Q2 2021 Catalent Inc Earnings Call
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And again.
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Ladies and gentlemen, thank you for standing by and welcome to the Kennewick, Inc. Second quarter fiscal year 'twenty from one earnings conference call.
This time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question and will need to purchase star one on your telephone if you require and further assistance. Please press star zero and I'd.
I'd like to hand, the conference over to your Speaker today, Paul as you dealt Vice President of Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us today and review cattle and second quarter 'twenty 'twenty one financial results.
Joining me on the call today are John from Minsky Chair, and Chief Executive Officer, and what new.
Joseph Senior Vice President and Chief Financial Officer.
Please see our agenda for this call on slide two of our supplemental presentation, which is available on our Investor Relations website at Www Dot <unk> 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.
For you to slide three for more detail slides four and five discuss the non-GAAP measures and our just issued earnings release provides reconciliations to most directly comparable GAAP numbers. Please also refer to <unk> form 10-Q regarding additional information about the risks and uncertainties that may bear on our operating Roe.
Results performance and financial condition, including those related to the COVID-19 pandemic now I would like to turn the call over to John from Etsy, whose remarks are covered on slides six and seven of the presentation John.
Thanks, Paul and welcome everyone to the call.
Before discussing our second quarter results, let me take a moment to remind you that our top priority. During the COVID-19 pandemic continues to be keeping our employees safe and by doing so maintain business continuity.
Given the wide range of the 7000 products, we produce on behalf of our customers I'm sure. Many of the folks listening to our call today have been touched by one or more of these products and the last year products that now include COVID-19, vaccines and treatments approved for emergency use.
Let me I know you appreciate the employees at Callaway and elsewhere, where we.
Working relentlessly to help us fight our way out of the pandemic and are helping to save lives.
From a bright line curdle and employees one of the ways. We've shown our appreciation is true. Thank you bonuses, which totaled more than $20 million since the beginning of the pandemic per second quarter.
Now I'm pleased to report that our strong start to fiscal 2021 continued and the second quarter.
Our second quarter results when combined with the higher levels of net demand and now expect for the remainder of the year have led us to raise our fiscal 2021 net revenue expectation with the low end of the range, increasing by $220 million and high and increasing by $170 million.
The adjusted EBITDA range was.
And by $70 million at the low end of the range and $50 million at the high end.
And the second quarter, our constant currency revenue growth was 24% year over year of which 17% was organic and.
Adjusted EBITDA of $224 million.
<unk> constant currency growth of 28% over the second quarter of fiscal 2020 of which 22% was organic.
Our adjusted net income for the second quarter was $114 million or <unk> 63 per diluted share.
And from 45 per share and the second quarter of fiscal 2020.
The biologics segment was again the biggest contributor to our performance as net revenue grew more than 75% over the second quarter of fiscal 2020 on a constant currency basis, including 65% organic growth with year on year margin expansion of more than 500 basis point.
To 33, 5%.
Demand for our drug product drug substance and viral vector offerings remain tight.
Particularly due to work on potential COVID-19, vaccines and treatments, which was the primary growth driver and the segment.
We saw another quarter, where the contribution from biologics toward and net revenue has increased with the segment contributing 44 per cent of the companys revenue and the quarter compared to 31% and the second quarter of fiscal 'twenty.
And our Softgel and oral technologies segment, we continue to experience some headwinds, which we attribute to both a decrease and occurrence and patent Flus and calls due to limited travel and social gatherings worldwide and.
And you did launches of new prescription products during the pandemic.
We're cautiously optimistic that these will begin to normalize and.
And we see improved performance projections and the back half of our fiscal year.
Our oral and specialty delivery, we saw continued organic revenue growth and new product momentum and our <unk> platform as loans returned to growth in our early phase development, which were partially offset by lower demand for certain orally delivered commercial products.
As we highlighted last quarter, we continue to be enthusiastic regarding the long term growth prospects and the OSD segment, given its 200 plus molecule.
Volume, including products based on our novel <unk>, Ultra technology, which will enable higher drug loading into each and <unk> tablets.
We anticipate the first day, its ultra commercial launch and the calendar year 2022 to 2023 time frame.
Now I'd like to provide you with a brief update on our COVID-19 related programs.
We've now been awarded work and more than 80 unique COVID-19 related compounds, where potential vaccines and therapies across all four of our reporting segments and increase of 20 compounds. Since we reported our first quarter results in November.
Some of those vaccines and therapies have been granted emergency use authorization or similar status.
The global plans and that makes us challenged our industry to be more creative and collaborative and all aspects of the supply chain in order to quickly accommodate additional COVID-19 related programs.
We're doing our part by accelerating some of our previously planned capacity expansion projects across our global manufacturing network to meet increased demand required to help fight the pandemic and to serve other patient needs.
And some vaccines and treatments have been approved for emergency use and we hope others will follow soon we thought it would be helpful to provide a brief update on some of our capacity expansion projects that will be used for both COVID-19 projects and non COVID-19 projects.
It is important to note per catalyst COVID-19 has been and accelerator for our long term strategic plans and will position us for continued long term sustainable growth.
I'll start with capital investments and Bloomington, and with an update on three specific capital projects and order of their readiness timelines.
The first is the addition of a high speed filling line, which we first announced in January of 2019, along with other capacity expansions with expectations to complete the project within three years.
This space has since become dedicated space for Johnson <unk> Johnson's COVID-19 vaccine candidate.
We've worked closely with Johnson and Johnson since April.
For truly extraordinary efforts coordination and commitment by hundreds of people working tirelessly over the last nine months. This buildout was breach certainly brought online, allowing us to meet the operational readiness and 24 by seven manufacturing commitments described and there are announcements last spring.
Okay.
The next two lines scheduled to be available and Bloomington is the high speed vial filling line, we announced in early September 2020, which we expect to come online early in our fiscal fourth quarter.
This line will help meet the high customer demand for bio filling at this site, including form of during this COVID-19 vaccine, which received emergency use authorization from the U S food and drug administration and December.
We're on track to support Madura and meeting its commitment of 100 million doses to the United States government by the end of March and 200 million doses total available by the end of June.
