Broadcom Q2 2023 Earnings Call Transcript

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Provided by Quartr
February 7, 2023

There are 14 speakers on the call.

Operator

Hello, everyone, and welcome to the Catalent Incorporated Second Quarter Fiscal Year 2023 Earnings Conference Call. My name is Emily, and I'll be moderating your call today. After the presentation, you will have the opportunity to ask any questions by pressing star followed by the number one on your telephone keypad. I'll now turn the call over to our host, Paul Serdes, Vice President of Investor Relations. Please go ahead, Paul.

Speaker 1

Good morning, everyone, and thank you all for joining us today to review Catalent's Q2 2023 financial results. Joining me on the call today are Alessandro Marcelli, President and Chief Executive Officer and Tom Castellano, Senior Vice President and Chief Financial Officer. Please see our agenda for today's call on Slide 2 of our supplemental presentation, which is available on our Investor Relations website at investor. Catalyn.com. During our call today, management will make forward looking statements and refer to GAAP and non GAAP financial measures.

Speaker 1

It is possible that actual results could differ from management's expectations. We refer you to Slide 3 for more detail on forward looking statements. Slides 45 discuss Catalent's use of non GAAP financial measures, and our just issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Catalent's Form 10 Q that will be filed with the SEC today for additional information on the risks And uncertainties that may bear on our operating results, performance and financial condition. Now, I would like to turn the call over to Alessandra Bacelli, These opening remarks will begin on Slide 6 of the presentation.

Speaker 2

Thank you, Paul, and welcome, everyone, to the call. Before turning to our results for the quarter, I want to address the Bloomberg News report that appeared over the weekend. But only to say that as a matter of policy, we do not comment on market rumors. With that topic out of the way, Our Q2 results met our expectations that have strengthened our forward momentum for our strategic plans, Highlighted by expanded collaborations with strategic partners, significant new business wins in our TAC product And gene therapy offerings renewed business development in drug substance and exceptional demand for our world leading Xylus FastiSoft technology. As we pass the midway point in fiscal 2023, I would like to first look back at the past 6 months.

Speaker 2

Our non COVID business continued to show strength as we grew organic cost and currency net revenue above market at approximately 12%, Despite softness in nutritional supplement demand, we brought online a new capacity to support areas of market with anticipated high demand, Particularly of prefilled syringes, viral vector manufacturing and Xyedis. We executed our plans to meet the increasing demand for fit for scale, high potent drug manufacturing through the acquisition of Matrix. We are very pleased that we did so well performance out of the gate, including the recent FDA approval of 2 new high potent drugs that Matrix is Broadening our lens, since the beginning of 2022, Cazurant has been a manufacturing partner for a total of 7 new approvals across our FDA approvals across our network. In addition, we touched approximately 50% of all FDA approvals through that time through our critical clinical supply, Analytical support and early development service offerings. We have agreed and announced and extended the partnership with the 2 of our largest Customers, all of this validates our strategy of providing to our partners a comprehensive portfolio of services Underpinned by our operational excellence track record, which together position Catherine to be the partner of choice To maximize the potential of their pipelines and allows us to continue to increase our share of the most Looking forward, I'm very excited to be leading Cardanoin in the next chapter of our journey.

Speaker 2

We have a clear mission to help people live better, healthier lives. At an investor conference last month, I discussed several aspects of Cadarette that should excite everyone about our premier place in the market and the growing opportunities in front of us. Among other things, I noted the continuing growth of our total addressable market, which you can see on Slide 6. Our strategic investment have materially expanded our total addressable market and will provide us with greater future growth opportunities. Since fiscal 2017, we have invested over $7,000,000,000 to enable accelerated growth in exciting segments of the CDMO market.

Speaker 2

And those moves have expanded our opportunities. In fiscal 2019, we addressed a $35,000,000,000 market. After our thoughtful diversification, including investment in technology, capacity and new capabilities, Today, we address a $70,000,000,000 market as an active and scaled player in many of the largest Fastest growing segments in our space. Looking ahead to fiscal 2026, we anticipate our addressable market growing another 40% To $100,000,000,000 across the markets in which we operate, and we are incredibly well positioned to continue to increase our share in these markets over time. Now moving on to the highlights of the Q2.

Speaker 2

As expected, Our Q2 results compared to the prior year period were negatively impacted by the lower year on year demand for COVID related products. However, notably revenue from COVID products grew sequentially as we were the primary U. S. Fill and finish site for a pediatric vaccine that received emergency use authorization during our Q2. Net revenue of 1.15 €1,000,000,000 was down 6% on a reported basis or a 2% decrease on a constant currency basis compared to the Q2 of fiscal 2022.

Speaker 2

While we exclude the impact of acquisition and divestitures, our organic revenue declined 4% measured in constant currency. I would like to call out that our organic non COVID revenue grew approximately 4% in the quarter in constant currency, including Double digits growth in our Biologics segment. This is a slower growth than realized in the Q1 because we End of the fiscal year to be more in line with the Q1 levels, which was more than 20% on a constant currency organic basis As we address our large backlog of non COVID work, particularly in our gene therapy and drug product offerings, And our PCH business returns to growth. Our 2nd quarter adjusted EBITDA of CHF 283,000,000 declined 9% as or 6% on a constant currency basis compared to the Q2 of fiscal 2022. When excluding M and A, The organic adjusted EBITDA decline was 7% emission in constant currency.

