Catalent Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 29, 2022

There are 17 speakers on the call.

Operator

Good morning. Thank you for attending today's Catalent Inc. 4th Quarter Fiscal Year 2022 Earnings Call. My name is Forum, and I will be your moderator for today's call. All lines will remain muted during the presentation portion of the call with an opportunity for public and private questions and answers at the end.

Operator

It is now my pleasure to pass the conference over to our host, Paul SerDes, Vice President of Investor Relations. Mr. SerDes, please proceed.

Speaker 1

Good morning, everyone, and thank you for joining us today to review Catalent's Q4 and full fiscal year 2022 financial results. Joining me on the call today are Alessandro Maselli, President and Chief Executive Officer and Tom Castellano, Senior VP 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.catalyt.com. During our call today, management will make forward looking statements and refer to non GAAP financial measures. It is possible that actual results could differ from management's We refer you to slide 3 for more detail on forward looking statements.

Speaker 1

Slides 45 discuss Catalent's use of non GAAP financial measures and our just issued earnings release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Catalent's Form 10 ks 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 Alessandro Miceli, whose opening remarks will begin on Slide 6 of the presentation.

Speaker 2

Thanks, Paul, and welcome, everyone, to the call. Fiscal 2022 was another extraordinary year for Catalent. During the year, we achieved strong results, both financially and operationally, while also making a positive impact on our global community by delivering our mission to develop and deliver products that help people live better and healthier lives. Some of our top highlights since July 2021 include: Significantly investing in capacity and infrastructure in both North America and Europe, particularly focused on servicing the high demand segments of the market. Adding another growth engine to the company through our entry in consumer preferred dosage, gourmet dosage forms for nutritional supplements, which we continue to aggressively expand.

Speaker 2

Agreeing to acquire a new capacity that will accelerate our demand in the attractive category of idiopoent compounds, expanding and deepening our one of our best talent tools in the industry, Intensifying our long standing commitment to sustainability, accelerating our growth strategy and delivering regular financial results despite a difficult inflationary environment and ongoing supply chain challenges. Fiscal 2022 net revenue was 4 point $83,000,000,000 which grew organically in constant currency at 20% compared to prior fiscal year. This growth was primarily driven by broad demand for our biologics offering, including the demand for COVID-nineteen related programs, Increased demand for our customer prescription products and a rebound in demand for our consumer health products. Adjusted EBITDA for the year was $1,290,000,000 reflecting constant currency organic growth of 28% compared to fiscal 2021. We also increased our adjusted EBITDA margin to 26.6 percent, up 110 basis points from 25.5 percent we recorded in fiscal 2021.

Speaker 2

Fiscal 2022 adjusted net income was $694,000,000 or $3.84 per diluted share, up from $3.04 per diluted share in fiscal 2021. Now focusing on the Q4, I'm pleased to report that we have closed out the year with Strong results as our robust business momentum more than offsets headwinds from inflation and unfavorable exchange transition translation. As shown on Slide 7, our 4th quarter revenue was $1,301,000,000 increasing 10% as reported or 15% in constant currency compared to the Q4 of fiscal 2021. When excluding acquisition and divestiture, organic growth was 10% measured in constant currency. This growth was primarily driven by our Biologics segment, which grew double digits despite Lower year on year revenue in the quarter from COVID-nineteen programs.

Speaker 2

Our 4th quarter adjusted EBITDA was 3.80 $1,000,000 increased 10% as reported or 16% on a constant currency basis compared to the Q4 of fiscal 2021. When excluding acquisition and divestiture, organic growth was 13% measured in constant currency. Our adjusted net income the Q4, it was $215,000,000 or $1.19 per diluted share, up from 1.16 Since the dividend share in the corresponding prior year period. As you know, we put in place new organizational structure effective July 1, the start of fiscal 2023, which was also the same day I transitioned to my current role as the CEO. Our new structure will help us better manage the business as it has grown over the last While also enabling value creation by giving our customers easier access to a broader array of our services.

Speaker 2

The reorganization has reduced our number of operating segments from 4 to 2, with one focusing on biologics and the other on Pharmaceuticals and Consumer Health. Each segment represents roughly half of the Total company revenues illustrated on Slide 8. We will begin reporting our results under this new structure starting with our Q1 earnings call in early November. We will also issue a rate statement of recent historical results under the new structure in the coming weeks. The new Pharma and Consumer Health segment includes the offering of 3 of our prior segments, Soft Gen and Oral Technology, Oral and Specialty Delivery and Clinical Supply Services and overwhelmingly serves small molecule programs.

Speaker 2

Notable offerings in Pharma and Consumer Health segment include our market leading capabilities for complex oral solid, Soft gel formulation, XADI's the fastest soft tablets, gummies and soft chews and clinical development and trial supply services. We have established dedicated teams focused individually on pharmaceutical, consumer health and clinical development and supply offerings. Our long term net revenue growth expectation for the Pharma and Consumer Health segment is 6% to 10%, which is 200 basis points higher at the upper end than the combined growth rates of the 3 previous segments now including within this new segment. This is due to the commercial synergies unlocked by our new go to market strategy enabled by this organizational structure and greater exposure to higher growth sectors of small molecule market as a result of recent investment and acquisitions. The new Biologics segment is essentially the same as the Biologics segment we reported in fiscal 2022 with some internal organization adjustments We could better service the newer modalities employed by many of our biopharma customers.

Speaker 2

Our expected long term growth Net revenue growth rate for the Biologics segment remains at 10% to 15%. There are several benefits to this important structural change. 1st, the simplified reporting structure enable us to be more agile in meeting and anticipating customer needs and expectations, as well as adapting to evolving customer and industry trends. 2nd, creating a more integrated offering makes it easier for customers to do business with CadaVent, leading to an enhanced customer experience and minimize barrier for existing and potential customers to access multiple services, So thereby enabling commercial synergies. Finally, it allows for even greater operational excellence as horizontal quality and operations oversight bolsters Accountability across the network.

Speaker 2

Importantly, based on our confidence in the long term growth expected across both segments to our Continued investment and synergy resulting from our reorganization, we're in a comfortable position to raise The top end of our projected consolidated long term growth rate to 12% compared to the previous 10% is shown in Slide 8. Looking to fiscal 2023, while Tom will review the details of our guidance later in the call, I would like to make some high level remarks On our revenue outlook, I indicated on our last earnings call in May that we were comfortable projecting the fiscal 2023 organic growth in line with our previous long term organic revenue growth rate of 8% to 10%, despite our forecast for a considerable decline in revenue from COVID-nineteen related programs. Since then, Given the more pronounced seasonality we project in customer ordering for these programs as well as the phasing of our fiscal year, We have further de listed the level of COVID related revenue in our guidance model. The new model used for the guidance we are sharing today takes into account the updated timing of the switch to single dose formats and forecast a roughly 2 thirds decrease in COVID vaccine related volumes in fiscal 2023 compared to fiscal 2022.

