Q3 2021 Catalent Inc Earnings Call
And you 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 the Investor Relations website at Www dot catalytic dot com.
The 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 details slides four and five discuss catalysts use of non-GAAP measures and our just issued earnings release provides reconciliations to the most directly comparable GAAP measures.
Please also refer to catalysts form 10-Q for additional information on the risks and uncertainties that may bear on our operating results performance and financial condition, including those related to the COVID-19 pandemic.
Now I would like to turn the call over to John Shymanski, whose remarks will be covered on slides six through eight of the presentation.
Thanks, Paul and welcome everyone to the call.
Over the past year channel and he has been providing critical support to the health care industry. During a time of unprecedented challenge.
We've employed comprehensive safety guidelines and protocols to keep our employees safe, which have allowed us to continue our operations and increase our capacity to meet patient needs and to produce COVID-19 vaccine doses as well as other important and critical medicines.
We're very proud of the work that our employees have done to provide the central manufacturing capacity and expertise for the more than 7000 products, we produce annually on behalf of our customers.
I'm pleased to report that the strong momentum, we built and our fiscal year continued into the third quarter and remained strong and we've entered the fourth quarter.
Due to our continued strong results and expected higher net demand for the remainder of the year, we're raising guidance for fiscal year 2021.
What he will go into more detail on that later in our presentation.
And the third quarter, our net revenue was 1.05 billion representing constant currency organic revenue growth of 35% year over year.
Adjusted EBITDA of $274 million represents constant currency organic growth of 44% over the third quarter of fiscal 2020.
Our adjusted net income for the third quarter was $148 million or <unk> 82 per diluted share up from 50 cents per diluted share and the third quarter of fiscal 2020.
The biologics segment was again the biggest contributor to catalyst performance as net revenue more than doubled over the third quarter of fiscal 2020 with year on year margin expansion of more than 200 basis points to $33 30.
<unk> 33, 1%.
Demand for our drug product drug substance and viral vector offerings remains high with elevated levels of work related to COVID-19, vaccines and treatments, which served as the primary growth drivers and the biologics segment.
Our softgel and oral technologies segment experienced the same pandemic related headwinds, we called out in prior quarters there'll be impact was much less and the third quarter than each of the first two quarters of fiscal year.
As you recall. These headwinds include a decrease from the current of common cold and flu due to limited travel and social gatherings worldwide.
And you didn't launches of new prescription products and the last year.
Hopeful that these issues will begin to normalize as more of restrictions are lifted over time.
Where oral and specialty delivery organic growth was significantly impacted by our product and our respiratory and ophthalmic platform that had a notable strong launch and the third quarter of last year and was later voluntarily recalled and September, causing a significant variance and the segment from the prior year quarter.
During the quarter, we completed the two portfolio moves and the OSD segment that we highlighted last quarter the.
First was the February acquisition of the best in class spray drying facility and the Boston, Cambridge area from a quarter Therapeutics and the second was the divestiture of our blow fill seal manufacturing business located in Woodstock, Illinois, which closed on March 31.
Our clinical supply services segment returned to high single digit growth. Despite the tough comparisons of the third quarter of last year, when we accelerated delivery of products to the clinical trial sites ahead of global Lockdowns, creating a boost and related activity and revenue and the third quarter of fiscal 2020.
Given the wide range of growth rates, among our four business segments due to the.
Pandemic, our M&A activity and other factors our business mix looks very different today than it did a year ago.
In January of 2020, we first announced our projection from the relative size of the Biologics segment, which then comprised of quarter of our revenue.
We've said that and that it would come to represent half of our revenue by 2024.
This projection was based on numerous long term growth drivers for biotherapeutic and cell and gene therapy manufacturing, including faster growth rates and R&D for biologics higher outsourcing rates favorable supply demand dynamics, the shift to more complex modalities, such as our mrna and the <unk>.
With the small cap biotech model where lies on the <unk> for development the.
The effects of the pandemic caused some of these drivers to be even more pronounced and enhancing the growth of our biologics segment, while also creating higher demand for the CMO industry as a whole.
We're pleased by the continued shift and our business mix towards the higher growth Biologics segment and.
And encouraged by the continued increased volume of commercial activity unrelated to COVID-19 that were experienced across all of the biologics segments offerings and it's here.
Now I'd like to provide you with a brief update on our COVID-19 related programs.
To meet our commitments to our customers and their patients a number of cattle and facilities have been operating $24 seven and for more than the year.
At the same time, we've hired and trained thousands of new employees over the last year to meet the demand full production capacity.
I'm proud to say that despite the complexity and intensity of this unprecedented and manufacturing effort. We're confident in our ability to continue to meet our commitments to our vaccine customers.
By the end of calendar 2021, we expect to have produced more than 1 billion doses of COVID-19 vaccines.
While I won't go into the detail on any individual customer program.
Highlight a few notable recent developments regarding capacity additions that we accelerated in order to meet the increased demand required to help the fight the pandemic and to serve other growing patient needs and.
Certainly COVID-19 has not only accelerated our strategic plans, but also accelerated returns and the strategic investments we've made enabling us to put additional cash to work to continue to drive our long term growth.
And the U S. R. C of the 950000 square foot facility and Bloomington, Indiana plays a critical role and the country's vaccine production effort.
The site now has two vial filling line dedicated to the manufacturer of products for two of our COVID-19 vaccine customers, including the high speed Biofilm and line that we first announced last September.
We recently completed this project in record time, and and begun the process of ramping up the line.
Our 300000 square foot fill finish facility in the non U. Italy is also making significant contributions to the global supply of COVID-19 vaccines for the multiple customers.
We recently announced that we will accelerate the qualification and scale up of and additional high speed filling line at the site, which is expected to be operational before the end of this calendar year.
Looking back the $55 million purchase of the non new site 16 months ago and our subsequent investments have quickly provided a critical component of the solution to the current global public health crisis, while simultaneously, creating meaningful value for our shareholders.
In addition to accelerating our global fill finish capacity, we recently announced that we completed. The addition of two new suites that are biologics drug substance development and manufacturing facility in Madison, bringing the total number of suites at the site to five.
