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Edited Transcript of CTLT earnings conference call or presentation 5-Feb-19 1:15pm GMT

Q2 2019 Catalent Inc Earnings Call

Somerset Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Catalent Inc earnings conference call or presentation Tuesday, February 5, 2019 at 1:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Chiminski

Catalent, Inc. - Chairman, President & CEO

* Thomas Castellano

Catalent, Inc. - VP of Finance & IR and Treasurer

* Wetteny N. Joseph

Catalent, Inc. - Senior VP & CFO

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Conference Call Participants

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* Daniel Gregory Brennan

UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences

* David Howard Windley

Jefferies LLC, Research Division - Equity Analyst

* Donald Houghton Hooker

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Evan Arthur Stover

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate

* John Charles Kreger

William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst

* Juan Esteban Avendano

BofA Merrill Lynch, Research Division - Associate

* Rivka Regina Goldwasser

Morgan Stanley, Research Division - MD

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Second Quarter Fiscal Year 2019 Catalent, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Tom Castellano, Vice President, Investor Relations, Treasurer. Please go ahead.

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Thomas Castellano, Catalent, Inc. - VP of Finance & IR and Treasurer [2]

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Thank you, Crystal. Good morning, everyone, and thank you for joining us today to review Catalent's second quarter fiscal year 2019 financial results. Please see our agenda on Slide 2 of our accompanying presentation, which is available on our Investor Relations website. Speaking today for Catalent are myself, John Chiminski and Wetteny Joseph.

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 expectations. We refer you to Slide 3 for more detail. Slides 3, 4 and 5 discuss the non-GAAP measures, and our just-issued earnings release provides reconciliation to the nearest GAAP measures. Catalent's Form 10-Q to be filed with the SEC later today has additional information on the risks and uncertainty that may bear on our operating results, performance and financial condition.

Now I'd like to turn the call over to John Chiminski.

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [3]

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Thanks, Tom, and welcome, everyone, to our earnings call. We're pleased with our second quarter financial results, which were ahead of our internal expectations and position us well heading into the second half of the fiscal year. We continue to be confident in delivering our fiscal year 2019 full year financial guidance, which we are reaffirming.

As you can see on Slide 6, our revenue for the second quarter increased 3% as reported and increased 5% in constant currency to $623 million, driven by our Biologics and Specialty Drug Delivery segment as well as the acquisition of Juniper Pharmaceuticals.

These increases were partially offset by the ASC 606 revenue recognition change related to the treatment of comparative sourcing activity within our Clinical Supply Services segment, which is now recorded on a net basis as compared to a gross basis under the prior financial guidance. Excluding the impact of this revenue recognition change, revenue would have increased 10% in constant currency compared to the prior year.

Organic revenue grew 4% year-over-year during the quarter, led by our Biologics and Specialty Drug Delivery and Clinical Supply Services segments. Our adjusted EBITDA of $146 million was above the second quarter of fiscal year 2018 on a constant-currency basis by 6%.

Our adjusted net income for the second quarter was $65.4 million or $0.45 per diluted share, which is in line with the adjusted earnings per diluted share figure from the prior fiscal year. The strong financial results were led by our Biologics and Specialty Drugs segment, which continues to be the fastest growing segment in the Catalent portfolio and recorded revenue growth of 25% and EBITDA growth of 28% during the second quarter, most of which was organic.

Now moving to our operational update. First, we continue to make great strides on our biologics strategy. The integration of the Bloomington business acquired in October of last year is essentially complete. The business continues to deliver, and as I stated on the last earnings call, the Bloomington site recently received approval for its 20th commercial product, which is up from the 12 it was producing at the time of the acquisition.

Additionally, the third manufacturing train at our Madison facility is complete and began contributing revenue during the fourth quarter of fiscal year 2018. Our growing robust funnel of late-stage clinical opportunities will help increase the utilization of the new capacity in fiscal year 2019 to more than 50%.

We also received approval from our Board of Directors for and recently commenced a $200 million investment, spanning both Bloomington and Madison, that will add more drug substance manufacturing and drug product fill-finish capacity due to projected growth among existing and future customers. The combination of organic and inorganic investments we have already made in biologics continues to create significant value for the company, our customers and our shareholders.

As a reminder, Catalent biologics, including both Bloomington and our preexisting businesses, can provide integrated solutions from drug substance manufacturing and analytical services through clinical and commercial supply and fill-finish of biologics in a variety of dosage forms, including vials, cartridges and syringes. As we're seeing in the numbers, the Bloomington site continues to accelerate the already strong growth of our preexisting biologics business. Biologics comprised approximately 14% of Catalent's consolidated revenue in fiscal year 2017 and represents more than 26% of the company's revenue to date.

