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Good day, ladies and gentlemen, and welcome to the Societal CDMO First Quarter 2023 Financial Results Conference Call. [Operator Instructions].
I would now like to hand the conference over to Stephanie Diaz of Societal's Investor Relations group. Please go ahead.
Thank you. Hello, and thank you for joining us. On today's call, we have David Enloe, President and CEO; and Ryan Lake, Chief Financial Officer. Today, we will be providing an overview of Societal contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended March 31, 2023.
After our prepared remarks, we will welcome your questions. Before we begin, I'd like to caution that comments made during this conference call today May 10, 2023, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current beliefs of the company, which involve a number of assumptions, risks and uncertainties.
Actual results could differ from these statements, and the company undertakes no obligation to revise or update any statement made today.
I encourage you to review all of the company's filings with the Securities and Exchange Commission concerning these and other matters. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations on our corporate website at societalcdmo.com.
With that, I will turn the call over to David Enloe, Societal's President and CEO.
Thank you, Stephanie, and thank you to everyone participating today via webcast. As reported during our March webcast, 2022 was a transformative year for Societal, and we have been pleased to ride the momentum created into the first quarter of 2023, despite the overall headwinds our industry is experiencing.
Since the beginning of 2023, we have announced multiple new business wins, including new customer wins as well as the expansion of work with multiple existing clients.
During the period, we were also very pleased to announce the FDA's approval of Societal's first commercially manufactured tablet product, an important expansion of our capabilities that extends beyond the company's long-standing expertise in commercial capsule production.
I will provide a more detailed review of our Q1 2023 achievements following an overview of our financial results for the quarter ended March 31, 2023. For that, I'll turn the call over to Ryan.
Thank you, David. Good afternoon, everyone. Before I begin, in addition to the brief financial overview, I'll provide on the call today, additional details on our financial results for the first quarter ended March 31, 2023, are included in our press release issued prior to this call and in our Form 10-Q, which is on file with the SEC.
Revenues for the quarter ended March 31, 2023, were $21.5 million. This represents a slight increase compared to our revenues of $21.2 million recorded during the prior year period. The increase of $0.3 million was primarily driven by an increase in revenue from the company's largest commercial customer, Teva, correlated with pull-through in demand resulting from market share gains against the sole competitor for the Verapamil SR products.
These increases were partially offset by lower revenues from commercial product sales to Lannett due to timing of customer orders. Cost of sales for the quarter ended March 31, 2023, was $19.3 million compared to $16.2 million for the comparable period of 2022. The increase of $3.1 million was primarily due to mix of revenue and related cost absorption, including increased costs associated with the new aseptic fill/finish line as we expand those capabilities and increased material costs.
Selling, general and administrative expenses for the first quarter of 2023 were $4.6 million compared to $5.7 million recorded in the 2022 period. The decrease of $1.1 million was primarily related to lower public company costs and administrative costs than the prior year. Interest expense was $2.1 million for the 3 months ended March 31, 2023, a decrease compared to $3.4 million for the comparable period of 2022. The decrease of $1.3 million was primarily due to a significantly reduced amount of aggregate principal and lower interest rates under the company's refinanced debt as compared to borrowings outstanding during the period ended March 31, 2022.
For the quarter ended March 31, 2022, the company recorded a net loss of $4.7 million or $0.06 per diluted share as compared to a net loss of $4.3 million or $0.08 per diluted share for the comparable period of 2022.
EBITDA as adjusted for the period was $0.6 million compared to $2.8 million in the prior year period. The $2.2 million decrease in EBITDA is primarily due to a mix of revenue and related cost absorption offset by reduced selling, general and administrative costs.
This concludes my financial overview. For those interested in reviewing our non-GAAP reconciliations, please refer to our 8-K filing or the press release issued today.
I'll now turn the call back over to David for an update on operations and achievements during the period. David?
Thanks, Ryan. Societal's achievements during 2022 positioned the company well for continued progress during the first quarter of 2023. Specific accomplishments in 2022 included enhancing the company's corporate identity and branding and successful adoption of a segment-specific marketing strategy to best serve our customers. Combined, these strategies drove strong sales in 2022 with the company signing over 170 new or expanded scope changes for projects with 33 different customers.
As a result, our clinical trial services business grew 58% in 2022 compared to the prior year, and we ended the year with a significantly expanded and diversified customer base compared to 2021 with more than 3x the number of customers that we had just 2 years ago.
