Introduction
Avid Bioservices (NASDAQ:CDMO) is a Tustin, CA-based biological services company that focuses on outsourced manufacture of biologics via cGMP processes. Thanks to the current FDA stringency and focus on high-quality cGMP procedures and protocols, and the significant growth of biologic therapies on the market, Avid has plenty of growth potential. However, limitations due to their small size and recent entry to the market are the major risk points. As of early January, the company has fixed one of these risks, with the opening of a new facility.
We are pleased to announce the official opening of our recently constructed second downstream processing suite within our state-of-the-art Myford facility. With this milestone, we now have two fully operational downstream processing suites within Myford North, significantly increasing the facility’s capacity and revenue-generating capability.
I recently covered the company back in August 2021 and laid out detailed expectations for growth over the next decade. In this article, I will cover new business information and update on the recent quarter’s performance.
New Facilities Highlight Growth Potential
Prior to 2018, Avid Bioservices was known as Peregrine Pharmaceuticals, and developed mAb alongside their own pipeline. However, after 2018 they shifted to Contract Development and Manufacturing Organization, hence their ticker symbol CDMO and name change to Avid Bioservices. Even prior to the name change, Avid had a history and built up a solid reputation as a high quality CDMO. Now, with all capital going directly towards providing those services, a far superior investing strategy is possible.
The new Myford North facility will now see its first customer within the month. With this opening only correlating to a phase one opening, investors can also expect increased revenue over the next few years from the phase 2 expansion underway. Combined, the two phases should contribute approximately $270 million in revenues per year. This is an anticipated increase in revenues of 2.7x current trailing revenues of $106 million. This will allow the company to continue the trend of 21% CAGR revenue growth that has been seen over the last decade (with a significant upward trend over the past 3 years).
Thankfully, the plans do not stop there, and Avid also has plans for a 53,000 sq ft viral vector development facility as well. This will allow the company to leverage the high growth vaccine and gene therapy markets. For those unfamiliar, viruses are acutely efficient at transferring genetic materials into a host, and for the past 50 years, endless amounts of research have gone into using this to produce novel therapies. As an example, the AstraZeneca (AZN) COVID vaccine was based on adenoviral vectors, and Alnylam (ALNY) was one of the first public companies to work on these products over a decade ago. This anticipated expansion is set to provide about $350 million in revenues per year, although the completion date has yet to be released.
With the increase in revenues of at least $620 million within the next decade, I find that Avid remains undervalued. To put it in perspective, if you discount this expected peak cash flow by 10-15% per year over 10 years, Avid’s expansions contribute to only 15-25% of Avid’s total $1 billion market cap. Further, production may be initiated far earlier than 10 years from now, and if discounted over five years, then the expansions are 30-40% of Avid’s current market cap. While one would say that this equates to overvaluation, this does not include the recent underlying 40% growth per year since the change to a pure CDMO company.
As a leader in the field, the company may have the ability to have control over pricing, and at current production capacity, would allow for significant growth as well. One must consider this for the expansion units as well, and so the current anticipated revenues may be quite conservative.
Interestingly enough, if the 20% underlying growth rate continues from current levels, then in 10 years, another $650 million in revenues will be seen. As a result, a combined $1.25 billion in revenues should be possible at a conservative measure within 10 years. If considering my expectations laid out in the first article, this revenue amount and growth rate correlate to my bull case. Therefore, we have more data now that supports this case, and I will need to adjust my expectations.
Solid Q3 Results
Avid has been a very stable company over the past few years, and the financial foundation has continued to improve. It is important to consider that growth has been elevated over the past year or so due to the pandemic, and comparables to the prior year are difficult. However, revenues were able to increase 23.95% YoY compared to the 15.02% increase the year prior. Some negativity may be based on the difference between Q2 and Q3. Q2 saw 21% YoY growth, but had to compare against 66.5% growth the year prior. Since revenues are contract based, volatility in the revenues should be expected, but a favorable upward trend is still clearly visible. Other points to note include:
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An increase in net income by 318% YoY to $3.5 million, a 13.4% net income margin.
