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spk01: session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today, Stephanie Diaz with Societals Investor Relations. Go ahead.
spk05: Thank you. Hello, and thank you for joining us. On today's call, we have David Enloe, President and CEO, and Ryan Lake, Chief Financial Officer. Today, we will be providing an overview of Societal's contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended March 31st, 2022. 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 May 11, 2022, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current beliefs of the company, which involve 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. 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 societalcdmo.com. With that, I will turn the call over to David Enloe, Societal's President and CEO.
spk04: Thank you, Stephanie, and thank you to everyone who has dialed in and to those who are participating today via webcast. By any measure, 2021 was a transformative year for the company. New management and team, new facilities, new capabilities. These factors contributed to other important changes, including a significantly expanded and diversified customer base and a stronger financial position. I am pleased to report that the momentum created in 2021 is carryover into 2022. Not only have we continued to advance each of the prior year goals, but we have established a new set of goals for 2022, which are executing segment-specific sales and marketing strategies while building a stronger corporate identity, optimizing and expanding our capabilities, enhancing both our customers' and our employees' experience working with and for the company, and continuing to achieve growth and strengthen our financial position. During the first quarter, our team made progress in each of these areas, giving us great optimism for the year ahead. I will provide a review of our Q1 2022 achievements, followed in an overview of our financial results for the quarter. For that, I'll turn the call over to Ryan.
spk03: Thank you, David. Good afternoon, everyone. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details on our financial results for the first quarter ended March 31st, 2022 are included in our press release issued prior to this call and in our Form 10-Q, which is on file with the SEC. Revenues for the quarter ended March 31st, 2022 were $21.2 million. This represents a 26% increase compared to revenues of $16.8 million recorded during the prior year period. The increase of $4.4 million was primarily the result of increases in revenue due to the acquisition of irises, as well as higher revenues from our clinical trial materials business. In addition, there was an increase in revenue from our largest commercial customer, Teva, correlated with pull-through in demand, resulting from market share gains against the sole competitor for the Verapamil SR products. Offsetting these increases was an unexpected decline in revenue from Lynette's commercial sales of the Verapamil PM products, resulting from weaker than anticipated sales from our partners' efforts in the market. We are diligently identifying the root cause for these declines and exploring strategic options to restore sales levels. Cost of sales for the quarter ended March 31st, 2022 was $16.2 million compared to $14.4 million for the comparable period of 2021. The increase of $1.8 million was primarily due to the acquisition of the San Diego facility and is partially offset by the reallocation of expenses reflecting the post-acquisition organizational structure. Selling general and administrative expenses for the first quarter were $5.7 million compared to $4.7 million recorded in the 2021 period. The increase of $1 million was primarily related to increased personnel costs tied to the reallocation of expenses reflecting the post-acquisition organizational structure offset by lower stock-based compensation expense. As previously communicated, as a result of our integration and reorganization effective October 1st, 2021, certain expenses associated with employees who now support our multi-site organizational structure and operations are classified in selling general and administrative expenses. Prior to October 1st, 2021, these employees supported our plan operations and were classified in cost of sales. Interest expense was $3.4 million for the three months ended March 31st, 2022, a decrease compared to $3.9 million for the comparable period of 2021. The decrease of $0.5 million was primarily due to reduced term loan borrowings under the credit agreement with Ethereum, as well as a decrease in the LIBOR base rate of interest on our term loans under the credit agreement. This decrease was partially offset by an increase in interest from the seller's note, which was a component of the IRS's acquisition purchase price. For the quarter ended March 31st, 2022, the company recorded a net loss of $4.3 million or $0.08 per diluted share as compared to a net loss of $6.8 million or $0.23 per diluted share for the comparable period of 2021. EBITDA, as adjusted for the period, was $1.4 million compared to $2.7 million in the prior year period. During the period, lower-than-expected sales of a rapid mill by our marketing partner, Lynette, negatively impacted EBITDA, as adjusted, by $1.5 million as compared to the 2021 period. Our cash and cash equivalents as of March 31, 2022, were $15.3 million compared to $25.2 million as of the end of the prior fiscal year. This concludes my financial overview. For those interested in reviewing our non-GAAP reconciliations, please refer to our 8K filing or the press release issued today. I will now turn the call back over to David for an update on operations and achievements during the period.
