Avid Bioservices Shifts To More Growth Amid Costly Expansion Efforts (NASDAQ:CDMO)

Introduction

Avid Bioservices (NASDAQ:CDMO) is a dedicated contract development and manufacturing organization [CDMO] with 30 years of experience in biologics production for the biotechnology and biopharmaceutical industries. They offer comprehensive services, from process development to CGMP manufacturing. Their growth strategy focuses on investing in manufacturing, broadening market awareness, expanding customer base, exploring strategic opportunities, and aiming to increase operating profit margins.

The following article discusses Avid Bioservices’ financial performance, growth initiatives, and challenges. It highlights revenue growth, declining net income, substantial investments in expansion, and presents a HOLD recommendation due to mixed financial signals and current valuation concerns.

Earnings Review

Avid Bioservices provided revenue guidance for fiscal 2024 of $145-$165 million. The fiscal fourth quarter of 2023 saw revenues of $39.8 million, a 28% increase from the prior year, while the full fiscal year recorded $149.3 million, a 25% increase. Revenue backlog as of April 30, 2023, was $191 million. Gross margin remained at 21% for the fourth quarter and the full fiscal year 2023, although adjustments and factors affected the comparisons. SG&A expenses rose by 29% for the fourth quarter and 32% for the full year. A net loss of $0.3 million was recorded for the fourth quarter, while the net income for the full fiscal year was $0.6 million. Cash and cash equivalents stood at $38.5 million as of April 30, 2023.

Balance Sheet

Upon examination of Avid’s balance sheet, several key insights can be identified regarding the company’s financial footing. The revenues have shown growth, reaching $149 million in 2023 from $119 million in 2022. However, the net income has dramatically decreased to $560 thousand in 2023, down from $127 million in 2022, mainly due to a significant change in income tax benefit. The company’s liquidity position has also weakened, with cash and cash equivalents declining from $126 million to $38 million. Free cash flow has remained negative, signifying a significant cash burn rate of $90 million in 2023. These factors might imply a potential need for additional financing, especially to support the increased cost of revenues and capital expenditure, as evidenced by a substantial investment in property and equipment, contributing to a decline in cash reserves.

Valuation, Growth, & Stock Momentum

Per Seeking Alpha data, the valuation, growth, and stock momentum for CDMO presents a mixed picture:

• Valuation: The forward P/E is at 87.07, while the trailing twelve months [TTM] P/E stands at a staggering 1,355.50. With a price/book ratio of 4.03 and EV/Sales and EV/EBITDA at 6.14 and 83.94, respectively, the valuation appears on the higher side, potentially reflecting high growth expectations.

• Growth: The revenue is showing a strong trend with a YoY growth of 24.81% and a 3-year CAGR at 35.72%. Sales projections for the coming years also appear positive. However, the EPS has sharply declined YoY by -99.51%, possibly a concern for investors. Profitability indicators like gross profit margin and net income margin are relatively low at 21.09% and 0.38%, reflecting challenges in cost control.

• Momentum: The stock’s momentum seems negative with a D+ rating. It has significantly underperformed the broader SP500, losing -32.91% over three months and -36.11% over a year. The last price of $12.25 is close to the 52-week low, indicating a bearish sentiment around the stock.

• Capital Structure: The market cap is $764.67M, with total debt at $189.76M and cash at $38.54M, leading to an enterprise value of $915.89M.

Growth Initiatives

In the recent earnings call, Avid’s management focused on key growth initiatives that have positioned the company for future expansion. They detailed the successful transition to a fully disposable platform, with an addition of over 20,000 liters of capacity. Emphasis was placed on the completion of mammalian cell capacity expansion, and the planned launch of CGMP manufacturing sites in their new cell and gene therapy facility by the end of Q3 2023. This expansion is expected to potentially generate $400 million in annual revenue. While there was an increase in late-phase and pre-commercial projects, a decrease in early-phase projects led to broader revenue guidance for fiscal 2024. Despite this shift in focus and the challenges in short-term revenue predictions, fiscal 2023 was marked as a record-setting year for Avid. The management expressed confidence in Avid’s flexibility and reputation, believing these factors will allow the company to take advantage of medium to long-term market opportunities, despite current challenges in the financial markets.

My Analysis & Recommendation

Avid Bioservices’ three-decade-long presence in biologics production offers a solid foundation as a dedicated contract development and manufacturing organization. The company’s growth and strategic planning, including recent investments in manufacturing capacity and the transition to a fully disposable platform, reflect a strong focus on innovation and future expansion.

From an investment perspective, Avid presents both opportunities and challenges. On the opportunity side, the company’s continuous revenue growth, ambitious manufacturing expansion, and solid backlog underscore its potential to capture new business and drive further revenue growth. The successful completion of the cell and gene therapy facility would unlock a new revenue stream, potentially generating $400 million annually.

On the challenge side, the decline in net income, the substantial cash burn rate, and the shift from early-phase projects, impacting short-term visibility, raise concerns. The negative stock momentum and high valuation ratios, particularly the TTM P/E of 1,355.50, further add to the complexity of the investment decision.

In evaluating Avid’s investment prospects, one must balance the robust growth trajectory against the near-term uncertainties and valuation concerns. The mixed financial signals, with strong revenue growth juxtaposed with declining net income, may require careful consideration of market positioning, competitive landscape, and execution risks.

In my opinion, given the strong growth prospects coupled with the current challenges, a HOLD recommendation seems warranted for Avid Bioservices at this juncture. While the future growth opportunities are exciting, the near-term uncertainties, declining cash position, and the existing valuation make it prudent to adopt a wait-and-see approach. Monitoring how the company manages its operational challenges, executes its growth strategies, and navigates the financial market conditions would provide better insights into its long-term investment potential. Investors with a higher risk tolerance might see value, but for those concerned with the short-term fluctuations and valuation, maintaining the current position may be the most balanced path forward.