The operator of the Catalent Incorporation Fourth Quarter Fiscal Year 2023 Earnings Conference Call introduces Paul Surdez, Vice President of Investor Relations, who then explains the risks and uncertainties associated with the call. John Greisch, Executive Chair of the Board, then gives some brief opening remarks.

This paragraph discusses two press releases issued in the morning, one announcing initiatives to create shareholder value, including the appointment of four new independent directors to the Board and the creation of a new strategic and operational review committee of the Board. Additionally, Marty Carroll was replaced by the speaker as Executive Chair and the company entered into a cooperation agreement with Elliott that includes standstill voting commitments and confidentiality provisions.

John Elliott shares the Board's confidence in Catalent's position as a key partner for the biopharmaceutical industry and is committed to driving shareholder value. Catalent is taking decisive action to strengthen operational performance, enhance profitability, and create value for stakeholders. They are collaborating with Elliott to accomplish these shared goals. Alessandro and Matti will then discuss their recent performance, which has been affected by COVID, lower biotech funding, slower customer decision-making, and lackluster consumer discretionary spend. They are taking steps to reduce costs, bolster their commercial efforts, and slow capital deployment in affected areas.

Catalent has been making progress in their leadership team by bringing in new strengths, skills, and perspectives. Matti Masanovich and Lisa Evoli have been appointed as the new Chief Financial Officer and Chief Human Resources Officer, respectively. The company is also searching for a new Biologics President to complete their core leadership team.

The company has seen improved operational performance over the last few months, and the fourth quarter marks the bottom for Biologics performance. The goal is to return to historical margin levels by 2024, and operational improvement has been particularly evident in gene therapy offerings. BWI is seeing growing revenue in the first quarter of 2024 due to a focus on rapid operational improvement, and the company celebrated the first commercial dose of a Duchenne muscular dystrophy gene therapy being delivered to a patient. Brussels and Bloomington have also seen some progress in operational execution, with Brussels trending better.

Catalent's customer successfully received an FDA approval for their product in June, despite an ongoing inspection in May. The company prioritized the inspection, resulting in increased costs in the first quarter of fiscal 2024, but ultimately led to a positive outcome. The company has had 14 successful inspections in the past few months, and expects to see mid-to-high single digit revenue growth in fiscal 2024 due to new product approvals and the resolution of supply chain issues. The Consumer Health business is also expected to level out.

The company is focused on improving its EBITDA margin, financial forecasting, and cash flow generation in order to create value for shareholders. To do this, they have implemented two cost reduction plans, which are expected to result in $150-$170 million in annualized run rate savings. Additionally, the Biologics segment has been impacted by investments in new modalities, such as cell therapies and plasmid, which did not deliver the expected high growth in fiscal 2023.

The company is addressing the decrease in utilization of its facility and is expecting the Biologics segment to return to its historical EBITDA margin. They are also working to strengthen their forecasting and internal control processes and reducing their CapEx in fiscal 2024 to around 8-10% of sales. The Board, management team and CEO are focused on executing their mission to improve the lives of patients while striving to create value for all stakeholders. They are also welcoming four new members to the Board.

In the fourth quarter, Catalent's net revenue was $1.1 billion, down 17% on a reported and constant currency basis compared to the prior fourth quarter. Adjusted EBITDA decreased 61% to $139 million, while adjusted net income was $16 million or $0.09 per diluted share. Excluded from net income were non-cash asset impairments totaling $85 million on an after-tax basis. Matti Masanovich discussed the financial results and the details of the fiscal 2024 guidance.

In the fourth quarter of fiscal 2023, net revenue in Catalent's Biologics segment decreased by 37%, largely due to significantly lower COVID demand. On a non-COVID basis, revenue decreased 16%. Drug product and drug substance offerings both grew double-digit year-on-year, but gene therapy revenue was down due to production issues. Revenue streams were affected by contractual language which did not always align with the regulatory status of a given product.

The Biologics segment experienced a large drop in EBITDA due to COVID-related declines and underutilization in new modality facilities. The Pharma and Consumer Health segment saw a 3% increase in net revenue and a 6% decline in EBITDA, primarily due to the October 2022 acquisition of Metrics and supply chain challenges related to a top product and a decline in prescription product revenue. EBITDA margin was lower by 260 basis points year-over-year.

Catalent's debt load is well-structured and has a covenant requiring the ratio of net first-lien debt to trailing 12 months adjusted EBITDA to remain below 6.5 times. The company's net debt leverage ratio as of June 30, 2023, was 6.4 times, slightly higher than the third quarter due to lower year-on-year LTM adjusted EBITDA. Catalent is focusing on maximizing EBITDA and reducing leverage, as well as reducing working capital, accounts receivable, inventory, and contract assets to drive free cash flow.

