Inotiv, Inc. Q3 FY2025 Earnings Call

Good day, and welcome to the Inotiv Third Quarter Fiscal 2025 Earnings Call. Please be advised today's program is being recorded. It is now my pleasure to turn the program over to Steve Halper of Life Science. You may begin.

Thank you, Aaron, and good afternoon, everyone. Thank you for joining today's quarterly call with Inotiv's management team. Before we begin, I'd like to remind everyone that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter, including risks and uncertainties that could cause results to differ from forward-looking statements. Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in the company's current and previous earnings releases, which have been posted to the Investors section of the company's website, www.inotiv.com, and is also available in the Form 8-K filed with the Securities and Exchange Commission. If you haven't obtained a copy of today's press release yet, you can do so by going to the Investors section of Inotiv's website. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; and Beth Taylor, Chief Financial Officer. John Sagartz, Chief Strategy Officer, will join us for the question-and-answer portion of the call. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results for our third fiscal quarter of 2025, and then we'll open the call for questions. It is now my pleasure to turn the call over to Bob Leasure, CEO. Bob, please go ahead.

Thank you, Steve, and good afternoon, everyone. During the third quarter, we made some announcements and saw some continuation of positive trends, which could be very meaningful for our business going forward. On May 29, 2025, during our in-person Investor Day, we addressed in more detail our view of the critical issues facing our industry such as tariffs, NIH funding and the recent comments from the FDA related to new approach methodologies or NAMs. We also outlined our progress over the last 8 years as we have built our business and a more recent focus over the last 2 years on integration and optimization. And then we outlined our goals to improve our cash flow and margins. On June 2, 2025, we were informed by the SEC's division of enforcement that it concluded its investigation, which began in May of 2023 related to the importation of nonhuman primates from Asia. Based on the information available to the division as of the date of its letter, the division does not intend to recommend an enforcement action by the SEC against Inotiv. As noted in our earnings release that just went out, based on current negotiations with the plaintiffs and the outstanding securities class action and shareholders' derivative lawsuits, we recorded a $10 million accrual for these lawsuits as of June 30, 2025, as well as a $10 million receivable due to the fact that we currently expect to recover the full amount of the accrual under our existing insurance policies. However, we must still reach a final agreement on the terms of any settlement and actual amounts may change. We will provide additional information once we have material updates to share. In June, we received updated ALAC accreditation for our NHP facilities in Texas. All of our RMS animal production facilities are currently ALAC accredited. So this by itself is not particularly noteworthy. However, what we are extremely proud of is that both NHP facilities in Texas received accreditation and were noted for having an exemplary program of laboratory animal care and use. This is a testament not only to the commitment of our people, but also the benefit of the investments we have made that have substantially improved these facilities and the welfare of our animal model business. We look forward to continuing to strive for the high standards as we invest in our facilities. Now moving on to the quarterly results. We are pleased with the quarterly results. We are seeing signs that demonstrate the potential to increase DSA awards and improve overall revenue, margins and adjusted EBITDA. For the third quarter of fiscal 2025, we saw a year-over-year revenue increase of 23.5%. The total revenue was $130.7 million compared to $105.8 million in the third quarter of fiscal 2024 and $124.3 million in Q2 of fiscal 2025. Consolidated revenue for the quarter was the strongest since Q1 of fiscal 2024. The year-over-year revenue increase was mainly due to an increase in RMS segment revenue of $21 million or 34.1% improvement over the prior year quarter and an increase in DSA segment revenue of $3.9 million or an 8.9% increase over the same period in fiscal 2024. Consolidated net loss for the quarter was $17.6 million compared to $26.1 million in the third quarter of fiscal 2024. Our EBITDA for the quarter was $11.6 million compared to $0.1 million in Q3 of fiscal 2024. Adjusted EBITDA for the quarter was the strongest since Q4 of fiscal 2023. Q3 fiscal year 2025, DSA operating margins improved 4.6% over Q2 fiscal year '25, but were still 0.8% lower compared to Q3 of 2024. We previously noted we had a deterioration of DSA operating margins during the second quarter of fiscal 2025, and we were pleased to see these margins improve during the fiscal third quarter. We believe the DSA operating margins have been impacted in fiscal year 2025 from the pricing pressure we faced in fiscal year 2024 that continued through the first part of fiscal 2025. Margin improvements are critical to achieving our adjusted EBITDA goals. Some of the improvements in the third quarter of fiscal '25 were due to improved pricing and scale as we grew revenue while working to control costs, and we'll continue to focus on improving these margins in the future. RMS operating margins for Q3 fiscal year 2025 were 19.8% higher than the prior year quarter. However, margins were 6.7% lower compared to Q2 fiscal year '25, which included $7.6 million of operating income from a litigation settlement agreement. If we excluded that $7.6 million litigation settlement from Q2 of fiscal year 2025, our RMS operating margins in Q3 fiscal year 2025 were the strongest operating margins we have seen since Q1 fiscal year 2024. We believe