Avid Bioservices, Inc. (NASDAQ:CDMO) Q3 2023 Earnings Call Transcript

Avid Bioservices, Inc. (NASDAQ:CDMO) Q3 2023 Earnings Call Transcript March 13, 2023

Operator: Good day, ladies and gentlemen and welcome to the Avid Bioservices Third Quarter Fiscal 2023 Financial Results Conference Call. As a reminder, this conference call maybe recorded. I would now like to hand the conference over to Tim Brons of Avid’s Investor Relations Group. Please go ahead.

Tim Brons: Thank you. Good afternoon and thank you for joining us. On today’s call, we have Nick Green, President and CEO; Dan Hart, Chief Financial Officer; and Matt Kwietniak, Avid’s Chief Commercial Officer. Today, we will be providing an overview of Avid Bioservices contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended January 31, 2023. After our prepared remarks, we will welcome your questions. Before we begin, I’d like to caution that comments made during this conference call today, March 13, 2023 will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current belief of the company, which involves a number of assumptions, risks and uncertainties.

Actual results could differ from these statements, and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company’s filings with the Securities and Exchange Commission concerning these and other matters. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations on our corporate website at avidbio.com. With that, I will turn the call over to Nick Green, Avid’s President and CEO.

Nick Green: Thank you, Tim and thank you to everyone participating today via webcast. The third quarter was another positive period for Avid. On the financial front, revenues remained strong for both process development and manufacturing, and margins are beginning to trend upwards due to an increase in utilized capacity. Our business development team was highly productive, signing a significant number of new business agreements during the quarter, pushing our backlog to a new record high. Our facility expansions continue to progress well. The Myford South expansion has been handed over to operations and is now complete. Further, our new process development capabilities will be operational in a few weeks. We also expect our new cell and gene therapy facility to come online later this year.

Matt and I will provide additional details on business development and operations for the period following an overview of our third quarter and first 9 months of fiscal 2023 financial results. And for that, I’ll turn the call over to Dan.

Dan Hart: Thank you, Nick. Before I begin, in addition to the brief financial overview, I’ll provide on the call today, additional details on our financial results are included in our press release issued prior to this call and in our Form 10-Q, which was filed today with the SEC. I’ll now provide an overview of our financial results from operations for the quarter and first 9 months ended January 31, 2023. Revenues for the third quarter of fiscal €˜23 were $38 million, representing a 21% increase compared to $31.5 million recorded in the prior year period. For the first 9 months of fiscal €˜23, revenues were $109.5 million, a 24% increase compared to $88.4 million in the prior year period. For both the quarter and the year-to-date periods, the increase in revenues can primarily be attributed to increases in manufacturing runs, process development services provided to new customers, and revenue recognized in the current period for changes in estimated variable consideration related to a contract where uncertainties have been resolved.

Gross margin for the third quarter of fiscal €˜23 was 26% and compared to a gross margin of 29% for the third quarter of fiscal €˜22. Gross margin for the first 9 months of fiscal €˜23 was 21%, compared to a gross margin of 34% for the same period during fiscal €˜22. For both the quarter and 9-month periods, the decreases in gross margins were primarily due to increases in costs associated with the growth of our business and our facility expansions. The primary driver of these costs were increases in labor, overhead and depreciation, which accounted for incremental decreases in margins of approximately 4 percentage points and 7 percentage points for the quarter and 9-month periods, respectively. It is also important to note that the current year third quarter and year-to-date margins benefited from a change in variable consideration under a contract where uncertainties have been resolved and the same prior year period, margins included a benefit from unutilized capacity fees.

Excluding all of these factors, our third quarter and year-to-date adjusted gross margins were 30% and 28% respectively, an increase as compared to the prior year third quarter and year-to-date adjusted gross margins of 26% and 27% respectively. We expect the expansion-related costs incurred to date will continue to affect near-term margins. In the coming quarters, we foresee incrementally incurring additional expansion-related costs, in line with anticipated growth and to support an anticipated ramp-up in capacity utilization of substantial asset additions. Total SG&A expenses for the third quarter of fiscal €˜23 were $7.1 million, an increase of 22% compared to $5.8 million recorded in the third quarter of fiscal €˜22. SG&A expenses for the first 9 months of fiscal €˜23 were $20.3 million, an increase of 33% as compared to $15.3 million recorded in the prior year period.

