Q1 2022 Catalent Inc Earnings Call
Welcome everyone to the first quarter fiscal year 2022 are these conference call. My name is Victoria and I'll be coordinating our call today, if you'd like to ask a question. During the presentation. You made you said that the feedstocks Walt I want your telephone keypad.
Yeah, Hi, Paul So that's why as president of Investor Relations from catalyst to begin Oh. Please go ahead.
Good morning, everyone and thank you for joining us today to review <unk> first quarter 2022 financial results. Joining me on the call today are John Schmitz, <unk> Chair, and Chief Executive Officer, and Comcast Olano, Senior Vice President and Chief Financial Officer.
Please see our agenda for todays call on slide two of our supplemental presentation, which is available on our <unk>.
Investor Relations website at Investor Doc catalyst Dot com.
During our call today management will make forward looking statements and refer to non-GAAP financial measures. It is possible that actual results could differ from management's expectations. We refer you to slide three for more detail on forward looking statements slides four and five discuss catalysts use of non-GAAP financial measures.
Just issued earnings release provides reconciliations to the most directly comparable GAAP measures. Please also refer to catalysts Form 10-Q that will be filed with the SEC today for additional information on the risks and uncertainties that made there on our operating results performance and financial condition, including those relate.
Due to the COVID-19 pandemic.
Now I will like to turn the call over to John Trubisky, whose remarks will cover slides six and seven of the presentation.
Thanks, Paul and welcome to the call.
Catalyst began fiscal 2022 with a strong start.
First quarter financial results were driven by both our ongoing work in support of global efforts to address the pandemic as well as our other critical work with our customers and delivering products that help people live better healthier lives.
In addition, we simultaneously continuing to execute on our long term growth strategy through organic investments and strategic acquisitions.
Before I detail our specific achievements during the quarter, let me highlight our first quarter results.
Our net revenue for the first quarter was just over $1 billion, increasing 21% as reported or 20% in constant currency compared to the first quarter of fiscal 2021.
When excluding acquisitions and divestitures organic growth was 23% measured in constant currency.
Our adjusted EBITDA of $252 million for the first quarter increased 44% on both an as reported and constant currency basis compared to the first quarter of fiscal 2021.
When excluding acquisitions and divestitures organic growth was 52% measured in constant currency.
Our adjusted net income for the first quarter was $128 million or <unk> 71 per diluted share up from 43 per diluted share in the corresponding prior year period.
The biologics segment driven by continued high demand from COVID-19 projects will begin the top contributors catalysts financial performance.
This segment experienced organic net revenue growth of 44% with segment EBITDA growing 56% from the fourth quarter of last year.
Our softgel and oral technologies segment resumed net revenue growth following the pandemic related headwinds we've experienced over the last year.
Increased year over year demand for both prescription and consumer health products drove a 9% increase in net revenue within this segment during the first quarter of fiscal 'twenty, two compared to the first quarter of fiscal 'twenty, one which is highly encouraging.
With net revenue up over last year, yet still down compared to the first quarter of 2020. This segment is still experiencing effects from the pandemic power.
However, we're seeing signs that these issues are transitory and we're looking forward to continued improvement over time.
Moving on now to our oral and specialty delivery segment, where we also saw a return to organic net revenue growth after facing headwinds in fiscal 2021.
As with Softgel and oral technologies, there are improving market dynamics across our oral and specialty delivery segment, most notably this quarter in our early phase development offerings.
Finally, our clinical supply services segment posted modest net revenue growth this quarter compared to the first quarter of fiscal 'twenty, one with profitability the negatively impacted by the cost of opening our new full service facilities in San Diego, California, and she could Japan.
Both investments are poised to meet growing customer demand.
We are expecting to be long term growth drivers for this segment.
On our last earnings call, we announced our agreement to acquire the terror, a leading developer and manufacturer of consumer preferred gummies salt chews in Los Angeles for nutraceutical functional and botanical extract products for $1 billion.
Following the completion of a successful debt raise including additional term loans with proceeds we used in part to fund the acquisition, we closed of the Terra acquisition on October one.
Catalyst one of the leading independent suppliers in a high growth capacity constrained portion of the nutraceutical and nutritional supplement market.
This acquisition enables Catalan and specifically, our Softgel and oral technologies segment to expand our existing substantial consumer health platform by adding the fast growing consumer preferred dose format for nutritional supplements.
This expansion also meets the evolving needs of our consumer health customers, we have consistently as catalyst for new additions to our product library, including gummies and other engaging formats for the nutritional supplement and nutraceutical product concepts.
As highlighted on our last call acquiring but tera enables us to increase our expectations for long term organic revenue growth rate.
Softgel and oral technologies segment from 3% to 5% to 6% to 8%.
This range is driven by the strength of our current advanced offerings and product libraries and is enhanced by the 20% plus growth contribution we expect from the Terra over the next several years.
This attractive growth rate from the Terra is accompanied by core EBIT margins accretive to the segment.
Combined these factors lead us to expect the acquisition to be accretive to adjusted net income per share in the first year after close and significantly accretive thereafter.
Our work streams, integrating the terror and supporting and accelerating its existing growth plans and the transition of approximately 500 experienced employees are now in full flight.
As we integrate these new capabilities and its robust library of ready to market products.
We're solidifying catalysts place as the partner of choice for consumer health companies across the globe.
As we've already experienced significant customer interest in engaging in these new capabilities, we are considering accelerating our organic investment plans for these new and exciting offerings.
Next I'll provide updates on a few organic investments in our biologics segment that have progressed since our last call.
First with respect to our biotherapeutics offerings. We previously detailed many of our upgrades that are growing campus in Bloomington, Indiana.
These upgrades have served as the key growth driver for catalyst and it played a critical role in the global effort to bring the pandemic tune and <unk>.
