Registrant’s telephone number, including area code: (732) 537-6200
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | CTLT | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x¨ No o☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o¨ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xo No o☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated”“accelerated filer," "smaller”“smaller reporting company"company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer | xý | | Accelerated filer | o¨ | |
Non-accelerated filer | o¨ | (Do not check if a smaller reporting company) | Smaller reporting company | o¨ | |
| | | Emerging growth company | o¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). oYes o☒ No x
As of December 31, 2016,2022, the aggregate market value of the registrant'sregistrant’s voting and non-voting common equity held by non-affiliates was $3.4$7.90 billion. On August 24, 2017November 30, 2023, there were 125,175,734180,641,272 shares of the Registrant’s Common Stock, par value $0.01 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
CATALENT, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2017
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PART I
Special Note Regarding Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (this “Annual Report”) of Catalent, Inc. ("Catalent"(“Catalent” or the "Company"“Company”) contains "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), which are subject to the "safe harbor"“safe harbor” created by those sections. All statements, other than statements of historical facts, included in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "predicts," "intends," "plans," "estimates," "anticipates"“outlook,”“believes,”“expects,”“potential,”“continues,”“may,”“will,”“should,”“could,”“seeks,”“predicts,”“intends,”“plans,”“estimates,”“anticipates,”“future,”“forward,”“sustain,” or the negative version of these words or other comparable words.
These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statement is subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements.
Some of the factors that may cause actual results, developments, and business decisions to differ materially from those contemplated by such forward-looking statements include, but are not limited to, those described under the section entitled "Risk Factors"“Risk Factors” in this Annual Report, on Form 10-K forwhich are summarized below:
Summary of Principal Risk Factors
Any investment, including an investment in our common stock, par value $0.01 (the “Common Stock”), involves risk. The following summary highlights certain risks that an investor in our Common Stock should consider. The following should be read in conjunction with the fiscal year ended June 30, 2017fuller discussion of risk factors we face set forth in “Item 1A. - Risk Factors.”
Risks Relating to Our Business and the following:Industry in Which We Operate
We participate in a highly competitive market,•Actions of activist shareholders could impact the pursuit of our business strategies and increased competition may adversely affect our business.results of operations, financial condition, or share price.
•We anticipate being subject to increasing focus by our investors, regulators, customers, and other stakeholders on environmental, social, and governance (“ESG”) matters.
•We are a part of the highly regulated healthcare industry, subject to stringent regulatory standards and other applicable laws and regulations, which can change unexpectedly or be the subject of unexpected changes in interpretation or enforcement, any of which may adversely impact our business.
•Any failure to implement fully, monitor, and continuously improve our quality management strategy could lead to quality or safety issues and expose us to significant costs, potential liability, and adverse publicity.
•We have experienced, and may continue to experience, productivity issues and higher-than-expected costs at certain of our facilities, which have resulted in, and may continue to result in, material and adverse impacts on our financial condition and results of operations.
•The declining demand for various COVID-19 vaccines and treatments from both patients and governments around the world has affected and may continue to affect sales of the COVID-19 products we manufacture and our financial condition.
•The demand for our offerings depends in part on our customers’ research and development and the clinical and market success of their products. Our business, financial condition, and results of operations may be harmed if our customers spend less on, or are less successful, in these activities.
We are subject to product and other liability risks that could adversely affect our results of operations, financial condition, liquidity, and cash flows.
Failure to comply with existing and future regulatory requirements could adversely affect our results of operations and financial condition.
Failure to provide quality offerings to our customers could have an adverse effect on our business and subject us to regulatory actions and costly litigation.
The services and offerings we provide are highly exacting and complex, and if we encounter problems providing the services or support required, our business could suffer.
•Our global operations are subject to economic, political and regulatory risks, including the risks of changing regulatory standards or changing interpretations of existing standards, that could affect the profitability of our operations or require costly changes to our procedures.
The referendum in the United Kingdom (the "U.K.") and resulting decision of the U.K. government to consider exiting from the European Union could have future adverse effects on our revenue and costs, and therefore our profitability.
If we do not enhance our existing or introduce new technology or service offerings in a timely manner, our offerings may become obsolete over time, customers may not buy our offerings, and our revenue and profitability may decline.
We and our customers depend on patents, copyrights, trademarks, trade secrets, and other forms of intellectual property protections, but these protections may not be adequate.
Our future results of operations are subject to fluctuations in the costs, availability, and suitability of the components of the products we manufacture, including active pharmaceutical ingredients, excipients, purchased components, and raw materials.materials, and other supplies or equipment we need to run our business.
Changes in market access or healthcare reimbursement for our customers’ products•Our goodwill has been subject to impairment and may be subject to further impairment in the United States or internationally, including the possible repeal or replacement of the Affordable Care Act in the United States, could adversely affect our results of operations and financial condition by affecting demand for our offerings.
As a global enterprise, fluctuations in the exchange rate of the U.S. dollar against foreign currenciesfuture, which could have a material adverse effect on our financial performance and results of operations.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations, and financial condition.condition, or future operating results.
•Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
•We may acquire businesses and offerings that complement or expand our business or divest non-strategic businesses or assets. We may not be able to complete desired transactions, and such transactions, if executed, pose significant risks, including risks relating to our ability to successfully and efficiently integrate acquisitions or
execute on dispositions and realize anticipated benefits therefrom. The failure to execute or realize the estimated futurefull benefits from any such transaction could have a negative effect on our operations and profitability.
•We may become subject to litigation, other proceedings, and government investigations relating to us or our operations, and the ultimate outcome of any such matter may have an impact on our business, prospects, financial condition, and results of operations.
•Our global operations are subject to economic and political risks, including risks resulting from continuing inflation, disruptions to global supply chains, destabilization of a regional or national banking system, or from the Ukrainian-Russian war or the effect of the evolving nature of the recent war in Gaza between Israel and Hamas, which could affect the profitability of the business mayour operations or require that we establish an additional valuation allowance against all or some portion ofcostly changes to our net U.S. deferred tax assets.procedures
We are dependent on key personnel.
•We use advanced information and communication systems to run our operations, compile and analyze financial and operational data, and communicate among our employees, customers, and counter-parties,counterparties, and the risks generally associated with such information and communications systems could adversely affect our results of operations.
We engage, from timecontinuously work to time, in acquisitionsinstall new, and upgrade existing, systems and provide employee awareness training around phishing, malware, and other transactions thatcybersecurity risks to enhance the protections available to us, but such protections may complementbe inadequate to address malicious attacks or expand our businessinadvertent compromises affecting data security or divestthe operability of non-strategic businesses or assets. We may not be able to complete such transactions, and such transactions, if executed, pose significantsystems.
•Artificial intelligence-based platforms present new risks and challenges to our business.
•Our cash, cash equivalents, and financial investments could have a negative effect onbe adversely affected if the financial institutions in which we hold our operations.cash, cash equivalents, and financial investments fail.
Risks Relating to Our Indebtedness
Our offerings and our customers’ products may infringe on the intellectual property rights of third parties.
We are subject to environmental, health and safety laws and regulations, which could increase our costs and restrict our operations in the future.
We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
Certain•The size of our pension plans are underfunded,indebtedness and additional cash contributions we may make will reduce the cash available for our business, such as the payment of our interest expense.
Our substantial leverageobligations associated with it could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or in our industry or to deploy capital to grow our business, expose us to interest-rate risk to the extent of our variable ratevariable-rate debt, andor prevent us from meeting our obligations under our indebtedness. These risks may be increased in a recessionary environment, particularly as sources of capital may become less available or more expensive.
•Despite our high indebtedness level, we and our subsidiaries are still capable of incurring significant additional debt, which could further exacerbate the risks associated with our substantial indebtedness.
•Our interest expense on our variable-rate debt may continue to increase if and to the extent that policymakers combat inflation through interest-rate increases on benchmark financial products.
•Despite the limitations in our debt agreements, we retain the ability to take certain actions that may interfere with our ability to timely pay our substantial indebtedness.
•We may not be able to pay our indebtedness when it becomes due.
•We are currently using and may in the future use derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable-rate indebtedness or changes in currency exchange rates, and any such instrument may expose us to risks related to counterparty credit worthiness or non-performance of these instruments.
Risks Relating to Ownership of Our Common Stock
•We do not presently maintain effective disclosure controls and procedures due to material weaknesses we have identified in our internal control over financial reporting. Failure to remediate these material weaknesses or any other material weakness or significant deficiencies have resulted in a revision of our financial statements, in the future could result in material misstatements in our financial statements and have caused, and in the future could cause us to fail to timely meet our periodic reporting obligations.
•Our stock price has historically been and may continue to be volatile, and a holder of shares of our Common Stock may not be able to resell such shares at or above the price such stockholder paid, or at all, and could lose all or part of such investment as a result.
•Future sales, or the perception of future sales, of our Common Stock, by us or our existing stockholders could cause the market price for our Common Stock to decline.
•We are no longer eligible to use the Form S-3 registration statement, which could impair our capital-raising activities.
•Provisions in our organizational documents could delay or prevent a change of control.
We caution you that the risks, uncertainties, and other factors referenced above may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Social Media
We file annual, quarterly, and current reports and other information with and furnish additional information to the U.S. Securities and Exchange Commission (the “SEC”). Our filings with the SEC are available to the public on the SEC’s website at www.sec.gov. Those filings are also available to the public on, or accessible through, our website (catalent.com) for free via the “Investors” section as soon as reasonably practicable after we file such material, or furnish it to, the SEC. We also use our website, (www.catalent.com), corporate Facebook page (https://www.facebook.com/(facebook.com/CatalentPharmaSolutions), LinkedIn page (linkedin.com/company/catalent-pharma-solutions/) and corporate Twitter account (@catalentpharma) as channels of distribution of Company information.information concerning our activities, our offerings, our various businesses, and other related matters. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission ("SEC")SEC filings, and public conference calls and webcasts. The contents ofinformation we file with or furnish to the SEC (other than the information set forth or incorporated in this Annual Report) or contained on or accessible through our website, andour social media channels, areor any other website that we may maintain is not however, a part of this report.Annual Report.
Catalent References and Fiscal Year
Unless the context otherwise requires, in this Annual Report, the terms “Catalent,” “the company,” “we,” “us,” and “our” refer to Catalent, Inc. and its subsidiaries. All references to years in this Annual Report, unless otherwise stated, refer to fiscal years beginning July 1 and ending June 30. All references to quarters, unless otherwise stated, refer to fiscal quarters. Fiscal years are referred to by the calendar year in which they end. For example, “fiscal 2023” refers to the fiscal year ending June 30, 2023.
Trademarks and Service Marks
We have U.S. or foreign registration inregistrations for the following marks, among others: ADVASEPT®Bettera®, Clinicopia®Catalent®, Easyburst®Clinicopia®, CosmoPod®, Easyburst®, FastChain®, FlexDirect®, Follow the Molecule®Molecule®, Galacorin®Galacorin®, GPEx®GPEx®, Liqui-Gels®GPEx® Boost, GPEx® Lightning, Graphicaps®, OptiForm®Liqui-Gels®, OptiShell®Manufacturing Miracles®, SMARTag®Micron Technologies®, SupplyFlex®OmegaZero®, Vegicaps®OneBio®, OneXpress Solution®, OptiDose®, OptiForm®, OptiGel®, OptiGel® Bio, OptiGel® DR, OptiMelt®, OptiShell®, PEEL-ID®, Pharmatek®, RP Scherer®, Savorgel®, Scherer®, SMARTag®, Softdrop®, Staby®, StabyExpress®, SupplyFlex®, Vegicaps®, Zydis®,and Zydis® Ultra®. This Annual Report on Form 10-K also includes trademarks and trade names owned by other parties, and these trademarks and trade names are the property of their respective owners. We use certain other trademarks and service marks, including PEEL-ID™, Fastchain™, OptiPact™, OptiGel™, OptiGel™ Bio, Savorgel™, and Softdrop™some on an unregistered basis and some have been applied for, but remain pending examination in trademark agencies in the United StatesU.S. and abroad.abroad, including, FlexDoseSM, Catalent Xpress PharmaceuticsSM, OptiPact™, ProteoSuiteSM, StartScoreSM, and VirtuosoSM.
Solely for convenience, the trademarks, service marks, and trade names identified in this Annual Report on Form 10-K may appear without the ®, SM, and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names.
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ITEM 1. BUSINESS ITEM 1.
| BUSINESS |
Overview
We are the leading global provider of advanced delivery technologiesprovide differentiated development and developmentmanufacturing solutions for drugs, protein-based biologics, cell and gene therapies, vaccines, and consumer health products at over fifty facilities across four continents under rigorous quality and animal health products.operational standards. Our oral, injectable, and respiratory delivery technologies, along with our state-of-the-art protein, plasmid, viral, and cell and gene therapy manufacturing capacity, address a wide and growing range of modalities and therapeutic and other categories across the full diversity of thebiopharmaceutical, pharmaceutical, industry, including small molecules, biologics, and consumer and animal health products.industries. Through our extensive capabilities, growth-enabling capacity, and deep expertise in product development, regulatory compliance, and clinical trial and commercial supply, we can help our customers take products to market faster, including nearlymore than half of new drug products approved by the U.S. Food and Drug Administration (the "FDA"“FDA”) in the last decade. Our advanced delivery technologydevelopment and manufacturing platforms, including those in our Softgel Technologies and Drug Delivery Solutions segments, our proven formulation, manufacturing,supply, and regulatory expertise, and our broad and deep intellectual propertydevelopment and manufacturing know-how enable our customers to developadvance and then bring to market more products and better treatments for patients and consumers. Across both development and delivery, ourOur commitment to reliably supply our customers’ and their patients'patients’ needs is the foundation for the value we provide; annually, we produce approximately 7270 billion unit doses for nearly 7,0008,000 customer prescription and consumer health products, or approximately 1 in every 2026 unit doses of such products taken each year by patients and consumers around the world. We believe that, through our investments in growth-enablingstate-of-the-art facilities and capacity expansion, including investments in facilities focused on new treatment modalities and capabilities,other attractive market segments, our ongoing focus oncontinuous improvement activities devoted to operational and quality excellence, the sales of existing customer products, theand introduction of new customer products, and, in some cases, our innovation activities and patents, and our entry into new markets, we will continue to benefit from attractive and differentiated margins,attract premium opportunities and realize the growth potential from these areas.
We continue to invest infocus on enhancing both our product and service offerings and our sales and marketing activities leadingin order to growth ingrow the number of active commercial manufacturing and development programs for our customers. This has further enhancedsustains our extensive, long-duration relationships and long-term contracts with a broad and diverse range of industry-leading customers. In the fiscal year ended June 30, 2017,2023, we didconducted business with 8587 of the top 100 branded drug and consumer health marketers 23and 82 of the top 25 generics marketers, 23 of the top 25100 biologics marketers, and 22 of the top 25 consumer health marketers globally.measured on a global basis. Selected key customers include Pfizer,Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Haleon, Johnson & Johnson, GlaxoSmithKline, Novartis, Roche,Moderna, Pfizer, and Teva. Sarepta Therapeutics.
We have many long-standing relationships with our customers, particularly in advanced delivery technologies, wherethose with commercial products, as we tend to followprovide support and reliable supply through each stage of a prescription molecule through all phases of its lifecycle, from the development and launch of the original brand prescription, to generics or over-the-counter switch. A prescription pharmaceutical productproduct's lifecycle. Our relationship with an innovator of a prescription pharmaceutical product will often last many years, years—in several cases, nearly two decades or more, more—extending from pre-clinical development through the endmore mature commercial stages of the product’sproduct's life cycle. We serve customers who requirerequiring some combination of innovative product development, superior quality, advancedstate-of-the-art manufacturing, and skilled technical services to support their development and marketed product needs. Our broad and diverse range of technologies closely integrates with all aspects of our customers’ molecules to yield final formulations and dose forms, and this generally results in the inclusion of Catalentour facilities as manufacturing and testing sites in our customers’ prescription product regulatory filings. Both of these factors frequently translate to long-duration supply relationships at an individual product level.
We believe our customers value us because our depth of development solutions and advanced deliverystate-of-the-art manufacturing technologies, intellectual property,continuous innovations and improvements, consistent and reliable supply, geographic reach, and substantial expertise enable us to create a broad range of business and product solutions that can be customized to fit their individual needs. Today we employ approximately 1,600more than 9,000 highly trained direct manufacturing associates, as well as more than 3,000 formulation, analytical development, and process scientists and technicians and hold approximately 1,100technicians. Our customers can also benefit from more than 1,800 patents and patent applications in advanced delivery platforms, drug and biologics formulation, and manufacturing. The aim of our offerings is to reliably supply our customers' commercial needs and also allow our customersthem to bring more products to market faster and develop and market differentiated new products that improve patient outcomes. We believe our leading market position significant global scale, and diversity of customers, offerings, regulatory categories, products, and geographies reduce our exposure to potential strategic and product shifts within the industry.our industries.
We provide a numberwide variety of proprietary and non-proprietary, differentiated technologies, products, and service offerings to our customers across our advanced delivery technologies and development solutions platforms. The core technologies within our advanced delivery technologies platform include softgel capsules, our Zydis oral dissolving tablets, blow-fill-seal unit dose liquids, and a range of other oral, injectable and respiratory technologies. The technologies and service offerings within our development solutions platform span the drug development process, ranging from our OptiForm Solutions Suite for bioavailability enhancement of early-stage molecules, and GPExand SMARTag platforms for development of biologics and antibody-drug conjugates (ADCs), to formulation, analytical services, early-stage clinical development, and clinical trials supply, including our unique FastChain demand-led clinical supply solution. Our offerings serve a critical need in the development and manufacturing of difficult-to-formulate products across a number of product types.
Weplatforms, which we have advanced our technologies and grown our service offerings over more than 8090 years through internal development, strategic alliances, in-licensing, and acquisitions. We initially introduced our softgel capsule technologytechnologies in the 1930s and have continued to expandcontinuously expanded our range of new, technologically enhanced offerings. Since fiscal 2013,In recent years, we have launched OptiShell, OptiMelt, Zydis Nano, Zydis Bio, and OptiPact. In fiscal 2016, we launched OptiForm Solutions Suite and our
FastChain demand-led clinical supply solution. Also in 2016, our customers received regulatory approval for first-to-market products using the OptiShell and ADVASEPT technologies.more than a dozen internally developed new technology platform offerings. We have also augmented our portfolio through eleven acquisitions since fiscal 2012,acquisitions. Among the technologies we currently offer are softgel capsules, including significantly expandingboth gelatin and non-gelatin formulations, our Zydis orally disintegrating tablets, gummy and soft chew oral forms, protein production using advanced mammalian cell lines, adeno-associated virus (“AAV”) and other viral vectors, induced pluripotent stem cells (“iPSCs”) and
other cell types, plasmid DNA (“pDNA”), and a range of other oral, injectable, and respiratory delivery technologies. The technologies and service offerings within our development solution platforms span the scalefull drug development process, ranging from our OptiForm Solution Suite for enhancement of our Clinical Supply Services segment through the acquisitionbioavailability and other characteristics of the Aptuit CTS business in February 2012; adding an ADC business through the completion of our acquisition of Redwood Bioscience in October 2014;early-stage small molecules, Gene Product Expression (“GPEx”), GPEx Boost, and extending our particle engineering capabilities via our November 2014 acquisition of Micron Technologies. In fiscal 2017, we continued to extend our capabilities and expertise via two acquisitions, we expanded our earlyGPEx Lightning for advanced cell line development, capabilities, including the addition of spray drying technology into our drug formulation and delivery technologies, through the acquisition of Pharmatek Laboratories, Inc. ("Pharmatek") in September 2016; and we expanded our softgelpDNA development and manufacturing network viaand SMARTag platforms for development of biologics and antibody-drug conjugates (“ADCs”), to formulation, analytical, and bioanalytical services, early-stage clinical development, drug-device combination development and supply, fill and finish operations for injectable products, and clinical trials supply, including our unique FlexDirect direct-to-patient and FastChain demand-led clinical supply solutions. Our offerings serve a critical need in the February 2017 acquisitiondevelopment and manufacture of Accucaps Industries Limited ("Accucaps").products across a broad range of product types. We focus on serving as an accelerator for new therapeutic modalities and formulation, delivery, and manufacturing technologies. Our expertise enables us to bring advanced products to market at scale, faster.
In large part due to acquisitions and investments, their subsequent organic growth, the revenue contribution from our Biologics segment has grown from approximately 17% in fiscal 2016 to 46% in fiscal 2023. We believe our own internal innovation and investments, supplemented by current and future external partnerships and acquisitions,acquisitions, will continue to strengthen and extend our leadership positions in the deliverydevelopment, reliable supply, and developmentdelivery of drugs, protein-based biologics, cell and gene therapies, and consumer and animal health products.
History
Catalent was formed in April 2007, when affiliates
We trace our history to the 1933 founding of The Blackstone Group L.P. ("Blackstone") acquired the core of the Pharmaceutical Technologies and Services ("PTS") segment of Cardinal Health, Inc. ("Cardinal"). Cardinal had created PTS through a series of acquisitions beginning with R.P. Scherer Corporation, which developed the first rotary die machine for the manufacture of soft gelatin capsules, and we assumed our current form in 1998.April 2007. We are a holding company that indirectly owns Catalent Pharma Solutions, Inc. ("Operating Company"), which owns, directly or indirectly, all of our operating subsidiaries. Since our 2007 acquisition, we have regularly reviewedreview our portfolio of offerings and operations in the context of our strategic growth plan, and, as a result, wewhere appropriate, have sold five businessesadded to or divested from our portfolio of offering and consolidated operations at five facilities, integrating them intosites, which has led to significant growth of the remaining facility network. We have also actively acquired new businesses and facilities, completing eleven transactions since fiscal 2012.overall business. In July 2014, we completed the initial public offering of our common stock (the "IPO"),Common Stock, which is listed on the New York Stock Exchange (the "NYSE"“NYSE”) under the symbol "CTLT." Blackstone, Genstar Capital and Aisling Capital (collectively, the "selling stockholders"“CTLT.”
We are a holding company that indirectly owns Catalent Pharma Solutions, Inc. (“Operating Company”) have completed several secondary offerings, which owns, directly or indirectly, all of their Catalent common stock in the past three fiscal years. In September 2016, the selling stockholders completed a final secondary offering of their remaining shares in the Company and are no longer shareholders.our operating assets.
Our Competitive Strengths
Leading Provider of Advanced Delivery Technologies and Development Solutions
Available, State-of-the-art Manufacturing Capacity in Attractive Market Segments
We are the leading global provider of advanced delivery technologies and development solutions for drugs, biologics and consumer and animal health products. In the last decade, we have earned revenue with respect to nearly half of the drugs based on new molecular entities ("NMEs") approved by the FDA, and over the past three years with respect to nearly 80% of the top 200 largest-selling compounds globally. With approximately 1,600 scientists and technicians worldwide and approximately 1,100 patents and patent applications, our expertise is in providing differentiated technologies and solutions that help our customers bring more products and better treatments to market faster. For example, in the high-value area of new chemical entities ("NCEs") , nearly 90% of NCE softgel approvals by the FDAinvested several billion dollars over the last 25few years to broaden our portfolio of offerings and expand our capacity with state-of-the-art manufacturing and development capabilities that focus on anticipating and meeting the needs of the evolving biopharmaceutical, pharmaceutical, and consumer health industries. In addition, we have been developedhired and suppliedtrained thousands of new direct manufacturing associates in our quality-focused culture of operational excellence. The capacity and capabilities we have built and purchased, along with our continuing efforts to assure operational and quality excellence, have and will continue to enable us to secure attractive new business opportunities in the expanding market for outsourced product development and supply.
Vibrant, Patient First-Driven Culture
From the manufacturing line to the executive suite, for all our critical decisions, we ask the question, “What would the impact be to the patient?”, and our culture is built on our cornerstone value of Patient First. We believe this mindset, which aligns closely with our customers’ values, enables a pervasive focus on patient safety, impact, and outcomes, and an uncompromising approach to product quality and compliance, by us.reminding us of those who depend upon our vigilance concerning the safety, quality, reliability, and sustainability of our product supply. Along with other key cultural strengths, including our commitments to diversity and inclusion and to science-based environmental sustainability, we believe our culture brings us both a unique reputation and an operating capability that is difficult to replicate.
Diversified Operating Platform
We are diversified by virtue of our broad range of product and service offerings, our geographic scope, our large customer base,portfolio, the extensive range of products we produce, our broad service offerings, and our ability to provide solutions at nearly every stage of a product’sproduct’s lifecycle. In fiscal 2017,2023, we produced nearly 7,0008,000 distinct itemsproducts across multiple categories; ourcategories. Our fiscal 2017 regulatory-based classification of revenues demonstrates this:2023 net revenue was distributed by relevant product regulatory/marketing status as follows: biologics 51%, branded drugs (40%)30%, generic prescription drugs (11%), biologics (14%)2%, over-the-counter (14%)drugs 7%, and consumer health veterinary products, medical devices and diagnostics (21% combined).other 10% combined. In fiscal 2017,2023, our top 20
products represented approximately 24%37% of our total net revenue, with no singleone customer accounting for greater thanapproximately 10% of net revenue and with nowhose largest individual product greater than 3%.accounted for approximately 9% of our net revenue. We serve more than 1,0001,200 customers in approximatelymore than 80 countries, with a majority35% of our fiscal 2017 revenues2023 net revenue coming from outside the United States.U.S. This diversity, combined with long product lifecycles and close customer relationships, has contributed to the long-term stability of our business. It has also allowed us to reduce our exposure to the risks associated with potential strategic, customer, and product shifts as well as to payer-driven pricing pressures experienced by our branded drug and biologic customers.
Longstanding, Extensive Relationships with Blue Chip Customersa Diverse Customer Portfolio
We have longstanding, extensive relationships with leading pharmaceutical, biotechnology, and biotechnologyconsumer health customers. In fiscal 2017,2023, we did business with 8587 of the top 100 branded drug and consumer health marketers 23and 82 of the top 25 generics marketers, 23 of the top 25100 biologics marketers, and 22 of the top 25 consumer health marketers globally,measured on a global basis, as well as with more than 1,0001,200 other customers, including emerging and specialty biotech and pharmaceutical companies, which are often more reliant on outside partners as a result of their more virtual business models. Regardless of size, our customers seek innovative product development, superior quality, advanced manufacturing, and skilled technical services to support their development and marketed product needs.
We believe our customers value us because our depthbroad range of development solutionsproduct and advanced delivery technologies, consistent andservice offerings, recently expanded capacity in state-of-the-art manufacturing facilities, including facilities offering new treatment modalities, reliable supply, geographic reach, commitment to operational and quality excellence, and substantial expertise that enable us to create a broad range of tailored solutions, many of which are unavailable from other individual providers.
Deep, Broad, and Growing Advanced Technology Foundation
OurOur breadth of proprietaryofferings employing advanced technologies and patented technologiesstate-of-the-art manufacturing systems and long track record of innovation substantially differentiate us from other industry participants. Our leading softgel platforms, including Liqui-Gels, OptiShell, OptiGel DR, and Vegicaps capsules, our gummy and soft chew oral forms, and our modified release technologies, including the Zydis family of orally disintegrating tablets, our spray drying capabilities, and our OptiPact and OptiMelt technologies, provide formulation expertise to solve complex delivery challenges for our customers. We offer advanced technologies for delivery of small molecules and biologics via oral, respiratory, ophthalmic and injectable routes including the blow-fill-seal unit dose technology, ADVASEPT glass-free vials, and prefilled syringes. We also provide advanced biologics formulation options, including Gene Product Expression ("GPEx") cell-lineGPEx, GPEx Boost, and GPEx Lightning mammalian cell lines for protein production, SMARTag antibody-drug conjugate technologies.ADC technology, AAV vectors for cell and gene therapies, iPSC development and manufacturing, and pDNA development and manufacturing. We have a market leadership position within respiratory delivery, including metered dose and dry powder inhalers and intra-nasal forms. We have reinforced our leadership position in advanced delivery technologies over the last fivethree years, as we have launched more than a dozen new technology platforms and applications, including the fiscal 2016 launch ofand recently purchased or expanded our OptiForm Solution Suite, a dose form-agnostic bioavailability enhancement programbusinesses developing and manufacturing consumer health products, protein-based biologics, fill and finish for early-stage molecules.injectable drugs and biologics, cell and gene therapies, and other new therapeutic modalities. Our culture of creativity, problem-solving, and innovation is grounded in our advanced delivery technologies, the substantial expertise and experience of our scientists and engineers, and, in some cases, our patents and proprietary manufacturing processes throughout our global network.manufacturing processes. Our global product development team drivesand innovation teams drive a focused application of resources to our highest priority opportunities for both new customer product introductions and platform technology development. As of June 30, 2017,2023, we had nearly 800more than 1,500 product development programs in active development across our businesses.
Long-Duration Relationships Provide Sustainability
Our broad and diverse range of technologies closely integrates with our customers’ molecules to yield safe and effective final formulations and dose forms, and this generally results in the inclusion of Catalent in our customers’ prescription product regulatory filings. Both of these factors translate to long-duration supply relationships at an individual product level, to which we apply our expertise in contracting to produce long-duration commercial supply agreements. These agreements typically have initial terms of threetwo to tenseven years with regular renewals of one to three years (see "Contractual Arrangements"“—Contractual Arrangements” for more detail). Nearly two-thirdsApproximately three-quarters of our fiscal 2017 advanced2023 net revenue from our product development and delivery technology platform revenues (comprised of our Softgel Technologiesofferings and Drug Delivery Solutions reporting segments)related services were covered by such long-term contractual arrangements. We believe this base provides us with a sustainable competitive advantage.
Significant Recent Growth Investments
We have made over time, and expect to continue to make, significant investments over time to establish a globalin our manufacturing network, which is capable of serving customers and patients worldwide, and today employ 5.3approximately 8 million square feet of manufacturing, laboratory, and laboratoryrelated space across fivefour continents. We have investeddeployed approximately $665 million$2.61 billion in the last five fiscal years in gross capital expenditures.expenditures, not including approximately $3.58 billion spent acquiring new facilities and businesses. Growth-related investments in facilities, capacity, and capabilities across our businesses have positioned us for future growth in areas
aligned with anticipated future demand.demand, including in pDNA, cell and gene therapies, fill and finish for injectable drugs and biologics, and other new therapeutic modalities. Through our focus oncontinuing commitment to operational, quality, and regulatory excellence, we drive ongoing and continuous improvements in safety, productivity, sustainability and reliable supply, to customer expectations, which we believe further differentiatedifferentiates us. Our manufacturing network and capabilities allow us the flexibility to reliably supply the changing needs of our customers while consistently meeting their quality, delivery, sustainability, and regulatory compliance expectations.
High Standards of Regulatory Compliance and Operational and Quality Excellence
We operate our plants in accordance with current good manufacturing practices ("cGMP"(“cGMP”) or other applicable requirements, following our own high standards that are consistent with those of many of our large global pharmaceutical and biotechnology customers. We have nearly 1,400approximately 1,900 employees around the globe focused on quality and regulatory compliance. More than halfAll of our facilities are registered where required with the FDA with the remaining facilities registered withor other applicable regulatory agencies, such as the European Medicines Agency (the "EMA"“EMA”). In somemany cases, our facilities are registered with multiple
food, drug, or biologics regulatory agencies.agencies around the world. In fiscal 2017,2023, we were subject to 5358 regulatory audits, and, over the last five fiscal years, we successfully completed more than 250approximately 300 regulatory audits. We also undergo more than 400700 customer and internal audits annually. We believe our quality and regulatory track record to be a favorable competitive differentiator for Catalent.differentiator.
Strong and Experienced Management Team
Our executive leadership team collectively has more than 200approximately 550 years of combined and diverse experience within the pharmaceutical and healthcare industries. With an average of more than 20approximately 28 years of functional experience, this team possesses deep knowledge and a wide network of industry relationships.
Our Strategy
We are pursuing
Our strategic ambition, guided by and operationalized through our values, is to power the innovation and growth of the life science industry by becoming its leading development and commercial partner in reliable supply, conventional and advanced technologies, first-to-scale innovation, and therapeutic modalities, and integrated solutions. To achieve this, we continue to pursue the following key growth initiatives:
"Follow the Molecule®" Providing Solutions to our Customers across all Phases of the Product Lifecycle
We intend to use our advanced delivery technologies and development solutions across the entire lifecycle of our customers’ products to drive future growth. Our development solutions span the drug development process, starting with our platforms for early pre-clinical development of small molecules, biologics and antibody-drug conjugates, to formulation and analytical services, through clinical development and manufacturing of clinical trial supplies, to regulatory consulting. Once a molecule is ready for therapeutic trials and subsequent commercialization, we provide our customers with a range of advanced delivery technologies and manufacturing expertise that allow them to deliver their molecules to the end-users in appropriate dosage forms. The relationship between a molecule and our advanced delivery technologies typically starts with developing and manufacturing the innovator product, then extends throughout the molecule’s commercial life, including with additional customers through potential generic launches or over-the-counter conversion. For prescription products, we are typically the sole and/or exclusive provider, and are reflected in customers’ new drug applications. Our revenues from our advanced delivery technologies are primarily driven by volumes and, as a result, the loss of an innovator drug's market exclusivity may be mitigated if we supply both branded and generic customers.
An example of this can be found in a leading over-the-counter respiratory brand, which today uses both our Zydis fast dissolve and our Liqui-Gels softgel technologies. We originally began development of the prescription format of this product for our multinational pharmaceutical company partner in 1992 to address specific patient sub-segment needs. After four years of development, we then commercially supplied the prescription Zydis product for six years, and we have continued to provide the Zydis form since the switch to over-the-counter status in the United States and other markets in the early 2000s. More recently, we proactively brought a softgel product concept for the brand to the customer, which the customer elected to develop and launch as well. By following this molecule, we have built a strong, 25-year long relationship across multiple formats and markets.
Customer Product Pipeline - Continuing to Grow Through New Projects and Product Launches
We intend to grow by supplementing our existing diverse base of commercialized advanced delivery technology products with new development programs. As of June 30, 2017, our product development teams were working on nearly 800 new customer programs. Our base of active development programs has expanded in recent years from growing market demand, as well as from our expanded capabilities and technologies. Although there are many complex factors that affect the development and commercialization of pharmaceutical, biological and customer and animal health products, we expect that a portion of these programs will reach full development and market approval in the future and thereby add to our long-duration commercial revenues under long-term contracts and grow our existing product base. In the year ended June 30, 2017, we introduced 183 new products, consistent with the prior year level.
Catalent continues to be the global leader in providing chemistry, manufacturing and controls-based product development services to the global pharmaceutical, biotechnology and consumer health industry, driven by thousands of projects annually. In the year ended June 30, 2017, we recognized approximately $409 million of revenue related to the development of products on behalf of customers, included in our Softgel Technologies and Drug Delivery Solutions reporting segments, up 24% from the prior year. In addition, substantially all of the revenues associated with the Clinical Supply Services segment relate to our support of customer products in development.
Capabilities & Capacity - Expanding In— Continued Expansion in Biologics and Other Attractive Markets
Recognizing the strategic importance of protein-based biologics, cell and gene therapies, pDNA, and other new biopharmaceutical modalities, we began to build a differentiated biologics cell-line and formulation development platform in 2002. Since then, the Company has2019, we have invested more than $150 million to create our Catalent Biologics offering (includedover $3.42 billion in our Drug Delivery Solutions segment).biologics business, including capital investments and approximately $1.83 billion for acquisitions of biologics-focused businesses and sites. Today, Catalent iswe are a recognized leader in biologics, including AAV vectors for gene therapies; development and supply for cell therapies; advanced cell-line development anddevelopment; formulation and increasingly infill-finish into vials, pre-filled syringes, and cartridges; specialized manufacturing of biologic drug substance for use in clinical trialssubstances; and bioanalytical analysis. During fiscal 2017, the second production suite in our Madison, Wisconsin facility came on-line, and we broke ground for the third suite, which will take us to commercial scale supply. We have partnered with customers from around the world to develop advanced cell expression for more than 600 products,1,100 cell lines, many using our advanced GPEx, technology.GPEx Boost, and GPEx Lightning technologies, and have actively collaborated on developing and scaling up more than 125 cell and gene therapies. In the recent fiscal years, we expanded our existing cell therapy development and manufacturing capabilities, began offering pDNA production services, and acquired several facilities including a commercial-scale cell therapy manufacturing facility in Princeton, New Jersey (“Princeton”) and a developer and manufacturer of iPSCs located near Dusseldorf, Germany. We have also invested in a second-generation antibody-drug conjugateADC technology, SMARTag, and in fiscal 2017, we licensed rights to a development stage ADC product we created and sawsee continued progress in this technology’s capabilities and our customers’ SMARTag product developmentproduct-development activities. We expect to continue to expand our biologics presence through both organic and potential inorganic investments.
In addition to our expansion in biologics, we have increasedinvested additional capital in our existing investments in several facilities in order to expand in attractive markets, including a recently completed significant expansion of our oral solid controlled release production capacity in Winchester, Kentucky, and the scaling-upaddition of commercial manufacturingspecialized capabilities and capacity in early development. We acquired a leading position in consumer-preferred gummy and soft-chew formats for consumer health products with our acquisition of Bettera Holdings, LLC (“Bettera Wellness”) in fiscal 2022. We expanded our capacity for metered-dose inhalers. We have also inorganically added key new capabilities in early developmentoral and injectable products via our fiscal 20172020 acquisition of Pharmatek,a facility in Anagni, Italy, and expanded our North American consumer health softgel capacity for spray dried dispersion and dry powder inhaler manufacturing via our Accucaps acquisition.fiscal 2021 acquisition of a facility located near Boston, Massachusetts.
AdvancedUse Our Proprietary Technologies - Capitalize onand Substantial Expertise to Help Our Substantial PlatformsCustomers Develop New Products
We have broad and diverse technology platformplatforms that are supported by deep scientific and technical expertise, extensive know-how, and approximately 1,100more than 1,800 patents and patent applications in approximately 100170 families across advanced delivery technologies,platforms, drug and biologics formulation, and manufacturing. For example, we have significant softgel fill and formulation know-how, databases of formulated products, and substantial softgel regulatory approval expertise, and, asexpertise. As a result, nearly 90% of NCE softgel
approvals by the FDA over the last 25 years of new chemical entities presented in a softgel format have been developed and supplied by us.
In addition to resolving productdelivery challenges for our customers’ molecules, for more than two decadesproducts, we have applied our technology platforms and development expertise to proactively develop proof-of-concept products, whether improved versions of existing drugs, new generic formulations, or innovative consumer health products. In the consumer health area, we file product dossiers with regulators in relevant jurisdictions for self-created products, which help contribute sustainable growth to our consumer health business. We expect to continue to seek proactive development opportunities and other non-traditional relationships to increase demand for and value realized from our technology platforms. These activities have provided us with opportunities to capture an increased share of end-market value through out-licensing, profit-sharing, and other arrangements.
Operational Leverage -— Deploy Existing Infrastructure and Operational Discipline to Drive Profitable Growth
Through our existing infrastructure, including our global network of operating locations and programs, we promote operational discipline and drive margin expansion. With our Lean Manufacturingactive focus on continuous improvement and Lean Six Sigma programs, asustainability enhancement, global procurement function, and conversion cost productivity metrics in place, we have created acontinuously seek to enhance our culture of functional excellence and cost accountability. We intend to continue to applyAlong with the ongoing increase in the share of revenues from higher margin biologics offerings, we expect this discipline to further leverage our operational network for profitable growth. Since fiscal 2009, we have expanded gross margin by over 400 basis points and Adjusted EBITDA margin by over 200 basis points. Note that that "Adjusted EBITDA" is a financial metric that is not prepared in accordance with the accounting principles generally accepted in the United States ("U.S. GAAP"), and that further explanations of this metric and comparisons to the most nearly comparable U.S. GAAP metrics are set forth below at "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Historical and Adjusted EBITDA."
Strategic Acquisitions and Licensing -— Build on our Existing Platform
We operate in highly fragmentedthe markets in both our advanced delivery technologies andfor outsourced development solutions businesses. Within those markets, the five top players represent nearly 35% and 10% of the total market share, respectively,commercial supply, generally provided by revenue.contract development and manufacturing organizations (“CDMO”), where we estimate current industry spending at more than $70 billion globally. Our broad platform, global infrastructure, and diversified customer baseportfolio provide us with a strong foundation from which to consolidate within these markets, to enter new markets, and to generate operating leverage through such acquisitions. Since fiscal 2012,2013, we have executed eleven22 transactions, investing approximately $900 million,$4.91 billion, and have demonstrated an ability to efficiently and effectively integrate these acquisitions.
While we are rigorously focused on driving Catalent'sour organic growth, we have in recent years substantially increased our participation in biologics, including protein-based biologics, cell and gene therapies, pDNA development and production, and drug product fill and finish, via strategy-driven inorganic transactions. We intend to continue to opportunistically sourceidentify and execute bolt-on strategic acquisitionstransactions to optimize our portfolio of offerings and businesses, within the context of our existing business areas, as well as to undertake transactions that provide us with expansion opportunities within new geographic markets or adjacent market segments.long-term capital allocation strategy. We have a dedicated corporate
development team in place to identifypursue these opportunities and havetransactions, enabled by a rigorous and financially disciplined process for evaluating and executing these transactions.
“Follow the Molecule”® by Providing Solutions to our Customers across all Phases of the Product Lifecycle
We intend to continue to use our development and integrating such acquisitions.manufacturing solutions across the entire lifecycle of our customers’ products to drive future growth. Our development solutions span the drug development process, starting with our platforms for early pre-clinical development of small molecules, protein-based biologics, and cell and gene therapies; through formulation and analytical services, development and manufacturing of clinical trial supplies, and fill and finish of injectable products; to regulatory consulting. Once a molecule is ready for clinical trials and subsequent commercialization, we provide our customers with a range of advanced technologies and expert, state-of-the-art manufacturing solutions that allow them to deliver their molecules to the end-users in safe, effective, and, in some cases, patient-preferred dosage forms, to produce biologic drug substances needed for protein-based biologics and cell and gene therapies, and to provide primary and secondary packaging solutions and cold-storage distribution services. Our relationship with a molecule typically starts with developing and manufacturing the innovator product and can extend throughout the molecule’s commercial life. For prescription products, we are often the sole or primary outsourced provider and are frequently reflected in customers’ product approval applications. Our revenue from our development and manufacturing activities are primarily driven by volumes, and, as a result, the loss of an innovator drug’s market exclusivity may be mitigated if we supply customers offering generic or biosimilar equivalents.
An example of the long and mutually productive relationships we foster can be found in a leading over-the-counter anti-allergy brand, which today uses both our proprietary Zydis orally disintegrating tablets and Liqui-Gels softgel technology. We originally began development of the prescription format of this product for our multinational pharmaceutical company partner in 1992 to address specific patient sub-segment needs. After four years of development, we then commercially supplied the prescription product in our Zydis format for six years, and we have continued to provide the Zydis form since the switch to over-the-counter status in the U.S. and other markets in the early 2000s. Subsequently, we proactively brought a softgel product concept for the brand to the customer, which the customer elected to develop and launch as well. By following this molecule, we have built a strong, 3 decade-long relationship across multiple formats and markets.
Customer Product Pipeline — Continuing to Grow Through New Projects and Product Launches
We intend to continue to supplement our existing diverse base of commercialized customer products with new development programs. As of June 30, 2023, our product development teams were working on more than 1,500 customer development programs in active development across our business. Our base of active development programs has expanded in recent years from growing market demand, as well as from our expanded capabilities and technology platforms. Although there are many complex factors that affect the development and commercialization of pharmaceutical, protein-based biologic, cell and gene therapy, and consumer health products, we expect that a portion of these programs will reach full development and market approval in the future and thereby add to our long-duration commercial revenues under long-term contracts and grow our existing product base. In fiscal 2023, we introduced 216 new products for our customers.
Catalent continues to be a leader in providing chemistry, manufacturing, and controls-based product development services to the global pharmaceutical, biotechnology, and consumer health industries, driven by thousands of projects annually. In fiscal 2023, we recognized $1.95 billion of net revenue related to the development of products, down 16% from the prior year, principally driven by the substantial decrease in net revenue from the development of COVID-19 related products. In addition, substantially all of the revenue associated with the Clinical Supply Services business relates to our support of customer products in development.
Our Reportable Segments
At the beginning of fiscal 2023, in connection with the appointment of a new President and Chief Executive Officer, who also serves as the Company’s Chief Operating Decision Maker, the Company changed its operating structure and reorganized its executive leadership team. This new organizational structure includes operating and reporting in two segments: (i) Biologics and (ii) Pharma and Consumer Health.
Biologics
Our offeringsBiologics segment provides formulation, development, and manufacturing for biologic proteins, cell gene, and other nucleic acid therapies; pDNA, iPSCs, oncolytic viruses, and vaccines; formulation, development, and manufacturing for parenteral dose forms, including vials, prefilled syringes, and cartridges; and analytical development and testing services for large molecules. The business has extensive expertise in development, scale up, and commercial manufacturing. Representative customers of our Biologics segment include Bristol-Myers Squibb, Johnson & Johnson, Moderna, and Sarepta Therapeutics, along with a broad range of innovative small and mid-tier biopharmaceutical customers.
Our biologics offering includes cell-line development based on our advanced, patented GPEx suite of technologies, which are summarized below by reporting segment.used to develop stable, high-yielding mammalian cell lines for both innovator and biosimilar biologic compounds. GPEx technology can provide rapid cell-line development, high biologics production yields, flexibility, and versatility. Our development and manufacturing facility in Madison, Wisconsin has the capability and capacity to produce cGMP quality biologics drug substance from 250L to 4000L scale using single-use technology across five suites to provide maximum efficiency, redundancy, and flexibility. Additionally, our Madison, Wisconsin facility features two flexible cGMP suites that are used to manufacture mRNA or other small-scale biomolecules. Our Bloomington, Indiana facility brings additional biologics development, clinical, and commercial drug substance manufacturing, and formulation development capabilities and capacity. Both Bloomington and our Anagni, Italy facility provide substantial capacity for finished-dose drug product manufacturing and packaging. Our SMARTag next-generation ADC technology, based in Emeryville, California, is a clinical-stage technology that enables development of ADCs and other protein conjugates with improved efficacy, safety, and manufacturability.
(DollarsAt our pDNA, cell therapy, and gene therapy global centers of excellence in millions)
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| | | | | |
Segment | Offerings and Services | | Fiscal 2017 Revenue* |
Softgel Technologies | Formulation, development and manufacturing of prescription and consumer health soft capsules, or "softgels" including traditional softgel capsules (in which the shell is made from animal-derived materials) and Vegicaps and OptiShell capsules (in which the shell is made from plant-derived materials). | | $ | 855.3 |
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Drug Delivery Solutions | Formulation, development and manufacturing of prescription and consumer and animal health products using our proprietary OptiMelt, OptiPact, OptiForm and Zydis technologies, other proprietary and conventional drug delivery technologies such as prefilled syringes; blow-fill seal unit dose manufacturing, including our ADVASEPT technology; biologic cell line development, including our GPEx and SMARTag technologies; biologics manufacturing; analytical and bioanalytical development; and testing services. | | $ | 910.1 |
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Clinical Supply Services | Manufacturing, packaging, labeling, storage, distribution and inventory management for global clinical trials of drugs and biologics for customer required patient kits; FastChain demand-led clinical supply service; clinical e-solutions and informatics; and global comparator sourcing services. | | $ | 348.8 |
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*Segment Revenue includes inter-segment revenue of $38.8 million.
This table should be readBelgium, Maryland, and New Jersey, we develop and manufacture advanced therapeutics, including AAV, lentivirus, oncolytic virus, CAR-T, and other cell or virus modalities together with critical pDNA biological starting material for cell, mRNA, viral-based therapies and next-generation vaccines. In fiscal 2022, we acquired a fully operational, commercial-scale cell therapy campus in Princeton with 16 suites available for both autologous and allogeneic clinical and commercial manufacturing. The Princeton campus works in conjunction with Note 15our Gosselies, Belgium cell therapy center of excellence and our iPSC manufacturing center of excellence in Dusseldorf, Germany, to support our customers’ global cell therapy needs. Additionally, we have expanded our gene therapy flagship manufacturing campus in Harmans, Maryland, creating a total of 18 penthouse-style viral-vector suites, and added our Virtuoso AAV platform that reduces AAV development time by half, enabling our customers to reach first-in-human studies faster. Our specialized expertise in AAV vectors, the Consolidated Financial Statements included elsewheremost commonly used delivery system for gene therapies, and iPSCs for next-generation allogeneic cell therapy manufacturing, together with our substantial global cell therapy manufacturing, capacity for clinical- through commercial-scale batches, and our capabilities in this Annual ReportmRNA and pDNA manufacturing, position us to capitalize on Form 10-K (the "Consolidated Financial Statements").strong industry demand and expansions in the use of newer modalities in the cell and gene therapy market.
Softgel Technologies
Our range of injectable manufacturing offerings includes manufacturing drug substances and filling small molecules or biologics into vials, syringes, and cartridges, with flexibility to accommodate other formats within our existing network. In addition to primary packaging, our network provides secondary packaging capabilities, including auto-injector and safety device assembly for commercial launch and life-cycle management. Our clinical supply services business provides a global network for clinical distribution, as well as labeling, packaging, and cold-chain storage for clinical trials and commercial supply of biotherapeutics and cell and gene therapies. Our fill and finish services are largely focused on complex pharmaceuticals and biologics. With our range of technologies, we are able to meet a wide range of specifications, timelines, and budgets. We believe that the complexity of the manufacturing process, the importance of experience and know-how, a proven history of regulatory compliance, and substantial state-of-the-art capacity provide us with a meaningful competitive advantage in the market.
We also offer analytical development and testing services for proteins, gene and cell therapies, and other biologic modalities, including bioassay, biophysical characterization, and cGMP release and stability testing. Our OneBio Suite provides customers with the potential to seamlessly integrate drug substance, drug product, and clinical supply management for products in development, and for integrated commercial supply across both drug substance and drug product. We provide a broad range of technologies and services supporting the development and launch of new biologic entities, biosimilars, biobetters, and cell and gene therapies to bring a product from gene to commercialization, faster.
Our Biologics segment represented 46%, 53%, and 48% of our aggregate net revenue before inter-segment eliminations for fiscal 2023, 2022, and 2021, respectively.
Pharma and Consumer Health
Through our Softgel TechnologiesPharma and Consumer Health segment, we provide market-leading capabilities for complex oral solids, softgel formulations, Zydis fast-dissolve technologies, and gummy, soft chew, and lozenge dosage forms; formulation, development, and manufacturing platforms for oral, nasal, inhaled, and topical dose forms; and clinical trial development and supply services.
Representative customers of our Pharma and Consumer Health segment include Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Haleon, Pfizer, and Procter & Gamble.
Our Pharma and Consumer Health segment represented 54%, 47%, and 52% of our aggregate net revenue before inter-segment eliminations for fiscal 2023, 2022, and 2021, respectively.
Formulation and development
Through our comprehensive pharmaceutical formulation and development platform, we provide pre-clinical screening, formulation, and analytical development, and cGMP manufacturing at both clinical and commercial scale for our market-leading softgel capsule and Zydis fast-dissolve tablet platforms, traditional and advanced complex oral solid-dose formats, dry powder inhalers, and nasal delivery devices. We have substantial, proven experience in developing and scaling up orphan and rare disease products, especially those requiring accelerated development timelines, solubility enhancement, specialized handling (e.g., potent or controlled substance materials), complex technology transfer and specialized manufacturing processes. We provide fluid bed coating, spray drying, hot melt extrusion, micronization, and lipid formulation capabilities, all of which are used to enhance a drug’s administration and release profile and its clinical performance. We offer comprehensive analytical method development and scientific capabilities, including stability testing and global regulatory services to support both fully integrated development programs or standalone fee-for-service work. We have a network of early development sites focused on earlier phase compounds (i.e., pre-clinical and Phase I) to engage with more customer molecules earlier in their development, with the intent to also support these molecules downstream as they progress towards commercial approval and supply. Demand for our offerings is driven by the need for scientific expertise, the depth and breadth of integrated services offered, as well as the reliability of our supply performance across quality and operational parameters.
Manufacturing
Our large-scale cGMP pharmaceutical manufacturing solutions typically include clinical trial supplies, registration batches, and commercial production across a broad range of formats, and may also involve finished dose packaging or advanced processing of intermediates to achieve the desired clinical performance of the prescription or over-the-counter pharmaceutical product. Finished dose forms include softgel capsules, our Zydis fast-dissolve tablets, and traditional and advanced complex oral solid-doses, including coated and uncoated tablets, pellet/bead/powder-filled two-piece hard capsules, granulated powders, and other immediate and modified release forms. Advanced intermediate processing may include coating, extrusion, or spheronization to achieve specific functional outcomes, including site- or time-specific drug release, taste
masking, or enhanced bioavailability. We have deep experience at managing complex technical transfers of clinical or commercial programs, whether from Catalent’s early development network, other contract development sites, or from customers directly.
Softgel technology platform
We provide formulation, development, and manufacturing services for soft capsules, or "softgels," which we“softgels,” as well as large-scale manufacturing of oral solid dose forms for pharmaceutical and consumer health markets, along with supporting ancillary services. Our softgel manufacturing technology was first commercialized by our predecessor in the 1930s, and we have continually enhanced.enhanced the platform since then. We are the market leader in overall softgel development and manufacturing and hold the leading market position in the prescription arena.innovator drug softgels. Our principal softgel technologies include traditional softgel capsules, in which the shell is made of animal-derived gelatin, and Vegicaps and OptiShell capsules, in which the shell is made from plant-derived materials. Softgel capsules are used in a broad range of customer products, including prescription drugs, over-the-counter medications, dietary supplements, unit-dose cosmetics, and unit-dose cosmetics.animal health medicinal preparations. Softgel capsules encapsulate liquid, paste, or oil-based formulations of active compounds in solution or suspension within an outer shell, fillingshell. In the manufacturing process, the capsules are formed, filled, and sealing the capsulesealed simultaneously. We typically perform all encapsulation for a product within one of our softgel facilities, with active ingredients provided by customers or sourced directly by us. Softgels have historically been used to solve formulation challenges or technical issues for a specific drug, to help improve the clinical performance of compounds, to provide important market differentiation, particularly for over-the-counter compounds,medications, and to provide safe handling of hormonal, highly potent, and cytotoxic drugs. We also participate in the softgel vitamin, mineral, and supplement business in selected regions around the world. With the 2001 introduction of ourOur plant-derived softgel shell,shells, available as Vegicaps and OptiShell capsules, allow innovators and consumer health manufacturers have been ablecustomers to extend the softgel dose form to a broader range of active ingredients and serve patient/patient and consumer populations that were previously inaccessible due to religious, dietary, or cultural preferences. In recent years, we have extended this platform to pharmaceutical products via our OptiShell offering. Our Vegicaps and OptiShell capsules are protected by patents in most major global markets. Physician and patient studies we have conducted have demonstrated a preference for softgels versus traditional tablet and hard capsule dose forms in terms of ease of swallowing, real or perceived speed of delivery, ability to remove or eliminate unpleasant odor or taste, and, for physicians, perceived improved patient adherence with dosing regimens. Representative customers
In addition to softgel capsules, following our fiscal 2022 acquisition of Softgel Technologies include Pfizer, Novartis, Bayer, GlaxoSmithKline, Teva, Johnson & Johnson and Allergan.
Our Softgel Technologies segment represents 40%, 41%, and 42% of the segments' aggregate revenue before inter-segment eliminations for fiscal 2017, 2016 and 2015, respectively.
