Paul Knight: On the inventory discussion earlier, are you finding that you can effectively destock now because of better supply chain conditions as well as normalized customer demand?
Tom Castellano: So, I would say, Paul, we’re seeing pockets of improvement. And again, we order many different components and inputs for the various different types of products that we manufacture across our Biologics and PCH segments. I would say there are areas of improvement, but there are certainly areas especially on the PCH side of the business, where we do continue to see some challenges from a supply chain standpoint that factored into our decision to continue to remain, I would say, slightly elevated or elevated from an inventory standpoint. We were very specific to say that in the short term, this is going to be a tailwind opportunity for us when we have the comfort in being able to pull back on some of those higher levels of inventory are more likely to be a meaningful contributor to free cash flow in ’24 than I would say it is in ’23; although, as we get into the back half of the year, we should see some modest improvement.
Alessandro Maselli: Yes. Look, cutting short the answer, I believe that our level of comfort in destocking is higher in biomanufacturing than it is in small molecule. Given the geographical source of these components, there is a little bit of a difference there.
Paul Knight: And then last question would be, you had mentioned at the beginning, Alessandro, the fill/finish market, very good. And what are the dynamics creating these positive trends in fill/finish and I believe you’re at top one, two, three in the world?
Alessandro Maselli: Yes, sure. Look, number one, we are very, very excited about our position in that market being one of the top players. And surely one of the players that before others moved into the state-of-the-art technology, which is fill and finish under isolator. So that is really creating a competitive advantage for Catalent and surely continued to increase our share of the most attractive molecules from a CDMO standpoint. I believe that the positive trends are twofolds: number one, the pipeline itself is lending naturally towards fill and finish because you’re looking at assets in the pipeline, which are — you cannot put in oral solid, so they are lending themselves more to fill and finish. And because there is a tendency to self administration, they lend themselves more towards prefill syringes and auto-injectors.
So that’s one dynamic. So, the pipeline — when you analyze the pipeline, that’s one dynamic. The other one is related to the increased movement of critical products to under isolator technology. Clearly, the regulatory environment is an evolving environment. And so the expectations when it comes to steady assurance I’m really suggesting that going forward, the preferred — by far, the preferred way of doing this is going to be under isolator. And for that, we are very well, well positioned with great assets already online and many more coming online in the next 18 months.
Operator: Our next question comes from Tejas Savant with Morgan Stanley. Please go ahead.
Tejas Savant: Tom, just a quick cleanup on the margin trajectory here into the back half of the year, it sounds like based on your comments, you are expecting a pretty significant sequential step up in EBITDA dollars into the fourth quarter here. Is the right way to think about it, essentially just the fact that you’ll get over $150 million essentially in COVID revenue in the fourth quarter and very little in the third quarter? And ex-COVID, can you just point us to sort of how you see that margin line fourth quarter here?
Tom Castellano: Sure. Tejas, I think your point is spot on. Certainly, we will see COVID in that range, as you mentioned, the $150 million-plus after a minimal contribution in Q3 that will certainly drive part of the margin story. But I was also very specific in discussing the ramp-up of the major gene therapy program, as we’ve talked about being late in the third quarter here and having a full quarter of ramped contribution to us from a fourth quarter standpoint, and given the operating leverage, you can see from the utilization of assets there as well as the just novel attractive margins that you see related to the gene therapy side of your business, and Biologics overall you can see that step-up. I would say from a non-COVID standpoint, if you were to strip out COVID out of all of our quarters, you would see a seasonality profile that very closely mirrors what our historical seasonality has been pre-COVID, which is that step up in — with the second quarter versus Q1 levels, then a step up to Q3.
But then ultimately a significant ramp in Q4 ahead of the summer months and some of the, I would say, downtime that we see across our customers and across our customers’ networks as well as our own network related to normal maintenance-related activities that you see in the summer months there and taking up sites off-line. So, that’s certainly all contributing to that significant step-up we see in the fourth quarter.
Tejas Savant: Got it. That’s super helpful. And then one on the — a two-parter the top line actually perhaps for Alessandro here. So first on Bettera, how confident are you that the asset can return to those sort of 20% growth levels that you talked about at the time of the acquisition? Or do you think that perhaps is being partially driven by uptake during the pandemic and perhaps now normalizes to a slightly lower level? And then the second part of my question here is on the Biologics front. As you think about potentially a $400 million to $450 million step down into fiscal ’24 from COVID, you’ll also be lapping some of these pre-approval sort of like inventory build for Sarepta, et cetera, how do you think about framing the growth for the Biologics segment as it sort of anniversaries those dynamics?
Alessandro Maselli: So, look, for the Bettera one, this is a market we are looking at very, very closely. The overall BMS market has decreased in fact, in 2022. So, we are really trying to get together with our customers, with our biggest customers to try and to understand a little more. The fundamental dynamics about this market have not changed, meaning that there is a tendency of people to go to self or preventative medicine, so to speak. However, you want to call it, and surely gummies is our preferred dosage form. So the fundamentals are there. Clearly, the market is going through a correction both because of the end market demand, which has contracted in 2022 and because of destocking for cash considerations. So, we have seen surely be clearly a disappointing trend in the last few quarters.
We expect this to continue through our fiscal year. But at the moment, there are signals that at some point in the later part of this calendar year, the correction of inventory could go out, we will be back serving the end market demand. With regards of the 2024, it’s a little bit too early to have any consideration about it. So, as we’re going to continue to walk through the fiscal year, we’re going to keep you updated about this. But I would say that we continue to be excited about the partnerships we have with the key customers going into the future.
Operator: Our next question comes from Sean Dodge of RBC Capital Markets. Please go ahead.
Sean Dodge: Yes. Tom, you mentioned the $75 million to $85 million of headcount-related savings. But then said there could be some additional beyond that, that could be in the tens of millions of dollars from other efficiency and I think you said procurement initiatives. Is there any more kind of detail you can share on the timelines for the latter? When do you expect the benefits from the other efficiency and procurement initiatives begin to accrue?
Tom Castellano: Yes. I think it’s the same timing of what we’re seeing from a headcount standpoint. The headcount initiatives said we were actioning by the end of the calendar year to be able to see the full benefit in the second half of fiscal year and the full annualized savings over the calendar 2023. I would say it’s been the same for some of the non-employee-related initiatives and procurement initiatives that we’ve had underway. We did highlight the tens of millions, but I would say there will be a partial contribution in fiscal ’23 assumed and then the carryover of that being into the first half of fiscal ’24. So again looking at that from the same lens on a calendar year basis.
