Lifecore Biomedical, Inc. (LFCR) Earnings Call Transcript & Summary

Good afternoon. Thanks for joining us. I'm Daniel Cohen. I'm a Managing Director in the -- at Morgan Stanley. I do have to read a disclosure before we start. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, we will kick it off. Very honored to have my friend, Paul Josephs, CEO of Lifecore, here with us today. Paul is coming -- you're coming up on about 18 months in the role, I think. Maybe 16 months, approaching 18 months?

Absolutely.

But I thought maybe why don't we start out by talking a little bit about what Lifecore does as a CDMO. And in particular, what area of the market is Lifecore focused on?

Sure. Great. Thanks for having me, Daniel. Lifecore Biomedical is a differentiated CDMO competing in what I think is the most exciting part of health care manufacturing, and that's sterile injectables. We're well known for our ability to solve complex injectable programs from an ophthalmic and orthopedic perspective, tremendous regulatory compliance capability along with technical expertise. And as I think about where we're going in the future, it's moving into an [ adventing ] into more a broader range of injectable programs, from a biologics perspective, GLP-1s, peptides, et cetera. We have a tremendous commercial base, a strong commercial base of programs, which are projected to grow over the midterm. And then it's buoyed in addition by our late-stage development programs of 11 different programs, which span a broad range of modalities. And at a 50% conversion rate, we expect to generate significant revenue over the midterm. So that's really all about Lifecore Biomedical.

That's great. You've had a career, spent time with -- in the CDMO space for many years, different types of CDMOs. Maybe tell us a little bit about, as you have come into the role, gotten your feet under you, what do you -- what surprised you perhaps on the positive? And perhaps what's been more challenging for you as you've embarked on your transformation at Lifecore?

Yes. It's been a strong combination, I think, of -- or a unique combination of strength and opportunity. So what did I learn? I was tremendously impressed with the technical capability of our team here at Lifecore. I didn't fully appreciate that technical capability. A large multinational pharmaceutical company told me earlier this year that after a visit, that our technical capability is world-class. So what that's done is really allow and give confidence to prospects and existing customers to invest in their program at Lifecore. So that's been a great learning for me, that technical capability, that can do attitude of the group. I think from a surprising perspective, and therein lies the opportunity is just the market awareness of Lifecore's broad capabilities. The investments that were made prior to my joining with the 5-head filler, which has opened up a wider spectrum of opportunities for us to go after and compete on, the aforementioned biologics, peptides, GLP-1s, et cetera. The market -- there's a level of market awareness that we had to generate within the CDMO industry. And I think the team has done a great job thus far, and we've made great progress in the first 15 months.

Maybe talking a little bit about the market. You've mentioned different modalities like GLP-1s and biologics. What is the dynamic in the market right now? Obviously, over the last -- I mean, really probably going back to COVID, you have -- we've had -- it's been a very dynamic market as it relates to injectable fill/finish CDMOs and perhaps pharma companies as well. In the most recent -- there have been transactions involving companies that have perhaps taken some capacity out of the market. Like where -- what do you see in the market today? Is the dynamic still one of a shortage of qualified suppliers? Is that -- does that apply to only specific parts of the market? And how does that cross over where Lifecore Biomedical has capabilities?

Yes. I think it's hard to replicate what we have, the strong technical capability, the great regulatory compliance that we have and then the capacity. So I think all those provide a unique and compelling value proposition to our customers. And then from an investment perspective, I don't think it's fully appreciated, the durability of the business we have today and the great growth potential we have in front of us. I think about recent transactions that have had with the go private, it's maybe the things that you're alluding to, whether it's 6x sales or 11x sales from a valuation perspective. Lifecore is an organization that's trading on 3x revenue, so half the value of previous transactions. So I don't think the market fully appreciates who we are and what we do today, but maybe more importantly, where we're growing to tomorrow.

So that leads me to my next question, which is really about the strategy. Obviously, as a new CEO, you have unveiled a 3-pronged strategy. Maybe talk a little bit about that strategy and where you are today and what the outlook looks for the next few years?

