Matti Masanovich
Senior Vice President and Chief Financial Officer at Catalent
Thank you, Alessandro. I'm very happy to be part of the Catalent team, and contributing to the meaningful impact our company has on helping people live longer, healthier lives. In my first two months at Catalent, I've been deeply focused on bolstering our internal finance team and improving our financial processes to position Catalent for long-term success. I look forward to meeting many of our investors and analysts in the coming weeks.
Starting with the consolidated numbers on Slide 7. Net revenue in the quarter was $1.1 billion, down 17% both on a reported basis and on a constant currency basis compared to the prior fourth quarter. Mergers and acquisitions had minimal impact on our results.
Our fourth quarter adjusted EBITDA decreased 61% to $139 million or a margin of 13% versus a margin of 27.8% in the prior year quarter. On an organic constant currency basis, our fourth quarter adjusted EBITDA declined 65% compared to the fourth quarter of the prior year, primarily driven by a decline in COVID demand. I will speak further to the major drivers of these results in the segment commentary.
Adjusted net income was $16 million or $0.09 per diluted share compared to adjusted net income of $195 million or $1.08 per diluted share last year. Reconciliations from GAAP net earnings to each of adjusted EBITDA and adjusted net income are in the appendix of the slide deck.
Excluded from net income, are non-cash asset impairments totaling $85 million on an after-tax basis. These non-cash impairments couple several assets in both of our business segments. The largest non-cash impairment is related to the partially constructed Biologics development and manufacturing facility near Oxford, UK.
Now let's discuss our segment performance. Our commentary around our segment growth will be in constant currency. As shown on Slide 8, fourth quarter net revenue in our Biologics segment was $406 million, a decrease of $239 million or 37% compared to the prior fourth quarter. The decline is primarily driven by significantly lower year-on-year COVID demand. Fourth quarter COVID revenue declined approximately $180 million to approximately $65 million. Our COVID work is no longer focused on take-or-pay arrangements and is now tied to more standard ordering arrangements based on rolling forecasts with binding periods, which are typical arrangements in our business.
On a non-COVID basis, Biologics revenue in the fourth quarter declined 16% versus the fourth quarter of 2022. In the fourth quarter, our drug product and drug substance offerings, excluding COVID and cell and gene therapies, each grew double-digit year-on-year. However, with our core gene therapy business -- however, while our core gene therapy business was the strongest source of growth for Catalent in the first three quarters of fiscal '23, in the fourth quarter, gene therapy revenue was down over the prior fourth quarter. This was in line with our expectations and the result of production issues outlined on our third quarter earnings call in June.
As you can see on the bar chart, there were notable movements in our Biologics commercial and development revenue streams, where the classification of development versus commercial is driven by contractual language, which does not always align with the regular status -- regulatory status of a given product.
The large drop in development revenue in the fourth quarter has two primary drivers. First, year-on-year decline in COVID revenue that has been designated as development revenue; and second, a large gene therapy product whose revenue was treated as development revenue a year ago, and is now treated as commercial revenue.
When looking at the full year for Biologics, COVID-related revenue declined over 50% from $1.3 billion in fiscal '22 to approximately $625 million in fiscal '23. Non-COVID Biologics revenue increased by approximately 12% across the full year.
Moving to EBITDA. The Biologics segment fourth quarter EBITDA was down $206 million to a loss of $12 million. Margin was negative at 2.9% compared to the positive 30% recorded in the prior fourth quarter. The drop in EBITDA was primarily driven by the COVID declines and resulting underutilization, as well as underutilization at new modality facilities. We are working to align our costs in these areas to be in line with demand and expect margins to improve on a year-over-year basis, primarily in the second half of the fiscal year.
As shown on Slide 9, the Pharma and Consumer Health segment generated net revenue of $662 million, an increase of $19 million or 3% compared to the prior year fourth quarter, with segment EBITDA of $187 million, down $11 million or a 6% decline over the same period. The segment's revenue growth was primarily driven by the October 2022 acquisition of Metrics which contributed 4 points to the segment's topline growth and 5 points to the change in adjusted EBITDA.
On an organic basis, the segment declined 1% as growth in Clinical Supply Services was more than offset by continued supply chain challenges related to a top product and a decline in prescription product revenue. EBITDA margin of 28.2% was lower by 260 basis points year-over-year from the 30.8% recorded in the prior fourth quarter. The decline was primarily a result of lower organic volume, unfavorable product mix, and cost inflation.
Slide 10 discusses our debt, debt maturities, related ratios, and capex plans. Our debt load remains well structured and permits us good flexibility. Our nearest maturity is not until 2027. Our primary debt covenant is the ratio of net first lien debt over the trailing 12 months adjusted EBITDA. The covenant requires this ratio to remain below 6.5 times and at June 30th, the actual level was 2.8 times.
Catalent's overall net debt leverage ratio as of June 30, 2023, was 6.4 times, a sequential increase from the third quarter at 4.9 times, driven by the lower year-on-year LTM adjusted EBITDA, as measured at fiscal year-end. Because the EBITDA portion of the net debt leverage ratio is calculated on an LTM basis, we expect this ratio to move higher, ultimately peaking at the end of the second quarter, due to a significant decline in COVID revenue on a year-over-year basis, and then improving in the second half of the fiscal year back to current levels as our EBITDA improves. We expect to be free cash flow neutral in fiscal 2024.
Reducing our leverage is our top priority. This is being achieved by maximizing EBITDA through continued revenue growth, improved utilization, better productivity, and continued cost structure alignments. At the same time, we are focusing on a number of opportunities to deliver incremental free cash flow in 2024, above and beyond our current guidance.
