Alpha Teknova Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the Technova First Quarter 2023 Financial Results Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker, Senior Vice President of Marketing At Technova, Jennifer Henry, please go ahead.

Speaker 1

Thank you, operator. Welcome to Technova's 1st Quarter of 2023 Earnings Conference Call. With me on today's call are Stephen Gunstream, Technova's President and Chief Executive Officer And Matt Lowell, Technova's Chief Financial Officer, who will make prepared remarks and then take your questions. As a reminder, the forward looking statements that we make during this call, including those regarding business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release The company issued earlier today and they are more fully described in the company's various filings with the SEC.

Speaker 1

Today's comments reflect the company's current views, which could change as a result of new information, future events or other factors, and the company does not obligate or commit itself to update its forward looking statements except as required by law. The company's management believes that, In addition to GAAP results, non GAAP financial measures can provide meaningful insight when evaluating the company's financial performance and the effectiveness of its business strategies. We will therefore use non GAAP financial measures of certain of our results during this call. Reconciliations of GAAP to non GAAP financial measures are included in the press release that we issued this afternoon, which is posted to Technova's website and at www.sec.gov/edgar. Non GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to Financial measures prepared in accordance with GAAP.

Speaker 1

The non GAAP financial measures in this presentation may differ from similarly named non GAAP financial Please also be advised that the company has posted a supplemental slide deck to accompany today's prepared remarks. They can be accessed on the Investor Relations section of Technova's website and on today's webcast. And now, I will turn the call over to Stephen.

Speaker 2

Thank you, Jen. Good afternoon and thank you everyone for joining us for our Q1 of 2023 earnings call. Technova is a leading producer of critical reagents for the life sciences industry to accelerate the introduction of novel therapies, vaccines and molecular diagnostics that We had a good start to the year. Our team continued to manage in a dynamic environment by delivering results in line with our plan, including increasing revenue sequentially by 16%. We are particularly pleased that we are not only Tracking well to our expected financial metrics for the year, but we are also executing on our key initiatives On or ahead to plan to position the company for sustainable accelerated growth.

Speaker 2

First, we saw an increase in clinical solutions customers in the Q1 and believe the growth demonstrates a stabilization in overall demand from our customers, And we remain optimistic about the long term potential of our target markets. We also continue to see strength in our commercial funnel and remain Confident in our top line guidance for the full year. 2nd, our new state of the art Modular manufacturing facility is on track for GMP grade production by mid-twenty 23. In addition, we are encouraged by early indications of interest from Certain of our customers, we have begun to schedule audits for early in the Q3. We believe this new facility plus our existing operating infrastructure Will give us the capacity to deliver approximately $200,000,000 in annual product revenue when fully utilized.

Speaker 2

3rd, on the R and D front, I am pleased to say our new product pipeline is progressing ahead of schedule. In March, we announced a collaboration with Sartorius via separations to help our customers improve AAV purification processes. Building on this news, last week we launched our first ever set of proprietary agents, which We believe can save months of development time for gene therapy customers as they develop their AAV bioprocessing workflows. As customers incorporate these proprietary reagents into their clinical production processes, we expect to become an even more critical supplier As they advance their therapies towards commercialization. Lastly, we are tracking well to our cost reduction plans.

Speaker 2

Operational expenses were down sequentially when excluding one time costs. And while cash outflow in the quarter was approximately 12,000,000 The corresponding expenses were planned and primarily related to the completion and qualification of our new facility. Thus, We are tracking towards our previously communicated total cash outflow target of approximately $30,000,000 for fiscal 2023. I will now hand the call over to Matt for a discussion of the financials.

Speaker 3

Thanks, Stephen, and good afternoon, everyone. Total revenue was $9,100,000 for the Q1 of 2023, an 18% decline from $11,100,000 in the first quarter of 2022, reflecting the continued headwinds associated with lower demand from early stage biopharma customers, Which we first observed in the Q3 of 2022. Lab Essentials products are targeted at the research use only or RUO market That includes both catalog and custom products. Lab Essentials revenue was $7,300,000 in the Q1 of 2023, A 4% increase from $7,000,000 in the Q1 of 2022. Growth for the first Quarter was primarily driven by higher average revenue per customer, partially offset by a decreased number of customers.