spk04: Thank you, Brian. As I stated in my opening remarks, 2021 was transformational for the company, but the progress continues, and we are thrilled to report early success with our 2022 priorities. I'll begin with the most obvious indicator of change, the company's name change to Societal CDMO. First, I believe it's important to state that this name change is not merely a marketing tactic. Rather, it is an important signal of the organization's evolving outlook and fundamentally to our approach to doing business. As we strive to build a better business, our leadership continually contemplates, what can we do better? How will it strengthen our business? Part of that positioning discussion led us to conclude that our name and visual identity did not align with our mission and vision. nor did it support the corporate values that define our behavior inside and outside of the company. After undertaking a comprehensive branding exercise, the company is very pleased to embrace the name Societal CDMO and our tagline, Bringing Science to Society. We believe this name reflects the company's commitment to our people, to our customers, the communities in which we operate, and most of all, the patients that we ultimately serve. In addition to expanding our capabilities, enhancing our facilities, increasing our customer base, and strengthening our financial position, last year we also intensified our commitment in the areas of diversity and inclusion and environmental sustainability. We believe that excellence in these areas brings forth better decision-making, higher employee engagement, and as a result, improved financial performance. We believe our new name more appropriately reflects these priorities. Since we announced the name change in March, as well as our new tagline, Bringing Science to Society, we have received exceptionally positive feedback, and we believe this identity will support our continued efforts to achieve increased growth and financial strength in the years to come. As disclosed during our fourth quarter and year-end conference call, CIDLE has prioritized five goals for 2022, and this name change supports several of these objectives. The first of these goals is to execute segment-specific sales and marketing strategies and build a stronger corporate identity. For all the reasons I have just outlined, we believe our new name brings with it a powerful message and identity. With respect to the company's sales strategy, we have adopted a new approach designed to best serve each of the specific market segments that we engage. Specifically, we currently support three discrete market segments. First, commercial oral solid dose products such as the Otsuka drug, the tech transfer of which is nearly complete. Second, our legacy profit-sharing products such as Verapamil, which I will discuss in greater detail later in my comments. And then finally, the early-stage development clients whose programs we support both in San Diego and in Gainesville, Georgia. As the needs of each of these segments are different, so too should be our sales strategy for each. The distinction between these segments include important factors such as different decision-making processes, key drivers and metrics of success, project management approach, and the approach to creating productive relationships with our clients. While we have been quite successful in attracting new and expanded business over the past year, we believe that a standardized approach to commercial development is not the best path forward to sustainably growing our business. For these reasons, the company is working to employ segment-specific marketing strategies tailored to the needs of each customer group. Before speaking to the progress we've made with respect to sales, I do want to comment on a couple of headwinds impacting our industry, as well as one specific challenge societal currently faces. I'll first speak to the macro factors. The first is the increasing challenges we see from a supply chain perspective. While the impact of COVID-19 to our professional and personal lives has lessened in recent months, we are now beginning to encounter residual supply chain issues that we believe may potentially impact the timing of certain project completions. Biles, blister packs, and other key components, as well as the client's API materials being shipped to our site, or continued processing are all being stressed right now. Secondly, it is important that we remain mindful of the impact that clinical failures and or poor financing conditions may have on the businesses of our customers. As we've seen in prior economic cycles such as this, these trends may create a general slowdown in clinical development activity. As for the specific challenge that Societal is facing, I would like to address the sales of our drug product, verapamil. As a reminder, Societal CDMO owns the NDA and the drug master file for verapamil, an approved calcium channel blocker for the treatment of hypertension. For the past several years, Teva has and continues to be a strong marketing partner for the dosage forms representing the largest portion of the overall Verapamil franchise sales, while Lynette has served as our marketing partner for certain formulations of this drug since 2014. As the market for Verapamil is mature, revenues for the entire franchise were expected to remain flat for the duration of the year. The significant decline in sales volumes during the quarter was related to those formulations sold through Lynette. Concurrent with our efforts to better understand the reason for the decline, we have initiated steps to more fully address this matter and to evaluate opportunities to restore sales levels. Resolving this matter is a paramount priority for societal CDMO, and we will keep the financial community apprised as to our Barapamil sales strategy going forward. While there is no way to know with certainty how matters will continue to evolve, to date we have a plan and are successfully navigating these headwinds. both those impacting the overall market and the specific Lynette sales of Arapamil. Accordingly, we see no current need to adjust our guidance for 2022. Speaking specifically to the first quarter sales activity, the company secured new business in both the oral solid dose commercial tech transfer and development stage CDMO segments. Several of these new contracts have been communicated publicly during the quarter, and our corporate investor deck has been updated to reflect important additions to our portfolio. Subsequent to quarter end, societal has continued its momentum, securing two additional new contracts. One of these agreements, which was previously disclosed, is a new manufacturing and packaging task order agreement by the National Cancer Institute's Division of Cancer Treatment and Diagnosis. The new contract