Societal CDMO, Inc. (NASDAQ:SCTL) Q1 2023 Earnings Call Transcript

Societal CDMO, Inc. (NASDAQ:SCTL) Q1 2023 Earnings Call Transcript May 10, 2023

Societal CDMO, Inc. misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $-0.05.

Operator: Good day, ladies and gentlemen, and welcome to the Societal CDMO First Quarter 2023 Financial Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to Stephanie Diaz of Societal’s Investor Relations group. Please go ahead.

Stephanie Diaz: 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 contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended March 31, 2023. After our prepared remarks, we will welcome your questions. Before we begin, I’d like to caution that comments made during this conference call today May 10, 2023, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current beliefs of the company, which involve a number of assumptions, risks and uncertainties.

Actual results could differ from these statements, and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company’s filings with the Securities and Exchange Commission concerning these and other matters. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations on our corporate website at societalcdmo.com. With that, I will turn the call over to David Enloe, Societal’s President and CEO.

David Enloe: Thank you, Stephanie, and thank you to everyone participating today via webcast. As reported during our March webcast, 2022 was a transformative year for Societal, and we have been pleased to ride the momentum created into the first quarter of 2023, despite the overall headwinds our industry is experiencing. Since the beginning of 2023, we have announced multiple new business wins, including new customer wins as well as the expansion of work with multiple existing clients. During the period, we were also very pleased to announce the FDA’s approval of Societal’s first commercially manufactured tablet product, an important expansion of our capabilities that extends beyond the company’s long-standing expertise in commercial capsule production. I will provide a more detailed review of our Q1 2023 achievements following an overview of our financial results for the quarter ended March 31, 2023. For that, I’ll turn the call over to Ryan.

Ryan Lake: Thank you, David. Good afternoon, everyone. Before I begin, in addition to the brief financial overview, I’ll provide on the call today, additional details on our financial results for the first quarter ended March 31, 2023, are included in our press release issued prior to this call and in our Form 10-Q, which is on file with the SEC. Revenues for the quarter ended March 31, 2023, were $21.5 million. This represents a slight increase compared to our revenues of $21.2 million recorded during the prior year period. The increase of $0.3 million was primarily driven by an increase in revenue from the company’s largest commercial customer, Teva, correlated with pull-through in demand resulting from market share gains against the sole competitor for the Verapamil SR products.

These increases were partially offset by lower revenues from commercial product sales to Lannett due to timing of customer orders. Cost of sales for the quarter ended March 31, 2023, was $19.3 million compared to $16.2 million for the comparable period of 2022. The increase of $3.1 million was primarily due to mix of revenue and related cost absorption, including increased costs associated with the new aseptic fill/finish line as we expand those capabilities and increased material costs. Selling, general and administrative expenses for the first quarter of 2023 were $4.6 million compared to $5.7 million recorded in the 2022 period. The decrease of $1.1 million was primarily related to lower public company costs and administrative costs than the prior year.

Interest expense was $2.1 million for the 3 months ended March 31, 2023, a decrease compared to $3.4 million for the comparable period of 2022. The decrease of $1.3 million was primarily due to a significantly reduced amount of aggregate principal and lower interest rates under the company’s refinanced debt as compared to borrowings outstanding during the period ended March 31, 2022. For the quarter ended March 31, 2022, the company recorded a net loss of $4.7 million or $0.06 per diluted share as compared to a net loss of $4.3 million or $0.08 per diluted share for the comparable period of 2022. EBITDA as adjusted for the period was $0.6 million compared to $2.8 million in the prior year period. The $2.2 million decrease in EBITDA is primarily due to a mix of revenue and related cost absorption offset by reduced selling, general and administrative costs.

This concludes my financial overview. For those interested in reviewing our non-GAAP reconciliations, please refer to our 8-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?

David Enloe: Thanks, Ryan. Societal’s achievements during 2022 positioned the company well for continued progress during the first quarter of 2023. Specific accomplishments in 2022 included enhancing the company’s corporate identity and branding and successful adoption of a segment-specific marketing strategy to best serve our customers. Combined, these strategies drove strong sales in 2022 with the company signing over 170 new or expanded scope changes for projects with 33 different customers. As a result, our clinical trial services business grew 58% in 2022 compared to the prior year, and we ended the year with a significantly expanded and diversified customer base compared to 2021 with more than 3x the number of customers that we had just 2 years ago.

In addition to the progress recorded in 2022, many of our successes last year have laid the foundation for growth and increasing financial strength in the future. Notably, last year, Societal launched new aseptic fill/finish and lyophilization services to better serve the end-to-end needs of our clients. We have also recently hired new personnel with expertise in the injectables market to facilitate this important capabilities expansion in our West Coast facility. And looking forward, we continue to explore opportunities for growth through facilities enhancement and expansion of our capabilities. But perhaps the 2022 achievement that will have the most influence on the company’s progress in the future, with the successful execution of a multistep strategy designed to recast our capital structure, improve our balance sheet and strengthen our overall financial profile.

This strategy was comprised of 4 separate transactions, including a sales and purchase agreement to sell approximately 121 acres of lake front land to a leading national homebuilder for approximately $9.1 million. The unused land is located adjacent to Societal’s manufacturing facility in Gainesville, Georgia. Subject to completion of diligence, we expect the sale to close in the second half of 2023. Second, a sale and leaseback transaction for our Gainesville, Georgia manufacturing site and campus, which yielded $39 million in non-dilutive gross proceeds. Third, the successful closing of concurrent public offerings of common stock and preferred stock generating gross proceeds of approximately $35.6 million prior to deducting the underwriting discounts and estimated offering expenses.