Drug Delivery Solutions
Our Drug Delivery Solutions segment provides various complex advancedBettera Wellness, we also conduct formulation, delivery technologies, and related integrated solutions including: development, and manufacturing of a broad range of oral dose forms including fast-dissolve tabletsgummies, soft chews, and both proprietary and conventional controlled release products, and delivery of pharmaceuticals, biologics and biosimilars administered via injection, inhalation and ophthalmic routes, using both traditional and advanced technologies. Representative customers of Drug Delivery Solutions include Pfizer, GlaxoSmithKline, Roche, Teva, Eli Lilly, Johnson & Johnson and Allergan.
We provide comprehensive pre-formulation, development, and both clinical and commercial scale for most traditional and advanced oral solid dose formats, including uncoated and coated tablets, powder/pellet/bead-filled two-piece hard capsules, lozenges powders and other forms for immediate and modified release prescription, consumer and animal health products. We have substantial experience developing and scaling up products requiring accelerated development timelines, specialized handling, complex technology transfers, or specialized manufacturing processes.
We launched our orally dissolving tablet business in 1986 with the introduction of Zydis tablets, a unique oral dosage form that is freeze-dried in its package, can be swallowed without water, and typically dissolves in the mouth in less than three seconds. Most often used for indications, drugs and patient groups that can benefit from rapid oral disintegration, the Zydis technology is utilized in a wide range of products and indications, including treatments for a variety of central nervous system-related conditions such as migraines, Parkinson’s Disease, schizophrenia,sizes and pain reliefshapes serving the dietary supplements market at three facilities in the United States. We use dietary and consumer healthcare products targeting allergy relief. Zydis tablets continue to be used in new waysfood ingredients provided by our customers asor sourced directly by us, and we extend the application of the technology to new categories,also provide ancillary services such as for immunotherapies, vaccines and biologics delivery.
Our range of injectable manufacturing offerings includes filling drugs or biologics into pre-filled syringes and glass-free ADVASEPT vials, with flexibility to accommodate other formats within our existing network, increasingly focused on complex pharmaceuticals and biologics. With our range of technologies we are able to meet a wide range of specifications, timelines and budgets. We believe that the complexity of the manufacturing process, the importance of experience and know-how, regulatory compliance, and high start-up capital requirements provide us with a substantial competitive advantage in the market. For example, blow-fill-seal is an advanced aseptic processing technology, which uses a continuous process to form, fill with drug, and seal a plastic container in a sterile environment. Blow-fill-seal units are currently used for a variety of pharmaceuticals in liquid form, such as respiratory, ophthalmic and otic products. We are a leader in the outsourced blow-fill-seal market, and operate one of the largest capacity commercial manufacturing blow-fill-seal facilities in the world. Our sterile blow-fill-seal manufacturing has significant capacity and flexibility with regard to manufacturing configurations. This business provides flexible and scalable solutions for unit-dose delivery of complex formulations such as suspensions and emulsions. Further, the business provides engineering and manufacturing solutions related to complex containers. Our regulatory expertise can lead to decreased time to commercialization, and our dedicated development production lines support feasibility, stability and clinical runs. We plan to continue to expand our product line in existing and new markets, and in higher margin specialty products with additional respiratory, ophthalmic, injectable and nasal applications.
Our fast-growing biologics offerings include our formulation development and cell-line manufacturing based on our advanced and patented GPEx technology, which is used to develop stable, high-yielding mammalian cell lines for both innovator and biosimilar biologic compounds. Our GPEx technology can provide rapid cell-line development, high biologics production yields, flexibility and versatility. We believe our development-stage SMARTag next-generation antibody-drug conjugate technology will provide more precision targeting for delivery of drugs to tumors or other locations, with improved safety versus existing technologies. Our biologics facility in Madison, Wisconsin has the current capability and capacity to produce clinical-scale biologic supplies, with a commercial-capable suite under construction; combined with offerings from our other businesses and external partners, we provide the broadest range of technologies and services supporting the development and launch of new biologic entities, biosimilars or biobetters to bring a product from gene to market commercialization, faster.
We also offer analytical chemical and cell-based testing and scientific services, stability testing, respiratory products formulation and manufacturing, micronization and particle engineering services, regulatory consulting, and bioanalytical testing for biologic products. Our respiratory product capabilities include development and manufacturing services for inhaled products for delivery via metered dose inhalers, dry powder inhalers and intra-nasal sprays. We also provide formulation development and clinical and commercial manufacturing for conventional and specialty oral dose forms. We provide global regulatory and clinical support services for our customers’ regulatory and clinical strategies during all stages of development. Demand for our offerings is driven by the need for scientific expertise and depth and breadth of services offered, as well as by the reliable supply thereof, including quality, execution and performance.packaging.
Our Drug Delivery Solutions segment represents 43%, 43% and 43% of the segments' aggregate revenue before inter-segment eliminations for fiscal 2017, 2016 and 2015, respectively.
Clinical Supply Services
Our Clinical Supply ServicesPharma and Consumer Health segment also provides clinical supply services through manufacturing, packaging, storage, distribution, and inventory management for small-molecule drugs, protein-based biologics, and biologicscell and gene therapies in clinical trials. We offer customers flexible solutions for clinical supplies production and provide distribution and inventory management support for both simple and complex clinical trials. This includes over-encapsulation where needed; supplying placebos, comparator drug procurement, and clinical packages and kits for physicians and patients; inventory management; investigator kit ordering and fulfillment; cold-chain storage and distribution; and return supply reconciliation and reporting. We support trials in all regions of the world through our facilities and distribution network. In fiscal 2016,recent years, we commenced an expansion ofhave extended our Singapore facility by buildingnetwork, with significant expansions at our Philadelphia, Pennsylvania and Shanghai, China free trade zone locations and facilities in California, China, and Japan. We also continue to develop new flexible cGMP space, and we introducedsolutions for the evolving clinical trial environment, including FlexDirect direct-to-patient, CT Success clinical supply services at our 100,000 square foot facility in Japan, expanding our Asia Pacific capabilities. Additionally, in fiscal 2013, we established our first clinical supply services facility in China as a joint ventureplanning, and assumed full ownership in fiscal 2015.extensive cold-chain investments. We are the leading provider of integrated development solutions and one of the leading providers of clinical trial supplies. Representative customers
We have partnered with companies who focus on the development of Clinical Supply Services include Merck KGaA, Quintiles, Eli Lilly, Abbvie, Incyte Corporationcannabis-based prescription medicines and Pfizer.high-value cannabinoid drug therapies whose goal is to achieve full regulatory approval under the strictest legal standards in effect in any jurisdiction affected, including cannabidiol and tetrahydrocannabinol pharmaceutical products using our Zydis technology in clinical trials across a range of indications, including multiple sclerosis spasticity, chemotherapy-induced nausea and vomiting, chronic pain for cancer, and epilepsy. Our total net revenue related to such development programs was less than 1% of total revenue generated in fiscal 2023.We do not provide any services for or otherwise partner with any company that does not comply with all applicable laws, including the U.S. federal controlled substances laws (or non-U.S. equivalent laws), relating to cannabis products.
Our Clinical Supply Services segment represents 16%, 16% and 15% of the segments' aggregate revenue before inter-segment eliminations for fiscal 2017, 2016 and 2015, respectively.
Integrated Development and Product Supply Chain Solutions
In addition to our proprietary offerings, we are also differentiated in the market by our ability to bring together our development solutions and advanced delivery technologiesstate-of-the-art product manufacturing to offer innovativeintegrated development and product supply solutions whichthat can be combined or tailored in many ways to enable our customers to take their drugs, biologics, and consumer and animal health products from laboratory to market.market, faster. Once a product is on the market, we can provide comprehensive, integrated product supply, from the sourcing or supply of the bulk active ingredient to comprehensive manufacturing and packaging, to the testing required for release, and to cold-chain or ambient temperature distribution. CustomerThe customer- and product-specific solutions we develop are flexible, scalable, and creative, so that they meet the unique needs of both large and emerging biopharmaceutical, pharmaceutical, and consumer health companies and are appropriate for products of all sizes. We believe that our development and product supply solutions, such as OptiForm Solution Suite and OneBio Suite, will continue to contribute to our future growth.
Sales and Marketing
Our target customers include large pharmaceutical and biotechnology companies, mid-size, emerging, and specialty pharmaceutical and biotechnology companies, and consumer health companies, along with companies in other selected healthcare market segments such as animal health and medical devices, and companies in adjacent industries, such as cosmetics. We have longstanding, extensive relationships with leading pharmaceutical, biotechnology, and biotechnologyconsumer health customers. In fiscal 2017,2023, we did business with 8587 of the top 100 branded drug and consumer health marketers 23and 82 of the top 25 generics marketers, 23 of the top 25100 biologics marketers, and 22 of the top 25 consumer health marketers globally,measured on a global basis, as well as with more than 1,0001,200 other customers. Faced with access, pricing, and reimbursement pressures as well as other market challenges, large pharmaceutical and biotechnology companies have increasingly sought partners to enhance the clinical competitiveness of their drugs and biologics and improve the productivity of their research and development activities, while reducing their fixed cost base.bases. Many mid-size, emerging, and specialty pharmaceutical and biotechnology companies, while facing the same pricing and market pressures, have chosen not to build a full infrastructure, but rather to partner with other companies through licensing agreements or outsourcing to access the critical skills, technologies, and services required to bring their products to market. Consumer health companies require rapidly developed, innovative dose forms and formulations to keep up inwith the fast-paced over-the-counter medication, dietary supplement, and vitaminspersonal care markets. These market segments are all critically important to our growth, but require distinct solutions, marketing and sales approaches, and market strategy.
We follow a hybrid demand generationdemand-generation organization model, with strategic account teams offering the full breadth of Catalent’s solutions, and technical specialist teams providing the in-depth technical knowledge and practical experience essential for each individual offering. All business development and field sales representatives ultimately report tooffering, both supported by a single sales head, and significant ongoing investments are made to enhance their skills and capabilities.dedicated team of deeply experienced scientific advisors. Our sales organization currently consists of more than 150200 full-time, experienced sales professionals, supported by inside sales and sales operations. We also have built a dedicated strategic marketing team, providing strategic market and product planning and management for our offerings. As part of our marketing efforts, we participate in major trade shows relevant to theour offerings globally and ensure adequate visibility to our offerings and solutions through a comprehensive print and on-line advertising and publicity program. We believe that Catalent is a strong brand with high overall awareness in our established markets and universe of target customers, and that our brand identity has becomeis a competitive advantage for us.
Global Accounts
We manage selectedselect accounts globally due to their substantial current business andor growth potential. We recorded approximately 26%one-third of our total net revenue in fiscal 20172023 from these global accounts. Each global account is assigned a lead business development professional with substantial industry experience. These account leaders, along with other members of the sales and executive leadership teams, are responsible for managing and extending the overall account relationship. Account leaders work closely with the rest of the sales organization as well as operational, quality, and project management personnel to ensure alignment around critical priorities for the accounts.
Emerging, Specialty, and Virtual Accounts
Emerging, specialty, and virtual pharmaceutical and biotechnology companies are expected to be critical drivers of industry growth globally.globally and account for more than three-quarters of the active drug and biologic development pipeline. Historically, many of these companies have chosen not to build a full infrastructure, but rather partner with other companies to produceformulate, develop, analyze, test, and manufacture their products. We expect them to continue to do so in the future, providing a critical source for future integrated solutions demand. We expect to continue to increase our penetration of geographic clusters of emerging companies in North America, Europe, Central and South America, and Asia. We regularly use active pipeline and product screening and customer targeting to identify the optimal candidates for partnering based on product profiles, funding status, and relationships, to ensure that our technical sales specialists and field sales representatives develop custom solutions
designed to address the specific needs of customersthese customers. In order to reach these emerging, specialty, and virtual companies, we actively partner with leading venture capital investors and biotech incubators.
Seasonality; Fluctuations in Operation Results
Our annual financial reporting period ends on June 30. As discussed further in “Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting our Performance,” our revenue and net earnings are generally higher in the market.third and fourth quarters of each fiscal year, with our first fiscal quarter typically generating our lowest revenue of any quarter, and our last fiscal quarter typically generating our highest revenue. These fluctuations are primarily the result of the timing of our, and our customers’ annual operational maintenance periods at locations in the U.S. and Europe, the seasonality associated with pharmaceutical and biotechnology budgetary spending decisions, clinical trial and research and development schedules, the timing of new product launches and length of time needed to obtain full market penetration, and, to a lesser extent, the time of the year some of our customers’ products are in higher demand, or are being produced to support future seasonal demand.
Contractual Arrangements
We generally enter into a broad range of contractual arrangements with our customers, including agreements with respect to feasibility, development, supply, licenses, quality, and quality.confidentiality. The terms of these contracts vary significantly depending on the offering and customer requirements. Some of our agreements may include a variety of revenue arrangements, such as fee-for-service, unit pricing in one or more tiers, minimum volume commitments, royalties, manufacturing preparation services, profit-sharing, and fixed fees. We employ a range of capacity access approaches, from standard to completely dedicated capacity models, based on customer and product needs. We generally secure pricing and other contract mechanisms in our supply agreements thatto allow for periodic resetting of pricing terms, and, in some cases, these agreements provide for our abilitypermit us to raise or renegotiate pricing in the event of certain price increases for the raw materials utilized in the productsor other inputs we make.use to make products. Our typical supply agreements include indemnification from our customers for product liability and intellectual property matters and caps on our contractual liabilities, subject in each case to negotiated exclusions. In addition,The terms of our manufacturing supply agreement termsagreements range from threetwo to tenseven years with regular renewals of one to three years, although some of our agreements are terminable upon much shorter notice periods, such as 30 or 9045 days. For our development solutions offerings, we may enter into master service agreements, which provide for standardized terms and conditions and make it easier and faster for customers with multiple development needs to access our offerings.
Backlog
While we generally have long-term supply agreements that provide for a revenue stream over a period of years, our backlog represents, as of a point in time, future service revenues from work not yet completed. For our SoftgelBiologics segment and Drug Delivery Solutions segments,a majority of our Pharma and Consumer Health segment, backlog represents firm orders for manufacturing services and includes minimum volumes, where applicable. Manufacturing businesses backlog represents firm orders for manufacturing services and includes minimum volumes, where applicable. For the clinical supply services offered through our Clinical Supply ServicesPharma and Consumer Health segment, backlog represents estimated future service revenuesrevenue from work not yet completed under signed contracts. Using these methods of reporting backlog, as of June 30, 2017,2023, our backlog was approximately $1,052.2 million, as$2.53 billion, compared to approximately $827.5 million$2.85 billion as of June 30, 2016,2022, including approximately $338.3$557 million and $292.1$549 million, respectively, related to our Clinical Supply Servicesscientific and clinical services offerings in our Pharma and Consumer Health segment. We expect to recognize as revenue by the end of fiscal 2024 approximately 83% of revenue fromthe value of the backlog in existence as of June 30, 2017 by the completion of the fiscal year ending June 30, 2018.2023.
To the extent projects are delayed, the timing of our revenue could be affected. If a customer cancels an order, we may be reimbursed for the costs we have incurred. For orders that are placed inside a contractual firm period or that involve minimum volume commitments, we generally have a contractual right to payment in the event of cancellation. Fluctuations in our reported backlog levels also result from the timing and order pattern of our customers, whowhich often seek to manage their level of inventory on hand. Because of customer ordering patterns, the matters discussed in this paragraph, and other factors, our backlog reported for certain periods may fluctuate and may not be indicative of future results.
Manufacturing Capabilities
We operate manufacturing facilities, development centers, and sales offices throughout the world. We have thirty-fiveAs of June 30, 2023, we had 52 facilities (three(3 geographical locations each operate as twomultiple facilities for differentbecause they support more than one reporting segments)segment, with one location including both a manufacturing facility and our corporate headquarters) on fivefour continents with 5.3approximately 8 million square feet of manufacturing, lablaboratory, office, and related space. Our manufacturing capabilities generally include the full suite of competencies relevant to the support of each site’s activities, including regulatory, quality assurance, and in-house validation.
We operate our plantsmanufacturing facilities and development centers in accordance with cGMP or other applicable requirements. More than halfAll of our facilitiesthese sites are registered where required with the FDA with the remaining facilities being registered withor other applicable regulatory agencies, such as the EMA. In some cases, our facilitiessites are registered with multiple regulatory agencies.
We have invested approximately $420.4 million of cash outflows$1.93 billion in our manufacturing and development facilities since fiscal 2015 through2021 for improvements and expansions, in our facilities, including approximately $139.8$583 million onin capital expenditures induring fiscal 2017.2023. We believe that our facilitiessites and equipment are in good condition, are well maintained, and are able to operate at or above present levels for the foreseeable future, in all material respects.
Our manufacturing operations are focused on employee health and safety, regulatory compliance, operational excellence, continuous improvement, and process standardization across the organization. In fiscal 2017,2023, we achieved approximately 98%95% on-time shipment delivery versus customer request date across our network as a result of this focus. Our manufacturing operations are structured around an enterprise management philosophy and methodology that utilizes principles and tools common to a number of quality management programs, including Lean Six Sigma and Lean Manufacturing.Manufacturing, which we brought together in a system that we refer to as “The Catalent Way.”
Raw Materials
We use a broad and diverse range of raw materials and other supplies in the design, development, and manufacture of our products. This includes, but is not limited to, key materials such as gelatin, starch, and iota carrageenancarrageenan; packaging films; single-use production components for our Softgel Technologies segment; packaging filmsdrug substance production, and glass vials and syringes for our Clinical Supply Services segment, and resin for our blow-fill-seal business in our Drug Delivery Solutions segment.drug product. The raw materials and other supplies that we use are sourced externally on a global basis. Globally, our supplier relationships could be interrupted due to natural disasters and international supply disruptions, including those caused by pandemics or geopolitical and other issues. For example, commercially usable gelatin is available from a limited number of sources. In addition, much of the gelatin we use is bovine-derived. Past concerns of contamination from Bovine Spongiform Encephalopathy ("BSE")bovine spongiform encephalopathy have narrowed the number of possible sources of particular types of gelatin. If there were a future disruption in the supply of gelatin or any other key material from any one or more keyof our current principal suppliers, there can be no assurance that we could obtain an adequate alternative supply from our other suppliers. IfAny future restrictionsrestriction that were to emerge on the use of bovine-derived gelatina key raw material used in our products from certain geographic sources or due to regulatory or consumer concerns of contamination from BSE, any such restriction could hinder our ability to timely supply our customers with products, and the use of alternative non-bovine-derived gelatin for specific customer productsraw materials could be subject to lengthy formulation, testing and regulatory approval periods.
We work very closely with our suppliers to assure continuity of supply while maintaining excellence in material quality and reliability, and we have an active and effective supplier audit program.reliability. We continually evaluate alternate sources of supply, although we do not frequently pursue regulatory qualification of alternative sources for key raw materials due to the strength of our existing supplier relationships, the reliability of our current supplier base, and the time and expense associated with the regulatory process.process, since regulators usually must approve changes to prescription product ingredient sources. Although a change in suppliers could require significant effort or investment by us in circumstances where the items supplied are integral to the performance of our products or incorporate specialized material such as gelatin, we do not believe that the loss of any existing supply arrangement would have a material adverse effect on our business. See "Risk“Item 1A. - Risk Factors—Risks Relating to Our Business and Industry—the Industry in Which We Operate—Our future results of operations are subject to fluctuations in the costs, availability, and suitability of the components of the products we manufacture, including active pharmaceutical ingredients, excipients, purchased components, and raw materials.materials, and other supplies or equipment we need to run our business."
Competition
We compete on several fronts both domesticallywith multiple companies as to each of our offerings and internationally,in every region of the globe in which we operate, including with CDMOs and other companies that offer conventional and advanced technologies for the development, supply, and delivery technologies,of medicinal products, clinical trials support, outsourced dose form, protein-based biologics or biologicscell or gene therapy manufacturing, or development services to pharmaceutical, biotechnology, and consumer health companies based in North America, Central and South America, Europe, and the Asia-Pacific region. We also may compete in some cases with the internal operations of those pharmaceutical, biotechnology, and consumer health manufacturerscustomers that also have manufacturing capabilities and choose to source these services internally, where possible.internally. Some of our competitors are substantially larger than we are and have access to more substantial resources, which could be deployed to expand their range of offerings or capacity.
Competition is driven by proprietary technologies and know-how (where relevant), capabilities, consistency of operational performance, availability of equipment, quality, regulatory track record, price, value, responsiveness, and speed. While we do have competitors that compete with us in our individual offerings, and a few competitors that compete across many of our offerings, we do not believe we have competition from any directly comparable companies.company.
Research and Development Costs
Our research activities are primarily directed toward the development of new offerings and manufacturing process improvements. Costs incurred in connection with the development of new offerings and manufacturing process improvements are recorded within selling, general, and administrative expenses. Such researchResearch and development costs included in selling, general, and administrative expenses amounted to $7.0$18 million, $7.6$23 million, and $12.2$21 million for the fiscal years ended June 30, 2017, June 30, 20162023, 2022, and June 30, 2015, respectively. Costs incurred in connection with research and development services we provide to customers and services performed in support of the commercial manufacturing process for customers are recorded within cost of sales. Such research and development costs included in cost of sales amounted to $45.8 million, $47.4 million and $41.3 million for the fiscal years ended June 30, 2017, June 30, 2016 and June 30, 2015,2021, respectively.
Employees
As of June 30, 2017,2023, we had approximately 10,800 employees in thirty-five17,800 individuals providing services for us at 52 facilities on five continents: twelve facilities are in the United States, with4 continents, of which certain employees at one facility beingtwo of our 24 U.S. facilities are represented by a labor organizationunions, with their terms and conditions of employment being subject to a collective bargaining agreement. Nationalagreements. Various combinations of national works councils, and/orlabor unions, and other labor organizations are active at all eleven of our European and many of our other ex-U.S. facilities consistent with labor environments/environments and laws in Europeanthose countries. Similar relationships with labor organizations or national works councils exist at our plants in Canada, Argentina, Brazil, and Australia. Our management believes that our employee relations with our workforce are satisfactory.
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| North America | Europe | South America | Asia Pacific | Total |
Approximate Number of Employees as of June 30, 2017 | 5,200 | 3,900 | 900 | 800 | 10,800 |
Corporate Responsibility
A sense of responsibility to our employees, customers and suppliers and the communities in which we operate and a desire to work to sustain the environments and resources affected by our activities are integrated into the heart Most of our business,individual service providers are full-time employees, while approximately 700 of our workers as we fulfill our purposeof June 30, 2023 are contingent workers who are either self-employed or employed by external services organizations.
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| North America | Europe | South America | Asia Pacific | Total |
Approximate number of workers as of June 30, 2023 | 10,500 | 5,700 | 1,000 | 600 | 17,800 |
Human Capital Management
Our employees share common goals: to help people live better, healthier lives. We take our corporate responsibilities seriously. We believe that we succeed as an organization when we put the needs of the patients and other individuals who consume our drugs and other products first and we are committed to act with integrity in everything we do. Our employees are supporting Catalent’s corporate responsibility commitment and helping millions ofhelp people around the world live better, healthier liveslives. Our global workforce is united by developing, deliveringour values: Patient First, commitment to our people, customer dedication, innovation, integrity, and supplying reliable, high-quality treatments; connecting toexcellence. Together, our values provide the foundation for our culture. We believe that an engaged, diverse workforce, empowered by inclusive leaders, will unlock our full potential as a company and bettering our communities; promotingas a healthy environment and investingleader in our peoplesector. Our employees’ success is Catalent’s success.
We focus on employee development, engagement, and diversity and inclusion (“D&I”) to help themhire, develop, and retain the best talent. As of June 30, 2023, we had approximately 17,800 individuals providing services to us globally, with women representing 44% of our employees and holding 40% of roles at the manager level or higher. In fiscal 2023, ethnically diverse talent represented 35% of our U.S. employees.
Our turnover rate increased to 22% as of June 30, 2023, including 13% voluntary turnover, substantially driven by voluntary turnover in the U.S. and by a few reorganizations at some of our larger sites and within our corporate functions.
Reducing voluntary attrition and retaining our talent remains one of our top priorities. We continue to implement initiatives to build upon our values-based and inclusive culture, improve our employees’ experiences at Catalent, and better develop and engage internal talent. We continuously monitor local talent markets and provide differentiated pay arrangements and benefits to attract and retain talent. Additionally, we provide flexible work arrangements where possible, broader leadership development programs, an employee wellness program, and access to employee recognition programs at all levels.
We continue to take steps to ensure that Catalent is a company where all employees can develop a fulfilling career with support from our leadership team. We believe that our diverse pool of internal talent and our business grow.employees’ passion for excellence make a difference in the way we grow and deliver results.
Talent Acquisition
We have strong human resources processes and practices in place to support our employees through their careers at Catalent. This starts with a robust recruiting strategy and a strong employer brand. We attracted over 4,000 new employees in fiscal 2023, continuously working to reduce the time it takes to fill open positions and reduce our cost per hire, while striving for a best-in-class candidate experience.
We offer competitive compensation and a comprehensive suite of benefits, which, in the U.S., range from medical, dental, and vision coverage to retirement, disability, employee stock purchase, and life insurance programs. We also provide health promotion and wellness programs, remote work flexibility, tuition assistance, and employee assistance programs in several countries.
Our Corporate Responsibility Council (the "CR Council"recruitment strategy aims to attract talent representing diverse backgrounds, perspectives, and ideas. This approach includes:
• engaging with potential top talent early in the career path through our university internship program;
• developing future leaders and enhancing their skills through programs, including various mentoring programs, our Global Organization Leadership Development (“GOLD”), Next Generation Global Leaders, and General Manager Excellence programs, as discussed further below;
• providing competitive compensation and benefits;
• continuously improving recruitment processes and platforms;
• working with several recruitment partners to attract diverse profiles and advertise open positions; and
•implementing unconscious bias workshops for hiring managers.
Catalent has been recognized as a TOP EMPLOYER USA since 2020 and as a TOP EMPLOYER in the United Kingdom ("U.K.") is made up of executivesince 2022. We differentiate ourselves as a preferred employer to candidates through our reputation as a great place to work, offering a fast-paced and senior leadership and guides the implementation of our corporate responsibility strategy and commitments. Three sub-committees - the Environmental Committee, the Grant-making Committee and the Community Engagement Ambassador Network - of the CR Council are responsible for driving progress in three key areas of our overall corporate responsibility commitment. They help to embed corporate responsibility deeper into the business and align the corporate responsibility agenda with our business goals.rewarding work environment.
Talent Development
We are expandingalso committed to the growth, development, and engagement of our strategic grant-making activities to focus on partnerships, initiatives and programs that demonstrably promote researchpeople once they have joined our family. Through a strong learning and development intoculture, we provide opportunities for specialized technical training, leadership development, and high-potential growth opportunities to endow our employees with the knowledge and expertise needed to grow their careers at Catalent.
Our primary goal is to develop our people from within, thereby establishing a strong successor bench to help support company growth. In fiscal 2023, over 2,400 employees moved to a new role within the organization (of which 49% were women), whether as a developmental move or delivery or usea promotion to a more senior position. Our senior leaders are committed to talent development and dedicate time each fiscal quarter to perform formalized talent reviews to discuss the development of key talent and to update succession plans for critical roles.
We strongly believe that the combination of experience (70%), exposure (20%), and education (10%) is the best recipe for personal development and career progression here. We have a treatment or encourage STEM (Science, Technology, Engineeringlibrary of tools and Mathematics) education initiatives. We intend to introduce matching-gift and volunteer grant programsresources available for our employees while coordinating evenwithin that framework, including access to a variety of tools and resources to learn new or expand existing skills.
Given our high volume of new hires, we continue to redesign our employee experience. We have upgraded our on-boarding experience to span employees’ first twelve months with Catalent.
We also offer four formal development programs to employees. All programs aim to prepare our talent to fill critical internal leadership roles. Through these programs, we have created a bench of leaders who model our values and are ready to take on more volunteer projects in the communitiesresponsibility.
(1) Entry-level GOLD program. The GOLD program is a two-year rotational program for recent graduates from universities around the world in which the employee participates in three rotations at different sites in our network to learn about different aspects of our business and our varied offerings. GOLD employees receive assignments to perform strategic roles in key business initiatives. We provide them with coaching and opportunities to interact with senior executives, which both develop the skills and experience of our GOLD employees and provide a platform through which they contribute fresh ideas that challenge the status quo. The GOLD program operates in the U.S. and has been relaunched in Europe following a pause in the program during the U.K.'s withdrawal from the European Union (“E.U.”).
(2) Manager-level Next Generation Global Leader program. Our Next Generation Global Leader program, for employees at the manager level, is a 15-month on-the-job program focused on preparing high-potential managers for director-level roles. Since fiscal 2022, 86 employees graduated from this program, and a new group of 56 employees has been selected to join this program in fiscal 2024.
(3) Senior leader General Manager Excellence program. Our general managers run our operating sites and have substantial and wide-ranging responsibilities. This program enhances the skills of our general managers by giving them exposure to industry best practices and opportunities to network internally and receive personalized career coaching, including a 3-day business simulation. In fiscal 2023 and 2022, 24 and 35 general managers, respectively, participated in this program.
(4) Front-line leader level Lead Now program. In fiscal 2023, we launched “Lead Now,” a Catalent-wide leadership offering targeted for those who are new to people leadership. During the first 3 months of a new leadership role, this program teaches employees the fundamentals of leadership and identifies tools to inspire their teams while role-modeling Catalent values. We have already enrolled over 250 new leaders into this program.
Diversity and Inclusion
At Catalent, we cultivate a workplace that respects and welcomes all people; celebrates the unique backgrounds and experiences of our workforce; encourages all employees to bring their true, authentic selves to work; and leverages our diversity to drive innovation, inclusion, and excellence in every aspect of our business. By closing diversity and inclusion gaps, we energize our people to do their best work.
Our commitment to D&I starts at the top with our board of directors (referred to herein as the “board of directors” or “Board”) and executive leadership team that bring a broad spectrum of backgrounds and perspectives. Led by our Diversity and Inclusion Office, and effectuated at all levels of the Company, we focus on attracting. retaining, and developing our diverse talent and creating an inclusive work environment globally.
We are committed to identifying and acknowledging gaps in our D&I mission and taking action to address them. To drive progress within Catalent, we focus on four strategic initiatives:
• Strengthening our culture of inclusion, supported by our nine employee resource groups;
• Promoting inclusive leadership;
• Accelerating talent acquisition and development, including with support from external partners; and
• Activating a data- and accountability-driven strategy.
One key example of our global D&I initiatives are our nine global employee resource groups (“ERGs”), providing support, resources, and a forum for topical discussion and engagement for employees in the following categories: people with disabilities, people of Asian and Pacific Islander descent, women, indigenous peoples, people of Hispanic and/or LatinX descent, our LGBTQ+ community, people of African descent, Gen Y and Z, and people with military and/or first responder service. Our ERG network includes 127 global, virtual, and site-based chapters.
Key D&I performance highlights are captured in our Corporate Responsibility and Environmental, Social, and Governance Strategy section below.
Engagement
Our employee-focused practices make a clear impact on our employee engagement. Through increased engagement, we can grow our business by relying on strong, engaged leaders and professionals willing to ensure we can overcome and thrive during any challenge.
We periodically administer a company-wide engagement survey to garner direct feedback from our employees regarding how we can more deeply and meaningfully engage them, enabling us to focus on improving specific areas where we can support our people.
In fiscal 2023 we changed our approach to employee engagement surveys and launched our first “pulse survey,” using an online platform to deliver an updated engagement score and immediate access to results for all our people leaders on a more frequent basis. This first pulse survey, in November 2022, led to a companywide score of 6.9 out of a possible 10 for Catalent (using a rating scale from 1 to 10). The platform highlighted key strengths, including our inclusive culture, peer relationships, goal setting, and meaningful work. The survey also highlighted areas requiring further focus, including workload, strategy communication, and rewards.
Corporate Responsibility (“CR”) and ESG Strategy
Our CR strategy, which includes our ESG strategy, is integrated into our company-wide strategic plan, ensuring that we operate in alignment with our values, meet our commitments to all our stakeholders, and contribute to the long-term success of the broader biopharmaceutical, pharmaceutical, and consumer health industries and the communities where we operate. Our approach to ESG focuses on three areas of society relevant to our business, prioritizing our impact on (i) people, (ii) the environment, and (iii) our communities. We focus on ESG areas that are the most significant to our business, and our strategy is
informed by our employees, customers, investors, communities, and other key stakeholders. Our fiscal 2023 ESG performance, described below, demonstrates our contribution to the long-term success of the industries we serve and the communities where we operate, as we continue to invest in a corporate culture that understands and prioritizes our impact on people in our operations and employee-related decision-making.
Fiscal 2023 brought new and continued challenges for our operations, including the on-going response to the Ukrainian-Russian war, significant reductions in the volume of vaccines produced for the COVID-19 pandemic, and the on-going supply chain challenges amid rising global inflation. Through it all, our mission and values continued to provide steady, critical orientation and focus. Amid these fiscal 2023 challenges, our business delivered approximately 70 billion unit doses, across more than 50 sites, where our workforce of over 17,000 worked hard, with our Patient First value guiding the way, to ensure that we met our commitments to our customers and their patients.
Governance
We are committed to ensuring strong corporate governance practices on behalf of our shareholders and other stakeholders. We believe strong corporate governance and an independent board of directors provide the foundation for financial integrity and shareholder confidence. More information about our corporate governance features can be found in Item 10. — Directors, Executive Officers, and Corporate Governance.
Our CR council, which reports to the CEO and is composed of senior leaders from various parts of our business, guides our CR efforts and sets our overall CR strategy. Management, including members of the CR council, provide regular CR updates to our board of directors, which regularly reviews material aspects of our CR strategy and performance as a full board and through its several committees, including a formal annual review of our overall CR strategy and performance.
Business Benefits
Beyond being the right thing to do, our focus on CR strengthens our business by reducing risks, meeting customer and investor expectations, and positioning us to attract top talent. CR performance is an important contributor to our business success. It informs our risk management process, protects our reputation, and alerts us to regulatory, environmental, and societal threats to our business. Our CR activities also align with many of our customers’ CR programs and strengthen our relationships.
Our future success depends on our highly skilled and dedicated global team of employees, who are passionate about improving health outcomes. We compete for top talent in our industry and recognize that our culture and reputation as a responsible company can be a differentiator for attracting job candidates and keeping and motivating our existing employees.
ESG progress in fiscal 2023
We made significant progress in several ESG focus areas in fiscal 2023:
•In February 2023, we published our fourth annual Corporate Responsibility report (covering fiscal 2022), which includes an evaluation of our performance against the standards set by the Sustainability Accounting Standards Board (SASB) for Biotechnology and Pharmaceuticals and the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Some highlights of our progress include:
◦purchasing renewable electricity for our operating sites, with energy attribution certificates (EACs) accounting for 81% of our electricity use by the end of fiscal 2022, compared to 23% at the end of fiscal 2021, thus reducing our total Scope 1 and 2 emissions by 38%, from a fiscal 2020 baseline;
◦implementing 153 sustainability projects, resulting in annual energy savings of more than 4%, compared to our fiscal 2018 baseline;
◦achieving our water efficiency target, of <500m3/$1M revenue, a year early, reducing our water intensity by 26%, from a fiscal 2020 baseline;
◦converting 1,400 metric tons of uncontaminated by-product (24% of the total volume) diverted from landfill, converting it to alternative uses, such as adhesive;
◦philanthropic giving that exceeded $1 million, driven significantly by philanthropic efforts related to the humanitarian response to the war in Ukraine and, our on-going commitment to science, technology, engineering, and math (STEM) education, and nonprofits that serve patients, with a focus on underserved communities; and
◦2,200 employees participated in the Catalent Cares Matching Gift Program, a 46% increase from fiscal 2021, raising $1 million for 625 non-profits in combined employee donations and Company matches.
•In fiscal 2023, we continued to drive D&I by (1) investing in the inclusive capabilities of our leaders, (2) working with partners who share our values and help enable our strategy, (3) accelerating diverse talent acquisition and development, and (4) curating an even more inclusive culture. Some highlights of our progress include:
◦a 17% increase (from 23% to 27%) in our U.S.-based leaders who are racially or ethnically diverse;
◦a 9% increase (from 35% to 38%) in women in leadership roles globally;
◦confirmation that we closed the U.S. gender pay gap in fiscal 2021 through EDGE certification;
◦publication of a Supplier Diversity Policy and setting the ambition to increase diverse supplier spend;
◦designation as a 2022 Best Place to Work for people with disabilities, based on the Disabilities Equality Index;
◦rollout of our inclusive leadership workshops for site and functional leadership teams and ongoing conversations hosted by our leaders following challenging current events in the U.S.; and
◦expansion of our ERGs, with a 21% increase in the number of ERG chapters, and a record 43 global ERG events with 7,500 attendees.
Looking ahead
We are determined to play an integral role in moving our industry toward more responsible and sustainable business practices as we continue to be at the cutting edge of developing and reliably supplying drugs, biologics, and consumer health products.
We continue to reduce our carbon emissions and have committed to Science Based Targets (SBT). The SBT report we submitted for assessment details a target reduction for our Scope 1 and 2 emissions, based on a fiscal 2022 baseline, and a goal for engaging our Scope 3 footprint by aligning emission reduction targets to SBT goals. We have achieved our water intensity goal, to decrease water intensity to 500 cubic meters per $1 million in revenue and will now focus on sites in water-deprived or sensitive areas, to reduce our water usage further. At the end of fiscal 2023, 65% of our sites were able to eliminate waste sent to landfill; in fiscal 2024, we expect to achieve this at all of our facilities. We have performed a risk assessment and identified process and infrastructure changes needed for us to achieve our bold goal to ensure no residual active pharmaceutical ingredient (API) above Predicted No Effect Concentration (PNEC) in wastewater. Activities to implement this goal will occur throughout fiscal 2024.
We continue to strengthen our supply chain by expanding our supplier assessment and auditing program, including continued use of our third-party vetting and due diligence platform in alignment with the Pharmaceutical Supply Chain Initiative (PSCI) principles and the U.N. Guiding Principles on Business and Human Rights. Our diverse supplier network and spend will continue to increase, as outlined in our new Diverse Supplier Policy.
Measuring against our baseline D&I statistics, we will work to progress our goal of recruiting, developing, and retaining more diverse talent, including in leadership roles. In fiscal 2024, we will further implement our D&I action plans, which outline localized strategies and goals to help us meet our company-wide targets. We continue to participate in external benchmarks, including the Corporate Equality Index (LGBTQ+ inclusion) and the Disability Equality Index to guide our goals and progress. Through training, forums, and internal performance metrics, we will continue to combat unconscious biases that can impact the hiring and promotion of diverse talent. Our employee surveys reveal that our employees are energized and engaged by our CR and D&I initiatives. In fiscal 2024, we will continue to assess our employees’ overall engagement and inclusion through our next corporate engagement survey.
Further information on our CR program is available at catalent.com/about-us/corporate-responsibility/, but this website is not part of our public disclosures and is not incorporated by reference into this Annual Report.
Intellectual Property
We rely on a combination of know-how, trade secrets, patents, copyrights and trademarks and other intellectual property laws, nondisclosure and other contractual provisions and technical measures to protect a number of our offerings, services and intangible assets. These proprietary rights are important to our ongoing operations. Certain of our operations and products are under intellectual property licenses from third parties, and in certain instances we license our technology to third parties. We also have a long track record of innovation across our lines of business, and, to further encourage active innovation, we have developed incentive compensation systems linked to patent filings and other recognition and reward programs for scientists and non-scientists alike.
We have applied in the United States and certain foreign countries for registration of a number of trademarks, service marks and patents, some of which have been registered and issued, and also hold common law rights in various trademarks and service marks. We hold approximately 1,100 patents and patent applications worldwide in advanced drug delivery and biologics formulations and technologies, and manufacturing and other areas.
We hold patents and license rights relating to certain aspects of our formulations, nutritional and pharmaceutical dosage forms, mammalian cell engineering, and sterile manufacturing services. We also hold patents relating to certain processes and products. We have a number of pending patent applications in the United States and certain foreign countries, and intend to pursue additional patents as appropriate. We have enforced and will continue to enforce our intellectual property rights in the United States and worldwide.
We do not consider any particular patent, trademark, license, franchise, or concession to be material to our overall business.
Regulatory Matters
The manufacture, distribution and marketing of healthcare products are subject to extensive ongoing regulation by the FDA, other United States ("U.S.") governmental authorities and foreign regulatory authorities. Certain of our subsidiaries are required to register for permits and/or licenses with, and must comply with the operating, cGMP, quality and security standards of, applicable domestic and foreign healthcare regulators, including the FDA, the Drug Enforcement Agency (the "DEA"), the Department of Health and Human Services (the "DHHS"), the equivalent agencies of European Union (the "EU") member states and various state boards of pharmacy, state health departments and comparable foreign agencies, as well as various accrediting bodies, each depending upon the type of operations and the locations of distribution and sale of the products manufactured or services provided by those subsidiaries.
In addition, certain of our subsidiaries are subject to other healthcare laws, including the United States Federal Food, Drug, and Cosmetic Act, the Public Health Service Act, the Controlled Substances Act and comparable state and foreign laws and regulations in certain of their activities.
We are also subject to various federal, state, local, foreign and transnational laws, regulations and recommendations, both in the United States and abroad, relating to safe working conditions, laboratory and distribution practices and the use, transportation and disposal of hazardous or potentially hazardous substances. In addition, U.S. and international import and export laws and regulations require us to abide by certain standards relating to the cross-border transit of finished goods, raw materials and supplies and the handling of information. We are also subject to various other laws and regulations concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records.
The costs associated with complying with the various applicable federal, state, local, foreign and transnational regulations could be significant and the failure to comply with such legal requirements could have an adverse effect on our results of operations and financial condition. See "Risk Factors—Risks Relating to Our BusinessIndebtedness
•The size of our indebtedness and Industry—Failure to complythe obligations associated with existing and future regulatory requirementsit could adversely affect our resultsability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or in our industry or to deploy capital to grow our business, expose us to interest-rate risk to the extent of operationsour variable-rate debt, or prevent us from meeting our obligations under our indebtedness. These risks may be increased in a recessionary environment, particularly as sources of capital may become less available or more expensive.
•Despite our high indebtedness level, we and financial condition," forour subsidiaries are still capable of incurring significant additional discussion ofdebt, which could further exacerbate the costsrisks associated with complyingour substantial indebtedness.
•Our interest expense on our variable-rate debt may continue to increase if and to the extent that policymakers combat inflation through interest-rate increases on benchmark financial products.
•Despite the limitations in our debt agreements, we retain the ability to take certain actions that may interfere with the various regulations.our ability to timely pay our substantial indebtedness.
In fiscal 2017, we were subject•We may not be able to 53 regulatory audits and, over the last five fiscal years, we successfully completed more than 250 regulatory audits, with approximately 50% resulting in no reported observations.pay our indebtedness when it becomes due.
Quality Assurance
•We are committedcurrently using and may in the future use derivative financial instruments to ensuringreduce our exposure to market risks from changes in interest rates on our variable-rate indebtedness or changes in currency exchange rates, and maintaining the highest standardany such instrument may expose us to risks related to counterparty credit worthiness or non-performance of regulatory compliance while providing high quality productsthese instruments.
Risks Relating to our customers. To meet these commitments,Ownership of Our Common Stock
•We do not presently maintain effective disclosure controls and procedures due to material weaknesses we have developedidentified in our internal control over financial reporting. Failure to remediate these material weaknesses or any other material weakness or significant deficiencies have resulted in a revision of our financial statements, in the future could result in material misstatements in our financial statements and implemented a Catalent-wide quality management system throughout the organization. We have nearly 1,400 employees around the globe focusing on quality and regulatory compliance. Our senior management team is actively involved in setting quality policies, standards and internal position papers as well as managing internal and external quality performance. Our quality assurance department provides quality leadership and supervises our quality systems programs. An internal audit program monitors compliance with applicable regulations, standards and internal policies. In addition, our facilities are subject to periodic inspection by the FDA, the DEA and other equivalent local, state and foreign regulatory authorities and customers. All FDA, DEA and other regulatory inspectional observations have been resolved or are on track to be completed at the prescribed timeframe provided in commitments to the applicable agency in all material respects. We believe that our operations are in compliance in all material respects with the regulations under which our facilities are governed.
Environmental Matters
Our operations are subject to a variety of environmental, health and safety laws and regulations, including those of the U.S. Environmental Protection Agency (the "EPA") and equivalent state, local and foreign regulatory agencies in each of the jurisdictions in which we operate. These laws and regulations govern, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous substances and wastes, soil and groundwater contamination and employee health and safety. Our manufacturing facilities use, in varying degrees, hazardous substances in their processes. These substances include, among others, chlorinated solvents,caused, and in the past chlorinated solvents were used at one or morefuture could cause us to fail to timely meet our periodic reporting obligations.
•Our stock price has historically been and may continue to be volatile, and a holder of shares of our facilities, includingCommon Stock may not be able to resell such shares at or above the price such stockholder paid, or at all, and could lose all or part of such investment as a number weresult.
•Future sales, or the perception of future sales, of our Common Stock, by us or our existing stockholders could cause the market price for our Common Stock to decline.
•We are no longer owneligible to use the Form S-3 registration statement, which could impair our capital-raising activities.
•Provisions in our organizational documents could delay or operate. As atprevent a change of control.
We caution you that the risks, uncertainties, and other factors referenced above may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our current facilities, contamination at such formerly owned or operated propertiesbusiness in the way expected. There can result and has resulted in liability to us, for whichbe no assurance that (i) we have recorded appropriate reservescorrectly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as needed. We believe that our operations are in compliance in all material respects withof the environment, healthdate of this report or as of the date they were made, and safety regulations applicablewe undertake no obligation to our facilities.publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Available Information
We file annual, quarterly, and specialcurrent reports and other information with and furnish additional information to the SEC.U.S. Securities and Exchange Commission (the “SEC”). Our filings with the SEC are available to the public on the SEC’s website at www.sec.gov. Those filings are also available to the public on, or accessible through, our website (catalent.com) for free via the "Investors"“Investors” section at www.catalent.com.
as soon as reasonably practicable after we file such material, or furnish it to, the SEC. We also use our website, Facebook page (facebook.com/CatalentPharmaSolutions), LinkedIn page (linkedin.com/company/catalent-pharma-solutions/) and Twitter account (@catalentpharma) as channels of distribution of information concerning our activities, our offerings, our various businesses, and other related matters. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The information we file with or furnish to the SEC (other than the information set forth or incorporated in this Annual Report) or contained on or accessible through our corporate website, our social media channels, or any other website that we may maintain is not incorporated by reference and is nota part of this Annual Report.
Catalent References and Fiscal Year
Unless the context otherwise requires, in this Annual Report, the terms “Catalent,” “the company,” “we,” “us,” and “our” refer to Catalent, Inc. and its subsidiaries. All references to years in this Annual Report, unless otherwise stated, refer to fiscal years beginning July 1 and ending June 30. All references to quarters, unless otherwise stated, refer to fiscal quarters. Fiscal years are referred to by the calendar year in which they end. For example, “fiscal 2023” refers to the fiscal year ending June 30, 2023.
Trademarks and Service Marks
We have U.S. or foreign registrations for the following marks, among others: Bettera®, Catalent®, Clinicopia®, CosmoPod®, Easyburst®, FastChain®, FlexDirect®, Follow the Molecule®, Galacorin®, GPEx®, GPEx® Boost, GPEx® Lightning, Graphicaps®, Liqui-Gels®, Manufacturing Miracles®, Micron Technologies®, OmegaZero®, OneBio®, OneXpress Solution®, OptiDose®, OptiForm®, OptiGel®, OptiGel® Bio, OptiGel® DR, OptiMelt®, OptiShell®, PEEL-ID®, Pharmatek®, RP Scherer®, Savorgel®, Scherer®, SMARTag®, Softdrop®, Staby®, StabyExpress®, SupplyFlex®, Vegicaps®, Zydis®,and Zydis Ultra®. This Annual Report also includes trademarks and trade names owned by other parties, and these trademarks and trade names are the property of their respective owners. We use certain other trademarks and service marks, some on Form 10-K. Youan unregistered basis and some have been applied for, but remain pending examination in trademark agencies in the U.S. and abroad, including, FlexDoseSM, Catalent Xpress PharmaceuticsSM, OptiPact™, ProteoSuiteSM, StartScoreSM, and VirtuosoSM.
Solely for convenience, the trademarks, service marks, and trade names identified in this Annual Report may appear without the ®, SM, and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names.
ITEM 1. BUSINESS
Overview
We provide differentiated development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, vaccines, and consumer health products at over fifty facilities across four continents under rigorous quality and operational standards. Our oral, injectable, and respiratory delivery technologies, along with our state-of-the-art protein, plasmid, viral, and cell and gene therapy manufacturing capacity, address a wide and growing range of modalities and therapeutic and other categories across the biopharmaceutical, pharmaceutical, and consumer health industries. Through our extensive capabilities, growth-enabling capacity, and deep expertise in product development, regulatory compliance, and clinical trial and commercial supply, we can help our customers take products to market faster, including more than half of new drug products approved by the U.S. Food and Drug Administration (the “FDA”) in the last decade. Our development and manufacturing platforms, our proven formulation, supply, and regulatory expertise, and our broad and deep development and manufacturing know-how enable our customers to advance and then bring to market more products and better treatments for patients and consumers. Our commitment to reliably supply our customers’ and their patients’ needs is the foundation for the value we provide; annually, we produce approximately 70 billion unit doses for nearly 8,000 customer prescription and consumer health products, or approximately 1 in every 26 unit doses of such products taken each year by patients and consumers around the world. We believe that, through our investments in state-of-the-art facilities and capacity expansion, including investments in facilities focused on new treatment modalities and other attractive market segments, our continuous improvement activities devoted to operational and quality excellence, the sales of existing and introduction of new customer products, and, in some cases, our innovation activities and patents, we will continue to attract premium opportunities and realize the growth potential from these areas.
We continue to focus on enhancing both our product and service offerings and our sales and marketing activities in order to grow the number of active commercial manufacturing and development programs for our customers. This sustains our extensive, long-duration relationships and long-term contracts with a broad and diverse range of industry-leading customers. In fiscal 2023, we conducted business with 87 of the top 100 branded drug and consumer health marketers and 82 of the top 100 biologics marketers, measured on a global basis. Selected key customers include Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Haleon, Johnson & Johnson, Moderna, Pfizer, and Sarepta Therapeutics.
We have many long-standing relationships with our customers, particularly those with commercial products, as we provide support and reliable supply through each stage of a product's lifecycle. Our relationship with an innovator of a prescription pharmaceutical product will often last many years—in several cases, two decades or more—extending from pre-clinical development through more mature commercial stages of the product's life cycle. We serve customers requiring some combination of innovative product development, superior quality, state-of-the-art manufacturing, and skilled technical services to support their development and marketed product needs. Our broad and diverse range of technologies closely integrates with all aspects of our customers’ final formulations and dose forms, and this generally results in the inclusion of our facilities as manufacturing and testing sites in our customers’ prescription product regulatory filings. Both factors frequently translate to long-duration supply relationships at an individual product level.
We believe our customers value us because our depth of development solutions and state-of-the-art manufacturing technologies, continuous innovations and improvements, consistent and reliable supply, geographic reach, and substantial expertise enable us to create a broad range of business and product solutions that can be customized to fit their individual needs. Today we employ more than 9,000 highly trained direct manufacturing associates, as well as more than 3,000 formulation, analytical development, and process scientists and technicians. Our customers can also readbenefit from more than 1,800 patents and copy,patent applications in advanced delivery platforms, drug and biologics formulation, and manufacturing. The aim of our offerings is to reliably supply our customers' commercial needs and also allow them to bring more products to market faster and develop and market differentiated products that improve patient outcomes. We believe our leading market position and diversity of customers, offerings, regulatory categories, products, and geographies reduce our exposure to potential strategic and product shifts within our industries.
We provide a wide variety of proprietary and non-proprietary, differentiated technologies, products, and service offerings to our customers across our development and manufacturing platforms, which we have advanced and grown over more than 90 years through internal development, strategic alliances, in-licensing, and acquisitions. We initially introduced our softgel capsule technologies in the 1930s and have continuously expanded our range of offerings. In recent years, we have launched more than a dozen internally developed new technology platform offerings. We have also augmented our portfolio through acquisitions. Among the technologies we currently offer are softgel capsules, including both gelatin and non-gelatin formulations, our Zydis orally disintegrating tablets, gummy and soft chew oral forms, protein production using advanced mammalian cell lines, adeno-associated virus (“AAV”) and other viral vectors, induced pluripotent stem cells (“iPSCs”) and
other cell types, plasmid DNA (“pDNA”), and a range of other oral, injectable, and respiratory delivery technologies. The technologies and service offerings within our development solution platforms span the full drug development process, ranging from our OptiForm Solution Suite for enhancement of bioavailability and other characteristics of early-stage small molecules, Gene Product Expression (“GPEx”), GPEx Boost, and GPEx Lightning for advanced cell line development, pDNA development and manufacturing and SMARTag platforms for development of biologics and antibody-drug conjugates (“ADCs”), to formulation, analytical, and bioanalytical services, early-stage clinical development, drug-device combination development and supply, fill and finish operations for injectable products, and clinical trials supply, including our unique FlexDirect direct-to-patient and FastChain demand-led clinical supply solutions. Our offerings serve a critical need in the development and manufacture of products across a broad range of product types. We focus on serving as an accelerator for new therapeutic modalities and formulation, delivery, and manufacturing technologies. Our expertise enables us to bring advanced products to market at SEC prescribed rates, any documentscale, faster.
In large part due to acquisitions and investments, their subsequent organic growth, the revenue contribution from our Biologics segment has grown from approximately 17% in fiscal 2016 to 46% in fiscal 2023. We believe our own internal innovation and investments, supplemented by current and future external partnerships and acquisitions, will continue to extend our leadership positions in the development, reliable supply, and delivery of drugs, protein-based biologics, cell and gene therapies, and consumer health products.
History
We trace our history to the 1933 founding of the R.P. Scherer Corporation, which developed the first rotary die machine for the manufacture of soft gelatin capsules, and we assumed our current form in April 2007. We regularly review our portfolio of offerings and operations in the context of our strategic growth plan, and, where appropriate, have added to or divested from our portfolio of offering and sites, which has led to significant growth of the overall business. In July 2014, we completed the initial public offering of our Common Stock, which is listed on the New York Stock Exchange (the “NYSE”) under the symbol “CTLT.”
We are a holding company that indirectly owns Catalent Pharma Solutions, Inc. (“Operating Company”), which owns, directly or indirectly, all of our operating assets.
Our Competitive Strengths
Available, State-of-the-art Manufacturing Capacity in Attractive Market Segments
We have invested several billion dollars over the last few years to broaden our portfolio of offerings and expand our capacity with state-of-the-art manufacturing and development capabilities that focus on anticipating and meeting the needs of the evolving biopharmaceutical, pharmaceutical, and consumer health industries. In addition, we have hired and trained thousands of new direct manufacturing associates in our quality-focused culture of operational excellence. The capacity and capabilities we have built and purchased, along with our continuing efforts to assure operational and quality excellence, have and will continue to enable us to secure attractive new business opportunities in the expanding market for outsourced product development and supply.
Vibrant, Patient First-Driven Culture
From the manufacturing line to the executive suite, for all our critical decisions, we ask the question, “What would the impact be to the patient?”, and our culture is built on our cornerstone value of Patient First. We believe this mindset, which aligns closely with our customers’ values, enables a pervasive focus on patient safety, impact, and outcomes, and an uncompromising approach to product quality and compliance, by reminding us of those who depend upon our vigilance concerning the safety, quality, reliability, and sustainability of our product supply. Along with other key cultural strengths, including our commitments to diversity and inclusion and to science-based environmental sustainability, we believe our culture brings us both a unique reputation and an operating capability that is difficult to replicate.