The third new line that will become operational in calendar 2021, and Bloomington is a high speed flexible syringe cartridge filling line, which was also announced in January of 2019.
And so this type of wine is not urgently needed for the manufacture of COVID-19 related products. We expect the line to be completed in the back half of 2021 and to serve non COVID-19 programs.
Additional capital investment projects announced in January 2019 included increased mammalian cell culture capacity and Madison by adding a fourth and fifth manufacturing trains at the site.
Providing additional clinical and commercial production capacity at the 2004 thousand liter batch scale.
These trains are on track to come online and our fiscal fourth quarter and will help accommodate increased customer demand for drug substance manufacturing for both COVID-19 related projects and non COVID-19 related projects and we anticipate achieving our long awaited goal a commercial drug substance.
<unk> production as a result of this work, thereby transforming this historical development based site.
The non <unk> facility, which we acquired just over a year ago and it's <unk>.
And on track to generate substantial returns in a very short period has become a critical asset for drug product manufacturing in Europe, including for COVID-19 vaccines.
Like in Bloomington, we're working on multiple high profile Tech scene projects and a 90 day with plans to increase capacity to support additional customers and programs.
Further enhancing our capacity in Europe last July we announced that we would modernize our fill finish and facility and the low spreads, including the installation of high speed flexible filling line capable of filling vials similar images or cartridges and under barrier Isolator technology.
We continue to anticipate the completion of this project and calendar year 2020.
Our viral vector manufacturing capacity is and high demand from the growing number of gene therapy compound currently and the industry's development pipeline, which now totals roughly 600 assets targeting six 1600 different diseases.
Adding to that demand has been viral vector manufacturing for COVID-19, vaccines for which a portion of our newly expanded capacity and our lead gene therapy manufacturing site has been dedicated.
We've now completed construction of all of the suites at the first building on the site to be developed and expect additional capacity being built out and the adjacent building to be brought online and calendar year 2022 to help meet the significant patient needs for gene therapy treatments.
But a year ago, we announced our entry into the adjacent and cell therapy space with the acquisition of Maths yourself.
Cell therapy assets, a rapidly growing with recently available count of unique assets and development Comping 1500.
More than a third of these involve allogeneic therapies.
Since the acquisition, we've made a number of strategic investments to expand our footprint and our cell therapy business and it's high growth potential, including opening and validating our U S clinical facility in Houston, where we're now performing work for a number of customers.
Continuing the build out of our commercial scale production and fill finish facility and gasoline, Belgium scheduled to open in fiscal 2022, and acquiring a purpose built <unk> facility and manufacturing assets from bone Therapeutics, which is located next to our existing facility.
And gasoline.
Given the evolving dynamics and technologies and our industry and the resulting demand for our valuable capacity and capabilities, even without considering the demand for COVID-19 related products, we've been focusing and our strategic planning and creating and expanding valuable offerings for our customers and their patients.
I'll also considering long term returns across our business.
This process includes evaluating potential acquisitions to expand our offerings.
Well as making adjustments to our existing portfolio where appropriate.
And the last six weeks, we made two moves to adjust our portfolio and our oral and specialty delivery segment.
So first with signing an agreement to sell our blow fill seal manufacturing business located in Woodstock, Illinois to SK capital for $350 million.
And with potential for additional portfolios earn outs of up to $50 million.
The sale is expected to close and the coming spring.
Blow fill seal is very attractive space for the right owner.
Given the opportunities for potential expansions and other areas of our business that we believe have higher potential returns and broker directories.
Pleased to have identified and owner with a desire to invest in that facility and create more opportunities for our employees and customers and that segment.
The second portfolio move is an agreement to acquire and 90000 square foot cgmp facility and the Boston, Cambridge area from a quarter therapeutics for $80 million.
The site includes best in class spray drying capabilities, and we'll provide catalyst with significant commercial scale capacity permitting this site to act as a global center of excellence for spray dry dispersion and dry powder encapsulation and packaging.
In addition to serving new customers at the site will continue to manufacture per quarter. There as a result of a long term supply agreement for the manufacturer of its commercial prescription product intended to treat symptoms associated with Parkinson's disease.
And the acquisition, which is expected to close before the end of our fiscal third quarter complements our existing U S based capabilities and metered dose and nasal inhalation and positions us for growth and the outsourced dry powder inhaler market.
We estimate at over $500 million, and total and growing and the high single digits.
I would now like to turn the call over to Inc.
View, our financial results for the quarter, and our enhanced fiscal 'twenty and 'twenty one guidance.
Thanks, John.
I will begin this morning with a discussion on segment performance.
As in past earnings calls.
We will be in constant currency.
I will start my commentary on slide eight with biologics, which is now our largest business segment.
Biologics net revenue of $404 million increased 76% compared to the second quarter of 2020 with segment EBITDA, increasing 109% over the same period.
Acquisitions contributed 11 percentage points to revenue and five percentage points and segment EBITDA and the second quarter compared to the prior year.
The acquisitions that primarily contributed to the revenue and segment EBITDA growth include. The addition of the and 90 facilities in January of 'twenty, and 'twenty and Master cell and February clinically.
Non <unk>, which extended our drug product business that falls within the Biologics segment. We continue to attribute all non BMS work, including all COVID-19 project and we brought the facility after the acquisition the organic growth and the segment.
The robust organic growth and our biologics segment and the quarter was driven across all segment offerings.
And drug product, the substance and cell and gene therapy, and was primarily driven by COVID-19 related projects.
The segment EBITDA margin increased significantly both year on year and from the first quarter to a record level of 33, 5% for the segment, which is primarily attributed to increase capacity and utilization and higher volume.
We expect strong year on year growth of the biologics segment for the remainder of this fiscal year.
Please turn to slide nine which presents our selves, Illinois technologies segment.
Total and all the technologies net revenue of $247 million decreased 10% compared to the second quarter of 2020 with segment EBITDA decreased from 31% over the same period.
The decline was driven by reduced volume for certain persistent products as well as lower demand for consumer health products, particularly for cough cold and over the counter pain relief products.
We continue to attribute the lower prescription volumes to slow rollout of new products during the pandemic and and lower consumer health demand through a combination of consumer stocking and the early stages of Independencia, Inc. As long as the effect of limited social gatherings and travel due to pandemic mitigation efforts.
