Inotiv Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2024

There are 7 speakers on the call.

Operator

This call is being recorded I would now like to turn the conference over to Bob Yedid. Please go ahead.

Speaker 1

Thank you, Julie, and good afternoon, everyone. Thank you for joining today's quarterly call with Inisys' management team. Before we begin, I'd like to remind everyone 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.

Speaker 1

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 will also discuss certain non GAAP financial measures in an effort to provide additional information for investors. Definition of these non GAAP measures and reconciliations to the most comparable GAAP measures are included in the company's earnings release, which has been posted to the Investors section of the company's website, www.innitiv co.com and is also available in the Form 8 ks filed with the Securities and Exchange Commission today. If you haven't obtained a copy of today's press release yet, you can do so by going to the Investors section of the company's website.

Speaker 1

Joining us today from the company this afternoon are Bob Leisure, President and Chief Executive Officer and Beth Taylor, Chief Financial Officer. John Sagarz, Chief Strategy Officer will join us for the Q and A session. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for the Q2 of fiscal 2024 and the 6 months ended March 31, 2024, and then we'll open the call for your questions. With that, it's now my pleasure to turn the call over to Bob Leisure, CEO. Bob, please go ahead.

Speaker 2

Thank you, Bob, and good afternoon to everyone. Thank you for joining today's call. Let's quickly run through the broad strokes of this quarter's results as we continue to operate in a mixed industry environment. Total revenue came in at $119,000,000 for Q2 of fiscal 20 which is down 21.5 percent year over year. Segment top line results consisted of DSA revenues of $46,600,000 which was only down $400,000 or less than 1% versus the comparable period a year ago.

Speaker 2

Revenue from RMS included NHP sales, diets, bedding, small animal models was down $72,400,000 in Q2, a decrease of $32,000,000 or 31 percent from the prior year period. Dollars 26,200,000 of the $32,100,000 decrease was driven by substantially lower NHP revenue. In addition, we have a decrease in revenue of $3,100,000 from the sale of our Israel business in August of 2023. Revenues this past quarter were well below our expectations. The lower revenue came in a result of many of the potential risks we discussed in our last quarterly call coming to fruition, primarily weak demand for NHPs and slower DSA discovery related sales, which were somewhat offset by the growth in our new safety assessment services.

Speaker 2

2023 was a challenging funding environment for the biopharma industry and we saw companies reprioritize their use of capital resulting in product reprioritizations and some cancellations as companies rationalize their R and D spending. In addition, as we have discussed in the past, the industry faced challenges and volatility resulting from the U. S. Attorney's Office criminally charging a Cambodian government official on alleged charges of conspiracy to illegally import NHP in the U. S.

Speaker 2

And our considered decision to suspend Cambodian imports and the subsequent effective industry ban on the importation of Cambodian NHP into the U. S. In late 2022. This ultimately resulted in lower NHP availability in the U. S.

Speaker 2

And heightened concern among customers regarding their ability to access NHPs to develop their pipeline products, which together drove increased NHP pricing in 2023. The uncertainty and available supply to the U. S. Also resulted in some discovery in preclinical studies moving outside the U. S, which further impacted drug discovery and development and overall demand for NHPs in the U.

Speaker 2

S. We indicated in our prior quarterly call that we expected this year could be choppy as it relates to NHP sales. We believe the industry continues to reset and refocus pipeline priorities and our Q2 results reflects the after effects and volatility caused by the NHP market dynamics at the end of 2022 through 2023 and the first half of fiscal twenty twenty four. We're currently witnessing some positive signs in this industry, such as marked improvement in the capital markets funding for biotech and small pharma companies during the Q1 of calendar 2024 as compared to the prior 2 years. While this is a positive sign for these companies and the CRO industry, we expect biopharma companies in the short term to continue to take a restrained conservative approach to the pipeline products in order to prioritize the use of capital to the most important projects.

Speaker 2

Accordingly, Enid's sales cycle has been slow as customers continue to evaluate and rationalize their product pipelines. This has impacted us predominantly through a further reduction in Q2 Discovery sales versus the prior year and in the RMS and HP business. In our Research Models and Services or RMS business, some of our major CRO and HP customers have seen delays and slowdowns in their ability to acquire new discovery and safety assessment studies requiring NHP. In other cases, it also became apparent this quarter that certain customers mitigated supply chain risk in 2023 by purchasing NHPs well in advance of their needs and are now able to delay purchasing additional NHPs until they deplete their current inventories. So this year, unlike 2023, we are now seeing customers align their NXP purchases more closely to their immediate project needs.