Speaker 2

Moving to Slide 8, I would like to cover some data Regarding our COVID related revenue that we addressed during the recent public webcast. Our revenue guidance Assumed an approximate $750,000,000 decline in COVID related revenues From approximately $1,300,000,000 in COVID revenue we recorded in fiscal 2022. We're actually tracking a slightly better than previously reported with approximately $450,000,000 in COLIIT revenue recorded in the first half of the fiscal year And expected additional demand in the 4th quarter to prepare for a seasonal COVID vaccine in the fall, which is expected to result in Fiscal 2023 COVID revenues that is more than $600,000,000 Having said that, given the expected new seasonality of the product, We expect minimal revenue contribution from COVID products in Q3, resulting in a decline of COVID related revenue of nearly $350,000,000 when compared to the Q3 of fiscal 2022, which was our peak COVID quarter. Moving on, we continue to position ourselves as the industry partner of choice across the pharma, Biotech and Consumer Health sectors, our position has been further validated by 2 significant Strategic partnership expansions. 1st, we will be extending and expanding our manufacturing partnership with Moderna, Which will see Catherine support the manufacture of multiple Moderna products in multiple formats Across our North American and European Biologics drug product network, Cadbury will continue to provide the drug product fill and The non COVID-nineteen programs such as flu and RSV vaccines From our manufacturing site in Bloomington, Indiana as well extending the partnership to support Moderna from our state of the art European facility in Anaheim, Italy.

Speaker 2

We look forward to our strong long term relationship and LP Moderna advance its robust mRNA pipeline. 2nd, we recently expanded our existing manufacturing partnership with Sarepta. Catherine will be the Sarepta primary commercial for its leading gene therapy candidate for the treatment of Duchenne muscular dystrophy, Which has May 29 PDUFA date. The agreement was also created mechanisms for CATHERINE To support the multiple gene therapy candidates in the Sarepta pipeline for limb girdle muscular dystrophy. To meet increasing demand for maturing gene therapy pipelines from Sarepta and other customers, we are ramping up additional suites At our BWI campus later this year.

Speaker 2

Critical to our business in building strong partnership with our customers is our quality and regulatory Quality and compliance are central to everything we do. And our strong quality management system continues to be a differentiator for Cadarette with several strong recent regulatory inspection results. In addition to enhancing our strong quality performance, our management team and I Have a renewed focus on improving efficiency across the organization and free cash flow generation, As demonstrated by our recently executed restructuring activities. Tom will share additional details on these activities in a moment. I will also walk you through our fiscal 2023 guidance ranges, which are unchanged from our November call.

Speaker 2

On Slide 9, we cover our recent progress in ESG areas. We have a strong commitment to And corporate responsibility at CABRENT. We will soon publish our fiscal 2022 corporate responsibility reports, which shows our continued progress in this area. We have developed our CR strategy to align to our patient first culture, Enhancing our inclusive culture, we drive our commitment to operational and quality excellence. Our CR strategy is focused on 3 Main pillars, people, environment and communities, each of which is informed by our employees, Communities, customer, investors and other key stakeholders, we put patients and people first, Invest in, ensure respect for our employees and promote responsible supply chain.

Speaker 2

This progress includes completion of a 3rd party human rights assessment as part of our responsible supply chain initiative, A sizable increase in diversity in our global leadership teams and extensive adoption of our employee resource group at our sites. For the environment, we are heavily focused on reducing our greenhouse gas emissions, waste and water use, as you can see by the targets and initiative on the slide. Finally, we give back to our communities by investing our time, talents and resources in serving patients. I'm proud of the increasing contribution that To close, we are uniquely positioned to leverage our cutting edge technologies to advance healthcare innovation on behalf of our customers and their patients, while powering the next generation of medicine. We have also created many opportunities for our business through our investment so that we may achieve long term attractive growth.

Speaker 2

With the assets we have in place, we are focused on executing our strategy to optimize our Best in class CDMO Ecosystem. We are maximizing asset utilization And free cash flow generation to enhance value for our customers, patients and shareholders. With that, I will turn the call over to Tom.

Speaker 1

Thanks, Alessandra. Before commenting on our segment performance, Let me provide you with some additional details related to our recent restructuring activities and other cost savings measures. Our restructuring effort, which was in part driven by our desire to align our organization to our business following the peak surge in COVID related activity, Reduced our cost structure in both operations and at the corporate level and consolidated facilities within our Biologics segment to optimize our infrastructure. Under the restructuring plan, we reduced our headcount by approximately 700 employees And expect to incur cumulative employee charges between $14,000,000 $20,000,000 As a result of our restructuring plans, We expect to deliver annualized run rate savings in the range of $75,000,000 to $85,000,000 over calendar 2023, With approximately half of the savings to be realized in the second half of our fiscal 'twenty three. In addition, We expect to generate savings from other cost efficiency and procurement programs above and beyond the reduction of approximately 700 staff That are expected to generate additional annualized savings of tens of 1,000,000 of dollars.

Speaker 1

Now let's discuss our segment performance where commentary around Segment growth will be in constant currency. As shown on Slide 10, Q2 net revenue in our Biologics segment of $580,000,000 decreased 7% compared to the Q2 of 2022. The decline is primarily driven by lower year on year COVID related demand. Q2 results included $54,000,000 from the vaccine take or pay settlement disclosed last quarter. The decline in COVID revenue was partially offset by growth across our non COVID programs with gene therapy being the strongest growth contributor.

Speaker 1

Total non COVID revenue growth for the Biologics segment was more than 10%, down from Q1. The non COVID revenue growth rate in Biologics is to return to the higher levels of growth we saw in the Q1, driven by increased demand in our gene therapy offering, easier comparisons in Brussels And uptake in demand for several drug product programs. The segment's EBITDA margin of 31.3% Was slightly higher than the 31.1 percent reported in the Q2 of fiscal 2022. Year over year margin expansion is mainly attributable for the vaccine take or pay settlement that we discussed during our Q1 call. As shown on Slide 11, Our Pharma and Consumer Health segment generated net revenue of $570,000,000 an increase of 3% Compared to the Q2 of fiscal 2022, with segment EBITDA down 3% over the same period last fiscal year.

Speaker 1

The segment's revenue growth was primarily driven by the recently acquired metrics business, which contributed 3 percentage points to the segment's top line And 4 percentage points to the bottom line. There were a number of moving pieces that drove organic PCH results in the quarter. First, As you can see on the revenue stream chart, our Development Services and Clinical Supply Services showed strong growth, but that was offset by a decline in our manufacturing And commercial supply revenue. Within the commercial stream, growth in over the counter cold and cough products were offset By a decline in prescription products and lower consumer spend for nutritional supplements such as gummies and other premium formats. The segment's EBITDA margin of 23.7 percent was lower by roughly 170 basis points Year over year from the 25.4 percent recorded in the Q2 of fiscal 2022.

