Societal CDMO, Inc.

Q1 2023 Earnings Conference Call

5/10/2023

spk07: Good day, ladies and gentlemen, and welcome to the Societal CDMO First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will go into the 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 hand the conference over to Stephanie Diaz of Societal's Investor Relations Group. Please go ahead.
spk06: Thank you. Hello, and thank you for joining us. On today's call, we have David Enloe, President and CEO, and Ryan Legge, 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 31, 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, May 10, 2023, 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 participating today via webcast. As reported during our March webcast, 2022 was a transformative year for Societal, And we have been pleased to ride the momentum created into the first quarter of 2023, despite the overall headwinds our industry is experiencing. Since the beginning of 2023, we have announced multiple new business wins, including new customer wins, as well as the expansion of work with multiple existing clients. During the period, we were also very pleased to announce the FDA's approval of Societal's first commercially manufactured tablet product, an important expansion of our capabilities that extends beyond the company's longstanding expertise in commercial capsule production. I will provide a more detailed review of our Q1 2023 achievements following an overview of our financial results for the quarter ended March 31, 2023. For that, I'll turn the call over to Ryan.
spk04: 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 31, 2023, are included in our press release issued prior to this call and in our form and queue, which is on file with the SEC. Revenues for the quarter ended March 31, 2023, were $21.5 million. This represents a slight increase compared to our revenues of $21.2 million recorded during the prior year period. The increase of $0.3 million was primarily driven by an increase in revenue from the company's largest commercial customer, Teva, correlated with pull-through in demand resulting from market share gains against the sole competitor for the Verapamil SR products. These increases were partially offset by lower revenues from commercial product sales to Lynette due to timing of customer orders. Cost of sales for the quarter ended March 31, 2023. was $19.3 million compared to $16.2 million for the comparable period of 2022. The increase of $3.1 million was primarily due to mixer revenue and related cost absorption, including increased costs associated with the new asyptic fill finish line as we expand those capabilities and increase material costs. Selling general and administrative expenses for the first quarter of 2023 were $4.6 million compared to $5.7 million recorded in the 2022 period. The decrease of $1.1 million was primarily related to lower public company costs and administrative costs than the prior year. Interest expense was $2.1 million for the three months ended March 31, 2023. The decrease compared to $3.4 million for the comparable period of 2022. The decrease of $1.3 million was primarily due to a significantly reduced amount of aggregate principal and lower interest rates under the company's refinance debt as compared to borrowings outstanding during the period ended March 31, 2022. For the quarter ended March 31, 2022, the company recorded a net loss of $4.7 million or $0.06 per diluted share as compared to a net loss of $4.3 million or $0.08 per diluted share for the comparable period of 2022. EBITDA, as adjusted for the period, was $0.6 million compared to $2.8 million in the prior year period. The $2.2 million decrease in EBITDA is primarily due to a mix of revenue and related cost absorption offset by reduced selling general and administrative costs. This concludes my financial overview. For those interested in reviewing our non-GAAP reconciliations, please refer to our 8 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. David.
spk02: Thanks, Brian. Societal's achievements during 2022 positioned the company well for continued progress during the first quarter of 2023. Specific accomplishments in 2022 included enhancing the company's corporate identity and branding and successful adoption of a segment-specific marketing strategy to best serve our customers. Combined, these strategies drove strong sales in 2022 with the company signing over 170 new or expanded scope changes for projects with 33 different customers. As a result, our clinical trial services business grew 58% in 2022 compared to the prior year, and we ended the year with a significantly expanded and diversified customer base compared to 2021 with more than three times the number of customers that we had just two years ago. In addition to the progress recorded in 2022, many of our successes last year have laid the foundation for growth and increasing financial strength in the future. Notably, last year, Societal launched new aseptic fill finish and lyophilization services to better serve the end-to-end needs of our clients. We have also recently hired new personnel with expertise in the injectables market to facilitate this important capabilities expansion in our West Coast facility. And looking forward, we continue to explore opportunities for growth through facilities enhancement and expansion of our capabilities. But perhaps the 2022 achievement that will have the most influence on the company's progress in the future was the successful execution of a multi-step strategy designed to recast our capital structure, improve our balance sheet, and strengthen our overall financial profile. This strategy was comprised of four separate transactions, including a sales and purchase agreement to sell approximately 121 acres of lakefront land to a leading national home builder for approximately $9.1 million. The unused land is located adjacent to Societal's manufacturing facility in Gainesville, Georgia. Subject to completion of diligence, we expect the sale to close in the second half of 2023. a sale and leaseback transaction for our Gainesville, Georgia manufacturing site and campus, which yielded $39 million in non-dilutive gross proceeds. Third, the successful closing of concurrent public offerings of common stock and preferred stock, generating gross proceeds of approximately $35.6 million prior to deducting the underwriting discounts and estimated offering expenses. And finally, securing a new debt facility for $36.9 million from Royal Bank of Canada. As a result of these transactions, societal was able to repay and retire a $100 million debt facility and replace it with a $36.9 million Term A loan that carries terms