Avid Bioservices, Inc. (CDMO) Q2 2022 Earnings Call Transcript

Avid Bioservices, Inc. (NASDAQ: CDMO) Q2 2022 earnings call dated Dec. 07, 2021

Corporate Participants:

Tim Brons — Investor Relations, Vida Strategic Partners

Nicholas Green — President and Chief Executive Officer

Daniel Hart — Chief Financial Officer

Matthew Kwietniak — Chief Commercial Officer

Analysts:

Sean Dodge — RBC Capital Markets — Analyst

Jacob Johnson — Stephens Inc. — Analyst

Matthew Hewitt — Craig-Hallum Capital Group — Analyst

Paul Knight — KeyBanc Capital Markets — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Avid Bioservices’ Second Quarter Fiscal 2022 Financial Results Conference Call. [Operator Instructions] 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 — Investor Relations, Vida Strategic Partners

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 October 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, December 7, 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 and Chief Executive Officer

Thank you, Tim, and thank you to everyone who has dialed in and to those participating today via webcast. I am pleased to announce another strong quarter at Avid. Beginning with our financial results for the sixth quarter in a row, we have recorded an increase in revenues compared to the prior year period. On the new business front, our team signed numerous new clients and new orders further strengthening our pipeline. Finally, with respect to operations, the Company successfully completed its annual maintenance shutdowns and broke ground on the Myford South construction. Most significantly, the Company recently announced its expansion into Viral Vector development and the manufacturing services for cell and gene therapy products. We believe this area offers significant opportunity for growth and we are very excited to begin offering services to this sector.

Before I turn the call over to Dan for a review of the financial results, I would first like to welcome Matt, Avid’s new Chief Commercial Officer to the call. Matt is an accomplished senior global sales executive with a proven track record of driving revenue growth. In his new role, he will be responsible for the continuing growth of Avid’s business through the ongoing expansion of the Company’s commercial and clinical client base. We are extremely pleased to have Matt join our team and we look forward to working with him. Matt, and I will provide additional details on business development and operations for the period following an overview of our second 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 second 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 and six months ended October 31, 2021. Revenues for the second quarter of fiscal 2022 were $26.1 million, representing a 24% increase compared to $21.1 million recorded in the prior year period. The increase in revenues can primarily be attributable to fees received from a customer during the current year period for unutilized reserve capacity combined with an increase in our process development revenues, primarily associated with services provided to new customers. For the first six months of fiscal 2022, revenues were $56.9 million, a 22% increase compared to $46.5 million in the prior year period. The increase in revenues for the first six months of fiscal 2022 can primarily be attributable to an increase in fees received from customers for unutilized reserve capacity combined with an increase in process development revenues primarily associated with services provided to new customers.

Gross margin for the second quarter of fiscal 2022 was 35% compared to a gross margin of 30% for the second quarter of fiscal 2021. Gross margin for the first six months of fiscal 2022 was 36% compared to 32% for the prior year period. The increases in gross margin for the quarter and the first six months were primarily from higher manufacturing and process development revenues during these periods. While we are pleased to report these improvements in gross margin compared to prior years, we do expect to increase hiring in the coming months to support our growing manufacturing capacity and our new Viral Vector business, and this may impact margins in future quarters.

Total SG&A expenses for the second quarter of fiscal 2022 were $5 million, an increase of 21% compared to $4.2 million recorded for the second quarter of fiscal 2021. For the first six months of fiscal 2022, SG&A expenses were $9.5 million as compared to $8 million for the prior year period. The increase in SG&A during the quarter and the first six months was primarily due to increases in stock-based compensation, facility and related expenses, advertising costs, partially offset by a decrease in payroll and benefit-related costs.

For the second quarter of fiscal 2022, we recorded net income attributable to common stockholders of $3.5 million, or $0.06 per basic and diluted share as compared to net income attributable to common stockholders of $800,000, or $0.01 per basic and diluted share for the second quarter of fiscal 2021. For the first six months of fiscal 2022, the Company recorded a consolidated net income attributable to common stockholders of $9.8 million, or $0.16 and $0.15 per basic and diluted share, respectively, compared to a consolidated net income attributable to common stockholders of $4.5 million, or $0.08 per basic and diluted share for the fiscal 2021 period.

