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Edited Transcript of PPHM earnings conference call or presentation 5-Sep-19 8:30pm GMT

Q1 2020 Avid Bioservices Inc Earnings Call

Tustin Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Avid Bioservices Inc earnings conference call or presentation Thursday, September 5, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel R. Hart

Avid Bioservices, Inc. - CFO

* Richard B. Hancock

Avid Bioservices, Inc. - Interim President, CEO & Director

* Tracy L. Kinjerski

Avid Bioservices, Inc. - VP of Business Operations

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Conference Call Participants

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* Paul Richard Knight

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst

* Steven Schwartz

First Analysis Securities Corporation, Research Division - Analyst

* Tim Brons

Vida Strategic Partners Inc. - EVP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Avid Bioservices First Quarter 2020 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I will now like to hand the conference over to Tim Brons of Avid's Investor Relations Group. Please go ahead.

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Tim Brons, Vida Strategic Partners Inc. - EVP [2]

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Thank you. Good afternoon, and thank you for joining us. On today's call, we have Rick Hancock, Interim President and CEO; Dan Hart, Chief Financial Officer; and Tracy Kinjerski, Vice President, Business Operations.

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 July 31, 2019. 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 5, 2019, 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 Rick Hancock, Interim President and CEO. Rick?

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Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [3]

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Thank you, Tim, and thank you to everyone who has dialed in and to those who are participating today via webcast. I am pleased to announce that Avid continued to make progress on multiple fronts during the first quarter of 2020. With respect to our financial performance, revenue for the first quarter of 2020 again beat consensus estimates and our backlog increased significantly. Dan will provide more details regarding our financial results in a moment.

With respect to business development, we signed 2 new contract manufacturing service agreements during the quarter and began onboarding activities for these clients. In addition, we continue to pursue opportunities to expand existing client relationships with active discussions regarding additional batches and potential projects for the manufactured new molecules. Activities with both potential new and existing customers were robust during the first quarter, and Tracy will provide more details on these developments.

With that, I'll turn the call over to Dan to provide a financial overview for fiscal first quarter results.

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Daniel R. Hart, Avid Bioservices, Inc. - CFO [4]

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Thanks, Rick. Before I begin, I'd like to recommend that everyone participating refer to our 10-Q filing with the Securities and Exchange Commission, which we filed today for additional details.

I'll now discuss our financial results from continuing operations for the first quarter of fiscal 2020 ending July 31, 2019, starting with revenue. Revenue for the quarter was $15.3 million, an increase of 21% as compared to $12.6 million for the same period of the prior year. This increase was primarily the result of growth in the number and scope of customer projects.

For the first quarter of 2020, gross margin of 7% was down slightly as compared to 9% gross margin in the prior year period. Despite increased revenue during the first quarter of 2020, gross margin was impacted by hiring personnel to accommodate growth and production demand, a realignment of the company's compensation structure to secure our existing workforce, and equipment repairs that impacted efficiencies during the period. Management does not expect these factors to impact our stated revenue guidance for the full year. And looking ahead, we expect expanding production demand to result in the increased utility of our existing capacity and improve margins.

I'll now address the expenses. Total SG&A expenses for the first quarter of fiscal 2020 were $4.5 million compared to $3.2 million for the first quarter of fiscal 2019. This increase was due primarily to employee separation-related expenses and increased stock-based compensation. Excluding the separation agreement expense and the increase in stock-based compensation, SG&A during the first quarter of 2020 would have been flat as compared to the prior year quarter.

For the first quarter of fiscal 2020, the company recorded consolidated net loss attributable to common stockholders of $4.6 million or $0.08 per share, compared to a consolidated net loss attributable to common stockholders of $3.4 million or $0.06 per share for the first quarter of fiscal '19. The increase in the net loss result primarily from the previously discussed increase in cost of revenue as well as the increase in SG&A from separation expenses and increased stock-based compensation expense.

Our backlog at the end of the first quarter 2020 was approximately $61 million, an increase of 34% compared to the $46 million at the end of fiscal 2019 due primarily to our growing list of customers as well as the expansion of the relationship with one of the company's existing biotechnology customers. We are pleased to maintain a strong backlog, and we expect to recognize the majority of this balance in fiscal 2020.

We are reporting cash and cash equivalents as of July 31, 2019, of $28.9 million as compared to $32.4 million as of the prior fiscal year ended April 30, 2019.

This concludes my financial overview. I will now turn the call over to Tracy for an update on business development activities and achievements during the quarter.

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Tracy L. Kinjerski, Avid Bioservices, Inc. - VP of Business Operations [5]

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Thanks, Dan. During and subsequent to the first quarter, Avid's business development team was extremely active on all fronts. We continued to build visibility with participation at industry events such as BIO International in June, The Bioprocessing Summit in Boston last month, as well as more local industry events. We are now preparing for the upcoming biotech week and outsourced pharma conferences. These events offer a particularly efficient forum to meet with potential new customers as well as current clients. With each event, recognition and enthusiasm builds for Avid and its services. And we continue to expand our book of new business as a result of this aggressive visibility campaign.