we have further opportunity to drive margins higher as we complete the next phase of the RMS site optimization plan, which we announced in December of 2024. As we stated last quarter, we now anticipate net annual savings of $6 million to $7 million on capital investments of approximately $6.5 million. To date, we have spent approximately $0.3 million net of tenant allowances related to this capital investment. In connection with our revised optimization plan, we have 2 properties under contract to be sold. We closed on the sale of one property in June, and the net proceeds were used to repay principal on our term loans. The second property is expected to close during Q4 of fiscal year 2025. This optimization plan is still on track to be completed by March of 2026. As with previous projects we have executed in the RMS segment, these additional investments are intended to help modernize our existing footprint while allowing us to close older facilities. The revised plan will reduce capacity and should create operating efficiencies while continuing our efforts to support our animal welfare objectives. Additionally, we believe this plan allows us to remain agile and increase capacity in the future if needed. We also continue to integrate and improve our North American transportation and distribution systems, which we brought in-house in the first half of fiscal 2024. We followed up last quarter's year-over-year increase in net DSA awards of 27% with a year-over-year Q3 increase in net DSA awards of 25%. We saw the most significant awards growth in our Discovery business and the Safety Assessment services, which we expanded and started up over the last 2 years, such as the biotherapeutics, medical device services and genetic toxicology. For the quarter, the Discovery awards increased 31.3% over the same period a year ago. For all of DSA, we saw a positive quarterly net book-to-bill of 1.07x and a year-to-date book-to-bill now at 1.03x. We are pleased with the fiscal 2025 third quarter results, which we believe demonstrate our ability to identify opportunities and implement action plans to improve revenue and margins. We remain confident about our ability to continue to show improvement in our financial performance as we prepare for fiscal years 2026 and 2027, while we simultaneously also focus on client satisfaction metrics, continue to integrate our services and enhance our speed and delivery. We continue to evolve as a company. The 14 companies we acquired from 2018 to 2022 have now been working together for 3 or 4 years. We have gone from being a handful of different entities to a fully integrated nonclinical drug discovery and development company, which has recruited and developed significant scientific strength. Examples of some of these changes include a more optimized facility footprint, where we have 30% fewer sites compared to three years ago, providing a much better client experience and operating more efficiently and cost-effectively. While we've reduced our sites by 30%, we have more than doubled the number of licensed veterinarians we have on staff, significantly increasing the critical animal welfare staffing per facility. We have integrated and improved our systems to now have 34% less software platforms. This is inherently more efficient and cost-effective domain, plus we've invested in improved platforms, which provide much better data and improved ability to communicate both internally and with our clients. Over the last 4 years, while we focus on integrating our services, we've also been strengthening our scientific group. As an example, we have more than doubled our board-certified veterinary pathologists as well as our pathology support team. We have improved our capacity, expanded our services and increased our scientific strength. We have also grown our sales team to help expand our sales and customer base. I believe we are just now beginning to see the benefits of these changes. We continue to seek improvement and believe we can be agile and evolve as the market and science such as NAMS continue to evolve. While we have implemented and continue to implement strategies that we believe will address our cash flow and business model, we also recognize the importance of improving our balance sheet. We recognize that our first lien term loan matures in November of 2026 with our convertible debt maturing in October of 2027. Our lenders and convert holders have been very important partners to us and have been very supportive through some very challenging times over the last 3 years, and we look forward to continuing to work with them in the future. While we are not providing any specific guidance at this time, we are prioritizing a strategic review of our balance sheet and capital structure, and our plan is to hire a third party to assist us with this process. We'll provide more information at the appropriate time. Before I close and turn it over to Beth, we want to recognize and acknowledge that it has been nice to see this increased sales and net awards over the past 2 quarters, and we've seen these trends continue through the first month of this current quarter. However, we are coming off some very weak numbers from a year ago and the geopolitical and macroeconomic conditions, risk and uncertainties are likely to remain with us and with the industry for the foreseeable future. We are cautiously optimistic with the keyword being cautious. Despite whatever challenges we face, we remain committed to building a business that will create value for our clients, employees and our shareholders and look forward to a bright future. Our leadership team has not only been resilient, but it has gotten stronger as we have worked through these changes in challenging times. We want everyone on our team and everyone who's been part of this company to know how much they are appreciated as this journey has required some sacrifices and everyone has been asked to put forth extraordinary efforts with their trust, time and talents to help us build this company. I'll now hand things over to Beth to provide the financial overview.

