Adma Biologics, Inc. Q2 FY2021 Earnings Call

Good afternoon, and welcome to ADMA Biologics Second Quarter 2021 Financial Results and Corporate Update Conference Call on Wednesday, August 11, 2021. At this time all participants lines are in a listen-only mode. There will be a question and answer session that will follow. Please be advised that this call is being recorded at the company's request. And will be available on the company's website approximately two hours following the end of the call. At this time, I would like to introduce Skyler Bloom, Director, Investor Relations and Corporate Strategy at ADMA Biologics. Please go ahead.

Welcome, everyone, and thank you for joining us this afternoon to discuss ADMA Biologics financial results for the second quarter of 2021 and recent corporate updates. I'm joined today by Adam Grossman, President and Chief Executive Officer; and Brian Lenz, Executive Vice President and Chief Financial Officer. During today's call, Adam will provide some introductory comments and provide a corporate update, and then Brian will provide an overview of the company's second quarter 2021 financial results. Finally, Adam will then provide some brief summary remarks before opening up the call for your questions. Earlier today, we issued a press release detailing the second quarter 2021 financial results and summarizing certain second quarter achievements and recent corporate updates. The release is available on our website at www.admabiologics.com. Before we begin our formal comments, I'll remind you that we will be making forward-looking assertions during today's call that represent the company's intentions, expectations, or beliefs concerning future events, which constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. All forward-looking statements are subject to factors, risks, and uncertainties such as those detailed in today's press release announcing this call and in our filings with the SEC, which may cause actual results to differ materially from the results expressed or implied by such statements. In addition, any forward-looking statements represent our views only as of the date of this call and should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligations to update any such statements, except as required by the federal securities laws. We refer you to the disclosure notice section in our earnings release we issued today in the Risk Factors section of our 2020 annual report on Form 10-K and our quarterly report on Form 10-Q for the second quarter ended June 30, 2021, for a discussion of important factors that could cause actual results to differ materially from these forward-looking statements. With that, I would now like to turn the call over to Adam Grossman. Adam?

