Avid Bioservices, Inc. (CDMO) Q4 2021 Earnings Call Transcript

Avid Bioservices, Inc. (NASDAQ: CDMO) Q4 2021 earnings call dated Jun. 29, 2021

Corporate Participants:

Tim Brons — Executive Vice President, Vida Strategic Partners, Inc.

Nicholas Green — President and Chief Executive Officer

Daniel Hart — Chief Financial Officer

Timothy Compton — Chief Commercial Officer

Analysts:

Thomas Kelliher — RBC Capital Markets — Analyst

Paul Knight — KeyBanc Capital Markets — Analyst

Lucas Baranowski — Craig-Hallum Capital Group LLC — Analyst

Nathon — Stephens Inc. — Analyst

Presentation:

Operator

Good day, ladies and gentlemen and welcome to the Avid Bioservices Fourth Quarter Fiscal 2021 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 — Executive Vice President, Vida Strategic Partners, Inc.

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 Timothy Compton, 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 April 30th, 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, June 29th, 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.

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 who are participating today via webcast. Since coming onboard almost a year ago, I’ve been delighted with the way the team has been able to focus on execution and the results and achievements made to date. In a relatively short amount of time Avid has successfully brought on multiple new clients and projects spanning early-stage development due to commercial manufacturing. We have significantly increased top line revenues, strengthened margins as well as laying a solid foundation for the future in the terms of backlog. These are all culminating in the delivery of operational profitability for four consecutive quarters.

The growing demand for our services has driven our ongoing phased expansions of the Myford facility. Furthermore, this growth combined with a strong balance sheet has enabled us to invest in additional offerings within our core business such as high throughput capabilities for upstream, downstream and analytical. We are also assessing further opportunities both within our core business as well as in adjacent and/or synergistic businesses where we might enhance and/or broaden our capabilities with the objective of providing more and better solutions to our existing and growing customer base.

Tim and I will provide additional details on business development and operations following an overview of our fourth 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 fourth quarter and full fiscal year financial results are included in our press release issued prior to this call and in our Form 10-K which was filed today with the SEC.

I’ll now provide an overview of our financial results from operations for the fourth quarter and full fiscal year ended April 30th, 2021. Revenues for the fourth quarter of fiscal ’21 were $27.6 million, which more than doubled our revenues of $12.6 million recorded during the prior-year fourth quarter, representing a 120% increase during the fiscal ’21 period. For the full fiscal year ’21 revenues were $95.9 million, a 61% increase as compared to revenues of $59.7 million in the prior-year period. The increases in revenue for both the fourth quarter and full fiscal year ’21 were 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 period.

Gross margin for the fourth quarter of fiscal ’21 was 29%, a significant increase compared to gross margin of negative 10% for the fourth quarter of fiscal ’20. While previously disclosed non-operations related factors strengthened the revenues and margins recorded in Q1 and Q2 of fiscal ’21, it is important to note that our Q3 and Q4 gross margins were achieved with no such adjustments. For this reason, we believe the strength of our third quarter and fourth quarter margins, which were 28% and 29% respectively, demonstrate the growing efficiencies of our business model.

Gross margin for the full fiscal year of ’21 was 31%, a significant increase compared to 7% in the prior-year period. The increase in gross margin during both the fourth quarter and full fiscal year ’21 were primarily from the leverage of higher manufacturing and process development revenues during the periods.

Total SG&A expenses for the fourth quarter of fiscal ’21 were $5.1 million, an increase of 43% compared to $3.5 million recorded in the fourth quarter of fiscal ’20. For the full fiscal year ’21, SG&A expenses were $17.1 million, an 18% increase compared to $14.5 million in the prior year. The increases in SG&A during both the fourth quarter and full fiscal year 2021 were primarily due to increases in payroll related costs, including stock-based compensation.

