Avid Bioservices Inc (CDMO) Q1 2021 Earnings Call Transcript

Avid Bioservices Inc (NASDAQ: CDMO) Q1 2021 earnings call dated Sep. 08, 2021.

Corporate Participants:

Tim Brons — Avid’s Investor Relations Group

Nicholas Green — President & Chief Executive Officer

Daniel Hart — Chief Financial Officer

Analysts:

Sean Dodge — RBC Capital Markets — Analyst

Jacob Johnson — Stephens — Analyst

Matt Hewitt — Craig-Hallum Capital — Analyst

Paul Knight — KeyBanc — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Avid Bioservices First Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Tim Brons of Avid’s Investor Relations Group. Please go ahead.

Tim Brons — Avid’s Investor Relations Group

Thank you. Good afternoon, and thank you for joining us. On today’s call, we have Nick Green, President and CEO; and Dan Hart, Chief Financial Officer.

Today, we’ll be providing an overview of Avid Bioservices’ contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended July 31, 2021. 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, September 8, 2021, 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.

Nicholas Green — President & Chief Executive Officer

Thank you, Tim, and thank you to everyone who has dialed-in today and for those who are participating via webcast. On the heels of a strong fourth quarter and full fiscal year 2021, we are pleased to announce another robust quarter.

During the first quarter of fiscal ’22, we recorded an increase in revenues compared to the prior year period, exceeding estimates for both revenues and earnings per share. Our margins are significantly improved during the first quarter, reflecting the efficiencies of our business model and our ability to strategically leverage our existing fixed costs.

In business development, we continued to expand and diversify our pipeline with the signing of multiple orders during the period. And as always, our BD team remains highly engaged in the pursuit of multiple new business opportunities.

Finally, with respect to operations, both Phase 1 and Phase 2 of our expansion projects remain on-track. I will provide additional details on business development and operations following an overview of our first quarter financial results.

And for that, I’ll turn the call over to Dan.

Daniel Hart — Chief Financial Officer

Thank you, Nick. Before I begin, in addition to the brief financial overview I’ll provide on the call today, additional details on our first quarter 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 ended July 31, 2021. Revenues for the first quarter of fiscal ’22 were $30.8 million, representing a 21% increase compared to $25.4 million recorded in the prior year period. The increase in revenues during the first quarter was primarily due to the growth in the number and scope of in-process and completed manufacturing runs, as well as an increase in the number of process development projects during the ’22 period.

Gross margin for the first quarter of fiscal 2022 was 37% compared to a gross margin of 34% in the first quarter of fiscal 2021. The increase in margin was primarily from higher manufacturing and process development revenues during the period as well as the receipt of a $3.3 million fee for unutilized reserved capacity from a customer during the quarter, similar to the $3.1 million fee from a customer received during the first quarter of fiscal 2021. As such, the gross margin percentages for both the current year and the prior year periods were strengthened by these unused reserve capacity fees. These fees improved margins by approximately 7% and 9% for the first quarter of fiscal 2022 and fiscal 2021 respectively.

While we believe the positive trend in our gross margin demonstrates the growing efficiencies of our business model, we do expect to increase hiring in the coming months to support our growing manufacturing capacity, and this may impact margins in future quarters.

Total SG&A expenses for the first quarter of fiscal 2022 were $4.5 million, an increase of 17% compared to $3.8 million recorded in the first quarter of fiscal 2021. The increase in SG&A during the quarter was primarily due to increases in stock-based compensation and consulting fees, partially offset by a decrease in payroll and benefit-related expenses.

For the first quarter of fiscal 2022, we recorded net income attributable to common stockholders of approximately $6.3 million or $0.10 per basic and diluted share, as compared to a net income attributable to common stockholders of $3.3 million or $0.06 per basic and diluted share for the first quarter of fiscal 2021. The increase in net income during the 2022 period is partially due to the accumulated preferred dividends included in net income attributable to common stockholders for the prior year period. This represents the company’s fifth consecutive quarter of operational profitability. And during the quarter, we achieved adjusted EBITDA of approximately $9.7 million or 32% of revenues.

Our cash and cash equivalents as of July 31, 2021, were $159.7 million compared to $169.9 million as of the prior fiscal year ended April 30, 2021. We are reiterating our plans to spend approximately $50 million to $60 million during the fiscal year 2022, primarily on our previously discussed facility expansions.