Speaker 2

Taking these dynamics collectively, we believe these pressures will normalize later in the year as customer NXP inventories are depleted and they focus on ordering to meet shorter term needs. Internally, we remain encouraged by the results and benefits of many of the critical actions we took in 2023 or taking in 2024, such as the integration efforts of our acquisitions. We are seeing lower cost and improved service from our RMS site optimization projects. We anticipate the RMS site optimization and cost initiatives we started last year are going to be completed by the end of July 2024 and the transportation initiatives which we announced in December 2023, are currently being implemented to create further cost and customer service benefits. Additionally, we are pleased to secure new contracts with 2 research organization customers who wish to occupy space within our UK RMS facilities.

Speaker 2

In addition to generating reoccurring income from the use of the space infrastructure and services, we are identifying opportunities to provide these customers with additional products and services to support their scientific research. In DSA, new service offerings are now contributing to increases in safety assessment revenues, which have helped offset some of the decreases we have seen in Discovery Services portion of that segment. In Discovery, we believe the additional salespeople and initiatives we implemented in Q1 of fiscal 2024 will help to increase our market awareness and quoting activity as we go through the remainder of the year. With many of our announced projects now completed or nearing completion, we've also been able to reduce our overall operating expense. Further, due to current market conditions and certain efficiencies we've been able to achieve, we affected a small reduction in force in April, which will help further reduce expenses in future quarters.

Speaker 2

Overall, net new DSA quarters for this quarter were $35,000,000 versus the $44,600,000 last year. For the year to date period ending March 31, 2024, we booked net new orders of $98,900,000 versus $84,600,000 for the 6 months ended March 31, 2023. The conversion rate this quarter was 30.1% versus 32% in the prior year. The DSA cancellations in Q2 were consistent with prior year period and in the 1st 6 months of fiscal 2024 were slightly less than they were the same period in 2023. For the 6 months ended March 31, 2024, we generated positive cash from operating activities of $10,400,000 and completed many of the investments and initiatives started almost 20 months ago.

Speaker 2

Capital investments were $7,000,000 in the 2nd quarter $12,600,000 in the year to date period. We expect these investments will be reduced further in the next two quarters and until we see further recovery in revenue. In Q2, we completed the sale of Blackthorn UK and Dublin, Virginia facilities. In April, we completed the sale of our Hazlett, Michigan facility. We expect to complete the sale of our Cumberland, Virginia facility in the 3rd quarter and have listed for sale an additional 85 excess acres of land we have in Pennsylvania.

Speaker 2

With the investments that we have completed in DSA business, we believe that we have the physical capacity to accommodate increased DSA revenue of 40% over the $185,000,000 recognized in 2023. This capacity still represents a substantial opportunity to improve our DSA sales and margins in the future. For these next two quarters, Innovative remains on track to further achieve financial benefits from our investments and growth initiatives, increased sales and marketing and the organic addition of new services and our consolidation integration projects with the related efficiency gains. I want to update you now briefly on material legal issues we previously disclosed. With respect to the Cambodian government official indicted by the U.

Speaker 2

S. Government, that official was found not guilty on all counts and has now returned to Cambodia. At this time, we do not have any further updates related to the status of potential future imports of NHP into the U. S. From Cambodia.

Speaker 2

With respect to the investigation by the DOJ and other federal and state law enforcement agencies related to the Cumberland, Virginia facility, which we closed in September of 2022, we have been in discussions to resolve the open matters relating to the investigation. Since we believe this resolution is now probable and estimatable, we have recorded an accrual as of March 31, 2024 of $26,500,000 We would expect to pay $6,500,000 of this $26,500,000 in fiscal year 2024 and the remaining $20,000,000 would be a non current liability to be paid over 3 to 5 years. This resolution is not finalized and not signed as of today. Until then, we cannot comment further. We have determined that in the last 2 years, we have incurred expenses of approximately $22,000,000 dollars for the investigation related so far to this Cumberland facility that we closed in 2022.

Speaker 2

The total expenses include 3rd party fees to comply with subpoena information request, legal fees and the cost to close the facility. Some of these fees have been added back as restructuring costs and calculated in adjusted EBITDA, but if possible, we would like to resolve this matter and put it behind us. With that, I'll turn the call over to Beth, who will provide detailed synopsis of Enanta's results for the quarter.

