Inotiv Inc (NOTV) 2021 Q3 法說會逐字稿

Greetings, and welcome to Inotiv Inc.'s Third Quarter Fiscal 2021 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kalle Ahl of the Equity Group. Thank you. Please go ahead.

Thank you, Donna, and good afternoon, everyone. Inotiv Inc.'s third quarter fiscal 2021 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 www.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 will open the call for questions.

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

All right. Thank you, Kalle, and good afternoon to everyone. Thank you for joining us today. This quarter, we continue to make significant progress executing our strategy to build a complete suite of contract research services that span the entire drug discovery and pre-clinical development continuum. With expanded in-house capabilities, we increasingly are engaging clients earlier in the drug discovery process and serving their needs more comprehensively during the full journey to clinical development.

Our recent success has been supported by 3 strategic growth pillars: one, is the acquisitions of strategic assets; two, the expansion of existing operations and services; and three, focus on start-up of new operations and services. First, I'll talk about the acquisitions -- regarding the acquisitions.

This quarter, we meaningfully enhanced our service offerings and scaled Inotiv's business with the acquisitions of HistoTox Labs and Bolder BioPATH, which closed on April 30 and May 3, respectively. These acquisitions now comprise our Boulder, Colorado operations and both delivered strong debut performances for Inotiv, contributing approximately $4.3 million of combined revenue during May and June of 2021, which corresponds to an annualized revenue run rate of approximately $25.8 million.

Strategically, the Bolder acquisitions expand our histopathology and non-clinical pharmacology services, while bringing us highly complementary client base predominantly consisting of emerging biopharma companies many of which focus cell and gene therapy. We are pleased with the progress of the integration of HistoTox and Bolder BioPATH, and we are already capitalizing on existing cross-selling opportunities that will further bolster Inotiv's overall growth. We're very optimistic that these acquisitions will create substantial value for our clients and shareholders, much likely accomplished with the purchase of Seventh Wave in July of 2018, Smithers Avanza in May of 2019, and PreClinical Research Services in December of 2019.

After the quarter ended, we also announced the acquisition of Missouri-based Gateway Pharmacology Laboratories. While Gateway's annual revenue run rate is relatively small at approximately $2 million, it brings us key talent and expertise to assist clients, early target validation activity and to help evaluate the efficacy and safety of new molecular entities designed for the treatment of kidney and heart disease. Strategically, Gateway acquisition does tow well into our St. Louis operations -- will be part of our St. Louis operations.

Regarding the expansion of existing operations, in May of 2021, we purchased the previously-leased St. Louis facility for approximately $4.7 million. In June, we commenced the construction on the unfinished shelf space at the 50,000 square foot facility. The expansion will add office and laboratory capacity to accommodate our growing client base and diversity of service offerings. In particular, the expansion will include laboratories for increased DMPK technology and capability, as well as new cell and molecular biology tools capable of delivering in vitro solutions and pharmacology and toxicology early in the drug discovery phase.

We expect the St. Louis expansion to add approximately 20,000 square feet of capacity to support our future growth, including new business opportunities that are being derived from HistoTox and Bolder BioPATH, and we are targeting project completion at the beginning of the second quarter of fiscal year 2022.

At our Fort Collins facility, we invested more than $1 million over the last year to make improvements, expand capacity and broaden our services, and we are currently evaluating further expansion opportunities at this location. And Evansville, we recently initiated design planning for another expansion. We're very pleased with the last expansion in Evansville, which went to operation in March of 2020, plan to add additional capacity there. We expect the design build and validation to be completed within 24 months.

In Bolder, they expanded their facilities last year prior -- just prior to the acquisition. In addition, we are increasing the lease space by an additional 9,000 square feet beside our existing site to support the additional strong demand that we are receiving for our services since the acquisition. Finally, in Gaithersburg, we're actively looking for additional space to address new growth opportunities and start-up operations at that location.

Regarding the start-up of new operations and services, over the last 2 quarters, we announced key initiatives to deliver additional services. In January, we announced initiating SEND data reporting in-house. In February, we announced starting clinical pathology services. In March, we announced the launch of in-house cardiovascular safety pharmacology capabilities. Each of these 3 development initiatives were launched in our fiscal second quarter and have now been validated and have incoming orders, and also begin to contribute to our revenue in the fiscal fourth quarter.

In our fiscal third quarter, we commenced 3 additional start-up initiatives which we've announced, that we believe will deliver significant long-term revenue and value for Inotiv. We've recruited leaders to manage these 3 new initiatives, and we are moving to accelerate these start-ups.