Speaker 2

After accounting for these additional derisking of COVID revenue, we still expect the fiscal 2023 organic growth at the midpoint to be around the low end of our long term range on a constant currency basis. Our projection of fiscal 2023 revenue growth is driven by our non COVID business, which is expected to grow organically by more than 25% at constant currency due to several factors, including: Growth expansions of existing assets that came online in the past year, such as our new drug substance lines in medicine and drug product lines in Bloomington and Europe, maximizing efficiencies in other areas of our global network, including those that manufacture our Gummy format and previously announced build outs of our cell therapy and plasmid offerings in Europe and U. S. Adding new capacity in the next two quarters, including the opening of 8 previously announced gene therapy suites in BWI and additional drug substance capacity in Bloomington. The large commercial tech transfer programs in our drug product assets we discussed on our last earnings call And later in fiscal 2023, our 2 new facility currently completing construction, our commercial cell therapy facility in Princeton and our drug It's anticipated following the closing of our recently announced agreement to acquire Matrix Contract Services, a food service specialty CDMO With a 330,000 square foot facility in Greenville, North Carolina for $475,000,000 from Maine Pharma as summarized On slide 9.

Speaker 2

The acquisition of this business and facility, which has enjoyed well over $100,000,000 in capital improvements in the last 5 years, will enable CATALAvent to accelerate existing plans to meet the increasing demand for fit for scale high potent drug manufacturer. Of course, the acquisition remains subject to customary closing conditions, including antitrust clearance. We expect to close the acquisition before December 31. One reason for our enthusiasm About the Medic business is the growth in the number of potent compounds in the oral solids market, driven by strong growth in the oral oncology pipeline, where more than 80% of programs require potent handling as well as the industry shift to in silico discovery, which often yields More potent and less soluble molecules. In the last several years, Cadavant has seen numerous opportunities to work with the highly potent compounds, which we can now service after we completed the acquisition of Matrix.

Speaker 2

Matrix Greenfield facility generated revenue of more than $90,000,000 during our Fiscal 2022 from services from third party customers, including large pharma and emerging biotech customers, as well as manufacturing services for several NIM Pharma owned products. I note that our deal with the NIM Pharma includes a long term supply agreement to manufacture certain of its product at the Greenville facility after closing. Once acquired, the domestic business will become part of our Pharma and Consumer Health segment and is expected to deliver revenue growth comparable to the segments projected overall long term growth of 6% to 10%. Matrix EBITDA margin is accretive to the PCH margin, and we intend to drive this margin above 30% over time by increasing utilization. Adding the product handling capabilities in fit for scale capacity through metrics represent a continuation of our strategy to maintain a balanced portfolio of offerings that closely matches the overall industry pipeline, which includes a growing number of innovative small molecules that are complex While innovation in the biologics market is more frequently mentioned in the headlines, Oral delivery is still the foundation of the prescription drug pipeline with almost 6,000 oral compounds currently in development, up approximately 10% from last year and that's been the focus of recent substantial Pharma M and A activities.

Speaker 2

The combination of our strategic acquisitions like Magics and our organic investment has positioned our Overall portfolio for long term success, including being in a strong position to meet our long term targets. As I wrap up my remarks this morning, let me add that the goals and objectives for fiscal 2020 reset by me and the rest of the Exelix team Lay the foundation for executing on long term on our long term strategy and also help position us to deliver another strong As we navigate the obstacle facing our industry today, which include the continued supply chain challenges, inflationary pressures, Energy supply issues in Europe, the uncertainty in the biotech funding and lower and more seasonal demand for Vaccine as we exit the pandemic. I am energized by our strategic growth ambitions, The roadmap we have in place and the covenant team working together to deliver for patients who rely on us, we continue to be in a strong position to succeed in the attractive markets we serve. Finally, I would like to congratulate Karen Flynn, who was elected by our Board of Directors last week to become the Board's newest member effective September 15. Karen recently retired after a longer distinguished career in the pharma service industry with their most recent role as Catherines, Senior Vice President and Chief Commercial Officer.

Speaker 2

And we are delighted to be able to continue Caren's involvement with the company. Now, I would like to turn the call over to Tom.

Speaker 3

Thanks, Alessandro. I'll begin this morning with a discussion on segment performance where commentary on segment growth will be in constant currency. I'll start on Slide 10 with the Biologics segment. Biologics net revenue in Q4 of $667,000,000 increased 14% compared to the Q4 of 2021. This strong net revenue growth was driven organically by Increased demand in our cell and gene therapy, drug product and drug substance offerings, which more than offset lower year over year revenue of our COVID-nineteen related programs.

Speaker 3

Our fiscal 2022 Q3 marked the peak in our COVID-nineteen related revenue with Q4 down both sequentially and year over year. When looking at the bar graph on Slide 10, you will see that Biologics commercial revenue declined year on year. The driver of the year over year decline is the conclusion of the COVID-nineteen program that was classified as a commercial product for revenue recognition purposes. This program is not expected to generate future revenue. The segment's EBITDA margin of 32.8 percent was up more than 2 10 basis points year over year from the 30.9% recorded in the Q4 of fiscal 2021 and up 170 basis points sequentially over the 3rd quarter.

Speaker 3

Year over year margin expansion was fueled by strong operational efficiencies, which more than offset the impact of remediation activity in Brussels. Note that remediation related costs were lower in Q4 than in Q3 and remediation activity continues at the site in fiscal 2023. In addition, margin was aided by a mix shift away from lower margin component sourcing revenue, which as mentioned on past calls, represents approximately 25% of total COVID vaccine revenue. As COVID-nineteen revenue continues to decline, so will the related dilutive margins from component sourcing that we have recently experienced. As shown on Slide 11, Softgel and Oral Technologies net revenue of $350,000,000 increased 22% compared to the Q4 of fiscal 2021 with segment EBITDA increasing 9% over the same period last fiscal year.

Speaker 3

The October 1, 2021 acquisition of Natera contributed 18 percentage points to SOT's net revenue growth and 13 percentage points to the segment's EBITDA growth during the quarter. The operational performance of the acquired Vatera business continues to exceed our expectations and remains an important driver for continued margin expansion for the company. SOT organic net revenue increased 4% and was driven by continued growth in development revenue as well as demand for both prescription products and consumer health products. However, supply chain challenges, inflationary pressures and unfavorable mix weighed on overall organic results Muting the impact of increased product demand. Slide 12 shows the results of the Oral and Specialty Delivery segment.

Speaker 3

Net revenue grew 11% and segment EBITDA was up 27% over the Q4 of last year. Overall demand for our Zydus offerings reached a record level, fueling significant growth. This strong demand was further supplemented by revenue from a royalty agreement related to our Zydus platform, which was a primary driver of the segment's strong EBITDA margin. As shown on Slide 13, our Clinical Supply Services segment posted net revenue of $104,000,000 representing 4% growth over the Q4 of fiscal 2021, driven by growth in our storage and distribution services. Segment EBITDA declined 2% driven by unfavorable mix.

