Manufacturing shutdowns and idle capacity mar Avid’s Q2

Business is up and proposal requests are increasing, but planned sequential maintenance shutdowns of both Avid’s manufacturing facilities hit the CDMO’s second quarter revenues.

For the second quarter FY19, Avid Bioservices reported manufacturing revenue of $10.2 million (€9 million), down 20% on the same period last year.

The firm – which became a pureplay contract development and manufacturing organization (CDMO) in January 2018 – attributed the drop to planned sequential maintenance shutdowns of both its Californian production plants.

Image: iStock/Artur

The Franklin facility shut down for a total of 23 days, and the newer Myford facility was non-operational for 22 days during the second quarter, CEO Roger Lias told stakeholders during a financial call.

“Given the loss of revenue opportunity occasioned by the declassification shutdown and reclassification of manufacturing facilities, I’m pleased with our financial performance during the quarter,” he said. “I’m also very happy with the performance of our team in efficiently executing these complex activities, both manufacturing facilities are back to full operational status.”

Avid’s process development services and lab work were not impacted by the shutdowns.

But while revenue dropped, Avid remained upbeat, boasting a backlog of $36 million in the quarter and a doubling in the number of requests for proposals received from Q1.

Keep the FDA at bay

“In the past, the former subsidiary of Peregrine Pharmaceuticals, Avid, has implemented primarily limited rolling overhauls that while allowing basic maintenance did not allow the implementation of certain critical upgrades and maintenance procedures necessary to mitigate risk and ensure efficient bioprocessing,” Lias said.

The last full shutdown at the Franklin facility was undertaken in 2013, he said, and during the shutdown the firm “undertook very significant maintenance and upgrade work necessitated by the age of the facility that had not been adequately addressed previously.”

At Myford, the CDMO completed work associated with the commissioning the facility and added backup power to the laboratory areas and new monitoring systems.

Annual planned shutdowns “have become an industry standard and an essential part of maintaining compliance,” said Lias, indicating internal exercises like this keep the US Food and Drug Administration (FDA) and other regulators at bay.

“What I’m looking at it is to stop the FDA from getting involved in future, because you’re doing your maintenance,” he continued. “It does reduce the probabilities that you’ll run into any future problems that’s the reason for doing it, I guess.”

In future years there should be less disruption, the firm said.

Idle capacity

For the six months of fiscal year 2019, gross margin was 6.7% down from 8% in the prior year period.

“This decrease was primarily attributed to the variability of product cost, offset by a favorable reduction in idle capacity cost,” CFO Daniel Hart said on the call. “It was gratifying to see our margins improve during the second quarter and they would have been further improved had we not incurred additional idle capacity due to the maintenance overhaul.”

The fixed costs associated with highly regulated biologics manufacturing are major influences on a CDMO’s margins, he continued, adding the only way to increase margins is by increasing capacity utilization.

“To this end, we continue an aggressive effort to both expand our customer base and extend current client projects to increase our backlog and enhance capacity utilization.”

UPDATE: Following the publication of this article, Avid told us the shutdowns were internally planned with no consideration for FDA or requirements from FDA. “Despite the less frequent shutdowns by Avid/Peregrine in the past, the company has always had an exemplary regulatory record when it comes to FDA inspections so this is not a concern for the company,” a spokesperson said. While there is no downside to the FDA knowing that a firm is staying on top of compliance issues, Avid said that it in no way drove the company’s maintenance strategy.