Lifecore Biomedical, Inc.

Good morning, and thank you for joining LifeCore's fiscal 2023 third quarter earnings call. During the presentation, all participants will be in listen-only mode. Now, I would like to turn the call over to Jeff Sonick, investor relations at ICR.

Good morning, and thank you for joining us today to discuss LifeCore Biomedical's third quarter fiscal 2023 earnings results. Hosting the call today from the company are Jim Hall, president and chief executive officer, and John Moorberg, Chief Financial Officer. Before we begin today, I'd like to remind everyone of the Safe Harbor Statement. Certain statements made in the course of this conference call contain forward-looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning risk factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's filings with the SEC, including, but not limited to, the company's Form 10-K-A for fiscal year 2022 and their subsequent periodic reports. Finally, in light of the company's ongoing exploration of strategic alternatives, management will not be conducting a live Q&A session on today's call. With that, I'd like to turn the call over to Jim Hall, Chief Executive Officer. Jim, go ahead.

Thank you, Jeff. Good morning, everyone, and thank you for joining us for our fiscal third quarter update. As announced last week, we took a meaningful step forward with the execution of an enhanced supply agreement with our significant and long-term customer, Alcon, as well as completing a comprehensive restructuring of our debt arrangements also with Alcon. These transactions allow us to clear the existing going concern qualification and create a more stable and sustainable business model. In combination with the sale of our remaining curation food segment business in early April, LifeCorps is beginning a new chapter as a standalone CDMO. Going forward, we remain focused on continuing to execute on our business plan and evaluate potential strategic alternatives so as to determine the best path forward to maximize value for our stockholders. Today, I'll briefly touch on our fiscal third quarter results and review some of the commercial aspects of these new agreements I mentioned and provide an update on our development portfolio. In the fiscal 23 third quarter, we generated life course segment revenue of $26.3 million and segment adjusted EBITDA of 3 million, both of which were consistent with our expectations and the cadence that we disclosed during our second quarter call. Both the second and third quarter results largely reflect the shift in timing of commercial launches by our customers, which impacted pre-launch production timing, as well as planned commercial revenues, and when combined with the shifting mix of revenues within our development portfolio temporarily slowed our growth. The good news here is that the launches of products are progressing well. On the point of our shifting mix of revenues, we are working through the maturation of certain projects that are being replaced by early stage smaller projects which are less impactful in terms of current revenue generation, but provide future opportunities for LifeCorps. We are also facing some headwinds as a result of inflationary pressures in the near term as pricing increases have lagged behind increases in costs due to customer contractual limitations, which we are now addressing. We believe our business remains very well positioned as a fully integrated CDMO with highly differentiated capabilities for the development, fill and finish of complex sterile injectable grade pharmaceutical products. These technical capabilities have been honed from our more than 40 years of experience in building a premier pharmaceutical injectable grade hyaluronic acid manufacturing platform with a focus on complex and highly regulated products. Our unique expertise coupled with ongoing industry trends towards outsourcing of new drug development positions LifeCorps as a preferred partner to provide CDMO services for new injectable drug applications. In fact, LifeCorps is the only manufacturer of pharmaceutical injectable grade HA with injectable CDMO expertise in the market today. According to industry estimates, approximately 55% of all new drug applications are injectables and pre-filled syringe demand is growing at an estimated 13% compound annual rate. Given the industry's limited specialized injectable drug manufacturing capacity, we intend to continue to take full advantage of this incredible opportunity and deliver much needed capacity that we've been investing in during the past few years. LifeCorps' unique expertise and longstanding commitment to quality are the foundation upon which LifeCorps intends to continue to expand its opportunities for growth in the future. One recent example of these wins is the expanded supply agreement and refinancing transactions with Alcon that we announced last week. Alcon and LifeCorps have worked together for over 35 years and have a deep relationship based on mutually beneficial support for each other's strategies. We are incredibly pleased with the outcome of our new agreements, both in terms of Alcon support on our refinancing, as well as their desire to shift increased capacity onto the LifeCorp platform. The supply agreement for HA fermentation has the potential to increase our HA raw material manufacturing business by approximately 70% over the next several years. While we believe we have ample capacity to satisfy this incremental HA production, we are