Alessandro Maselli
President and Chief Executive Officer at Catalent
Thank you, Paul, and thank you to everyone who has joined the call today. I'll cut to the chase. This is not at all the call that we expected to have. And we are not at all where we expected to be. Our financial performance and operational execution have all fallen significantly short of our expectations and our February forecast and we accept responsibility for disappointing you. We should also not be taking this long to finalize our financial reports, even though we and our third-party advisors had been using this time to engage in a deep and thorough review of our accounts and our financial reporting processes.
Because that work is ongoing, there are few specific details I can provide today regarding our financial performance, but I will share what news I can to give you a sense of how we got to where we are and explain our path forward. As we indicated in our April 14 and May 8 business updates, a combination of operational and productivity issues, as well as forecasting challenges have led us to significantly reduce both our fiscal '23 net revenue and adjusted EBITDA guidance. We are now reducing our fiscal '23 net revenue guidance to a range from $4.25 billion to $4.35 billion. And we are reducing our adjusted EBITDA guidance to a range from $725 million to $775 million.
It is important to note that these ranges reflect that a significant gene therapy product began to be treated in the third quarter as a commercial product for accounting purposes and while our evaluation remains ongoing, we anticipate continuing to record revenue for this product entirely on a percentage of completion basis. I understand how disappointing our further revised guidance is for all of you. I share your disappointment. Catalent has established itself as a global leader in drug manufacturing and delivery and produce exceptional results to investors and patients over the last -- past several years. But as your CEO, I'm responsible not only for the successes, but also for our poor performance this quarter and this year. I'm committed to putting Catalent back on track to assure a stronger fiscal '24 and that we return to building long-term shareholder value.
To that end, on this call, I will explain to you the operational challenges and other issues that contributed to our expected Q3 results and revised guidance. This will include walking you through the reasons why we believe that the operational challenges behind this quarter's disappointing performance and revised outlook are temporary and addressable. I'll then outline the actions we have taken to increase the rigor and discipline in our forecasting.
I will also briefly discuss the factors including our accounting adjustments at Bloomington that are expected to lead to the filing of an amended 10-K for fiscal '22 and that delayed the filing of our third quarter fiscal '23 10-Q. Finally and most importantly, I'll remind you of our positive long-term vision, a vision that while fully reflective of our short-term challenges, continues to look Catalent's long-term opportunities, performance and growth with the confidence and optimism. Catalent remains a great company and we are committed to remaining our customers' #1 CDMO partner in helping pharmaceutical, biotech and drug innovators develop, deliver and supply products that improve people's lives.
Before I do that, let me reassure you regarding some concerns we've had from investors over the last few weeks. The disappointing third quarter results, we expect to report, were not EU GMP compliance issues or the loss of any customer or canceled order. Our customer supply situation remain healthy and we believe we can sufficiently service their demand. We continue to be an essential part on individual drug manufacturing and delivery solutions that positively impact patients. We continue to win significant new business. Recent notable examples of these include new expansion of our long-term supply agreements with both Novo Nordisk and Samsung Bioepis.
With that, let's review the operational challenges that materially and directly impacted the EBITDA in the third quarter and our full year guidance. As we first communicated on April 14, during the third quarter, we began to identify productivity challenges and higher than expected cost at our drug product manufacturing facilities located in Bloomington and Brussels. These issues drove our EBITDA reduction in our revised guidance to be greater than our revenue reduction due to the following dynamics.
First, even when revenues were delayed or missed, the majority of the labor and overhead cost remained. Second, our plans to reduce our cost base were delayed in order to implement corrective and preventative actions following regulatory inspections earlier in the fiscal year in our Biologics segment. Finally, balance adjustment and inventory reserves for soon to expire biomanufacturing components and raw materials procured during the height of the pandemic are having a larger-than-normal one-time impact on our profitability.
Our gene therapy manufacturing operations in Maryland also faced unforeseen challenges, as we scale-up commercial volumes requiring a new ERP system and successfully completed three regulatory inspections. Stepping back, I believe a root cause of these challenges and increased costs are two different [Indecipherable] cliffs we experienced; a revenue cliff and an unprecedented operational cliff. Allow me to explain. In the last year while we have spoken of the COVID cliff, we usually meant the significant decline in revenue as the world emerged from the worst of the pandemic, which occurred much faster-than-expected or forecasted.