is an individual task order of more than $400,000, for the manufacture and packaging of a chemical compound known as ATTM capsules to support clinical development of that compound. We look forward to being able to share more about our new business wins to the extent we are permitted by these contracts. Until then, I do want to share that these programs will utilize multiple services provided by Societal, strengthening the nature of these relationships. Given these early successes, we are optimistic that our sector-specific marketing strategies will continue to attract and support new business in the future. I'll now pivot to our four remaining priority efforts for 2022, which are optimizing and expanding our capabilities, enhancing our customers' experience working with the company, enhancing our employees' experience working for the company, and finally, continuing to strengthen our financial position. I'll first address the company's ongoing progress towards optimizing and expanding our capabilities. As reported following the acquisition of IRISIS, the company formed an integration team which is focusing on 15 discrete work streams to ensure all synergies and opportunities are being captured and optimized. These efforts focus on key areas including sales and marketing, quality and regulatory systems, human resource and people engagement practices, environmental health and safety policies, business systems, and operational excellence processes. We're pleased to report that the integration process continues according to plan. The majority of the work streams are complete, with the few remaining integration efforts moving towards completion on schedule. The changes implemented to date have already enhanced our operations, creating a more efficient and effective organization. With respect to expanding our technical capabilities, during the first quarter, societal continued validation and commissioning activities for its aseptic fill finish and lyophilization capabilities. We are beginning to provide these services to clients this quarter, Q2 2022, and already have customers under contract. I would like to thank our technical teams for all of their efforts in getting these important services up and running. Another priority for the company this year is improving the engagement experience for key stakeholders at the forefront of this effort being our customers. While societal enjoys strong customer relationships, we believe it is important to anticipate the needs of our growing customer base in order to provide the highest standards of service. To this end, we are actively implementing procedural enhancements designed to strengthen our client interactions, continue to create unparalleled trust and establish valuable partnerships from process development through commercialization. The key initiative we are undertaking is to upgrade the project management approach across both of our sites. We have added a seasoned director of project management, and she is leading the charge here, making sure we are deploying best industry practices in this important area. It is our belief that optimized communication and professional trust will play critical roles in our ability to continue to attract new customers and to expand our existing relationships, both of which are expected to be core drivers of our future growth. Another key stakeholder group, of course, is our societal team. And for 2022, we have prioritized the creation of an industry-leading employee experience and corporate culture. In addition to changing our name and brand to be more reflective of our organizational values, We have elevated our internal talent acquisition and human resource teams to ensure we are attracting the best of the best to join us as we grow. And to support that talent once aboard, we have curated a series of meaningful events and are developing educational activities addressing both the personal interest and professional growth of our team. We believe that these efforts result in a more engaged workforce and lower turnover, leading to higher productivity, better ideas to address challenges faced, all of which ultimately leads to increased profitability. It is our belief that the successful achievement of these four goals will facilitate our fifth and final goal for the year, strengthening the company's financial position. As reported by Ryan, first quarter revenues of $21 million represents a strong year-over-year improvement and demonstrates the momentum in our corporate development efforts. Complementing this top-line growth, Societal is carefully managing every aspect of the business in an effort to preserve cash and reduce debt. And beyond typical cost-saving measures, we are pursuing opportunities to monetize non-core assets such as real estate in order to generate non-dilutive funds that can be used to pay down our debt. Since initially disclosing these efforts, we are pleased to announce that we expect to enter into a letter of intent for the sale of approximately 121 undeveloped acres surrounding our facility in Gainesville, Georgia, in the coming months. We are actively taking steps to facilitate this sale and will provide an update as appropriate. We are also exploring the potential opportunity to execute the sale leaseback of our Gainesville facility and will provide additional detail as this process advances. As I hope is evident, Societal is deliberate in its planning and is executing according to that plan. As we've outlined today, during the first quarter, the company made progress with each of our stated goals for 2022. During the period, the company's name recognition and sales were bolstered by our segment-specific marketing strategy, as well as a new and stronger brand identity. We continued work to bring additional capabilities online, and we're launching our new aseptic fill finish and lyophilization capabilities later this quarter. During the period, we also made meaningful progress towards strengthening the engagement experience for both our customers and our employees. And this effort will be ongoing as we continue to identify and implement best practices for a changing workplace. We believe that early successes with each of these efforts have already improved the financial strength of the organization. Despite weaker-than-expected verapamil sales, Societal had a strong first quarter, reporting revenue of $21 million for the period. In closing, I wish to highlight that Societal executed precisely according to plan during 2021. 2022 has brought on difficult economic conditions overall, but we remain on a path to deliver in line with our guidance again this year as well. We look forward to reporting continued progress with each of our 2022 goals in the months ahead. This concludes my prepared remarks for today. We can now open up for the call for questions. Operator?