Speaker 3

Thank you, Bob, and good afternoon, everyone. Before I start, we have one correction to note. The incurred expenses for the investigation related to the Cumberland facility were $19,000,000 not $22,000,000 Now for the current financial results for the 2024 Q2, total revenue was $119,000,000 compared to $151,500,000 during the prior year period, a decrease of 21.5 percent, primarily due to a decrease in the number of NHP sold in the current quarter. For the 6 months ended March 31, 2024, consolidated revenue was $254,500,000 down 7.2% compared to $274,200,000 for the same period last year due to the decrease in NHP sold, which was primarily offset by a 3.6% increase in DSA revenue. DSA revenues in the 2024 Q2 decreased by less than 1% to $46,600,000 when compared to the prior year period of $47,000,000 The decrease in the DSA revenue was primarily driven by our discovery services as a result of the decline in overall biotech funding and separately a decrease in medical device surgical services due to cancellations we experienced in the Q4 of fiscal 2023 and Q1 of 2024 and also delayed projects.

Speaker 3

Partially offsetting this, we continue to see increased revenue from our new service offerings in genetic toxicology and biotherapeutic analysis in connection with new business at our Rockville facility, plus the timing of general toxicology services. DSA revenue for the 6 months ended March 31, 2024 were $91,300,000 or 3 0.6% higher compared to the prior year of $88,100,000 The increase in DSA revenue was primarily driven by the mix of general toxicology services and continued increases from value added services in connection with new business at our Rockville facility, partially offset by a decrease in revenue related to our discovery services as a result of the decline in overall biotech funding and a decrease in medical device surgical services due to cancellations we experienced in the Q4 of 2023 and the Q1 of 2024 and delayed projects. RMS revenue for the first for the fiscal second quarter was down 30.7% to $72,400,000 compared to $104,500,000 the same quarter last year, due primarily to the lower NHP related product and service revenue. In addition, there was a decrease in revenue of $3,100,000 as a result of the sale of our Israeli business in fiscal 2023 and a decrease in sales of small research models, which was partially offset by an increase in sales in diets and bedding.

Speaker 3

RMS revenue for the 6 months ended March 31, 2024 was down 12.3 percent to $163,200,000 compared to $186,100,000 in the same period last year. The decrease was due to the negative impact of lower volume of NHP sales, lower revenue as a result of the sale of our Israeli businesses in fiscal 2023 and lower sales of small research models. Partially offsetting these decreases in revenue, there were higher sales in dyes and bedding. Regarding NHP pricing, we indicated on our last conference call that NHP prices were expected to come down from the highs we saw in Q4 of fiscal 2023. We did see NHP pricing in Q2 of fiscal 2024 on average come down roughly 2% from Q1 2024.

Speaker 3

This compared to the decrease in pricing in Q1 fiscal twenty twenty four of 18% compared to Q4 of fiscal 2023. Operating loss for the Q2 fiscal 2024 was $43,100,000 compared to a loss of $2,100,000 from last year's Q2, primarily due to lower margins relating to the decrease in revenue. The $26,500,000 charge related to the agreement in principle with the DOJ and the impact of lower margins from the sale of our Israeli businesses. These items were partially offset by decreases in third party fees and restructuring costs and favorable cost reductions related to the site closures and optimizations compared to the prior year period. In addition, gross margins for the new DSA services are still creating a headwind for overall margins.

Speaker 3

However, as we see these service revenues increase, we expect to see an associated margin improvement. Consolidated net loss attributable to common shareholders in the second quarter of fiscal 2024 totaled $48,100,000 or a 1.86 dollars loss per diluted share. This compared to consolidated net loss attributable to common shareholders of $10,000,000 or a $0.39 loss per diluted share in the Q2 of 2023. For the quarter, adjusted EBITDA was $3,100,000 or 2.6 percent of total revenues compared to $17,100,000 or 11.3 percent of total revenue for last year's Q2. For the 6 months ended March 31, 2024, adjusted EBITDA improved by $1,100,000 compared to the prior year period to $12,700,000 or 5 percent of total revenues from $11,600,000 or 4 0.2 percent of revenue in the same period last year.

Speaker 3

Non GAAP operating income for our DSA segment in the 2nd quarter increased to $8,200,000 or 17.6 percent of segment revenue from 7,900,000 dollars or 16.8 percent of segment revenue in last year's Q2. As our new GSA services are fully online and we began to fill newly added capacity, we continue to believe we will be able to boost our DSA operating margins. The book to bill ratio for DSA in the 2nd quarter was 0.77:one coming off the strong net awards in Q1 fiscal 2024. So our 6 month year to date fiscal 2024 book to bill is 1.11:one and our trailing 12 month net book to bill is 0.98:one. As we stated last quarter, we believe it is more meaningful to use book to bill ratios for 6 months or longer as better indicators of our DSA performance.

