Tim Brons - IR Roger Lias - President of Avid Bioservices Paul Lytle - CFO

Tarun Aswani - NOBLE Capital Markets

Good day, ladies and gentlemen, and welcome to the Peregrine Pharmaceuticals Second Quarter Fiscal 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and our instructions will follow at that time. As a reminder, this conference may be recorded. I would now like to hand the conference over to Tim Brons of Peregrine’s Investor Relations Group. Please go ahead.

Thank you. Good afternoon and thank you for joining us. On today’s call, we have Roger Lias, President of Avid Bioservices and Paul Lytle, Chief Financial Officer of Peregrine Pharmaceuticals. Today, we will be providing an overview of the company's operations and progress with emphasis on the Avid Bioservices' contract development and manufacturing business and corporate activities. After our prepared remarks, we will welcome your questions. Before we begin, I’d like to caution that comments made during this conference call today, December 11, 2017, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, concerning the current belief of the company, which involves a number of assumptions, risks and uncertainties. Actual results could differ from these statements and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company’s filings with the Securities and Exchange Commission concerning these and other matters. With that, I will turn the call over to Roger Lias. Roger?

Thanks, Tim, and thanks to all of you who've dialed in and all of you who are participating today via webcast. As discussed, during our first quarter earnings call last September, the company is undergoing a broad-scale transformation, the goals of which are to shift complete focus to the Avid Bioservices contract development and manufacturing business and the complete divestiture of all of Peregrine's legacy R&D assets, which include bavituximab. As previously discussed, the current biologics contract services market allows us to take advantage of our installed cGMP manufacturing capacity and existing capabilities and expertise. Our exemplary track record in releasing commercial products to many global markets, including the United States and European Union catalyzes the transition to a focused, revenue-generating services business with a potential for consistent and sustainable growth at less risk. We initiated a plan during the first quarter of financial 2018 to effect the transformation of the business and to continue - and we continue to execute this transition. During the second quarter we have achieved several important milestones that we believe will facilitate a successful outcome. I will give an overview addressing our corporate and organizational progress, and then we'll turn the call over to Paul to address the company's financial results for the quarter. Before discussing advances and executing our new corporate strategy however, I would like to first address the fact that I am beginning today's call instead of Steve King. Today, we'll be discussing our work to transition to a dedicated CDMO business and our progress in that effort. And for that reason, as President of Avid Bioservices, which represents the future of the company, I'm very pleased to be able to address you all today. Next, I would like to address the proxy matters that have been publicly deliberated in recent months. As many of you know, several of Peregrine's investors have collectively lobbied for the new direction that the company is taking and a new Board composition. We recently entered into a settlement agreement with these investors under which 4 existing Board members have resigned and 4 new independent Board members have been appointed. More specifically, on November 27 of this year, directors Steven King, Carlton Johnson, Eric Swartz and David Pohl each resigned from Peregrine's Board of Directors and from the Board of Directors of Avid Bioservices. The vacancies created by these resignations were immediately filled by Richard Hancock, Joel McComb and Gregory Sargen, each of whom were nominated by the investor group for election at Peregrine's upcoming 2017 Annual Meeting of Stockholders. In addition, Joseph Carleone, who is independent of both the investors and of Peregrine, joined the Board and is serving as Chairman. Each of these appointees has very significant experience in the biomanufacturing industry, and the newly seated Board has already demonstrated that they will add great value as we work to establish Avid as a leading contract development and manufacturing organization. In addition to the newly appointed members, Mark Bamforth, Patrick Walsh and I will continue to serve on the Board. We've recently announced that we will hold our 2017 Annual Shareholder Meeting on January 18, 2018. We encourage all shareholders to review the biographies and accomplishments of these Board appointees, and we request your support for them in your proxy voting. We believe each new member will continue to bring a wealth of experience and the industry leadership required to take Avid to the next level. I am personally very pleased that we have avoided further distraction and are now able to focus fully on the execution of our strategic plan and the complete transition of the company to a dedicated contract development and manufacturing organization. I would now like to discuss in more detail some of the advances we've made with respect to our corporate strategy. In recent months, we have made substantial progress towards establishing the company as a dedicated CDMO with the potential to achieve significant growth. During the quarter, we recorded $12.8 million in revenue, and on a year-to-date basis, we reported revenues of approximately $40 million. This is in line with the guidance provided earlier in the year, and we continue to expect revenue for fiscal 2018 to be consistent with revenue from last year, with most revenue recognized in the first and second quarters. Though we achieved a 6 year compound annual growth rate of approximately 38% between fiscal 2011 and fiscal 2017, we're projecting relatively flat revenue this year due to a previously announced decrease in demand from our two largest customers. We expect this lull in growth to be temporary as