Diversified Operating Platform
We are diversified by virtue of our broad range of product and service offerings, our geographic scope, our large customer portfolio, the extensive range of products we produce, and our ability to provide solutions at every stage of a product’s lifecycle. In fiscal 2023, we produced nearly 8,000 distinct products across multiple categories. Our fiscal 2023 net revenue was distributed by relevant product regulatory/marketing status as follows: biologics 51%, branded drugs 30%, generic prescription drugs 2%, over-the-counter drugs 7%, and consumer health and other 10% combined. In fiscal 2023, our top 20
products represented 37% of our total net revenue, with one customer accounting for approximately 10% of net revenue whose largest individual product accounted for approximately 9% of our net revenue. We serve more than 1,200 customers in more than 80 countries, with 35% of our fiscal 2023 net revenue coming from outside the U.S. This diversity, combined with long product lifecycles and close customer relationships, has contributed to the long-term stability of our business. It has also allowed us to reduce our exposure to the risks associated with potential strategic, customer, and product shifts as well as to payer-driven pricing pressures experienced by our drug and biologic customers.
Longstanding, Extensive Relationships with a Diverse Customer Portfolio
We have longstanding, extensive relationships with leading pharmaceutical, biotechnology, and consumer health customers. In fiscal 2023, we did business with 87 of the top 100 branded drug and consumer health marketers and 82 of the top 100 biologics marketers, measured on a global basis, as well as with more than 1,200 other customers, including emerging and specialty biotech and pharmaceutical companies, which are often more reliant on outside partners as a result of their more virtual business models. Regardless of size, our customers seek innovative product development, superior quality, advanced manufacturing, and skilled technical services to support their development and marketed product needs.
We believe our customers value us because our broad range of product and service offerings, recently expanded capacity in state-of-the-art manufacturing facilities, including facilities offering new treatment modalities, reliable supply, geographic reach, commitment to operational and quality excellence, and substantial expertise that enable us to create a broad range of tailored solutions, many of which are unavailable from other individual providers.
Deep, Broad, and Growing Advanced Technology Foundation
Our breadth of offerings employing advanced technologies and state-of-the-art manufacturing systems and long track record of innovation substantially differentiate us from other industry participants. Our leading softgel platforms, including Liqui-Gels, OptiShell, OptiGel DR, and Vegicaps capsules, our gummy and soft chew oral forms, and our modified release technologies, including the Zydis family of orally disintegrating tablets, our spray drying capabilities, and our OptiPact and OptiMelt technologies, provide formulation expertise to solve complex delivery challenges for our customers. We offer advanced technologies for delivery of small molecules and biologics via oral, respiratory, and injectable routes and also provide advanced biologics formulation options, including GPEx, GPEx Boost, and GPEx Lightning mammalian cell lines for protein production, SMARTag ADC technology, AAV vectors for cell and gene therapies, iPSC development and manufacturing, and pDNA development and manufacturing. We have a leadership position within respiratory delivery, including dry powder inhalers and intra-nasal forms. We have reinforced our leadership position in advanced technologies over the last three years, as we have launched more than a dozen new technology platforms and applications, and recently purchased or expanded our businesses developing and manufacturing consumer health products, protein-based biologics, fill and finish for injectable drugs and biologics, cell and gene therapies, and other new therapeutic modalities. Our culture of creativity, problem-solving, and innovation is grounded in our advanced technologies, the substantial expertise and experience of our scientists and engineers, and, in some cases, our patents and proprietary manufacturing processes. Our global product development and innovation teams drive a focused application of resources to opportunities for both new customer product introductions and platform technology development. As of June 30, 2023, we had more than 1,500 product development programs in active development across our businesses.
Long-Duration Relationships Provide Sustainability
Our broad and diverse range of technologies closely integrates with our customers’ molecules to yield safe and effective final formulations and dose forms, and this generally results in the inclusion of Catalent in our customers’ prescription product regulatory filings. Both factors translate to long-duration supply relationships at an individual product level, to which we apply our expertise in contracting to produce long-duration commercial supply agreements. These agreements typically have initial terms of two to seven years with regular renewals of one to three years (see “—Contractual Arrangements” for more detail). Approximately three-quarters of our fiscal 2023 net revenue from our product development and delivery offerings and related services were covered by such long-term contractual arrangements. We believe this base provides us with a sustainable competitive advantage.
Significant Recent Growth Investments
We have made over time, and expect to continue to make, significant investments in our manufacturing network, which is capable of serving customers and patients worldwide, and today employ approximately 8 million square feet of manufacturing, laboratory, and related space across four continents. We have deployed approximately $2.61 billion in the last five fiscal years in gross capital expenditures, not including approximately $3.58 billion spent acquiring new facilities and businesses. Growth-related investments in facilities, capacity, and capabilities across our businesses have positioned us for future growth in areas
aligned with anticipated future demand, including in pDNA, cell and gene therapies, fill and finish for injectable drugs and biologics, and other new therapeutic modalities. Through our continuing commitment to operational, quality, and regulatory excellence, we drive continuous improvements in safety, productivity, sustainability and reliable supply, which we believe further differentiates us. Our manufacturing network and capabilities allow us the flexibility to reliably supply the changing needs of our customers while consistently meeting their quality, delivery, sustainability, and regulatory compliance expectations.
High Standards of Regulatory Compliance and Operational and Quality Excellence
We operate our plants in accordance with current good manufacturing practices (“cGMP”) or other applicable requirements, following our own high standards that are consistent with those of many of our large global pharmaceutical and biotechnology customers. We have approximately 1,900 employees around the globe focused on quality and regulatory compliance. All of our facilities are registered where required with the FDA or other applicable regulatory agencies, such as the European Medicines Agency (the “EMA”). In many cases, our facilities are registered with multiple food, drug, or biologics regulatory agencies around the world. In fiscal 2023, we were subject to 58 regulatory audits, and, over the last five fiscal years, we successfully completed approximately 300 regulatory audits. We also undergo more than 700 customer and internal audits annually. We believe our quality and regulatory track record to be a favorable competitive differentiator.
Strong and Experienced Management Team
Our executive leadership team collectively has approximately 550 years of combined and diverse experience within the pharmaceutical and healthcare industries. With an average of approximately 28 years of functional experience, this team possesses deep knowledge and a wide network of industry relationships.
Our Strategy
Our strategic ambition, guided by and operationalized through our values, is to power the innovation and growth of the life science industry by becoming its leading development and commercial partner in reliable supply, conventional and advanced technologies, first-to-scale innovation, and therapeutic modalities, and integrated solutions. To achieve this, we continue to pursue the following key growth initiatives:
Capabilities & Capacity — Continued Expansion in Biologics and Other Attractive Markets
Recognizing the strategic importance of protein-based biologics, cell and gene therapies, pDNA, and other new biopharmaceutical modalities, we began to build a differentiated biologics platform in 2002. Since 2019, we have invested over $3.42 billion in our biologics business, including capital investments and approximately $1.83 billion for acquisitions of biologics-focused businesses and sites. Today, we are a recognized leader in biologics, including AAV vectors for gene therapies; development and supply for cell therapies; advanced cell-line development; formulation and fill-finish into vials, pre-filled syringes, and cartridges; specialized manufacturing of biologic drug substances; and bioanalytical analysis. We have partnered with customers from around the world to develop advanced cell expression for more than 1,100 cell lines, many using our advanced GPEx, GPEx Boost, and GPEx Lightning technologies, and have actively collaborated on developing and scaling up more than 125 cell and gene therapies. In the recent fiscal years, we expanded our existing cell therapy development and manufacturing capabilities, began offering pDNA production services, and acquired several facilities including a commercial-scale cell therapy manufacturing facility in Princeton, New Jersey (“Princeton”) and a developer and manufacturer of iPSCs located near Dusseldorf, Germany. We have also invested in a second-generation ADC technology, SMARTag, and see continued progress in this technology’s capabilities and our customers’ SMARTag product-development activities.
In addition to our expansion in biologics, we have invested additional capital in our facilities in order to expand in attractive markets, including significant expansion of our oral solid controlled release production capacity in Winchester, Kentucky, and the addition of specialized capabilities and capacity in early development. We acquired a leading position in consumer-preferred gummy and soft-chew formats for consumer health products with our acquisition of Bettera Holdings, LLC (“Bettera Wellness”) in fiscal 2022. We expanded our capacity for oral and injectable products via our fiscal 2020 acquisition of a facility in Anagni, Italy, and our capacity for spray dried dispersion and dry powder inhaler manufacturing via our fiscal 2021 acquisition of a facility located near Boston, Massachusetts.
Use Our Proprietary Technologies and Substantial Expertise to Help Our Customers Develop New Products
We have broad and diverse technology platforms that are supported by deep scientific and technical expertise, extensive know-how, and more than 1,800 patents and patent applications in approximately 170 families across advanced delivery platforms, drug and biologics formulation, and manufacturing. For example, we have significant softgel fill and formulation know-how, databases of formulated products, and substantial softgel regulatory approval expertise. As a result, nearly 90% of
approvals by the FDA over the last 25 years of new chemical entities presented in a softgel format have been developed and supplied by us.
In addition to resolving delivery challenges for our customers’ products, we have applied our technology platforms and development expertise to proactively develop proof-of-concept products, whether improved versions of existing drugs, new generic formulations, or innovative consumer health products. In the consumer health area, we file product dossiers with regulators in relevant jurisdictions for self-created products, which help contribute sustainable growth to our consumer health business. We expect to continue to seek proactive development opportunities and other non-traditional relationships to increase demand for and value realized from our technology platforms. These activities have provided us with opportunities to capture an increased share of end-market value through out-licensing, profit-sharing, and other arrangements.
Operational Leverage — Deploy Existing Infrastructure and Operational Discipline to Drive Profitable Growth
Through our existing infrastructure, including our global network of operating locations and programs, we promote operational discipline and drive margin expansion. With our active focus on continuous improvement and sustainability enhancement, global procurement function, and conversion cost productivity metrics in place, we continuously seek to enhance our culture of functional excellence and cost accountability. Along with the SEC atongoing increase in the SEC’s Public Reference Room located at 100 F Street, N.E., Washington D.C. 20549. You can call the SEC at 1-800-SEC-0330share of revenues from higher margin biologics offerings, we expect this discipline to obtain informationfurther leverage our operational network for profitable growth.
Strategic Acquisitions and Licensing — Build on the operation of the Public Reference Room.
If any of the following risks actually occur, our business, financial condition, operating results or cash flow could be materially and adversely affected. Additional risks or uncertainties not presently known to us, or that we currently believe are immaterial, may also impair our business operations.
Risks Relating to Our Business and Industry
We participate in a highly competitive market, and increased competition may adversely affect our business.
We operate in the markets for outsourced development solutions and commercial supply, generally provided by contract development and manufacturing organizations (“CDMO”), where we estimate current industry spending at more than $70 billion globally. Our broad platform, global infrastructure, and diversified customer portfolio provide us with a strong foundation from which to consolidate within these markets, to enter new markets, and generate operating leverage through acquisitions. Since fiscal 2013, we have executed 22 transactions, investing approximately $4.91 billion, and have demonstrated an ability to efficiently and effectively integrate these acquisitions.
While we are rigorously focused on driving our organic growth, we have in recent years substantially increased our participation in biologics, including protein-based biologics, cell and gene therapies, pDNA development and production, and drug product fill and finish, via strategy-driven inorganic transactions. We intend to identify and execute strategic transactions to optimize our portfolio of offerings and businesses, within the context of our long-term capital allocation strategy. We have a dedicated corporate development team in place to pursue these transactions, enabled by a rigorous and financially disciplined process for evaluating and executing these transactions.
“Follow the Molecule”® by Providing Solutions to our Customers across all Phases of the Product Lifecycle
We intend to continue to use our development and manufacturing solutions across the entire lifecycle of our customers’ products to drive future growth. Our development solutions span the drug development process, starting with our platforms for early pre-clinical development of small molecules, protein-based biologics, and cell and gene therapies; through formulation and analytical services, development and manufacturing of clinical trial supplies, and fill and finish of injectable products; to regulatory consulting. Once a molecule is ready for clinical trials and subsequent commercialization, we provide our customers with a range of advanced technologies and expert, state-of-the-art manufacturing solutions that allow them to deliver their molecules to the end-users in safe, effective, and, in some cases, patient-preferred dosage forms, to produce biologic drug substances needed for protein-based biologics and cell and gene therapies, and to provide primary and secondary packaging solutions and cold-storage distribution services. Our relationship with a molecule typically starts with developing and manufacturing the innovator product and can extend throughout the molecule’s commercial life. For prescription products, we are often the sole or primary outsourced provider and are frequently reflected in customers’ product approval applications. Our revenue from our development and manufacturing activities are primarily driven by volumes, and, as a result, the loss of an innovator drug’s market exclusivity may be mitigated if we supply customers offering generic or biosimilar equivalents.
An example of the long and mutually productive relationships we foster can be found in a leading over-the-counter anti-allergy brand, which today uses both our proprietary Zydis orally disintegrating tablets and Liqui-Gels softgel technology. We originally began development of the prescription format of this product for our multinational pharmaceutical company partner in 1992 to address specific patient sub-segment needs. After four years of development, we then commercially supplied the prescription product in our Zydis format for six years, and we have continued to provide the Zydis form since the switch to over-the-counter status in the U.S. and other markets in the early 2000s. Subsequently, we proactively brought a softgel product concept for the brand to the customer, which the customer elected to develop and launch as well. By following this molecule, we have built a strong, 3 decade-long relationship across multiple formats and markets.
Customer Product Pipeline — Continuing to Grow Through New Projects and Product Launches
We intend to continue to supplement our existing diverse base of commercialized customer products with new development programs. As of June 30, 2023, our product development teams were working on more than 1,500 customer development programs in active development across our business. Our base of active development programs has expanded in recent years from growing market demand, as well as from our expanded capabilities and technology platforms. Although there are many complex factors that is highly competitive. We compete on several fronts, both domesticallyaffect the development and internationally, including competing with other companiescommercialization of pharmaceutical, protein-based biologic, cell and gene therapy, and consumer health products, we expect that provide similar offeringsa portion of these programs will reach full development and market approval in the future and thereby add to our long-duration commercial revenues under long-term contracts and grow our existing product base. In fiscal 2023, we introduced 216 new products for our customers.
Catalent continues to be a leader in providing chemistry, manufacturing, and controls-based product development services to the global pharmaceutical, biotechnology, and consumer health industries, driven by thousands of projects annually. In fiscal 2023, we recognized $1.95 billion of net revenue related to the development of products, down 16% from the prior year, principally driven by the substantial decrease in net revenue from the development of COVID-19 related products. In addition, substantially all of the revenue associated with the Clinical Supply Services business relates to our support of customer products in development.
Our Reportable Segments
At the beginning of fiscal 2023, in connection with the appointment of a new President and Chief Executive Officer, who also serves as the Company’s Chief Operating Decision Maker, the Company changed its operating structure and reorganized its executive leadership team. This new organizational structure includes operating and reporting in two segments: (i) Biologics and (ii) Pharma and Consumer Health.
Biologics
Our Biologics segment provides formulation, development, and manufacturing for biologic proteins, cell gene, and other nucleic acid therapies; pDNA, iPSCs, oncolytic viruses, and vaccines; formulation, development, and manufacturing for parenteral dose forms, including vials, prefilled syringes, and cartridges; and analytical development and testing services for large molecules. The business has extensive expertise in development, scale up, and commercial manufacturing. Representative customers of our Biologics segment include Bristol-Myers Squibb, Johnson & Johnson, Moderna, and Sarepta Therapeutics, along with a broad range of innovative small and mid-tier biopharmaceutical customers.
Our biologics offering includes cell-line development based on our advanced, patented GPEx suite of technologies, which are used to develop stable, high-yielding mammalian cell lines for both innovator and biosimilar biologic compounds. GPEx technology can provide rapid cell-line development, high biologics production yields, flexibility, and versatility. Our development and manufacturing facility in Madison, Wisconsin has the capability and capacity to produce cGMP quality biologics drug substance from 250L to 4000L scale using single-use technology across five suites to provide maximum efficiency, redundancy, and flexibility. Additionally, our Madison, Wisconsin facility features two flexible cGMP suites that are used to manufacture mRNA or other small-scale biomolecules. Our Bloomington, Indiana facility brings additional biologics development, clinical, and commercial drug substance manufacturing, and formulation development capabilities and capacity. Both Bloomington and our Anagni, Italy facility provide substantial capacity for finished-dose drug product manufacturing and packaging. Our SMARTag next-generation ADC technology, based in Emeryville, California, is a clinical-stage technology that enables development of ADCs and other protein conjugates with improved efficacy, safety, and manufacturability.
At our pDNA, cell therapy, and gene therapy global centers of excellence in Belgium, Maryland, and New Jersey, we develop and manufacture advanced therapeutics, including AAV, lentivirus, oncolytic virus, CAR-T, and other cell or virus modalities together with critical pDNA biological starting material for cell, mRNA, viral-based therapies and next-generation vaccines. In fiscal 2022, we acquired a fully operational, commercial-scale cell therapy campus in Princeton with 16 suites available for both autologous and allogeneic clinical and commercial manufacturing. The Princeton campus works in conjunction with our Gosselies, Belgium cell therapy center of excellence and our iPSC manufacturing center of excellence in Dusseldorf, Germany, to support our customers’ global cell therapy needs. Additionally, we have expanded our gene therapy flagship manufacturing campus in Harmans, Maryland, creating a total of 18 penthouse-style viral-vector suites, and added our Virtuoso AAV platform that reduces AAV development time by half, enabling our customers to reach first-in-human studies faster. Our specialized expertise in AAV vectors, the most commonly used delivery system for gene therapies, and iPSCs for next-generation allogeneic cell therapy manufacturing, together with our substantial global cell therapy manufacturing, capacity for clinical- through commercial-scale batches, and our capabilities in mRNA and pDNA manufacturing, position us to capitalize on strong industry demand and expansions in the use of newer modalities in the cell and gene therapy market.
Our range of injectable manufacturing offerings includes manufacturing drug substances and filling small molecules or biologics into vials, syringes, and cartridges, with flexibility to accommodate other formats within our existing network. In addition to primary packaging, our network provides secondary packaging capabilities, including auto-injector and safety device assembly for commercial launch and life-cycle management. Our clinical supply services business provides a global network for clinical distribution, as well as labeling, packaging, and cold-chain storage for clinical trials and commercial supply of biotherapeutics and cell and gene therapies. Our fill and finish services are largely focused on complex pharmaceuticals and biologics. With our range of technologies, we are able to meet a wide range of specifications, timelines, and budgets. We believe that the complexity of the manufacturing process, the importance of experience and know-how, a proven history of regulatory compliance, and substantial state-of-the-art capacity provide us with a meaningful competitive advantage in the market.
We also offer analytical development and testing services for proteins, gene and cell therapies, and other biologic modalities, including bioassay, biophysical characterization, and cGMP release and stability testing. Our OneBio Suite provides customers with the potential to seamlessly integrate drug substance, drug product, and clinical supply management for products in development, and for integrated commercial supply across both drug substance and drug product. We provide a broad range of technologies and services supporting the development and launch of new biologic entities, biosimilars, biobetters, and cell and gene therapies to bring a product from gene to commercialization, faster.
Our Biologics segment represented 46%, 53%, and 48% of our aggregate net revenue before inter-segment eliminations for fiscal 2023, 2022, and 2021, respectively.
Pharma and Consumer Health
Through our Pharma and Consumer Health segment, we provide market-leading capabilities for complex oral solids, softgel formulations, Zydis fast-dissolve technologies, and gummy, soft chew, and lozenge dosage forms; formulation, development, and manufacturing platforms for oral, nasal, inhaled, and topical dose forms; and clinical trial development and supply services.
Representative customers of our Pharma and Consumer Health segment include Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Haleon, Pfizer, and Procter & Gamble.
Our Pharma and Consumer Health segment represented 54%, 47%, and 52% of our aggregate net revenue before inter-segment eliminations for fiscal 2023, 2022, and 2021, respectively.
Formulation and development
Through our comprehensive pharmaceutical formulation and development platform, we provide pre-clinical screening, formulation, and analytical development, and cGMP manufacturing at both clinical and commercial scale for our market-leading softgel capsule and Zydis fast-dissolve tablet platforms, traditional and advanced complex oral solid-dose formats, dry powder inhalers, and nasal delivery devices. We have substantial, proven experience in developing and scaling up orphan and rare disease products, especially those requiring accelerated development timelines, solubility enhancement, specialized handling (e.g., potent or controlled substance materials), complex technology transfer and specialized manufacturing processes. We provide fluid bed coating, spray drying, hot melt extrusion, micronization, and lipid formulation capabilities, all of which are used to enhance a drug’s administration and release profile and its clinical performance. We offer comprehensive analytical method development and scientific capabilities, including stability testing and global regulatory services to support both fully integrated development programs or standalone fee-for-service work. We have a network of early development sites focused on earlier phase compounds (i.e., pre-clinical and Phase I) to engage with more customer molecules earlier in their development, with the intent to also support these molecules downstream as they progress towards commercial approval and supply. Demand for our offerings is driven by the need for scientific expertise, the depth and breadth of integrated services offered, as well as the reliability of our supply performance across quality and operational parameters.
Manufacturing
Our large-scale cGMP pharmaceutical manufacturing solutions typically include clinical trial supplies, registration batches, and commercial production across a broad range of formats, and may also involve finished dose packaging or advanced processing of intermediates to achieve the desired clinical performance of the prescription or over-the-counter pharmaceutical product. Finished dose forms include softgel capsules, our Zydis fast-dissolve tablets, and traditional and advanced complex oral solid-doses, including coated and uncoated tablets, pellet/bead/powder-filled two-piece hard capsules, granulated powders, and other immediate and modified release forms. Advanced intermediate processing may include coating, extrusion, or spheronization to achieve specific functional outcomes, including site- or time-specific drug release, taste
masking, or enhanced bioavailability. We have deep experience at managing complex technical transfers of clinical or commercial programs, whether from Catalent’s early development network, other contract development sites, or from customers directly.
Softgel technology platform
We provide formulation, development, and manufacturing services for soft capsules, or “softgels,” as well as large-scale manufacturing of oral solid dose forms for pharmaceutical and consumer health markets, along with supporting ancillary services. Our softgel manufacturing technology was first commercialized by our predecessor in the 1930s, and we have continually enhanced the platform since then. We are the market leader in overall softgel development and manufacturing and hold the leading market position in innovator drug softgels. Our principal softgel technologies include traditional softgel capsules, in which the shell is made of animal-derived gelatin, and Vegicaps and OptiShell capsules, in which the shell is made from plant-derived materials. Softgel capsules are used in a broad range of customer products, including prescription drugs, over-the-counter medications, dietary supplements, unit-dose cosmetics, and animal health companies basedmedicinal preparations. Softgel capsules encapsulate liquid, paste, or oil-based formulations of active compounds in North America, Latin America, Europesolution or suspension within an outer shell. In the manufacturing process, the capsules are formed, filled, and sealed simultaneously. We typically perform encapsulation for a product within one of our softgel facilities, with active ingredients provided by customers or sourced directly by us. Softgels have historically been used to solve formulation challenges or technical issues for a specific drug, to help improve the Asia-Pacific region.clinical performance of compounds, to provide important market differentiation, particularly for over-the-counter medications, and to provide safe handling of hormonal, highly potent, and cytotoxic drugs. We also may competeparticipate in the softgel vitamin, mineral, and supplement business in selected regions around the world. Our plant-derived softgel shells, available as Vegicaps and OptiShell capsules, allow innovators and consumer health customers to extend the softgel dose form to a broader range of active ingredients and serve patient and consumer populations that were previously inaccessible due to religious, dietary, or cultural preferences. Our Vegicaps and OptiShell capsules are protected by patents in most major global markets. Physician and patient studies we have conducted have demonstrated a preference for softgels versus traditional tablet and hard capsule dose forms in terms of ease of swallowing, real or perceived speed of delivery, ability to remove or eliminate unpleasant odor or taste, and, for physicians, perceived improved patient adherence with dosing regimens.
In addition to softgel capsules, following our fiscal 2022 acquisition of Bettera Wellness, we also conduct formulation, development, and manufacturing of gummies, soft chews, and lozenges in a variety of sizes and shapes serving the internal operationsdietary supplements market at three facilities in the United States. We use dietary and food ingredients provided by our customers or sourced directly by us, and we also provide ancillary services such as analytical testing and packaging.
Clinical Supply Services
Our Pharma and Consumer Health segment also provides clinical supply services through manufacturing, packaging, storage, distribution, and inventory management for small-molecule drugs, protein-based biologics, and cell and gene therapies in clinical trials. We offer customers flexible solutions for clinical supplies production and provide distribution and inventory management support for both simple and complex clinical trials. This includes over-encapsulation where needed; supplying placebos, comparator drug procurement, and clinical packages and kits for physicians and patients; inventory management; investigator kit ordering and fulfillment; cold-chain storage and distribution; and return supply reconciliation and reporting. We support trials in all regions of thosethe world through our facilities and distribution network. In recent years, we have extended our network, with significant expansions at our Philadelphia, Pennsylvania and Shanghai, China free trade zone locations and facilities in California, China, and Japan. We also continue to develop new solutions for the evolving clinical trial environment, including FlexDirect direct-to-patient, CT Success clinical supply planning, and extensive cold-chain investments. We are the leading provider of integrated development solutions and one of the leading providers of clinical trial supplies.
We have partnered with companies who focus on the development of cannabis-based prescription medicines and high-value cannabinoid drug therapies whose goal is to achieve full regulatory approval under the strictest legal standards in effect in any jurisdiction affected, including cannabidiol and tetrahydrocannabinol pharmaceutical products using our Zydis technology in clinical trials across a range of indications, including multiple sclerosis spasticity, chemotherapy-induced nausea and vomiting, chronic pain for cancer, and epilepsy. Our total net revenue related to such development programs was less than 1% of total revenue generated in fiscal 2023.We do not provide any services for or otherwise partner with any company that does not comply with all applicable laws, including the U.S. federal controlled substances laws (or non-U.S. equivalent laws), relating to cannabis products.
Integrated Development and Product Supply Chain Solutions
In addition to our proprietary offerings, we are also differentiated in the market by our ability to bring together our development solutions and state-of-the-art product manufacturing to offer integrated development and product supply solutions that can be combined or tailored in many ways to enable our customers to take their drugs, biologics, and consumer health products from laboratory to market, faster. Once a product is on the market, we can provide comprehensive, integrated product supply, from the sourcing or supply of the bulk active ingredient to comprehensive manufacturing and packaging, to the testing required for release, and to cold-chain or ambient temperature distribution. The customer- and product-specific solutions we develop are flexible, scalable, and creative, so that they meet the unique needs of both large and emerging biopharmaceutical, pharmaceutical, and consumer health companies and are appropriate for products of all sizes. We believe that our development and product supply solutions, such as OptiForm Solution Suite and OneBio Suite, will continue to contribute to our future growth.
Sales and Marketing
Our target customers include large pharmaceutical and biotechnology companies, mid-size, emerging, and specialty pharmaceutical and biotechnology companies, and consumer health companies, along with companies in other selected healthcare market segments such as animal health and medical devices, and companies in adjacent industries, such as cosmetics. We have longstanding, extensive relationships with leading pharmaceutical, biotechnology, and consumer and animal health manufacturers that choose to source these offerings internally.
We face material competition in eachcustomers. In fiscal 2023, we did business with 87 of our markets. Competition is driven by proprietary technologies and know-how, capabilities, consistency of operational performance, quality, price, value and speed. Some competitors may have greater financial, research and development, operational and marketing resources than we do. Competition may also increase as additional companies enter our markets or use their existing resources to compete directly with ours. Expanded competition from companies in low-cost jurisdictions, such as India and China, may in the future adversely affect our results of operations or limit our growth. Greater financial, research and development, operational and marketing resources may allow our competitors to respond more quickly with new, alternative or emerging technologies. Changes in the nature or extent of our customer requirements may render our offerings obsolete or non-competitive and could adversely affect our results of operations and financial condition.
The demand for our offerings depends in part on our customers’ research and development and the clinical and market success of their products. Our business, financial condition and results of operations may be harmed if our customers spend less on, or are less successful in, these activities.
Our customers are engaged in research, development, production and marketing of pharmaceutical, biotechnologytop 100 branded drug and consumer health marketers and animal health products. The amount82 of customer spendingthe top 100 biologics marketers, measured on research, development, production and marketing,a global basis, as well as the outcomes of such research, development, and marketing activities, have a large impact on our sales and profitability, particularly the amount our customers choose to spend on our offerings. Our customers determine the amounts that they will spend based upon, amongwith more than 1,200 other things, available resources and their need to develop new products, which, in turn, is dependent upon a number of factors, including their competitors’ research, development and production initiatives, and the anticipated market uptake, clinicalcustomers. Faced with access, pricing, and reimbursement scenarios for specific productspressures as well as other market challenges, large pharmaceutical and therapeutic areas. In addition, consolidation inbiotechnology companies have increasingly sought partners to enhance the industries in which our customers operate may have an impact on such spending as customers integrate acquired operations, including researchclinical competitiveness of their drugs and development departmentsbiologics and their budgets. Our customers financeimprove the productivity of their research and development activities, while reducing their fixed cost bases. Many mid-size, emerging, and specialty pharmaceutical and biotechnology companies, while facing the same pricing and market pressures, have chosen not to build a full infrastructure, but rather to partner with other companies through licensing agreements or outsourcing to access the critical skills, technologies, and services required to bring their products to market. Consumer health companies require rapidly developed, innovative dose forms and formulations to keep up with the fast-paced over-the-counter medication, dietary supplement, and personal care markets. These market segments are all important to our growth, but require distinct solutions, marketing and sales approaches, and market strategy.
We follow a hybrid demand-generation organization model, with strategic account teams offering the full breadth of Catalent’s solutions, and technical specialist teams providing the in-depth technical knowledge and practical experience essential for each individual offering, both supported by a dedicated team of deeply experienced scientific advisors. Our sales organization currently consists of more than 200 full-time, experienced sales professionals, supported by inside sales and sales operations. We also have built a dedicated strategic marketing team, providing strategic market and product planning and management for our offerings. As part of our marketing efforts, we participate in major trade shows relevant to our offerings globally and ensure adequate visibility to our offerings and solutions through a comprehensive advertising and publicity program. We believe that Catalent is a strong brand with high overall awareness in our established markets and universe of target customers, and that our brand identity is a competitive advantage for us.
Global Accounts
We manage select accounts globally due to their substantial current business or growth potential. We recorded approximately one-third of our total net revenue in fiscal 2023 from these global accounts. Each global account is assigned a lead business development professional with substantial industry experience. These account leaders, along with other members of the sales and executive leadership teams, are responsible for managing and extending the overall account relationship. Account leaders work closely with the rest of the sales organization as well as operational, quality, and project management personnel to ensure alignment around critical priorities for the accounts.
Emerging, Specialty, and Virtual Accounts
Emerging, specialty, and virtual pharmaceutical and biotechnology companies are expected to be critical drivers of industry growth globally and account for more than three-quarters of the active drug and biologic development pipeline. Historically, many of these companies have chosen not to build a full infrastructure, but rather partner with other companies to formulate, develop, analyze, test, and manufacture their products. We expect them to continue to do so in the future, providing a critical source for future integrated solutions demand. We expect to continue to increase our penetration of geographic clusters of emerging companies in North America, Europe, Central and South America, and Asia. We regularly use active pipeline and product screening and customer targeting to identify the optimal candidates for partnering based on product profiles, funding status, and relationships, to ensure that our technical sales specialists and field sales representatives develop custom solutions
designed to address the specific needs of these customers. In order to reach these emerging, specialty, and virtual companies, we actively partner with leading venture capital investors and biotech incubators.
Seasonality; Fluctuations in Operation Results
Our annual financial reporting period ends on June 30. As discussed further in “Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting our Performance,” our revenue and net earnings are generally higher in the third and fourth quarters of each fiscal year, with our first fiscal quarter typically generating our lowest revenue of any quarter, and our last fiscal quarter typically generating our highest revenue. These fluctuations are primarily the result of the timing of our, and our customers’ annual operational maintenance periods at locations in the U.S. and Europe, the seasonality associated with pharmaceutical and biotechnology budgetary spending from privatedecisions, clinical trial and public sources. A reductionresearch and development schedules, the timing of new product launches and length of time needed to obtain full market penetration, and, to a lesser extent, the time of the year some of our customers’ products are in spending byhigher demand, or are being produced to support future seasonal demand.
Contractual Arrangements
We generally enter into a broad range of contractual arrangements with our customers, including agreements with respect to feasibility, development, supply, licenses, quality, and confidentiality. The terms of these contracts vary significantly depending on the offering and customer requirements. Some of our agreements may include a variety of revenue arrangements, such as fee-for-service, unit pricing in one or more tiers, minimum volume commitments, royalties, manufacturing preparation services, profit-sharing, and fixed fees. We generally secure pricing and other contract mechanisms in our supply agreements to allow for periodic resetting of pricing terms, and, in some cases, these agreements permit us to raise or renegotiate pricing in the event of certain price increases for the raw materials or other inputs we use to make products. Our typical supply agreements include indemnification from our customers for product liability and intellectual property matters and caps on our contractual liabilities, subject in each case to negotiated exclusions. The terms of our manufacturing supply agreements range from two to seven years with regular renewals of one to three years, although some of our agreements are terminable upon much shorter notice periods, such as 30 or 45 days. For our development solutions offerings, we may enter into master service agreements, which provide for standardized terms and conditions and make it easier and faster for customers with multiple development needs to access our offerings.
Backlog
While we generally have long-term supply agreements that provide for a revenue stream over a period of years, our backlog represents, as of a point in time, future service revenues from work not yet completed. For our Biologics segment and a majority of our Pharma and Consumer Health segment, backlog represents firm orders for manufacturing services and includes minimum volumes, where applicable. Manufacturing businesses backlog represents firm orders for manufacturing services and includes minimum volumes, where applicable. For the clinical supply services offered through our Pharma and Consumer Health segment, backlog represents estimated future service revenue from work not yet completed under signed contracts. Using these methods of reporting backlog, as of June 30, 2023, our backlog was $2.53 billion, compared to $2.85 billion as of June 30, 2022, including $557 million and $549 million, respectively, related to our scientific and clinical services offerings in our Pharma and Consumer Health segment. We expect to recognize as revenue by the end of fiscal 2024 approximately 83% of the value of the backlog in existence as of June 30, 2023.
To the extent projects are delayed, the timing of our revenue could be affected. If a customer cancels an order, we may be reimbursed for the costs we have incurred. For orders that are placed inside a contractual firm period or that involve minimum volume commitments, we generally have a contractual right to payment in the event of cancellation. Fluctuations in our reported backlog levels also result from the timing and order pattern of our customers, which often seek to manage their level of inventory on hand. Because of customer ordering patterns, the matters discussed in this paragraph, and other factors, our backlog reported for certain periods may fluctuate and may not be indicative of future results.
Manufacturing Capabilities
We operate manufacturing facilities, development centers, and sales offices throughout the world. As of June 30, 2023, we had 52 facilities (3 geographical locations operate as multiple facilities because they support more than one reporting segment, with one location including both a manufacturing facility and our corporate headquarters) on four continents with approximately 8 million square feet of manufacturing, laboratory, office, and related space. Our manufacturing capabilities generally include the full suite of competencies relevant to the support of each site’s activities, including regulatory, quality assurance, and in-house validation.
We operate our manufacturing facilities and development centers in accordance with cGMP or other applicable requirements. All of these sites are registered where required with the FDA or other applicable regulatory agencies, such as the EMA. In some cases, our sites are registered with multiple regulatory agencies.
We have invested $1.93 billion in our manufacturing and development facilities since fiscal 2021 for improvements and expansions, including $583 million in capital expenditures during fiscal 2023. We believe that our sites and equipment are in good condition, are well maintained, and are able to operate at or above present levels for the foreseeable future, in all material respects.
Our manufacturing operations are focused on employee health and safety, regulatory compliance, operational excellence, continuous improvement, and process standardization across the organization. In fiscal 2023, we achieved approximately 95% on-time shipment delivery versus customer request date across our network as a result of this focus. Our manufacturing operations are structured around an enterprise management philosophy and methodology that utilizes principles and tools common to a number of quality management programs, including Lean Six Sigma and Lean Manufacturing, which we brought together in a system that we refer to as “The Catalent Way.”
Raw Materials
We use a broad and diverse range of raw materials and other supplies in the design, development, and manufacture of our products. This includes, but is not limited to, key materials such as gelatin, starch, and iota carrageenan; packaging films; single-use production components for drug substance production, and glass vials and syringes for drug product. The raw materials and other supplies that we use are sourced externally on a global basis. Globally, our supplier relationships could be interrupted due to natural disasters and international supply disruptions, including those caused by pandemics or geopolitical and other issues. For example, commercially usable gelatin is available from a limited number of sources. In addition, much of the gelatin we use is bovine-derived. Past concerns of contamination from bovine spongiform encephalopathy have narrowed the number of possible sources of particular types of gelatin. If there were a future disruption in the supply of gelatin or any other key material from any one or more of our current principal suppliers, there can be no assurance that we could obtain an adequate alternative supply from our other suppliers. Any future restriction that were to emerge on the use of a key raw material used in our products from certain geographic sources or due to regulatory or consumer concerns could hinder our ability to timely supply our customers with products, and the use of alternative raw materials could be subject to lengthy formulation, testing and regulatory approval periods.
We work very closely with our suppliers to assure continuity of supply while maintaining excellence in material quality and reliability. We continually evaluate alternate sources of supply, although we do not frequently pursue regulatory qualification of alternative sources for key raw materials due to the strength of our existing supplier relationships, the reliability of our current supplier base, and the time and expense associated with the regulatory process, since regulators usually must approve changes to prescription product ingredient sources. Although a change in suppliers could require significant effort or investment by us in circumstances where the items supplied are integral to the performance of our products or incorporate specialized material such as gelatin, we do not believe that the loss of any existing supply arrangement would have a material adverse effect on our business, financial condition and results of operations. If our customers are not successful in attaining or retaining product sales duebusiness. See “Item 1A. - Risk Factors—Risks Relating to market conditions, reimbursement issues or other factors, our results of operations may be materially adversely affected.
We are subject to product and other liability risks that could adversely affect our results of operations, financial condition, liquidity and cash flows.
We are subject to potentially significant product liability and other liability risks that are inherent in the design, development, manufacture and marketing of our offerings. We may be named as a defendant in product liability lawsuits, which may allege that our offerings have resulted or could result in an unsafe condition or injury to consumers. Such lawsuits could be costly to defend and could result in reduced sales, significant liabilities and diversion of management’s time, attention and resources. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees.
Furthermore, product liability claims and lawsuits, regardless of their ultimate outcome, could have a material adverse effect on our business operations, financial condition and reputation and on our ability to attract and retain customers. We have historically sought to manage this risk through the combination of product liability insurance and contractual indemnities and liability limitations in our agreements with customers and vendors. The availability of product liability insurance for companies in the pharmaceutical industry is generally more limited than insurance available to companies in other industries. Insurance carriers providing product liability insurance to those in the pharmaceutical and biotechnology industries generally limit the amount of available policy limits, require larger self-insured retentions and exclude coverage for certain products and claims.
We maintain product liability insurance with annual aggregate limits in excess of $25 million. There can be no assurance that a successful product liability claim or other liability claim would be adequately covered by our applicable insurance policies or by any applicable contractual indemnity or liability limitations.
Failure to comply with existing and future regulatory requirements could adversely affect our results of operations and financial condition.
The healthcare industry is highly regulated. We are subject to various local, state, federal, foreign and transnational laws and regulations, which include the operating, quality and security standards of the FDA, the DEA, various state boards of pharmacy, state health departments, the DHHS, similar bodies of the EU and its member states and other comparable agencies around the world, and, in the future, any changes to such laws and regulations could adversely affect us. Among other rules affecting us, we are subject to laws and regulations concerning cGMP and drug safety. Our subsidiaries may be required to register for permits and/or licenses with, and may be required to comply with, the laws and regulations of the FDA, the DEA, the DHHS, foreign agencies including the EMA, and other various state boards of pharmacy, state health departments and/or comparable state and foreign agencies as well as certain accrediting bodies depending upon the type of operations and locations of distribution and sale of the products manufactured or services provided by those subsidiaries.
The manufacture, distribution and marketing of our offerings are subject to extensive ongoing regulation by the FDA, the DEA, the EMA, and other equivalent local, state, federal, foreign and transnational regulatory authorities. Failure by us or by our customers to comply with the requirements of these regulatory authorities could result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture or distribution, restrictions on our operations, civil or criminal sanctions, or withdrawal of existing or denial of pending approvals, permits or registrations, including those relating to products or facilities. In addition, any such failure relating to the products or services we provide could expose us to contractual or product liability claims as well as contractual claims from our customers, including claims for reimbursement for lost or damaged active pharmaceutical ingredients, which cost could be significant. Customers may also claim loss of profits due to lost or delayed sales, although our contracts generally place substantial limits on such claims. There can be no assurance that any such contractual limitation will be applicable or sufficient or fully enforced in any given situation.
In addition, any new offering or product classified as a pharmaceutical product must undergo lengthy and rigorous clinical testing and other extensive, costly and time-consuming procedures mandated by the FDA, the EMA and other equivalent local, state, federal and foreign regulatory authorities. We or our customers may elect to delay or cancel anticipated regulatory submissions for current or proposed new products for any number of reasons.
Although we believe that we comply in all material respects with applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal would not reach a different conclusion concerning the compliance of our operations with applicable laws and regulations. In addition, there can be no assurance that we will be able to maintain or renew existing permits, licenses or other regulatory approvals or obtain, without significant delay, future permits, licenses or other approvals needed for the operation of our businesses. Any noncompliance by us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could have an adverse effect on our results of operations and financial condition. Furthermore, loss of a permit, license or other approval in any one portion of our business may have indirect consequences in another portion of our business if regulators or customers adjust their reviews of such other portion as a result or customers cease business with such other portion due to fears that such loss is a sign of broader concerns about our ability to deliver products or services of sufficient quality.
Failure to provide quality offerings to our customers could have an adverse effect on our business and subject us to regulatory actions and costly litigation.
Our results depend on our ability to execute and improve when necessary our quality management strategy and systems, and effectively train and maintain our employee base with respect to quality management. Quality management plays an essential role in determining and meeting customer requirements, preventing defects and improving our offerings. While we have a network of quality systems throughout our business units and facilities that relate to the design, formulation, development, manufacturing, packaging, sterilization, handling, distribution and labeling of the products we supply, quality and safety issues may occur with respect to any of our offerings. A quality or safety issue could have an adverse effect on our business, financial condition and results of operations and may subject us to regulatory actions, including product recalls, product seizures, injunctions to halt manufacture or distribution, restrictions on our operations, or civil sanctions, including monetary sanctions and criminal actions. In addition, such an issue could subject us to costly litigation, including claims from our customers for reimbursement for the cost of lost or damaged active pharmaceutical ingredients or other related losses, the cost of which could be significant.
The services and offerings we provide are highly exacting and complex, and, if we encounter problems providing the services or support required, our business could suffer.
The offerings we provide are highly exacting and complex, particularly in our Softgel Technologies and Drug Delivery Solutions segments, due in part to strict regulatory requirements. From time to time, problems may arise in connection with facility operations or during preparation or provision of an offering, in both cases for a variety of reasons including, but not limited to, equipment malfunction, sterility variances or failures, failure to follow specific protocols and procedures, problems with raw materials, environmental factors and damage to, or loss of, manufacturing operations due to fire, flood or similar causes. Such problems could affect production of a particular batch or series of batches, require the destruction of or otherwise result in the loss of product or materials used in the production of product, or could halt facility production altogether. This could, among other things, lead to increased costs, lost revenue, damage to customer relations, reimbursement to customers for lost active pharmaceutical ingredients or other related losses, time and expense spent investigating the cause, lost production time, and, depending on the cause, similar losses with respect to other batches or products. Production problems in our drug and biologic manufacturing operations could be particularly significant because the cost of raw materials is often higher than in our other businesses. If problems are not discovered before the product is released to the market, recall and product liability costs may also be incurred. In addition, such risks may be greater at facilities that are new or going through significant expansion or renovation.
Our global operations are subject to economic, political and regulatory risks, including the risks of changing regulatory standards or changing interpretations of existing standards that could affect the profitability of our operations or require costly changes to our procedures.
We conduct our operations in various regions of the world, including North America, South America, EuropeBusiness and the Asia-Pacific region. Global and regional economic and regulatory developments affect businesses such as oursIndustry in many ways. Our operations are subject to the effects of global and regional competition, including potential competition from manufacturers in low-cost jurisdictions such as India and China. Local jurisdiction risks include regulatory risks arising from local laws. Our global operations are also affected by local economic environments, including inflation and recession. Political changes, some of which may be disruptive, and related hostilities can interfere with our supply chain and customers and some or all of our activities in a particular location. While some of these risks can be hedged using derivatives or other financial instruments and some are insurable, such attempts to mitigate these risks are costly and not always successful.
The referendum in the U.K. and resulting decision of the U.K. government to consider exiting from the European Union could have future adverse effects on our operations revenues and costs, and therefore our profitability.
In June 2016, the U.K. held a referendum in which a majority of voters approved the U.K.’s exit from the EU, and the U.K. government has publicly announced that it intends to honor that vote and seek an exit. There is no immediate change in either the U.K. or the EU as a result of this referendum, and the U.K. government must now decide, through legislative action and through negotiations with the EU and other affected parties, what changes will result from the decision to exit. Four of our thirty-five facilities, employing hundreds of workers, are located in the U.K., and these facilities, as well as others in our network, source goods, manufacture goods and provide services from or intended for the U.K. These facilities operate within an existing framework of trade and human capital integration with the EU and, by extension, the other parts of the world, with which the EU has trade and immigration agreements. Due to future changes in the U.K. resulting from an eventual exit, such as increased trade barriers, increased tariff rates or custom duties, or in anticipation of such changes, our suppliers, customers or employees may change their interactions with us, including changes in imports to or exports from the U.K., changes in the requested utilization of our facilities, both within and without the U.K., and changes in our relationships with our workforce in the U.K. To the extent that our facilities operate as part of a cross-border supply and distribution chain, their operations may also be negatively affected by a decrease in the cross-border mobility of goods and services.Which We cannot anticipate the nature of these changes, as they largely depend on factors outside our control, but the changes may result in adverse changes in our future operations, revenues and costs, and therefore our future profitability.
If we do not enhance our existing or introduce new technology or service offerings in a timely manner, our offerings may become obsolete or uncompetitive over time, customers may not buy our offerings and our revenue and profitability may decline.
The healthcare industry is characterized by rapid technological change. Demand for our offerings may change in ways we may not anticipate because of evolving industry standards as well as a result of evolving customer needs that are increasingly sophisticated and varied and the introduction by others of new offerings and technologies that provide alternatives to our offerings. Several of our higher margin offerings are based on proprietary technologies. To the extent that our proprietary rights are based on patents, patents are inherently of limited longevity and therefore will ultimately expire, and such offerings may
then become subject to competition. Without the timely introduction of enhanced or new offerings, our offerings may become obsolete or uncompetitive over time, in which case our revenue and operating results would suffer. For example, if we are unable to respond to changes in the nature or extent of the technological or other needs of our pharmaceutical customers through enhancing our offerings, our competition may develop offerings that are more competitive than ours and we could find it more difficult to renew or expand existing agreements or obtain new agreements. Potential innovations intended to facilitate enhanced or new offerings generally will require a substantial investment before we can determine their commercial viability, and we may not have financial resources sufficient to fund all desired innovations.
The success of enhanced or new offerings will depend on several factors, including our ability to:
properly anticipate and satisfy customer needs, including increasing demand for lower cost products;
enhance, innovate, develop and manufacture new offerings in an economical and timely manner;
differentiate our offerings from competitors’ offerings;
achieve positive clinical outcomes for our customers’ new products;
meet safety requirements and other regulatory requirements of governmental agencies;
obtain valid and enforceable intellectual property rights; and
avoid infringing the proprietary rights of third parties.
Even if we succeed in creating enhanced or new offerings from these innovations, they may still fail to result in commercially successful offerings or may not produce revenue in excess of the costs of development, and they may be rendered obsolete by changing customer preferences or the introduction by our competitors of offerings embodying new technologies or features. Finally, innovations may not be accepted quickly in the marketplace because of, among other things, entrenched patterns of clinical practice, the need for regulatory clearance and uncertainty over market access or government or third-party reimbursement.
We and our customers depend on patents, copyrights, trademarks, trade secrets and other forms of intellectual property protections, but these protections may not be adequate.
We rely on a combination of know-how, trade secrets, patents, copyrights and trademarks and other intellectual property laws, nondisclosure and other contractual provisions and technical measures to protect a number of our offerings and intangible assets. These proprietary rights are important to our ongoing operations. There can be no assurance that these protections will prove meaningful against competitive offerings or otherwise be commercially valuable or that we will be successful in obtaining additional intellectual property or enforcing our intellectual property rights against unauthorized users. Operate—Our exclusive rights under certain of our offerings are protected by patents, some of which will expire in the near term. When patents covering an offering expire, loss of exclusivity may occur and this may force us to compete with third parties, thereby affecting our revenue and profitability. We do not currently expect any material loss of revenue to occur as a result of the expiration of any patent currently protecting our business.
Our proprietary rights may be invalidated, circumvented or challenged. We may in the future be subject to proceedings seeking to oppose or limit the scope of our patent applications or issued patents. In addition, in the future, we may need to take legal actions to enforce our intellectual property rights, to protect our trade secrets or to determine the validity or scope of the proprietary rights of others. Legal proceedings are inherently uncertain, and the outcome of any such legal action may be unfavorable to us.
Any legal action regardless of outcome might result in substantial costs and diversion of resources and management attention. Although we use reasonable efforts to protect our proprietary and confidential information, there can be no assurance that our confidentiality and non-disclosure agreements will not be breached, our trade secrets will not otherwise become known by competitors or that we will have adequate remedies in the event of unauthorized use or disclosure of proprietary information. Even if the validity and enforceability of our intellectual property is upheld, an adjudicator might construe our intellectual property not to cover the alleged infringement. In addition, intellectual property enforcement may be unavailable or practically ineffective in some foreign countries. There can be no assurance that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology or that third parties will not design around our intellectual property claims to produce competitive offerings. The use of our technology or similar technology by others could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our business.
We have applied in the United States and certain foreign countries for registration of a number of trademarks, service marks and patents, some of which have been registered or issued, and also claim common law rights in various trademarks and service marks. In the past, third parties have occasionally opposed our applications to register intellectual property and there
can be no assurance that they will not do so in the future. It is possible that in some cases we may be unable to obtain the registrations for trademarks, service marks and patents for which we have applied and a failure to obtain trademark and patent registrations in the United States or other countries could limit our ability to protect our trademarks and proprietary technologies and impede our marketing efforts in those jurisdictions.
Our use of certain intellectual property rights is also subject to license agreements with third parties for certain patents, software and information technology systems and proprietary technologies. If these license agreements were terminated for any reason, it could result in the loss of our rights to this intellectual property, our operations may be materially adversely affected and we may be unable to commercialize certain offerings.
In addition, many of our branded pharmaceutical customers rely on patents to protect their products from generic competition. Because incentives exist in some countries, including the United States, for generic pharmaceutical companies to challenge these patents, pharmaceutical and biotechnology companies are under the ongoing threat of challenges to their patents. If our customers’ patents were successfully challenged and as a result subjected to generic competition, the market for our customers’ products could be significantly adversely affected, which could have an adverse effect on our results of operations and financial condition. We attempt to mitigate these risks by making our offerings available to generic as well as branded manufacturers and distributors, but there can be no assurance that we will be successful in marketing these offerings.
Our future results of operations are subject to fluctuations in the costs, availability, and suitability of the components of the products we manufacture, including active pharmaceutical ingredients, excipients, purchased components, and raw materials.materials, and other supplies or equipment we need to run our business."
Competition
We depend on various active pharmaceutical ingredients, components, compounds, raw materials, and energy supplied primarily by others for our offerings. This includes, but is not limitedcompete with multiple companies as to gelatin, starch, iota carrageenan, petroleum-based products and resin. Also, our customers frequently provide to us their active pharmaceutical or biologic ingredient for formulation or incorporation in the finished product. It is possible that any of our or our customers' supplier relationships could be interrupted due to changing regulatory requirements, import or export restrictions, natural disasters, international supply disruptions caused by pandemics, geopolitical issues and other events, or could be terminated in the future.
For example, gelatin is a critical component in most of the products produced in our Softgel Technologies segment. Gelatin is available from only a limited number of sources. In addition, much of the gelatin we use is bovine-derived. Past concerns of contamination from BSE have narrowed the number of possible sources of particular types of gelatin. If there were a future disruption in the supply of gelatin from any one or more key suppliers, we may not be able to obtain an adequate alternative supply from our other suppliers. If future restrictions were to emerge on the use of bovine-derived gelatin due to concerns of contamination from BSE or otherwise, any such restriction could hinder our ability to timely supply our customers with products and the use of alternative non-bovine-derived gelatin could be subject to lengthy formulation, testing and regulatory approval.
Any sustained interruption in our receipt of adequate supplies could have an adverse effect on us. In addition, while we have processes intended to reduce volatility in component and material pricing, we may not be able to successfully manage price fluctuations and future price fluctuations or shortages may have an adverse effect on our results of operations.
Changes in market access or healthcare reimbursement for our customers’ products in the United States or internationally, including the possible repeal or replacement of the Affordable Care Act (the "ACA") in the United States, could adversely affect our results of operations and financial condition.
The healthcare industry has changed significantly over time, and we expect the industry to continue to evolve. Some of these changes, such as ongoing healthcare reform, adverse changes in governmental or private funding of healthcare products and services, legislation or regulations governing patient access to care and privacy, or the delivery, pricing or reimbursement approval of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to change the amounteach of our offerings they purchase or the price they are willing to pay for our offerings. In particular, there is significant uncertainty about the futureand in every region of the ACA and healthcare laws in general in the United States. While we are unable to predict the likelihood of changes to the ACA, any repeal or full or partial replacement could have a material adverse effect on the demand for our customer’s products, which in turn could have a negative impact on our results of operations, financial condition or business. Changes in the healthcare industry’s pricing, selling, inventory, distribution or supply policies or practices could also significantly reduce our revenue and results of operations. In particular, volatility in individual product demand may result from changes in public or private payer reimbursement or coverage.
As a global enterprise, fluctuations in the exchange rate of the U.S. dollar against foreign currencies could have a material adverse effect on our financial performance and results of operations.
As a company with significant operations outside of the United States, certain revenues, costs, assets and liabilities, including our euro-denominated 4.75% Senior Notes due 2024 (the "Notes") and a portion of our senior secured credit facilities, are denominated in currencies other than the U.S. dollar. As a result, changes in the exchange rates of these currencies or any other applicable currency to the U.S. dollar will affect our revenues, earnings and cash flows. There has been, and may continue to be, volatility in currency exchange rates affecting the various currenciesglobe in which we do business,operate, including as a result of the U.K.'s referendum in which voters approved the U.K.'s exit from the EU. Such volatilitywith CDMOs and other changescompanies that offer conventional and advanced technologies for the development, supply, and delivery of medicinal products, clinical trials support, outsourced dose form, protein-based biologics or cell or gene therapy manufacturing, or development services to pharmaceutical, biotechnology, and consumer health companies based in exchange rates could result in unrealized and realized exchange losses despite any effort we may undertake to manage or mitigate our exposure to foreign currency fluctuations.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
We are a large multinational corporation with operations in the United States and international jurisdictions, including North America, Central and South America, Europe, and the Asia-Pacific region. As such, we are subject to the tax laws and regulations of the United States federal, state and local governments and of many international jurisdictions. From time to time, various legislative initiatives may be proposed that could adversely affect our tax positions. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these initiatives. In addition, United States federal, state and local, as well as international tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We have net operating loss carryforwards available to reduce future taxable income. Utilization of our net operating loss carryforwards may be subject to a substantial limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), and comparable provisions of state, local and foreign tax laws due to changes in ownership of our company that may occur in the future. Under Section 382 of the Code and comparable provisions of state, local and foreign tax laws, if a corporation undergoes an "ownership change," generally defined as a greater than 50% change by value in its equity ownership over a three-year period, the corporation’s ability to carry forward its pre-change net operating losses to reduce its post-change income may be limited. We may experience ownership changes in the future as a result of future changes in our stock ownership. As a result, our ability to use our pre-change net operating loss carryforwards to reduce U.S. federal and state taxable income we produce in the future years may be subject to limitations, which could result in increased future tax liability to us.