Second, you'll recall that we closed the acquisition of Juniper Pharmaceuticals during the first quarter, adding to our network of a European early development Center of Excellence with dose-form development and early manufacturing capabilities. Juniper's proven solutions and capabilities in formulation, development, bioavailability solutions and clinical-scale, oral-dose manufacturing, including spray dry dispersion, are already advancing our strategic goal to be the most comprehensive partner for pharmaceutical innovators, helping our customers to unlock the full potential of their molecules and provide better treatments to patients faster.

The integration of the Nottingham, U.K. site and its nearly 150 employees into the Catalent network is well under way and tracking according to our expectations while contributing strong financial results to our Oral Drug Delivery segment.

Third, I wanted to provide a further update on our Softgel Technologies business, which is generally performing in line with our expectations but continues to be negatively affected by the worldwide ibuprofen API shortage. Although the supply shortage is improving, the situation remains a challenge. During the second quarter, the ibuprofen shortage reduced segment EBITDA by approximately $8 million, and we currently expect some impact in the third quarter, although we see the basis for greater supply stability by the fourth quarter, in part because we have taken steps to secure alternative sources of supply that should be alleviating some of the bottlenecks by then.

Lastly, I'd like to discuss several factors that give us confidence in delivering our fiscal year 2019 financial guidance. First, we have a very strong pipeline of new products that are expected to launch in the fiscal year, and we already have visibility to more than $70 million of expected revenue from the 92 products that launched in the first half of the fiscal year, a higher rate than the first quarter when we launched 38 products.

Next, our biologics business continues to experience robust demand, and we're confident in our ability to execute on the demand, including the 20 commercial products in Bloomington.

In addition, we've built a backlog of orders in many of our sites across the network, and once again, we're confident in our ability to execute on that demand throughout the second half of the fiscal year, just as we did in the second quarter.

Finally, we remain positioned increasingly well in an attractive, robust, growing market and have the strongest development pipeline since Catalent's inception with more than 1,000 active projects.

Now I'll turn the call over to Wetteny Joseph, our Chief Financial Officer, who'll take you through our second quarter financial results.

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [4]

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Thanks, John. As John briefly mentioned earlier, the company adopted ASC 606, the new accounting standards concerning revenue from contracted customers as of July 1, 2018, using the modified retrospective method.

The reported results for the 3 and 6 months ended December 31, 2018, reflect the application of the new standard while the reported results for the 3 and 6 months ended December 31, 2017, were prepared under the guidance of the prior standard, ASC 605. This is especially important as I discuss the results related to our Clinical Supply Services segment, where adoption of the new standard changed the treatment of our comparator sourcing activities, which are now reported on a net basis compared to a gross basis in the prior year.

Now please turn to Slide 7 for a more detailed discussion on segment performance, beginning with our softgel business. As in past earnings calls, my commentary around segment growth will be in constant currency.

Softgel revenue of $213.7 million declined 3% during the quarter, with segment EBITDA declining 9% due to lower consumer health volume as a result of the worldwide ibuprofen shortage which negatively impacted segment EBITDA by approximately $8 million. Given the latest information we have available, we expect the ibuprofen shortage to continue for the next quarter until the worldwide supply stabilizes, as John noted earlier.

This headwind was partially offset by strength in Europe, where we experienced higher demand for prescription and consumer health products. The Asia Pacific divestitures negatively affected the segment's revenue by 2 percentage points but did not materially impact the segment's bottom line.

Another important item to note regarding Softgel segment performance is that, normalized for the Q2 impact of the Asia Pacific divestitures and ibuprofen shortage, the segment would have reported revenue growth of approximately 3%, which is in line with the segment's historical average.

Slide 8 shows that our Biologics and Specialty Drug Delivery segment recorded revenue of $184.3 million in the quarter, which is up 25% versus the comparable prior year period, with segment EBITDA growing 28% during the quarter. A portion of the segment's revenue and EBITDA growth was driven by the Bloomington biologics acquisition, which closed in October 2017 and contributed 10 percentage points to the revenue growth and 10 percentage points to the EBITDA growth. The Bloomington site has performed above our expectations continuously from the time of the acquisition announcement, and we feel good about the immediate and long-term growth prospects of this critical high-growth business.

On an organic basis, we saw strong growth, with revenue in Biologics and Specialty Drug Delivery segment up 15% and segment EBITDA up 18% during the quarter. Recent organic investments in our legacy biologics business continued to translate into growth during the second quarter and remains the fastest growing business within Catalent. We recorded strong growth in drug substance, driven by the completion of project milestones and larger clinical programs, but this was partially offset by modest declines in our European drug product business. We continue to believe that our biologics business is positioned well to deliver future growth.

As John mentioned, the third suite at Madison is complete and online, and its utilization level continues to ramp. In addition to the strong performance in biologics, we saw a nice recovery within our respiratory and ophthalmic business, which saw higher volumes in the second quarter and experienced a combination of favorable product mix and increased capacity utilization levels. Fundamentals continue to remain attractive for these key sterile fill technology platforms.