which are significantly more advantageous to societal. These transactions resulted in the significant improvement of the company's net debt leverage ratio from greater than six times EBITDA to just over two times EBITDA, immediately reducing our annual interest burden by an estimated $6 million, with the potential to increase that number to approximately $7 million annually. And we expect that our financial position will be further strengthened with the closing of the land sale, which is expected to generate gross proceeds of $9.1 million later this year. While it is not our intent to look too long into the rearview mirror, I believe it is important to restate these important achievements as they have removed certain financial burdens, placed the CIDL in an overall stronger financial position, and paved the way for growth in 2023 and beyond. Looking at 2023, we remain confident at this time in our ability to achieve our stated guidance for the year. This is based largely on the 12-month forecast we have seen from customers as well as the orders already booked through Q3 of this year. While our revenue during the period reflected only a slight increase as compared to the same 2022 period, it is important to acknowledge the period-to-period fluctuations or lumpiness that is commonplace in our business, caused largely by timing and type of production runs and cost absorption related to those runs. We continue to closely monitor the plans of our capital market dependent clients, As discussed last quarter, financing challenges have impacted some of those customers' pipeline development plans. However, given the overall level of activity we have seen in recent weeks and our ability to maintain our win rate that we have successfully improved during 2022, we remain confident for the remainder of the year. During the first quarter, we won multiple key projects, including signing four new customers and expansions for 12 existing programs. that will continue to feed our backlog, our manufacturing pipeline and our capacity utilization during the year. As a point of comparison, Societal signed a total of 15 new customers during the entirety of fiscal 22, placing us on track to potentially beat that measure in fiscal 2023. Notable among our first quarter wins is the project recently announced with new customer Longboard Pharmaceuticals. This project will span a range of Societal's offerings including technology transfer and analytical method validation activities to support Longboard's lead asset, LP352, a 5-HT2C receptor super agonist. The scope of work for this project highlights Societal's attractiveness to those customers, requiring a broad range of services to advance their candidates through clinical development, spanning tech transfer, and through to CGMP manufacturing. Subject to quarter end, we also announced that the company had signed work order extensions with multiple existing customers that also span a range of the company's CDMO services. While securing new customers remains an important objective for the company, being awarded expansion projects by our existing customers is an equally important area of growth for the company. During the first quarter, we signed multiple work expansion agreements spanning from analytical services to manufacturing to product encapsulation and packaging. Another important event for Societal during the first quarter was the approval by the FDA of the company as a manufacturer of a commercial tablet product. This approval is the first for Societal for the manufacturer of a commercial tablet, reflecting both the company's ongoing expansion of capabilities as well as our success in building Societal's reputation as a CDMO of choice. We are delighted to have been entrusted with the production of this important product, and we expect to begin manufacturing it later this year in our Gainesville, Georgia facility. In other product news, we would also like to comment on Lynette's announcement regarding its recently executed restructuring support agreement for RSA and bankruptcy filings. As a reminder, Societal CDMO owns the NDA and the drug master file for Verapamil, a long-approved calcium channel blocker for the treatment of hypertension. Lynette has served as the company's marketing partner for the Verapamil PM and Beryllin SR formulations since 2014. In July 2022, the company entered into an agreement to its license and supply agreement with Lynette which provided Societal CDMO with improved overall economics, increases in manufacturing prices, and potential new GMP manufacturing agreements targeting injectable products for multiple additional Lynette development projects. In addition, the agreement provided Societal with options to engage with alternative marketing partners under certain conditions. We are very pleased that Lynette has entered into this RSA that will allow it to continue operations with minimal interruption while reducing its debt burden and strengthening its balance sheet. Importantly, we believe this agreement will allow Lynette to continue to execute as a marketing partner to Societal CDMO in the near term. However, it's important to note that Societal CDMO is first and foremost committed to protecting and expanding the distribution of our Verapamil PM and Barrel and SR products. For that reason, We have been carefully monitoring Lynette's circumstances over the past 12 months and expect that, should it be necessary, any transition from Lynette to another marketing partner would take place with limited disruption to the sales of Verapamil, PEM, and Veriline SR. In closing, we would first like to address the recent pressure on the company's stock price, and we wish to assure you that no internal event or factor has triggered the decline in value. Our fundamentals are now stronger than ever, particularly given all the progress we have made the past couple of years diversifying our customer portfolio and addressing our debt position. And we began 2023 from a fortified position of strength that we believe will facilitate growth this year and for many years to come. The steps taken last year and to date in 2023 have honed our business development and marketing strategies, resulting in valuable new business and expansion project wins during the first quarter. We continue to expand and enhance our capabilities, including making an investment in the high-value injectables market, including biologics. And a recent approval by the FDA of Societal as a manufacturer of a commercial tablet product establishes the company as an experienced partner for this valuable service. This concludes my prepared remarks for today. We can now open up the call for questions. Operator?