Speaker 3

As of June 30, 2022, backlog for the segment was $540,000,000 up from $529,000,000 at the end of last quarter and up 10% from June 30, 2021. The segment recorded net new business wins of $132,000,000 during 4th quarter compared to $119,000,000 in the Q4 of the prior year. The segment's trailing 12 month Book to bill ratio is 1.1 times. Moving to our consolidated adjusted EBITDA on Slide 14. Our 4th quarter adjusted EBITDA increased 10% to $384,000,000 or 29.2 percent of net revenue, which was roughly in line with the Q4 of fiscal 2021.

Speaker 3

On a constant currency basis, our 4th quarter adjusted EBITDA increased 16% compared to the Q4 of the prior year. For the full year, adjusted EBITDA increased 26% to $1,290,000,000 Over fiscal 202120 8 percent on a constant currency basis. Adjusted EBITDA margin increased 110 basis points to 26.6 percent in fiscal 2022 from 25.5% in fiscal 2021. As shown on Slide 15, 4th quarter adjusted net income was $215,000,000 or $1.19 per diluted share compared to adjusted net income of $209,000,000 or $1.16 per diluted share in the Q4 a year ago. For the full fiscal year, adjusted net income was $694,000,000 or $3.84 per diluted share compared to adjusted net income of $549,000,000 or $3.04 per diluted share in fiscal 2021.

Speaker 3

Slide 16 shows our debt related ratios and our capital allocation priorities. Catalent's net leverage ratio as of June 30, 2022 was 2.9 times, slightly below our long term target of 3.0x. This compares to net leverage of 2.6x on March 31, 2022 and 2.2 times on June 30, 2021. Our combination our combined balance of cash, Cash equivalents and marketable securities as of June 30, 2022 was $538,000,000 compared to $880,000,000 as of March 31, Note that our free cash flow has been negatively impacted the last 2 years by our strategic decision at the onset of the pandemic to increase inventory levels, which continue to allow us to have the inputs we need to meet our supply obligations to our customers and their patients in a timely manner. When we feel the time is appropriate and are more comfortable with the stabilization of our supply chain, we will begin to reverse course, which will have a future positive effect on free cash flow.

Speaker 3

Similarly, the realization of contract assets will also drive Favorable impact on future free cash flow after negatively impacting our fiscal 2022 results. As of June 30, 2022, our contract asset balance was $441,000,000 an increase of $260,000,000 compared to June 30, 2021. The overwhelming majority of this increase is related to some notably large development programs, Such as for some of the COVID vaccines where revenue is recorded based on a percentage of completion versus entirely on batch release as it is for commercial programs. This difference in approach affects when we are able to invoice customers, thereby delaying cash realization and negatively affecting free cash flow. Moving on to capital expenditures, we added a new slide in the appendix to illustrate our annual CapEx spend.

Speaker 3

In fiscal 2022, CapEx as a percentage of revenue was 14% compared to 17% in fiscal 2021. CapEx as a percent of revenue was a bit lower than we initially expected for fiscal 2022, driven by higher than expected revenue growth as well as some supply chain related delays and longer lead times than initially anticipated for some of our capital projects. For fiscal 2023, we expect CapEx to be in a similar range as fiscal 2022 or approximately 13% to 15% of net revenue. Now we turn to our financial outlook for fiscal 2023 as outlined on Slide 17. The midpoints reflected in our outlook Assume the challenging macro environment remains stable.

Speaker 3

We expect full year net revenue in the range of 4,975,000,000 to $5,225,000,000 representing growth of 3% to 8% on an as reported basis compared to fiscal 2022. Current FX rates, which we use in this forecast, are forecasted to have a negative impact of approximately 3 to 4 percentage points on our revenue and adjusted EBITDA growth. We project that inorganic revenue, which basically reflects One remaining quarter of the Botera acquisition until the 1st anniversary of that acquisition on October 1 will positively impact our annual growth rate by less than 1 percentage point. So after taking into account these two considerations, our expected organic Constant currency net revenue growth rate in fiscal 2023 is approximately 8% at the midpoint of our guidance range. The acquisition of Metrix will be factored into updated guidance we will share during the first earnings call following the close of the transaction.

Speaker 3

For full year adjusted EBITDA, we expect a range of $1,310,000,000 to $1,390,000,000 representing growth of 2% to 8% at reported rates compared to fiscal 2022. I would like to remind you of the seasonal nature of our business where revenue and EBITDA generation is historically more weighted to the back half of the year with roughly 60% of fiscal 2023 adjusted EBITDA expected to be generated in the second half of the year. Now we expect limited EBITDA margin this year on a constant currency basis. While we're still on track to achieve our fiscal 2026 EBITDA margin Target of 30%, there are a number of factors impacting margin expansion in fiscal 2023, including Headwinds from COVID related volume declines that we have been anticipating inflationary and supply chain pressures Startup costs related to our acquisitions of Princeton and Oxford, which we are absorbing in our organic assumptions because neither asset generated substantial revenue prior to its acquisition and foreign exchange translations as our margin profile is Higher outside of the U. S, while the majority of our corporate costs are domestic.

Speaker 3

Note that swings in the euro have a greater impact on FX translation than the pound. Moving to adjusted net income, we expect full year ANI of 660 to $730,000,000 representing a range from a decline of 5% to an increase of 5% compared to fiscal 2022. However, ANI was negatively impacted by FX translation of more than 4 percentage points. In addition, ANI growth in fiscal 2023 is being impacted by all of the items affecting adjusted EBITDA as well as the following items. 1st, And expected higher effective tax rate in the 24% to 25% range compared to 23.4% in fiscal 2022 given the year on year increase in the weighting of earnings in higher tax jurisdictions second, an increase in interest expense due to servicing the full year of new debt we raised in part to fund the Natera acquisition as well as related increases in the current rising interest rate environment and finally, increased depreciation expense due to our significantly larger asset base, which is also more heavily weighted in the U.

Speaker 3

S. The last piece of our guidance is the fully diluted share count. As in the past years, we offer guidance on share count on a diluted weighted average basis, which is the number needed to compute our adjusted net income per share or adjusted EPS. For fiscal 2023, we expect our share count to be in the range of 181,000,000 to 183,000,000 shares. Operator, this concludes our prepared remarks and we would now like to open the call for questions.

Operator

Please limit your questions to 1 question and a follow-up question and then re queue for any further questions. Our first question comes from the line of Sejes Savant with Morgan Stanley. Sejes, your line is now open.

Speaker 4

Hey, guys. Good morning. So maybe just following up there, Tom, on your remarks on the margin headwinds. Outside of that 300 bps to 400 bps FX hit on both the top line as well as EBITDA. Can you share some color on the moving pieces here in terms of the facility remediation, And the new facility ramps and COVID contributions normalizing.

Speaker 4

And I think you also called out So if you can just share some color and help build a bridge from where you finished fiscal 2022 and the midpoint of the guide next year on EBITDA margin that would be helpful.

Speaker 2

Yes, sure, Tayo. So thanks for the question.