Changes to the estimated future profitability of the business may require that we establish an additional valuation allowance against all or some portion of our net U.S. deferred tax assets.
We have deferred tax assets for net operating loss carryforwards and other temporary differences. We currently do not maintain a valuation allowance for a portion of our U.S. net deferred tax assets. We may experience, in the future, a decline in U.S. federal taxable income, resulting from a decline in profitability of our U.S. operations, an increased level of debt in the U.S. or other factors. In assessing our ability to realize our U.S. deferred tax assets, we may conclude that it is more likely than not that some portion or all of our U.S. deferred tax assets will not be realized. As a result, we may be required to record an additional valuation allowance against our U.S. deferred tax assets, which could adversely affect our effective income tax rate and therefore our financial results.
We are dependent on key personnel.
We depend on our executive officers and other key personnel, including our technical personnel, to operate and grow our business and to develop new enhancements, offerings and technologies. The loss of any of these officers or other key personnel combined with a failure to attract and retain suitably skilled technical personnel could adversely affect our operations.
In addition to our executive officers, we rely on approximately 130 senior employees to lead and direct the Company. Our senior leadership team ("SLT") is comprised of our executive officers and other vice presidents and directors who hold critical positions and possess specialized talents and capabilities that give us a competitive advantage in the market. The members of the SLT hold positions such as facility general manager, vice president/general manager of business unit commercial development, vice president of quality and regulatory activities and vice president-finance.
With respect to our technical talent, we have approximately 1,600 scientists and technicians whose areas of expertise and specialization cover subjects such as advanced delivery, drug and biologics formulation and manufacturing. Many of our sites and laboratories are located in competitive labor markets like those in which our Morrisville, North Carolina; Brussels, Belgium; Woodstock, Illinois; Madison, Wisconsin; Emeryville, California and Schorndorf, Germany facilities are located. Global and regional competitors and,also compete in some cases with the internal operations of those pharmaceutical, biotechnology, and consumer health customers that also have manufacturing capabilities and suppliers,choose to source these services internally. Some of our competitors are substantially larger than we are and have access to more substantial resources, which could be deployed to expand their range of offerings or capacity.
Competition is driven by proprietary technologies and know-how (where relevant), capabilities, consistency of operational performance, availability of equipment, quality, regulatory track record, price, value, responsiveness, and speed. While we have competitors that compete for the same skills and talent as we do.
We use advanced information and communication systems to run our operations, compile and analyze financial and operational data and communicate among our employees, customers and counter-parties, and the risks generally associated with such information and communications systems could adversely affect our results of operations.
We rely on information systemsus in our business to obtain, rapidly process, analyzeindividual offerings, and manage data to:
facilitate the manufacture and distribution of thousands of inventory items in, to and from our facilities;
receive, process and ship orders on a timely basis;
manage the accurate billing and collections for roughly one thousand customers;
create, compile, and retain testing and other product-related data necessary for meeting our and our customer's regulatory obligations.
manage the accurate accounting and payment for thousands of vendors;
schedule and operate our global network of development, manufacturing and packaging facilities;
document various aspectsfew competitors that compete across many of our offerings, we do not believe we have competition from any directly comparable company.
Research and Development Costs
Our research activities includingare primarily directed toward the agreementsdevelopment of new offerings and manufacturing process improvements. Research and development costs amounted to $18 million, $23 million, and $21 million for fiscal 2023, 2022, and 2021, respectively.
Employees
As of June 30, 2023, we make with suppliers and customers;
compile financial and other operational data into reports necessary to manage our business and comply with various regulatory or contractual obligations, including obligations under our bank loans, the indenture governing the Notes, the federal securities laws and the Code and other applicable state, local and foreign tax laws; and
communicate among our 10,800had approximately 17,800 individuals providing services for us at 52 facilities on 4 continents, of which certain employees spread across thirty-five facilities over five continents.
We deploy defenses against cyber-attack and work to secure the integrityat two of our data systems using techniques, hardware and software typical of companies of our size and scope. Despite our security measures, however, our information technology and infrastructure may be vulnerable to attacks by increasingly sophisticated intruders or others who try to cause harm to or interfere with our normal use of our systems. They are also susceptible to breach due to employee error, malfeasance or other disruptions. Our results of operations could be adversely affected if these systems are interrupted, damaged by unforeseen events or fail for any extended period of time.
We engage from time to time in acquisitions and other transactions that may complement or expand our business or divest of non-strategic businesses or assets. We may not be able to complete such transactions, and such transactions, if executed, pose significant risks and could have a negative effect on our operations.
Our future success may depend in part on opportunities to buy or otherwise acquire rights to other businesses or technologies or enter into joint ventures or otherwise enter into strategic arrangements with business partners that could complement, enhance or expand our current business or offerings and services or that might otherwise offer us growth opportunities. We may face competition from other companies in pursuing acquisitions and similar transactions in the pharmaceutical and biotechnology industry. Our ability to complete such transactions may also be limited by applicable antitrust and trade regulation laws and regulations in the United States and foreign jurisdictions in which we or the operations or assets we seek to acquire carry on business. To the extent that we are successful in making acquisitions, we may have to expend substantial amounts of cash, incur debt or assume loss-making divisions as consideration. We may not be able to complete such transactions for reasons including, but not limited to, a failure to secure financing. Any transaction that we are able to identify and complete may involve a number of risks, including, but not limited to, the diversion of management’s attention to integrate the acquired businesses or joint ventures, the possible adverse effects on our operating results during the integration process, the potential loss of customers or employees in connection with the acquisition, delays or reduction in realizing expected synergies, unexpected liabilities and our potential inability to achieve our intended objectives for the transaction. In addition, we may be unable to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies.
To the extent that we are not successful in completing divestitures, as such may be determined by future strategic plans and business performance, we may have to expend substantial amounts of cash, incur debt and continue to absorb the costs of loss-making or under-performing divisions. Any divestiture, whether we are able to complete it, or not may involve a number of risks, including diversion of management’s attention, a negative impact on our customer relationships, costs associated with
maintaining the business of the targeted divestiture during the disposition process, and the costs of closing and disposing of the affected business or transferring the operations of the business to other facilities.
Our offerings or our customers’ products may infringe on the intellectual property rights of third parties.
From time to time, third parties have asserted intellectual property infringement claims against us and our customers, and there can be no assurance that third parties will not assert infringement claims against either us or our customers in the future. While we believe that our offerings do not infringe in any material respect upon proprietary rights of other parties and/or that meritorious defenses would exist with respect to any assertion to the contrary, there can be no assurance that we could successfully avoid being found to infringe on the proprietary rights of others. Patent applications in the United States and some foreign countries are generally not publicly disclosed until the patent is issued or published, and we and our customers may not be aware of currently filed patent applications that relate to our or their products, offerings or processes. If patents later issue on these applications, we or they may be found liable for subsequent infringement. There has been substantial litigation in the pharmaceutical and biotechnology industries with respect to the manufacture, use and sale of products that are the subject of conflicting patent rights.
Any claim that our offerings or processes infringe third-party intellectual property rights (including claims arising through our contractual indemnification of our customers), regardless of the claim's merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail against any such claim given the complex technical issues and inherent uncertainties in intellectual property matters. If any such claim results in an adverse outcome, we could, among other things, be required to:
pay substantial damages (potentially including treble damages in the United States);
cease the manufacture, use or sale of the infringing offerings or processes;
discontinue the use of the infringing technology;
expend significant resources to develop non-infringing technology;
license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms, or may not be available at all; and
lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others.
In addition, our customers’ products may be subject to claims of intellectual property infringement and such claims could materially affect our business if their products cease to be manufactured or they have to discontinue the use of the infringing technology.
Any of the foregoing could affect our ability to compete or have a material adverse effect on our business, financial condition, and results of operations.
We are subject to environmental, health and safety laws and regulations, which could increase our costs and restrict our operations in the future.
Our operations are subject to a variety of environmental, health and safety laws and regulations, including those of the EPA and the24 U.S. Occupational Safety & Health Administration and equivalent local, state, and foreign regulatory agencies in each of the jurisdictions in which we operate. These laws and regulations govern, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous substances and wastes, soil and groundwater contamination and employee health and safety. Any failure by us to comply with environmental, health, and safety requirements could result in the limitation or suspension of production or subject us to monetary fines or civil or criminal sanctions, or other future liabilities in excess of our reserves. We are also subject to laws and regulations governing the destruction and disposal of raw materials and non-compliant products, the handling of regulated material that are included in our offerings, and the disposal of our products or their components at the end of their useful lives. In addition, compliance with environmental, health and safety requirements could restrict our ability to expand our facilities or require us to acquire costly environmental or safety control equipment, incur other significant expenses or modify our manufacturing processes. Our manufacturing facilities may use, in varying degrees, hazardous substances in their processes. These substances include, among others, chlorinated solvents, and in the past chlorinated solvents were used at one or more of our facilities, including a number we no longer own or operate. As at our current facilities, contamination at such formerly owned or operated properties can result and has resulted in liability to us. In the event of the discovery of new or previously unknown contamination either at our facilities or at third-party locations, including facilities we formerly owned or operated, the issuance of additional requirements with respect to existing contamination, or the imposition of other cleanup obligations for which we are responsible, we may be required to take
additional, unplanned remedial measures for which no reserves have been recorded. We are conducting monitoring and cleanup of contamination at certain facilities currently or formerly owned or operated by us.
We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
We employ approximately 10,800 employees worldwide, including approximately 5,200 employees in North America, 3,900 in Europe, 900 in South America and 800 in the Asia/Pacific region. Certain employees at one of our North American facilities are represented by a labor organization,unions, with their terms and conditions of employment being subject to collective bargaining agreements. Various combinations of national works councils, and/orlabor unions, and other labor organizations are active at all of our European facilities and certainmany of our other ex-U.S. facilities consistent with local labor environments/laws.environments and laws in those countries. Our management believes that our employee relations with our workforce are satisfactory. However, further organizing activities, collective bargaining or changes in the regulatory framework for employment may increase our employment-related costs or may result in work stoppages or other labor disruptions. Moreover, as employers are subject to various employment-related claims, such as individual and class actions relating to alleged employment discrimination and wage-hour and labor standards issues, such actions, if brought against us and successful in whole or in part, may affect our ability to compete or have a material adverse effect on our business, financial condition and results of operations.
CertainMost of our pension plansindividual service providers are underfunded,full-time employees, while approximately 700 of our workers as of June 30, 2023 are contingent workers who are either self-employed or employed by external services organizations.
| | | | | | | | | | | | | | | | | |
| North America | Europe | South America | Asia Pacific | Total |
Approximate number of workers as of June 30, 2023 | 10,500 | 5,700 | 1,000 | 600 | 17,800 |
Human Capital Management
Our employees share common goals: to put patients first and additional cash contributions we may make will reduceto help people around the cash availableworld live better, healthier lives. Our global workforce is united by our values: Patient First, commitment to our people, customer dedication, innovation, integrity, and excellence. Together, our values provide the foundation for our business orculture. We believe that an engaged, diverse workforce, empowered by inclusive leaders, will unlock our full potential as a company and as a leader in our sector. Our employees’ success is Catalent’s success.
We focus on employee development, engagement, and diversity and inclusion (“D&I”) to discharge our financial obligations.
Certain of our currenthire, develop, and former employees inretain the U.S., the U.K., Germany, France, Japan, Belgium and Switzerland and Australia are participants in defined benefit pension plans that we sponsor.best talent. As of June 30, 2017, the underfunded amount2023, we had approximately 17,800 individuals providing services to us globally, with women representing 44% of our pension plans on a worldwide basis was approximately $86.0 million, primarily relatedemployees and holding 40% of roles at the manager level or higher. In fiscal 2023, ethnically diverse talent represented 35% of our U.S. employees.
Our turnover rate increased to our pension plans in the U.K. and Germany. In addition, we have an estimated obligation of approximately $39.1 million,22% as of June 30, 2017, related2023, including 13% voluntary turnover, substantially driven by voluntary turnover in the U.S. and by a few reorganizations at some of our larger sites and within our corporate functions.
Reducing voluntary attrition and retaining our talent remains one of our top priorities. We continue to implement initiatives to build upon our withdrawalvalues-based and inclusive culture, improve our employees’ experiences at Catalent, and better develop and engage internal talent. We continuously monitor local talent markets and provide differentiated pay arrangements and benefits to attract and retain talent. Additionally, we provide flexible work arrangements where possible, broader leadership development programs, an employee wellness program, and access to employee recognition programs at all levels.
We continue to take steps to ensure that Catalent is a company where all employees can develop a fulfilling career with support from our leadership team. We believe that our diverse pool of internal talent and our employees’ passion for excellence make a multiemployer pension plandifference in the way we grow and deliver results.
Talent Acquisition
We have strong human resources processes and practices in place to support our employees through their careers at Catalent. This starts with a robust recruiting strategy and a strong employer brand. We attracted over 4,000 new employees in fiscal 2023, continuously working to reduce the time it takes to fill open positions and reduce our cost per hire, while striving for a best-in-class candidate experience.
We offer competitive compensation and a comprehensive suite of benefits, which, we formerly participated. In general,in the amount ofU.S., range from medical, dental, and vision coverage to retirement, disability, employee stock purchase, and life insurance programs. We also provide health promotion and wellness programs, remote work flexibility, tuition assistance, and employee assistance programs in several countries.
Our recruitment strategy aims to attract talent representing diverse backgrounds, perspectives, and ideas. This approach includes:
• engaging with potential top talent early in the career path through our university internship program;
• developing future contributionsleaders and enhancing their skills through programs, including various mentoring programs, our Global Organization Leadership Development (“GOLD”), Next Generation Global Leaders, and General Manager Excellence programs, as discussed further below;
• providing competitive compensation and benefits;
• continuously improving recruitment processes and platforms;
• working with several recruitment partners to the underfunded plans will depend upon asset returns, applicable actuarial assumptions, prevailingattract diverse profiles and expected interest ratesadvertise open positions; and other factors,
•implementing unconscious bias workshops for hiring managers.
Catalent has been recognized as a TOP EMPLOYER USA since 2020 and as a result, the amount we may be required to contributeTOP EMPLOYER in the futureUnited Kingdom ("U.K.") since 2022. We differentiate ourselves as a preferred employer to fund the obligations associated with such plans may vary. Such cash contributionscandidates through our reputation as a great place to work, offering a fast-paced and rewarding work environment.
Talent Development
We are also committed to the growth, development, and engagement of our people once they have joined our family. Through a strong learning and development culture, we provide opportunities for specialized technical training, leadership development, and high-potential growth opportunities to endow our employees with the knowledge and expertise needed to grow their careers at Catalent.
Our primary goal is to develop our people from within, thereby establishing a strong successor bench to help support company growth. In fiscal 2023, over 2,400 employees moved to a new role within the organization (of which 49% were women), whether as a developmental move or a promotion to a more senior position. Our senior leaders are committed to talent development and dedicate time each fiscal quarter to perform formalized talent reviews to discuss the development of key talent and to update succession plans will reducefor critical roles.
We strongly believe that the cashcombination of experience (70%), exposure (20%), and education (10%) is the best recipe for personal development and career progression here. We have a library of tools and resources available for our employees within that framework, including access to a variety of tools and resources to learn new or expand existing skills.
Given our high volume of new hires, we continue to redesign our employee experience. We have upgraded our on-boarding experience to span employees’ first twelve months with Catalent.
We also offer four formal development programs to employees. All programs aim to prepare our talent to fill critical internal leadership roles. Through these programs, we have created a bench of leaders who model our values and are ready to take on more responsibility.
(1) Entry-level GOLD program. The GOLD program is a two-year rotational program for recent graduates from universities around the world in which the employee participates in three rotations at different sites in our network to learn about different aspects of our business and our varied offerings. GOLD employees receive assignments to perform strategic roles in key business initiatives. We provide them with coaching and opportunities to interact with senior executives, which both develop the skills and experience of our GOLD employees and provide a platform through which they contribute fresh ideas that challenge the status quo. The GOLD program operates in the U.S. and has been relaunched in Europe following a pause in the program during the U.K.'s withdrawal from the European Union (“E.U.”).
(2) Manager-level Next Generation Global Leader program. Our Next Generation Global Leader program, for employees at the manager level, is a 15-month on-the-job program focused on preparing high-potential managers for director-level roles. Since fiscal 2022, 86 employees graduated from this program, and a new group of 56 employees has been selected to join this program in fiscal 2024.
(3) Senior leader General Manager Excellence program. Our general managers run our operating sites and have substantial and wide-ranging responsibilities. This program enhances the skills of our general managers by giving them exposure to industry best practices and opportunities to network internally and receive personalized career coaching, including a 3-day business simulation. In fiscal 2023 and 2022, 24 and 35 general managers, respectively, participated in this program.
(4) Front-line leader level Lead Now program. In fiscal 2023, we launched “Lead Now,” a Catalent-wide leadership offering targeted for those who are new to people leadership. During the first 3 months of a new leadership role, this program teaches employees the fundamentals of leadership and identifies tools to inspire their teams while role-modeling Catalent values. We have already enrolled over 250 new leaders into this program.
Diversity and Inclusion
At Catalent, we cultivate a workplace that respects and welcomes all people; celebrates the unique backgrounds and experiences of our workforce; encourages all employees to bring their true, authentic selves to work; and leverages our diversity to drive innovation, inclusion, and excellence in every aspect of our business. By closing diversity and inclusion gaps, we energize our people to do their best work.
Our commitment to D&I starts at the top with our board of directors (referred to herein as the “board of directors” or “Board”) and executive leadership team that bring a broad spectrum of backgrounds and perspectives. Led by our Diversity and Inclusion Office, and effectuated at all levels of the Company, we focus on attracting. retaining, and developing our diverse talent and creating an inclusive work environment globally.
We are committed to identifying and acknowledging gaps in our D&I mission and taking action to address them. To drive progress within Catalent, we focus on four strategic initiatives:
• Strengthening our culture of inclusion, supported by our nine employee resource groups;
• Promoting inclusive leadership;
• Accelerating talent acquisition and development, including with support from external partners; and
• Activating a data- and accountability-driven strategy.
One key example of our global D&I initiatives are our nine global employee resource groups (“ERGs”), providing support, resources, and a forum for topical discussion and engagement for employees in the following categories: people with disabilities, people of Asian and Pacific Islander descent, women, indigenous peoples, people of Hispanic and/or LatinX descent, our LGBTQ+ community, people of African descent, Gen Y and Z, and people with military and/or first responder service. Our ERG network includes 127 global, virtual, and site-based chapters.
Key D&I performance highlights are captured in our Corporate Responsibility and Environmental, Social, and Governance Strategy section below.
Engagement
Our employee-focused practices make a clear impact on our employee engagement. Through increased engagement, we can grow our business by relying on strong, engaged leaders and professionals willing to ensure we can overcome and thrive during any challenge.
We periodically administer a company-wide engagement survey to garner direct feedback from our employees regarding how we can more deeply and meaningfully engage them, enabling us to focus on improving specific areas where we can support our people.
In fiscal 2023 we changed our approach to employee engagement surveys and launched our first “pulse survey,” using an online platform to deliver an updated engagement score and immediate access to results for all our people leaders on a more frequent basis. This first pulse survey, in November 2022, led to a companywide score of 6.9 out of a possible 10 for Catalent (using a rating scale from 1 to 10). The platform highlighted key strengths, including our inclusive culture, peer relationships, goal setting, and meaningful work. The survey also highlighted areas requiring further focus, including workload, strategy communication, and rewards.
Corporate Responsibility (“CR”) and ESG Strategy
Our CR strategy, which includes our ESG strategy, is integrated into our company-wide strategic plan, ensuring that we operate in alignment with our values, meet our commitments to all our stakeholders, and contribute to the long-term success of the broader biopharmaceutical, pharmaceutical, and consumer health industries and the communities where we operate. Our approach to ESG focuses on three areas of society relevant to our business, prioritizing our impact on (i) people, (ii) the environment, and (iii) our communities. We focus on ESG areas that are the most significant to our business, and our strategy is
informed by our employees, customers, investors, communities, and other key stakeholders. Our fiscal 2023 ESG performance, described below, demonstrates our contribution to the long-term success of the industries we serve and the communities where we operate, as we continue to invest in a corporate culture that understands and prioritizes our impact on people in our operations and employee-related decision-making.
Fiscal 2023 brought new and continued challenges for our operations, including the funds availableon-going response to pursue strategic growth initiatives or the paymentUkrainian-Russian war, significant reductions in the volume of interest expensevaccines produced for the COVID-19 pandemic, and the on-going supply chain challenges amid rising global inflation. Through it all, our mission and values continued to provide steady, critical orientation and focus. Amid these fiscal 2023 challenges, our business delivered approximately 70 billion unit doses, across more than 50 sites, where our workforce of over 17,000 worked hard, with our Patient First value guiding the way, to ensure that we met our commitments to our customers and their patients.
Governance
We are committed to ensuring strong corporate governance practices on behalf of our shareholders and other stakeholders. We believe strong corporate governance and an independent board of directors provide the foundation for financial integrity and shareholder confidence. More information about our corporate governance features can be found in Item 10. — Directors, Executive Officers, and Corporate Governance.
Our CR council, which reports to the CEO and is composed of senior leaders from various parts of our business, guides our CR efforts and sets our overall CR strategy. Management, including members of the CR council, provide regular CR updates to our board of directors, which regularly reviews material aspects of our CR strategy and performance as a full board and through its several committees, including a formal annual review of our overall CR strategy and performance.
Business Benefits
Beyond being the right thing to do, our focus on CR strengthens our business by reducing risks, meeting customer and investor expectations, and positioning us to attract top talent. CR performance is an important contributor to our business success. It informs our risk management process, protects our reputation, and alerts us to regulatory, environmental, and societal threats to our business. Our CR activities also align with many of our customers’ CR programs and strengthen our relationships.
Our future success depends on our indebtedness.highly skilled and dedicated global team of employees, who are passionate about improving health outcomes. We compete for top talent in our industry and recognize that our culture and reputation as a responsible company can be a differentiator for attracting job candidates and keeping and motivating our existing employees.
ESG progress in fiscal 2023
We made significant progress in several ESG focus areas in fiscal 2023:
•In February 2023, we published our fourth annual Corporate Responsibility report (covering fiscal 2022), which includes an evaluation of our performance against the standards set by the Sustainability Accounting Standards Board (SASB) for Biotechnology and Pharmaceuticals and the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Some highlights of our progress include:
◦purchasing renewable electricity for our operating sites, with energy attribution certificates (EACs) accounting for 81% of our electricity use by the end of fiscal 2022, compared to 23% at the end of fiscal 2021, thus reducing our total Scope 1 and 2 emissions by 38%, from a fiscal 2020 baseline;
◦implementing 153 sustainability projects, resulting in annual energy savings of more than 4%, compared to our fiscal 2018 baseline;
◦achieving our water efficiency target, of <500m3/$1M revenue, a year early, reducing our water intensity by 26%, from a fiscal 2020 baseline;
◦converting 1,400 metric tons of uncontaminated by-product (24% of the total volume) diverted from landfill, converting it to alternative uses, such as adhesive;
◦philanthropic giving that exceeded $1 million, driven significantly by philanthropic efforts related to the humanitarian response to the war in Ukraine and, our on-going commitment to science, technology, engineering, and math (STEM) education, and nonprofits that serve patients, with a focus on underserved communities; and
◦2,200 employees participated in the Catalent Cares Matching Gift Program, a 46% increase from fiscal 2021, raising $1 million for 625 non-profits in combined employee donations and Company matches.
•In fiscal 2023, we continued to drive D&I by (1) investing in the inclusive capabilities of our leaders, (2) working with partners who share our values and help enable our strategy, (3) accelerating diverse talent acquisition and development, and (4) curating an even more inclusive culture. Some highlights of our progress include:
◦a 17% increase (from 23% to 27%) in our U.S.-based leaders who are racially or ethnically diverse;
◦a 9% increase (from 35% to 38%) in women in leadership roles globally;
◦confirmation that we closed the U.S. gender pay gap in fiscal 2021 through EDGE certification;
◦publication of a Supplier Diversity Policy and setting the ambition to increase diverse supplier spend;
◦designation as a 2022 Best Place to Work for people with disabilities, based on the Disabilities Equality Index;
◦rollout of our inclusive leadership workshops for site and functional leadership teams and ongoing conversations hosted by our leaders following challenging current events in the U.S.; and
◦expansion of our ERGs, with a 21% increase in the number of ERG chapters, and a record 43 global ERG events with 7,500 attendees.
Looking ahead
We are determined to play an integral role in moving our industry toward more responsible and sustainable business practices as we continue to be at the cutting edge of developing and reliably supplying drugs, biologics, and consumer health products.
We continue to reduce our carbon emissions and have committed to Science Based Targets (SBT). The SBT report we submitted for assessment details a target reduction for our Scope 1 and 2 emissions, based on a fiscal 2022 baseline, and a goal for engaging our Scope 3 footprint by aligning emission reduction targets to SBT goals. We have achieved our water intensity goal, to decrease water intensity to 500 cubic meters per $1 million in revenue and will now focus on sites in water-deprived or sensitive areas, to reduce our water usage further. At the end of fiscal 2023, 65% of our sites were able to eliminate waste sent to landfill; in fiscal 2024, we expect to achieve this at all of our facilities. We have performed a risk assessment and identified process and infrastructure changes needed for us to achieve our bold goal to ensure no residual active pharmaceutical ingredient (API) above Predicted No Effect Concentration (PNEC) in wastewater. Activities to implement this goal will occur throughout fiscal 2024.
We continue to strengthen our supply chain by expanding our supplier assessment and auditing program, including continued use of our third-party vetting and due diligence platform in alignment with the Pharmaceutical Supply Chain Initiative (PSCI) principles and the U.N. Guiding Principles on Business and Human Rights. Our diverse supplier network and spend will continue to increase, as outlined in our new Diverse Supplier Policy.
Measuring against our baseline D&I statistics, we will work to progress our goal of recruiting, developing, and retaining more diverse talent, including in leadership roles. In fiscal 2024, we will further implement our D&I action plans, which outline localized strategies and goals to help us meet our company-wide targets. We continue to participate in external benchmarks, including the Corporate Equality Index (LGBTQ+ inclusion) and the Disability Equality Index to guide our goals and progress. Through training, forums, and internal performance metrics, we will continue to combat unconscious biases that can impact the hiring and promotion of diverse talent. Our employee surveys reveal that our employees are energized and engaged by our CR and D&I initiatives. In fiscal 2024, we will continue to assess our employees’ overall engagement and inclusion through our next corporate engagement survey.
Further information on our CR program is available at catalent.com/about-us/corporate-responsibility/, but this website is not part of our public disclosures and is not incorporated by reference into this Annual Report.
Risks Relating to Our Indebtedness
Our substantial leverage•The size of our indebtedness and the obligations associated with it could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or in our industry or to deploy capital to grow our business, expose us to interest-rate risk to the extent of our variable ratevariable-rate debt, andor prevent us from meeting our obligations under our indebtedness. These risks may be increased in a recessionary environment, particularly as sources of capital may become less available or more expensive.
•Despite our high indebtedness level, we and our subsidiaries are still capable of incurring significant additional debt, which could further exacerbate the risks associated with our substantial indebtedness.
•Our interest expense on our variable-rate debt may continue to increase if and to the extent that policymakers combat inflation through interest-rate increases on benchmark financial products.
•Despite the limitations in our debt agreements, we retain the ability to take certain actions that may interfere with our ability to timely pay our substantial indebtedness.
•We may not be able to pay our indebtedness when it becomes due.
•We are currently using and may in the future use derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable-rate indebtedness or changes in currency exchange rates, and any such instrument may expose us to risks related to counterparty credit worthiness or non-performance of these instruments.
Risks Relating to Ownership of Our Common Stock
•We do not presently maintain effective disclosure controls and procedures due to material weaknesses we have identified in our internal control over financial reporting. Failure to remediate these material weaknesses or any other material weakness or significant deficiencies have resulted in a revision of our financial statements, in the future could result in material misstatements in our financial statements and have caused, and in the future could cause us to fail to timely meet our periodic reporting obligations.
•Our stock price has historically been and may continue to be volatile, and a holder of shares of our Common Stock may not be able to resell such shares at or above the price such stockholder paid, or at all, and could lose all or part of such investment as a result.
•Future sales, or the perception of future sales, of our Common Stock, by us or our existing stockholders could cause the market price for our Common Stock to decline.
•We are no longer eligible to use the Form S-3 registration statement, which could impair our capital-raising activities.
•Provisions in our organizational documents could delay or prevent a change of control.
We caution you that the risks, uncertainties, and other factors referenced above may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
We file annual, quarterly, and current reports and other information with and furnish additional information to the U.S. Securities and Exchange Commission (the “SEC”). Our filings with the SEC are available to the public on the SEC’s website at www.sec.gov. Those filings are also available to the public on, or accessible through, our website (catalent.com) for free via the “Investors” section as soon as reasonably practicable after we file such material, or furnish it to, the SEC. We also use our website, Facebook page (facebook.com/CatalentPharmaSolutions), LinkedIn page (linkedin.com/company/catalent-pharma-solutions/) and Twitter account (@catalentpharma) as channels of distribution of information concerning our activities, our offerings, our various businesses, and other related matters. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The information we file with or furnish to the SEC (other than the information set forth or incorporated in this Annual Report) or contained on or accessible through our website, our social media channels, or any other website that we may maintain is not a part of this Annual Report.
Catalent References and Fiscal Year
Unless the context otherwise requires, in this Annual Report, the terms “Catalent,” “the company,” “we,” “us,” and “our” refer to Catalent, Inc. and its subsidiaries. All references to years in this Annual Report, unless otherwise stated, refer to fiscal years beginning July 1 and ending June 30. All references to quarters, unless otherwise stated, refer to fiscal quarters. Fiscal years are referred to by the calendar year in which they end. For example, “fiscal 2023” refers to the fiscal year ending June 30, 2023.
Trademarks and Service Marks
We have U.S. or foreign registrations for the following marks, among others: Bettera®, Catalent®, Clinicopia®, CosmoPod®, Easyburst®, FastChain®, FlexDirect®, Follow the Molecule®, Galacorin®, GPEx®, GPEx® Boost, GPEx® Lightning, Graphicaps®, Liqui-Gels®, Manufacturing Miracles®, Micron Technologies®, OmegaZero®, OneBio®, OneXpress Solution®, OptiDose®, OptiForm®, OptiGel®, OptiGel® Bio, OptiGel® DR, OptiMelt®, OptiShell®, PEEL-ID®, Pharmatek®, RP Scherer®, Savorgel®, Scherer®, SMARTag®, Softdrop®, Staby®, StabyExpress®, SupplyFlex®, Vegicaps®, Zydis®,and Zydis Ultra®. This Annual Report also includes trademarks and trade names owned by other parties, and these trademarks and trade names are the property of their respective owners. We use certain other trademarks and service marks, some on an unregistered basis and some have been applied for, but remain pending examination in trademark agencies in the U.S. and abroad, including, FlexDoseSM, Catalent Xpress PharmaceuticsSM, OptiPact™, ProteoSuiteSM, StartScoreSM, and VirtuosoSM.
Solely for convenience, the trademarks, service marks, and trade names identified in this Annual Report may appear without the ®, SM, and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names.
ITEM 1. BUSINESS
Overview
We provide differentiated development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, vaccines, and consumer health products at over fifty facilities across four continents under rigorous quality and operational standards. Our oral, injectable, and respiratory delivery technologies, along with our state-of-the-art protein, plasmid, viral, and cell and gene therapy manufacturing capacity, address a wide and growing range of modalities and therapeutic and other categories across the biopharmaceutical, pharmaceutical, and consumer health industries. Through our extensive capabilities, growth-enabling capacity, and deep expertise in product development, regulatory compliance, and clinical trial and commercial supply, we can help our customers take products to market faster, including more than half of new drug products approved by the U.S. Food and Drug Administration (the “FDA”) in the last decade. Our development and manufacturing platforms, our proven formulation, supply, and regulatory expertise, and our broad and deep development and manufacturing know-how enable our customers to advance and then bring to market more products and better treatments for patients and consumers. Our commitment to reliably supply our customers’ and their patients’ needs is the foundation for the value we provide; annually, we produce approximately 70 billion unit doses for nearly 8,000 customer prescription and consumer health products, or approximately 1 in every 26 unit doses of such products taken each year by patients and consumers around the world. We believe that, through our investments in state-of-the-art facilities and capacity expansion, including investments in facilities focused on new treatment modalities and other attractive market segments, our continuous improvement activities devoted to operational and quality excellence, the sales of existing and introduction of new customer products, and, in some cases, our innovation activities and patents, we will continue to attract premium opportunities and realize the growth potential from these areas.
We continue to focus on enhancing both our product and service offerings and our sales and marketing activities in order to grow the number of active commercial manufacturing and development programs for our customers. This sustains our extensive, long-duration relationships and long-term contracts with a broad and diverse range of industry-leading customers. In fiscal 2023, we conducted business with 87 of the top 100 branded drug and consumer health marketers and 82 of the top 100 biologics marketers, measured on a global basis. Selected key customers include Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Haleon, Johnson & Johnson, Moderna, Pfizer, and Sarepta Therapeutics.
We have many long-standing relationships with our customers, particularly those with commercial products, as we provide support and reliable supply through each stage of a product's lifecycle. Our relationship with an innovator of a prescription pharmaceutical product will often last many years—in several cases, two decades or more—extending from pre-clinical development through more mature commercial stages of the product's life cycle. We serve customers requiring some combination of innovative product development, superior quality, state-of-the-art manufacturing, and skilled technical services to support their development and marketed product needs. Our broad and diverse range of technologies closely integrates with all aspects of our customers’ final formulations and dose forms, and this generally results in the inclusion of our facilities as manufacturing and testing sites in our customers’ prescription product regulatory filings. Both factors frequently translate to long-duration supply relationships at an individual product level.
We believe our customers value us because our depth of development solutions and state-of-the-art manufacturing technologies, continuous innovations and improvements, consistent and reliable supply, geographic reach, and substantial expertise enable us to create a broad range of business and product solutions that can be customized to fit their individual needs. Today we employ more than 9,000 highly trained direct manufacturing associates, as well as more than 3,000 formulation, analytical development, and process scientists and technicians. Our customers can also benefit from more than 1,800 patents and patent applications in advanced delivery platforms, drug and biologics formulation, and manufacturing. The aim of our offerings is to reliably supply our customers' commercial needs and also allow them to bring more products to market faster and develop and market differentiated products that improve patient outcomes. We believe our leading market position and diversity of customers, offerings, regulatory categories, products, and geographies reduce our exposure to potential strategic and product shifts within our industries.
We provide a wide variety of proprietary and non-proprietary, differentiated technologies, products, and service offerings to our customers across our development and manufacturing platforms, which we have advanced and grown over more than 90 years through internal development, strategic alliances, in-licensing, and acquisitions. We initially introduced our softgel capsule technologies in the 1930s and have continuously expanded our range of offerings. In recent years, we have launched more than a dozen internally developed new technology platform offerings. We have also augmented our portfolio through acquisitions. Among the technologies we currently offer are softgel capsules, including both gelatin and non-gelatin formulations, our Zydis orally disintegrating tablets, gummy and soft chew oral forms, protein production using advanced mammalian cell lines, adeno-associated virus (“AAV”) and other viral vectors, induced pluripotent stem cells (“iPSCs”) and
other cell types, plasmid DNA (“pDNA”), and a range of other oral, injectable, and respiratory delivery technologies. The technologies and service offerings within our development solution platforms span the full drug development process, ranging from our OptiForm Solution Suite for enhancement of bioavailability and other characteristics of early-stage small molecules, Gene Product Expression (“GPEx”), GPEx Boost, and GPEx Lightning for advanced cell line development, pDNA development and manufacturing and SMARTag platforms for development of biologics and antibody-drug conjugates (“ADCs”), to formulation, analytical, and bioanalytical services, early-stage clinical development, drug-device combination development and supply, fill and finish operations for injectable products, and clinical trials supply, including our unique FlexDirect direct-to-patient and FastChain demand-led clinical supply solutions. Our offerings serve a critical need in the development and manufacture of products across a broad range of product types. We focus on serving as an accelerator for new therapeutic modalities and formulation, delivery, and manufacturing technologies. Our expertise enables us to bring advanced products to market at scale, faster.
In large part due to acquisitions and investments, their subsequent organic growth, the revenue contribution from our Biologics segment has grown from approximately 17% in fiscal 2016 to 46% in fiscal 2023. We believe our own internal innovation and investments, supplemented by current and future external partnerships and acquisitions, will continue to extend our leadership positions in the development, reliable supply, and delivery of drugs, protein-based biologics, cell and gene therapies, and consumer health products.
History
We trace our history to the 1933 founding of the R.P. Scherer Corporation, which developed the first rotary die machine for the manufacture of soft gelatin capsules, and we assumed our current form in April 2007. We regularly review our portfolio of offerings and operations in the context of our strategic growth plan, and, where appropriate, have added to or divested from our portfolio of offering and sites, which has led to significant growth of the overall business. In July 2014, we completed the initial public offering of our Common Stock, which is listed on the New York Stock Exchange (the “NYSE”) under the symbol “CTLT.”
We are highly leveraged.a holding company that indirectly owns Catalent Pharma Solutions, Inc. (“Operating Company”), which owns, directly or indirectly, all of our operating assets.
Our Competitive Strengths
Available, State-of-the-art Manufacturing Capacity in Attractive Market Segments
We have invested several billion dollars over the last few years to broaden our portfolio of offerings and expand our capacity with state-of-the-art manufacturing and development capabilities that focus on anticipating and meeting the needs of the evolving biopharmaceutical, pharmaceutical, and consumer health industries. In addition, we have hired and trained thousands of new direct manufacturing associates in our quality-focused culture of operational excellence. The capacity and capabilities we have built and purchased, along with our continuing efforts to assure operational and quality excellence, have and will continue to enable us to secure attractive new business opportunities in the expanding market for outsourced product development and supply.
Vibrant, Patient First-Driven Culture
From the manufacturing line to the executive suite, for all our critical decisions, we ask the question, “What would the impact be to the patient?”, and our culture is built on our cornerstone value of Patient First. We believe this mindset, which aligns closely with our customers’ values, enables a pervasive focus on patient safety, impact, and outcomes, and an uncompromising approach to product quality and compliance, by reminding us of those who depend upon our vigilance concerning the safety, quality, reliability, and sustainability of our product supply. Along with other key cultural strengths, including our commitments to diversity and inclusion and to science-based environmental sustainability, we believe our culture brings us both a unique reputation and an operating capability that is difficult to replicate.
Diversified Operating Platform
We are diversified by virtue of our broad range of product and service offerings, our geographic scope, our large customer portfolio, the extensive range of products we produce, and our ability to provide solutions at every stage of a product’s lifecycle. In fiscal 2023, we produced nearly 8,000 distinct products across multiple categories. Our fiscal 2023 net revenue was distributed by relevant product regulatory/marketing status as follows: biologics 51%, branded drugs 30%, generic prescription drugs 2%, over-the-counter drugs 7%, and consumer health and other 10% combined. In fiscal 2023, our top 20
products represented 37% of our total net revenue, with one customer accounting for approximately 10% of net revenue whose largest individual product accounted for approximately 9% of our net revenue. We serve more than 1,200 customers in more than 80 countries, with 35% of our fiscal 2023 net revenue coming from outside the U.S. This diversity, combined with long product lifecycles and close customer relationships, has contributed to the long-term stability of our business. It has also allowed us to reduce our exposure to the risks associated with potential strategic, customer, and product shifts as well as to payer-driven pricing pressures experienced by our drug and biologic customers.
Longstanding, Extensive Relationships with a Diverse Customer Portfolio
We have longstanding, extensive relationships with leading pharmaceutical, biotechnology, and consumer health customers. In fiscal 2023, we did business with 87 of the top 100 branded drug and consumer health marketers and 82 of the top 100 biologics marketers, measured on a global basis, as well as with more than 1,200 other customers, including emerging and specialty biotech and pharmaceutical companies, which are often more reliant on outside partners as a result of their more virtual business models. Regardless of size, our customers seek innovative product development, superior quality, advanced manufacturing, and skilled technical services to support their development and marketed product needs.
We believe our customers value us because our broad range of product and service offerings, recently expanded capacity in state-of-the-art manufacturing facilities, including facilities offering new treatment modalities, reliable supply, geographic reach, commitment to operational and quality excellence, and substantial expertise that enable us to create a broad range of tailored solutions, many of which are unavailable from other individual providers.
Deep, Broad, and Growing Advanced Technology Foundation
Our breadth of offerings employing advanced technologies and state-of-the-art manufacturing systems and long track record of innovation substantially differentiate us from other industry participants. Our leading softgel platforms, including Liqui-Gels, OptiShell, OptiGel DR, and Vegicaps capsules, our gummy and soft chew oral forms, and our modified release technologies, including the Zydis family of orally disintegrating tablets, our spray drying capabilities, and our OptiPact and OptiMelt technologies, provide formulation expertise to solve complex delivery challenges for our customers. We offer advanced technologies for delivery of small molecules and biologics via oral, respiratory, and injectable routes and also provide advanced biologics formulation options, including GPEx, GPEx Boost, and GPEx Lightning mammalian cell lines for protein production, SMARTag ADC technology, AAV vectors for cell and gene therapies, iPSC development and manufacturing, and pDNA development and manufacturing. We have a leadership position within respiratory delivery, including dry powder inhalers and intra-nasal forms. We have reinforced our leadership position in advanced technologies over the last three years, as we have launched more than a dozen new technology platforms and applications, and recently purchased or expanded our businesses developing and manufacturing consumer health products, protein-based biologics, fill and finish for injectable drugs and biologics, cell and gene therapies, and other new therapeutic modalities. Our culture of creativity, problem-solving, and innovation is grounded in our advanced technologies, the substantial expertise and experience of our scientists and engineers, and, in some cases, our patents and proprietary manufacturing processes. Our global product development and innovation teams drive a focused application of resources to opportunities for both new customer product introductions and platform technology development. As of June 30, 2017,2023, we had $1,596.2more than 1,500 product development programs in active development across our businesses.
Long-Duration Relationships Provide Sustainability
Our broad and diverse range of technologies closely integrates with our customers’ molecules to yield safe and effective final formulations and dose forms, and this generally results in the inclusion of Catalent in our customers’ prescription product regulatory filings. Both factors translate to long-duration supply relationships at an individual product level, to which we apply our expertise in contracting to produce long-duration commercial supply agreements. These agreements typically have initial terms of two to seven years with regular renewals of one to three years (see “—Contractual Arrangements” for more detail). Approximately three-quarters of our fiscal 2023 net revenue from our product development and delivery offerings and related services were covered by such long-term contractual arrangements. We believe this base provides us with a sustainable competitive advantage.
Significant Recent Growth Investments
We have made over time, and expect to continue to make, significant investments in our manufacturing network, which is capable of serving customers and patients worldwide, and today employ approximately 8 million (dollarsquare feet of manufacturing, laboratory, and related space across four continents. We have deployed approximately $2.61 billion in the last five fiscal years in gross capital expenditures, not including approximately $3.58 billion spent acquiring new facilities and businesses. Growth-related investments in facilities, capacity, and capabilities across our businesses have positioned us for future growth in areas
aligned with anticipated future demand, including in pDNA, cell and gene therapies, fill and finish for injectable drugs and biologics, and other new therapeutic modalities. Through our continuing commitment to operational, quality, and regulatory excellence, we drive continuous improvements in safety, productivity, sustainability and reliable supply, which we believe further differentiates us. Our manufacturing network and capabilities allow us the flexibility to reliably supply the changing needs of our customers while consistently meeting their quality, delivery, sustainability, and regulatory compliance expectations.
High Standards of Regulatory Compliance and Operational and Quality Excellence
We operate our plants in accordance with current good manufacturing practices (“cGMP”) or other applicable requirements, following our own high standards that are consistent with those of many of our large global pharmaceutical and biotechnology customers. We have approximately 1,900 employees around the globe focused on quality and regulatory compliance. All of our facilities are registered where required with the FDA or other applicable regulatory agencies, such as the European Medicines Agency (the “EMA”). In many cases, our facilities are registered with multiple food, drug, or biologics regulatory agencies around the world. In fiscal 2023, we were subject to 58 regulatory audits, and, over the last five fiscal years, we successfully completed approximately 300 regulatory audits. We also undergo more than 700 customer and internal audits annually. We believe our quality and regulatory track record to be a favorable competitive differentiator.
Strong and Experienced Management Team
Our executive leadership team collectively has approximately 550 years of combined and diverse experience within the pharmaceutical and healthcare industries. With an average of approximately 28 years of functional experience, this team possesses deep knowledge and a wide network of industry relationships.
Our Strategy
Our strategic ambition, guided by and operationalized through our values, is to power the innovation and growth of the life science industry by becoming its leading development and commercial partner in reliable supply, conventional and advanced technologies, first-to-scale innovation, and therapeutic modalities, and integrated solutions. To achieve this, we continue to pursue the following key growth initiatives:
Capabilities & Capacity — Continued Expansion in Biologics and Other Attractive Markets
Recognizing the strategic importance of protein-based biologics, cell and gene therapies, pDNA, and other new biopharmaceutical modalities, we began to build a differentiated biologics platform in 2002. Since 2019, we have invested over $3.42 billion in our biologics business, including capital investments and approximately $1.83 billion for acquisitions of biologics-focused businesses and sites. Today, we are a recognized leader in biologics, including AAV vectors for gene therapies; development and supply for cell therapies; advanced cell-line development; formulation and fill-finish into vials, pre-filled syringes, and cartridges; specialized manufacturing of biologic drug substances; and bioanalytical analysis. We have partnered with customers from around the world to develop advanced cell expression for more than 1,100 cell lines, many using our advanced GPEx, GPEx Boost, and GPEx Lightning technologies, and have actively collaborated on developing and scaling up more than 125 cell and gene therapies. In the recent fiscal years, we expanded our existing cell therapy development and manufacturing capabilities, began offering pDNA production services, and acquired several facilities including a commercial-scale cell therapy manufacturing facility in Princeton, New Jersey (“Princeton”) and a developer and manufacturer of iPSCs located near Dusseldorf, Germany. We have also invested in a second-generation ADC technology, SMARTag, and see continued progress in this technology’s capabilities and our customers’ SMARTag product-development activities.
In addition to our expansion in biologics, we have invested additional capital in our facilities in order to expand in attractive markets, including significant expansion of our oral solid controlled release production capacity in Winchester, Kentucky, and the addition of specialized capabilities and capacity in early development. We acquired a leading position in consumer-preferred gummy and soft-chew formats for consumer health products with our acquisition of Bettera Holdings, LLC (“Bettera Wellness”) in fiscal 2022. We expanded our capacity for oral and injectable products via our fiscal 2020 acquisition of a facility in Anagni, Italy, and our capacity for spray dried dispersion and dry powder inhaler manufacturing via our fiscal 2021 acquisition of a facility located near Boston, Massachusetts.
Use Our Proprietary Technologies and Substantial Expertise to Help Our Customers Develop New Products
We have broad and diverse technology platforms that are supported by deep scientific and technical expertise, extensive know-how, and more than 1,800 patents and patent applications in approximately 170 families across advanced delivery platforms, drug and biologics formulation, and manufacturing. For example, we have significant softgel fill and formulation know-how, databases of formulated products, and substantial softgel regulatory approval expertise. As a result, nearly 90% of
approvals by the FDA over the last 25 years of new chemical entities presented in a softgel format have been developed and supplied by us.
In addition to resolving delivery challenges for our customers’ products, we have applied our technology platforms and development expertise to proactively develop proof-of-concept products, whether improved versions of existing drugs, new generic formulations, or innovative consumer health products. In the consumer health area, we file product dossiers with regulators in relevant jurisdictions for self-created products, which help contribute sustainable growth to our consumer health business. We expect to continue to seek proactive development opportunities and other non-traditional relationships to increase demand for and value realized from our technology platforms. These activities have provided us with opportunities to capture an increased share of end-market value through out-licensing, profit-sharing, and other arrangements.
Operational Leverage — Deploy Existing Infrastructure and Operational Discipline to Drive Profitable Growth
Through our existing infrastructure, including our global network of operating locations and programs, we promote operational discipline and drive margin expansion. With our active focus on continuous improvement and sustainability enhancement, global procurement function, and conversion cost productivity metrics in place, we continuously seek to enhance our culture of functional excellence and cost accountability. Along with the ongoing increase in the share of revenues from higher margin biologics offerings, we expect this discipline to further leverage our operational network for profitable growth.
Strategic Acquisitions and Licensing — Build on our Existing Platform
We operate in the markets for outsourced development solutions and commercial supply, generally provided by contract development and manufacturing organizations (“CDMO”), where we estimate current industry spending at more than $70 billion globally. Our broad platform, global infrastructure, and diversified customer portfolio provide us with a strong foundation from which to consolidate within these markets, to enter new markets, and generate operating leverage through acquisitions. Since fiscal 2013, we have executed 22 transactions, investing approximately $4.91 billion, and have demonstrated an ability to efficiently and effectively integrate these acquisitions.
While we are rigorously focused on driving our organic growth, we have in recent years substantially increased our participation in biologics, including protein-based biologics, cell and gene therapies, pDNA development and production, and drug product fill and finish, via strategy-driven inorganic transactions. We intend to identify and execute strategic transactions to optimize our portfolio of offerings and businesses, within the context of our long-term capital allocation strategy. We have a dedicated corporate development team in place to pursue these transactions, enabled by a rigorous and financially disciplined process for evaluating and executing these transactions.
“Follow the Molecule”® by Providing Solutions to our Customers across all Phases of the Product Lifecycle
We intend to continue to use our development and manufacturing solutions across the entire lifecycle of our customers’ products to drive future growth. Our development solutions span the drug development process, starting with our platforms for early pre-clinical development of small molecules, protein-based biologics, and cell and gene therapies; through formulation and analytical services, development and manufacturing of clinical trial supplies, and fill and finish of injectable products; to regulatory consulting. Once a molecule is ready for clinical trials and subsequent commercialization, we provide our customers with a range of advanced technologies and expert, state-of-the-art manufacturing solutions that allow them to deliver their molecules to the end-users in safe, effective, and, in some cases, patient-preferred dosage forms, to produce biologic drug substances needed for protein-based biologics and cell and gene therapies, and to provide primary and secondary packaging solutions and cold-storage distribution services. Our relationship with a molecule typically starts with developing and manufacturing the innovator product and can extend throughout the molecule’s commercial life. For prescription products, we are often the sole or primary outsourced provider and are frequently reflected in customers’ product approval applications. Our revenue from our development and manufacturing activities are primarily driven by volumes, and, as a result, the loss of an innovator drug’s market exclusivity may be mitigated if we supply customers offering generic or biosimilar equivalents.
An example of the long and mutually productive relationships we foster can be found in a leading over-the-counter anti-allergy brand, which today uses both our proprietary Zydis orally disintegrating tablets and Liqui-Gels softgel technology. We originally began development of the prescription format of this product for our multinational pharmaceutical company partner in 1992 to address specific patient sub-segment needs. After four years of development, we then commercially supplied the prescription product in our Zydis format for six years, and we have continued to provide the Zydis form since the switch to over-the-counter status in the U.S. and other markets in the early 2000s. Subsequently, we proactively brought a softgel product concept for the brand to the customer, which the customer elected to develop and launch as well. By following this molecule, we have built a strong, 3 decade-long relationship across multiple formats and markets.
Customer Product Pipeline — Continuing to Grow Through New Projects and Product Launches
We intend to continue to supplement our existing diverse base of commercialized customer products with new development programs. As of June 30, 2023, our product development teams were working on more than 1,500 customer development programs in active development across our business. Our base of active development programs has expanded in recent years from growing market demand, as well as from our expanded capabilities and technology platforms. Although there are many complex factors that affect the development and commercialization of pharmaceutical, protein-based biologic, cell and gene therapy, and consumer health products, we expect that a portion of these programs will reach full development and market approval in the future and thereby add to our long-duration commercial revenues under long-term contracts and grow our existing product base. In fiscal 2023, we introduced 216 new products for our customers.
Catalent continues to be a leader in providing chemistry, manufacturing, and controls-based product development services to the global pharmaceutical, biotechnology, and consumer health industries, driven by thousands of projects annually. In fiscal 2023, we recognized $1.95 billion of net revenue related to the development of products, down 16% from the prior year, principally driven by the substantial decrease in net revenue from the development of COVID-19 related products. In addition, substantially all of the revenue associated with the Clinical Supply Services business relates to our support of customer products in development.
Our Reportable Segments
At the beginning of fiscal 2023, in connection with the appointment of a new President and Chief Executive Officer, who also serves as the Company’s Chief Operating Decision Maker, the Company changed its operating structure and reorganized its executive leadership team. This new organizational structure includes operating and reporting in two segments: (i) Biologics and (ii) Pharma and Consumer Health.
Biologics
Our Biologics segment provides formulation, development, and manufacturing for biologic proteins, cell gene, and other nucleic acid therapies; pDNA, iPSCs, oncolytic viruses, and vaccines; formulation, development, and manufacturing for parenteral dose forms, including vials, prefilled syringes, and cartridges; and analytical development and testing services for large molecules. The business has extensive expertise in development, scale up, and commercial manufacturing. Representative customers of our Biologics segment include Bristol-Myers Squibb, Johnson & Johnson, Moderna, and Sarepta Therapeutics, along with a broad range of innovative small and mid-tier biopharmaceutical customers.
Our biologics offering includes cell-line development based on our advanced, patented GPEx suite of technologies, which are used to develop stable, high-yielding mammalian cell lines for both innovator and biosimilar biologic compounds. GPEx technology can provide rapid cell-line development, high biologics production yields, flexibility, and versatility. Our development and manufacturing facility in Madison, Wisconsin has the capability and capacity to produce cGMP quality biologics drug substance from 250L to 4000L scale using single-use technology across five suites to provide maximum efficiency, redundancy, and flexibility. Additionally, our Madison, Wisconsin facility features two flexible cGMP suites that are used to manufacture mRNA or other small-scale biomolecules. Our Bloomington, Indiana facility brings additional biologics development, clinical, and commercial drug substance manufacturing, and formulation development capabilities and capacity. Both Bloomington and our Anagni, Italy facility provide substantial capacity for finished-dose drug product manufacturing and packaging. Our SMARTag next-generation ADC technology, based in Emeryville, California, is a clinical-stage technology that enables development of ADCs and other protein conjugates with improved efficacy, safety, and manufacturability.