Speaker 3

Year to date March 31, 2024, we have booked net new orders of $98,900,000 versus $84,600,000 for the 6 months ended March 31, 2023. The DSA cancellations in the second quarter were consistent with prior year period and year to date for the last 6 months were slightly less than the same period in the prior year. GSA backlog was $142,100,000 at March 31, 2024, compared to $145,700,000 at March 31, 2023. In our RMS segment, non GAAP operating income in the Q2 of fiscal 2024 was $8,200,000 or 11.3 percent of segment revenues compared to $24,400,000 or 23.4 percent of segment revenues in last year's period. The lower operating income in Q2 fiscal 2024 was primarily the result of a decrease in RMS revenue and the $26,500,000 charge related to the agreement in principle discussed above, partially offset by favorable cost reductions related to the site closures and optimizations compared to the prior year period and decreased third party fees and restructuring costs.

Speaker 3

Interest expense in Q2 2024 increased by $11,100,000 up from $10,500,000 in last year's Q2 due to higher interest rates. Our balance sheet as of March 31, 2024 included $32,700,000 in cash and cash equivalents as compared to September 30, 2023. Total debt, net of debt issuance costs as of March 31, 2024 was $380,600,000 consistent with the $377,700,000 at at September 30, 2023. Net cash provided by operations for the 6 months ended March 31, 2024 was $10,400,000 compared to cash provided by operations of $5,400,000 in the same period last year. Cash provided by operations for the trailing 12 months was $32,800,000 Capital expenditures in the 2nd quarter were $7,000,000 or 5.9 percent of total revenue and $12,600,000 or 5 percent of total revenue for the 6 months ended March 31, 2024 as compared to $16,800,000 or 6.1 percent for the year to date period for 2023.

Speaker 3

The capital expenditures reflect investments in completing our DSA capacity expansions, infrastructure improvements in NHP facilities and renovations in the UK in order to complete the expansion of Hillcrest for the new customer contracts and the consolidation of Blackthorn and enhancements in laboratory technology and improvements for animal welfare. Now let's turn to our guidance. With the significant impact that NHPs have on our revenue and margins and the current uncertainty in demand for NHPs, we are withdrawing financial guidance for fiscal year 2024. We expect to provide guidance once we have greater clarity on the NHP market and customer demand. We still believe in our long term plan and our ability to achieve our financial goals.

Speaker 3

In the DSA segment, we are focusing to optimize our market share and increasing awards to utilize new services and additional capacity to grow DSA segment revenue. We believe that our strategic initiatives to increase our sales force and optimize sales territory coverage and focus on sales and discovery services puts us in an advantageous position to gain market share and increase awards as biopharma companies begin to increase their level of investment in preclinical studies. We will continue to stay focused on client satisfaction through innovation and the development of nimble solutions and custom offerings. As the industry continues to face headwinds, we remain focused on executing our plan for long term growth and sustainable margins. If revenue and margins do not improve in Q3 fiscal 2024, we could be in non compliance with our covenants at June 30, 2024 and we will have approximately 55 days after the end of the quarter to cure.

Speaker 3

We have plans to remedy any non compliance with our lenders through a credit agreement amendment. And with that financial overview, we will turn the call over to our operator for questions. Thank

Operator

Your Your first question comes from Dave Windley from Jefferies. Please go ahead.

Speaker 4

Hi, thanks for taking my questions. I wanted to start on NHPs. I heard you say that pricing in 2Q was just 2% lower than 1Q. Could you maybe put help us with some numbers around that? Where was pricing at the peak?

Speaker 4

I think you referenced peak of 3Q of your last fiscal year. Where was that? Where is the kind of down 2% in 2Q put you? And then given the low volume that you're highlighting, where is that price moving as we sit here today? Thanks.

Speaker 2

I think the peak was Q4 of last year and Q1 was down 18%. I think we said Q2 is down 2%. So I mean, we'd be down 20% from where it was Q4 of last year. More recently, I've not seen it slip since Q2, but it could. And one of the things that's keeping up is our costs are still high.

Speaker 2

So you've got to look on the world market, see where the pricing is, where's China, where's Cambodia, where's Vietnam, They're still selling across the world. And some of those prices are staying a little bit stronger. But I expect we could see those come down in this quarter and next quarter, depending on what happens in Cambodia specifically. And so we'll just have to see how that goes.

Speaker 4

Okay. Bob, so in terms of the revenue in the quarter, I just want to understand kind of your calculus around supply demand. Your revenue was down $26,000,000 I forget the exact percentage, maybe 30% or something like that. Only 2 percent of that is price, so volume is down a lot. You mentioned costs.

