Societal CDMO Inc

F:RAH

Earnings Call Transcript 2023-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Societal CDMO Second Quarter 2023 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 Stephanie Diaz of Societal's Investor Relations group. Please go ahead.

[Stephanie Diaz, Investor Relations Group]

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 and six-months, ended June 30, 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, August 14, 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 Web site at societalcdmo.com.

With that, I will turn the call over to David Enloe, Societal's President and CEO.

[David Enloe, President and Chief Executive Officer]

Thank you, Stephanie, and thank you to everyone participating today via webcast. The second quarter was a very busy and productive time in Societal CDMO. Despite the financing challenges faced by many of our customers, we continue to attract new business as well as expand work with our existing customers. We were actively onboarding the new business more on] (ph) during the first-half, and we are pleased with our progress in these efforts. Additionally, we are pleased to have seen an increase in orders for Verapamil, a drug we own outright from our partner, Teva, thus validating the long-term durability of this important part of our product portfolio.

And subsequent to quarter end, we achieved two important objectives. First, we recently announced that the company had successfully secured a Schedule 1 controlled substance manufacturing license from the Drug Enforcement Agency that will allow us to expand our work beyond Schedule 2 products to manufacture for the growing psychedelic drug market. Also subsequent to quarter end, we successfully restructured our debt and certain covenants with our creditors to provide additional financial flexibility to the company during this time of market uncertainty. I will provide a more detailed review of all of our Q2 2023 achievements following an overview of our financial results for the quarter ended June 30, 2023. For that, I'll turn the call over to Ryan.

[Ryan Lake, Chief Financial Officer]

Thank you, David. Good afternoon, everyone. Before I begin, in addition to 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, 2023, are included in our press release issued prior to this call, and in our Form 10-Q which is on file with SEC.

I will now begin with results for the second quarter. Revenues for the quarter ended June 30, 2023, were $21.8 million, compared to $23.2 million for the comparable 2022 period. The decrease of $1.4 million was primarily driven by a decrease in revenue from the company's largest commercial customer, Teva, due to a scheduled shutdown of our packaging line to implement the upgrades required to comply with the new serialization and aggregation compliance standards. In addition, the new manufacturing revenue associated with the then new customer, InfectoPharm's, inventory-build during Q2 2022 was greater than the normalized quarterly revenue recorded in Q2 2023.

These reductions in revenue were partially offset by increased pre-commercial development revenues from our clinical trial materials and technology transfer projects. It is important to note that we expect to delay Teva orders to recover in the short-term, supported by the continued pull through in demand resulting from market share gains against the sole competitor for the Verapamil SR products. Cost of sales for the quarter ended June 30, 2023, was $17.3 million, compared to $17.5 million for the comparable period in 2022.

The decrease of $200,000 was primarily due to lower commercial manufacturing revenue based on the timing of the serialization and aggregation compliance project, offset by higher fixed costs primarily to support the newly installed aseptic fill/finish line that has expanded our capabilities. Selling, general, and administrative expenses for the second quarter of 2023, of $5.3 million, was consistent with the comparable period-year period of $5.2 million. Interest expense was $2.3 million for the three months ended June 30, 2023, a decrease compared to $3.4 million for the comparable period of 2022.

The decrease of $1.1 million was primarily due to a significantly reduced amount of aggregate principal and lower interest rates under the company's refinanced debt as compared to the borrowings outstanding during the period ended June 30, 2022. For the quarter ended June 30, 2023, the company recorded a net loss of $3.2 million or $0.04 per diluted share, as compared to a net loss of $3.1 million or $0.06 per diluted share, for the comparable period of 2022. EBITDA, as adjusted for the period was $2.8 million, compared to $4.0 million in the prior year period. The $1.2 million decrease in EBITDA is primarily due to lower revenue during the period.