Thank you, Skyler. Good afternoon, everyone, and thank you for joining us on today's call. We hope those joining us today continue to remain healthy and safe. ADMA continues to excel with the commercial launch and revenue ramp-up of its immunoglobulin and hyperimmune globulin product portfolio as well as more broadly, advancing our company's strategic goals to create value for stockholders in the periods to come. The underlying business trends for our commercial immune globulin business have never been stronger, and the operational execution by our organization across business segments cannot be overstated. The significant strides made during the first half of 2021 form the foundation for continued quarter-on-quarter improvement over the remainder of the year and thereafter. The totality of our achievements to date will enable ADMA to enter the next phase of its profit-oriented growth strategy from a position of strength. The multiyear investment and remediation initiatives will be successfully winding down with the anticipated approval of the Vanrx aseptic fill/finish machine over the coming months. As a result, the company is now on the precipice of realizing significant operating leverage on its pathway to corporate profitability. During the second quarter of 2021, ADMA exceeded analysts' consensus top line revenue forecasts for the fourth consecutive quarter, generating record quarterly revenues of $17.8 million, representing a 129% growth rate compared to the second quarter of 2020. Additionally, the company successfully narrowed our gross and net losses year over year. A trend ADMA believes can continue in the coming quarters and further accelerate throughout 2022. While ADMA's revenue and execution of its business plan have seen record and favorable results over the past several quarters, it is important to highlight that pandemic-related headwinds have impacted and continue to impact ADMA's commercial launch phase. Furthermore, these record second quarter financial results do not yet reflect the added benefits expected from the recent FDA approval of our 4400-liter expanded IDIG production scale, the additional plasma center developments, including opening a new plasma center, and implementing the new persona donor collection software, nor does it include the operating efficiencies expected from the anticipated Vanrx approval over the coming months. We expect these approvals and enhancements to act as significant tailwinds for our business over the remainder of 2021 and beyond. Said another way, through unprecedented adversity, ADMA is just beginning to scratch the surface of the ultimate financial and value potential we believe this asset base and biologic drug manufacturing organization is now able to support. We expect the supply chain milestones achieved thus far in 2021 will result in greater product yields and cost of goods sold improvements to support both near-term and ongoing financial results. Importantly, they will set the stage for durable value creation and continued narrowing of both gross and net losses over the longer term. The recent achievement of the FDA finding no Form 483 observations as part of the pre-approval inspection for the Vanrx aseptic fill/finish machine should pave the way for an anticipated approval over the coming months. When approved, the licensure of the Vanrx machine will cap a successful multiyear remediation process and supply chain investment initiative at the Boca Raton Florida manufacturing facility. Propelling ADMA into an elite group of U.S.-based drug manufacturers with comprehensive in-house control of a majority of its critical manufacturing functions. The COVID-19 pandemic has illuminated high-profile vulnerabilities in pharmaceutical supply chains among our large and mid-size peers. It is in this context that we believe the successful remediation of our manufacturing operations, establishment of end-to-end supply chain control, and ADMA's continued commitment to GMP compliance uniquely differentiate our manufacturing footprint and is a testament to our industry-leading regulatory, quality, and operational personnel. In addition to recently revising the plant's annual peak production capacity up to 600,000 liters, as well as increasing peak revenue guidance to $300 million or more, ADMA is actively exploring new contract manufacturing opportunities following the anticipated approval of the Vanrx machine in the second half of 2021, which could add additional revenue sources presently not contemplated in the company's current financial targets. We intend to provide updates to these financial objectives and communicate developments to the market as appropriate over the coming months. Ensuring uninterrupted raw material plasma supply has been a strategic priority and investment focus for ADMA prior to and throughout the COVID-19 pandemic. Industry-wide headwinds pressuring plasma collection remain intact and are likely to sustain due to recent U.S. government policy restrictions pertaining to the U.S.-Mexico border and plasma collection facilities, among other variables. Accordingly, we believe the 2021 year-to-date milestones achieved by our ADMA Bio Centers business unit will yield significant results and largely insulate the company from broader market plasma collection and pricing fluctuations in the periods ahead. Most notably, the first half of 2021 can be defined by three overarching achievements for the ADMA Bio Center segment and ongoing raw material supply. One, the implementation of human persona technology across our plasma collection center network, which is expected to enhance collection yield by approximately 8%. Two, the extension of our company's principal third party plasma supply contract through year-end 2022. And three, continued on-track expansion of the bio centers plasma collection center network, which now includes eight centers in various stages of approval and development. Collectively, the benefits of these three elements establish a solid foundation for ADMA to ensure continuity of product supply into an increasingly supply constrained immune globulin market. ADMA's robust inventories of approximately $100 million at the end of the second quarter further validate the company's commitment to generate quarter-over-quarter revenue growth throughout 2021 and beyond, as well as meet the production needs to achieve longer-term revenue guidance of $300 million or more. All told, ADMA remains on track to have 10 or more FDA approved plasma collection facilities in operation by 2024. ADMA is hitting its stride at a moment in time when immune globulin and continuity of plasma supply has arguably never been more critical or threatened. Less than two years into the commercial launch of our company's immune globulin and hyperimmune globulin products portfolio, ADMA has established a strong foundation to continue to penetrate the rapidly growing U.S. immunoglobulin market, which reached approximately $9.5 billion in total revenues in 2020, up approximately 19% year-over-year. With ADMA's commercial portfolio now annualizing more than $71 million in top line sales, and with losses continuing to narrow, we anticipate the next several quarters of forward-looking financial results will be reflective of what we believe is a highly undervalued asset base well on its way to generating peak revenues of $300 million or more, with significant profitability beginning no later than the first quarter of 2024. Additionally, as previously mentioned, we believe there may be opportunities to formally revisit the company's current top line revenue and profitability guidance as the year progresses and anticipated regulatory events unfold. The evaluation of these targets is ongoing, and we look forward to communicating more in the periods ahead. We would like to thank the ADMA Biologics team for keeping its focus and continuing to execute. Producing biologics is a very complex process with many constituents throughout the supply chain. I commend you all for meeting our top goal, delivering for the patients who are counting. Additionally, we are sincerely grateful to our stockholders for their continued support of our efforts to provide life-saving products to patients in need. With that said, I'd now like to turn the call over to Brian for a review of the second quarter 2021 financials.