Speaker 1

Year over year margin decline was a result of Cost inflation and unfavorable product mix across the network. We expect the PCH segment organic growth rate modestly increased in the back half of the year, particularly in the Q4 due to continued demand for clinical supply services And increased volume for prescription products, most notably in our Zydus delivery platform. Moving to consolidated adjusted EBITDA on Slide 12. Our 2nd quarter adjusted EBITDA decreased 9% to $283,000,000 or 24.6 percent of net revenue. On a constant currency basis, our 2nd quarter adjusted EBITDA declined 6% compared to the Q2 of the prior year.

Speaker 1

As shown on Slide 13, Q2 adjusted net income was $122,000,000 Or $0.67 per diluted share compared to adjusted net income of $163,000,000 or $0.90 per diluted share in the 2nd quarter Slide 14 shows our debt related ratios and other capital allocation priorities. Catalent's net leverage ratio as of December 31, 2022 was 3.7 times, up from the 3.2 times As of September 30, 2022, due to draw downs on our revolving credit facility, the Fundamentrix acquisition, which closed October 3, 2022. Net leverage as of December 31, 2021 was 2.8 times and our long term net leverage Target ratio remains at 3.0 times. Our combined balance of cash, cash equivalents and marketable securities As of December 31, 2022, it was $470,000,000 an increase of $125,000,000 from September 30, 2022. Although our free cash flow generation is improving, there's still work to do and this remains a significant focus of the management team.

Speaker 1

For the Q2, we were pleased to generate free cash flow of approximately $45,000,000 making the first time in several quarters that we generated positive free cash flow. This was a result of more disciplined CapEx spending as previously discussed, a strong quarter of AR collections At a rise in contract liabilities due to upfront payments from several customers, we continue to expect our fiscal 2023 CapEx As a percentage of revenue to be between 10% 11%. Free cash flow was again negatively impacted by our strategic decision to maintain Increased inventory levels, which we do not expect to change in the short term due to our concerns about the stabilization Of the global supply chain and our commitments to our customers to deliver reliable supply. Note that Approximately 15% of our inventory includes work in process, with the remainder being raw materials and supplies. As a reminder, we do not include our customers' finished goods in our inventory balance.

Speaker 1

I've noted in the past, contract assets are generated as revenue is recorded based on percentage of completion versus entirely on back release as it is for typical commercial programs. As of December 31, 2022, our contract asset balance was $513,000,000 a Sequential increase of $52,000,000 This increase was primarily driven by gene therapy programs In the development stage for which the cash conversion cycle is longer given duration of the manufacturing and release testing process, which can take multiple quarters from start to finish. We have a number of internal initiatives in place to optimize the manufacturing cycle time. In addition, improvement of our contract terms is a potential lever That could reduce our cash conversion cycle and contract asset balance. Once the batch Subject to contract asset treatment is released to the customer and the invoice is sent to the customer and the related balance moves from contract assets to accounts receivable.

Speaker 1

As you will read in our 10 Q file today, we have 2 strategic customers that collectively represent approximately 35% of our aggregate net trade receivables and current contract asset values in the Q2. Separately and unrelated to our balance sheet, During the Q2, we had 2 customers that each accounted for more than 10% of net revenue. The majority of revenue from these customers were derived from COVID programs. Now we turn to our financial outlook for fiscal 2023 as outlined on Slide 15. We are reiterating our guidance ranges for the full year.

Speaker 1

However, I would like to highlight some of the changes in the assumptions that underpin our projected full year results. 1st, As mentioned earlier on the call, our COVID business is tracking ahead of our expectations with full year revenue now expected to be above $600,000,000 compared to our previous estimate of approximately $550,000,000 Based on current visibility, We expect Q3 to have a minimal COVID contribution and be our lightest COVID quarter by far in fiscal 'twenty three. However, looking to Q4, we expect revenue to sequentially increase based on customer demand related to the fall booster season. 2nd, as consumer discretionary spend challenges continue, our projections for consumer health products, including gummies, Have been negatively impacted but are now anticipated to be down when compared to prior year levels. 3rd, We continue to see increased strength in gene therapy with a significant program further ramping late in our Q3, which we expect to lead to a notable step up in Q4 revenue and earnings.

Speaker 1

4th, our non COVID business outlook remains strong With the second half of the year expected to be in line with the growth we saw in the Q1, which was more than 20% on an organic constant currency basis. For the full year, non COVID growth is expected to be in the high teens. 5th, from a quarterly perspective, we expect Q3 revenue to be roughly in line with the reported Q2 results. However, as Q2 included the $54,000,000 take or pay agreement, We project margins to be sequentially down from Q2 to Q3, then expanding as we get into the 4th quarter. Finally, the U.

Speaker 1

S. Dollar has weakened since our last report, resulting in a modest FX tailwind when compared to our November assumptions. Operator, I would now like to open the call to questions.

Operator

Thank Please limit yourself to one question and one follow-up and then please return to the queue if you have any further questions. Our first question today comes from Jacob Johnson with Stephens. Please go ahead, Jacob.

Speaker 3

Hey, good morning. Thanks for taking the questions. Maybe for Tom, following up on those last comments around the guidance. The updated guidance assumes kind of less of an FX headwind, slightly higher COVID revenue. That would seem to imply maybe you're tempering slightly your organic ex COVID growth versus prior expectations, maybe some of that's related to the 2Q actual, but Any areas where you build in some conservatism there?