These incremental opportunities include: first, working capital, which includes accounts receivable, inventory, and contract assets at June 30th was over $2 billion. We have a significant opportunity ahead of us to reduce working capital and drive free cash flow for the company. Our initial focus will be on reducing accounts -- the accounts receivable balance of over $900 million, reducing our inventory balance of over $700 million and reducing our contract asset balance of over $400 million. Our goal is to drive sustainable improvement in these categories, to deliver incremental free cash flow while simultaneously working to restore our historical EBITDA margin.
Second, we will ensure all capex spend is either aligned with our core values of patient first, quality, safety, and compliance or contributes to key strategic initiatives with shorter, more appropriate payback periods.
And finally, with our newly created Strategic and Operational Review Committee of the Board, we plan to continue to evaluate our strategy and portfolio. These activities will enhance cash generation balance with returning to a more normalized EBITDA margins should improve our overall net debt leverage. Our target for our overall net debt leverage remains less than 3 times.
Our combined balance of cash, cash equivalents, and marketable securities as of June 30, 2023, was $280 million, an increase of $78 million from March 31, 2023, before a $50 million partial pay down of our revolver that we were able to make in the quarter. The increase in cash was driven by strong cash collections in the quarter.
I would now like to discuss our contract assets which as of June 30, 2023, had a balance of $436 million, a sequential decrease of $69 million, and flat year-on-year. We are working with key customers to further reduce this balance through more favorable contract terms that are more aligned with our manufacturing timelines.
At June 30, we had one strategic customer, a majority of whose business relates to our gene therapy platform, that represented 20% of our $1.4 billion in aggregate net trade receivables and contract assets. We are confident that our contract asset balance is fully collectible. The same customer was less than 10% of total revenue in the fourth quarter, but represented nearly 10% of our revenue for fiscal 2023, compared to approximately 5% in fiscal 2022.
Finally, capex in fiscal 2023 was $601 million or 14% of revenue. In light of the significant capital investments we have already put into the business, we are reducing capex in fiscal 2024 by more than 30% to a range of 8% to 10% of revenue.
Now please turn to our financial outlook for fiscal '24 as outlined on Slide 11. We expect our 2024 net revenue in the range of $4.3 billion to $4.5 billion, representing growth of 3% at the midpoint. This includes COVID revenue of approximately $130 million, a roughly $500 million decrease from 2023. Our non-COVID business is expected to continue to deliver strong performance with full year revenue growth of approximately 15% to 20%. This is driven by roughly 30% growth in our non-COVID Biologics portfolio, primarily driven by significant growth from our largest customer, as well as completion of tech transfer activities.
In PCH, we expect mid to high single-digit growth. Current FX rates, which we use in this forecast, are forecasted to have a positive impact of 1 percentage point to 2 percentage points on our revenue. We project that inorganic revenue, which reflects one remaining quarter of the Metrics acquisition, will not have a meaningful impact.
We expect adjusted EBITDA in the range of $680 million to $760 million. While this is a slightly wider range than usual, as Alessandro mentioned earlier, this is reflective of our new more conservative approach to forecasting. These temporary low margin levels anticipated for 2024 reflect our low facility utilization as our reliance on COVID revenue declines. As we ramp up our non-COVID business and align our cost structure, we expect margins to recover towards historic levels as we exit fiscal 2024.
We expect the margin for our Biologics segment to improve modestly as we move sequentially from our 2023 fourth quarter to the first quarter of 2024, and progressively improve through the year with a more pronounced ramp in the second half. In addition, given historical -- historically seasonal nature of our PCH business, where revenue and EBITDA generation is the lightest in the first quarter, and more weighted to the back half of the year combined with our expected productivity ramps later in the year, we forecast roughly two-thirds of our consolidated adjusted EBITDA to be generated in the second half of the year. While this is more back half weighted than most years, the overall expected revenue split is more balanced with approximately 55% expected in the second half of 2024.
We expect adjusted net income in the range from $113 million to $175 million. Adjusted net income growth in fiscal 2024 is being impacted by all of the items affecting adjusted EBITDA as well as the following items. First, an expected effective tax rate in the 25% to 27% range compared to 25.5% in fiscal '23. Second, an increase in interest expense due to rising interest rates, though as a reminder, with our rate hedge in place, nearly 70% of our debt is effectively fixed rate. And finally, increased depreciation expense due to the substantial investments we have previously made.
I'd now like to share an update regarding the status of our filing of our fiscal '23 Form 10-K. As we continue to improve our accounting, finance staffing, and related processes, and we continue to bolster our internal finance resources, some additional steps remain to finalize our 10-K. This will not allow us enough time to file for all of our closing procedures -- excuse me, this will not allow enough time for all of our closing procedures to be completed today. Therefore, the completion of our financial statement closing processes and subsequent filings with the SEC will require more time, extending beyond today's deadline. Tomorrow, we plan to file a notification of late filing on Form 12b-25. Our team is working expeditiously to finish the 10-K within the 15-day grace period permitted by the Form 12b-25 filing. We do not expect any change to the numbers we released today. We appreciate your patience.
To close, I want to summarize with you my top priorities as Catalent's CFO, which are partnering with Alessandro to improve our margins by supporting productivity and cost alignment plans, to delivering incremental free cash flow by reducing the capex and the working capital intensity of the business, and finally, strengthening our internal controls and processes over financial reporting and forecasting. All of these priorities are within our control.
Operator, this concludes our prepared remarks. We'll now open up the call for questions.
