
Yes, so so tyco I'll unpack a few a few questions that you have in there first of all with regards to our oldest these segment on the development.
The development revenue and development pipeline is generally a shorter cycle business and early on in the pandemic. We saw people not knowing what was going to happen in our orland specialty delivery, we service a lot of.
Small venture backed.
Companies that early on.
We didnt know, where the pandemic was going in and be basically I would say set still a little bit. So we didn't pick up early under the pandemic, let's just call it kind of through the the March through May June timeframe. We just didnt have the same sort of wins that we we normally would and obviously that impacted a little bit.
Development revenue in the oldest segment that being said, we're now in I would say, it's stable stable part of the pandemic as it continues to develop where people really do understand their funding we still continue to operate and we're starting to see those those wins if you will.
Pick up and then how.
Would you see the Ot segment as what you alluded to in his prepared comments really has one of the strongest overall pipelines.
In the business.
To over 200 molecules, so again with our follow the molecule strategy I mean, we're working on these these items all the way through getting development revenue and hoping to get our customers all the way through launch so again very strong pipeline. There now. The other question you had was was with regards to.
Prescription demand and Thats in our end so she business and what we saw is that we had product launches in our and so tea segment that quite frankly, the launches were the words I used in the prepared comments were muted, meaning meaning with the.
The the pandemic the ability for those customers to fully launch and get their sales teams out into.
Out into.
The doctors' offices and hospitals to be able to promote those products and in some cases, they literally just stopped on the promotion until they get better better clarity when they could actually deployed some of their overall resources. However, we do believe that.
We have some launches planned here for the second half and we also expect that debt.
The muted.
Launches that we had on some of these launches in the US 50 segment should gain momentum in the second half again as Weve seen you know we were running into the later phases of pandemic and people know how to how to deal with them or.
Moving along so Thats way I would answer that question if thats helpful. Tyco.
That is that is and then just thinking a little bit about caseload going back up here I'm. Just wondering is there incremental risk on soft shell potentially getting worse in the next quarter or two and then also CSS returned to growth in trials have been back up and running but is there any risk there.
Cases go back up above that going back into negative territory.
Well first of all I would say.
This is this is not prepared comments. This is John instruments skewed, but right now we know that cases aren't really correlated if you will to death rates in the us in fact, we see that there is you have rising cases, and so it's not necessarily.
In impacting mortality rates and we're also seeing that although we have a tightening of some.
A tightening of some measures in certain areas, we're not seeing wholesale locked down so we're not seeing the same sort of.
Clinical trial pullback that we did early on we're where we didnt have the actions access if you will to the clinical trial patients and so forth. So I don't anticipate that that unless things take a dramatic turn and we actually do get to a.
Additional lockdowns, there's very strong debt the CSS business should.
Should continue to to go ahead and in perform there was the second part of that Tyco.
And similarly on top shelf I mean does that get worse sequentially here.
Or do you think we've kind of reached the bottom I think the thing that I would mention on soft Joel is that part.
Part of the slowdown we saw was really in the consumer health area in that kind of a crazy thing, but you know the flu season is virtually nonexistent and people developing cough and cold.
So we are seeing we saw demand really here in the quarter on just very very low on the consumer health.
Products and just as a little bit of a trivia they literally had hundreds of cases.
Flew in Australia compared to the normal thousands so it's pretty much a non existant season. So the only thing that that we will need to watch out for in soft gel is if we have continued low consumer health demand based upon the social distancing lack of social and social gatherings and lack of travel that.
Really really predicated on us, having some challenges and consumer health. So thats really one of the areas that we'll watch out and maybe I'll ask when is he wants to jump in here also.
Yes, just a couple of quick points with respect to Esso key hedging those cycle. We don't we don't get into specifics in terms of guidance by segment, but largely speaking I would expect the Esso TV first after local lot more like the first quarter.
With improved performance on the back half versus a very strong prior year, if you recall.
Fiscal 20 or SSC business.
We expect long term growth in that 3% to 5% range.
Was actually above.
More than twice that.
In the fiscal year last year. So it's a combination of a tougher comparable for the segment as well as some of the corporate Knights and related.
Headwinds that we've already talked about that are impacting the segment and I'll take the first half again to be more like the first quarter and the.
Improved performance in the back half the other point I would make is with respect to CSS.
Point around.
Increased cases et cetera, what you may recall is the pre.
Previous occurrence of this led to actually ramp up in CSS before before rent down.
We're very pleased with the net new business wins, we're seeing in the business throughout the pandemic achieved a healthy which bodes well for long term performance of the segment.
And we won't predict what could happen.