Speaker 3

And then still a fairly wide range for the guidance for this year, just any

Speaker 1

Look, I would say, we did see, as we mentioned on the call, non COVID organic growth in the first half Of the fiscal year at about 12%. It was down in the Q2 in comparison to where we saw in Q1 levels. However, As we get into the second half of the year, we have line of sight, which is very typical at this point in time to have strong visibility to just the remaining 5 or 6 months that we have in the fiscal year from those volumes, so expecting to see non COVID growth In the second half, more in line with what we saw in the first half, again, in that 20% range, that will bring our full year non COVID related Growth to be in the mid teens as I mentioned on the call. I think we continue to be Very bullish on the demand profile we see around gene therapy programs as well as on the drug product side of the business. Those would be the main contributors that we would see To the change in organic non COVID related growth in the second half of the year, and we were Able to still hold our guidance range and pull back around the assumptions on the PCH side of the business, whereas we mentioned, we continue to see some pressures, Particularly when it comes to discretionary spend on the gummies, and I would say just nutraceutical products Across both Softgel and Combis in the second half of the year, you did mention FX that is, I would say, a modest tailwind for us here.

Speaker 1

But Given where we are in the year and only the modest weakening of the dollar we saw in comparison to the euro and GDP, not a significant uplift there. I would say, as you think about the range that we have out there for the full year guide, I think it really comes down to execution in terms of where we land within the range. As I said, at this point in time, we typically do have very strong visibility So the demand profile across the business, and it comes down to execution across our network. And we certainly, I would say, built in So natural hedge just based on the normal execution related hiccups you can see in this business when you operate 55 sites across the globe.

Speaker 3

Got it. That's helpful. And then just my follow-up For Alessandro, just on the agreement with Moderna, first congratulations and it's good to see. Can you just talk about This relationship kind of beyond FY 2023 as we investors think about kind of the endemic COVID revenue opportunity, but also the non COVID work You could do with them perhaps with RSV and Fluent and COVID, all of these things are kind of blurring together, but just kind of any thoughts about that

Speaker 2

Sure. Look, first of all, I would say that our relationship with Modelba, it goes back many, many years. So we started to work with them when they were at the very beginning of the journey in 2015, twenty So we are very, very pleased how this relationship has grown and continues to grow into the future. I believe that with regards of the We are keeping our network to be in the best position to serve what is going to be a seasonal product going forward, So that on one hand we can search capacity across our network in multiple sites and at the same time Maintain a level of efficiency and productivity, which is important to us, right? And this is the best way to do it when it comes to seasonal demand.

Speaker 2

On the other hand, very, very excited about participating to these promising new platforms. We continue to support them both on the clinical side, but also preparing across So we are very excited about this relationship. We've always been In partnership with them and we are very pleased that this relationship will continue to grow as in the next few years.

Speaker 3

Got it. Thanks for taking the questions.

Operator

Our next question comes from Luke Sergott of Barclays. Please go ahead, Luke.

Speaker 4

Hi, this is Salem on for Luke.

Speaker 2

Just a

Speaker 4

couple of questions here. With a couple of quarters left in the fiscal year, what gets You guys to the low to high end of the EBITDA guidance range. Does Sarepta factor in there with their approval? We can just start off there.

Speaker 1

Sure. So obviously, we did mention And the PDUFA date being in late May, I would say very little downside risk associated with Sarepta outside of just normal execution Here, just given the fact that at this point in time, we really do have very strong visibility, as I mentioned earlier, So the volume related to that program and quite frankly related to many of the larger development and commercial programs that we have across the network. As I said, We continue to manage the business to a higher set of financial targets internally as we commit to that we commit to externally, which is very standard. As I think about the range of our guidance for next year, I think execution really drives where in that range do we land Versus any material changes in demand, just based again on where we are in the fiscal year and the amount of visibility we have around the demand profile Across both, especially across our Biologics business, but I would say, even across our clinical supply and pharma side Of our PPD or our PCH segment, the one area where I would say we have a little more variability, but again Have a relatively reduced outlook related to the consumer health side of our TCH business is certainly already factored in To the guidance as well.

Speaker 4

Thanks. That's helpful. And then on a follow-up, So the top line guide implies a bit of a step down. What got materially worse? And is that kind of split between PCH and biologics?

Speaker 4

And that also implies a 4Q step up Outside of historical norms, is that just from COVID? Any color around that would be helpful. Thank you.

Speaker 1

Sure. So we did highlight in our prepared remarks that where we do see a change in outlook is primarily driven on the PCH side of the business. And I would say The consumer health part of that business, really the area where we have derisked. I would say from a COVID standpoint, there certainly is a step up here in our Q4. As we mentioned, we have orders and visibility to a booster season in the fall With demand ramping up across multiple formats for a major strategic customer in that 4th quarter.

Speaker 1

So given the fact that we do expect to see minimum COVID revenue in our Q3 based on what we have visibility to, But significant demand in our Q4, we wanted to ensure that, that point was communicated to you all. So again, I would say TCH continues to be the area where we have seen the most I'll pull back and again on the consumer health side of that business.

Speaker 5

Awesome. That's helpful. Thank you.

Operator

Our next question comes from Dave Windley with Jefferies. Please go ahead, Dave.

Speaker 6

Hi, thanks. Good morning. Thanks for taking my questions. So, Tom, I wanted So try to focus a little bit on gene therapy and some of your commentary around the contract asset And the conversion of that, so if we presume that Sarepta gets good news and gets approved and you continue there, You say like you'll move the contract asset into build receivable. And then I guess From a commercial product standpoint, it would then become a batch revenue a batch delivery revenue recognition Model, I guess I'm trying to understand at the point at which that gets approved and you've been recognizing revenue in the contract asset, Do you then have a period where there's not revenue recognition until you get the next batch done and deliver that Because it's now an approved product.

Speaker 6

Can you walk us through that a little bit?

Speaker 1

Yes, Dave, it's a great question and one that we continue to wrestle with and work through internally here. I would Say there is various different ways that we can address in the event that we do see the Sarepta product essentially moving To commercial, the scenario that you laid out, which would be a movement from Percent completion as it's done on the development cycle to batch release upon commercialization is certainly one of those alternatives. There are other alternatives as well that would align to U. S. GAAP and ASC 606 guidance around revenue recognition, And we are pursuing those and looking at those with our auditor in conjunction with our auditor to ensure that we have The best possible scenario as outlined, in the situation in which you highlighted, if we were to Move to batch release being driving the recognition and the cycle time remains as long as it is from that production cycle, It wouldn't relate it would create a period of an air pocket, as you mentioned, from a revenue standpoint.