Slide 9 shows that our Oral Drug Delivery segment recorded revenue of $154 million in the quarter, which was up 14% versus the comparable prior year period, with segment EBITDA increasing 11% during the quarter, driven by the Juniper Pharmaceuticals acquisition, which contributed 17 percentage points to the segment's revenue growth and 26 percentage points to the segment's EBITDA growth during the quarter. The organic revenue decline of 3% and EBITDA decline of 15% was primarily driven by volume declines for a few high-margin products within our U.S. oral solids business, which saw one customer -- which one customer has moved volumes in-house to leverage unused internal capacity, as discussed during the -- our first quarter earnings call.

That being said, we have one of our strongest development pipelines, including several late-stage spray dry development programs within this high-margin segment and expect to see accelerating growth in the near to midterm. Partially offsetting the oral solids decline was the recovery within our analytical development services business, which experienced increasing volumes during the second quarter.

In order to provide additional insight into our long-cycle businesses, which include Softgel Technologies, Biologics and Specialty Drug Delivery and Oral Drug Delivery, we are disclosing our long-cycle development revenue and a number of new product introductions, NPIs, as well as revenue from NPIs. As a reminder, these metrics are only directional indicators of our business since we do not control the sales or marketing of these products nor can we predict the ultimate commercial success of them.

For the first 6 months ended December 31, 2018, we recorded development revenue across both small and large molecule of $310 million, which is 24% above the development revenue recorded in the first 6 most of the prior fiscal year. Additional disclosure on our development revenue, which is now calculated in accordance with the ASC 606, is included in our Form 10-Q filed today with the SEC.

In addition, we introduced 92 new products, which are expected to contribute $75 million of revenue in the fiscal year, which is more than double the revenue contribution of NPIs launched in the first 6 months of the prior fiscal year. This is especially important as it gives us additional confidence in our ability to deliver on our fiscal 2019 financial guidance, as John previously highlighted.

Now as shown on Slide 10, our Clinical Supply Services segment posted revenue of $80.8 million, which was down 25% compared to the second quarter of the prior year, driven by the ASC 606 revenue treatment of comparator sourcing activity on a net basis compared to gross basis in the prior fiscal year. Excluding the impact of ASC 606, segment revenue increased 2% due to increased volume related to core storage and distribution services. Segment EBITDA increased 13% compared to the second quarter of the prior year, primarily driven by the revenue growth in our core storage and distribution services business, favorable product mix and improved capacity utilization across the network. All of the revenue and segment EBITDA growth recorded within CSS was organic.

As of December 31, 2018, our backlog for the CSS segment was $319 million, a 6% sequential increase. The segment recorded net new business wins of $106 million during the second quarter, which is an increase of 59% compared to the net new business wins recorded in the second quarter of the prior year. The segment's trailing 12-month book-to-bill ratio is 1.2x. It is important to note that the backlog and net new business wins figures that I just disclosed have been adjusted for the ASC 606 change in revenue accounting and now include comparator revenue on a net basis.

The next slide contains reference information. We have already discussed the segment results shown on the consolidated income statement by reporting segment on Slide 11.

Slide 12 shows, in precisely the same presentation format as Slide 11, the 6-month year-to-date performance of our operating segments, both as reported and in constant currency. I won't cover the various drivers in detail since they closely parallel our second quarter results. The key growth drivers are the acquisition of Bloomington and Juniper Pharmaceuticals, strong growth within our biologics business and increased storage and distribution revenue within Clinical Supply Services, which are partially offset by the softgel impact of the worldwide ibuprofen shortage and oral solids revenue decline due to certain high-margin products.

Slide 13 provides a reconciliation to the last 12 months of EBITDA from operations to the most [comparable] GAAP measure, which is net earnings or loss. This bridge will assist in tying out the reported figures to our computation of adjusted EBITDA, which is detailed on the next slide.

Moving to adjusted EBITDA on Slide 14. Second quarter adjusted EBITDA increased 5% to $146 million. On a constant-currency basis, our second quarter adjusted EBITDA increased 6%. Most of the growth was driven by the Bloomington biologics and the Juniper Pharmaceuticals acquisition.

On Slide 15, you can see that second quarter adjusted net income was $65.4 million or $0.45 per diluted share compared to adjusted net income of $60.7 million or $0.45 per diluted share in the second quarter a year ago. This slide also includes the reconciliation of net earnings or loss to non-GAAP adjusted net income in a summarized format. A more detailed version of this reconciliation is included in the supplemental information section at the end of the slide deck and shows essentially the same add-back as seen on the adjusted EBITDA reconciliation slide.