Allowing us to quickly scale high speed filling lines on behalf of our COVID-19 vaccine customers.
Just recently, we completed the addition of a new high speed syringe filling line at the site.
A project that we first announced in January 2019.
This line is an additional source of growth for our biologics segment and like all of our existing syringe filling lines can be leveraged for a wide range of biologics products, including COVID-19 vaccines.
Given the strong demand for biotherapeutic manufacturing will continue to invest in additional drug product and drug substance capacity at our Bloomington campus.
Similarly, we continue to make organic investments at our 300000 square foot facility in a 90, Italy, which we originally purchased in January of 2020.
When we acquired the site is already benefited from years of steady investments that now support our biologics capabilities as well as other assets and capabilities for oral solid dose forms, including high capacity blister packaging and bottle carton solutions.
Since the acquisition, we've made significant investments in the 90 to meet growing customer demand for biologics capacity.
In 2020, we took action to meet the needs of multiple vaccine innovators, including several enhancements to existing capacity to improve productivity and output.
In February of this year, we began the rapid build out of an additional high speed vial filling line, which has been qualified and will soon begin manufacturing.
In addition to drug product investments, we announced a 100 million dollar expansion project at our <unk> facility over the summer the.
The expansion will allow us to add biologics drug substance manufacturing capability at the site, establishing our first drug substance capacity outside of the U S to support the growing European market demand for biologics manufacture and supply.
Ultimately the expansion will house multiple single use bioreactors totaling 16000 leaders of total flexible manufacturing capacity with the initial four <unk> is expected to be completed in late fiscal 2023.
The growth in investment at our 90 site demonstrate how the COVID-19 pandemic has not only accelerated our strategic plans, but has also accelerated the return on investments we've made enabling us to put additional cash to work to drive continued long term growth.
We also recently announced a digital investments and our gene therapy campus in Harmon's, Maryland near the BWI Airport.
Early this calendar year, we completed construction in one building on campus, which now contains 10 multi room commercial scale manufacturing suites.
Given the high demand for manufacture of the growing number of gene therapy compounds and other products addressing new modes of treatment and the industry's development pipeline. We are increasing the number of manufacturing suites planned for the adjacent building from the five suites, we initially announced to add three more commercial scale.
The advanced biologics manufacturing suites.
This latest expansion will also include the construction of new storage capabilities for just in time inventory space Ultra low temperature freezers to support a larger set of compounds and an expansion of overall infrastructure.
When completed at the end of calendar 2022, the campus will house, a total 18 cgmp manufacturing suites.
Each designed to accommodate multiple bioreactors up to 2000 liter scale and enable the execution of commercial manufacturing from cell bank to purified drug substance.
Given the growing scope of investments made to support the cabinets. The total size of this project to be spent over a multi year period. Starting last year is now expected to be $360 million up from the $130 million initially projected.
This increase of investment was already factored into our initial fiscal 2022 Capex plans discussed on our last earnings call.
Finally through the acquisition of <unk> cel in August we expanded our cell therapy offerings to include proprietary IP FC GMP cell lines and technology to boost our current development and manufacturing capabilities to bring Ips seat based cell therapies to scale.
Phil.
We are receiving a good number of customer inquiries with this exciting new offering and integration is tracking to our expectations.
I'd now like to turn the call over to Tom who will review our financial results for the first quarter and our fiscal 'twenty two guidance, which we're raising to reflect the closing of the Terra acquisition as well as our increased organic growth forecast for the remainder of the year.
Thanks, John I'll begin this morning with a discussion on segment performance, where commentary around segment growth will be in constant currency.
I will start on slide eight with the biologics segment.
To highlight the company's transformation over the last few years, you will see that the segment represented 53% of our net revenue in Q1 of this fiscal year compared to 44% in Q1 of fiscal 2021, and 28% in Q1 of fiscal 2020.
Biologics revenue in Q1 of $546 million increased 44% compared to the first quarter of 2021 with segment EBITDA, increasing 55% over the same period.
With robust net revenue growth was organic and was driven by high demand for drug product and drug substance offerings in the U S and Europe, most notably for COVID-19 related programs, which continue to contribute to both development and commercial organic revenue growth.
The segment EBITDA margin increased significantly year over year to 33% compared to 28, 2% in Q1 of the prior year, which was primarily attributable to increased capacity utilization from higher manufacturing volumes.
We expect the biologics segment growth rate to decelerate as the year progresses, because we will begin to compare against the higher levels of demand from the back half of our last fiscal year.
Please turn to slide nine which presents the results from our Softgel and oral technologies segment.
Softgel and oral technologies net revenue of $243 million increased 9% compared to the first quarter of 2021 with segment EBITDA, increasing 9% over the full period.
Increase was driven by growth in both prescription products and consumer health products, mainly in cough cold and over the counter handling products.
It was encouraging to see the start of a strong return for commercial demand, which despite growing 9% year over year, it's still below the segment's pre pandemic level and the comparable first quarter of 2020.
Development revenue continue to perform robustly as it has throughout the pandemic period and is a strong indicator for long term growth in this segment.
Segment, EBITDA grew 9% and EBITDA margin was in line with the first quarter of the prior year.
Slide 10 shows the results of the oral and specialty delivery segment net revenue growth in the segment was again impacted by the challenging comparison against the prior year, where we had recorded revenue associated with the single product when our respiratory platform that was voluntarily recalled in September of 2020.
However, EBITDA at a favorable comparison to the $12 million of recall related costs incurred in the first quarter of 2021.
As the recalled products did not generate revenue. After it was voluntarily recalled this will be the last quarter for which it will impact the net revenue comparison in the segment.
Favorable segment EBITDA comparison will likely continue as recall costs extended throughout fiscal 2021.