This concludes my financial overview. I’ll now turn the call back over to Nick for an update on business development and operations activities and achievements for the quarter.

Nicholas Green — President & Chief Executive Officer

Thanks, Dan. I would first like to acknowledge the appointment of Avid’s newest Director, Dr. Esther Alegria. During the first quarter, Dr. Alegria joined the Avid Board, bringing nearly 30 years of biopharmaceutical experience. We welcome doctor Alegria to Avid and we are thrilled to have the benefit of her experience and expertise on our Board.

I would now like to address another recent appointment. While Avid has not experienced any pandemic-related supply chain delays to-date, it is important to recognize that uncertainty remains in the supply market, and we are cognizant of the impact it may have on timing and the pricing of materials in the future.

In light of this uncertainty and as we continue to expand our manufacturing capacity, we have recently added a new and important position to Avid’s management team. I am pleased to announce that we have recently hired Joseph Scott as the Company’s first Vice President of Supply Chain. Joe’s experience in supply chain at both Gilead and Biogen will be invaluable as he and his team manage the complexities associated with sourcing and procuring critical materials, as well as managing inventory and supply logistics as the company continues to grow and expand. And we are very pleased to welcome Joe to the Avid team.

Addressing another personnel matter. Last month, our Chief Commercial Officer, Tim Compton, left Avid to rejoin an organization that he had been integral in building in the past. We understand that this opportunity was unique and one that he felt he could not pass up. The search for Tim’s replacement is ongoing and given the company’s continued performance, we believe we are in a position to select from a number of highly talented and industry respected candidates. While Tim will be missed, rest assured that the rest of the company’s BD team is continuing to execute in an extremely effective manner.

During the first quarter, the company signed new project orders totaling approximately $23 million from new and existing customers, including the previously announced commercial manufacture of the humanized monoclonal antibody portion of ZYNLONTA, a recently approved cancer treatment developed by ADC Therapeutics. Avid has provided clinical manufacturing services to ADC to support development of this product since 2017, and we are excited to see the manufacturing relationship expand to include commercial manufacturing activities for ZYNLONTA.

Work for projects signed during the first quarter will spun all areas of the business from process development to commercial manufacturing and the resultant backlog at quarter-end was approximately $110 million. We expect to recognize most of the current backlog over the next 12 months.

And on that note, I’d like now to address the operations at Avid. Given the company’s significant growth achieved during fiscal ’21 in both revenue and number of clients, it became clear last year that the expansion of our activities was required if we were to be able to provide capacity for both new and existing clients.

Capacity availability, we feel, is critical, not only to onboard new clients but also to ensure existing clients that their manufacturing partner will not impact their timelines as a result of failing to have adequate capacity.

As we stand today, we are more than halfway through Phase 1, and I’m delighted to report that both Phase 1 and Phase 2 remain on-track. We fully expect to have Phase 1 mechanically compete as we enter the [Technical Issues] to have the equipment validated and operational at the outset of the New Year in January.

Achieving approximately $31 million in revenue also requires seamless execution on behalf of all of our operational teams. The efforts of our facilities, maintenance, supply chain and manufacturing teams along with all those who support them should be applauded for converting a healthy order book into revenue at close to capacity during the quarter. Q2 and Q3 operations include annual shutdowns for the Franklin and Myford facilities.

As we speak, I am pleased to say that the Franklin shutdown is already complete and manufacture operations have restarted and we look forward to an efficient and effective shutdown and restart of Myford in fiscal Q3.

As we now have the first quarter behind us and we are well into the second quarter, we believe we are on-track to achieve our stated full year ’22 revenue guidance of between $115 million and $117 million. This represents a year-over-year growth rate of approximately 20% to 22%. Despite the annual shutdowns, numerous factors contribute to our confidence in reaching this milestone, including continued demand from new and existing customers and substantial backlog, which we expect to continue to grow over coming months.

With the successful fund raising completed in December of last year, and March of this year, we are very well capitalized with approximately $160 million of cash on hand. These proceeds support our expansion and enhancement efforts and will allow the company to explore value-creating opportunities for organic and inorganic growth in the future. We are fortunate to be able to leverage this position of financial strength and we are grateful to have the support of our investors during this exciting period of growth.

Looking ahead, we are focused on the continued expansion and diversification of our client base, successfully executing our Myford shutdown, completing both phases of facility expansion and hiring exceptional talent to support our growing capacity and customer demand. We are making consistent progress with each of these efforts, and we believe we are well-positioned to continue to strengthen and elevate the Avid organization and brand.

