Avid Bioservices, Inc. (CDMO) Q3 2022 Earnings Call Transcript

Avid Bioservices, Inc.  (NASDAQ: CDMO) Q3 2022 earnings call dated Mar. 08, 2022

Corporate Participants:

Tim Brons — Investor Relations

Nicholas Green — President & 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

Matt Hewitt — Craig-Hallum — Analyst

Paul Knight — KeyBanc Capital Markets — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Avid Bioservices’ Third Quarter Fiscal 2022 Financial Results Conference Call. [Operator Instructions] 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

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, 2022. 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 8, 2022, 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, and to those who are participating today via webcast. We are very pleased with the achievements of the third quarter. During the period, we again recorded year-over-year growth in revenues, gross margin, net income, backlog and adjusted EBITDA. Our business development team had an exceptional quarter, signing multiple new orders that will span the range of Avid’s current capabilities. With respect to our expansions, we continue to make excellent progress on our new mammalian capacity in our Myford facility as well as with our Viral Vector facility in Costa Mesa, California. Matt and I will provide additional details on business development and operations for the period following an overview of our third quarter financial results. And for that, I will 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 the third 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 nine months ended January 31, 2022.

Revenues for the third quarter of fiscal 2022 were $31.5 million, representing a 44% increase compared to $28.8 million recorded in the prior year period. The increase in revenues for the quarter can primarily be attributed to an increase in the mix of in-process and completed manufacturing runs and an increase in process development revenues primarily associated with services provided to new customers. For the first nine months of fiscal 2022, revenues were $88.4 million, a 29% increase compared to $68.3 million in the prior year period. The increase in revenues for the nine months of fiscal 2022 can primarily be attributed to an increase in the number and mix of in-process and completed manufacturing runs and unutilized reserve capacity fees and process development revenues during the current period as compared to the prior year.

Gross margin for the third quarter of fiscal 2020 was 29% compared to a gross margin of 28% for the third quarter of fiscal ’21. Gross margin for the first nine months of fiscal ’22 was 34% compared to 31% in the prior year period. The increase in the gross margin for the quarter in the first nine months were primarily from higher manufacturing and process development revenues during the periods, partially offset by increases in planned growth costs, including compensation and benefits, stock-based compensation and facility and equipment related costs. While we’re pleased to report these improvements in gross margin compared to prior years, in the coming months we do expect additional increases and expense from hiring and other expansion-related costs to support our growing mammalian business as well as our new viral vector business, and this may impact margins in future quarters.

Total SG&A expenses for the third quarter of fiscal ’22 were $5.8 million, an increase of 45% compared to $4 million recorded in the third quarter of fiscal ’21. The increase in SG&A for the quarter was primarily due to stock-based compensation and benefits and facility related expenses. For the first nine months of fiscal ’22, SG&A expenses were $15.3 million compared to $12 million in the prior year period. The increase in SG&A during the first nine months was primarily due to stock-based compensation, facility related expenses, advertising costs, compensation and benefits and legal and accounting fees.

For the third quarter of fiscal 2022, we reported net income attributable to common stockholders of $2.2 million or $0.04 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 third quarter of fiscal ’21. For the first nine months of fiscal ’22, the company recorded net income attributable to common stockholders of $12.1 million or $0.20 per basic and $0.19 per diluted share, compared to net income attributable to common stockholders of $5.6 million or $0.10 per basic and diluted share for the fiscal ’21 period.

Highlighting the strength of our third quarter financial results, we are pleased to report that we’ve achieved adjusted EBITDA of $7.2 million during the period, and $24.5 million for the first nine months of fiscal ’22. These are compared to adjusted EBITDA of $4 million for the third quarter and $14.7 million for the first nine months of the prior year period.

Our cash and cash equivalents on January 31, 2022 were $150 million compared to our second quarter balance of $163.7 million on October 31, 2021 and prior fiscal year-end balance of $169.9 million on April 30, 2021. This concludes my financial overview, I will now turn the call over to Matt for an update on business development during the quarter.

Matthew Kwietniak — Chief Commercial Officer

Thanks, Dan. The business development team had a strong performance during the third quarter, signing net new project orders totaling approximately $52 million from 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 third quarter with a net backlog of approximately $140 million, representing the company’s largest backlog to date. We expect to recognize most of that backlog over the next 12 months. COVID related business represents approximately 5% of our total backlog.

Our team continues to see and pursue the growing demand for CDMO services and in particular, biologics manufacturing. As we’re approaching the close of fiscal ’22, to date, we have doubled our client base and client awards have already reached roughly the same as the whole of fiscal year 2021. Although this new business manifests in all areas of operations, we are particularly happy with the significant increase in process development, which we hope will grow further into long-term opportunities as these relationships develop over time. To support increasing demand and our continued growth we have recently expanded our commercial team and we look forward to building on that momentum the company has been building over recent years.