In addition to the progress recorded in 2022, many of our successes last year have laid the foundation for growth and increasing financial strength in the future.
Notably, last year, Societal launched new aseptic fill/finish and lyophilization services to better serve the end-to-end needs of our clients. We have also recently hired new personnel with expertise in the injectables market to facilitate this important capabilities expansion in our West Coast facility. And looking forward, we continue to explore opportunities for growth through facilities enhancement and expansion of our capabilities.
But perhaps the 2022 achievement that will have the most influence on the company's progress in the future, with the successful execution of a multistep strategy designed to recast our capital structure, improve our balance sheet and strengthen our overall financial profile. This strategy was comprised of 4 separate transactions, including a sales and purchase agreement to sell approximately 121 acres of lake front land to a leading national homebuilder for approximately $9.1 million.
The unused land is located adjacent to Societal's manufacturing facility in Gainesville, Georgia. Subject to completion of diligence, we expect the sale to close in the second half of 2023.
Second, a sale and leaseback transaction for our Gainesville, Georgia manufacturing site and campus, which yielded $39 million in non-dilutive gross proceeds.
Third, the successful closing of concurrent public offerings of common stock and preferred stock generating gross proceeds of approximately $35.6 million prior to deducting the underwriting discounts and estimated offering expenses.
And finally, securing a new debt facility for $36.9 million from Royal Bank of Canada. As a result of these transactions, Societal was able to repay and retire a $100 million debt facility and replace it with a $36.9 million Term A loan that carries terms, which are significantly more advantageous to Societal. These transactions resulted in the significant improvement of the company's net debt leverage ratio from greater than 6x EBITDA to just over 2x EBITDA, immediately reducing our annual interest burden by an estimated $6 million with the potential to increase that number to approximately $7 million annually.
And we expect that our financial position will be further strengthened with the closing of the land sale, which is expected to generate gross proceeds of $9.1 million later this year. While it is not our intent to look too long into the rearview mirror, I believe it is important to restate these important achievements as they have removed certain financial burdens, place Societal and an overall stronger financial position and pave the way for growth in 2023 and beyond.
Looking at 2023, we remain confident at this time in our ability to achieve our stated guidance for the year. This is based largely on the 12-month forecast we have seen from customers as well as the orders already booked through Q3 of this year. While our revenue during the period reflected only a slight increase as compared to the same 2022 period, it is important to acknowledge the period-to-period fluctuations or lumpiness that is commonplace in our business, caused largely by timing and type of production runs and cost absorption related to those runs.
We continue to closely monitor the plans of our capital market-dependent clients. As discussed last quarter, financing challenges have impacted some of those customers' pipeline development plans. However, given the overall level of activity we have seen in recent weeks and our ability to maintain our win rate that we have successfully improved during 2022, we remain confident for the remainder of the year.
During the first quarter, we won multiple key projects, including signing 4 new customers and expansions for 12 existing programs that will continue to feed our backlog, our manufacturing pipeline and our capacity utilization during the year.
As a point of comparison, Societal signed a total of 15 new customers during the entirety of fiscal '22, placing us on track to potentially beat that measure in fiscal 2023.
Notable among our first quarter wins as the project recently announced with new customer Longboard Pharmaceuticals. This project will span a range of Societal's offerings, including technology transfer and analytical method validation activities to support Longboard's lead asset, LP352, a 5-HT2C receptor superagonist.
The scope of work for this project highlights Societal's attractiveness to those customers requiring a broad range of services to advance their candidates through clinical development, spanning tech transfer and through to CGMP manufacturing. Subject to quarter end, we also announced that the company had signed work order extensions with multiple existing customers that also span a range of the company's CDMO services.
While securing new customers remains an important objective for the company, being awarded expansion projects by our existing customers is an equally important area of growth for the company.
During the first quarter, we signed multiple work expansion agreements spanning from analytical services to manufacturing, to product encapsulation and packaging.
Another important event for Societal during the first quarter was the approval by the FDA of the company as a manufacturer of the commercial tablet product.
This approval is the first for Societal for the manufacturer of a commercial tablet, reflecting both the company's ongoing expansion of capabilities as well as our success in building Societal's reputation as a CDMO of choice. We are delighted to have been entrusted with the production of this important product, and we expect to begin manufacturing it later this year in our Gainesville, Georgia facility.
