Catalent Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 15, 2023

There are 16 speakers on the call.

Operator

Hello all and welcome to Capilent's First Quarter Fiscal Year 20 24 Earnings Call. My name is Lydia and I'll be your operator today. I'll now hand you over to your host, Paul Curdig, Vice President of Investor Relations to begin. Please go ahead.

Speaker 1

Good morning, everyone, and thank you all for joining us today to review Catalent's Preliminary Q1 2024 Financial Results. Joining me on the call are John Greisch, Executive Chair of the Board Alessandro Maselli, President and Chief Executive Officer and Matti Masanovich, Senior Vice President and Chief Financial Officer. During our call today, management will make forward looking statements and refer to non GAAP financial measures. It is possible that future results could differ from management's expectations, Including as a result of the finalization of Catalent's fiscal 2023 and Q1 fiscal 2024 financial statements. Please refer to slide 2 of the supplemental presentation available on our Investor Relations website at investor.catalynt.com For a discussion of risks and uncertainties that could cause actual performance or results to differ from what is suggested by those forward looking statements And slides 34 for a discussion of Catalent's use of non GAAP financial measures.

Speaker 1

Please also refer to Catalent's Annual Report on Form 10 Okay. For the year ended June 30, 2022, as amended, Catalent's quarterly report on Form 10 Q for the 3 9 months ended March 31, 2023 and our filings with the SEC for additional information on certain of the risks and uncertainties that may bear on our operating results, performance Now I would like to turn the call over to John for some brief opening remarks before handing it to Alessandro. Commentary for these 2 presenters is covered on Slide 5.

Speaker 2

Thank you, Paul. Good morning, and thanks for joining us today. Before I turn the call over to Alessandro, I want to share a few comments on the quarter and on the progress our management team Strategic and operational review committee have made over the past two and a half months toward achieving our goals. As you saw in the earnings release and will hear further from Alessandro, we have delivered a solid first quarter And are confirming our full year guidance. Given the turmoil in many of our markets, we are pleased on both fronts.

Speaker 2

In addition, Matti and his team have brought a renewed focus on cash flow and we are encouraged by already seeing benefits improved working capital management and greater analytical rigor around CapEx spend thus far in the year. I want to reiterate that we expect to catch up on our fiscal 2023 and Q1 2024 SEC filings Later this month. We've been working tirelessly to finalize these documents over the last couple of months. Matti will go into additional detail on this topic later in today's call. Finally, I'd like to comment on the work underway by the Board's Strategic and Operational Review Committee.

Speaker 2

As you will recall, we formed the committee at the end of August to conduct a thorough review of our businesses, strategies, operations and capital allocation priorities with a view towards maximizing the long term value of the company. Since then, the committee has made progress Identifying and evaluating a number of options to maximize long term value creation for shareholders. We continue to work closely with Elliot as we thoroughly evaluate these strategic options, and we look forward to sharing a more Detailed update with all of you at a later date. Let me wrap up by emphasizing that the entire Catalent team Is working hard to execute against our strategic plans in order to improve performance and create value. As you will hear today, we are confident in the value of opportunities that lie ahead and are pleased that our first quarter performance Puts us on track to realize our 2024 plans.

Speaker 2

With that, I'd like to turn the call over to Alessandro.

Speaker 3

Thank you, John. Good morning, everyone. I'm proud of the work the Catherine team has done to deliver a Strong start to our fiscal year 2024. We delivered a solid financial performance in the Q1, Including the 5% non COVID revenue growth, while also progressing on all fronts With our operational improvements, I echo John's confidence in our plan and I'm pleased to reaffirm Our fiscal 2024 guidance today, while the macro headwinds that we started to call out in November of last year are Still present. The strength of our pipeline is bearing fruit, allowing us to continue to guide to Amid to high since revenue growth rate this year when excluding COVID related revenue.

Speaker 3

Key factors underpinning our confidence include continued high demand for our gene therapy services, Expanded exposure to GLP-one demand as we bring up more lines And a very strong rate of new approvals that we have seen in the Pharma and Consumer Health segment in this calendar year. We continue to address underutilization at some of our new facilities, bolster our Commercial efforts to accelerate new business wins and reduce our capital deployment in affected areas, All while focusing our CapEx on projects that leverage high demand areas. We also made a measurable progress in implementing operational improvements in our Biologics segment, resulting in favorable performance trends Over the last few months, in a quarterly sequential 1400 basis points improvement in EBITDA margin, We are committed to demonstrating what we believe is our unrivaled ability to run the best Track development and manufacturing facilities in the world, both to our investors and our customers. To help us achieve these goals, we recently appointed David McCarlain as the Group President of our Biologics segment. David, previously SVP of Lonza's Bioscience business is a seasoned and highly successful business leader With a record of developing winning strategies that drive growth and create significant value, We are energized by the immediate positive impact he's already making on the business.

Speaker 3

In Biologics, we are seeing the impact of operational enhancement and strong commercial demand on our financial results. In the Q1, our drug product business in Brussels and our gene therapy business in PWI, Each had a strong year over year and sequential growth as well as margin improvements. As you know, the PWA facility deserves multiple programs for our largest customer, Sarepta, As well as many programs for other customers. Our pipeline for gene therapy is healthy, Including several programs in late stage, one of which was recently signed. As a reminder, The late stage programs are generally insulated from softness in the biotech funding environment.

Speaker 3

Our world class team continues to ramp operations and work around the clock to meet Sarepta's demand and manufacturing goals. Sarepta has recently confirmed their scale up plans for calendar 2024, Firming up orders, we expect revenue from these top customers to grow approximately 65% this fiscal year. As we manufacture product for the U. S. Market and the rest of the world to Sarepta and its partners.

Speaker 3

Additionally, I'm very pleased with the progress we are making on our working capital initiatives, Including the contract assets, of which Maddy will provide additional details. In Bloomington, We continue to improve operational performance and we ramp up the assets needed to satisfy demand across multiple new products, Including the GLP-1s. As a result of these multi site progress, we To exit the fiscal 2024 with the more normalized pre pandemic margins in the Biologics segment. Moving to Pharma and Consumer Health. This segment delivered the 1st quarter in line with our expectations With the solid organic growth when excluding our Consumer Health business.

