Q1 2023 Landec Corp Earnings Call
Speaker 1: you
Speaker 2: Good morning, and thank you for joining Landex fiscal 2023 first quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, I will provide instructions on how to ask a question. Now I would like to turn the call over to Jeff Sonick in investor relations at ICR. Thank you. Please go ahead.
Speaker 3: Good morning and thank you for joining us today to discuss Land Act Corporation's first quarter fiscal 2023 earnings results. On the call today from the company are Jim Hall, Chief Executive Officer and President of Life Corps and John Morberg, Chief Financial Officer.
Speaker 3: Before we begin today, you should have received a copy of our earnings release, which is also available on the company's website, where we also post our investors' presentation. In addition, we'd like to remind everyone of the Safe Harbor Statement. Certain statements made in the course of this conference call a Contained Forward Looking Statement.
Speaker 3: It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements.
Speaker 3: Additional information concerning risk factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's filings with the SEC, including but not limited to the company's Form 10-K for fiscal year 2022.
Speaker 3: Copies of those filings may be obtained from the company's website.
Speaker 3: And with that, I'd like to turn the call over to Jim Hall, Chief Executive Officer.
Speaker 4: Thank you, Jeff. Good morning everyone and thank you for joining us. I'll begin today with a brief update on our strategic initiative that we unveiled just eight weeks ago to transform the focus of the company to a standalone life core business.
Speaker 4: In terms of the formal timing of the transition to the LifeCorps corporate branding and ticker switch, we are working through those legal processes and are targeting November for the formal change.
Speaker 4: When we have a greater precision, we will be sure to update the market accordingly so everyone is prepared.
Speaker 4: With respect to our efforts to monetize the remaining curation foods assets, those activities are well underway. However, we are not in a position yet to communicate any potential outcomes. That said, I want to continue to emphasize the importance of this work by our team and our commitment to getting this done as soon as possible.
Speaker 4: With that, I'll provide a summary of LifeCourse fiscal 23 first quarter performance, provide some additional updates on our business and commercial efforts.
Speaker 4: then pass the call to John to discuss the financials and the fiscal 23 outlook which we are reiterating today.
Speaker 4: In the fiscal 23 first quarter, LifeCorps grew revenue by 8% to $23.7 million, generating an increase of 8.1% in adjusted EVA to $2.5 million, both of which were consistent with our plan and the cadence that we disclosed at the beginning of the fiscal year.
Speaker 4: As a reminder, the first quarter is our seasonally lowest quarter of the year in terms of revenues and EBITDA due to the idling of our manufacturing lines for annual required cleanroom certification and facility maintenance.
Speaker 4: Nonetheless, we're off to a solid start for the year and remain excited about the business development activity that we're generating, which I'll cover in a moment.
Speaker 4: Our business remains very well positioned as a fully integrated CDMO with highly differentiated capabilities for the development, fill and finish of complex, sterile, injectable grade pharmaceutical products.
Speaker 4: These technical capabilities have been honed from our more than 40 years of experience in building a premier pharmaceutical injectable grade hyaluronic acid manufacturing platform with a focus on complex and highly regulated products.
Speaker 4: Our unique expertise coupled with the ongoing industry trends towards outsourcing of new drug development means LifeCorps is ideally positioned as a preferred partner to provide CDMO services for new injectable drug applications.
Speaker 4: In fact, LifeCorps is the only manufacturer of pharmaceutical injectable grade HA with injectable CDMO expertise in the market today.
Speaker 4: Approximately 55% of all new drug applications are injectables, and prefilled syringe demand is growing at an estimated 13% compound annual rate.
Speaker 4: Given the industry's limited injectable drug manufacturing capacity, we will continue to take full advantage of this incredible opportunity and deliver much needed capacity that we've been investing in during the past few years.
Speaker 4: On the development front, our project portfolio remains robust with 24 active projects from 21 different customers.
Speaker 4: These 24 projects are dispersed across various stages of our portfolio as follows.
Speaker 4: early phase clinical development with five projects, phase one and two clinical development with 11 projects, and phase three clinical development and scale up commercial validation activity with eight projects.