Speaker 3

Clinical Solutions products are made according to good manufacturing practices or GMP quality standards and Primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products. Clinical Solutions revenue was $1,600,000 in the Q1, a 58% decrease from $3,800,000 In the Q1 of 2022, the decrease in clinical solutions revenue was attributable to lower average revenue per customer, partially offset by an increased number of customers. We expect revenue per customer to increase over time as they ramp up their purchase volumes. However, this metric can be affected by the mix of newer clinical customers who typically order less. Just as a reminder, due to the large average order sizes in Gross profit for the Q1 of 2023 was $2,400,000 compared to $5,300,000 in the Q1 of 2022.

Speaker 3

Gross margin was 26.6 percent of revenue in the Q1 of 2023, which is down from 48 percent of revenue in the Q1 of 2022. The lower gross margin for the Q1 of 2023 compared to Q1 of 2022 was primarily driven by the decrease in revenue and the associated lower Absorption of fixed manufacturing, labor and overhead costs, including depreciation from our new facility. Operating expenses for the Q1 of 2023 were $11,400,000 compared to $11,200,000 for the Q1 of 2022. Excluding the one time Non recurring charge related to the reduction in workforce of $700,000 incurred during the Q1 of 2023, Operating expenses decreased compared to the Q1 of 2022. The decrease was driven by reduced spending, primarily fees and occupancy costs, partially offset by higher wages and stock based compensation expense.

Speaker 3

The reduction in workforce of approximately 40 physicians is expected to generate annualized savings of approximately $4,000,000 Net loss for the Q1 of 2023 was $8,800,000 or $0.31 per diluted share Compared to a net loss of $5,500,000 or $0.20 per diluted share for the Q1 of 2020 2, the company recorded minimal tax benefit this quarter against its pre tax losses as it is currently recording Valuation allowances against incremental net operating loss carry forwards. Adjusted EBITDA, a non GAAP measure, was negative $6,100,000 for the Q1 of 2023, compared to negative $4,300,000 for the Q1 of 2022. However, adjusted EBITDA increased by more than $2,000,000 sequentially. Capital expenditures for the Q1 of 2023 were $4,300,000 Compared to $5,900,000 for the Q1 of 2022, this marks the 3rd straight quarter of declining capital expenditures. Most of the spending in the Q1 of 2023 went towards the completion and qualification of our new GMP production facility.

Speaker 3

Free cash flow, a non GAAP measure, which we define as cash provided by or used in operating activities, Less purchases of property, plant and equipment was negative $12,000,000 for the Q1 of 2023, Compared to negative $11,100,000 for the Q1 of 2022. This decrease compared to the prior year period was primarily Due to higher cash used in operating activities, partially offset by a decrease in capital expenditures. Turning to the balance sheet. As of March 31, 2023, We had $30,200,000 in cash and cash equivalents and $22,100,000 in gross debt. Now on to our 2023 guidance and outlook.

Speaker 3

We are reiterating 2023 total revenue guidance of $42,000,000 to $46,000,000 At the midpoint, this assumes revenue growth of approximately 6% compared to 2022. With respect to product categories, we continue to expect Lab Essentials revenue to be roughly flat compared to 2022 And Clinical Solutions revenue to grow between 20% to 50% compared to 2022. This product category growth guidance This includes the assumption that a significant customer shifts from lab essentials to clinical solutions products in 2023. The company continues to aggressively manage expenses. At the end of March, the company had 251 associates, down from 290 at the end of 2022.

Speaker 3

Excluding non recurring charges, the company posted operating expenses below $11,000,000 for the first time since 2021, which does not reflect the full benefit of the reduction in force completed in February. Similarly, the company saw a reduction in free cash outflow during the Q1 of 2023. This marks the 3rd straight quarter of lower cash outflow and is consistent with the company's expectations for the year as we anticipate operating losses and capital expenditures to continue to trend downward over the course of the year. In addition to cash on hand, we have access to our revolver up to $5,000,000 and ATM facility up to $14,500,000 Further, we believe we have already made the step up investments needed to execute our growth strategy and can scale without significant additional investment. With that, I will turn the call back to Stephen.

Speaker 2

Thanks, Matt. Overall, we were pleased with our performance in the Q1 of 2023. The long term outlook for our end markets remains positive. We are committed to executing on our strategy to help our customers Accelerate the introduction of novel therapies, diagnostics and other products that improve human health. We will now take your questions.

