Inotiv, Inc. (NOTVQ) Earnings Call Transcript & Summary

Hi, and welcome to day 2 of the UBS Global Healthcare Conference. I'm John Sourbeer. And I cover Life Sciences Tools and Pharma Services. I'm happy to start off the day here with Inotiv. We have Bob Leasure, President and CEO, and Beth Taylor, the CFO. Welcome.

Good morning.

So I believe that you're going to start off with a presentation, and then we can go into some Q&A.

Yes, it's our first time to present at this conference. I thought we'd do a presentation briefly and then the Q&A if it is okay with you.

Sounds great.

All right. Is the presentation up? I see it in front of me. I don't -- okay. Okay, thank you. I guess -- like i don't mess this up. All right, so today, Inotiv is really about a 4-year old company. I joined it about 4 years ago in late '17, '18 and started what was emerging acquisition of growth strategy. So at the time, it was about 21 -- it was 2 locations in Indianapolis, about 150 people and $21 million in sales. Today, we're over 2,100 people with 30 locations in 4 countries. And I think based on the last quarter, we were about $140 million in sales. So we're closer to -- I think we gave guidance closer to $510 million this year, our fiscal year ends in September 30, each year. We're public. We trade under symbol NOTV. We're a full spectrum drug discovery and development provider. So we really focus on early-stage discovery work, all the way from preclinical, and it's our first in human. So we've become a full-service provider, so we can be a one-stop shop to our clients. Right now today, 1 of the critical things required for discovery and development are animal -- research animals. So about a year ago, we've acquired a company called Envigo, which is a research animal provider, being rodents, rabbits, canines and non-human primates. So we're very -- nonhuman-primate being the largest component of that business. Today that makes up about 72% of our business. Over the last 4 or 5 years, we've put together a completely new management team. So I think, as I look here, John Sagartz joined me in 2018, really creative [indiscernible] leading the strategy. Chief Strategy Officer, Mike Garrett joined us last year. Fernando is General Counsel joined us just a few months ago. Beth joined us 2 years ago. Greg Beattie, a year ago. So you can kind of get -- and our two Chief Technology Officer also about 4, 5 months ago. So you can see we've really been growing the team pretty aggressively getting ready for that next step. So about a year ago at this time, we were about $50 million in sales, trying to become $100 million. Today, we're over $500 million in sales, looking at how we're going to become $1 billion. You can see some of the revenue growth here that we've had. And you can see flat up until about '18. The company has been around for a lot longer than '18, but that's when we joined it or I joined it. And it's really going through a lot of acquisitions and about 35% internal growth. So as we've been able to scale up, our cash flow and adjusted EBITDA has been able significantly increased. So as you can see, as we're building our infrastructure and getting ready for growth, it declined, but with a recent high growth, I think now we're projecting at least 15% EBITDA this year from 10% last year. Our book-to-bill has been very favorable, which is supporting our internal growth. It was -- again, in '18, it was negative. We've been able to turn that around. Last year at 1.5%. This is just our DSA business, which is Discovery and Safety Assessment. But -- and this year, we're running a very high rate of 1.6%, very difficult for us to keep that up, because that's an awful lot of internal growth for us. But that's what we've been able to maintain our -- more recently our request for quotes, new orders or sales even up to April and into May, also hitting record months and record quarters. So our backlog is up 3x what it was a year ago in this business and just as again Discovery and Safety Assessment. So a key element of our strategy has been the full-service solution-oriented, COO, achieve scale, which we think which is needed for the infrastructure we want to put in place and invest aggressively in internal things such as technology, systems, communication. So we want to be the best communicator, best provider of our services. Right now for the last 2 years, we've been investing heavily in technology in order to have a higher touch, higher ability to communicate and build for our clients to understand where the projects are and how they get access to their data and their projects. By doing that we've been able to significantly improve our cash and our cash flow. So the outline growth of the infrastructure, technology, rebranded. We've branded everything under a Inotiv in November '19. Recruiting the top scientific people and a great leadership team, which I think we've done and making sure we have all the services in-house to be 1 stop provider. So this gets into a little bit a lot of the -- or what drives our organic growth. And so when we bought these companies, we've bought 14 companies in the last 3 or 4 years, and we've started up 8 companies. And so a lot of significant investments. What's really driven our improvement and growth is all the leverage -- operating leverage we have in our companies. So we have significant investments going on internally in order to gain more leverage. So we have a very fixed cost infrastructure. So we will leverage that and scale that up is very important to us. The fixed cost is an unallocated corporate G&A and in every site, it's a very regulated industry that requires a very heavy fixed costs. So we made a lot of significant capital investments in order -- when we buy facilities, as deferred maintenance as bottlenecks, we've been able to gain a great deal of efficiencies by making these investments. We currently outlined in our last call -- in our earnings call a few weeks ago, 4 or 5 new significant investments we're making over the next 6 months, which should significantly, probably increase our capacity another 30% for next year