Speaker 4: We continue to work closely with all of our customers in progressing their products through the various stages of development and eventual FDA approval.
Speaker 4: These efforts are now paying off. Three of the late phase projects are nearing FDA approval. One is a drug with a PDUFA date before the end of calendar 2022 and the other two are medical device programs, both of which have anticipated approvals within this calendar year Command colors reminder.
Speaker 4: As I mentioned last quarter, we are preparing for pre-approval inspections to support these projects and are working closely with these customers to support their product launch plans.
Speaker 4: As it pertains to the forecasted value of the projects in our active portfolio, we currently believe the revenue potential from the development activity is in the range of $50 to $80 million in development revenue over the life cycle of the projects, which we expect will continue to grow as we expand our active development project portfolio.
Speaker 4: Looking at the potential commercial value for the eight late-stage projects in our active portfolio,
Speaker 4: We believe that the commercial revenue opportunity is in the range of $45 to $120 million annually as these products receive FDA approval and are successfully transferred to contracted commercial supply agreements.
Speaker 4: CDMO activities represented nearly 80% of our revenue mix this past fiscal year 2022, with the balance of our revenue generated from HA raw material sales.
Speaker 4: HA remains a critical component of our business and is the foundation by which we've developed our CDMO expertise in complex and highly viscous products over the past 40 years.
Speaker 4: Approximately 50% of the revenue produced in our CDMO business is generated from products utilizing HA, and within our current active project portfolio, that mix is approximately 70%.
Speaker 4: HA is viewed as an ideal excipient for injectable therapies and that it is a naturally occurring substance in the human body and its highly viscous characteristics allow for optimized targeted drug development.
Speaker 4: Thus, we continue to see a meaningful activity among the biopharma community in utilizing HA, and nearly 40% of our prospective project opportunities are utilizing HA, which is a good segue to updating you on our commercial strategy to convert new potential engagements.
Speaker 4: We now have the complete team in place that we set out to establish from our investments and people that we announced last year.
Speaker 4: Our team is doing an impressive job ramping up our commercial presence in the market and we are seeing immediate returns on our investment in people which spans marketing, sales, business operations, and process development.
Speaker 4: In the fiscal first quarter, we added 14 new prospective opportunities to our development opportunity funnel for a total of 63 projects that are in various stages of diligence and discussion.
Speaker 4: These opportunities span multiple end markets, classes of drugs and medical devices, and with an assortment of companies both large and small, which we believe speaks to the attractive CDMO capabilities within LifeCorps growing expertise that the pharma industry is actively seeking in a CDMO partner.
Speaker 4: While the number of potential projects will shift over time as we convert some and dismiss others, we aren't seeing any slowdown in the number of opportunities.
Speaker 4: On the contrary, we continue to believe that our expanded commercial strategy will support an increasing trend well into the future.
Speaker 4: On the operational front, our company continues to prepare for a multi-year acceleration of growth.
Speaker 4: As I mentioned, it is imperative that we continue to push our organization forward with the implementation of best practices and new capabilities.
Speaker 4: Our team is in place.
Speaker 4: they are diligently working to raise our profile. We've bolstered our marketing approach which is supported by enhanced branding, awareness, and greater reach to communicate LifeCorps differentiated
Speaker 4: Last fiscal year, we made great advancements in optimizing our facilities in anticipation of adding new capacity in the coming years.
Speaker 4: With this complete, we are now focused on creating operational efficiencies across the entire company.
Speaker 4: We are modernizing systems and automating wherever possible. For instance, our Laboratory Information Management System, or LMS, has been integrated and we've qualified our first product on LMS in late June .
Speaker 4: with a series of other products transitioning the limbs in the coming months.
Speaker 4: This platform provides rapid visibility to data and enhanced analytics that replaces manual and inefficient processes.
Speaker 4: We are also isolating additional areas of savings and efficiency through our focus on pharmaceutical elegance.
Speaker 4: These opportunities include enhancing our sustainability and energy management, our supply chain, and working capital requirements. Further, our team is laser focused on resource planning across our entire organization to prepare us to add new manufacturing lines and shifts, and to do so with an efficient workforce as capacity and demand requires.