Yes. Great question. So I think with a 3-pronged strategy is really focusing on key areas around maximizing our existing commercial business. Two is the commercialization of our late-stage pipeline, and three is the addition of new and impactful programs into the site. So on the underpinning of number one is we have a contractual minimums based commitments built into our -- many of our commercial agreements, the most important one being our largest commercial customer, who is projected to more than double their volume or demand in 2027. That will be a significant part of our growth over the midterm. Then that you tie that to our late-stage pipeline of 11 programs with launches to be between 2025 and 2029 with -- a spanning modalities including GLP-1s, medical devices, ophthalmic products at a conversion rate of 50% we believe will provide meaningful demand and meaningful revenue growth over the midterm as well. And the third part of that strategy is the addition of new and impactful business through our sites. One of the first things that I did is evaluate the sales and marketing team. And while a high-quality team, the competencies of the team were a little bit different. It was more of what I characterize as a farming mentality where we mine our existing customer base and look to grow within that base. Yes, we want to continue to do that. But in order for us to meet the aggressive goals that we do have and maximize the overall market, I knew we needed to make a change. So we have completely rebuilt that team. We have a proven industry leader who's been very successful in the private equity side of the business, Mark DaFonseca, who joined us as our Chief Commercial Officer. He understands being in the private equity side, the immediate urgency of now. So he's really driving improvements. And I will say, the right metrics from a sales and marketing perspective. And then we, in turn, turned over the entire sales team to a group of hunters. So we have a set and defined geography to mine, and they're the CEOs of their territories. And we've changed our compensation plan also to reward them for their results. So I'm really excited about what they've done over the, I'll say, the past 90 to 120 days. And we see if we're able to keep up these leading indicators of success that is to come.

What is the right -- what's the ideal customer for Lifecore? Is it large pharma? Is it emerging biopharma? Is it both?

I think it's both. So I think that what we provide for specialty pharma, Daniel, is the hands and the brain. So the hands is the equipment, but the brain is that technical expertise to solve problems for our customers. Because regardless of the opportunity that comes in, whether it's big pharma or small pharma, they're coming to us with a problem. They have a problem with regard to capacity support or they have a problem to note whether it's the method or the formulation that they need to solve to get to market. And our technical expertise, combined with our capacity and add-on our regulatory expertise, provide a great complement to specialty pharma. From a large pharma perspective, you look bigger enough to compete against your larger players whether they're Catalent or Simtra or Thermo Fisher, but we also provide that unique technical entrepreneurial ability to tailor our solutions to our customers' manufacturing or development needs. So I think that's what makes us attractive to large pharma, that ability to tailor our solutions to them and be very responsive and have access to senior leadership at a moment's notice. And then the specialty pharma again to provide both the hands and the brain.

You mentioned a new Chief Commercial Officer that you're very excited about, and it has had an impact on the business. Were there other functions that required change and maybe talk about your leadership team and how that's evolved?

Yes. We turned over virtually the entire leadership team, Daniel. So starting with Ryan Lake, who's in the audience today. So Ryan is a well experienced and proven Chief Financial Officer. He has over 25 years of health care experience. He joined me in September of last year. He's been a great partner in rebuilding the entire finance department, making finance a true complement to the rest of the organization. We brought in Tom Salus, who's our Chief Legal and Administrative Officer, to support us both from a legal and HR perspective. Tom has well over 20 years of experience in the pharmaceutical industry, can help us from also from a strategy perspective. He was in the boardroom at Viatris. He just -- for him to join our organization, it's a great addition as well. I talked about Mark. The other final person that we brought on board and maybe most importantly or equally as important is Thomas Guldager as our Senior VP of Operations. So Thomas joined us from a Novo Holdings subsidiary. He has well over 20 years of experience in the pharmaceutical industry, finance background, OpEx background, running and leading a site in Denmark. He had enough confidence in Lifecore and what we are trying to build, to move his family from Denmark to join us in Minneapolis because he believes in the growth story that we have in front of us. So I love the team we put in place, and we also rebuilt the sales team. So we've done and accomplished a lot in the first 15 months. I'm very proud of what the group has done.

I apologize for bouncing around a little bit. It just came to me, question came to me as you were talking. You -- one of the positives of the CDMO industry is that products tend to be sticky. On the flip side, one of the negatives of the CDMO industry is that products tend to be sticky. So as a company that's looking to bring on new products to your funnel. Can you talk about -- a little bit about the KPIs that investors should be watching in terms of -- how do we -- how do investors measure progress on bringing new products? You talked about 2027 being an important year for one customer. But I imagine that there's -- and you have a new sales team that's focused on bringing on new products. How long does that take? How do we measure that?

Yes. We'll be very vocal with regard to our sales success as we close more and more deals and gain successes down the road. I would continue to look at the evolution of our late-stage pipeline in terms of numbers and launch years and the valuations of those opportunities. And we'll also communicate as we make progress with regard to the expansion project with our largest customers as we look to double that demand by 2027. When you ask how long it takes, so one of the things that is clear in the macroeconomic environment now is that -- I've been in this business for 30 years and a little over 30. There's never been, in my opinion, a greater demand for domestic manufacturing. So we feel as though and then we see it in our pipeline, we have more potential commercial site transfers to our site. Those are products that are commercially approved, just like this water, moving it from a site in Europe to Lifecore. We see more of those type of products in our pipeline than we ever have or we have heretofore. It takes about 2 years from the time that we signed one of those commercial site transfers to move it into our site and commercially manufacture. It's critically important because, yes, we'll make onetime revenue along the way, but it's all about recurring revenue and generating that commercial revenue down the road.