Speaker 3

Revenue growth in the Consumer Health you suspected, it's expected to decline in the first half of fiscal twenty twenty four and then return to growth in the Q3. This growth is driven in part by an impressive commercial win in the Q1, A new strategic contract with 1 of the leading consumer companies for our Gamipi offering. This is in line with our strategy to leverage the Catalent brand to increase the penetration of the legacy BetTerra business In the top global consumer health companies. Winning this important contract, while making progress on other Exciting your business development activities bolsters my confidence in our ability to achieve our Goals for the PCH segment performance in fiscal 2024 and beyond. Before I hand the call to Mady, I would like to touch on some important and exciting updates about the Biologics business on the commercial front.

Speaker 3

Our exposure to the GLP-one opportunity is rapidly growing. We are now forecasting that the larger majority of our current and future pre fill syringe capacity Coming online in fiscal 2024 through fiscal 2026 is expected to be booked soon. In support of these exciting category of products, confirming our position as a leading CDMO in this space Globally. We have plans to accelerate our investments in this area. We've seen our existing fill and finish facility in Bloomington and Anani including partnering with our customers.

Speaker 3

We believe we are only beginning to see the tailwinds from this category. Just for reference, In fiscal 2024, we expect revenues of less than $100,000,000 from GLP-1 programs. Once all these lines I just referred to are completed and running at scale, We anticipated this product category to contribute well over $500,000,000 in revenue. As you all know, GLP-1s present an enormous opportunity for growth In the coming years. The major role that Covalent will play in bringing this important innovation to market, Especially so soon after our contributions during the COVID pandemic is a testament to our unique Capabilities and Positioning.

Speaker 3

Catalent's Board and management team remain confident in the future of our company As we continue to make strides towards improving our operations and bringing our margin performance back to pre COVID level with urgency, While growing the exposure of the company in the most exciting areas of the biopharmaceutical service industry, We remain focused on delivering value for all our shareholders by executing on our mission To improve the lives of patients every day. I will now turn it to Mady For a discussion of our Q1 financial results.

Speaker 4

Thank you, Alessandro. I'd like to begin with an update regarding the status of both our annual report on Form 10 ks for the fiscal year ended June 30, 2023, And quarterly report on Form 10 Q for the fiscal quarter ended September 30, 2023. While we have implemented improvements in our accounting and finance staffing and related closing processes, as we noted in our notification late filing on Form 12b-twenty 5 filed on Monday. We were unable to file our 10 ks and 10 Q on time. We require additional time to complete procedures related to management's assessment of the effectiveness of our internal controls Overfinance reporting as of June 30, 2023 and other closing procedures.

Speaker 4

This has included procedures related to management's assessment Of the measurement and timing of a non cash goodwill impairment of approximately $700,000,000 Which relates primarily to acquisitions in the company's Consumer Health and Biomodality's reporting units in its Pharma and Consumer Health and Biologics segments, respectively. Please note that for purposes of providing our preliminary 1st quarter fiscal 'twenty four earnings. We have assumed that the non cash goodwill impairment will be included in our Q1 results. We are also incurring substantial time to review other closing procedures supporting our 10 ks and 10 Q for both reporting periods. We expect to file the Form 10 ks on or before November 27, and we expect to file Form 10 Q probably following the filing of our 10 ks.

Speaker 4

Additionally, based on currently available information and subject to completion of our evaluation of the potential impairment charge, As well as the preparation of our financial statements and assessment of our internal controls, we do not expect any material change To the financial results to be included in Form 10 ks compared to the financial information reported in the preliminary earnings release Cowen furnished to the SEC On Form 8 ks filed on August 29, 2023. We appreciate your patience as we work through and complete our closing procedures. Moving on to our preliminary first quarter results, starting with the consolidated numbers on Slide 6. Net revenue in the quarter was $982,000,000 down 4% on a reported basis and 6% on a constant currency basis compared to the prior Q1. This decline is primarily attributed to the significant reduction in COVID revenue Approximately $85,000,000 in the quarter as well as a one time $30,000,000 licensing fee in the prior year.

Speaker 4

This was partially offset by constant currency revenue growth in the rest of Biologics of 11% and 5% in PCH. The Metrix acquisition, which is reported in the PCH segment and closed in October of 2022 Accounted for 2% growth on a consolidated basis. Our first quarter adjusted EBITDA decreased 38% To $115,000,000 or a margin of 11.7% versus margin of 18.3% in the prior year quarter. On an organic basis, our Q1 adjusted EBITDA declined 45% compared to the Q1 of the prior year, Primarily driven by a decline in COVID revenue. I will speak further to the major drivers of these results in the segment commentary.

Speaker 4

Adjusted net loss was $19,000,000 or a loss of $0.10 per diluted share compared to adjusted net income of $61,000,000 Or $0.34 per diluted share last year. Reconciliations from GAAP net earnings to each of adjusted EBITDA and adjusted net income are in the appendix Excluded from adjusted net income are the non cash goodwill impairments Totaling $700,000,000 I just reviewed. Now I'll discuss our segment performance Our commentary around segment growth will be in constant currency. As shown on Slide 7, 1st quarter net revenue In our Biologics segment, it was $447,000,000 a 16% decrease compared to the prior year quarter. The decline is primarily driven by significantly lower year on year COVID demand.

Speaker 4

1st quarter COVID revenue Of approximately $100,000,000 represents a decline of approximately $85,000,000 from the prior year period. On a non COVID basis, biologics revenue in the Q1 was in line with the Q1 of 2023. When excluding the one time $30,000,000 licensing fee

Speaker 3

signed

Speaker 4

in the prior year, non COVID Year on year revenue growth in this segment is approximately 11%. This result was driven By double digit revenue growth in gene therapy, non COVID drug products and drug substance offset by a decline in cell therapy. The bar chart on Slide 7 illustrates the Biologics commercial and development revenue streams The classification of development versus commercial is driven by the contractual language, which does not always align with the regulatory status of a given product. The large drop in development revenue in the Q1 had 2 primary drivers. 1st, the year on year decline in COVID revenue It has been designated as development revenue.

Speaker 4

And second, a large gene therapy product whose revenue was treated as development revenue a year ago Is now treated as commercial revenue. Moving to EBITDA. The Biologics segment's 1st quarter EBITDA was down $61,000,000 year over year to $52,000,000 but was up $64,000,000 sequentially From a $12,000,000 loss in the 4th quarter. The sequential improvement from the Q4 to the Q1 is primarily a result of improved productivity and schedule adherence in the BWI and Brussels facilities. Margin was 11.6% Compared to 21.5% reported in the prior year and up 1400 basis points sequentially.