Speaker 4: In fact, we just recently added an additional weekend shift to support increased manufacturing activity across our organization.
Speaker 4: While there is always more to do, LifeCorps is very well prepared for our anticipated robust growth.
Speaker 4: Looking ahead, our future expansion continues to be driven by our strong development project portfolio, expansion of our prospective development pipeline, and conversion of these projects into our active development portfolio.
Speaker 4: We remain focused on driving towards a multi-year acceleration of annual revenue growth into the mid to high teens.
Speaker 4: based upon our current project portfolio characteristics and favorable industry tailwinds.
Speaker 4: While we continue to concentrate on maximizing the revenue generating capacity of our current infrastructure, we also must balance the known future capacity requirements within our project portfolio with the multi-year lead times on the specialized equipment that is manufactured to our specifications and must also undergo rigorous testing, customer acceptance, and regulatory approval.
Speaker 4: Our four decades of experience in creating a world-class quality management system provides us the confidence to directly meet these challenges as we plan to deliver this multi-year acceleration and revenue growth trajectory.
Speaker 4: which is supported by known projects within our existing project portfolio and will be further enhanced by new opportunities with the prospective projects in our development pipeline.
Speaker 4: Now I would like to turn the call to John for his financial review.
Speaker 5: Thank you, Jim.
Speaker 5: I'll start with a review of LifeCorps financial performance and our Fiscal 23 outlook before shifting to some updates around the financial aspects of the transition plan that we shared in August .
Speaker 5: As a reminder, our first quarter is our seasonally lowest quarter in terms of revenues.
Speaker 5: This seasonality results from idling our manufacturing lines for annual required clean room certification and facility maintenance.
Speaker 5: This slows shipment volumes and causes first quarter to be our lightest quarter of the year.
Speaker 5: For the first quarter of fiscal 23, LifeCorps total revenues increased 8% to $23.7 million, consistent with our expectation for the first quarter growth to be in the single digit range.
Speaker 5: This growth was driven by a 31% increase in our HA raw material manufacturing business and a 3% increase in our CDMO business.
Speaker 5: The increase in the HA business is primarily due to reduced shipments in the prior year period due to excess channel inventory during the global pandemic and its impact on elective procedures.
Speaker 5: Life Corps gross profit increased 6%.
Speaker 5: to $6.1 million for the first quarter of 23, representing a gross margin of 25.7%
Speaker 5: which compares to 26.3% in the prior year period.
Speaker 5: The 60 basis point variance versus prior year was primarily due to higher depreciation partially offset by improved revenue mix.
Speaker 5: Life Corps adjusted EBITDA increased 8.1% to 2.5 million for the first quarter of 23.
Speaker 5: with an adjusted EBITDA margin of 10.4%, which was consistent with the prior year.
Speaker 5: Shifting to our fiscal 23 outlook for our life course segment.
Speaker 5: We are reiterating revenue guidance in the range of 122 to 126 million, which implies growth in the range of 12 to 15 percent.
Speaker 5: and adjusted EBITDA guidance.
Speaker 5: in the range of 31 to 32 and a half million.
Speaker 5: which implies growth in the range of 7 to 12 percent.
Speaker 5: While we are no longer providing formal guidance on our curation food segment,
Speaker 5: Due to our strategic actions to monetize those remaining assets,
Speaker 5: For modeling purposes, we are assuming no contribution from Croatian Foods.
Speaker 5: for the full fiscal year.
Speaker 5: Additionally, we are reiterating our full year guidance for our other segment, which reflects the ongoing corporate costs of the organization.
Speaker 5: which we continue to expect in the range of 7 to 7.5 million.
Speaker 5: On this point, I'd remind everyone that while our intent is to formally transition to LifeCorps, our organization is in the process of establishing the corporate infrastructure that we carry at Landeck.
Speaker 5: As this transition progresses, we will be making those changes
Speaker 5: But in the near term, we think it's most appropriate to expect those expenses to continue.
Speaker 5: Longer term, we believe there will be some modest savings as we manage the smaller and less complex life core organization.
Speaker 5: So on a consolidated basis, we expect adjusted EBITDA, net of corporate costs, and assuming no contribution from Curation Foods.
