Inotiv Inc (NOTV) 2022 Q1 法說會逐字稿

Greetings. Welcome to Inotiv Inc.'s First Quarter Fiscal 2022 Financial Results Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Kalle Ahl of the Equity Group. Thank you. You may begin.

Thank you, Alex, and good afternoon, everyone. Inotiv Inc.'s first quarter of fiscal 2022 financial results were released today after the market closed. A copy of the earnings release can be found in the Investors section of the company's website at inotivco.com.

As a matter of formality, I need to remind you that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected.

Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter.

Management also will discuss certain non-GAAP financial measures in an effort to provide additional information for investors. A definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures is included in the company's financial results press release and corresponding Form 8-K.

Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; Beth Taylor, Chief Financial Officer; and John Sagartz, Chief Strategy Officer. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results. Then we'll open the call for questions.

Now it's my pleasure to turn the call over to Bob.

Thank you, Kalle, and good afternoon to everyone. Thank you for joining us today. We're really pleased with the way we started fiscal '22. We've continued our momentum building Inotiv into a comprehensive provider, preclinical research services while adding a very highly complementary research model platform through the strategic acquisition of Envigo. Our full spectrum solutions now span 2 segments, discovery and safety assessment or DSA and research models and services, which we also refer to as RMS.

The acquisition of Envigo was transformative to our company, and we have now grown from 240 employees in 2018 to over 2,000 employees today. In addition, our revenue has grown from approximately $26 million in fiscal '18 to a pro forma revenue of fiscal 2021, reflecting the acquisition of Envigo of approximately $395.8 million.

Since the start of the fiscal year, we further bolstered our DSA capabilities through the acquisition of Plato Biopharma in October of 2021, the purchase of Integrated Laboratory Systems in January of 2022, a new collaboration with Synexa Life Sciences in January of 2022 and several ongoing investments in internal start-ups and capabilities. Plato Biopharma provides our DSA segment with in vivo pharmacology research, drug discovery expertise in the areas of cardiovascular, renal, pulmonary and hepatic therapies. Plato's integrative approach to functional and physiological measurements, histological evaluations and biomarker analysis complements our existing suite of services. Plato is located near our Boulder, Colorado discovery operations. And Plato and Bolder operations are now both operating synergistically, and we are adding additional lease space to both locations in order to support the strong demand we are currently seeing.

Integrated Laboratory Systems or ILS brings our DSA segment immediate scale, genetic toxicology, building on the genetic toxicology assets we acquired in 2021 from MilliporeSigma's BioReliance portfolio. We've essentially accelerated by a few years our in-house Gentox start-up with the acquisition of ILS, which adds 2 leased facilities with a total of 50,000 square feet, including a vivarium that is accredited by the Association for Assessment and Accreditation of Laboratory Animal Care. In addition to gaining expertise in genetic toxicology in vivo and in vitro toxicology, pathology, molecular biology, bioinformatics and computational toxicology services, we gained access to excellent talent in the vicinity of North Carolina's Research Triangle Park, where ILS is located. We're making further investments over the next 2 quarters to additionally expand capacity in the ILS facility.

Our collaboration with Synexa Life Sciences will establish a center of excellence for biotherapeutics and biomarkers at a recently leased facility in Rockville, Maryland, which is currently under construction. Under this collaboration, the biomarker Pioneer Synexa will further its international expansion and lease laboratory space at our Rockville site, while supporting Inotiv in developing and delivering comprehensive GLP biomarker and biotherapeutic services. Working together, we expect to achieve scale, broaden our respective customer bases and capitalize on cross-selling opportunities.

We continue to make internal investments in our DSA business, including opening of the modern DMPK cell molecular biology laboratories at our St. Louis facility, which we opened in November of 2021. That's the first phase. Second phase will be opening next month. We are beginning to see the benefits of the new capabilities and capacity.

We have continued to invest in our people, our infrastructure, and new systems and technologies. We believe these investments will augment future growth and enhance operating margins while improving service for our clients. The first quarter adjusted unallocated corporate G&A was approximately $7 million or 8.3% of revenue compared to 16.2% of revenue for the same period last year, and we expect to see this figure decline as we continue to grow.

Moving to our RMS segment. Our strategic acquisition of Envigo helped establish Inotiv as a leader in research models at a time when strong industry demand has been outstripping supply, particularly in the category of nonhuman primates or NHPs. With the Envigo purchase, we mitigated potential research bottlenecks addressing a common concern of our customers and established a new growth platform for additional service offerings.