Speaker 4

I mean, the customer

Speaker 2

Our average cost would be higher than last year's average cost. And the supply is down significantly. And our inventory is also down. But we do have plenty of inventory right now to meet our customers' needs.

Speaker 4

And I guess so sorry, sorry, go ahead. Sorry.

Speaker 2

No, I said we did see a very weak second quarter in terms of the units, the number of NXP sold.

Speaker 4

And so to ask a provocative question, I guess, why not drop price to sell more volume?

Speaker 2

I'm not sure that would do it. The challenge is that they don't need the volume right now. So could price become an issue? It could. It's not been an issue.

Speaker 2

The issue has been people have inventory. And so some that have reoccurring monthly or quarterly shipments did not need any or needed very few just in the last quarter. I believe that we do have some visibility, some of the inventory and the levels. I think they are coming down and I think we're starting to see some of that rebound, in some customers, not all customers yet. We also see some customers that have lower demand probably because they have lower orders.

Speaker 4

Okay. And on the stocking point, these animals have an age window in which they are applicable. They're usable for research studies. So they can't they being the client can't stock them indefinitely. Help us understand a little bit.

Speaker 4

I know you talked about selling and then contract boarding for some clients. But in those cases, you would know what you have on property. Help us to understand a little bit how this advanced buying and inventory stockpiling of live animals works or worked?

Speaker 2

Well, they would they can always take 1st in inventory be the 1st out of inventory. So they're quite adaptive managing the age limits that they need. And also remember some animals need mature or some studies need mature animals and some need more immature animals. So, there are different ages that may be needed at different times. But that is a customer by customer decision.

Speaker 2

And we've been able to manage our inventory accordingly.

Speaker 4

Got it. One more question on NHP and I'll yield. In your press release this afternoon, you disclosed the NHP related revenue decline and then the cost of revenue in the $7,200,000 range. So that works out to about a 72% gross margin. Is that the right gross margin to be thinking about on NHP related revenue?

Speaker 4

Thank you.

Speaker 2

No, I think that is not. That is that just shows the some of that is an indication of the cost didn't go down as much because the average cost per NHP sold went up was higher.

Speaker 4

Okay. So the year over year change is not a congruent

Speaker 2

pro rata change. I noticed that also yesterday when we were looking at this, that can be misleading. That's not the margin, it's just indicative that the price that you would think it did, the average price was going up.

Speaker 4

Got it. Okay. I'll yield the floor. Thank you.

Operator

Your next question comes from Matt Hewitt from Craig Hallum. Please go ahead.

Speaker 5

Good afternoon. Thank you for taking the questions. Maybe just a couple more on the NHPs. Regarding Cambodia, it's still unknown what's going to happen there, but let's assume for sake of argument that market opens back up to U. S.

Speaker 5

Importation. What does that do to the supply demand dynamics and ultimately the pricing?

Speaker 2

1, we don't know when and if that will open. And 2, I'm not going to sit here and try to predict the future of commodities. I think anything is possible. Again, it's a world market. Remember, Cambodians have been used everywhere but the U.

Speaker 2

S, Still are. Could that help decrease the price of the cost? Yes. Will that but second of all, will that impact margin dollars? It could.

Speaker 2

I think but right now, I don't think we can sit here and predict commodity pricing. What's important to us is that we need we really need to make this and we have been making it more of a service business than just selling NHP. And we continue to do that with boarding and with breeding. And at some point, yes, we're selling a significant less amount of NHP than we did in the past. So it's a matter of margin dollar for NHP.

Speaker 2

There's also obviously, you can see it's very dependent on the number of NHPs that we sold.

Speaker 5

Got it. And then kind of transitioning from there. So I guess and you just touched on it a little bit, but as you transition more customers to the contracts versus the prior year and a half of buying in the spot market, have you had success with that? When do you start to see that materialize from a margin perspective? And I guess maybe that has something to do with inventory, but when does that start to help on the margin front having a more consistent or better visibility via the contracts into the costs associated with those?

Speaker 2

Yes. We have had some success and we're working on calendar 2025 contracts. Importantly, right now, we're also working on what is going to be needed at the back half of the year as the inventories start to deplete. Some people have more inventory than others. So I think we will see some of that change also.

Speaker 2

So but longer term and I've said this before is that we want to make sure that we had a business 2 years ago that was fairly dependent on these NHPs and NHP margins. And I think what we're building right now is a business that's going to be much less dependent on our NHP margins going forward. So we're not we probably will continue focusing on growing the margins in our Small Animal Tech Lab and DSA business. We're not going to probably see, I don't think at least we're not going to put in our projections a bit on it, margins ever coming back to what we saw the last 2 years. If it does, that's great.