The expansion, which we started in January of 2019 is beginning to ramp and we will provide additional clinical and commercial production capacity at the 2004 thousand liter batch scale.
And the site with this increased capacity will accommodate increased customer demand for drug substance manufacturing for a variety of projects, including some related to COVID-19.
The completion of these projects will help transform Madison from what has historically been a development and phase site two of commercial drug substance production site.
Moving to our cell and gene therapy offering within the biologics segment. We've discussed on previous calls our interest and ability to include plasmid, DNA technology and production capabilities and our cell and gene therapy service offering.
In February we formally announced our entry into the space via the acquisition of Delphi genetics, located and gasoline, Belgium now part of our cell therapy Center of excellence and Europe together with the launch of plasmid DNA development and manufacturing services through and organic investment and our Rockville, Maryland.
<unk>.
These two strategic actions have enabled us to establish plasmid DNA presence in both Europe and the U S.
Additionally in April we completed the purchase of prudent laboratory and clean room space in an adjacent building on the gasoline campus to allow for accelerated capacity expansion across our growing cell and gene therapy platform.
Plasma T needs of component and most gene therapy, and gene enabled cell therapy production processes and the market for plasmid DNA is growing rapidly.
We estimate the plasmid DNA market size and five years to be well over $1 billion at the low end.
With performance of idle integration of plasma and DNA into our overall cell and gene therapy offerings, choosing Cadillac will allow customers to derisk their supply chain and optimize their programs along the entire development pipeline.
Viral vector manufacturing capacity continues to be and high demand for the growing number of gene therapy compounds current.
And the <unk>.
Industries development pipeline as well and for viral vector manufacturing for COVID-19 vaccines.
With the initial 10 commercial scale manufacturing suites, and the first building on our gene therapy campus near the BWI Airport now available to serve customers. We were focused on building out the adjacent building to include at least five cgmp suites with the ability to add additional suites.
Our project and remains on track for completion and calendar year 2022.
And cell therapy, we're continuing to build out of our commercial scale production and fill finish facility and gasoline, Belgium, which remains on schedule to open in fiscal 2022.
In addition to increasing our cell and gene therapy capacity, we also announced investments and our global cold storage capacity with over 200 ultra low temperature freezers added to our cell and gene therapy and clinical supply services facilities in the U S U K, Germany and.
And Asia Pacific as well as investments and cryogenic storage and our clinical supply services facility in Philadelphia to support sponsors developing cell and gene therapies.
These investments enable the safe handling of cell and gene therapy samples and established capability to package label and distributed cryogenic materials.
We implemented these initiatives to rapidly expand our capacity in order to meet growing clinical supply and supply needs as well as future commercial demand.
Before turning today's presentation over to Whitney I'd like to bring your attention to slide eight the highlight our progress and the corporate responsibility area.
A year ago, we published our initial corporate responsibility report and will soon release, our second report covering our fiscal year 2020.
The reported will describe how we extended and deepened our corporate responsibility commitment and we will also share some important achievements from fiscal year 2020. Some of our highlighted progress includes the development of our first human and bright statement of.
Our commitment to new targets for waste and water reduction.
The transition of six sites to 100% renewable electricity and completion of 50 energy efficient projects the.
The improvement of our low industry, leading recordable incidents and lost.
The injury rates.
The double a doubling of the number of employee resource groups to eight each sponsored by a member of our executive leadership team.
And our largest ever of philanthropic contribution total with the substantial portion of our gifts focused and our response to the interconnected COVID-19, and social inequality crises.
We'd also deepen the relationships, we have with potential sources of talent and other HR providers to promote even more aggressive diverse talent recruitment and engagement and development initiatives.
Finally, we're excited to announce that we will now have the council of Mike borrower Ge's, Chief Diversity Officer, who became a member of our board of directors last week.
And Mike joined GE, and 1981 and has held a wide range of leadership roles and engineering operations and product management, including his prior roles as president and CEO of GE, and molecular imaging and computer tomography business and chief engineer and CEO of GE healthcare.
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.
Ill begin this morning, the discussion on segment performance.
As usual my commentary around segment growth and constant currency.
I'll begin on slide nine with biologics, our largest business segment.
Biologic to net revenue of $544 million increased 113% compared to the third quarter of 2020 with that in any of the the increasing 238% over the same period.
With the anatomy and Thats the style acquisitions of annualized Inc. All revenue growth was essentially driven organically and EBITDA growth was slightly impacted by 1%. This of costs from the recent and relatively small skeletal and depth of acquisitions as we began to scale and integrate the business.
The robust organic growth of our biologics segment and the quarter was again driven by high demand across all segment offerings and putting drug product acceptance.
Gene therapy and by line of local services.
The increase was primarily driven by COVID-19 related projects, which contributed to both development and commercial revenue growth depending on the terms of the contract.
The segment's EBITDA margin increased significantly year on year to 33, 1% compared to 28% excuse me of last year, which was primarily attributable to the increased capacity utilization and higher volumes.
We continue to expect strong year on year growth for the biologics segment, and we conclude fiscal 2021.
Please turn to slide 10, which means that the results from our Softgel and oral technologies segment.
John and all technologies net revenue of $244 million decreased 2% compared to the third quarter of 2020, what type of an EBITDA decreased from 3% over the same period.
The decline continues to be driven by reduced volume of certain percentage of audits as well as lower demand for consumer health products, particularly for call hold and over the counter pain relief products.
And we also believe that more of a social volumes are due to slow rollout of newer products during the pandemic and lower consumer health demand is due to the combination of consumers parking and the early stages of the pandemic as one of the effects of limited social gatherings and travel due to condemn the mitigation efforts.
I'd like to note that while the 2% revenue decline is of course, well below our long term expected growth rate of three 5% and the <unk> segment, it and the sequential improvement from the 10% decline last quarter and the 12% decline and the first quarter.
And your growth and that's what these development revenue was again over 25% would you expect that will eventually lead to future of new product introductions that will help drive the segment's long term revenue growth.