Speaker 1

And I think that's A piece that we essentially need to continue to look at. So as we know more around this and come to determination, 1, whether or not that Commercial approval is granted in that late May time period, again, being outside of our control, obviously, We'll communicate more to The Street around this. I would say regardless of what happens on May 29, The impact to us in fiscal 2023 is minimal, if at all, right, because what we will have at that point in time is The majority of revenue that we would be recognizing in that June time period being batches that are essentially already in flight That have essentially kicked off while the product was still considered a development product. So many moving pieces around this, Dave. I think you're asking the right questions.

Speaker 1

These are the The types of things we're looking at internally, and when we come to a determination on exactly, what that revenue recognition profile is going to look like for this particular product, Given the binary event associated with the approval, we will ensure that that's properly communicated, so that you all understand how to model it.

Speaker 6

Appreciate that. Thank you. My follow-up question, Alessandro, is for you. You mentioned in your prepared remarks Some recent successful regulatory reviews. I was going to ask or give you the opportunity to maybe elaborate on that.

Speaker 6

Going back a little bit further, you've obviously had some fairly high profile 483s that probably caused some Thanks, with management and trying to address those and energy and so forth. And so in the context of those things, I guess, I wanted to understand what you emphasize Catalent's quality. I wanted to understand Are your aspirations to eliminate these 483s or deal with them best you can when they happen? I'm Just wanting to understand where the aspirations are on the track record relative to regulatory review. Thank you.

Speaker 2

Sure. Look, this is a great question, and thanks for asking it. So look, first of all, I would say, as you said, poultry trees are Not uncommon in our industry, especially in some type of manufacturing operations. Surely, Sterile operations are the one that see these to happen more frequently. Just to be clear, We don't plan for 483s.

Speaker 2

We work very hard across our quality management system with our leadership, with our people, with our operational excellence, Expectations to avoid this volatility to the extent is possible. However, it's these are public information. You see that There is a share of those inspections, which will result in 480 degrees. This is true for all the players into the industry. And it's as important as try to prevent them, but even more important, how you respond to those observations In a thorough, extensive and holistic way committing to corrective actions.

Speaker 2

And some of those corrective actions actually, most of them yields to an improved operation on the Two corporation on the other end of them. So that's one part of the answer. The other part of the answer, which I want to stress is that as we signaled many times, the Cadavent receives regular inspections All the time. Now in these couple of cases happened to be, as you said, more visible, but there are inspections all the time. And We are pretty pleased with our track record of inspections, both from share and ratio of the ones Resulting in 4803s, but also looking at the number of observations that are normally in those 4803s.

Speaker 2

So look, I know it's been an element of noise In the last few months, but given the outcome of those inspections you're referring to, plus the ongoing track record on the further inspections We feel pretty confident about our quality management system and our operational expense.

Speaker 6

That's helpful. Thank you.

Operator

The next question comes from Max Smock of William Blair. Please go ahead, Max.

Speaker 7

Hi. Thanks for taking our questions. I just wanted to touch on Funding Dynamics, I know last quarter you pointed to some cash conscious decision making from customers on the biologics side. Just curious if your conversations really have changed here at all given some of the positive Developments in the market and what are customers telling you about their conviction and their ability to go out and raise funds? And how does that compare to when we spoke this time or at the end of last year?

Speaker 2

Yes, sure. Look, thanks for the question. I believe, look, we need to separate it out in our consideration relative considerations and absolute I will tell you that in absolute terms, our market could be continue to be a very exciting market. Our share in this market continues to be One of the leading shares into the market that we continue to see very nice wins across the board of our offerings. So some of the considerations sometimes are in relative In terms of what was, what could have been, but in general terms, we are very, very happy about the market that we're operating in.

Speaker 2

The funding has been surely reducing. But when you look at The growth in our core business, our non COVID business, you're still seeing the business growing above market and to be honest, In the mid teens. And when you look at the Biologics specifically, even more exciting than that. So I would tell you, The market did correct a little bit, but still supporting a very exciting growth perspective for the future.

Speaker 7

That's good to hear. Thank you. And then just a quick follow-up for me around the Brussels facility. I know last fiscal year 2022 has closed down Just wondering if there's any way, any detail you can provide that helps us think about the margin tailwind here in fiscal 2023 from that Doctor. Bean online for the full year?

Speaker 7

Thank you.

Speaker 2

Yes. This is Brussels is

Speaker 1

a relatively small facility for us overall, but it's certainly, as I mentioned in my prepared remarks, In my prepared remarks, Matt, Max provides a little bit of a tailwind for us here, both from a revenue and a margin standpoint. As you mentioned, The site was taken offline in the second half of the fiscal year, so it is up against a relatively easy comp. But again, Brussels, Not a significant sight in terms of size from a revenue and profitability contribution for the company. Thanks.

Operator

Our next question comes from Paul Knight with KeyBanc. Please go ahead, Paul.

Speaker 6

Thanks, Alessandro and Tom and Paul. On the inventory discussion Earlier, are you finding that you can effectively destock now because of better supply chain conditions as well as Normalized customer demand?

Speaker 1

So I would say, Paul, we're seeing pockets of improvement. And again, we order Many different components and inputs for the various different types of products that we manufacture across our Biologics and PCH segments. I would There are areas of improvement, but there are certainly areas, especially on the PCA side of the business, Where we do continue to see some challenges from a supply chain standpoint that factored into our decision to continue to remain, I would say slightly elevated or elevated from an inventory standpoint. We were very specific to say that in the short term, This is going to be a tailwind opportunity for us when we have the comfort in being able to pull back on some of those higher levels of inventory, more likely to be a meaningful contributor The free cash flow in 2024, then I would say it is in 2023, although as we get into the back half of the year, we should see some modest improvement.