I'll now review the results for the six months, ending June 30, 2023. Revenue for the six months ended June 30, 2023, was $43.3 million, compared to $44.3 million for 2022. The decrease of $1.0 million in revenue was primarily driven by the decreases in revenues from Teva and InfectoPharm, which were partially offset by an increase in pre-commercial development revenues, as discussed previously. Cost of sales for the six months ended June 30, 2023, was $36.6 million, compared to $33.6 million in 2022. The cost of sales increase of $3.0 million was primarily due to mix of revenues and related fixed cost absorption, including increased costs associated with the new aseptic fill/finish line that has expanded our capabilities and increased material costs.

Selling, general, and administrative expenses for the six months ended June 30, 2023, were $9.9 million, compared to $10.9 million in 2022. The decrease of $1.0 million was primarily related to lower public company costs and administrative costs than the prior year. Interest expense was $4.4 million and $6.8 million for the first six months of 2023 and 2022, respectively. The decrease of $2.4 million was due to a significantly reduced amount of aggregate principal and lower interest rates under the Company's refinanced debt as compared to the borrowings outstanding during the period ended June 30, 2022.

For the six months ended June 30, 2023, Societal reported a net loss of $7.9 million, or $0.09 per diluted share compared to a net loss of $7.4 million, or $0.13 per diluted share for 2022. EBITDA as adjusted for the six months was $3.4 million, compared to $6.8 million in the prior year period. The $3.4 million decrease in EBITDA is primarily due to a mix of revenue and related fixed 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-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.

[David Enloe, President and Chief Executive Officer]

Thanks, Ryan. The second quarter was a highly productive period from an operational perspective. During the quarter, we continued to aggressively pursue and win new business as well as expand multiple programs with existing customers. In addition to our normal course of business, the Company also successfully executed a scheduled maintenance shutdown, as well as an upgrade of our packaging line that was required to make it compliant with new serialization and aggregation standards.

And finally, the company recently secured a Schedule 1 Controlled Substance Manufacturing License from the Drug Enforcement Agency that will allow us to expand our work beyond Schedule 2 products to manufacture for the growing psychedelic drug market. Yet the period was not without challenges.

As Ryan reported, we recorded a decline versus Q2 2022 revenues due to a short-term delay in 2023 Teva revenue as a result of the scheduled packaging line shutdown as well as a revenue delta created by the Q2 2022 InfectoPharm inventory build. However, both of these decreases were largely offset by an increase in precommercial development revenues, and we believe the Teva revenues will be recovered prior to year-end. These offsets validate our revenue diversification strategy that has been our core focus for the past couple of years. More an issue than these typical variances is the fact that our customers continue to face an unfavorable financing environment.

During the first-half of the year, several projects were delayed or placed on hold by customers, primarily as a result of either funding challenges or overall cash preservation efforts by those customers.

And while a certain amount of project attrition is normal in the CDMO business, we are seeing higher rates than in the past that can be directly attributed to the current financing environment. Despite these hurdles, at this time we do not believe that our top line year-end revenue guidance will be affected. However, we do believe that our EBITDA guidance requires revision. We had previously guided to a 2023 full-year EBITDA of between $15 million and $18 million. Today, we are revising our 2023 EBITDA guidance to between $12 million and $15 million.

It is important to emphasize that our operations and business fundamentals remain solid at Societal CDMO. This shift in guidance can be attributed to the financing hardships being faced by many companies in the biotech and life science sectors, and we continue to believe that it will be temporary. At the time that our customers secure the needed funding, Societal CDMO will have the talent, the capabilities and capacity in place and be ready to execute for our clients. And while we remain confident that the current financing environment will soon correct, the company has taken proactive steps to fortify our balance sheet today.

To this end, the company recently renegotiated our debt structure and certain covenants with our creditors to provide us with additional breathing room as we wait out the current market. Specifically, among other benefits, the new terms defer previous mandatory payments, reduce certain payments, and lower certain minimum liquidity and fixed charge coverage ratios. This restructuring, which was completed last week, drove our decision to reschedule our earnings announcement. We are very pleased with the outcome of this effort and the additional financial flexibility secured.

