Ricky Hopson
Interim Chief Financial Officer at Catalent
Thank you, Alessandro. Okay. Starting on Slide 6. Net revenue in the quarter was $1.04 billion, down 19% on a reported basis or a 17% decrease on a constant currency basis compared to the third quarter of fiscal 2022. When we exclude the impact of acquisitions and divestitures, organic revenue declined 19%, measured in constant currency.
Our third quarter adjusted EBITDA decreased 69% to $105 million or 10.1% of net revenue versus 26.6% in the prior year quarter. On a constant currency basis, our third quarter adjusted EBITDA declined 68% compared to the third quarter of the prior year. I will speak to the major drivers of these declines in the segment commentary.
Adjusted net income was negative $17 million or negative $0.09 per diluted share compared to adjusted net income of $188 million or $1.04 per diluted share in the third quarter a year ago. Reconciliations from net earnings, the nearest GAAP measure to each of adjusted EBITDA and adjusted net income are in the appendix to the slide deck. Excluded from adjusted net income is a goodwill impairment of $210 million on an after-tax basis in our Consumer Health business, which includes the Bettera business that we acquired in October 2021.
Now let's discuss our segment performance, where commentary around segment growth will be in constant currency. As shown on Slide 7, Q3 net revenue in our Biologics segment was $475 million. This was a decrease of 32% compared to the third quarter of 2022. The decline is primarily driven by significantly lower year-on-year COVID demand.
As previously disclosed, the third quarter of 2022 was the Company's strongest quarter for COVID revenue, while in the third quarter of this year, COVID revenue declined approximately 68% to $120 million. Included in the $120 million was an unusually high level of component sources, which carries a single-digit margin, as we finalized a one-time settlement for COVID-related raw materials totaling $35 million.
In February, we have forecasted that COVID revenues were expected to be more than $600 million in fiscal '23, an expectation we maintain. However, the quarterly phasing of this revenue is different than our comments suggested in February, where we expected Q4 to be higher than Q3.
In Q3, we recorded more COVID revenue than expected due to the resolution of certain extended take-or-pay and component sourcing arrangements. With our third quarter year-to-date COVID revenue of approximately $560 million, our Q4 COVID expectation is now substantially reduced.
Our long-term COVID take-or-pay agreements are now concluded and in fiscal '24, COVID volumes will be tied to more standard ordering arrangements based on rolling forecasts, including binding [Phonetic] periods, which are typical arrangements in our business. Finally, we continue to plan for a significant year-on-year reduction in COVID revenue in fiscal '24.
Non-COVID growth in Biologics in Q3 was approximately 11% year-on-year. Our core gene therapy business has been the strongest source of growth for Catalent year-to-date and grew double digits in Q3, but well below our expected growth for the reasons we outlined on the May 19th call.
I would also like to draw your attention to the movements in our Biologics' commercial and development revenue streams, where the classifications are driven by contractual language, which is not always aligned with the regulatory status of a given product. The large drop in development revenue had two primary drivers. First, the year-on-year decline in certain COVID revenue that has been designated as development revenue; and second, in the third quarter, in fiscal 2023, we started producing product under an updated gene therapy contract, which changed the product classification from development to commercial. In addition, in the third quarter of fiscal 2022, there was also a large COVID program designated as commercial that concluded that quarter.
Moving to EBITDA. The segment's EBITDA margin was 1.1% compared to the 31.1% recorded in the third quarter of fiscal 2022. Items that adversely impacted net revenue and segment EBITDA include productivity issues and higher-than-expected costs and accounting adjustments in Bloomington, productivity issues and higher-than-expected costs in Brussels, ERP implementation and unforeseen operational challenges that led to the under-absorption at BWI, and low levels of absorption and utilization across our cell therapy and plasmid assets, where optimistic planning drove [Phonetic] accelerated investments and the revenue is not being generated, as quickly as expected.
The accounting adjustments during the quarter were largely due to the reserves or write-offs of raw materials in Bloomington totaling approximately $55 million that we purchased at our own risk, as safety stock during the pandemic. This alone impacted segment margin by more than 1,100 basis points. The other accounting adjustments identified through the independent balance sheet review were all immaterial in nature and essentially netted out close to zero.
As shown on Slide 8, our Pharma and Consumer Health segment generated net revenue of $563 million, an increase of 1% compared to the third quarter of fiscal 2022. Segment EBITDA down 10% over the same period. The segment's revenue growth was primarily driven by the recently acquired Metrics business, which contributed four percentage points to the segment's top line and five percentage points to adjusted EBITDA.
The organic PCH business continued to see increased revenue in clinical supply services, whilst commercial revenues continued to face headwinds with the most notable driver being high-end nutritional supplements, including our gummy offerings, as soften consumer demand continued to create under-absorption. In addition, the segment also faced continued supply chain issues related to a top product, which is in the process of being resolved and lower demand related to some other high-margin pharmaceutical products.