Lower volumes were the primary drivers of the decline in margin.
Slide 11 shows the results of our oral and specialty delivery segment, which were impacted by the previously discussed voluntary recall of a single product and all aspects of our alpha.
On the platform in September.
And sort of had a notably strong launch in Q3 of last year and included and the product participation component and creating a difficult comparison between the current quarter and Q3 of fiscal 2020.
In addition, we incurred a further $15 million and costs associated with the recall and the quarter, bringing the total recall associated costs of approximately $29 million this fiscal year.
With that background and the other segment reported net revenue of $172 million and the quarter, which was down 9% compared to the third quarter of fiscal 2020.
Segment, EBITDA was $31 million, the 49% decline over the third quarter of 2020.
The acquisition of reported spray drying facility in February kind of negligible contribution to growth and the sale of of local steel business did not impact the <unk>.
<unk> closed on the last day of the quarter.
If I went and back out the revenue from the revolve product and the third quarter of fiscal 2020.
And I would have shown and low single digit revenue growth this quarter.
The USA segment third quarter results include the continued product momentum.
The momentum in our <unk> platform, which grew nicely. Despite some consumer health pandemic related headwinds.
This growth was partially offset by decreased volume for the non side is all of the delivered commercial products.
Each quarter, the dispose of our long cycle development revenue and the current year and <unk>.
Order to provide additional insight into our long cycle segments, which include biologics softgel and oral technologies and oil and specialty of delivery.
And the third quarter of 2021, and we recorded development revenue across both small and large molecule of audits of $481 million, which is 97% of the development revenue reported in the third quarter of fiscal 2020.
The development revenue, which includes net revenue from certain COVID-19 related products of pool for emergency use represented 46% of our revenue and the third quarter compared to the 32% from the comparable prior year period.
The strong growth of the biologics business and plenty of growth from COVID-19, vaccines and therapies approved for emergency use of the biggest driver of this year on year changes.
And the third quarter, our development pipeline that true 30, and new product introductions are a total of 92 and the first nine months of fiscal 2021.
As shown on slide 12, our clinical supply services. The segment posted net revenue of $100 million, representing 9% growth year over year.
This is a notable increase compared against the segment's strong performance and the third quarter of fiscal 2020, when customers were pulling forward Q4 shipments and distribute and supply at the clinical site ahead of Lockdowns.
Segment, EBITDA was $27 million, a 4% increase compared to Q3 of fiscal 2020 and was driven by strong demand and our manufacturing and packaging and storage and distribution offerings and North America, partially offset by an unfavorable sales mix and Europe.
Segment EBITDA margin was 27, 1% down slightly over the third quarter of last year.
As of March 31st 2021 backlog of the CSS segment was $490 million compared to $448 million at the end of last quarter and up 24% from March 31 2020.
The segment reported net new business wins of $137 million during the third quarter of 43% increase compared to the third quarter of the prior year the.
The segment's trailing 12 month book to Bill ratio is one three times.
Moving to the companywide adjusted EBITDA on Slide 13, our third quarter, adjusted EBITDA increased 48% to $274 million of 26% of net revenue compared to the 24, 4% of net revenue and the third quarter of fiscal 'twenty.
On a constant currency basis, our third quarter, adjusted EBITDA increased 44% compared to the third quarter of fiscal 2020.
And as shown on the slide 14 third quarter adjusted net income of $148 million of 82.
The chair of the adjusted.
Net income of $3 million or 55 per diluted share of in the third quarter of year ago.
But the thing shows our debt related ratios and capital allocation priorities.
During the quarter within the range of the favorable lending environment to meaningfully reduce our weighted average interest rate the low 3% down roughly 70 basis points from our previous weighted average rates.
And so modestly increase our debt by over $160 million at these low rates, while also pushing out our nearest maturity to 2027.
The net effect of these changes will create an approximate $10 million reduction and our annual interest expense.
Despite the additional debt and the purchase of the of quarter facility, along with other smaller acquisitions in the quarter. Our net leverage decreased from two three times from two six times at December 31, while the sale of our blow fill seal business and EBITDA growth boosted our cash position and the same period.
Our cash and cash equivalents balance at March 31 was $988 million when combined with $75 million of marketable securities of illiquid assets exceeded $1 billion.
This compares and $833 million of December 31, and $608 million at March 31, 2020.
Moving on the capital expenditures will continue to expect Capex at the <unk>.
Percentage of net revenue to remain at elevated levels for the next and for full year of and accelerate our organic growth plans to meet customer demands and patient Inc.
In fiscal 2021, we continue to expect the Capex will be approximately 15% to 16% of 2021 revenue.
Now with parents of our financial outlook for fiscal 2021 as outlined on slide 16.
We are raising our previously issued guidance ranges, which remained rather than in recent years due to the increase of uncertainty introduced by the pandemic.
The new range is our.
Net revenue and the range of $3 75 billion to three.
The 95 billion compared to the previous range of $3 8 billion, so critical and 95 billion.
Adjusted EBITDA and the range of $975 million to $1, one zero of $5 billion.
And the previous range of $950 million to $1 billion.
And adjusted net income and the image of $500 million to $540 million compared from the previous range of $475 million to $525 million.
We continue to expect that our fully diluted share count on a weighted average basis for the fiscal year will be in the range of $180 million. The 182 million shares and the consolidated effective tax rate will be between 24% and 5% and the fiscal year.
There are three important assumptions underlying our revised guidance.
First we assume no major unforeseen external changes of the current status of the COVID-19 pandemic and its effect on our business.
Second the revised guidance does not assume the receipt of any vaccine or treatment of order from any of our customers beyond what either has the new seats debate or is deemed required under executed the take or pay arrangements.
And third we now attribute approximately 16 to 18 percentage points of the projected net revenue growth from net COVID-19 related revenue versus the previous estimate of approximately 14 to 16 percentage points.
As many of our prior estimates the net COVID-19 revenue estimate is based on factors that affect multiple business segments, including.
Updated forecast and it's a business that we include the previously including some that have increased in size this of reaching certain milestones of the other triggers.
