Avid Bioservices, Inc.

Good day, ladies and gentlemen, and welcome to the AVID Bioservices fourth quarter and Year in Fiscal 2023 Financial Results Conference call. At this time, all participants are in the listening 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 turn the conference over to Tim Brons of AVID Investor Relations Group. Please go ahead.

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 Kwiśniak, 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 and year ended April 30th, 2023. 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 21st, 2023, 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 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.

Thank you, Tim, and thank you to everybody participating today via webcast.

Both

the fourth quarter and 2023 full fiscal year were record-setting for the company, as we achieved record-high revenues during both periods, and ended the fiscal year with a record-high backlog of $191 million, a 25% increase over last year. With respect to business development, bookings for the quarter and the full fiscal year as a whole were strong, and our teams continued to have success bringing in new customers and winning project expansions with existing customers. In operations, our MyFood expansion, including our new process development capabilities, are now in full operation and actively fulfilling customer requirements. And we continue to make progress with our Cell and Gene Therapy facility and remain on schedule to bring this building online later this year. Matt and I will provide additional details on business development and operations for the period following an overview of our fourth quarter and full year fiscal 2023 financial results.

And

for that, I'll turn the call over to Dan.

Thank you, Nick. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details on our 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 quarter and fiscal year ended April 30, 2023. Revenues for the fourth quarter of fiscal 23 were $39.8 million, representing a new single quarter high for the company, and a 28% increase compared to $31.2 million recorded in the prior year period. For the 2023 full fiscal year, revenues were $149.3 million, representing a new full year high for the company, and a 25% increase compared to $119.6 million in the prior year period. For both the quarter and the full fiscal year, the increase in revenues can primarily be attributed to increased manufacturing runs and process development services provided to new customers. Gross margins for the fourth quarter of fiscal 23 was 21%, and in line as compared to gross margin of 22% for the fourth quarter of fiscal 22. Gross margin for the 23 full fiscal year was 21%, compared to a gross margin of 31% for the same period during fiscal 22. During the three and 12 months ended April 30, 2023, our labor, overhead, and depreciation expenses increased over the prior year periods, primarily due to the hiring of personnel and additional facility and equipment related costs ahead of our mammalian and cell and gene therapy facility expansions. Additionally, the current fiscal year margin benefited from revenue associated with a change in variable consideration under a contract where uncertainties have been resolved, as compared to benefits from unutilized capacity fees recognized in the same prior year period. Excluding all these factors, our fourth quarter and fiscal year adjusted gross margins would have been 28% for both periods. An increase as compared to the prior year fourth quarter and fiscal year adjusted gross margins, which would have been 22% and 25% respectively. We expect the expansion related costs incurred to date will continue to affect near-term margins, especially the related increase in depreciation costs. Additionally, any incremental expansion related costs will only be added in line with anticipated growth and to support future increases in capacity. Total SG&A expenses for the fourth quarter of fiscal 23 were $7.6 million, an increase of 29% compared to $5.9 million recorded in the fourth quarter of fiscal 22. SG&A expenses for the 23 full fiscal year were $27.9 million, an increase of 32% as compared to $21.2 million recorded in the prior year period. The increases in SG&A for both the quarter and the full fiscal year were primarily due to increases in compensation and benefits related costs, legal, accounting, and other professional expenses. Before addressing that income, I would like to remind everyone that during our fourth quarter of fiscal 22, we recorded a non-cash income tax benefit of $115 million, or $1.63 per diluted share, due to a release of our valuation allowance recorded against the company's deferred tax assets, or DTAs. The company previously maintained evaluation allowance on its DTAs until there was sufficient evidence to support the reversal of all or some portion of those allowances. During the prior year fourth quarter, the company determined that it was more likely than not that the DTAs would be realized and release the valuation allowance related to federal and state DTAs as of April 30, 2022. During the fourth quarter of fiscal 23, the net loss of approximately $300,000, or zero cents per basic and diluted share, as compared to net income of $115.6 million, or $1.87 per basic and $1.65 per diluted share for the fourth quarter of fiscal 22. For the 23 full fiscal year, the company recorded a net income of approximately $600,000, or one penny per basic and diluted share, as compared to net income of $127.7 million, or $2.08 per basic and $1.84 per diluted share, respectively, during the prior year period. Excluding the non-cash income tax benefit of $115 million recorded during the fourth quarter of fiscal 22, the company's net income was approximately $600,000, or one penny per basic and diluted share for the prior year quarter, and $12.7 million, or 21 cents per basic and diluted share for the full fiscal year 22. For the fourth quarter and the 23 full fiscal year, the company achieved an adjusted EBIT of $6.3 million, and $21.7 million, respectively. Our cash and cash equivalents on April 30, 2023, were $39 million, compared to $126 million on April 30, 2022. We have made great progress on our facility expansion. As of the end of the fourth quarter, we have completed our mammalian expansions, including process development and manufacturing capacity. We look to complete our cell and gene therapy expansion by the end of calendar Q3 of 2023. We estimate our fiscal year 24 cash required for expansion-related capital expenditures to be $30 million. Upon completion of these expansion projects, we estimate that our combined facilities will have the potential to bring our total revenue generating capacity to up to approximately $400 million annually, depending on the mix of future customer projects. This concludes my financial overview. I'll now turn the call over to Matt for an update on commercial activities during the