spk01: As a reminder, to ask a question, you need to press star 1 on your telephone, and to withdraw your question, just press the pound key. Please stand by while we compile the Q&A roster. Our first question will come from the line of Matt Hewitt from Craighalem. Your line is open.
spk00: Good afternoon, and thank you for all the detail and for taking the questions. Maybe the first one, going through your slide deck, slide nine, you provided kind of tombstones for the relationships with some of your existing partners, but there's a new one on the list, and I was curious what you can tell us about the Vietris unnamed oral solid dose tech transfer that's listed on that page.
spk04: Thanks, Matt. This is David. There are, as you know, a lot of restrictions on what and how much we can communicate about a lot of our client programs. That being said, we are excited to now be carrying out tech transfer activities in order to be the manufacturer of one of their commercial products. And, Matt, I'm afraid that's all that we can share at this time. But, you know, we're very pleased for the win.
spk00: Well, congratulations on that front. Maybe shifting gears a little bit, obviously there are some headwinds. I'm just curious, as you look at gross margins, let's start there over the remainder of the year, how should we be thinking about those kind of trending as you bring in some of these new capabilities and bring on some of these new contracts?
spk03: Matt, this is Ryan. So I'd say that the gross margins and the cadence for that, the second quarter will certainly depend on the variation in production and timing of shipments, but we would currently expect those to be in the 20% range, and the full year we're still expecting gross margins in the mid-20% range.
spk00: Okay, great. And then maybe one last one, then I'll hop back into the queue. And you touched on this a little bit. I'm just curious if you can elaborate, but obviously there's been a lot of questions about biotech funding. As you look at your customer list, obviously government contracts I would think are much more stable and reliable, but as you look at the rest of your portfolio and your relationships with customers, Is there a way to quantify what percentage of your customers would be considered maybe medium to large-sized pharma versus smaller pharma and biotech? I think that's the end of the spectrum that investors seem to be a little bit more nervous about. If there's any color that you could provide on that scale, that would be helpful. Thank you.
spk04: Yeah, David again here, Matt. So, I mean, this... Your question really speaks to why we chose this three-pronged strategy in terms of our sales market. So the early stage CDMO space is still active, it's still growing, it's still robust. You know, in terms of quantifying, I would say to you that we're engaging with customers and having discussions about up and down the spectrum of size. However, you're reading the same things that we are, and we are keeping a close eye on the fact that so much capital was raised in 17, 18, 19, 20, that capital got put to work, and you see a lot of clinical trials now not progressing to the next stage, and And so, you know, now people are sort of circling the wagons and figuring out which of their portfolio they want to advance. And I think the big observation I would make, Matt, is that the primary observation I would make is that rather than, oh, we'll, you know, this is a small biotech talking, rather than, oh, let's go raise more capital for our other programs, It feels like we're going to have a cycle where the number of programs in development per company is going to shrink and be more focused as they preserve cash and kind of hang on to dry powder, so to speak. So we haven't seen anything materially different yet, but I did want to make sure that we mentioned that this is a different year than the past couple in terms of activity.
spk00: That's helpful. Thanks very much.
spk04: Thank you, Matt.
spk01: Last question, we'll call for the line of Christine Raines from William Blair. Your line is open.
spk06: Hi, thanks for taking the question. Hi, Ryan and David. My first question is on the release that you had about the new commercial contract with Infecto Pharma. Is it incrementally additive to the business, or is it just maintaining the existing business given Novartis' divestment of its European rights to Ritalin LA? Also, is the contract with Novartis for rest of the world is expected to expire in 2023? Are you anticipating a renewal here?
spk03: Thanks, Christine. So first within the effective farm agreement, the exclusivity periods is consistent with the Novartis agreement, but this agreement actually extends it out to 2025. It effectively is taking, you know, the, you know, Novartis Ritalin franchise and, you know, splitting it with in particular the Ritalin long acting and, capsules being sold by Infectifarm. I think that this is a very important product strategically for Infectifarm. It expands their geographic reach in the EU and particularly in the Nordic countries, Sweden, Norway, Denmark. And Infectifarm's kind of aim is really to increase their pediatric reach and presence It's one of their most important target groups and their focus, I think about 80% of their business is focused on autism, ADHD, and other spectrum diseases. So we're really excited to be partnering with Novartis. We do not see at this time any reason why the current agreement with Novartis would not be extended.
spk06: Okay, thanks. That's really helpful. And then next on the National Cancer Institute contract, I know that Societal has several government contracts, including with the NIH. Can you just quantify the number and sale contribution of current government contracts and what your growth trajectory for this part of your business is?
