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spk00: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
spk04: Hello, thank you for standing by, and welcome to the Societal CDMO Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Stephanie Diaz, with the Company's Investor Relations Group. Please go ahead.
spk08: 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 contract development and manufacturing business, including updates on corporate activities and financial results for the quarter and six months ended June 30th, 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 August 10, 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.
spk02: Thank you, Stephanie, and thank you to everyone who has dialed in and to those who are participating today via webcast. The second quarter of 2022 was highly productive. During the three-month period, the company signed numerous new project agreements, initiated our first revenue-generating project using the automated fill-finish and lyophilization line, and launched our novel 2080 second-source technical transfer service model. Also, immediately after quarter end, we executed a favorable amendment of our contract with Lynette, which we expect to yield improved economics for one of our key Verapamil product offerings. These achievements have strengthened the company's financial position, expanded our capabilities to best serve our existing customers and attract new customers, and introduced a new and innovative program designed to build security and flexibility into our clients' development programs. We are extremely pleased with the progress during the period, and I will provide a more detailed review of our Q2 2022 achievements following an overview of our financial results for the quarter and six months ended June 30, 2022. For that, I'll turn the call over to Ryan.
spk01: 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 second quarter and six months ended June 30, 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. I'll begin with an overview of our financial results for the second quarter. Revenues for the quarter ended June 30, 2022, were $23.2 million. This represents a 29% increase compared to revenues of $18 million recorded during the prior year period. The increase of $5.2 million was primarily driven by an increase in European Ritalin LA demand from our new customer, Infectifarm. Revenue resulting from the acquisition of viruses, as well as higher revenues from our clinical trial materials business. There were continued headwinds from a decline in revenue from Lynette's commercial sales of Arapamil PM products compared to the prior year. We entered into an amendment of our license and supply agreement with Lynette for the marketing of Arapamil PM and Veralyn products subsequent to the end of the period. which contains overall improved economics for societal and is expected to improve our revenues from Lynette in the second half of the year, despite the declines experienced in the first half of the year. Cost of sales for the quarter ended June 30, 2022, with $17.5 million compared to $12.3 million for the comparable period of 2021. The increase of $5.2 million was primarily due to costs associated with operating the San Diego facility acquired from IRASIS, an increase tied to increased manufacturing revenue during the quarter. In addition, in 2021, we received certain employment incentive tax credits that were not repeated in 2022, resulting in increased expense in 2022. These increases were partially offset by the reallocation of expenses reflecting the post-acquisition organizational structure. Selling general and administrative expenses for the second quarter were $5.2 million compared to $3.8 million recorded in the 2021 period. The increase of $1.4 million was primarily related to increased personnel costs tied to the reallocation of expenses and integration costs associated with the IRIS's integration. Specifically, effective October 1st, 2021, certain employees who previously supported our plan operations now support our multi-site organization structure and operations. Accordingly, expenses associated with these employees have been reclassified from cost of sales to selling general and administrative expenses. Interest expense with 3.4 million for the three months ended June 30th, 2022. a decrease compared to $4 million for the comparable period of 2021. The decrease of $0.6 million was primarily due to reduced non-cash financing expense and increased capitalized interest. This decrease was partially offset by an increase in interest from the debt portion of the IRS's acquisition purchase price. For the quarter ended June 30, 2022, the company recorded a net loss of $3.1 million, or $0.06 per diluted share, as compared to net income of $1.2 million or $0.03 per diluted share for the comparable period of 2021. EBITDA, as adjusted for the period, was $4.6 million compared to $5.4 million in the prior year period. The prior year period included a one-time $3.4 million gain on extinguishment of debt related to the Paycheck Protection Program notes. During the period, lower sales of ArapaMill PM by our marketing partner Lynette negatively impacted EBITDA as adjusted by $0.5 million as compared to the 2021 period. I will now provide an overview of our financial results for the first six months of 2022. Revenue for the six months ended June 30th, 2022 was $44.3 million compared to $34.8 million for 2021. The increase of $9.5 million in revenue was primarily driven by revenue resulting from the acquisition of irises, as well as higher revenues