Avid Bioservices, Inc. logo

Avid Bioservices, Inc.

CDMO US

Avid Bioservices, Inc.United States Composite

6.72

USD
-0.17
(-2.54%)

Q3 2018 · Earnings Call Transcript

Mar 12, 2018

Executives

Tim Brons - IR Roger Lias - President and CEO Tracy Kinjerski - VP of Business Operations Paul Lytle - CFO

Analysts

Caroline Palomeque - Noble Life Science Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Avid Bioservices' Third Quarter Fiscal 2018 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 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

Thank you. Good afternoon and thank you for joining us.

On today's call, we have several members of Avid's management team, including Roger Lias, President and CEO; Tracy Kinjerski, Vice President of Business Operations; and Paul Lytle, Chief Financial Officer. Today, we will be providing an operational overview of the Avid Bioservices' contract development and manufacturing business as we well as an update on corporate activities.

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 12, 2018, 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.

And with that, I will turn the call over to Roger Lias. Roger?

Roger Lias

Thank you, Tim, and thanks to all of you who've dialed in and all of you who are participating today via webcast. During our second quarter's earning call back in December, I outlined a number of ambitious objectives all designed to transition Peregrine Pharmaceuticals into a dedicated CDMO business.

Three months later, I am very pleased to announce that Avid has completed these key objectives. First, in January, we changed the name of the company from Peregrine Pharmaceuticals to Avid Bioservices, and we also changed our NASDAQ ticker symbol to CDMO.

We successfully divested the company's lead immuno-oncology assets to an organization with the financial resources and expertise to further develop them. We have established a new operational structure that will allow our business to take full advantage of the substantial and growing demand for biologics manufacturing.

And lastly, we executed a financing round raising gross proceeds of more than $23 million. These funds we will use to grow and enhance our CDMO business including the strengthening of our process development capabilities.

Not only does process development work represent an attractive and profitable business opportunity in its own right, but it is crucial for on-boarding new projects that we anticipate will generate a pipeline of future cGMP manufacturing opportunities. I would like now to discuss the R&D asset divestiture.

Last month, Avid successfully entered into an asset assignment and purchase agreement with Oncologie Incorporated for the company's PS-targeting program. In addition to bavituximab, the deal included Avid's other PS-targeting antibody derivates including beta bodies and certain other assets and licenses useful for the potential commercialization of bavituximab.

Not included in the deal is the PS-targeting Exosome technology, which is being returned to University of Texas, South Western. Under the terms of the Oncologie agreement, Avid will receive an aggregate of $8 million in upfront payments.

These will be made over a period of six months from the execution date of the agreement, and we expect to receive our initial payment of $3 million within the next few days. The deal also makes Avid eligible to receive up to $95 million in development, regulatory, and commercialization milestones.

Oncologie will be responsible for all future research, development, and commercialization costs and activities, including intellectual property costs, and with Avid receiving royalties on net sales, there are upward tiering into the mid-teens. The deal also requires Oncologie to enter into an agreement with Avid for future contract development and manufacturing activities in support of bavituximab.

We are very pleased to have reached this important agreement with Oncologie. This deal places Avid's legacy R&D assets in very capable hands, while providing additional capital, both upfront and potentially downstream to support our CDMO business.

Importantly, the Oncologie deal marks the completion of Avid's transition to a dedicated CDMO business, and our team is now fully engaged in the work of expanding and diversifying our customer base and enhancing our services. Following my comments, Tracy will discuss the very rapid progress we have made in this effort.

But first, I would like to provide a brief overview of the biologics manufacturing market that drives our optimism for the future of Avid Bioservices. By 2022, the biologics drug market is anticipated to increase to approximately $326 billion annually, and biologics are predicted to comprise more than half of the top 100 drug sales worldwide.

Growth is anticipated to continue at a compound annual growth rate of 10%. Within this market, protein drugs such as monoclonal antibodies continue to dominate, and mammalian cell culture base manufacturing of the type that we provide at Avid has become the preeminent technology used in the manufacture of these highly complex biopharmaceutical products.

In 2016, biologics based on mammalian cell culture technology represented 87% of sales of marketed products, as compared to those based on microbial fermentation technology. And this percentage is forecast to further increase to 92% by 2020.

Given this backdrop, the CDMO industry has also experienced substantial growth over the past few years for the predicted compound annual growth rate of 13% from 2015 to 2020. Growth projected from mammalian biologics manufacturing is particularly strong.