Here in the event of an increased.
Like downs et cetera, but certainly clear per occurrence led to pick up in Q in our third quarter fiscal last year on before you start you are down in the fourth quarter.
Okay. That's helpful. And then one quick one before I hop off in the vaccine work I know your guidance doesn't assume any approvals I'm just curious how much lumpiness in volatility you think there will be once you have accruals, obviously, they're big government contracts and stockpiling.
You think it will be relatively smooth incomes and scale up thanks.
You know look and Tyco, we have take or pays that are that are in place in those take or pays.
Do contemplate a certain amount of capacity utilization.
And so I think the the area we're.
I think there could be and I wouldnt call. It lumpiness, but I would say increased demand is with regards to therapies, if they get approved and depending on what the uptake of those are that that's an area, where we would have to obviously respond to and the.
The only other thing with regard specifically to the vaccines is whether or not there would be volumes above and beyond the take or pays that we already have in place.
Okay. Thank you.
Our next question comes from one Avenue.
America. Please go ahead.
Hello, Congrats on the quarter.
I might have missed this but what was the recovered Merck revenue that you realized in the quarter across the whole company not just biomarkers.
One problem, we didnt get decision on this but our estimation around.
Order is as follows we delivered 20% organic growth.
Growth in the quarter across.
The company and even if you were to exclude.
COVID-19 impacts.
Still had a double digit organic growth.
Our performance for the company.
Another reminder, I would give you is when you think about the activities. We have both the cost therapeutics and non of excellence here.
Foreclosed I've seen.
The volumes and related take a page really take effect more towards the back half of our year than first half. So really mostly have startup activities that are happening that are contributing to the performance and so I would expect as we saw in Q4 as well as in Q1 most of the performance here is not related to acquired 19.
So this is two quarters of double digit organic growth ex will then cover the nice thing for the company.
Got it appreciate definitely appreciated the quarter given that you did provide guidance for net Kroger related revenue for the whole year are contributing nine to 11 percentage points I just wanted to know how much was in the bag or realized during the warm Q2, and how much was left.
Any quantitative but you could share on that but what I would tell you directionally the.
A person's nine to 11 on the year of the first quarter is substantially below that.
Again, yes, 20% organic growth on the company and we still had one.
Well into double digits excellent galvanizing again.
I won't give you precision here given all the factors, where we request, but as I said.
The take or pays are factored into our guidance most to take effect.
It was about half of the year for us have slowed if you will.
With that demand in the first quarter would be largely not focused related when we think about our outlook.
Okay. Thank you and switching gears a little bit we've seen a few critical wholesome permission from the gene therapy development projects in the last couple of months has this changed the confidence of sponsors or your own competence them up and on the potential opportunity from gene therapy going forward.
No not at all I would say there's very specific.
Factors involved in a couple of those cases that came out and doesn't change either our outlook on on the space or the activity that we have in the gene therapy business.
Okay. Thank you.
Our next question comes from Jacob Johnson from Stephens. Please go ahead.
Hey, just one for me and maybe following up on that last question can you just give us an update on how Nasser sales performing.
This is a small revenue revenue base when you bought it but as we look out. The next couple of years, how should we think about the revenue ramp here and also can you just talk about how you're integrating master cell with Paragon along with some of the other acquisitions you've done here and maybe how these companies work together.
Yeah sure. Thanks. Thanks for the question Jay Good first of all we're super excited to be able to get our hands on this premier cell therapy asset and as I've said before we kind of caught this acquisition a little bit earlier in the cycle.
Than we did for example, with Paragon or even Bloomington, so over.
Over the next several years, we don't expect.
Significant revenue and EBITDA compared to the overall company, but we expect fairly strong growth on you can see that we made some pretty astute event investments already both from a capex standpoint, as well as from the facility.
Facility acquisition standpoint, so we're investing in master cell.
A two and a facility that's down the street from gasoline sales is going to have commercial manufacturing capability. In addition to that.
We've invested cash capex in the Houston facility, which has just recently opened and then finally with the founder Cubic's acquisition of their subsidiary got our hands on you know us substantial facility and capabilities that are going to be able to help us more quickly being able to go.
Commercial with potentially some of the late fees.
Programs that we have within cell therapy. The integration is going extremely well I can tell you that we're off to I would say of strong winds rate.
As were on kind of exiting the overall calendar year.
And obviously, we just talked about.
The the recent recent fairly significant.
Our win that we had with the company that's going to be able to those fighting less so I think putting all those those things together the acquisitions going vary.
The integration is going very well. We've also acquired some very good talent into that into that facility. The other thing is is that we also see a significant synergies between our gene therapy and cell therapy business in that a lot of.