The increases in SG&A for both the quarter and year-to-date periods are primarily due to increases in compensation and benefit-related costs, legal, accounting and other professional expenses. For the third quarter of fiscal €˜23, the company recorded a net income of $500,000 or $0.01 per basic and diluted share, as compared to a net income of $2.2 million or $0.04 per basic and diluted share for the third quarter of fiscal €˜22. For the first 9 months of fiscal €˜23, the company recorded a net income of $900,000 or $0.01 per basic and diluted share, as compared to net income of $12.1 million or $0.20 per basic and $0.19 per diluted share, respectively, during the prior year period. For the third quarter and first 9 months of fiscal €˜23, the company achieved an adjusted EBITDA of $7.4 million and $15.4 million, respectively.

Our cash and cash equivalents on January 31, 23 were $60 million, compared to $126 million on April 30, 2022. We continue to make great progress on our facility expansions. As of the end of the third quarter, we estimate our remaining expansion-related capital expenditures to be between $27 million and $30 million. Upon completion of these expansion projects, we estimate that our combined facilities will have the potential to bring our total revenue generating capacity to up to approximately $400 million annually, depending on the mix of future customer projects. This concludes my financial overview. I’ll now turn the call over to Matt for an update on commercial activities during the quarter.

Matt Kwietniak: Thanks, Dan. During the third quarter, the business development team continues to be very active in the industry, maintaining a strong presence at trade meetings and remaining highly engaged with existing and prospective customers. As we outlined last year, we felt that Avid’s offering and capacity would not only be attractive to our current customer base, but it would also allow Avid to be viewed as a strategic supplier to big pharma accounts that require not only strong functional disciplines, but also a critical mass in terms of capabilities and capacity. To this end, our expanded business development team included a new position focused on large pharma accounts. We feel our BD strategy is starting to pay off as one of the most noteworthy achievements during the period was Avid’s new designation as a preferred provider for a top pharma company, an important strategic achievement as we continue to expand and diversify our customer base.

In addition, other large pharma companies have already visited the facility and have conducted audits or have committed to doing so, which we view as very positive developments. We remain active in our interactions with the industry, and our leading indicators remain strong. I am pleased to report that our team signed $67 million in net new business agreements during the quarter. This represents our second highest quarterly signing to date for the company, only behind the third quarter of fiscal €˜21 in which we signed a significant COVID-related agreement. In addition to the total dollar amount signed during the quarter, we also signed a significant number of new customer agreements during the period. In fact, the number of new customer signings during the third quarter of fiscal 2023 represents approximately half of the signings during all of fiscal 2022.

As a result, our backlog achieved a new record high of $176 million at the end of the third quarter. While we expect the majority of this backlog to be recognized over the next 12 months, some of which maybe recognized over a longer period, depending on the maturity of the project. Importantly, new proposal requests remain robust, a solid signal for the quarters ahead. We are very pleased with the performance of our commercial team and the significant success that they’ve continued to deliver, and we remain optimistic for a strong close to the year. This concludes my overview of commercial activities. I will now turn the call back over to Nick for an update on operations and other achievements during the period.

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Nick Green: Thanks, Matt. During the third quarter, our team continued to make significant progress towards a number of important milestones for the year. As of the end of this month, we will have only one of our expansion projects still ongoing. With all the others, including Myford South, the downstream processing expansion, along with the process development in both the mammalian, and cell and gene therapy, all complete on schedule. Quarter three revenues also maintain our momentum towards achieving the guidance, which we raised last quarter. Allied with strong top line performance, we were also pleased with the positive margin development as we increased utilization. As reported by Matt, our commercial team had another exceptional quarter with signings totaling $67 million.

