Greetings. Welcome to Inotiv, Inc.'s Third Quarter Fiscal 2022 Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Devin Sullivan of the Equity Group. Thank you. You may begin.

Thank you, Alex. Thank you, everyone, for joining Inotiv's Third Quarter Fiscal 2022 Financial Results Call. 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 any 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. Management will also discuss certain non-GAAP financial measures in an effort to provide additional information for investors. A definition of these non-GAAP measures and reconciliation to the most comparable GAAP measures are included in the company's earnings release, which will be posted in the Investors section of the company's website at inotivco.com and is also available in the Form 8-K filed with the Securities and Exchange Commission today. Joining us from the company this afternoon are Bob Leasure, President and Chief Executive Officer; Beth Taylor, Chief Financial Officer; and John Sagartz, Chief Strategy Officer. Bob will begin with some opening remarks, after which Beth will present a summary of the company's financial results. Then we'll open the call for questions. It is now my pleasure to turn the call over to Bob Leasure, President and CEO of Inotiv. Bob, please go ahead.

Thank you, Devin, and good afternoon, everyone. We appreciate you taking the time to join us today. By almost any measure, our third quarter results were above our expectations at this point in our growth and integration development strategy, driven by a combination of the positive impact of well-positioned acquisitions, organic growth and a favorable pricing environment, we reported record revenues, adjusted EBITDA and backlog. We continue to make investments in expanding capacity and developing new service lines in response to demand from existing clients, clients of businesses we acquired in recent acquisitions and new clients we've attracted as we've continued to build the product and service portfolio and positive reputation of Inotiv as a fully integrated service provider. We've implemented a site optimization plan to enhance services and improve our business model at our Research Model Services, or RMS business. This will allow us to achieve scale at RMS sites, augment existing facilities and improve future margins. We also continue to add scale in our Discovery and Safety Assessment, or DSA, business, to meet increasing customer demands, drive revenue growth and improve efficiencies and margins. This requires that we continue to invest in our recruiting, internal processes, facilities, equipment, technology and existing personnel. In our view, Inotiv's performance so far in fiscal 2022 reflects our continuing evolution towards being a world-class provider of preclinical CRO services to the global pharmaceutical and biotech industries as they pursue their development of life-changing new medicines. I think, as a company, we're much better today than we were 9 months ago, but we're not nearly as good as we need to be 9 months from now. The total revenue for fiscal 2022 third quarter grew sevenfold to $172.7 million and adjusted EBITDA increased to $37 million or 21.4% of total revenues. Our DSA…

Thanks, Bob, and good afternoon. Total revenue for the third quarter of fiscal 2022 rose to $172.7 million from $22.9 million in last year's third quarter, driven by higher revenue at our DSA segment and incremental revenue from our RMS segment. DSA segment revenue grew 114.8% in the fiscal 2022 third quarter to $49.2 million from $22.9 million in the fiscal 2021 third quarter, and this was driven by a $20.9 million increase in service revenue from internal growth, which was complemented by $5.4 million of incremental service revenue from the acquisitions that Bob referenced earlier. Our RMS segment revenue was $123.4 million. We did not have any RMS revenue in the comparable prior year period. And as Bob noted, we did realize a full quarter of revenue from the Orient BioResource acquisition. Our total gross profit increased to $50.9 million or 29.5% of revenue, up from total gross profit of $7.6 million or 28.9% of revenue in last year's third quarter. Gross profit for our DSA segment was $21.8 million or 44.3% of segment revenue compared to segment gross profit of $7.6 million or 33.2% of segment revenue in last year's third quarter. The improvement in gross profit was primarily due to increased revenues as a result of favorable pricing and investments in the DSA segment designed to increase margins and capacity in order to meet growing customer demand. RMS segment gross profit in the third quarter of fiscal 2022 was $29.1 million or 23.6% of RMS revenue. While we did not have any RMS gross profit in the prior year's comparable period, RMS gross profit in the fiscal 2022 third quarter benefited from improved product mix of higher-margin research models, along with the full quarter of margin from the Orient BioResource acquisition, and this was partially offset by…

[Operator Instructions] Our first question comes from the line of Frank Takkinen with Lake Street Capital Markets.

Congrats on the results and really all the positive progress here. I wanted to start my questioning on the DSA business. And first, a clarifying question. The organic growth rate, did I hear correct at 91.3%? And then two, just any specific bright spots in the DSA business driving that organic growth worth calling out would be great color?