also looking to the future for ways to invest in and optimize our HA manufacturing footprint. Moreover, we've agreed with Alcon to evaluate supporting their future HA capacity needs with the build out of additional and redundant HA manufacturing. Alcon would own the dedicated production lines within our facilities and help defray associated CapEx that would typically be borne by LifeCorps. It's a win-win for both companies, securing future supply for Alcon's products while at the same time increasing our capacity in an asset-light, capital-efficient manner that we believe will help us return to our historical trend of achieving double-digit revenue and adjusted EBITDA growth in the future. This expansion demonstrates the traction we are experiencing with existing and prospective customers as we continue to enhance our business with new capabilities and added capacity to support the continued expansion of our commercial product portfolio. Overall, our development portfolio of active projects continues to be well-balanced, although we've realized a subtle shift towards early-stage, lower-revenue development projects as two large-revenue, late-stage projects transition to commercial approval. In total, as of the end of our fiscal third quarter, our active development projects decreased by 1 to 24, which is comprised of 22 different customers. These projects are spread across early phase clinical development with eight projects, phase one and two clinical development with seven projects, and phase three clinical development and scale-up commercial validation activity with nine projects. Our team is doing a great job ramping up our commercial presence in the market. As we've discussed several times over the past year, our investments in our business development team are paying dividends. With our two new isolator fillers arriving this year, we are broadening our opportunity set in a significant way as a request for usage of those fillers for customer projects are in particularly high demand. Our approach has shifted in response to that. We've been culling our prospective opportunities with those fillers in mind as we look toward a future state with more optimized and balanced capacity. So while we ended the third quarter with 51 identified prospective projects in our development opportunity pipeline, the opportunities are as diverse and impactful as we've ever had at LifeCorps. This is especially exciting as we work on leveraging our expanded set of capabilities. For instance, previously our opportunities were more focused on highly viscous products that utilized our HA expertise, whereas today, This is only about half of what we are going after. In simple terms, we are opening paths to other segments of the market that we previously may not have had the ability to execute and refining our pipeline to focus on opportunities that we believe we are uniquely situated to capitalize upon. When combined with our unique expertise working with difficult materials, we feel like we are in an extremely strong position. These opportunities span multiple end markets, classes of drugs and medical devices, and with an assortment of companies, both large and small, which we believe speak to the attractive CDMO capabilities within LifeCore's growing expertise that the pharma industry is actively seeking in a CDMO partner. In terms of our growth and ability to meet customer needs contemplated in our development portfolio, we continue to invest in capacity. Today, our theoretical capacity remains at 22 million units versus demand of 8 to 10 million units, which we expect will be fully utilized over the next few years with projects within our existing development portfolio. As such, We need to keep our eye on the near and long-term future, and as I mentioned, we have invested in two isolated fillers that are being manufactured with anticipated delivery dates this summer and later this fall, respectively. We believe that these fillers will allow us to double our theoretical capacity to approximately 45 million units, putting LifeCorps in a great position to meet market needs and optimize our production across our manufacturing footprint. With our portfolio of current development projects and the pipeline of opportunities we are seeing, the new fillers will be very timely to assist LifeCorps in fulfilling our customer forecast commercial units we see on the horizon. Once again, LifeCorps is well positioned to take advantage of the strong industry fundamentals and customer projects as they progress through development and into commercialization. We believe this positioning will translate into significantly increased revenue generating capacity for LifeCorps beginning in FY24 and beyond. In summary, we are making important progress on preparing LifeCorps for the growth that we see in our development portfolio with the completion of the curation food divestments, the refinancing and important commercial advancements with Elkhorn, The LifeCorp business has the strongest foundation we've had in several years. I'm extremely pleased with the resilience that our organization has demonstrated and thank each of our team members for their individual contributions. We operate in an exciting and rapidly growing industry, and I believe we are well positioned for significant growth ahead. We also look forward to updating you on any outcomes as our strategic review process progresses. With that, I'll pass the call to John to discuss LifeCourse fiscal third quarter financials.