Also during the quarter, we began the work of onboarding our newest manufacturing projects. As we announced in early July, Avid signed 2 new contract manufacturing service agreements to support the development of novel drug candidates during the quarter. The agreements include the addition of one of the world's leading pharmaceutical companies to Avid's growing list of customers as well as the expansion of the relationship with one of the company's existing biotechnology customers. The onboarding processes for both of these projects were initiated during the first quarter and they are proceeding well.

As a reminder, I'd like to restate the importance of winning new business with existing customers. While some of this business results from the expansion of a current project, much of this new business is from completely new projects requiring development and/or manufacturing of new molecule. Aside from the revenue generated by the expansion of any relationship, new project wins from existing customers are incredibly valuable for several reasons.

Early phase projects represent opportunity for manufacturing work, up to and including commercial production. On boarding follow-on molecules from existing customers may be later phased, leading to validation in commercial stage with more certainty and providing assurance of need for long-term manufacturing. In addition, as we already have a working relationship with these companies, onboarding and other aspects of the process are much more efficient and less costly, making these projects more profitable for Avid.

During the first quarter, Avid also successfully completed a process validation campaign for a scaled-up manufacturing process on behalf of an existing customer in anticipation of future commercial manufacturing. This represents our first process validation of fiscal 2020, followed by the completion of 2 in fiscal 2019.

Once a process validation is completed, the associated specifications of that process are incorporated into global regulatory filings. If approved, the customer is then required to manufacture in a specified facility using that specified process. Therefore, for those products approved using processes validated at Avid, it's anticipated that the commercial manufacturing will be conducted at Avid. For this reason, we see each process validation completed today as a great opportunity to build commercial business in the future.

This concludes my business overview, and I'll now hand the call back over to Rick. Rick?

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Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [6]

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Thank you, Tracy. I'd now like to provide a brief update regarding operations at Avid. With respect to our expansion work, we continue to make progress with the process development lab in our Franklin facility. This purpose-built, state-of-the-art facility will house Avid's expanded upstream and downstream process development capabilities. We remain on track to begin operations in this facility in the fall of calendar 2019.

More broadly, we continue the ongoing evaluation of our facilities, equipment and processes. It is the goal of the organization to optimize where possible, update where necessary and ensure that we are employing the most effective technologies and processes to ensure our standing as a leading CDMO. As we conduct this review, we are finding areas for improvement. It is always our intent to identify any potential problems before they occur. And to this end, Avid conducts a comprehensive annual maintenance overhaul, during which time our facilities may be partially or completely shut down. We are currently in the middle of this annual process. Because of the significant amount of work that was done during last year's shut down, this year will require less downtime. Last year, both facilities were shut down for more than 3 weeks. This year, Franklin was down for less than 2 weeks, and at Myford, we'll only have a partial shutdown affecting only the exterior of the building.

As result of our annual maintenance overhaul, we expect anomalies in both revenue and margins during the second quarter of fiscal 2020. But we do not expect this to impact our ability to achieve our stated revenue guidance for the year.

I'll now turn to leadership at Avid. As reported last quarter, the Avid Board has initiated a search for the company's new permanent CEO. Avid is well positioned for expansion and growth, and it is imperative that we find the ideal candidate to entrust with the future strategy and vision for the business. Accordingly, we'll take our time with this process and we'll provide an update as there is news to report.

In closing, we recorded revenue that met our expectations for the period, significantly strengthened our backlog and initiated a number of operational improvements in our facility during the first quarter of 2020. Important achievements during the period included the completion of an additional process validation campaign for a customer that anticipates conducting future commercial manufacturing at Avid. The company also entered into 2 new contract manufacturing service agreements during the first quarter adding one of the world's leading pharmaceutical companies to Avid's customer list. These projects are currently in the on boarding process, both of which are proceeding well. We continue to advance discussions with potential new customers and pursue expansion and new project opportunities with existing customers.

As we've seen previously, each existing customer has the potential to create multiple new opportunities for growth. And for this reason, we remain committed to providing the best possible customer experience and producing the highest quality products.

The highlights for the first quarter of 2020 were new customer contracts, significant backlog growth and another successful process validation. We believe that each of these accomplishments will contribute significantly to the future growth and expansion of the business, and we are eager to build on this momentum.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Paul Knight from Janney.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [2]

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And are you at this point, with this kind of very strong backlog build, are you able to get better pricing? Are you looking at customer requests that seem, let's call it, more profitable than maybe in past periods in your experience? So can you just talk about the pricing environment for projects?