We see some of these headwinds subsiding and the next six months and expect improvement and revenue growth and the back half of our fiscal year.
Year on year growth.
Development revenue was over 40% from the second consecutive quarter, which we expect will eventually lead to future new product introductions and will help drive the segment's long term revenue growth.
Lower volumes were the primary drivers to the decline in margin, which was also affected by elevated year on your operating costs related to the pandemic, including.
Possible. Thank you bonuses additional protective equipment and adjusted net sufficient production workflows and put in place to facilitate social distancing among our employees.
Note that these higher cost impacted all segments.
Slide 10 shows that our oil and assesses the delivery segment recorded net revenue of $170 million and the quarter, which is up 17% compared to the second quarter of fiscal 'twenty and 'twenty.
Excluding the portion of the acquired a 90 facility that is part of the OSB segment year on year revenue increased 2%.
Rising and market demand for commercial products across our tightest OLED dissolving tablet technology platform and a return to growth for early phase development activities in the quarter, partially offset by lower demand for non <unk> subscription products.
Segment, EBITDA increased 31% over the second quarter of 2020 of which you've always been a portion of the acquired non facility contributed 22 percentage points.
Segment EBITDA margin increased by nearly 300 basis points.
Turning to the remainder of our development revenue and order to provide additional insight into our long cycle segments, which include biologics softgel and oral technologies and oil and assess it to delivery this quarter, we disclose our long cycle development revenue and the current year.
And the second quarter of 2021, we reported development revenue across both small and large molecule products from $370 million, which is 68% above the development revenue reported in the second quarter of fiscal 2020.
Development revenue, which includes net revenue from products approved for emergency use.
It represented 41% of our revenue and the second quarter compared to 30% and the comparable prior year period.
The strong growth and the biologic business was the biggest driver of this year on year changes.
And the second quarter, our development pipeline led to 32, new product introductions for a total of 62 and the first six months of fiscal 2021.
Now as shown on slide 11, our clinical supply services segment posted net revenue of $94 million, an increase of 4% over the strong results and the second quarter of the prior year.
Segment, EBITDA was $25 million or 2% increase and segment EBITDA margin was 27, 1% down slightly over the second quarter of last year margin was impacted by sales mix in Europe.
The CSS business is adjusting to some new realities and close by Brexit and.
In response, we have implemented the process to close the segment facility and bolt and UK and consolidate into our existing facilities and back and U K and Schoendorf, Germany.
An important consideration for the fashion as our investments and higher growth areas for the business, including Asia Pacific, where we are fitting out our newly acquired 60000 square foot facility, and sugar and Japan, and North America, where we are starting construction on a 25000 square foot facility in San Diego that will be co located with our existing.
Oil and especially to delivering early phase development facility.
As of December 31, 2020, our backlog for the CSS segment was $448 million compared to $428 million at the end of last quarter and up 15% from December 31 2019.
The segment reported net new business wins of $118 million during the second quarter, and 13% increase compared to the second quarter of the prior year the.
The segment's trailing 12 month book to Bill ratio is one two times.
Moving to companywide adjusted EBITDA on Slide 12, our second quarter, adjusted EBITDA increased 31% from $224 million or 24, 5% of net revenue compared to 23, 7% of net revenue and the second quarter of fiscal 'twenty.
On a constant currency basis, our second quarter, adjusted EBITDA increased 28%, including 2% organic growth compared to the second quarter of fiscal 'twenty.
On slide 13, you can see.
Second quarter, adjusted net income was $114 million or 63 per diluted share compared to adjusted net income of $72 million or <unk> 45 per diluted share and the second quarter a year ago.
Slide 14, and so our debt related ratios and our capital allocation priority.
Our cash and cash equivalents balance at December 31.
$833 million compared to roughly $1 billion at September 30, and $189 million and.
At December 31, 2019.
Our net leverage ratio was two six times at December 31, the same as September 30, and down from four two times at the end of December 31st 2019.
Call that in August we lowered our long term net leverage target of 3.0 times compared to our previous target of three five times.
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 accelerate our organic growth plans to meet customer demand and patient needs.
And fiscal 2021, we continue to expect that Capex will be approximately 15% to 16% of 'twenty and 'twenty one revenue.
Now, we turn to our financial outlook for fiscal 'twenty, one as outlined on slide 15.
We are raising our previously issued guidance to reflect second quarter performance and to account for higher demand primarily related to COVID-19 projects.
The guidance ranges, which remain broader than in recent years due to the increased uncertainty introduced by the pandemic.
Now net revenue and the range of $3 8 billion and $3 95 billion.
Compared to the previous range of 358 billion to $3 seven and $8 billion.
Adjusted EBITDA and the range of $950 million to $1 billion compared.
Compared to the previous range of $880 million to $950 million.
And adjusted net income and the range of $475 million to $525 million compared to the previous range of $410 million and $470 million.
We expect that our fully diluted share count on a weighted average basis for the fiscal year will be and the range of $180 million to 182 million shares and that our consolidated effective tax rate will be between 24% and 25% and the fiscal year compared to our previous estimate of 24% to 26%.
There are important assumptions underlying our revised guidance, including first we assume no major unforeseen external change to the current status of the COVID-19 pandemic and its effect on our business.
Second.
Revised guidance does not assume the receipt of any vaccine or treatment order from any of our customers beyond what either has been received to date.
Deemed required under executed take or pay arrangement.
Third revenue from acquisitions was projected to represent approximately two percentage points of our revenue growth rate for the year, our guidance assumes net acquisition and divestiture and the OSB segment that John highlighted in his opening remarks close as anticipated in the coming months.
And finally, we now attribute approximately 14% to 15 percentage points of the projected net revenue growth to net COVID-19 related revenue versus our previous estimate of approximately nine to 11 percentage points.
This estimate is based on factors that affect multiple business segments, including.
Updated forecast related to business that we included previously, including some that have increased and size due to reaching certain milestones or other triggers.
Revenue and not previously projected from additional work among the COVID-19 related projects and which we are engaged.
An assessment of opportunity cost, including the lost value of work that would likely have been placed and the same space as some of the COVID-19 related work and.
