Avid Bioservices, Inc.
Q1 2018 Earnings Call Transcript

Published: 11 Sep 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Peregrine Pharmaceuticals First Quarter Fiscal 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference may be recorded. I would now like to hand the conference over to Tim Brons of Peregrine’s Investor Relations Group. Please go ahead.

[Tim Brons:]

Thank you. Good afternoon and thank you for joining us. On today’s call, we have Steve King, President and Chief Executive Officer; Paul Lytle, Chief Financial Officer; and Dr. Roger Lias, President of Avid Bioservices. Today, we will be providing an overview of the company’s operations and progress, spanning the Avid Bioservices contract manufacturing business, as well as our research and development programs and corporate activities. 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, September 11, 2017, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, concerning the current belief of the company, which involves a number of assumptions, risks and uncertainties. Actual results could differ from these statements and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company’s filings with the Securities and Exchange Commission concerning these and other matters. With that, I will turn the call over to Steve King.

[Steven King:]

Thanks, Tim, and thanks to all of you who have dialed in and all of you who are participating via webcast today. I would actually like to start with a moment of silence in respect to those that died in the 9/11 terrorist attacks and for those that have been affected by the recent hurricanes. Over the past year and a half, following the negative results from our Phase III SUNRISE trial, we have seen the company change from an R&D-focused business that has been running a contract development and manufacturing organization or CDMO on the side to a CDMO business that has been running R&D on the side. I am very proud that we have been able to grow our CDMO business, Avid Bioservices, from an internal support operation to a full service CDMO that now manufactures bulk drug substance for products that are approved and marketed in over 18 countries by leading biopharma companies. The company was recently recognized as a leading CDMO by Life Science Leader and received multiple 2017 Contract Manufacturing Leadership Awards for Quality, Reliability, Capabilities, Expertise and Compatibility. Avid has an outstanding regulatory inspection history and state-of-the-art cGMP manufacturing facilities. This growth did not happen by accident. It is the result of the dedication, selflessness and intense effort by the Avid and Peregrine employees that have been involved in the business, which has always been the secret of our success and will continue to be in the future. We have two very different businesses, CDMO and R&D within Peregrine with different investment and growth strategies and the two efforts need to be separated so that each has a better opportunity for success. From a business standpoint, we want to ensure the success of Avid which represents a relatively lower risk business that can be grown over the coming years to create significant stockholder value. In the meantime, we also want to find the best strategic options for advancing the bavituximab and PS-exosome diagnostic programs which will require significant short-term investment which by the very nature of R&D is relatively high risk and capital intensive. The appointment of Dr. Roger Lias as president of Avid Bioservices and his appointment to Peregrine's Board of Directors marks an important next step in this transition. Roger is a highly experienced executive with a long track record of success in the CDMO industry, and was an ideal candidate for the position. We have a successful commercial CDMO business and we look forward to taking Avid to the next level under Roger's leadership. Naturally, job one will be a smooth transition to ensure we continue to support our existing clients while simultaneously working to attract new clients as we look to grow the business on multiple fronts. As we focus on the success of the CDMO business, we have been evaluating the best options for divesting our R&D assets. The goal being to find a partner that will make a significant short-term investment in the bavituximab program in order to validate the subset analysis from the Phase III SUNRISE trial and build on recent data from our collaborators. The subset analysis, which supports the combination of bavituximab with checkpoint inhibitors, is compelling but needs further clinical validation. This data, combined with findings from our collaborators at Memorial Sloan Kettering Cancer Center or MSKCC supporting combinations with cellular therapies including CAR-T and the ongoing trials from our partners at the National Comprehensive Cancer Network or NCCN, all as outlined in our earnings release, have bolstered our belief that our bavituximab program can be successfully advanced in the right hands. However, there is still much work to be done to realize this value. For this reason, we have concluded that in order to best position Peregrine’s R&D assets for successful development, they should be advanced by a partner with the appropriate expertise and ample resources to invest in the necessary clinical trials. To that end, we have been working diligently towards the transformation of the overall business to becoming a pure-play CDMO while assessing the best strategic options for the R&D assets that would allow stockholders to directly see the future value from their continued developments. By partnering and eliminating future R&D expenditures, we believe we are best positioning Avid for future growth. Through reinvestment and expansion we believe we will attract new customers and extend current contracts that will help position Avid as a leading U.S. CDMO. We are moving forward expeditiously with strategic discussions as we recognize the need to move quickly both from the R&D and CDMO standpoints. We hope to bring this process to completion over the coming months and will update you on our progress. Now back to Avid. We have continued to see lots of activity on the CDMO front, including first quarter revenues of 27 million. And while we are projecting a relatively flat revenue year, based on the decreased fiscal year 2018 forecast from our two largest customers, we do believe this decrease will be temporary and expect that Avid will continue to thrive despite lower revenue from these two clients in the short term. There could still be a revenue upside this year as our new customers continue to move towards GMP manufacturing and the potential to bring on even more new customers. In addition to our business development efforts, we have also continued to make critical investments in our CDMO facilities to ensure that we offer the most state-of-the-art systems. During the quarter, we installed two new 2,000 liter bioreactors in the Myford facility and we have already secured commitments for this capacity. Due to its modular design, there’s a potential to install additional bioreactors in our Myford facility which will allow us to grow the business in the future. In addition, we continue to evaluate options to expand Avid’s offerings in order to meet even more needs for our existing and prospective clients. I would now like to turn the call over to Roger for a few words on his joining the company and future directions, and we will then turn the call over to Paul Lytle for a discussion of financial highlights for the quarter and for the remainder of the fiscal year. Roger?