from our clinical trial materials business. In addition, there was an increase in European Ritalin LA demand from our new customer, Infectifarm, as well as 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. The increase in revenue was partially offset by a decline in revenue from Lynette's commercial sales of the Verapamil PM products. Cost of sales for the six-month end of June 30, 2022 was $33.6 million compared to $26.7 million in 2021. The cost of sales increase of $6.9 million was primarily due to the acquisition of the San Diego facility and certain 2021 employment incentive tax credits that were not repeated in 2022, resulting in increased expense in 2022. These increases were partially offset by the reallocation of expenses reflecting the post-acquisition organizational structure. Selling, general, and administrative expenses for the six months ended June 30, 2022 were $10.9 million compared to $8.5 million in 2021. The increase of $2.4 million was primarily related to increased personnel costs tied to the reallocation of expenses and integration costs associated with the IRCIS integration. These increases were offset by lower stock-based compensation expense. Interest expense was $6.8 million and $7.8 million for the first six months of 2022 and 2021 respectively. The decrease of $1 million was primarily due to reduced non-cash financing expense and increased capitalized interest. Also contributing to the reduction in interest was the successful refinancing and 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. These decreases were partially offset by an increase in interest from the debt portion of the IRS's acquisition purchase price. For the six months ended June 30, 2022, Societal reported a net loss of $7.4 million or $0.13 per diluted share, compared to a net loss of $5.5 million or $0.16 per diluted share for 2021. EBITDA, as adjusted for the first six months, was $6 million compared to $8.1 million in the prior year period. During the six-month period, lower sales of ArapaMill PM by our marketing partner, Lynette, negatively impacted EBITDA as adjusted by approximately $2 million as compared to the 2021 period. Our cash and cash equivalents as of June 30, 2022, were $15.5 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 8-K filing or the press release issued today. I'll now turn the call back over to David for an update on operations and achievements during the period.
spk02: Thanks, Ryan, for the update. During the second quarter, Societal continued to execute against its strategic plan for the year, making progress across the organization. As a reminder, the company's stated goals for the year include executing segment-specific sales and marketing strategies, building stronger visibility and an updated identity for the organization, enhancing both our customers and our employee experience working with and for the company, and continuing to achieve growth and strengthen our financial position. During the first quarter, the company undertook a comprehensive rebranding exercise and changed its name from Recro Pharma to Societal CDMO. We believe this new brand, as well as the company's new tagline, Bringing Science to Society, captures the company's commitment to our community, including the patients we serve, the team we employ, and the customers we support. Completing this rebranding early in the year positioned us perfectly for the work ahead, and during the second quarter, we continued to execute according to plan. With respect to sales and marketing, we are seeing positive results with respect to our segmented business development strategy, which we announced during the first quarter of this year. As a brief reminder, the company adopted a new approach to business development that allows Societal to support customers in three discrete market segments, commercial oral solid dose products, legacy profit sharing products such as verapamil, and early stage development clients whose programs we support both in San Diego and in Gainesville, Georgia. The company's segment-specific marketing strategy takes into account the unique needs of clients in each of these markets, as well as decision-making and sales cycle attributes of each segment. During the second quarter, we saw progress in each of the three business channels. As part of the company's commercial oral solid dose business focus, during the quarter, the company launched its 2080 second source tech transfer service. Societal created this new service model in response to the growing risks and vulnerabilities associated with the global supply chain that has significantly elevated the importance of second source suppliers within the pharmaceutical industry. Under this model, pharma companies are able to collaborate with Societal to execute all sourcing and planning phase activities of a standard tech transfer process prior to the time that product supply is needed. By undertaking these activities in advance, societal customers can complete approximately half of the technical transfer process and position themselves to initiate the transfer of material and commence the batch manufacturing or execution phase whenever new and or additional finished drug product supply is required. By executing the material sourcing, planning, and other production prep phases of the technology transfer, A societal customer can be supply ready approximately a full year sooner than if it commenced those activities at the onset of a supply disruption. Importantly, investing in the initial sourcing and planning phase activities accounts for 20% on average