And estimated loss revenue and certain parts of the business as a result of the pandemic such as lower demand for consumer health products, and our Softgel and oral technologies segment as well as impacts with some precision products.
Operator. This concludes our prepared remarks, and we would like now to open the call for questions.
Thank you, ladies and gentlemen, and thank.
As a reminder to ask a question and will need to press star one on your telephone to withdraw. Your question is just press the pound key.
Please standby, while we compile the Q&A roster.
Okay.
Your first question comes from the line of John Donovan.
UBS Your line is open.
Hey, guys, great. Congratulations on a strong quarter and everything you guys are doing obviously to get the economy going here.
Maybe first question would just be if we could dig in on Covid. So can you just break out what was the impact on the quarter. I know you basically said it was the biggest contributor to biologics growth, but if you could just help us on that fund a and then B. Just you gave us the math Whitney right at the very end, but just kind of walk us through and push it in your updated guidance kind of how do we think about.
I could do the math, but didn't have time here, how do we think about the change and what you were thinking about the base business ex COVID-19 and the full year.
Yes, sure then book off first.
In terms of the Covid impact on the quarter.
Clearly, we're pleased to see the progress on the on the various dose vaccines therapeutics and working with our customers on as you know we have 7000 products across the company both on the development program and across over 1000 customers.
I just want to remind everyone of the.
Impact across the Covid programs, and therapeutics, which is I would say not a precise science and quite frankly at this stage given the various parts of the business and the impact that we described and are.
Laying out our guidance earlier.
It becomes increasingly difficult to really bifurcate COVID-19 versus non COVID-19, which is why we're not.
Going to a level of precision here than what we can say is the biologic business had 65% organic growth and the quarter.
And just remind everyone. The COVID-19 activities that we're doing also organic and occupy some of our.
Top scientists across the company.
Who arguably could be working on other projects as well as quality professionals et cetera, and some of the space that we use.
One more comment I'll make then is that from.
And some cases, we have programs that we're working on prior to the pandemic with our customers within our current business that now become.
And good therapeutics or candidates for the COVID-19.
Pandemic and so it makes it again not a precise science to count those as purely COVID-19 vs versus not on what we can say as compared to the first quarter.
Significant portion of the majority of the growth was coming from COVID-19, we still saw very good growth and our biologics business, but we're saying on the 65% plus day.
And with the worst that portion of it came from COVID-19, and this case and therefore for the company.
As well.
Moving on to the base business as you as you might see if you really take the midpoint for example of our guidance range, we increased debt by about seven points.
But we added about five points to the COVID-19 range that we gave stickiness from nine to 11 to now 14 two.
And <unk>, so that would that would imply about five of the seven and coming from COVID-19, and the remainder coming from the base business and hopefully that gives you a sense in terms of.
And where we see the base business versus the rest of COVID-19, and again I'll remind everyone being COVID-19 activities are organic in nature.
And then maybe just one follow up and and John and that was a tremendous amount of detail obviously updating us on all the manufacturing expansion plans and timing and if you will but when we think about.
And as things coming on in this fiscal year, and then and this calendar year.
How does your guidance accounts for the expansion Thats ongoing this year, meaning.
Have you.
And having left open room with the new capacity expansion coming online at different points and the year that we could be could see further step ups.
Or have you already incorporated largely and your guidance for the year.
Benefits and customer demand that is occupying some of that new expansion plans and thank you.
Yeah. So first of all obviously.
Sure.
Updated guidance includes.
All of the assumptions with regards to the catastrophe and the programs that we currently have in place, but one thing that I want to emphasize that's really important is that COVID-19 has really been and accelerator of catalysts strategic plans.
We have pulled in capacity that we were planning for and we've also put in place additional catastrophe that would've been within our strategic plan. So when we take a look at the impacts of Covid and Cadillac and certainly we're seeing an impact and our fiscal year 'twenty, one and we'll see ongoing impacts from quarter.
Fiscal year 'twenty, two but importantly, we've been able to really accelerate our strategic plans, which is really going to help drive our continued long term long term sustainable growth. Thanks, Dan.
Great. Thanks, guys.
Your next question and from the line of and John Kreger with William Blair. Your line is open.
Hi, Thanks very much.
And John I think I saw it.
Yesterday and interesting article that Madonna's kicking around the idea of putting more doses and.
And vials.
To expand their overall capacity is there a way for you to comment on that's maybe not specific to <unk> that is that is that feasible from your perspective and is that kind of change that you can implement quickly and alleviate some of the capacity constraints. Thanks.
Yes. Thanks for the question, John and I will just say that I can't comment on that that's really something for.
And <unk> to opine on what I can tell you is and the current configuration.
The vials that we have that we are.
We're committed to delivering what <unk> put into their press release, which is really a 100 million.
Doses by the end of March and then a total of $200 million by the end of June Thanks for that question John.
Okay, great. Thanks, and then a follow up given the unprecedented spike and Covid work, how are you handling disruption as CIT and non Covid clients can you comment on the degree to which some programs have had to be back burner and and how are you sort of mitigating that.
Those disruptions for that thanks.
Yes, no. Thanks, Thanks, John and what I would say is that although a challenging situation with I.
I would say a handful of customers that we have to manage specifically and our Bloomington site, we see that really being alleviated.
Really kind of in our fourth quarter as we're bringing on new vital capacity.
<unk> high speed <unk> discussed in my prepared comments. So certainly we are working very closely with all of our customers and they certainly understand the situation and urgency from a capacity standpoint, or COVID-19 related programs, but I will say that although challenging certainly.
And we're able to to mostly manage that situation and definitely see relief as we approach our our fourth quarter of this fiscal year with the additional capacity coming online. So we don't see this says.
Any long term impact the pipeline for the company.
Great. Thank you.
Your next question comes from the line of Tycho Peterson from Jpmorgan. Your line is open.
Hey, Thanks, John actually want to pick up on that last point about capacity and we've got a question about defense production Act and if you could kind of strong arm and I know youre going to $100 million.
Mrna dosing and the government by March and 200 million by June but is there a risk that the government could actually request created and developed further capacity and create an issue or do you feel like with the new high speed <unk> line, you've got enough cushion there.