In summary, in June, we announced the establishment of in-house medical device histology and pathology services which we previously had outsourced to third parties. Of note, we recruited Nicolette Jackson, an expert in medical device pathology to spearhead this new business. In July, we acquired key assets -- key assets for MilliporeSigma's BioReliance portfolio to start up our own in-house genetic toxicology business under sales-based royalty agreement that did not require any upfront funding from us.

We acquired standard operating procedures, stock cultures, historical control data and client list. Of note, we recruited Dr. Gopala Krishna, a pharmaceutical industry veteran with experience in drug discovery and clinical safety evaluation, to lead our entry into genetic toxicology arena. In support of this new offering, we expect to lease space near MilliporeSigma's current facilities in Rockville, Maryland.

Also in July, we purchased the physical assets of a Tennessee-based laboratory service provider that ceased operations. These assets, which include state-of-the-art cell molecular biology instrumentation, stock consumables and chemicals, lab benchwork and office furniture will accelerate the completion of a new regulated laboratory operation that we plan to build in support of our broadening biotherapeutics client base. We acquired these assets for approximately $1.3 million, at which we believe is a substantial discount to our estimate of fair market value and currently are exploring locations for the operations as well as building the scientific and business teams that will execute on Inotiv's expanded biotherapeutics initiative.

Of note, we appointed a new Vice President Bioanalytical Services, Kenneth Swart, who will be responsible for building out our regulated biotherapeutics operation. Dr. Swart joins us with more than 3 decades of global experience supporting all aspects of clinical development, including recent tenure at Parexel, where he led and influenced a 20-year evolution in bioanalytical sciences and translational pharmacology as well as developing genomic and individualized medicines.

Simultaneously, across our organization, we have continued to make broad expansion investments in G&A including our people, our infrastructure, systems and services. So in summary, during our fiscal third quarter and beginning our fiscal fourth quarter, we made significant investments in our business through acquisitions, internal expansion and embedded operational start-ups, all designed to augment our future growth.

Moreover, we continue to invest in our talent and bench strength, infrastructure systems across the entire organization. The successful equity and debt financings we completed in April 2021 provided us with net proceeds of approximately $49 million and $17 million respectively, facilitating our ability to make these critical investments in Inotiv's future. We thank our new shareholders and the team at First Internet Bank of Indiana for their support. I'd like to note that after the quarter ended, we did receive notice that our PPP loan totaling $4.9 million has been forgiven.

Moving to a few of our third quarter fiscal 2021 financial highlights. Inotiv's revenue grew by approximately 45% year-over-year to $22.9 million, driven by internal growth of $2.9 million combined with $4.3 million of incremental revenue from HistoTox and Bolder BioPATH during the months of May and June. Gross profit increased approximately 51% year-over-year to $7.6 million due to higher revenue.

Our strategic growth investments we made this quarter drove higher operating expenses, including incremental acquisition and integration costs related to HistoTox and Bolder BioPATH, incremental start-up costs for internal investments and new service offerings and higher recruiting and retention-related expenses. However, our adjusted EBITDA increased approximately 148% to $2.2 million from $894,000 in the prior year quarter, demonstrating the underlying leverage in our business as we scale.

Finally, we are pleased that after a 45% growth in revenue, we were able to achieve a book-to-bill ratio in the third quarter of 1.53x for our services business. And we ended the period with a backlog of $62 million, which was up 15% compared to $53.9 million in March 31, 2021, and up 68% from $36.9 million at June 30, 2020, indicating current strength of our business.

We are pulling several levers to improve longer-term profitability including making scalable investments, reducing outsourcing by bringing key capabilities in-house, driving cross-selling initiatives, taking advantage of purchasing opportunities, lowering our client acquisition costs as a percent of revenue, leveraging existing direct fixed cost and reducing corporate overhead as a percentage of revenue.

In the third quarter, adjusted unallocated corporate G&A was approximately $3.1 million or 13.5% of revenue compared to 16.6% of revenue for the same period last year, and we believe we will continue to see this figure decline as we continue to grow.

In closing, we've been assembling highly complementary assets and an extremely talented team under one roof, all dedicated to providing a white glove service to our clients. We believe that we can grow faster than the broader CRO market due to our ability to cross-sell newly-created and acquired solutions, our success with retaining clients, our ability to identify and complete attractive acquisitions, our access to the capital markets and our efforts to assemble talent to complete, support and integrate all of our businesses.

We have continued to significantly transform Inotiv and believe that our best is yet to come. We will strive to outperform our CRO peers with service, flexibility, innovation and attention to the details, creating a unique opportunity for us to accelerate our growth.