of the total technical transfer cost for a commercial product, whereas the execution and manufacturing phase makes up the remaining 80% of the cost. This new service offering is just one of the ways that Societal is taking innovative steps to anticipate the future needs of our customers, provide supply security and stability, and to do so in a cost-efficient manner. In our rapidly expanding development stage business segment, I'm pleased to report that the company signed several new project agreements. During the quarter, Societal secured new projects spanning clinical trial support, manufacturing, packaging, and automated fill finish and lyophilization services. reflecting the company's wide-ranging appeal to customers at each stage of the development and manufacturing process. Additionally, the company received new business contracts from several of our existing clients. It is important to recognize that the initial projects with development stage clients very often lead to additional work as their drugs progress in clinical trials. As a result, over time, many new business wins yield significantly greater revenues to societal than what is specified in those original contracts. For this reason, building and strengthening the trust of our clients is critical to our long-term success, and we greatly appreciate the confidence that so many of our customers have placed in us over the life of their program's development cycle. With respect to the legacy profit sharing segment of our business, Societal recently announced that the company has entered into a favorably amended license and supply agreement with Lynette Company for the marketing of verapamil PM and veriline products. As a reminder, Societal CDMO owns the NDA and the drug master file for verapamil and veriline, a long-approved calcium channel blocker for the treatment of hypertension. For the past several years, Teva has and continues to be 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 however as we discussed last quarter Lynette sales of Verapamil PM experienced an unexpected decline in recent quarters, prompting societal management to engage in restructuring discussions with Lynette. In early July, we announced that the two companies had agreed to an amendment to our license and supply agreement. Under terms of the amendment, societal will now receive improved overall economics, including a 10% increase in the profit share component of revenue from Verapamil PM product sales. as well as immediate and scheduled increases in manufacturing prices. Additionally, the amendment awards societal potential new GMP manufacturing agreements targeting injectable products for multiple additional Lynette development projects. We are very pleased with the outcome of these negotiations and believe that the new terms increase the overall value of our partnership. We look forward to continuing a strong and productive relationship with Lynette. I would now like to address our ongoing efforts to expand and optimize our technical capabilities. During the second quarter, the company completed validation and commissioning activities for our new aseptic fill finish and lyophilization services. As a reminder, the new aseptic fill finish suite features a sterile automated vial filling system with the capability to fill up to 2,000 pre-sterilized vials per hour at a range of volumes. The company's lyophilization offering incorporates a novel patented approach to uniformity and instantaneously induces nucleation via pressurization and depressurization. This equipment provides the capacity for lyophilization of approximately 9,010 mL vials during each three to five day freeze drying cycle. During the quarter, the company also initiated a new customer project that is the first to utilize these state-of-the-art capabilities. This project is focused on formulation development and sterile GMP manufacturing of a lyophilized novel cancer therapeutic for intravenous infusion. Societal has been contracted by an emerging Japan-based biopharmaceutical company to conduct this work in support of the company's ongoing clinical development of the compound as a potential treatment for solid tumors. Not only are we pleased to quickly achieve returns from our investment in these capabilities, but it is gratifying to see the growing interest from non-U.S.-based biopharmaceutical companies that are recognizing the importance of conducting final dose manufacturing in the U.S. to support the global development efforts, all while mitigating supply chain risks, which continue to affect our industry. It is our plan to continue to expand and enhance our capabilities in an effort to create new revenue channels, and we are actively evaluating opportunities that we deem value-creating. In addition to our physical infrastructure, during the second quarter and the first six months of the year, the company made investments in our two largest stakeholder groups, our customers and our employees. With respect to our customers, Societal has made significant outward-facing enhancements, such as launching the previously discussed 2080 Second Source Technical Transfer Program, as well as other internal process enhancements designed to provide our clients with an industry-leading partner experience. Societal also remains committed to establishing a positive workplace for our employees. At the heart of this priority is the creation of an environment that supports our employees personally, culturally, and professionally. We have identified this as one of the company's five core objectives for the year, and this stems