I would now like to provide a bit more color on our achievements for the quarter. During the second quarter, we signed new business and expanded scope of work agreements for 19 existing programs. During the period, we also expanded both our business development leadership and our sales team and we are encouraged by the progress we are seeing out of the gate. While the majority of our customers require that we do not disclose our partnerships in order to protect their competitive strategies, we are able to highlight a few new programs signed during the period, including a new project with Xequel Bio, Inc.

Through this project, Societal will provide CDMO services to support the ongoing clinical development of a patented new chemical entity based on its aCT1 platform. The agreement spans a range of our offerings, including process development and clinical trial services culminating in cGMP manufacturing of the compound and placebo for upcoming Phase 2 clinical trials of iNexin, which is an aCT1 ophthalmic solution. iNexin is a sterile, preservative free ophthalmic solution containing aCT1 peptide that is currently being evaluated by Xequel for the potential treatment of persistent corneal epithelial defects.

During the period, we were also selected by Atossa Therapeutics to provide a range of clinical trial services offerings focused on Atossa's proprietary Selective Estrogen Receptor Modulator, or SERM (Z)-endoxifen. The agreement spans a range of activities including analytical method transfer, development and validation, cleaning verification, method validation, manufacturing of multiple R&D engineering batches, and stability testing of the R&D engineering batches.

We also signed a Master Service Agreement with CivicaScript. This agreement covers an initial project supporting tech transfer of a generic drug candidate that is moving through development and registration efforts with the potential to expand to include support of additional CivicaScript programs and finally, subsequent to the quarter end, Societal won a new project with Spinnaker Biosciences, Inc. to execute CDMO services supporting the clinical development of a novel therapeutic candidate.

The activities to be conducted under this agreement include analytical method transfer and qualification, aseptic process development, manufacturer of a prototype batch of the therapeutic cGMP filling of the resultant sterile powder into vials and stability testing of the therapeutic candidate to be used in a planned Phase 1/2 study. As I hope is evident, the scope of these projects span early stage process development to cGMP manufacturing to fill finish. We believe this broad range of services highlights a growing customer recognition of Societal CDMO as a start to finish partner and we continue to expand our capabilities in an effort to address new and growing markets.

The company recently announced that it has taken another step to expand our services by securing a license to manufacture in support of psychedelic drug development. This strategic expansion is a natural fit for the company based on our decades of experience in manufacturing and handling controlled substances. We believe this unique experience positions Societal well to address the emerging psychedelic therapy sector as well as the growing number of ongoing and planned clinical trials in this area. The company recently announced that it has completed key regulatory requirements and received a U.S. Drug Enforcement Agency approval to add certain Schedule 1 psychedelic compounds to our controlled substance manufacturing registration.

These compounds expand upon the Schedule 2 manufacturing registration that we have held with the DEA for over 20 years. Importantly, Societal is now able to expand its capabilities into the psychedelic drug development market without committing any additional capital investment. We are currently in discussions with leading drug manufacturers engaged in the psychedelic area, and we look forward to our work in this new and exciting space.

In closing, I would like to again reiterate that the company's operational and business fundamentals remain solid. Over the last year, we have substantially reduced our debt, improved our covenants and strengthened our balance sheet to support our plans for growth.

We continue to work to mitigate the impact of today's financing environment on our business, and to that end, we have expanded both our BD leadership as well as our sales team. This group continues to sign new projects to feed our pipeline, and we are very encouraged by the progress they continue to make.

As we look forward to the second-half of the year, we have a superb team in place, a strong pipeline of customer projects and a broad range of capabilities that continues to grow to meet new and expanding areas of demand.

In short, we believe our organization is is well-positioned to weather today's temporary financing headwinds and excel in the markets ahead.

This concludes my prepared remarks for today. We can now open up the call for questions. Operator?

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital.