At our pDNA, cell therapy, and gene therapy global centers of excellence in Belgium, Maryland, and New Jersey, we develop and manufacture advanced therapeutics, including AAV, lentivirus, oncolytic virus, CAR-T, and other cell or virus modalities together with critical pDNA biological starting material for cell, mRNA, viral-based therapies and next-generation vaccines. In fiscal 2022, we acquired a fully operational, commercial-scale cell therapy campus in Princeton with 16 suites available for both autologous and allogeneic clinical and commercial manufacturing. The Princeton campus works in conjunction with our Gosselies, Belgium cell therapy center of excellence and our iPSC manufacturing center of excellence in Dusseldorf, Germany, to support our customers’ global cell therapy needs. Additionally, we have expanded our gene therapy flagship manufacturing campus in Harmans, Maryland, creating a total of 18 penthouse-style viral-vector suites, and added our Virtuoso AAV platform that reduces AAV development time by half, enabling our customers to reach first-in-human studies faster. Our specialized expertise in AAV vectors, the most commonly used delivery system for gene therapies, and iPSCs for next-generation allogeneic cell therapy manufacturing, together with our substantial global cell therapy manufacturing, capacity for clinical- through commercial-scale batches, and our capabilities in mRNA and pDNA manufacturing, position us to capitalize on strong industry demand and expansions in the use of newer modalities in the cell and gene therapy market.
Our range of injectable manufacturing offerings includes manufacturing drug substances and filling small molecules or biologics into vials, syringes, and cartridges, with flexibility to accommodate other formats within our existing network. In addition to primary packaging, our network provides secondary packaging capabilities, including auto-injector and safety device assembly for commercial launch and life-cycle management. Our clinical supply services business provides a global network for clinical distribution, as well as labeling, packaging, and cold-chain storage for clinical trials and commercial supply of biotherapeutics and cell and gene therapies. Our fill and finish services are largely focused on complex pharmaceuticals and biologics. With our range of technologies, we are able to meet a wide range of specifications, timelines, and budgets. We believe that the complexity of the manufacturing process, the importance of experience and know-how, a proven history of regulatory compliance, and substantial state-of-the-art capacity provide us with a meaningful competitive advantage in the market.
We also offer analytical development and testing services for proteins, gene and cell therapies, and other biologic modalities, including bioassay, biophysical characterization, and cGMP release and stability testing. Our OneBio Suite provides customers with the potential to seamlessly integrate drug substance, drug product, and clinical supply management for products in development, and for integrated commercial supply across both drug substance and drug product. We provide a broad range of technologies and services supporting the development and launch of new biologic entities, biosimilars, biobetters, and cell and gene therapies to bring a product from gene to commercialization, faster.
Our Biologics segment represented 46%, 53%, and 48% of our aggregate net revenue before inter-segment eliminations for fiscal 2023, 2022, and 2021, respectively.
Pharma and Consumer Health
Through our Pharma and Consumer Health segment, we provide market-leading capabilities for complex oral solids, softgel formulations, Zydis fast-dissolve technologies, and gummy, soft chew, and lozenge dosage forms; formulation, development, and manufacturing platforms for oral, nasal, inhaled, and topical dose forms; and clinical trial development and supply services.
Representative customers of our Pharma and Consumer Health segment include Bayer, Bristol-Myers Squibb, GlaxoSmithKline, Haleon, Pfizer, and Procter & Gamble.
Our Pharma and Consumer Health segment represented 54%, 47%, and 52% of our aggregate net revenue before inter-segment eliminations for fiscal 2023, 2022, and 2021, respectively.
Formulation and development
Through our comprehensive pharmaceutical formulation and development platform, we provide pre-clinical screening, formulation, and analytical development, and cGMP manufacturing at both clinical and commercial scale for our market-leading softgel capsule and Zydis fast-dissolve tablet platforms, traditional and advanced complex oral solid-dose formats, dry powder inhalers, and nasal delivery devices. We have substantial, proven experience in developing and scaling up orphan and rare disease products, especially those requiring accelerated development timelines, solubility enhancement, specialized handling (e.g., potent or controlled substance materials), complex technology transfer and specialized manufacturing processes. We provide fluid bed coating, spray drying, hot melt extrusion, micronization, and lipid formulation capabilities, all of which are used to enhance a drug’s administration and release profile and its clinical performance. We offer comprehensive analytical method development and scientific capabilities, including stability testing and global regulatory services to support both fully integrated development programs or standalone fee-for-service work. We have a network of early development sites focused on earlier phase compounds (i.e., pre-clinical and Phase I) to engage with more customer molecules earlier in their development, with the intent to also support these molecules downstream as they progress towards commercial approval and supply. Demand for our offerings is driven by the need for scientific expertise, the depth and breadth of integrated services offered, as well as the reliability of our supply performance across quality and operational parameters.
Manufacturing
Our large-scale cGMP pharmaceutical manufacturing solutions typically include clinical trial supplies, registration batches, and commercial production across a broad range of formats, and may also involve finished dose packaging or advanced processing of intermediates to achieve the desired clinical performance of the prescription or over-the-counter pharmaceutical product. Finished dose forms include softgel capsules, our Zydis fast-dissolve tablets, and traditional and advanced complex oral solid-doses, including coated and uncoated tablets, pellet/bead/powder-filled two-piece hard capsules, granulated powders, and other immediate and modified release forms. Advanced intermediate processing may include coating, extrusion, or spheronization to achieve specific functional outcomes, including site- or time-specific drug release, taste
masking, or enhanced bioavailability. We have deep experience at managing complex technical transfers of clinical or commercial programs, whether from Catalent’s early development network, other contract development sites, or from customers directly.
Softgel technology platform
We provide formulation, development, and manufacturing services for soft capsules, or “softgels,” as well as large-scale manufacturing of oral solid dose forms for pharmaceutical and consumer health markets, along with supporting ancillary services. Our softgel manufacturing technology was first commercialized by our predecessor in the 1930s, and we have continually enhanced the platform since then. We are the market leader in overall softgel development and manufacturing and hold the leading market position in innovator drug softgels. Our principal softgel technologies include traditional softgel capsules, in which the shell is made of animal-derived gelatin, and Vegicaps and OptiShell capsules, in which the shell is made from plant-derived materials. Softgel capsules are used in a broad range of customer products, including prescription drugs, over-the-counter medications, dietary supplements, unit-dose cosmetics, and animal health medicinal preparations. Softgel capsules encapsulate liquid, paste, or oil-based formulations of active compounds in solution or suspension within an outer shell. In the manufacturing process, the capsules are formed, filled, and sealed simultaneously. We typically perform encapsulation for a product within one of our softgel facilities, with active ingredients provided by customers or sourced directly by us. Softgels have historically been used to solve formulation challenges or technical issues for a specific drug, to help improve the clinical performance of compounds, to provide important market differentiation, particularly for over-the-counter medications, and to provide safe handling of hormonal, highly potent, and cytotoxic drugs. We also participate in the softgel vitamin, mineral, and supplement business in selected regions around the world. Our plant-derived softgel shells, available as Vegicaps and OptiShell capsules, allow innovators and consumer health customers to extend the softgel dose form to a broader range of active ingredients and serve patient and consumer populations that were previously inaccessible due to religious, dietary, or cultural preferences. Our Vegicaps and OptiShell capsules are protected by patents in most major global markets. Physician and patient studies we have conducted have demonstrated a preference for softgels versus traditional tablet and hard capsule dose forms in terms of ease of swallowing, real or perceived speed of delivery, ability to remove or eliminate unpleasant odor or taste, and, for physicians, perceived improved patient adherence with dosing regimens.
In addition to softgel capsules, following our fiscal 2022 acquisition of Bettera Wellness, we also conduct formulation, development, and manufacturing of gummies, soft chews, and lozenges in a variety of sizes and shapes serving the dietary supplements market at three facilities in the United States. We use dietary and food ingredients provided by our customers or sourced directly by us, and we also provide ancillary services such as analytical testing and packaging.
Clinical Supply Services
Our Pharma and Consumer Health segment also provides clinical supply services through manufacturing, packaging, storage, distribution, and inventory management for small-molecule drugs, protein-based biologics, and cell and gene therapies in clinical trials. We offer customers flexible solutions for clinical supplies production and provide distribution and inventory management support for both simple and complex clinical trials. This includes over-encapsulation where needed; supplying placebos, comparator drug procurement, and clinical packages and kits for physicians and patients; inventory management; investigator kit ordering and fulfillment; cold-chain storage and distribution; and return supply reconciliation and reporting. We support trials in all regions of the world through our facilities and distribution network. In recent years, we have extended our network, with significant expansions at our Philadelphia, Pennsylvania and Shanghai, China free trade zone locations and facilities in California, China, and Japan. We also continue to develop new solutions for the evolving clinical trial environment, including FlexDirect direct-to-patient, CT Success clinical supply planning, and extensive cold-chain investments. We are the leading provider of integrated development solutions and one of the leading providers of clinical trial supplies.
We have partnered with companies who focus on the development of cannabis-based prescription medicines and high-value cannabinoid drug therapies whose goal is to achieve full regulatory approval under the strictest legal standards in effect in any jurisdiction affected, including cannabidiol and tetrahydrocannabinol pharmaceutical products using our Zydis technology in clinical trials across a range of indications, including multiple sclerosis spasticity, chemotherapy-induced nausea and vomiting, chronic pain for cancer, and epilepsy. Our total net revenue related to such development programs was less than 1% of total revenue generated in fiscal 2023.We do not provide any services for or otherwise partner with any company that does not comply with all applicable laws, including the U.S. federal controlled substances laws (or non-U.S. equivalent laws), relating to cannabis products.
Integrated Development and Product Supply Chain Solutions
In addition to our proprietary offerings, we are also differentiated in the market by our ability to bring together our development solutions and state-of-the-art product manufacturing to offer integrated development and product supply solutions that can be combined or tailored in many ways to enable our customers to take their drugs, biologics, and consumer health products from laboratory to market, faster. Once a product is on the market, we can provide comprehensive, integrated product supply, from the sourcing or supply of the bulk active ingredient to comprehensive manufacturing and packaging, to the testing required for release, and to cold-chain or ambient temperature distribution. The customer- and product-specific solutions we develop are flexible, scalable, and creative, so that they meet the unique needs of both large and emerging biopharmaceutical, pharmaceutical, and consumer health companies and are appropriate for products of all sizes. We believe that our development and product supply solutions, such as OptiForm Solution Suite and OneBio Suite, will continue to contribute to our future growth.
Sales and Marketing
Our target customers include large pharmaceutical and biotechnology companies, mid-size, emerging, and specialty pharmaceutical and biotechnology companies, and consumer health companies, along with companies in other selected healthcare market segments such as animal health and medical devices, and companies in adjacent industries, such as cosmetics. We have longstanding, extensive relationships with leading pharmaceutical, biotechnology, and consumer health customers. In fiscal 2023, we did business with 87 of the top 100 branded drug and consumer health marketers and 82 of the top 100 biologics marketers, measured on a global basis, as well as with more than 1,200 other customers. Faced with access, pricing, and reimbursement pressures as well as other market challenges, large pharmaceutical and biotechnology companies have increasingly sought partners to enhance the clinical competitiveness of their drugs and biologics and improve the productivity of their research and development activities, while reducing their fixed cost bases. Many mid-size, emerging, and specialty pharmaceutical and biotechnology companies, while facing the same pricing and market pressures, have chosen not to build a full infrastructure, but rather to partner with other companies through licensing agreements or outsourcing to access the critical skills, technologies, and services required to bring their products to market. Consumer health companies require rapidly developed, innovative dose forms and formulations to keep up with the fast-paced over-the-counter medication, dietary supplement, and personal care markets. These market segments are all important to our growth, but require distinct solutions, marketing and sales approaches, and market strategy.
We follow a hybrid demand-generation organization model, with strategic account teams offering the full breadth of Catalent’s solutions, and technical specialist teams providing the in-depth technical knowledge and practical experience essential for each individual offering, both supported by a dedicated team of deeply experienced scientific advisors. Our sales organization currently consists of more than 200 full-time, experienced sales professionals, supported by inside sales and sales operations. We also have built a dedicated strategic marketing team, providing strategic market and product planning and management for our offerings. As part of our marketing efforts, we participate in major trade shows relevant to our offerings globally and ensure adequate visibility to our offerings and solutions through a comprehensive advertising and publicity program. We believe that Catalent is a strong brand with high overall awareness in our established markets and universe of target customers, and that our brand identity is a competitive advantage for us.
Global Accounts
We manage select accounts globally due to their substantial current business or growth potential. We recorded approximately one-third of our total net revenue in fiscal 2023 from these global accounts. Each global account is assigned a lead business development professional with substantial industry experience. These account leaders, along with other members of the sales and executive leadership teams, are responsible for managing and extending the overall account relationship. Account leaders work closely with the rest of the sales organization as well as operational, quality, and project management personnel to ensure alignment around critical priorities for the accounts.
Emerging, Specialty, and Virtual Accounts
Emerging, specialty, and virtual pharmaceutical and biotechnology companies are expected to be critical drivers of industry growth globally and account for more than three-quarters of the active drug and biologic development pipeline. Historically, many of these companies have chosen not to build a full infrastructure, but rather partner with other companies to formulate, develop, analyze, test, and manufacture their products. We expect them to continue to do so in the future, providing a critical source for future integrated solutions demand. We expect to continue to increase our penetration of geographic clusters of emerging companies in North America, Europe, Central and South America, and Asia. We regularly use active pipeline and product screening and customer targeting to identify the optimal candidates for partnering based on product profiles, funding status, and relationships, to ensure that our technical sales specialists and field sales representatives develop custom solutions
designed to address the specific needs of these customers. In order to reach these emerging, specialty, and virtual companies, we actively partner with leading venture capital investors and biotech incubators.
Seasonality; Fluctuations in Operation Results
Our annual financial reporting period ends on June 30. As discussed further in “Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting our Performance,” our revenue and net earnings are generally higher in the third and fourth quarters of each fiscal year, with our first fiscal quarter typically generating our lowest revenue of any quarter, and our last fiscal quarter typically generating our highest revenue. These fluctuations are primarily the result of the timing of our, and our customers’ annual operational maintenance periods at locations in the U.S. and Europe, the seasonality associated with pharmaceutical and biotechnology budgetary spending decisions, clinical trial and research and development schedules, the timing of new product launches and length of time needed to obtain full market penetration, and, to a lesser extent, the time of the year some of our customers’ products are in higher demand, or are being produced to support future seasonal demand.
Contractual Arrangements
We generally enter into a broad range of contractual arrangements with our customers, including agreements with respect to feasibility, development, supply, licenses, quality, and confidentiality. The terms of these contracts vary significantly depending on the offering and customer requirements. Some of our agreements may include a variety of revenue arrangements, such as fee-for-service, unit pricing in one or more tiers, minimum volume commitments, royalties, manufacturing preparation services, profit-sharing, and fixed fees. We generally secure pricing and other contract mechanisms in our supply agreements to allow for periodic resetting of pricing terms, and, in some cases, these agreements permit us to raise or renegotiate pricing in the event of certain price increases for the raw materials or other inputs we use to make products. Our typical supply agreements include indemnification from our customers for product liability and intellectual property matters and caps on our contractual liabilities, subject in each case to negotiated exclusions. The terms of our manufacturing supply agreements range from two to seven years with regular renewals of one to three years, although some of our agreements are terminable upon much shorter notice periods, such as 30 or 45 days. For our development solutions offerings, we may enter into master service agreements, which provide for standardized terms and conditions and make it easier and faster for customers with multiple development needs to access our offerings.
Backlog
While we generally have long-term supply agreements that provide for a revenue stream over a period of years, our backlog represents, as of a point in time, future service revenues from work not yet completed. For our Biologics segment and a majority of our Pharma and Consumer Health segment, backlog represents firm orders for manufacturing services and includes minimum volumes, where applicable. Manufacturing businesses backlog represents firm orders for manufacturing services and includes minimum volumes, where applicable. For the clinical supply services offered through our Pharma and Consumer Health segment, backlog represents estimated future service revenue from work not yet completed under signed contracts. Using these methods of reporting backlog, as of June 30, 2023, our backlog was $2.53 billion, compared to $2.85 billion as of June 30, 2022, including $557 million and $549 million, respectively, related to our scientific and clinical services offerings in our Pharma and Consumer Health segment. We expect to recognize as revenue by the end of fiscal 2024 approximately 83% of the value of the backlog in existence as of June 30, 2023.
To the extent projects are delayed, the timing of our revenue could be affected. If a customer cancels an order, we may be reimbursed for the costs we have incurred. For orders that are placed inside a contractual firm period or that involve minimum volume commitments, we generally have a contractual right to payment in the event of cancellation. Fluctuations in our reported backlog levels also result from the timing and order pattern of our customers, which often seek to manage their level of inventory on hand. Because of customer ordering patterns, the matters discussed in this paragraph, and other factors, our backlog reported for certain periods may fluctuate and may not be indicative of future results.
Manufacturing Capabilities
We operate manufacturing facilities, development centers, and sales offices throughout the world. As of June 30, 2023, we had 52 facilities (3 geographical locations operate as multiple facilities because they support more than one reporting segment, with one location including both a manufacturing facility and our corporate headquarters) on four continents with approximately 8 million square feet of manufacturing, laboratory, office, and related space. Our manufacturing capabilities generally include the full suite of competencies relevant to the support of each site’s activities, including regulatory, quality assurance, and in-house validation.
We operate our manufacturing facilities and development centers in accordance with cGMP or other applicable requirements. All of these sites are registered where required with the FDA or other applicable regulatory agencies, such as the EMA. In some cases, our sites are registered with multiple regulatory agencies.
We have invested $1.93 billion in our manufacturing and development facilities since fiscal 2021 for improvements and expansions, including $583 million in capital expenditures during fiscal 2023. We believe that our sites and equipment are in good condition, are well maintained, and are able to operate at or above present levels for the foreseeable future, in all material respects.
Our manufacturing operations are focused on employee health and safety, regulatory compliance, operational excellence, continuous improvement, and process standardization across the organization. In fiscal 2023, we achieved approximately 95% on-time shipment delivery versus customer request date across our network as a result of this focus. Our manufacturing operations are structured around an enterprise management philosophy and methodology that utilizes principles and tools common to a number of quality management programs, including Lean Six Sigma and Lean Manufacturing, which we brought together in a system that we refer to as “The Catalent Way.”
Raw Materials
We use a broad and diverse range of raw materials and other supplies in the design, development, and manufacture of our products. This includes, but is not limited to, key materials such as gelatin, starch, and iota carrageenan; packaging films; single-use production components for drug substance production, and glass vials and syringes for drug product. The raw materials and other supplies that we use are sourced externally on a global basis. Globally, our supplier relationships could be interrupted due to natural disasters and international supply disruptions, including those caused by pandemics or geopolitical and other issues. For example, commercially usable gelatin is available from a limited number of sources. In addition, much of the gelatin we use is bovine-derived. Past concerns of contamination from bovine spongiform encephalopathy have narrowed the number of possible sources of particular types of gelatin. If there were a future disruption in the supply of gelatin or any other key material from any one or more of our current principal suppliers, there can be no assurance that we could obtain an adequate alternative supply from our other suppliers. Any future restriction that were to emerge on the use of a key raw material used in our products from certain geographic sources or due to regulatory or consumer concerns could hinder our ability to timely supply our customers with products, and the use of alternative raw materials could be subject to lengthy formulation, testing and regulatory approval periods.
We work very closely with our suppliers to assure continuity of supply while maintaining excellence in material quality and reliability. We continually evaluate alternate sources of supply, although we do not frequently pursue regulatory qualification of alternative sources for key raw materials due to the strength of our existing supplier relationships, the reliability of our current supplier base, and the time and expense associated with the regulatory process, since regulators usually must approve changes to prescription product ingredient sources. Although a change in suppliers could require significant effort or investment by us in circumstances where the items supplied are integral to the performance of our products or incorporate specialized material such as gelatin, we do not believe that the loss of any existing supply arrangement would have a material adverse effect on our business. See “Item 1A. - Risk Factors—Risks Relating to Our Business and the Industry in Which We Operate—Our results of operations are subject to fluctuations in the costs, availability, and suitability of the components of the products we manufacture, including active pharmaceutical ingredients, excipients, purchased components, and raw materials, and other supplies or equipment we need to run our business."
Competition
We compete with multiple companies as to each of our offerings and in every region of the globe in which we operate, including with CDMOs and other companies that offer conventional and advanced technologies for the development, supply, and delivery of medicinal products, clinical trials support, outsourced dose form, protein-based biologics or cell or gene therapy manufacturing, or development services to pharmaceutical, biotechnology, and consumer health companies based in North America, Central and South America, Europe, and the Asia-Pacific region. We also compete in some cases with the internal operations of those pharmaceutical, biotechnology, and consumer health customers that also have manufacturing capabilities and choose to source these services internally. Some of our competitors are substantially larger than we are and have access to more substantial resources, which could be deployed to expand their range of offerings or capacity.
Competition is driven by proprietary technologies and know-how (where relevant), capabilities, consistency of operational performance, availability of equipment, quality, regulatory track record, price, value, responsiveness, and speed. While we have competitors that compete with us in our individual offerings, and a few competitors that compete across many of our offerings, we do not believe we have competition from any directly comparable company.
Research and Development Costs
Our research activities are primarily directed toward the development of new offerings and manufacturing process improvements. Research and development costs amounted to $18 million, $23 million, and $21 million for fiscal 2023, 2022, and 2021, respectively.
Employees
As of June 30, 2023, we had approximately 17,800 individuals providing services for us at 52 facilities on 4 continents, of which certain employees at two of our 24 U.S. facilities are represented by labor unions, with their terms and conditions of employment being subject to collective bargaining agreements. Various combinations of national works councils, labor unions, and other labor organizations are active at all of our European and many of our other ex-U.S. facilities consistent with labor environments and laws in those countries. Our management believes that our relations with our workforce are satisfactory. Most of our individual service providers are full-time employees, while approximately 700 of our workers as of June 30, 2023 are contingent workers who are either self-employed or employed by external services organizations.
| | | | | | | | | | | | | | | | | |
| North America | Europe | South America | Asia Pacific | Total |
Approximate number of workers as of June 30, 2023 | 10,500 | 5,700 | 1,000 | 600 | 17,800 |
Human Capital Management
Our employees share common goals: to put patients first and to help people around the world live better, healthier lives. Our global workforce is united by our values: Patient First, commitment to our people, customer dedication, innovation, integrity, and excellence. Together, our values provide the foundation for our culture. We believe that an engaged, diverse workforce, empowered by inclusive leaders, will unlock our full potential as a company and as a leader in our sector. Our employees’ success is Catalent’s success.
We focus on employee development, engagement, and diversity and inclusion (“D&I”) to hire, develop, and retain the best talent. As of June 30, 2023, we had approximately 17,800 individuals providing services to us globally, with women representing 44% of our employees and holding 40% of roles at the manager level or higher. In fiscal 2023, ethnically diverse talent represented 35% of our U.S. employees.
Our turnover rate increased to 22% as of June 30, 2023, including 13% voluntary turnover, substantially driven by voluntary turnover in the U.S. and by a few reorganizations at some of our larger sites and within our corporate functions.
Reducing voluntary attrition and retaining our talent remains one of our top priorities. We continue to implement initiatives to build upon our values-based and inclusive culture, improve our employees’ experiences at Catalent, and better develop and engage internal talent. We continuously monitor local talent markets and provide differentiated pay arrangements and benefits to attract and retain talent. Additionally, we provide flexible work arrangements where possible, broader leadership development programs, an employee wellness program, and access to employee recognition programs at all levels.
We continue to take steps to ensure that Catalent is a company where all employees can develop a fulfilling career with support from our leadership team. We believe that our diverse pool of internal talent and our employees’ passion for excellence make a difference in the way we grow and deliver results.
Talent Acquisition
We have strong human resources processes and practices in place to support our employees through their careers at Catalent. This starts with a robust recruiting strategy and a strong employer brand. We attracted over 4,000 new employees in fiscal 2023, continuously working to reduce the time it takes to fill open positions and reduce our cost per hire, while striving for a best-in-class candidate experience.
We offer competitive compensation and a comprehensive suite of benefits, which, in the U.S., range from medical, dental, and vision coverage to retirement, disability, employee stock purchase, and life insurance programs. We also provide health promotion and wellness programs, remote work flexibility, tuition assistance, and employee assistance programs in several countries.
Our recruitment strategy aims to attract talent representing diverse backgrounds, perspectives, and ideas. This approach includes:
• engaging with potential top talent early in the career path through our university internship program;
• developing future leaders and enhancing their skills through programs, including various mentoring programs, our Global Organization Leadership Development (“GOLD”), Next Generation Global Leaders, and General Manager Excellence programs, as discussed further below;
• providing competitive compensation and benefits;
• continuously improving recruitment processes and platforms;
• working with several recruitment partners to attract diverse profiles and advertise open positions; and
•implementing unconscious bias workshops for hiring managers.
Catalent has been recognized as a TOP EMPLOYER USA since 2020 and as a TOP EMPLOYER in the United Kingdom ("U.K.") since 2022. We differentiate ourselves as a preferred employer to candidates through our reputation as a great place to work, offering a fast-paced and rewarding work environment.
Talent Development
We are also committed to the growth, development, and engagement of our people once they have joined our family. Through a strong learning and development culture, we provide opportunities for specialized technical training, leadership development, and high-potential growth opportunities to endow our employees with the knowledge and expertise needed to grow their careers at Catalent.
Our primary goal is to develop our people from within, thereby establishing a strong successor bench to help support company growth. In fiscal 2023, over 2,400 employees moved to a new role within the organization (of which 49% were women), whether as a developmental move or a promotion to a more senior position. Our senior leaders are committed to talent development and dedicate time each fiscal quarter to perform formalized talent reviews to discuss the development of key talent and to update succession plans for critical roles.
We strongly believe that the combination of experience (70%), exposure (20%), and education (10%) is the best recipe for personal development and career progression here. We have a library of tools and resources available for our employees within that framework, including access to a variety of tools and resources to learn new or expand existing skills.
Given our high volume of new hires, we continue to redesign our employee experience. We have upgraded our on-boarding experience to span employees’ first twelve months with Catalent.
We also offer four formal development programs to employees. All programs aim to prepare our talent to fill critical internal leadership roles. Through these programs, we have created a bench of leaders who model our values and are ready to take on more responsibility.
(1) Entry-level GOLD program. The GOLD program is a two-year rotational program for recent graduates from universities around the world in which the employee participates in three rotations at different sites in our network to learn about different aspects of our business and our varied offerings. GOLD employees receive assignments to perform strategic roles in key business initiatives. We provide them with coaching and opportunities to interact with senior executives, which both develop the skills and experience of our GOLD employees and provide a platform through which they contribute fresh ideas that challenge the status quo. The GOLD program operates in the U.S. and has been relaunched in Europe following a pause in the program during the U.K.'s withdrawal from the European Union (“E.U.”).
(2) Manager-level Next Generation Global Leader program. Our Next Generation Global Leader program, for employees at the manager level, is a 15-month on-the-job program focused on preparing high-potential managers for director-level roles. Since fiscal 2022, 86 employees graduated from this program, and a new group of 56 employees has been selected to join this program in fiscal 2024.
(3) Senior leader General Manager Excellence program. Our general managers run our operating sites and have substantial and wide-ranging responsibilities. This program enhances the skills of our general managers by giving them exposure to industry best practices and opportunities to network internally and receive personalized career coaching, including a 3-day business simulation. In fiscal 2023 and 2022, 24 and 35 general managers, respectively, participated in this program.
(4) Front-line leader level Lead Now program. In fiscal 2023, we launched “Lead Now,” a Catalent-wide leadership offering targeted for those who are new to people leadership. During the first 3 months of a new leadership role, this program teaches employees the fundamentals of leadership and identifies tools to inspire their teams while role-modeling Catalent values. We have already enrolled over 250 new leaders into this program.
Diversity and Inclusion
At Catalent, we cultivate a workplace that respects and welcomes all people; celebrates the unique backgrounds and experiences of our workforce; encourages all employees to bring their true, authentic selves to work; and leverages our diversity to drive innovation, inclusion, and excellence in every aspect of our business. By closing diversity and inclusion gaps, we energize our people to do their best work.
Our commitment to D&I starts at the top with our board of directors (referred to herein as the “board of directors” or “Board”) and executive leadership team that bring a broad spectrum of backgrounds and perspectives. Led by our Diversity and Inclusion Office, and effectuated at all levels of the Company, we focus on attracting. retaining, and developing our diverse talent and creating an inclusive work environment globally.
We are committed to identifying and acknowledging gaps in our D&I mission and taking action to address them. To drive progress within Catalent, we focus on four strategic initiatives:
• Strengthening our culture of inclusion, supported by our nine employee resource groups;
• Promoting inclusive leadership;
• Accelerating talent acquisition and development, including with support from external partners; and
• Activating a data- and accountability-driven strategy.
One key example of our global D&I initiatives are our nine global employee resource groups (“ERGs”), providing support, resources, and a forum for topical discussion and engagement for employees in the following categories: people with disabilities, people of Asian and Pacific Islander descent, women, indigenous peoples, people of Hispanic and/or LatinX descent, our LGBTQ+ community, people of African descent, Gen Y and Z, and people with military and/or first responder service. Our ERG network includes 127 global, virtual, and site-based chapters.
Key D&I performance highlights are captured in our Corporate Responsibility and Environmental, Social, and Governance Strategy section below.
Engagement
Our employee-focused practices make a clear impact on our employee engagement. Through increased engagement, we can grow our business by relying on strong, engaged leaders and professionals willing to ensure we can overcome and thrive during any challenge.
We periodically administer a company-wide engagement survey to garner direct feedback from our employees regarding how we can more deeply and meaningfully engage them, enabling us to focus on improving specific areas where we can support our people.
In fiscal 2023 we changed our approach to employee engagement surveys and launched our first “pulse survey,” using an online platform to deliver an updated engagement score and immediate access to results for all our people leaders on a more frequent basis. This first pulse survey, in November 2022, led to a companywide score of 6.9 out of a possible 10 for Catalent (using a rating scale from 1 to 10). The platform highlighted key strengths, including our inclusive culture, peer relationships, goal setting, and meaningful work. The survey also highlighted areas requiring further focus, including workload, strategy communication, and rewards.
Corporate Responsibility (“CR”) and ESG Strategy
Our CR strategy, which includes our ESG strategy, is integrated into our company-wide strategic plan, ensuring that we operate in alignment with our values, meet our commitments to all our stakeholders, and contribute to the long-term success of the broader biopharmaceutical, pharmaceutical, and consumer health industries and the communities where we operate. Our approach to ESG focuses on three areas of society relevant to our business, prioritizing our impact on (i) people, (ii) the environment, and (iii) our communities. We focus on ESG areas that are the most significant to our business, and our strategy is
informed by our employees, customers, investors, communities, and other key stakeholders. Our fiscal 2023 ESG performance, described below, demonstrates our contribution to the long-term success of the industries we serve and the communities where we operate, as we continue to invest in a corporate culture that understands and prioritizes our impact on people in our operations and employee-related decision-making.
Fiscal 2023 brought new and continued challenges for our operations, including the on-going response to the Ukrainian-Russian war, significant reductions in the volume of vaccines produced for the COVID-19 pandemic, and the on-going supply chain challenges amid rising global inflation. Through it all, our mission and values continued to provide steady, critical orientation and focus. Amid these fiscal 2023 challenges, our business delivered approximately 70 billion unit doses, across more than 50 sites, where our workforce of over 17,000 worked hard, with our Patient First value guiding the way, to ensure that we met our commitments to our customers and their patients.
Governance
We are committed to ensuring strong corporate governance practices on behalf of our shareholders and other stakeholders. We believe strong corporate governance and an independent board of directors provide the foundation for financial integrity and shareholder confidence. More information about our corporate governance features can be found in Item 10. — Directors, Executive Officers, and Corporate Governance.
Our CR council, which reports to the CEO and is composed of senior leaders from various parts of our business, guides our CR efforts and sets our overall CR strategy. Management, including members of the CR council, provide regular CR updates to our board of directors, which regularly reviews material aspects of our CR strategy and performance as a full board and through its several committees, including a formal annual review of our overall CR strategy and performance.
Business Benefits
Beyond being the right thing to do, our focus on CR strengthens our business by reducing risks, meeting customer and investor expectations, and positioning us to attract top talent. CR performance is an important contributor to our business success. It informs our risk management process, protects our reputation, and alerts us to regulatory, environmental, and societal threats to our business. Our CR activities also align with many of our customers’ CR programs and strengthen our relationships.
Our future success depends on our highly skilled and dedicated global team of employees, who are passionate about improving health outcomes. We compete for top talent in our industry and recognize that our culture and reputation as a responsible company can be a differentiator for attracting job candidates and keeping and motivating our existing employees.
ESG progress in fiscal 2023
We made significant progress in several ESG focus areas in fiscal 2023:
•In February 2023, we published our fourth annual Corporate Responsibility report (covering fiscal 2022), which includes an evaluation of our performance against the standards set by the Sustainability Accounting Standards Board (SASB) for Biotechnology and Pharmaceuticals and the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Some highlights of our progress include:
◦purchasing renewable electricity for our operating sites, with energy attribution certificates (EACs) accounting for 81% of our electricity use by the end of fiscal 2022, compared to 23% at the end of fiscal 2021, thus reducing our total Scope 1 and 2 emissions by 38%, from a fiscal 2020 baseline;
◦implementing 153 sustainability projects, resulting in annual energy savings of more than 4%, compared to our fiscal 2018 baseline;
◦achieving our water efficiency target, of <500m3/$1M revenue, a year early, reducing our water intensity by 26%, from a fiscal 2020 baseline;
◦converting 1,400 metric tons of uncontaminated by-product (24% of the total volume) diverted from landfill, converting it to alternative uses, such as adhesive;
◦philanthropic giving that exceeded $1 million, driven significantly by philanthropic efforts related to the humanitarian response to the war in Ukraine and, our on-going commitment to science, technology, engineering, and math (STEM) education, and nonprofits that serve patients, with a focus on underserved communities; and
◦2,200 employees participated in the Catalent Cares Matching Gift Program, a 46% increase from fiscal 2021, raising $1 million for 625 non-profits in combined employee donations and Company matches.
•In fiscal 2023, we continued to drive D&I by (1) investing in the inclusive capabilities of our leaders, (2) working with partners who share our values and help enable our strategy, (3) accelerating diverse talent acquisition and development, and (4) curating an even more inclusive culture. Some highlights of our progress include:
◦a 17% increase (from 23% to 27%) in our U.S.-based leaders who are racially or ethnically diverse;
◦a 9% increase (from 35% to 38%) in women in leadership roles globally;
◦confirmation that we closed the U.S. gender pay gap in fiscal 2021 through EDGE certification;
◦publication of a Supplier Diversity Policy and setting the ambition to increase diverse supplier spend;
◦designation as a 2022 Best Place to Work for people with disabilities, based on the Disabilities Equality Index;
◦rollout of our inclusive leadership workshops for site and functional leadership teams and ongoing conversations hosted by our leaders following challenging current events in the U.S.; and
◦expansion of our ERGs, with a 21% increase in the number of ERG chapters, and a record 43 global ERG events with 7,500 attendees.
Looking ahead
We are determined to play an integral role in moving our industry toward more responsible and sustainable business practices as we continue to be at the cutting edge of developing and reliably supplying drugs, biologics, and consumer health products.
We continue to reduce our carbon emissions and have committed to Science Based Targets (SBT). The SBT report we submitted for assessment details a target reduction for our Scope 1 and 2 emissions, based on a fiscal 2022 baseline, and a goal for engaging our Scope 3 footprint by aligning emission reduction targets to SBT goals. We have achieved our water intensity goal, to decrease water intensity to 500 cubic meters per $1 million in revenue and will now focus on sites in water-deprived or sensitive areas, to reduce our water usage further. At the end of fiscal 2023, 65% of our sites were able to eliminate waste sent to landfill; in fiscal 2024, we expect to achieve this at all of our facilities. We have performed a risk assessment and identified process and infrastructure changes needed for us to achieve our bold goal to ensure no residual active pharmaceutical ingredient (API) above Predicted No Effect Concentration (PNEC) in wastewater. Activities to implement this goal will occur throughout fiscal 2024.
We continue to strengthen our supply chain by expanding our supplier assessment and auditing program, including continued use of our third-party vetting and due diligence platform in alignment with the Pharmaceutical Supply Chain Initiative (PSCI) principles and the U.N. Guiding Principles on Business and Human Rights. Our diverse supplier network and spend will continue to increase, as outlined in our new Diverse Supplier Policy.
Measuring against our baseline D&I statistics, we will work to progress our goal of recruiting, developing, and retaining more diverse talent, including in leadership roles. In fiscal 2024, we will further implement our D&I action plans, which outline localized strategies and goals to help us meet our company-wide targets. We continue to participate in external benchmarks, including the Corporate Equality Index (LGBTQ+ inclusion) and the Disability Equality Index to guide our goals and progress. Through training, forums, and internal performance metrics, we will continue to combat unconscious biases that can impact the hiring and promotion of diverse talent. Our employee surveys reveal that our employees are energized and engaged by our CR and D&I initiatives. In fiscal 2024, we will continue to assess our employees’ overall engagement and inclusion through our next corporate engagement survey.
Further information on our CR program is available at catalent.com/about-us/corporate-responsibility/, but this website is not part of our public disclosures and is not incorporated by reference into this Annual Report.
Intellectual Property
We use a combination of know-how, trade secrets, patents, copyrights, trademarks, and other intellectual property, nondisclosure and other contractual provisions, and technical measures to protect certain innovative aspects of our offerings, services, and intangible assets that we have developed. These proprietary rights can be important to aspects of our ongoing operations. Many of our operations and products are covered by intellectual property licenses from third parties, particularly our customers that provide licenses to their proprietary active ingredients or formulations as part of our development or supply agreements with them, and in certain instances we license our technology to third parties.
We also have a long track record of innovation across our lines of business, and, to further encourage active innovation, we have developed incentive compensation systems linked to patent filings and other recognition and reward programs for
scientists and non-scientists alike. We have applied in the U.S. and certain other countries for registration of a number of trademarks, service marks, and patents, some of which have been registered and issued, and also hold common law rights in various trademarks and service marks. We hold more than 1,800 patents and patent applications worldwide relating to advanced drug delivery platforms, biologics formulations and technologies, and manufacturing.
We hold patents and license rights relating to certain aspects of our formulations, pharmaceutical and nutritional dosage forms, mammalian cell engineering, antibody-drug conjugation, iPSCs, and plasmid DNA manufacturing. We also hold patents relating to certain processes and products. We have pending patent applications in the U.S. and certain other countries and intend to pursue additional patents as appropriate. We have enforced and will continue to enforce our intellectual property rights in the U.S. and worldwide in appropriate circumstances.
We do not consider any particular patent, trademark, license, franchise, or concession to be material to our overall business.
Regulatory Matters
The manufacture, distribution, and marketing of healthcare products and the provision of certain services for development-stage pharmaceutical and biotechnology products are subject to extensive ongoing regulation by the FDA, other U.S. governmental authorities, and similar regulatory authorities in other countries. Certain of our subsidiaries are required to register for permits or licenses with, and must comply with the operating, cGMP, quality, and security standards of, applicable domestic and foreign healthcare regulators, including the FDA, the U.S. Drug Enforcement Agency (the “DEA”), the U.S. Department of Health and Human Services (the “DHHS”), the equivalent agencies of the E.U. and its member states, and various state boards of pharmacy, state health departments, and comparable agencies in other jurisdictions, as well as various accrediting bodies, each depending upon the type of operations and the locations of distribution and sale of the products manufactured or services provided by those subsidiaries.
In addition, various aspects of our business are subject to other healthcare laws, including the U.S. Federal Food, Drug, and Cosmetic Act, the Public Health Service Act, the Controlled Substances Act, and comparable state and foreign laws and regulations relevant to their activities.
We are also subject to various federal, state, local, national, and transnational laws, regulations, and requirements, both in the U.S. and other countries, relating to safe working conditions, laboratory and distribution practices, and the use, transportation, and disposal of hazardous or potentially hazardous substances. In addition, applicable import and export laws and regulations require us to abide by certain standards relating to the cross-border transit of finished goods, raw materials, and supplies and the handling of information. We are also subject to various other laws and regulations concerning the conduct of our non-U.S. operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act, and other anti-bribery laws and laws pertaining to the accuracy of our internal books and records. Furthermore, we are subject, in various jurisdictions, including the E.U. and certain U.S. states, to various privacy laws protecting data we may collect or process from employees, our customers' patients, or others.
The costs associated with complying with the various applicable federal, state, local, national, and transnational regulations could be significant, and the failure to comply with such legal requirements could have an adverse effect on our results of operations and financial condition. See “Item 1A. - Risk Factors—Risks Relating to Our Business and the Industry in Which We Operate—We are a part of the highly regulated healthcare industry, subject to stringent regulatory standards and other applicable laws and regulations, which can change unexpectedly or be the subject of unexpected changes in interpretation or enforcement, any of which may adversely impact our business,” for additional discussion of the costs associated with complying with the various regulations.
In fiscal 2023, we were subject to 51 regulatory audits, and, over the last five fiscal years, we completed approximately 300 regulatory audits.
Quality Assurance
We are committed to ensuring and maintaining the highest standard of regulatory compliance while providing high quality products to our customers, supported by our core value of Patient First. To meet these commitments, we have developed and implemented a Catalent-wide quality management system. We have employees around the globe focusing on quality and regulatory compliance. Our senior management team is actively involved in setting quality policies, standards, and internal guidance as well as managing internal and external quality performance. Our quality assurance department provides quality leadership and supervises our quality systems programs. An internal audit program monitors compliance with applicable regulations, standards, and internal policies. In addition, our facilities are subject to periodic inspection by the FDA, the DEA, and other equivalent local, state, and foreign regulatory authorities as well as our customers. All FDA, DEA, and other
regulatory inspection observations have been resolved or are on track to be completed at the prescribed timeframe provided in commitments to the applicable agency in all material respects. We believe that our operations are in compliance in all material respects with the regulations under which our facilities are governed.
Environmental, Health & Safety Matters
Our operations are subject to a variety of environmental, health, and safety laws and regulations, including those of the U.S. Environmental Protection Agency (the “EPA”), the U.S. Occupational Safety & Health Administration (“OSHA”), and equivalent state, local, and national regulatory agencies in each of the jurisdictions in which we operate. These laws and regulations govern, among other things, air emissions, wastewater discharges, the use, handling, and disposal of hazardous substances and wastes, soil and groundwater contamination, and employee health and safety. Our manufacturing facilities use, in varying degrees, hazardous substances in their processes. These substances include, among others, chlorinated solvents, and in the past chlorinated solvents were used at one or more of our facilities, including a number we no longer own or operate. As at our current facilities, contamination at such formerly owned or operated properties can result and has resulted in liability to us, for which we have recorded appropriate reserves as needed. We believe that our operations are in compliance in all material respects with the environment, health, and safety regulations applicable to our facilities.
ITEM 1A. RISK FACTORS
If any of the following risks actually occur, our business, financial condition, operating results, or cash flow could be materially and adversely affected. Additional risks or uncertainties not presently known to us, or that we currently believe are immaterial, may also impair our business operations.
Risks Relating to Our Business and the Industry in Which We Operate
Actions of activist shareholders could impact the pursuit of our business strategies and adversely affect our results of operations, financial condition, or share price.
We value constructive input from investors and regularly engage in dialogue with our shareholders regarding strategy and performance. Our board of directors and management team are committed to acting in the best interests of all shareholders. The actions taken by our board of directors and management in seeking to maintain constructive engagement with certain shareholders, however, may not be successful.
We have been, and may in the future be, subject to activities initiated by activist shareholders. In August 2023, we entered into a Cooperation Agreement (the “Cooperation Agreement”) with Elliott Investment Management L.P. (“Elliott”). Pursuant to the Cooperation Agreement, we appointed Steven Barg, Frank D’Amelio, Michelle Ryan, and Stephanie Okey as members of the Board, with an initial term expiring at the Company’s 2023 Annual Meeting of Shareholders.
We strive to maintain constructive, ongoing communications with all shareholders, including Elliott, and we welcome constructive input from all shareholders toward the shared goal of enhancing stakeholder value. Nonetheless, we may not be successful in engaging constructively with one or more shareholders, and any resulting activist campaign that contests, or seeks to change, our strategic direction or business mix could have an adverse effect on us because: (i) responding to actions by activist shareholders could disrupt our business and operations, be costly or time-consuming, or divert the attention of our board of directors or senior management from the pursuit of business strategies, which could adversely affect our results of operations or financial condition; (ii) perceived uncertainties as to our future direction may lead to the perception of a change in the direction of the business, instability, or lack of continuity, any of which may be exploited by our competitors, cause concern to our current or potential customers, cause concern in the minds of our employees and lead to the departure of critical employees, result in the loss of potential business opportunities, or make it more difficult to attract and retain qualified personnel and business partners; and (iii) these types of actions could cause significant fluctuations in our share price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
We anticipate being subject to increasing focus by our investors, regulators, customers, and other stakeholders on ESG matters.
Our investors, regulators, customers, and other stakeholders are increasingly focused on ESG matters. Certain investors, particularly institutional investors, and certain of our customers may use third-party benchmarks or scores to measure our ESG practices, and to decide whether to invest in our shares, engage with us regarding our practices, or engage or continue to use our services. If our ESG scores or practices do not meet desired standards, we may face reputational challenges. There can be no assurance that we will be able to accomplish any particular ESG goal or commitment, including any additional or revised commitment that we may announce in the future, as statements regarding such goals and commitments reflect our plans and aspirations at the time of announcement and do not guarantee achievement of such plans and aspirations within the timelines we announce or at all.
Different stakeholder groups have divergent views on ESG matters, which increases the risk that any action or lack thereof with respect to ESG matters will be perceived negatively by at least some stakeholders and adversely impact our reputation and business. Anti-ESG sentiment has gained some momentum across the United States, with several states having enacted or proposed “anti-ESG” policies or legislation, or issued related legal opinions. If we do not successfully manage ESG-related expectations across these varied stakeholder interests, it could erode stakeholder trust, impact our reputation, and constrain our business. Globally, a lack of harmonization in relation to ESG legal and regulatory reform across the jurisdictions in which we may operate may affect our future implementation of, and compliance with, rapidly developing ESG standards and requirements.Generally, we expect stakeholder demands and the prevailing legal environment to require us to devote additional resources to ESG matters in our review of prospective acquisitions. Additionally, collecting, measuring, and reporting ESG information and metrics can be costly, difficult, and time-consuming, are subject to evolving reporting standards, and can present numerous operational, reputational, financial, legal, and other risks.Compliance with ESG-related rules and efforts to meet investor expectations on ESG matters may place strain on our personnel, systems, and resources, and we may incur
significant compliance costs. Additionally, failure to comply with such rules or meet investor expectations may have a material adverse impact on our business, prospects, financial condition, or results of operations.
We are a part of the highly regulated healthcare industry, subject to stringent regulatory standards and other applicable laws and regulations, which can change unexpectedly or be the subject of unexpected changes in interpretation or enforcement, any of which may adversely impact our business.
The healthcare industry is highly regulated. We, and our customers, are subject to various local, state, federal, national, and transnational laws and regulations, which include the operating, quality, and security standards of the FDA, the DEA, various state boards of pharmacy, state health departments, the DHHS, similar bodies of the U.K., the E.U. and its member states, and other comparable agencies around the world, and, in the future, any change to such laws and regulations or the interpretation or application thereof could adversely affect us. Among other rules affecting us, we are subject to laws and regulations concerning cGMP and drug safety. New public health orders or best practice guidelines may increase our costs to operate or reduce our productivity, thereby affecting our business, financial condition, or results of operations.
We cannot ensure that our compliance controls, policies, and procedures will in every instance protect us from acts of our employees, agents, contractors, or collaborators that turn out to violate the laws or regulations of the jurisdictions in which we operate, including, without limitation, healthcare, employment, foreign corrupt practices, trade restrictions and sanctions, environmental, competition, and privacy laws and regulations. Failure by us or by our customers to comply with the requirements of applicable laws and regulations or requests from regulatory authorities could result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture or distribution, restrictions on our operations, civil or criminal sanctions, or withdrawal of existing or denial of pending approvals, permits, or registrations, including those relating to products or facilities. In addition, any such failure relating to the products or services we provide could expose us to contractual or product liability claims as well as claims from our customers, including claims for reimbursement for lost or damaged active pharmaceutical ingredients, which cost could be significant. Our business activities outside the U.S. are subject to the U.S. Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act, and other anti-bribery or anti-corruption laws, regulations, or rules. Our business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S. governments. There is no certainty that all of our employees, agents, contractors, or collaborators, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws.Violations of these laws and regulations may have a material adverse impact on our business, prospects, financial condition, or results of operations.
In addition, any new offering or product classified as a pharmaceutical or medical device must undergo lengthy and rigorous clinical testing and other extensive, costly, and time-consuming procedures mandated by the FDA, the EMA, and other equivalent local, state, federal, national, and transnational regulatory authorities in the jurisdictions that regulate our offerings and products.
Although we believe that we comply in all material respects with applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal would not reach a different conclusion concerning the compliance of our operations with applicable laws and regulations. In addition, there can be no assurance that we will be able to maintain or renew existing permits, licenses, or other regulatory approvals or obtain, without significant delay, future permits, licenses, or other approvals needed for the operation of our businesses. Any noncompliance by us or our customers with applicable law or regulation or the failure to maintain, renew, or obtain necessary permits and licenses could have an adverse effect on our results of operations and financial condition. Furthermore, loss of a permit, license, or other approval in any one portion of our business may have indirect consequences in another portion of our business if regulators or customers adjust their reviews of such other portion as a result or customers cease business with such other portion due to fears that such loss is a sign of broader concerns about our ability to deliver products or services of sufficient quality.
Any failure to implement fully, monitor, and continuously improve our quality management strategy could lead to quality or safety issues and expose us to significant costs, potential liability, and adverse publicity.
Our results depend on our ability to execute and improve when necessary our quality management strategy and systems, and effectively train and maintain our workforce with respect to quality management. Quality management plays an essential role in determining and meeting customer requirements, preventing defects, and improving our offerings, and, despite our network of quality systems, a quality or safety issue, including with respect to a high-revenue product, could have an adverse effect on our business, financial condition, stock price, or results of operations and may subject us to regulatory action, including a product recall, product seizure, injunction to halt manufacture or distribution, or restriction on our operations; monetary fines; or other civil or criminal sanctions. In addition, such an issue could subject us to adverse publicity and costly
litigation, including claims from our customers for reimbursement for the cost of lost or damaged active pharmaceutical ingredients or other related losses, the cost of which could be significant.
We have experienced, and may continue to experience, productivity issues and higher-than-expected costs at certain of our facilities, which have resulted in, and may continue to result in, material and adverse impacts on our financial condition and results of operations.
In the fourth quarter of fiscal 2023, we announced that we experienced productivity issues at three of our facilities, including two of our largest manufacturing facilities in fiscal 2023, relating to, among other things, deployment of a new enterprise resource planning (ERP) system and continued need to implement enhancements to operational and engineering controls following regulatory inspections, which led to reductions in revenues and increases in costs at these sites in fiscal 2023. Our plans to increase capacity for a customer’s product at one of these sites did not move forward on schedule, and, due to manufacturing capacity constraints, revenue from the unproduced batches was not made up in fiscal 2023. There can be no assurance that such revenue will be recovered on expected timeframes or at all. In addition, we have experienced higher-than-expected costs at the three facilities. Although we have taken several measures at these facilities, including management and operational changes, there can be no assurance that such measures will successfully address the root causes of the issues identified at each site, that our costs will return to anticipated levels, or that productivity levels at these sites will return to normal in the expected timeframes or at all. If we are unsuccessful in remedying the productivity issues at our facilities, if we are unable to recover revenue from unproduced batches when expected or at all, or if our costs at our facilities remain elevated, we may continue to experience material and adverse impacts on our financial condition and results of operations. Furthermore, there can be no assurance that additional operational and productivity issues will not arise at these three sites, or that similar operational and productivity issues will not materialize in our other manufacturing facilities, which may result in material and adverse impacts on our financial condition and results of operations.
The declining demand for various COVID-19 vaccines and treatments from both patients and governments around the world has affected and may continue to affect sales of the COVID-19 products we manufacture and our financial condition.
We manufacture or provide services for a variety of products intended for the prevention or treatment of COVID-19 and its symptoms and effects, including both vaccines and treatments. Due to the substantially decreased demand for these products since the height of the COVID-19 pandemic, no single one of these products is currently material to our business. The duration and extent of future revenues from our development, testing, manufacturing, and packaging of COVID-19-related products is uncertain and dependent upon customer demand. As the COVID-19 pandemic evolved into an endemic phase, we anticipated greater seasonality for demand and a decreased patient population, which may result in overall lower demand for the COVID-19-related products we develop, test, manufacture, or package. The market for the COVID-19 vaccines we develop, test, manufacture, or package depends on several evolving factors that are outside of our control, including public health authority recommendations and consumer motivation to vaccinate.
Certain of the COVID-19-related products we develop and manufacture have not yet received full marketing approval from relevant regulatory authorities around the world or for certain patient populations. Should any of these COVID-19-related products be denied any necessary regulatory approval, the demand for such product could decrease significantly and therefore decrease customer orders for additional development, manufacturing, or packaging of those products. Additionally, the need for continued manufacture and supply of vaccines (including “booster” doses) and therapies to address COVID-19, including new and developing variants of COVID-19, is highly uncertain and subject to various political, economic, and regulatory factors that are outside of our control. In addition, highly public political and social debate relating to the need for, efficacy of, or side effects related to one or more specific COVID-19 vaccines could contribute to changes in public perception of one or more COVID-19 vaccines manufactured by us, which could decrease demand for a COVID-19 related products we develop, manufacture, or package. Any of these factors, or others, could lead to decreased demand for the COVID-19 related products we develop, manufacture, or package and, as a result, have an adverse effect on our financial results or financial condition.
The demand for our offerings depends in part on our customers’ research and development and the clinical and market success of their products. Our business, financial condition, and results of operations may be harmed if our customers spend less on, or are less successful in, these activities. In addition, customer spending may be affected by, among other things, recessionary economic conditions caused in whole or in part by lingering effects of the COVID-19 pandemic, the Ukrainian-Russian war, the war in Gaza between Israel and Hamas, higher interest rates, or the rise in inflation worldwide.
Our customers are engaged in research, development, production, and marketing of pharmaceutical, biotechnology, and consumer health products. The amount of customer spending on research, development, production, and marketing, as well as the outcomes of such research, development, and marketing activities, have a large impact on our sales and profitability,
particularly the amount our customers choose to spend on our offerings. Available resources, including funding for our biotechnology and other customers, the need to develop new products, and consolidation in the industries in which our customers operate may have an impact on such spending. Our customers and potential customers finance their research and development spending from private and public sources. A reduction in available financing for and spending by our customers, for these reasons or because of the direct or indirect lingering effects of the COVID-19 pandemic, inflation, higher interest rates, the Ukrainian-Russian war or other regional or global conflicts such as the war in Gaza, could have a material adverse effect on our business, financial condition, and results of operations. If our customers are not successful in attaining or retaining product sales due to market conditions, reimbursement issues, or other factors, our results of operations may be materially adversely affected.
We participate in a highly competitive market, and increased competition may adversely affect our business.
We operate in a market that is highly competitive. We compete with multiple companies as to each of our offerings and in every region of the globe in which we operate, including competing with other companies that offer advanced delivery technologies, outsourced dose form or biologics manufacturing, clinical trials support services, or development services to pharmaceutical, biotechnology, and consumer health companies globally. We also compete in some cases with the internal operations of those pharmaceutical, biotechnology, and consumer health customers that also have manufacturing capabilities and choose to source these services internally.
We face substantial competition in each of our markets. Competition is driven by proprietary technologies and know-how, capabilities, consistency of operational performance, quality, price, value, responsiveness, and speed. Some competitors have greater financial, research and development, operational, and marketing resources than we do. Competition may also increase as additional companies enter our markets or use their existing resources to compete directly with ours. Expanded competition from companies in low-cost jurisdictions, such as India and China, may in the future adversely affect our results of operations or limit our growth. Greater financial, research and development, operational, and marketing resources may allow our competitors to respond more quickly with strategic acquisitions, or with new, alternative, or emerging technologies. Changes in the nature or extent of our customers’ requirements may render our offerings obsolete or non-competitive and could adversely affect our results of operations and financial condition.