Slide 16 shows our capitalization table and capital allocation priorities. Our total net leverage ratio as of December 31 was 3.4x, which is modestly down from the 3.5x we recorded during the prior quarter and is the lowest level in Catalent's history. As a reminder, we proactively paid down $450 million of our U.S. dollar-denominated term loan in July with the proceeds from the equity offering and closed the Juniper acquisition on August 14, and the impact from both transactions is reflected in our leverage ratio.

Additionally, given the strong free cash flow generation of the company and its growing EBITDA -- adjusted EBITDA, the company naturally delivers a ratio decrease of between 0.5 and 0.75 turn per year.

Finally, our capital allocation priorities remain unchanged and focused, first and foremost, on organic growth, followed by strategic M&A.

Turning to our financial outlook for fiscal year 2019 on Slide 17. We are reaffirming our previously issued guidance. We continue to expect full year revenue in the range of $2.5 billion to $2.59 billion.

We expect full year adjusted EBITDA in the range of $597 million to $622 million and full year adjusted net income in the range of $260 million to $285 million.

We expect in the range of $175 million to $185 million for capital expenditures, and we expect that our fully diluted share count on a weighted average basis for the fiscal year ending June 30 will be in the range of 146 million to 147 million shares.

In addition to the guidance we just provided on revenue, adjusted EBITDA and adjusted net income, we also wanted to reiterate our expectations related to our consolidated effective tax rate, which we expect to be between 25% and 27% in the fiscal year. We also expect interest expense in fiscal year '19 to be approximately $112 million to $114 million, which is reflective of both the July debt paydown as well as an updated LIBOR curve for our floating-rate debt.

Additionally, let me remind everyone of the seasonality in our business and highlight our expected quarterly progression through the year. As discussed for several years now, the first quarter of any fiscal year is generally our lightest quarter by far, with the fourth quarter of any fiscal year generally being our strongest by far. This will continue to be the case in fiscal year 2019, where we expect to realize between 40% and 45% of our adjusted EBITDA in the first half of the year and 55% to 60% of our adjusted EBITDA in the second half of the fiscal year.

Operator, we would now like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Tycho Peterson from JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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A couple of questions, I guess, looking forward. On Oral Drug Delivery, you talked a little bit about the 3% decline. Can you maybe just talk through your confidence level on that coming back from the back half of the year? I know you had telegraphed some of the softness last quarter, but just curious on the a recovery.

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [3]

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Sure, Tycho. As you know, we issue guidance on a consolidated basis for the company and not by segment. But the color I will provide for you is our oral drug business has, as we've said in the prepared commentary, one of the most robust pipelines that we have among the 1,000 development programs we have across the company. The Oral Drug Delivery segment has a great pipeline that should contribute to increasing growth in the business, I would say, in the near to midterm, including, as we talked about, spray dry dispersion, which is one of the areas of future growth for the business and for the segment, where we have a number of late-stage development programs that we would look to capitalize on as those progress through the late phases up to commercial approval. So if we look at the business, we're very excited about its future given the pipeline that it has. Currently, in the near term, as we've discussed last quarter as well as this one, we have a few high-margin products that have seen declining volumes, including one that was taken in-house by a customer, and that has had the near-term or short-term impacts for the business. But we look forward to the long -- to the mid to long term, returning to growth that is at the Catalent average, if you will, for the segment.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Okay. And then on softgel, there are a number of kind of moving pieces here. You mentioned an alternative supplier. BASF is -- their plant, I think, is also going off-line again in April and May. So can you maybe just talk on those 2 dynamics and what's baked into the guidance for the ibuprofen impact in the back half of the year?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [5]

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Sure. Our guidance fully reflects what we expect to receive at this stage from the perspective of ibuprofen. Our supplier is bringing their facility back up and running, but that facility is expected to be taken back down. So we have taken steps to secure supply from alternative providers, again reflecting on what we have here in the -- for the balance of the year. But we do expect this to continue to see some headwind associated with this, which continues to be a worldwide shortage of ibuprofen, given the size of the supplier that's involved here.

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Operator [6]

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Our next question comes from John Kreger from William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [7]

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John, given the high-profile ibuprofen shortage, have you guys thought at all about API production perhaps being a little bit more strategically attractive to you on the oral solids side?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [8]

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Yes. Thanks, John. So we continue to look at all adjacencies, I would say, as potential inorganic growth opportunities for the company. And we've continued to have -- on what we call our bull's eye chart, where we look at where we'd like to strategically add adjacent businesses, and API continues to be something that we look at. Certainly, in our oral drug -- broadly speaking, our Oral Technologies, which includes Softgel and Oral Drug Delivery, there could be some interesting synergies there in terms of bringing in more molecules into the company. So certainly, it's an area of interest, but it always goes with the understanding if you have something that really fits the profile of Catalent, it's not commodity based and would be somewhat specialized. Nothing currently on the table, but certainly -- again, of interest to us as are other adjacencies that we continue to look at.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [9]