Well, firstly I just want to qualify that.
Ill.
The defense production Act, which really.
Don't you walk us through what's called a ready to order or not the government on catalyst and such.
Which then flows down to us just for that clarification and I will say that we have put in place.
The necessary capacity between the dedicated Johnson and Johnson wine that I described and Mike.
Prepared comments, along with the additional line that's going to be coming in.
And our fourth quarter more precisely will probably be a little bit more early and that fourth quarter. We're comfortable that we're going to have the capacity necessary to meet.
And that's seen required production as well as the production.
Our customers through a non.
And non COVID-19 related customers through the remainder of our calendar 2021.
Yes, I'll just add.
Tycho that.
We and our customers are certainly responsible for delivering mainly non COVID-19 medicines that are critical to patients and so we continue to work closely with our customers and government agencies to balance those priorities.
With COVID-19 pandemic needs as.
And as well as other items that are impacts and to patients and using our patient first mindset.
And mindset and culture is our guiding principle along those months.
And then maybe shifting over to Softgel and oral tech still down double digits I guess, what gives you confidence that it can get back to growth.
The back half of this fiscal year, especially with the lighter flu season, and all the stocking that happened at the beginning of the pandemic.
Yes, Tycho and we said all along and after our first quarter results, we expect that the second quarter to be roughly in line with where.
And where.
The first quarter landed and we already.
And then saw.
The back half being.
Improved from where the first half.
So the business continues to.
And really perform as we as we thought it would it would keep in mind, our social business is a relative to the rest of our segments a lower top line growth business that generates significant amount of cash flows.
Which is one of the day, we love this business and and contributes to the growth that we're and the expenses, we're making across the rest of our segments and all.
Has the majority of our long cycle.
If you will commercial products, which gives us an opportunity to see and interact with our customers in terms of looking at what they are forecasting what they're starting to see and so as we enter into the second year as John said in his opening remarks, we're cautiously optimistic with what the business will deliver and the second half and we certainly see improvement and the business versus the first half comp growth.
Okay and then just one last one is the divestiture of blow fill seal kind of a one off or is there more portfolio shaping and shifting towards biologics cell and gene therapy. How do you think about potential future. That's all I would just I would just tell you on this one is that we want.
Strategy is everything and catalysts.
And we're constantly updating and driving our strategic plans, which include constantly looking at our portfolio of businesses and understanding what is the best mix of businesses for catalyst for long term sustained growth high growth higher margins and so this is this was a case where.
We had been looking at this for a week.
While.
And we were able to find the right owner for this business, but you can you can count on Cadillac and continuing to.
Adjusted portfolio.
Going forward strategically as it makes sense to drive higher growth and higher margin for the business. The other part is that when we looked at our blow fill seal business.
And as requiring a certain amount of capex investments that when stacked up against the returns with Capex investments and other parts of our business, specifically biologics cell and cell and gene therapy.
It was a situation, where we were going to be able to make the best and invest.
Since into Woodstock, because we knew we would get better returns and other areas of our business. So we will continue to use that very strong disciplined not only in our acquisitions, but also in looking at our portfolio for potential divestitures.
Okay. Thank you.
Your next question is from David from rules with Jefferies. Your line is open.
Thanks for taking my questions.
Trying to do some back of the envelope would it be reused.
Reasonable to say that your and your new guidance and what Youre expecting for Covid that that year to date, you've recognized and maybe something like 40% to 45% of that number is that.
Just kind of trying to figure out have you recognize more and the first half or do you still expect more and the second half.
Yes, they higher percentage of the total debt is.
Yeah.
Let me see if I can give.
From some help with that first we're very pleased with the strong start to the fiscal year right.
Which continued with robust organic growth and the.
And the second quarter.
And and put us in position to raise our guidance given the increased outlook that we see for the remainder of the year as well as you recall and the first quarter.
And was primarily on largely non COVID-19 related and we saw.
Our robust growth across biologics and simple the company and the first quarter second quarter, we're seeing primarily.
Primarily COVID-19, but we still saw.
Very very good growth across the biologics business again and and.
And so on and this is one of the growth and on OSB et cetera. So I think given the timing of some of the relatively speaking higher volume.
Some of the emergency use authorizations and so on and those.
And those will be.
And the monthly and the second.
Second half.
The year, so that would be the lion's share of the Covid related.
The impact from the year would fall on the back half versus versus the first half of the year growth and as a reminder, we just raised our guidance.
And second half of the year, adding seven points to the growth.
With about four or five of those be and Covid related so that would that would also infer that.
And the lion's share would flow in the back half, but I won't I won't take it down to a precise number.
Okay.
John I appreciate your detailed discussion on the on the capacity adds and noted the specific companies appreciate that detail too by the way.
And the specific companies.
There are a couple that I think you've had press releases and at least one I'm thinking of Astrazeneca that you've had some press releases about that you have relationships for that you did not specifically identify and your commentary and relative to tyco's question about capacity and just wanted to share.
And have broadened the question.
As you're answering the high speed drilling selling line that you were adding.
If we get additional approvals beyond J&J and the dedicated line. There are you still okay to to kind of service everybody presuming others get approval as well.
Yes.
Thanks for the question there, David and I will just see that were and are positioned to meet meet our commitments with all of the.
With all of the Covid vaccine manufacturers that we have.
And that we have signed up with.
Specific to Astrazeneca, we're not just using assets and Bloomington, and we're also using assets in our newly acquired gene therapy.
Business, which by the way is a very welcoming.
And because now viral vectors and that's being used for gene therapy, but theyre also bidding.
Obviously validated and used for.
And for vaccine work, so with regards to Astrazeneca, we're doing work primarily out of our.
And our gene therapy business.
The drug substance side, and then our 90 facility, which again was a very fortuitous.
Acquisition that came online at a point when.
And that capacity became coveted and and so perhaps and as I think <unk> will be doing drug product work. There. So again back to the essence of your question were comfortable that even with the additional approvals that we.
We will be able to meet our commitments to our customers also noting that our customers have a wider network than just caddo and they're using.
A multitude of CD and <unk> and other assets to be able to meet those commitments. So we're very comfortable with with what we've committed to our customers and the capacity that we have or will be bringing online.