Thank you, Adam. Since we issued a press release earlier today, outlining our second quarter 2021 financial results, I'll just review some of the highlights. For the second quarter of 2021, total revenues were $17.8 million, compared to $7.8 million for the second quarter of 2020. This represents an increase of $10 million, or approximately 129%. The revenue growth for the second quarter of 2021 compared to the second quarter of 2020 was favorably impacted by the continued commercial ramp-up of our IDIG product portfolio and expanding customer base at both our bio centers plasma collection segment, as well as in our bio-manufacturing segment. Additionally, ADMA grew its total asset base to a quarter-end balance of approximately $232.8 million, which includes approximately $100 million in inventory. ADMA expects the robust inventories recorded at the company's cost to support quarter-over-quarter revenue growth throughout 2021 and beyond, as well as meet the production needs to achieve longer-term revenue guidance of $300 million or more. This inventory balance consists of raw materials, including source plasma, and other materials expected to be used in production, as well as work in process and finished goods inventories comprised of our commercial IDIG products and intermediate fractions. In the periods ahead, ADMA anticipates continuing to purchase raw materials while also growing its internal plasma collection center network, building work in process inventories, and finished goods inventories. Given the ongoing industry plasma collection constraints as ADMA previously characterized, we intend to retain a portion of our growing inventories as safety stock, which we believe will help solidify our emerging position as a reliable supplier to our customers, distribution partners, and prescribers over the coming quarters. Our consolidated net loss for the second quarter of 2021 was approximately $18.9 million, or $0.15 loss per basic and diluted share, compared to a consolidated net loss of approximately $20.2 million, or $0.23 loss per basic and diluted share for the second quarter of 2020. The decrease in year-over-year net loss was primarily attributable to increased revenues and improved gross margins. With this being the fourth consecutive quarter of revenue growth, we anticipate this trend to continue in the periods ahead. With that, I will now turn the call back over to Adam for closing remarks.

Thank you, Brian. Within two years following FDA approval of ASCENIV and BIVIGAM, ADMA successfully established end-to-end control of its manufacturing chain. In doing so, it has also built a high-caliber commercial organization well positioned to compete in the rapidly growing U.S. immune globulin market. This market is expected to reach approximately $17.2 billion in annual revenues by 2027. ADMA's 2021 year-to-date accomplishments across business segments will enable the company to accelerate robust financial trends in the period ahead and enter the next phase of what we believe will be a multi-decade profit-oriented lifecycle opportunity. In the short term, we now anticipate exiting 2021 with an annualized revenue run rate of approximately $100 million or more. Additionally, and as communicated in prior calls, we as a management team and board of directors have invested significant capital into the company. We are acutely aware of the valuation disconnect between ADMA's appreciating intrinsic value and the company's current market cap. We are aligned with your stockholders. As such, we are considering alternative business opportunities to maximize stockholder value, including, for example, the acquisition or sale of specific assets or businesses, collaboration and/or license agreements, or other co-development agreements or arrangements. We look forward to a strong remainder of 2021 and a bright future for ADMA Biologics. In closing, I'd like to thank you, our stockholders, for your continued support. Your investment in ADMA helps to advance our mission to save lives and make good, efficacious, safe products that help our friends, family, and neighbors. Please donate plasma and help save lives. With that, I'd now like to open up the call for your questions.

And our first question comes from Anthony Petrone from Jefferies. Your line is now open.

Thanks, good afternoon, everyone. Congratulations on another strong Q2 here. I'm going to start with the $100 million target exiting this year. Just wondering what the mix of Nabi and ASCENIV is in there. So that would be the first question and then on the disclosure here on the CDMO arrangements. When we think about the plant in Boca, you're eventually getting to an operational capacity of 600,000 liters. What should we be thinking about in terms of allocation to future potential CDMO agreements? And I'll have a couple of follow-ups.