Given this view and our desire to scale the RMS business, we acquired 2 complementary businesses in January: Orient Bioresource Center or OBRC, and the [Rabbreeding] and supply business of Robinson Services, Inc. or RSI. OBRC NHP facility is located on 500 acres of land near Inotiv's existing primate facility in Texas and brings meaningful opportunity to expand NHP boarding and breeding capacity to our RMS customers. Having been a customer of OBRC ourselves, we are very familiar with OBRC's high level of service and animal welfare. RSI brings additional rabbit customers and market share to RMS and will consolidate its production into existing Inotiv facilities during 2022.

We believe RMS is well positioned for revenue growth and improved operational performance. By way of example, in fiscal Q3, we will begin closing 2 Envigo sites and consolidate their operations into a third location in Denver, Pennsylvania, creating scale advantages at the site level and driving operating leverage.

With several common goals guide our actions across both segments, including listening to our customers and the desire to provide them with a high-touch consultative service, building a comprehensive offering to meet our customers' needs and control speed to market, scaling our business in strategic growth areas, cross-selling services and products to expand customer base, respecting our employees, customers and shareholders while encouraging a culture playing to win, and investing in people, technologies and infrastructure and facilities to build a contemporary and scalable company.

As we succeed in these areas, we plan to increasingly become our customers' primary research provider versus a secondary option, and are handling a greater number of longer duration programs spanning the entire preclinical continuum versus delivering one-off services. We achieved an excellent mix of internal and external growth in the first quarter of 2022, reflecting the successful execution of our strategy. Looking ahead, near-term demand for our DSA and RMS services remains very robust as illustrated by our DSA strong book-to-bill ratio of 1.78 and the quarter-end DSA backlog of $104.6 million. Over the long term, we are continuing to target organic revenue growth to the high single to low double digits and adjusted EBITDA margins in the range of 18% to 20%.

With that, I'd like to turn it over to Beth Taylor, our Chief Financial Officer.

Thanks, Bob. Good afternoon. In the first quarter of fiscal 2022, our total revenue increased 370.4% to $84.2 million from $17.9 million in the comparable prior year period, driven by a $14.9 million increase in DSA revenue and $51.4 million of incremental RMS revenue. RMS revenue reflected a partial quarter contribution from Envigo, which was acquired on November 5, 2021. Our DSA segment revenue grew 83.2% year-over-year to $32.8 million, driven by $10 million of incremental service revenue from the acquisitions of HistoTox Lab, Bolder BioPATH, Gateway pharmacology and Plato Biopharma, and $4.9 million of higher service revenue from internal growth.

Our acquisition of Envigo contributed $45.1 million of product revenue and $6.3 million of service revenue to our RMS segment this quarter. We did not have any RMS revenue in the comparable prior year period. In the first quarter of fiscal 2022, our total gross profit increased to $19.3 million or 22.9% of revenue, and that was up from $5.9 million or 33% of revenue in the comparable prior year period. The decrease in the gross profit as a percent of revenue reflects the introduction of RMS products to our overall business mix starting this quarter. RMS products have lower gross profit as a percent of revenue compared to DSA services. In addition, total gross profit included noncash amortization for a step-up in the value of RMS inventory of $3.7 million for the acquisition of Envigo, which had a negative impact on the gross profit percentage of 4.4%.

Our DSA segment gross profit, excluding amortization of the intangible assets, was $12.2 million or 37.2% of DSA revenue, and this is compared to $5.9 million or 33% of DSA revenue in the comparable prior year period. The year-over-year increase in gross profit percentage was primarily driven by higher margins on incremental revenue from the acquisitions of HistoTox labs, Bolder BioPATH, Gateway Pharmacology and Plato Biopharma, and greater utilization of recently expanded capacity.

Our RMS segment gross profit, excluding amortization of the intangible assets, was $7.1 million or 13.8% of RMS revenue. And again, the amortization of the step up of value of inventory of $3.7 million for the acquisition of Envigo negatively impacted the RMS segment gross profit by 4.4%.

Operating loss in the first quarter of fiscal 2022 totaled $33.6 million compared to operating income of $14,000 in the comparable prior year period, reflecting higher noncash stock compensation expense of $23.8 million, which included $23 million of post combination stock compensation expense recognized in connection with the Envigo transaction, and that related to the adoption of the Envigo equity plan and higher strategic investment in unallocated corporate G&A to support additional future revenue growth. And this included additional head count, recruiting and relocation expense, higher compensation expense, transaction costs related to the acquisitions of Plato, Envigo and V-Go in RSI, an increase in sales commissions due to higher sales awards, an increase in selling expenses due to an increase in travel as our sales and marketing teams have traveled more as the COVID-19 pandemic eases and an increase in start-up costs for internal investments in new service offerings.