With that, I will turn the call over to Beth Taylor, our Chief Financial Officer, to recap for fiscal 2021 third quarter financial results in more detail. Beth, please go ahead.

Thanks, Bob. Good afternoon. In the third quarter of fiscal 2021, our revenue increased 45.2% to $22.9 million from $15.8 million in the comparable prior year period, driven by internal growth of $2.9 million and 2 months of incremental revenue contribution, HistoTox Labs and Bolder BioPATH totaling $4.3 million.

Service segment revenue in the third quarter of fiscal 2021 increased 47.6% to $21.9 million from $14.9 million in the comparable prior year period. Service gross margin increased to 33% in the third quarter of fiscal 2021 from 31.9% in the comparable prior year period, reflecting the greater utilization of recently expanded capacity.

Product segment revenue increased 6%, $968,000, in the third quarter of fiscal 2021 from $913,000 in the comparable prior year period, reflecting an increase in analytical instruments, which was partially offset by a decrease in collect in vivo sampling systems. Product gross margin increased to 43.7% in the third quarter of fiscal 2021 from 35.6% in the comparable prior year period, driven by expense reductions implemented in the last half of fiscal year 2020 and improved margins on existing sales.

Operating loss in the third quarter of fiscal 2021 totaled $1.7 million compared to an operating loss of $477,000 in the prior year period, reflecting increased strategic investments in operating expenses to support future revenue growth, including $899,000 of incremental acquisition and integration costs, $404,000 of higher non-cash stock compensation expense and $359,000 of higher start-up costs.

This quarter's growth-oriented investment in G&A includes recruiting and relocation expense, higher compensation expense including non-cash stock compensation. and transaction costs related to the acquisitions of HistoTox Labs and Bolder BioPATH. All combined, adjusted corporate unallocated G&A, much of which was growth oriented, totaled approximately 13.5% of revenue in the third quarter of fiscal 2021 compared to approximately 16.6% of revenue in the third quarter of fiscal 2020.

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 the corresponding revenue.

Net loss in the third quarter of fiscal 2021 totaled $2.3 million or a negative $0.15 per diluted share compared to a net loss of $879,000 or a negative $0.08 per diluted share in the comparable prior year period. Adjusted EBITDA equaled approximately $2.2 million in the third quarter of fiscal 2021 and compared to $894,000 in the comparable prior year period. The book-to-bill ratio for the third quarter of fiscal 2021 was 1.3x. We continue to build our infrastructure for growth, which included additional headcount, transaction and integration costs for the 2 acquisitions and initial investments in new service offerings, technology and systems.

Our backlog at the end of the third quarter of fiscal 2021 was $62 million, up from $53.9 million on March 31, 2021, and up from $36.9 million on June 30, 2020. Briefly reviewing our first 9 months fiscal 2021 results, total revenue increased 33.2% to $59.5 million driven by $2.5 million of internal growth and 2 months of incremental revenue contribution from HistoTox Labs and Bolder BioPATH totaling $4.3 million.

Compared to the prior year period, the first 9 months of fiscal 2021 gross margin expanded 236 basis points to 33.3%. That loss widened from approximately $2.9 million to $3.4 million, or a negative $0.27 per diluted share, and adjusted EBITDA increased 92.2% to $5 million.

Cash flow from operations during the first 9 months of fiscal 2021 totaled $8 million, which primarily reflects the add-back of depreciation and amortization of $4.1 million and non-cash stock compensation expense of $1 million, an increase in customer advances of $7.5 million and an increase in accounts payable and accrued expenses of $2.8 million, which was partially offset by an increase in accounts receivable of $4 million. CapEx for the first 9 months of fiscal 2021 totaled $8.4 million, which includes the purchase of the building for our St. Louis operations of $4.7 million.

Our balance sheet at June 30, 2021 included cash and cash equivalents of $24.7 million and long-term debt of $28.7 million. Total debt was $43.5 million, which included a $4.9 million balance of our PPP loan, which has been forgiven subsequent to year-end. Overall, we are very pleased with the direction our business is heading, and we feel confident in continuing to invest in our future.

This concludes our prepared remarks. So with that, I will turn it over to our operator, Donna, to open up the call for questions.

(Operator Instructions) Our first question is coming from Kyle Bauser of Collier Securities.

Great. Great update, and congrats on the phenomenal results, again. Maybe I'll start with margin contribution from the Bolder and HistoTox acquisitions. I know you spell out the sales contributions from both of them for the 2 months, which were well above our estimates. But can you talk about the margin contribution and how we might target EBITDA margins over the coming quarters as well?