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 & Chief Executive Officer

Thanks Matt. The third quarter was the company’s seventh consecutive quarter of operational profitability, and we continue recording year-over-year growth in multiple key areas including revenues, gross margin, net income and adjusted EBITDA. And Matt just reported, our new business signings remain robust and the company’s backlog has never been stronger. We are also making great progress with each of our expansion projects. First, I’d like to revisit last quarter’s announcement that the company is expanding its CDMO service offering into the rapidly growing cell and gene therapy market. While this is a very exciting sector of the market, it is the fundamentals that define Avid that underpin our viral vector offering. Quality is being built into the very fabric of the facility as well as the systems, procedures, and most importantly, culture. We will of course be integrating our knowledge of disposables into the design and the business will retain our transparent, customer-centric and flexible approach clients have come to expect and value from Avid.

In recent months, Drew Brennan, General Manager of our viral vectors business has successfully recruited most of the key leaders for the viral vectors covering the functional areas such as process development, quality, operations and facilities. The process of adding additional strength and depth to the team is also well underway. Our purpose-built 53,000 sq ft facility will come online in two phases. The first phase will include process development and analytical development, and is expected to come online before the end of Q1 fiscal ’23. Phase 2 is expected to be complete approximately one year later and we’ll add the GMP suites at an estimated total cost of about $75 million.

Turning to our mammalian offering. During the third quarter, the company announced a significant milestone with the completion of the first phase of the two-part expansion of the Myford facility. This new downstream suite is now operational and scheduling client projects. This additional capacity was ideally time coming online in the same quarter as our backlog has risen to $140 million, exceeding our prior capacity. Importantly, this expansion also enables Avid to continue to maintain capacity for new and existing clients and to ensure that plant availability is not a factor in our client’s timelines.

Our attention now turns to Myford South, which remains on schedule and is expected to come online in less than 12 months. Our new capacity is now approximately $170 million per annum, up from the previous $120 million. Myford South will add in a further $100 million at the beginning of calendar ’23, and with viral vectors a further $80 million around the middle of the next calendar year; bringing Avid’s total revenue generating capacity to more than $350 million per annum. For anyone interested in learning more about our expansions, I would encourage you to visit our website’s facilities page for videos documenting our progress.

Our top line growth has been fueled by the success of our business development team. It continues to achieve robust new business signings as evidenced by our current backlog of $140 million, our highest backlog to date. The financial performance of increased revenues, gross margin, net income and adjusted EBITDA has been made possible by the effective execution of our operations, quality facilities and support functions such as HR, finance, and supply chain. These groups often go unrecognized but without which none of this would have been possible.

This concludes my prepared remarks for today, and we can now turn the call over to the operator for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Now, first question coming from the line of Sean Dodge from RBC Capital Markets. Your line is open.

Sean Dodge — RBC Capital Markets. — Analyst

Yeah, thanks. Good afternoon, and congratulations on the continued strong progress with the new business wins. I wanted to start on the revenue guidance. You’re maintaining $115 million, $117 million target for the year, but when we look at what you’ve generated, year-to-date, this implies a sequential decline in the fourth quarter. So I — and I — I think that’s despite what were some annual shutdown that took place in Q3. So maybe just give us more color on why revenue should be down in the fourth quarter.

Nicholas Green — President & Chief Executive Officer

Yeah, thanks, Sean. It’s Nick speaking. It’s just very simply timing of batches for clients. It’s, again, as you highlight, the general trend is a continuing growing backlog of $140 million. But I think we’ve talked about — talked to this on a number of occasions. The timing doesn’t always quite perfectly work out on each quarter-end And so you just see a little fluctuation in that. So that’s really it. We’re obviously already utilizing the new space that we’ve got created. Obviously a $120 million backlog — sorry 120 million capacity and $140 million backlog, we desperately needed that additional space or would have needed that additional space. Fortunately, that’s online now. And I do understand that there is a general feeling that, obviously, if you got $140 million of backlog, you’ve got the extra capacity, why isn’t it flowing through straight away, and it’s just a timing issue really on the — as we see the quarter. Obviously, if there is any opportunity to pull anything forward into there, then we will be taking advantage of that to the extent that we can. But that’s all we see it as, and clearly we see that continued growth that you see in the backlog.