Speaker 3

Yes, so your numbers are spot on in terms Of FX, we did talk about FX impact of 3 to 4 points on the revenue and EBITDA. We do see a little bit more Of an impact to the bottom line from FX than we do to the top line just given the geographic, I would say, mix Of earnings there. So the I would say the EBITDA impact to FX is more towards the top of that range where The revenue impact, I would say, is more towards the low to the midpoint of that range. So figure somewhere between 0.5 basis point difference between revenue and EBITDA there. Other items, I did mention in my comments that we do have remediation efforts continuing in Brussels Here into our fiscal 2023 that obviously is reflected into our guidance for sure.

Speaker 3

From a COVID standpoint, we mentioned in our prepared remarks that we have taking a 2 thirds haircut to the volumes we saw in fiscal 2022 in our fiscal 2023 guidance that's further derisking from what was assumed as part of our May comments on our Q3 call here. And just given that decrease volume and the absorption impact related to running at high levels of utilization on COVID dedicated lines, there is A relatively impact to our overall margin profile as a result of that. Supply chain and inflationary pressures, I would say, continue to be a challenge. And in some cases, even I would say more of a challenge now than they were in How we've talked about this in the past, we've seen more supply chain impacts to our SOT segment, specifically More recently around our ability to get our hands on active ingredients and other key inputs related to consumer health volumes. So that will play a role into the a little bit of the margin story here.

Speaker 3

And then just from an inflationary standpoint, I mean, look, just

Speaker 5

given the environment we're in, we're

Speaker 3

looking at Lorraine, we're looking at impact related to wages that are probably about 2 times what we would have seen in a normal year and that doesn't take into account What we're seeing on just the material side of things as well. Now obviously, we were able to pass those off to customers. We're doing that. We're going at the price where we can as well to help offset some of these pressures. But giving all of these moving pieces here To be sitting in a position on a constant currency basis where we are seeing modest margin improvement is a pretty good position to be in and what I would consider the most Challenging macroeconomic environment I've seen in my career.

Speaker 3

Lastly, I would just say we continue to be on track From a long term margin target year, Tejas, although we're not going to see the margin expansion of 100 plus basis points like we've seen over the last several years, We remain committed to our 28% EBITDA margin by sorry, our 30% EBITDA margin by fiscal 2026.

Speaker 4

Got it. That's super helpful, Tom. And then one for Alessandro, just in terms of the impact of the new operating structure from a customer standpoint, What changes versus before, any color there on the commercial synergies that you alluded to? And as you think about the segment growth rates that you had pointed to embedded in your prior long term target. Where do you expect to see the biggest uplift?

Speaker 2

Sure, sure. Look, this is very simple in many ways, although not easy Yes, it required a little bit of organizational adjustment. Look, when you look at the percentage of our customers, which are buying more than one service This is still a relatively low percentage. And when you look at where the customer base is going With more and more customers, which are more on the small side, the biotech type of customers, clearly, they have the need of Way more than just one service out of Covalent. And there is an opportunity there to significantly increase the share of existing customers, Which and the new customers will enjoy more than one service out of a cadher length offering.

Speaker 2

In the past, our previous organization was creating some internal barriers From that weapon, both from a go to market strategy, from an execution standpoint and by combining all of these together, clearly those barriers have been removed. There are incentive plans allowing people to benefit from cross offering And we are already seeing since the onset of these new organizations some very good trends in these regards. So with regards of the increased guidance for this segment, look, we have made already investments In the Gamid business, we already said that this Gamid business is growing significantly above the average of this segment. We also have expanding and resolved some bottleneck we have in the capacity on the complex oral solid business in North America, Which were constraining in the past a little bit our growth was self constrained. We did have demand that we see demand and we couldn't really enjoy the demand that we were seeing there.

Speaker 2

And lastly, the fact that we are now both organically and inorganically opening up Our offering to Hypotient, which is the fastest growing sub segment of oral solid primarily driven by the oncology pipeline. All of that combined really has an impact on the expected growth rate of these segments. So in many ways, these are These were things in the making over the last 2 years unlocked by this new organization. Got it. Very helpful.

Speaker 2

Appreciate the color.

Operator

Thank you for your question. Our next question comes from the line of Luke Sergott with Barclays. Luke, your line is now open.

Speaker 6

Good morning, guys. Thanks for the question. So jumping real quick here on the guide. Can you help frame What the range of COVID is down based on the guidance for 2023. So if the midpoint is down 2 thirds on the volumes, what The worst case scenario would be and best case for you guys?

Speaker 3

So Luke, I would maybe just start here by saying, I don't know That there's a significant variation around COVID volume to the low end here. I would say the levels that we've taken COVID volume down is Reflective of contractual obligations that we have with key customers and decreasing it 2 thirds from where we were in fiscal 2021 Puts it down to a relatively much smaller level than it has been contributing in the past. I would say That's not an assumption that I would say is really the variability here In terms of the guidance range now, there's obviously if we see any significant increases here related COVID demand that can factor into the high end or outside on the high end of the range, but I wouldn't say that there's a material Swing in the assumption around COVID throughout the range of guidance. I would say the real variability here in terms of our range is just A lot of the supply chain related challenges that we saw and are we going to have any difficulty in getting our hands on materials there. As I mentioned, The midpoint of the range assumes that the macroeconomic environment we're in today remains steady.

Speaker 3

If that were to get worse, that would be more of A potential impactor to getting us towards the lower end of that range Any further movement on the COVID side, which as I said, we feel pretty good around and is pretty much a firm outlook here Based on contractual obligations. Yes. The other piece I would add, Luke, here is during the spring, we have said many times that There was still

Speaker 2

a number of variables significantly impacting the potential outlook on COVID vaccine demand. And those variables were primarily related to what is our second half of our fiscal year, meaning the first half of next calendar year. So some of those variables have settled now and are clear, primarily with regards of how they the I'm going to behave from a seasonal standpoint. We made the reference in our script that now we have a pretty good outlook around the seasonality Of the vaccines and so forth. And so we are in a better position to forecast the second half of the our fiscal year, which is the 1st 6 months of next year.

Speaker 2

So I believe that this is a solid outlook we are providing today. All right, great.

Speaker 6

And then just a quick follow-up on that. So I mean you guys are talking about the offsets coming from all the capacity expansions that you've done in Bloomington and Indianapolis And then the suites coming on in Princeton and elsewhere. Can you just help us think about when there's these supply chains, Is there a particular indication that it's hitting hardest? Or is it just broad based? And then can you give us a sense of How you're thinking about these easing?

Speaker 2

Look, when it comes to these new assets, these new assets were is a combination of several assets, which were You know, meant to meet demand in a number of therapeutic areas, which we have seen over the last 3 years potentially in high demand. One of these is Diabetes, which combines now with some obesity as well, neurological disorders And surely oncology, the new approved cell therapies for the oncology pipeline are Pretty remarkable and this is an area where we see opportunity. So all these assets were primarily built to meet This demand coming from these indications and therapeutic areas.

Speaker 3

Yes. And I would just add to that, Luke, as I highlighted earlier in my Comments to Tejas. A lot of the supply chain challenges that we've been seeing more recently have been impacting Our SOT business and particularly on the consumer health side. So, not geared towards, those large molecule Biologic assets that you're referencing. Yes.