Speaker 5: To be in the range of $23.5 to $25.5 million,
Speaker 5: for the full year fiscal 23.
Speaker 5: With respect to LifeCor, there are a few modeling considerations of note.
Speaker 5: We continue to anticipate gross margins to decline by approximately 100 basis points in Fiscal 23 to approximately 39%, which is very consistent with Fiscal Year 20 and Fiscal Year 21 performance.
Speaker 5: This is due to an expected mix shift towards higher commercial revenues.
Speaker 5: which on a relative basis have lower margins than our other revenue streams.
Speaker 5: Additionally, we will continue to invest in the sales and marketing functions as we drive an acceleration of top-line growth taking advantage of the favorable industry tailwinds.
Speaker 5: As a result, we anticipate a similar to slightly higher level of operating expenses versus prior year. We anticipate a similar to slightly higher level of operating expenses versus prior year.
Speaker 5: perhaps by approximately 50 basis points as a percentage of revenues for the full year.
Speaker 5: In terms of LifeCorps quarterly cadence, we continue to expect sequential revenue growth from first to second quarter and second to third quarter.
Speaker 5: And then similar revenue in both third and fourth quarters.
Speaker 5: And as a reminder, third quarter of fiscal 22 revenues were higher than expected due to shipment timing. Therefore, we would expect this year's third quarter to be approximately flat with the prior year.
Speaker 5: Adjust DVIDA is expected to increase sequentially from the first through the third quarters, but then flatten out in fiscal fourth quarter, which is expected to be similar in size to that of the third quarter.
Speaker 5: Now turning to Landex balance sheet which still reflects our remaining curation foods assets and liabilities and the impact of the segments cash flows.
Speaker 5: Net bank debt on a reported basis for the fiscal quarter ended August 28, 2022 was $138.3 million.
Speaker 5: which was essentially flat with the net bank debt at the end of fiscal 22 of 136.5 million.
Speaker 5: In fiscal 23 first quarter, LifeCorps spent $2.9 million in capital expenditures, which is consistent with our fiscal year 23 CapEx guidance.
Speaker 5: of $34 to $38 million, which is earmarked for two multi-use isolator fillers and the associated formulation and process support equipment which will be ready for acceptance testing next summer.
Speaker 5: As a reminder, included in this estimate is approximately 3.4 million of CapEx carryover from Fiscal 22.
Speaker 5: This keeps us on track to expand our operational filling capacity from our current 10 million units.
Speaker 5: to 22 million units and beyond to meet expected growth and capacity demand driven by projected growth in our base commercial business and commercialization of products in the late phases of development and our active portfolio.
Speaker 5: And with that operator, please open the call for questions.
Speaker 2: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, that's star 1 to register a question at this time.
Speaker 2: The first question is coming from Jacob Johnson of Stevens. Please go ahead.
Speaker 6: Hey, good morning, Jim and John . Congrats to a nice start to the year at LifeCorps. Maybe kicking off with a higher level question, Jim, you talked a little bit about the state of the fill-finish market, but maybe just to flush it out some more, can you just talk about where fill-finish supply and demand is for the industry? It sounds like capacity is still tight there. And then just a follow-up there, maybe just a couple of comments on how you differentiate yourself versus other fill-finish providers.
Speaker 4: on the door, and I think a lot of that is based on our ability to provide capacity. People know that we have additional capacity coming on board over the next couple of years, which also says there isn't a lot of unused capacity out there, and people are looking for it, right? That's part of it, and the other part is, the niche that we provide and the complex formulations of the products and the fact that LifeCorps.
Speaker 4: has the HA manufacturing capability and the importance of that HA to our business that I discussed during the earlier in the call also plays into it because a big chunk of what's coming our way contains HA, which is answers part of your question on the differentiation of life core. So you hear people talking about reduced funding in biotech projects. I think that's probably true.
Speaker 4: I think in our experience though, what's not getting funded is earlier phase projects that you know
Speaker 4: probably wouldn't be funded in a typical situation, except that there was a lot of funding available out there. So we're not seeing a slow down, far from it. We still see the limited capacity out there that's helping drive the additional opportunities for Life Corps. And listen, the work we've done to put the organization in place from a targeted marketing and sales approach.
