Replies to post #312390 on Avid Bioservices Inc (CDMO)

[patientlywaiting]

Norm's picture looks like someone woke him from the dead.

Norman Roberts
Special situations, contrarian
Member Since 2016
I suspect that most preferred income investors are conservative by nature. I am. I don't believe I have any special talent or gift for trading, a crystal ball, or any access to insider information. Consequently, I have little expectation of prospering by consistently buying low and selling high. In fact, prior to becoming a fixed income investor, my trading history boasted the opposite, buying high and selling low. Tis sad but true, over those years, I've given more to the market than I've taken from it. However, that's yesterday's news, and of no real interest. Of importance is that I'm patient, analytical, organized, pretty good at math, and always looking for that angle, strategy, or edge to help guarantee my market success. The Art & Science of Preferred Dividend Investing details my history, education and growth as a preferred investor and the lessons I learned along the way. I want to share that knowledge by introducing you to this effective, profitable, and safe way to invest in preferred equities.

[BioBS2012]

This is a good read, no matter what colored glasses one is wearing these days.

Un-Spinning The Peregrine Pharmaceuticals Spin Zone
Norman Roberts
Sep. 21, 2017 9:15 AM ET

Summary
As usual, PPHM's latest CC was a denizen of the spin zone.
However, with a careful read between the lines there were things to be learned.
I guess we'll have to take the good with the bad and hope for the best.
Painting lipstick on pigs is more often than not what's to be expected during company conference calls. And Peregrine Pharmaceuticals’ (PPHM) most recent conference call is certainly no exception to that rule. However, because I am a bit more familiar with this company than with most and because of my substantial preferred investment in it, I read the SA conference call transcript more closely than I usually do with other companies I hold investments in. Consequently, this article is devoted to deciphering the double-speak and reading between the lines to best divine the truths beyond the usual mountains of bull-puckey we are often forced to wade through.
The most interesting and best part of the CC was when its CEO, Steven King, announced that the BOD had finally seen the light and were transforming the company from primarily a Pharmaceutical R&D to a Contract Development and Manufacturing Organization, CDMO.
Over the past year and a half, following the negative results from our Phase III SUNRISE trial, we have seen the company change from an R&D-focused business that has been running a contract development and manufacturing organization or CDMO on the side to a CDMO business that has been running R&D on the side.
Either because of the shareholder pressure or the continued hemorrhage of money, it appears that the BOD has finally thrown in the R&D towel.
We have two very different businesses, CDMO and R&D within Peregrine with different investment and growth strategies and the two efforts need to be separated so that each has a better opportunity for success.
Although it won't be a clean and immediate break as we might have hoped for, the transformation will continue gradually with less capital being devoted to the further development of Bavituximab, which was initially developed as a synergistic drug designed to help cancer-fighting drugs better attach to tumor walls. When that approach failed, PPHM attempted to market it as a cancer biomarker, which they are still haphazardly in pursuit of. The good news is that this avenue also appears to be closing.

Now turning to R&D, we are continuing our commitment to reduce R&D spending. In fiscal year 2017, we reported a 52% decline in R&D expenses and we have continued this trend into the first quarter of fiscal year '18 achieving a 57% reduction in R&D expenses. Based on our plan to pursue strategic alternatives for our R&D assets, we expect R&D expenses to decline at least 50% overall this year and it could be a greater percentage decline depending on the timing of any potential transaction around the R&D assets.
Consequently, what I and many of us had hoped for, Avid Bioservices will, in the future, become the core business of PPHM. Toward that end:
The appointment of Dr. Roger Lias as president of Avid Bioservices and his appointment to Peregrine's Board of Directors marks an important next step in this transition.
And now I'm going to read between the lines as I ponder why Dr. Lias was brought aboard at what I believe to be a very generous package of salary and perks. I believe the following blockquote will go a long way towards explaining this.
While we had an excellent quarter, we have also seen decreases in manufacturing and demand from our two largest customers. As a result, we saw revenue backlog decline to approximately 33 million at the end of the current quarter. As we look ahead, adding new customers and diversifying our customer base will be extremely important to growing revenue. This is the key reason we have hired a President of Avid solely focused on our CDMO business and someone who is highly connected to the bio-manufacturing industry.
As far as I'm concerned, although Avid is the heart and soul of the new PPHM, the division of the company they have invested heavily in, they were surprised and concerned when orders softened from their two largest customers, and the hoped-for projected income growth failed to materialize.
During the current quarter, our gross margins declined to 24% mostly due to a higher percentage of revenue related to pass through charges, such as raw materials, that are recorded to revenue at cost plus a nominal mark-up. This is relatively standard for our industry. During the current quarter, 38% of our revenue was related to pass through charges versus 20% in the same prior year quarter, thereby lowering the overall gross margin.

Consequently, as far as I'm concerned, Dr. Lias was brought on primarily as a salesman to stimulate sales and more importantly expand Avid's customer base. Therefore, if Avid's manufacturing suites are as state of the art and efficient as PPHM claims it to be and Dr. Lias is as good a salesman as they hope he will be, our preferred investments in this company are secure. Sorry, but I can't say the same for PPHM's common shareholders, at least for the short term. However, if I am wrong about Avid's future prospects, I hope the bath water I'll be floating in will be comfortably warm.

Disclosure: I am/we are long PPHMP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.