During the quarter, we continued investing in internal capabilities to provide additional service offerings such as laboratory solutions, medical device pathology, biotherapeutics and genetic toxicology. All combined adjusted corporate unallocated G&A, much of which was growth oriented, totaled approximately 8.3% of revenue in the first quarter of fiscal 2022 compared to approximately 16.2% of revenue in the first quarter of fiscal 2021. I'd also like to point out that this quarter's selling expenses were higher compared to prior periods due to our increased book-to-bill ratio as we accrue commissions when we win new orders prior to the recognition of corresponding revenue.

Net loss attributable to common shareholders in the first quarter of fiscal 2022 totaled $83 million or a negative $3.93 per diluted share compared to a net loss of $366,000 or a negative $0.03 per diluted share in the comparable prior year period. This quarter's reported figure as mentioned above, was impacted by post combination nonstock compensation expense recognized in connection with the Envigo acquisition of $23 million relating to the adoption of the Envigo equity plan and a $56.7 million loss on fair value remeasurement of the convertible notes issued in September 2021. Adjusted EBITDA equaled approximately $10.1 million or 12% of revenue in the first quarter of fiscal 2022 compared to $1.4 million or 7.8% of revenue in the comparable prior year period.

The book-to-bill ratio for our DSA services business in the first quarter of fiscal 2022 was 1.78x. We continue to build our infrastructure for growth, which included additional head count, transaction and integration costs and internal investments in our people, new service offerings, new systems and technology. Our backlog at the end of the first quarter of fiscal 2022 was $104.6 million, up 28.5% from $81.4 million on September 30, 2021 and up 130.9% from $45.3 million on December 31, 2020.

Our balance sheet as of December 31, 2021, included cash and cash equivalents of $42.4 million -- we had a 0 balance on a $15 million revolving credit facility and a delayed draw term loan facility in the original principal amount of $35 million available to be drawn up to 18 months from the date of the credit agreement, which was November 5, 2021.

Our consolidated debt as of December 31, 2021, totaled $260.6 million. Our Form 10-Q will be filed on Monday, February 14, and will provide the balance sheet and statement of cash flows. On January 10, 2022, we borrowed the full amount under our existing $35 million delayed draw term loan facility to fund the purchase of ILS. And on January 27, 2022, we've rolled on incremental term loans of $40 million for the purchase of OBRC. Overall, we are pleased with the direction our business is heading, and we feel confident in continuing to invest in our future.

This concludes our prepared remarks. And with that, operator, please open the call for questions.

(Operator Instructions) Our first question comes from the line of Kyle Bauser with Colliers.

Congrats on the phenomenal results here again. Maybe starting with some of the recent acquisitions, so specifically ILS and OBRC. Just kind of curious how those came about? Or were these situations where you were able to kind of quickly act and say, popped onto your radar somehow? Or had you been in discussions with the companies for a while? Just kind of curious how it played out?

OBRC had historically been the supplier to Envigo or to Inotiv for several years. So we started talking to them prior to the Envigo deal being closed or announced. So that had been in the works for some time. It was part of our strategy. We knew that there was an opportunity to continue building our services and expand our boarding capability, board for breeding and boarding for maturing for our customers. And that's been an increasing revenue source for Envigo being increasing for us going forward.

We looked at the other alternatives on how we could expand in our property in Texas and knowing our supplier, we kind of had an idea that they wanted to sell, and we were able to, I think, get involved before anybody else did involved they enter an agreement with us, and we were able to complete that transaction. So really pleased it opens up some capacity for us. And I think it will be synergistic with our current ILS facility and provide some additional room for -- in services and for our customers. As far as the RSI that was a company that Envigo had identified prior to us closing. They told us about it. They initiated those conversations with them and visits. And then in early October, we were able to strike a deal with them. Again, prior to probably closing transaction and we knew that it was something that we had capacity internally. They were going to get out of the business, and it was an opportunity for us to gain market share and use some of our existing capacity. So one of our key strategies is scale, making sure we utilize unutilized capacity. And we need that customer base. Some of that is a sticky customer base with that which we've talked about before. So acquiring customer base, they're made sense to us. And I thought it would not put too much more burden because they were going to be somewhat add-ons to what we already had. So I know that's a lot of acquisitions at one time. And we've been able to complete these, and I'm really pleased with what the team has done, but it's -- we've got a group of people put in some extraordinary effort and really pleased with the results so far, but it's still a lot of work to do.

Great. That's certainly highly accretive. And I realized that Envigo deal only closed in early November, but given your track record of quick turnarounds, I was just wondering what sort of changes or improvements have been made so far as it relates to the, I guess, organizational and operating structure? And what are some other opportunities here to drive synergies in that business?