Revenue and optimistic projected from additional work among the COVID-19 related projects and which we are engaged.
On the assessment of opportunity costs, including the loss of value of work that would likely have been placed and the same space and some of the COVID-19 related work and estimated loss revenue and certain parts of the business as a result of and the pandemic such as lower demand for consumer health products and all sorts of all technologies segment as well as impacts of some prescription products.
Lastly, we continue to project that revenue from acquisitions will represent approximately two percentage points of our revenue growth rate for the year.
Operator. This concludes our prepared remarks and would now like to open the call for questions.
Okay.
Operator, we're ready for questions.
Ladies and gentlemen, as a reminder.
And I ask the question. Please press star followed by the number one and you can tell us.
Thank you Pat we'll pause for just the mom and while the path the Q&A roster again the stock line.
First question is from the line of Dan Brennan with UBS.
And Mr. Ben and your line is open.
Sorry about that.
Hey, guys congrats on the quarter.
And just the first question and thanks for all of the color obviously.
I know, sometimes it's hard to tease out COVID-19 versus non called the book and help us think through kind of in the quarter of the really strong biologics growth how would you characterize the COVID-19 contribution and the quarter versus the base and again I understand that the COVID-19 can crowd out some of the base of it's not a perfect.
The calculation, but if you could help us think of that that would be terrific.
Yes, Dan.
Look as you said, it's certainly not a perfect.
The acquisition and from.
And we won't separate the day.
As you know the impact of this segment is different.
And you have seen.
The driver.
The primary driver for growth within all of biologics.
Segmental cleaner and with growth of over 113% and the segments and.
I will get to our guidance here in terms of the range of net COVID-19 impact we expect for the year.
Might be helpful in terms of.
Seeing through the non COVID-19 growth across the year, but within the quarter, we won't break that out.
Four of <unk>. So it means the negative impact even the consumer health and <unk>.
So on the muted launch.
Poor RF products as well and then the.
The only thing some.
The impact from the side of that.
And from some of our consumer related product as we alluded to.
During the prepared commentary.
All of our precision products as well, so I won't break it out on the quarter and such.
The primary driver of with COVID-19, but and.
As you can imagine with us raising our guidance and.
And having a range of growth of the 25% to 28% on the year the 16 to 18.
Points of that from gold.
And with 19, that's true.
And at least two solid growth across the company.
And as well as of August.
$4 seven months and now this quarter was over 50% of our revenues.
Got it okay.
And maybe you can help us think through the capacity expansion that you guys are using.
The number of them that are coming online now I believe and the fourth quarter of the fiscal year and as well as we move forward into the next fiscal year day.
Hi.
Is it possible and hope it came through like the magnitude of these expansion.
Have you been capacity constrained to biologics at all and kind of what these expansions could allow you to do and from the <unk>.
Revenue contribution in that segment.
Yes.
I'll answer that one Dan and just see that.
And we're not going to give any specifics with regards to our capacity, but I would just really point out two things number one is our strategic plans really put us in.
And put us in a pole position as we entered COVID-19 to have really covenant capacity on line and then obviously, we announced other capacity expansions and the best way to think about this is one we were put in put in a very strong position to accelerate our strategic plans.
And with the capacity expansions that we announced and then I would also say that COVID-19 actually accelerated the returns that we have from these overall capacity expansions and that the company continues to look aggressively putting in capacity, where we see future demand from overall.
Pipeline as well as the likely continuation of COVID-19 vaccine related work and as it's becoming more and more clear of that COVID-19 vaccines for the billions of people around the world will still need to be manufactured along with boosters and the effects of potential vary and so I would just say that.
Sure.
The path to be.
Plans really have put us and a great position and will allow us to really continue.
Our sustained long term growth.
Got it.
And the Atlanta.
I would just add.
Clearly of course of biologics at night, and we have a number of all things.
And coming from satellite developments of the drug substance and then when you go into drug product. We also have.
The capability and capacity to fill vials syringes lyophilize across a number of different locations as well and then bioanalytical services.
And as you heard from off the growth commentary with some really solid growth across all of the offerings within our biologics business and then as well.
And thirdly as well.
I might add so I think when you think about capacity, where we essentially expanding across virtually every one of our of.
Operating locations within biologics.
You have to think about the different formats, and we have as well. So for example, and the ranges where we announced in early 2019 extension of the growth vials and syringes, we of state of the art capacity for critical so range across the company with all of biologics to continue to meet customer demands and addition to the wildlife.
Ah publicly and that's what we're adding across the network as well as with the teams to meet our customer demands and balance of COVID-19, but the non COVID-19 related work as well.
And then and then if I can sneak one more and I know, there's a lot of other topics to discuss like type of one more question on COVID-19 here, but John I know you mentioned, the 1 billion doses by the end of calendar year 'twenty one.
And you've been pretty clear on past calls you know at June 30.
It's not like COVID-19 demand stop and turn the persist here any way to help us think of at this point what that contribution could look like.
And you know kind of going forward into next fiscal year because.
And I think it's an important aspect of kind of understand.
And how we should be thinking about both of the COVID-19 and the non COVID-19 growth as we cycled past the end of June 30. Thank you.
Yes, sure. So certainly we're not going to be providing any guidance with regards to fiscal 'twenty, two but I will reemphasize, what you've already said, which is we do see.
And the ongoing need for vaccine production actually going into calendar year 'twenty two.
Certainly there is billions of people that need to be vaccinated, there's the.
And the spectrum for booster shots. There is also of the need to address the variance. So I would just consider that.
The capacity that we built and the partnerships that we have with regards to the vaccine production are likely to continue on into the future at some level.
Yeah and I'll just.
And then.
Two things one and have made certain.
Public announcements with the press releases for certain of our programs that have been extended with our customers in terms of the contract terms.
And well into calendar 2022 and.
And the other point I'll make is the strategic relationships with the number of our customers that we're working with.
And have been elevated to a point where.
And we'll work with them across the broad spectrum of the pipeline products that they have.
And given the relationships that we previously had sort of what we've done with.
The global response for the spend back as well.
Great guys. Thank you.