[Roger Lias:]

Thanks, Steve, and good afternoon, everyone. I’d first like to say that I’m absolutely delighted to be able to join the Avid Bioservices team at what is a very exciting time for the company. It’s clear that the broad biologics market remains robust and there is undoubtedly very strong demand for high-quality contract development and manufacturing services to support the development and launch of a wide range of important therapeutic biological products. Based on my personal long experience in this field stretching way back to the formative perhaps market-making years at Celltech Biologics which is now Lonza and at companies such as Diosynth, KBI BioPharma, Cytovance Biologics and Eden Biodesign, I very strongly believe that the building blocks are mostly in place here at Avid to support growth and transition to a world-leading CDMO. I’ve had the opportunity to look at Avid recently both as a competitor over the years and even more recently as a consultant supporting a very well funded company on the East Coast that has selected, I’m pleased to say, Avid as its preferred manufacturer for a very interesting and potentially lifesaving product that should move rapidly to commercialization. The decision-making process for this company was multifaceted. The quality and capabilities go without saying and ultimately the decision to come to Avid came down to the employees, the people, the flexible and creative approach and the ability to meet timelines. And it’s interesting that Avid beat out most major contract manufacturers to win this project, and I was certainly duly impressed. In many ways, Avid is in a very unusual position relative to its peer contract manufacturers based on the somewhat unorthodox way in which the company has evolved. An exemplary 12-year track record in releasing commercial batches is very unusual and coupled with almost 25 years of overall experience in biologics, process development and manufacture, this represents a truly tremendous platform from which to grow the company. There’s clearly work to be done, however. Over the shorter term I believe we clearly need to diversify the client base and to continue to grow the order book and revenue backlog. I believe that as part of this effort, Avid’s market visibility and reach needs to be dramatically increased. The new Myford manufacturing facility represents a tremendous opportunity and obviously needs to be filled as a priority, and I’m pleased to see progress in that direction already. I believe that Avid’s earlier stage process development and process sciences capabilities need to be strengthened both in support of manufacturing operations and to create a stronger pipeline of future manufacturing projects and additional revenue stream. Stepping back and taking the longer view, there’s clearly exciting opportunities for considerable growth both organically and potentially via mergers and acquisitions. Clearly I believe the available Myford II expansion space provides opportunity to add additional commercial drug substance manufacturing to the type already installed, but we should also examine opportunities to potentially add earlier discovery services to feed the process development and subsequent manufacturing pipeline and potentially latest stage drug product manufacturing services that will fill and finish a product. I believe strongly that we also need to be ready to look beyond antibodies and recombinant proteins and to take advantage of growing market demand for newer classes of products such as viral vectors and vaccines. These support exciting new therapeutic advantages in gene, cellular and immunotherapies, antibody-drug conjugates and bio multi-specific antibody products. Each of these has specific technical and operational challenges that will need to be carefully addressed, but the opportunities are significant and I believe the timing is very good. So in closing, I’m very much looking forward to getting started and I believe that the future looks very bright for the broad biologics market and for Avid Bioservices in particular. I’m very much looking forward to taking Avid to the next level and to reporting on progress during future calls. And with that, I’d hand over to Paul who will cover the quarterly results in more detail.