Sean Dodge — RBC Capital Markets. — Analyst

Okay. Thanks, Nick. And then maybe on your last point there, the $140 million backlog. Myford 1 now being open, so you have the available capacity. Can you just give us a little bit more detail on the fluidity of the fundability of that backlog? How quick can you maybe pull some of the stuff forward and get the new Myford space ramp to a full $12.5 million quarterly revenue run rate? Is that — I guess, can you put any bookends around timing for that? Is that one quarter, a couple of quarters or longer?

Nicholas Green — President & Chief Executive Officer

Yes, we’ve always said typically that we expect to recognize the backlog in a period of approximately 12 months, and this one remains pretty much the same, I think it’s fair to say. So in that extent, I’ve done the math in my head quickly but if you’ve got extra $20 million over, there must be — there is an extra $5 million already in that backlog arguably going into that additional suite. Clearly to completely fill it, we’d be up $170 million, if that was immediate. And at this stage, we’re not guiding to next year. That will be the next quarter and so, when we’ll guide forward. But I think we’ve alluded to — the trajectory of the business remains strong. The growth, it remains — and backlog is kind of indicative of the growth of the business. And so, we hope to see that flowing through into that suite as we go through next year. And then first-world problems would be if that was full and even in that case and we do have the Myford South, which, seems incredible to be saying it now, but it will be on stream in less than a year. So hopefully that’s ideally timed as well.

Sean Dodge — RBC Capital Markets. — Analyst

Yes, right. That’s helpful. Thanks and congrats again.

Nicholas Green — President & Chief Executive Officer

Thanks very much, Sean.

Operator

Now, our next question coming from the line of Jacob Johnson with Stephens. Your line is open.

Jacob Johnson — Stephens, Inc. — Analyst

Hey, good afternoon. At the risk of asking a question that Nick said you wouldn’t answer, I know you’re not guiding yet to 2023. But as we think about FY ’23, just — maybe the question would be this. How should we think about the long-term growth outlook for Avid? And then, maybe whether or not the COVID — some of the COVID revenues in ’22 could prove to be a tough comp. Think you could maybe kind of walk through those two pieces.

Nicholas Green — President & Chief Executive Officer

Yes, I think we’ve kind of articulated the growth. I mean clearly, if we’ve got $140 million in the backlog and we expect to recognize most of that in the next 12 months then I guess that puts a bottom end on the expected growth that we’re going to go forward with. But we’ve also seen the market growing pretty well and we expect to beat that, I think we said that as well. Again, I don’t want to get into the position of having to — Avid to give guidance earlier than we should do. And we’re not in a position to be prepared to do that right now but obviously, as I say, $140 million will be the low end of anything that — as that’s what we’ve already got in the backlog unless something drastic was to happen. And hopefully, we’ll see more than that going forward.

And then obviously as you go forward — we’ve put additional capacity in in Myford South as well coming on stream next year. So I think I’ve also made the comment that we’re not putting that capacity in because we don’t expect to utilize it. Maybe not always on the first day that it opens as we probably almost did this time but certainly in the not too distant future. So, we’re certainly envisaging being able to fill that downstream suites that we’ve just put in, in a reasonable period of time such that we then need to go into the new suite for — into Myford South. And then, ultimately, you’ve got you viral vectors to come on top of that, but again, that’s under construction as well at the moment.

Jacob Johnson — Stephens, Inc. — Analyst

Got it. That last point leads to my next question. Just — the viral vector process development lab, I think comes online, I think you said 1Q fiscal ’23. Can you just talk about how important that viral vector process development lab is for the business development efforts, ahead of the manufacturing suites coming online?

Nicholas Green — President & Chief Executive Officer

Yes. So, first and foremost, the ADP — a new development and process development should be online. We think it will be towards the end of the quarter, quarter one, so, probably July, somewhere around that. The reality of it is — I mean, obviously, we’re engaging in conversations, and I’ll let Matt speak to that but we’re in great — obviously engaging with clients, but ultimately having — and we can obviously show them the sort of facilities that we have, we can — I mean we could throw people around our existing facility and the two will look a lot different. So I think people will have a pretty good idea of what they’re going to — what’s going to be built and the quality of that infrastructure.

But ultimately, at the end of the day, people need — they need the actual facility to be there to do business with us and I think that will enhance the meaningful discussions a whole stage further and start to get us towards a position, hopefully, where we can start to bring business in and in terms of real business in real activities. Matt, I don’t know whether you want to say anything about the the BD efforts and — that are on going out there and what you’ve done in the team?