Your next question is from the line of Tycho Peterson with Jpmorgan.
Hey, good morning, Thanks, just to follow up on that last point I guess as we think about the guidance here and the near term, obviously youre raising net but you do have the J&J rollout halted chunk of just curious how that factored into guidance does that upside to the extent that that rollout that continues and then John.
John can you talk about what you can what degree actually have vaccine arrangements and.
Place for 2022, 2023 of our research tell a little bit early on that spectrum.
And if I can I'll take I'll take the first part of the question and.
John wants to add here.
We certainly won't go into any specific customer contract, we have scores of COVID-19.
Programs that we won with our customers and addition to the 7000 products, we supply and the market and the 1200 the development programs that we work with our customers on.
Throughout the the pipeline.
And all of that into consideration and certainly sitting here today, and we factored and the latest information across all of the products and services with our customers on to arrive at the guidance of all of those and factored in.
But we don't specifically discuss the Johnson and Johnson one.
The vessel so was that all part of the John I'll comment.
Yes, I really don't want to provide any any additional specifics other than what we've already announced publicly with regards to any relationships that we can with the vaccine manufacturers, but then I'll just again refer to my previous comments obviously.
We expect that we're going to be entering into a phase where there is going to be some level of continuing the vaccine requirement we work too.
Contract with our customers and are in the appropriate way and we'll continue to do that.
Okay and then.
And the segment level for Softgel, you're building momentum here I think you said last quarter, you had two consecutive quarters of over 40% growth and development.
How should we think about that segment getting back to growth and then separately from the CSS, 43% net new business wins, it's pretty meaningful can you just provide some color on that.
Yes, Michael look certainly the pandemic related.
Impacts on the sulfate of lower technologies business and has lasted longer than and we expected.
And as we said and prepared commentary of the performance of the third quarter.
And was an improvement over the first two quarters.
And at the same time, we are continuing to see really strong development.
The activity in the pipeline with our customers across the segments. If you recall the first two quarters were above 40% growth.
And year on development, and then and this last quarter of 2025% and.
And so we're pleased with that and think long term.
The supports.
Our confidence and the business and its ability to deliver between three and 5% long term, but as we go into each year, we'll we'll take a look at the.
And the.
E.
Commercial and other development work that we've done with our customers to look at what that translates to about a year.
And any given year.
And with TSS, certainly pleased with the net new business wins as well as.
And the performance and the quarter against really.
The robust third quarter last year and to close the 9% growth of where things with them and <unk>.
Just as importantly, the backlog of growth.
This one's on number of closely and the business is also the stall.
And this is one of our six shorter cycle businesses.
Although given the sourcing and distribution assets and lastly wanted to be here so closely.
And clinical program the <unk>.
Business that they have the shorter cycle compared to the longer cycle businesses from from sales to revenue. So that's on the indicators that we like and the business as well.
Okay, and then one last one.
Just on capital deployment and leverage of $2 three turns of leverage you're familiar and long term target of returns can you just talk about that and the context of.
Organic investments and also your appetite and willingness to do additional M&A.
Yeah, So Tycho I'll, just say that certainly we.
From a priority on our organic and <unk>.
Investments and again I'm very pleased to see that COVID-19, not only accelerated our strategic plans, but really accelerated the returns on the.
The strategic investments that we've made and we're going to continue to prioritize organic investments, which obviously means capex deployment and thats clearly detailed out.
And this call here today also state that Cadillac continues to be very active from an overall M&A standpoint, and if we can identify assets that will accelerate.
Our strategic plans both in terms of geography and capacity that we will continue to do that.
Okay. Thank you.
Your next question is from the line of Jacob Johnson with Stephens.
Hey, Thanks. Good morning, maybe first question you've added to your cold storage capabilities and TSA.
Yes.
And it seem to be aligning CFS with your cell and gene therapy capabilities can you talk about your broader strategy around these cold chain capabilities and does this growth and and coaching capabilities may be geared towards the cell and gene therapy and market and to the growth profile of that segment potentially going forward.
Sure. Thanks for the question Jacob.
See that.
And when we take a look at our CSS business, although it's relatively small compared to our other bits of segments, we really see it as a strategic asset that we can lever.
Across our other business units and clearly one of those areas and the gene and cell therapy.
Therapy area, where access to that cold chain really makes it gets significantly the enabler.
For our <unk>.
And for our customers and the gene and cell therapy area itself.
And we're putting specific numbers on it I would just agree that.
And the the strategic nature of the investments that we're making in CSS.
And the cold storage area and aligning it with the other business units specifically in the cell and gene therapy area really I would say, it's a positive synergy for the company.
Got it.
And just to add one quick comment.
Biologics Wolf and general has been.
The key element here with respect to the need for cold storage, and then more specifically cell and gene therapy, but also of low temperatures.
And the supply chain and handling as an added element here of that we're very pleased with where the safest and disposition for the export customers the business.
Okay. Thanks for that one and then maybe John and another strategic question, we've seen of CRA will get into the C. D ammo industry recently, and thermo acquirer of Crs and add to the <unk> capabilities and just be curious of your view of Catlin may be moving closer to the CRA work and and why or why not and it would make sense to operate.
And it's euro.
And CMO under one roof.
And while I answer the question this way Jacob I think first of all I think it was.
Very interesting moves with regards to thermo acquiring PPD and I would just make the comment that it really shows the overall importance of the pharmaceutical services industry for.
Pharma and <unk>.
Emerging pharma.
Got it thanks for taking the questions.
Your next question is from the line of Nathan Rich.
Jefferies.
Hi, Thanks, Good morning, Thanks for taking my question so.
The overarching question about guidance and particularly long term guidance John as you can as you covered in your prepared remarks you've.
Hit some of those metrics now three years ahead of plan.
Do you have an inclination to revisit that long term guidance anytime soon just thinking about.
One more quarter before the end of your fiscal year, and and what we might expect at the fiscal year and.
Yeah. So so certainly we're not going to be.
And we provided long term guidance.
No.
And creating and only recently and and we also in.
Talked about a $4 $5 billion revenue goal.