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Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [3]

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Great question, Paul. So as you know, we have a unique resource here, in that we can go from early-stage process development all the way through commercial. So having the commercial operations adds a certain amount of regulatory compliance and quality oversight to everything that we do here. So typically, we don't -- I wouldn't say we're the lowest price provider, but for people who need the types of capabilities that we have, I think, we're very competitive in our pricing. But again, we are differentiated from some of the other players in this space who maybe can do early stage development and maybe some very early preclinical and early clinical work. But for people who have operational capability, I think we're very, very fairly priced.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [4]

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And then the next part of my question, with your backlog building to these levels, what's your thought on capacity expansion? We know that you've got space, but when do you start thinking about that part of your capital expenditure program?

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Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [5]

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Right. So we do have tentative plans for building out the remainder of our Myford facility where we have quite a large area, essentially equivalent to what's currently in production right now. We are in active discussion with our clients in terms of when we pull the trigger on that and exactly what capabilities we put in. We are looking at some incremental expansions within that area that will add to our efficiency. But that would be short of building out the entire space. So we're looking at over the next 12 months, making some of those incremental improvements, adding some additional downstream capability. Our focus right now today is really the process development area that we're very excited about, bringing that online. And once that is fully operational, then we'll turn our attention back to our GMP manufacturing capabilities.

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Operator [6]

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And our next question is from Steve Schwartz from First Analysis.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [7]

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First question, just with respect to the backlog. So obviously, you've reached a nice level here. But in stating that you expect the majority of the backlog to flow through revenue this year. If we just do simple math, $61 million plus $15 million for the first quarter, it leaves you about $10 million of the current backlog at the end of the fiscal year. I think that suggests that maybe at a certain point in the year, you kind of hit a peak number, and then maybe you've got some subsequent quarters where the backlog is maybe less than what it is here in the first quarter or even the second quarter. Can you give us any color maybe on how you expect the new business to flow in versus what will flow out through the year?

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Daniel R. Hart, Avid Bioservices, Inc. - CFO [8]

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Sure. Steve, as far as backlog, backlog can increase or a decrease in any given quarter dependent upon a couple of factors, one of which is how much business -- what new business we signed and how much revenue we recognized during the period. So backlog isn't necessarily a number that will continue to increase quarter over quarter over quarter. Though that's definitely a challenge for us that we are up to the task. However, it's difficult in saying how much would translate during the period in any given quarter.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [9]

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Yes, yes, certainly, I understand that. I think to your comment in the prepared remarks with respect to the shutdown, the second quarter is going to be light, right? And certainly the first quarter, while it came in as expected, was less than 25% of your guidance level. So if we look at the flow of revenue through the year, do you expect that maybe the first half of the fiscal year is 40% of total revenue? Is it 35%? Just trying to get a sense of what that second quarter looks like with the shutdowns? And then what happens in third and fourth quarter?

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Daniel R. Hart, Avid Bioservices, Inc. - CFO [10]

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Steve, for the year, we're reaffirming our guidance of $64 million to $67 million. And as you pointed out, yes, the first quarter was under the 25% mark. So that being said, we're a capacity business and as we fill that capacity with revenue through our production, we're going to have some highs and lows in our revenue number. So we're still tied to what we're going to do this year, the $64 million to $67 million, not necessarily providing any guidance on half year or quarterly.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [11]

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Yes. Okay. And can you talk a little bit, since it has come up here in this earnings report, with respect to comp structure and what have you? Where is your business headcount expected to be from -- at the end of FY '19 here in the first quarter? And then as you move through the year. Are you adding people to the business?

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Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [12]

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Right. We're not adding terribly significantly. We do need to add a few revenue-producing positions in operations, process development, analytical development. Generally in terms of the overhead positions, we're stable there. So we don't see a very significant increase in headcount. It will be -- commensurate with the -- as we convert the backlog to revenue.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [13]

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Okay. And with respect to the comp structure in gross margin, can you give me a little bit of color around that? Is it basically -- does your commentary relate to wages and on a unit produced basis, cost or is there a long-term comp component in there? What exactly is that? How do we look at that with respect to gross margin and production levels?

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Daniel R. Hart, Avid Bioservices, Inc. - CFO [14]

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The way I would structure that for you, Steve, is when we transitioned this business about 2 years ago from a development company to a pure play CDMO. We went through significant changes and reductions in costs during that process to stabilize the P&L and to move forward with growing at pure play CDMO. So given the first year, we didn't have a lot of opportunity to provide wage growth or bonus or any of those overall total comp packages to our revenue-producing individuals. Where in fiscal '20, we're taking the opportunity to provide those costs to those individuals to further on where we're going as far as the business and to align the overall comp structure for the existing workforce.

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Operator [15]

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At this time, I would like to hand the call back over to Rick Hancock for any closing remarks.

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Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [16]

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Thank you, again, for participating today and for your continued support of Avid Bioservices. We look forward to updating you again in the near future.

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Operator [17]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.