In other product news, we would also like to comment on Lannett's announcement regarding its recently executed restructuring support agreement, or RSA, and bankruptcy filing. As a reminder, Societal CDMO owns the NDA and the drug master file for Verapamil, a long-approved calcium channel blocker for the treatment of hypertension. Lannett has served as the company's marketing partner for the Verapamil PM and Verelan SR formulations since 2014.
In July 2022, the company entered into an agreement to its license and supply agreement with Lannett, which provided societal CDMO with improved overall economics, increases in manufacturing prices, and potential new GMP manufacturing agreement targeting injectable products for multiple additional development projects. In addition, the agreement provided with options to engage with alternative marketing partners under certain conditions.
We are very pleased that Lannett has entered into this RSA that will allow it to continue operations with minimal interruption while reducing its debt burden and strengthening its balance sheet. Importantly, we believe this agreement will allow Lannett to continue to execute as a marketing partner to Societal CDMO in the near term. However, it's important to note that Societal CDMO is first and foremost committed to protecting and expanding the distribution of our Verapamil PM and Verelan SR products.
For that reason, we have been carefully monitoring Lannett circumstances over the past 12 months and expect that, should it be necessary, any transition from Lannett to another marketing partner would take place with limited disruption to the sales of Verapamil PM and Verelan SR.
In closing, we would first like to address the recent pressure on the company's stock price, and we wish to assure you that no internal event or factor has triggered the decline in value.
Our fundamentals are now stronger than ever, particularly given all the progress we have made the past couple of years diversifying our customer portfolio and addressing our debt position. And we began 2023 from a fortified position of strength that we believe will facilitate growth this year and for many years to come.
The steps taken last year and to date in 2023 have honed our business development and marketing strategies, resulting in valuable new business and expansion project wins during the first quarter.
We continue to expand and enhance our capabilities, including making an investment in the high-value injectables market, including biologics, and a recent approval by the FDA of Societal as a manufacturer of a commercial tablet product establishes the company as an experienced partner for this valuable service.
This concludes my prepared remarks for today. We can now open up the call for questions. Operator?
[Operator Instructions]. Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital Group.
Congratulations on the strong start to the year. Maybe first up, regarding the first commercial tablet, maybe explain the size of that market? I realize it's very early days, but have you received interest from other parties because of this first approval? I mean what can this mean for you?
Yes. Matt, David Enloe. Thanks for the question. It is early days. But certainly, we see an active market on both the capsule side and the tablet side and having this commercial approval and the knowledge of the ability for us to successfully perform a technology transfer in the way that we did is something that we're communicating to future customers. And we're engaged in discussions that will make us not just the producer of one commercial tablet in the future, but that is certainly part of our business development effort right now is to leverage this new capability and, if you will, feather in our cap.
Got it. That's helpful. And then it seems like more so this quarter than maybe even the Q4 earnings season, we've been hearing a lot about the challenging environment, particularly for small pharma and biotech companies, maybe kind of reining and spending kind of holding off, yet you put up a pretty strong quarter from a new win perspective even with the expansions.
What do you think is helping you kind of differentiate and drive those incremental contracts where maybe some of your peers are struggling a little bit?
Thanks. We spent a lot of time, as you know, in 2022 really focusing our targeting efforts, if you will, for clients that were strong fits inside the set of capabilities that we offer And we were able to increase our win rate by somewhere between 2x and 3x. So -- but Matt, I don't want to mislead either, I mean, we are seeing programs that were there were going to be 2 and now there's 1 or something is getting postponed.
And so certainly, I would say, we are not completely excluded from what we're seeing there. There are -- there were fewer opportunities, I'll say it that way. Particularly, January, February, March, we're actually seeing a bit more traction now, an uptick.
But back to the real question you asked, I think we have a very experienced sales team that has been together now by and large for a couple of years. And we have a really strong proposal writing -- a very technical proposal writing team, and we've added market intelligence manager skills into our efforts. And it's been top of mind every day and every afternoon. And I think as a result, we're seeing some good traction here.
Got it. And then maybe one quick one, and then I'll hop back in the queue. Gross margins in the quarter, you explained, I think it was mix and a couple of other factors. But does that bounce back here in the second quarter? Or how should we be thinking about gross margins over the remainder of the year?