these customers sell through current inventory and work through a regulatory filing delay. This situation, however, points to the urgent need to access new growth opportunities for Avid to diversify our client base and to broaden Avid's service offering. To that end, during my first two months with the company, I've worked closely with the Avid team to establish a sustainable growth strategy for the company for the near term and into the future. This strategy is comprised of three primary components. Firstly, we will diversify and broaden our customer base and project mix. Next, we will expand and strengthen Avid's current service offering, taking advantage of current capabilities and available space to increase revenue-generating potential. Activities will include optimization of production capacity within existing facilities and the addition of process development capabilities and strengthening of our commercial terms. Finally, to further increase growth potential and profitability, we will, in future, introduce new service offerings into the biologics contract services market. As we effect this strategy, Avid will no longer need to compete for resources with the company's internal R&D programs or be impacted by management decisions related to the other side of the legacy business. There certainly remains some issues that need to be addressed in order for Avid to operate more efficiently as a dedicated CDMO, but we expect these to be short term, and we are already working actively to make the necessary changes. The fact that Avid has been able to grow to a $50 million excess capacity business despite Peregrine's focus on development of R&D assets and with extremely limited marketing visibility demonstrates, I believe, both the strength and the potential of the company. Our target market remains strong and dynamic. The broad pharmaceutical industry remains highly dependent on the shift in focus from traditional small molecule drugs to biologics. In addition, we see acceleration in biosimilar development for global markets. Biologic sales are projected to reach greater than $250 billion by 2020 at a compound annual growth rate of around 9%. This represents very nearly half of the top 100 pharmaceutical products, and a significant majority of these products are derived from mammalian cell culture and require the type of process development and cGMP manufacturing capabilities that we offer here at Avid. The explosive growth in the biologics market has necessitated considerable focus on the manufacturing technologies and process economics. Avid's state-of-the-art Myford facility featuring single-use bioreactors and other modern process innovations in custom-designed clean rooms has been widely praised by current and future customers, including pharmaceutical multinationals, and this provides the opportunity to deliver highly efficient and cost-effective manufacturing. The demand for biologics CDMO services remains very strong and is widely predicted that while there is no one-size-fits-all manufacturing approach to biologics and we are seeing considerable growth in investment in new facilities and capacity, there will remain an imbalance between supply and demand for the foreseeable future. I will now provide some additional information on the three aspects of Avid Bioservices' strategy at a high level and how we intend to take advantage of this market opportunity. First, we are working to expand and, importantly, diversify our customer base as a broader customer portfolio will help mitigate the risks associated with being reliant on a few large clients. Again, while we believe the current decrease in demand from two of our largest clients is temporary, we are working to obtain significant additional visibility into their future production needs based on excellent existing relationships and improved communications. We must clearly bring in new customer projects as soon as possible to increase utilization rates for our existing capacity. In support of this important objective, we are executing our marketing and promotional plan, including some re-branding, to greatly increase market visibility and commercial reach and to position Avid Bioservices for the first time ever in its history as an expert and reliable, dedicated service provider. Our long experience and available state-of-the-art cGMP manufacturing capacity capable of producing both clinical-stage and commercial-stage biopharmaceuticals position us extremely well to take advantage of the considerable market opportunity. We've recently hired Tracy Kinjerski as Vice President of Business Operations to lead this effort. Tracy is a senior business development executive with over 17 years of experience in the biopharmaceutical industry, almost all of which have been focused in contract development and manufacturing of biologics. Tracy most recently served as Senior Director of Global Business Development at CMC Biologics, a global contract manufacturing organization. There she achieved rapid success in her role spearheading business development and client relationship management, which resulted in significant new business growth. Prior to CMC Biologics, Tracy held senior corporate development positions with other leading CDMOs, including Fujifilm Diosynth, Althea Technologies and Avecia Biologics. In her new role, Tracy is charged with expanding the company's client base and driving growth at Avid. In addition to her responsibilities in business development, including strengthening our presence in the Eastern United States, Tracy will strengthen Avid's project management and client relationship operations and systems and will direct our marketing and promotional activities. We're thrilled to have Tracy on board in this important role, and we believe that she will make significant contributions to Avid's continued growth, strengthening of the revenue backlog and profitability. We are actively engaging with numerous potential new customers with products at all stages of development and are confident that we will be able to announce additions to our client base in the near future. Concurrent with our ramp up in business development efforts, we continue to work closely with the four new customers that were signed earlier in 