[Paul Lytle:]

Thanks, Roger, and welcome to the team.

[Roger Lias:]

Thank you.

[Paul Lytle:]

I’ll now discuss our financial results for the first quarter of fiscal year 2018 starting with revenue. As a backdrop, our revenue guidance for the full fiscal year is expected to be between 50 million and 55 million of which we recognized 27 million during the first quarter of fiscal year 2018. This included 10 million in revenue that shifted from Q4 of last fiscal year to the first quarter due to a customer requested shipping delay. This represents an increase in revenue of 383% versus 5.6 million that we reported during the same prior year period. While we had an excellent quarter, we have also seen decreases in manufacturing demand from our two largest customers. As a result, we saw revenue backlog decline to approximately 33 million at the end of the current quarter. As we look ahead, adding new customers and diversifying our customer base will be extremely important to growing revenue. This is the key reason we have hired a President of Avid solely focused on our CDMO business and someone who is highly connected to the bio-manufacturing industry. Let me shift gears now to discuss our gross margins on contract manufacturing. During the current quarter, our gross margins declined to 24% mostly due to a higher percentage of revenue related to pass through charges, such as raw materials, that are recorded to revenue at cost plus a nominal mark-up. This is relatively standard for our industry. During the current quarter, 38% of our revenue was related to pass through charges versus 20% in the same prior year quarter, thereby lowering the overall gross margin. In addition, we saw lower capacity utilization during the current quarter in addition to unavailable capacity while we installed and validated two 2,000 liter bioreactors which are now operational. This also impacted our gross margins for the current quarter versus the same prior year period. Now turning to R&D, we are continuing our commitment to reduce R&D spending. In fiscal year 2017, we reported a 52% decline in R&D expenses and we have continued this trend into the first quarter of fiscal year '18 achieving a 57% reduction in R&D expenses. Based on our plan to pursue strategic alternatives for our R&D assets, we expect R&D expenses to decline at least 50% overall this year and it could be a greater percentage decline depending on the timing of any potential transaction around the R&D assets. In summary, the increase in manufacturing revenue combined with a decrease in R&D spending has translated into a reduction in our net loss by 89% to 1.2 million for the current quarter versus a net loss of 11 million for the same prior year period. This concludes my financial overview. I will now open the call up for questions. Operator?

[Operator:]