This represents the largest non-COVID-related signing for a quarter that we have had in the company’s history. Naturally, these new project wins have further expanded and diversified our customer base and significantly bolstered our backlog, which for a brief period at the end of the quarter exceeded our then current operating capacity. Given this demand and the fact that our backlog has hit a new high, we feel the timing could not be better for Avid to complete our mammalian cell facilities expansion, which will provide new state-of-the-art capacity to accommodate our growth in backlog. The Myford South expansion has been handed over to operations and is now complete, and we are pleased to report that our first customer is scheduled to begin manufacture next month.

Further, our new process development capabilities will be operational in a few weeks. While this expansion was only initiated in June of 2022, later this week, our PD will start to move into their new space. And we will then have even more capacity to onboard new clients destined to fill the new manufacturing capacity in Myford. This is also well timed with the team posting another impressive quarter and PD revenues exceeding more than $18 million year-to-date. Our team has worked tirelessly over the last few years to complete the Myford expansion, which we believe will not only allow us to service the backlog that we have today, but to continue to attract the new business that will fuel our next level of growth. This has been a long and complex process, which has required a great deal of coordination and collaboration and one that has been executed with a great deal of professionalism every step of the way.

I wish to extend the profound thank you to our exceptional team for making this expansion in reality. Parallel to this work, the company continues to make progress with the building out of its new cell and gene benefit facility, which we expect to come on open later this year. As we reported previously, we have already launched the analytical and persons development capabilities for this business, and we currently have projects ongoing in these areas. As with operations and business development, the third quarter was a strong one from a financial perspective. We continue to log year-over-year revenue growth for both the quarter and the first 9 months. During the quarter, we have seen positive margin development. And looking forward, we anticipate increased utilization will continue to drive this positive trend.

In closing, I would like to emphasize that we are extremely pleased with the first three quarters of fiscal 2023. Our revenues remain strong, and we are on target to hit our revenue guidance for the full fiscal year 2023 of between $145 million and $150 million. Combined, our revenues and increased capacity utilization are having a positive impact on our margins. Our commercial team continues to impress with significant new business wins from both existing and new customers. And finally, our facility expansions are nearing completion, providing an additional capabilities and capacity to drive Avid’s next phase of growth. 2023 marks Avid’s 30th year in the field of biologics and the 18th year of commercial manufacturing. Over time, Avid has built a reputation as a true commercial grade CDMO capable of supporting its customers throughout the product life cycle from cell line development to commercial manufacture and 1 able to support customers’ drug substance needs around the world.

We believe the investments in capacity and capabilities over the past few years position Avid as a top CDMO in the provision of mammalian cell derived drug substance in North America. This concludes my prepared remarks for today. We can now open the call for questions. Operator?

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Q&A Session

Operator: Our first question comes from the line of Sean Dodge of RBC Capital Markets. Your question, please, Sean.

Sean Dodge: Yes. Thanks. Good afternoon and congratulations on the strong bookings results. So looking back, Q3 have always seasonally been the strongest at least over the last several years. But Matt also mentioned the heightened interest now from large pharma. So I guess when we think about the $67 million level, how do you feel about that as being a pace you can sustain going forward?

Nick Green: This is Nick, Sean. Thanks very much. I think as we’ve always highlighted, that you do get swings in the amount of backlog or orders that we managed to post each quarter. But I think what you’ve seen is a pretty steady increase in backlog over the years, not necessarily quarter-to-quarter, but certainly, if you take a longer-term view on it. We’d expect that to continue, but I think it would be difficult for me to turn down and suggest that we will be signing $67 million every quarter. So I think just like to see continuing on the trend that we’ve got for now.

Sean Dodge: Okay. Fair enough. And then Dan, your comments around gross margin going forward, I just want to make sure I’m clear there. It sounds like for at least the next handful of quarters, we should expect cost and revenue kind of growing in line. So I guess the short answer there is maybe think about gross margin being kind of pretty flat sequentially somewhere in this 28% range after adjusting for the one-time items you mentioned?