<unk> margins and also the percent of biologics that we will have as part of the overall business I would say we're extremely pleased with the progress that we've made against the overall long term goal and that we're going to continue to.
We monitor the performance of the company with regards to our strategic plans and what we see from the future, but there is nothing you can happen with regards start our long term guidance.
As of now okay. Thanks for that.
And related to COVID-19 earlier, I think Dan's question on capacity expansion maybe.
And maybe to come at that a slightly different way.
Okay.
And it seems like you're investing a lot of the Celgene therapy, among other places, but certainly there.
And that space, we continue to hear is growing 30% plus.
I guess the question is could you devote even more capex.
To that space build out more suites faster and capture more businesses like as fast as you are growing that capacity could you grow it faster and gains and more share.
Well first of all I would just say that Youre right. This is an extremely fast growing space.
Second in the prepared remarks, we noted the fact that we've completed the 10 suites, we've got an additional five suites with the capability for even additional suites. So this is an area that we continue to work at it from the overall strategic standpoint to build out of that capacity and clearly.
We have our sights from being the leader from the CD and most standpoint from a overall gene and cell therapy space, but we have many times pointed out the imbalance between the overall.
Supply and demand and the specific space, we've talked about the overall outsourcing rate, which is extremely high and the gene therapy area, specifically given the day the dynamics of potentially.
Yes.
Sure of BOE durable therapies combined with many small companies not being able to the both the resources necessary to build the overall infrastructure and we actually see the altos outsourcing rate increasing from where it is today. So so certainly.
And the aggressive approach that cattle and has taken towards building out.
Capacity in the gene.
Cell therapy area is going to continue and again I'll just refer you to the remarks that we had here with the 10 suites going with the additional five and and the capability to do more and so we're going to continue to.
Monitored the.
And the expansion of the space the overall demand and what Catlin does as we work to put capacity in place ahead of demand and pipeline that we see.
Got it thanks and last one from me, let me and your <unk>.
Prepared remarks, you made a comment about <unk>.
The inclusion of revenue.
Related to COVID-19 and development versus commercial supply depending on the terms of those contracts and I think including.
The comment around the EUA approvals being development. So I guess, what I wanted to clarify since I think all of the all of the vaccines.
Vaccines and the market have yet to be.
Formally approved and.
Our and EUA status should we think about all your COVID-19 revenue is being included and development services and the biologics segment at this point. Thanks.
Yes, Dave.
Thanks for that look what we are.
Saying here is that.
And the credit rate among the.
The.
The vaccines that have been approved of course of the U S and of course.
Europe.
And the emergency use authorization.
Saying is that depending on the terms of the contract.
The elements in terms of how those get classified you could have elements of both commercial as well as development level.
And this whole thing.
Okay. Okay. Thank you.
Your next question is from the line of Sean Dodge with RBC capital markets.
Hey, good morning, and this is Thomas Keller one for Sean Thanks for taking the questions.
Because of all mentioned and the acceleration of multiple class and expansion to accommodate some of the vaccine related demand.
And how did these expansion impact some of the kind of initial take or pay arrangements or the adjusted or adjusted at the start of fiscal 'twenty, two or what happened from those.
Yes.
I'll take that we have.
Number of expansions throughout.
The business and particularly across the biologics offerings.
The essentials are supported by pipeline products, but because of our customers' demand.
The demand both for COVID-19 and non COVID-19 acceleration.
Of certain capital that as we looked at our strategic plans, we will be adding.
Anyway.
Not all four of them have take or pay elements associated with them.
The expenses do.
Those are reflected in the current year.
The guidance of a given and that we'd have the strength throughout the year, we won't break those out and in any way other than to say, it's a combination of the.
Timing in terms of the pace and Walgreens that we actually produce.
Of course, the business for our businesses, but I would I would point out the majority of our contracts across the company and again the of 7000 parts of the supply for our customers. In addition to 1200 development goes and so as you can imagine the vast majority of and don't have these.
And what they thought the elements associated with them.
Okay, Thanks, and then and more and more.
Have you all been able to alleviate some of most of the projects and incentive side in favor of the vaccine production and you mentioned seeing some relief here and with new capacity and fiscal fourth but any updates on how widespread the issue is or isn't.
So I would just say that we've continued to work on your own.
The order environment with regards to our Bloomington site, I think which has seen the greatest amount of that of that work. If you will which flows down from our overall customers certainly share through.
The first quarter of the calendar year, and I would say going into late spring and summer we continued to manage our capacity between the <unk>.
The orders and.
Non range of orders for other customers the rollout.
Expect that to alleviate here in the coming weeks and months.
Okay, Great and Thats all from me. Thank you.
Your next question is from the line of Ricky Goldwasser with Morgan Stanley.
Hi, This is the only from Ricky just two questions on the biologics business on the margin side can you help break down the drivers of the margin expansion and the segment for this quarter and how should we think about the margin from the vaccine versus the base business and.
And when to happen.
With the biologics of segment margins and.
And the studies range play around from guidance.
Yeah, all of topic that look I'm very pleased with the with the margin expansion of the business.
Here year over year, I would say the primary driver of margin and the business is going to be the level.
The volume and throughput.
Of course, our utilization across the network.
Which you can see that.
Translate into margins in the quarter, both the 3%.
Having said that with respect of vaccine versus base business as I've said on prior calls and we'll talk about it and specific programs but.
And the work that we do of course vaccines of.
Of our similar in terms of pricing and economics to life kind of work that would be sort of non vaccines and so I think really what you're looking at here is principally on the element of the throughput.
And of course, the network the strength of instead of sort.
And the margins that you see which are aligned with what we expect for the business long term.
Albeit not necessarily in the areas, we have sort of in the past.
Great and then following up on the floor and of gene therapy can you talk about the client mix of kind of small versus large biopharma and of what.
The pipeline is looking like and the second half of <unk>.
And we'll have more visibility.
The 22.
Yes look the cell and gene therapy business is the key.
<unk>.
Part of that offering within our biologics segment, we haven't broken that out of it as part of the organic picture.