Speaker 2

But I don't think that's not the business model we're going to build. In addition, as I said before, we'd like to see DSA be over 50% closer to 70% of our business versus 30%, seventy percent. So we'll continue to work that direction and continue to build our Services segment and decrease the dependency on HP margins. And if they happen, that's great. But I don't think that once that's not going to be the business model that we count on for the next 5 years.

Speaker 2

The other margins have to continue to grow. Look, we've done that's why it's important we can grow that DSA business because I think we'll get with that next $60,000,000 I think we'll see over $30,000,000 of that go to the bottom line. I think with the RMS costs we're taking out, we'll see over $20,000,000 of costs coming out. We see the SG and A costs coming out. You start looking at that and you add up to $40,000,000 $50,000,000 $60,000,000 that's why it's important to get those dollars out.

Speaker 2

So we're not really as dependent on those NHP margins going forward and that's what we're setting up.

Speaker 5

Got it. And then maybe last one for me and I'll hop back into the queue. But regarding the early stage discovery work, the delay that you saw this quarter, you're not alone. Others have kind of talked about how the funding environment improved or has improved yet there these companies are a little bit slower to deploy that capital. We're now into the Q3 for you, 1.5 months into the quarter.

Speaker 5

Are you starting to see some of those dollars flow at this point? Or anything that you can provide from a color perspective for how Q3 is shaping up?

Speaker 2

Yes. I think we've seen safety assessment for ourselves stay relatively strong. I think we sell safety assessment actually has increased probably 8% or 9% year over year. It's the discovery that's down 10% plus year over year that's really hurting us. And that we saw and we were down from weak comparisons from a year ago.

Speaker 2

So the discovery is the area where I think where we're seeing the greatest impact in our business and to our margins and our top line. And so we started making those sales changes and how we operate 6 months ago. Now I think what we are seeing now is an increase in the amount of customers who are starting to work with us And then we should hopefully, we'll start seeing an increase in the amount of awards and the size of the awards. But, I'm pleased with the progress that the sales team is making. It's not going to happen overnight, but they've been very focused.

Speaker 2

They've done a great job. We are seeing incremental new customers. We're starting to see some of the size increase. Will that happen overnight? Will we see that next quarter or 2 quarters out?

Speaker 2

That's hard for us. That's why we're not giving that guidance right now. But we are seeing some momentum.

Speaker 5

Got it. All right. Thank

Operator

Your next question comes from Frank Tikhonnen from Lake Street Capital Markets. Please go ahead. Great.

Speaker 6

Thanks for taking the questions. I'll also start with 1 in the NHP business. Maybe just from a higher level, Bob, trying to understand the market, obviously, supply is constrained and some heard the comments about some of the business moving overseas. If we're thinking about just the U. S.

Speaker 6

Market, what's kind of the quantity change of NHP is being used in the U. S. Last year versus maybe kind of thinking about projections for this year? And I know it's going to be tough to track exactly, but maybe a percentage reduction estimate would be a good way to be thinking about it.

Speaker 2

Frank, the information that I have that we look at is coming from the USDA. And I think if you look at it in broad terms and these are I believe was in the 30,000 plus HPs imported in 2022, and I think it dipped down to like 19,023 into the U. S. And so that's a pretty substantial, I think, reduction. And then we found, I think, some of those inventories did not really go down and some of our customers' inventories may have actually increased.

Speaker 2

So I think it's a function of what moved overseas. It's a function of people getting smarter redesigning studies to maybe use less NHPs and less studies overall. So I don't have any exact numbers. I'd say our Safety Assessment business internally has stayed very full and we've stayed it's been one of the positive and very pleased with is our ability to maintain our the same level in use of NHP. But we're a very small user compared to some of the compared to the overall market and some of the other CROs.

Speaker 2

So that it's but I think the reduction the numbers I gave you are substantial. And so a slight recovery there will be substantial.

Speaker 6

Got it. That makes sense. And I know you pulled the guide and are reluctant to kind of comment forward, but is it how are we thinking about where we are in the destocking process? I think I heard some comments that maybe some of your customers are getting ready to reorder. But do we feel like the worst of the destocking is over?

Speaker 6

Or is there still a decent slug of customers that have good inventory and we should expect kind of this level or this run rate from the RMS business for the next couple of quarters?

Speaker 2

Well, Frank, if I had that specific answer, we wouldn't withdraw it. We would have put out new guidance, I think is so I'm going to be careful. I don't have a really good feel for that right now. We can see some customers coming back and ordering, but we're meeting with them and on-site at their facilities. Hopefully, we get a better feel for them.