This concludes my prepared remarks for today. We can now open the call for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Sean Dodge with RBC Capital Markets. You may proceed with your question.

Sean Dodge — RBC Capital Markets — Analyst

Thanks. Good afternoon. Congratulations on the strong quarter. Maybe starting with the expansions. Nick, you said the first on-track to come online in January. Are there any updates you can share on how fast do you think you can ramp revenue in that new space to the $50 million run rate you’re targeting? And then how much visibility you have as we sit here now on the project needed to do that? I guess the $110 million backlog, what proportion of that is booked into the new space? Or is that not necessarily the right way of thinking about it?

Nicholas Green — President & Chief Executive Officer

Thanks very much, Sean. I mean, I think, to be frank with you, we’re already booking projects that will go into that expansion. But it does provide us with an ability to go to both ways. So we’re basically adding a second DSP suite. So it’s not difficult for us to actually move something that would initially have been in one suite, and put it into the new suite and that’s kind of something that we can do just to make ourselves more efficient and effective. I guess what you’re trying to get — as you know, can we get — could we get up to $50 million of revenue from it out of the gate? Potentially, yes, we could. I think, again, it’s unlikely that we’re going to have clients fully booked into there, right out of the gate, and sell it for the first four months or the last four months of this year as it were.

So we will be putting projects actively through it and just depending on how kind of the last — the next few months goes in terms of which projects and where they will — fate will depend on whether we are able to squeeze something in there and hopefully, put ourselves with a bit of headroom as we mentioned earlier on to hopefully improve our forecast. But at this stage, we remain very much where we were, which is $115 million, $117 million is where we feel is reasonable at this moment.

Sean Dodge — RBC Capital Markets — Analyst

Okay. That’s great. Thanks. And then with the revenue concentration around Halozyme, are there any updates you can share there about visibility you have on revenue coming from them for fiscal 2022, and any sense you can give us for direction? Does that, I guess, the guidance assume Halozyme is up, down, flat for this year?

Nicholas Green — President & Chief Executive Officer

Yes, it’s not my position to comment on Halozyme’s business. So, I can’t really guide you to where they — what they are taking from us. But I think we’ve consistently said, I think is that we’d like to see Halozyme continue to grow as a business — as a revenue, but reduce as a percentage of our overall business. And I would kind of — I think we’re probably somewhere in that sort of ballpark in terms of where we’re heading this year so far, but bearing in mind, we are only at the end of Q1, so.

Sean Dodge — RBC Capital Markets — Analyst

Sure. Okay. Fair enough. Thanks and congratulations again.

Operator

Thank you. Our next question comes from Jacob Johnson with Stephens. You may proceed with your question.

Jacob Johnson — Stephens — Analyst

Hey, thanks and congrats on the quarter. Maybe Nick, just first question, you mentioned that you’ve got a bunch of candidates for the CCO role, that seem to be a desirable position. Just any thoughts on kind of the — on the timing of when we may see you announce somebody put into that position? Is this something you need to fill relatively soon, or can you take your time to find the right person?

Nicholas Green — President & Chief Executive Officer

I mean, I — we could always take our time, I think to be honest, Jacob. I mean, it’s a strategic position, Chief Commercial Officer. I’m hoping they’re not doing too much door-knocking in day-to-day sales. So that’s really down to the BD group. So I don’t think it impacts us on an immediate short term. But clearly, I think we valued what Tim did and I’m standing in between in there in some regard. So I think maybe the team would probably prefer to have his replacement sooner rather than later, as would I.

So we’re not in an urgent rush. We can see some good candidates out there, but just want to make sure that we land the one that’s going to do the job and also fit very well with the culture and the dynamics of the organization. So I wouldn’t expect it to be too long, but I’d probably avoid putting an exact date on it right now.

Jacob Johnson — Stephens — Analyst

Got it, got it. That makes sense. And then, Nick, last quarter and I think in your commentary today, you talked about evaluating inorganic opportunities, and you called them synergistic last quarter. Can you give any update on how that effort is progressing? And when you say synergistic opportunities, should we think about this as you looking to add additional capabilities? Or could it just be as simple as adding additional capacity facilities elsewhere?