Obviously, we work with a broad spectrum of customers across the headlines, including biologics offerings and the.
And also in cell and gene therapy.
Offerings and.
And so we wont necessarily give a big benefits of what the customer profile look like other than to say that it is across the book of spectrum, but if you look at the pipeline of cell and gene therapy. The number of small cap biotech sort of driving the innovation and.
And we partner with in terms of the work that we do of course.
And the business won't be the breakdown in terms of what the second half look like versus any other point.
And timing of the business.
The other than say the overall set.
All of the trends continue and then.
Pipeline continues to expand if you look across gene therapies.
It looks like the impact of assets go into just the 100 by plenty.
For the 26 centered on the cell therapy side.
As well.
And more assets and the pipe.
And the expected to grow accordingly.
No specifics in terms of the the profile of the customers the sorts of fairly broad spectrum that would work with of course biologics.
Thank you.
The next question is from the line of John Kreger with William Blair.
Hi, Thanks, very much and my question relates to Madison.
Have you guys validated the two new trains that you said were completed and as that facility now and any form of kind of commercial production at the spine or is it still clinical.
We believe the please go ahead and winning.
And we've just completed the fourth and fifth.
Sweet and Madison is you know part of the.
The strategic pathway for the businesses to become a commercial site and with this capacity.
And we are not capable of handling products across the development pipeline and.
Commercial but today all of the activities and the site remain development stage programs and <unk>.
Obviously the underwriting.
Yep.
Great. Thanks, and then John maybe a broader one it seems like your biologics business is now kind of.
And three or four big buckets.
The cell and gene therapy, and <unk>, our monoclonal production and sterile. So can you help us kind of better understand and those drivers are they comparable in size and whats your sort of longer term view on growth rates across those buckets. Thanks.
So first of all I would just say that we certainly see extremely strong growth rates and biologics period in the double digit.
Growth range.
From a just relative size standpoint, I would share drug product is for more significant of our biologics revenues with drug substance being a smaller component, but obviously incredibly important and I think we've been very clear that we're focused on the sub 5000 liter segment where today.
And we're.
A relatively small of an important player.
I would say that we continue to look for.
<unk> assets.
Growth in the U S and.
Western Europe with regards to drug product.
And drug substance, we certainly created a strong foothold now.
From a drug product standpoint in the non new facility that we purchased from BMS, but we certainly have the right fit on the also growing and that some 5000 liter area in our existing assets as well as <unk>.
Many of the right asset in Europe from an overall drug substance standpoint, again focused on net sub 5000 liter but.
And all the areas that we've mentioned between our biotherapeutics, our cell and gene therapy. The fact that we've entered into.
And the plasmid DNA space I think we will of Dolby out of very strong overall biologics platform for the company that is now.
You stated in the prepared remarks and.
Exceeding 50% of the overall company's revenues.
That's helpful. Thank you.
Your next question is from the line of Juan Avendano with Bank of America.
Hi, good morning from.
Thank you for the question.
Given given the manufacturing setbacks that the one of your competitors has faced and a facility that is Matt that is geographically close to.
From one of the plants.
And around Baltimore do you foresee, perhaps an opportunity to engage with that COVID-19 vaccine developer and discussions to do drug substance work for them given the.
And the geographical proximity of your capabilities on drug substance did you see an opportunity to essentially help them and gain share of wallet within that customer.
Yeah, I didn't want and I can't answer of that very very specific question and I would just see that.
Ketel, one and same dialogues with many of the vaccine manufacturers.
Manufacturers to provide support neither of drug products or drug substance.
The standpoint.
Okay, Alright, Thanks, and then a quick follow up around the potential cover the vaccine booster.
Opportunity have you renewed any take or pay contracts to extend beyond the original timeframe.
From the initial will grow out of the vaccines.
And how much.
Are you segregate them and actively allocating capacity.
Around COVID-19 and 22.
Yes.
Go ahead John.
Yes, I would.
I would just say.
Clearly.
From a from a catalyst standpoint.
Our goal is to have contracted volumes now and into the future or where you're moving and working with with customers. I will also note that capacity in splits of clean of drug product area and has been.
Very very tight throughout the entire of pandemic. So the put catlin.
And overall, our pole position, if you will and and the final comment I'll make and said we do see.
The production needs.
For vaccines.
Beyond calendar year, 2021, and <unk> and certainly.
There can be some role to play with regards to booster shots and vary and so there will likely be some level of continued vaccine manufacturer.
Okay. Thank you I appreciate the insights and now and looking forward to chatting with you of the Bank of America Healthcare Conference next week. Thank you.
Thank you.
Your next question is from the line of Jack Meehan with Mcdonalds.
Thank you good morning, I was wondering if you.
Obviously very strong growth across the business, especially in biologics and I was wondering if you could talk a little about the supply chain and whether youre seeing any pressure points from any of your suppliers and just how you're managing through that.
Yes.
<unk> is the from an overall supply chain standpoint, certainly the pandemic has stressed the overall supply chain.
<unk> the industry and I'm proud to say that kettle and was extremely proactive and the early time of the pandemic in terms of actually.
Placing demand all the way.
Throughout calendar year.
'twenty 'twenty back from the pandemic hits, where we're able to stress the supply chain and understand what the overall availability is and then we continue that and overall rolling basis to.
To date, we've been able to manage any supply.
The supply chain constraints.
But it continues to be something that we that we monitor and are going after proactively.
Thank you and then one follow up on the COVID-19 commentary within guidance and you look at the way that the biologics business has been trending as well as the rate of growth and development services and it looks like the gross contribution from COVID-19 is trending kind of a lot higher than the net that you flagged.
Within guidance is there any.
And would you mind, giving some additional color around and around the gross versus net and what you're assuming there.
Yeah, So Jack.
Clearly this is a fairly complex and integrated set of offerings that we have as well as capacity as I said in the prepared commentary.
And we looked at of course.
Our operating segments with varying impacts from from COVID-19, we won't dive into our building two weeks with details on the grille, especially of the net suffice it to say.
And that.
We've taken into account and not only the the.
Offsets within some of the businesses, where COVID-19 is actually.