Dan Hart: Yes, Sean. So pulling out those one-time items, that’s the run that we would be at. I would just reiterate with, as we’ve been mentioning throughout this fiscal year, we’ve been investing aggressively in people and the build-out of our expansions. Further cost from, I’d say, this point forward would be in line with anticipated growth. We’re at a point where the expenses are or, I would say, flattening out as far as a ramp from prior quarters. So with that flattening out, that’s where we believe that our margins will further be strengthened as we convert our backlog and as our capacity utilization increases.

Sean Dodge: Okay, that’s great. Thanks, again.

Nick Green: And just to add to that, Sean. I mean, I think, again, with the critical mass that we’ve got, it’s obviously getting better over time. But there is always that sort of quarter-to-quarter fluctuation that we see. It’s not a smooth line as much as we might always like it to be. But I think if you again take a slightly longer period, then you’ll see that there is a general trend to the positive, which is kind of what we’re looking for. But €“ that doesn’t mean to say that we don’t go through a quarter where we have, for example, the shutdowns that we’ve seen in the past a lower revenue and the margins so far as accordingly. So it’s €“ I wouldn’t say a bumpy road, but a fluctuating one.

Sean Dodge: Okay. Sure, thanks both.

Operator: Thank you. Our next question comes from the line of Matt Hewitt of Craig-Hallum. Matt, your line is open.

Matt Hewitt: Alright. Thanks. I’ll echo congratulations on a strong quarter. Maybe first one, and given the events over the weekend and what was already a very challenging environment from a funding perspective, what are you hearing from customers on the smaller end of the spectrum? Obviously, you’re moving to large pharma should help, but what are you hearing from the smaller customers as far as funding cash positions? Are you seeing any movement with some of those contracts?

Nick Green: Yes. I mean I think as you highlight, the sort of funding environment for biotech has been, I guess, stressful for a while. Average portion, 50% of our revenue is roughly somewhere close. That is commercial. And so obviously, then as you add some big pharma to that, then that also then sort of reduces the amount of exposure to small biopharma, but they are still very, very important part of our business. We’ve seen, I think, generally, the market being sort of price €“ not price €“ sorry, cash conscious. So when you’re having discussions with customers, you can €“ I always joke with Dan a little bit. You can always hear the Dan speaking in the background theme be cautious with the cash. So I think what we’re seeing is people maybe prioritizing later-phased projects.

Again, it’s always difficult for us to see how much of that is real and how much of it is us, because we actually probably do more later phase than earlier phase typically. So may be less affected by that. But I think it will be difficult for anybody to say that you can’t see some sort of, I guess, responsible behavior going on in the marketplace in regards to making sure they have adequate cash.

Matt Hewitt: That’s really helpful. Thank you. And then maybe a second question. As far as the cell and gene therapy manufacturing pipeline, could you give us an update there? Obviously, once that comes online, how quickly do you think you’ll be able to get that first contract kicked off and started utilizing some of that capacity? Obviously, you’ve had a lot of success with the capacity so far. I’m just curious on that how that pipeline is looking? Thank you.

Nick Green: Yes. I mean, we’ve talked to a lot of people. We’ve had a lot of site visits, which to me is always a strong indicator. It’s been a bit interesting, and I would go back to pre-COVID and I would always say that if a client hasn’t been on site, then they are never going to sign a piece of business with you. But clearly, during COVID, that wasn’t the case. So it’s trying to get used to a new norm, but we’re certainly seeing a lot of interest, which gives us a lot of confidence that once we kick off the new GMP facility that people will be looking to go into there. I think the C and GT area has been impacted by funding a little more maybe than mainly inside over the past few years, but we certainly are seeing continued interest in what we do.

And again, it goes back to the, I think, ensuring that you provide high-quality assets and good, strong quality culture. There is always a place for that. So €“ we’re hoping that when we get to that facility up and running, then we will see those interesting conversations and site visits convert into business.

Matt Hewitt: That’s great. Thank you.