Thank you, Bob, and good afternoon, everyone. For the third quarter of fiscal 2025, total revenue was $130.7 million compared to $105.8 million in the third quarter of fiscal 2024. This was a $24.9 million or 23.5% increase in revenue from the prior year quarter, primarily driven by increased NHP revenue within our RMS segment. DSA revenue in the fiscal 2025 third quarter was $48.2 million compared to $44.2 million in Q3 fiscal year 2024. The year-over-year increase in DSA revenue was primarily driven by an increase in general toxicology services as well as an increase in biotherapeutic services and medical device services. Overall, net new DSA awards this quarter were $50.4 million, a 13% increase over Q2 of fiscal 2025 and a 25% increase over Q3 of fiscal 2024. We have also seen strong quoting and awards for the month of July, which has been a good start to our last fiscal quarter of 2025. The backlog conversion rate in the third quarter of fiscal 2025 was 35.5%, up from 31% in the prior year period. The DSA cancellations and negative change orders in the third quarter of fiscal 2025 were approximately 31% higher compared to the prior year third quarter. Cancellations in the trailing 12-month period were approximately 2% more than the prior trailing 12-month period. RMS revenue for the third quarter of fiscal 2025 of $82.5 million increased $21 million or 34.1% compared to Q3 fiscal year 2024. The increase in RMS revenue was primarily due to higher NHP volumes sold and higher average selling prices for NHPs compared to the prior year quarter. The overall operating loss for the third quarter of fiscal 2025 decreased $15.1 million from $20.8 million in the third quarter of fiscal 2024 to $5.7 million in Q3 of fiscal 2025, primarily due to the $24.9 million increase in revenue previously mentioned and decreased operating expenses, primarily offset by increased cost of revenue. The increase in cost of revenue primarily relates to increased costs associated with the increased NHP-related product and service revenue previously discussed. Consolidated net loss attributable to common shareholders in the third quarter of fiscal 2025 totaled $17.6 million or a $0.51 loss per diluted share. This is compared to consolidated net loss attributable to common shareholders of $26.1 million or a $1 loss per diluted share in the third quarter of fiscal 2024. For the third quarter of 2025, adjusted EBITDA was $11.6 million or 8.9% of total revenue compared to $0.1 million or 0.1% of total revenue for the third quarter of 2024. Non-GAAP operating income for our DSA segment in the third quarter was $7.2 million or 5.5% of total revenue compared to $5 million or 4% of total revenue in the second quarter of fiscal 2025 and $7.8 million or 7.4% of total revenue in the last fiscal year's third quarter. As Bob mentioned, we continue to be focused on our DSA margins, and we expect to see improvement in future quarters. As we experience an increase in Discovery service revenue and continue to fill the added capacity and services we have developed over the last 18 months, we believe we will see margin improvement through operating leverage. In addition, we are seeing a much more stable pricing environment across our DSA services. The book-to-bill ratio for DSA in the third quarter of fiscal 2025 was 1.07x: 1. Our trailing 12-month book-to-bill was 0.97x:1. DSA backlog was $134.3 million at June 30, 2025, compared to $130.8 million at March 31, 2025, and $139.4 million at June 30, 2024. In our RMS segment, non-GAAP operating income in the third quarter of fiscal 2025 was $16.9 million or 12.9% of total revenue compared to $15.6 million or 12.5% of total revenue in the second quarter of fiscal 2025 and $6.5 million or 6.2% of total revenue in the third quarter of fiscal 2024. Interest expense in Q3 of fiscal 2025 increased to $13.6 million from $12.1 million in the third fiscal quarter of 2024, primarily due to PIK interest incurred in relation to the second lien notes issued in September 2024. Our balance sheet as of June 30, 2025, included $6.2 million in cash and cash equivalents as compared to $21.4 million on September 30, 2024. The primary uses of cash during the first 9 months of fiscal 2025 were negative working capital of $19.2 million as we increased NHP inventory based on timing of imports and $5.6 million of cash used in consolidated operations. In the third quarter of fiscal 2025, we saw significant fluctuations in our working capital based on the timing of NHP purchases and when we get paid for sales of NHPs by our clients. The company has utilized and will continue to utilize its revolving credit facility during the normal course of business as needed. As of June 30, 2025, the company had access to the $15 million revolver, which had no balance outstanding. Recently, the company has requested a draw of $3 million on its revolving credit facility. Total debt net of debt issuance costs as of June 30, 2025, was $396.5 million compared to $393.3 million on September 30, 2024. This includes $114.8 million of convertible notes as of June 30, 2025, and our second lien notes of $21.8 million. Cash used in operating activities was $24.8 million for the 9 months ended June 30, 2025, compared to $14.4 million of cash used in operating activities for the 9 months ended June 30, 2024. Capital expenditures in the third quarter of fiscal 2025 were $4 million or approximately 3.1% of total revenue. The third quarter of fiscal 2024 capital expenditures were $4.4 million or 4.2% of revenue. We continue to expect our annual capital spend for fiscal 2025 to be less than 4% of revenue. We have not provided formal financial guidance for fiscal 2025. While we continue to feel positive about the progress we have made in recent quarters, we are not providing formal fiscal 2025 guidance at this time. As we have stated previously, we hope to resume providing guidance once we have greater clarity on the market and client demand and clarity on any impact to our business once there is more information on tariffs. Our current operating plan forecasts compliance with the updated covenants under our latest amendment to the credit agreement entered into in September 2024. And with that financial overview, we will turn the call over to our operator for questions.