With that background segment reported net revenue of $146 million in the quarter, which was down 10% compared to the first quarter of fiscal 2021 segment EBITDA was $33 million or 48% increase over the first quarter of 2021.
When factoring out the net impact from the divestiture of our local fuel business and the acquisition of accorded spray drying assets organic net revenue grew 3% and segment EBITDA more than doubled.
The topline growth was primarily driven by elevated demand for early phase development programs.
You may recall that a year ago, we called out lower demand for early phase development programs as a result of pandemic related lockdowns. So this bounce back is another good indicator of the return of pre pandemic activity.
As shown on slide 11, our clinical supply services segment posted revenue of $96 million, representing 2% growth over Q1 in the prior year.
This was driven by strong global demand and manufacturing and packaging services, partially offset by a decline in demand for storage and distribution services in Europe, North America saw an increase in storage and distribution demand in the quarter.
During the quarter, we opened two new full service clinical supply facilities, one in San Diego and the other in Chiba, Japan cost related to these openings had an adverse impact on segment EBITDA in the segment EBITDA margin.
As of September 32021 backlog for the segment was $515 million.
Compared to $501 million at the end of last quarter and up 20% from September 32020.
The segment recorded net new business wins of $109 million during the first quarter, a 10% increase compared to the first quarter of the prior year.
<unk> trailing 12 month book to Bill ratio is one three times.
Moving to our consolidated adjusted EBITDA on Slide 12, our first quarter adjusted EBITDA increased 44% to $252 million or 24, 6% of net revenue compared to 26% of net revenue in the first quarter of fiscal 2021.
On a constant currency basis, our first quarter adjusted EBITDA increased 44% compared to the first quarter of fiscal 'twenty, one while organic EBITDA growth was higher exit and 2%.
As shown on slide 13 first quarter, adjusted net income of $128 million or <unk> 71 per diluted share compared to adjusted net income of $78 million or <unk> 43 per diluted share in the first quarter a year ago.
Slide 14 shows our debt related ratios and our capital allocation priorities.
At the end of September the company raised $1 $1 billion in gross proceeds through a current of an incremental term loan issuance of new senior notes at an attractive overall average rate of approximately 2%. We used most of the net proceeds to fund the <unk> acquisition, which was completed on October one.
With capital raise probe our cash cash equivalence and marketable securities balance at September 30th just before the closing to be in excess of $2 billion.
Compared to $967 million at June 30th.
Our net leverage was two one times at September 30, compared to two two on June 30th However, our reported cash balance and corresponding leverage ratios artificially favorable due to the timing of the closing of the popular acquisition.
When adjusting for this our pro forma cash cash equivalents and marketable securities balance as of September 30 would have been approximately $1 billion on a pro forma net leverage ratio would have been three times, which aligns with our long term leverage target from here, we will naturally delever, providing us with significant flexibility to continue.
To pursue organic and inorganic growth opportunities.
Moving on to capital expenditures, we continue to expect capex to be approximately 15% to 16% of our 2022 net revenue expectations, driven primarily by growth investments in our biologics segment, including the investments that John detailed earlier.
Now, we turn to our fiscal outlook.
For fiscal 2022 as outlined on slide 15, which has been updated to reflect the October one acquisition of the tundra.
As well as an increase in organic growth, we are not forecasting in the back half of the year.
We now expect full year net revenue in the range of $4 six 2% to $4 82 billion.
Representing growth of 16% to 21% versus our previous estimate for three to $4 $5 billion.
We now project that net revenue growth from M&A will be two to three percentage points driven by the acquisition of the term.
Recall that our original guidance for M&A activity reflected a negative 1% to two percentage point impact as the divestiture of the blow fill seal business more than offset the expected upside from the multiple smaller acquisitions, we completed in fiscal 2021.
We continue to project organic net revenue growth in each of our segments to be within or above the long term growth range. We had previously disclosed for each segment.
For full year adjusted EBITDA, we expect the range of one to two five to $1 $295 billion.
Representing growth of 20% to 27% over fiscal 2021 compared to our previous estimate of 113 to $1 $2 billion.
We expect full year, adjusted net income of $630 million to $695 million representing growth of 15% to 27% over last year compared to our previous estimate of $585 million to $650 million.
We continue to expect our fully diluted share count on a weighted average basis for fiscal 2022 to be in the range of 181 to 183 million shares.
This projection counts our series a convertible preferred shares.
All were converted to common shares in accordance with their terms.
Finally, we also continue to expect our consolidated effective tax rate to be between 23 and 25% for fiscal 2020 to.
Operator. This concludes our prepared remarks, and we would now like to open the call for questions.
Thank you very much.
A reminder, if you'd like to ask a question. Please press star followed by one thank you.
Perhaps if you can just mind Keith first half followed by taking your questions. So please.
Please ensure that was part of your question the telephone.
Our first question comes from Tycho Peterson from JP Morgan.
Please go ahead.
So my first one is pretty significant raise here after in late first quarter.
If we take out the $150 million of terror.
Yes, the leads around $170 million of organic upside through the prior topline guide. So just wanted to get your thoughts on the organic piece.
Is this a raise of function.
Seasonality within the business or are there other factors such as vaccine boosters.
That strategy.
Yes, there is.
Yes, sure I'll take this one.
We did mention that the Terra acquisition. In addition to the first quarter beat that we saw along with continued strength from an organic perspective in the back half of the year.
I would say as we look across the business units certainly our biologics continues to be.
Performing extremely extremely well given tailwind related to COVID-19.
Vaccines that we mentioned, we expect to see us multi.
Duration revenue streams for us, but we've also seen I would say positive recovery as we've highlighted in the prepared remarks around OSD.