Matt, thanks for the question. So Q2, we expect gross margins to be in the 20% range. And then in the second half, an improvement with margins close to the 30% range, and that's due to higher expected revenue and mix.
Our next question comes from the line of Max Smock with William Blair.
Maybe just following up on one of your comments a second ago in terms of seeing more traction recently after January and February. Just wondering if you can walk us through how things have trended month over month here in the second quarter? And whether you've seen a pickup that maybe it was a little bit better than you expected when we spoke a couple of months ago during the fourth quarter earnings call?
Yes. Thanks, Max. David here. I mean, we certainly track activity. And I can't give you -- I think people are settling into the new normal. I think also, quite frankly, as you know, smaller companies aren't going to get to their next value inflection point by only sitting on their cash. And I think there was just -- if I can overly generalize, I think there was a Q1 kind of a freeze and hunker down until people began to understand.
We've all heard how the second half of 2023 is going to be so much better. And I think that, that has waned down a little bit, and it might be a little bit more of a sustained level that the market is experiencing. So people are now kind of popping back up and saying, "All right, this is what we have, this is how it's going to go, perhaps no worse, perhaps no better, but probably a little bit better. So let's get going with our programs." And as a result of that, we've started to see more of the conversations that we had begun to be picked back up, resumed and off to the races in terms of getting going on programs.
Got it. Makes sense. Good to hear. Following up, there's been some major disruptions at the larger player in the space. And we've heard about some of their smaller customers leaving actually. And I wonder if you've actually seen that have an impact for you yet in terms of number of proposals written so far this year or win rate? And what it could mean for your ability to win new business here moving forward in 2023?
Yes. I mean, I certainly don't want to speak about a different company in our space. But I'll say that our value proposition all along, right, has been that we're not one of the big CDMOs, we are able to provide a more agile, flexible and bespoke approach to -- particularly to a smaller companies program where they're going to have access to the top of the organization anytime. And it is more of a boutique type of offering.
And right now, with the smaller companies being so careful, rightfully so with their cash, and wanting to have strong relationships with manufacturing partners they can trust. I think we're in a good position to step in and fill that void, and we're starting to see some of that traction.
Got it. And then maybe just one final one for me here. Can you remind us of your exposure to preclinical and Phase I work in particular? We heard some commentary earlier today actually around slowdown in this part of the stage of development specifically. So wondering if you could quantify that? And then if you could just comment around whether or not the uptick -- or whether or not you even seen any uptick in cancellations here, in particular? Or if you have any concerns about some of your pre-commercial customers to pay?
Max, this is Ryan. I would say, generally speaking, for the quarter, we added $4 million in that backlog, which is a positive sign. I also think that just from adding new customer perspective, we're playing in the right spaces, right, high-value areas, including high potency, controlled substances, DEA regulated products, sterile fill/finish high potency. All of those are very attractive spaces for our customers. So we haven't experienced or seen any impact. And I would generally say there's probably about half of our customers kind of in that preclinical Phase I part of our pipeline.
And Max, this is David again. Just a little bit of a pile on here is, our strategy, if you recall, starting about 1.5 years ago was to also really expand effort, energy and resource on securing later-stage tech transfer type programs that either did not have a presence in the U.S. or needed more of a presence in the U.S., and that strategy has proven to be very timely right now because those programs are far more likely to be funded and not dependent on the capital markets. So I think that's been an advantage for us recently.
Our next question comes from the line of Sean Dodge with RBC Capital Markets.
This is Thomas Keller on for Sean. Congrats on all the commercial momentum. I just wanted to follow up on that 20/80 tech transfer model. You said you've seen some good progress there. I guess, should we expect any contribution to that in the next year? Or is that still kind of longer term?
Yes. Thanks for the question. This is David. It's hard to say. I'll say that it is an offering designed for a company who is not fully budgeting a full second-source alternative. And so we think about it in terms of either U.S.-based or ex U.S.-based companies who want to make sure that they have an opportunity to be in a position to pull the trigger should they have a situation where they need a second source, but they can't fund the whole thing.
And I've said this before, a bit tongue in cheek, but not. We're far more interested in 100 zeros, meaning the whole program now. But I was in Asia 2 weeks ago and had conversations with companies there. And so there's interest. I don't think it's going to be a -- this giant tsunami of activity, but it is something -- it is one way that we can demonstrate that we understand what development companies are going through and what their constraints and limitations are and it was designed to be what I believe to be a creative and unique model for folks to leverage on if they want to.