Speaker 2

Yes. Look, cutting short the answer, I believe that our level of comfort in destocking is higher in biomanufacturing than it is in small molecule. Given that the geographical source of these components, there is a little bit of a difference there.

Speaker 6

And then last question would be, you had mentioned in the beginning, Alessandro, the fill finish market, very good. And what are the dynamics creating these positive trends until finished? And I believe you're, what, top 1, 2, 3 in the world.

Speaker 2

Yes, sure. Look, number 1, we are very, very excited about our position In that market being one of the top players and surely one of the players that before others moved Into the state of the art technology, which is fill and finish underwriter. So that is really creating a competitive advantage for Qatar and to surely Continue to increase our share of the most attractive molecules from a CDMO standpoint. I believe that the positive trends are Twofold. Number 1, the pipeline itself is landing naturally towards fill and finish because you're looking at Assets in the pipeline, which are you cannot put in oral solid.

Speaker 2

So they are lending themselves more to fill and finish. And because there is a tendency To self administration, they lend themselves more towards prefilled syringes and auto injector. So That's one dynamic. So the pipeline when you analyze the pipeline, that's one dynamic. The other one is related to the increased movement of Critical products to underwrite radar technology.

Speaker 2

Clearly, the regulatory environment is an evolving environment. And so the expectations when it comes to SterileAssurance are really suggesting that going forward, the preferred By far, the preferred way of doing this is going to be under regulated. And for that, we are very well positioned with great assets already online And many more coming online in the next 18 months.

Speaker 8

Thank you.

Operator

Our next question comes from Tasia Savant with Morgan Stanley. Please go ahead.

Speaker 8

Hey guys, good morning. Tom, just a quick clean up on the margin trajectory here into the back half of the year. It sounds like based on your comments, you are expecting a pretty significant sequential step up in EBITDA dollars into the Q4 here. Is the right way to think about it essentially just the fact that you'll get over $150,000,000 essentially in COVID revenue in the Q4 and very little in the Q3? And ex COVID, can you just point us to sort of how you see that margin line evolving between the 3rd Q4 here?

Speaker 1

Sure. Tejas, I think your point is spot on. Certainly, we will see COVID in that range as you mentioned of $50,000,000 plus after a minimal contribution in Q3, that will certainly drive part of the margin story. But I was also very Specific in discussing the ramp up of a major gene therapy program, as we've talked about Being late in the Q3 here and having a full quarter of ramped contribution to us From a Q4 standpoint and given the operating leverage you can see from the utilization of assets there as well as the just normal attractive margins that you see Related to the gene therapy side of our business in biologics overall, you can see that step up. I would say from a non COVID Standpoint, if you were to strip out COVID out of all of our quarters, you would see a seasonality profile that very closely mirrors what our historical seasonality Has been pre COVID, which is that step up in the Q2 versus Q1 levels, then a step up to Q3, but then ultimately a significant ramp In Q4, ahead of the summer months and some of the, I would say, downtime that we see across our customers and Across our customers' networks as well as our own network, related to normal maintenance related activities that you see in the summer months there and taking of sites offline.

Speaker 1

So that's certainly all contributing to that significant step up we see in the Q4.

Speaker 8

Got it. That's super helpful. And then one in the a 2 parter on the top line actually perhaps for Alessandro here. So first on Botera, how confident are you that the asset can return to those sort of 20% growth levels that you talked about at the time of the acquisition? Or do you think of that perhaps as being partially driven by uptake during the pandemic and perhaps now normalizes to a slightly lower level?

Speaker 8

And then the second part of my question here is on the biologics front. As you think about potentially a 400,000,000 to 450,000,000 Step down into fiscal 2024 from COVID. You'll also be lapping some of these preapproval sort of like Inventory builds for Sarepta, etcetera. How do you think about framing the growth for the Biologics segment as it sort of anniversaries those dynamics?

Speaker 2

So look, for the better one, this is a market we are looking at very, very closely. Clearly, the overall BMS market has decreased in fact in 2022. So we are really Trying to get together with our customers, with our biggest customers to try and understand a little bit more. The fundamental dynamics About this market have not changed, meaning that there is a tendency of people to go to Self or preventative medicine, so to speak, however you want to call it, and Surigame is our preferred dosage form. So the fundamentals are there.

Speaker 2

Clearly, the market is going through correction both because of the end market demand, which has contracted in 2022 And because of destocking therefore cash considerations, so we have seen should be clearly a disappointing trend In the last few quarters, we expect this to continue through our fiscal year. But at the moment, there are signals At some point in the later part of this calendar year, the correction of inventory could go out. We will be back serving the end market demand. With regards of the 2024, it's a little bit too early to have any consideration about it. So as we're going to continue To walk through the fiscal year, we're going to keep you updated about these, but I would say that we continue to be excited about the partnerships we are with the key customers going into the future.

Speaker 8

Got it. Thank you.

Operator

Our next question comes from Sean Dodge of RBC Capital Markets. Please go ahead.

Speaker 5

Yes. Thanks. Good morning. Tom, you mentioned the $75,000,000 to $85,000,000 of headcount related savings, but then said there could be some additional Beyond that, that could be in the tens of 1,000,000 of dollars from other efficiency and I think you said procurement initiatives. Is there any more The kind of detail you can share on the time lines for the latter, when do you expect the benefits from the other efficiency and procurement initiatives begin to accrue?

Speaker 1

Yes. I think it's the same timing of what we're seeing from a headcount standpoint. The headcount initiatives said we were actioning by At the end of the calendar year to be able to see the full benefit in the second half of fiscal year and the full annualized savings over the calendar 2023. I would say it's been the same for some of the non employee related initiatives and procurement initiatives that we've had underway. We did highlight the tens of 1,000,000,000, but I would say there will be a partial contribution in fiscal 2023, assumed and then The carryover of that being into the first half of fiscal twenty twenty four.

Speaker 1

So again, looking at that from the same lens on a calendar year basis.