<unk> segments, as well, particularly around the consumer health side of the businesses, which were certainly challenge in fiscal 'twenty. One as a result of the global pandemic. So as we look across the portfolio. We haven't seen a real estate, we continue to see strength across across all four of our segments and especially the three that I highlighted here that are all contributing.
Getting to the guidance range on an organic basis.
Gotcha.
My last question would be can you just elaborate on the demand environment for the organic Softgel business.
I think it was mentioned that some of the headwinds.
Thank you guys.
I have seen.
Scientific debate.
But we're still at pre pandemic levels here. So can you just.
Hello, Patrick.
So can you just sort of elaborate on loopnet by about there. Thanks.
Sure, Yes, no we continue to be very pleased with what we're seeing out of the <unk> segment. This is the second consecutive quarter, where we've seen a return to organic growth we saw organic growth of 9% in the first quarter, which is nicely above the long term outlook.
Of that segment and I would say the demand profile remains positive as I mentioned that was certainly one of the factors that we took into consideration.
When raising the guidance for the second half of the year.
No.
The fact that we're still below where we were in 2020 I think.
Provides us even more confidence at the slow growth to come here on the horizon.
Certainly as I said seeing strengths.
Across this business on the consumer hired as the recovery continues.
<unk>.
Strong.
Back half of the year from this business.
Okay.
Operator, thank you.
Question. Please.
Yes. Thank you very much tighter for your question and our next question comes from Jacob Johnson from Stephens Jacob Your line is open.
Hey, Thanks, Good morning, everybody, maybe maybe first a bigger picture question for John.
In his recent book Scott Gottlieb talked about CDMA was having incremental excess manufacturing capacity.
For vaccine and therapeutic manufacturing in case. Another pandemic presents itself is this something that would make sense for Cadillac would you be interested in and maybe what would it take for you to participate in something like that.
Well, let me just say what are the major drivers behind the C. D. Ammo industry is having the right capacity and the right capability.
Significant driver for for the business and when we came into the pandemic.
We're in the enviable position of having.
<unk> built out our strategic plans and putting we're putting in place significant capacity for our biologics business both of the drug substance side and the drug product side, what I can tell you without responding directly to the question.
With regards to vaccines.
Scott Gottlieb's book I will just tell you that we're constantly looking at the market. We're constantly looking at what our customers customers' needs are and as the management team working closely with our board, we're looking out into the future to understand what strategic investments that need to make.
So that we will have the capacity necessary for our customers and their pipelines.
And obviously.
<unk> demonstrated itself in how catalog was able to play a significant role in the manufacture.
Our vaccines for multiple customers.
Got it thanks for that John and then maybe on that note non COVID-19 side.
To focus on VW.
Andy in Bloomington, So maybe I'll ask one just on Madison can you just.
Update us on your efforts there and then can you can you remind us are you supporting any commercial therapies out of that location.
Yes so.
A key strategic priority for us is to bring in a commercial.
Product into our Madison site as you know we've completed out both our fourth and fifth trains at the site, we have a very robust.
Pipeline there.
We were hopeful that one of the products that we actually had there for.
For a COVID-19 therapy would actually get emergency use authorization that has not happened yet, but we're very confident over the next 12 to 18 months, we should be able to secure a commercial.
<unk> there.
We have very good business, there, but as you know when you're only.
Looking in the clinical space the.
The work there can be somewhat lumpy, depending on the clinical trials, so really the big.
Desire for us to have a commercial product at the site is just to make sure that we have that stable base load. If you will and we're confident that we'll be able to get it soon.
Got it thanks for taking the questions.
Thank you very much. Thank you for your question.
Next question Dave.
David <unk> from Jefferies. Please go ahead.
Hi, good morning, Thanks for taking my question.
You called out.
John and Tom you called out in your <unk>.
Prepared remarks.
Development acceleration in both.
And OSD that development activity seems to be robust and attractive there and then you also have 20% year over year backlog growth in <unk>.
In the CSS segment, so all of those seem to point toward a nice future revenue opportunity I was hoping you could shine, maybe a little bit more light on that in terms of cycle time and.
Your guidance you commented on the guidance.
You know kind of alludes to that but perhaps you could talk about how that unfolds over the next several quarters.
So David.
Good to hear from you I would just say that.
Both of these businesses are businesses, where we do significant development work, both for <unk> and OSD and that usually is a precursor for.
Potential products growing commercial so we can't call, whether its going to be within the next quarter or two over the next year, but we're increasingly confident is that we are seeing a return to the the long term growth rates that we expect out of both of these businesses as you know on the.
So T business was the one business that we had within catalog that really was affected by the pandemic.
It has slower prescription launches and also we had our consumer health business.
Was we've not seen demand as people were in lockdowns and not traveling and not.
Purchasing their normal cough cold and other other products and so that is starting to come back combined with.
I'd say more activity from a development standpoint that we see both of that Soc and OSD. So we're confident that we're going to be able to continue with the long term growth targets that we have for both of those businesses and as you know we're going to take up our long term growth target for.
The <unk> business from 3% to 5% to 6% to 8% with the acquisition of the tariff so that really does significantly enhance that that segment.
That's helpful. Thank you and my follow up is around your gene therapy business and the BWI.
Facilities your.
Capex cost for the incremental three suites that you are talking about today is the simple math would suggest that it's.
Quite a bit more that each of those are quite a bit more expensive you mentioned storage in some some ultra low temp.
10th Freezers and things like that is that what drives up the extra cost or are these suites going to be more specialized in what they can do I wondered if you could talk about the extra cost for the incremental.
Yes, sure Tom here I can jump in I.
I will say.
First of all I would say that.
The new amount of $360 million of taken into consideration in the outlook, we gave related to.