For Catalent that is expected to translate into slightly more than 50% decline in our fiscal '23 COVID-related revenues compared to fiscal '22 when COVID-related revenue was approximately $1.3 billion, with well over half of these have been tied to take or pay or related component sourcing agreements. While we expect some combination of COVID and other mRNA respiratory vaccines to remain a meaningful part of our revenue stream in the years to come, we don't have enough information at this point to forecast the expected full year impact in fiscal '24, although we are planning for a significant year-on-year reduction.
But this significant drop in COVID-related revenues doesn't tell the whole story. As you know, our people did an extraordinary job expanding our operations to meet the demands placed on us by the global pandemic response. Between meeting the unprecedented COVID vaccine demand and implementing growth initiatives to capitalize on the stronger long-term growth potential in biologics, we extended very quickly since the end of fiscal '19, including by adding approximately 7,000 more worker, roughly doubling our workforce and investing over $3.5 billion across our network, some of which was intended to help offset the revenue gap that will inevitably emerge once the COVID crisis faded.
We know now that we enter fiscal '23 overly optimistic about our current year growth. Our personnel and key processes simply did not keep pace with the dramatic up-and-down swing caused by COVID. And not only that some of the anticipated revenue offsets not materialized as quick as expected, but it ha proven much more complicated to exit the pandemic operationally at these impacted sites. Most importantly, we have not been able to reduce the cost that we added to the company, including personnel, material and inventory as rapidly as needed.
This is the operational COVID crisis I mentioned, driven by the extraordinary unprecedented complexity involved in implementing the operational changes required to execute the COVID programs and then we wanted to produce the non-COVID programs that would offset those revenues and fuel our future growth. I believe we have made solid progress replacing those revenues with the new sources that will ultimately produce sustainable long-term growth. However, it is now clear that we underestimated the related operational challenges and that forecasting suffered as a result. Now, that we fully recognize the depth of the challenges we're addressing them in a rapid focused manner.
Let me transition to forecasting. Whenever actual results varied materially form our expectations and projections, our underlying assumptions prove substantially inaccurate, it is time to reassess our forecasting rigor and discipline. This includes moderating our short-term optimism by more thoroughly assessing and integrating the negative impact of the recent macro events that have and continue to have a material impact on our business. This included the significant contraction in biotech funding, which is especially impactful for newer modalities.
At the same time, we are building the foundations of our demand planning process in our Biologics segment. We have also conducted a root cause analysis of our forecasting to improve our understanding of the internal operational drivers that led us to such inaccuracies. In Bloomington and Brussels, we are more effectively waiting the temporary impact of productivity challenges and higher than expected cost, including those associated with the regulatory remediation that generated adverse manufacturing variances.
In Bloomington, we expected some large product tech transfers to help offset the lower COVID demand at the site. Those tech transfers turn out to be more complex and are taking longer than anticipated, resulting in overly ambitious forecasts. Most of these have now been overcome. And we expect that these transfers to complete in the second half of this calendar year. On the positive side, some of these tech transfer customers are now adding an eye to Bloomington for their feel and finish work.
Gene therapy has been our brightest spot this year, including rapid growth in the first half of the year as we scaled the business. But we experienced significant unforeseen operational challenges in the business in the third quarter. These challenges have continued into the beginning of the fourth quarter as we increase the capacity to serve growing demand. As we first communicated on April 14, one of the key issues here involved replacing the BWI's prior ERP system, which was better suited for smaller clinical and development operations. While the implementation of the new ERP was critical to support the fundamentally bigger commercial operations at BWI. The challenges we experienced in the implementation delayed the ramp-up of this additional capacity until early May. Again, these challenges were temporary and will not affect any customer. As we have previously built a sufficient bright stock to support their immediate needs and we are now producing in normal fashion.
Our focus in our Pharma and Consumer Health segment have also been too optimistic. This is a segment where we expected strong growth as we started the year, modified our expectations to much more modest growth in November and February and now tracking to flat organic revenue growth for the full year. The main headwinds here are more pronounced declines in some existing commercial high value pharmaceutical products, delayed the launches of some promising new prescription products and lower consumer demand, particularly for gummies and other high-end nutritional supplements.
We are confident that the segments we return to organic growth in the coming quarters, given the growth we see in our core development revenue. The expected rebound of our top product for the segment that experienced supply-chain challenges in fiscal '23, the continuing strong demand that we see for our Zydis platform and the expected launches of 10 products recently approved by the FDA.
To recap, we have reviewed the procedure that with which we execute our processes to determine how macro events impacted our ability to meet our forecast, after delivering three years of exemplary performance. We are bringing back more rigor and skepticism that is known and previously unforeseen in macro and internal operational drivers. At the same time, we now recognize the need to reflect better the increased level of complexity involved in this new phase of our business. While it is difficult to assign the precise figures to the impact of this operation on forecasting challenges, we attribute about the same magnitude of those two items in our overall net revenue and EBITDA guidance adjustments.