Well, we have obviously been increasing our capacity at a few of our sites, for one; two, we benefited from favorable pricing in the market; and three, we've benefited from several acquisitions where we continue to acquire customers. So we've been able to grow our customer base; and then finally, we've actually increased our sales and marketing. So we talked about this a little bit also going back into, I think, in our January call is that one of the -- when the economy goes down, what we want to do is make sure we're picking up -- we're very small part of a very big market. We want to make sure we're picking up our percent and be the first call that our clients make. And we need to work very hard to earn that every day. We also, during this time, felt that we may need to pick up some more clients if the market was to go down. So we put some extra effort into our sales and marketing, adding people to the sales. And I think we benefited a little bit from all of those things. So I don't think it's any one thing. I think it's several things. And the fact that we had the capacity to expand our sales. We've been working on that for a while. People always ask, what is your capacity? And I'm not sure we even know ourselves sometimes what it is. The growth of $48 million, $49 million on the DSA business was not something I would've expected this quarter, but very pleased to see.

Okay. That's helpful. And then maybe just a follow-up related to your commentary on the cancellations. I appreciate the color there. Just so I'm making sure I'm understanding correctly, it sounds like it was more customer-by-customer basis based on the programs that they were advancing in those programs, not making it to the next stage, if I'm understanding correctly. And then just maybe to ask for a little more color on that. Any of those cancellations related to a more challenged biotech funding market where they just don't have the capital to pursue some of their earlier stage projects? Or are you not seeing that phenomenon play out?

Well, I think in the ordinary course of business, sometimes with the biotechs, you do see some people that are you going to -- don't feel like you're making the progress and they're not going to raise the money. I don't think we've seen anything out of the ordinary course of business in those cancellations. What was unusual is the number of cancellations we saw this quarter because of the molecules not being ready or delays that our clients have had in being able to go forward with their studies. And so that did impact or the study is just not ready to go forward or will never go forward because they didn't proceed as they expected. I guess it's something we should have expected, seeing that we're booking things 16 to 18 months out, and it's not as well known. But I'm guess -- John, John, do you have something that you could add? Anything you want to add to what you've seen there and what you -- how you feel about that?

No, I would just echo what you said that I think our clients are prophetically booking studies well into the future in some cases in which molecules haven't even been properly identified. So there are lots of reasons for compounds to fail. And if they're not ready to go, they don't take the slots that they had previously booked.

I will add to that also, Frank, right now, we've been fortunate we've been able many times to go at. We have those openings. We've been able to go out to the market and say we have an opening. And it's -- because the market -- the demand is pretty high, we've been able to fill up some of those openings. So we've been fortunate to date with that.

Okay. That's really helpful. And then just maybe an update around optimizing the network footprint as my last question. Following along, it makes a lot of sense in the world, and I understand the strategy around it. Just curious if when you're looking at the broader business right now, if there's still more significant network optimization coming from as far as a consolidation or closure of facilities in the research model business goes.

No, not at this point. We have announced what we intend to do. And we're always evaluating opportunities. But this is all, I think, we have to announce at this time.

Our next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group.

Congratulations on the progress. Maybe first up, a big step-up in service gross margin in the quarter. I know you've obviously been working on some of these optimization progresses or projects. But as we think about that Q4 and going forward, I would assume that, that maybe pulls back a little bit based on mix in Q4, it sounds like. But how should we be thinking about that line item going forward?

I would say that we had a pretty favorable mix, and we had some favorable pricing in this quarter in the Q3. And as I said before, I think you got to look at the combination of the rolling six months, not just 1 quarter at a time because you can have unusual mix or charges go through a quarter. Beth, do you have anything you want to add to that?

No, I will just echo especially on the RMS side, it was a mix of the product sales. And then on the DSA side, I mean, we're definitely getting the benefit of scale as our revenue is increasing.

Yes. We have a very fixed cost structure. So some of this incremental revenue is -- some of this sees as much as 50% to 80% drops to the bottom line.

That's great. Maybe shifting gears, the Protypia acquisition, adding some new capabilities in the immuno-oncology and cell and gene therapy markets. Is that an area where you see some incremental growth and opportunity as we look out over the next couple of years? Is that something customers are seeking out and you're looking at that and trying to balance, okay, near-term capacity expansion, adding head count, all those types of things, owned by the way, we've got some new markets where there's clearly some opportunities?

I think this technology fits well into pulling several things together for us. But I'm going to let John answer that.

Boy, that's a good question. So yes, it brings new technology that complements where we're going in our large molecule bioanalytical business. It allows us to take a look at biomarkers in solid tissues where prior to that, we were looking at biomarker development in body fluids. So it complements very much what we're doing in both the nonclinical and clinical space. The applications immediately offered are in the immuno-oncology space, but we have an opportunity to leverage the technology into many other therapeutic indications.

This is also one of the -- as I said I think in other times before, this is one of those technologies that we want to build the company, we want to be in the future. And when I got here in 2018, there was a risk of building the company, spending 2 or 3 years to build the company, you should have been in 2018. This is 2022, and we're trying to build right now and put together the technology we think is going to be relevant in 2024 and 2025. And this was critical to that strategy.