Sure. Thanks, Anthony. Thanks for your kind words. Hope you're staying safe up there in New York. So it's a great time to be in the immune globulin business. Some I think that you know, you've stayed on top of current events with the collection segment as well as how that flows through to finished goods. A number of our competitors, large, mid-size, and smaller players are not taking on new customers right now. They are talking about having tightness of supply anticipated later this year and early next year. We're hearing that there are substantial countries in Europe, in the EU, that are truly undersupplied at the present time, and I'm not sure how much longer competitors will be able to take product from one country and bring it into the U.S. So, the outlook for our revenue growth looks very, very strong. Again, we've got more product in the supply chain and coming online than we ever had before. Regarding your question about the $100 million potential run rate that we would be achieving later this year, as we've previously said to you and others, on these calls, our current mix is pretty much 90% to 10%, 80% to 20% right now. But again, the majority of the product that we are producing, distributing, and selling out of this plant is experiencing growth in our hyperimmune product segment. The utilization of Nabi and the press release earlier this week regarding now having the 1 ml size back on the market is certainly welcome to our customers. We are very, very excited there and hope to gain some more market share back since we haven't had the 1 ml product on the market for a while. ASCENIV is growing at a steady pace, both in the outpatient and inpatient segments. We feel very, very confident that the J code has really helped to bolster and solidify reimbursement in multiple treatment settings. We are very proud of the work that we're doing and the acceptance of our products. Again, we've got more products available, we are taking on new customers, adding people to our distribution network. We are selling through distributors and pulling it through, and we are also adding new specialty pharmacies, and hospitals, home care organizations all the time. So, really, things are going very well for us from a commercial standpoint. I think your next question was around capacity. Again, it's going to take us a little while to get up to the 600,000-liter capacity. You know, what we do say is that within three or four years or so we should be able to generate revenues of, we say, $250 million or more in 2024. And then potentially generating more thereafter, it's probably going to take us until 2024 or 2025 to really get to that 600,000-liter capacity, Anthony. We're currently expanding our ADMA Bio Centers business segment. Sure, you saw that press release yesterday after the market. We are really very proud of the work that's being accomplished there. You take our vertically integrated plasma collection coupled with our third-party supply agreements and some new contracts that are going to come online later this year and next year, and we reiterate all previously stated financial and strategic objectives with respect to quarter-over-quarter revenue growth, anticipating that it will continue all the way through profitability forecasted for Q1 2024. Hopefully that answered your question.

Sure. I could add a little bit more color to the revenue mix, Anthony. As we saw in this quarter, actually, compared to the first quarter of ‘21, we have a negative 11% gross margin. That number has been cut in half now to negative 6% gross margin. That's really attributable to selling more of our hyperimmune globulin products. So that product mix is already starting to see a shift. The hyperimmune globulins, as we mentioned previously, have a 70% to 80% gross margin and our standard IDIG products have a gross margin of 20% to 30%. We've already started seeing that product mix really start in the second quarter, and we think that trend will continue.

That's helpful. A couple of follow-ups here would be one just to reiterate on the plasma collection side. You're in the process of getting to eight centers. I just want to confirm that exiting 2022, the target is still for 10 operational centers. So that would be the first question. And then secondly, just you know, as you speak to inventories, and you mentioned safety stock, maybe what should we be thinking of as we look at the inventory going forward? What percent of your balances will be represented by safety stock? Thanks again and congrats again on the quarter.

Sure, okay. I can take those questions. With regards to the centers, we currently do have eight centers in various stages of development. Two are FDA approved, and five centers are collecting plasma at present. By the end of 2022, we want to have 10 centers or more under our corporate umbrella, and by 2024, we'd like to have all those 10 centers or more FDA approved. We want to be in a place where we are self-sufficient to bring in the majority, if not all, of our raw materials, maybe 600,000 liters of revenue or liters of plasma coming in from our plasma centers. As for our inventories, ending the second quarter of 2021, we have $100 million in inventory, and half of that inventory—this is a testament to show how much production we have ramped up here in Boca. Our working processes close to $50 million. That demonstrates how significantly production has continued to increase here. We just got the 4400 approval process approved by the FDA just in April. We think that that working in process number will continue to grow, which is a good sign because as that working process number moves through the manufacturing and filling phase of our seven to 12 month production lifecycle, a lot of that product is then going to go into the final phase, the finished good phase. To answer your question regarding how much finished goods we estimate to have on a quarterly basis—if we reach the $250 million revenue mark in 2024—we say roughly a blended margin of about 50%. On a quarterly basis, you're looking at somewhere between $60 million and $70 million a quarter at 50% gross margin, which translates to about $30 million to $40 million at our cost of finished goods. We're certainly well on our way, having a balance sheet of $100 million in inventory. We expect around 50% gross margin on that number as we set ourselves up for strong foundation for continued quarter-on-quarter revenue growth, which further validates the financials we've published for our second quarter.