in the Discovery and Safety Assessment side of our business. In the animal welfare side of the business, we don't see quite as much growth there. What we're doing there is investing in the facilities, and we're going to be closing some facilities, and we will be -- so that will be the way that we increase our margins. Again, leveraging the fixed cost structure that we have in the facilities we're going to grow, closing a few facilities, significantly make investments to address the concerns that I think are significant which regarding animal welfare. So I think the trend in animal welfare is going to continue to ratchet up, and we want to make sure we're a leader. So we're adding veterinary support and making a lot of significant investments in our facilities at this time. These are referred to the building box. These are the services that we've built internally. And I won't go through all of them in the interest of time. But these were all started between '18, '19, '20. The ones we started in '21 aren't -- won't come online until probably early next year, we're doing a [ few ] services. All the sources we started in '19 are already expanding, and we're making further investments to be able to expand these services. But we'll look forward to these starting to come on between now and in the first quarter -- first calendar quarter of '23. And these are, again, where some of the acquisitions we've done. Some of these businesses have been on for many years. Several places first been around for a while, preclinical Fort Collins and histopathology and the Bolder BioPATH for Boulder, Colorado. So it's 3, 4 places in Colorado right now. MilliporeSigma genetic toxicology assets, BioReliance assets and hire those people in July, and that's a startup is starting to generate revenue and won't really be fully operational probably until September, October and December this year. Plato BioPharma -- some of these -- ILS is the most recent 1 we have completed. And I'll say that of all of these, I think ILS was the only 1 that was probably being heavily marketed by a third party. Most of these have come by word of mouth that we reached out to or the owners have reached out to us saying they want to be part of our company. So this is our global footprint today. Mainly the DS&A business, the orange dots that are in the North America. Research models in North America and Western Europe are today at about 10% of our sales are in Western Europe. We do DS&A Discovery Safety and Assessment work in 4 European companies, but we do them in the U.S. So our positioning today to the right is that we have some very large CROs, those are the LabCorp, our CRO, Charles River, which are the billion-dollar players. We see -- then onto the other side of it was a heavily fragmented market. We can do one-off services. So if the client wanted to use our service, they could, but they probably aren't going to get a full IND enabling project. We're in the middle now, where we can provide a full IND enabling project. A lot of our client base is smart. For the DS&A business is small and medium pharma. Biotechs today, I think if we get the question frequently, non-commercial biotechs probably make up, I believe, it's 20% of our sales. We have a high degree of reoccurring client base. On the research model business, again, very high reoccurring client base there. And we probably have a significant market share of NHPs, 1 of 3 of the 4 larger players in the rodents. Canines is a very small part of our business. It's gotten a little attention lately, but it's less than 1% of our sales. It represents [ none ] of earnings. The leverage and profitability for us continues, as I said, scaling investments, leveraging existing direct fixed cost structure we put in place. It does give us a lot of purchasing opportunities, which we're just starting to explore some or achieve some of those. Lower client acquisition costs. We've acquired a lot of clients. At any time we acquired a business, it is a single-purpose business, we'll pick up some clients. And when we do that, we're able to take our clients and sell mass service and sell those clients, all of our other services. Within a year, we usually have about 80% of those clients doing business with multiple sites. So that's helped us achieve our 35% internal growth rate. We're looking to reduce corporate overhead right now, but actually last year was running high teens, low 20s. This year, I think we're running 10% to 12%. We're looking to -- as we go to scale, down to 7% or 8%. So we think we have 3 or 4 points pick up there. And again, we'll continue to develop our in-house capabilities to really reduce reliance on outsourcing. And as of December, I think we should -- we do outsource today, but we're significantly reducing that outsourcing. And then we leverage our cross-selling opportunities, as we've talked about. We have about 3,500 customers today and probably only 500 are using our DS&A services currently. So we still think there's a high growth opportunity for us in the DS&A business. So this just gives a little bit of an idea of our segment. Because we're over 72% research models, 1 of our large customers are the other CROs. Since they are large non-human primate supplier, that's probably a lot of those sales, that's do a lot with universities. biotechs, pharma and government. Geography, as I said, it says 85% North America, 15%, I think, it looks like in this, it is 10% -- it is 13%, I know just updated. Okay. And a sort of type of sales and services, we do a lot of service sales in the RMS business. So that's why the services are 42%. We also provide the feed for animals and research models that 10% of our sales. Small animals and rodents are 17%. Large animals, mainly are all in NHPs are probably 29%, and others 2%. So the canine business is in the NHPs, but it would be less than 1% of that 29%. So I think that kind of gives you an idea and an overview of who we are today. I think we're very aligned with our shareholders, our management team or significant shareholders. I think we have about 20% today, so and so internal ownership.