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Diluted EPS increased 473% to $0.06 per share, even as total shares outstanding increased from 56.7 million to 61.6 million YoY.
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A small increase in cash of $4 million QoQ to $163.7 million, although it will be important to watch the increase in total debt which has increased to $182.9 million.
Over the past quarter, the company has invested heavily into capital expenditure, new hires, and items such as advertising. These may be the factors leading to the increase in debt, and current low rates may end up favorable to development now, and in the future. However, I remain a proponent of having little to no debt, so I will look to Avid to reduce their debt load from current levels. Although the overall outlook seems quite positive at Avid and I will count on this development-based momentum.
Also during the quarter, we were pleased to have our progress, as measured in the value created for shareholders, recognized as the company’s stock was named for the first time to the S&P SmallCap 600 Index. We are honored to join this index and believe that it speaks to the collective effort of everyone at Avid, while building greater visibility for the company with investors and the industry alike. We are pleased with our recent achievements, and believe that each of the accomplishments during the quarter will facilitate growth and move us toward our overarching goal of establishing Avid as a best-in-class CDMO focused on biologics.
Expectations Readjusted
While my bullish growth case is looking to be quite accurate, my valuation expectations are quite far off. Avid was unable to hold a 17.0x, 8.5x, or 7.5x price to share ratio as the share price has fallen 27% since publication. While this is unfortunate to those of us who have held through this period, it opens up Avid for tremendous returns over the next decade from current levels. Although it was a positive sign to see the share price increase 30% into November to reach a price to share of over 20x.
While these were obviously high and unsustainable valuations, it may provide support for when the current sell-off subsides and a return to normalcy is seen. Especially important is Avid’s move to far better margins, and the current 9% net income margin is a fair sign as no major payments or milestones attributed to this positivity. In fact, Q3 marked the sixth consecutive quarter of positive net income. If this pattern remains in place, we can begin to look past price to share, and directly to price to earnings. As such, the current 57x-60x forward P/E is sustainable, and the trailing values should stabilize over the next few quarters. I will now calculate expectations based on the new growth rates and valuations.
Growth Rate (%) |
FWD PE (5YR, 10YR) |
Five Year Return Rate (%) |
Ten Year Return Rate (%) |
25.0 |
40.0,30.0 |
16.4 |
17.2 |
28.0 |
50.0,35.0 |
24.8 |
21.9 |
30.0 |
55.0,40.0 |
29.0 |
25.5 |
As you can see, the return rates are far more favorable than in my prior article. This leads me to have an even higher bullish outlook on the stock, and I do not anticipate the share price will fall for longer. Especially once the newly expanded production begins to add revenues over the next few quarters. However, I will be hesitant to say outstanding returns will occur in 2021 alone, and suggest recurring investments over this period. This will reduce the negative impact of market volatility.
Conclusion
In summary, I find Avid Bioservices continues to provide a compelling investment thesis. Now that the price has fallen by a quarter, those who were hesitant before should find little reason not to invest. With growth leveraging modern and innovative biotech research and development, without company risk in regards to clinical trials, Avid is one of the best investments in the biotech industry. I expect the share price to increase at a rate that ranges between 20% and 23% per year over the next decade, and this is only half of the rate of return seen by investors over the past five years. However, the business has leveraged itself into a pure-play CDMO and this will likely pan out favorably, and bring solid fundamentals along with it.
I look forward to continued profitability, and stable margins at the present would be quite competitive when compared to peers. However, the major risks to consider are a move to increased leverage, and reliance on a few large contracts. Although current expansions are already underway or complete, and both numbers of contracts and debt-based capital expenditures should die down over the next few years. All in all, I will keep Avid as a mid-weight company in my portfolio, and I am looking to add more over the next few months.
Thanks for reading, and feel free to comment anything below.