Concurrently and in conjunction with the changes in our finance leadership, we have conducted an independent third-party balance sheet review at the two largest sites in our Biologics segment; Bloomington and BWI. Most importantly, these balance sheet review reaffirmed its overall soundness including our contract asset balances. In all, we expect to record a few accounting adjustments at Bloomington. One example, we expect to increase our inventory reserve by roughly $55 million related to certain raw materials and component to achieve the safety stock to minimize pandemic-related supply-chain shortages. We also expect it to correct $26 million recognition error related to the fourth quarter of fiscal '22. Separately, given our lower-growth expectations for our consumer health business, we also expect to report a goodwill impairment in that business in excess of $200 million.
Properly assessing and addressing the effect of these adjustments on our previously issued financial statements, including those in our most recent 10-K and our 10-Qs for the current fiscal year as well as their effects on our internal control over financial reporting and disclosure control and procedures are contributing to our delay in finalizing our third quarter 10-Q. When our assessment is complete, we will fully explain to our investors these prior-period changes and their effects, including their effects on our internal controls. We very much appreciate the patience of our shareholders as we work to resolve these issues in a timely fashion.
Moving on to a review of our manufacturing operations, we have taken several corrective actions at the BWI and Bloomington, including both management and operational changes to address the root causes of the issues identified at each site. The operational changes include the more rigorous demand planning, deployment of additional Six Sigma Black Belt resources to recover previously experienced productivity levels and a holistic cost review to adapt the future organizational structure to the new outlook on our demand. We expect these actions to bring us back progressively to typical profitability levels at these locations.
We have also made a number of important leadership changes. We announced on April 14 that we appointed Ricky Hopson to serve as our Interim Chief Financial Officer. Ricky is an experienced finance executive and operational finance expert who deeply understands Catalent and can successfully lead our financial function through this interim period as we search for a permanent CFO. We also made the changes in the finance organization in the last month, including changing the finance directors and to the sides with the greatest challenges.
On the operations side, we made several executive leadership changes in our Biologic segment. As just one example, we are pleased that Ricardo Zayas, a proven biologics operations leader with a vast industry experience, who joined Catalent in January, will now lead our operations worldwide across the Biologic segment. In addition, in early March, we announced that Sridhar Krishnan, a 20-year industry expert in Lean Six Sigma, had returned to Catalent to reignite the Catalent Way. The Catalent Way is a company-wide system of continuous improvement in lean manufacturing with clear standards to enable more predictable and efficient processes.
When I speak about rigor, it also means effectively managing costs and cash to ensure we drive the company's expected profitability. We have developed another cost reduction plan intended to drive margins more aligned to our historical levels, with a goal to double our previous committed $75 million to $85 million of analyzed run rate savings from restructuring activities. In addition, we are limiting our capex to all the essential investments. And we are also actively evaluating our current portfolio to ensure we have a suite of business that achieve the sustainable, profitable and capital-efficient growth that delivers superior shareholder values.
I want to reiterate my disappointment in having to deliver this news. My team and I accept the responsibility for falling short of your expectations and ours. We, nonetheless, remain committed to Catalent's long-term vision. The secular trends in our overall business and operating environment remain fundamentally strong. We operate generally in excellent markets with industry-leading services and capabilities to meet customer needs. We are proud of our regulatory record including this year where in the last six months we underwent nine successful FDA inspections, only a few of which included observations and all of those can be readily addressed. Among the successful inspections were two PAIs inspections at our gene therapy site in support of our significant product.
We also see strong current and future demand for our broad platform of services. And while lower biotech funding has impacted some near-term demand for some of our offerings in the newer modalities further away from commercialization, those assets that are closer to commercial approval or those that they have already been approved, which is well over half of our revenue when combined, has continued their ordering process as expected. We have also invested hundreds of millions of dollars in assets that target are getting ready to be deployed as dictated by the market demand. This included the additional new suites in BWI that now expected to be completed in fiscal '24. Two state-of-the art sterile syringe line, one in Anaheim and one in Bloomington and a high capacity expansion of our Zydis offering.
We estimate that when we reach planned level of utilization of these large footprint we will be able to generate $6.5 billion in annual revenue without the need for substantial new growth capital investments. We will let you know as soon as we're ready to announce our full quarterly results and provide any necessary further detail regarding revision to our prior financial statements.
I will now turn the call over to Ricky for a discussion of our capital position and expected fiscal '23 results.