Speaker 5

Okay. And just to clarify, you said about half of that annual run rate you expect to capture in the second half of your fiscal twenty twenty It looks like some of these headcount reductions took place after the beginning of Q2. Was there any amount Of the savings reflected in this most recent your fiscal Q2?

Speaker 1

No. There was no material impact from these initiatives In the Q2, they were actioned, I would say, late in the Q2. Some of the cash Costs associated with those exits were contemplated in the second quarter. Some of that may perhaps carry into Q3 as well, you'll see that as an add back to our adjusted EBITDA through the restructuring line item, but the real Pact from a savings standpoint will be realized in the second half of the fiscal year and then again carry into first half of twenty twenty four.

Speaker 5

Okay. That's very helpful. Thank you.

Operator

The next question comes from Justin Powers of Deutsche Bank. Please go ahead.

Speaker 9

Good morning, everyone. So just based on the comments on PCHS coming in a little lighter, It would imply that biologics is coming in stronger. Can you just help us bridge The non COVID growth in the second half of the year and some of the key drivers there?

Speaker 1

Yes. Justin, we really didn't highlight any material change to the non COVID biologics growth. I would say it's very similar to what was assumed and what we saw as part of our last guidance. The real change that offsets the call, the pullback on the PCH side is the over performance on the COVID portfolio. As we mentioned, COVID was originally assumed to be approximately $550,000,000 of revenue for us in our prior guidance.

Speaker 1

Based on the orders that we have now related to our Q4, as our customer ramps up for the fall booster season, We now expect COVID revenue to be more than $600,000,000 in the year. So it's really the COVID revenue that's offsetting the pullback on PCH.

Speaker 9

Okay, got it. And then just You talked about tech transfers over the last couple of quarters. Have those started or are they contributing yet? And then just with the commentary on the additional suites at Harman's, are they When are those coming online? Is that a fiscal year event or is that a calendar year event?

Speaker 9

Just a little more clarity there would be helpful.

Speaker 2

Yes. Look, let me just start from the latter part of your question. So yes, additional suites are coming online as we speak As we have already shared, the level of utilization It's ramping it will be ramping up in the next few quarters, right? So I believe that in Q3, you're going to see a little bit of A balance impact because, yes, you're ramping up, but you also the utilization, but you're also ramping up the costs So, see, with diving and training the people that are required for these new suites. As we said, we remain Very, very optimistic around the gene therapy demand and viral vector manufacturing going forward, not only It's wrapped up across the spectrum of our clients.

Speaker 2

It's a pretty good space for us. With regards of the tech transfers, These successes continue to progress. Of course, there are several programs at the same time progressing. And I would say that we are pleased with the kind of program we're transferring in And surely, these programs will continue to contribute to our drug product growth into the future.

Speaker 9

Thank you. I'll jump back in queue.

Operator

Our next question comes from Derik de Bruin of Bank of America. Please go ahead Derik.

Speaker 10

Hey, good afternoon or good morning. Can we talk a little bit about the Sarepta contract? I'm just sort of curious, is that contemplated and Like the ramp up contemplated in your original fiscal 2023 guide? Or is what you're seeing now more incremental to what you originally expected?

Speaker 1

So related to Sarepta, Derek, this is playing out as we had anticipated for the fiscal year here. As I mentioned, the PDUFA date in late May, depending on where that lands, that doesn't have a material change For us, regardless of whether that's an approval or not in the current fiscal year and the outcome of that will have more of an impact for us on fiscal 2024. But I would say nothing materially different from what we had assumed based on the This has always been a program that obviously our customer, but we have been bullish on as well. So no real change in outlook there in terms of what The 23 impact is related to the announcement here.

Speaker 2

Yes. I just want to say that the partnership with Sarepta goes, it's a little bit wider than these only programs. So they have Some capacity that we dedicate to them into our Haarman's facility and they can allocate the different programs, both Clinical and preparation for commercial as they see their internal plans developing. So there is more than just DMD here.

Speaker 10

Got it. And I want to follow-up on, Tejas' question on

Speaker 2

the PCH business. I mean, it does look

Speaker 10

like that the when I look at third party research on the gummies Market, it looks like that's more like a 12%, 13% sort of like growth market from what I've been able to dig up. I mean, when you look at that 6% to 10% guide you put out The long term in the PCH, how critical is the gummy segment going back to the 20% range? Is it like Get to that number.

Speaker 2

So look, number 1, I would tell you that we never assume a business going forward to grow at the top end of any Just so we didn't assume in our story there the 20% assumption for sure, right. So We tend to be pretty conservative on these forecasts because as you know, things might change in these markets. So that's first consideration. The second consideration I will tell you in terms of the PCH story, there is much more to PCH just regarding The gamut, so when you look at the demand, we are seeing that was in my remarks around OXIELI's dosage form is just Exceptional demand. And I used the word exceptional not by chance or mistake.

Speaker 2

We are seeing a demand that is far exceeding capacity. So we are Building capacity as fast as we can. We're going to be opening soon on North America, not very soon, but sometimes in the next few quarters on North America Facility for Zydis, because we need an additional facility. We have installed recently last year, we have installed an additional line In Zadis, we are working on a number of operational excellence programs to debottleneck capacity there. But there are some Very, very visible products, which are growing very fast in the sizes format.

Speaker 2

So that is one area that is surely Contributing to the growth story of BCH. And let me remind you that's one of the most profitable business of the current Network should be over and above some other businesses, even considering Biologics. And with regards of The other parts of PCH look, clearly PCH especially in the pharmaceutical supply is very much dependent on the timing of some approvals And the timing of some of and the launch of some of these approvals. So it tends to be a little bit lumpy at times, but when you look at In the 3 to 5 years horizon, that is a business that has a very exciting pipeline to support growth.

Speaker 8

Thank you.

Operator

Our next question comes from John Sauerbeer of UBS. Please go ahead, John.

Speaker 11

Thanks for taking the question. Just with the increase in the COVID guidance and that greater than $600,000,000 in strength In 4Q, anyone you could provide some color on what the endemic COVID run rate looks here even beyond fiscal 2023 and what should we how should we think about this long term?