Nicholas Green — President & Chief Executive Officer

Yes. So I understand the, I guess, the desire to see what we’re going to do with the funds that we’ve gotten. Obviously, we’re just keen to execute as anybody, but I think it’s a little bit light when I first came on board in the expansion. We want to be swift in what we do, but we also want to be thoughtful to make sure we do the right things.

We can see a number of opportunities. I think that clearly at this stage, we are a biologics-focused CDMO and intend to remain such. And whilst I don’t think we’re going to be putting more mammalian cell culture in right now, we’ve still got Phase 1 and Phase 2 ongoing. But we can see some other opportunities out there, and as soon as we are in a position that we think it’s the right thing to do, then obviously we’ll be letting people know. It will be as quick as we can, but also we are not going to risk just for the sake of rushing as it were and make bad decisions.

Jacob Johnson — Stephens — Analyst

Got it. Makes sense. Thanks for taking the questions, Nick.

Nicholas Green — President & Chief Executive Officer

Thanks very much, Jacob.

Operator

Thank you. Our next question comes from Matt Hewitt with Craig-Hallum Capital. You may proceed with your question.

Matt Hewitt — Craig-Hallum Capital — Analyst

Thank you for taking the questions and nice start to the year. Maybe the first one for me is, you talked a little bit about some of the supply chain issues. You’re not seeing them directly, but obviously, as you look around the landscape, some of those are apparent. How are you staying ahead? Are you pre-ordering well in advance? And then I guess, as a tail to that, as you look at the Phase 1 and the Phase 2 build-out, does that supply chain risk maybe want you — maybe want to push you into even starting to look at a Phase 3, so that you’re ahead of the curve there? Or is there — are there ways to kind of stay ahead of that game?

Nicholas Green — President & Chief Executive Officer

Yes, Matt, good questions. It’s — why we’ve managed to do so well? I mean, I think it’s a little bit like, I’ve often said, a swan or duck swimming across the pond. It looks quite graceful on the top, but we’re paddling like hell underneath. And that’s kind of what the team are doing. They’re dodging and weaving and trying to make sure that they get there. And I think I’ve alluded to this before, on occasions, we’ve got closer than we wanted to do.

So I think there’s a lot of hard work and an element of luck and it’s only for the sake of one item here and there every now and again that you could get caught out. So it’s not one that we relax on, it’s not one we’re in total control of to be frank. I think I’ve made an analogy before, as you know, you might have 5,000 components on a car, you can put it all together, but if you only end up with three out of the four wheels being delivered it still isn’t much use.

So we’re really just trying really hard to stay ahead, where we can. We bring materials in ahead of time. Where we can see strategic stock that we could bring in, if it’s available, then we will bring it in. But quite often even building a strategic stock is a difficult thing to do in many cases today. So it’s a whole combination of those.

With regard to building out Phase 3, that’d be a really nice problem to have. At this moment in time, it’s not an urgent requirement from our perspective. I think we have obviously leading indicators to our business that suggested we needed to do Phase 1 and Phase 2. And $150 million of expansion revenue generating capacity expansion is a pretty big number on a business that was only $60 million two years ago.

So we’ve got a better growing into there, but obviously, we keep casting our eye forward and the more often we have quarters where we do a good job and we deliver product for customers and our reputation continues to build as a really commercial grade manufacturer and someone you can trust and hopefully, we will be facing an issue with Phase 3 somewhere down the road in the future. But I don’t think that’s right now.

Matt Hewitt — Craig-Hallum Capital — Analyst

Understood. That’s really helpful. Maybe one question for Dan. Regarding the gross margin, obviously, you’ve had this tailwind the last two quarters from the unused reserve capacity. Should we be modeling more like your typical upper 20s or near term, or as you’re filling that capacity, we should be anticipating better gross margins and that’s — that lift will kind of offset if there is a decline in the unused portion?

Daniel Hart — Chief Financial Officer

Yes, Matt. Great question. The way I look at it, and I believe I stated last — on the last call, we ended the fiscal year last year with just over 30%. If you take out the one-time items, we’re roughly at 27%. I think moving into fiscal ’22 with the expansion and taking our capacity up to roughly 120, what is currently installed, we would typically be at 30% give or take gross margin. As we start to fill the Phase 1 and Phase 2, we’ll see some incremental margins roughly 40% to 60%. But that’s going to be based on the timing of the stairstep of cost. The earlier we bring in cost versus revenue, clearly that margin will go down. But over time, I would anticipate once we hit the ultimate capacity of $270 million, we’d be at a 40% plus or minus gross margin.