quarter. Thanks, Dan. Fiscal 2023 was a great year for our commercial team. During the past year, we made substantial changes to our organization, including the expansion of our sales team with additions in both our mammalian and our cell and gene therapy offerings. We created a new function dedicated to the specific needs of large pharma customers, and this investment is already paying off. We were recently named a preferred partner for a top pharma company, and other large pharma companies have conducted audits or are planning to visit our facilities in the near term. During the year, our team enhanced its visibility at conferences and industry events, and we continue to expand our outreach and presence in the leading value of technology regions in North America. Combined, these strategic moves significantly improved our team's productivity in fiscal 2023 as compared to prior years. This is evidenced in our bookings for both the fourth quarter of fiscal 2023 as well as the full fiscal year. AVID recorded a fourth quarter bookings of $55 million, and as a result, we ended fiscal 2023 with a new record high backlog of $191 million, representing an increase of 25% as compared to $153 million at the end of fiscal 2022. Changing market dynamics have resulted in the biotech sector focusing resources on later phase projects over earlier phase assets. These projects tend to take longer to complete, but are larger and have a much higher probability of regulatory approval, leading to recurring commercial revenues. This market dynamic provides a strong long-term benefit for the business and should help stabilize AVID's future revenue base and long-term growth. As a result, a growing portion of the backlog will extend beyond a year. With a shift to larger and later stage programs, allied with the increasing commercial manufacture contributing to backlog, we would expect this trend to continue. The successes of the past year have allowed us to continue to expand and diversify our client base, an ongoing priority for the company. We are also beginning to utilize our new capacity, and we continue to engage with potential customers for a cell and gene therapy offering, which includes process development and -to-be online CGMP manufacturing services. And finally, we continue to respond to demand for proposals, which we believe will drive our new business successes in the future. In summary, we cannot be more pleased with the growth and productivity of our commercial organization in Fiscal 2023. The team's dedication and hard work have elevated AVID's reputation and visibility within the industry, and we look forward to leveraging their standing in Fiscal 2024. This concludes my overview of commercial activities. I will now turn the call back over to Nick for an update on operations and other achievements during the period.