The companies have both gene therapy and cell therapy programs, so that people were able to.
Work work across those those facilities and then also point to the the Andy Thomas.
The are these touch partnership that we have within our cell therapy business, it's actually expanding all the way through our clinical trials. So I.
Feel very very good again, we caught this one a little bit earlier in the.
In the cycle, which means that we're going to be able to enjoy that future growth from I would say 10 years from now we're going to see really.
Explosion of solar cell therapy.
Products and approvals that that should happen, which will be a very exciting for patients around the world.
Got it thanks for taking the questions.
Our next question comes from John.
Command Afghan research. Please go ahead.
Thank you good morning.
I was hoping you could elaborate a little bit more on the strength of the development work within the biologics segment that in addition to covert team to drive a lot of the segment performance. So can you just elaborate how much of that is coming from Covance, maybe versus gene therapy, and then how did the mark how did that impact segment margins in the quarter how to divide.
Sales and margins compared to the commercial work.
Yes, sure we were very pleased with the performance with the biologics business overall as I mentioned earlier.
Well well above half of the 83% organic growth in the second half was not corporate related.
And.
Also gene.
Gene therapy was a significant contributor.
The growth in the business.
Well from a revenue perspective, I think when you when you look at the.
EBITDA margin expansion year on year.
It would bode well for the level of capacity utilization, we have across the segment.
Here as we are near capacity.
With respect to some of our areas.
Particularly around our file capacity et cetera, and as you know we have.
New excel.
Extensions that on the way that will be up and running in next few months.
In those areas for our relay.
Remaining customers as well as those that are pursuing organizing vaccines in therapy. So all those are punching heaters to the.
So the performance here from a margin perspective in the quarter, which were very.
We're pleased with and COVID-19, while contributing to the performance wasn't.
Within substantially less than half.
Development revenue continues to be.
Logical portion of this segment as we have.
Hi, maturing pipeline programs that we're working with customers across the full team and hopefully thats aside the gene therapy and cell therapy across all offerings within biologics.
And so which again in the future as well as those programs get.
Commercially launched.
And.
In the future.
We get closer to.
A balance in development and commercial development revenue continues to be stronger sales.
Several quarters of growth and development revenue, which is why you see about 44% of our total revenue to be in development in this quarter versus roughly 30% a year ago.
Thank you Andy.
Our next question comes from Dan.
Yes.
Thank you Rob Thanks for taking the questions.
Just aren't coded.
Could you give us some sense of the split between drug products and drug substance when the new coded revenues and let.
When we think about some of your customers potentially getting approvals is that all upside or do some of the take or pay contracts already include capacity build out that incorporate the volumes were could occur and then just one other one on coated.
Hi, good morning, if if if.
Some of your larger customers that use bigger space for and are working with those companies don't get.
Vaccines approved what what what should we think about the capacity allocated towards those customers.
Yes, maybe I'll start with the last part of your question.
And work my way back.
Certainly the capacity that we have here.
That is positioned to.
To work on Covance specific programs is not.
For the Nike right. We are part of the reason that we're a growth company here is because we have capabilities are traditionally we've had in the company as well as kids as we added over the last several years around.
Around.
Drug product took such as gene therapy et cetera, as well as capacity that we already had in flight before covered my team but.
The capacity Wasnt, specifically contemplating the spend that ignores it unique to manufacturing COVID-19.
Therapies in vaccines and so the long term prospects out.
Up sell fill finish.
Gene therapy.
Above that could manufacturing project substance.
For biologics all point.
With strong.
Growth of our long term, which is why we were pursuing these expansions and what I'll remind you.
January 2019.
Given the pipeline of products that we have in front of us and our.
Biologic strip products of finish facility in the US by way of example, we.
We didn't foresee the maturing pipeline.
Requiring more and more capacity to the point that we anticipated by 2021.
To be running out of capacity across files.
And closely so across that syringes.
So at that point, we announced an expansion of.
Acetate for that facility as we stand today, particularly with nickel was on Q4 brands as well as we mentioned, we're near capacity involved with with more.
Capacity coming on board over the next few months to relieve that so I think that sales that capacity is very fungible across the offerings. We have within the segment and not specific to over 19 and have confidence in the U.S beyond.
The need for this wouldn't affect to the table base clearly they are factors.
Summers that reflect what they anticipate the volume needs might be in the event of a.
Of an approval as well as the timing of those approvals and we have been hiring and training and Onboarding resources to position ourselves. In addition to the startup activities to be able to manufacture those volumes.