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Great. And then one quick follow-up. You mentioned the board approval of the $200 million CapEx plan around biologics. Can you just expand upon on that a little bit? And as a result, should we think about any sort of kind of elevated CapEx requirements for the company broadly over the next [few years]?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [10]

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Sure. So we do not expect to go beyond our current 7% to 8% of revenue spend on CapEx even with this large CapEx announcement. The way we do CapEx within the company is on a project-by-project basis that's approved for its returns and strategic nature. With regards to those 2 particular projects, those are really being feathered-in when we see the capacity needs for both Madison and Bloomington. As we've stated, our third train, which just went live last April, in this fiscal year, will probably exceed 50% of capacity utilization in its first year. So that fourth and fifth train, one, will be necessary to make sure that we have the capacity for the pipeline for our -- both our current and future customers. Second, it's really going to put us in a position to have some commercial products at our Madison facility. We're putting in 2, 2 by 2,000 single-use bioreactors in the fourth and fifth train. And clearly, that's going to give us the capability for going commercial with some of these molecules that will require some 5,000-liter bioreactors. With regards to Bloomington, again, we've got a very robust pipeline there. We -- I would say that we achieved a level of commercial products there that we really didn't fully anticipate at the time of the acquisition, growing from 12 to 20. And we're probably operating somewhere between 50% and 60% capacity utilization. And what we're going to be doing is, more or less, doubling the capacity of Bloomington in the '20, '21, '22 time frame by putting in both syringe and high-speed [bio line] and some cartridge assembly. So again, very robust pipeline there, a lot of approved commercial products. And we just want to make sure that we continue to stay ahead of the capacity curve for the growth that we have, both in Bloomington and Madison.

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Operator [11]

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Our next question comes from Ricky Goldwasser from Morgan Stanley.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [12]

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Can you talk a little bit more about the SG&A savings efforts and how should we think about the margin for softgel? I know that, in the past, you talked about some of the cost-cutting opportunities offsetting the revenue decline. Where are you at, at that process? And where should we think about margins bottoming?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [13]

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Ricky, we've communicated and are committed to delivering an additional 200 to 300 basis point expansion to our EBITDA margins for the company in the next 2 to 3 years in addition to the 160 basis points that we have in our guidance for fiscal year '19. As we look across the company, certainly, the softgel business will be a contributor to that as we look to execute from a productivity and throughput perspective across the company. We've established a Center of Excellence to carry through and capitalize on best practices across the operating sites that we have within the softgel business. So we see that contributing to that overall margin expansion that we talk about for Catalent as a whole in addition to the mix of biologics in Catalent contributing to that; as well as, lastly, the change in the revenue recognition for ASC 606 contributing to this year's 160 basis points expansion, about half of that coming from the comparator change. So again, 160 basis points this year; another 200 to 300 basis points beyond this year, the next 2 to 3 years, coming from mix; softgel contributing, as well as other parts of the company.

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [14]

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Yes. And Ricky, I'll [dial in] a little closer to your question with regards to softgel. As we've talked about, softgel's historical growth rate has been about 2% to 4%. And quite frankly it's, outside of the ibuprofen shortage and dispositions of some assets in Asia, it would be performing in line with that historical growth rate. But in addition to that, you can see that we've really been -- I would say the business has performed despite those headwinds, in part due to, I would say, the aggressive productivity efforts that we have within the softgel business. And we have, in our strategic plans, an acceleration of productivity in the softgel business over the next 4 years, already -- with contributions starting this year. That will actually have softgel as one of the contributors to this margin expansion that Wetteny just detailed.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [15]

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Okay. And when you think about the -- your guidance range, you talked about kind of like some of the expectations. As we think about softgel, what are your expectations for softgel at the low end of the range versus the high end of the range? And for the biologics business, kind of the same question, but should we assume biologic growth second half kind of like normalizing at that mid-teen organic level?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [16]

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Sure. From a softgel perspective, again, we -- our guidance is on a company-wide basis and not by segment, Ricky. But what I would say is, when we look at the softgel business, we see it in the 0% to 2% growth for fiscal year '19. You can see some of the short-term impacts from ibuprofen as well as the divestitures, which we anniversary in the third quarter. So for the first 2 quarters, the divestitures were each 2 percentage points off the top line for softgel for each of the first and second quarter. That will become about 1% for the full year for softgel. So we see that in the 0% to 2% range for the year. And then from a biologics perspective, we see that core biologics business growing in the teens, remainder of the segment, which biologics is about 60% of the Biologics and Specialty segment. The specialty delivery element is about 40% of the business, which we see growing in the Catalent average of 4% to 6%. So you can net that out to about a 10%-or-so growth for the segment, is what we would expect.