The second quarter of fiscal 2022 was the Company’s sixth consecutive quarter of operational profitability and we are pleased to report that we achieved adjusted EBITDA of $7.6 million during the second quarter and $17.3 million for the first six months of fiscal 2022.

Our cash and cash equivalents on October 31, 2021, were $163.7 million compared to our first quarter balance of $159.7 million on July 31, 2021, and prior fiscal year-end balance of $169.9 million on April 30, 2021.

We are updating our previously announced planned capital spend for fiscal year 2022 from $50 million to $60 million to approximately $55 million to $65 million, which now includes anticipated spend on the Viral Vector facility.

This concludes my financial overview. I’ll now turn the call over to Matt for an update on business development during the quarter.

Matthew Kwietniak — Chief Commercial Officer

Hello, everyone. I am very pleased to be participating in my first earnings call as Avid’s Chief Commercial Officer. Throughout my career, I’ve had the good fortune of working with many leading companies in the development and CDMO sectors and in each role, I’ve been charged with driving revenue growth and building the business development teams that achieved that growth. I was eager to join Avid because I believe the opportunity to be substantial, and after my first two months on the job, I can say that my enthusiasm has only grown for this Company. While the ongoing expansion and the Company’s move into Viral Vector manufacturing presents significant opportunities for growth in the future, our current team continues to deliver solid results for our existing mammalian cell business.

During the second quarter, the business development team signed new project orders, totaling approximately $36 million from the new and existing customers. This work will span process development, new projects with existing customers and additional orders for commercial products. As a result, we ended the second quarter with a backlog of approximately $120 million and expect to recognize most of that backlog over the next 12 months. We are also pleased to report that during the first six months of fiscal 2022, we have signed as many new projects from new and existing clients as we did in the whole of fiscal 2021. We believe this as an early indicator of the trajectory ahead and the entire business development team is looking forward with great optimism.

This concludes my overview of business development activities for the quarter. I will now turn the call back over to Nick for an update on operations and other achievements during the quarter.

Nicholas Green — President and Chief Executive Officer

Thanks, Matt. The Company made great progress in operations during the quarter, most notably Avid recently announced that the Company is expanding its CDMO service offering into the rapidly growing cell and gene therapy market. This decision was driven by continued strong growth in this sector, combined with the CDMO industry’s overall lack of proven, high-quality CGMP manufacturing expertise and capacity for Viral Vectors. To lead the Company’s strategic expansion into this market, we are actively building an industry-leading team of experts with established track records of success in this field. To this end, Avid recently appointed Drew Brennan, an experienced executive from the Viral Vector sector of the CDMO market to lead the Company’s expansion into cell and gene therapy market. Drew, most recently spent more than a decade in senior commercial and operational positions at Novasep, where he was credited with driving significant growth of Novasep’s US CDMO Services business, including the securing of several major Viral Vector CDMO contracts. In addition, the Company recently appointed, Elie Hanania as Vice President, Process Development. Elie is a seasoned life science industry executive with more than 30 years of experience in the field of cell and gene therapy.

To house this new business, the Company is constructing a world-class purpose-built 53,000 square feet Viral Vector development and GMP manufacturing facility in Costa Mesa, California, approximately 5 miles from Avid’s existing operations in Tustin, California. Based on current projections, Avid expects the entire new facility build-out to take up to 18 months at an estimated cost of approximately $75 million. The new facility’s analytical and process development laboratories are expected to come online more rapidly with the potential to be operational during the first quarter of fiscal 2023. Given Avid’s strong record of quality and manufacturing, our exceptional regulatory inspection history and our customer-centric approach to business, we believe this Company is uniquely qualified to bring these values and skills to the cell and gene therapy sector and look forward to bringing this business online during fiscal year 2023.