Thanks, Matt. Fiscal 23 has been nothing short of extraordinary. During the year, we have opened each of our expansions in the mammalian part of the business. In the same quarter, we have seen the backlog equal or exceed our prior capacity. As planned, Fiscal 23 has seen AVID transition to a fully disposable platform with more than 20,000 liters of -the-art capacity, most of which is new. With the completion of these mammalian cell capacity expansion projects, currently AVID's only remaining expansion effort includes the build-out of its new cell and gene therapy facility, which will support early-stage development through commercial manufacturing. The company has already launched analytical and process development capabilities at this facility and remains on track to launch the CGMP manufacturing suite by the end of the third quarter of County of 2023. Upon completion of the cell and gene therapy facility, we estimate that our combined facilities will have the potential to bring a total revenue generating capacity to approximately $400 million annually. Our business development team achieved signings during the quarter of more than $55 million, bringing total signings for the second half alone to $122 million, all of which bodes well for the future. Equally, however, it is impossible to ignore some of the changes we have seen in the market dynamics. Reduced resources from investors being applied to early-phase customers has certainly resulted in low proportions of pre-clinical and early-phase projects in our backlog. However, the focus of customers on late-phase and pre-commercial projects provides longer-term upside as one of the few CDMOs with close to two decades of commercial manufacturing under our belt. This has resulted in an increase in later phase and commercial business in our backlog. During 2023, signings associated with late-phase projects, defined internally as phase III and PPQ campaigns, increased by approximately

34%. The

increase in late-phase projects also has the effect of extending the project duration and associated revenues. Quite simply, there's significantly more work involved in a late-phase project than there is in an early-phase project. However, this also means in the medium term, we have in effect more shots on goal. By this I mean we hope the increase in late-phase projects will lead to an increase in the number of BLAs being filed for products manufactured with AVID, and we would expect a resultant increase in commercial products and revenues assuming their subsequent approval. This trend, we feel, is a result of AVID being recognized as a partner capable of meeting the complete life cycle of our customers' needs. I believe given the increase in later-stage projects, the probability of adding additional commercial products in the future has been significantly enhanced. On the other hand, the reduced number of early-phase projects does make the short-term less clear. Each quarter, we would typically expect to register new customer wins with early-phase projects that can be recognized in the short-term, i.e. upcoming quarters. Although AVID is to some degree insulated from this as a significant proportion of our businesses already commercial, this does in short-term impact and speed at which we can attract new customers. It is as a result of this level of uncertainty as to when exactly funding will return to the broader biotech sector and the impact it has on our short-term revenue that we have felt compelled to broaden our guidance for financial markets. We believe, as in fiscal 23, AVID's reputation as a flexible, reliable, and truly commercial-grade partner will continue to position AVID in an ideal place to take advantage of the medium- to longer-term market fundamentals that underpin the business. This concludes my prepared remarks for today, and we can now open the call for questions. Operator.

Thank you. If you would like to ask a question, please press star 1-1 on your telephone. One moment while we compile the Q&A roster. Our first question for today will be coming from Matt Hewitt of Craig Hillam. Your line is open.

Good afternoon. Thank you for taking the questions. Nick, thank you for providing a little bit of detail on what you're hearing from the customers, but maybe a little bit more detail on what's transpiring on the short or the near-term opportunities. Your guidance implies basically what -single-digit growth at the midpoint this year, a pretty dramatic slowdown from what we saw here in fiscal 23. So just a little bit more color in what you're seeing in the market.

