Inotiv, Inc. (NASDAQ:NOTV) is a leading contract research organization (CRO) dedicated to providing nonclinical and analytical drug discovery and development services to the pharmaceutical and medical device industries, as well as selling a range of research-quality animals and diets to the same industries, academia, and government clients. The company has faced a mix of industry-specific and company-specific challenges in recent periods, but remains focused on executing its long-term strategic plan to drive sustainable growth and profitability.

Financials

For the fiscal year ended September 30, 2023, Inotiv reported annual revenue of $572.4 million and a net loss of $105.1 million. The company generated annual operating cash flow of $27.9 million and annual free cash flow of $0.4 million. These results reflected the impact of various headwinds the company has navigated, including disruptions in the non-human primate (NHP) supply market, a challenging funding environment for the biopharma industry, and legal and regulatory matters.

In the second quarter of fiscal 2024, Inotiv reported total revenue of $119.0 million, down 21.5% year-over-year. This decline was primarily driven by a 30.7% decrease in the company's Research Models and Services (RMS) segment revenue, which was largely attributable to lower NHP-related product and service revenue. The company's Discovery and Safety Assessment (DSA) segment revenue decreased by less than 1% in the quarter.

The lower RMS revenue was partially offset by a 3.6% increase in DSA revenue for the six months ended March 31, 2024, compared to the prior-year period. The DSA revenue growth was driven by increased demand for the segment's safety assessment services, including genetic toxicology and biotherapeutic analysis, which helped offset declines in the discovery services portion of the business.

Inotiv's consolidated net loss for the second quarter of fiscal 2024 was $48.1 million, or $1.86 per diluted share, compared to a net loss of $10.0 million, or $0.39 per diluted share, in the prior-year period. The increased net loss was primarily due to the lower revenue, a $26.5 million charge related to an agreement in principle with the U.S. Department of Justice (DOJ), and the impact of lower margins from the sale of the company's Israeli businesses.

Business Overview

The company's RMS segment was particularly impacted by the challenges in the NHP market. NHP-related product and service revenue decreased by $26.2 million, or 30.7%, in the second quarter compared to the prior-year period. Inotiv noted that the overall supply of NHPs in the U.S. has declined significantly, from over 30,000 NHPs imported in 2022 to approximately 19,000 in 2023, leading to increased pricing and some studies being shifted outside of the U.S. The company has been working to diversify its NHP suppliers and develop new service offerings to reduce its reliance on NHP-related revenue.

Geographically, Inotiv's revenue is primarily generated in the United States, which accounted for 85.1% of total revenue in the second quarter of fiscal 2024. The Netherlands contributed 8.2% of revenue, while the remaining 6.7% came from other international markets.

Outlook

Looking ahead, Inotiv has withdrawn its financial guidance for fiscal year 2024 due to the ongoing uncertainty in the NHP market and its impact on the company's revenue and margins. The company remains focused on optimizing its market share and increasing awards in the DSA segment, as well as continuing to execute on its site optimization and cost reduction initiatives in the RMS segment.

Liquidity

Inotiv's liquidity position remains a concern, as the company had $32.7 million in cash and cash equivalents as of March 31, 2024, compared to $35.5 million at the end of the prior fiscal year. The company's total debt, net of debt issuance costs, was $380.6 million as of March 31, 2024, relatively consistent with the $377.7 million reported at September 30, 2023.

The company's financial covenants under its credit agreement include a requirement to maintain certain leverage and fixed charge coverage ratios. Inotiv has obtained an amendment to its credit agreement that allows it to add back the $26.5 million charge related to the DOJ agreement in principle when calculating its financial covenants. However, the company has indicated that if its revenue and related operating margins do not improve, it could result in non-compliance with the financial covenants, which could lead to an acceleration of the company's debt.

Inotiv has taken several actions to improve its liquidity and financial position, including implementing cost-cutting measures, site optimization initiatives, and new strategies to improve the efficiency and cost-effectiveness of its transportation operations. The company has also been working with its lenders to obtain amendments to its credit agreement and is evaluating additional financing alternatives to meet its cash requirements.

Conclusion

Despite the challenges Inotiv has faced, the company remains focused on executing its long-term strategic plan. The company believes it has the physical capacity to accommodate a 40% increase in DSA revenue over the $185 million recognized in fiscal 2023, and it is working to optimize its market share and increase awards in this segment. Additionally, the company expects to realize further benefits from its investments in new service offerings, sales and marketing initiatives, and site optimization projects.

Inotiv's management team is committed to navigating the current industry and company-specific headwinds, while positioning the business for long-term growth and sustainable profitability. The company's diversification efforts, cost-cutting initiatives, and focus on high-growth service offerings are intended to reduce its reliance on the volatile NHP market and build a more resilient business model for the future.