I’ll now provide an update of other operational achievements. As of today, the Company has successfully concluded its annual maintenance shutdowns for [Phonetic] ground on Phase 2 of the Myford South expansion and tied in the Phase 1 expansion which we expect to be available to operations by January 2022 as we previously communicated. And we are also scheduling clients into this space during quarter one of calendar 2022. As we’ve discussed previously, we estimate that the addition of the Viral Vectors to the ongoing expansions will bring the Company’s total annual revenue generating capacity to approximately $350 million. As I hope is evident, the second quarter was highly productive and a transformative time for Avid. The Company’s financial status is increasingly strong supported by year-over-year revenue growth, continued new business wins and substantial backlog. For these reasons, we believe we remain on track to achieve our stated full-year 2022 revenue guidance of between $115 million and $117 million.

Our business development team continues to perform signing $36 million in new business during the quarter and ending the period with a backlog of $120 million. And under the new leadership of Matt, we believe our new business opportunities will only grow. Leveraging the Company’s operational strengths, we are pleased to expand our service offerings into the cell and gene therapy market and we are confident in our ability to establish an industry-leading Viral Vector CDMO business and we are actively building the team and facilities that we believe will drive our success and expand our revenue-generating capacity.

Also, during the quarter, we are pleased to have our progress as measured in the value created for shareholders, recognized as the Company’s stock was named for the first time to the S&P SmallCap 600 Index. We are honored to join this index, and we believe it speaks to the collective effort of everyone at Avid, while building greater visibility for the Company with investors in the industry alike. We are pleased with our progress and we believe that each of our accomplishments during the quarter will facilitate the growth and move us towards our overarching goal of establishing Avid as the best-in-class CDMO focused on biologics.

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

Questions and Answers:

Operator

Certainly. [Operator Instructions] Our first question comes from the line of Sean Dodge from RBC Capital Markets. Your question, please.

Sean Dodge — RBC Capital Markets — Analyst

Yeah, thanks. Good afternoon and congratulations on the success with the new business wins. Nick or Matt, you touched on it a bit in your prepared remarks, but can you talk a little bit more about the broader demand environment? Are you seeing any noise from supply chain challenges? And then maybe with the backlog and then the visibility you may have through your sales pipeline, can you just give us some kind of idea of how quickly you think you can fill the incremental capacity that will be coming online in the next couple of months here?

Matthew Kwietniak — Chief Commercial Officer

Yeah. I think, with the strong backlog already and positive growth with our issuance in the last few months, I think that we’re going to remain on track for continued growth.

Sean Dodge — RBC Capital Markets — Analyst

Okay. And then maybe, I guess, on the forward margin trajectory, there is a couple of different dynamics that will be affecting you over the coming quarters. Dan you mentioned increasing hiring soon, but you also have this new space opening up and generating revenue. Is there any general direction you can give us on how we should be thinking about the trajectory and margins over the next year, year and a half?

Daniel Hart — Chief Financial Officer

Yeah. I think I’ll firm up, Sean, with what I’ve said in the past that with the current installed capacity we should see a gross margin that’s roughly 30% plus or minus depending on mix. Moving into the first phase and second phase for that matter of the mammalian expansion, we should see a good positive 50% to 70% or so margin expansion. But that’s fully dependent on the mix that comes through the timing of the revenues and filling that first phase and second phase and onboarding the cost. So, in general, we should see continued growth as the top line increases. But just to point out in the near-term, we’ll have, based on mix and the costs associated with bringing on the new facilities and absorbing the depreciation and other costs, including personnel costs could impact how quick it expands.

Sean Dodge — RBC Capital Markets — Analyst

Okay. And then just to follow on to that, the cell and gene therapy expansion, how quickly will you be hiring to begin to staff that? Are those kind of more G&A additions at this point and then we’ll start to get to kind of more the facility-specific people or will those happen, I guess, soon?

Nicholas Green — President and Chief Executive Officer

Yeah. So, Sean, it’s Nick speaking. I mean, think it’s a mixture to be frank with you. Some of the first people we’re bringing in, we’ve already got people in engineering, obviously, and we’ve obviously got Elie on the R&D side. But we also, we’re looking at bringing in operational people, quality people, we’ve got to build the quality systems and everything else ahead of opening up manufacturing. But I think you’re probably going to see more in the development side of the business as we bring new clients initially into development and then move them into GMP. And that’s the way we’re bringing the facilities online. So we’re bringing the development hopefully in quarter one of fiscal 2023 and then, obviously, we said the GMP completion is about an 18-month program. So that will be somewhat later on after that.