Demand for commercial manufacturing capacity for biologics derived from mammalian systems, including biosimilars is expected to rise from 2 million liters in 2016 to approximately 3.5 million liters in 2020. The availability of facilities offering this production capacity is limited.

While many organizations would like to take advantage of current market demand, the lengthy process of designing, constructing, equipping and validating these facilities requires significant expertise and capital investment which function as formidable barriers to entry into the CDMO market. For all of these reasons, we believe that Avid is exceptionally well positioned to address the market with numerous strongly differentiating advantages which include a virtually unmatched 25 years of expertise and experience in developing a manufacturing biologics, a comprehensive range of services to support customers from early stage development through to commercialization, our customer-centric approach, our agile manufacturing and development capabilities which include comprehensive analytical and characterization services and our cost effective solutions which are facilitated by state-of-the-art facilities which feature modular clean room design, single-use bioreactors and other disposable technologies employed throughout the production cycle.

It is Avid's excellent regulatory track record however that is perhaps our strongest advantage and differentiator, historically developing the expertise to comply with stringent regulatory audits and validation requirements has been a challenge for both biopharmaceutical companies and CDMOs alike, customers place premium on working with CDMOs that can ensure high degree of regulatory compliance which decreases execution risk. This applies not only to customers approaching the typically large scale commercial manufacture, but also to those in process development or earlier clinical manufacturing stages who want to avoid the need for an expensive and technically risky future transfer to more experienced CDMO to support their pre-approval inspections and market supply.

In my experience in this industry, I believe our track record to be virtually unparalleled, which consists of 15 years history of inspection by global regulatory authorities with no significant impact on our business or that of our customers. In addition, between 2005 and 2017, we completed six successful pre-approval inspections and between 2013 and the present, we've also hosted four routine FDA inspections including the latest unannounced inspection which was completed last month, none of these resulted in any Form 483 observations and indeed the most recent inspection resulted in no observations of any kind.

In addition to the FDA, we've also completed inspections by the European EMA, Brazil's ANVISA, Health Canada, The California Department of Health, the Australian Department of Health and Turkish authorities, and finally we regularly successfully comply with audits from large pharmaceutical companies which are often more rigorous than those of the regulatory agencies. Given this track record and landscape, we believe Avid has a significant opportunity to drive organic growth by leveraging our strengths, broadening our capabilities, increasing our capacity and improving our market visibility and reach.

To this end, we have taken and continue to take steps to diversify and expand our customer base, we are executing marketing and sales strategies designed to drive new client acquisitions while also continuing to pursue additional collaborations with our existing customers. I'm pleased to be able to report that in a very short period of time we've generated significant interest from both emerging and grow biopharmaceutical players and from pharmaceutical multinationals.

I'm confident that the plan we're executing will drive a considerable increase in backlog and the opportunity to further enhance capacity utilization in the future. So with that background, I'd like to hand over the call to Tracy Kinjerski for an overview of the specific steps, we've taken during and subsequent to the third quarter of fiscal year 2018 on our pathway to achieving our growth and operational objectives.

Tracy?

Tracy Kinjerski

Thank you, Roger. Since joining the company in November, I've had the pleasure of meeting and speaking with a number of our investors and I'm pleased to be participating in my first earnings call for Avid.

As Roger outlined, the market opportunity for biologics manufacturing is significant and growing. And our expertise, facilities and regulatory track record position Avid for leadership in this landscape.

Since coming on board, my priority has been to strengthen our business system and to expand and diversify our customer base in order to meet our revenue goals. As we ramp up our efforts to attract new business to Avid, it is critical that we strengthen our operational processes and systems to ensure that the company is capable of providing customers with an optimal experience at every stage of their interaction with our team.

Specifically, we have taken steps to coordinate business development and project management functions with our teams working closely together in order to best manage and advance all client-basing activities. For example, this includes issuing of proposals and negotiating contracts.

We have also implemented additional procedures across the organization, spanning all stages of work to ensure that each functional team has full visibility regarding the status of existing projects and new projects in the queue. For example, these efforts have resulted in customized site visits designed to optimize technical discussions and the tour experience for each potential new customer with smooth and efficient transfer of newly signed projects from the business development team to the assigned project manager and a tight alignment between marketing, BD and project management group in order to best promote our progress and successes to the outside industry.

This last effort is particularly important as our marketing group often the first interface with a new customer and their close coordination with both business development and project management facilitates more accurate and comprehensive interactions. Also critically important are the multiple changes we've made with respect to our customer contracts and legal engagements.