Speaker 6: decision-making process as you take those leads and then kind of convert them into the development pipeline.
Speaker 4: Yeah, sure. Listen, LifeCorps has got a very experienced and amazing team that's got a lot of industry experience and really has a lot of experience and works hard to evaluate and identify.
Speaker 4: low probability projects and tries to eliminate those sooner rather than later. And really it's one of our core competencies that's been driven by our 40 years of experience trying to identify what we should and shouldn't work with. And what really sparked that is historically LifeCorps didn't have a lot of capacity and we wanted to make sure we picked the right projects that had a high probability of success to get there. So that's really...
Speaker 4: you know, what we bank on as we pick that pick and work through the ideas to get through the funnel. The other thing is we're spending a lot of time on our new marketing effort, getting Lifecore's unique capabilities out to the marketplace. For the first time ever, we've, you know, upgraded our website, doing Google Ads, Google Ads, updating our social media content, and enhancing our trade show presence. But really what's more important is we're paying attention to what that's telling us and where we
Speaker 6: me, Jim, you mentioned, I think some kind of operational initiatives. And I think last quarter, you talked a little bit about LifeCorps University, and I think a bunch of Lean and Six Sigma people have been kind of educated on those. Can you just talk about the key areas for operational improvements? And then if John wants to chime in on how we should think about that from a financial perspective, that'd be great too.
Speaker 4: Yeah sure Jacob it's actually across the entire organization and impacts every corner of the company right. Obviously we want to optimize and get the most out of our processes as we can so we look for efficiencies and there's a lot of lean projects centered around that as well as you know our business operations processing to help get things identified and onboarded and making sure that the organization is set up.
Speaker 4: not only from a project management and business ops standpoint, but from a development and manufacturing standpoint to support the increased manufacturing capacity. So you know LIMS is another example, our laboratory information management system to allow us to manage data and look at it quicker and get it out to our our partners quicker as well. And so it's across the entire organization.
Speaker 4: something that is ingrained in our culture at Life Corps and one of the reasons you know that we implemented what we call Life Corps universities to get people onboarded, our employees onboarded and operational as quickly as possible.
Speaker 5: You want to add? Hey Jacob, from a financial perspective, it really impacts two areas, our gross profit margins and operating leverage and operating expenses. All these things that Jim's talking about are, we want to be able to keep our gross profit margin in that high 30s to low 40s. And then secondly, over time, leverage the operating expense to drive EBITDA margins. So that's why we're very focused on these efforts.
Speaker 6: Thanks for that, John and Jim. Thanks for taking the questions.
Speaker 7: Thanks Jacob.
Speaker 2: Once again ladies and gentlemen that is star one if you would like to register a question at this time. The next question is coming from Mark Smith of Lake Street Capital Markets please go ahead.
Speaker 5: Hi guys. I just wanted to look at the pipeline just a little bit more. Can you just talk about kind of conversion from prospects into projects, kind of generally how you feel about your pipeline and then really that conversion process?
Speaker 4: Good morning, Mark. Obviously we have a lot of things in the pipeline that we're analyzing, 63 that we're in discussion with now. And the way we look at those is how they run through the funnel is what converts to leads. And then we monitor qualified leads and then they get to the proposal stage. Not all of them are going to make it into that process. We have a lot of experience and a pretty good...
Speaker 4: set of criteria we look at to gauge opportunities before we would even consider them part of that funnel or part of the 63 projects so There I don't have a set percentage of how many of those will Will be onboarded over the next period of time a lot of it depends on You know what phase they're in and how it fits into our niche of capabilities, but Our track record and historical rate is pretty high
Speaker 4: Will that continue as more come through? It's our intent to have as many of those come through as we can, but it's difficult to judge how many of those. The one thing I can tell you is a majority of those 63 fit what we look for. Now it's just gonna be picking the best ones that utilize our skillset and we can provide the most value to.
Speaker 4: Okay, and then a couple kind of model questions maybe for John .
Speaker 4: cadence of the revenue guidance. It sounds like you guys are looking for a really solid growth here in Q2. It's some of that just a function of seasonality and then just how well Q3 was, how solid Q3 was last year that really drives that higher year over year growth here in Q2.