Sean Dodge — RBC Capital Markets — Analyst

Okay. Super helpful. Thanks and congratulations again.

Nicholas Green — President and Chief Executive Officer

Thanks very much, Sean.

Operator

Thank you. Our next question comes from the line of Jacob Johnson from Stephens. Your question, please.

Jacob Johnson — Stephens Inc. — Analyst

Hey. Good afternoon, everybody. First, just because I’m getting a number of questions on it, just to get out of the way. On COVID-19, can you just talk about how much of your backlog today is comprised of COVID-19-related work?

Nicholas Green — President and Chief Executive Officer

Yeah. I think we’re around 15% roughly, give or take, Jacob of the backlog.

Jacob Johnson — Stephens Inc. — Analyst

Okay. And then, I guess, shifting gears to the Viral Vector build-out, maybe first Nick, what kinds of Viral Vectors will you be manufacturing? Is it AAV, lenti, both? And then also any interest in getting into plasmids?

Nicholas Green — President and Chief Executive Officer

So first question on the vectors, both AAV and lenti, Elie has a tremendous range. Actually, I was shocked there were vectors that I haven’t even heard of to be frank with you that he has been involved within in his 30-year history. So, not that I would surprise anybody, but it’s — he has been involved in a large number, and a good variation. But clearly, AAV and lenti, adenovirus as they sort of main — the main throes of the Viral Vector market for cell and gene therapy. But there will be others, I’m sure. We, obviously, need them as we go along to bring additional expertise around those to support Elie, which we’re obviously out there looking for as we speak. So — but AAV and lenti will certainly, I think be a key cornerstone of the business.

Jacob Johnson — Stephens Inc. — Analyst

Got it. And then just one last follow-up along those same lines, Nick, can you just remind us the synergies that exist between the mammalian capacity and the Viral Vector business?

Nicholas Green — President and Chief Executive Officer

Yeah. I mean, obviously, we still grow the cells in a mammalian cell and in HEK and more often the NOT [Phonetic], which is not a lot different to what we do with CHO in the mammalian cell business. So, a lot of the key fundamental, the size of reactors, the disposable technologies, the unit steps, the purification are all very common. Obviously, the quality systems under a biologics operation, as well as is very similar. But there are other challenges, obviously, that are dissimilar, so air flows and construction of the facility is slightly different in terms of Viral Vectors and, obviously, we’ve got to do the viral component which is why we brought people like Elie and because that’s the new technology that we need to add to what we already know how to do. So a lot of commonality there.

With respect to your comment regarding plasmids, I mean, I think that, obviously, is an interesting field, every Viral Vector that requires a plasmid or two or three. And so, that clearly is an area that they could be of potential interest going forward, as I think we probably highlighted some time in the past. But right at this moment in time, we’ve got a few things that we’re occupied with getting up and running, so not right at this minute.

Jacob Johnson — Stephens Inc. — Analyst

Perfect. I’ll leave it there. Thanks for taking the questions, Nick.

Nicholas Green — President and Chief Executive Officer

Thanks very much, Jacob.

Operator

Thank you. Our next question comes from the line of Matt Hewitt from Craig-Hallum Capital. Your question, please.

Matthew Hewitt — Craig-Hallum Capital Group — Analyst

Good afternoon, gentlemen. Congratulations on all the progress. Maybe the first one regarding the first phase at Myford and now that that’s complete. I think early on there was the potential that if that was completed on time that there could be as much as $12 million of upside to your guidance for the year. If I’m reading the press release correctly, it sounds like that will be dependent upon validation. And I’m just curious what could delay that validation and push that into February, March timeframe versus getting that done here before the end of the year?

Nicholas Green — President and Chief Executive Officer

Yeah. So, as we speak, we’re in pretty good shape. So we fully expect it to be on in January. I don’t anticipate that being much in terms of validation that would cause us not to be able to do that to be frank. So, I think the major issue for us was getting to where we are now, coming out of shut down and having tied it into the existing operations, which we’ve done all of that. So fundamentally, it’s mechanically complete.