Capex investments in the fiscal year of about 15% to 16%. So no change to that as a result of this and this will be investment that has already started.
Contribution in fiscal 'twenty, one we will continue in fiscal 'twenty, two as well as fiscal 'twenty three to answer around the increase in costs I would say, we certainly improved the layout of these suites, which have.
Substantially increased the cost of it but also have given us more and more flexibility in and being able to meet the needs of our customers. I would also say that there are additional investments related to.
To warehouses, two parking garages and things that we need to be able to make sure. We can keep up with the pace of growth in hiring thats going to be needed at the site. That's awesome contemplated in that investment. So those are the types of things that are that are driving the cost up to that 360, but as I said already contemplated in the outlook, we've given around thoughts around capex.
Yeah, and Dave just as a follow on to that so one side of it is the Capex investments that you are you are clearing out. The other side is what are the drivers behind it and I would tell you is we just continue to see.
An experienced very robust demand for our gene therapy.
<unk>.
If we just take a look at the overall pipeline has more than 300, new gene therapy assets that entered into the pipeline.
In 2021, and we see that pipeline growing from.
From about 900 assets to about 2900 assets. If you were to go all the way out to 2027 with the kind of work that we do in understanding the overall pipeline. So we feel really good about about these these investments and clearly it's going to make us a leader.
In the overall gene therapy development and manufacturing area.
I appreciate the perspective there. Thank you.
Thank you very much. Thanks for your question and our next question comes from Tien Tsin.
Please tell me I guess your line is open.
Hey, guys good morning.
Maybe I'll start with one on <unk>.
Tom.
It's about $150 million contribution a fair way to think about it in terms of what's embedded for the three quarters.
This fiscal year.
And now that <unk> closed can you give us some color on early customer conversations John I believe in your prepared remarks, you mentioned something about a planned acceleration of investments. There is that can you just shed some color on that and is that sort of expected to weigh on margins here a little bit.
Sure. Thanks for the question I'll take us.
We haven't split out the increase of the $320 million to the guidance between what the <unk> contribution in what is.
What is the base business however.
We'll say Directionally you are in the right place in terms of how.
Youre thinking about this we were very pleased to be able to get the acquisition closed on October one and expected to see a full nine months contribution here and as we said.
Round this business when we announced the acquisition.
Back in August.
This is a business that is growing.
At 20 plus percent organically at.
At EBITDA margins.
In the near 30% or low 30% range approaching that of our biologics business. So.
Hopefully that's enough color to give you to be able to help you model. The contribution and then just as a reminder, we report our results for the second quarter, we will be calling out the Terra acquisition here as part of our <unk> segment that will be that will be treated.
As.
<unk> and <unk>, just as I did with Tycho I'll provide you a little backdrop to the overall dynamics, we continue to see with with the terror and the overall gummy.
Gummy Soft-shoe laws are in your area that.
There is significant demand that is currently outpacing capacity there just isn't enough capacity out there for the demand that you have I mean companies have grown to a 30 billion dose.
Marketplace here in the in the U S. So as we got our hands on the chair.
One we've had significant reach outs from I would say.
Well known high profile customers, who are looking.
Two catalyst to really help them.
<unk> to build out their franchises or get into the franchise and so in my prepared remarks.
<unk> two is the fact that.
As we move forward with this integration we may even accelerate some of the investment plans that we had contemplated during our due diligence period, because now that we're.
Into this.
A month or so we have even more visibility to the customer demand and needs of that business. So this is one where we can very effectively deploy additional capex and quickly gain market share as well as grow the business potentially faster than our.
Original business case, so we're extremely excited about this it really enhances and transforms our.
Business segment, and we look forward to.
<unk> to do the integration and as I said potentially accelerate the investment plans that we that we had contemplated before the acquisition.
Got it very helpful.
Another quick one for you on the guide can you give us a sense to what extent you're baking in any supply chain disruptions or inflationary pressures on wages as well as a strong flu season here.
Yes.
All of those items are certainly I would say.
Are taken into consideration.
Yes.
And the guidance I would say.
Very conservative in what we've assumed from a wage inflationary perspective in this guidance. We certainly continue to see material challenges. We've done a very good job I would say internally by staying up staying ahead of those and obviously, we're able to pass some of that on where we have the ability to so everything reflected as we know today.
Related to inflationary pressures are included in the guidance wouldn't expect any.
Any further headwinds to be talked about through the remainder of the year around that based on.
The approach we've taken and what we've included.
The other thing related to your question around a strong flu season on services.
Certainly part of maybe a little bit of the strength, we're seeing within the consumer health side of the business within <unk>, when we talked about a little bit of a recovery around cough cold pain medications that we've seen here.
But that's really it in terms of the contribution in <unk>.
Tailwind that's that's already contemplated in reflected in the revised guidance with the strength in the second half across the <unk> segment and <unk>.
Again, bringing it up to a higher level on the overall supply chain certainly.
<unk> had most of the world talking about supply chain issues I would say cat alone was out in front very early in the pandemic are doing the work that we needed to do to.
Secure our materials throughout the pandemic and going forward I will tell you it continues to be.
A relatively relative challenge for us, but we've put in place very strong operating mechanisms.
We have engagement at the highest levels of management working with our our suppliers to ensure that we get the components that.
We need you probably have heard people talk about single use components, specifically on the drug product and drug substance side being a challenge, but again, we have strong working relationships with everyone.
When we look at the overall supply challenges.
We along with most CEOC to supply chain challenges continuing out through probably the second half of 2022.
From a catalyst perspective. This also means that we've had to make additional investments from an overall inventory standpoint, which obviously impacts our our working capital, but there are the right investments if you will necessary to ensure that we continue to reliably supply across all fronts from.
Our vaccines through the 7000 other products that we that we manufacture.