And there are some other things that we're doing with smaller companies as well to try to be flexible during this -- the tough market environment.
All right. That's helpful. And then it looks like there was an FDA inspection of the facility in San Diego back in January. If there's more detail you can provide on observations there? Did you have any or are you expecting any associated remediation costs?
Yes. Good question. Thanks. I -- no, there's nothing else to be done. There were 3 points made -- 3 observations. They were all at -- 2 of the 3 were addressed before the inspector left. The other one was addressed a handful of days later. We turned in our response early to it.
And the most important part was of this inspection was we were blessed to have the same inspector that had been at that site prior to our acquisition. And it served as the ultimate measuring stick of the progress we have made maturing those quality systems, regulatory compliance systems and just the overall quality mindset on that site. And we were very pleased with the comments that the inspector made of -- he was -- he remarked over and over about the commitments quality, the progress, the level of compliance and was very pleased.
So there's nothing left to do there, and they were -- I don't -- there's no such thing as an easy fix. But if there were, these were the ones. So we were very happy with the outcome of that inspection.
Our next question comes from the line of Jacob Johnson with Stephens.
This is Mac on for Jacob. Just a quick question on the Lannett relationship. I appreciate the additional color that you all gave. But if you were to switch partners, just out of curiosity, how long might that take? And would you potentially be able to achieve the same economics that you received in that revised relationship last year?
Mac, it's Ryan. So what I would say is that we've gone through several scenario planning related to that, and we would anticipate about a 3-month transition to be able to switch over the labeling, and we would not expect very limited or minimal disruption when that actually has 3 to 4 months of inventory roughly in the channel, so they would continue to sell that through, we would continue to receive profit sharing on that. And we would transition that to a new partner.
And I think to answer your last part of the question, we would expect to be able to receive similar or better economics. Certainly, we're having ongoing discussions with other partners or potential partners about that. And these are very valuable assets, and there's parties that are very interested in, and it's our job to make sure that we're doing everything we can to really monetize that Verapamil franchise and improve on the economics.
Our next question comes from the line of Marla Marin with Zacks.
So switching topics. I'm wondering if you can provide a little bit more color on the expansion of your capabilities now with the FDA approval on tablet manufacturing. How to think about the sales cycle there? First of all, is this something that you're expecting your existing sales capability can continue to negotiate for leverage, try to obtain more wins here?
And how to think about the sales cycle, like the length of time between initiating discussions and closing a sale? And if you think that, that is going to get longer, given the current business and economic environment?
Marla, David here. I'll -- I think I'll go backwards on that. We certainly have seen -- to some of the points in the earlier questions around company's propensity to be holding on to the timing of projects. And so we have seen sales decisions stretching out. And then, of course, there's a little bit of a hurry up and wait thing that's happening, too, because once these clients get the green light then they're ready to go, right?
So we have seen some things drag out longer than they would have a year ago or 2 years ago. So that is an impact, and it's something that we're staying on top of and working with these customers to help communicate with their management and Board on what we can do to be helpful and flexible there.
With respect to the commercial tableting, tableting has been a competency of the company, but not all the way through to a commercial product. So -- I don't want to say all this, but what this really represents is the proven ability to take something from beginning all the way through commercialization, not only for capsules, not only for modified release capsules, but now also for tablets. And so having that experience is just one more step of validation and another opportunity for us.
Now our current business development team can definitely support that and is. And it, quite frankly, it makes the team's job a bit easier because we have been through that process. And I need to also, for color, say that the approval did not require an on-site inspection because of, we believe, the long, long history of success at the Gainesville, Georgia site commercially for other products that were not tablets.
So we have a great deal of confidence going forward that we can carry out more of those sorts of programs, and we're engaging in those sorts of discussions to grow that part of our business.
I think I answered everything that you asked, but I'm not sure. Tell me if I missed something.
No. I think you did.
I'd now like to turn the call back over to David Enloe for closing remarks.
Many thanks to all of our clients, supply chain and other service providers and partners and particularly to our excellent Societal team. We look forward to many great achievements in the months ahead, and thank you all for -- again, for participating today and for your continued support of Societal CDMO.
This concludes today's conference call. Thank you for participating. You may now disconnect.