Thank you and you would anticipate that.
Customers expectations with volumes already somewhat reflected here, but lots of variables could.
Could impact those.
As we go forward and we wont venture to guess as to what that might be.
But some of those are certainly already contemplated.
Those take or pay electric and then lastly, you. The first question is around just subsistence robotic we've announced some.
Some of these programs already in terms of.
The work Weve done on.
That means that therapy include our sort of core EPS will all we have not.
Venture to two announced with various reasons, but we'll work at 16 over 60 compounds organization with a majority of those hit our biologics business and they do spend across both co product acceptance and I would add.
Gene therapy vector manufacturing as well so we're very pleased with.
Afterwards, we have not only about logic, but elsewhere across the company, which again is why we say we are go to company for both in Iceland.
Thanks, Wendy and maybe just one follow up just on Paragon. So the capacity that you're building our today I mean to the extent some of the programs. We're working on and go from clinical to commercial success.
How do we think about the capacity that you're planning and kind of what's the way to think about the revenue impact for channel. Thanks.
So as we as we continue to expand and suites as John mentioned in our prepared commentary.
And the next few months will have 10.
Fleet operational number of customers have a subset of those suites on their capacity reservations conclude.
Including certain minimum volumes, which our sales.
Again take or pay types type arrangements.
So we anticipate volume increases across the segment and the pipeline continues to make sure that we have within catalent, but.
At large and we expect to continue to.
To Onboarding, new customers and continue to drive programs through those on the sidelines for commercial use so I think.
As as volumes go through a factor as a company that has the scale that we do at the upper end of utilization those can drive meaningful.
Margin uplift.
Performance in the business.
Which we would anticipate over time.
Last point I'll make is we.
Discussed last quarter.
Our gene therapy offerings about the only.
CDMO operation.
In the world with a commercial license to produce gene therapies, which positions us well to continue to not only perform for the customers. We are engaged with habit potentially more as the pipeline of gene therapy for sales expense.
Great. Thank you.
Our next question comes from Sean Dodge from RBC capital markets. Please go ahead.
Hey, good morning, the stones color on for Sean Thanks for taking the questions.
Thank you Bill a brief statement.
They've been answered earlier, but the longer term EBITDA margins for the biologics segment.
It was targeted around 35% because still anticipating reaching this by fiscal 24 or maybe exceeding it or is there any change to this targeted that's what's going on last few months.
Yeah, So look on our margin expectations for the segments remain unchanged.
Given a company wide.
Margin expectations as we expand and we have said that as we grow and biologics, which you saw this quarter as 44% of our revenues.
And biologics being higher margin that will propel the company margins.
To expand so we continue to expect that long term.
Those won't be linear as we add capacity and we add resources that are highly trained highly.
A complex exacting processes that we have.
As we do so those will.
At some variability across our margins and keep in mind also that we have a large proportion of development programs, which tend to be more variable than commercial manufacturing. So I think overtime, we expect margins to.
Two.
Expand and stabilize across the segment as we add.
Capacity as we get at the higher end of capacity. In addition margins will go up as we added capacity built up a bit and then long term expectations remain unchanged last quarter I did highlight that.
Well, let me see potentially continuing particularly as we.
Potentially set to manufacture large volumes of organizing vaccines et cetera, which is component.
Sourcing materials that are used in both.
My start to increase and those we see as additive to be.
Top line growth for the company. There is a portion of our revenues that are the couple of outsourcing that to the extent they grow faster than the rest of the revenues that could have.
I would say short term FX related to.
To margins, but as I said those are additive to the business and we don't change our long term expectations.
Okay. That's very helpful. Thank you.
Our next question comes from Evan.
From Baird. Please go ahead.
Yes, hi, thanks for taking the question you.
You mentioned.
You mentioned.
The slower than expected.
Take up some new product launches, but I wanted to ask from a slightly different angle.
Actual npis new product introduction themselves there were 30 in the quarter and I know, there's ebbs and flows there, but that was a little bit.
I think lower than what weve seen per quarter looking back the last year or two so the question would be in addition to the floor product launches are.
Are you seeing just some changes in customer behavior overall, maybe holding back on launching a product period in this environment.
Is that something that you expect to change.
As we move to the pandemic.
Yes, Kevin first part of your question with respect to.
Solar update two.
Launches.
And the Npis being 30 in the quarter.
Npis the timing of them isn't something that we necessarily control.
Whether you academic whatnot.
Their regulatory pathways and other variables that are involved in the customers are more in control of those.
As you know with capital that we have over 1000 development programs and those large npis slug every year that drive our long term growth.