Last question from me.
Appreciating that.
Folks are acting responsibly and not trying to profits here in this environment.
Your your margin I am thinking about the kind of the basket of margins are really good.
Utilization is is I'm sure relatively high but you are also putting this capacity in place that is ramping or not being fully used until <unk> or extended things like that that would perhaps dampen utilization and the short run and how is the pricing environment for the services that you're offering in particular.
Early and biologics.
This is lightning here as we've shared previously.
We would put the.
Pricing for the services that we're performing portfolio 19 and.
Roughly in line with similar to work that we do for non COVID-19 related activities and so.
Clearly with our mission and to help people.
Live better healthier lives, where and positioned to demonstrate and energized and quite frankly across our network for employees working around the clock to deliver.
Robustly on these commitments and do so in record time, So we'll continue to do that and by the way we are dedicating assets and some of these cases, we're accelerating capacity to be online and time.
To deliver for our customers and for patients worldwide. So the pricing is roughly in line I would point that you've revised team now.
A nice increase in EBITDA margins for example, and our social business.
And the quarter and.
Whenever as a.
And manufacturer.
Whenever you get to high levels of throughput and.
Utilization and any part of the business is going to translate into higher margins and we're starting to see those happen.
As a reminder.
And that half of last year as well as through the first half of this year. We continue to add significant amount of resources not just hard capacity, but also people head counts that have had an impact on our overall margins and as we see volume come through you see that increase and we would anticipate continuing to see.
And particularly in the parts of the business, where volumes are increasing significantly and see that translate into better margins as well. So it's not purely on the pricing point. It's also the throughput from the factory.
Okay. Thank you.
Your next question is from the line of Jacob Johnson with Stifel. Your line is open.
Hey, Thanks, maybe a big picture question and you talked about four and 5 million revenues by 2020 for 50% of that coming from biologics and we think about the cell and gene therapy component within biologics, how large could that business day by 2024, or maybe asking it another way how should we think about the long.
Term organic growth profile of your cell and gene therapy assets.
Yeah. So I'll first thank you for the question and I'll first answer and just from a maybe a big picture strategic standpoint, So first of all the market for gene therapy and cell therapy continues to be incredibly robust if you take a look at the.
And the cell and gene therapy as they had and my prepared comments you know you probably you have roughly 500 asset set that we expect to growth to more than 500 assets over the next.
Five to six years and then when you take a look at the cell cell therapy space you'd get about 1500.
Assets right now that it's going to grow too.
Probably double double in that overall overall size. So there continues to be.
I'd say, a very robust and market for these services and we see.
Really demand outstripping supply throughout this.
Throughout this whole period.
Something else that I want to maybe highlight I stated in our J P M presentation.
At the beginning of the year that we first introduced that chart about us being $4 5 billion with 50% of our revenues coming from biologics at that time at 28% margins at the time that we actually introduced that chart, we had envisioned.
Both organic growth as well as inorganic growth contributing to getting to that $4 5 billion with the additional moves that we've made and capacity expansions and the purchase of a non <unk> and capacity expansion there as well as our acquisition of R. R.
Master cell and the cell therapy space.
<unk> now exceeded at the J J P and conference. This year is that we do not see any.
Any additional substantial M&A required to get to that warrant it.
<unk>.
Targeted 50% coming from biologics and when I use and what substantial means it wouldn't be material enough where through an acquisition, we would state the revenue and EBITDA. So I'll leave that as kind of the big picture comments and see if he wants to round it out with any other specific details.
John you covered it really well clearly we see long term sustainable growth across our biologics business broadly we won't get into specific contribution of the growth rate.
From gene therapy, or cell therapy et cetera, but overall, we feel great about the business and where we are on that trajectory.
And as John said, we expect the business to be roughly 50%.
Our revenues by 2024 and you can see.
And is making significant progress towards that.
Got it and maybe just one quick follow up you are selling the blow fill seal operations for $350 million is there any way to frame up the financial impact and the catalyst from that sale and in terms of the revenues or margins of that business.
Yeah look I think as we said in the prepared comments.
And we're able to raise our guidance here for the remainder of the year, given the very strong start and as well as.
The.
Programs and the.
Pipeline and increased volume lift that we can see.
And that includes by the way, reflecting the divestiture in the guidance that we just.
That we just gave and just released so.
And we won't go as far as to quantify the exact.
Amount coming from both the appeal.
Given the vast number of products that we have across the network and so forth, but the price.
And as I say the guidance that we just issued already reflects that.
Based on the timing, we expect that day.
Divestiture closed.
Got it thanks for taking the questions.
Your next question is from Ricky Goldwasser with Morgan Stanley. Your line is open.
Hi, this is around the Farmington and.
Congratulations on the quarter I wanted to follow up on the battle.
And with them how much of the increased box and demand and mcdonalds come from the orders that have been received from the already approved vaccine with HOKA tanker demand and given the nature of the J&J contract.
And think about again, the opportunity already embedded and our current guidance or there are small.
And more room for upside and wise that is approved and what are the data points and what's important.
Yeah. So look in terms of how we treat.
The.
The COVID-19 impact and our guidance has been very consistent from the beginning.
We expect to have Lee.
And our guidance.
Any portion of our.
And the contractual.
Elements with our customers, where it's basically a take or pay required volume that they have to give us within the timeframe that fall within the fiscal year, I'll remind everyone that our fiscal year and.
At the end of June and.
And so we only have roughly five months left and the fiscal year. So to the extent there is work that we're doing with our customers.
And those require certain volume throughout the calendar year, and perhaps maybe even getting into the following and calendar year. Those would fall into our next fiscal year, which we'll talk about and August as we give guidance for their fiscal year, but offer through your ended in June were reflected in there anything thats already on order that's been given to us by the customer that is effectively firm.
Sure.
Contractual commitment and effectively a take or pay that requires the customers and it gives us that volume.
And by the end of the fiscal year.
By the end of this fiscal year, whether they have actually given that quarter or not so that's what's reflected to the extent that a customer gives additional orders above that minimum.
From here forward that would.
Potentially provide some level of upside.
For the year.