from our belief that a highly engaged and better supported workforce will be more productive and invested in the success of our business. At Societal, this commitment is manifested in an expanded human resources organization, sponsored events to address the personal and cultural interests of our team, educational forums, and most important, the consistent opportunity for professional growth across the business. We believe that our execution against this core commitment has yielded great returns to date. At a time when talent is scarce, Societal has experienced less turnover and high productivity both of which are critical to the company's success. To highlight this point, I'm proud to report that our technical team has delivered on our commercial production at a 99% on time and in full or OTA level through the first two quarters of the year. I want to recognize and thank our team for these excellent results. In closing, I'd like to recount the company's many recent achievements. During the first six months of the year, the upgrades and enhancements spanning the entire organization have positively impacted the company's financial position. Second quarter revenues of $23.2 million represent a significant improvement compared to the prior year period. This growth has been supported by the continued expansion and diversification of our customer base, enhancements to our sales and marketing strategies, improvements in the customer engagement process, the optimization of existing facilities and processes, and the addition of new capabilities And finally, the retention, engagement, and productivity of our people. All of these important achievements reflect our success in executing the company's strategic plan for 2022, which we believe will continue to deliver growth throughout the year. In addition to operational improvements, the company continues to explore non-dilutive means of paying down our debt and strengthening our overall financial position. To that end, the company intends to sell its real estate assets of approximately 121 undeveloped acres surrounding our facility in Gainesville, Georgia. We are also in negotiations for the potential opportunity to execute the sale leaseback of our Gainesville facility. The non-diluted funds generated from such transactions will allow the company to significantly strengthen its balance sheet and maximize organic growth. And reflecting on these achievements, it's clear that the first six months of the year were highly productive, and looking ahead, we remain optimistic regarding our ability to continue this positive momentum. This concludes my prepared remarks for today. We can now open up the call for questions. Operator?
spk04: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by as we compile the Q&A roster. Our first question comes from Matthew Hood with Craig Hallam. You may proceed.
spk03: Good afternoon. Thanks for the update, and congratulations on the progress so far this year. Maybe to dig in a little bit regarding the 2080 service that you've launched, I'm curious. I realize it's relatively early days, but what has the feedback been from your customers, and what does the pipeline look like for that service?
spk02: Hi, Matt. David Enloe here. Thanks for the question. It is early and we are just now beginning to attend conferences where we're able to be more active and engage with potential projects and opportunities in the U.S. And additionally, We'll be having some international travel with, well, me, for one thing, and this is where we really want to ramp up those conversations. Thus far, as we've brought that up as an opportunity, it's been well-received. We were able to communicate the idea at a recent consultant's day, and it was well-received. There were plenty of questions around it, but I would just summarize by saying we're in the early stages right now.
spk03: Got it. And then you've issued press releases regarding some of the success you've had on the sales side. How should we be thinking about those recent wins ramping up over the back half of the year and into next year?
spk02: Ryan, do you want to speak to some of the timing or I'm happy to either way?
spk01: Yeah, Matt. So I would first say that we are making some significant progress and have good momentum during the Second quarter, we signed six new or expanded projects during the quarter. And in general, for the year, we're expecting to almost double the number of proposals written during 2022 compared to 2021. And currently expecting to sign about 40% more proposals compared to the prior year. And the team is on track to also double our win rate for the year. So there is expectations of things being a little bit more back-ended. Generally speaking, our revenue has seen some shift to the right from Q3 to Q4. not only i guess a from commercial orders due to some supply chain juggling and timing of production runs but also the expectation of some of the signing of these you know top opportunities in terms of the new business opportunities that we believe will be able to earn that backlog but we feel confident you know in the guidance we've given um and are maintaining that of 90 to 95 million in revenue and ebitda of 16 to 18 million But the mix between commercial and development revenue just might be a little different than we anticipate. And the way that we're thinking about revenue for the second half of the year is we expect it to come in proportionately or about 45% of our remaining revenue target. to come in during the third quarter, and then the remainder, about 55% in the fourth quarter.