Matthew Kwietniak — Chief Commercial Officer

Yes, sure. So just to add upon that, we did add a dedicated viral vector business development person this year. She had started in January with us, so we’re already seeing a lot of interest from potential clients. We’ve attended a couple of shows, they are starting to get a few more that are face-to-face now, so each one that we go to, there is more and more activity. So there’s a lot of interest in our value proposition and I think it’s progressing nicely, as good as I could hope at this stage with things, right? So, I think we’re in a good place and as Nick has previously stated, as we get closer to opening of the facility, I think things are going to firm up nicely.

Jacob Johnson — Stephens, Inc. — Analyst

Got it. Thanks for that, Nick and Matt.

Operator

Now, our next question coming from the line of Matt Hewitt with Craig-Hallum. Your line is open.

Matt Hewitt — Craig-Hallum — Analyst

Good afternoon, and congratulations on the strong quarter. Maybe a couple of questions from me. First off on the gross margin, I think you talked about some of the incremental cost that you faced in the third quarter. But as we look at — revenues came in much better than I think many of us had anticipated. What the delta or what causes the shift in — from quarter-to-quarter in the gross margin? Is that purely a mix of bigger batches versus smaller batches versus the services? Maybe — what creates that delta?

Daniel Hart — Chief Financial Officer

Matt, thanks, this is Dan. You essentially just answered your own question. Yes, it’s absolutely up to the mix and the scale, the duration, the process, it’s kind of all of the above. As I’ve said in the past, gross margin of 30% roughly, plus or minus is highly dependent on the mix. So I think that’s kind of what we’ve seen in the last three, four quarters.

Matt Hewitt — Craig-Hallum — Analyst

Got it. And then given some of the headlines here recently and I know others have talked about it, are you seeing any inflation in your business? Is that — is it primarily in wages or are you seeing it maybe in some of the inputs as well? Maybe help us out there.

Nicholas Green — President & Chief Executive Officer

So, Nick speaking again here. I think certainly in wage increases, we see inflation in terms of what it requires to get hold of stuff and new stuff as we’re growing and we’re certainly hiring a good number of people these days. In terms of the inputs into the process, a lot of the inputs for us are pass-throughs. So, the — a vast majority of the raw material component is a pass-through to the clients, so, whilst we do see these things coming through, they’re not as big an impact on our profitability in terms of fact that is passed through ultimately to the end client.

Matt Hewitt — Craig-Hallum — Analyst

Got it. All right, well thank you very much and congratulations on the strong quarter.

Nicholas Green — President & Chief Executive Officer

Thanks very much.

Daniel Hart — Chief Financial Officer

Thanks, Matt.

Operator

Now, our next question coming from the line of Paul Knight with KeyBanc. Your line is open.

Paul Knight — KeyBanc Capital Markets — Analyst

Hi, Nick. On the commercial profile — on the profile of the contracts, are you starting to average longer duration? Meaning, are there more moving into Phase 3? I mean are you an average Phase 2 now? Or where is that maturity of the pipeline with the backlog increase etc?

Nicholas Green — President & Chief Executive Officer

Yes, really good question, Paul. It’s — I don’t actually know what the average is. I’ve never actually done that one. It’s an interesting concept. I might have a look at that one but we do monitor, obviously, the pipeline. I think, as I’ve alluded to, one of the nice things about the businesses is that we established a funnel over the last couple of years for sure that as we see projects now in preclinical Phase 1 Phase 2 Phase 3 and commercial, obviously. What we now see — what we’re now sort of experiencing is a broadening of that funnel and that’s what we’re trying to do. And I think we’ve been quite pleased that, kind of in the message of of our commercial pedigree is getting out there and we are seeing some later-phased projects coming in and we’re seeing projects maturing to fit those phases. Ultimately, the Holy Grail is when clients actually jump across and we saw that last year as well. So — but yes, we’re pretty pleased with the development in terms of the maturity of the pipeline, but we’d always take more late phase and commercial products because those are always really good for predictability and reproducibility in terms of revenue streams.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. And then, with your experience in the industry, what type of EBITDA margin do you and Dan think Avid could operate with more — at the mature stage of the business?

Daniel Hart — Chief Financial Officer

Sure. Definitely at the heart of what we’re aiming at here, Paul. I think — as I’ve said in the past, looking at the capacity going from $120 million to $170 million and ultimately getting to $270 million on the mammalian side and then adding in additional approximately $84 million to the viral vector — looking at both of those different offerings, they’re pretty close in the overall margin profile. Some similarities, some differences. All in all, you can see that we’ve been running at low-to-high 20s in the last four, five quarters as far as a percentage of EBITDA. I would imagine as we reach at full capacity, that number would be starting with a 3 — low mid 30s.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. Thank you.

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 thank you to everyone participating on today’s call. In closing, I’d like to thank Avid’s customers, partners and investors for their ongoing collaboration. And as always, I’d 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]