Given quarter those numbers may move around but if you look at this first quarter versus last year first quarter. For example, we at 30. This year, we got 15, which has an impact last year. So.
Not that those two years or so or is adequate I think with 30 npis in a quarter. When we expect to do somewhere in the ballpark of 150 give or take in any given year I'd say, it's an average quarter, probably again higher than the number of npis.
Year ago.
With respect to customer behavior, I would say, we're seeing meaningful.
Changes I think we talked about us lower early phased development programs with respect to clinical.
Programs you saw some of that and also if that business in the fourth quarter last year. They see some of that in our east segment.
This quarter. So so I think if you look at across capital.
Mid and late stage programs tend to be.
More of the proportional developed for that we have and again timing of watch is not something that we necessarily control nor do we see any means.
Meaningful a significant change in customer behaviors of animals, I think as products get launched and.
Fewer visits to physically to see doctors offices with respect to the sales engine.
Customers that may have had an impact of how fast the uptake is and we saw some of that in our esselte segment from launches over the last two fiscal quarters.
Yes, Mike.
It makes sense final question for me can you help us to code exactly.
What's going on with the.
The voluntary recall that you mentioned, obviously kind of an add 7000 products always dangerous to focus on one but it's just a little bit notable that you called out product participation and fly to age 20.
And then the negative impact from the Threeq on trying to figure out how those are how those are connected.
And.
Maybe if there's anything else to call out on what exactly happened there.
Yes. So first of all thank you for for highlighting the hill site that capital as a highly diversified company with 7000 products and a thousand dissolvable rems as well that are contributing meaning.
Meaningfully to our to our revenues.
Experience and more and more.
More exposed to biologic, representing a greater proportion of our revenues, which is on a faster growing and in.
And despite this product that you referred to which we did highlight in the second half of our prior year in the third and fourth quarter, we delivered a solid quarter.
In Q1 and are pleased to be in position to be increasing our guidance for the year, having said that with our E. You have this one product, which had an impact in the quarter was sent to the $12 million.
Cost that we that we saw.
In the quarter and if you look at the rest of the year.
The.
Product that you're referencing was the second half.
Launch.
Tivity, so we see that being more of a comparable challenge in Q3 and Q4, but as we look at the RC segment and we pick out this.
If you assume.
You mentioned five year on year picking out this product you still see segment that delivering close to what we would.
Or in line with what we would expect us to do long term, which is roughly 5% to 7%. So we're pleased with the segment. We are pleased with the growth that we're seeing particularly in our guidance.
All these dissolving.
Franchise within the business.
In the pipeline that we have booked for that as well as non died and the segmented bodes well for the long term growth at the segment. So we're very pleased with the performance of the segment. It could take this this product out it does have a part but the specialty trailer.
And.
Which contributed to the second half of last year and as we said we will have an impact this year on a year over year basis, although our venture to give more than we did in our prepared commentary which has.
Their activity on the way.
With this.
All of them.
And we do not yet.
Have an estimation as to when or if that product will be coming back.
Thanks, Let me.
This concludes our question answer session.
For any closing remarks.
Thanks, operator, and thanks, everyone for your questions in particular time, he joined your call I'd like to close by highlighting a few key points we covered today.
First we're very pleased with a very strong start to fiscal 2021, including 20% organic net revenue growth and 23% organic adjusted EBITDA growth.
Our first quarter results combined with our increased forecast in the back half of the year led us to raise our fiscal 2001 21 net revenue growth expectation by approximately five percentage points in our adjusted EBITDA expectation by approximately seven percentage points.
Next the transformative acquisitions, we've made over the last several years combined with our strategic internal growth investments across the company were well timed to enable us not only to address the increased level of R&D innovation across a broad range of therapeutic categories, but also to position.
Indolent to play an important role in the efforts to create therapeutics and vaccines to combat Covidien team.
We are accelerating our strategic Capex plans in our biologics business, which will help meet near term demand as well as have the effect of sustaining our long term growth targets.
Last January we announced our plan for biologics to become 50% of our overall net revenue by 2024.
And this quarter, we are nearing our target faster than expected with our biologic segment accounting for 44% of our net revenue.
Finally, our mission to develop manufacture and supply products that help people live better and healthier lives has never been more important.
We continue to be thankful for our 14000, plus employees, who live our patients first culture and it worked hard to carry out the great responsibility, we have to maintain business continuity for all of those counting on us to deliver before a potential COVID-19 therapy or vaccine or the SEC.
1000 other products, we produce every year for customers. Thanks.
Thank you.
Ladies and gentlemen.
Today's conference call. Thank you for participating you may now disconnect.
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