During the fourth quarter of ’21, Avid redeemed its outstanding shares of Series E Convertible Preferred Stock. This redemption resulted in a one-time charge of $3.4 million, which was completely unrelated to operations and recorded as a reduction to net income attributable to common stockholders. As a result, for the fourth quarter of fiscal ’21, we recorded a net loss attributable to common stockholders of approximately $2.7 million or $0.04 per basic and diluted share as compared to a consolidated net loss attributable to common stockholders of $6.2 million or $0.11 per basic and diluted share for the fourth quarter of fiscal ’20. However, when we adjust for the one-time preferred stock redemption charge, Avid would have recorded a net income attributable to common stockholders of approximately $800,000 or $0.01 per basic and diluted share during the fourth quarter of fiscal ’21.

For the full fiscal year ’21, the Company recorded a consolidated net income attributable to common stockholders of $3.3 million or $0.06 per basic and diluted share compared to a consolidated net loss attributable to common stockholders of $15.2 million or $0.27 per basic and diluted share for fiscal ’20. Excluding the one-time preferred stock redemption charge, we would have recorded net income attributable to common stockholders of approximately $6.8 million or $0.12 and $0.11 per basic and diluted share respectively for the full fiscal year ’21.

Our cash and cash equivalents as of April 30th ’21 were $169.9 million, an increase of $99 million from the end of the third quarter and an increase of $133.7 million from the end of the prior fiscal year. The increase in cash and cash equivalents over the end of the prior fiscal year is primarily due to the following factors. First, $31.2 million generated from operations during the fiscal year of which $17.9 million was generated in the fourth quarter. Secondly, approximately $32.1 million in net proceeds raised during the third quarter from our follow-on underwritten equity financing to fund our facility expansions.

And finally, approximately $138.5 million in net proceeds raised during the fourth quarter from our 1.25% convertible senior notes offering, of which approximately $12.8 million was used to purchase capped call transactions and our previously discussed use of approximately $40.5 million of the note offering proceeds in April ’21 to redeem all of our outstanding 10.5% Series E Convertible Preferred Stock. The redemption of the preferred stock significantly strengthens our balance sheet and will save us $2.5 million annually in dividend payments, net of our annual interest payment on convertible notes.

We intend to use the combined net proceeds for our two-phased facility expansion with the remaining net proceeds for working capital and other general corporate purposes. We may, however, also use a portion of such proceeds for the acquisition of investment in technologies, solutions or businesses that complement our business, although we have no commitments to enter into any such acquisitions or investments at this time.

Our capital expenditures for full fiscal year ’21 were $9.9 million. We anticipate spending an additional $50 million to $60 million during the fiscal year ’22, primarily on our previously-discussed facility expansions.

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

Timothy Compton — Chief Commercial Officer

Thank you, Dan. Fiscal 2021 was a great year for Avid, capped by a strong fourth quarter. During the fourth quarter, the business development team brought on multiple new customers and projects, signing new orders, totaling approximately $26 million. The work for these new orders will expand all areas of the business from process development to commercial manufacturing. During fiscal 2021, the Company signed new business orders for approximately $148 million as compared to $80 million during fiscal 2020. In addition, subsequent to the quarter-end, we announced that Avid will serve as the commercial manufacturer for 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 the products since 2017 and we’ll now expand our manufacturing relationship to include commercial manufacturing activities for ZYNLONTA.

Our evolving and expanding relationship with ADC is an excellent illustration of the value of the early-stage customers, which bring with them the opportunity for clinical development and ultimately commercial manufacturing. We are very pleased to have worked alongside ADC as they advance ZYNLONTA through the clinic and we look forward to supporting the commercial efforts.

For the fiscal year 2021 we onboarded a total of eight new customers, a significant increase over the prior fiscal year. The backlog at the end of fiscal year 2021 was approximately $118 million, a dramatic increase compared to the backlog of approximately $65 million at the end of the prior fiscal year. We expect to recognize most of the current backlog by the end of fiscal 2022.

Looking ahead, we remain optimistic regarding our opportunity to further grow the business. Based on market projections and customer estimates, we believe that our ongoing facility expansion has been exceptionally well timed to align our spend with growing demand. In fact, we are pleased to report that at present the BD team is actively pre-booking our expanded capacities.

This concludes my business development overview and I’ll now hand the call back over to Nick.