Okay. Good. Could you talk about -- you mentioned your lead product, lead customer. Can you talk a little bit about -- the -- you're somewhat unique in that you are also making a substance in addition to the fill/finish. Can you talk about the HA part of your business and the strategic importance of that to your business and the outlook for it?

I would say the HA side of the business, hyaluronic acid, think of it as a lubricant that's used in pharmaceutical products as a natural lubricant within your body. So it's critically important because it provides a stable -- that HA base or that sub API substance, as we call it, serves as a stable core in our long-term future. It'll always be a critical component of our overall business. But where we see the growth is in that -- in the sterile fill/finish. Now what does HA do as an advantage for us? Really, what it does, and it gives confidence to our partners, whether they have HA and a product or not, they know that we can solve complex problems. Because HA-related injectables are probably the hardest injectables to make. So if we can make HA-based sterile injectable products, there's no doubt that we can make a GLP-1 peptide, a biologic, et cetera. So it serves not only a quantitative importance, but also to a certain extent, a qualitative importance in our future.

And for your products -- what form are you filling them into? Is it into vials or prefilled syringes? Or...

Vials and prefilled syringes, and we also have the ability to do cartridges as well. So we span the gamut of all sterile injectables. I would say that our pipeline right now, Daniel, is leaning more to, what I would say, cartridges and prefilled syringes. I feel like the market itself, and we were -- I think you were alluding to this earlier, on the vial side post-COVID, great capacity there. But where there is, I will say, the ability or a demand need is really in the prefilled syringes and cartridges.

Got it. Maybe talk a little bit about the financials of Lifecore, maybe current revenue, margin structure versus optimized or future?

Yes. We just -- so we just finished our fiscal year in May of this year, and we're transitioning to a calendar fiscal year, traditional with 95% of the rest of the industrial world. But coming off our last fiscal year, approximately $129 million in revenue, $19.6 million in adjusted EBITDA. We have a midterm strategy that will take us to the midpoint about $200 million with expanding EBITDA margins of 25%. So that would put us about $50 million in EBITDA. And then our total revenue generating capacity with the addition of the 5-head filler and the improvements we made, we see a $300 million in revenue-generating capacity. And our belief is that we have the opportunity to continue to improve EBITDA margins beyond the 25% as we continue to go up that revenue scale.

What about -- can you talk a little bit about capital intensity?

Yes. So the big investments have been made, so the addition of the 5-head filler, that build-out all has been made. Our annual, I would say, maintenance and compliance related, maybe some minor growth CapEx in that neighborhood of about $10 million or so. If there was a transformational deal, we would anticipate that one of our customers would meaningfully participate in that. So again, we're budgeting sort of that $10 million range on a go-forward because of the capacity investments have already been made. A great example of that, if I could, because we have a late-stage program in, that is projected to get regulatory approval in 2027. It's a major program for us. We couldn't be more excited about that. I think -- it's with a large multinational partner. I think it's an example of the tailored solutions we can provide, but they made a multimillion dollar investment in a specialized production line within our site. We were allowed -- we were afforded, based on our size, the ability to dedicate space to them to support that exciting program. So that customer also is committed to a 7-figure development program to scale up and get ready to commercialize that program. So the reason we're so excited about the program is because of the investments that they're making in that program.

And are products like that -- the opportunities like that, do they tend to be only working with you? Or do you know if they were -- are they working with multiple CDMOs? Or how is that the dual versus single-source nature?

At this point, we believe we're exclusive, and we are in discussions with this partner too about even a second line if they're able to meet their projections. On a broader scale, I would say that in today's environment, companies are dual sourcing more so now than they ever have. At the same time, I think based on the team that we have, my commercial experience of more than 30 years in the industry, Ryan's of 25 plus, Tom Salus, who's on the legal side, we have, I think, a tremendous playbook where we'll be able to protect our floor and raise our ceiling as we look to negotiate agreements with customers.

Are there any other areas of pharma manufacturing that you think about? Or are you pretty dedicated to fill/finish manufacturing?