2017. While we expect to recognize some revenue from these relationships in this fiscal year as we kick off projects and effect technology transfers it will be fiscal 2019 before we see significant revenues derived from these new customers. These projects, ranging from early-stage development to commercialization, have the potential to make meaningful contribution to the top line in the future. While we continue to focus on opportunities to transfer any existing larger scale and later stage manufacturing projects over the near term, it is important that we also continue to secure additional early stage process development and clinical manufacturing projects that will deliver the opportunity for significant incremental manufacturing revenue in the future. As a final part of the first component of our strategy, we are taking immediate action to strengthen our contractual mechanisms and related terms and conditions with focus on pricing, forecasting, customer commitment and revenue recognition. The second arm of Avid's new growth strategy is the expansion and strengthening of current service offerings. This includes the addition of process development capabilities and optimizing current manufacturing operations. As a dedicated contract manufacturer, we need to both broaden and strengthen our process development capabilities. Not only does process development work represent an attractive and profitable standalone business opportunity, but, as just mentioned, it also generates future manufacturing opportunities and allows development of strong client relationships with visibility and access to additional future projects. Process development laboratories and capabilities are used as shop fronts by our peers in the biologics contract manufacturing space. And as we diversify both the client base and the project mix, we need to develop competitive capabilities in this area capable of delivering a strong project pipeline. Necessary expansions include additional modern and well equipped laboratory space and strengthened service offerings in areas such as analytical development, cell line development and formulation. The addition of new equipment and technologies will allow us to greatly increase throughput and efficiency and to deliver first-in-class process development services to our customers. Planning for these additions commenced during the second quarter. On the manufacturing side, we continue to ensure that Avid's facilities are state-of-the-art and capable of meeting the highest industry standards. The sophistication of our Myford facility clearly provides an advantage in this respect, but there are a number of areas for improvement. In recent months, we have expanded capacity by installing and validating two new 2,000 liter bioreactors in this facility, and we've already secured some commitments for this capacity. We also continue to work on changes necessary to improve efficiency and throughput when operating this facility in multi product mode. Due to its modular design, the use of single-use manufacturing technologies and already operational supporting quality laboratories, warehousing and utilities, there's the potential to relatively quickly and cost effectively install additional manufacturing capacity in available shelf space within the Myford facility. This provides the opportunity to organically and significantly grow our current drug substance manufacturing business within our existing facilities. Finally, beyond growth, strengthening and extension of our current service offering, there's tremendous opportunity in areas that Avid is not currently active. This represents the third facet of the growth strategy. At present, Avid is focused on the production of antibodies and various classes of recombinant proteins derived from mammalian cell culture. Opportunities exist to manufacture other biologics derived from microbial expression systems, and advances in gene, cellular and immunotherapies, antibody drug conjugates and multi-specific antibody products feed a growing demand for manufacture of newer classes of products, including viral vectors and vaccines, which are quite similar but distinct manufacturing processes to those currently offered at Avid. The available space in the Myford manufacturing facility also provides us with the opportunity to consider additional vertically integrated, high-value manufacturing services, such as fill-and-finish drug product manufacture in support of customers' clinical requirements. While incorporating such offerings into the business will undoubtedly deliver technical and regulatory challenges they offer considerable growth opportunity, and they ultimately contribute to the transformation of Avid into a global and leading CDMO. We continue to evaluate these strategic opportunities and we'll report our conclusions as they are reached. Given today's strong biologics market, the growing demand and limited production capacity available globally, it is clear that there is a tremendous opportunity for Avid in the coming years. We have established a strategy to take full advantage of promising market conditions and have launched a number of efforts to position Avid to successfully achieve stable growth and leadership in this sector. Before turning over the call to Paul, I'd like to address two additional steps that must be completed in order to finalize and formalize this transition. First, as discussed previously, we are in active discussions to divest the legacy Peregrine R&D assets and have taken action to formally wind down all R&D related activities not required to effect the transaction. We will keep you updated on progress. Lastly, we are taking steps to transition Peregrine and Avid into a single entity and will change the name of the company to Avid Bioservices Incorporated. Through this process, there will be no change to the company's shares outstanding or to the shares held by individual shareholders. We are currently taking steps to effect this transition, and we expect to have the entire process complete in early 2018. I look forward to completing the transition to a dedicated CDMO, to focusing on execution and to keeping you updated on progress. With that, I’ll hand over to Paul, who will cover the quarterly financial results.