Yeah, Matt, thanks for the question. What's going on, I think, at least from what we can see is that clearly with the amount of investment going into early-phase projects, I'm talking pre-clinical phase one, which are relatively small in size, those funds are certainly being, at least from our perspective, being diverted towards later phase. So the big impact for us there is that we would pick up a number of those in a quarter, and we can execute those immediately. So they go straight into the process of elements and small-scale manufacture, and you can get those in and out very, very quickly. They're being replaced, and as I said, as I highlighted in my commentary, that's by an increase in 34% in our late phase, that's phase three and PPQ campaigns, which just by virtue of the phase that they're in, they involve more batches, they involve the PPQ and the validation exercises, and they just take longer to execute. Now, frankly, if I had a choice, would I prefer a phase one pre-clinical or a phase three? I think the answer to that's quite obvious. I mean, the revenues in a phase three obviously are larger, but they take longer to execute. But I think the big fundamental for me is that they're one stage away from approval, and the probability of approval of those products or the likelihood of approval of a stage three project versus a phase one project is significantly higher. So that drives us much closer towards commercial revenues, and fundamentally, the whole purpose of building a pipeline of projects and diversification of that is to give you more hits on your shops on goal, more products get approved, more products get approved, more commercial revenues. And I think that you could look at this in a number of different ways. If you're not a commercial manufacturer, how do you benefit from those late phase projects? Because most people are probably not going to trust you with those. Whereas if you have got that track record, which I've been doing, then we've seen that 34% increase, which is kind of everything that you'd want. It does create some short-term uncertainty. I don't know any way of getting around that, which I did. But I'm sure as the funding goes back into the early phase projects, we'll see that lift back up, and hopefully that's sooner rather than later. But again, if there's a trade-off between a pre-clinical phase one and a phase three, I'd like to see what we've got, which is the phase threes, and those will result in not only larger revenues, as you can see in the backlog at 191 million and 122 million signed in the second half of the year. So I think that shows the underlying robustness of the business. As those converge, again, I can't be sure whether they do get approved or they don't. But assuming industry averages, we can look forward to some additional commercial products being added to our pipeline and then results and growth in those that one normally sees in commercial-approved products.

Got it. All right. That's very helpful. And maybe a follow-up question for me, and I'll hop back in the queue. But regarding your backlog, $191 million, obviously, congratulations on the growth there in the second half of the year in particular. And I don't know if you have this, but a split between how much of that you would qualify as commercial versus late stage versus early stage. Do you have some type of a split there for us?

I don't, of mine. I don't think we've ever reported on the exact split. So unfortunately, I don't have that detail with me.

All right. Thank you.

Thank you. One moment for the next question. And our next question will be coming from Paul Knight of Key Bank Capital. Your line is open.

Hi, Nick. You mentioned that the later stage projects were up 34%. So I have two questions around that. Is later stage phase three and beyond, is it a third of the business? Do you have a rough idea? And then the second question is regarding for the team, I guess, how quickly can you kind of move into these later stage programs relative to what was a pretty robust phase one pipeline before? So how quickly can you win over large customers?

So we don't have a breakdown, Paul, unfortunately, on the individual components of the pipeline. But I mean, I think just in general terms, I mean, it has a pretty robust commercial pipeline. And I think we've talked before that we do tend to attract later phase projects generally in probably a slightly more favorable manner than one might see the overall clinical pipeline landscape. I mean,

the typical

landscape is a lot of early phase three clinical, less phase one, less phase two, and less phase three. Ours certainly would be more advantageous towards the later phase than one would typically see. And I think that trend is what I've alluded to today in my comments has moved even further that way, as we've seen a significant increase. And it's not a significant increase on a couple of dollars, it's a significant increase on a reasonable number of dollars. So we're very happy with that sort of general dynamic. In terms of execution, I mean, it just is physically the time to execute. So in terms of winning these projects, obviously, they do take a little bit longer to land because most people don't sign a $50 million check for argument's sake versus to compare to a $2 million check in the same amount of time. People tend to do a bit more naval gazing and studying before they sign those size checks. But by virtue of the fact that the backlog has gone up 34% in that area, those are signed because that's how you get into the backlog. And we can clearly see other opportunities in our, what we call our pipeline, where we could attract even more of those. So attracting them, I don't think is the biggest issue. I mean, obviously, there is at the time, as I've said, in signing the checks or the orders for those larger sums, which does take a little bit longer, as we've mentioned before. But also then executing. To execute a large project with a PPQ campaign, for example, is a lot of documentation, a lot of diligence, a lot of hard work in making sure all the I's and S's are crossed on absolutely every thing. Because literally, this is the formal part and parcel of your filing to the FDA. And it involves obviously initially the tech concern and the scale up and then the demonstration and engineering batches and PPQ. So it just takes longer to execute that. It's nothing unusual to have it. It's the same for anybody who's doing late phase projects. But signing that piece of business, we just have to go through that process. But I'll take one of those every single day, because the next thing that happens after that is a BLA gets filed to the FDA. And with a following win, that gets approved. And then we've got another commercial product. And last time I checked, most commercial products, if we start with one batch, they move to two, three, four, five, six, seven, and off we go. So you then get repeatable business going forward, which is exactly the fundamental and why we try to build a pipeline in the first.