Speaker 5: Yeah, Mark, I think we're really seeing is the back half of the year is probably where the biggest growth is going to be occurring. And again, it's just kind of the lineup of projects that are out there and a timing of orders from customers. So we actually see a bigger growth in the back half of the year.
Speaker 5: And not dissimilar than last year actually as well.
Speaker 4: Okay. And then similarly, just as we think about CapEx, very little spend here in Q1, these projects that are coming online, what's kind of the cadence or expected timing of this larger spend in CapEx this year?
Speaker 4: Yeah, I'll start and I'll ask John to weigh in a little bit as well. But listen, LifeCorps works very hard to be good stewards of our capital. This is a timing and within what we expected Q1 will be and really focuses on progress payments for a lot of the capacity related spend we have.
Speaker 4: it's obviously going to pick up through the rest of the year. We're still maintaining the spend guidance that we gave earlier and so nothing really to
Speaker 4: to call out here other than this is the timing. Q1 was light as we projected, and Life Corps is gonna do whatever it can to manage the spend and not spend until we need to.
Speaker 5: Yeah, the only thing else to add to that is that you know most of our CapEx or you know 85% of it is you know growth related and primarily focused on the filler isolator equipment and Which we hope to arrive next summer and so as a result it just kind of pushes a lot of the progress payments You know later into the year or the back half of the year
Speaker 8: Okay, great. Thank you guys.
Speaker 8: Great, thank you guys. Thanks Mark.
Speaker 2: The next question is coming from Mike Petuski of Farrington Research. Please go ahead....
Speaker 3: Hey, good morning. So that actually was a perfect lead into the question I wanted to ask. One of the questions I get most about Landeck is CapEx in terms of the longer term.
Speaker 3: normalize CapEx. Can you guys, you know, you sort of alluded to a lot of a lot of current year spending growth capital. Could you speak to what's a normalize?
Speaker 3: figure or normalized range after you sort of get through, you know, what I think is a period of elevated investment.
Speaker 5: Hey, Mike, good morning, how are you?
Speaker 5: I think as we've shared a few times, you know, we've had, you know, our capex needs are, you know, could be somewhat lumpy and not necessarily perfectly linear. But we certainly are looking at our capacity needs and we need to place orders for, you know, filling equipment, the couple years it takes to get it here and then you've got time to get it validated before it starts, you know, really earning some revenue. And so, you know, that's a big part of the, of what we look at from a capex perspective.
Speaker 5: But primarily I would say that our CapEx is going to be growth focused. So, you know, we should be 85% plus of our CapEx spend is always going to be focused on that and not focused on maintenance CapEx.
Speaker 5: so
Speaker 5: You know, the other part is, is you can see that we're transitioning to really a growth company. And so, you know, we intend to really, at least the next couple of years, is to reinvest, you know, our EBITDA life core back into CapEx.
Speaker 5: because we're really focused in on is growing our EBITDA out into the future. And we think with these investments, you know, the annual increase in EBITDA is very worthwhile. We think this, you know, 34 to 38 million, for instance, out of bill to generate, you know, an additional 5 to 10 million of EBITDA on an annual basis. And as a result, that turns into a very nice ROI when you look at, you know, valuation multiples in the CDMO space.
Speaker 3: So is it then fair to say that maybe this really isn't an elevated range going forward? I'd say this is more of a
Speaker 9: more like a normal range going forward?
Speaker 5: Yeah, just, you know, we just, you know, not in position yet today to probably give, you know, guidance on that other than what we're given guidance on for this year. But again, I again, I would think that we would be trying to reinvest for the most part or even back into capex going forward.
Speaker 5: And by the way, once you get through a couple of years of that, you eventually turn around to a pretty nice free cash flowing business. But in the short term here, the focus is on being a growth company.
Speaker 9: I know you don't want to comment a lot about the duration assets, but is there an expectation that that process of monetization will be complete either by calendar year end or fiscal year end? Can you speak to that?