Nicholas Green — President and Chief Executive Officer

Thank you, Tim. There are four key areas I would like to address as we close out fiscal 2021 and look forward to a new year. While I don’t want to dwell on the past, I think it’s important to recognize the tremendous performance of the team and the business over the past 12 months. Fiscal year 2021 saw Avid deliver on many of the attributes built as a result of the Company’s significant heritage of commercial manufacture.

Revenues increased by 61%, eight new clients brought on board, our team successfully completed FDA inspections for two product approvals with zero 483 observations. Gross margins increased from 7% to more than 30%, cash generated from operations exceeded $31 million, and we raised more than $170 million in net proceeds from our equity and debt offerings to strengthen our balance sheet.

On top of this, the Company was also able to record four consecutive quarters of operational profitability and an adjusted EBITDA of approximately $20 million or almost 21% of revenues.

This brings me to the second aspect of the business. The growth in the business during the year made it clear that an expansion of our capacity will be needed in the near future if we were to ensure adequate capacity to onboard new clients and provide existing clients with available capacity as we successfully navigate the clinical process and increase their needs. This took the form of a two-phased approach which brings short-term capacity online in this fiscal year with a larger bonus of capacity followed shortly thereafter in calendar 2022. I am delighted to say that both expansions are underway and are currently proceeding to plan.

Looking forward, while historically our annual maintenance shutdowns for Myford and Franklin are planned back to back in fiscal quarter two, this year we are moving Myford to the first weeks of fiscal quarter three to accommodate the tie-ins necessary to connect the Phase I expansion with our existing Myford operations.

As we look forward into financial year 2022, thanks to the BD efforts and all of those in the supporting team, we have a healthy backlog which we feel supports our expected growth of fiscal ’22 — between 20% and 22% or revenues of $115 million to $117 million.

In arriving at this guidance, we were cognizant of a number of factors that we believe have the potential to influence the business as we expect to come out of the COVID-related crisis over this past 15 months or so. The first is supply chain. The impact of COVID and the demands placed on the pharma sector have resulted in not only prices of many key materials increasing, but also the lead times and the availability of key supplies been extended or becoming unreliable. While we’ve been able to manage this throughout the year last year and have avoided any impact on the business, this remains a concern as we enter into financial year 2022.

Secondly, per my prior communications regarding the expansions, you will note that as a result of last year’s growth and our expectations for this year, our guidance is encroaching on our previously-estimated capacity. Throughout last year, we worked diligently on improving our efficiency and we hope that these actions allied with the timely delivery of Phase I will provide some additional headroom as we progress throughout the year.

With some six months to go and although we are currently on schedule, we feel that as the year progresses, we will be in a much better position to guide on the impact of these programs, which we clearly anticipate will be positive.

To this end, a key milestone of course, will be where we stand when we come out of the Myford shutdown in October.

Finally, as mentioned earlier during financial year 2021, the balance sheet has been strengthened and as a result there are substantial positive cash flows generated by the business, the redemption of the preferred shares and the two successful financing rounds. We exit financial year 2021 with approximately $170 million of cash on hand. We actually as demonstrated by the business during the past 12 months, we believe, can bring value to a growing number of customers in the field of biologics. Not only with needs derived from mammalian cells, but in other adjacencies that would equally value a reliable, experienced, high-quality and customer centric partner. We are currently in the process of evaluating a number of synergistic opportunities. While at this juncture, we remain in the evaluation phase, we believe there are opportunities out there for Avid to broaden our offering as we continue to build our reputation in the field of biologics outsourcing.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Sean Dodge from RBC Capital. Your line is now open.

Thomas Kelliher — RBC Capital Markets — Analyst

Hey. Good afternoon. This is Thomas Kelliher on for Sean. Thanks for taking the questions. I guess to start off, how would you guys characterize the development pipeline of your customers right now? Like how many programs you’re working on? How many would you consider that are in a later stage with potential to go commercial versus some of the earlier-stage work?