Speaker 6

Awesome. Great. Thank you.

Operator

Thank you for your questions. Our next question comes from the line of Julia Kim with JPMorgan. Julia, your line is now open.

Speaker 7

Hi, good morning. Thanks for taking the question. So just a couple to clear up the guidance. First regarding I heard you on kind of attributing your updated guidance to derisk COVID revenue and FX. How about the outlook for the other non vaccine Has there been any changes?

Speaker 7

And in light of the inflationary pressures you cited earlier, how much pricing contribution are you embedded in the guidance?

Speaker 3

Sure. So look, I would say with the derisking here from a guidance standpoint, You broke up a little bit during the second part of your question, Julia, so I'll do my best here to answer it. But in terms of the first part, we did mention that we are seeing the base business here growing in excess of 25% in the fiscal year. That's going to be a significant offset to the 2 thirds reduction in COVID related volume that we have in our fiscal 2023 guidance. And that does contemplate growth across all of our technology offerings.

Speaker 3

I would say from a biologic standpoint, we are seeing ex growth, ex COVID growth on the drug product side. But obviously, cell and gene therapy is a Significant contributor to the fiscal 2023 growth story. That was a business that was not significantly impacted by COVID related demand. Our drug substance Business out of both Madison and Bloomington as well as capacity that we'll be bringing online in Europe as a result of the Facility, that was another business that was obviously not significantly impacted by COVID related demand that we will be seeing growth From in fiscal 2023, I think there may have been a part of your questions around COVID therapeutics in here. I would say COVID therapeutics are not Significant growth driver as we've talked about.

Speaker 3

The bulk of our COVID related revenue has been from more vaccine Related revenue. And in terms of, I think the second part of your question was related to supply chain challenges and what the impact There is and I think we've talked about that already mostly impacting the consumer health side of the business. In terms of inflationary pressures, We are seeing wages up 2 times to what they would be in a normal year as well as seeing increases Where our contracts give us the ability to as well as, I would say driving off cycle price increases, where we're able to from customers to ease that impact. But Again, despite all of those challenges, we are looking at modest margin expansion at the midpoint of our fiscal 2023 guidance on a constant currency basis.

Speaker 7

Great. Thanks. And on the long term guidance, you're raising the high end of that. On the PCH incremental revenue synergy, can you talk about how long do you think it will take for you to achieve the full potential and push Towards the high end of that 6% to 10% growth. And then on the biologics side, has there been any improved Outlook, on that side, given what's happening on the new modalities and around biosimilars, or are we still maintaining kind of the midpoint of that 10% to 15% growth?

Speaker 7

Thanks.

Speaker 2

Sure. Look, clearly, we don't give very short term indications of guidance by But in terms of answering broadly to your question, we are already seeing the transition of that segment Accelerating towards the new growth that we have projected. As I said, that is driven If you look at the factors that I did mention, which are behind debt acceleration, some of them were already In play in the last couple of years, right? So the addition of the Gammick business will be organic this year. There is only 1 quarter where it's going to be inorganic.

Speaker 2

So not only now we have full ownership We are very much accelerating on expanding capacity to meet the high demand in that area. Our expansions and acceleration on complex oral solid in North America as well has been quite Executed well by the team and is coming available for executing on programs, which we have secured over the last few years. And I would say in general that there is a continued rebound of our consumer products with specifically out of cough and cold categories And so and pain relief, which is another area where we are seeing significant demand. If anything there, we're trying to overcome some supply challenges. So When you look at all of these dynamics, which I did mention, these are dynamics that have been in play already in the last few quarters and Coming to fruition, on top of that, we are confident that the accelerated commercial synergies We can enable with the new organization will allow to further accelerate this growth.

Speaker 1

Next question, operator?

Operator

Thank you. Our next question comes from the line of Jacob Johnson with Stephens. Jacob, your line is now open.

Speaker 8

Hey, good morning. Maybe starting off with just a higher level question, dollars 2,500,000,000 I think of Biologics revenue in In FY 2022, you've got the BWI expansion, Mastercell, Princeton, Oxford, a number of kind of and Bloomington, A number of capacity additions there. I know capacity is hard to define or quantify, but can you just talk about The amount of capacity you've added to your Biologics segment over the last couple of years and what that could mean for growth as we look out the next several years?

Speaker 2

Yes, sure. Look, it's as you pointed out, it's quite remarkable, the capacity that we have added. And with the remaining execution that we're going to do what I can tell you is that by continuing on that execution and the plans we have In the next 18 months, 18 to 24 months, we are very well positioned to deliver our fiscal 2026 targets, if you like. So in many ways, we have already created a significant amount of the capacity that Once getting utilized, we'll deliver the fiscal 2026 target. So probably this is giving you a little bit of Quantitative measure of the capacity being created.

Speaker 2

But another way to look at that, look, when it comes We've been primarily focusing complementing the offering with the syringes on top of vials. And when it comes to drug substance, we've been just doing expansion and densifying our production schedule. And when it comes to gene therapies, we'd be essentially going from 10 suites to 18 suites in BWI. So This again gives you a little bit of a measure of what is the potential of this capacity going forward.

Speaker 8

Got it. Thanks for that, Alessandra. And then just one on the COVID kind of roll off. Can you just talk about how quickly you can transition The drug product assets to new kind of non COVID applications, is there any lag Period or downtime associated with switching those lines over? And maybe how should we think about the timing of that Transition throughout 2023, is that something where maybe there could be a little softness early in the year as you're transitioning or not so much?

Speaker 2

Look, the transition is mostly seamless, meaning that it is happening in parallel. One thing that Is happening is that mostly the lines on which we are transferring new products, we've been transferring and onboarding new programs Our lines which were built in parallel of the COVID lines. We always wanted to have the possibility to serve new customers and new programs while Still leaving enough capacity to satisfy the COVID vaccine demand, which in many ways is still not totally predictable, although we're Getting to a much better visibility on it. So I would tell you that the transition has been pretty Seamless, you don't have to think about these like stopping vaccine and starting something new, but it's mostly things that are happening on different formats And on different production lines. With regards of some of the ones that are in fact going to be served out of the Current COVID vaccine lines, which are going to remember the entirety of the current vaccine supplies made in vials For some of these programs, to a large extent, we can onboard them and validate them on the line while still making the So, it's a kind of phase in, phase out type of dynamic as opposed to having a gap in between.

Speaker 8

Got it. Thanks for taking the questions.

Operator

Thank you for your question. Our next question comes from the line of Derik De Bruin with Bank of America. Derek, your line is now open.

Speaker 9

Hi, good morning. Thank you for taking my questions. So I've got a few which I'm just going to shoot off here. 1, what's the embedded organic revenue growth guide by segment for the Biologics and PCH? That's the first one.

Speaker 9

The second one is going to be, when you talk about a 2 thirds volume reduction for Your COVID vaccines, are you also implying the 2 thirds revenue? I assume that you have some take or pay contracts. And then the third one is, You talked about a 28% adjusted EBITDA margin for 2024. Is that still something there? I mean, I realize you're backing your 30% number by 2026.