Speaker 5: Yeah, sure. So the first thing is we said, you know, obviously we're in a process, you know, to, to sell those off. And, and when we say that by virtue of being in the process, you know, we've hired the appropriate advisors to help represent our interests and they're very much underway. You know, we've kind of created our own, you know, Jim and I, our own self-imposed goal of a sale by year end. You know, what I hope you take away from that though is that we're really committed to making something happen.
Speaker 5: But we're also realistic as to the amount of time things like this take. You know, we do appreciate our shareholders who would like to see this done quickly. And we're aligned with that completely. But we've been working through projects with
Speaker 5: really in a midst of unprecedented circumstances between the pandemic, extreme inflation, labor shortages, and all those variables really complicate this exercise already, which we've done each time for each asset that we've had to sell. So I will say we are focused on it, work on it every day, and we know this is important for this company and we intend to get it done as quickly as we can and we'll update.
Speaker 9: obviously the market as soon as we are able to. Okay, alright great. And I just wanted to confirm that I heard one thing I think that Jim said earlier. Padufa date before the end of the year and two devices likely approved before the end of the calendar year, correct?
Speaker 8: That's correct, Mike.
Speaker 9: Thanks guys, really appreciate it.
Speaker 4: Thanks, talk soon.
Speaker 2: Our final question today is going to be coming from Mitch Pinheiro of Sturtivan Company. Please go ahead. Hi, this is Mitch Pinheiro of Sturtivan Company.
Speaker 10: Yeah, hi. Good morning.
Speaker 9: Morning, Mitch. Hey, one thing I want to understand that you talk about.
Speaker 3: Tight capacity in the syringe fill finish area.
Speaker 11: syringe, fill finish area in the industry.
Speaker 12: But, you know, art...
Speaker 11: Isn't that capacity kind of constrained company to company where, you know, new drugs, new therapies are, you know, the manufacturer is sort of
Speaker 11: already embedded into that process at the beginning. So I'm not sure why there's a lack of capacity that you can take advantage of in any immediate sense. Wouldn't you have to go through the whole the whole FDA process again to get approved into that new therapy? Could you talk about that a little bit?
Speaker 4: Yeah, Mitch, I think where you're a little bit confused is, and I'll clarify your last part of your question, if somebody is going to transition
Speaker 4: from an already approved CDMO to another one, that would require the qualification, FDA approval, the whole process again. What we're finding, there's a lot of drug development going on and the majority of that is being outsourced. And what we're seeing is people trying to identify CDMOs that have capacity that can build with them in the future. So they have a product platform.
Speaker 4: several products, they project what kind of capacity they're gonna need for the next two, three, four, five years and try to lock that up with somebody that's got the ability to grow with them. And that is part of the qualification process for, and a drug would be an NDA, where LifeCorps in this case would be qualified as they develop the product and process. But a lot of the things in our pipeline, our company's looking for.
Speaker 11: to people, you know, to companies that you're already connected with.
Speaker 13: So...
Speaker 11: Are you is that a that is that true and B? If not, are you I mean we're gonna see a ramp up in capex to further expand your theoretical capacity.
Speaker 4: Right, you're right that we have a good chunk of that capacity earmarked with things we're already working on. We also know and are planning additional capacity above and beyond what we think we're gonna need because in the world of injectable grade CDMO, you need capacity to continue to grow and expand and that's what we're planning on. So not all of the capacity we're planning is taken up, we're trying to sell additional capacity.
Speaker 4: And at some point down the road, LifeCorps will need to expand beyond the two additional fill lines. We've talked about that. We're constantly evaluating what kind of capacity we think we'll need to support that pipeline, and we'll make sure the investment aligns when the time's right to make sure we have that capacity moving forward. I wouldn't say there's gonna be a ramp up in capital spend. I think we just need to evaluate when we need it.
Speaker 4: Like we've talked about, Mitch, you know, it's a three plus year timeline to get a fill line in place now. And so the art of this is determining what kind of capacity you need and making that investment early enough. The other thing we're seeing, like I just mentioned, with, from our people out in the field is there are people looking for future capacity and willing to help invest in that. And that's something we're looking at as well.
Speaker 11: Yeah, I mean, you know, I mean that, you know, it must be difficult to, I mean, you know, to sort of figure out.