We are subject to product and other liability risks that could exceed our anticipated costs or adversely affect our results of operations, financial condition, liquidity, and cash flows.
We are subject to potentially significant product liability and other liability risks that are inherent in the design, development, manufacture, and marketing of our offerings. We may be named as a defendant in product liability lawsuits, which may allege that our offerings have resulted or could result in an unsafe condition or injury to consumers. Such lawsuits, even those without merit, could be costly to defend and could result in reduced sales, significant liabilities, adverse publicity, and diversion of management’s time, attention, and resources.
Furthermore, product liability claims and lawsuits, regardless of their ultimate outcome, could have a material adverse effect on our business operations, financial condition, and reputation and on our ability to attract and retain customers. The availability of product liability insurance for companies in the pharmaceutical industry is generally more limited than insurance available to companies in other industries. We maintain product liability insurance with annual aggregate limits in excess of $25 million. There can be no assurance that a successful product liability or other claim would be adequately covered by our applicable insurance policies or by any applicable contractual indemnity or liability limitations.
Our business, financial condition, and results of operations may be adversely affected by global health epidemics.
Any public health epidemic, such as the COVID-19 pandemic, may affect our operations and those of third parties on which we rely, including our customers and suppliers. Our business, financial condition, and results of operations may be affected by: disruptions in our customers’ abilities to fund, develop, or bring to market products as anticipated; delays in or disruptions to the conduct of clinical trials; cancellations of contracts or confirmed orders from our customers; decreased demand for categories of products in certain affected regions; governmental restrictions imposed to respond to the risks posed by any such epidemic; and inability, difficulty, or additional cost or delays in obtaining key raw materials, components, and other supplies from our existing supply chain; among other factors caused by a public health epidemic.
In addition, the impact of a public health epidemic could exacerbate other risks we face, including those described elsewhere in “Risk Factors.”
The services and offerings we provide are highly exacting and complex, and, if we encounter problems providing the services or support required, our business could suffer.
The offerings we provide are highly exacting and complex, due in part to complex and exacting manufacturing processes and strict regulatory requirements. From time to time, problems may arise in connection with facility operations or during preparation or provision of an offering, in both cases for a variety of reasons including, but not limited to, equipment malfunction, sterility variances or failures, failure to follow specific protocols and procedures, problems with raw materials, environmental factors, and damage to, or loss of, manufacturing operations due to fire, flood, or similar causes. Such problems could affect production of a particular batch or series of batches, require the destruction of or otherwise result in the loss of product or materials used in the production of product, or could halt facility production altogether. This could, among other things, lead to increased costs, lost revenue, damage to customer relations, reimbursement to customers for lost active pharmaceutical ingredients or other related losses, time and expense spent investigating the cause, lost production time, and, depending on the cause, similar losses with respect to other batches or products. Production problems in our biologic manufacturing operations could be particularly significant because the cost of raw materials is often appreciably higher than in our other businesses. If problems are not discovered before the product is released to the market, recall and product liability costs may also be incurred. In addition, such risks may be greater at facilities that are new or going through significant expansion or renovation. The risks associated with running a highly complex facility doing exacting work with substantial regulatory oversight are enhanced for our larger sites, like our Bloomington, Indiana, Harmans, Maryland, St. Petersburg, Florida, or Swindon, U.K. sites, which generally generate much more revenue.
If we cannot keep pace with rapid technological advances, our services may become uncompetitive or obsolete, and our revenue and profitability may decline.
The healthcare industry is characterized by rapid technological change. Demand for our offerings may change in ways we may not anticipate because of evolving industry standards as well as a result of evolving customer needs that are increasingly sophisticated and varied and the introduction by others of new offerings and technologies that provide alternatives to our offerings. Several of our higher margin offerings are based on proprietary technologies. To the extent that such technologies are protected by patents, their related offerings may become subject to competition as the patents expire. Without the timely introduction of enhanced or new offerings and technologies, our offerings may become obsolete or uncompetitive over time, in which case our revenue and operating results would suffer. For example, if we are unable to respond to changes in the nature or extent of the technological or other needs of our pharmaceutical customers through enhancing our offerings, our competition may develop offerings that are more competitive than ours and we could find it more difficult to renew or expand existing agreements or obtain new agreements. Potential innovations intended to facilitate enhanced or new offerings generally will require a substantial investment before we can determine their commercial viability, and we may not obtain access to the innovations or have financial resources sufficient to fund all desired innovations.
Even if we succeed in creating or acquiring enhanced or new offerings from these innovations, they may still fail to result in commercially successful offerings or may not produce revenue in excess of the costs of development, and they may be rendered obsolete by changing customer preferences or the introduction by our competitors of offerings embodying new technologies or features. Finally, innovations may not be accepted quickly in the marketplace because of, among other things, entrenched patterns of clinical practice, the need for regulatory clearance, and uncertainty over market access or government or third-party reimbursement.
Any failure to protect or maintain our intellectual property may adversely affect our competitive edge that we hold and result in loss of revenue or reputation.
We rely on a combination of know-how, trade secrets, patents, copyrights, trademarks, and other intellectual property laws, nondisclosure and other contractual provisions, and technical measures to protect many of our offerings and intangible assets. These proprietary rights are important to our ongoing operations. There can be no assurance that these protections will provide uniqueness or meaningful competitive differentiation in our offerings or otherwise be commercially valuable or that we will be successful in obtaining additional intellectual property or enforcing our intellectual property rights against unauthorized users. The exclusive rights underlying certain of our offerings are protected by patents, some of which will expire in the near term. When patents covering an offering expire, loss of exclusivity may occur, which may force us to compete with third parties, thereby negatively affecting our revenue and profitability.
The proprietary rights that we or our customers may hold in these offerings may be invalidated, circumvented, or challenged. We may in the future be subject to proceedings seeking to oppose or limit the scope of our patent applications or issued patents. In addition, in the future, we may need to take legal actions to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity or scope of the proprietary rights of others. Legal proceedings are inherently uncertain, and the outcome of such proceedings may be unfavorable to us. Any legal action regardless of outcome might result in substantial costs and diversion of resources and management attention.
There can be no assurance that our confidentiality agreements will not be breached, our trade secrets will not otherwise become known by competitors, or that we will have adequate remedies in the event of unauthorized use or disclosure of proprietary information. Even if the validity and enforceability of our intellectual property is upheld, an adjudicator might construe our intellectual property not to cover the alleged infringement. In addition, intellectual property enforcement may be unavailable or practically ineffective in some countries. There can be no assurance that our competitors will not independently develop technologies that are substantially equivalent or superior to our proprietary technology or that third parties will not design around our intellectual property claims to produce competitive offerings. The use of our technology or similar technology by others could reduce or eliminate any competitive advantage we have developed, cause us to lose sales, or otherwise harm our business.
While we continue to apply in the U.S. and certain other countries for registration of a number of trademarks, service marks, and patents, and also claim common law rights in various trademarks and service marks, there can be no assurance that third parties will not oppose our applications in the future. In addition, it is possible that in some cases we may be unable to obtain the registrations for trademarks, service marks, and patents for which we have applied, and a failure to obtain trademark and patent registrations in the U.S. or other countries could limit our ability to protect our trademarks and proprietary technologies and impede our marketing efforts in those jurisdictions.
License agreements with third parties control our rights to use certain patents, software, and information technology systems and proprietary technologies owned by third parties, some of which are important to our business. Termination of these license agreements for any reason could result in the loss of our rights to this intellectual property, causing an adverse change in our operations or the inability to commercialize certain offerings.
In addition, many of our branded pharmaceutical customers rely on patents to protect their products from generic competition. Because incentives exist in some countries, including the U.S., for generic pharmaceutical companies to challenge these patents, pharmaceutical and biotechnology companies are under the ongoing threat of challenges to their patents. If the patents on which our customers rely were successfully challenged and, as a result, the affected products become subject to generic competition, the market for our customers’ products could be significantly adversely affected, which could have an adverse effect on our results of operations and financial condition. We attempt to mitigate these risks by making our offerings available to generic as well as branded manufacturers and distributors, but there can be no assurance that we will be successful in marketing these offerings.
Our offerings or our customers’ products may infringe on the intellectual property rights of third parties.
From time to time, third parties have asserted intellectual property infringement claims against us and our customers, and there can be no assurance that third parties will not assert infringement claims against either us or our customers in the future. While we believe that our offerings do not infringe in any material respect upon proprietary rights of other parties, and that meritorious defenses would exist with respect to any assertion to the contrary, there can be no assurance that we could successfully avoid being found to infringe on the proprietary rights of others. Patent applications in the United States and certain other countries are generally not publicly disclosed until the patent is issued or published, and we and our customers may not be aware of currently filed patent applications that relate to our or their products, offerings, or processes. If patents later issue on these applications, we or they may be found liable for subsequent infringement. There has been substantial litigation in the pharmaceutical and biotechnology industries with respect to the manufacture, use, and sale of products that are the subject of conflicting patent rights.
Any claim that our offerings or processes infringe third-party intellectual property rights (including claims arising through our contractual indemnification of our customers), regardless of the claim’s merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail against any such claim given the complex technical issues and inherent uncertainties in intellectual property matters. If any such claim results in an adverse outcome, we could, among other things, be required to: pay substantial damages (potentially including treble damages in the U.S.); cease the manufacture, use, or sale of the infringing offerings or processes; discontinue the use of the infringing technology; expend significant resources to develop non-infringing technology; license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms or at all; and lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others.
In addition, our customers’ products may be subject to claims of intellectual property infringement and such claims could materially affect our business if their products cease to be manufactured or they have to discontinue the use of the infringing technology.
Any of the foregoing could affect our ability to compete or have a material adverse effect on our business, financial condition, and results of operations.
Events that diminish, tarnish, or otherwise damage our brand may have an adverse effect on our future financial condition and results of operations.
We have built a strong brand in “Catalent,” with high overall and generally favorable awareness of the brand in our established markets and with target customers. Our brand identity is a competitive advantage for us in sales and marketing, which is evidenced by our customer mix among top branded drug, generics, biologics, and consumer health marketers. We have spent and continue to spend substantial time, money, and other resources to establish both our brand awareness and a favorable perception of our brand in relevant markets. Among other strategies, we participate in major international trade shows in our established markets and ensure visibility into our offerings through a comprehensive print and on-line advertising and publicity program. It is possible that a single event, or aggregation of several events, may diminish, tarnish, or otherwise damage our brand and adversely affect our future financial condition and results of operations.
For example, meaningful interruptions to our ability to reliably supply one or more customers with products on time, whether as a result of supply chain disruptions, manufacturing delays or defects, or the need to address regulatory requirements at our facilities, may diminish our customers’ confidence in our ability to timely meet our commitments, thereby damaging our brand. In addition, we are subject to various local, state, federal, national, and transnational laws and regulations, including the operating, quality, and security standards of the FDA, the DEA, and similar bodies of the U.K., the E.U., and other comparable agencies around the world. Highly public or significant negative reports or findings from a regulatory agency with respect to one or more manufacturing or quality defects in our operations, inspections of our facilities, or other routine reviews could cause negative public perception of our operations, negatively impacting our brand, and adversely affecting our financial condition and results of operations. In addition, many of the other risks we face, including those described elsewhere in “Risk Factors” could diminish, tarnish, or otherwise damage our brand.
Our results of operations are subject to fluctuations in the costs, availability, and suitability of the components of the products we manufacture, including active pharmaceutical ingredients, excipients, purchased components, and raw materials, and other supplies or equipment we need to run our business.
We depend on various active pharmaceutical ingredients, components, compounds, raw materials, and energy supplied primarily by third parties for our offerings. Our customers also frequently provide us with their active pharmaceutical or biologic ingredient for formulation or incorporation in the finished product and may supply other raw materials as well. It is possible that any of our or our customers’ supplier relationships could be interrupted due to changing regulatory requirements, import or export restrictions, natural disasters, international supply disruptions, including those caused by public health emergencies, wars, geopolitical issues, operational or quality issues at the suppliers’ facilities, and other events, or could be terminated in the future.
For example, gelatin, a critical component for manufacturing many of our softgel formats is only available from a limited number of sources. In addition, much of the gelatin we use is bovine-derived. Past concerns of contamination from bovine spongiform encephalopathy have narrowed the number of possible sources of particular types of gelatin. If there were a future disruption in the supply of gelatin or any other key raw material used to manufacture our products, we may not be able to obtain an adequate alternative supply. If future restrictions or other developments limit our ability to obtain a key material, any such restriction or development could hinder our ability to timely supply our customers with products, and the use of alternative material could be subject to lengthy and uncertain formulation, testing, and regulatory approval.
In addition, certain of our inputs are currently sole-sourced, so any disruption related to such a supplier is more likely to have an impact on our operations. Replacing a sole-source supplier of a production input to a medicine requiring marketing approval may be impossible or time-consuming, due to the rigorous standards we are obliged to apply to any new supplier.
Any sustained interruption in our receipt of adequate supplies could have an adverse effect on our business and results of operations. In addition, while we have processes intended to reduce volatility in component and material pricing, we may not be able to successfully manage price fluctuations, and future price fluctuations or shortages may have an adverse effect on our results of operations.
Our goodwill has been subject to impairment and may be subject to further impairment in the future, which could have a material adverse effect on our results of operations, financial condition, or future operating results.
We perform an annual goodwill impairment test for each reporting unit on April 1, or more frequently if indicators for potential impairment exist. Indicators that are considered include significant changes in performance relative to expected operating results, significant negative industry or economic trends, or a significant decline in our stock price and/or market capitalization for a sustained period of time. In addition, we assess the current and future economic outlook for our reporting units in our Pharma and Consumer Health and Biologics segments during the fiscal year. While we believe the assumptions used in determining whether there was impairment and the amount of any resulting impairment were reasonable and commensurate with the views of a market participant, changes in key assumptions in the future, including increasing the discount rate, lowering forecasts for revenue and operating margin, or lowering the long-term growth rate, could result in additional charges; similarly, one or more changes in these assumptions in future periods due to changes in circumstances could result in future impairments in this reporting unit or other reporting units. We have incurred impairment charges in the past, and we cannot predict if or when additional future goodwill impairments may occur. For example, for the three months ended March 31, 2023, we recorded a goodwill impairment charge of $210 million in the Consumer Health reporting units within our Pharma and Consumer Health segment. In addition, for the three months ended September 30, 2023, we recorded goodwill impairment charges of $689 million associated with the Consumer Health and Biomodalities reporting units in our Pharma and Consumer Health and Biologics segments, respectively. Any goodwill impairments could have material adverse effects on our operating income, net assets, or our cost of, or access to, capital, which could harm our business. See Note 4, Goodwill and Note 20, Subsequent Events, “Impairment of Goodwill” to our consolidated financial statements as of and for the fiscal year ended June 30, 2023 (our “Consolidated Financial Statements”) for more details.
Changes in market access or healthcare reimbursement for, or public sentiment towards our customers’ products in the U. S. or internationally, or other changes in applicable policies regarding the healthcare industry, could adversely affect our results of operations and financial condition by affecting demand for our offerings.
The healthcare industry has changed significantly over time, and we expect the industry to continue to evolve. Some of these changes, such as ongoing healthcare reform, including with respect to reforming drug pricing, adverse changes in governmental or private funding of healthcare products and services, legislation or regulations governing patient access to care and privacy, or the delivery, pricing, or reimbursement approval of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to change the amount of our offerings that they purchase or the price they are willing to pay for these offerings. In particular, it is possible that future legislation in the U.S. may affect or put a cap on future pricing of pharmaceutical and biotechnology products. While we are unable to predict the likelihood of changes to U.S. and other international laws affecting pharmaceutical and biotechnology products, any substantial revision of applicable healthcare legislation could have a material adverse effect on the demand for our customers’ products, which in turn could have a negative impact on our results of operations, financial condition, or business. Changes in the healthcare industry’s pricing, selling, inventory, distribution, or supply policies or practices, or in public or government sentiment for the industry as a whole, could also significantly reduce our revenue and results of operations. In particular, volatility in individual product demand may result from changes in public or private payer reimbursement or coverage.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We have generated net operating losses (“NOLs”) (and acquired affiliates with pre-existing NOLs) or certain other tax attributes that have been, and continue to be, used to reduce taxable income. In the case of our NOL carryforwards (and new NOLs that may arise), they may be subject to a substantial limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and comparable provisions of state, local, and foreign tax laws due to changes in ownership of our company that may occur in the future. Under Section 382 of the Internal Revenue Code and comparable provisions of state, local, and foreign tax laws, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change by value in its equity ownership over a three-year period, the corporation’s ability to carry forward its pre-change NOLs to reduce its post-change income may be limited. In addition, we acquired companies that generated pre-acquisition NOLs for tax purposes that will also be subject to limitation under Section 382 and comparable provisions of state, local, and foreign tax laws. We may experience ownership changes in the future because of future changes in our stock ownership. As a result, our ability to use NOL carryforwards to reduce U.S. federal, state, local, and foreign taxable income we produce in the future years may be subject to limitations, which could result in increased future tax liability to us.
Changes to the estimated future profitability of the business may require that we establish an additional valuation allowance against all or some portion of our net deferred tax assets.
We have deferred tax assets for NOL carryforwards, certain other tax attributes, and other temporary differences. We currently maintain a valuation allowance for a portion of our U.S. net deferred tax assets and certain foreign net deferred tax assets. It is possible we may experience a decline in U.S. and foreign taxable income resulting from a decline in profitability of our relevant operations, an increased level of debt in the U.S., or other factors. In assessing our ability to realize our deferred
tax assets, we may conclude that it is more likely than not that some additional portion or all our deferred tax assets will not be realized. As a result, we may be required to record an additional valuation allowance against our deferred tax assets, which could adversely affect our effective income tax rate and therefore our financial results.
We depend on key personnel, and, if we are unable to attract, retain and motivate well-qualified employees, our business could be harmed.
We depend on our executive officers and other key personnel, including our technical personnel, to operate and grow our business and to develop new and enhanced offerings and technologies. The loss of any of these officers or other key personnel or a failure to attract and retain suitably skilled technical personnel could adversely affect our operations. In addition to our executive officers, we rely on approximately 170 senior employees to lead and direct our business. Our senior leadership team is comprised of our subsidiaries’ executive officers and other vice presidents and directors who hold critical positions and possess specialized talents and capabilities that give us a competitive advantage in the market. Any change in our senior leadership team in particular, even in the ordinary course of business, may be disruptive to our business. While we seek to manage these transitions carefully, such changes may result in a loss of institutional knowledge and cause disruptions to our business and new executive hires may fail to achieve any anticipated benefits. If our senior leadership team fails to work together effectively or execute our plans and strategies on a timely basis as a result of management turnover or otherwise, our business could be harmed. In addition, we employ more than 3,000 scientists and technicians whose areas of expertise and specialization cover subjects such as advanced delivery, biologics and gene and cell therapy formulation and manufacturing. Many of our sites and laboratories are located in competitive labor markets; therefore, global and regional competitors and, in some cases, customers and suppliers compete for the same skills and talent as we do. If we are unable to hire and retain sufficient qualified employees, our ability to conduct and expand our business could be meaningfully reduced.
We may acquire businesses and offerings that complement or expand our business or divest non-strategic businesses or assets. We may not be able to complete desired transactions, and such transactions, if executed, pose significant risks, including risks relating to our ability to successfully and efficiently integrate acquisitions or execute on dispositions and realize anticipated benefits therefrom. The failure to execute or realize the full benefits from any such transaction could have a negative effect on our operations and profitability.
Our future success may depend in part on opportunities to buy or otherwise acquire rights to other businesses or technologies, enter into joint ventures or otherwise enter into strategic arrangements with business partners that could complement, enhance, or expand our current business or offerings and services or that might otherwise offer us growth opportunities, or divest assets or an ongoing business. We face competition from other companies in pursuing acquisitions and similar transactions in the pharmaceutical and biotechnology industry. Our ability to complete transactions may also be limited by applicable antitrust and trade laws and regulations in the U.S. and other jurisdictions in which we or the operations or assets we seek to acquire carry on business. To the extent that we are successful in making acquisitions, we expend substantial amounts of cash, incur debt, or assume loss-making divisions as consideration. We or the purchaser of a divested asset or business may not be able to complete a desired transaction for any number of reasons, including a failure to secure financing.
Any acquisition that we are able to identify and complete may involve a number of risks, including, but not limited to, the diversion of management’s attention to integrate the acquired businesses or joint ventures, the possible adverse effects on our operating results during the integration process, the potential loss of customers or employees in connection with the acquisition, delays or reduction in realizing expected synergies, unexpected liabilities, and our potential inability to achieve our intended objectives for the transaction. In addition, we may be unable to maintain uniform standards, controls, procedures, and policies, which may lead to operational inefficiencies.
To the extent that we are not successful in completing desired divestitures, we may have to expend cash, incur debt, or continue to absorb the costs of loss-making or under-performing divisions. Any divestiture, whether we complete it or not, may involve numerous risks, including diversion of management’s attention, a negative impact on our customer relationships, costs associated with maintaining its business during the disposition process, and the costs of closing and disposing of the affected business or transferring remaining portions of the operations of the business to other facilities.
We provide services incorporating various advanced modalities, including protein and plasmid production and cell and gene therapies, and these modalities relate to relatively new modes of treatment that may be subject to changing public opinion, continuing research, and increased regulatory scrutiny, each of which may affect our customers’ abilities to conduct their businesses or obtain regulatory approvals for their therapies, and thereby adversely affect these offerings.
Cell and gene therapy, with or without the use of iPSCs or plasmids, remain relatively new means for treating disease and other medical conditions, with only a few cell and gene therapies approved to date in the U.S., the E.U., or elsewhere. Public
perception may be influenced by claims that cell or gene therapies are unsafe, and cell or gene therapy may not gain the acceptance of the public or the medical community. In addition, ethical, social, legal, and cost-benefit concerns about cell or gene therapy, genetic testing, genetic research, and the use of stem cells or materials derived from viruses could result in additional regulations or limitations or even outright prohibitions on certain cell or gene therapies or related products. Various regulatory and legislative bodies have expressed an interest in, or have taken steps towards, further regulation of various biotechnologies, including cell and gene therapies. More restrictive regulations or claims that certain cell or gene therapies are unsafe or pose a hazard could reduce our customers’ use of our services. We can provide no assurance whether legislative changes will be enacted, regulations, policies, or guidance changed, or interpretations of existing strictures by agencies or courts changed, or what the impact of such changes, if any, may be.
We may become subject to litigation, other proceedings, and government investigations relating to us or our operations, and the ultimate outcome of any such matter may have an impact on our business, prospects, financial condition, and results of operations.
We may become subject to litigation or government investigations in the U.S and foreign jurisdictions that may arise from the conduct of our business. We generally intend to defend ourselves vigorously against any litigation proceeding or government investigation; however, we cannot be certain of the ultimate outcomes of any legal proceedings or investigations that may arise in the future. Resolution of these types of matters against us may result in, among other things, the payment of significant fines, judgments, penalties or settlements, the imposition of administrative remedies, changes and additional costs to our business operations to avoid risks associated with such litigation or investigations, reputational damage and decreased demand for our products, and the expenditure of significant time and resources that would otherwise be available for operating our business, all of which may have an impact on our business, prospects, financial condition, or results of operations.
We are subject to environmental, health, and safety laws and regulations, which could increase our costs or restrict our operations in the future.
Our operations are subject to a variety of environmental, health, and safety laws and regulations, including those of the EPA, OSHA, and equivalent local, state, and national regulatory agencies in the jurisdictions in which we operate. Any failure by us to comply with environmental, health, and safety requirements could result in the limitation or suspension of production or subject us to monetary fines, civil or criminal sanctions, or other future liabilities in excess of our reserves. In particular, we are subject to laws and regulations governing the destruction and disposal of raw materials, byproducts of our manufacturing operations, and non-compliant products, the handling of regulated material included in our offerings, and the disposal of our products or their components at the end of their useful lives. In addition, compliance with environmental, health, and safety requirements could restrict our ability to expand our facilities or require us to acquire costly environmental or safety control equipment, incur other significant expenses, or modify our manufacturing processes. Our manufacturing facilities may use, in varying degrees, hazardous substances in their processes. These substances include, among others, chlorinated solvents, and in the past chlorinated solvents were used at one or more of our facilities, including a number we no longer own or operate. As at our current facilities, contamination at such formerly owned or operated properties can result and has resulted in liability to us. In the event of the discovery of new or previously unknown contamination either at our facilities, facilities we acquire in the future, or at third-party locations, including facilities we formerly owned or operated, the issuance of additional requirements with respect to existing contamination, or the imposition of other cleanup obligations for which we are responsible, we may be required to take additional, unplanned remedial measures for which we have not recorded reserves. We are conducting monitoring and cleanup of contamination at certain facilities currently or formerly owned or operated by us, and such activities may result in unanticipated costs or management distraction.
We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
We have nearly 17,800 individuals providing services for us worldwide, including approximately 10,500 service providers in North America, 5,700 in Europe, 1,000 in South America, and 600 in the Asia-Pacific region. Certain employees at one of our North American facilities are represented by a labor organization, and national works councils or labor organizations are active at our European facilities and certain of our other facilities consistent with local labor environments and laws. Our management believes that our employee relations are satisfactory. However, further organizing activities, collective bargaining, or changes in the regulatory framework for employment may increase our employment-related costs or may result in work stoppages or other labor disruptions. Moreover, as employers are subject to various employment-related claims, such as individual and class actions relating to alleged employment discrimination and wage-hour and labor standards issues, such actions, if brought against us and successful in whole or in part, may affect our ability to compete or have a material adverse effect on our business, financial condition, and results of operations.
We have partnered with, and may continue to partner with, companies that focus on the development of cannabis-based prescription medicines and cannabinoid drug therapies solely to the extent such companies’ programs comply with all U.S. and non-U.S. equivalent laws, which is a business that attracts a high-level of public and media interest and an industry in which laws and regulations are constantly evolving.
We have partnered with, and may continue to partner with, companies that focus on the development of cannabis-based prescription medicines and high-value cannabinoid drug therapies, which may attract a high-level of public and media interest, and in the event of any resultant adverse publicity, our reputation may be harmed. In addition, the constant evolution of laws and regulations affecting the research and development of cannabinoid-based pharmaceutical products and treatments could detrimentally affect our business. Laws and regulations related to the therapeutic uses of cannabinoids are subject to changing interpretations. These changes may require us to incur costs associated with legal and compliance fees and ultimately require us to alter our business plan. Furthermore, violations or alleged violation of these laws could disrupt our business and result in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations or applications of laws and regulations and it is possible that new laws and regulations may be enacted in the future that will be directly applicable to our business. In addition, regulatory approval of product candidates that contain controlled substances may generate public controversy or scrutiny. Adverse publicity from misuse or adverse side effects of cannabis-based prescription medicines may adversely affect the commercial success or market penetration achievable by such product candidates which could result in an adverse effect on our operations.
Certain of our pension plans are underfunded, and additional cash contributions we may make to increase the funding level will reduce the cash available for our business, such as the payment of our interest expense.
Certain of our current and former employees in the U.S., the U.K., Germany, France, Japan, Belgium, and Switzerland are participants in defined benefit pension plans that we sponsor. As of June 30, 2023, the underfunded amount of our pension plans on a worldwide basis was $44 million, primarily related to our pension plans in the U.K. and Germany. In addition, we have an estimated obligation of $38 million, as of June 30, 2023, related to our withdrawal from a multiemployer pension plan in which we formerly participated. In general, the amount of future contributions to the underfunded plans will depend upon asset returns, applicable actuarial assumptions, prevailing and expected interest rates, and other factors, and, as a result, the amount we may be required to contribute in the future to fund the obligations associated with such plans may vary. Such cash contributions to the plans will reduce the cash available for our business, including the funds available to pursue strategic growth initiatives or the payment of interest expense on our indebtedness.
Our global operations are subject to economic and political risks, including risks resulting from continuing inflation, disruptions to global supply chains, destabilization of a regional or national banking system, from the Ukrainian-Russian war, or the effect of the evolving nature of the recent war in Gaza between Israel and Hamas, which could affect the profitability of our operations or require costly changes to our procedures.
We conduct our operations in various regions of the world, including North America, South America, Europe, and the Asia-Pacific region. Global and regional economic and political developments affect businesses such as ours in many ways. Our operations are subject to the effects of global and regional competition. Our global operations are also affected by local economic environments, including inflation, recession, and changes to the availability of capital our customers may need to continue or expand their business with us. Political changes, some of which may be disruptive, and related hostilities can interfere with our supply chain, our customers, and some or all of our activities in a particular location. While some of these risks can be hedged using derivatives or other financial instruments and some are insurable, such mitigating measures may be unavailable, costly, or unsuccessful.
Beginning in fiscal 2022, much of the world, including the U.S. and the E.U., began to experience inflation levels not seen in more than 30 years. As a result, prices for many of our inputs have risen, in some cases dramatically. If inflation stays at elevated levels or increases, we may not be able to mitigate the impact of the increased costs we will bear through corresponding price increases to our customers, which could have an impact on our results of operations and financial condition.
The outbreak of hostilities between Israel and Hamas has the potential for further disruption of economic markets, particularly if the war expands to include other state actors. The Company has no operations in the Middle East at the current time. However, events there could result in political turmoil in Europe, which could directly affect our operations there, and could also adversely affect the business that we conduct with customers in the Middle East and other parts of the world. Also, the turmoil in the Middle East could have global economic effects that are the same as or more severe than those of the war in the Ukraine, with similar consequences for our business.
As a global enterprise, fluctuations in the exchange rates of the U.S. dollar, our reporting currency, against other currencies could have a material adverse effect on our financial performance and results of operations.
As a company with significant operations outside of the U.S., certain revenues, costs, assets, and liabilities, including our euro-denominated 2.375% Senior Notes due 2028 (the “2028 Notes”), are denominated in currencies other than the U.S. dollar, which is the currency that we use to report our financial results. As a result, changes in the exchange rates of these or any other applicable currency to the U.S. dollar will affect our revenues, earnings, and cash flows. There has been, and may continue to be, volatility in currency exchange rates affecting the various currencies in which we do business. Such volatility and other changes in exchange rates could result in unrealized and realized exchange losses, despite any effort we may undertake to manage or mitigate our exposure to fluctuations in the values of various currencies.
Tax legislative or regulatory initiatives, new interpretations or developments concerning existing tax laws, or challenges to our tax positions could adversely affect our results of operations and financial condition.
We are a large multinational enterprise with operations in the U.S. and more than a dozen other countries across North and South America, Europe, and the Asia-Pacific region, and we do business with suppliers and customers in many additional regions. As such, we are subject to the tax laws and regulations of the U.S. federal, state, and local governments and of many jurisdictions outside of the U.S. From time to time, various legislative initiatives may be proposed that could adversely affect our tax positions, and existing legislation may be subject to additional regulatory changes or new interpretations. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these initiatives.
In addition, U.S. federal, state, local, and foreign tax laws and regulations are extremely complex and subject to varying interpretations. We are subject to regular examination of our income tax returns by various tax authorities. Examinations or changes in laws, rules, regulations, or interpretations by taxing authorities could result in adverse impacts to tax years open under statute or to our operating structures currently in place. It is possible that the outcomes from these examinations or changes in laws, rules, regulations, or interpretations by taxing authorities will have a material adverse effect on our financial condition or results of operations.
We use advanced information and communication systems to run our operations, compile and analyze financial and operational data, and communicate among our employees, customers, and counterparties, and the risks generally associated with information and communications systems could adversely affect our results of operations. We continuously work to install new, and upgrade existing, systems and provide employee awareness training around phishing, malware, and other cyber security risks to enhance the protections available to us, but such protections may be inadequate to address malicious attacks or inadvertent compromises affecting data security or the operability of such systems.
We rely on information systems in our business to obtain, process, analyze, and manage data to:
•facilitate the manufacture and distribution of thousands of inventory items in, to, and from our facilities;
•receive, process, and ship orders on a timely basis;
•manage the accurate billing and collections for more than one thousand customers;
•create, compile, and retain testing and other product-, manufacturing-, or facility-related data necessary for meeting our and our customers’ regulatory obligations.
•manage the accurate accounting and payment for thousands of vendors and our employees;
•schedule and operate our global network of development, manufacturing, and packaging facilities;
•document various aspects of our activities, including the agreements we make with suppliers and customers;
•compile financial and other operational data into reports necessary to manage our business and comply with various regulatory or contractual obligations, including obligations under our bank loans and other indebtedness, the federal securities laws, the Internal Revenue Code, and other applicable state, local, and ex-U.S. tax laws; and communicate among our nearly 19,000 workers spread across dozens of facilities over four continents.
We face various security threats on a regular basis, including ongoing cyber security threats to and attacks on our information technology infrastructure. We deploy defenses against such threats and attacks and work to secure the integrity of our data systems using techniques, hardware, and software typical of companies of our size and scope. Despite our security measures, however, our information technology and infrastructure may be vulnerable to attacks by increasingly sophisticated intruders or others who try to cause harm to or interfere with our normal use of our systems. They are also susceptible to breach due to employee error, malfeasance, or other disruptions. Our suppliers, contractors, service providers, and other third parties with whom we do business also experience cyber threats and attacks that are similar in frequency and sophistication. In many cases, we have to rely on the controls and safeguards put in place by our suppliers, contractors, service providers, and other third parties to defend against, respond to, and report these attacks. We cannot know the potential impact of future cyber incidents, which vary widely in severity and scale. There can be no assurance that the various procedures and controls we
utilize to mitigate these threats will be sufficient to prevent disruptions to our systems, in part because (i) cyber-attack techniques change frequently and, at times, new techniques are not recognized until launched, and (ii) cyber-attacks can originate from a wide variety of sources. Our results of operations could be adversely affected if these systems are interrupted or damaged or fail for any extended period.
Efforts by governments around the world or our customers to secure or promote the benefits of locally produced supplies, as well as other risks associated with foreign operations, may render the locations of certain of our facilities less desirable, affecting their utilization rates and therefore our profitability, financial condition, or results of operations.
We serve more than 1,200 customers in more than 80 countries, with 35% of our fiscal 2023 net revenue coming from outside the U.S., and we operate facilities in more than a dozen U.S. states and more than a dozen countries outside the U.S. The global nature of our sales and operations subjects us to risks, including risks arising from efforts by governments around the world or our customers to secure or promote the benefits of locally produced supplies, higher import duties in some countries that may favor locally produced supplies, the differing impacts of varying economic conditions in different jurisdictions, changes in tariffs and trade relations, unexpected changes in regulatory requirements, certification requirements, environmental regulations, reduced protection for intellectual property rights in some countries, potentially adverse tax consequences, and political and economic instability. If one or more of these risks is realized, it could have a material adverse impact on our utilization rates for certain of our facilities, and therefore our profitability, financial condition, or results of operations.
Artificial intelligence-based platforms present new risks and challenges to our business.
Artificial intelligence, or AI, based platforms are increasingly being used in the biopharmaceutical, pharmaceutical, and consumer health industries. We are committed to providing a safe and secure environment for our personnel, our business partners, and our customers, including the responsible use of AI chatbots and generative AI data processor products (“AI Systems”). We have developed policies governing the use of AI Systems to help reasonably ensure that such AI Systems are used in a trustworthy manner by our employees, contractors, and authorized agents and that our assets, including intellectual property, competitive information, personal information we may collect or process, and customer information, are protected. Any failure by our personnel, contractors, or other agents to adhere to our established policies could violate confidentiality obligations or applicable laws and regulations, jeopardize our intellectual property rights, cause or contribute to unlawful discrimination, or result in the misuse of personally identifiable information or the injection of malware into our systems, any of which could have a material adverse effect on our business, results of operations, and financial condition.
The use of AI Systems by our business partners with access to our confidential information, including trade secrets, may continue to increase and could lead to the release of such information, which could negatively impact us, including our ability to realize the benefits of our intellectual property. The use of AI Systems by our business partners may lead to novel and urgent cybersecurity risks, which could have a material adverse effect on our operations and reputation as well as the operations of any of our business partners. We may also face increased competition from other companies that are using AI Systems, some of whom may develop more effective methods than we and any of our business partners have, which could have a material adverse effect on our business, results of operations, or financial condition.In addition, uncertainties regarding developing legal and regulatory requirements and standards may require significant resources to modify and maintain business practices to comply with U.S. and non-U.S. laws concerning the use of AI and AI Systems, the nature of which cannot be determined at this time.
Our cash, cash equivalents, and financial investments could be adversely affected if the financial institutions in which we hold our cash, cash equivalents, and financial investments fail.
We regularly maintain cash balances at third-party financial institutions in excess of the insurance limit of the Federal Deposit Insurance Corporation (the “FDIC”) and other countries’ deposit insurance systems.
The FDIC took control and was appointed receiver of Silicon Valley Bank and New York Signature Bank (collectively, the “Failed Banks”) on March 10, 2023 and March 12, 2023, respectively. We do not have any direct exposure to either of the Failed Banks. However, if banks and financial institutions where we maintain large cash balances, cash equivalents, or financial investments enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents, and financial investments could be threatened and may have a material adverse impact on our business, prospects, financial condition, or results of operations. Moreover, events such as the closure of large regional or national banks like the Failed Banks, in addition to other global macroeconomic conditions, may cause further turbulence and uncertainty in the capital markets.
Risks Relating to Our Indebtedness
The size of our indebtedness and the obligations associated with it could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or in our industry or to deploy capital to grow our business, expose us to interest-rate risk to the extent of our variable-rate debt, or prevent us from meeting our obligations under our indebtedness. These risks may be increased in a recessionary environment, particularly as sources of capital may become less available or more expensive.
As of June 30, 2023, on a consolidated basis, we had $4.85 billion (U.S. dollar equivalent) of total indebtedness outstanding, consisting of $1.92 billion of secured indebtedness under our senior secured credit facilities and $2.93 billion of senior unsecured indebtedness, including $500 million aggregate principal amount of 5.000% U.S. dollar-denominated Senior Notes due 2027 (the “2027 Notes”), €825 million aggregate principal amount of the 2028 Notes, $550 million aggregate principal amount of U.S. dollar-denominated 3.125% Senior Notes due 2029 (the “2029 Notes”), and $424.3$650 million aggregate principal amount of U.S. dollar-denominated 3.500% Senior Notes due 2030 (the “2030 Notes” and, together with the 2027 Notes, the 2028 Notes, and the 2029 Notes, the “Senior Notes”). As of June 30, 2023, we also held $341 million in finance lease obligations. We also had the ability to incur significant additional indebtedness, including via $594 million of Notes; an additional $188unutilized capacity under our $1.10 billion secured revolving credit facility, which part of our senior secured credit facilities (the “Revolving Credit Facility”) following borrowings of $500 million of un-utilized capacity and $12.0$6 million of outstanding letters of credit undercredit.
The multi-billion-dollar size of our revolving credit facility.
Our high degree of leverageindebtedness could have important consequences for us, including:
•increasing our vulnerability to adverse economic, industry, or competitive developments;
•exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our senior secured credit facilities, and our Senior Euro-denominated Notes, are at variable rates of interest;
•exposing us to the risk of fluctuations in exchange rates because certain of our borrowings, including certain of our senior secured term loan facilities, are denominated in euros;euro-denominated notes;
•making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an eventone or more events of default under the agreements governing such indebtedness or, through cross-defaults, in agreements governing other indebtedness;
•restricting us from making strategic acquisitions or capital investments or causing us to make non-strategic divestitures;
•limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
•limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who arehave less highly leveragedindebtedness relative to their size and who, therefore, may be able to take advantage of opportunities that our leveragehigher level of indebtedness prevents us from exploiting.exploiting; and
•limiting the types of investors who are willing to invest in our Common Stock, as certain investors prefer to invest in companies with lower levels of indebtedness relative to other financial metrics.
Our total interest expense, net was $90.1$186 million, $88.5$123 million, and $105.0$110 million for fiscal years 2017, 20162023, 2022, and 2015,2021, respectively. After taking into consideration our ratio of fixed-to-floating ratefixed-to-floating-rate debt, an increaseincluding as a result of 100our June 2023 amendment to our interest-rate swap agreement with Bank of America N.A., and assuming that the Secured Overnight Financing Rate (“SOFR”) is above any applicable minimum floor, each change of 50 basis points in floatinginterest rates would increase ourresult in a change of $7 million in annual interest expense by approximately $12.6 million.on the indebtedness under our senior secured credit facilities.
Our interest expense may continue to increase as policymakers combat the inflation that has taken hold since fiscal 2022 through interest-rate increases on benchmark financial products that can affect the interest rates on our variable-rate debt.
The size of our indebtedness, alone or combined with volatility in our reported financial results, may cause suppliers or customers to opt not to do business with us or to do so under less attractive terms, or render it more costly or time-consuming to secure supplies or attract customers, which could affect our financial condition and results of operations.
There can be no assurance as to the effect that the size of our indebtedness, alone or combined with volatility in our reported financial results, will have on our relationships with our suppliers or customers. To the extent that the size of our indebtedness, alone or combined with volatility in our reported financial results, results in the tightening of payment or credit terms, increases in the price of supplied goods, or the loss of one or more major suppliers or customers, it could have a material adverse effect on our business, financial condition, liquidity, or results of operations.
Despite our high indebtedness level, we and our subsidiaries willare still be able to incurcapable of incurring significant additional debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and, under certain circumstances, the amount of indebtedness that we may incur while remaining in compliance with these restrictions could be substantial. In addition, as of June 30, 2023, we had approximately $594 million available to us for borrowing, subject to certain conditions, under our Revolving Credit Facility. If new debt is added to the current debt levels for which we or our subsidiaries are responsible, the risks associated with debt we currently face would increase.
Our interest expense on our variable-rate debt may continue to increase if and to the extent that policymakers combat inflation through interest-rate increases on benchmark financial products.
Borrowings under our variable-rate debt are at variable rates of interest and are based upon benchmarks that are subject to potential change or elimination, and therefore expose us to interest-rate risk. If interest rates increase, our debt service obligations on our variable-rate debt will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
The agreements governing our outstanding indebtedness contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit the ability of Operating Company and those of its subsidiaries to which these covenants apply (which ourOperating Company’s Amended and Restated Credit Agreement, dated as of May 20, 2014 (as amended, the "Credit Agreement"“Credit Agreement”) calls "restricted subsidiaries"“restricted subsidiaries”) to, among other things:
•incur additional indebtedness and issue certain preferred stock;
•pay certain dividends on, repurchase, or make distributions in respect of capital stock or make other restricted payments;
•pay distributions from restricted subsidiaries;
•issue or sell capital stock of restricted subsidiaries;
•guarantee certain indebtedness;
•make certain investments;
•sell or exchange certain assets;
•enter into transactions with affiliates;
•create certain liens; and
•consolidate, merge, or transfer all or substantially all of theirour assets and the assets of theirour subsidiaries when considered on a consolidated basis.
A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross-default provisions, and, in the case of our revolving credit facility,Revolving Credit Facility, permit the lenders to cease making loans to us.
Despite the limitations in our debt agreements, we retain the ability to take certain actions that may interfere with our ability to timely pay our substantial indebtedness.
The covenants in the Credit Agreement and in the several indentures governing our Senior Notes (collectively, the “Indentures”) contain various exceptions to the limitations they otherwise impose on our ability and the ability of our restricted subsidiaries to take the various actions described in the prior risk factor. For example, if the Senior Notes have investment-grade ratings and we are not in default under these agreements, certain of these covenants will not apply, including the covenants restricting certain dividends and other payments, the covenants concerning the incurrence of indebtedness, and the covenants limiting guarantees of indebtedness by our restricted subsidiaries. In addition, the covenants restricting dividends and other distributions by us, purchases or redemption of certain equity securities, and prepayment, redemption, or repurchase of any subordinated indebtedness are subject to various exceptions.
We may not be able to pay our indebtedness when it becomes due.
Our ability to pay principal and interest on our variable-rate debt and to satisfy our other debt obligations will depend upon, among other things:
•our future financial and operating performance, which will be affected by prevailing economic, industry, and competitive conditions and financial, business, legislative, regulatory, and other factors, many of which are beyond our control; and
•our future ability to borrow under the Revolving Credit Facility, the availability of which depends on, among other things, our complying with applicable covenants in our Credit Agreement.
We cannot assure you that our business will generate cash flow from operations, or that we will be able to draw under the Revolving Credit Facility or otherwise, in an amount sufficient to fund our liquidity needs, including the payment of principal and interest on the Senior Notes, our term loans, our existing borrowings under our Revolving Credit Facility, and our other debt obligations. If our cash flows and other capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value, on a timely basis to meet our needs, or at all. Furthermore, any proceeds that we could realize from any or all such dispositions may not be adequate to meet our debt service obligations then due. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, could result in a material adverse effect on our business, results of operations, or financial condition. If we cannot make scheduled payments on our indebtedness, we will be in default, and, as a result of existing “cross-default” terms in our indebtedness or otherwise, all outstanding principal and interest may be declared to be due and payable, the lenders under our variable-rate debt could terminate their commitments to loan money, our secured lenders (including the lenders under our senior secured credit facilities or the holders of the Senior Notes) could foreclose against the assets securing their loans and the Senior Notes, and we could be forced into bankruptcy or liquidation.
We are currently using and may in the future use derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable-rate indebtedness or changes in currency exchange rates, and any such instrumentsinstrument may expose us to risks related to counterparty credit worthiness or non-performance of these instruments.
We have executed and may enter into additional or new interest-rate swap agreements, currency swap agreements, or other hedging transactions in an attempt to limit our exposure to adverse changes in variable interest rates and currency exchange rates. Such instruments may result in economic losses if, for example, prevailing interest rates decline to a point lower than any applicable fixed-rate commitment. Any such swap will expose us to credit-related risks that, if realized, could adversely affect our results of operations or financial condition.
Risks RelatedRelating to Ownership of Our Common Stock
We do not presently maintain effective disclosure controls and procedures due to material weaknesses we have identified in our internal control over financial reporting. Failure to remediate these material weaknesses or any other material weakness or significant deficiencies has resulted in a revision of our financial statements, in the future could result in material misstatements in our financial statements and has caused, and in the future could cause, us to fail to timely meet our periodic reporting obligations.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report on, and our independent registered public accounting firm is required to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to determine the adequacy of our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation if a weakness or deficiency is identified. Annually, we perform activities that include reviewing, documenting, and testing our internal control over financial reporting. Our failure to achieve and maintain effective disclosure controls and procedures and internal control has resulted in, and in the future could result in, misstated consolidated financial statements and restatements of previously issued financial statements related to prior periods and delays or a failure to meet our reporting obligations, which could cause investors to lose confidence in our reported financial information and could lead to a decline in our stock price. Additionally, ineffective or inadequate disclosures and internal control could expose us to increased risk of misuse of corporate assets or fraud, or subject us to litigation, regulatory investigations, or civil or criminal sanctions, including by the SEC or other regulatory authorities, or potential delisting from the NYSE or any other stock exchange on which we may list our Common Stock in the future.
As discussed below in “Item 9A. – Controls and Procedures,” due to certain inadequacies of our internal control over financial reporting, we have not been able to conclude on an ongoing basis that we have effective disclosure controls and procedures and internal control over financial reporting in accordance with legal requirements. For example, in the third quarter of fiscal 2023, management identified a material weakness in internal control related to revenue recognition at our Bloomington, Indiana facility during fiscal 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Due to this material weakness in internal control over financial reporting, we concluded that, as of June 30, 2022, our disclosure controls and procedures were not effective and that we did not maintain effective internal control over financial reporting.
In addition, in preparing our consolidated financial statements for the three and nine months ended March 31, 2023, management identified a separate material weakness in internal control over financial reporting resulting from ineffective information technology general controls in the areas of user access management, application change management, operating system and database logical access controls, and segregation of duties for key information technology systems that support our financial reporting process. As a result, we identified this ineffectiveness as an additional material weakness in our internal control over financial reporting as of March 31, 2023, and concluded that our disclosure control and procedures were not effective as of March 31, 2023. During the fourth quarter of fiscal 2023, we successfully completed the testing necessary to conclude that this material weakness has been remedied.
In preparing our audited financial statements for the fiscal year ended June 30, 2023, management identified (i) a material weakness in internal control over financial reporting related to the consolidated financial statement close process, and (ii) a material weakness in internal control over financial reporting related to inventory reconciliation at our Baltimore, Maryland facility. Due to these material weaknesses in internal control over financial reporting, we concluded that, as of June 30, 2023, our disclosure controls and procedures were not effective and that we did not maintain effective internal control over financial reporting.
The failure to maintain effective disclosure control and procedures and internal control as a result of the material weaknesses described above has resulted in significant expenses to remediate the disclosure and internal control deficiencies. In addition, as a result of the material weaknesses described above, we failed to timely file our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, and this Annual Report, and filed an Amendment to our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 to revise our consolidated financial statements as a result of the error in the periods impacted.
Management is actively engaged in the implementation of remediation efforts to address our remaining material weaknesses and control deficiencies. However, we may not be successful in promptly remediating these material weaknesses or be able to identify and remediate any additional control deficiency, including any material weakness, that may arise in the future. Management is currently unable to conclude, and may not be able to conclude in future periods, that our disclosure controls and procedures are effective due to the effects of various factors, which may, in part, include unremediated material weaknesses in internal control over financial reporting. If not remediated, any failure to establish and maintain effective disclosure control and procedures and internal control over financial reporting could result in material misstatements in our consolidated financial statements or cause us to fail to meet our reporting and financial obligations, each of which could have a material adverse effect on the confidence that stockholders, customers, or suppliers have in our financial reporting, which could materially harm our business, our financial condition, or the trading price of our Common Stock.
For further discussion of our material weaknesses, see “Item 9A. – Controls and Procedures.”
Our stock price has historically been and may change significantly,continue to be volatile, and youa holder of shares of our Common Stock may not be able to resell such shares of our common stock at or above the price yousuch stockholder paid, or at all, and you could lose all or part of yoursuch investment as a result.
The trading price of our common stockCommon Stock has been and continues to be volatile. Since shares of our common stock were offered for sale in our initial public offering on July 31, 2014 throughFor the three years ended June 30, 2017,2023, our common stockCommon Stock price ranged from
$18.92 to $38.73.$142.64 on September 9, 2021 and a low of $31.45 on May 15, 2023. The trading price of our common stockCommon Stock may be adversely affected due to a numberby any one or more of several factors, such as those listed above in "Risks Related“—Risks Relating to Our Business and Our Industry"Industry in Which We Operate” and the following:
•results of operations that vary from the expectations of securities analysts or investors;
•results of operations that vary from those of our competitors;
•changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts or investors;
•declines in the market prices of stocks generally, or those of pharmaceutical or other healthcare companies;
•strategic actions by us or our competitors;
•announcements by us or our competitors of significant contracts, new products, acquisitions, joint marketing relationships, joint ventures, other strategic relationships, or capital commitments;
•changes in general economic or market conditions or trends in our industry or markets;markets, such as increased inflation;
•changes in business or regulatory conditions or regulatory actions taken with respect to our business or the business of any of our competitors or customers;
•future sales of our common stockCommon Stock or other securities;securities we may issue in the future;
•investor perceptions of the investment opportunity associated with our common stockCommon Stock relative to other investment alternatives;
•any decision by securities analysts to not publish research or reports about our business or to downgrade our stock or our sector;
•additions or departures of key personnel;
•the public response to press releases or other public announcements by us or third parties, including our filings with or documentsinformation furnished to the SEC;
•announcements relating to litigation;or developments in litigation, including shareholder lawsuits;
•guidance, if any, that we provide to the public, any change in this guidance, or any failure to meet this guidance;
•the development and sustainabilityavailability of an active trading market for our stock;Common Stock;
•public response to changes in the COVID-19 pandemic and public perceptions as to the need for manufacture of certain COVID-19-related products and our role in the successful manufacture of such products;
•changes in the accounting principles we use to record our results or our application of these principles to our business; and
•other events or factors, including those resulting from natural disasters, hostilities, the war in Ukraine, acts of terrorism, geopolitical activity, public health crises, including pandemics, or responses to these events.
Broad market and industry fluctuations may adversely affect the market price of our common stock,Common Stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float or trading volume of our common stockCommon Stock is low, and the amount of public float on any given day can vary depending on whetherthe individual actions of our stockholders choose to hold for the long term.stockholders.
Following periods of market volatility, stockholders have been known to institute securities class action litigation in orderan attempt to recover theirany resulting losses. If we become involvedloss. In February 2023, a complaint styled City of Warwick Retirement System v. Catalent, Inc., et al., No. 23-cv-01108, was filed in New Jersey federal court against us and three of our then-officers purportedly on behalf of a putative “class” consisting of persons who purchased or otherwise acquired our securities between August 30, 2021 and October 31, 2022, inclusive, and on September 15, 2023, the Warwick complaint was amended (together with the original complaint, the “Warwick Complaint”), which expanded the class period to between August 30, 2021 and May 7, 2023, inclusive. The complaint purports to assert claims under Sections 10(b) and 20(a) of the Exchange Act, alleging that, unbeknownst to investors, the defendants purportedly engaged in accounting and channel stuffing schemes to pad our revenue and failed to disclose adverse facts that purportedly were known to or recklessly disregarded by defendants. Further, in August 2023, an alleged shareholder filed a derivative complaint styled Husty, et al. v. Carroll, et al., No. 23-cv-00891, in Delaware federal court against the current members of our board of directors, two former members of our board, and nominally against Catalent, Inc. The complaint mimics the allegations set out in the original complaint filed in the City of Warwick Retirement System action and claims that the alleged activities described there led to, and will continue to expose us to, costs and damages. Finally, in September 2023, an alleged shareholder filed a derivative complaint styled Brown, et al. v. Chiminski, et al., Case 3:23-cv-15722, in New Jersey federal court against certaincurrent members of our board of directors, two former members of our board, and nominally against Catalent, Inc. The complaint also mimics the allegations set out in the original complaint filed in the City of Warwick Retirement System action and claims that the alleged activities described there led to, and will continue to expose us to, costs and damages. See “Item 3 - Legal Proceedings” and Note 17, Commitments and Contingencies to the Consolidated Financial Statements for additional information. These litigations, and any additionalsecurities litigation, it could have a substantial cost and divert resources and the attention of senior management from our business regardless of the outcomeoutcomes of such litigation.litigations.
Because we have no plan to pay cash dividends on our common stockCommon Stock for the foreseeable future, you may not receive anyreceiving a return on youran investment in your stock unless you sell itour Common Stock may require a sale for a net price greater than that which youwhat was paid for it.
We currently intend to retain future earnings, if any, for future operations, expansion, and debt repayment and have no current plan to pay any cash dividend on our Common Stock for the foreseeable future. Our board of directors has also authorized a stock buyback program that we may use from time to time to purchase our common stock. Any future decision to pay a dividend in respect of our Common Stock, and the amount and timing of any futuresuch dividend, on shares of our common stock will be at the sole discretion of our board of
directors. Our board of directors may take into account, when deciding whether or how to pay a dividend, numeroussuch factors as they may deem relevant, including general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, possible future alternative deployments of our cash, our future capital requirements, and contractual, legal, tax, and regulatory restrictions and implications on the payment of dividends by us to our stockholdersholders of shares of our Common Stock or by our subsidiaries to us and such other factors as our board of directors may deem relevant.us. In addition, our ability to pay dividends is limited by covenants in the agreements governing our outstanding indebtedness and may be limited by covenants of any future indebtedness we or our subsidiaries incur. As a result, youa holder of a share of our Common Stock may not receive any return on ansuch investment in our common stock unless you sell our common stockit is sold for a price greater than that which youwas paid for it, taking into account any applicable commission or other costs of acquisition or sale.