spk07: Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt Hewitt with Craig Hallam Capital Group. Your line is now open.
spk00: Congratulations on the strong start to the year. Maybe first up, regarding the first commercial tablet, maybe explain the size of that market. I realize it's very early days, but have you received interest from other parties because of this first approval? I mean, what can this mean for you?
spk02: Yeah. Matt Hyde, David Enloe, thanks for the question. It is early days, but certainly... We see an active market on both the capsule side and the tablet side, and having this commercial approval and the knowledge of the ability for us to successfully perform a technology transfer in the way that we did is something that we're communicating to future customers. And we're engaged in discussions that will make us not just the producer of one commercial tablet in the future, but that is certainly part of our business development effort right now is to leverage this new capability and, if you will, feather in our cap.
spk00: Got it. That's helpful. And then, you know, It seems like more so this quarter than maybe even the Q4 earnings season. We've been hearing a lot about the challenging environment, particularly for small pharma and biotech companies, you know, maybe kind of reining in spending, kind of holding off. Yet you put up a pretty strong quarter from a new wind perspective, even with the expansions. What do you think is helping you kind of differentiate and drive those incremental contracts where maybe some of your peers are struggling a little bit?
spk02: Mm-hmm. Thanks. We spent a lot of time, as you know, in 2022 really focusing our targeting efforts, if you will, for clients that were strong fits inside the set of capabilities that we offer. And we were able to increase our win rate by, somewhere between 2x and 3x. But Matt, I don't want to mislead either. I mean, we are seeing programs where there were going to be two and now there's one, or something's getting postponed. And so certainly, I would say we are not completely excluded from what we're seeing. There are There were fewer opportunities, I'll say it that way, particularly January, February, March. We're actually seeing a bit more traction now and uptick. But back to the real question you asked, I think we have a very experienced sales team that has been together now by and large for a couple of years. And we have a really strong proposal writing, a very technical proposal writing team. And we've added market intelligence manager skills into our efforts. And it's been, you know, top of mind every day and every afternoon. And, you know, I think as a result, we're seeing some good traction here.
spk00: Got it. And maybe one quick one, and then I'll hop back into Q. Gross margins in the quarter, you explained, I think it was mixed and Couple other factors, but does that bounce back here in the second quarter, or how should we be thinking about gross margins over the remainder of the year? Thank you.
spk04: Hi, Matt. Thanks for the question. So Q2, we expect gross margins to be in the 20% range, and then in the second half, an improvement with margins close to the 30% range, and that's due to higher expected revenue and mix.
spk00: Excellent. Thank you.
spk07: Thank you. Our next question comes from the line of Max Smock with William Blair. Your line is now open.
spk05: Hey, thanks for taking our questions. Maybe just following up on one of your comments a second ago in terms of seeing more traction recently after January and February. Just wondering if you can walk us through how things have trended month over month here in the second quarter and whether you've seen a pickup that maybe was a little bit better than you expected when we spoke a couple months ago during the fourth quarter earnings call. Thank you.