That is correct.

And so again, developing the fully integrated suite services, focusing on superior client service and high communication, taking advantage of the operating leverage, and make sure we have all the services and products that our clients need to go from discovery to the first-in-human. So I think 2 weeks ago, we gave out our first guidance. We had not done that before. After -- We've all been out in the year talking about our company for about 1.5 years now. But we gave guidance for our fiscal year, which is September 30, $510 million, which will be about 30% internal growth. And then adjusted EBITDA of at least 15%. I think in first quarter, we were 14%. And last quarter, we were 18%. Year-to-date, we're at 15%. So we love that the year-to-date average. And I think we give guidance on next year, we did not talk about next year. Okay. Thank you. I will stay away from that. Long-term, we think as the business grows, we can continue to do the high single digit, low double digits, at least, of growth. I think that most of that will right now be in the Discovery and Safety Assessment in the future years, that's where we're growing. There'll be a heavier and a higher percent than the research models. I think our EBITDA margin last -- again, last quarter, we did 18%. I think as we continue to scale, hitting 18% to 22% is very achievable. As I said, we should share our unallocated corporate overhead go down at least 3 or 4 points as we scale. And people ask about our debt. Right now, I think our first senior secured line is what...

$240 million.

$240 million, which would be a run rate of about 2.4, and I think the total leverage is 3.5 with out convertible debt.

Yes.

And I think as we continue to see our cash flow go up, that should be able to go down. I think these are some of the financial results that I think at that point. [ You might as well go ahead some ] Questions then?

Yes. Thank you for that overview there. Maybe just kind of digging into the last slide a little bit more that you presented on the long-term guidance. From a high level, where do you see that high single-digit, low double-digit revenue coming from this on the organic basis there? Is that share gains? Is that industry continued to outsourcing? Can you just dig in a little bit more on that?

Yes. Well, right now, as I said, we do business on the DS&A side, it's about 500 customers. And I think the DS&A side will probably see, I guess, you can call it share gain because we're -- we have a lot more opportunity. We're declining opportunities right now. We now quote and our backlog is up, in some cases, 12, 18 months. So we're opening up capacity as quickly as we can. We'll continue to grow that. And some of the new space. We're opening up a wide of at least 100,000 square feet of new space over the next 6 months, which will give us some opportunity and continue to hire. On the Research Model side, again, our scale, again, is very important. We're growing the services and the business for the NHP business. We've also had a lot of growth, because of recent price increases. So that's been very helpful in terms of our top line. And on the Research Model side, in Europe, we're looking at, again, improving margins by consolidating its use facilities. So probably lower growth on the small animal models and the canines.

Appreciate that. And then could you kind of, I guess, continue on that and talk through just on the margin profile and the EBITDA margin that you provided there. What are some of the levers that you have to expand the margins year-over-year to hit that?

Yes, it's due to growth in our corporate G&A stays fix that helps drive the corporate G&A from stay kind of a lot of percent today down to hopefully it will be a 6% to 7% in the future. In terms of facilities, as we build internally, we have about 45% to 50% margins on the incremental revenue. So today, we're overall 30% and the incremental revenues in a range of 45% to 55%. So we'll see our margins start to increase quite a bit. Again, a lot of that is because we've got a very fixed cost, regulated infrastructure that we're able to leverage with the existing sites.

And just maybe talking more on the competitive landscape in the industry. How do you see your positioning versus some of the larger players like a Charles River or Covance?