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Operator [17]

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Our next question comes from Donald Hooker from KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [18]

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Just kind of broad higher-level question here in terms of just looking at kind of the pullback in biotech equity valuations across all your various businesses. Thinking about net product introductions and whatnot, a lot of noise around the FDA shutdown and all that. Can you talk a little bit about kind of your thoughts around recent sort of equity gyrations in biotech?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [19]

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Really, no commentary with regards to equity valuations. What I would just say is that the [VC's] strong, its funding continues to be very strong, and we continue to see, I would just say, robust demand. Most of the business that we do out of our Madison facility -- actually, all of the business that we do out of the Madison facility is clinical -- preclinical and clinical work for biologics. And then within Bloomington, we already have 20 commercial products, so those are already up and running. But they also have a very large slate of, again, preclinical and clinical products there. So I can't really comment on equity valuations, but I can say the R&D spending continues to be strong. And again, it was in part the support for the $200 million in CapEx that we have across Madison and Bloomington.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [20]

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But you don't see any changes in your conversations around pipelines or anything like that? Just that's what I meant by my question.

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [21]

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No.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [22]

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Okay. And then maybe -- you kind of gave a lot of guidance, and we all appreciate that. In terms of free cash flow, it seemed like, in prior years, you were trending ahead of your long-term expectations. How are you thinking about this year? I know it moves around quarter-to-quarter, but we watch that metric closely, as you're paying down debt and whatnot. Can you give us a little commentary on maybe kind of your outlook -- near-term outlook for free cash flow?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [23]

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Sure. Our outlook for the year is between 65% and 75% of free cash flow as a percentage of our adjusted net income. You would have seen us deliver slightly north of that in the prior 2 years. The first half of the year, particularly the first quarter, tends to be a slower start as our EBITDA tends to be lighter in the first quarter and strongest in the fourth quarter, so the cash -- free cash flow generation seems to be a bit more back-half sort of weighted, which is what we're seeing this year. So we continue to guide to 65% to 75% of our adjusted net income for the year.

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Operator [24]

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Our next question comes from Juan Avendano from Bank of America.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [25]

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Can you give us an update on the level of capacity utilization at Cook or Catalent Indiana? And then also, if I heard correctly, there are still about 20 products -- commercial products launched out of Catalent Indiana, which is the same number as of the last quarter. So were there no additional commercial products launched over the last quarter?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [26]

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Yes. So first of all, I'd say, I think I stated in an earlier question that we're running somewhere between 50% and 60% of capacity utilization in Bloomington. And currently, the CapEx that we plan on spending there, about $112 million, will really dovetail into when they'll be approaching somewhere near full capacity utilization in the 2021/'22 time frame. We are -- we had no additional products that went commercial since last quarter, which is not unusual given the relative lumpy nature of when commercial approvals happen. We certainly -- we expect, with the pipeline that we have, about another half dozen potential commercial approvals over the next 2 to 3 years. So we don't expect the rate of approvals that we had from the time that we acquired them, from 12 to 20, to continue at the same pace, but we to do have another, I would say, half dozen or so that we expect in the near term, over the next couple of years.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [27]

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And on the Oral Drug Delivery segment, you had a notable sequential improvement also, but Juniper was well ahead of expectations. And so how should we think about Juniper -- about the Juniper revenue growth run rate going forward? Has there been a recent higher?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [28]

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Well, one, we've factored in the acquisition in the guidance that we prepared. If you recall, we closed on the acquisition prior to issuing guidance. And obviously, we're pleased with the performance of the business. Certainly, the strategic intent here is to add to our Oral Drug Delivery, bringing more molecules into Catalent and having a Center of Excellence in Europe, which is effectively a feeder of molecules that we work on in the development stages; in some cases, preclinical, that would feed into the long-term growth of the oral drug business. So, so far, we're very pleased with what the business is performing -- contributing, and the strategic intent here is to drive more molecules through Catalent. We haven't broken down any specifics [beyond dividing] it by segment. It is factored into the overall guidance that we issued.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [29]

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Okay. Lastly and very quickly on the CSS, the Clinical Supply Services. I mean, even excluding the impact of the adoption of ASC 606, that segment is growing low single digits, and that's been usually -- usually does higher than the company average. And so can you give us an update on the landscape in there or the competitive dynamics and also, the end market, how that's working out?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [30]

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Sure. We're very pleased, certainly, with the EBITDA performance in the segment, double digit, 13% in the quarter, and I think you'll see several quarters in a row that the business has delivered double-digit EBITDA growth. The other thing I would say is, if you look at the net new business wins as well as the book-to-bill ratio, those have been trending up over the last 2 quarters, which is an early signal of top line growth for the business. So we look forward to sort of an increasing growth rate in the business as we look out in the near term for the segment but certainly pleased with what the business has been delivering from an EBITDA perspective.