Speaker 1

Well, I think it's a difficult question to answer, John. So we're going to hold back from giving any more Specifics around what fiscal 2024 could look like here, but I think the relationship and the continued relationship and strategic partnership that's been Extended as well as expanded with Moderna, I think speaks to The future that we believe exists for COVID and vaccine related revenue in the future for us, but again, we're going to fall short of giving any Specific run rate as we exit this year in terms of what that could look like for us in 2024?

Speaker 2

Again, I'm going to add one comment to this one. Look, the fact that we are bringing online more Assets into the network surely will contribute to the ability of running an endemic business with better productivity and profitability.

Speaker 11

Thanks. And if I could sneak in a follow-up. The company has previously stated, I think, working on greater than 150 Supported gene therapy product, any update just on the number of programs here and just how we think about with the additional capacity coming online in that Non surrender opportunity with some of these programs? Thanks.

Speaker 1

Yes. I wouldn't say there's any change to that. We continue to work on about 100 50 development programs across that part of the business, that's what has justified further capacity expansions Within that space, and I would say not only we're pleased with the number of programs we work on, on the gene therapy side of business, but also the progression and maturity of those that continue to move from earlier phase to later phase and obviously the Sarepta relationship And program or programs is just one example of that. So again, feel very good about the growth prospects and opportunities in this business.

Operator

Our next question comes from Evan Stover with Baird. Please go ahead Evan.

Speaker 12

Just one for me because John asked one of mine. But this is a cleanup. Last quarter you said you had some efficiency initiatives that were in flight and in your last updated guidance. So I just wanted to be Perfectly clear that 75 to 85 efficiency actions that you kind of Noted today. Is that prior program or is that incremental addition An additional cost savings to your guide today?

Speaker 1

No, Evan, these were all originally contemplated. We felt the need to be able to provide some additional closure and meat on the bone, if you will, related to the cost savings initiatives. The 700 headcounts we've talked about were difficult for us to talk through at the time Of our last guidance because we weren't able we didn't execute on those, but now we've since executed on that through the end of the calendar year. So we'll see Half of that run rate savings in the current fiscal year with the remaining half to be carried into the first half. So you should look at that annualized number Across calendar 2023 versus our fiscal year, and I would say the further commentary around the tens of 1,000,000 of dollars related to other Cost savings initiatives, efficiencies and procurement programs were also contemplated as part of the original guide.

Speaker 12

Yes. As expected, I appreciate that clarification. That's it for me.

Speaker 2

Thanks, Adam.

Operator

Our final question comes from Jack Meehan of Nephron Research. Please go ahead, Jack.

Speaker 13

Thank you. Good morning. So I want to talk about core organic growth. It was over 20% last quarter. It was 4% this quarter.

Speaker 13

Can you frame for us the math on some of the moving parts that led to the quarterly slowdown? And then for 3Q, is the Reacceleration over 20% happening right now, just talk about your visibility at the end of that.

Speaker 1

Sure. So Jack, I think we've said in Alessandro's comments that one of the things we needed to do was prioritize A COVID related program related to the emergency use authorization of the pediatric COVID vaccine over Non COVID related revenue out of our Bloomington facility. I'm

Speaker 11

not going to be

Speaker 1

in a position to tell you what our non COVID growth would have been in the 2nd quarter, if we weren't prioritizing that program, but that certainly had a significant Impact and why we were only able to achieve 4% non COVID growth in Q2 and 12% non COVID growth in Q2 for the Biologics business. But it's not necessarily the same assets and lines that are being utilized, but Certainly, the same operations and quality folks that we have in terms of putting in the time and efforts around releasing of batches. So That certainly played into why we had a depressed non COVID related growth in the second quarter. So I think returning in the Q3 back to non COVID levels that we have seen through the Q1 of the year What I would consider to be normal course or a low bar based on what we've been able to show. And again, the uptick in COVID related revenue that we expect to see in the Q4 is really offsetting the pullback on the TCH side of the business where we continue to experience headwinds, particularly in Consumer Health.

Speaker 13

Got it. I wanted to try on the margin one more time. Just looking at the Q4, your guidance and the commentary, I think it implies 4Q EBITDA is about 40% of the full year. I look over the last 5 years, it's about 33%. So Just help us with the math.

Speaker 13

Again, I know there are some things that are really stepping up in the Q4. It's just much more pronounced than I think we've seen previously.

Speaker 1

Yes. I think your numbers are probably close. Maybe I'd say it's a little bit on the high side in terms of the Q4 contribution, but again, not materially Difry, I would say, 3 things I'd point to. 1, the COVID related revenue here is going to be sizable as we've already talked As we've already talked about, the ramp up on the gene therapy side of the business related to a major customer program that we've talked about here, new capacity that's going to be coming online In the Q3, it's going to be utilized. This is going to be by far the strongest gene therapy contribution we've ever seen in the Q4.

Speaker 1

So very difficult To compare that to historical years where we weren't seeing gene therapy contributions to the levels that we'll see here around the business, The area that I would say I would factor in and then just the normal level of seasonality that we see around the PCH side of the business around Q4 Heading into the summer shutdown periods is another item to take into consideration here. Lastly, I would say the Brussels dynamic for us in Prior year, if we're looking at this, it's certainly, I would say, a headwind that we had in So that natural lift up that we'll see here for the Q4, that was a business that was shut down or a facility that was shut down for us, that will be up and running here as well. So I think all of those things factor into the margin profile we expect to see in the Q4. And lastly, I would say I'd just reiterate That this was that the demand is there, right, the level of visibility that we have to volume here or demand For the second half of the year and even the Q4 is high, and it comes down to the levels of execution That we're able to deliver upon across our network sites.

Speaker 13

Thank you, Tom.

Operator

Those are all the questions we have for today. So I'll turn the call back to Alessandro for concluding remarks.

Speaker 2

Thank you, everyone, for taking the time to join our call and your continued support of CATHERINE.

Speaker 1

Thank you.

Operator

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

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Broadcom Q2 2023
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