I will give you -- what I'd like to -- the key is the word's perception. I think the perception in the industry is from the small and medium-size pharma companies and the biotechs we work with. Their perception is that CRL and LabCorp really want to focus on large pharma. Large pharma is actually less than 1% of our Discovery and Safety Assessment sales. It's a larger percent of our -- we do a lot of Research Model with them. But as far as the Discovery and Safety Assessment, we focus much more on the probably staying out of large pharma. We want people who want a high touch and a high degree of service. So again, organizations that may not have all the pathologists and scientists and toxicologists. And it's a very, let's say science to science sale, not just a salesperson we're just selling a room, and we're not selling up -- somebody calls and says, we want a cost-plus contract, and they've probably got the wrong place. We were not interested in cost-plus contracts. We're providing a service and a reoccurring service. Once we get to know those scientists and we get to know that organization, how they work and how they want to work, we can customize it, work with them and again, they tend to come back quite a bit. So I think it's less price sensitive work at that range.

And going down that growth, I think you said that 20% of your backlog or your revenues is emerging from biotechs. Just given the funding levels today in the public markets and some of the commentary from others out there, have you noticed any changes in that business given the funding?

We're well aware of it. We hear it frequently. I think the public biotech funding may be down, but it was so high for several years. And I don't think that much -- the capacity added didn't keep up with it. So I think everybody is, including all of our competitors' backlogs are out fairly far at this point. The private equity biotech funding is still very high. The cash flow from our clients that are commercial is very high. We keep an eye on the balance sheet and the cash position of our public companies. We can also look at the private companies and they will share with us. And they appear to be in a fairly strong position. So today, we also still have a large client base that is coming to us that we've not been able to handle yet. And so I think there's still opportunities for us to grow, but we're well aware of the commentary that's out there, keep an eye on it and look at those metrics weekly. It has not dropped out for us yet. And we do keep an eye on the cash. So it seems to me there's still opportunities and the backlog is still pretty strong.

And also, there's been some industry reports out there that there has been an increased level of cancellations. Have you noticed any changes in your book of business? And can you just kind of run over an overview of maybe what type of therapeutic class or indications that you're most focused on?

Cancellations are part of the ordinary course of business. And when your backlog is now out 16 to 18 months, I think they're -- no matter what the funding is, you're going to see some cancellations. Because people are giving you a purchase order to reserve time 16, 18 months, because they know that there's limited vivarium to our space. So they're trying to lock that space up. By definition, nothing always happens as expected. So you have to be very agile. Sometimes there are large cancellation charges, if you get close to the time that disposal start and then cancel. So we stay in communication with the projects, know where they are, and we say fairly agile. We've not had any cancellations due to lack of funding or cash, but we may have cancellations due to inability to get their compound, or if you're with -- working with China, working overseas. There may be things that interrupt, but we're not seeing any cancellations at this time due to cash or lack of funding.

And pricing is 1 other area, I think, that's been benefiting you lately, given the inflationary environment. Some of your competitors have also talked about pricing increases. Any way to just run through what your historical price increases have been and what are we seeing today in the current inflationary environment?

Yes. About a year ago, we started seeing an increase in our employee turnover at the entry level position. That's where we first started seeing it. So we filled it very quickly and started looking at what we needed to do to make sure that we maintain a low level turnover. So at 1 point, we're hiring we have 2,100 people, we have probably threw 400 open positions, where I was hiring about 15% of what we have to grow at the rate we're growing. So retaining what we have is really critical. So when we saw those entry-level positions change, a person making a $15 or $16 an hour, quickly went to $21, $22. We had to pivot. And that, of course, changes all the wages. So there has been wage inflation. We also passed a lot of that along, wages being -- and not being up 20% of our business, I believe -- but We've been able to pass quite a bit of that along in our industry. And we've been able to see the retention improve and that's something that's really critical to us and our ability to hire people. So the challenge on the entry level, but on the other level positions, if somebody is with us for a year, the retention level we have is fairly positive. One of the challenges you have when you have a 16-, 18-month backlog, you give a price increase, it's not going to come through for 16 or 18 months. So I think last quarter, we saw some of those -- we obviously saw an increase in our margins and our EBITDA and some of that. The reflections price increases we probably put through in the summer of last year. As far as our raw materials, one of the reasons we got the Research Model business is because when the pandemic originally hit 2 years ago, we started looking at where we could have weaknesses, where we may have challenges, and raw materials was something that was concerned about. And so we looked at specifically NHPs, which is a critical part of drug discovery and development. And that's really what led us to Envigo, which subsequently led us to a company called OBRC. So of our Research Model business, NHPs are probably I think 50% to 60% or...