Speaker 4

The year on year drop in EBITDA margin was primarily driven by COVID declines as well as underutilization At new modality facilities including our cell therapy business. We reduced our cell therapy cost structure during the quarter And expect improved performance in the second half of fiscal twenty twenty four. Similarly, in Bloomington, we have formalized a transformation project They will help drive margin improvement this year and in the future. When combining these prudent actions and our projected increase in revenue growth, We expect our Biologics segment to improve margins on a year over year basis with a more pronounced impact as we exit the fiscal year. Our non COVID, non Sarepta Biologics business is expected to grow in the low to mid teens in fiscal 2024 As we launch GLP-one production and bring on incremental capacity and improved productivity.

Speaker 4

Importantly, We have high visibility over this growth given the strong demand from customers. As a result of our unique scale and capabilities in sterile fill finish, We continue to install and qualify new prefilled syringe lines in our global network and are excited to have more prefilled lines On order as part of our committed CapEx spend coming online in fiscal 2025 and 2026. We believe this investment We'll drive a highly attractive return on capital for Catalent over the long term as we install and validate those lines in our existing facilities. As shown on Slide 8, our Pharma and Consumer Health segment generated net revenue of $535,000,000 An increase of $23,000,000 or 5% compared to the prior year Q1, with segment EBITDA of $101,000,000 Down $10,000,000 or a 9% decline over the same period. The segment's revenue growth was primarily driven By the prior year's acquisition of Metrix.

Speaker 4

On an organic basis, the segment declined 1% as growth In prescription products and clinical supply services was outweighed by softness in consumer health. We expect Consumer Health declined in the first half of fiscal twenty twenty four and returned to year on year growth in the second half of the year, In part due to the recently signed substantial contract with their premier consumer health company. Adjusted EBITDA margin of 18.9 percent was lower by 280 basis points year over year from the 21.7% recorded in the prior Q1. The decline was primarily related to under absorbed capacity in the Gummy network and the impact of a one time $10,000,000 insurance benefit Received in the Q1 of fiscal 2023. PCH has strong underlying fundamentals and continues to perform at a high level.

Speaker 4

Slide 9 discusses our debt, debt maturities, related ratios and CapEx plans. Our debt load remains well structured and allows for 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 the September 30 actual level was 3.4 times.

Speaker 1

Catalent's overall

Speaker 4

net leverage ratio as of September 30, 2023 was 7.4 times, A sequential increase from the 4th quarter at 6.4 times, driven by the lower year on year last 12 months adjusted EBITDA. Because the EBITDA portion of the net debt leverage ratio is calculated on an LTM basis, we expect this ratio to peak at the end of the second quarter Due to the significant decline in COVID revenue on a year over year basis and then rapidly improve in the second half of the fiscal year Back to the June 30, 2023 level as our adjusted EBITDA recovers to more normalized levels. One of our top priorities remains reducing our leverage. And as we disclosed last quarter, we are taking a number of steps to achieve this, Including reducing working capital, ensuring that CapEx spend is aligned with our strategic initiatives with shorter payback periods And maximizing EBITDA with revenue growth and cost structure alignment initiatives. With these initiatives underway, Including the recent finalization of a contract amendment with one of our large customers in gene therapy, we expect to significantly improve our cash flow generation As we substantially reduce the level of contract assets.

Speaker 4

We now expect free cash flow to be in excess of $100,000,000 in Fiscal 'twenty four versus our initial expectation of initial. We continue to identify opportunities to drive further free cash flow generation for the year. Our combined balance of cash and cash equivalents as of September 30, 2023 was $209,000,000 A decrease of $71,000,000 from June 30, 2023. The decrease in cash was driven primarily by an increase in contract assets in the quarter Related to the ramp up of production to meet customer demand. As of September 30, 2023, Contract assets had a balance of $543,000,000 a sequential increase of $107,000,000 and up $82,000,000 year on year.

Speaker 4

Importantly, we expect the contract asset balance to decrease going forward. At September 30, We had one strategic customer, a majority of whose business relates to our gene therapy platform that represented 30% Of our $1,400,000,000 in aggregate net trade receivables and contract assets, we continue to convert The contract assets to accounts receivable and receive timely payments from the customer. As such, we are very confident About the collectability of our contract asset balance, the reduction of which will accelerate as a result of the previously mentioned contract amendment. The same customer represented approximately 16% of consolidated revenue in the Q1 of fiscal 2024 Or approximately $155,000,000 We expect revenue contribution from this customer to also be approximately 16% Of total consolidated revenue for the full fiscal year, we have clear line of sight into this outlook given already committed orders. Finally, CapEx in the Q1 was $84,000,000 We continue to expect CapEx in fiscal 2024 To be in the range of 8% to 10% of revenue, representing approximately $400,000,000 Please now turn to our financial outlook For fiscal 2024 as outlined on Slide 10.

Speaker 4

With a third of the fiscal year behind us, We are confident in reiterating our fiscal 'twenty four guidance, which includes net revenue in the range of $4,300,000,000 to $4,500,000,000 Representing growth of 3% at the midpoint. Adjusted EBITDA range from $680,000,000 to $760,000,000 And adjusted net income in the range of $113,000,000 to $175,000,000 Our underlying assumptions are largely the same, with the exception that we now expect COVID revenue of approximately $180,000,000 $50,000,000 more than our previous expectation of $130,000,000 Roughly offsetting the coat revenue increase Our unfavorable FX rates in the euro and British pound. As a reminder, our non COVID business It's expected to continue to deliver strong performance with full year revenue growth in the mid to high teens for the company. This is driven by roughly 30% growth in our non COVID Biologics portfolio, including approximately 65% revenue growth From our largest customer, which at this point of the year is largely contracted. Non COVID, non Sarepta Biologics segment growth Is expected to be lowtomidteens, driven by tech transfer activities.

Speaker 4

In PCH, We continue to expect mid to high single digit growth. As we ramp up our non COVID business and align our cost structure, We expect margins for the company and the Biologics segment to recover towards historical annual EBITDA margins as we exit fiscal 'twenty four. We forecast roughly 2 thirds of consolidated adjusted EBITDA to be generated in the second half of the year. As shared on our last call, the overall expected revenue split is more balanced with approximately 55% expected in the second half of twenty twenty four. In closing, our priorities for fiscal 2024 remain intact: to improve our margins By supporting productivity and cost alignment plans, to deliver incremental free cash flow by lowering the company's working capital intensity And maximizing commercial opportunities.