Speaker 2

And as we do and we have a better feel for it, then I think we'll come back and be able to do something with guidance again. But right now, that's one of the things that has us concern is where are we in that process overall. But I think last quarter was fairly weak. I'd hope that we don't have I'd hope we don't get any weaker than that.

Speaker 6

Right. Okay. And then last one for me. In relation to the DOJ matters, if the agreement in principle is signed in its current form, just a clarifying question, does this resolve all outstanding DOJ matters or is there still pending investigation ongoing beyond what's in that agreement in principle?

Speaker 2

Well, as far as I know, I think we had this was the Virginia matter. The last time we received a subpoena from the NHP matters, which we've talked about, I think was in June of 2021. So I don't know that we ever find out and have a resolution from that. Could they ask more questions? I guess they could.

Speaker 2

But the last time we received a subpoena related to the NHP matter, which was in Miami, Florida was June of 2021. This was the only active one that we currently had subpoenas. I believe we've referred to other cases like SEC inquiries, which we've been cooperating with, but I don't I'm not aware of any other DOJ matters as we speak of today. Got it. Okay.

Speaker 2

Thank you, I'll stop there. And this is we've had really 3 substantial overhangs in the past 3 years. 1 was the DOJ Virginia matter, which has been massive for us. Also the DOJ NHP matter, which we've also spent several $1,000,000 on the last 2 years following and looking into that. And then we have the downturn of the biotech funding market.

Speaker 2

What I'm looking forward to is seeing the conclusion of all three of these, quantifying what it's going to cost us and move forward. And overall, yes, I'd give ourselves a little bit of it's been difficult. Those were, 1st of all, very expensive matters. I outlined $20,000,000 or $19,000,000 I think that said in legal fees, I think the $22,000,000 includes actually the cost of closure of the facility and the $22,000,000 $19,000,000 is just the 3rd party fees. Is that right, Beth?

Speaker 2

That may be

Speaker 3

No, I think the total is 19.

Speaker 2

Okay.

Speaker 3

Yes.

Speaker 2

So if you look at that and you look at that money spent and you look at where we are unless on our sales margins being less than we expected due to this reduction in our industry later, we're behind where we'd like to be with cash right now in liquidity. But I would say, give ourselves an A on managing the balance sheet. As outlined, we've generated $32,000,000 in cash. And the team has done a good job of managing the balance sheet, continuing to make all the cost cutting and integration side optimization projects come to fruition. We're about done with those now.

Speaker 2

So that should be significantly reduced. We invested over $22,000,000 in infrastructure and animal welfare improvements in facilities we purchased is significant. Those are coming to made most of those that we wanted to do. So we've done a good job, I think, of managing our balance sheet. We sold some assets, did a little bit better than we thought on the sale of the assets.

Speaker 2

And we've maintained very good lender support. So I'm really pleased that even the last week we found that we may have this event that is probable and estimatable that with being able to work with our lenders in a very short period to get the amendment we did yesterday, I think shows fabulous cooperation, really appreciative of them being attentive to our needs and continuing to work with us. So, I think we have some positives, but yes, there's been a we've had a couple of tough things go against us. We've managed through it. We continue to stay focused on the long term.

Speaker 2

And, yes, I'm pleased that we've also had some pretty good wins throughout. So we'll get through this and then we'll figure out how to manage forward.

Speaker 1

Okay.

Operator

Your next question comes from Matthew Hewitt from Craig Hallum. Please go ahead.

Speaker 5

Quick question regarding the BioSecure Act. It's been front of mind for a lot of investors here over the past couple of months. And with it moving through the house today, I'm just curious what, if any, impact you could see on your business if Fuji Eptech is ultimately blocked from the U. S. Market?

Speaker 5

I assume that would be a positive, but what are you hearing from customers and how are you thinking about that?

Speaker 2

Well, first of all, I would say, I don't I have not followed what came out today. So if something just happened today, I'm not familiar with it. I've not had an update. We have followed it. WuXi Aptek is a large player in our market our competitor having something negative happened to them, nor are we going to bet on it.

Speaker 2

The things that they moved to China would probably be a significant take some significant capacity out of the U. S. And yes, get ourselves and the other CROs in the U. S. Benefit from that.

Speaker 2

Yes, that's not lost upon us. There could be some head, some wind to our back with that actually and that may help us out. But I'm not going to sit here and tell you we're going to bet our business on somebody having a bad day and what the government's going to do. And I don't want to wish anybody bad luck. I've dealt with my own DOJ government issues and I don't I know it can be challenging.

Speaker 5

Got it. All right. Thank you.