And we will take our first question from Matt Hewitt with Craig-Hallum Capital Group.

Congratulations on the progress. Maybe first up, it sounds like your cancellations or negative change orders are still a little bit elevated. Is it your expectation that you could start to see that decline as we get into the back half of the year, maybe into fiscal year '26? Or how are you thinking about that metric?

I can't predict future outcomes. However, cancellations were indeed high last quarter. For the year overall, cancellations have only increased by 2%, but we experienced a significant number of cancellations in the last quarter. Our book-to-bill ratio on a gross basis was quite robust, combining that with the 8% increase in sales resulted in a very strong quarter for new bookings. We need to prepare for continued high cancellation rates. If they decrease, that would be a positive outcome, but we must adjust our expectations for a higher gross book-to-bill ratio accordingly. Over the past year, we've improved in anticipating these factors, and last quarter's results reflect that. If high cancellations persist as a trend, our gross bookings and projections for gross bookings need to rise. This is why we've expanded our sales force. Currently, I believe our team is effectively managing these challenges. However, as we've mentioned before, we do occasionally experience significant cancellations due to the scale of our operations. While last quarter was notable, this quarter has started off better, though we will monitor how it unfolds. Essentially, we need to adapt to this new reality and continue selling, as we cannot alter the situation. We just need to be ready for it.