The segment's EBITDA margin of 22.3% was lower by roughly 290 basis points year-over-year from the 25.2% recorded in the third quarter of fiscal 2022. Year-over-year margin decline was a result of unfavorable product mix across the segment and cost inflation.
Segment [Phonetic] 9 shows our debt-related ratios and capital allocation priorities. Our debt load, which we now intend to reduce more aggressively remains well structured and permits good flexibility. Our nearest maturity is not until 2027. Our most rigorous debt covenant is the ratio of first lien debt divided by the last 12 months of adjusted EBITDA with the threshold being 6.5 times. This compares to our March 31st actual level of 2.2 times.
Catalent's net leverage ratio, as of March 31st, 2023, was 4.9 times, an increase when compared to December 31st, 2022, at 3.8 times, which was driven by the lower year-on-year adjusted EBITDA in Q3. Because the EBITDA portion of the net leverage ratio is calculated on an LTM basis, we expect our net leverage ratio to continue to move higher in the coming quarters, peaking in Q2 of fiscal '24 and then improving in the second half of the fiscal year. This is largely driven by a comparison that includes the $440 million of COVID revenue and related EBITDA generated in the first half fiscal 2023.
Our combined cash -- our combined balance of cash, cash equivalents and marketable securities, as of March 31st, 2023, was $252 million, a decrease of $218 million from December 31st, 2022, primarily driven by negative free cash flow in the quarter, as well as a $50 million revolver repayment. Note that our cash balance on March 31st was approximately $300 million, even after accounting for another $10 million repayment on the revolver.
As discussed on May 19th, but worth repeated, my top priority is for positive cash generation and allocation of capital, which will support our efforts back towards our net leverage target of 3.0 times include greater utilization of our asset base, completion of essential in-flight capex projects that we believe will generate positive returns in the near to medium term, activities that will reduce our cost base and contract negotiations to reduce our cash conversion cycle.
I would now like to discuss our contract assets, which as of March 31st, '23, had a balance of $505 million, a sequential decrease of $8 million and an increase of $64 million from June 30th, 2022, our prior fiscal year end. This increase was primarily driven by gene therapy programs, for which the cash conversion cycle is longer given the duration of manufacturing and release testing process, which can take multiple quarters from start to finish.
Also related to contract assets, the revenue accounting treatment for complex products with long production cycle times will continue to be recognized on a percentage of completion basis when contract terminology determines our work related to commercial activity. Note, that as previously mentioned on this call, in the third quarter, there was a change in classification from development to commercial of a large gene therapy program.
With the support of independent third-party experts, we also conducted a comprehensive review of the related contract and determined that the arrangement requires an analysis under GAAP guidance for both leases and revenue within our financial reporting. Based upon this analysis, we concluded the provisions of ASC 842 leases will apply to a portion of this arrangement, and accordingly, the accounting was finalized. This change in accounting has no effect on our fiscal '23 guidance nor do we expect this change to have a material impact on our fiscal '24 results.
At March 31st, we had one strategic customer, a majority of whose business relates to our gene therapy platform that represented 23% of our $1.56 billion in aggregate net trade receivables and contract assets. Unrelated to our balance sheet, but to provide further transparency on our customer concentration, we have two customers in the Biologics segment that each represented 11% of consolidated net revenue during the three months ended March 31st, 2023. These same two customers, one of which is primarily a drug product customer and the other of which is primarily a gene therapy customer represented 9% and 5% of net revenue, respectively, in the three months ended March 31st, 2022.
Finally, we continue to expect our fiscal '23 capex to be approximately $550 million. When considering the billions of dollars of capex investments we have already made in the business, in fiscal '24, we expect to be able to reduce our capex to only the most critical projects, leading to substantially lower level of spend.
Now please turn to our financial outlook for fiscal 2023, as outlined on Slide 10. As Alessandro mentioned, we are adjusting our guidance primarily to account the lower sequential growth assumptions in our Pharma and Consumer Health segment. As you know, my highest priorities in my first month, as interim CFO were related to the challenges in our Biologics segment and overseeing the substantial work needed to report our third quarter results. Now that we have spent more time on PCH, we are in a better position to align our guidance with our performance.
We now expect fiscal '23 net revenue in a range of $4.225 billion up to $4.325 billion. Note that we previously expected PCH to be flat organically for the full year, but now expect organic revenue to decline in the lower single digits.
We now expect adjusted EBITDA in a range from $700 million up to $750 million. We now expect adjusted net income in a range from $169 million up to $210 million. Our assumed tax rate remains 27% to 29% for the full year.
Provided some additional clarity on our segment performance in the second half, we expect Q4 margin in our PCH segment to improve against the margin levels reported in the third quarter and our Biologics segment margin to remain depressed in the fourth quarter, as we continue to manage through the operational healing process and ramp up production through the back half of Q4 into the first quarter of fiscal '24. We are working diligently for our fiscal '24 budgeting process and look forward to presenting fiscal '24 guidance during our August call.
Operator, this concludes our prepared remarks, and we would now like to open the call for questions.