Going forward, our master service agreement will commit clients to longer term project scope with industry standard reservation fees and cancellation provisions. This will in time provide a more complete forward-looking financial picture for the company.

We also have modified our approach to passing through material cost to clients to include deposits paid against lead times that equitably balance cash flow. These contractual changes enable improved security and assurance for our clients and provide multiple benefits to Avid.

For Avid, our new contract and work statement documentation allows the company to provide a more comprehensive backlog, improved resource allocation and gains the visibility we need to project revenues and project expansion needs. From the client perspective in addition to reducing administrate burden, the system provides assurances that capacity will be available when needed and offers long-term visibility and security for their manufacturing projects.

With our internal systems strengthened, we are actively ramping up our business development effort and building visibility in the industry. Concurrent with our announcement of Avid as an independent CDMO at the J.P.

Morgan Healthcare Conference in January, we launched our new logo and new tagline with other initiatives that are creating brand awareness and driving demand. Renewed marketing efforts have successfully brought new inquiries to Avid and it is clear that our efforts are having the desired impact in our market.

In fact in the first three months of 2018, we've received more than 10 new RFPs from potential clients as a result of new discussions and meetings. These represented all project phases early and late and include commercial manufacture.

The client demographics range from biotechnology companies to multinational pharmaceutical companies. Furthermore in the last two months Avid has been notified that we have been awarded projects by multiple clients and I'm happy to announce that within the past week, two additional new clients have announced their intent to execute master service agreements with Avid.

Two other clients in particular recently allowed us to announce specific details of the project we're undertaking on their behalf. I'd like to provide a little more detail on these customer relationships.

First, I'd like to comment on the Enzyvant project. Enzyvant a subsidiary of Roivant Sciences selected Avid as the commercial drug substance manufacturer for RVT-801, its recombinant enzyme replacement therapy for Farbers disease.

Though it was only recently announced, successful technology transfer and clinical manufacturing have been underway since mid 2017. Avid is undertaking process characterization and optimization in support of Enzyvant's ongoing developments and regulatory activities for RVT-801.

Because of this molecule's indication, it's expected to progress very rapidly to process validation in support of pivotal trials and commercial launch. In addition last month Acumen Pharmaceuticals selected Avid to provide process development and clinical manufacturing services in support of ACU193, being developed for the treatment of Alzheimer's disease.

Avid and Acumen will immediately commence process development work with the goal of creating a robust cost effective and scalable process to support cGMP manufacture. The Acumen contract represents in earlier stage project which supports our near-term revenue and profitability goals as well potentially advancing to larger scale, later stage manufacturing opportunities in the future.

We also continue to engage with multiple potential customers regarding their later stage and commercial manufacturing needs. It is standard that the due diligence surrounding later stage contracts encompasses a larger but longer decision cycle on the part of the client than early stage projects.

We are qualified and well-positioned to win a number of these later stage projects for which we're currently in discussion. While we are not in a position to publicly disclose such potential partners at this time, we believe it's important to communicate the scale of our effort.

2018 is off to great start with a very positive market feedback. From a business development perspective, we continue to focus our efforts proactively on the North America client base but have without dedicated effort also attracted the attention of global companies as well as smaller biotechnology companies outside of the North American region.

Our business development team will include one West Coast and one East coast representative with Roger and myself continuing to actively support the recruitment of new clients. In closing, I believe our business development activities and operational improvements have positioned us well to take full advantage of the growing demand in the biologics manufacturing market.

We are confident that our growing book of new and potential new business positions us on the path to leadership in the industry as well as substantial and sustainable revenue growth. With that, I'll turn the call over to Paul to discuss our recent corporate achievements and financial highlights.

Paul?

Paul Lytle

Thanks, Tracy. I'll now discuss our financial results for the third quarter of fiscal '18 starting with revenue.

As discussed in the last call, we expected to generate between $10 million and $15 million in aggregate revenue during the third and fourth quarters of fiscal '18 currently due to lower demand for services from our two largest customers. During the third quarter of fiscal '18, we recognized $6.8 million in revenue and we remain on track to achieve between $50 million and $55 million as revenue for the full fiscal year.

Though the current quarter revenue was down compared to the same prior year period, the team is making a important progress and diversifying and expanding our customer base as Tracy just discussed. And our current revenue backlog has increased to $39 million representing signed commitments from our customers.

While we have these signed commitments, it's important to discuss that the way we recognize revenue from this backlog is going to change in fiscal year '19. On May 1, 2018 the beginning of fiscal year '19 we will be adopting the new revenue recognition standards, commonly referred to as ASC606 and this new standard will have a significant impact on the timing of revenue recognition going forward.