Thank you. [Operator Instructions]. We have a question from the line of George Zavoico from FBR [sic] (JonesTrading). Your line is open. George Zavoico Hi, everyone. Good afternoon. And Roger welcome to Peregrine. I have a question for you. The revenue and client customer base, it’s kind of choppy, kind of up and down as you’ve seen and as Peregrine has seen lately. What in your view do you see as the critical mass that you need in terms of customer base to sort of eliminate some of that choppiness in terms of number of customers and volumes? In other words, what’s your goal, what’s your objective to get to that point? Roger Lias Yes, I think the key thing is to look – we’re very well positioned to given the track record and obviously the available capacity to potentially bring in later phase clients and to technology transfer in programs that can go straight into commercial manufacturing, and clearly that’s a major objective. While the two current commercial clients are sort of somewhat soft in their forecast at the moment, if we can get more similar clients into the Myford facility, clearly that’s going to do a good job of smoothing these revenue flows. We’re fortunate in many ways even though at times it seems that the commercial manufacturing side of things can be heavy lifting and hard work, it’s a lot more choppy and lumpy if you rely entirely on process development and clinical stage projects and I do believe we need more of those as well in order to keep the funnel full for pipeline and to keep feeding manufacturing. But I think if we could over the shorter term get in at least two more commercial clients and to fill the Myford 1 facility, I think we’ll see a much smoother revenue flow. George Zavoico Clearly there was something – you mentioned some of the aspects of that that you really were attracted to, to be able to take this position. Could you expand on that a little bit? What do you see as a differentiating factor for Avid compared to some of its competitors? Is there going to be a cost benefit, an advantage, efficiency? What do you see as the key advantages of going with Avid versus the competitor? Roger Lias Yes, it’s a very good question. Differentiation in the, let’s call it the 2,000 liter single use bioreactor space is getting tougher and tougher. There were more and more competitive players out there offering on paper at least similar capacity. I think for me what really – certainly with respect to the particular program that I was assisting with, what was really very impressive was the people and I have to say that. It was the ability to think creatively out of the box to provide sort of exemplary feedback and that’s a difficult thing to lay out on paper. But once you get potential clients inside the door, I think the team really shines. On top of that of course I do believe that – actually the program I was involved in and I haven’t had the chance to look too carefully at pricing yet, I think there’s some potential, let’s say, just to increase margins based on pricing. I think Avid is a long way away from being one of the more expensive players out there, which I think is good news. I think it gives us a lot of upside. The available capacity in that long regulatory track record of releasing commercial batches should not be underestimated. There are many, many I guess I’d call them peer contract manufacturers who are only just now getting to that stage of their first Food and Drug Administration inspection. And we, in my view, we should play that for all it’s worth. So I think there’s a, from a client perspective, tremendous opportunity to gain both capacity and expertise at actually pretty reasonable value terms. George Zavoico And as I recall and correct me if I’m wrong, it’s mostly been bulk manufacturing and not so much fill and finish. Do you have any plans to do that? Roger Lias I can’t say we have plans at this point. And again, forgive me as it’s early and I haven’t even had the chance to really discuss this too much with the rest of the team at this point. I do, however, believe that sort of forward integration into drug product manufacture fill and finish is potentially valuable. We have the space to do it. I certainly wouldn’t recommend jumping in heavily into very large scale or anything like that to start off with. It’s a different business. It’s further down the value chain. But nevertheless, we could certainly support clinical fills to support those drug substance clients that are in the clinic and I think that’s potentially a very good way to start at relatively low investment. George Zavoico Okay. Roger, welcome and good luck in meeting objectives. I also have a question for Steve regarding bavituximab, because you barely touched on it in your prepared remarks. Could you remind me of what are some of the near-term milestones? Are you going to be presenting anything at SITC, for example, or any other medical conference? Steven King Yes, sure. So for bavituximab I think we have kind of few things on the horizon. Obviously, we recently announced that the NCCN studies are starting to kickoff and one of those I think that’s particularly important is a combination with Keytruda in head and neck cancer. Clearly the data, the subset analysis from the SUNRISE trial really supports moving these kind of combinations forward naturally where we feel that the focus of the program should be in moving forward. In addition, we have other investigators who have expressed interest in running studies that we hopefully would be able to start over the near term with other combinations with the checkpoint inhibitors and actually new indications. And so I think that those are some of the milestones. Absolutely, you’ll continue to see data coming out at conferences like SITC and AACR and a series of other conferences highlighting both the potential of bavi in combination with checkpoint inhibitors and combinations with cellular therapies such as CAR-T and other cellular therapies that are emerging. And so yes, I think the program – I think importantly from the standpoint of finding the right partner for the program, it’s really important that it is a living program and that it is active and that we’re continuing to garner the sort of interest we are from key opinion leaders and from others who really want to see the program advancing and do think it could potentially be a perfect fit with these I/O combinations. So yes, I think you’ll see lots of information coming out. And again, hopefully we’re able to find that right partner here over the short term that will really be able to not just oversee these studies but really boost the program, because it’s very important that we find a partner that’s willing to invest significant dollars upfront here in advancing the program because we need to really illustrate the proof of concept that the subset analysis from the SUNRISE study is valid. I think that’s an important first step. And then actually move it very quickly toward commercialization because – of course with any drug you get closer and closer rather to your patent expiry and even though those can be extended, there’s I think a real sense of urgency to see the program move forward very quickly toward those later stage clinical trials. So yes, I look forward to updating on all fronts; the science front, clinical front as well as the partnering front as we move into the last part of this year. George Zavoico Okay, thanks. Look forward to seeing those – the new data. Thank you very much. Steven King Thanks, George.

[Operator:]

Thank you. At this time, I will like to hand the call back over to Mr. Steve King for any closing remarks.

[Steven King:]

Okay. I’d like to thank you all again for participating in today’s phone call. As always, I want to thank our stockholders for their continued support. And I would like to especially thank our patients, their families and the investigators that are participating in our bavituximab clinical trials. With that, we will conclude the call.

[Operator:]

Thank you, ladies and gentlemen, for connecting to our conference today. This concludes the program and you may all disconnect. Have a great day.