Speaker 4

And finally, to strengthen our internal controls and processes over financial reporting and forecasting. With thorough, careful analysis and disciplined execution of our cost structure, we are making steady progress against these initiatives And are optimistic in our continuously improving performance throughout fiscal year 2024. Operator, this concludes our prepared remarks. We'd now like to open the call for questions.

Operator

Thank Our first question today comes from Tejasavan of Morgan Stanley. Your line is open.

Speaker 5

Hey, guys. Good morning and thanks for the time here. Alessandro, one on Sarepta for you to kick things off. You've talked in the past of not peaking in the label expansion for Elevatus into your forecast. Sarepta, I think, as you alluded to, So they want to manufacture in anticipation of the unrestricted label ahead of that FDA decision.

Speaker 5

So how should we think about the implications of that in terms of Perhaps potential upside for you in your FY 'twenty four guide, does the $700,000,000 or so that you're baking in for Sarepta, the midpoint factor this in, in light of your comments I think you said you're starting to get orders from Sarepta now for that incremental production. And then in terms of the potential downside to Fiscal 2025, if the FDA doesn't allow for label expansion, any sort of framework that you can help us think through that dynamic here?

Speaker 3

Sure. Hi, hi, hi, everyone. Look, this is a good question. I would tell you overall The way I'll characterize the relationship with Sarepta, there is a lot of positive momentum into the relationship. But when you think about On our performance, really our Q1 performance was really underpinned by a strong operational performance at our PWI facility where we 4th, Sarepta.

Speaker 3

And even this amount has been even more reassuring that we are on the right path from an operational performance standpoint. The contract amendment that Matti mentioned, which will really allow us now to normalize more the time to cash profile of important contract, which in terms will reduce contract asset to improve cash flow and really also reaffirm Demand that we've seen in the recent weeks. So going to your question, really, look, our job is Continue to leverage the capacity that we have deployed the suites with which we are supporting the customer. Continue to now Seeing that this very good level of performance, which is the one that will allow us to satisfy this demand. And in terms of your last part of your question in terms of you, I will not speculate of course on the label expansion of FDA.

Speaker 3

It's not my place to do so. Chenova, FDA is not my place to do so. But in terms of making your model and working Your model, I will remind that as we disclosed in these 50% of the revenues Our pass through revenues are coming at fairly low margin with a mid to high single digit margin. These are materials and testing services we buy on Yes, of the customer. So this could I believe it can be helpful in modeling this out.

Speaker 5

Got it. That's actually helpful. And then I want to ask one on just ex COVID, ex Sarepta growth on a sequential basis. Just doing some quick math here. It sounds like you guys had about $235,000,000 in Biologics revenue last quarter.

Speaker 5

That went to about maybe 185 ish This quarter? And so can you just walk us through the moving pieces there? I know you gave color year over year, but just sequentially. And I know you got the full finished capacity utilization for COVID here. Did that play a role in this?

Speaker 5

Or was it sort of some of the cell therapy work Declining. And then on your comment on the significant GLP-one ramp over the next couple of fiscal years for you here, Any color on the slope of that increase and at the cadence at which you expect this new capacity to come online?

Speaker 3

Yes, sure. Look, I'm going to cover the GLP-1 and then hand over to Matti to give you some helpful reconciling Q1. So when it comes to GLP-1, I would say for this This career is fundamentally a second half story, right? The second half is really when the commercial production is going to start Canning on some of the new assets. I would also add that as I said, we expect Significant new capacity coming online between fiscal 2024 and fiscal 2026.

Speaker 3

And probably the way you should be thinking about these It's probably that each of these given years, we're going to more than double the capacity that is going to be deployed against the GLP-one, so any given year. So there are a lot of lines that are already installed and they have been qualified. So some of them will come up to the back end of this fiscal year, Full strength next year, there is the phasing that the next year is really going to be a full year story, not only H2. And so I believe that assuming that there will be more than doubling the capacity available for this demand and the fact that we have a very strong visibility to demand Can be helpful for you to understand the ramp.

Speaker 4

Yes. So in this one,

Speaker 3

I think so Biologics

Speaker 4

non COVID revenue and then stripping out the $30,000,000 licensing fee From the prior year quarter, we're up 11%. So I think I put that into the script. I think I talked about that, but maybe you didn't pick it up. But And we can reconcile No,

Speaker 5

I was just talking about the sequential trends there, Matti. What happened in 4Q versus 1Q, not year over year?

Speaker 4

So Q4, so clearly our BWI business has really kind of come has bounced back and then Brussels And you do approve. And so those are the 2 primary businesses and with PWI being the gene therapy business with our ramp up as I discussed in the script, Obviously, our PWI gene therapy business is well up.

Speaker 5

Got it. Thank

Operator

you. Our next question today comes from Luke Securic of Barclays. Your line is

Speaker 6

open. Great. Thanks. Just kind of want to dig in here on The overall gene therapy franchise and how big this is for you, I know that you have you guys have always bucketed it as your Mabs and the other drivers of indications and it will kind of be helpful as you think about the rest of the gene therapy business outside of the Sarepta-nine hundred on elevators drug.

Speaker 3

Hi, Luke. Thanks. This is Alessandro. Look, first of all, let me clarify. Our MAPS protein business is not classified under gene therapy.

Speaker 3

We call it the drug substance. Thanks for the question because we are having a very good year in Tax Substance. And I do believe there is good momentum going forward there. We had a lot of seeding happening in that business over the last several years. And now It seems that the harvest time is coming with a significant amount of late stage program heading to work on commercialization.

Speaker 3

Biq Pharma. So they've extended patient populations. So very exciting areas for us, Doug Samson, and I will be a great contributor as we go forward. In terms of the Gene Therapy business, as I said, we have a pretty balanced portfolio. Number 1, with Sarepta as well, we have several programs with them, some of them very exciting.

Speaker 3

But also there is I've seen some good momentum there, some programs getting some early very good clinical data, Which made customers more bullish in moving full steam ahead in scaling up. So Look, the biotech funding environment, it is what it is. We were the first one to go it out 1 year ago, still remains a little bit uncertain. But When you look at our own portfolio and our own pipeline, I feel pretty good about it. The cell therapy story remains a little bit one where we have reviewed our outlook there.