As a backdrop, today, we recognize 100% of our revenue at a single point in time and in general that point in time represents the date when all deliverables are completed. As an example, revenue from a manufacturing run is recognized when the drug substance is shipped from our facility and all other deliverables have been completed.

Starting May 1, 2018 the new revenue recognition standard will require us to recognize revenue over a period of time for the majority of services we provide including manufacturing services. For that same example mentioned above, during fiscal year '19 revenue will be recognized over the entire manufacturing process which is typically a four month period and the amount of revenue we recognize will be based on a percentage of completion at the end of each period.

There are a few important points I'd like to discuss regarding the adoption of ASC606. First, we plan to adopt this standard on a modified retrospective basis.

For fiscal '19, our statement of operations will report revenue under the new standard based on a percentage of completion from the majority of our revenue and we will separately disclose the amount of revenue we would have recognized during fiscal '19 under the current point-in-time method. In addition, on May 1, 2018, we will analyze all partially-completed and in-process customer projects and the amount of revenue we can recognize in fiscal '19 will only include a percentage of revenue not completed as of April 30, 2018.

As an example, if we are 40% complete with $1 million manufacturing project as of April 30, 2018, then the amount of revenue we can recognize in fiscal '19 would be equal to 60% of $1 million or $600,000 under ASC 606. The amount of revenue and related cost of goods allocated to the period prior to May 1, 2018, will be reported as a one-time adjustment to retained earnings on May 1, 2018.

Let me shift gears now to discuss our gross margins on contract manufacturing revenue. During the current quarter, gross margin declined to a negative 61%.

This was mostly driven by idle capacity during the quarter in the amount of 5.3 million. When we exclude this idle capacity from our gross margin calculations, gross margin for the quarter improved to 17%.

While this margin is well below our expectations for the business going forward, our margins are highly dependant on the manufacturing capacity utilization. As we look to improve our gross margins, in addition to focusing on growing our customer base and backlog to enhance capacity utilization, we continue to evaluate our overall cost structure to better match it with the future needs of the business.

Now turning to expenses; total SG&A expenses for the third quarter of fiscal year '18 were $4.8 million, compared to $4.4 million for the third quarter of fiscal year '17. The current quarter increase was mostly driven by increases in legal and other related fees associated with the settlement agreement reached in November regarding the composition of the Board of Directors and the sale of PS-targeting assets.

With the recent sale of the PS-targeting assets, we have now fully transitioned to a dedicated CDMO. Accordingly, the operating results of our R&D business are now reported separately as a loss and discontinued operations for all periods presented in the statement of operations.

Company's consolidated net loss attributable to common stockholders was $12.4 million or $0.28 per share for the third quarter of fiscal year '18, compared to $9.2 million or $0.25 per share for the same prior year quarter. Cash and cash equivalents as of January 31, 2018 were $17.9 million, compared to $46.8 million at the fiscal year ended April 30, 2017.

Following the completion of the public offering last month, cash and cash equivalents increased to $41.7 million as of February 28, 2018. In closing, I would like to suggest that all participants review our close of report on Form 10-Q, which was filed today for additional detail on the company's financial payments and its result of operations.

This concluded my financial overview. I will now open the call up for questions.

Operator?

Operator

Thank you. [Operator Instructions] Our first question comes from Caroline Palomeque of NOBLE Capital Markets.

Your line is now open.

Caroline Palomeque

Paul Lytle

Caroline Palomeque

Paul Lytle

Caroline Palomeque

Roger Lias

Caroline Palomeque

Operator

Thank you. And I am showing no further questions at this time.

I would now like to turn the call back over to you Mr. Roger Lias for any closing remarks.

Roger Lias

Thank you, Sonya. I'd like to thank you all for participating in today's call.

And as always, I'd like to thank all of our stockholders both long-term and new for their continued support. But I need to acknowledge, and before signing off I'd like to acknowledge, Paul Lytle, who has recently announced his resignation as many of you know effectively in mid-May.

Paul was instrumental in the founding of Avid as a subsidiary of Peregrine way back in 2002. We certainly wish to thank him for his more than 20 years of service to the organization.

I know Paul is tough to replace, but a search has been commenced for his successor, and we look forward to providing news on that soon. So with that, we will conclude the call.

Thank you all for dialing-in, or listening in on the webcast, and have a good afternoon. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program.

You may all disconnect. Everyone have a great day.

)