But again, it's a limited amount of time remaining and all year.
Thank you and next I wanted to touch on the foreign and gene therapy manufacturing and victory and recur from discussion and Tom.
And I will tag and the mine is that correct.
Over time, given the various commodity consideration so what's your view on the sustainability of outsourcing.
Our form 10-K.
And from the recent conversations with the clients.
Yes. This is John here I would see that we actually see outsourcing and rates increasing across the cell and gene therapy space.
Over the next five to seven years, you have to understand for gene therapy, a majority gene and cell therapy therapy, a majority of the customers are small biotech customers, where the decision to put in capacity for relatively few assets that could actually.
Cure the disease they are dramatically reduced.
<unk> their volume doesn't really make a lot of strength. So it actually lends itself much more towards outsourcing and so as we looked at specifically the gene therapy space are de Novo research that we did showed that are today about 65%.
And <unk>.
The gene therapy manufacturing was outsourced and we actually saw that growing to nearly 75% again over the next five to seven years. So we still are very bullish on both the gene and cell therapy space as it relates to capacity requirements from <unk> like catalyst.
Great that's helpful and nationally and Softgel.
On a mark and five.
And the segment margins per ton a bit below our inc.
And that patients and what are the puts and takes if we need to from the margin coming back to the pre COVID-19 levels.
Yeah. So.
Across our businesses, particularly where we have.
High levels of.
Capacity and.
And we're and Softgel and oral technologies as I said.
A good portion of our 7000.
And that we supply are in that business.
Can have an outsized effect in both directions when volumes go down.
Down versus when volumes come up and Thats, where the business you can see the impact even in our biologics business, we see volume increase this year and all price effect in terms of margins increase and we're pleased to see.
Margin expansion.
And in the quarter across the company our guidance.
And if you just take the midpoint of our guidance for example, Youll see about 80 basis points margin expansion year on year and the business. Despite.
What would.
And what you just described and your question with respect to.
Illinois technologies business, we have very good visibility and that business has reflected that.
And that in our current guidance already.
With the second half of the business coming in better than the first half.
And all that reflected and what we've described today and where we will put it. So we are delivering margin expansion and the year.
And which we're very pleased with.
Despite that and we would expected volume come through and the business for that to reverse in terms of the impact on margins as well.
Thank you.
Yeah.
Your next question is from Sean Dodge.
RBC capital your line is open.
Thanks, Good morning.
Maybe John going back and the insourcing versus outsourcing decision, if we set and gene therapy side and from them or are you seeing any evidence and and strain and these new COVID-19 projects and putting on the available supply.
Is that is that changing kind of day thought processes around in sourcing outsourcing maybe non program, but for the larger guys. Do you think the conclusion some of them to think a little bit more critically about building their own internal capacity now.
Actually what I would tell you is that.
And what has happened because of Covid is pricing.
Pharma and biotech and general has really understood the strategic nature and partnership.
C D and motion Jack.
The challenge put in front of all pharma and biotech with regards to COVID-19 would not and been able to be realized by I would say pharma companies that were totally vertically integrated or 20 years ago.
Take a liquid it's happened during Covid is as is allowed pharma and biotech to focus on what they do which is to develop these novel vaccines and treatments and and and run their clinical trials with their partners and then using C D and mode for strict Scott.
Strategic capacity build outs, which cash generally has done.
Bart and.
And well noted through my.
My opening comments, so I think the strategic nature of CD and most partnered with <unk>.
Pharma and biotech has really come to bear.
And strongly throughout Covid and I believe that those partnerships will continue.
Actually probably increase overall.
Outsourcing in the future specifically with regards to book the large pharma companies that again.
Really got into a mode of partnering with senior mode to be able to address this challenge.
Okay. That's helpful. Thanks, and then going back to the question around.
Loading more COVID-19 doses and evolve if that is feasible and and they do go ahead with it does that affect the economics and the contract at all for you I guess do you get paid on a per dose or a per mile basis.
We won't.
Get into.
Specifics.
Cros are all programs, what I would say is again, what we reflect in our guidance is what is contractually required.
And as contractual minimums from our customers or if they have and these place orders for something above that and we reflected those and so.
It is very unusual for us because he wants us to come down to the individual doses.
But I won't go and contract dairy as well in terms of how they are.
And they're constructed with our customers so it and not all one and the same but I would say across whether it's covered or not.
And unusual to have contracts that come down to the individual dose for patients.
So that.
Just give you that is and at this point.
Okay fair enough, thanks, and thanks again.
Yeah.
Your next question is from John.
And with Bank of America. Your line is open.
Close alright, thank you for squeezing me in.
Based on some of the comments by other COVID-19 supply chain players vaccine manufacturing activities and the early innings and this could continue into calendar 'twenty and 'twenty. Two so my question is.
Do you agree with this view and given that your fiscal year end and in June why Couldnt. We conservatively you expect a similar COVID-19 revenue contribution in fiscal year 'twenty two.
One Oh look I think you're probably looking at some of the same information that we are.
I would probably to turn that question too.
Our customers, who essentially or working with us and working with them to deliver on what they see that they're going to need.
And is that the need arises whether it's multiple different some strange and what have you.
And the impact of those will be first and foremost became our customers who will work with us to deploy.
Determined what we need to assist with in terms of our our role in this process.
In terms of our next fiscal year as I said earlier.
Per year and June therefore, as we've talked about and see some of these programs get to the point of very good data to potentially emergency use authorization and then eventually potentially and a full commercial appeal.
<unk> these.
The impact is limited in terms of how much time, we have left from the current fiscal year and you would imagine some of those will spill into the following year.
Here now that saw from July one.
And we will give guidance more specifically as we get.
As we get to the.
Could we get to the point of giving guidance for the next year.
Yes sure.
And maybe you want and maybe I'll, just say that we're going to learn a lot more about.
Vaccine requirements and effectiveness and the coming months. These learnings are going to aid our thinking as we formulated our guidance for fiscal year 'twenty. Two later this year that said I would say that we do anticipate.
Manufacturing vaccines into our fiscal year 'twenty, two which begins on July one.
And likely through calendar year 'twenty two also.