That's great color. Thanks, so much guys.
Thank you very much Carlos for your question.
Clayton Williams.
John Your line is open.
Hi, Thanks very much.
Guys could you just give us an update on your latest thinking on vaccine production.
I know you don't want to get into this specifically, but just curious if youre thinking about this is a business that grows further in the coming year levels off or decline Smith.
Yes, So hi, John I would just say that as Ive said on previous calls it's increasingly clear that that the vaccines are going to be here to stay for quite a while theres still a large part of the population that needs to be vaccinated.
There is the need for boosters, they're now new formats.
That are that are coming out.
Compared to where we were at the beginning of the vaccine distribution and also we see that there is some.
Potential for.
The COVID-19 vaccine to be married with an annual flu vaccine. So I would say that from a catalog perspective, we see this as really a new franchise.
For for the company and we think.
Vance vaccines in general.
With the advent of two approved mrna vaccines, so advanced vaccines are going to be.
Again.
An important franchise for the company going forward, So I hope that clears things up a little bit for you.
It does thanks, and maybe as a follow up if you think about your the different sort of buckets within your biologics business I know you've said.
<unk> quite good across the board where are you seeing the greatest sort of lead times.
As clients, bringing new orders and sort of what are the plans to alleviate that.
Yes.
Again I'll just go back to the fact that the strategic planning within catalyst I think is literally top quartile, if not top 10% in terms of our market landscaping, our understanding of what our customer needs are and the capacity that we need to put in place.
Moving to about 15%, 16% of our Capex is going to be 15% to 16% of our revenues can be deployed towards capex. This year.
We're in constant dialogue with our board every board meeting had some component.
The strategic.
Capacity needs and Capex.
That will lead to follow on so we're in regular dialogue, there and I would just say catalysts doing an excellent job just as we did before the pandemic having capacity that was was worth covenant and making sure that we continue to have the right capacity for our customers on a go forward basis.
Sounds good thank you.
Thank you Jack.
Thanks for your question and the next question.
Please go ahead your line is open.
Thank you good morning.
Just was hoping to get your thoughts how the how did the quarter play out versus your expectations, obviously, 23% organic growth is nothing to stop that and youre raising the full year organic growth, but the quarter revenue did come in a little below our forecast and the street was there anything that came in a little later than expected or any.
<unk> dynamics, you would call out.
Hey, Jack I would just I would just say this.
Quarter was really very closely aligned to our internal expectations.
I think.
As we look at.
As we look at the first quarter historically and into the future. It has and will continue to be our seasonally.
Lightest quarter from a.
From a volume perspective to them.
Any of the months as part of the first quarter or in the middle of the summer months, where we.
Some shutdowns at our facility shutdowns at the facilities within our customers' network as well I would say as we look at the performance here now what we saw from a margin expansion perspective in the first quarter was.
Very pleased with.
We're expecting 120 basis points of margin expansion at the midpoint of our guidance on a full year basis, and we've had the strongest first quarter margin we've ever had as a company. So.
I don't think as I look through things or was there anything that came in necessarily lighter than where we expected and this was really right down the middle of the fairway in terms of.
Management's jackpot.
Jack.
Let me, maybe just put a really clear on sharpie on this one this was an extremely strong start to our fiscal year and as Tom said.
It was really.
What we have from an overall expectation standpoint, and having been in the seat for 12 years I would say again. This was from the strong. This was the strongest start to a fiscal year that we've had so we are very pleased with results.
Great.
And then yeah.
Just one more follow up on the Covid contribution within guidance as your was that portion kind of unchanged within the within the core guidance raise and.
Just looking at the development sales within biologics were down 20 million sequentially was that related to Covid any dynamics, there you would call out.
We have Jack we're going to stay away from giving any more specifics around COVID-19 and what the contributions were in the second half of the year as I said.
The strength that we saw in the first quarter.
The demand profile, we continue to see across both development and commercial programs drug substance and drug product as well as viral vector manufacturing within biologics gave us the confidence and comfort to be able to increase.
The organic growth rate, we expect to see in the second half of the year and as John said to be able to start the year in fiscal 'twenty two from our first quarter, our seasonally lightest quarter perspective. The way, we have gave us that much more confidence in being able to to increase the full year outlook as part of guidance.
In addition, as I mentioned earlier as well, our S&P and OSD segments continue to perform well and that was taken into consideration.
From a from a fiscal 'twenty two guidance increase that standpoint as well.
Got it thank you Tom.
Thank you Jack for your question and now we will move on to Paul <unk> from Keybanc capital markets.
Paul Please go ahead.
Thank you John could you talk about the proportion of business and biologics is fill and finish and.
Would it not be fairly would assume the barriers to entry in that part of the market.
Are probably picking up your need for Capex.
Yes, so first of all I would say that in our biologics business clearly.
For I would say are non gene therapy business.
The drug product as well.
The proportion of our overall revenues comparing drug product to George substance, but when you take a look at our gene therapy business.
In the totality of our joint customers It has a significant.
Our drug substance.
Drug substance capacity and obviously in my prepared remarks, we detailed out the fact that we have 10 suites now there and that we were adding it.
Another five suites, but we're now moving that up to a total of eight suites, so between that and R. R.
Investments that were making in <unk>, which again I detailed out in my prepared remarks, we are now starting to have I would say a lot more of our drug substance to the future are sort of a lot more of a bump biologics revenues in the futures will start coming from that drug substance drug product is the large part of that overall revenue.
In this segment and I would just say again.
From a drug product standpoint.
Getting.
Filling the line up and running as is.
Usually best case, a two to three year endeavor, depending on whether or not you have.
Sure.
You have room in the existing facility or you need to build out a greenfield facility then you need to have.