Kyle, this is Bob. And yes, we gave the sales, I think it was $25.8 million, I believe. We generally don't give margin contributions by site. But this, since we just acquired these sites, I'm obviously well aware of it, well aware of what we expected. The margin contribution, the EBITDA contribution from both bottom lines was about 32%. So I think the sales and the contributions exceeded our original expectations, and we're very pleased with that.

Great. Appreciate that. And I appreciate the breakout of unallocated G&A in the press release. It looks like it bumped up a little bit from the acquisitions, recruiting, relocation, et cetera. Can you kind of speak about G&A just on a macro level, how you're thinking about it, where you think it can go and how much leverage we could get there with scale?

I think as I said in the past, I believe our unallocated corporate G&A will come down to 6% to 7% from a reoccurring standpoint. We do have a lot going on in our G&A right now, as we are very active -- have been very active raising capital. We've been very active in the M&A market, which have generated some additional fees and consultant fees and M&A activity fees, and then we have also started new businesses and we've recruited leaders for those businesses.

So I believe that this time, we have tried to, in our release, separate out of some of the service segment business and separate out some of the -- what are the start-up costs and what are the M&A integration cost, so we can do a little bit better job probably picking out what's reoccurring and what's not reoccurring in the unallocated corporate G&A.

But at this time, we think this is a great opportunity for us to grow. We believe we can grow faster than we have. And to do that, we're going to need to buy capacity and build capacity and build services, and that's what we'll focus on doing.

Got it. Definitely. And maybe you could talk a little bit about what you're targeting for an organic growth rate? And if we layer inorganic growth from M&A, what sort of incremental amount could we get on top of that? I know the underlying biotech market in terms of R&D spend is typically around 20%. Just kind of curious how that's looking and what you're targeting?

In terms of our organic growth and inorganic growth?

Yes.

Well, I think the last 3 years, we've been in excess of 35%. I don't -- we have not really given any go-forward information. But I think that, that is what we -- I think we're on a run rate to do about that this year again. And I think continuing that will obviously be something that we're expecting to do.

So other than that, I don't think we give really any go-forward guidance. I can't really project the inorganic growth because that would be projecting the acquisitions. And I don't think we can give any M&A guidance on our strategy other than we're going to remain active.

No, that makes sense. And maybe just on the M&A strategy, again. In general terms, maybe you could just talk about how you're prioritizing targets? How many do you typically examine at any given time? And if you find a company with a similar corporate culture, are you prioritizing that over maybe expanding the geographic footprint? Just kind of wondering how you're prioritizing M&A in general.

I would say the corporate culture, providing the [similar] mindset that we have, providing services to a client and corporate culture is very critical, or how could we achieve our goals with that acquisition? We want that acquisition to make sure that they very much believe in our strategy. And you'll note by the last couple that we did that the sellers took stock back in our company. So obviously, they're a big believer in what we are doing, and we'd like to see them bet on our future also.

So in one time, I -- we're looking at multiple things, talking to multiple people. And -- but to give a certain number, I'd hate to do that. We're -- but I would tell you that we've got -- as you can see, we've developed quite a team to be able to do multiple things at once. And it's great to have these team members on board to be able to stretch ourselves a little further to look at more things, do more things, start up more things all simultaneously.

This is no longer a one- or 2-man show, this is a fairly deep team of talented people. We're really committed to looking at how we can grow as well as continue to take care of what we have acquired and what we've put together. So right now, I know that we're working at a pretty quick pace. I don't know if that's always sustainable, but I'm really pleased with the group that we have, the achievement that they've made and what they've been able to accomplish.

Yes. Certainly a lot going on. I'm wondering when you find time to sleep over there. The book-to-bill ratio, 1.5 again. I guess, how sustainable is that? Was that artificially high because of the Bolder and HistoTox acquisitions, maybe not getting up to 100%? I'm just kind of curious how we should think about that going forward.

So I will -- the Bolder operations, the work is a little different. It comes and goes pretty quickly. So we don't have -- it's usually -- that doesn't have as big a backlog as the remaining operation. So most of the book-to-bill came in the arena without Bolder. So if you were to back out Bolder and you looked at the book-to-bill, I think it was closer to 1.7. It was -- I would have never projected that we could have done 1.5 on that kind of growth that we had in sales.

So is it sustainable? I don't know. I would have ever projected the year that we had and the month that we have. I'll tell you that it is currently very strong. But we never know what we're going to wake up to tomorrow. So -- but right now, obviously, we're very pleased. And I think we, along with the rest of the industry, is seeing an increasing backlog, which means work is being scheduled out much further.