Okay. Thank you that's helpful color and then a quick follow up I mean, if we look at the publicly disclosed COVID-19 manufacturing partnerships the cattle and cash.
Of them are on the product side with the exception of the drug substance for us to prevent a capex keeping this in mind. Our used are you what is the fate of the drug substance and vaccine and API supply and are you seeing any bottlenecks that would prevent you from doing the crop products beside that you've been some and to do.
One thing I would say one first of all we have more than 80.
COVID-19 related programs that we're working with our customers on this and across our business segments gross drug product and drug substance and.
We have only announced.
And relatively small number of those and you made some references to those but just keep in mind. There are many more that we have of working with our customers on that may spend of gross growth products into assistance as well as.
Therapeutics that are not and our biologics segment.
So that's the first point in terms of what Joseph since it looks like clearly.
And supply chain is relatively complex there are instances, where we're manufacturing drug product for our customer.
Coming from multiple different places from a drug substance perspective.
And we won't speak to those and I would reserve with questions from our customers and physical what that means is.
They look at the overall supply chain.
And we tend to have again contracts that fill out what our requirements are and what we need to deliver to our customers.
And if that changes on the customer providing drug substance.
US we're still we still have the contractual right in terms of the volume that they've committed to force and gives us a level of confidence in terms of what we included half and our guidance and what we're prepared to execute for.
Alexander.
And for them.
Thank you.
Thank you.
And now our last question comes from Jackie Zone.
Research Your line is open.
Yes, thank you for taking the questions.
Just a couple of cleanup ones on Softgel and oral tack and have talked about the expectations growth is going to start to improve and the second half can you just talk about what youre hearing from customers in terms of demand and.
Whether there could be some lingering impact from the pandemic kind of what cash.
Growth rates are you thinking about from a segment.
Yes.
Thanks for the question look we've reflected and our guidance not only what has already taking shape clearly and the first half full and we expect and the second half and what we've said is while we expect improvement and the growth and the segment is still going to be substantially below what we've said the business would do.
Long term from a top line perspective, and again, those alts and reflected we do have.
<unk> communications with our customers, obviously, who will providing us forecasts and.
And many emphasis those forecast on a rolling basis, all the way out for a year and.
So we get a sense from them in terms of where they are as well as.
And our commercial contracts, we tend to have about a 90 day period and general.
Where the forecast becomes firm so that gives us a certain level of clarity clearly and addition to the additional.
Information that we're providing book to us from a forecast perspective. So this is a business that has.
A very good level of visibility.
And clearly in a given the the commercial products that we supply and indeed, we have seen.
From impact from COVID-19, which we described in our open and our prepared commentary.
But we are expecting the business to improve and the back half again still substantially below what.
And what we expect the business to.
And the long term and.
And all reflected in the guidance that we gave.
Great and then two follow ups on Covid.
The incremental projects Youre working on now up to 80 since last quarter can you.
Just give us a sense or any of the or any of these high profile similar to the ones that you have publicly announced and then also I'm sorry, if I missed this earlier, but of the guidance increase for the full year embedded within that what is your expectation for COVID-19.
Yes, so in terms of what we haven't announced and there are reasons that we haven't announced yet so we won't go into any particular detail on these jobs programs clues and some of the more spotlighted programs that are.
Vaccine related and so on the fair amount of.
Public information on those.
And I'll, just remind you and when we look at the business we have a strategic.
And point of view that particularly when you look at our biologics business and the number of development programs, we're working with our customers across a number of different.
Modality gene therapy cell therapy <unk>.
<unk> and its about and et cetera, we have.
Expectation to need to deploy capacity.
And the scale necessary for these programs as we get late fees and require more volume and potentially commercially approved and require more as well. So we are accelerating our capacity builds across the business.
<unk>.
And that are eventually.
Necessary for COVID-19 programs and some instances.
Long term. This is capacity, we would anticipate adding and that are perfectly and our and our strategic viewpoint as well. So this is why we see this is allowing us to accelerate.
Our capacity our strategic plans in terms of adding capacity to meet those needs, whether theyre corporate programs, and we've announced haven't announced per non COVID-19 related programs essentially across our biologic segment in particular.
And within the guidance was there and amount.
Misrepresented and in terms of the rates.
In terms of the Covid impact and in terms of the rates correct, yes, yes.
So our guidance we've increased.
Just for any of the point just the midpoint of our guidance range, we've increased it by about seven points, but.
But we've increased the COVID-19 net contribution by about five points. So hopefully that gives you some level of clarity.
Thank you.
Okay.
There are no further questions I'll turn the call back over to John Chen for closing remarks.
Thanks, operator, and thanks, everyone for your questions and particular time to join our call I'd like to close by highlighting a few key points we covered today.
First our strong results and the second quarter, including 17% organic net revenue growth and 22% organic adjusted EBITDA growth combined with our increased forecast for the back half of the year and led us to raise our fiscal 2021 net revenue growth expectations by approximately six percentage points and our <unk>.
And EBITDA growth expectations by approximately seven percentage points.
Next we've been accelerating.
And we've been accelerating our strategic Capex Capex plans and our biologics business in order to help meet near term demand for both Covid and non Covid products. As a result of some of these actions were now producing COVID-19 vaccines and treatments that are being used at this moment to help fight the pandemic.
Importantly, COVID-19 has been and accelerator for our long term strategic plans and will position us for continued long term sustainable growth.
Our biologics segment continued to reported exceptional growth and the second quarter with organic net revenue growth of 65% inorganic segment EBIT growth of more than 100%.
<unk> segment constituted 44% of our overall net revenue in quarter compared to 31% a year ago and.
It is the key driver for cattle and to meet its 2024 revenue target of $4 5 billion, which we believe can be met without any large new acquisition.
Finally, our mission to develop manufacture and supply products that help people with better and healthier lives has never been more important.
We continue to be thankful for our 14000, plus employees, who live our patient first culture and have worked hard to carry out the right responsibility we have to maintain business continuity for all of those counting on us to deliver it for COVID-19 therapy or vaccine or the 7000 and other products we produce and.
Three year. Thank you.
And you.
Ladies and gentlemen that concludes today's conference call from key everyone from joining me and my disconnect.
Yes.
And.
Yes.