Speaker 9

Just wondering if That 28% number, that's how we should sort of think about the rebound for next year. Thank you.

Speaker 3

So I'll start here. Alessandra, feel free to jump in. So I'll start with your last question first, Eric. Look, we're not in a position at this point to give guidance around fiscal 2024 and I think there's still a lot to And in terms of what the macro environment looks like today and what that where that heads over the next year, what I have said is we're absolutely on track and continue to be Confident about our ability to deliver on the 30 percent EBITDA margin target for fiscal 2026. In terms of the organic revenue growth on a segment by segment basis, I would say that that's not something we've talked about here.

Speaker 3

Specifically, we did Make comments in our prepared remarks that we're seeing 25% business 25% growth across our business Excluding COVID demand, I think you can do some math and come based on disclosures we've made here as well as based on customer concentration Related disclosure that will be in our 10 ks and be able to estimate in a pretty tight band what the COVID related impact is here. And I would say As you take that into consideration, it's very difficult to have a 2 thirds related volume headwind on COVID and be able to see Growth within biologics including that in the 10% to 15% range. So I think you can maybe take from that where we are there. And from a SOT, OSD basis, we'll We'll be reporting those out as our farmer and consumer health segments starting in next quarter And that is a business that's growing outside of here in 2023 guidance that 6% to 10% long term outlook here, obviously, considering we're seeing 25% growth across the business on the next COVID basis.

Speaker 2

Yes. So look, with regards of your question around the take or pay, it's been kind of a routine question over the last few months. I'm going to reiterate what I've already shared. While we feel strong about our Take or Pay commitments and so on, we're also very mindful of being Partners with our Greek clients and making sure that we listen to their needs. And we try to find A win win solution for a landscape that is very hard to read for everyone.

Speaker 2

So in many ways, the breadth of the offering of covenant gives us optionality in sometimes To trade some of the what is viewed volumes in these contracts with something else. I believe that Part of the success we're having in non COVID business, which is growing at more than 25% is also due to this approach, Which have been very, very successful in securing long term good outlook on non COVID business Leveraging those relationship and our partnership approach. So we feel pretty good about our approach so far. We believe that's created momentum in non COVID business and is part of our it's partly behind our confidence in the long term prospects of the company. Thank you.

Operator

Thank you for your question. Our next question comes from the line of Jack Meehan with Nephron Research. Jack, your line is now open.

Speaker 10

Thank you. Good morning. I wanted to kind of continue along that line of questioning as it pertains to the guide. Is there any help you can provide around Seasonality, you talked about some of the seasonality in the business this year. Just help with pacing in terms of maybe expectations, especially Anything for the Q1 would be helpful.

Speaker 3

Yes. Look, Jack, we're going to fall short of giving specific quarterly guidance here, but let me just I would say as we did make a point here to reference seasonality that we I see in this business and I would say what we're seeing in fiscal 2022 probably feels a little bit more like what we've seen in Fiscal 2020 and prior to that given that fiscal I'm referring to fiscal 2023 now, feeling more like fiscal 2021 and 2020 from a seasonality perspective more so than what we saw fiscal 2022, which was obviously a year that was significantly skewed by COVID related increases through sequential quarters until we got to our Q4 where the volume declined here. We did mention about 60% of our absolute dollar EBITDA being generated in the second half of the fiscal year, bring 40% of that For the first half of the fiscal year and I would say in terms of the quarterly phasing again going back to what Q1, Q2 splits looked like In that 2019 2020 21 time period, it's probably a close proxy to how you can see the year play from a quarterly phasing standpoint in 2023.

Speaker 10

Great. That's helpful. And then on metrics, so you disclosed the over $90,000,000 of Trailing sales, with the supply agreement, what's the annualized revenue contribution we should expect upon close?

Speaker 3

So we'll give more specifics around the guidance here of metrics when we do close the transaction, which we're hoping to do by the end of The calendar year here, we did talk about growth rates that we expect to see from that business being Very closely aligned to that of what the new pharma consumer health business of 6% to 10% would look like. And you can use that $90,000,000 as a base knowing that obviously this will only be a partial year contribution that we would see in fiscal 2023. And again that Exactly how much will depend on the timing of the close of the transaction. So we'll give some more specifics around the revenue and EBITDA

Speaker 2

I would just add one comment more general. One reason why we do like the space of prescription oral solid is that you normally have a pretty good visibility on the revenues for a fairly good horizon Given the prescription nature of the business and the strength of the pipeline.

Speaker 1

Next question, operator?

Operator

Our next question comes from the line of Paul Knight with KeyBanc. Paul, your line is now open.

Speaker 11

Yes, Alessandro. Thanks for the question. Where are you in the go to market strategy? Are you Halfway there in the productivity you expect, could you give us some metrics around where we are today with This strategy?

Speaker 2

Sure. That's a great question. I believe we are in a pretty good Please. I believe, look, we've been always very happy about our sales machine, which has been producing consistent organic growth Over the last 4, 5 years, I would say. Here is more in terms of Making sure that when one of our sales rep engages with the customer and we do have a relationship with the customer, we Take the full advantage of the relationship and try to offer more than just one service.

Speaker 2

So I would say that, look, I cannot point to the specific percentage of completion of the plan, but we are pretty advanced in what we are trying to implement here. Our basics and foundations of our sales machine remain very, very strong and what they drove Really success in the last few years. And this is the way you need to see is not a revolution, but an enhancement of the go to market Strategy so that we can unlock value where the value was blocked by our internal barriers.

Speaker 11

And you raised your long term growth guidance by 200 basis points. Is that due to your increased Optimism around single dose fill finish outlook or is it that plus Cell therapy, what are the components of that 200 basis point increase or the big drivers I think is the best way to ask that?

Speaker 2

Yes, sure. Look, I believe that on the Biologics side, our outlook remains pretty much The same that was before. That's really not what is driving this increase. We remain very bullish on the biologics story at 10% to 15%. What is driving the overall increase in the growth expectation from the company is, if you like, the assets, which were a little bit Behind in the growth story of the company, dragging down the overall growth rate perspective for the company, which were more in the small molecule side.

Speaker 2

And the refashioning of the small molecule footprint we were able to implement through the pandemic, which went a little bit Under the radar, I understand that during the pandemic, everything was making the news was related to biologics, vaccines and But we were working very, very hard in the background in addressing some of the gaps we had in the small molecule portfolio To enable faster growth there. And I will point out again, primarily in the consumer health, getting on top of these In high demand, the dosage form of gummies and soft chews, which is again is a significant contributor to that acceleration. The fact that we've been investing organically in our Kentucky facility, in our Florida facility, which are Serving the complex oral solid market in the United States, which is very, very healthy at this point in time, As well as leveraging some of the dynamics in the consumer health after an initial period of, if you like, a crisis at the beginning of the pandemic Came back pretty, pretty strong. So, it's more on the PCH side that you need to see the increase. We have increased 200 basis points, The top end on the PCH side compared to the past and this is really what is driving our most More comfortable outlook about the company and really putting us in a comfortable position to raise our long term guidance for the organization.