Well, obviously, yes, your sales team is doing a phenomenal job if they're more than covering that. Maybe second would be what's up next for your site optimization? You've obviously made some significant progress on the checklist there. And I'm just curious, as you look at Q4, but more importantly, at fiscal '26, what's next on the site optimization side?

I want to emphasize that we are shifting our focus away from substantial changes in brick-and-mortar locations and are instead concentrating on refining what we already have. We are currently in the process of relocating three or four facilities and significantly improving one of them, which will be important for our operations. In Dallas, Texas, we plan to enhance our facilities as we ramp up service work to meet growing demand, which may require us to expand our capabilities there. We are examining ways to optimize our current facilities by reallocating tasks without the need for major renovations, allowing us to better serve our clients and increase our operational capacity. While we are avoiding major changes to physical locations for now, we don't anticipate needing to close any old facilities beyond this last significant one. Our priority will be on making smaller yet impactful adjustments to improve our existing facilities.

And we can take our next question from Dave Windley with Jefferies.

I wondered, first, Bob, if you could talk about the mix of bookings that you're seeing relative to your book of business. You've called out new services added a couple of quarters, maybe more quarters about momentum in biotherapeutics and medical device was another call out today. Are the bookings even more overweighted in those new service directions than the current revenue?

Yes. We have seen bookings, but revenue has yet to align with some of the bookings we recorded last quarter. Over the past two quarters, we observed the beginning of a significant increase that started last year in our first fiscal Q1 in Discovery, continued into Q2, and expanded quite a bit in Q3. Discovery's year-over-year growth of 31% to 32% is substantial for us, especially since Discovery is one of our most fixed cost businesses. This has a significant impact on our ability to create margins and contribute to the bottom line. Additionally, we have expanded some services and brought in scientific talent, which we are very pleased with. We also started developing a new sales team in December 2023. Over the past 18 months, it has been gratifying to see them come together, win new accounts, and increase sales from existing accounts. They are feeling optimistic about their momentum. However, it's important to note that our Safety Assessment capacity has remained fairly full. While we may benefit from pricing in Safety Assessment, we have limited room as we have maintained 85% capacity in that area. Therefore, much of the growth is within niche and scientific sectors.

Got it. Moving to NHPs. Your competitor and you have announced the conclusion of the DOJ investigation today. This is obviously positive news as it allows you to move past the legal costs you were incurring. I want to better understand your flexibility with NHP. Are you now free to import from Cambodia in a broad sense? Additionally, how do you think any changes, based on your answer to my question, might affect the market and pricing as a result of these developments?

First of all, the issues with the DOJ have been resolved several quarters ago, and the U.S. Fish and Wildlife Service and the DOJ have never indicated that we cannot import from Cambodia. In fact, they have confirmed that we are free to import from Cambodia, although we haven't done so in the last two or three quarters. Our ability to import also depends on the Cambodian government. We collaborate with contacts in Cambodia and other countries, and if a safe and fairly priced opportunity arises for imports, we will certainly consider it. However, that has not happened yet, and I am not aware of anyone who has successfully imported. There may also be constraints from the Cambodian side. At this time, I don't foresee any plans to change our situation in the next quarter, but discussions and site visits occur frequently, which could lead to changes. For now, I believe we have sufficient capacity to meet demand and will keep our options open.

So on the price point, COGS is still a little elevated in NHP-related activities. Yours may not have changed, but Charles River's situation definitely changed. They have inventory that is freed up, and I think that inventory might have aged out of its usefulness. However, seemingly, there's more inventory available than not. I'm wondering how that impacts price going forward.

I can't comment on Charles River. In terms of pricing, we haven't observed significant changes over the past year. Fortunately, the situation has stabilized. There hasn't been much variation in price or costs in the U.S. Additionally, based on USDA and other government data, there hasn't been a major increase in the availability of NHPs in the U.S. So for now, it appears that things are remaining stable. Unless Cambodia opens up and alters its pricing and exporting methods, I don't anticipate any changes next year. There are many factors involved, and I won't cover all of them on this call, but currently, we don't foresee any changes in pricing.