In the fourth quarter of fiscal 2023, the company had $280 million in cash, cash equivalents, and marketable securities, which was an increase of $78 million from the previous quarter. Contract assets were $436 million, a decrease of $69 million from the previous quarter, and the company is working to reduce this balance with more favorable contract terms. CapEx for the year was $601 million, or 14% of revenue. The company's goal is to drive sustainable improvement in order to deliver incremental free cash flow and restore their historical EBITDA margin, while also ensuring all CapEx spend is aligned with their core values or contributes to key strategic initiatives. The target for overall net debt leverage is less than 3 times.

CapEx is being reduced by more than 30% in fiscal 2024 and net revenue is expected to be in the range of $4.3 billion to $4.5 billion, representing growth of 3%. Non-COVID business is expected to have full year revenue growth of 15-20%, driven by 30% growth in the Biologics portfolio and mid-to-high single-digit growth in PCH. Inorganic revenue is not expected to have a meaningful effect. Adjusted EBITDA is expected to be in the range of $680 million to $760 million with low margins due to low facility utilization. Biologics segment margins are expected to improve modestly and more pronouncedly in the second half of the year.

The company expects two-thirds of its consolidated adjusted EBITDA to be generated in the second half of the year, with 55% expected in the second half of 2024. They anticipate adjusted net income in the range of $113 million to $175 million, and the effective tax rate will be between 25%-27%. An increase in interest expense due to rising interest rates is expected, as well as increased depreciation expense due to investments. The company will not have enough time to file their 10-K today, so they plan to file a notification of late filing on Form 12b-25 and finish the 10-K within the 15-day grace period.

In this paragraph, Alessandro Maselli and Matti Lehtonen discuss the expectations for their fiscal 2024 guidance despite the drop in COVID revenues. They emphasize the underlying strength of their business and the growth of their gene therapy business. They explain that their top priorities as the CFO are to improve margins, reduce CapEx and working capital intensity, and strengthen internal controls and processes over financial reporting and forecasting. They then open up the call for questions.

The company is working to restore its margins in the first half of the year and Matti Masanovich explains the bridge from $714 million of EBITDA in 2023 to the midpoint of $720 million. This is due to COVID demand, increased gene therapy, better performance in Brussels and Bloomington facilities and growth in Biologics. Alessandro Maselli adds that there are one-off impacts to consider when modeling the fiscal year. Tejas Savant then asks about the strategic review underway.

The agreement between the company and Elliott is designed to enhance long-term shareholder value. The mandate of the strategic and operational review committee is to review the company's businesses and strategies with the goal of improving operational performance, strengthening the financial profile, and maximizing long-term value for shareholders. The first meeting of the committee is in September, and Alessandro and the management team will bring a proposal to the committee and Board in the coming months.

John Greisch of the strategic review committee states that it is difficult to give a specific timeline for when the committee will report their findings and recommendations to the Board. Alessandro Maselli adds that the company has ample liquidity and a unique opportunity to reduce working capital and CapEx intensity, and that they do not necessarily need to raise capital or debt. Tejas Savant concludes the conversation.

Alessandro Maselli and Matti congratulated on the new seat and discussed the accuracy and conservatism of their guidance. They noted that it is difficult to understand the trends of their business due to its high concentration in a few assets, and that their PCH segment performance in fiscal 2023 was below expectations. They believe that the business should grow in the mid-to-single digits.

PCH is growing within the expected range, with inorganic contributions and delayed approvals impacting growth last year. Consumer Health is now stable, while approvals have happened and the product is back on track. There is optimism across the board, with the mid-to-high single digits guidance feeling good, and Zydis continuing to have a high growth path.

In the last 12 months, Alessandro and Matti have discussed the importance of having a ground-up forecast to balance and be more conservative with guidance. They believe that this will help them identify any underutilization and help them get after those pockets of higher utilization. Jacob Johnson then asked about utilization at Bloomington and the long-term growth opportunity in fill finish broadly.

Alessandro Maselli explains that Bloomington is a launch pad for many new therapies and is often in the news for inspections due to the amount of work going on. He further states that they are pleased with the pipeline and assets, which are heavily utilized, especially in prefilled syringes. Additionally, they are investing in GLP-1, which they expect to be a dominant therapeutic area in the future. Jacob Johnson follows up by asking if they are willing to accept a near-term drag on profitability from early-stage assets in order to gain long-term growth opportunities. Alessandro responds that they still view these assets as key to their strategy.

Catalent believes that the growth of GLP-1 therapies will be exponential, but the start of the growth curve will be lower due to funding and manufacturing processes. They need to adjust their cost structure to mitigate short-term margin impacts, but they must avoid jeopardizing the long-term opportunity. Jacob Johnson asked for more information on the GLP-1 opportunity, and Catalent responded that they expect GLP-1 sales to represent a significant portion of their sales.