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Operator [31]

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Our next question comes from David Windley from Jefferies.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [32]

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John, I was hoping to start in biologics and to try to get a better feel for how the kind of bevy of commercial product approvals that you've seen in that business are ramping. I guess, my intuition is that you would usually have a client requesting large quantities in and around the time of the commercial approval. And so I'm wondering if you have enough of a diverse portfolio there now for that to be a relatively smooth progression in and after the launch. Or is it still kind of fits and starts until those commercial products find their footing in the end market?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [33]

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I would say that we're not really seeing lumpiness in the performance of the business. I would say that it's been much more of a normal smooth progression. They already had 12 products that were commercial when we purchased them, so we've got another 8. And I would just say that, across those 8, it's just kind of working out to be not very lumpy and somewhat of a smooth ramp in terms of what we would expect. So you do have launch quantities feeding into that, but then you kind of have the normal progression of product growth over a multiyear period. So I would say that the way the business is performing with the products, we're very pleased with it, and our challenge is just to make sure that we continue to have the capacity to supply those commercial products. So, so far, so good, David.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [34]

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Okay, great. That sounds good. In terms of then breaking down between your drug substance activities and your drug product activities, you've had these nice approvals. You also -- I think in the prepared remarks, there was comment that drug substance actually hit some milestones and did pretty well in the quarter. Can you give us a sense for how much of the overall biologics activity is substance versus product?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [35]

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Well, again, we don't break out the actual numbers for that. But I would just say that our Madison facility, which we've talked about in the past, is primarily -- it is all drug substance, and then our Bloomington facility is probably about 80-20 in terms of drug substance, drug product, maybe closer to 2/3-1/3. But -- so that's the mix across those 2 facilities. And then within Madison, we do not yet have a product that has gone commercial, but over the next couple of years, certainly, as we look to bring on the additional fourth and fifth train, we do expect to either bring in-house or have one of the current late-phase clinical products there go commercial. So it should be a continuing nice ramp in the drug substance area, complementing what we already have for commercial in drug product.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [36]

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Okay. And then from a go-to-market strategy standpoint, are you in the market offering a combined substance and product, kind of soup-to-nuts offering to the client? Or is it still being sourced by the client pretty independently such that, that doesn't make sense?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [37]

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So first of all, I would say that, currently, the trend is, for a lot of this, sourcing independently. And with the acquisition of Bloomington, we're actually at work creating an end-to-end offering that will be going to markets, so we have some pilots with that. In advance of that, I would just say that the dialogues that we were having in Madison have crossed over to Bloomington and vice versa, meaning that each site now is -- has a broader view of opportunities across the continuum, from cell line development through drug substance and drug product. So we're already seeing some of those benefits, and I can tell you that we've captured customers we would not have otherwise. And we're currently in the process, as I said, of creating an end-to-end offering as a real offering, not just we have the capability, that we'll be piloting. So I think it will be a huge differentiator. And again, this is one of the strategic rationales for having that drug product and creating that end to end across biologics, which I'll tell you, in general, end-to-end solutions are much more of a talk track and a marketing ploy than it is in real -- how it works in real life, not so on the biologics front. It really will be a differentiator, having that end-to-end capability. So that will be making some progress over the next 12 to 18 months.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [38]

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Okay, great. And last question for me. On the 1,000 projects in development currently, how does the mix of softgel in that base look relative to history? Is softgel still kind of holding its share of your development pipeline?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [39]

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Yes. No, softgel's pipeline actually looks terrific. The challenge is, is that -- it's for smaller disease populations, orphan drugs and so forth, so the challenge is just more of a -- from a volume standpoint and not from an actual new product introduction. We've had some terrific new product introductions in the pipeline for softgel, and they're well north of 100, 120-or-so of active, I would say, Rx projects, which is the real value-add drivers in softgel, and it's certainly a large number of OTC and VMS projects. So very healthy pipelines. And again, this has been a historical 2% to 4% grower, given the niche dose form. But it's -- when you're the leader and 4x bigger than the next, it's really a terrific business. So we're really running it in that zip code for growth, but trying to get more margin out with our productivity.

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Operator [40]

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Our next question comes from Evan Stover from Robert W. Baird.

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Evan Arthur Stover, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [41]

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Just one for me. In BSDD, we talked about -- you talked about increased volumes from your respiratory and ophthalmic platforms. I know that was an area of some softness last quarter. Now we're seeing some recovery. I'm wondering if you can tell me kind of some more color of the drivers of that. Are we talking normal ebb and flow here? Or is this more the result of operational and executional improvements that maybe are a little bit more durable there?

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [42]

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It's purely operational and executional improvement. As you know, we had some operational challenges in our blow-fill-seal facility dating all the way back almost 1.5 years ago that we've been working through, and through that period, a backlog had been developing. And really, what we're seeing now is the relief of that backlog through improved operations. And we expect that healing to continue, if you will, across that respiratory and ophthalmic business.