And last question, Nick, would be this. You obviously have a lot of industry experience along with your team. What's the situation with phase three and later stage pipelines? It seems like the large CDMOs like Lanza, Catalan are putting in a ton of capacity to meet demand. Do you think this later stage environment is good, great, tight? What's your view on this late stage world? I

mean, I've said this on numerous occasions, you know, it isn't necessarily the bellwether for the whole industry. But from what we can see, we're seeing a growing proportion of those coming to AVID. It's always difficult to determine exactly why. Is it because funds have been moving towards late phase from early phase? I think that certainly has to be a contributor as a highlighter. Ultimately, if a phase three project is coming to AVID, it's coming from somewhere else. So somebody, I guess, has done something wrong. Who that is is not always clear to us. But people don't normally move late phase projects just for the fun of it. But I think in case of AVID, I can only talk about ourselves, is that we have got almost 20 years, I think it's 18 plus years now of late phase commercial manufacturing experience. And clearly that, I think, goes a long way to making your clients feel comfortable that it's not your first rodeo.

Thank you. One moment while we prepare for the next question. And our next question today will be coming from Jacob Johnson of Stevens. Your line is open.

Hey, good afternoon. Next, maybe on the later stage customers, is there any way to outline how many of these projects you have? Because obviously, you outline the trade off for these later stage that they can turn into commercials. So I'm just trying to think about how many commercial therapy opportunities there are as you look at a couple of years. It sounds like it's not one we're talking about.

No, it's not one, Jacob. And good afternoon, by the way. No, it's not one. We don't go into the detail and break down each number of projects by phase or clients. But no, it's not one. It is multiple and there are multiple in the pipeline. So it's very encouraging. I mean, if you stand here and look at the expansion that we've put on, the things that are going to fill that expansion are late phase projects. I might fill the expansion with three or four commercial products, but it is encouraging and I think it kind of underpins the absolute basic fundamentals of this sector and this business is that AVID is a full life cycle CDMO partner that can take you all the way through. And when dynamics such as we see in the financial markets and biotech funding happen and funds get focused towards later phase, it's good to see AVID benefit from that. But equally, there is less funding going into biotech and that affects everybody. Assuming that you're still picking up phase ones and phase twos and we all, at least I believe it, all CDMOs are all also interested in picking those up. And I don't know how you get away from that fact at the end of the day, but the fact that it actually gets covered, albeit going out slightly longer by later phase projects, we're one of the few people who I think can benefit from that because of that commercial pedigree. So medium to long term, I think we've got a boost in the next couple of quarters. Clearly, we would have liked to have seen much more bullish investment and therefore continued growth as we have done. But I don't know how to get away from some of those smaller projects not being funded and therefore not being able to pick them up.

Got it. Thanks, Nick. And then maybe my follow up for Dan. Dan, could you just talk about the outlook for margin in FY24 given mid single digit-ish growth, but I'm guessing a larger cost base with the capacity additions online. And then just along those same lines, can you just touch on kind of the state of the balance sheet if we see maybe a little bit of margin pressure this year? Along with some continued investments on the viral vector side. Thank you.