Operator

Thank you. One moment for our first question. And that will come from the line of Jacob Johnson with Stephens. Your line is open.

Speaker 4

Hey, good afternoon, Steve and Congrats on this quarter. Maybe just to kick it off with the lazy macro question, just because There's been a lot of mixed commentary this quarter about the cell and gene therapy space. I'd just be curious kind of if you're seeing any kind of Hesitation from customers due to the macro certainly doesn't seem like it given the result you put up or at least maybe versus Your prior expectations, but and the year seems to be tracking ahead of plan. So maybe just start there on the macro.

Speaker 2

Yes, great. Thanks, Jacob. We have not seen a decrease from what we called out after our Q2 earnings in 2020 And I think that we are a little bit different than some of the other players in the space in that our reagents aren't stocked, Right. We have a unique ability to custom manufacture these things and get them there quickly and so are not prone to some sort of destocking piece. But we are tied obviously to some of the biotech funding.

Speaker 2

So when we saw the biotech funding shift and impact that had in the back half of the year, What we saw was what we reiterated before, which is a slowdown in the number of clinical trials happening or reduce in size of those clinical trials. And as I said in the last earnings call, we kind of believe we're in a kind of a new normal Operating environment where the customers we're talking to now have their budget for the year and they're building that up. And you can see from what we just said in the script here that We have seen an increase in clinical customers in the Q1. And we see that as a very positive sign that the funnel is building and that our commercial strategy is working And that should be paying off in the back half this year as we've indicated.

Speaker 4

Got it. And then I guess the follow-up just on The AAV Tech launch, that seems to be kind of the formal commercial launch of that product. But I think you've been testing with customers. I'm curious about reception, especially given, some of the disclosures today about the difficulties of the downstream Chromatography

Speaker 2

steps. Yes. And I think it is a major pain point from the time it started here in 2020, the first time we talked to Some of these AAV gene therapy developers was really separating these empty and full capsids. And the team has done an awesome job of putting together a complete solution for those customers. We launched the AAV2 serotype kit a couple of weeks ago and in what marks really the first time Technova has launched some proprietary products.

Speaker 2

The customer response has been very favorable, really excited. We're excited. The product is actually in stock ready to go And it's going to help us onboard a lot more of these customers and then get them into our regions. And as they go downstream, they become bigger and more reliant on us As they go through commercialization. But probably most importantly for them, this is a lot of work from that step to identify which is the right set of buffers Do that last polishing step and we can save them months of time of work to get them into the clinic faster.

Speaker 4

Got it. Thanks, Stephen.

Operator

Thank you. One moment for our next question. And that will come from the line of Matt Larew with William Blair. Your line is Ben? Hi.

Operator

Thank you so much

Speaker 5

for taking my question. This is actually Madelyn Mollman on for Matt. Thinking about the clinical solutions Step down year over year. I know you said that part of that was due to sort of a mix towards newer customers. Can you talk a little bit about how you see that trending over the year and what is kind of incorporated in your guidance for the year from Clinical Solutions?

Speaker 2

Yes, I'll start, Matt. Feel free to jump in. I mean, we've talked about the changes in the biotech funding space and the particular impact on early in mid Ace Biotech, particularly for us, we had a number of customers in cell and gene therapy that were affected by that and they reduced their overall Size of clinical trial and the number of clinical trials or the number of different therapies working through the pipeline. And so we pulled that And it's built into the forecast for the year. And so not surprising, these are right in line with what we'd expect to be, if not ahead after the Q1.

Speaker 2

For the remainder of the year though, we do have a commercial organization up and going and we're excited to see that we increase the number of clinical customers. On a year on year, yes, the average spending is down, but that is expected. And we do think that the back half of this year is It's lining up to do

Speaker 3

really well as we look at

Speaker 2

our funnel and then obviously into 2024. Then you combine that with our new facility opening and The facility will allow obviously a lot of capacity expansion, but also allows us to onboard some of these customers that now can look at our So they realize that we can be with them all the way through commercialization and beyond. So I mean the combination of those two things I think sets Really well for a strong back half year in 2024.

Speaker 5

Great. Thank you. And so just thinking from a margin perspective, I think in the past you said that you were expecting full year margins to be around 30%. Does this change the clinical solutions piece Do you have anything about how you're thinking about margins for the year?