[Matt Hewitt, Craig-Hallum Capital]

Good afternoon. Congratulations on the progress, and thank you for taking the questions. Maybe first up regarding the psychedelic opportunity, how quickly could that translate into some new wins? And as you look at that opportunity, is there a handful of players or do you think it could become a rapid growth market with a number of different companies expanding into that area?

[David Enloe, President and Chief Executive Officer]

Yes, hi, Matt. David here, and thanks for the question. The space is certainly growing, and it's growing rapidly. There are now something like 90 clinical trials in the U.S., testing various drugs that are characterized and classified as psychedelics, usually around mental health disorders, depression, a lot in PTSD. And what we're seeing is, is that there are -- there's a nice amount of throughput on the API side, but not necessarily on the finished dose side, which is where we come in. So, I'll say to you that we have active discussions that are -- these aren't hypothetical, they're specific projects. And we're doing everything we can to secure those and bring them in-house, and begin to manufacture and produce.

[Matt Hewitt, Craig-Hallum Capital]

That's great. And then regarding the broader pipeline, I'm curious what you're seeing in the market right now. Some of your peers have talked about some shifts that have occurred, maybe focusing more energy, more effort towards later stage. Obviously, you continue to win business across early to late stage. So, I'm just curious what you're seeing from your customers.

[David Enloe, President and Chief Executive Officer]

Yes, I mean there's -- as we talked about just prior, there certainly remains difficulty by the very small companies with early, early programs to raise the capital necessary to go ahead, and so we're seeing hesitance there to get started. But our efforts span very intentionally across the gamut, if you will. And we remain very active on, as you know, Matt, the tech transfer front. And we continue to see activity there as companies are weighing the requirements that they have internally for supply chain control and strength by manufacturing into U.S. So, that's a space that we continue to emphasize. And I think the rest of it kind of speaks for itself.

We're seeing fewer opportunities pop up, but we're doing everything we can to win those, and we're seeing some nice success this year so far.

[Matt Hewitt, Craig-Hallum Capital]

Got it. And then maybe one last and I'll hop back into queue. A nice pop in gross margins here in the second quarter is somewhat expected, but a little bit better than we had been anticipating. How should we think about gross margins in the back-half of the year? Thank you.

[Ryan Lake, Chief Financial Officer]

Hi, Matt. So, Q2 margins were about 21%, and rebounded from Q1. And we expect further improvement in margins in the second-half, with expected margins to be in the mid-20% range, and that's really driven by mix and type of revenue, and related cost absorption, including the increased costs associated with the new aseptic fill/finish line and lyophilization as we expanded those capabilities and increased material costs. But one of the big drivers is related to the increase in revenue. And we have a high degree of confidence in the revenue guidance that we've put forward.

Year-to-date, we've achieved about $43 million or 45% of our full-year guidance, and expect the second-half to be about 55%, with Q3 probably in the mid-20% range. And this is consistent with what we communicated previously for the total year revenue weighted with about 45% in the first-half, and 55% in the second-half. Importantly, we've now completed the serialization and aggregation compliance, so that's behind us. And we're now fulfilling the -- the customer demand has been backed up, so we're seeing a lot of those shipments go out this quarter. And commercial revenue is also increasing in the second-half from the launch of the Otsuka and Viatris products.

You get a chance to look at our investor deck; you'll notice that we have an additional Viatris tech transfer project now, as well as some development projects ongoing with them. And we also have, now where we stand in the year, commercial customer orders that are already in-house through nearly the end of the year, which derisked our revenue forecasts. And it was more of a mix of commercial versus development orders. But we still have really good line of sight to our development revenue. I think at the midpoint it's roughly $22 million. We've already earned 40% of that, and we expect to earn 50% and over the next 50% from business that's already signed and in-house. And the remaining 10% is from business that we're planning on executing additional new business and scope changes on the current items that are in the sales funnel.

[Matt Hewitt, Craig-Hallum Capital]

That's great. Thank you very much for that color there.