Well, first of these results, we -- in these results, we only own Envigo 7 weeks. And of those 7 weeks, 3 weeks were holiday weeks. So there's only 4 weeks, 5 weeks really to do much at the end of the year. But we've been pretty aggressive, I think, in transforming the corporate culture. We've made several changes and identifying who the leaders will be from a corporate standpoint. And unfortunately, that means that some -- we don't need duplicate corporate leaders. Those changes have occurred or been announced or in process. And the other thing that is interesting is a year ago, and it was a $50 million company growing up to be a $100 million company. And Envigo is not sure what it was doing, but it was about a $300 million company.

Now we're at a run rate of over $500 million, growing again. So instead of building a company to be $100 million, we're obviously a billing company to be much bigger than $500 million. that requires change, again, further changes in infrastructure and technologies and some skill sets. So we've been making those changes, pleased with the team that's coming together. And I think you'll see to some of the additional things in the future. So I'm looking forward to seeing what this team can do. And also we're testing them out quick. It was kind a lot in the last -- just in the last 4 weeks, 5 weeks.

Definitely. I appreciate that. And then just lastly, housekeeping item. That's just kind of wondering, so you kind of walked through it a little bit, but just to verify, can you provide kind of the current cash levels and debt including converts and basic shares outstanding? After kind of all these recent acquisitions?

Yes. We -- yes, our current cash level is down slightly from that $42 million level, but we expect strong receipts. So we're not expecting a significant change in cash. It will not be lower by the end of the quarter. And our current debt level is the $260 million reported plus the $40 million in term loans that we borrowed for the OBRC acquisition. And then the basic shares currently outstanding, which were reported in the proxy last week, around $24.8 million. And then fully diluted, including the convertible notes would be around $30.5 million.

Perfect. And congratulations on another great quarter.

Our next question comes from the line of Matt Hewitt with Craig-Hallum.

Congratulations on the strong quarter. Maybe first up, and I realize it's still only for some of the recently acquired properties. But could you talk a little bit about the cross-selling synergies that you're seeing already? And how you think those could progress over the course of the year?

Yes, I don't have a metric for you on the cross-selling. Obviously, by the book-to-bill of 1.78 to 1, we're not having trouble selling our services at the moment. And so -- but we do get -- I do get reports of the cross-selling. And we are seeing probably a lot right now, mainly in the discovery and small animal models. And we're seeing that develop and we're seeing the relationships develop. I couldn't tell you what the revenue is, but there's a long list of relationships that are starting to develop and expand. And fortunately, this is also taking advantage of some of the new capabilities we're building and brought on board with Plato and the Bolder acquisitions and with the recent expansion in St. Louis.

That's great. And NHP pricing, I'm wondering if you could kind of walk through maybe where that was pre-pandemic, where it is today? And maybe talk a little bit about how you've positioned yourself to kind of be the source for your customers where others are maybe facing challenges because of the supply disruptions and the issues, but kind of where you stand on that point as far as being able to meet your customers and maybe even how far out you've kind of booked some of those contracts?

Yes. It's a little big question, but I think the pre-pandemic at one point, the open market was probably 3,000 range. I think it's doubled every year, doubled to 6, 12, I think this year, we'll see it double again. I think the spot market is probably in the 20s now. And we don't see that going away. Most of what we have coming in for the year and have available for the year have been presold and we want to make sure we owner any contracts that we have with all of our customers. But there has been, obviously, a lot of cost pressure and pricing pressure. So our costs have increased significantly and so has the pricing. And our margins, I think, are doing well so far. There'll be some synergies with what we just did with -- further with some of our import and transportation. There will be further synergies with feed and what we have. So -- and I think there are additional services now that as a result of the condition in terms of some customers wanting to do their own breeding or their own boarding and they're maturing, if you will. So we're going to expand those services, make sure those are available. So those are new services, I think they are expanding rapidly. As far as the overall market condition, I believe this is something that's been going on not just pandemic related. I think it's a trend that occurred started 10 years ago. And I think you bring down the CDC reports, but you can see that -- at one point, China was exporting 90% of what they are producing. And today, they don't want to export any. And that was a trend that started 10 years ago, and it's not a trend that started just when COVID -- COVID did happen to coincide when they stopped exporting. So that has put a large pressure on the supply and the demand continues to increase with biotherapeutics and cell and gene therapy. So it's still -- so there are many of the drugs going to get FDA approval. Many of them are going to require NHPs for their studies. So I don't see that trend changing anytime in the next few years. So we'll continue to build up our services and our capacity. And right now, I think we have a good market share of NHPs.