And finally, securing a new debt facility for $36.9 million from Royal Bank of Canada. As a result of these transactions, Societal was able to repay and retire a $100 million debt facility and replace it with a $36.9 million Term A loan that carries terms, which are significantly more advantageous to Societal. These transactions resulted in the significant improvement of the company’s net debt leverage ratio from greater than 6x EBITDA to just over 2x EBITDA, immediately reducing our annual interest burden by an estimated $6 million with the potential to increase that number to approximately $7 million annually. And we expect that our financial position will be further strengthened with the closing of the land sale, which is expected to generate gross proceeds of $9.1 million later this year.

While it is not our intent to look too long into the rearview mirror, I believe it is important to restate these important achievements as they have removed certain financial burdens, place Societal and an overall stronger financial position and pave the way for growth in 2023 and beyond. Looking at 2023, we remain confident at this time in our ability to achieve our stated guidance for the year. This is based largely on the 12-month forecast we have seen from customers as well as the orders already booked through Q3 of this year. While our revenue during the period reflected only a slight increase as compared to the same 2022 period, it is important to acknowledge the period-to-period fluctuations or lumpiness that is commonplace in our business, caused largely by timing and type of production runs and cost absorption related to those runs.

We continue to closely monitor the plans of our capital market-dependent clients. As discussed last quarter, financing challenges have impacted some of those customers’ pipeline development plans. However, given the overall level of activity we have seen in recent weeks and our ability to maintain our win rate that we have successfully improved during 2022, we remain confident for the remainder of the year. During the first quarter, we won multiple key projects, including signing 4 new customers and expansions for 12 existing programs that will continue to feed our backlog, our manufacturing pipeline and our capacity utilization during the year. As a point of comparison, Societal signed a total of 15 new customers during the entirety of fiscal ’22, placing us on track to potentially beat that measure in fiscal 2023.

Notable among our first quarter wins as the project recently announced with new customer Longboard Pharmaceuticals. This project will span a range of Societal’s offerings, including technology transfer and analytical method validation activities to support Longboard’s lead asset, LP352, a 5-HT2C receptor superagonist. The scope of work for this project highlights Societal’s attractiveness to those customers requiring a broad range of services to advance their candidates through clinical development, spanning tech transfer and through to CGMP manufacturing. Subject to quarter end, we also announced that the company had signed work order extensions with multiple existing customers that also span a range of the company’s CDMO services. While securing new customers remains an important objective for the company, being awarded expansion projects by our existing customers is an equally important area of growth for the company.

During the first quarter, we signed multiple work expansion agreements spanning from analytical services to manufacturing, to product encapsulation and packaging. Another important event for Societal during the first quarter was the approval by the FDA of the company as a manufacturer of the commercial tablet product. This approval is the first for Societal for the manufacturer of a commercial tablet, reflecting both the company’s ongoing expansion of capabilities as well as our success in building Societal’s reputation as a CDMO of choice. We are delighted to have been entrusted with the production of this important product, and we expect to begin manufacturing it later this year in our Gainesville, Georgia facility. In other product news, we would also like to comment on Lannett’s announcement regarding its recently executed restructuring support agreement, or RSA, and bankruptcy filing.

As a reminder, Societal CDMO owns the NDA and the drug master file for Verapamil, a long-approved calcium channel blocker for the treatment of hypertension. Lannett has served as the company’s marketing partner for the Verapamil PM and Verelan SR formulations since 2014. In July 2022, the company entered into an agreement to its license and supply agreement with Lannett, which provided societal CDMO with improved overall economics, increases in manufacturing prices, and potential new GMP manufacturing agreement targeting injectable products for multiple additional development projects. In addition, the agreement provided with options to engage with alternative marketing partners under certain conditions. We are very pleased that Lannett has entered into this RSA that will allow it to continue operations with minimal interruption while reducing its debt burden and strengthening its balance sheet.

Importantly, we believe this agreement will allow Lannett to continue to execute as a marketing partner to Societal CDMO in the near term. However, it’s important to note that Societal CDMO is first and foremost committed to protecting and expanding the distribution of our Verapamil PM and Verelan SR products. For that reason, we have been carefully monitoring Lannett circumstances over the past 12 months and expect that, should it be necessary, any transition from Lannett to another marketing partner would take place with limited disruption to the sales of Verapamil PM and Verelan SR. In closing, we would first like to address the recent pressure on the company’s stock price, and we wish to assure you that no internal event or factor has triggered the decline in value.

Our fundamentals are now stronger than ever, particularly given all the progress we have made the past couple of years diversifying our customer portfolio and addressing our debt position. And we began 2023 from a fortified position of strength that we believe will facilitate growth this year and for many years to come. The steps taken last year and to date in 2023 have honed our business development and marketing strategies, resulting in valuable new business and expansion project wins during the first quarter. We continue to expand and enhance our capabilities, including making an investment in the high-value injectables market, including biologics, and a recent approval by the FDA of Societal as a manufacturer of a commercial tablet product establishes the company as an experienced partner for this valuable service.

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

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Q&A Session

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

Operator: Our next question comes from the line of Max Smock with William Blair.

Operator: Our next question comes from the line of Sean Dodge with RBC Capital Markets.

Operator: Our next question comes from the line of Jacob Johnson with Stephens.

Operator: Our next question comes from the line of Marla Marin with Zacks.

Operator: I’d now like to turn the call back over to David Enloe for closing remarks.

David Enloe: Many thanks to all of our clients, supply chain and other service providers and partners and particularly to our excellent Societal team. We look forward to many great achievements in the months ahead, and thank you all for — again, for participating today and for your continued support of Societal CDMO.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.