Timothy Compton — Chief Commercial Officer

Yeah. I’d say this. This is Tim. Thanks for the question, Sean. I’m sorry, it was [Indecipherable] [Speech Overlap]. Yeah, our pipeline is really well mixed between early phase and late phase as far as new opportunities coming in. I would say it’s more weighted towards the early phase which is nice because we tend to hold on to those opportunities throughout the entire lifecycle of those programs. But as an organization, we really maintain optimism and are optimistic about the future of the pipeline.

Daniel Hart — Chief Financial Officer

Yeah, the spread is probably roughly 60%-40% in terms of — we don’t actually break it down by individual clinical phase, roughly 60% earlier phase, 40% later phase.Okay. That sounds good. Thank you. And then one more on business development. I know you guys have expanded the team over the past year and it’s — it seems like that’s been reflected on the bookings. Is there more investment you’ll need to make here to that team or do you pretty much kind of have all the pieces in place to fill all the upcoming capacity?

Timothy Compton — Chief Commercial Officer

Yeah. No, the teams in place and they’re obviously performing very well by the numbers you’ve heard today and we don’t anticipate needing to onboard anymore of the BD team in the next fiscal year.

Thomas Kelliher — RBC Capital Markets — Analyst

Okay. That sounds good. That’s all for me. Thank you.

Nicholas Green — President and Chief Executive Officer

Thanks, Tom.

Operator

Thank you. Our next question comes from the line of Paul Knight from KeyBanc. Your line is now open.

Paul Knight — KeyBanc Capital Markets — Analyst

Hey. How are you? Could you talk to — you mentioned the facility closures and how will that roll out this year in terms of putting that down into the rollout of quarters?

Nicholas Green — President and Chief Executive Officer

Yeah. I mean in terms of splitting the two, we’ve always tried to keep the facility running. So we’ve always had a phased shutdown with Franklin initially and then Myford coming on afterwards as Franklin comes back up. So we end up with the same — the same effect. The only thing is I think that there’ll be an impact across both quarters, quarter two and quarter three this year, whereas in past years these all come in quarter two. Difficult to say. I mean, typically the shutdowns probably last somewhere in the order of three weeks. So I would kind of split that down for that [Phonetic] you’ve seen in previous quarters and just take half of it in each is probably the best proxy I can give at this stage without getting into a really detailed analysis of it.

Paul Knight — KeyBanc Capital Markets — Analyst

Sure. Okay. And regarding backlog, was there any COVID benefit? I know you had a little bit in the prior quarter, any in this quarter, Nick?

Nicholas Green — President and Chief Executive Officer

I’m not so sure there is an enormous amount actually in quarter four, if any, in quarter four. So I think the answer to that is no.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. And could you talk to the industry conditions as capacity still pretty tight in the market, is the timeline shortening at all? What’s your read on that?

Nicholas Green — President and Chief Executive Officer

Yeah, still seeing — I think we still hear of cases where people are short of capacity and are concerned about lead times. It’s always a bit of a difficult thing to assess. Certainly my competition wouldn’t tell me whether they were full or they weren’t I’m sure. But we see a good healthy inflow of RFPs looking for capacity. So if the inputs of opportunities is an indication, there’s still plenty of demand out there and I think I’ve seen nothing to suggest that the capacity issue has eased significantly for sure. I’m sure as we go through that we will take away the — obviously the COVID, at least we hope we take away some of the COVID impact in terms of the industry as a whole. I have always been of the view that even when COVID comes away, because there has been a lack of supply, there is a lot of other therapeutics that are waiting for capacity that are out there that we certainly hope now started to come through and we see those and we see going back to sort of the — sort of typical profile we might have seen pre-COVID as I’m sure we’re all looking forward to life without masks.

Paul Knight — KeyBanc Capital Markets — Analyst

Yeah. Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Matt Hewitt from Craig-Hallum Capital. Your line is now open.

Lucas Baranowski — Craig-Hallum Capital Group LLC — Analyst

Hi, guys. This is Lucas on for Matt Hewitt. Just a couple of questions here. I guess, once the expansions are complete how should we be thinking about the speed of the production ramp for those, I mean, just in general terms?