[Operator]

Thank you. One moment for our next question, please. It comes from the line of Jacob Johnson from Stephens. Please proceed.

[Jacob Johnson, Stephens]

Hey, thanks. Good afternoon. Ryan, I appreciate all the color you just gave, so you might have answered some of this, but I just want to make sure I understand it. You guys were talking about the macro challenges, which seems like most everybody is talking about this quarter, but you're not really changing your revenue outlook, but your EBITDA outlook is trimmed a bit. Is that dichotomy there related to the mix of business being kind of lower margin business or can you just help frame why EBITDA guidance is coming down, revenue unchanged in light of the macro?

[Ryan Lake, Chief Financial Officer]

Yes, so the revision to our EBITDA guidance is a result of the impacts on the shift in mix of revenue and higher fixed costs, primarily in development. So, we're projecting less development revenue and more commercial revenue. And as a result of the macro funding environment in biotech, the slowdown in new signed business, and customer delays and customer attrition that David commented on earlier, that's what's causing that mix shift, and the higher fixed costs associated with the development business.

[Jacob Johnson, Stephens]

Okay, got it. That makes sense, thank you. And then maybe David, just on the macro, I'm just curious if you're seeing more of these headwinds at some of the legacy capabilities at Gainesville or if maybe more of this relates to some of the newer capabilities, like fill/finish and lyo?

[David Enloe, President and Chief Executive Officer]

Yes, it's a good question. And it's across the board. We see fewer -- the level of throughput of activity, if you look at the top of our funnel, our marketing efforts, lead identification, qualification, that's all going very well, quite frankly ahead of where we had targeted with each of those metrics. But as decisions to award and advance a program, and as best we understand it by any one -- we're not losing the business, it's just not being awarded, period. And that is a slowdown that runs across formulation type right now.

[Jacob Johnson, Stephens]

Okay, got it. I'll leave it at two. Thank you.

[David Enloe, President and Chief Executive Officer]

Thank you, Jacob.

[Operator]

Thank you. One moment for our next question, please, comes from the line of Max Smock with William Blair.

[Max Smock, William Blair]

Hey, good afternoon. Thanks for taking our questions. On the follow-up on Jacob's question, I'm still just trying to understand why EBITDA margin would step down so materially in the same revenue base here. So, I guess, Ryan, what's really changed relative to last quarter when you reaffirmed guidance? And can you walk through the margin profile associated with development revenue versus commercial revenue? I would have assumed that commercial would have been higher margi. So, mix shift towards more commercial maybe seemed -- I would have maybe assumed to be positive, but it sounds like that's actually the opposite. So, it'd be helpful to just get some commentary around that dynamic?

[Ryan Lake, Chief Financial Officer]

Yes. So, again the Q2 margins improved to 21%. So, they rebounded from a lower Q1. And the margin profile and mix in the second-half of the year is expected to improve to the mid 20% or low 20% range. And between development and commercial, keep in mind, the nascency of our development revenue business. So, we have a greater amount of fixed costs associated with the development business. So, it's almost a one-for-one impact, the shift in mix of development revenue to EBITDA. So, if development revenue is down, it's not absorbing those fixed costs, which go directly to the bottom line versus from a commercial perspective, those fixed costs that we have associated with that business are already absorbed through the business. So, it doesn't have it -- as much contributory impact to the margins.

[Max Smock, William Blair]

Got it, understood. Maybe just looking at the slide deck, I'm looking particularly at slide 15, just trying to confirm what you're factoring in the guidance for attrition in the back-half of the year here. And I'm having a little bit of trouble, frankly, following slide 15. I was wondering if you could just walk us through what exactly is going on there, and what exactly each of these revenue buckets entails, and what your assumptions are, I guess, for the back-half of this year?