spk02: Yeah, thanks, Max. David here. I mean, we, you know, certainly track activity and I can't give you, I think people are settling into the new normal. I think also, you know, quite frankly, as you know, smaller companies aren't going to get to their next value inflection point by only sitting on their cash. And I think there was just a, If I can overly generalize, I think there was a Q1 kind of a freeze and hunker down until people began to understand. We've all heard how the second half of 2023 is going to be so much better, and I think that that has waned down a little bit, and it might be a little bit more of a sustained level that the market is experiencing today. So, you know, people are now kind of popping back up and saying, all right, this is what we have. This is how it's going to go. Perhaps no worse, perhaps no better, but probably a little bit better. So let's get going with our programs. And as a result of that, we've started to see more of the conversations that we had begun to be picked back up, resumed, and, you know, off to the races in terms of getting going on programs.
spk05: Got it. Makes sense. Good to hear. Following up, there's been some major disruptions with the larger player in the space. And we've heard about some of their smaller customers leaving, actually. And I wonder if you've actually seen that have an impact for you yet in terms of number of proposals written so far this year or win rate and what it could mean for your ability to win new business here moving forward in 2023.
spk02: Yeah, I mean, I certainly don't want to – about a different company in our space, but I'll say that our value proposition all along, right, has been that we're not one of the big CDMOs. We are able to provide a more agile, flexible, and bespoke approach to a, particularly to a smaller company's program where they're going to have access to the top of the organization, you know, any time. And, you know, it is more of a boutique-y type of offering. And right now, with the smaller companies being so careful, rightfully so, with their cash and wanting to have strong relationships with manufacturing partners they can trust, I think we're in a good position to step in and fill that void, and we're starting to see some of that traction.
spk05: Got it. And maybe just one final one from me here. Can you remind us of your exposure to preclinical and phase one work in particular? We heard some commentary earlier today actually around slowdown in this stage of development specifically. So wondering if you could quantify that and then if you just comment around whether or not the uptick or whether or not you've even seen any uptick in cancellations here in particular or if you have any concerns about some of your precommercial customers to pay. Thank you.
spk04: Hey Max, this is Ryan. I would say, you know, generally speaking for the quarter, we added 4 million in that backlog, which is a positive sign. I also think that just from a adding new customer perspective, you know, we're playing in the right spaces, right? High value areas, including high potency, Controlled substances, DEA regulated products, sterile fill finish, high potency, all of those are very attractive spaces for our customers. So we haven't experienced or seen any impact. And I would generally say there's probably about half of our customers kind of in that preclinical phase one part of our pipeline.
spk05: Okay, great. Thank you both.
spk02: And Max, this is David again. Just a little bit of a pile on here is our strategy, if you recall, starting about a year and a half ago, was to also really expend effort, energy, and resource on securing later stage tech transfer type programs that either did not have a presence in the U.S. or needed more of a presence in the U.S., and that strategy has proven to be very timely right now because those programs are far more likely to be funded and not dependent on the capital markets. So I think that's been an advantage for us recently. Yeah, absolutely. Thank you for the extra commentary.
spk07: Thank you. Thank you. Our next question comes from the line of Sean Dodge with RBC Capital Markets. Your line is now open.
spk03: Hey, good afternoon. This is Thomas Keller. I'm for Sean. Thanks for the questions, and congrats on all the commercial momentum. I just wanted to follow up on that 2080 tech transfer model. You said you've seen some good progress there. I guess should we expect any contributions to that in the next year, or is that still kind of longer term?
spk02: Yeah, thanks for the question. This is David. You know, it's hard to say. I'll say that it is an offering designed for a company who is not fully, you know, budgeting a full second source alternative. And so we think about it in terms of either U.S.-based or ex-U.S.-based companies who want to make sure that they have an opportunity to be in position to pull the trigger should they have a situation where they need a second source, but they can't fund the whole thing. And I've said this before, a bit tongue in cheek, but not. We're far more interested in 100 zeros, meaning the whole program now, But I was in Asia two weeks ago and had conversations with companies there, and so there's interest. I don't think it's going to be this giant tsunami of activity, but it is one way that we can demonstrate that we understand what development companies are going through and what their constraints are. and limitations are, and it was designed to be what I believe to be a creative and unique model for folks to leverage on if they want to. And there's some other things that we're doing with smaller companies as well to try to be flexible during the tough market environment.