If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our stock price and trading volume could decline.
The trading market for our common stock has been affected in part by the research and reports that industry and financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who cover us downgrade our stock or our industry, change their views regarding the stock of any of our competitors or other healthcare sector companies, or publish inaccurate or unfavorable research about our business, the market price of our stock could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
Future sales, or the perception of future sales, of common stock,our Common Stock, by us or our existing stockholders could cause the market price for our common stockCommon Stock to decline.
The sale of shares of our common stockCommon Stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock.Common Stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of August 24, 2017, 43,720 shares of our common stock, representing less than 1% of our total outstanding shares of common stock, are "restricted securities" within the meaning of the SEC's Rule 144 promulgated under the Securities Act ("Rule 144") and subject to certain restrictions on resale. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144.
In addition, 1,581,761 shares of common stock may become eligible for sale upon exercise of vested options. A total of 6,700,000 shares of common stock were reserved for issuance under the 2014 Omnibus Incentive Plan, of which 2,398,417 shares of common stock remain available for future issuance at August 25, 2017. These shares can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates.
The market price of shares of our common stockCommon Stock could drop significantly if the holders of theseour Common Stock sell their shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of shares of our common stock or other equity securities that we wish to issue. In the future, we may also issue our securities in connection with investments or acquisitions.acquisitions or to pay down debt. The number of shares of our common stockCommon Stock issued in connection with an investment or acquisitionissuable as a result could constitute a material portion of then-outstanding shares of our common stock,Common Stock, subject to limitations on issuance of new shares without stockholder approval imposed by the NYSE.NYSE (including any applicable requirement for stockholder approval) or restrictions set forth in the agreements governing our indebtedness. Any issuance of additional securities in connection with investments, acquisitions, or acquisitionsotherwise may result in dilution to you.the holders of shares of our Common Stock.
Anti-takeover provisions
We are no longer eligible to use the Form S-3 registration statement, which could impair our capital-raising activities.
As a result of our failure to timely file our periodic reports with the SEC, we are no longer eligible to use a Form S-3 registration statement. As a result of our late 10-Q filing, we are also no longer a “well-known seasoned issuer,” as such term is used in the SEC's regulations, which otherwise would allow us to, among other things, file automatically effective shelf registration statements. Our eligibility to use a Form S-3 registration statement may not be restored until December 1, 2024, and then only if we have not had any other filing delinquency that would preclude Form S-3 eligibility and satisfy all other requirements for Form S-3 eligibility. During any period when we are not eligible to use Form S-3 or qualify as a “well-known seasoned issuer,” our capital raising ability may be impaired. Under these circumstances, we will be required to use a registration statement on Form S-1 to register securities with the SEC, which could hinder our ability to act quickly in raising capital to take advantage of market conditions in our capital-raising activities and may increase our cost of raising capital. Further, the expenses associated with raising capital using Form S-1 are generally greater than those associated with using Form S-3.
Provisions in our organizational documents could delay or prevent a change of control.
Certain provisions of our amended and restatedcurrent certificate of incorporation and bylaws may have an anti-takeover effect and may delay, defer, or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control transaction that may otherwise be in the best interests of our stockholders, including transactions that might otherwise result in the payment of a premium over the market price for the shares held by our stockholders.
These provisions provide for, among other things:
•a classified board of directors with staggered three-year terms;
•the ability of our board of directors to issue one or more series of preferred stock;
•advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings (though our board of directors has implemented shareholder proxy access, beginning with our 2018 annual meeting of shareholders)access); and
•certain limitations on convening special stockholder meetings;meetings.
Provisions such as those just described, to the removal of directors only for cause and only upon the affirmative vote of holders of at least 66-2/3% of the shares of common stock entitled to vote generallyextent that they remain in the election of directors (a level that our board will recommend be reduced to a simple majority, subject to shareholder approval at our 2017 annual meeting of shareholders); and
any amendment of certain provisions only by the affirmative vote of at least 66-2/3% of the shares of common stock entitled to vote generally in the election of directors (though our board will be reducing the threshold for amendment of our bylaws to a simple majority, subject to shareholder approval at our 2017 annual meeting of shareholders).
These anti-takeover provisionseffect, could make it more difficult for a third party to acquire us, even if the third-party’sthird party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares.
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are located at 14 Schoolhouse Road, Somerset, New Jersey. We alsoAs of June 30, 2023, we had 52 facilities (3 geographical locations operate as multiple facilities because they support more than one reporting segment, with our Somerset location including both a manufacturing facility and our principal executive offices), comprising manufacturing operations, development centers, and sales offices throughout the world. We have thirty-five facilities (three locations each operate as two facilities for different reporting segments) with manufacturing capabilities located on five continents withcontained in approximately 5.38 million square feet of manufacturing, lablaboratory, office and related space. Our manufacturing capabilities encompass a full suite of competencies includinginclude all required regulatory, quality assurance and in-house validation at all of the production sites.space. The following table sets forth our facilities containing manufacturing, laboratory, office, and laboratory facilitiesrelated space by areareporting segment and regiongeographic location as of June 30, 2017:2023:
|
| | | | | | | | | | | | |
| Facility Sites | | Country | | Region | | Segment | | Total Square Footage | | Leased/Owned |
1 | Eberbach | | Germany | | Europe | | Softgel | | 370,580 |
| | Leased |
2 | St. Petersburg, FL | | USA | | North America | | Softgel | | 328,073 |
| | Owned |
3 | Buenos Aires | | Argentina | | South America | | Softgel | | 265,000 |
| | Owned |
4 | Haining | | China | | Asia Pacific | | Softgel | | 219,930 |
| | Owned |
5 | Braeside | | Australia | | Asia Pacific | | Softgel | | 163,100 |
| | Owned |
6 | Windsor | | Canada | | North America | | Softgel | | 125,892 |
| | Owned |
7 | Sorocaba | | Brazil | | South America | | Softgel | | 124,685 |
| | Owned |
8 | Strathroy | | Canada | | North America | | Softgel | | 118,009 |
| | Owned |
9 | Kakegawa (1) | | Japan | | Asia Pacific | | Softgel | | 104,500 |
| | Owned |
10 | Aprilia | | Italy | | Europe | | Softgel | | 92,010 |
| | Owned |
11 | Beinheim | | France | | Europe | | Softgel | | 78,100 |
| | Owned |
12 | Dee Why | | Australia | | Asia Pacific | | Softgel | | 59,836 |
| | Leased |
13 | Indaiatuba | | Brazil | | South America | | Softgel | | 53,800 |
| | Owned |
14 | Woodstock, IL | | USA | | North America | | Drug Delivery Solutions | | 421,665 |
| | Owned |
15 | Kansas City, MO (1) | | USA | | North America | | Drug Delivery Solutions | | 329,394 |
| | Owned |
16 | Brussels | | Belgium | | Europe | | Drug Delivery Solutions | | 265,287 |
| | Owned |
17 | Somerset, NJ | | USA | | North America | | Drug Delivery Solutions / Corporate HQ | | 265,000 |
| | Owned |
18 | Swindon | | United Kingdom | | Europe | | Drug Delivery Solutions | | 253,314 |
| | Owned |
19 | Morrisville, NC | | USA | | North America | | Drug Delivery Solutions | | 186,406 |
| | Leased |
20 | Winchester, KY | | USA | | North America | | Drug Delivery Solutions | | 180,000 |
| | Owned |
21 | Limoges | | France | | Europe | | Drug Delivery Solutions | | 179,000 |
| | Owned |
22 | Schorndorf (1) | | Germany | | Europe | | Drug Delivery Solutions | | 166,027 |
| | Owned |
23 | Madison, WI | | USA | | North America | | Drug Delivery Solutions | | 102,723 |
| | Leased |
24 | Malvern, PA | | USA | | North America | | Drug Delivery Solutions | | 84,000 |
| | Leased |
25 | San Diego, CA | | USA | | North America | | Drug Delivery Solutions | | 66,244 |
| | Leased |
26 | Dartford | | United Kingdom | | Europe | | Drug Delivery Solutions | | 20,250 |
| | Leased |
27 | Emeryville, CA | | USA | | North America | | Drug Delivery Solutions | | 6,418 |
| | Leased |
28 | Philadelphia, PA | | USA | | North America | | Clinical Supply Services | | 206,878 |
| | Leased/Owned |
29 | Bathgate | | United Kingdom | | Europe | | Clinical Supply Services | | 191,000 |
| | Owned |
30 | Kansas City, MO (1) | | USA | | North America | | Clinical Supply Services | | 80,606 |
| | Owned |
31 | Bolton | | United Kingdom | | Europe | | Clinical Supply Services | | 60,830 |
| | Owned |
32 | Schorndorf (1) | | Germany | | Europe | | Clinical Supply Services | | 54,693 |
| | Owned |
33 | Shanghai | | China | | Asia Pacific | | Clinical Supply Services | | 31,000 |
| | Leased |
34 | Singapore | | Singapore | | Asia Pacific | | Clinical Supply Services | | 13,379 |
| | Leased |
35 | Kakegawa (1) |
| Japan |
| Asia Pacific |
| Clinical Supply Services | | 2,800 |
|
| Owned |
| Total | | | | | | | | 5,270,429 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Geographic Region | | Biologics | | Pharma and Consumer Health | | Corporate | | Total (1) |
North America | | 10 | | 15 | | 1 | | 26 |
South America | | — | | 3 | | 1 | | 4 |
Europe | | 6 | | 10 | | 1 | | 17 |
Asia-Pacific | | — | | 5 | | — | | 5 |
Total | | 16 | | 33 | | 3 | | 52 |
(1) Represents sites whereSites that are used by multiple segments operate.are included once for each segment in this table.
The Company continues to receive and resolve claims stemming from a prior, temporary regulatory suspension of oneTwo of our manufacturing facilities. To date, morefacilities, located in Bloomington, Indiana and Harmans, Maryland, together generate a material portion of our net revenue. We believe these facilities are suitable for their intended purposes, with adequate capacity for current and projected demand for their contracted products.
We generally seek to own, rather than 25 customers of the facility have presented claims against the Company for alleged losses, including lost profitslease, our manufacturing facilities, although some facilities are leased. Our office space and other types of indirect or consequential damages that they have allegedly suffered due to the temporary suspension, or have reserved their right to do so subsequently. The Company is unable to estimate at this time either the total value of claims thatwarehouse facilities are reasonably possible to be assertedoften leased.
Additional information with respect to this matter or the likely costour leases and property, plant, and equipment is contained in Notes 16 and 19, respectively, to resolve them, although (a) as of the end of fiscal 2017, the Company settled 12 customer claims and recorded $1.8 million for claim amounts that the Company deemed to be both probable and reasonably estimable, but is not currently in a position to record under U.S. GAAP any insurance recovery with respect to such costs and (b) certain remaining customers have presented the Company with support for other claims having an aggregate claim value of approximately $20 million. To date, none of the asserted claims takes into account limitations of liability in the contracts governing these claims or any other defense that the Company may assert. In addition, the Company may have insurance for additional costs it may incur as a result of such claims, subject to various deductibles and other limitations, but there can be no assurance as to the aggregate amount or timing of insurance recoveries against any such costs.our Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Companywe may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. The Company intendsWe intend to vigorously defend itselfourselves against any such litigation and doesdo not currently believe that the outcome of any such litigation will have a material adverse effect on the Company’sour financial statements. In addition, the healthcare industry is highly regulated and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
In February 2023, an alleged shareholder filed a complaint styled City of Warwick Retirement System v. Catalent, Inc., et al., No. 23-cv-01108 in New Jersey federal court against us and three of our then-officers (collectively, the “Warwick Defendants”) purportedly on behalf of a putative “class” consisting of persons who purchased or otherwise acquired our securities between August 30, 2021 and October 31, 2022, inclusive. On September 15, 2023, the Warwick complaint was amended (together with the original complaint, the “Warwick Complaint”), which amended complaint expanded the class period to between August 30, 2021 and May 7, 2023, inclusive (the “Class Period”). The Warwick Complaint purports to assert claims under Sections 10(b) and 20(a) of the Exchange Act and the related regulations, alleging that, unbeknownst to investors, the Warwick Defendants purportedly engaged in accounting and channel stuffing schemes to pad our revenues and failed to disclose adverse facts that purportedly were known to or recklessly disregarded by the Warwick Defendants. Specifically, the Warwick Complaint alleges that the Warwick Defendants (i) overstated revenue and earnings by prematurely recognizing revenue in violation of accounting principles generally accepted in the U.S. (“U.S. GAAP”); (ii) suffered material weaknesses in our internal control over financial reporting related to revenue recognition; (iii) falsely represented demand for our products while we knowingly selling more product to our direct customers than could be sold to healthcare providers and end consumers; (iv) cut corners on safety and control procedures at key production facilities; (v) disregarded regulatory rules at key production facilities in order to rapidly produce excess inventory that was used to pad our financial results through premature revenue recognition in violation of U.S. GAAP or stuffing our direct customers with this excess inventory; and (vi) lacked a reasonable basis for their positive statements about our financial performance, outlook, and regulatory compliance during the Class Period.
We believe that the Warwick Defendants have defenses to the allegations and claims set forth in the complaint and filed a motion to dismiss the Warwick Complaint on November 15, 2023.
In June 2023, we received a demand from a company stockholder pursuant to 8 Del. C. § 220 to inspect books and records of the Company relating to, among other things, the allegations raised in the Warwick Complaint. We have responded to the demand and cannot determine at this time if the books and records demand will lead to litigation.
In August 2023, an alleged shareholder filed a derivative complaint styled Husty, et al. v. Carroll, et al., No. 23-cv-00891, in Delaware federal court against certain current and former members of our board of directors (the “Husty Defendants”) and nominally against Catalent, Inc. The complaint mimics the allegations set out in the original complaint filed in the City of Warwick Retirement System action described above and claims that the alleged activities described there led to, and will continue to expose us to, costs and damages. We believe that the Husty Defendants have defenses to the allegations and claims set forth in the complaint and once all Husty Defendants are properly served with the complaint, intend to vigorously defend the Husty Defendants against such allegations.
In September 2023, an alleged shareholder filed a derivative complaint styled Brown, et al. v. Chiminski, et al., Case 3:23-cv-15722, in New Jersey federal court against certain current and former officers and members of our board of directors (the "Brown Defendants") and nominally against Catalent, Inc. The complaint mimics the allegations set out in the original complaint filed in the City of Warwick Retirement System action described above and claims that the alleged activities described there led to, and will continue to expose us to, costs and damages. On November 8, 2023, the Court entered a stipulation between the parties extending the Brown Defendants' time to respond to the complaint until January 8, 2024. We believe that the Brown Defendants have defenses to the allegations and claims set forth in the complaint and intend to vigorously defend the Brown Defendants against such allegations.
From time to time, the Company receiveswe receive subpoenas or requests for information relating to the business practices and activities of customers or suppliers from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties engaged in patent infringement, antitrust, tort, and other litigation. The Companyparties. We generally respondsrespond to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort and can result in considerable costs being incurred. The Company expects
For additional information, see Note 17, Commitments and Contingencies, to incur costs in future periods in connection with future requests.the Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
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ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The principal market for trading of the Company’s common stockour Common Stock is the NYSE. The following table sets forthOur Common Stock trades under the high and low sale prices per share for our common stock as reported on the NYSE for the period indicated: symbol “CTLT.” |
| | | | | | | |
Common Stock Market Prices | 4th Quarter | | 3rd Quarter | | 2nd Quarter | | 1st Quarter |
Fiscal year ended June 30, 2017: | | | | | | | |
High | $38.73 | | $30.22 | | $27.43 | | $26.95 |
Low | $27.48 | | $25.51 | | $21.83 | | $22.52 |
Fiscal year ended June 30, 2016: | | | | | | | |
High | $32.24 | | $27.60 | | $28.75 | | $34.42 |
Low | $20.94 | | $18.92 | | $23.63 | | $24.05 |
As of August 24, 2017November 30, 2023, we had approximately 2217 holders of record of outstanding shares of our common stock.Common Stock. This number does not include beneficial owners whose shares were held in street name.
We did not declare or pay any dividend on our Common Stock in fiscal 2023 or fiscal 2022. We have no current plansplan to pay dividendsany dividend on our common stock.Common Stock. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictionsrestriction, and other factors that our board of directors may deem relevant. Because we are a holding company and have no direct operations, we will only be able to pay dividends from funds we receive from our subsidiaries. In addition, our ability to pay dividends will be limited by covenants in our existing indebtedness and may be limited by the agreements governing other indebtedness we or our subsidiaries incur in the future. See "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Financing Arrangements—Debt Covenants."”
We did not declare or pay any dividends on our common stock in fiscal 2017 or fiscal 2016.
Recent Sales of Unregistered Equity Securities
We did not sell any unregistered equity securities during the period covered by this Annual Report on Form 10-K.Report.
Purchases of Equity Securities
On October 29, 2015, our Board of Directors authorized a share repurchase program to use up to $100.0 million to repurchase outstanding sharesWe did not purchase any of our common stock. We may repurchase shares under the program through open market purchases, privately negotiated transactions or otherwise as permitted by applicable federal securities laws. There was no purchase by us, on our behalf, or on behalf of any affiliate of our registered equity securities during the period covered by this Annual Report on Form 10-K.Report.
Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on the Company’s common stock since July 31, 2014 (the date our common stock commenced trading on the NYSE)Common Stock from June 30, 2018 through June 30, 2017,2023, based on the market price of the Company’s common stockour Common Stock and assuming reinvestment of dividends, with the cumulative total shareholder return of companies on the S&P Composite 1500500 Index and S&P Composite 1500 Healthcare500 Health Care Index. The graph assumes that $100 was invested in the Company’s common stockour Common Stock and in each index at the market close on July 31, 2014.June 30, 2018. The stock price performance of the following graph is not necessarily indicative of future stock performance.
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ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth our selected historical financial and operating data for, or as of the end of, each of the five years ended June 30, 2017. The selected financial data as of June 30, 2017 and 2016, and for the fiscal years ended June 30, 2017, 2016 and 2015 has been derived from our audited consolidated financial statements included in "Financial Statements and Supplementary Data." The financial data as of June 30, 2015, 2014 and 2013 and for the fiscal years ended June 30, 2014 and 2013 have been derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. This table should be read in conjunction with the Consolidated Financial Statements and the notes thereto.
ITEM 6. [RESERVED]
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended June 30, |
(Dollars in millions, except as noted) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Statement of Operations Data: | | | | | | | | | |
Net revenue | $ | 2,075.4 |
| | $ | 1,848.1 |
| | $ | 1,830.8 |
| | $ | 1,827.7 |
| | $ | 1,800.3 |
|
Cost of sales | 1,420.8 |
| | 1,260.5 |
| | 1,215.5 |
| | 1,229.1 |
| | 1,231.7 |
|
Gross margin | 654.6 |
| | 587.6 |
| | 615.3 |
| | 598.6 |
| | 568.6 |
|
Selling, general and administrative expenses | 402.6 |
| | 358.1 |
| | 337.3 |
| | 334.8 |
| | 340.6 |
|
Impairment charges and (gain)/loss on sale of assets | 9.8 |
| | 2.7 |
| | 4.7 |
| | 3.2 |
| | 5.2 |
|
Restructuring and other | 8.0 |
| | 9.0 |
| | 13.4 |
| | 19.7 |
| | 18.4 |
|
Operating earnings | 234.2 |
| | 217.8 |
| | 259.9 |
| | 240.9 |
| | 204.4 |
|
Interest expense, net | 90.1 |
| | 88.5 |
| | 105.0 |
| | 163.1 |
| | 203.2 |
|
Other (income)/expense, net | 8.5 |
| | (15.6 | ) | | 42.4 |
| | 10.4 |
| | 25.1 |
|
Earnings/(loss) from continuing operations before income taxes | 135.6 |
| | 144.9 |
| | 112.5 |
| | 67.4 |
| | (23.9 | ) |
Income tax expense/(benefit) | 25.8 |
| | 33.7 |
| | (97.7 | ) | | 49.5 |
| | 27.0 |
|
Earnings/(loss) from continuing operations | 109.8 |
| | 111.2 |
| | 210.2 |
| | 17.9 |
| | (50.9 | ) |
Earnings/(loss) from discontinued operations, net of tax | — |
| | — |
| | 0.1 |
| | (2.7 | ) | | 1.2 |
|
Net earnings/(loss) | 109.8 |
| | 111.2 |
| | 210.3 |
| | 15.2 |
| | (49.7 | ) |
Less: Net earnings/(loss) attributable to noncontrolling interest, net of tax | — |
| | (0.3 | ) | | (1.9 | ) | | (1.0 | ) | | (0.1 | ) |
Net earnings/(loss) attributable to Catalent | $ | 109.8 |
| | $ | 111.5 |
| | $ | 212.2 |
| | $ | 16.2 |
| | $ | (49.6 | ) |
| | | | | | | | | |
Basic earnings per share attributable to Catalent common shareholders: | | | | | | | | | |
Earnings/(loss) from continuing operations | $ | 0.88 |
| | $ | 0.89 |
| | $ | 1.77 |
| | $ | 0.25 |
| | $ | (0.68 | ) |
Net earnings/(loss) | 0.88 |
| | 0.89 |
| | 1.77 |
| | 0.22 |
| | (0.66 | ) |
Diluted earnings per share attributable to Catalent common shareholders: | | | | | | | | | |
Earnings/(loss) from continuing operations | $ | 0.87 |
| | $ | 0.89 |
| | $ | 1.75 |
| | $ | 0.25 |
| | $ | (0.68 | ) |
Net earnings/(loss) | 0.87 |
| | 0.89 |
| | 1.75 |
| | 0.21 |
| | (0.66 | ) |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended June 30, |
(Dollars in millions) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Balance Sheet Data (at period end): | | | | | | | | | |
Cash and cash equivalents | $ | 288.3 |
| | $ | 131.6 |
| | $ | 151.3 |
| | $ | 74.4 |
| | $ | 106.4 |
|
Goodwill | 1,044.1 |
| | 996.5 |
| | 1,061.5 |
| | 1,097.1 |
| | 1,023.4 |
|
Total assets | 3,454.3 |
| | 3,091.1 |
| | 3,138.3 |
| | 3,073.4 |
| | 2,931.3 |
|
Long term debt, including current portion and other short term borrowing | 2,079.7 |
| | 1,860.5 |
| | 1,880.8 |
| | 2,693.8 |
| | 2,673.4 |
|
Total liabilities | 2,730.8 |
| | 2,455.2 |
| | 2,498.5 |
| | 3,440.7 |
| | 3,341.6 |
|
Total shareholders’ equity/(deficit) | $ | 723.5 |
| | $ | 635.9 |
| | $ | 634.0 |
| | $ | (371.8 | ) | | $ | (410.3 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended June 30, |
(Dollars in millions) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Other Financial Data: | | | | | | | | | |
Capital expenditures | $ | 139.8 |
| | $ | 139.6 |
| | $ | 141.0 |
| | $ | 122.4 |
| | $ | 122.5 |
|
Net cash provided by/(used in) continuing operations: | | | | | | | | | |
Operating activities | 299.5 |
| | 155.3 |
| | 171.7 |
| | 180.2 |
| | 139.1 |
|
Investing activities | (309.0 | ) | | (137.7 | ) | | (271.8 | ) | | (175.2 | ) | | (122.1 | ) |
Financing activities | 161.3 |
| | (30.8 | ) | | 196.5 |
| | (42.1 | ) | | (49.3 | ) |
Net cash provided by/(used in) discontinued operations: | — |
| | — |
| | 0.1 |
| | 2.1 |
| | (1.4 | ) |
Effect of foreign currency on cash | $ | 4.9 |
| | $ | (6.5 | ) | | $ | (19.6 | ) | | $ | 3.0 |
| | $ | 1.1 |
|
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Item 6. Selected Financial Data" and our Consolidated Financial Statements and related notes, which appear elsewhere in this Annual Report. This section of the Annual Report generally discusses the fiscal years ended June 30, 2023 and 2022 and year-to-year comparisons between the fiscal years ended June 30, 2023 and 2022. The discussion of our results of operations for the fiscal year ended June 30, 2021 and a comparison of our results for the fiscal years ended June 30, 2022 and 2021 is included in Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K.10-K for the fiscal year ended June 30, 2022, filed with the SEC on August 29, 2022, as amended by Amendment No.1 to Annual Report on Form 10-K/A filed with the SEC on June 12, 2023 and is incorporated herein by reference. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Annual Report. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, on Form 10-K, particularly in "Item“Item 1A. - Risk Factors."”
Overview
We are the leading global provider of advanced delivery technologiesprovide differentiated development and developmentmanufacturing solutions for drugs, protein-based biologics, cell and gene therapies, vaccines, and consumer health products at over fifty facilities across four continents under rigorous quality and animal health products.operational standards. Our oral, injectable, and respiratory delivery technologies, provide delivery solutionsalong with our state-of-the-art protein and cell and gene therapy manufacturing capacity, address a wide and growing range of modalities and therapeutic and other categories across the full diversity of thebiopharmaceutical, pharmaceutical, industry, including small molecules, biologics, and consumer and animal health products.industries. Through our extensive capabilities, growth-enabling capacity, and deep expertise in product development, regulatory compliance, and clinical trial supply, we can help our customers take products to market faster, includingand have done so for nearly half of new drug products approved by the FDA in the last decade. Our advanced delivery technologydevelopment and manufacturing platforms, which include those in our Softgel Technologies and our Drug Delivery Solutions segments, our proven formulation, manufacturingsupply, and regulatory expertise, and our broad and deep intellectual propertydevelopment and manufacturing know-how enable our customers to advance and their patients' needsthen bring to developmarket more products and better treatments for patients and consumers. Across both development and delivery, ourOur commitment to reliably supply our customers’ and their patients’ needs is the foundation for the value we provide; annually, we produce approximately 7270 billion unit doses for nearly 7,0008,000 customer prescription and consumer health products, or approximately one1 in every twenty26 unit doses of such products taken each year by patients and consumers around the world. We believe that, through our investments in growth-enablingstate-of-the-art facilities and capacity expansion, including investments in facilities focused on new treatment modalities and capabilities,other attractive market segments, our ongoing focus oncontinuous improvement activities devoted to operational and quality excellence, the sales of existing customer products, theand introduction of new customer products, and, in some cases, our innovation activities and patents, and our entry into new markets, we will continue to benefit from attractive and differentiated margins,attract premium opportunities and realize the growth potential from these areas.
Advanced Delivery Technology Platforms
Softgel Technologies
ThroughAt the commencement of fiscal 2023, in connection with our Softgel Technologieschange in Chief Executive Officer and Chief Operating Decision Maker, we adopted a new operating structure with two operating and reportable segments: (i) Biologics and (ii) Pharma and Consumer Health. The Biologics segment we provideprovides development and manufacturing for biologic proteins; cell, gene, and other nucleic acid therapies; pDNA; iPSCs, and oncolytic viruses; and vaccines. It also provides formulation, development, and manufacturing for parenteral dose forms, including vials, prefilled syringes, and cartridges; and, as noted above, analytical development and testing services for large molecules. Our Pharma and Consumer Health segment, comprises the Company’s market-leading capabilities for complex oral solids, softgel formulations, Zydis fast-dissolve technologies, and gummy, soft capsules, or "softgels," which we first commercialized in the 1930schew, and have continually enhanced. We are the market leader in overall softgel manufacturing, and hold the leading market position in the prescription arena. Our principal softgel technologies include traditional softgel capsules, in which the shell is made of animal-derived gelatin, and Vegicaps and OptiShell capsules, in which the shell is made from plant-derived materials. Softgel capsules are used in a broad range of customer products, including prescription drugs, over-the-counter medications, dietary supplements and unit-dose cosmetics. Softgel capsules encapsulate liquid, paste or oil-based active compounds in solution or suspension within an outer shell, filling and sealing the capsule simultaneously. We typically perform all encapsulation for a product within one of our softgel facilities, with active ingredients provided by customers or sourced directly by us. Softgels have historically been used to solvelozenge dosage forms; formulation, challenges or technical issues for a specific drug, to help improve the clinical performance of compounds, to provide important market differentiation, particularly for over-the-counter compounds, and to provide safe handling of hormonal, potent and cytotoxic drugs. We also participate in the softgel vitamin, mineral and supplement business in selected regions around the world. With the 2001 introduction of our plant-derived softgel shell, Vegicaps capsules, consumer health manufacturers have been able to extend the softgel dose form to a broader range of active ingredients and serve patient/consumer populations that were previously inaccessible due to religious, dietary or cultural preferences. In recent years, we have extended this platform to pharmaceutical products via our OptiShell offering. Our Vegicaps and OptiShell capsules are protected by patents in most major global markets. Physician and patient studies we have conducted have demonstrated a preference for softgels versus traditional tablet and hard capsule dose forms in terms of ease of swallowing, real or perceived speed of delivery, ability to remove or eliminate unpleasant odor or taste and, for physicians, perceived improved patient adherence with dosing regimens. Representative customers of Softgel Technologies include Pfizer, Novartis, Bayer, GlaxoSmithKline, Teva, Johnson & Johnson and Allergan.
On February 14, 2017, we acquired Accucaps, a Canada-based developer and manufacturer of over-the-counter, high potency and conventional pharmaceutical softgels. The acquisition complements Catalent's global consumer health and prescription pharmaceutical softgel capabilities and capacity with the addition of a portfolio of products and two state-of-the-art facilities offering integrated softgel development, and manufacturing platforms for oral, nasal, inhaled, and packaging, strengthening our ability to offer customers turnkey solutions.
We have thirteen Softgel Technologies facilities in ten countries, including three in North America, three in Europe, three in South Americatopical dose forms; cold-chain storage and four in the Asia-Pacific region. Our Softgel Technologies segment represents 40% of the segments' aggregate revenue before inter-segment eliminations for fiscal 2017.
Drug Delivery Solutions
Our Drug Delivery Solutions segment provides various complex advanced formulation delivery technologies,distribution, and related integrated solutions including:clinical trial development and manufacturing of a broad range of oral dose forms including fast-dissolve tablets and both proprietary and conventional controlled release products, and delivery of pharmaceuticals, biologics and biosimilars administered via injection, inhalation and ophthalmic routes, using both traditional and advanced technologies. Representative customers of Drug Delivery Solutions include Pfizer, GlaxoSmithKline, Roche, Teva, Eli Lilly, Johnson & Johnson and Allergan.
We provide comprehensive pre-formulation, development, and both clinical and commercial scale for most traditional and advanced oral solid dose formats, including uncoated and coated tablets, powder/pellet/bead-filled two-piece hard capsules, lozenges, powders and other forms for immediate and modified release prescription, consumer and animal health products. We have substantial experience developing and scaling up products requiring accelerated development timelines, specialized handling, complex technology transfers, or specialized manufacturing processes.
We launched our orally dissolving tablet business in 1986 with the introduction of Zydis tablets, a unique oral dosage form that is freeze-dried in its package, can be swallowed without water, and typically dissolves in the mouth in less than three seconds. Most often used for indications, drugs and patient groups that can benefit from rapid oral disintegration, the Zydis technology is utilized in a wide range of products and indications, including treatments for a variety of central nervous system-related conditions such as migraines, Parkinson’s Disease, schizophrenia, and pain relief and consumer healthcare products targeting allergy relief. Zydis tablets continuesupply services. Prior-period segment results were reclassified to be used in new ways by our customers as we extend the application of the technologyconform to new categories, such as for immunotherapies, vaccines and biologics delivery.
Our range of injectable manufacturing offerings includes filling drugs or biologics into pre-filled syringes and glass-free ADVASEPT vials, with flexibility to accommodate other formats within our existing network, increasingly focused on complex pharmaceuticals and biologics. With our range of technologies we are able to meet a wide range of specifications, timelines and budgets. We believe that the complexity of the manufacturing process, the importance of experience and know-how, regulatory compliance, and high start-up capital requirements provide us with a substantial competitive advantage in the market. For example, blow-fill-seal is an advanced aseptic processing technology, which uses a continuous process to form, fill with drug, and seal a plastic container in a sterile environment. Blow-fill-seal units are currently used for a variety of pharmaceuticals in liquid form, such as respiratory, ophthalmic and otic products. We are a leader in the outsourced blow-fill-seal market, and operate one of the largest capacity commercial manufacturing blow-fill-seal facilities in the world. Our sterile blow-fill-seal manufacturing has significant capacity and flexibility with regard to manufacturing configurations. This business provides flexible and scalable solutions for unit-dose delivery of complex formulations such as suspensions and emulsions. Further, the business provides engineering and manufacturing solutions related to complex containers. Our regulatory expertise can lead to decreased time to commercialization, and our dedicated development production lines support feasibility, stability and clinical runs. We plan to continue to expand our product line in existing and new markets, and in higher margin specialty products with additional respiratory, ophthalmic, injectable and nasal applications.
Our fast-growing biologics offerings include our formulation development and cell-line manufacturing based on our advanced and patented GPEx technology, which is used to develop stable, high-yielding mammalian cell lines for both innovator and biosimilar biologic compounds. Our GPEx technology can provide rapid cell-line development, high biologics production yields, flexibility and versatility. We believe our development-stage SMARTag next-generation antibody-drug conjugate technology will provide more precision targeting for delivery of drugs to tumors or other locations, with improved safety versus existing technologies. Our biologics facility in Madison, Wisconsin has the current capability and capacity to produce clinical-scale biologic supplies, with a commercial-capable suite under construction; combined with offerings from our other businesses and external partners, we provide the broadest range of technologies and services supporting the development and launch of new biologic entities, biosimilars or biobetters to bring a product from gene to market commercialization, faster.period presentation.
We also offer analytical chemical and cell-based testing and scientific services, stability testing, respiratory products formulation and manufacturing, micronization and particle engineering services, regulatory consulting, and bioanalytical testing for biologic products. Our respiratory product capabilities include development and manufacturing services for inhaled products for delivery via metered dose inhalers, dry powder inhalers and intra-nasal sprays. We also provide formulation development and clinical and commercial manufacturing for conventional and specialty oral dose forms. We provide global regulatory and clinical support services for our customers’ regulatory and clinical strategies during all stages of development.
Demand for our offerings is driven by the need for scientific expertise and depth and breadth of services offered, as well as by the reliable supply thereof, including quality, execution and performance.
We have fourteen Drug Delivery Solutions manufacturing facilities, including nine in North America and five in Europe. Our Drug Delivery Solutions segment represents 43% of the segments' aggregate revenue before inter-segment eliminations for fiscal 2017.
Clinical Supply Services
Our Clinical Supply Services segment provides manufacturing, packaging, storage, distribution and inventory management for drugs and biologics in clinical trials. We offer customers flexible solutions for clinical supplies production, and provide distribution and inventory management support for both simple and complex clinical trials. This includes over-encapsulation where needed; supplying placebos, comparator drug procurement and clinical packages and kits for physicians and patients; inventory management; investigator kit ordering and fulfillment; and return supply reconciliation and reporting. We support trials in all regions of the world through our facilities and distribution network. In fiscal 2016, we commenced an expansion of our Singapore facility by building new flexible cGMP space, and we introduced clinical supply services at our 100,000 square foot facility in Japan, expanding our Asia Pacific capabilities. Additionally, in fiscal 2013, we established our first clinical supply services facility in China as a joint venture and assumed full ownership in fiscal 2015. We are the leading provider of integrated development solutions and one of the leading providers of clinical trial supplies. Representative customers of Clinical Supply Services include Merck KGaA, Quintiles, Eli Lilly, Abbvie, Incyte Corporation and Pfizer.
We have eight Clinical Supply Service facilities, including two in North America, three in Europe and three in the Asia Pacific region. Our Clinical Supply Services segment represents 16% of the segments' aggregate revenue before inter-segment eliminations for fiscal 2017.
Critical Accounting Policies and Estimates
The following disclosure supplements the descriptions of our accounting policies contained in Note 1 to our Consolidated Financial Statements in regard toregarding significant areas of judgment. Management made certain estimates and assumptions during the preparation of the Consolidated Financial Statements in accordance with generally accepted accounting principles.U.S. GAAP. These estimates and assumptions affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities in the Consolidated Financial Statements. These estimates also affect the reported amount of net earnings during the reporting periods. Actual results could differ from those estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on the Consolidated Financial Statements than others.
Management has discussed the development and selection of these critical accounting policies and estimates with the audit committee of theour board of directors. A discussion of some of our more significant accounting policies and estimates follows.
Net Revenue Recognition
We sell products and services directly to our biopharmaceutical, pharmaceutical, biotechnology and consumer and animal health customers. The majority of our business is conducted through manufacturing and commercial product supply, or development agreements. The majorityservices, and clinical supply services.
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require judgment. For our manufacturing and commercial product supply revenue, the contract generally includes the terms of the manufacturing services and related product quality assurance procedures to comply with regulatory requirements. Due to the regulated nature of our business, these contract terms are highly interdependent and, therefore, are considered to be a single combined performance obligation. For our development services and clinical supply services revenue, our performance obligations vary per contract and are accounted for as separate performance obligations. If a contract contains a single performance obligation, we allocate the entire transaction price to the single performance obligation. If a contract contains multiple performance obligations, we allocate consideration to each performance obligation using the “relative standalone selling price” as defined under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Generally, we utilize observable standalone selling prices in our allocations of consideration. If observable standalone selling prices are not available, we estimate the applicable standalone selling price using an adjusted market assessment approach, representing the amount that we believe the market is willing to pay for the applicable service. Revenue is recognized over time using an appropriate method of measuring progress towards fulfilling our performance obligation for the respective arrangement. Determining the measure of progress that consistently depicts our satisfaction of performance obligations within each of our revenue is charged onstreams across similar arrangements requires judgment.
Our customer contracts generally include provisions entitling us to a price-per-unit basistermination penalty when the customer terminates prior to the contract’s nominal end date. The termination penalties in these customer contracts vary but are generally considered substantive for accounting purposes and is recognized either upon shipment or deliverycreate enforceable rights and obligations throughout the stated duration of the product or service. Revenue generated from development arrangements are generally priced by project and are recognized either upon completion of the required service or achievement ofcontract. We account for a specified project phase or milestone.
Our overall net revenue is generally affected by the following factors:
Changes in the level or timing of research and development activities and sales activities by our customers;
Fluctuations in overall economic activity within the geographic markets in which we operate;
Change in the level of competition we face from our competitors;
New intellectual property we develop and expiration of our patents;
Changes in prices of our products and services, which are generally relatively stable due to our long-term contracts; and
Fluctuations in exchange rates between foreign currencies, in whichcontract termination as a substantial portion of our revenues and expenses are denominated, and the U.S. dollar.
Operating Expenses
Cost of sales consists of direct costs incurred to manufacture and package products and costs associated with supplying other revenue-generating services. Cost of sales includes labor costs for employees involved in the production process and the cost of raw materials and components used in the process or product. Cost of sales also includes labor costs of employees supporting the production process, such as production management, quality, engineering, and other support services. Other costs in this category include the external research and development costs on behalf of our customers, depreciation of fixed assets, utility costs, freight, operating lease expenses and other general manufacturing expenses.
Selling, general and administrative expenses consist of all expenditures incurred in connection with the sales and marketing of our products, as well as administrative expenses to support our businesses. The category includes salaries and related benefit costs of employees supporting our sales and marketing, finance, human resources, information technology and legal functions, research and development costs in pursuit of our own proactive development and costs related to executive management. Other costs in this category include depreciation of fixed assets, amortization of our intangible assets, professional fees, and marketing and other expenses to support selling and administrative areas.
Direct expenses incurred by a segment are included in that segment’s results. Shared sales and marketing, information technology services and general administrative costs are allocated to each segment based upon the specific activity being performed for each segment or are charged on the basis of the segment’s respective revenues or other applicable measurement. Certain corporate expenses are not allocated to the segments. We do not allocate the following costs to the segments:
Impairment charges and (gain)/loss on sale of assets;
Equity compensation;
Restructuring expenses and other special items;
Sponsor advisory fee and the related termination fee incurred in connection with our initial public offering;
Noncontrolling interest; and
Other (income)/expense, net.
Our operating expenses are generally affected by the following factors:
The utilization rate of our facilities: as our utilization rate increases, we achieve greater economies of scale as fixed manufacturing costs are spread over a larger number of units produced;
Production volumes: as volumes change, the level of resources employed also fluctuate, including raw materials, component costs, employment costs and other related expenses, and our utilization rate may also be affected;
The mix of different products or services that we sell;
The cost of raw materials, components and general expense;
Implementation of cost control measures and our ability to effect cost savings through our Operational Excellence, Lean Manufacturing and Lean Six Sigma programs; and
Fluctuations in exchange rates between foreign currencies, in which a substantial portion of our revenues and expenses are denominated, and the U.S. dollar.
Allowance for Inventory Obsolescence
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected, additional inventory write-downs may be required resulting in a charge to incomecontract modification in the period suchin which the customer gives notice of termination. The determination was made.of the contract termination penalty is based on the terms stated in the relevant customer agreement. As of the modification date, we update our estimate of the transaction price using the expected value method, subject to constraints, and recognize the amount over the remaining performance period under the contract. In the event of a contract termination, revenues are recognized to the extent that it is probable that a significant reversal will not occur when any uncertainty is subsequently resolved.
Long-lived and Other Definite-Lived Intangible Assets
We allocate the cost of an acquired company to the tangible and identifiable intangible assets and liabilities acquired, with theany remaining amount beingcost recorded as goodwill. CertainIntangible assets primarily include customer relationships, technology, and trademarks. Valuing the identifiable intangible assets requires judgment. Intangible assets are generally amortized on a straight-line basis, reflecting the pattern in which the economic benefits are consumed, and are amortized over their estimated useful life.lives.
We assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying valuevalues of the assetassets may not be recoverable. Factors that we consider important that could trigger an impairment review include the following:
Significant
•significant under-performance relative to historical or projected future operating results;
Significant•significant changes in the manner of use of the acquired assets or the strategy of the overall business;
Significant•significant negative industry or economic trends; and
Recognition•recognition of goodwill impairment charges.
If we determine that the carrying value of identifiable intangibles and/or long-lived assets may not be recoverable based on the existence of one or more of the above indicators of impairment, we measure recoverability of assets by comparing the respective carrying valuesvalue of the assets to the current and expected future cash flows, on an un-discounted basis, to be generated from such assets. If such analysis indicates that the carrying value of these assets is not recoverable, we measure anyan impairment based on the amount inby which the net carryingcarrying amount of the assets exceedexceeds the fair valuevalues of the assets. See Note 4Notes 3, Business Combinations and 16Divestitures and 5, Other Intangibles, net to the Consolidated Financial Statements.
Goodwill and Indefinite-Lived Intangible Assets
We account for purchased goodwill and intangible assets with indefinite lives in accordance with Accounting Standard Codification ("ASC")ASC 350, Intangibles –– Goodwill Intangible and Other Assets. Under ASC 350, goodwill and intangible assets with indefinite lives are not amortized, but instead are
tested for impairment at least annually. We perform an impairment evaluation of goodwill annually utilizing bothduring the fourth quarter of our fiscal year or when circumstances otherwise indicate an evaluation should be performed. The evaluation may begin with a qualitative assessment for each reporting unit to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the qualitative assessment does not generate a positive response, or if no qualitative assessment is performed, a quantitative assessment, based upon discounted cash flows, is performed and quantitative assessments. Ourrequires management to estimate future cash flows, growth rates, and economic and market conditions.
We perform an annual goodwill impairment test for each reporting unit on April 1, the measurement date and more frequently if indicators of impairment exist.
Due to our underperformance of operating results relative to expectations and the decline in our stock price, we assessed the current and future economic outlook as of March 31, 2023. The evaluation began with a qualitative assessment of each reporting unit to determine if it was conductedmore likely than not that the fair value of the reporting unit was less than its carrying value. The qualitative assessment did not indicate that it was more likely than not that the fair value exceeded the carrying value in each of its six reporting units as of March 31, 2023 which led to a quantitative assessment for each of our reporting units. The evaluation performed as of March 31, 2023 resulted in a goodwill impairment charge of $210 million in our Consumer Health reporting unit within the Pharma and Consumer Health segment. A 50 basis point increase in the discount rate would increase the goodwill impairment $70 million and a 50 basis point decrease in the long-term growth rate would increase the goodwill impairment by $40 million.
Subsequent to the quantitative assessment performed as of March 31, 2023, we performed a qualitative assessment as of April 1, 2017. We assess goodwill2023, which yielded no indicators of impairment.
In fiscal 2022, we proceeded immediately to the quantitative assessment, but in fiscal 2021 we began with the qualitative assessment. Accordingly, no sensitivity analysis was performed for possible impairment by comparingfiscal 2021.
Subsequent to June 30, 2023, as a result of Consumer Health's underperformance of recent operating results relative to expectations, as well as current macroeconomic conditions impacting the carrying valueconsumer health and biotechnology industries, and higher interest rates, we assessed the current and future economic outlook as of September 30, 2023 for our Consumer Health and Biomodalities reporting units in our Pharma and Consumer Health and Biologics segments, respectively, and identified indicators for impairment of goodwill.
The evaluation began with a qualitative assessment of each reporting unit to their fair values. We determine if it was more likely than not that the fair value of the reporting unit was less than its carrying value. The qualitative assessment did not indicate that it was more likely than not that the fair value exceeded the carrying value in our Consumer Health and Biomodalities reporting units, utilizing estimated future discounted cash flowswhich led to a quantitative assessment for the corresponding reporting units. The evaluation performed as of September 30, 2023 resulted in a goodwill impairment charge of $689 million in our Consumer Health and incorporate assumptions that we believe marketplace participants would utilize. In addition, we use comparative market information and other factors to corroborate the discounted cash flow results. NoBiomodalities reporting units were at riskwithin the Pharma and Consumer Health and Biologics segments, respectively. For further details on the impairment charges for the three months ended September 30, 2023, see Note 20, Subsequent Events, “Impairment of failing step one in the goodwill impairment test under the provisions of ASC 350 as of April 1, 2017. See Note 3 to the Consolidated Financial Statements.Goodwill.”
Income Taxes
In accordance with ASC 740, Income Taxes, we account for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and the corresponding financial reporting bases of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which we operate. Deferred taxes are not provided on the undistributed earnings of subsidiaries outside of the United StatesU.S. when it is expected that these earnings will be permanently reinvested. WeIn fiscal 2018, we recorded a provision for U.S. income taxes and foreign withholding taxes in relation to expected repatriations as a result of the 2017 U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”), but we have not made any provision for U.S. income taxes on the remaining undistributed earnings of foreign subsidiaries as those earnings are considered permanently reinvested in the operations of those foreign subsidiaries.subsidiaries in the years after 2018.
The 2017 Tax Act imposed taxes on so-called “global intangible low-taxed income” (“GILTI”) earned by certain foreign subsidiaries of a U.S. company. In accordance with ASC 740, we made an accounting policy election to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred.
We had valuation allowancesassess the realizability of $78.8 million and $69.9 million as of June 30, 2017 and 2016, respectively, against our deferred tax assets. We consideredassets by considering all available evidence, both positive and negative, in assessing the need for a valuation allowance for deferred tax assets.negative. We evaluated threeevaluate four possible sources of taxable income when assessing the realizationrealizability of deferred tax assets:
Future•carrybacks of existing NOLs (if and to the extent permitted by tax law);
•future reversals of existing taxable temporary differences;
•tax planning strategies; and
Future•future taxable income exclusiveexclusive of reversing temporary differences and carryforwards.
We consideredconsider the need to maintain a valuation allowance on deferred tax assets based on management’s assessment of whether it is more likely than not that we would realize those deferred tax assets would be realized based onas a result of future reversals of existing taxable temporary differences and the ability to generate sufficient taxable income within the carryforward period available under the applicable tax law. The deferred tax liabilities are expected to reverse in the same period and jurisdiction and are of the same character as the temporary differences giving rise to a portion of the deferred tax assets.
The state valuation allowance on $386.3 million of apportioned state net operating losses was maintained. Due to uncertainty around earnings, apportionment, certain restrictions at the state level, and the history of tax losses, anticipated utilization rates were not sufficient to overcome the negative evidence and allow a release.
ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeal or litigation process, based on the technical merits. We recognized no material adjustment in the liability for unrecognized income tax benefits.
The calculation of our income tax liabilities involves dealing with uncertainties in the application of complex domestic and foreign income tax regulations. Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in the Consolidated Financial Statements. Tax benefits are recognized in the Consolidated Financial Statements when it is more likely than not that a tax position will be sustained upon examination. To the extent we prevail in matters for which liabilities have been established or are required to pay amounts in excess of our liabilities, our effective income tax rate in a given period could be materially affected. An unfavorable income tax settlement may require the use of cash and result in an increase in our effective income tax rate in the year it is resolved. A favorable income tax settlement would be recognized as a reduction in the effective income tax rate in the year of resolution. At June 30, 2017
Our accounting for income taxes involves the application of complex tax regulations in the U.S. and 2016, we recorded unrecognized tax benefits and related interest and penalties of $57.5 million and $67.1 million, respectively.
The anticipated future trends included in our assessmenteach of the realizabilitynon-U.S. jurisdictions in which we operate, particularly European tax jurisdictions. The determination of ourincome subject to taxation in each tax-paying jurisdiction requires us to review reported book income and the events occurring during the year in each jurisdiction in which we operate. In addition, the application of deferred tax assets areand liabilities will have an effect on the sametax expense in each jurisdiction. For those entities engaging in transactions with affiliates, we apply transfer-pricing guidelines relevant in many jurisdictions in which we operate and make certain informed and reasonable assumptions and anticipated future trends that were incorporated intoestimates about the estimated fairrelative value of our reporting units for purposescontributions by affiliates when assessing the allocation of testing goodwill for impairment. Suchincome and deductions between consolidated entities in different jurisdictions. The estimates and assumptions and anticipated future trends were also incorporated into other assessments of our tangible and intangible assets for impairment, as applicable. We are not currently relying on any tax-planning strategy to supportused in these allocations can result in uncertainty in the realization of deferredmeasured tax assets.benefit.
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for a description of recent accounting pronouncements.
Factors Affecting our Performance
Fluctuations in Operating Results
Our annual financial reporting periods operateperiod ends on a June 30 fiscal year end. Our30. Excluding the impact from COVID-19, our revenue and net earnings are generally higher in ourthe third and fourth quarters of each fiscal year.year, with our first fiscal quarter typically generating our lowest revenue of any quarter, and our last fiscal quarter typically generating our highest revenue. These fluctuations are primarily the result of the timing of our, and our customers’, annual operational maintenance periods at locations in continental Europe and the United Kingdom,U.S., the seasonality associated with pharmaceutical and biotechnology budgetary spending decisions, clinical trial and research and development schedules, the timing of new product launches and length of time needed to obtain full market penetration, and, to a lesser extent, the time of the year some of our customers’ products are in higher demand.
Acquisition and Related Integration Efforts
Our growth and profitability are affected by the acquisitions we are able to complete and the speed at which we integrate those acquisitions into our existing operating platforms. Since January 1, 2012,In fiscal 2021, we have completed eleven acquisitions.expanded our capacity and capabilities through five acquisitions for our Biologics segment and through the acquisition of a dry powder inhaler and spray dry manufacturing business from Acorda Therapeutics, Inc. (“Acorda”). In the recent three fiscal years the Company2022, we acquired the remaining shareseach of Redwood Bioscience Inc. ("Redwood")Bettera Wellness, a manufacturer of a consumer-preferred gummy and its SMARTag ADC technology platformother formats for consumer health products, a commercial-scale cell therapy manufacturing facility in October 2014. ThePrinceton, and a manufacturing facility for biologic therapies and vaccines near Oxford, U.K. In fiscal 2023, we acquired Metrics Contract Services (“Metrics”), an oral solids development and manufacturing business is basedspecializing in the U.S. and is included in the Drug Delivery Solutions segment. Additionally, in November 2014, the Company acquired 100%manufacture of the shares of MTI Pharma Solutions, Inc. ("Micron Technologies"). The acquired business is based in the U.S. and the U.K. and is included in the Drug Delivery Solutions segment. Finally, in fiscal 2017, we completed acquisitions of Pharmatek based in the U.S. and Accucaps based in Canada, which have been integrated in our Drug Delivery Solutions and Softgel Technologies segments, respectively.drugs containing highly potent active pharmaceutical ingredients.
Foreign Exchange Rates
Significant portions of our revenues and costs are affected by changes in foreign exchange rates. Our operating network is global, and, as a result, ourwe have substantial revenues and operating expenses are influenced by changes in foreign exchange rates. In fiscal 2017, approximately 52% of our revenue was generated from our operations outside the United States. Much of the revenue generated outside the United States and many of the expenses associated with our operations outside the United Statesthat are denominated in currencies other than the U.S. dollar, particularlythe currency in which we report our financial results. Our results of operations and financial performance are therefore influenced by changes in currency exchange rates. In fiscal 2023, 35% of our net revenue was generated from our operations outside the U.S. Foreign currencies for our operations include the British pound, theEuropean euro, the Brazilian real, the Argentine peso, the Japanese yen, and the AustralianCanadian dollar. Changes
Inflation
In fiscal 2023, we began to experience the effects of increased global inflation, which has risen to levels not seen in those currencies relativemore than 30 years. In response, we implemented various mitigation strategies, including in some cases increasing prices to
customers or reducing other costs of operation, including through price renegotiations with suppliers. The effects of inflation are likely to continue to affect us for most or all of fiscal 2024, at least, and there can be no assurance that our mitigating strategies will continue to enjoy the U.S. dollar will affect our revenues and expenses.same degree of success.
Trends Affecting Our Business
Industry
We participate in nearly every sector of the $900 billionglobal pharmaceutical and biotechnology industry, which has been estimated to generate more than $1 trillion in annual revenue, global pharmaceutical industry, including, but not limited to, the prescription drug and biologic sectors as well as consumer health, which includes the over-the-counter and vitamins and nutritional supplement sectors,sectors. Innovative pharmaceuticals, and animal health. Innovative pharmaceuticalsbiologics in particular, continue to play a critical role in the global market, while the share of revenue due to generic drug sharedrugs and biosimilars is increasing in both developed and developing markets. Sustained developed
market demand and rapid growth in emerging economies is driving the consumer health product growth rate to more than double that for pharmaceuticals.growth. Payors, both public and private, have sought to limit the economic impact of suchpharmaceutical and biologics product demand through greater use of generic and biosimilar drugs, access and spending controls, and health technology assessment techniques, favoring products that deliver truly differentiated outcomes.
New Molecule Development and R&D Sourcing
Continued strengthening in early-stage development pipelines for drugs and biologics, compounded by increasing clinical trial breadth and complexity, sustainsupport our belief in the attractive growth prospects for development solutions. Large companies are in many cases reconfiguring their R&D resources, increasingly involving the appointmentuse of strategic partners for important outsourced functions.functions and new treatment modalities. Additionally, an increasing portion of compounds in development are from companies that do not have a full R&Dresearch and development infrastructure, and thus are more likely to need strategic development solutions partners.
Demographics
Aging population demographics in developed countries, combined with the global COVID-19 pandemic and health care reforms in many global markets that are expanding access to treatments to a greater proportion of their populations,the global population, will continue to drive increases in demand for both pharmaceuticalpharmaceuticals, biologics, and consumer health products. Increasing economic affluence in developing regions will further increase demand for healthcare treatments, and we are taking active steps to allow us to participate effectively in these growth regions and product categories.
Finally, we believe the market access and payor pressures our customers face, global supply chain complexity, and the increasing demand for improved and new modality treatments will continue to escalate the need for advanced formulation and manufacturing, product differentiation, improved outcomes, and treatment cost reduction, all of which can often be addressed using our advanced delivery technologies.
Non-GAAP Performance Metrics
UseAs described in this section, management uses various financial metrics, including certain metrics that are not based on concepts defined in U.S. GAAP, to measure and assess the performance of our business, to make critical business decisions, and to assess our compliance with certain financial obligations. We therefore believe that presentation of certain of these non-GAAP metrics in this Annual Report will aid investors in understanding our business.