spk03: I would say, Christine, that in general, if you look back, this is part of, as David mentioned, our segmented sales strategy as it relates to new business development sales to smaller, midsize, emerging biotech companies. I think that's the ultimate strategy. you know, market for these products is, you know, ending up with smaller and mid-sized pharma companies out of, you know, NIST and NIH. So it is a component of, you know, what we're anticipating this year, which is, you know, roughly 25, 30% of our overall revenue. It's a component of that, but we don't specifically break out what component those government grants are of that amount.
spk06: Okay, that's helpful. And then my last one is, I don't know if you're at liberty to say, but you said you had two additional contract ads in that quarter. One was with the Cancer Institute. Which one is the other? At least can you share what therapeutic area it's in? And I imagine it's on the clinical side, correct?
spk03: Christine, that is... We can't announce the name of that yet. What it is is a cross opportunity though for our sites, meaning that there is work being done and it represents one of our first projects that we've won where we're seeing the synergistic value in being able to utilize both our skills and talent in San Diego as well as Gainesville, Georgia.
spk04: Yeah, and Christine, this is David. Let me just say that we've now officially seen opportunities that are under contract where we've had an existing customer from Gainesville expanding scope for services that we can now perform in San Diego. We have seen now an opportunity that had originated in San Diego that we have redeployed and positioned. in Gainesville, which was asked about earlier. And now we have a contract where part A of the work will be done in San Diego and then product shift to Gainesville for completion. And so we're very happy with the way our teams have been able to work together on making that experience seamless to our clients.
spk06: Great. Thank you both for the callers.
spk01: Thank you. Thank you. Our next question will come from the line of Jacob Johnson from Stevens. Your line is open.
spk02: Hey, good afternoon. This is Mack on for Jacob. I just had a few quick questions. First to start, on the headwind from the decline in Lynette commercial sales of Rapamil, is this something that you all have any control over? And if this isn't resolved soon, would this represent potential risk to your guidance?
spk03: Thanks for the question, Mac. So we are, you know, first and foremost, we're maintaining our full year guidance of $90 to $95 million and EBITDA as adjusted of $16 to $18 million. We currently expect about 45% of our revenue to come in the first half of this year and then about 55% in the second half of the year. And this outlook does include updates. to our anticipated revenues based on an updated forecast from Lynette and their revised expectations, which created headwinds of approximately $3 million for us in revenue for 2022. This decrease is expected to be lessened and offset by anticipated increases from improvements that we have from other commercial customers. I think it's also important, you know, just to back up in regards to, you know, Verapamil SR capsules that are sold by Teva, and we continue to see, you know, increased market share. They're continuing to remain steady in the market with over 60% market share for the SR capsule market, and we view that as very positive. As it relates to the Verapamil PM sales with Lynette, During Q1, the third-party data that we subscribed to shows about a 16% decline in units compared to Q1 of 2021. And, you know, Lynette's sales in the channel were down by an even greater amount than that, which is why there was such a negative impact to our EBITDA as compared to the prior year period of about 1.5 million. You know, we have had a series of meetings with Lynette to better understand the underlying conditions that resulted in these disappointing sales to their distribution network. And so far, we don't have a root cause for the decrease, keeping in mind we only received these results a few days ago. But we are actively, you know, in – you know, a mode of better understanding not only, you know, the situation but our alternatives to restore these sales, you know, to at a minimum their prior levels. But we don't see this as a verapamil problem in general. We are not seeing this impact, you know, in the larger verapamil market, and it appears to be confined to Lynette's distribution channel. I just want to assure you we are diligently looking at this and devoting the appropriate attention to this matter.
spk02: Great. That's some pretty helpful color. Also, can you all talk about the backlog trends in the quarter and how much visibility do you have into the FY22 revenue guides here? Sure.
spk03: Mack, I'd say it's consistent with what we reported just a couple of months ago with the year-end guidance. We have a deck or a slide in our investor deck that lays out the backlog that we had at year-end, which is a very strong backlog number, and the portion of that that we expect to earn this year. And our funnel continues to be the biggest that it's ever been. So even with the cautionary headwinds in the general economic environment, I think we're happy with the general trend and direction of the funnel.
spk02: Great. Thanks for taking the questions.
spk03: Thanks. Thanks.
spk01: Thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back over to David for any closing remarks. Thanks.
spk04: Many thanks to all of our clients, our supply chain, and other service providers and partners, and particularly to our excellent societal team. We look forward to many great achievements in the months ahead. Thank you again for participating today and for your continued support of Societal CDMO.
spk01: And this concludes today's conference call. Thank you for participating.
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