Got it. No, I appreciate that. And maybe just last question. How is the build-out of the St. Louis facility going? I forgot if you gave a time line on this.

Well, what I mentioned in the call is that it's scheduled for completion end of -- the first part of calendar '22 or the second quarter of fiscal '22, so we're targeting January and February to have it up in operation. What I did not mention is what we're looking to do right now is can we open up a phase of it starting in October? And we're trying to break it down in phases. So we maybe can achieve some capacity growth before January of next year. I think the demand is there, and so we're doing what we can to accelerate this.

So if we can get in and start using some of the facility in October, we will, but it won't be completed, really, if we can stay on track until January of next year. And I'm very pleased with our -- the contractors right now. They've been able to stay on track. I know that's not always easy in today's construction market.

I agree. No, that's great. Perfect. Congrats on the results again.

(Operator Instructions) Our next question is coming from Dave Windley of Jefferies.

Bob, it's related to a couple of your answers already. But I was wondering how much capacity you have in your existing footprint? Your last answer, you were talking about opening part of that St. Louis early, but whether you answered it with St. Louis in or out, I don't have a preference. But I'm wondering how much revenue you could add in your network without acquisition?

Okay. Again, another question to stay away from, but I'm going to try to articulate this. If you look at the last quarter, I think we were $22 million and -- in Bolder. So if we had a full quarter of Bolder operations, we'd have probably been close to $25 million on an annualized basis, so we're about $100 million run rate.

I do believe that with some of the moves we've made in the last quarter that we've opened up capacity in some areas. So I think we could see some additional capacity right now and hopefully in Gaithersburg and in St. Louis, maybe Fort Collins, West Lafayette. So I don't -- I think that we're continuing to look at ways to expand, but I'm hopeful that we're going to see that we have some opportunities to see some growth this quarter in some of those areas with things that we're currently doing and bringing on board.

So I wouldn't say it's not siting at 20% or 30% of open capacity today, but then our goal is to continue to open up that 25% to 30% with what we're doing with our facilities and the things that we're leasing and the equipment that we've recently purchased. But I would say that it's possible that we could see a little bit of increased capacity this quarter from last quarter.

Understood. So it sounds like the book-to-bill that you mentioned is very high, very attractive. It sounds like -- and you mentioned in the last answer that the clients are booking further out into the future. So if I take your capacity comments and those comments together, it does sound like you're working to open capacity to be able to satisfy some of that demand as soon as possible, but some of the bookings are simply scheduling further out into the future. Is that a fair way to characterize it?

I think that is at this point, yes. So I think we...

And then what about -- sorry, go ahead, sorry.

No, go ahead.

I was just going to ask, what about the labor side of the equation to satisfy the demand? Are you able to find the scientific talent and staff people that you need in the labs and so forth to staff that capacity as you're bringing it on? What's the labor market look like for you?

We've had a lot of people in the last quarter. We've brought on board, I think we're up to about 560 people, which is significantly up. And again, to add capacity, we brought on another recruiter or 2 to continue to add that capacity and we're very pleased that we've been able to maintain a low turnover rate. But constantly having -- we do have several open positions right now, and we're constantly striving to fill those things. And we're not any different than anybody else in today's market. It's a challenge to recruit.

Fortunately, I think we have got a good company and a place that people want to come to work, and I hope that we can continue to improve our culture and make it a better place to work. I think we can always do better. So it is a challenge. I think we've done a fine job so far, but we're going to have to keep it up. That pressure to add people is not going to go away for us.

Got it. And last question for me...

I'd like to see us grow our workforce another 10% over the next 3 or 4 months.

It seems like a good problem to have. Last question for me would be around demand across -- or demand by service area, are you seeing disproportionately strong demand in one or a couple of your service lines? Or is it pretty strong, pretty balanced and strong across everything?

I think we've stayed fairly strong across everything at the moment. One of the things that we have been able to do a better job with, I think we get more programs now than we have in the past. As we've added these additional services and we now have a full breadth of services from discovery through ID-enabling programs, we now get a much larger programs and I think that's also driving up our book-to-bill as these programs involve all services. And we're doing, I think, a much better job of starting to communicate internally and communicate with our clients. We can do all these services in-house.

Thank you. This brings us to the end of our question-and-answer session. I would like to turn the floor back over to Mr. Leasure for closing comments.

Thank you for participating in our call this afternoon, and please reach out to our Investor Relations firm, The Equity Group, if you're interested in scheduling a follow-up call. We look forward to reporting back to you in December when we release our fourth quarter fiscal 2021 financial results. I hope everybody has a good day. Thank you very much.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.