Speaker 3

We have reassessed And so as Mady said, we've taken an opportunity to want to really rebalance The absorption there and this will be a driver of margin improvement going forward because now we're going to suffer by much less underutilization Negative EBITDA impact there. So hopefully this gives you a little bit of color across all the different sub segments.

Speaker 6

Yes, that helps. And then I guess on the biologics, there's elevated pass through coming through here. You have the GLP-one, you have the pens. Also with the Sarepta, you guys kind of called that out. Can you update like how much of the business comes from the Sourcing.

Speaker 6

And then are you seeing a similar margin that you have in the past there? Or is this going to be elevated, like we saw with the COVID sourcing?

Speaker 4

When you think of the Biologics business and the pass through revenue, Sarepta has about a 50% pass through content and that's Materials and Testing. The balance of the business is between, I would say, 15% to 20% is where it sits from a pass through perspective. And the margins are a little bit different. Margins are pretty low as we articulated on the as Alison articulated on the Sarepta piece. They're probably, I would say, Mid single digits to mid teen digits on the margins on the balance of the business of that 15% to 20%.

Speaker 3

Yes. And I just would add one other Element of color there. The drug product is very different from drug substance in general when it comes to material pass through. Not necessarily the materials are less expensive, but some most of the times they are bought by the customers, not by us. So It doesn't affect our revenues.

Speaker 3

It doesn't affect our margin.

Speaker 6

Great. Thanks.

Operator

Our next question today comes from Dave Windley of Jefferies. Your line is open.

Speaker 7

Hi. Thanks for taking my question. I hope you can hear me. I'm in a hotel basement. Can you hear me?

Speaker 3

You sound good. You sound good, Dave.

Speaker 7

Okay. All right. Thank you. So My question is maybe a follow on to Tejas' earlier question, but a broader one. The company, Let's call it pre pandemic, used to talk about the diversity of the platform, 7,000 products.

Speaker 7

No one product Really makes up a substantial percentage of revenue, doesn't move the needle necessarily. And you're moving into a period where not two products Very substantially moved the needle. I guess what I'm also thinking is that, again related to Tejas' question, Sarepta has a label expansion kind of optionality element to it, and the GLP-1s have Oral delivery of GLP-one data readouts coming out. So how do you think about The concentration of those revenue streams in your business and risk mitigating that in the potential that both of them could see headwinds From developments in the pipeline? Thank you.

Speaker 3

Yes, sure. So Dave, a couple of things.

Speaker 1

First of

Speaker 3

all, you're calling out 2 of the key, I would say, dynamic of our industry overall, surely GLP And I feel very proud and look excited that Cadaverint was able to have such an exposure So I don't see that necessarily under negative terms is great and it's Something that can be applied across several therapeutic dynamics therapeutic areas as dynamics across different geographies. So I would say it's a little bit of a different element compared to the gene therapy program that you have mentioned. With regards of So and so it's actually the you're also going forward, because of the different therapeutic areas, the different potential indication, Extension of indications of GLP-1s, I don't see that category to be a significant element of volatility, so to speak. Our job there I believe is to continue to do a great job for our customer and continue to bring the capacity online and the rest will come Pretty much as a consequence. I don't believe personally that Total will be a Significant competitor of injection for the time being.

Speaker 3

I when you think about that in the current form like peptides, the bioavailability It's not that high. So there is a lot of API there. There are studies out there that are showing that how much more API you need The oral delivery versus the injectable. So I do believe that it's going to be for the time being an injectable story personally. And with regards of how we are approaching these, look, for me the important thing is that we understand the dynamics, we understand the market, we Ourselves are a little bit in the middle of the range.

Speaker 3

We don't expect in our projections Everything to be going in the right direction and leaving the debt as an upside. And we position ourselves in a, I would say prudent way when it comes to these dynamics so that we have a good set of different options to continue to grow the company in line with

Operator

Our next question comes from Justin Bowers of Deutsche Bank. Your line is open.

Speaker 8

Hi. Thank you, and good morning, everyone. So just wanted to get a little clarity on some of the prepared remarks. With respect to GLP-1s, I think you said 100,000,000 This year, is that incremental over next sorry, over last year? Or is that total?

Speaker 8

And can you sort of give us a sense of what the order of magnitude was in FY 2023? And then I think you said sort of a $500,000,000 run rate number. And is that sort of like the targeted exit rate In FY 2026 or is that sort of the contribution from the incremental capacity coming online? And then I think you said most of that you have firm orders for. So do you have protection for that, I.

Speaker 8

E. Some sort of Take your pay arrangement.

Speaker 3

Great question. So first of all, yes, look, we said that this year is going to be Below $100,000,000 We didn't say $100,000,000 And these are for sure one of the contributors of the non COVID Non septa growth in Biologics, right? So because so far it's been a more tech transfer work and now it's becoming commercial work. So first of all, It's contributing to our growth outlook and as I said, it's more an H2 story than an H1 story. So it's also helping with We'll just see as a ramp H2 versus H1.

Speaker 3

With regards of the long term outlook, I said That is going to be well over €500,000,000 I gave a little bit of a color around the timeframe. And to be quite honest, with your question around the demand, I see for these franchise, the capacity is bigger than the constraining factor Rather than the demand. So it's going to be really depending on our ability to bring capacity as fast as possible. We are seeing Very high level of interest and demand for these assets and really is one where capacity is going to be the Strength or on all the fronts. And I believe that the runway goes beyond the 20 Timeframe that we have highlighted here.

Speaker 3

So all in all, it's a very exciting space to be in.

Speaker 8

Thank you. And then just a quick follow-up on the gene therapy franchise. Can you

Speaker 4

talk a little bit about

Speaker 8

the dynamics ex Sarepta, I. E, are there other programs And your pipeline that are advancing through different stages? And then with respect to The top customer. Are you ramping up additional Production throughout the year? Or is this just sort of a conversion of things in flight With the existing outlook?

Speaker 8

Thank you.

Speaker 3

Yes. Look, first part of the question, as I said in my If I remarks, the pipeline is healthy, both with additional program with our my biggest customer, but also with other customers. As I said, we signed very recently another late stage program And the clinical data on that program look very, very exciting. So impact on patients is it could be great. So It's also in line with our Correvario Patient First.