Operator

Your next question comes from Dave Windley from Jefferies. Please go ahead.

Speaker 4

Hi, thanks for taking the follow ups. Just a couple. Bob, you talked about in the kind of geographic mix of studies that some studies moved out of the U. S. I think you mentioned Europe, Canada, I think was also a net recipient.

Speaker 2

Okay.

Speaker 4

In terms of your supply of NHPs kind of emphasizing the point that you don't do a lot of SA study conduct in NHP. So most of your NHPs are selling to others that are doing that. Are you not able is it not part of your business to supply NHPs to users outside the United States?

Speaker 2

We do sell NHPs in Europe. And but we do not sell them anywhere else. So but we quarantine and distribute in Europe and U. S.

Speaker 4

So for those studies that moved to Europe, you would be able to continue or you would see customers continue to buy from you for that or would have over the last year or so?

Speaker 2

We would, but I don't think the European Safety Assessment business is big enough to make it that big to make a big dent at it. We've not we don't see that big of a change over there in what we can sell.

Speaker 4

Got it. Okay. And then on the cash flow, several parts that I wanted to kind of understand if the benefits of which may still be in the future for you. So like proceeds from the sale of Blackthorn, proceeds from the Haslet, Michigan facility, proceeds from sale of Cumberland, Are those all have you received those yet or would those all add to your cash balance post March 31st? And how much would that be?

Speaker 2

Those at March 31st, they were not all closed. That's it. Well, Cumberland is not closed. That will close this quarter. And that's what closed after March 31st.

Speaker 2

When did Dublin and U. K. In this close?

Speaker 3

Dublin closed in Q2 and Haslet closed in April. Okay. So we'll have Q and Blackstorm was in April. No, in Q2.

Speaker 2

In Q2.

Speaker 3

So we'll have 2 closures in Q3.

Speaker 2

Okay.

Speaker 4

Can you give approximate kind of net proceeds from those in Q3?

Speaker 3

You know what? Yes. Hazlett is like 150,000 dollars immaterial. And what we get for Cumberland will pretty much offset the expenses to prepare the site for closure.

Speaker 4

Okay. So just a last question then on the cash flow, you had $10,000,000 in positive cash flow, dollars 10,400,000 in positive cash flow in the quarter, a couple of fairly significant moving parts there year to date. Are there items that are, say, timing of payments, timing of accruals that you would expect to reverse in the next quarter that would cause the delta between operating losses and positive cash flow to narrow significantly?

Speaker 3

I don't think so. I don't yes, I don't see any significant prepaid in the next quarter and inventory will probably it will go down significantly for whatever NHP we sell.

Speaker 4

Yes. Okay. So kind of

Speaker 3

Most significant, yes.

Speaker 2

The most significant would be if we settle with the DOJ and make a payment, that $6,500,000 we talked about. Other than that, as we look out over the next 12 months, and we look at our cash flows and our different models in the next 12 months, we do not see that we have a liquidity problem.

Speaker 4

Okay. Okay. All right. That's what I'm getting at. Thank you.

Speaker 4

Appreciate it.

Speaker 2

There's a lot of help you out there. No, we have sensitized that, looked at it. I would I'd like not to be that tight, but no, we will not have a liquidity issue. But we could what we talk about is working with our lenders if we have covenant issues, but we have time to address that.

Speaker 4

Sounds great. Thank you for the answers.

Speaker 2

Thank you.

Operator

And there are no further questions at this time. I will turn the call back over to Bob Leisure for closing remarks.

Speaker 2

Well, thank you everyone for joining today's call and I want to close today by reiterating our thinking on the long term future for our industry, our company, the investments we've made to position ourselves for the future. The new spending on research and development for new medicines historically ebbed and flowed based on either the industry specific factors such as timing of patent expirations or macroeconomic or geopolitical population is getting older and people are looking for higher quality of life as they age and there's still a multitude of largely unmet medical needs. The companies that work in this space, our customers are committed to providing that and have historically reinvested more strongly after every down cycle. Within the broader industry context, we believe we're building ourselves a high touch flexible provider that is really attractive to Bio Tech customers who appreciate personal service and attention and detail they can get from Inative. We've done a lot of work over the last couple of years in an effort to both drive our top line for the long term with investments and additional capacity, new service lines and stronger sales and marketing efforts and drive our bottom line through operating leverage gained from optimizing our site footprint, transportation and logistics.

Speaker 2

I feel very positive about our team, what we've accomplished, our ability to navigate through our current challenges and how the next 12 months look for our industry and our company. I thank you for your time today.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.

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Earnings Conference Call
Inotiv Q2 2024
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