Speaker 2

Thank you.

Operator

Thank you for your question. Our next question comes from the line of Dave Windley with Jefferies. Dave, your line is now open.

Speaker 12

Hi, thanks. Good morning. I have a couple of clarifications and then a more strategic question. So Am I right in calculating that the Zydus related royalty in the quarter would be about maybe $10,000,000 Is that a fair estimate?

Speaker 3

David, we didn't disclose exactly what the contribution was there. We did point to the fact that it was That's significant driver of margin profile. So I think if you were able to do that math and triangulate something in that range, I think that's directional.

Speaker 12

Yes. Okay. And secondly, on Tom, you talked about lower component sourcing with COVID, But then on the other hand, kind of lower absorption from lower COVID volumes, I guess I'm wondering If kind of the bottom line margin impact from the lower COVID assumptions in 2023 is margin dilutive or margin accretive taking those two impacts together.

Speaker 3

Yes. Look, I think it's I think you're right. We did We mentioned that with the declining COVID related revenue that we will see the component sourcing dynamics start to normalize Here and the year and then obviously in talking about some of the margin pressure opportunities here, we talked about The we've talked about the absorption related items driven volumes. I would say The point of referencing the component sourcing piece is really more material For the Biologics segment, then I would say it is for the company overall. Meanwhile, the absorption piece does have a more meaningful impact On the company overall here, Dave, just given the fact that we're talking about dedicated Capacity that was running at very high levels of utilization and being replaced whether on the same And other assets that we brought online during that period here.

Speaker 3

I'm not quantifying each of those for you, but I would say They essentially offset each other, but there's probably a little bit more impact to the bottom line here From an absorption standpoint, just as we start to ramp up other assets that we brought online during the COVID pandemic That are, I would say, slow on the uptake here, right? You don't plug in a new syringe line and be operating at 85%, 90% utilization and start to see that full There's a ramp up period here that we see that takes into consideration. But I would say the That we're in again in a position where we are seeing modest margin expansion despite a lot of these moving pieces and challenging macroeconomic environment is something we're pleased with and we're obviously going to look to maximize the margin expansion opportunity that we have here in Goal 23 on our path towards 30% by fiscal 2026. And as an follow-up

Speaker 2

I'll comment on these. I would tell you, clearly, as the vaccines for COVID, the transition Difficult amount of volumes in a shorter time frame and the rest of the year, you're essentially in a much lower production mode. So that is a little bit more challenging to manage from an absorption and profitability standpoint. It's something that takes some time to organize your sales And that's why I believe we have a very good plan. We are discussing this also with our partners, but It's a dynamic that needs to be taken into account as you move from the pandemic where you have been essentially running flat out through the 12 months You're moving to a more traditional vaccine manufacturing, which has a better challenge always add and will always add.

Speaker 2

So the last question I

Speaker 12

wanted to ask is around your long term growth and the raised guidance there. So 'twenty three will start up. I don't know if we want to think about A 4 year period since you do have 26 targets in the public, maybe a 4 year period is a reasonable period Think about you're starting that 4 year period a couple of points lower than the long term guide. Should we think about this as a Kind of a midpoint 10 percent CAGR target where at some point over that horizon you'll grow faster than the 10%? Or do you think of it as Getting to 10% after fiscal 2023.

Speaker 12

Thanks.

Speaker 2

So look, clearly, we see these fiscal year 2023 a little bit as a And at the same time, we are in line with expectations. And I will point you towards what we shared around the non COVID business and the strength there, Right. So we have highlighted that that is above 25%. I believe you guys can make some math and be a little bit more accurate on that. We provided all the relevant Information to be to do so.

Speaker 2

But that is telling us that all the moves we've done, refreshing and retooling our portfolio On the remaining business put us in a very strong position as we transition outside the pandemic.

Speaker 12

Thank you. That's great.

Speaker 1

Thanks, Dave. Next question please.

Operator

Thank you for your question. As a brief reminder Thank you. Our next question comes from the line of Christine Raines with William Blair. Christine, your line is now open.

Speaker 13

Hi. Yes. Thanks for the question. Just one for me. So, we've noted a slowdown in FDA approvals in the first half of the year, over last year.

Speaker 13

Any insight into the dynamic playing out here? And do you see this as having any near term impact on Catalent's business? Thanks.

Speaker 2

Well, look, from our perspective, we've been pretty pleased with the approvals that have been impacting our pipeline. And we see further opportunities going forward. So look, it's a little bit Not necessarily the macro dynamic of the approvals that happens out there significantly In tax, Catalent, it depends. It's very discrete, right, and very much focused on some products. But I got to tell you, we've been seeing some good success of the products in our pipeline in the last few quarters.

Speaker 13

Thank you.

Operator

Okay. Thank you for your question. Our next question comes from the line of John Sauerbeer with UBS. John, your line is now open. It looks like we've lost connection with John.

Operator

Our next question comes from the line of Justin Bowers with Deutsche Bank. Justin, your line is now open.

Speaker 14

Thank you and good morning. I'll keep it jiffy with the call running long. But Just in terms of the new capacity, specifically U. K. And Princeton, when does that really start coming online And the fiscal year and then by year end, what percentage of the Capacity will be built out with respect to, the footprint of those facilities.

Speaker 2

Sure. So very different answers for the new facilities. So with regards to Princeton commercial cell therapy, Capacity is mostly already online. And in fact, there is already one product, which is late stage running there. We've seen very, very strong interest out of the gate after we announced it.

Speaker 2

And it's more related to the Time for us to onboard these programs and the capacity. So the constraining factor in principle is really around our ability to close these deals and onboard these tech transfers and these Activities into facility, which again, I remember everybody is skewed more toward late stage. So we are talking about mature Cell therapy programs, which are trying to find home for their commercial Phase threepommercial needs. So that's Princeton. Cell therapy serving mostly oncology therapies.

Speaker 2

With regards to Oxford, it's a little bit of a different story. The build out is proceeding at pace. I believe that we are very close to open our PD side of the house, We're going to start working on, if you like, of the scale up of these cell lines. So this facility will be mostly Serving messenger RNA and proteins to a large extent. And then the large Scale of bioreactor will come a little bit later in the year.

Speaker 2

We expect that these assets to such a negative revenues as we said in the Part of the fiscal year, we believe that Princeton is going to be a little bit faster in that.

Speaker 3

Yes. And I'll just add Justin to that, related to Oxford specifically. This was a pivot for us here in terms of building out capacity For European drug substance originally in our Anani facility and then we were able to accelerate that with the acquisition of Oxford. So Our original drug substance plans didn't have revenue contribution until probably midway through our fiscal 2024 year, if not later. And as Alessandro said, as a result of this acceleration through what we've acquired as well as the capacity we're deploying in that site, We would be in a position to be able to see revenue contributions late in fiscal 2023.

Speaker 14

Yes, that's a great point, Tom. Okay, thanks. That's it for me.

Operator

Thank you for your question. Our next Question comes from the line of John Sauerbeer with UBS. John, your line is now open. Hi.