EBITDA from continuing operations
Management measures operating performance based on consolidated earnings from continuing operations before interest expense, expense/(benefit)expense for income taxes, and depreciation and amortization, and is adjusted for the income or loss attributable to noncontrollingnon-controlling interests ("(“EBITDA from continuing operations"operations”). EBITDA from continuing operations is not defined under U.S. GAAP, and is not a measure of operating income, operating performance, or liquidity presented in accordance with U.S. GAAP, and is subject to important limitations.
We believe that the presentation of EBITDA from continuing operations enhances an investor’s understanding of our financial performance. We believe this measure is a useful financial metric to assess our operating performance from period to periodacross periods and use this measure for business planning purposes. In addition, given the significant investments that we have made in the past in property, plant, and equipment, depreciation and amortization expenses represent a meaningful portion of our cost structure. We believe that disclosing EBITDA from continuing operations will provideprovides investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt, and to undertake capital expenditures because it eliminateswithout consideration of non-cash depreciation and amortization expense. We present EBITDA from continuing operations in order to provide supplemental information that we consider relevant for the readers of the Consolidated Financial Statements, and such
information is not meant to replace or supersede U.S. GAAP measures. Our definition of EBITDA from continuing operations may not be the same as similarly titled measures used by other companies. The most directly comparable measure to EBITDA from continuing operations defined under U.S. GAAP is earnings/(loss) from continuing operations.net earnings. Included in this reportManagement’s Discussion and Analysis is a reconciliation of earnings/(loss) from continuing operationsnet earnings to EBITDA from continuing operations.
In addition, we evaluate the performance of our segments based on segment earnings before noncontrollingnon-controlling interest, other (income)/expense, impairments, restructuring costs, interest expense, income tax expense/(benefit),expense, stock-based compensation, gain (loss) on sale of subsidiary, and depreciation and amortization ("(“Segment EBITDA"EBITDA”).
Adjusted EBITDA
Under the Credit Agreement and in the Indentures, the ability of Operating Company to engage in certain activities, such as incurring certain additional indebtedness, making certain investments, and paying certain dividends, is tied to ratios based on Adjusted EBITDA (which is defined as “Consolidated EBITDA” in the Credit Agreement and “EBITDA” in the Indentures). Adjusted EBITDA is a covenant compliance measure in our Credit Agreement and Indentures, particularly those covenants governing debt incurrence and restricted payments. Adjusted EBITDA is based on the definitions in the Credit Agreement, is not defined under U.S. GAAP, is not a measure of operating income, operating performance, or liquidity presented in accordance with U.S. GAAP, and is subject to important limitations. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
In addition, we use Adjusted EBITDA as a performance metric that guides management in its operation of and planning for the future of the business and drives certain management compensation programs. Management believes that Adjusted EBITDA provides a useful measure of our operating performance from period to period by excluding certain items that are not representative of our core business, including interest expense and non-cash charges like depreciation and amortization.
The measure under U.S. GAAP most directly comparable to Adjusted EBITDA is net earnings. In calculating Adjusted EBITDA, we add back certain non-cash, non-recurring, and other items that are deducted when calculating EBITDA from operations and net earnings, consistent with the requirements of the Credit Agreement. Adjusted EBITDA, among other things:
•does not include non-cash stock-based employee compensation expense and certain other non-cash charges;
•does not include cash and non-cash restructuring, severance, and relocation costs incurred to realize future cost savings and enhance operations;
•adds back any non-controlling interest expense, which represents minority investors’ ownership of non-wholly owned consolidated subsidiaries and is, therefore, not available; and
•includes estimated cost savings that have not yet been fully reflected in our results.
Adjusted Net Income and Adjusted Net Income per Share
We use Adjusted Net Income and Adjusted Net Income per share (which we sometimes refer to as “Adjusted EPS”) as performance metrics. Adjusted Net Income is not defined under U.S. GAAP, is not a measure of operating income, operating performance, or liquidity presented in accordance with U.S. GAAP, and is subject to important limitations. We believe that providing information concerning Adjusted Net Income and Adjusted Net Income per share enhances an investor’s understanding of our financial performance. We believe that these measures are useful financial metrics to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business, and we use these measures for business planning and executive compensation purposes. We define Adjusted Net Income as net earnings adjusted for (1) earnings or loss from discontinued operations, net of tax, (2) amortization attributable to purchase accounting, and (3) income or loss from non-controlling interest in majority-owned operations. We also make adjustments for other cash and non-cash items (as shown above, in “—Adjusted EBITDA”), partially offset by our estimate of the tax effect of such cash and non-cash items. Our definition of Adjusted Net Income may not be the same as similarly titled measures used by other companies. Adjusted Net Income per share is computed by dividing Adjusted Net Income by the weighted average diluted shares outstanding.
Use of Constant Currency
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant currency basis as one measure to evaluate our performance. In this Annual Report, on Form 10-K, we calculate constant currency by calculating
current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant currency basis as
excluding the impact of foreign exchange. These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
The contract manufacturing industry is labor intensive. As a result, we incur significant fixed costs to operate our facilities and maintain additional infrastructure required to obtain, develop, manufacture, transport, store, and test our products. Therefore, relatively small changes in demand can have a significant impact on short-term profitability.
In the second quarter of fiscal 2023, we engaged in a restructuring effort, which reduced our cost structure, consolidated facilities, and optimized our infrastructure across the organization. In the fourth quarter of fiscal 2023, we extended our restructuring effort, with further headcount reduction primarily in our Biologics segment and in our corporate functions. In connection with these restructuring plans, during the fiscal year ended June 30, 2023, we reduced our headcount by approximately 1,100 employees and incurred $66 million of cumulative pre-tax employee separation and other restructuring related costs. As a result of our restructuring plans, we expect to deliver an annualized run-rate savings of $150 to $160 million.
For further details regarding restructuring costs, see Note 6, Restructuring Costs to our Consolidated Financial Statements.
Summary Two-Year Key Financial Performance Metrics
Discussion of the year-over-year changes for the fiscal year ended June 30, 2022 compared to the fiscal year ended June 30, 2021 and the results of operations and cash flows for the fiscal year ended June 30, 2021, is included in Item 7. —Management's Discussion and Analysis of Financial Condition and Result of Operations of our Amendment No. 1 to Annual Report on Form 10-K/A for the fiscal year ended June 30, 2022, filed with the SEC on June 12, 2023, and is incorporated herein by reference.
The below tables summarize our results in fiscal 2023 and 2022 with respect to several financial metrics we use to measure performance. Refer to the discussions below regarding performance and the use of key financial metrics and “—Non-GAAP Metrics—Use of Constant Currency” concerning the measurement of revenue at “constant currency.”
Fiscal Year Ended June 30, 20172023 compared to the Fiscal Year Ended June 30, 20162022
Results for the fiscal year ended June 30, 20172023 compared to the fiscal year ended June 30, 20162022 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, | | FX impact | | Constant Currency Increase/(Decrease) |
(Dollars in millions) | 2017 | | 2016 | |
| | Change $ | | Change % |
Net revenue | $ | 2,075.4 |
| | $ | 1,848.1 |
| | $ | (54.8 | ) | | $ | 282.1 |
| | 15 | % |
Cost of sales | 1,420.8 |
| | 1,260.5 |
| | (31.9 | ) | | 192.2 |
| | 15 | % |
Gross margin | 654.6 |
| | 587.6 |
| | (22.9 | ) | | 89.9 |
| | 15 | % |
Selling, general and administrative expenses | 402.6 |
| | 358.1 |
| | (5.8 | ) | | 50.3 |
| | 14 | % |
Impairment charges and (gain)/loss on sale of assets | 9.8 |
| | 2.7 |
| | — |
| | 7.1 |
| | * |
|
Restructuring and other | 8.0 |
| | 9.0 |
| | 0.3 |
| | (1.3 | ) | | (14 | )% |
Operating earnings | 234.2 |
| | 217.8 |
| | (17.4 | ) | | 33.8 |
| | 16 | % |
Interest expense, net | 90.1 |
| | 88.5 |
| | (2.6 | ) | | 4.2 |
| | 5 | % |
Other (income)/expense, net | 8.5 |
| | (15.6 | ) | | (2.6 | ) | | 26.7 |
| | * |
|
Earnings from continuing operations, before income taxes | 135.6 |
| | 144.9 |
| | (12.2 | ) | | 2.9 |
| | 2 | % |
Income tax expense | 25.8 |
| | 33.7 |
| | (2.7 | ) | | (5.2 | ) | | (15 | )% |
Earnings from continuing operations | 109.8 |
| | 111.2 |
| | (9.5 | ) | | 8.1 |
| | 7 | % |
Net earnings from discontinued operations, net of tax | — |
| | — |
| | — |
| | — |
| | * |
|
Net earnings | 109.8 |
| | 111.2 |
| | (9.5 | ) | | 8.1 |
| | 7 | % |
Less: Net earnings/(loss) attributable to noncontrolling interest, net of tax | — |
| | (0.3 | ) | | — |
| | 0.3 |
| | * |
|
Net earnings attributable to Catalent | $ | 109.8 |
| | $ | 111.5 |
| | $ | (9.5 | ) | | $ | 7.8 |
| | 7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Fiscal Year Ended June 30, | | FX Impact | | Constant Currency Increase (Decrease) |
| 2023 | | 2022 | | | | Change $ | | Change %(1) |
Net revenue | $ | 4,263 | | | $ | 4,802 | | | $ | (108) | | | $ | (431) | | | (9) | % |
Cost of sales | 3,223 | | | 3,188 | | | (78) | | | 113 | | | 4 | % |
Gross margin | 1,040 | | | 1,614 | | (30) | | | (544) | | | (34) | % |
Selling, general, and administrative expenses | 829 | | | 844 | | | (11) | | | (4) | | | — | % |
Gain on sale of subsidiary | — | | | (1) | | | — | | | 1 | | | * |
Goodwill impairment charges | 210 | | | — | | | — | | | 210 | | | * |
Other operating expense | 164 | | | 41 | | | 2 | | | 121 | | | 296 | % |
Operating (loss) earnings | (163) | | | 730 | | | (21) | | | (872) | | | (120) | % |
Interest expense, net | 186 | | | 123 | | | (2) | | | 65 | | | 53 | % |
Other (income) expense, net | (7) | | | 28 | | | (11) | | | (24) | | | (85) | % |
(Loss) earnings before income taxes | (342) | | | 579 | | | (8) | | | (913) | | | (158) | % |
Income tax (benefit) expense | (86) | | | 80 | | | (5) | | | (161) | | | (201) | % |
| | | | | | | | | |
| | | | | | | | | |
Net (loss) earnings | $ | (256) | | | $ | 499 | | | $ | (3) | | | $ | (752) | | | (151) | % |
| | | | | | | | | |
| | | | | | | | | |
* Percentage notNot meaningful
(1) Change % calculations are based on amounts prior to rounding.
Net Revenue
| | | | | | | | | | | | | | | |
| | 2023 vs. 2022 | |
Year-Over-Year Change | | Fiscal Year Ended June 30, | |
| | Net Revenue | |
Organic | | (12) | % | |
Impact of acquisitions | | 3 | % | |
| | | |
Constant currency change | | (9) | % | |
Foreign currency translation impact on reporting | | (2) | % | |
Total % change | | (11) | % | |
| | | | | |
Net revenue increaseddecreased by $282.1$431 million, or 15%9%, as compared to the twelve monthsfiscal year ended June 30, 2016,2022, excluding the impact of foreign exchange. Sales increased across all three reportable segments, ledNet revenue decreased 12% organically on a constant-currency basis, primarily by our Drug Delivery Solutions segment. The increaserelated to a significant decline in net revenue was primarily due to favorable end-market customer demand for certain offerings within our oral delivery solutions platformCOVID-19 related programs and our biologics offerings within our Drug Delivery Solutions segment. Neta decline in revenue also increased due to end-market volume demand for our higher marginfrom the manufacture of prescription products in Europe withinthe Pharma and Consumer Health segment, partially offset by growth in our Softgel Technologies segment compared to lower production levels related togene therapy offerings, as well as growth in our clinical supply services.
Net revenue increased 3% inorganically as a temporary suspensionresult of our acquisitions of RheinCell Therapeutics GmbH (“RheinCell”) in August 2021, Bettera Wellness in October 2021, our Princeton facility and operations at one facility in the prior fiscal year. We also acquired PharmatekApril 2022, and Metrics in September 2016 and Accucaps in February 2017, which increased net revenue within our Drug Delivery Solutions and our Softgel Technologies segments, respectively.October 2022.
Gross Margin
Gross margin increaseddecreased by $89.9$544 million, or 15%34%, asin fiscal 2023 compared to the twelve months ended June 30, 2016,fiscal 2022, excluding the impact of foreign exchange, primarily due to increased volumes and favorablean unfavorable shift in product mix, withinlower levels of utilization across the network, inventory write-offs, operational challenges that meaningfully reduced productivity, and higher costs from increased spending on operational and engineering enhancements in our oral delivery solutions platform and our biologics offering within our Drug Delivery Solutions segment and increased volumes within our Softgel TechnologiesBiologics segment.
On a constant currencyconstant-currency basis, gross margin, as a percentage of net revenue, was 31.8%decreased 910 basis points to 24.5% in the twelve monthsfiscal year ended June 30, 2017, which was consistent with2023, compared to 33.6% in the prior fiscal year.year, primarily due to the factors described in the previous paragraph.
Selling, General, and Administrative Expense
Selling, general, and administrative expense increaseddecreased by $50.3$4 million or 14%, asin fiscal 2023, a negligible change compared to the twelve months ended June 30, 2016,fiscal 2022, excluding the impact of foreign exchange,exchange. The year-over-year increase of $33 million in net incremental expenses from businesses acquired in the last 12 months were offset by a $6 million decrease in credit losses, an $11 million decline in acquisition, transaction and integration costs, and a $19 million decrease in stock-based compensation costs.
Goodwill Impairment Charges
Goodwill impairment charges during fiscal 2023 were associated with our Consumer Health reporting unit, which is part of our Pharma and Consumer Health segment. For further details, see Note 4, Goodwill to our Consolidated Financial Statements.
Other Operating Expense
Other operating expense for the fiscal years ended June 30, 2023 and 2022 was $164 million and $41 million, respectively. The year-over-year increase was primarily due to incremental employee compensation costs of
approximately $35a $56 million inclusive of certain severance payments, inflationary increases and an increase in restructuring charges and a $71 million increase in fixed-asset impairment charges, partially offset by a $4 million gain from the sale of our non-cash equity compensation plans of $10 million as a result offacility in Bolton, U.K. The increase in fixed-asset impairment charges was primarily driven an additional year of vesting in fiscal 2017 as compared to fiscal 2016. Selling, general and administrative expense also increased $14 million, including $9 million of integration costs and $2 million of incremental depreciation and amortization expense, because of entities we acquired during the fiscal year.
Impairment Charges and Loss on Sale of Assets
Impairment charges for the twelve months ended June 30, 2017 and June 30, 2016 were $9.8 million and $2.7 million, respectively, and included charges for tangible and intangible assets that no longer generate revenueidle facility in our Drug Delivery SolutionsBiologics segment and Softgel Technologies segments.
Restructuringobsolete equipment that could not be sold or repurposed in the Pharma and Other
Restructuring and other charges of $8.0 million for the twelve months ended June 30, 2017 decreased by $1.0 million, or 11%, compared to the twelve months ended June 30, 2016. The twelve months ended June 30, 2017 included restructuring activities of $6 million enacted to improve cost efficiency, including employee severance costs from our corporate operations and across our global network. Other costs of $2 million include settlement charges for claim amounts that the Company deemed to be both probable and reasonably estimable, but is not currently in a position to record under U.S. GAAP any insurance recovery with respect to such costs related to the temporary suspension of operations at a softgel manufacturing facility. The prior period charges included restructuring initiatives enacted to improve cost efficiency at sites across our global network, including costs related to a site consolidation in pursuit of synergies in our Clinical Supply ServicesConsumer Health segment. Restructuring expense will vary period to period based on the level of acquisitions during the year and site consolidation efforts to further streamline the business.
Interest Expense, net
Interest expense, net, of $90.1$186 million for the twelve months ended June 30, 2017in fiscal 2023 increased by $1.6$65 million, or 2%53%, compared to fiscal 2022, excluding the twelve months ended June 30, 2016,impact of foreign exchange. The increase was primarily attributable to incremental interest expense on our most recent tranche of term loans, increased borrowings on our Revolving Credit Facility, and the issuance of our 2030 Notes.
Other (Income) Expense, net
Other income, net of $7 million for fiscal 2023 was primarily driven by higher levelsforeign currency gains of outstanding debt from the Notes issued in December 2016, offset by principal payments on the term loans under our senior secured credit facility and an overall reduction in December 2016 in our interest rates on our senior secured credit facility as compared to the prior year period. On December 12, 2016, Operating Company, our wholly owned subsidiary, completed a private offering of €380.0 million aggregate principal amount of the Notes. The proceeds of the Notes were used to repay $200 million of outstanding borrowings on Operating Company's U.S. dollar denominated term loan, pay the $81 million then outstanding under its revolving credit facility, pay accrued and unpaid interest and certain fees and expenses associated with the offering, fund a previously announced acquisition, and provide cash for general corporate purposes. Concurrent with the private offering of the Notes, we repriced the senior secured credit facilities to lower the interest rate on our U.S. dollar-denominated and euro-denominated term loans. The new applicable rate for the U.S. dollar-denominated term loans is 0.50% lower than the previous rate and the new applicable rate for the euro-denominated term loans is 0.75% lower than the previous rate. The net increase to our outstanding Senior debt balance is $221 million as compared to June 30, 2016.$8 million.
Other (Income)/Expense, net
Other expense, net of $8.5$28 million for the twelve months ended June 30, 2017fiscal 2022 was primarily driven by non-cash net$33 million of foreign currency losses from foreign exchange translation of $4.2 million recorded during the period and $4.3$4 million of financing charges related to our outstanding term loans, partially offset by a $2 million gain related to the December 2016 private offeringchange in fair value of the Notes andderivative liability arising from the repricing and partial paydowndividend-adjustment mechanism of our formerly outstanding Series A convertible preferred stock, par value $0.01 (the “Series A Preferred Stock”).
Benefit for Income Taxes
Our benefit for income taxes for the senior secured credit facility. Other income, net of $15.6 million in the twelve monthsfiscal year ended June 30, 20162023 was primarily driven by non-cash net gains from foreign exchange translation recorded during the period plus earnings from our available for sale investments related$86 million relative to our deferred compensation plans.
Provision/(Benefit) for Income Taxes
$342 million. Our provision for income taxes for the twelve monthsfiscal year ended June 30, 20172022 was $25.8 million relative to earnings before income taxes of $135.6 million. Our provision for income taxes for the twelve months ended June 30, 2016 was $33.7$80 million relative to earnings before income taxes of $144.9 million.$579 million. The difference in the income tax provision forprovision/benefit in the current period is not comparable tocurrent-year over the same periodprior-year was largely the result of losses in the U.S., research and development credits in the U.S., the recognition of deferred tax assets on the book impairment of tax-deductible goodwill, and decreased earnings in non-U.S. jurisdictions with lower tax rates. This benefit was partially offset by fixed permanent tax adjustments in the U.S. on lower income. In comparison, the lower effective tax rate on the prior year global income was partially the result of a net deferred benefit of $21 million related to tax reform in Switzerland and related transition rules (collectively, “Swiss Tax Reform”) and additional foreign tax credits in the U.S. due to changesamended prior-year returns. The benefit for income taxes in each of fiscal 2023 and 2022 was also affected by the geographic distribution of our pretax income, over many jurisdictions and the impact of discrete items. Generally, fluctuations in the effective tax provision are primarily due to changes in our geographic pretax income resulting from our business mix and changes in the tax impact of permanent differences, restructuring, other special items, and other discrete tax items whichthat may have unique tax implications depending on the nature of the item. Our effective tax provision at June 30, 2017 reflects the impact of an increase in foreign earnings taxed at rates lower than the US statutory rate. This benefit is offset by an increase in the valuation allowance and the impact of permanent difference including disallowed transaction costs and deemed dividends offset by the benefit from the stock compensation deduction and dividend income exempt from tax under local law.
Segment Review
The Company's results on a segment basisbelow charts depict the percentage of net revenue from each of our two reportable segments for the twelve months ended June 30, 2017 compared toprevious two years. Refer below for discussions regarding the twelve months ended June 30, 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, | | FX impact | | Constant Currency Increase/(Decrease) |
(Dollars in millions) | 2017 | | 2016 | |
| | Change $ | | Change % |
Softgel Technologies | | | | | | | | | |
Net revenue | $ | 855.3 |
| | $ | 775.0 |
| | $ | (11.3 | ) | | $ | 91.6 |
| | 12 | % |
Segment EBITDA | 190.5 |
| | 163.8 |
| | (6.3 | ) | | 33.0 |
| | 20 | % |
Drug Delivery Solutions | | | | | | | | | |
Net revenue | 910.1 |
| | 806.4 |
| | (22.8 | ) | | 126.5 |
| | 16 | % |
Segment EBITDA | 242.4 |
| | 215.2 |
| | (9.6 | ) | | 36.8 |
| | 17 | % |
Clinical Supply Services | | | | | | | | | |
Net revenue | 348.8 |
| | 307.5 |
| | (21.3 | ) | | 62.6 |
| | 20 | % |
Segment EBITDA | 54.9 |
| | 53.2 |
| | (5.6 | ) | | 7.3 |
| | 14 | % |
Inter-segment revenue elimination | (38.8 | ) | | (40.8 | ) | | 0.6 |
| | 1.4 |
| | (3 | )% |
Unallocated Costs (1) | (115.6 | ) | | (57.9 | ) | | 2.0 |
| | (59.7 | ) | | * |
|
Combined Total | | | | | | | | | |
Net revenue | $ | 2,075.4 |
| | $ | 1,848.1 |
| | $ | (54.8 | ) | | $ | 282.1 |
| | 15 | % |
| | | | | | | | | |
EBITDA from continuing operations | $ | 372.2 |
| | $ | 374.3 |
| | $ | (19.5 | ) | | $ | 17.4 |
| | 5 | % |
| |
(1) | Unallocated costs includes equity-based compensation, certain acquisition-related costs, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows: |
|
| | | | | | | |
| Fiscal Year Ended June 30, |
(Dollars in millions) | 2017 | | 2016 |
Impairment charges and gain/(loss) on sale of assets | $ | (9.8 | ) | | $ | (2.7 | ) |
Equity compensation | (20.9 | ) | | (10.8 | ) |
Restructuring and other special items (2) | (33.5 | ) | | (27.2 | ) |
Noncontrolling interest | — |
| | 0.3 |
|
Other income/(expense), net | (8.5 | ) | | 15.6 |
|
Non-allocated corporate costs, net | (42.9 | ) | | (33.1 | ) |
Total unallocated costs | $ | (115.6 | ) | | $ | (57.9 | ) |
| |
(2) | Segment results do not include restructuring and certain acquisition-related costs. |
Provided below is a reconciliation of earnings from continuing operations to EBITDA from continuing operations:
|
| | | | | | | |
| Fiscal Year Ended June 30, |
(Dollars in millions) | 2017 | | 2016 |
Earnings from continuing operations | $ | 109.8 |
| | $ | 111.2 |
|
Depreciation and amortization | 146.5 |
| | 140.6 |
|
Interest expense, net | 90.1 |
| | 88.5 |
|
Income tax expense | 25.8 |
| | 33.7 |
|
Noncontrolling interest | — |
| | 0.3 |
|
EBITDA from continuing operations | $ | 372.2 |
| | $ | 374.3 |
|
Softgel Technologies segment
|
| | | | | |
| 2017 vs. 2016 |
Factors Contributing to Year-Over-Year Change | Fiscal Year Ended June 30, |
| Net Revenue | | Segment EBITDA |
Revenue / Segment EBITDA without acquisitions | 6 | % | | 15 | % |
Impact of acquisitions | 6 | % | | 5 | % |
Constant currency change | 12 | % | | 20 | % |
Foreign exchange fluctuation | (2 | )% | | (4 | )% |
Total % Change | 10 | % | | 16 | % |
Softgel Technologies’ net revenue increased $91.6 million, or 12%, excluding the impact of foreign exchange, as compared to the twelve months ended June 30, 2016. Net revenue increased 6% excluding the effect of the Accucaps acquisition primarily driven by increased end-market volume demand for prescription products in Europe, which included increased volume of approximately $38 million at a facility that had produced at lower levels in the prior year due to a temporary suspension. In addition, net revenue increased as a result of higher end-market volume demand for both prescription and consumer health products in North America and Latin America, partially offset by lower end-market volume demand for consumer health products in Asia Pacific.
Softgel Technologies’ Segment EBITDA increased by $33.0 million, or 20%, as compared to the twelve months ended June 30, 2016, excluding the impact of foreign exchange. Segment EBITDA increased 15% excluding the effect of the Accucaps acquisition, primarily driven by a favorable mix shift to prescription products, increased volume in North America, Latin America and Europe and reduced one-time costs of approximately $13 million related to the facility suspension. Refer to Note 14 to the Consolidated Financial Statements for further discussion.
On February 14, 2017, we acquired Accucaps, which develops and manufactures over-the-counter (OTC), high potency and conventional pharmaceutical softgels. The acquisition substantially complements Catalent’s global consumer health and prescription pharmaceutical softgel capabilities and capacity with the addition of a portfolio of products supplied to pharmaceutical companies in North America and two state-of-the-art facilities offering integrated softgel development and manufacturing and packaging, strengthening our ability to offer customers turnkey solutions. Thesegments’ net revenue and EBITDA performance and to “—Non-GAAP Metrics” for a discussion of our use of Segment EBITDA, impact to our Softgel Technologies segment for the twelve months ended June 30, 2017 was an increase of 6% and 5%, respectively, compared to the prior-year period.
Drug Delivery Solutions segment
|
| | | | | |
| 2017 vs. 2016 |
Factors Contributing to Year-Over-Year Change | Fiscal Year Ended June 30, |
| Net Revenue | | Segment EBITDA |
Revenue / Segment EBITDA without acquisitions | 13 | % | | 15 | % |
Impact of acquisitions | 3 | % | | 2 | % |
Constant currency change | 16 | % | | 17 | % |
Foreign exchange fluctuation | (3 | )% | | (4 | )% |
Total % Change | 13 | % | | 13 | % |
Net revenue in our Drug Delivery Solutions segment increased by $126.5 million, or 16%, as compared to the twelve months ended June 30, 2016, excluding the impact of foreign exchange. Excluding the 2% impact of the resolution of volume commitments in the prior year, net revenue increased by 15%, excluding the effect of the Pharmatek acquisition, driven primarily by favorable end-market demand for certain higher margin offerings primarily within our oral delivery solutions platform of 6% and increased volume from our biologics offerings of 4%. Further increasing net revenue (excluding Pharmatek revenue) by 2% was a contractual settlement with respect to our oral delivery solutions platform.
Drug Delivery Solutions’ Segment EBITDA increased by $36.8 million, or 17%, as compared to the twelve months ended June 30, 2016, excluding the impact of foreign exchange, primarily due to increased volumes and favorable mix within our biologics offering, increased volumes related to our integrated oral solids development and manufacturing capabilities within our oral delivery solutions platform, and a contractual settlement relating to our oral delivery solutions platform, partially offset by the impact of the resolution of volume commitments in the prior year.
On September 22, 2016, we acquired Pharmatek, a contract drug development and clinical manufacturing company, based in the U.S. Pharmatek adds discovery-to-clinic drug development capabilities, expands our capability for handling highly potent compounds, and adds spray drying to our portfolio of advanced delivery technologies. The net revenue and Segment EBITDA impact to our Drug Delivery Solutions segment for the twelve months ended June 30, 2017 was an increase of 3% and 2%, respectively, as compared to the prior-year period.
Clinical Supply Services segment |
| | | | | |
| 2017 vs. 2016 |
Factors Contributing to Year-Over-Year Change | Fiscal Year Ended June 30, |
| Net Revenue | | Segment EBITDA |
Revenue / Segment EBITDA without acquisitions | 20 | % | | 14 | % |
Impact of acquisitions | — | % | | — | % |
Constant currency change | 20 | % | | 14 | % |
Foreign exchange fluctuation | (6 | )% | | (11 | )% |
Total % Change | 14 | % | | 3 | % |
Clinical Supply Services’ net revenue increased by $62.6 million, or 20%, as compared to the twelve months ended June 30, 2016, excluding the impact of foreign exchange, primarily due to increased volume related to storage and distribution revenue, increased lower-margin comparator sourcing volume of $20 million and increased volume related to manufacturing and packaging.
Clinical Supply Services’ Segment EBITDA increased by $7.3 million, or 14%, excluding the impact of foreign exchange, as compared to the twelve months ended June 30, 2016, primarily due to increased sales volumes in both our storage and distribution and manufacturing and packaging businesses, as well as increased profit from lower-margin comparator sourcing.
Fiscal Year Ended June 30, 2016 compared to Fiscal Year Ended June 30, 2015
Results for the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015 are as follows:
|
| | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, | | FX impact (unfavorable) / favorable | | Constant Currency Increase/(Decrease) |
(Dollars in millions) | 2016 | | 2015 | | | | Change $ | | Change % |
Net revenue | $ | 1,848.1 |
| | $ | 1,830.8 |
| | $ | (95.4 | ) | | $ | 112.7 |
| | 6 | % |
Cost of sales | 1,260.5 |
| | 1,215.5 |
| | (69.1 | ) | | 114.1 |
| | 9 | % |
Gross margin | 587.6 |
| | 615.3 |
| | (26.3 | ) | | (1.4 | ) | | * |
|
Selling, general and administrative expenses | 358.1 |
| | 337.3 |
| | (9.5 | ) | | 30.3 |
| | 9 | % |
Impairment charges and (gain)/loss on sale of assets | 2.7 |
| | 4.7 |
| | 0.2 |
| | (2.2 | ) | | (47 | )% |
Restructuring and other | 9.0 |
| | 13.4 |
| | (0.6 | ) | | (3.8 | ) | | (28 | )% |
Operating earnings | 217.8 |
| | 259.9 |
| | (16.4 | ) | | (25.7 | ) | | (10 | )% |
Interest expense, net | 88.5 |
| | 105.0 |
| | (1.5 | ) | | (15.0 | ) | | (14 | )% |
Other (income)/expense, net | (15.6 | ) | | 42.4 |
| | (2.6 | ) | | (55.4 | ) | | * |
|
Earnings from continuing operations before income taxes | 144.9 |
| | 112.5 |
| | (12.3 | ) | | 44.7 |
| | 40 | % |
Income tax expense/(benefit) | 33.7 |
| | (97.7 | ) | | (4.0 | ) | | 135.4 |
| | * |
|
Earnings from continuing operations | 111.2 |
| | 210.2 |
| | (8.3 | ) | | (90.7 | ) | | (43 | )% |
Net earnings from discontinued operations, net of tax | — |
| | 0.1 |
| | — |
| | (0.1 | ) | | * |
|
Net earnings | 111.2 |
| | 210.3 |
| | (8.3 | ) | | (90.8 | ) | | (43 | )% |
Less: Net earnings/(loss) attributable to noncontrolling interest, net of tax | (0.3 | ) | | (1.9 | ) | | — |
| | 1.6 |
| | (84 | )% |
Net earnings attributable to Catalent | $ | 111.5 |
| | $ | 212.2 |
| | $ | (8.3 | ) | | $ | (92.4 | ) | | (44 | )% |
* Percentage not meaningful
Net Revenue
Net revenue increased by $112.7 million, or 6%, as compared to the twelve months ended June 30, 2015, excluding the impact of foreign exchange. The increase in net revenue was driven by increased sales across all three reportable segments, led primarily by our Softgel Technologies segment. The increase in net revenue was primarily driven by higher end market volume demand for consumer health products using our softgel offering, increased sales volume across our Drug Delivery Solutions segment platforms and increased comparator sourcing volume and increased sales volume related to storage and distribution revenue within our Clinical Supply Services segment. Revenue increases were partially offset by a decrease in volume as a result of the temporary suspension of operations at a softgel manufacturing facility, which occurred between November 2015 and April 2016.
Gross Margin
Gross margin decreased by $1.4 million, as compared to the twelve months ended June 30, 2015, excluding the impact of foreign exchange. The decrease in gross margin was primarily driven by lower volumes resulting in reduced end customer demand of certain higher margin offerings within our Drug Delivery Solutions segment and decreased revenue resulting from the temporary suspension of operations at a softgel manufacturing facility during the period within our Softgel Technologies segment, partially offset by higher sales volumes across all three segments and more effective absorption of fixed costs through higher capacity utilization within our Softgel Technologies segment. On a constant currency basis, gross margin, as a percentage of revenue, decreased 200 basis points to 31.6% in the twelve months ended June 30, 2016 as compared to the prior year primarily driven by an unfavorable shift in revenue mix in our Drug Delivery Solutions segment and in our Clinical Supply Services segment.
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $30.3 million, or 9%, as compared to the twelve months ended June 30, 2015, excluding the impact of foreign exchange, primarily due to incremental employee compensation costs of approximately $13 million, inclusive of certain severance payments, inflationary increases and an increase in our non-cash equity compensation plans as a result of a change from a cash-based long-term incentive plan to an equity-based long-term incentive plan. Selling, general and administrative expense also increased due to acquisition-related transaction costs of approximately $5 million, and increased costs of approximately $6 million related to the temporary suspension of operations at a softgel manufacturing facility from November 2015 to April 2016. Selling, general and administrative expense increased approximately $5 million because of entities we acquired during the prior year.
Restructuring and Other
Restructuring and other charges of $9.0 million for the twelve months ended June 30, 2016 decreased by $4.4 million, or 33%, compared to the twelve months ended June 30, 2015. The twelve months ended June 30, 2016 included restructuring activities enacted to improve cost efficiency, including employee severance expenses and costs related to a site consolidation in pursuit of synergies in our Clinical Supply Services segment within our U.K. operations. The prior period charges included restructuring initiatives enacted to improve cost efficiency at sites across our global network. Restructuring expense will vary period to period based on the level of acquisitions during the year and site consolidation efforts to further streamline the business.
Interest Expense, net
Interest expense, net, of $88.5 million for the twelve months ended June 30, 2016 decreased by $16.5 million, or 16%, compared to the twelve months ended June 30, 2015, primarily driven by lower levels of outstanding debt as compared to the prior year. We redeemed $350 million of Senior Notes due 2018 (the "Senior Notes") and $275 million of Senior Subordinated Notes due 2017 (the "Senior Subordinated Notes") on August 28, 2014 and September 4, 2014, respectively. In addition, we reduced an aggregate of $234.5 million of outstanding borrowings under an unsecured term loan during the first quarter of fiscal 2015, partially offset by incremental borrowings of $191 million during the second quarter of fiscal 2015 in support of completed acquisitions. The funds utilized to reduce our debt levels were generated by proceeds from our IPO, which was completed during the first quarter of fiscal 2015.
Other (Income)/Expense, net
Other income, net of $15.6 million for the twelve months ended June 30, 2016 was primarily driven by non-cash net gains from foreign exchange translation recorded during the period plus earnings from our available for sale investments related to our deferred compensation plans. Other expense, net of $42.4 million in the twelve months ended June 30, 2015 was primarily driven by a sponsor advisory fee agreement termination fee of $29.8 million, which we agreed to pay in connection with our IPO. In addition, we incurred $21.8 million of expense in fiscal 2015 associated with the early redemption of our Senior Notes and pre-payment of an unsecured term loan, of which $9.8 million was a cash expense. Offsetting these other expense items were non-recurring non-cash purchase accounting gains, net, of $8.9 million related to acquisitions completed during the period and $2.4 million of non-cash net gains associated with foreign exchange.
Provision/(Benefit) for Income Taxes
Our provision for income taxes for the twelve months ended June 30, 2016 was $33.7 million relative to earnings before income taxes of $144.9 million. Our benefit for income taxes for the twelve months ended June 30, 2015 was $97.7 million relative to earnings before income taxes of $112.5 million. The income tax provision for the current periodmeasure that is not comparable to the same period of the prior year due to changes in pretax income over many jurisdictions and the impact of discrete items. Generally, fluctuations in the effective tax rate are primarily due to changes in our geographic pretax income resulting from our business mix and changes in the tax impact of permanent differences, restructuring, other special items and other discrete tax items, which may have unique tax implications depending on the nature of the item. Our effective tax rate at June 30, 2016 reflects the release of thedefined under U.S. federal valuation allowance and an increase in a tax reserve related to an adjustment to inter-company interest income in Germany, partially offset by a corresponding deduction in the United Kingdom.GAAP.
Segment Review
All prior period comparative segment information has been restated to reflect the current reportable segments in accordance with ASC 280 Segment Reporting as discussed in Note 1 to the Consolidated Financial Statements. The Company’sOur results on a segment basis for the fiscal year ended June 30, 20162023 compared to the twelvefiscal year ended June 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Fiscal Year Ended June 30, | | FX Impact | | Constant Currency Increase (Decrease) |
| 2023 | | 2022 | | | | Change $ | | Change % (1) |
Biologics | | | | | | | | | |
Net revenue | $ | 1,978 | | | $ | 2,534 | | | $ | (31) | | | $ | (525) | | | (21) | % |
Segment EBITDA | 277 | | | 777 | | | (4) | | | (496) | | | (64) | % |
Pharma and Consumer Health | | | | | | | | | |
Net revenue | 2,287 | | | 2,271 | | | (77) | | | 93 | | | 4 | % |
Segment EBITDA | 548 | | | 589 | | | (23) | | | (18) | | | (3) | % |
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| | | | | | | | | |
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Inter-segment revenue elimination | (2) | | | (3) | | | — | | | 1 | | | * |
Unallocated Costs(2) | (559) | | | (286) | | | 10 | | | (283) | | | 99 | % |
Combined totals | | | | | | | | | |
Net revenue | $ | 4,263 | | | $ | 4,802 | | | $ | (108) | | | $ | (431) | | | (9) | % |
| | | | | | | | | |
EBITDA from operations | $ | 266 | | | $ | 1,080 | | | $ | (17) | | | $ | (797) | | | (74) | % |
(1) Change % calculations are based on amounts prior to rounding.
* Not meaningful
(2) Unallocated costs include restructuring and special items, stock-based compensation, gain (loss) on sale of subsidiary, impairment charges, certain other corporate-directed costs, and other costs that are not allocated to the segments as follows:
| | | | | | | | | | | |
| Fiscal Year Ended June 30, |
(Dollars in millions) | 2023 | | 2022 |
Impairment charges and gain/loss on sale of assets (a) | $ | (98) | | | $ | (31) | |
Stock-based compensation | (35) | | | (54) | |
Restructuring and other special items (b) | (98) | | | (55) | |
| | | |
| | | |
| | | |
Gain on sale of subsidiary (c) | — | | | 1 | |
Goodwill impairment charges (d) | (210) | | | — | |
Other income (expense), net (e) | 7 | | | (28) | |
Non-allocated corporate costs, net | (125) | | | (119) | |
Total unallocated costs | $ | (559) | | | $ | (286) | |
(a) For the fiscal year ended June 30, 2023, impairment charges and gain/loss on sale of assets include fixed-asset impairment charges that are primarily associated with an idle facility in the Biologics segment and obsolete equipment that could not be sold or repurposed in the Pharma and Consumer Health segment.
In the three months ended June 30, 20152023, we identified an indicator of impairment related to one of our facilities in the Biologics segment given our plan to pause any additional spend on site development due to a lack of demand, leading to a partial impairment charge of $54 million. We primarily utilized a market and income approach for real property and a cost approach for personal property to record the partial impairment on its idle facility. Impairment charges are recorded in Other operating expense in the consolidated statements of operations.
Also, in the three months ended June 30, 2023, we identified an indicator of impairment related to obsolete equipment from a terminated project in the Pharma and Consumer Health segment, leading to a full impairment charge of $18 million.
For the fiscal year ended June 30, 2022, impairment charges and gain/loss on sale of assets include fixed-asset impairment charges associated with a product we no longer manufacture in our Pharma and Consumer Health segment.
(b) Restructuring and other special items for the fiscal year ended June 30, 2023 include (i) restructuring charges associated with the implementation of our restructuring efforts that reduced costs, consolidated facilities, and optimized infrastructure across the organization, (ii) transaction and integration costs associated with the Metrics acquisition, and (iii) warehouse exit costs for a product we no longer manufacture in our Pharma and Consumer Health segment.
Restructuring and other special items for the fiscal year ended June 30, 2022 include (i) transaction and integration costs primarily associated with the acquisition of our facility and operations in Princeton, and the Bettera Wellness, Delphi Genetics SA, Hepatic Cell Therapy Support SA, Acorda and RheinCell transactions and (ii) unrealized losses on venture capital investments.
(c) For the fiscal year ended June 30, 2022, gain on sale of subsidiary was due to the divestiture of our facility and related business in Woodstock, Illinois.
(d) Goodwill impairment charges during the fiscal year ended June 30, 2023 were as follows:associated with our Consumer Health reporting unit, which is part of our Pharma and Consumer Health segment. For further details, see Note 4, Goodwill to our Consolidated Financial Statements.
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| Fiscal Year Ended June 30, | | FX impact (unfavorable) / favorable | | Constant Currency Increase/(Decrease) |
(Dollars in millions) | 2016 | | 2015 | | | | Change $ | | Change % |
Softgel Technologies | | | | | | | | | |
Net revenue | $ | 775.0 |
| | $ | 787.5 |
| | $ | (68.2 | ) | | $ | 55.7 |
| | 7 | % |
Segment EBITDA | 163.8 |
| | 173.6 |
| | (15.9 | ) | | 6.1 |
| | 4 | % |
Drug Delivery Solutions | | | | | | | | | |
Net revenue | 806.4 |
| | 798.3 |
| | (20.4 | ) | | 28.5 |
| | 4 | % |
Segment EBITDA | 215.2 |
| | 230.7 |
| | (5.2 | ) | | (10.3 | ) | | (4 | )% |
Clinical Supply Services | | | | | | | | | |
Net revenue | 307.5 |
| | 288.4 |
| | (9.4 | ) | | 28.5 |
| | 10 | % |
Segment EBITDA | 53.2 |
| | 56.7 |
| | (2.4 | ) | | (1.1 | ) | | (2 | )% |
Inter-segment revenue elimination | (40.8 | ) | | (43.4 | ) | | 2.6 |
| | — |
| | * |
|
Unallocated Costs (1) | (57.9 | ) | | (100.8 | ) | | 3.3 |
| | 39.6 |
| | (39 | )% |
Combined Total | | | | | | | | | |
Net revenue | $ | 1,848.1 |
| | $ | 1,830.8 |
| | $ | (95.4 | ) | | $ | 112.7 |
| | 6 | % |
| | | | | | | | | |
EBITDA from continuing operations | $ | 374.3 |
| | $ | 360.2 |
| | $ | (20.2 | ) | | $ | 34.3 |
| | 10 | % |
| |
(1) | Unallocated costs includes equity-based compensation, certain acquisition-related costs, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows: |
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| Fiscal Year Ended June 30, |
(Dollars in millions) | 2016 | | 2015 |
Impairment charges and gain/(loss) on sale of assets | $ | (2.7 | ) | | $ | (4.7 | ) |
Equity compensation | (10.8 | ) | | (9.0 | ) |
Restructuring and other special items (2) | (27.2 | ) | | (27.2 | ) |
Noncontrolling interest | 0.3 |
| | 1.9 |
|
Other income/(expense), net (3) | 15.6 |
| | (42.4 | ) |
Non-allocated corporate costs, net | (33.1 | ) | | (19.4 | ) |
Total unallocated costs | $ | (57.9 | ) | | $ | (100.8 | ) |
| |
(2) | Segment results do not include restructuring and certain acquisition-related costs. |
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(3) | Amounts for fiscal 2015 primarily relate to the expense associated with the termination of the sponsor advisory fee agreement of $29.8 million resulting from the IPO, expenses related to financing transactions of $21.8 million and non-recurring non-cash purchase accounting gains of approximately $8.9 million related to acquisitions completed. |
financing charges and foreign currency adjustments recorded within Other (Income) Expense, net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings from continuing operations to EBITDA from continuing operations:
| | | | | | | | | | | |
| Fiscal Year Ended June 30, |
(Dollars in millions) | 2023 | | 2022 |
Net (loss) earnings | $ | (256) | | | $ | 499 | |
Depreciation and amortization | 422 | | | 378 | |
Interest expense, net | 186 | | | 123 | |
Income tax (benefit) expense | (86) | | | 80 | |
| | | |
EBITDA from operations | $ | 266 | | | $ | 1,080 | |
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| Fiscal Year Ended June 30, |
(Dollars in millions) | 2016 | | 2015 |
Earnings from continuing operations | $ | 111.2 |
| | $ | 210.2 |
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Depreciation and amortization | 140.6 |
| | 140.8 |
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Interest expense, net | 88.5 |
| | 105.0 |
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Income tax (benefit)/expense | 33.7 |
| | (97.7 | ) |
Noncontrolling interest | 0.3 |
| | 1.9 |
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EBITDA from continuing operations | $ | 374.3 |
| | $ | 360.2 |
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Softgel TechnologiesBiologics segment
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| | | | | |
| 2016 vs. 2015 |
Factors Contributing to Year-Over-Year Change | Fiscal Year Ended June 30, |
| Net Revenue | | Segment EBITDA |
Revenue / Segment EBITDA without acquisitions | 6 | % | | 4 | % |
Impact of acquisitions | 1 | % | | — | % |
Constant currency change | 7 | % | | 4 | % |
Foreign exchange fluctuation | (8 | )% | | (9 | )% |
Total % Change | (1 | )% | | (5 | )% |
Softgel Technologies’ net revenue increased $55.7 million, or 7%, excluding the impact of foreign exchange. The primary driver was higher end market volume demand for lower margin consumer health products using our softgel offering primarily in Asia Pacific. Partially offsetting the segment's increased revenue was a decrease in volume of prescription products of approximately $35 million primarily in Europe due to the temporary suspension of operations at one facility, which occurred between November 2015 and April 2016. See below for further discussion.
Softgel Technologies’ Segment EBITDA increased by $6.1 million, or 4%, as compared to the twelve months ended June 30, 2015, excluding the impact of foreign exchange. The increase was primarily driven by increased sales volumes of our lower margin consumer health products and more effective absorption of fixed costs through higher capacity utilization, partially offset by the temporary suspension of operations at one facility resulting in a decrease of approximately $32 million. See below for further discussion.
On November 13, 2015, the primary French drug regulatory agency (the "ANSM") issued an order temporarily suspending operations at a softgel manufacturing facility, which was lifted on April 28, 2016. The suspension order permitted the facility to apply for exemptions for certain types of operations. Due to the temporary suspension, we were unable to use certain raw materials, work in process and finished goods and took a charge of $1.0 million in fiscal 2016 in connection with such loss of use. We recorded remediation associated costs of $6.0 million in the same period. Further, certain customers of the facility have presented claims against us for losses they have allegedly suffered due to the temporary suspension or have reserved their right to do so subsequently. We are unable to estimate at this time either the total value of these claims or the likely cost to resolve them.
Drug Delivery Solutions segment
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| | | | | |
| 2016 vs. 2015 |
Factors Contributing to Year-Over-Year Change | Fiscal Year Ended June 30, |
| Net Revenue | | Segment EBITDA |
Revenue / Segment EBITDA without acquisitions | 3 | % | | (5 | )% |
Impact of acquisitions | 1 | % | | 1 | % |
Constant currency change | 4 | % | | (4 | )% |
Foreign exchange fluctuation | (3 | )% | | (3 | )% |
Total % Change | 1 | % | | (7 | )% |
| | | | | | | | | | | |
| 2023 vs. 2022 |
Year-Over-Year Change | Fiscal Year Ended June 30, |
| Net Revenue | | Segment EBITDA |
Organic | (21) | % | | (62) | % |
Impact of acquisitions | — | % | | (2) | % |
| | | |
Constant currency change | (21) | % | | (64) | % |
Foreign exchange translation impact on reporting | (1) | % | | — | % |
Total % change | (22) | % | | (64) | % |
Net revenue in our Drug Delivery SolutionsBiologics segment increaseddecreased by $28.5$525 million, or 4%, as compared to the twelve months ended June 30, 2015, excluding the impact of foreign exchange. Net revenue increased approximately 3% from our analytical services platform driven by increased sales volumes related to fee for service development work and analytical testing in the U.S. Net revenue also increased approximately 2% as a result of increased volume from our biologics offerings and increased volume of products utilizing our blow-fill-seal technology platform of approximately 1%. Offsetting revenue was decreased volumes from our oral delivery solutions platform of 3% due to reduced end customer volume demand for certain higher margin offerings primarily in our U.S. operations and lower revenue from product participation related activities. Finally, net revenue increased approximately 1% as a result of the Micron Technologies acquisition completed during the second quarter of fiscal 2015.
Drug Delivery Solutions’ Segment EBITDA decreased by $10.3 million, or 4%, as compared to the twelve months ended June 30, 2015, excluding the impact of foreign exchange, primarily due to lower volumes driven by reduced end customer demand of certain higher margin offerings and lower absorption of fixed manufacturing costs within our oral delivery solutions platform, partially offset by increased profit generated by our biologics offering and from products utilizing our blow-fill-seal technology platform.
Clinical Supply Services segment |
| | | | | |
| 2016 vs. 2015 |
Factors Contributing to Year-Over-Year Change | Fiscal Year Ended June 30, |
| Net Revenue | | Segment EBITDA |
Revenue / Segment EBITDA | 10 | % | | (2 | )% |
Impact of acquisitions | — | % | | — | % |
Constant currency change | 10 | % | | (2 | )% |
Foreign exchange fluctuation | (3 | )% | | (4 | )% |
Total % Change | 7 | % | | (6 | )% |
Clinical Supply Services’ net revenue increased by $28.5 million, or 10%, as compared to the twelve months ended June 30, 2015, excluding the impact of foreign exchange, primarily due to increased lower-margin comparator sourcing volume of $13 million, or 4%, and increased volume related to storage and distribution revenue.
Clinical Supply Services’ Segment EBITDA decreased by $1.1 million, or 2%21%, excluding the impact of foreign exchange, as compared to the twelve monthsfiscal year ended June 30, 2015,2022. The decrease was primarily duedriven by a significant decline in demand for COVID-19 related programs, partially offset by strong growth in our gene therapy offerings.
Biologics Segment EBITDA decreased by $496 million, or 64%, excluding the impacts of foreign exchange and acquisitions, compared to the fiscal year ended June 30, 2022. Segment EBITDA decreased 62%, compared to the fiscal year end June 30, 2022, excluding the impact of acquisitions. The decrease was primarily driven by a shiftsignificant decline in demand for COVID-19 related programs, inventory write-offs, and lower levels of utilization across the Biologics segment, as well as an unfavorable impact from remediation-related activities at our Bloomington and Brussels facilities, which were partially offset by strong growth in our gene therapy offerings.
We completed the acquisitions of RheinCell in August 2021 and our Princeton facility and operations in April 2022. For the fiscal year ended June 30, 2023, these acquisitions decreased Segment EBITDA on an inorganic basis by 2% compared to the corresponding prior-year period and had a negligible impact on the segment's net revenue.
Pharma and Consumer Health segment
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| 2023 vs. 2022 |
Year-Over-Year Change | Fiscal Year Ended June 30, |
| Net Revenue | | Segment EBITDA |
Organic | (1) | % | | (9) | % |
Impact of acquisitions | 5 | % | | 6 | % |
| | | |
Constant currency change | 4 | % | | (3) | % |
Foreign exchange translation impact on reporting | (3) | % | | (4) | % |
Total % change | 1 | % | | (7) | % |
Net revenue in our Pharma and Consumer Health segment increased lower-margin comparator sourcing volume withinby $93 million, or 4%, excluding the impact of foreign exchange, compared to the fiscal year ended June 30, 2022. Net revenue decreased 1%, compared to the fiscal year ended June 30, 2022, excluding the impact of acquisitions. The decrease in organic revenue was primarily driven by a decline in revenue from the manufacture of prescription products and a decline in demand for our consumer health products, primarily our wellness products, partially offset by growth in our clinical supply services.
Pharma and Consumer Health Segment EBITDA decreased by $18 million, or 3%, excluding the impact of foreign exchange, compared to the fiscal year ended June 30, 2022. Segment EBITDA decreased 9%, compared to the fiscal year ended June 30, 2022, excluding the impact of acquisitions. The decrease in organic Segment EBITDA was primarily driven by inflationary pressures, a decline in demand for our consumer health products, and a decline in revenue mixfrom the manufacture of prescription products, which were partially offset by growth in additionour clinical supply services.
We completed the Bettera Wellness acquisition in October 2021 and the Metrics acquisition in October 2022, which increased net revenue and Segment EBITDA on an inorganic basis by 5% and 6%, respectively, during the fiscal year ended June 30, 2023, compared to increased cost related to a business update to enhance operational efficiency.the corresponding prior-year period.
Liquidity and Capital Resources
OverviewSources and Uses of Cash
Our principal source of liquidity has been cash flow generated from operations.operations and the net proceeds of capital market activities. The principal uses of cash are to fund planned operating and capital expenditures, business or asset acquisitions, interest payments on debt, and any mandatory or discretionary principal paymentspayment on our debt issuances.debt. As of June 30, 2017, our financing needs were supported by2023, and following Operating Company's five-year, $200 millionNovember 2022 execution of Amendment No. 7 (the “Seventh Amendment”) to the Credit Agreement, which increased the capacity of our revolving credit facility that maturesto $1.10 billion and extended its maturity to November 2027, we had available $594 million in May 2019 andborrowing capacity under our Revolving Credit Facility. The capacity of our Revolving Credit Facility is reduced by $12.0 million in lettersthe amount of credit. The revolving credit facility includes borrowing capacity available forall outstanding letters of credit issued under the senior secured credit facilities and for short-term borrowings referred to as swing-line borrowings. As of June 30, 2017,2023, we had no$6 million of outstanding letters of credit and $500 million in outstanding borrowing under our Revolving Credit Facility.
As of December 1, 2023, we have increased our borrowings under our revolving credit facility.
facility to $670 million. We continue to believe that our cash on hand, cash from operations, and available borrowings under Operating Company's revolving credit facilityour Revolving Credit Facility will be adequate to meet our future liquidity needs for at least the next twelve months.months, including the amounts expected to become due with respect to our pending capital projects. We have no significant maturity under any of our bank or note debt maturity until the senior secured term loans mature in May 2021.July 2027 maturity of our 2027 Notes.
Cash Flows
Fiscal Year Ended June 30, 20172023 Compared to the Fiscal Year Ended June 30, 20162022
The following table summarizes our consolidated statementstatements of cash flows from continuing operations for the fiscal year ended June 30, 20172023 compared with the fiscal year ended June 30, 2016:2022:
| | | Fiscal Year Ended June 30, | | | | Fiscal Year Ended June 30, | | |
(Dollars in millions) | 2017 | | 2016 | | $ Change | (Dollars in millions) | 2023 | | 2022 | | Change $ |
Net cash provided by/(used in): | | | | | | |
Net cash provided by (used in): | | Net cash provided by (used in): | | | | | |
Operating activities | $ | 299.5 |
| | $ | 155.3 |
| | $ | 144.2 |
| Operating activities | $ | 254 | | | $ | 439 | | | $ | (185) | |
Investing activities | $ | (309.0 | ) | | $ | (137.7 | ) | | $ | (171.3 | ) | Investing activities | $ | (955) | | | $ | (1,884) | | | $ | 929 | |
Financing activities | $ | 161.3 |
| | $ | (30.8 | ) | | $ | 192.1 |
| Financing activities | $ | 521 | | | $ | 1,031 | | | $ | (510) | |