Speaker 3

Yes. I would just say from a margin perspective, I mean, for the full year, we've certainly mentioned about Yes, in the 30% range, we certainly considered the amount of clinical revenue contribution for the year and that into the margins. That's not really changing here. Again, as we've kind of reiterated our guidance on revenue for the year. I think we will see a time when the revenue from clinical is a bigger contributor in the quarter.

Speaker 3

It could be a help to margins. Generally speaking, the biggest help to gross margins is just overall revenue volume. So we're still seeing this The current margins where they are similar to last quarter at this revenue level and with the new facility coming into play. But for the full year, we're still Looking for the same type of result you mentioned, Matti.

Speaker 5

Thanks. I really appreciate it.

Operator

Thank you. One moment for our next question. That will come from the line of Stephen Ma with TD Cowen. Your line is open.

Speaker 6

Great. Thanks. Congrats on the quarter and thanks for taking the A couple of follow-up ones on the AAV Tech Solutions kit. Did you guys do any voice of customer or other market research to identify this pain point in the AAV bioprocessing? And if you did, do you guys have a sense on how big the market opportunity is for this product given that it's so new?

Speaker 2

Yes. I mean, it certainly is a new product and it's a product that solves a problem from Number of our customers. So yes, we did do market research, obviously, talking to customers directly, but also additional market research on the product. Again, the value driver of this is really over the long term, right? Instead of coming to us with this very specific formulation, They've done months of work to figure out what the right buffer combination to use to get their virus Purified and polished, they can come right into our proprietary reagents and find a solution in a couple of weeks.

Speaker 2

And so once they do that, then they're kind of using our reagents and they become bigger, larger trials as they move down the clinical pipeline and ultimately commercialization. We think that the expansion in that timeframe from beginning to end is about a 30 fold increase. And this was actually some of the research We did even before we took the company public was in this area and feel pretty good about not only The size, I mean, if you look at the size of the number of therapies going through AAV, that's one way to look at it, but also of one of the most critical pain points. I don't think we've yet disclosed the size of that market. I think it obviously depends on the number of trials that you assume that go through and the amount of spend, but maybe that's something we could do at a later date.

Speaker 6

Okay, got it. And then could you just give me a sense for the kit like how many assays or runs it would go through?

Speaker 2

Yes. So the kit itself sorry, can you follow on? The kit itself It's built out of a number of what we call design of experiments done here internally. So we ran Hundreds of different buffer combinations to basically set this down to a size of about 7 combination buffers, so 14 total And 1 liter bottles for customers to evaluate. So depending on the serotype they're using, the So the resin or the platform they're using for purification as well as their transgene, you may end up choosing 1 of these 7 buffer.

Speaker 2

So the idea is you fit this whole kit in, you try all 7 and then identify which of those combinations will work And then the customers can do a couple of things. Obviously, they can continue to order one of those going forward. We sell those individually. They can order them in larger scale. They can order them in GMP They can also come back to us.

Speaker 2

We can do some work with them and find out if there's a combination between a couple of them and we'll even give them better results. It's really up to them to define which is kind of what makes us unique and that we can get these into production and for them and then scale with them through clinical trials.

Speaker 6

Okay. That's really helpful. And then a question for Matt about the gross margin. How should we think about the gross margin impact as your new facility comes online, as the facility scales And you can spread out overhead and fixed costs. When do you expect the gross margins to sort of bottom out and then begin to recover?

Speaker 6

Thanks.

Speaker 3

Yes. I think overall, the long term story for gross margin is that we're targeting 60% to 65%, right? That's Quite a bit above where we are today, but we expect to see some pretty good acceleration in that gross margin as we Grow the top line as we're expecting here over the next several years. So we do have that potential going forward. In the short run, there is Started some depreciation on a portion of the facility at the very end of last year.

Speaker 3

We have a full quarter of that In Q1 results, and we'll be bringing more parts of the facility online later this year, which will further increase the depreciation Load, but it's I think this year, FY2023 will be the low point because of these added costs coming in. And as To go to the top line, we'll start to see some material improvement going forward.

Speaker 6

Okay, great. That's very helpful. Thank you.

Operator

Thank you. I'm showing no further questions in the queue at this time. This concludes today's program. Thank you all for participating. You may now disconnect.

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Earnings Conference Call
Alpha Teknova Q1 2023
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