Thanks, again.

Thank you. And our next question comes from Elliot Wilbur from Raymond James. Your line is now open.

Thanks. Good afternoon. First question for Brian, maybe just following up on your commentary around COGS and inventory. Specifically thinking about the COGS line, there's always a lot of questions when you have negative margins. But just kind of thinking about how this line progresses or changes going forward as your top line increases. If I look at second quarter revenue, it went up sequentially by around $1.8 million, while COGS would have been around $1 million. Is that how we're going to see things progress going forward? Basically, will you start to see a 40% to 50% incremental margin through incremental revenue dollar on top of the average COGS run rate we've seen in the last quarter? I'm just trying to figure out how exactly that number is going to trend as sales continue to accelerate?

Sure, thanks for the question, Elliott. So a couple of things regarding COGS. When we achieve the $250 million run rate from a revenue standpoint in 2024, we'll essentially be at very close to full capacity production, around 90% to 100% capacity production, producing that much product to get to that level. We're certainly not there yet. We currently do have some unabsorbed manufacturing overhead costs that are still in the cost of product revenue line, but as we continue to scale up operations—most importantly, as I mentioned, with the 4400 scale up—producing more BIVIGAM at the 4400-liter capacity means more product, and that will improve margins to generate those additional revenues. Simplistically, revenues will outpace the overall COGS number in the not too distant future because of the 4400-liter batches we're producing and releasing next year. In the second half of this year, we have the 4400-liter batches of conformance products manufactured previously, which we hope to sell in the second half of this year, thus improving margins. Once again, the lifecycle timeframe of 4400-liter production takes about seven to 12 months, so we will start realizing some of those synergies and cost efficiencies, margin improvement as we've seen this quarter from the previous quarter.

I also think, Elliott, if I can just add something else to take note of is that with any drug manufacturing, and I think in the comments, you know, Adam and I have both stated that producing biologics is certainly complicated, complex, and not the easiest thing in the world. But there are always possibilities of some one-off charges and expenses. These are unpredictable events that are hard to guide using analysts and others. However, I believe that as we continue to produce more, the effects of maybe some of these discrepancies and one-off occurrences could be less meaningful. Additionally, I think with the pandemic and certain supply chain issues regarding raw materials, disposables, consumables, testing, reagents, et cetera, there are some costs, shipping charges and one-time expenses that can arise. For instance, you may need to negotiate additional fees to have a truck delivered with ethanol if there are driver shortages. These unpredictable factors are something we need to consider. But to Adam's point, we expect revenues to continue to increase. The product mix is certainly improving, and the acceptance of our hyperimmune products is also growing. As we've previously reported, the margins on our hyperimmune products are typically about 60% to 80% gross margin products. The more of those we can sell, the better our overall COGS will be as an operating business unit in the bio-manufacturing segment.

Thanks, Adam. If I can ask you a question as well, I mean, historically, Nabi has been a relatively steady product, but can you speak to any factors that might be driving marginally increasing demand there? Similarly, regarding ASCENIV, what may be driving the incremental volume there? Is it just overall demand for IDIG, or is it more specifically tied to the emergence or the increase in RSV infections that we've been hearing about in the media?