Before our next question, we do have a correction to our cash used in operating activities for the 9 months ended June 30, 2024. I read this as $14.4 million, but it was $4.4 million. So operator, please continue.

And we can move next to Frank Takkinen with Lake Street Capital Markets.

I was hoping to follow up on some of the Discovery commentary. Obviously, you just mentioned that's your largest fixed cost business. I was hoping you could help maybe put some metrics around what incremental growth in that business would translate to from an EBITDA perspective. I realize you're not providing forward EBITDA commentary at this point, but just kind of understanding just how much leverage is in that business as some of the strong orders you've seen start to translate to revenue.

Yes. Let me revisit that. We observed a significant increase, but it's not yet back to the levels seen two or three years ago. This has had a considerable impact on our margins and bottom line when we experienced those declines. However, we are now recovering quickly, and if we can maintain this growth, we could return to the levels of two or three years ago. Regarding Safety Assessment, any additional bottom line contribution would range from 50% to a variable contribution of 50% to 60%. In Discovery, due to its fixed cost structure, the incremental bottom line could be as high as 70% to 80%.

Got it. That's helpful. And then I think we've talked about kind of some of the metrics you have recently started tracking around customers' satisfaction, on-time delivery of services. Can you maybe recap some of those metrics for the most recent quarter and the importance of just that and how it translates to new business awards from those customers?

During the Investor Day, we mentioned some key points. One significant benefit of our new and improved systems is that we now have much better metrics. When we first started out, we had 14 sites operating independently, but now many customers are using multiple sites, with approximately 60% to 70% of our customer base utilizing more than one. It's crucial for us to operate as a cohesive company, ensuring that customers feel they're interacting with a single entity rather than multiple separate companies. We need to make their experience seamless and manage internal communications effectively to ensure timely delivery. To support this, we developed systems to track and communicate our operations. Three years ago, we could grow, but we lacked the sophistication in our pricing and management systems, which affected our on-time delivery. Today, we have made significant advancements. I'm closely monitoring our growth as we learned from past mistakes; while we expanded quickly, we often fell short of customer expectations, and we now have a much better way to track these metrics scientifically. I'm proud of our improved on-time delivery, which has significantly enhanced over the past two years due to better tracking. As we monitor these metrics, we see improvements that correlate with increased revenue and orders from existing customers, primarily in the small and medium pharma or biotech sectors. Positive experiences significantly impact our ability to maintain a recurring and stable customer base. While we are still striving for perfection and are not quite there yet, we are much closer than we were a year ago.

Got it. That's helpful. And then maybe just one last one related to cash. I heard the comment about some NHP stocking that took some cash out this quarter. I was curious if you could maybe talk to cash flow expectations going forward as some of those NHPs maybe convert to revenue and what that does to your cash balance?

I think we will likely maintain a higher level of NHPs than we have previously. We had been operating with minimal inventory, and I believe our customers would prefer to see a bit more stock available. Currently, we are holding more inventory, and I anticipate that we will continue this trend. When assessing our balance sheet, we need to determine if this is the new standard for our inventory levels. We could convert some of the inventory to cash if necessary. However, if we decide to adopt this new inventory level, we should plan accordingly to enhance our balance sheet. If we find it necessary to reduce imports and slow our operations, we can do so to generate cash. Ultimately, our goal is to create a more stable environment to meet our customers' needs.

And this does conclude the question-and-answer session. I'd like to turn the program back over to Bob Leasure for any closing remarks.

Thank you. We are very encouraged by the results and recent growth in our DSA business over the last two quarters. As this growth continues, we must remain focused on providing an exceptional experience, service, and product for our clients. We have made progress toward our financial goals established during our Investor Day, and we will prioritize a strategic review of our capital structure to improve our balance sheet. We believe we are a much better company today than we have ever been, but we still see opportunities for further improvement. Thank you for your time today, and we look forward to speaking with many of you later.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.