[Ryan Lake, Chief Financial Officer]

Yes, so let me just pull that up, so that I have it handy as well. I think, importantly, with what this is showing is that, from a development revenue perspective, we already have earned 40% or $9 million of the total estimated revenue from development revenue. And then, the other 50% or the $11 million, which is below the line, in terms of the second-half revenue, that $11 million is already signed business. So, what's important about that is there is a risk adjustment included in that number.

So, really, the remaining go-get is about $1 million to $4 million between, basically, new business and go-get, and change of scope of work with existing customers. What we tried to lay out was a waterfall to show you that, although we're winning new work, we're also experiencing, and David mentioned this during his comments, attrition or delays of committed business already at an extent that we hadn't experienced before, which is certainly you can almost see the direct impact. That decrease in development revenue is, effectively the decrease that we're experiencing, from an EBITDA perspective. So, that's why we're highlighting that $4 million that's circled on that slide.

[Max Smock, William Blair]

Got it. Understood. Maybe one last quick one for me, just any guidance you can give us around expected cash burn this year and then cash balance, as we head into 2024?

[Ryan Lake, Chief Financial Officer]

So, we ended Q2 with $4.7 million in cash and cash equivalents. And we have been, and we're continuing to look at ways that we can reduce our cash burn, while still prioritizing spend on strategic value and growth drivers. And from a cash flow perspective, we still expect to be positive cash flow from operations for the full year. We're prioritizing our capital spending needs, and customers are also continuing to fund capital expenditures as well.

On a go-forward basis, our cash burn from principal and interest is expected to be less after the land sale proceeds and pay down of the RBC debt, which is shifted to the first-half of next year. But after that we would have, roughly, only $25 million of senior debt outstanding. And we also expect increased profitability from our Verapamil franchise, as we renegotiate those agreements at the end of 2024 as well.

[Max Smock, William Blair]

Okay, great. I'll leave it there. Thank you.

[Operator]

Thank you. One moment for our next question. And it comes from the line of Sean Dodge with RBC Capital Markets.

[Thomas Keller, RBC Capital Markets]

Hey, good afternoon. This is Thomas Keller on for Sean. Thanks for taking the questions. So, I wanted to come back to Lannett, I believe you'd said back in May, they had about three or four months of inventory, any update can you provide on demand front there or any just general updates on that relationship going forward?

[Ryan Lake, Chief Financial Officer]

So, demand for Lannett has been consistent. They're continuing to meet their obligations under the agreement. And I think, quite honestly, the relationship is better now that they've emerged from bankruptcy. And it's both the -- well, technically all of the Verapamil franchise, we see that as a significant asset, and one that we're going to be able to improve upon the economics, profit-sharing from that as we exit the natural agreement that they're currently under, and as we enter into those new agreements, beginning January of 2025.

[Thomas Keller, RBC Capital Markets]

That's helpful. Thank you. And then, on the MSA with CivicaScript, I think they've got initial plans for six to 10 generics, something like that. I think I saw -- how would potential expansion work there beyond that initial program? Is that a competitive process for each? Are you all like a default vendor to their potential expansion?

[David Enloe, President and Chief Executive Officer]

Yes. Hey, Thomas. David here. I mean, certainly, each project and program is being awarded in and of itself. As we begin the tech transfer work for this one, we expect, like all the other tech transfers, to be very successful and very communicative with them. There's, quite frankly, a different skill set to succeed in the tech transfer world than earlier-stage programs, and for that matter, commercial manufacturing. And we've become very adept at it, have high confidence in our ability to deliver there. And we -- we've been discussing multiple programs with them. And they are pacing out their programs and projects, consistent with what we've described with the macro market.

[Thomas Keller, RBC Capital Markets]

All right. Thanks. I'll leave it there.

[David Enloe, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. And I don't see any further questions in the queue. I will pass it back to David Enloe for closing comments.

[David Enloe, President and Chief Executive Officer]

Great, thanks. 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. Thank you again for participating today, and for your continued support of Societal CDMO.

[Operator]

This does conclude the program. You may now disconnect.