Nicholas Green — President and Chief Executive Officer

Yes. Hi, Lucas, and thanks for the question. This is Nick. So — I mean, clearly the first expansion brings on around $50 million of capacity. At the moment we’re sort of planning for that to come on in quarter four. Obviously, we’re doing everything we can in terms of accelerating that if there is an opportunity to do that. And as I alluded in my remarks earlier that, as we come out of the October shutdown, that’s really when we will be able to cement exactly when we feel it’s going to — it’s going to come online and if there is an opportunity to bring that into calendar ’21 as opposed to calendar ’22 [Indecipherable].

If you take the $50 million, roughly that obviously gives us at least $12 million of upside if we get it on January 1st, maybe a little bit more north of that. In terms of filling it up, when we — when we give the dates, it’s fully operational. And as Tim alluded to, we are booking into it. It will be difficult to say at this stage whether we’d be able to book all of that, but we will certainly be making every effort to do so.

Lucas Baranowski — Craig-Hallum Capital Group LLC — Analyst

Thanks. That’s really helpful. And then I guess given the hiring that needs to take place, should we be expecting a step-up in SG&A once the expansions are complete or would all of that fall into cost of goods sold?

Nicholas Green — President and Chief Executive Officer

No, there is a little increase in the SG&A over the next sort of — I don’t know 12 to 18 months if we continue to grow as we have and guided to continue to grow. There’s always a little bit of a headwind in terms of the business in terms of bringing in personnel because frankly we need them in six to nine months ahead of the capacity coming online to get people trained and GMP ready as it were. So we do have that headwind. Some of that comes into cost of goods, but some of it also comes into SG&A.

Lucas Baranowski — Craig-Hallum Capital Group LLC — Analyst

Okay. Thank you very much. That’s all I had.

Nicholas Green — President and Chief Executive Officer

Thanks, Lucas.

Operator

Thank you. Our next question comes from the line of Jacob Johnson from Stephens, Inc. Your line is now open.

Nathon — Stephens Inc. — Analyst

Hey, guys. This is Nathon [Phonetic] on for Jacob. Just a few quick ones from me. Starting with the ’22 guide, how should we think about the pace of activity this year? Are there any specific projects that could be lumpy in any particular quarters?

Nicholas Green — President and Chief Executive Officer

We’re not guiding on the quarters. I think — but I don’t know of anything that would immediately stand out outside what we just sort of highlighted in terms of the shutdowns. That’s the major area of lumpiness. You always get a little bit of impact obviously of the Christmas break, but we actually continue to run through that. But I guess as the market as a whole tends to going down a little bit, but it’s not overly market as you’ve seen from our prior quarters. So nothing exceptional that we’re expecting as we sit here right now. Is that fair, Dan?

Daniel Hart — Chief Financial Officer

Yeah.

Nathon — Stephens Inc. — Analyst

Yeah. Got it. And as we sort of think about growth in 2022, the year-over-year growth, any color on the main driver of that growth? Is it mainly existing customers scaling up, is it new projects with existing customers or new customer programs themselves?

Nicholas Green — President and Chief Executive Officer

I think probably the best answer to that is all of the above. We continue to see — try to see our commercial clients continue to increase in revenues, but we’ve seen all four modalities of new business in growth — new business coming — new clients coming on board, clients moving from one phase to the other; commercial clients increasing their demands and then additional programs from existing clients. And we’ve got all four of those working last year to the extent that we can forecast where clients move in their clinical demands and that clinical success would expect to see all four continue in this year as well.

Nathon — Stephens Inc. — Analyst

Got it. Thanks. That’s it from me.

Nicholas Green — President and Chief Executive Officer

Thanks, Jacob [Phonetic].

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 and Chief Executive Officer

Thank you, operator. And thank you to everybody for participating on today’s call. In closing, I’d like to thank all our employees for their exceptional performance during fiscal ’21 that brought us to the position of operational and financial strength. And I look forward with excitement to the many opportunities that lie ahead as a result. Our team remains the key to our success and I am grateful for their dedication and unwavering professionalism. And thank you again to everybody participating on the call and for your continued support of Avid Bioservices.

Operator

[Operator Closing Remarks]