Our next question comes from the line of Dave Windley with Jefferies.

Bob, I wanted to start and ask if you could elaborate on what you're seeing in kind of both the demand side and the supply side of your nonhuman primate business?

Well, let's say, switching over the nonhuman primate. It's been a market where the -- historically, the demand has been outstripping our supply. And we still see that today. I think that right now, we're trying to evaluate what 2023 is going to look like. It looks like that is going to -- that could continue. We don't see the supply increasing any at this time. But a lot of that has to do with what's taking place in Asia, China, Cambodia. And sometimes, it's hard to get that information directly over the phone. So we're on the ground, and we're trying to understand that what that future is going to look like, what it looks like today. But so far, we've seen that demand remain fairly strong. We're still getting our hand around that business, I think, and what it can be. We also, I believe, can really enhance the services of that business. So it's one thing to sell the NHP, but it's another broad all the services that go with that being boarding in and the breeding the veterinary care and whatnot. So we're looking at all those things as ways to grow the business. But right now, we don't see anything changing over the last 6 or 8 months. And I'd see the demand staying the same, but I understand why you're asking the question, it could be a good bellwether if projects are slowing down or canceling. If we look at our future toxicology request, we're still out 14, 16 months. And we believe that our -- most of our customers are still out quite a bit, too. So -- but we'll have to evaluate that as the next 90 days as we start getting more, I guess, more concrete ideas of what the people -- what our customer base is going to be looking for next year.

Right. If I could follow up there, are you still seeing pricing escalate for, I guess, the pricing for monkeys has gone up a tremendous amount? And I guess I'm wondering, is that still escalating? Or is it more of an equilibrium now? And then I appreciate you said you don't see supply increasing. I'm hearing that maybe some breeders are coming back online. And the Philippines and some other areas, I'm wondering if you're seeing any of that?

We have not seen it yet, but -- come to market, but somebody coming back online and breeding and then having something to sell is going to be a 3- to 4-year process. So we will -- I appreciate you mentioning that. We'll look into that. We've not seen that to date. And as far as pricing goes, I believe the pricing is staying fairly healthy. I believe it's going up. And early indications, we've got some indications of pricing may continue to go up. But I think, again, that's something that we'll know more about in the next 60 to 90 days.

Okay. Let me flip over to DSA and ask, are you having clients approach you for either take-or-pay, what would be, I guess, more space-oriented agreements, take-or-pay agreements around reserving study rooms or reserving animal colonies to ensure the availability of the colony when they're ready to run the study? Are you seeing clients kind of willing to take risk around that type of engagement?

Yes. Let's take those two separate questions. One, we do not have a take-or-pay arrangement in our business model. And we don't have a lot of large pharma toxicology studies. We're still small to medium-sized pharma biotechs. And we've not -- so we've not had in our client base, the take-or-pay request or proposals. And so we've not addressed that. And right now, I don't see that we are set up to do that. As far as colonies, yes, we do have -- we do in our RMS business sell to large pharma. So we do the other CROs and small and the government. And we do see people wanting to reserve colonies and have boarding arrangements, so they do have them available because they're concerned over the supply issue going forward.

Okay. I appreciate that. And then if you could talk, maybe this is a Beth question, but thoughts around capital structure and your ability to -- I missed it if you said it, what your kind of exposure to variable rate is and your ability to perhaps lock that in or swap that to minimize your interest rate exposure?

Beth, I'll let you answer that.

Yes. So yes, regarding our interest rates, it is like 6.25 on our senior secured debt plus LIBOR, and we have the option of locking that in either every three months or six months.

And is that a permanent? I'm sorry, I didn't understand that. Is that a permanent lock-in or you can lock it in for a period of time?

No, we can lock in for a period of time when we get the option of locking it in for three months at a time or six months at a time.

Okay. And what are thoughts about, say, hedging interest rate risk or swapping to fixed over the duration of the debt?

Well. Yes, we have -- in looking at the debt market right now in a refinancing option, it would be actually very expensive for us to refinance to a fixed rate.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call back over to Bob Leasure for closing remarks.

Thank you, everyone, today. As I mentioned at the top of the call, we are very pleased with our performance through the first nine months of fiscal '22. Demand from existing and new clients for our services continues to grow. We believe we're in a strong position to provide fully integrated consultant CRO service supporting critical drug, medical discovery, device discovery and development that saves and improves the quality of human lives. We continue to make careful customer-led investments in our business to drive future growth, and we continue to attract and promote world-class talent to develop and implement our strategic plans. In closing, I'd like to take a moment to thank our 2,000-plus employees who work tirelessly every day to provide a unique Inotiv experience for all of our customers. They are the reason our customers want to grow with us and to truly appreciate what they do for us. This concludes our prepared remarks. And with that, operator, I think we can close the session. Thank you very much.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.