That's really helpful. And then maybe one last one. Beth, this might be for you. Thank you for kind of walking us through the product gross margin and the puts and takes there. If I heard you correctly, that the adjusted, if you will, product gross margin should have been something closer to 17% for the quarter. Will it kind of -- will it bounce up to that here starting this quarter? Or how does that kind of play out over the next couple of quarters, especially given some of the price increases that you've seen?

Yes, you are correct. It would be closer to that 17% without the noncash amortization. There will be a little bit more of that amortization that will hit Q2 for the step-up of inventory but that will not continue after Q2.

Our final question comes from the line of Frank Takkinen with Lake Street Capital Markets.

I wanted to continue on for Matt's line on the NHP pricing. I was hoping you could just give us a little bit more color into what some of the contracts look like right now? And if there is an opportunity just to -- as contracts expire and new contracts come in, have some step-up in pricing over the next couple of years with the difference, both Envigo as well as OBRC?

The contract -- our contracts are generally -- even though we may have multiple year contracts from our suppliers, they set reset pricing annually. And so we reset pricing annually also with our customers. So I don't know that anybody has a real good fix on what 2023 pricing is at this point. We'll talk to our suppliers, and we'll make that decision probably in closer to September to October of this year, where it's going to be in '23 when we get more feedback from that. Hopefully, the markets -- the travel will be opened, we'll be able to visit them and meet them averse for that. It's we've been able to do that lately. But we -- as I said, we'll continue to honor what we have there and what we have in place right now is will be through the rest of the year.

Okay. That's helpful. And then just want…

Not fiscal year, to the calendar year contracts.

Got it. And then just little bit…

We actually have -- we do have some we sell on the spot market. If we have extra capacity, extra available, we will sell some on the spot market, but a great deal of what we have coming in is accounted for.

Got it. Okay. That makes sense. Just wanted to take a little bit higher view and wanted to get some anecdotal feedback you've been hearing in the field now that you've been offering the full suite of preclinical plus research model since November. What has been just broad industry feedback, how have people been digesting this change in the market?

Well, we're on the DSA side. So we're a buyer and a user and Discovery and Safety Assessment side. And we've been -- all of our customers are well aware of what's taking place. And as a result, we've been able to pass that through. And I believe all of our customers have been able to pass that through. So I understand it's part of doing business that I don't think has been a problem for any of us that I'm hearing out here pushback. And they're more concerned right now about their supply, which is increasing some of the request for boarding or breeding and boarding contracts so that they can start to have their own colony or their own resources. And that's where I think we'll see some increase in services. And so we'll be making some further investments in our facilities in order to expand those services. But I think they're more worried about. At this time, I would say, I hear more worry about access to supply than I hear about necessarily the pricing.

Got it. Okay. That's perfect. And then just last one for me. Can you comment on acquisition pipeline at all? Obviously, I heard your comments about there's a lot to digest right now, but I'm sure that the acquisition team isn't sitting around right now. So just any update on that front you can provide us would be great.

Well, we really don't comment on the go-forward acquisitions. I've always then been very open that we are expanding internally, and that's obviously very valuable for us to continue to grow internally. And that's where our employees like to see investment in our facilities, our internal growth. But we are constantly looking at external acquisitions, I would say, with our growth over the last 4 months or 5 months, we've probably have shown up on more radar screens than we did before. And we can look at probably a broader array of potential assets and acquisitions going forward. But this -- so I won't comment on anything going forward, but we're always going to remain active. But I'll have to balance that, again, with our team and our ability to build our corporate team, and are they ready to really digest and continue to move forward. But we always keep our eye on a few things. And we will continue to do so. And I hope that, that continues to be part of our strategy. And again, our corporate team and our acquisition team are people, they like that. And what's really rewarding for us right now is we have some people reach out to us and they like to be part of our organization. They're looking for an exit strategy or to be part of a full service organization. And it's very rewarding to have him calling so we would like to be part of the organization, not necessarily even going through a process. So we continue to take those calls and we look forward to looking at those opportunities.

Got it. Okay. I'll stop there. Congrats on all the progress.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Bob Leasure for closing remarks.

Well, thank you for participating in our call this afternoon. In closing, I'd really like to thank all of our employees and everyone involved and the extraordinary effort that they bring every day to make this an exceptional company and achieving the transformation that's occurred over the last 4 months to 6 months. Please reach out to our investor relations firms, the equity group if you're interested in scheduling a follow-up call, and I look forward to reporting back to you in May when we release our second quarter fiscal 2022 financial results. Have a great day.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.