Advanced order on a line, which can take to get up to two years and then you have to go through the installation and the overall qualification. So getting out ahead of that 12 product capacity.
Three big deal and we do see very strong demand going forward in the future given <unk>.
From the vaccines given the very strong.
Biologics.
Drug product roadmap, which is increasing at very very strong double digit rates. The overall pipeline is so again.
It's a constant dialogue both internally from a market landscaping standpoint, a strategic standpoint, knowing what capacity we have to put in place and then.
Strong dialogues with our board in terms of supporting the overall Capex and what I can assure you from an overall.
Growth standpoint that Katalin knows what it needs to do to put them online capacity.
Passing to ensure that we have.
It has to be that our customers need for for their overall pipelines and then I'll just remind you that the capacity that we purpose for the vaccine work clearly it's fungible for other biologic buyer.
Biologic drug product filling so we feel really good about the assets that we've put in place and are going to put in place.
And the final comment is that we continue to state that for us Covid and the vaccine work really accelerated our strategic plans and it also accelerated as we invest the returns on those investments, allowing us to put more of that cash to work.
We and even Inorganically, so I hope that answers your question.
Yes.
On the you had mentioned earlier.
The new formats and vaccine is.
The Covid vaccine.
Portal are they going to single dose formats.
So there is certainly going down to lower dose formats within the vials. They wanted to take it down from the higher number of doses to lower number of doses as you have.
It becomes more challenging for them to basic.
Basically through the clause, we then use the vaccines and the vials.
Turning to clients, we're going down to a lower number of doses and then certainly there are also going to sing.
Single dose pre filled syringe format. So again.
Ongoing work by our customers and clearly Ketel one is looped in there and I can't really detail out more than that I would just say that there is.
<unk> change within the formats and as I said, we even hear discussions about a combination of the COVID-19 vaccine with flu flu vaccine so that could be an annual.
Covid vaccine from that standpoint.
Okay. Thanks.
Perfect. Thank you Paul for your question, we will now move on to Sean Dodge from RBC capital markets. Sean. Please go ahead. Your line is now open.
Sure.
Hey, Good morning. This is Thomas pillar, one for Sean Thanks for taking the questions.
And then going back to the gene therapy as you guys continue to build out this new capacity and sort of thinking over the longer term and given the relative complexity involved in the manufacturing.
EBITDA margins do you expect gene therapy to contribute relative to the 30% or servicing across all our biologics today basically how do you expect those margins for gene therapy to look relative to the rest of biologics.
Yes, Tom it's a level of disclosure, it's a little bit below what we've what we've talked about publicly I will say our biologics business continues to have.
The most robust EBITDA margins that we really have across the portfolio.
Low to mid <unk> with the potential.
Of expanding north of that we've talked about the company overall being able to drive towards that 28% EBITDA margin by fiscal 2024, and say, we're well on pace.
For that end market.
Margin expansion opportunity across our biologic segment inclusive of the.
<unk>.
Of the cell and gene therapy business is certainly going to contribute in the probably one of the main drivers of that is the pharma margin expansion that we'll see across the.
Across the company so.
Hopefully that gives you some direction to think about the margin.
That subsegment of the biologics business.
Okay.
And then you all mentioned plans to hire additional technical and operational expertise over the next few years to support.
And gene therapy.
The typical profile looking forward as everyone needs to be kind of a.
Highly sought after scientists are expert are you able to kind of leverage a lot of the existing Tom expertise, we already have.
Yes.
First state that Cadillac over the last couple of years in a row has hired more than 4000 people from the outside so we are constantly.
Excluding into catalysts.
The necessary resources, we need to run the business and we've been very effective at doing that also note that we have very high internal referral rates.
When we take a look at our last year's external hires of about 4500 people. We had about a third of those 30% of those came from.
Internal referrals for an external candidate when we specifically look at our business, we really have kind of.
Two sets of people that we need to hire first of those that are that are experienced and qualified from your overall.
Our Biopharma G&P standpoint.
With regards to that would say everything from your.
Biologists to cemex to microbiology.
Folks within our quality organization, which has a very high demand.
And then obviously those that are actually doing the innovation in product development, and which are a much higher level. These are at the Phd.
An advanced degree level and certainly those.
That have had experience in and we have obviously a strong pool of those candidates that are that are in the U S and I would just see the catalyst overall brand is has made us an employer of choice for that on the other side. We also need to have I would say capable operators. These are folks.
That in some cases do not need to be degree, but in some cases actually do need to be degree depending on the work that they're doing from a gene therapy standpoint. So.
We actually have been in the sweets and operating and again these can be degreed in some cases non degree depending on the overall work but.
It's a huge operational after from a talent acquisition standpoint that I would say <unk> is well positioned for given.
The amount of hires that we've had over the last several years and will continue to have into this year and so far we've been able to meet those needs.
Quite frankly at a lower cost I'm sure that many in terms of acquiring that talent.
Jordan Thanks, Tom.
That's all for me.
Perfect. Thank you Sean for your question. Our next question comes from George Hill from Deutsche Bank. Please go ahead. Your line is open.
Good morning, guys and thanks for taking the question John just wondering if you think about bio biologics capacity and M&A. If we look at like the last decade, or so we've seen a lot of would be biologics manufacturers kind of build out their own capacity does a lot of this capacity becomes fit for purpose. If you guys want to buy it is it too fragmented and kind of different speed you guys to market from a capacity.
Perspective, if you will to kind of buy capacity in place versus building.
Can you just kind of talk about the opportunity to buy capacity from Phil biotech companies.
Well as you know.
Ketel one is has a very strong overall inorganic or M&A activity. So we're constantly.
Looking.
And know the assets that are available out there and generally speaking on the drug substance side. These can be somewhat fungible assets versus highly specific these are I would say so.