Speaker 5

Can you guys hear me now?

Speaker 2

Yes.

Speaker 5

Thanks for taking the questions. Just one for me. Can you just talk a little bit more on the M and A outlook? I guess how are you seeing the valuations tracking? And then after the Metrc transaction, do you see potential for additional activity in 2023?

Speaker 5

And any areas within the Biologic portfolio that could present inorganic opportunities? Thanks.

Speaker 2

So look, I believe that the first before the summer, we didn't see significant moves in the evaluations and so forth. As if the space was still waiting to factor in the new reality of multiples Into the assets. I believe we are still we are starting to see some early signs of more Catching up with the current environment, especially when it comes to cost of capital and macro economical Uncertainty over the next couple of years as well as by the funding. So I believe that As we move in the next few quarters, I do expect some correction there. I will add though that The premium assets in our space are still kind of expensive because they have A pretty good strategic prospect in front of them.

Speaker 2

So I believe it's a little bit of a mixed bag. I would tell you That's, of course, multiple can constitute an ARDOL, but for Cadarent is probably never only an evaluation Multiple and primarily our financial evaluation is more of a strategic evaluation and how we're going to make sure that when we add an asset To cadherin, we can accelerate growth and generate synergies out of these and not only enable More growth out of Canada, but we can also accelerate the growth into these assets. This is what we believe for Medix. We believe that By inserting these premium assets in our much larger commercial engine, we'll accelerate the pipeline creation On the other hand, we expect that these offering completing these offering in downstream High pot and capacity will create additional opportunities for some of our assets, which are more early stage, which didn't have necessarily a down capacity prior. So metrics is squarely in the definition of debt in terms of M and A.

Speaker 2

Cava Ent is always having a pretty healthy portfolio of M and A opportunities as we explore the market. And Whenever we see an opportunity to accelerate growth and expand margin through what I just Right. We definitely are interested in exploring the debt opportunity.

Speaker 5

Thanks for taking the question.

Operator

Thank you for your question. Our next question comes from the line of Sean Dodge with RBC Capital Markets. Sean, your line is now open.

Speaker 15

Yes. Thanks. Good morning. Well, on the organizational changes, Alessandro, you mentioned the revenue synergies from that. How should we think about the cost impact?

Speaker 15

Does realigning the commercial organization, is it something you need to invest or add headcount to do? Or do you think there's some cost efficiencies that you can drive longer term along with those? I guess, they're revenue growth enhancing. Are they Also intended to be margin percentage enhancing?

Speaker 2

Sure. Look, as I said on the commercial side, Most of the foundations were already there. We needed to tweak a little bit our incentive plans and so forth To make sure that we drive the right behaviors and remove some artificial P and L internal barriers, which were not really enhancing Our opportunities to sell across our portfolio offerings to our customers, which by the way, We'll buy them anyway either from us or from others. So better they buy all

Speaker 3

of them from us.

Speaker 2

So on that side, I don't believe that there will be any cost Impact on the commercial side of the house, we did point towards that this organization is a little bit leaner In terms of management and surely enables us to drive operational excellence across the board more effectively than we used to do before, Sharing some best practices and surely avoiding some duplication. When you think about, for instance, managing a program, which is both Giving the customer formulation development, clinical material and at the same time distributing the clinical trials for their own trials. Clearly, there is some synergy there in the way you manage this project across, while before you had to manage different PCC slices, when in fact you had the different slices, Which as I said was not as common as could have been. So clearly in that regards, we see an opportunity here To continue to drive operational excellence and efficiency and leaner approach. So bottom line is that, yes, we do expect that This is not only to drive accelerated top line growth, but also provide us a little bit of productivity and efficiency.

Speaker 3

Yes. And I would just add Sean, this gives us even more confidence than we already had around being able to achieve our fiscal 2026 long term EBITDA margin of target of 30%.

Speaker 2

Okay. That's clear. Thank you.

Operator

Thank you for your question. Our final question comes from the line of Evan Stover with Baird. Evan, your line is now open.

Speaker 16

Hey, thanks. Appreciate it. Just one for me, obviously. I wanted to relate the long range CapEx Outlook to your updated long range kind of revenue growth plan today. We're at the point where we've doubled the Revenue growth goal since the IPO.

Speaker 16

Can you talk about how that would relate to CapEx after we get past kind of the bolus of projects That's elevating the number higher here. What that equates to a longer run percent of your revenue spent on CapEx because you You're kind of getting to the point on your long range revenue plan where it feels like some of this higher CapEx is structural rather than transitory. So anything you can provide on A longer range settling of that number would be helpful.

Speaker 2

So I will let Tom to provide some more color around how you should think about it. What I can tell you is that the fact that now this overall organic growth expectation Is accelerated by the PCA segment as opposed to the Biologics segment. It's good news in that regard because our PCA segment is significantly lower in terms of capital intensity towards Biologics. And again, that was very, very intentional from us. We recognize that our Biologics segment is very capital intensive, specifically when it comes to assets like protein, drug product, You know, gene therapies and so forth.

Speaker 2

But when you look at complex oral solid, when you look at gamins, when you look at the softgels, when you look at Early stage formulation development assets and so forth, these are assets will come without a lower Capital intensity as a percentage of revenues. So as we accelerate that growth and that part We continue to have a significant share of the portfolio of Covalent. Overall, this is good news in terms of capital intensity of the organization. With the specifics of Biologics, I will let to Thomas to respond.

Speaker 3

Yes. I think it's a great point, Evan. And I think We historically have been spending capital at the clip of somewhere between 8% to 10%. We were at that time somewhere between a 4% 6% grower, maybe 4% 8% Tops and with the capital that we've deployed over the last couple of years into biologics, I think it's been pointed out to me that many of our that are more heavily biologics weighted than we are spending something like 20%, 25% of revenue. Look, I think Alessandra's points here around what we're seeing The pharma and consumer health side of the business being less capital intensive, but yet seeing the growth is accurate.

Speaker 3

This year, we've talked about spending something in that 13% to 15% of range. I don't think that a normal year for us is 8% to 10 Any longer given the mix shift of assets we now have in the portfolio. It feels like the normal for us now just given how much maintenance we have across 50 plus roof Top feels more like about 10%. So we do need to get back down to that 10%. I don't know that we get there exactly Next year, but we'll obviously give some more specifics around how this phases out.

Speaker 3

But I would expect 13% to 15% this year, probably a step Down from that level next year, probably not quite to the 10% normal run rate, but then thereafter we're getting Close to, if not at that 10% and that being the new sort of base CapEx level of deployment to expect.

Speaker 16

Appreciate it. Thank you.

Operator

Thank you for your questions. This concludes our Q and A session for today's call. I will now pass the call back to Alessandro Miceli for any closing remarks. Thank you.

Speaker 2

Thank you, everyone, for taking the time to join our call and your continued support of covering. We were pleased to deliver record results in fiscal 2022, and we are fully committed to deliver another

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect your line.

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Earnings Conference Call
Catalent Q4 2022
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