Slow progress with respect to certain of your product launches of consumer health.
Products and over the kind of pain medications and so on.
And to arrive at the net COVID-19, the range that we're giving we did increase that obviously as we have previously during the year that was saying out of the <unk>.
The 5% to 28% topline growth of the company.
And 16 and 18 points.
The.
From net.
Of the 19 and multi points within those two ranges of necessarily correlated so the portfolio anywhere within the ribosome.
Thank you Whitney.
Sure.
Your next question comes from the line of Evan Stover with bank.
Yes. Thank you. So this is obviously an oversimplification, but as I think about how COVID-19 vaccines of rolled out globally, it's kind of led by the U S and Western Europe.
Markets as far as uptake so.
And the question is I guess as I roll that forward and kind of think about the rest of the globe.
Picking up at the COVID-19 vaccination efforts.
For cattle and as you think about your site network.
Youre, making vaccines and also your your.
The current commercial arrangements with partners on COVID-19 vaccine is there any reason to believe that.
The <unk>.
Catalyst would be more or less equally levered as we kind of see vaccines pick up across the rest of the globe for catalyst the kind of maintain its share of what's being produced and the market.
I would just because of the comment that.
Honestly billions of doses are going to need going to be needed.
Two to really make a dent in the overall volume.
Population from a vaccine standpoint cash.
And certainly has some very important assets from a drug product standpoint that have been used and the fight and.
Against the COVID-19 and I would just expect that.
We would continue to play with the partners that we have and in some way.
I'll take that net.
The other thing to consider here Evan is the.
John initial dosing or as you referenced and the U S and then.
Following the U S and Europe the.
And the potential for boosters in those markets as the rest of the world.
She is actually it's another element to consider and because of the hottest months play out and now ultimately we don't control of the destination of the policy of manufacturer and pressure on the orders and demand from our customers and the.
And with them and where were those products.
And the and the market.
Thank you Sir.
And final question from me, you've got and elevated Capex outlook for the next two fiscal years.
My question requires you to put on a longer term hat and.
I think beyond that and obviously catalyst the business mix has changed markedly and a few years, but.
Your outlook I think used to be high single digit cash.
Capex of the percentage of revenue how did your business mix change to the tiny certain any significant extent, where you would now expect that level of ongoing capital investment to be higher to hit your long term, 6% to 8% growth targets.
Just wondering if you can give me a longer term view on capex.
And I look as you said.
We are the more elevated level.
Capex is the percentage of our net revenues historically, we've operated and the high single digits, while we expect the long term.
To migrate towards that level to the extent that we remain at these elevated levels, but longer period of time instead of the driven by demand.
From our customers, including the.
Scaling of pipeline that we have as those go from development and commercial and we'll continue to evaluate those.
And make sure of that the returns of the business cases are appropriate as we always do in the business.
Didn't see that theres necessarily a.
So the structural element and the business that has changed the mandate of higher of maintaining a higher level of both of us.
The capital as a percentage of about revenues and all.
The two to achieve our long term growth rates I would say that across the business, depending on which segment and what areas are you looking at.
Some of the inorganic growth that we've made for example also.
And the capabilities of the company than the substitute the scaling of those businesses and therefore, you see that impact from the organic perspective. So that's really a follow on to the inorganic if you follow and some of that dynamic of what you're seeing playing out now and as we look further out.
And to evaluate the demand from our customers to determine where we deploy capital.
All of the same time being mindful of and types.
Very helpful. Thank you.
And your final question comes from the line of George Hill with Deutsche Bank.
Good morning, guys and thanks for Squeaking me and I wanted to follow up on Dave When Lee's question talking about the cell and gene therapy market. There doesn't seem to be a lot of third party commercial solutions out. There. So you guys have a good sense of your market share and the competitive environment and I guess do you feel like it's better is.
Is this sort of environment, where it makes more sense to acquire kind of tangential players of continue to build your own capacity.
Yes, we just see the.
The first of all and we do see extremely strong strong demand in the space.
The demand is going to outstrip supply.
We really like adding.
Ganic capacity through the assets that we have and the overall Baltimore area to get over for each of my <unk>.
Repaired remarks with regards to the 10 suites that we brought on language I believe at the time of the acquisition, we had one suite up and running with the second suite coming online. We've now built that out to 10 suites.
And we announced an additional five suites.
Past, the four or more so we love, having I would say that concentration of capability both in terms of people and capacity there.
Certainly if the high quality assets would meet the self available we would.
Can you to consider those but we really do like the path that we're on right now and.
Not only until the spring and gene therapy, we love and accelerating returns on our organic investments.
Thank you.
That concludes today's Q&A session and I would now like to turn the call back over to John Smith for closing remarks.
Thanks, operator, and thanks, everyone for your questions in particular trying to join our call I'd like to close by highlighting a few key points we covered today.
First we're encouraged by our strong results from the third quarter.
The 35% organic net revenue growth and 44% organic adjusted EBITDA growth shows the success of our strategy and the continued strength of the business enhanced by COVID-19 related demand.
We've expanded our biologics visit business at an unprecedented pace in order to help meet demand for both COVID-19 and non COVID-19 products.
And now that the acceleration of our capacity build outs has played a key role and the fight against the COVID-19 pandemic and we will continue to aggressively build the capacity that will also position us for sustainable long term growth.
The biologics segment continued to reported exceptional growth and the third quarter, including more than doubling its revenue.
The segment comprised more than half of our overall net revenue and the quarter compared to roughly one third of a year ago and continues to be the key growth driver for cattle and as we increase capacity and investing in innovation.
Finally, we couldnt be prouder of our thousands of dedicated employees across the globe. We've demonstrated our patient first culture, placing patients at the center of everything that we do the.
The importance of their tireless efforts to develop and supply of products that help people live better and healthier lives is now more evident than ever before we're grateful for their commitment to ensure the safe and reliable supply of the more than 7000 products that were responsible for delivering each year. Thank you.
And you.
Thank you ladies and gentlemen, this concludes today's conference call and thank you for your participation and ask that you now disconnect your lines.
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