Sure, Jacob. As I noted in my prepared remarks, we've invested in our people and our facilities over the last fiscal year, which is also including establishing our cell and gene therapy business. Looking forward, any further investment would be to support any additional growth or fulfilling of capacity. Looking at those gross margins for last year as a starting point, as I noted, if you were to normalize for those costs and for some of the benefits that went through, we saw roughly a 7 percentage point impact, positive impact for both the fourth quarter and the full year of fiscal 23. I would say looking ahead on a comparable basis, our gross margins will continue to be impacted by the increase in the fixed cost base that we established during fiscal 23 and also an increased level of depreciation related to the new completed expansion. For instance, the increase in depreciation, which will more than double next year for these assets, those impact future margins by approximately 5 percentage points. In the long term, we still strongly believe that our margins will be strengthened as capacity utilization increases. As far as the balance sheet looking forward, on the cash side, we still feel confident that our cash from operations will fund the business. In the event we needed to, we could pull from a revolver that we have in place, but we believe the cash from operations will satisfy where we're at going forward and we're comfortable where we're at as far as the balance sheet. Looking at viral vector, we're still 100% moving into the viral vector space and we'll continue to fund that similar to the mammalian side as it grows, we'll continue to increase labor and related costs around that.

Got it. Thanks for all that.

Thank you. One moment for our next question. And our next question, we have a follow-up from Matthew Hewitt of Craig Hill. Your line is open.

Thank you. Just one follow-up for me. Maybe on the booking side, is there a breakdown between your gross bookings versus cancellations in the quarter, just if you've got that number handy?

As far as I was

aware,

there was virtually no cancellations in the quarter.

That's fantastic. All right, that's it for me. Thank you.

Thank you. One moment for our next question. And our next question will be coming from Sean Dodge of RBC Capital Markets. Your line is open.

Hey, good afternoon. This is Thomas Keller. I'm Sean. Thanks for stating the questions. There's a notable disconnect between the backlog and the fiscal 24 outlook. Is it fair to say that you all have a particularly high level of visibility on this year's guidance, or maybe say in a different way, how much of this is already kind of effectively contracted versus the go-get portion?

I don't think we actually come in on that one normally, Sean, but I mean out of $191 million, that's clearly a significant portion of that in the first year. I think Dan has always sort of made the comment that the majority is in the next 12 to 15 months. I think if you were looking at the next 15 months, the majority is certainly over 50%. So over 50% of that in the next 12 to 15 months is a significant number of that guidance. So that's the best way I can probably answer that. In regards to the prior question from Matt, I said, you know, virtually no cancellations. The reason I hesitated to say virtually no is kind of a strange answer, but I do recall there being a change of scope, which was a very small number. That comes as a negative in our signings, so just for clarification, I don't think there was any cancellations. I think there was a change in scope, which was some undecided. So I just wanted to clarify on the previous question from Matt as well.

All right, thanks. So then just a quick one on CapEx, and I apologize if you answered already, but how much more do you have left to spend on these expansions and fiscal 24? And then is there any sort of like a good rule of thumb for, you know, maintenance spend going forward?

Sure, Thomas, as far as cash outlay, we have roughly $30 million just going forward to spend, which will be over the entire year, but a significant majority of that over the next three quarters. So there's that component. So as far as maintenance CapEx, I apologize. Maintenance CapEx, you know, in the long term, I would imagine we're going to get to 4 or 5% of revenues, but in the short term, since the assets are brand new, that's going to be a smaller ramp up to those levels. So I would start with a lower number, call it 2 to 5 million on an annual basis, and that would ramp up over some period of time.

All right, perfect. All right, thanks, Fiat, it's all for me.

Thank you. That concludes the Q&A session for today. I would like to turn the call back over to Nick Green for closing remarks. Please go ahead.

Yes, thank you, operator, and thank you to everybody participating on today's call. In closing, as we mark our 30th year in business, we acknowledge the substantial progress made in recent years. We thank our customers for their trust and partnership and our investors for their continued support. And I would like to thank and recognize our exceptional employees who continue to drive our success. Thank you again for participating today and for your continued support of Obby Bioservices.

This concludes today's conference call. Thank you all for joining. You may disconnect and everyone enjoy your evening.