Thanks, Roger. I'll now discuss our financial results for the second quarter of fiscal '18, starting with revenue. During the second quarter, we recognized $12.8 million in contract manufacturing revenue compared to $23.4 million in contract manufacturing revenue for the second quarter of fiscal '17. While the current quarter revenue declined compared to the same prior year period, we have achieved higher revenue to date for the current 6 month period of almost $40 million versus the same prior year period of $29 million. In addition, as Roger mentioned, we are still on track to achieve the full fiscal year '18 revenue guidance of $50 million to $55 million. This means though, we expect revenue for the remainder of the fiscal year to be relatively light due to the decrease in demand from our two largest customers, combined with the normal development and manufacturing time lines of new customer projects. As a backdrop, it's important to note that new customer projects generally commence with either a technology transfer of a known or defined manufacturing process, or we can develop a new manufacturing process for them, which can take up to 1 year before the higher value manufacturing revenue is generated. Therefore, customers that we secure in fiscal '18 will generally contribute more meaningfully to top line revenue in fiscal '19 and reinforces our need to secure new business over the near term. This brings me to our revenue backlog. As of today, our existing customers have signed and committed to $33 million in future manufacturing services, of which we expect to recognize $10 million to $15 million in revenue over the remainder of fiscal year '18. In addition to our committed backlog, it's important to highlight that our customers have historically committed to services that cover a relatively short period of time as their project advances. Therefore, the committed backlog does not generally include all manufacturing services required to fully execute on their program. As a result, we do have a soft backlog of business on top of what has been committed to, and our goal over the near term is to continue to convert the soft backlog to a committed backlog. Let me shift gears now to discuss our gross margins on contract manufacturing revenue. During the current quarter, our gross margin declined to a negative 27%. This was mostly driven by manufacturing capacity that was not utilized during the quarter, also referred to as idle capacity. During the current quarter, idle capacity negatively impacted gross margin by 39 percentage points. As we look to improve these margins, in addition to focusing on our book of business and growing our customer base and backlog, we are also actively evaluating our overall cost structure as a dedicated CDMO, and we plan to align our cost structure to match the future needs of this new dedicated CDMO business. Turning now to operating expenses. Total operating expenses for the second quarter of fiscal '18 were $9.2 million compared to $12 million for the second quarter of fiscal '17. Included in operating expenses this quarter was $1.6 million in restructuring charges associated with workforce reduction pursuant to our restructuring plan implemented last August 2017. Research and development expenses decreased to $3.7 million in the second quarter of fiscal '18 compared to $7 million for the second quarter of fiscal '17, in line with our ongoing wind-down of R&D activities. It's important to note that over the next few months, we will continue to rapidly wind down all research and development costs to zero, supporting only those efforts needed to pursue the license or sale of our research and development assets. And for the second quarter of fiscal '18, SG&A expenses decreased to $3.9 million compared to $5 million for the second quarter of fiscal '17. The company's consolidated net loss attributable to common stockholders was $14.1 million or $0.31 per share for the second quarter of fiscal '18 compared to $5.5 million or $0.16 per share for the same prior year quarter. Cash and cash equivalents as of October 31, 2017, were $27.7 million compared to $46.8 million at fiscal year ended April 30, 2017. As further discussed in the company's quarterly report on Form 10-Q, which was filed today, we plan to raise additional capital within the next six months to support our continued operations and other initiatives that will enhance our CDMO operations. The amount of capital we need to raise will depend on a number of factors, including, the amount of new business we can secure over the near term, the anticipated changes in our operations as we wind down R&D operations and align our cost structure to meet the future needs of the CDMO business and the capital needed to support our other initiatives within our near term strategic plans that will enhance our operations. Due to some of these uncertainties, we cannot quantify the amount of capital we need to raise today, but we are focused on minimizing dilution and only raising sufficient capital to achieve these goals. This concludes my financial overview. I will now open the call up for questions. Brian?

Thank you, sir. [Operator Instructions] And our first question will come from the line of Caroline Palomeque with NOBLE Capital Markets. Please proceed.

Thank you. And I'm showing no further questions at this time. I'd like to hand the call back to Mr. Roger Lias for any closing remarks. Please proceed, sir.

Okay. Thank you, Brian. Thank you, everybody, again for participating in today's call. I'd certainly like to take the opportunity to welcome our new Board of Directors and to thank them for their input and guidance to date. And of course, as always, I'd like to thank our stockholders for their continued support. Thank you, and have a great afternoon. And with that, I will conclude the call. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This will conclude our program. You may now disconnect. Everybody, have a wonderful day.