spk03: That's very helpful. Thank you. Maybe one more here, and then I'll hop back into queue. Regarding the new legislation that was, you know, that's out, I'm just curious, how will that impact the CDMO sector in general, if at all?
spk02: Yeah, so this is David again, and I had an opportunity to visit on this topic with one of our directors, Jim Miller, in some detail a couple of days ago. And I would say that here are the places that we've landed on this, Matt, is a lot of the larger companies, the big pharma companies, probably will focus more intently on their own cost structures. And that's been happening, but we believe it may be with a little bit more intensity. A lot of the automation and AI talk and prioritization is probably going to be accelerated to push their cost bases down. And then the other part on that side of things versus the CDMO space is that You know, the ROI calculations for some of these drugs may be impacted depending on the situation. And so we would expect that some of the venture-backed innovator companies to see, quite frankly, dampen returns in terms of the multiples they've been seeing the past few years versus now just because the models going out that pharma companies will be acquiring are going to be somewhat impacted. And then part of this is also going to be impacted by that there's probably going to be a little bit less of a development commitment on the ninth version of a drug that's already out there and available. But that's really more of a market share shift. of an existing market, not necessarily a drop. But all of that said, we think that CDMOs are probably going to see a net gain by all of this because a decision that's a so-called make-or-buy decision by a biopharma company to invest in their own additional internal infrastructure will become more challenging probably. And so outsourcing is a very logical alternative in that kind of condition, and we think that we can see continued increases in the decision to outsource drug manufacture as a result of the legislation.
spk03: That's really helpful. Thank you very much. Sure.
spk04: Thank you. And as a reminder, to ask a question, you will need to press star 1-1 on your telephone. One moment for questions. Our next question comes from Christine Rain with William Blair. You may proceed.
spk07: Hi, guys. Good afternoon and congratulations on the quarter. In your comments about and in the release about your amended agreement with Lynette, you pointed to potential new clinical injectable work with Lynette. What does this comment mean and are there any contracts in place here?
spk01: So Christine, thanks for the question and thanks for the compliments on the quarter. We are working with Lynette on, they've identified kind of a list of development projects and we're working through that with them to down select a number of those projects for us to begin work on.
spk07: I think that's helpful. Also, the progress on your automated sterile finish line and bringing that online, can you give us an update on the project using line? Currently, it seems like it's just the Japanese oncology therapeutic, but I just want to know if I'm missing anything here. And then overall, what is the available capacity here if you include that project? Thanks.
spk02: Yeah, I mean, this is David. Christine, hi. You know, there's a lot of capacity on the line because it's just now launching and available, but we have the only project that we've announced is the one that you referenced, this Japanese one, Japanese biopharma project, and there is an active you know, set of other opportunities that we're talking through, and some of them in very late stages of discussion, and then some in earlier stages of discussion. But that's where we are right now, and we look forward to seeing more traction as we go forward here in the coming weeks.
spk07: Great. Thanks, Min. Just one last one for me. I know you referenced last quarter some supply chain headwinds. specifically on the sort of API shipment and other component side. How are those faring? Are they better or worse than three months ago or resolved? Any info there would be helpful. Thank you, guys.
spk02: Sure. I mean, the answer, it depends. I mean, I'm thinking right now of a specific program where API is delayed in getting to us and therefore you know, our ability to start that project is also impeded. So, you know, there's one example there. I would say there hasn't been a lot of change, but the types of conversations that we're able to have right now with key suppliers are more promising than they were three and six months ago.
spk07: Great. Thank you so much.
spk02: Please don't take that as a we're back to normal, but I'd have to say if I had to pick, it's better, it's the same or better, it's not worse. How about that?
spk07: Great, really helpful.
spk02: Okay, thanks.
spk04: Thank you, and I'm not showing any further questions at this time. I would now like to turn the call back over to David Enloe for any further remarks.
spk02: Great. So 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.
spk04: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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