spk03: All right, that's helpful. Thank you. And then it looks like there was an FDA inspection of the facility in San Diego back in January. Is there more detail you can provide on observations there? Did you have any, or are you expecting any associated remediation costs?
spk02: Yeah, good question. Thanks. No, there's nothing else to be done. There were three points made, three observations. Two of the three were addressed before the inspector left, The other one was addressed a handful of days later. We turned in our response early to it, and the most important part of this inspection was we were blessed to have the same inspector that had been at that site prior to our acquisition, and it served as the ultimate measuring stick of the progress we had made maturing those quality systems, regulatory compliance systems, and just the overall quality mindset on that site. And we were very pleased with the comments that the inspector made of, you know, he was he remarked over and over about the commitment to quality, the progress, the level of compliance, and was very pleased. So there's nothing left to do there. And they were, I don't, there's no such thing as an easy fix, but if there were, these were the ones. So we were very happy with the outcome of that inspection.
spk03: All right, perfect. Good to hear. Thanks for the comments.
spk02: Thank you.
spk07: Thank you. Our next question comes from the line of Jacob Johnson with Stevens. Your line is now open.
spk01: Good afternoon. This is Mack on for Jacob. Just a quick question on the Lynette relationship. I appreciate the additional color that you all gave, but if you were to switch partners, just out of curiosity, how long might that take, and would you potentially be able to achieve the same economics that you received in that revised relationship last year?
spk04: Hi, Mac. It's Ryan. So, you know, what I would say is that we've gone through, you know, several scenario planning related to that. And, you know, we would anticipate about a three-month transition to be able to switch over the labeling. And we would not expect very limited or minimal disruption. you know, three to four months of inventory roughly in the channel. So they would continue to sell that through. We would continue to receive profit sharing on that. And, you know, we would, you know, transition that to a new partner. And I think to answer your last part of the question, you know, we would expect to be able to receive similar or better economics. Certainly we're having ongoing discussions with other partners or potential partners about that. And these are very valuable assets and, you know, there's parties that are very interested in them and it's, it's our job to make sure that, you know, we're doing everything we can to, you know, really, you know, monetize that, that draft mill franchise and improve on the economics.
spk01: Appreciate the additional color. Thanks for taking my question.
spk07: Thank you. Our next question comes from the line of Marla Marin with Zax. Your line is now open. Thank you.
spk08: So switching topics, I'm wondering if you can provide a little bit more color on the expansion of your capabilities now with the FDA approval on tablet manufacturing. How to think about the sales cycle there? First of all, is this something that you're expecting your existing sales capability can continue to negotiate for leverage, try to obtain more wins here? And how to think about the sales cycle, like the length of time between initiating discussions and closing a sale, and if you think that that is going to get longer given the current business and economic environment? Thank you.
spk02: Hi, Marla. David here. I think I'll go backwards on that. We certainly have seen to some of the points in the earlier questions around companies propensity to be holding on to the timing of projects. And so we have seen sales decisions stretching out, you know, and then, of course, there's a little bit of a hurry up and wait thing that's happening too, because once these clients get the green light, then they're ready to go, right? So, you know, we have seen some things drag out longer than they would have a year ago or two years ago. So that is an impact and it's something that we're staying on top of and working with these customers to help communicate with their management and board on what we can do to be helpful and flexible there. With respect to the commercial tableting, tableting has been a competency of the company, but not all the way through to a commercial product. I don't want to say all this, but what this really represents is the proven ability to take something from beginning all the way through commercialization, not only for capsules, not only for modified release capsules, but now also for tablets. And so having that experience is just one more step of validation and another opportunity for us. Now, our current business development team can definitely support that and is. And quite frankly, it makes the team's job a bit easier because we have been through that process. And I need to also for color say that the approval did not require an on-site inspection because of, we believe, the long, long history of success at the Gainesville, Georgia site commercially for other products that were not tablets. So, you know, we have a great deal of confidence going forward that we can carry out more of those sorts of programs and we're engaging in those sorts of discussions to grow that part of our business. I think I answered everything that you asked, but I'm not sure. Tell me if I missed something.
spk08: No, I think you did.
spk07: Thank you.
spk02: Sure.
spk07: Thank you. I'd now like to turn the call back over to David Enloe for closing remarks.
spk02: Many thanks to all of our clients, 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, and thank you all for, again, for participating today and for your continued support of Societal CDMO.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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