Matt Hewitt — Craig-Hallum Capital — Analyst

That’s really helpful. That’s it from me. Thanks very much.

Daniel Hart — Chief Financial Officer

Thanks, Matt.

Operator

Thank you. Our next question comes from Paul Knight with KeyBanc. You may proceed with your question.

Paul Knight — KeyBanc — Analyst

Hi, Nick. You had mentioned you expect backlog to pick up in the — I think the future months. What’s your thinking there?

Nicholas Green — President & Chief Executive Officer

Yes, I mean, it’s another tougher challenge for the BD team. Obviously, when they hit the revenues of nearly $31 million this quarter to increase the backlog, they’ve got to sign even more than that. So we keep raising the bar as it were, which is obviously what we’re here to do.

Quarters — business doesn’t always jive perfectly well with the quarter, and so we can see some opportunities out there that we think we have a reasonable prospect of winning. And I think if we can execute on what we can see out there at this moment in time, we should hopefully see that the backlog will start to grow over the next few months. That’s kind of where we feel it is.

It would have been nice if things would have just finished off right now. Something that you could sign at the end of July instead at the beginning of August might just change the needle a little bit sometimes. So it isn’t perfectly jiving. So we can see some things that give us good reason to believe that’s possible going forward.

Paul Knight — KeyBanc — Analyst

And you had mentioned numerous contracts or in — I’m sorry, projects. Was it the most projects you’ve seen in the quarter, could you qualify that?

Nicholas Green — President & Chief Executive Officer

It’s more mix. I mean, again that we can go from smaller projects and lots of them are larger projects and less of them, but we — it’s really the blend in the total revenue. And we obviously internally, we probability wait those in terms of whether we think we’ve got a good fit, a good chance, whether it’s just waiting for the people’s approval process and effectively, they’ve already confirmed that they’re going to come. They just need to go to Board or what have you.

So that can be a whole host of factors that — but we kind of monitor pretty carefully obviously right away from number of CDAs that we might sign or even number of hits on websites, all the way through to MSAs in review or signed or even going further than that, we even go down to analyzing the number of modifications to our work statement.

So just trying to measure engagement that gives us an idea of what’s coming forward and that leads into obviously trying to forecast on the business, but also more importantly to some of the other areas that we talked about, which is expansion requirements as well. So it’s a mixture of those that gives us that confidence.

Paul Knight — KeyBanc — Analyst

And my understanding is that your technology content is high, your use of single-use technology, etc. Are you thinking you’re winning, let’s call it, share because of your technology content and turnaround time?

Nicholas Green — President & Chief Executive Officer

Yes, I mean, I think it’s — there are a number of factors that I think starting to resonate in the marketplace. I mean, Avid’s only a name out there that is so focused. CDMO is only a few years old. The truth of the matter is that we’ve been in the biologics space for 28 years, as a company. We’ve been manufacturing commercially for more than 16 and we have a regulatory track record, which is pretty impressive. And the guys do a great job and then it comes down to execution of batch in, batch out and building that reputation and then people start talking about you and that gets out there and I think that’s what’s going on at the moment.

And then the other thing is that speed to market is a critical success factor for most of our clients, if not all of them. There are lots of things you can do at the end of the day to speed up the process between inception of the project and delivery. But one of the key success factors is actually having a bioreactor to make something in. And so having that capacity, being proactive with those investments and showing clients that whether you are an existing client or a new client that we’ll be here for you, and we’ll have that capacity available when you get success.

And so those are the key factors that I think are driving it obviously, being an early mover in disposable technology means the guys are pretty good at using it these days and pretty effective. So a whole host of different things.

Paul Knight — KeyBanc — Analyst

Okay. Thank you.

Nicholas Green — President & Chief Executive Officer

Thanks, Paul.

Operator

Thank you. At this time, I would like to hand the call back over to Nick Green for any closing remarks.

Nicholas Green — President & Chief Executive Officer

Thank you, operator, and thanks to everybody participating on the call today. In closing, I’d just like to thank Avid’s customers, partners and investors for their ongoing collaboration. I would also like to acknowledge Avid’s extraordinary employees who together are driving the company’s success. Thank you again for participating today and for your continued support of Avid Bioservices.

Operator

[Operator Closing Remarks]