Sure, regarding the flows in the market, we're not aware of any supply chain issues reported by our competitors, but it's always possible that challenges exist. Our pricing remains competitive, and while some competitors in the immunoglobulin sector have raised their prices, we feel confident about our pricing strategy. We've recently announced a price increase for NABI that will take effect shortly. Our product holds a reputable brand in the market. Additionally, there are other dynamics at play, as people are still cautious about social interactions. Hepatitis remains a recognized use for our drug, and awareness among patients may be increasing due to our marketing initiatives and campaigns. Concerning ASCENIV, its differentiation lies in our patented approach to screening plasma donors, who we ensure have high levels of neutralizing antibodies to RSV. Our patent suggests these donors also have elevated antibody levels against other respiratory viruses. While it's challenging to articulate, it contradicts much of what I've learned over my extensive career in RSV immunoglobulin. However, there is a growing awareness of RSV, especially since the CDC released alerts for the Southeastern United States, indicating a heightened alert for RSV. We've noticed a rise in RSV infections ahead of the usual season. Our drug demonstrates effectiveness in outpatient environments, and patients with chronic bacterial and viral infections may be using concurrent antibiotic therapy alongside it. Our commercial team has made significant investments for the launch through various approaches, including face-to-face interactions, virtual conferences, and media campaigns. These investments, along with establishing a J code for reimbursement, are yielding promising results. Altogether, we're starting to see positive returns on our investments. Furthermore, we have developed a robust commercial organization supporting our three main products, complete with an exceptional salesforce and national accounts team. Their field expertise is enabling growth at ADMA Biologics. I appreciate their ability to connect with clinicians during the pandemic, which encouraged me to travel again when restrictions eased, and I've noticed the benefits in our expense reports. In conclusion, as we witness hospital closures and increased patient loads in hospitals, our situation in the immune globulin market is aligning favorably. We continue to receive inquiries, and our salesforce is actively engaging potential clients, leading to an optimistic outlook.

Thanks. One last question, if I may. Can you just talk a little bit about the 100 ml offering and how important that is to expanding the franchise? I know it's available in limited quantities currently, but when do you anticipate kind of reaching full run rate in respect to that presentation? I'm just curious how that allows you to expand business with existing customers and whether it opens new doors simply because that's often the preferred offering in the market. Strategically, what does that mean for growing the franchise going forward?

You know, it's first of all, it's something all of our competitors have. We have been commercial with a 5-gram, 50-ml vial size. When I started my career selling IDIG, it was much tougher to market solely 5-gram vials compared to larger formats, especially considering that immune globulin is dosed at roughly 500 milligrams per kg of body weight. Therefore, for a 70 kg adult, the average dose is around 30 to 40 grams. When a hospital pharmacist or homecare pharmacist is preparing immune globulin for infusion, they need to either pull it into a specific infusion transfer bag or hang each individual vial. They certainly prefer fewer vials for added efficiency. The availability of the 100 ml vial helps us compete effectively, specifically in higher-volume specialty pharmacies, home care organizations, and hospitals where time is extremely valuable. Additionally, it demonstrates our commitment to improving product quality and the diversity of our available offerings. Commercial manufacturing demands diversity, and we currently have plans only for the 5 and 10, 50 ml and 100 ml vials. As mentioned earlier, the 100 ml vial is available now. Those vials we currently have were produced in four conformance batches that formed the basis for our prior approval supplement submission to the FDA. Fast forward four years from taking over the plant with a warning letter, the improvements we've made are noteworthy. We completed an FDA pre-approval inspection with no observations, engaged in new container closure system development, and diversified our product portfolio. The investment in our plasma center expansion is exceeding expectations. Overall, we’ve accomplished much over these past four years and our customers are taking notice. I hope this lengthy response effectively highlights the significance of the 100 ml size as it positions ADMA on par with competitors.

Thank you, Adam.

Thank you. And with that, ladies and gentlemen, we are currently out of time. I'd like to turn the call back to Adam for additional closing remarks.

Thanks, everybody. I hope you found the call interesting. Again, to the ADMA team that's listening, I am truly proud of you. You are doing a great job. Let's keep helping the patients who are counting on us. To our shareholders, again, we appreciate your continued support. Your investment in ADMA helps advance our mission to save lives and provide effective products that help our friends, family, and neighbors. Please donate plasma and help save lives. Wishing you all a healthy and safe evening. Take care.

Ladies and gentlemen, this does conclude the conference call for today. We appreciate your participation, and you may disconnect.