Two things that can't be repurposed.
From a catalog perspective, we've discussed the fact that that we'd love to find the right asset and drug substance side.
Outside of the U S Western Europe.
Where we don't have.
We don't have a position today and ultimately in our 90 facilities. We're building that out I would also say that that obviously valuations and multiples are extremely high.
The marketplace. So we have to weigh out.
Making sure that we buy the asset where it really has to be.
Somewhat close to perfection, if you will given the high multiples and then the alternative is obviously, putting your own capital to work for them.
Organic standpoint, and on the drug substance side that has really been our our preferred mode of going after it also mentioned that from a drug substance standpoint, we're really focused on that sub 5000 liter category.
Sure.
More than a majority of the curve biologics pipeline about 70%.
If those molecules get approved given the I would say.
Smaller in nature of the disease populations for the indications that we're going after we'll require 5000 liters or less drug substance manufacturing.
Those products get approved so that's really the category that we continue to.
Go after that being said as we continue to bring on more drug substance and work these trains effectively.
Certainly we'll be able to take on I would say, even higher volume trumps substance, but again, we continue to look for the right assets, but.
We've been very effective in our strategic growth plans building out organically on the drug substance side.
Couple John Thanks.
Alright. Thank.
Thank you Josh to your question, we will now move on to Bank of America.
Eric Your line is open.
Hi, good morning.
Hey.
You guys have some.
Pretty tough comps in the second half of.
Fiscal 'twenty, two and just sort of philosophically on this one.
The other way, but I guess can you just are you expecting to see.
Positive organic revenue growth in the back half of the year when its all in.
Just given the cost situation.
So so derik I think youre right, we certainly will see some more challenging comps around around the third quarter.
In the fourth quarter, given the strength we saw.
Those businesses in the prior year as we started to really see.
Emergency use authorization volume for Covid related vaccines start to.
Start to tick up we.
We did mention specifically in our prepared remarks that we would not expect to see as we get into the back half of the year. The biologics segment continue to grow.
At the.
At the levels that we saw in the fourth quarter of last year, the first quarter of this year.
Here How's.
However, I will say, we do continue to see strength on.
Within our SRT in OSB businesses that we expect to carry into <unk>.
The back half of the year from a.
Organic growth perspective.
So.
The last thing I'll, maybe highlight here is a typical year for catalyst as 40.
40, 60 in terms of.
Revenue contribution this year, maybe feels a little bit more balanced not quite 50, 50, but a little bit more balance there. So hopefully I've given you enough color to maybe softly equation, there, but I think what.
Paul shorter letting you know what the revenue expectations is going to be in the back half of the year.
Got it first half second half specifically or quarterly.
But we will certainly see a deceleration of revenue growth from the levels. We've seen here in the first quarter. The other thing we did highlight though to give you and the street a little more comfort.
The results of.
Raising our fiscal 'twenty two guidance does not only.
The <unk> acquisition and the strength, we saw in the first quarter, but that we do continue to see more accelerated organic growth in the back half of the year versus what we thought.
60 days to grow when we put out our.
Our previous.
In fiscal 'twenty two guidance.
Okay.
<unk>.
Think about the long term growth rate in biologics.
Is it 10% to 15%.
If you look in the queue.
I'm sorry, Hello.
Yeah.
Keep going here.
At this time.
Yeah. If you think about the if you think about the guidance for not the guidance. If you think about that.
Our long term guide is 10% to 15%.
The biologics segment.
Look at it.
Do you think about going into fiscal 'twenty three.
And there we went to a sort of a comp question again I mean do you expect would you expect to the 23 levels to be somewhere in that range.
Or is there a potential step down just kind of given the comps is once again. It's a question on just just can you turn this existing <unk>.
Toby capacity that you have now and flip that over to other projects or do you expect that sort of might be overall category to continue to grow.
Yeah, So Eric obviously, we're not in a position at this time to be able to comment on more specificity around our fiscal 'twenty three.
Guidance on what that will look like out continue to highlight that we did raise our long term growth outlook from six 8% to 8% to 10% last quarter.
As a result of the robust demand that.
That we see across the business.
I will say, we do have additional capacity, that's going to be coming online across the business here in late fiscal 'twenty, two and so that fiscal 'twenty three year, which we certainly think will help us continue to see strong performance in fiscal 'twenty three we're going to fall short of giving you more specific.
In terms of.
Quantifying.
That again will continue to see coal demand is having a multiyear duration. We're still in the very early stages in terms of worldwide vaccine populations and what we're seeing from a booster.
Demand perspective, as well as.
No.
Younger age populations.
Getting approval for the vaccine et cetera continue to give us.
But this is going to be around for a multiyear duration, including investments in fiscal 'twenty three.
Great. Thank you very much.
Correct.
The kind of nice to have a question and I will now pass on TMC.
The final remarks.
Thanks, operator, and thanks, everyone for your questions and for taking the time to join our call I'd like to close by highlighting a few key points we covered today.
We're proud of our performance this quarter and of our skilled and dedicated employees, who have allowed us to successfully execute on our long term growth plans.
In fiscal 2022, we now expect stronger revenue and EBITDA growth in our initial guidance driven by continued growth in our biologics segment. This was renewed growth in our softgel and oral technologies and oral and specialty delivery segments.
Because of the investments we've made over the past few years, which included high growth franchises like those we have acquired in our biologics segment and most recently with the growth expected as a result of the Terra acquisition.
Millions of patients around the world.
Building on this we are on track to deliver over 1 billion doses of COVID-19 vaccines as well as millions of Covid therapeutic doses by the end of the calendar year, playing an important role in addressing the COVID-19 pandemic.
As we continue to support global efforts to address the pandemic and plan for the future we remain fully caught up.