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Operator [43]

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Our next question comes from Daniel Brennan from UBS.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [44]

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First, I just wanted to go back to the Juniper acquisition a bit. Could you just give us a little more color on some of the strength you're seeing right now with that business? I know -- I think it was doing around $15 million per quarter when you closed the deal, and it looks like, this quarter, substantially higher than that. So just kind of talk through how we should think about the opportunity for Juniper going forward.

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [45]

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Sure. So the business, as I mentioned, is doing well, I would say, across both fronts. There is the development activity as far as us working with our customers as their products are making it through the clinic, so from preclinical to clinic. And that continues to execute well for us. We're very pleased with what the business is doing on that front and slightly above, I would say, our internal expectations. And then there is a product that we partner with -- or supply into the market as well commercially that is also performing well for us. I wouldn't say anything fundamentally is changing with the business, but it's -- it is performing slightly above what we -- the internal expectations that we have.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [46]

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Okay, great. And then on the biologics side, so I know you just mentioned to Dave's question previously that the 8 commercial products that you've kind of gained since closing the deal, you wouldn't expect that pace to continue. Certainly, that's a very robust pace. But could you just speak a little bit to kind of why you've been so successful out of the gate and possibly why that pace might not be able to continue? I think you certainly talked about the capability of cross-selling, but maybe just a little more color on what you've seen to date since the acquisition and how you think about that opportunity to capture new commercial products going forward.

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [47]

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Yes. So look, what I would say is that Cook built this business up over a 15-year period. And specifically, on a drug product front, I would say, over the last 8 to 10 years, they had high focus on 2 things. One is late-stage biologics products that they believe would go commercial and then focused on customers that would stay with them for commercial. So they had a very specific strategy that, quite frankly, Catalent has been the benefit -- beneficiary of, that we literally acquired them on the upswing of this terrific pipeline. So they had 12. We thought maybe another 3 or 4 were going to go commercial, and then, again, it just worked out that they had a stronger slate of approvals than we had expected, and it went up to 20. We certainly do not expect to see that same rate of approvals. We do have about another half a dozen over the next 2 to 3 years that are, again, in the [chute] for potential approvals. But that doesn't mean that the growth rate is slowing down because we also continue to win and bring in clinical-stage business, which is, again, the front-end engine of that business. So we continue to see the -- I would say, the growth rate of that business continue with no falloff. And then the bonus is when you do get some of those commercial products. Most of the products in Catalent that we do in our development pipeline do not get approved. So our business model was to bring in molecules; do development work on them; and then, if and when they get approved, do the long-term commercial manufacturing. So I'd say Bloomington is fitting right into our Catalent follow-the-molecule strategy and is performing, I would say, better than we had forecasted, but continue to see that growth rate going forward.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [48]

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Okay. And maybe just one -- just quick final one, just on ibuprofen and softgel. Can you just remind us -- basically, what's implied in guidance right now is you have the second source coming on in the fourth quarter and that the divestiture impact that you saw on the first 2 quarters is done now?

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Wetteny N. Joseph, Catalent, Inc. - Senior VP & CFO [49]

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All factors related to softgel are baked into our guidance, whether they be the ibuprofen, where the -- the product participation that had fallen off as well as the divestitures. We -- and as well as the second source that we brought online. So I would say that's all contemplated in our reaffirmed guidance.

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Operator [50]

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And I am showing no further questions from our phone line. I'd now like to turn the conference back over to John Chiminski for any closing remarks.

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John R. Chiminski, Catalent, Inc. - Chairman, President & CEO [51]

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Thanks, operator, and thanks, everyone, for your questions and for taking the time to join our call. I'd like to close by reminding you of a few important points. First, our strong Q2 performance positions us well in the second half of the fiscal year, and we're confident in and committed to delivering fiscal year '19 results consistent with our financial guidance and are focused on continuing to drive organic growth across our overall business. Second, we're committed to continuing to grow our world-class biologics business, as demonstrated by our recent announcement of $200 million of CapEx being deployed to further build our capacity and capability in our Madison and Bloomington sites, and look forward to continued strong double-digit revenue and high-margin EBITDA growth from our biologics offering. Third, the continued successful and efficient integration of the Juniper Pharmaceuticals business into the Catalent family is a top priority as we look to swiftly capitalize on our recent inorganic investments. The Juniper business continues to perform above expectations. Fourth, expanding the adjusted EBITDA margin of our business is a key focus area for this management team as we drive towards 200 to 300 basis points of further expansion over the next 3 to 4 years. Last but not least, operations, quality and regulatory excellence are at the heart of how we run our business and remain a constant focus and priority. We support every customer project with deep scientific expertise and a commitment to putting the patient first in all we do. Thank you.

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Operator [52]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.