Speaker 3

So I would define the pipeline in gene therapy as healthy. And I will also tell you that in gene therapy, the capacity, it's easier to redeploy compared to other technologies. Normally in Chinterafy you have suites, but you have most of the units are mobile units. So it's very easy to reconfigure the capacity Compared to other technologies, at least for the way we have designed our facility, we make them very, very fungible across different Type of products. And with regards of the profile of these, look, We that is the physical capacity and there is the productivity that you can achieve.

Speaker 3

We are ramping, Right. So our physical capacity is fully deployed, fully staffed, fully equipped. But clearly, we are not ramping productivity. As you know, we come from a very Difficult spot during the spring because of some of the challenges we have disclosed. And now we have an exciting ramp.

Speaker 3

So I will tell you that we are ahead of the ramp that I had in mind at the beginning of this fiscal year, but there will continue to be progress As we go through the year, so the more we improve our output, the more demand we will be able to satisfy for our customer. As I said, we said that the visibility of this demand is pretty high at this point of the year as Mady shared.

Speaker 8

Thank you, Alessandro. Appreciate the time.

Operator

The next question in the queue today comes from Jack Meehan of Nephron Research. Your line is open.

Speaker 9

Thank you. Good morning. First, I was wondering if you could just elaborate on the factors that are leading the strategic review to take a bit longer at least Versus what I was expecting last quarter, the word urgent was used multiple times and I was expecting some sort of update here. Can you just Maybe talk about anything you can share? Thank you.

Speaker 2

Yes, Jack. This is John. So if you think about the committee We formed a couple of months ago, and we've got 2 new directors and 2 of our legacy directors plus myself on it. I'd say the 3 top priorities of the activities of the committee have been to Focus on operational improvements along with Alessandra and the team, focus on cash flow improvements and Focus on capital structure improvements over time. As you saw and heard in the comments, Alessandra and the team Continue to drive operational performance and cash flow improvements in a way that gives us a lot of confidence for The rest of this year.

Speaker 2

So like the first two priorities were to get the company back on track out of the surprise mode, Which we've been in for the last several quarters and deliver on the commitments that the teams laid out. I think they've done A heck of a job doing that as we start fiscal 'twenty four. The committee, along with our partners at Elliott, We're evaluating several strategic options to address the capital structure improvements over time. With a sense of urgency, we spent a heck of a lot of time getting everybody up to speed on where we are. It's an area where we don't want to ready fire aim.

Speaker 2

And with the operational improvements and the cash flow improvements, We're out of what may have been perceived by some as crisis mode and in a position where we can thoughtfully evaluate those options going forward. In addition to the committee and the full Board, Alessandro and I spent a lot of time with our partners at Elliott Evaluate those options, and we don't have anything to announce today. But as noted, we'll provide updates If and once specific decisions are made by the Board. So I think the near term operational improvements, cash flow improvements here at Kymati, We've improved our free cash flow outlook for the full year, and have made some great moves along those lines as well as the operational improvements here Alessandro, those are on track. Capital structure over time, we'll address it, but we're not ready To announce any decisions today, but we'll do so once the Board and Alessandro team Make those decisions.

Speaker 9

Okay. I appreciate that feedback. And a question for Maddy. On the GLP-1s, can you talk about the returns you're expecting on this additional prefilled Syringe full finished capacity you're adding, I'm having investors e mail me for a little bit more detail

Speaker 4

on that. I know you said

Speaker 9

it would be attractive, but Just any context would be great.

Speaker 4

Yes, I really can't. I mean, I think Alessandro laid it out. We're in the stage of trying to book that business. So I think it would be a good idea for me to

Speaker 2

disclose the returns and what we're looking at from

Speaker 4

a pricing perspective. So but I can tell you that it will be Very attractive for Catalent overall.

Speaker 3

I would love to say that We have configured this franchise with lines which are twin of each other. So our ability To continue to deploy the product across multiple lines is on an accelerated fashion because we're just going to somewhat copy and paste What we have learned in the 1st tax transfers. So you can expect that the ramp to revenues on the new assets are coming online It's going to be faster, and that's the number one factor that affects your return and the margin. But as Marty said, we expect the margin to be

Speaker 4

The only thing I'd say is from a ramp up perspective, I think the company has proven itself. If you look at what it did with COVID and the ramp up of COVID and Meeting the COVID demand, the company has a proven track record to ramp up quickly and ramp up its facilities quickly to deliver. And I think leveraging that experience of the company Into this GLP-one opportunity is significant.

Speaker 1

Next question operator?

Operator

The next question comes from John Salisbury of UBS. Please go ahead. Your line is open.

Speaker 10

Good morning and thanks for taking the question. Two questions here. First one on COVID. Just any way to quantify what the COVID margin contribution was in the quarter end? COVID

Speaker 3

came in quite

Speaker 10

a bit ahead of our expectations. You raised the guidance there. Any color on just the pacing there for the remainder of the year?

Speaker 2

Yes. COVID will have

Speaker 4

a somewhat negligible impact in the back half of the year. So I think it's going to come down. The first half of the year is when we'll Most of the COVID demand there is some demand in the back half of the year. And as for margins, that's not something that we've disclosed historically and not something we want to disclose The margin is on the COVID business. But so I'd say that that's about as far as I can go from a COVID perspective, but COVID is becoming a less and less important part of the business for us.

Speaker 3

Yes. I would just add to look, compared to pandemic levels, surely not as attractive because the portfolio is more complex, The level of absorption because of the volume is much lower. So the current level of the margins from We should be not even close to where they were in the pandemic in that pandemic times.

Speaker 10

Thanks. Appreciate it. And second question here also I guess on margins. And you gave some color earlier on Sarepta margin. I guess when you remove the raw material pass throughs there be just on the gene therapy or drug substance business in general, How do we think about the and you remove the other passengers, how do we think about the margin profile on gene drug substance versus filthination, any differentials there?

Speaker 3

So look, I will tell you that across the board of the drug substance, these The gene therapy, protein, MAPS, margin are pretty much in the same zip code where you Cut out the material pass through clearly. While you have such an high value pass through, you would all think it gets Lower, but on the pure services side, I would say that there is a pretty much good alignment across the drug substance. I would say the JAK product has a little bit of a different dynamic where the margin really depends being a very high volume Commercial, industrial production system is very, very depending on absorption, right? And so the margin itself of the products, I would say, of the products we run, it's pretty I mean, it's not big the range, but there are products like the vaccines or the GLT-1s that because of the volume, they can drive a lot of outsourced

Speaker 10

Thanks for taking the questions.