Dedicated to fill/finish manufacturing right now. At the same time, are there things -- we're head down, executing against our organic strategy. At the same time, there's a lot going in the market, as you know. So we'll always keep our eye open for things. But we'll only consider those things that allow us to advance our midterm strategy. That is nonnegotiable. It has to be something that either increases our chance of success, accelerates or even increases it. So now that's how I think about it. I haven't seen anything yet that piques my interest, but -- and again, I'm excited about our organic strategy.

Yes. I mean, you've been around a long time in this industry. What -- or how would you characterize the CDMO industry right now relative to where you've seen it in the past? Is this an exciting time? Is it a stable time of growth? Like how do you see the...

Exciting time. Most exciting time in -- it's funny, when I got -- when I entered this industry, I was in -- I was 29 or so. Now I just turned 60, and I've never been more excited about the industry. We're competing in a $10 billion market that's growing at double digits. The valuations of CDMOs have never been higher. 30 years ago, generic companies were trading at CDMO multiples and CDMOs were trading at low single-digit multiples. And now, it's really reversed. And I never thought I'd see a CDMO like Catalent trade at 11x multiple to go private or Abbott at 6x multiple to go private. It's just a different and exciting time.

Revenue.

Revenue. Sorry. Revenue. Did I say EBITDA?

Clarifying revenue.

Yes. Revenue. There's never been a more exciting time. And I think from a pharmaceutical industry as well, just in general, if I think about it, CDMOs were tactical back in the 90s, purchasing related. Now it's strategic from a pharmaceutical perspective. So there are departments built around external manufacturing versus it just being a side job for somebody in purchasing in pharmaceuticals. So this business is resilient. It's here to stay, and it's growing at double digits, which makes it very exciting for a quality organization such as ourselves.

Do you see that in the -- have you seen an evolution in terms of who you talk to at the pharma company, whether procurement versus someone else in the organization? Or has that...

Yes. So when I think about when I started in this business, it was hard to get above a purchasing manager to a director. Now you're -- you could be speaking to the CEO or the CFO depending on the size and scope of company because, again, this is a strategic initiative for a lot of organizations. So decisions that are being made about sourcing, I was actually trading e-mails today with a senior level external manager at a large multinational who's making CEO decisions on sourcing. So that's a different world from what it was before when you were just talking about maybe tactical decisions to outsource a specific amount of volume.

And I didn't specifically ask it, but can you just address like the quality track record of Lifecore and where the company has been? Has it been a good track record historically and where is it today?

Great track record. Critically important from my perspective, we're just coming off of March, unannounced 2-week general inspection of our facility. The results were phenomenal, very favorable for us. The audit has been closed, and it resulted in what they characterize as VAI, voluntary action indicated. So we couldn't be more pleased with the results from a customer perspective, they couldn't be more happy. Those who are with us, it gives them confidence to continue. And for those prospects that we're talking to, it checks that box, which is critically important. The other thing that I'll say, just in general, is beyond just the FDA, we have regulatory -- we're regulatory compliant with what I would characterize as figurative speaking most of the industrial world. Our expansion project with our largest customer, we're going to be producing for the Asia Pacific market shortly. We have the ability to support TGA, so Australia, New Zealand. EMA, Europe, Canada, United States, Brazil. So our ability to reach multiple geographies is also a key value proposition for our customers because the ability to source out of one site also is -- provides a lot of advantages for our customers on a go-forward basis.

Yes. Obviously, the quality track record is critical. It's not always the case as we've seen in news stories around companies in the space. And obviously, you're doing what's probably the hardest part of the CDMO sector, which is sterile manufacturing. And so the bedrock of having a solid quality organization is critical.

You mentioned earlier, one of the things about, the things that maybe not surprised me, that I was pleased with was the quality track record. I knew it was good on the surface, but to come into the organization, experience it, spend time with the team, go through our quality management reviews, tremendous, really, really high quality. And that's why you have some of the leading pharmaceutical companies in the world outsourcing with Lifecore. It's amazing.

It's amazing. That's great. What else? Is there anything that I should have asked you that I didn't? I'll open it to you, Paul.

No. I think -- the one thing I would say, I think that we have -- one thing I'd leave you with is strong commercial base with predictable revenue growth over the midterm, promising late-stage development pipeline that even on a conservative conversion rate will provide meaningful growth for our organization. And I think an undervalued opportunity based on some of the things we talked about, about recent transactions and valuations. But I couldn't be more excited about the future at Lifecore, proud to be part of it, and I love what we're doing day in, day out in Minneapolis.

It's certainly an exciting time in the CDMO space, particularly in the sterile fill/finish space. So congrats on the success you've had and the outlook ahead of you.

Thanks.

Thank you. Thanks for doing this. Okay.