So, I guess, the main thing is that, upside is where you’re getting at regarding the forecast and then it remains the same as it was before, yes, there is. Now, we’ve got it onsite, obviously, we can leverage that. But we got to have it — we — it has to be operational before you can book people in. We are already starting booking people in quarter one, but we can’t switch those as I’ve mentioned before from the one DSP suite to the new one. So it doesn’t always mean just because I put a client in there that’s above our initial guidance. But as — I think probably the sort of more positive one towards that one is the backlog that Matt highlighted, which is the $120 million. So, clearly, if he — if Matt continues to add to that, and some of it we can squeeze into this year, then if our capacity is $120 million and it hits $125 million, then we’ve got some additional revenue opportunities there. So, kind of let’s get Christmas out of the way, everything up and running and then, obviously, we’ll obviously be driving to do as much as we can. But at the moment, our guidance remains sort of $115 million, $117 million mark and we’ll work really hard in the New Year to try to see if we can find any opportunity to improve if it’s possible.

Matthew Hewitt — Craig-Hallum Capital Group — Analyst

That’s great and thank you for the color there. Shifting gears a little bit regarding the new Viral Vector opportunity. I would assume at this point, you’ve had an opportunity to check with existing customers that are developing cell and gene therapies in addition to maybe their traditional large molecule products. And I’m curious if there is any overlap there. And if those are the low-hanging fruit as the existing customer base that could come in earlier or quickly once that new facility is up and ready to go?

Nicholas Green — President and Chief Executive Officer

Yeah. I mean, I think I would say that it’s probably not just about going around our existing customers and the like. Obviously, those would be people that we would go out to and talk to. But to be very frank, the main thrust of the focus at the moment is making sure we bring the right level of expertise in, getting the construction and the design absolutely nailed on, moving that forward as fast as we can and then putting a quality system in. Again, we’re here to do this, right, that’s kind of one of the fundamentals of our business is quality first and making sure that we have a real world-class facility, well equipped with the right level of competence. I think the customer side of it is always a challenge in bringing new business in. But we feel that with that — with those things in place that we’ll be able to attract the attention that we need to the facility.

Matthew Hewitt — Craig-Hallum Capital Group — Analyst

Understood. All right. Thank you very much.

Operator

Thank you. Our next question comes from the line of Paul Knight from KeyBanc. Your question, please.

Paul Knight — KeyBanc Capital Markets — Analyst

Hey, Dan. What was the contract fees in the quarter just posted?

Daniel Hart — Chief Financial Officer

I’m sorry, could you repeat that question, Paul?

Paul Knight — KeyBanc Capital Markets — Analyst

Effectively?

Daniel Hart — Chief Financial Officer

I’m sorry, Paul, could you repeat that question for me?

Paul Knight — KeyBanc Capital Markets — Analyst

Sorry. Certain part of the revenue is from manufacturing not performed, but still a charge of revenue recognition. What was that level in the quarter?

Daniel Hart — Chief Financial Officer

That number was roughly $5 million during the quarter.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. And then the COVID is 15% of backlog, is that where you’re getting the most non-recognition or non-manufacturing revenue?

Daniel Hart — Chief Financial Officer

No. Most of the non-manufacturing revenue is coming just from the PD side of the house, which is the entry point into the mammalian side, new programs coming and have the PD side tech transfer, what have you, analytical before it gets to CGMP.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. And then that $5 million, what was that a year ago?

Daniel Hart — Chief Financial Officer

Year ago it was $3.1 million.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. Thanks. And then on the cell and gene therapy expansion, how many square feet did you mention, Nick?

Nicholas Green — President and Chief Executive Officer

54,000 square feet, Paul.

Paul Knight — KeyBanc Capital Markets — Analyst

And $75 million of capex, what do — you’re kind of implying about $100 million and about — about $80 million of potential revenue that — would you view that as kind of a conservative level of revenue out of the facility of that size?

Nicholas Green — President and Chief Executive Officer

It will depend on mix, obviously, and capacity utilization. But I think it’s a little early for me to be absolutely frank on whether we can squeeze more out of it until we start getting it operational and see the opportunities. But I would be surprised if it was any less for sure.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. Thank you.

Operator

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

Nicholas Green — President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]