Operator

Our next question today comes from Matt Smock of William Blair. Your line is open.

Speaker 11

Hey, good morning. Thanks for taking our questions and congrats on the nice update. Just looking through Sarepta filings, it seems like R and D on a lepidas has been about Four times as much as R and D on some of their other gene therapy programs. Just wondering if based on this, is it fair to assume that something like 75% of Total Sarepta revenue for you is tied to Elevatus. And then in terms of that Elevatus spend, is there any detail you can give us around what your fiscal 2024 Revenue outlook that's tied to Levitas translates to from a dose perspective.

Speaker 11

I think there's quite a bit of uncertainty still out there in terms of how much it costs to manufacture the annual Or the actual gene therapy. So any context there would be great. Thank you.

Speaker 3

So, You take the first half.

Speaker 4

So from an overall perspective, we disclosed the Sarepta Revenue, and you can get to the math if you leave the script, but it's about 90% of the revenue Izel Elbit. So it's 9,001. So that's the lion's share, by far the lion's share of the revenue from Sarepta. We do have other programs that are being developed and are in development and we'll Begin to grow more rapidly as we go forward. As far as doses and patients, that's not something that we've commented on.

Speaker 4

I don't think it's and I'll start it all to refer to you. But we fill an order that we're given by a customer And that customer or that's our that's what we do now. We study the market. We do look around corners and we do assess it, but that's not something that I think we're going to discuss today.

Speaker 3

Well said.

Speaker 11

Understood. Thank you. Just to clarify, you said 90%, Eletus?

Speaker 4

90%. Yes, you can get to that math. Yes. Okay,

Speaker 11

perfect. And then just following up A clarifying one. You mentioned a couple of minutes ago that it's easy to reconfigure the gene therapy capacity and that capacity pretty fungible. I just wanted to confirm, you're saying it's easy to reconfigure for other gene therapy programs, right? And then while that may be the case, given Some of the macro headwinds we've seen, which I think most people would acknowledge have had an outsized impact on the broader cell and gene therapy space.

Speaker 11

How should we think about your ability to backfill that capacity If Sarepta's label doesn't actually end up getting expanded. Thank you.

Speaker 3

Yes. Look, first of all, I personally don't see these Sarepta as a binary dynamic as you guys are depicting either extended or non But I leave it like that. I believe there is a spectrum there that is more than just binary. That's been said, Truly, it's the most fixed part of infrastructure are the suites. And the suites are designed in a way that can So a number of different processes.

Speaker 3

Both define the processes are the manufacturing units that are within the suites, and they are mostly mobile. So you can reconfigure them in a pretty easily. So fundamentally, it's one of those facilities That we have in the network, which have the highest grade of easiness to reconfigure To be redeployed towards other programs, should we need to do so? At the moment, Honestly, I don't have any visibility that we have to do so because we remain focused working around the clock to satisfy the demand of Sarepta.

Speaker 11

Understood. Thanks again for taking the questions and congrats again on a good quarter.

Operator

Our next question comes from Derik De Bruin of Bank of America. Your line is open.

Speaker 12

Hi, good morning. Thanks for taking my question. Just one clarifying question to start with and I've got a couple of others. So what was embedded Originally in your guide for 2024 for Sarepta from a dollar amount and sort of like what's the incremental That's, here now. Just wanted to get some maps a little bit all over the place.

Speaker 12

So that's the first part.

Speaker 4

From our original guide to today, it's remained unchanged.

Speaker 12

Unchanged. So you'd already assumed that was going in. Great. That's what I thought. Just wanted to make sure.

Speaker 12

And how should we think about PCH margins progressing from here? A little bit lower than we thought in the quarter, how should we think about that Moving.

Speaker 4

PCH margins sequentially will go off through the year and there's a natural seasonality to the business model that they run and the business they bring in. In addition, we do have some cost structure initiatives going into PCH. And we also know that this new Gummy contract that was one with A very substantial contract that was one that will launch in the Q3 and be into our run rate in the Q4. So we do believe that we've got the opportunity to generate those margins on a

Speaker 12

Great. And then just one final one. So I'm looking at the consensus estimates for fiscal 2025. The Street roughly has you increasing EBITDA by 35%. So that's Call it a 16% margin at the midpoint of your current guide, that's 21 ish percent for Fiscal 2025.

Speaker 12

I mean is that sort of 500 basis point gain in EBITDA margins realistic for next year, Given where you see the business right now and I asked this just because I was certainly thinking the margin contribution on the Sarepta business was going to be a lot higher than it actually turns out to be. So just wondering any thoughts on how we should sort of think about EBITDA margin progression as we're exiting 2024?

Speaker 4

We talked about our exit run rate being more in line in our 4th quarter, more in line with our historic average. And so I think that's the best Guideposts I can give you, we're not going to give a 25 update today or kind of look into look beyond the full year here today, fiscal Fiscal year 2024. But I think that's a good guidepost to use if we get to that exit run rate that we talked about, and you can use that as a benchmark to jump

Speaker 3

off from. And one point I can reiterate once again. Our margin Reduction this year is not due to a portfolio shift. It's due to an operational dislocation, which we have shared multiple times. As John said, we have shared in his remarks, we are making very good progress in In addressing that, the probably progress is faster than our initial expectations.

Speaker 3

So when you combine these two factors, You can make your

Speaker 4

own assessment. Great. Thanks very much.

Operator

The next question today comes from Paul Knight of KeyBanc. Your line is open.

Speaker 13

Hi, thanks for the question. Regarding Sarepta on next year, your lot is booked Through your fiscal year ending June, what portion of when does the second half of twenty twenty four get booked? And meaning when do we get your FY 'twenty five Sarepta book? Is it starting now? What visibility do you have beyond June of 2024 on Sarepta.

Speaker 4

Yes. I think we've discussed at a high level. We've had customer conversations around it, but we've discussed How we actually booked production is booked on a rolling 6 month basis. So that's why we feel really confident about how 2024 is going to finish. And as we think about this rep to readout and Alessandro made comments to his view on this rep to readout where it's not maybe as binary Some are thinking.