Alessandro Maselli and John Meehan discussed the GLP-1 category and Patara, respectively. Maselli noted that the category is expected to start to gain an inflection point in the second half of fiscal 2024 and fiscal 2025 due to increased manufacturing and output. Meehan asked if Patara, which is part of the Consumer Health market, would be part of the strategic review or potentially divested. Maselli noted that the Consumer Health market is going through a correction due to inventory levels and consumer discretionary spend, but Patara does not have a significant presence of the big consumer companies with the biggest brands.

The commercial team has made progress in building relationships and penetrating different segments of the market. They are close to signing additional work with blue-chip companies which will drive growth. Alessandro and John are working with a committee to improve operations, do a strategic review, assess the portfolio, and allocate capital to drive long-term shareholder value. They will report back on their findings and recommendations to the Board, but specific actions are premature to comment on at this time.

Alessandro Maselli and Matti Masanovich discussed the potential growth from gene therapy customers and the importance of the EMBARK data that will be released later this year. Maselli then mentioned that the relationship with the customer is across multiple programs, some closer to full approval than others. He also discussed the changes made to personnel and oversight at the Bloomington facility to restore operational excellence and give clients confidence. Finally, Maselli gave a shout out to the Bloomington team for their role in producing billions of vaccine doses to save millions of lives during the pandemic.

The Bloomington team has accomplished an historical mission, and changes have been made in the site leadership, quality function, and other leadership positions. These changes have allowed for progress in cost reduction and customer excellence. The new phase of the site is focused on launching new products and therapies. The strategic review did not confirm the $6.5 billion revenue capacity mentioned in the fiscal 3Q update.

Alessandro Maselli explains that the company's goal is to achieve utilization of assets between 70-80%, which would translate to $6.5 billion. He then discusses the progress being made at the Brussels facility, which is expected to return to normal productivity levels in the second half of the year.

Alessandro Maselli discussed the potential for the Biologics segment to return to historical margin levels and the 3x leverage target. He believes that the EBITDA will return to expected levels by fiscal 2025, and Matti is focused on initiatives to reduce working capital and improve short-term cash flow.

Alessandro Maselli and Justin Bowers discussed the pre-pandemic margins in the Biologics segments and the outlook for C19 revenue. Maselli believes that there is nothing preventing the company from returning to historical margin levels. He also clarified that the C19 revenue outlook does not include other respiratory program revenue. De Bruin asked if the company had done a systematic review of all facilities to look for potential areas of investment remediation.

Matti Masanovich and Alessandro Maselli both discussed the confidence in achieving the cost savings goal of $150 million to $170 million. This goal has been achieved through headcount reductions and closing underutilized facilities. The Strategic Review Committee will look at capacity and utilization to determine if there is more room for improvement. In regards to the cell and gene therapy business, Alessandro Maselli believes that early-stage is only one part of the equation.

Alessandro Maselli of the CDMO discussed the demand for GLP-1s and the need for capacity to satisfy it. He mentioned that they will be bringing capacity online quickly to meet the demand and that they will be a partner of choice for commercial assets in late-stage clinical phases. He also mentioned that they expect to have significant assets coming to fruition in 2025.

Alessandro Maselli discusses the role that their therapeutic facilities will play in the future and how the upcoming data readout from Sarepta's study will be an important event for them. He stresses that the impact of the readout will be delayed, but will still have an impact on their growth in the future.

Alessandro Maselli explains that PCH's growth is primarily driven by consumer discretionary spending in the Consumer Health sector, while the rest of the business is more influenced by pipeline dynamics. Last year was a disappointment due to delayed approvals, but a dozen of them have been approved in the last six months and are now launching. Additionally, the supply chain disruption has been resolved for a specific product, leading to an inflated demand in the short-term.

Alessandro Maselli explains that when evaluating the performance of customers, there is a wide range of data that is considered, not just the newsworthy events. He also states that according to their quality agreements, customers are informed of all regulatory outcomes that may or may not affect their products, providing them with a comprehensive view of the company's compliance profile.

Alessandro Maselli of Catalent reported that their sterile fill and finish capacity is close to 40% prefilled syringes and is rapidly increasing. He also noted that their services include packaging, auto-injector assembly, and other ancillary capacities which are important to the overall economics of the franchises.

Matti Masanovich explains that inventory is high on the list of working capital initiatives, but it is not as easy to get the cash out as with receivables since it requires burning off the inventory and changing ordering patterns. He believes that the company has not focused on it as much as they should have and there is an opportunity to take it down to a more normalized number. He states that the supply chain has leveled out and this should make it easier to reduce the inventory balance.

Catalent has recently achieved a historical milestone in the promise of treating terrible conditions by delivering the first dose of LFDs gene therapy to a young child in the U.S. suffering from DMD. The company remains focused on leading Catalent towards sustainable and profitable growth and increasing shareholder value. The actions announced today have placed the company on a clear path to do so.

This summary was generated with AI and may contain some inaccuracies.