Speaker 11: your capacity needs as You know
Speaker 11: you know, most of those 24 projects in your pipeline, you know, just by definition of, you know, of drug approval, you know, most of those will fail.
Speaker 11: So, how to know what your capacity is, your need, capacity needs will be against the prospects of successful drug development seems to be quite a challenge.
Speaker 4: It is a challenge and you're right, not everything will make it through. It's why we, once things make it into the late phase and we start to see some successful data coming out of phase 3 trials, we have a little more assurance that it typically...
Speaker 4: is not a matter of if, but a matter of when an approval will happen. Not everything will make it through, even though it's in its phase three trial. But the other thing is, not everything, and that's why we pay attention to the late phase and the eight projects that are really driving the next three to four years of commercial capacity requirement. The other game and thing we need to model and we pay a lot of attention to is how much clinical capacity we'll need to support that portfolio as it moves forward.
Speaker 4: qualification batches, validation batches, that kind of thing. So it's not all a commercial volume puzzle. And listen, our team does a phenomenal job working through this and understanding and working with our partners of what is expected as they move through and as we move to the commercial contract that we have, what we need in place to support them.
Speaker 11: One more question.
Speaker 11: Okay, one more question and it just concerns leverage.
Speaker 11: So, you know, you're a growth company, but a growth company with high leverage.
Speaker 11: you know is obviously less attractive than perhaps the alternative and You know we're here at five times leverage. I know that there's going to be some asset sales down the road
Speaker 11: But as you come out of that, I mean, that the asset sales sort of have to play into your capital spending plans for LifeCorps.
Speaker 11: I mean, you don't want to emerge as, you know, LifeCorps biomedical with a highly leveraged balance sheet because you can't get the asset sale, you know, pricing that you want. So where, how do you think about that? Are you confident that you can, you know, that your asset sales will be enough to keep yourself at a, whatever you deem as reasonable leverage or?
Speaker 11: Is that does that slow down your capital spending plans? Can you talk about that a little bit?
Speaker 11: slow down your capital spending plans. Can you talk about that a little bit? Yeah.
Speaker 5: You know, obviously, you know, improving our capital structure, it's been a common thread behind Project Swift and, you know, since we introduced it, you know, a couple years ago. It's no secret that it's unsustainable, the leverage level that we have, and hence the hard work to preserve cash, optimize our assets and extract value. As you've seen, we've directly redeployed that cash towards debt retirement and we've been consistent in our intent to improve the balance sheet.
Speaker 5: You know while I'm not in a position to provide you a forecast of what standalone leverage will be you know Suffice it to say you know we want to improve it You know going forward and we're going to do it in two ways you know continuing to sell off assets to improve the balance sheet With our EBITDA growth will also really help to de-lever the business
Speaker 5: And you know we are constantly in great communication with our banks, always looking for you know what's the next you know bank deal we could do going forward once we're a standalone life war business.
Speaker 5: So we we still believe that there's a great way forward for us to make this make our growth plans work.
Speaker 11: I know you know as you look forward I mean is is is there a leverage?
Speaker 11: Target that you think LifeCorps Biomedical can operate comfortably.
Speaker 11: that you think LifeCorps Biomedical can operate comfortably?
Speaker 11: Is it three times? Is it two times?
Speaker 14: um any any idea
Speaker 5: Yeah, I mean, you know, my personal sense is I'd love to be in the three times range and we recognize for a short period of time we might have to be above that, but ultimately we think we can be more comfortably in that type of range.
Speaker 5: We look you know kind of mid range timeframes
Speaker 9: Okay. All right. Very helpful. Thank you, guys.
Speaker 7: helpful. Thank you guys. Thanks, Mitch.
Speaker 2: Thank you. At this time I'd like to turn the floor back over to Mr. Hall for any additional or closing comments.
Speaker 4: Thanks again everyone for your interest. These are very exciting times for LifeCorps. We'll look forward to talking with you again when we release our fiscal second quarter results. Thank you and have a good day.
Speaker 2: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
Speaker 1: And I.
Speaker 9: Welcome to the Q1 2023 Atlantic Corp earnings call. Sure, what's your first and last name please? First name is Rachel. Last name is Smith. Thank you. Please stand by. Thank you.