Speaker 4

So I do think that's the comments I can give you on it, but I we just fact specifically get the orders on a rolling 6 month basis. Okay. And then regarding As you work through this year, we'll get further orders enrolled in the 25.

Speaker 13

Okay. And then regarding Brussels, you commented That was improving. Is that due to the biotech demand? Is it GLP-1s? Is it cell therapy?

Speaker 13

What's making Brussels improve?

Speaker 3

So Brussels is a product facility, right? And yes, there is a GLP demand there. It's no secret. It's a public available information. Clearly, I believe that in general, as we said before, the site is sitting on a very high level of demand because that has been Posed in production for some time in the last fiscal year, right, was a big drain on our margin last year and is Going back, right.

Speaker 3

So it's fully utilized because we have backlog to recover on. It's going to take significant time and yes, there is A lot of GLP demand, and I would tell you that the site is performing really well in satisfying the demand.

Speaker 13

Okay. Thank you.

Operator

The next question comes from Eric Coldwell of Baird. Please go ahead.

Speaker 14

I wanted to hit on 2 topics. The first is coming back to the COVID revenue. Sorry if I missed this, but Did you comment on how the $100,000,000 of Q1 revenue compared to your prior expectations or what was originally embedded in Street Guidance. And then what changed to drive that upside or and or the increase for the full year on the COVID side?

Speaker 4

I think when we guided for COVID, I think we took a fairly conservative assumption on COVID, not knowing where the season was going to go, number 1. But we don't provide, as you know, individual guidance from a quarter perspective. But I'd say that it's coming stronger. It will come in stronger in the first half, as I mentioned, It's not as important to the back half of the year from a COVID perspective from a COVID revenue perspective than what we're seeing today. Now as the season plays out this year, That's going to dictate demand at the end of our fiscal year, our Q4, our Q2 calendar year next year.

Speaker 4

And we should be able to have more visibility as we work through the tail end of the COVID season here in our second quarter And calendar year 4th quarter, and I'll take a little dictate the season for next year.

Speaker 14

Okay. And then on second topic on the Gummy award, just hoping we could get a little more on the nature of the award. Was that an expansion with an existing customer, a new relationship with a new customer? Was it a competitive takeaway from external or internal manufacturing? And finally, Are these new launches from the partner or maybe that ties back to where this production is coming from that you have been awarded?

Speaker 14

Any additional details on timing or sizing? I know you said 3Q start, but it sounds like a pretty substantial deal for a segment that's been challenged. So I'm surprised it hasn't Gotten a little more attention today.

Speaker 4

Yes. The gummy market has been down. It continues to trend down. The underlying market This is a share gain. This is new business for us from this customer.

Speaker 4

It's an already existing product, And it's going to fit in perfectly into our network. We don't have to add any SG and A per se on top of it, and it fits into the existing Gummy network that we have and the open capacity that we have, so it's a kind of what I'd say is a no brainer. It's got reasonably good margins From a business perspective, it's got a very quick payback. So I think overall, it's a big win. It doesn't require much CapEx either to go in.

Speaker 4

So it's pretty impressive.

Speaker 3

Thank you.

Operator

Our next question comes from Rachel Vanthal of JPMorgan. Please go ahead.

Speaker 15

Great. Good morning. Thanks for fitting me in. Just one for me on PCH. So last year you continuously flagged some of the inventory destocking, Consumer discretionary spending headwinds.

Speaker 15

So can you walk us through, are you still seeing some of those headwinds impacting that business? And then just to follow-up on the earlier question around that commercial win on the gummy side. If we exclude that commercial win, how should we think about growth in consumer this year? Thank you.

Speaker 3

So look, let me cover the first part of the question in terms of the headwinds. As we said in the prepared remarks, Some of the macro environment that we have highlighted in November last year are still present. And we continue to see some prudent spend on the size of our Especially at this stage, right, at the early stage customers are very prudent in progressing gases through the pipeline given the bioelectronic environment. The consumer environment is still not as it was before. But the reason why we have in our own shop excitement about the way we We're going to continue to grow the company on an ex COVID basis.

Speaker 3

It's twofold really, right? So first of all, it's the pipeline, Right. In PCH, we had a lot of products have been approved, some of them recently, which will drive a lot of Growth in our Pharmaceutical Commercial Business and Share Gain, right? We knew That over time, our existing relationship with the large consumer company, which were not necessarily the natural market for Pedera, Those customers because of the relationship we have with Catherant and our brand will end up coming with us. We have a little bit of a trend that is better than the market because of these main dynamics ACH, and that's why we are confident about the ramp and the profile of the business as go through the fiscal 24.

Operator

Our last question today comes from Sean Dodge of RBC Capital Markets. Please go ahead. Your line is open.

Speaker 4

Hey, good morning. This is Thomas Keller on for Sean. Thanks for taking the question. And apologies if this recovery, I got disconnected earlier. I wanted to go back to the just tech transfers in Bloomington.

Speaker 4

Should we just consider these complete or are there still some hurdles you need to clear to get these into full production? Any more detail here would be helpful. Thanks.

Speaker 3

Well, first of all, I never said the Bloomington, right? So it's and we already said In previous calls that some of those relationship are extended and expanded. So I would say that now this is something that is really touching All our network when it comes to sterile product, and we feel pretty good about it because it's really the way we want Our customers with a network approach, not a side approach, which gives us a lot of flexibility and a lot of optionality For customers. So first of all, it's across the network. And yes, I do believe that those Tech transfer activities could be deemed largely done, of course, on the first line.

Speaker 3

So there will be more coming on the But as I said, it's much easier because these are like for like assets to the current ones. And so, yes, we're now going to start in the second half of the year in ramping up commercial volumes and really giving more supply to our customers.

Operator

Thank you. We have no further questions in the queue. So I'll turn the call back over to CEO, Alessandro Marcelli, for any closing remarks.

Speaker 3

Thank you, everyone, for taking the time to join our call today. We are pleased to have delivered the solid financial performance this quarter, While making operational improvement. At the same time, the strength of our pipeline and new commercial wins Increase our confidence in fiscal 2024 guidance, which we have reaffirmed. We remain focused on restoring Catalent's Margins, while driving a sustainable and profitable growth, increasing shareholder value And executing on our mission to improve the lives of patients every day. Thank you.

Powered by Quartr
Earnings Conference Call
Catalent Q1 2024
00:00 / 00:00