Lifecore Biomedical, Inc. (NASDAQ: LFCR) is an integrated contract development and manufacturing organization (CDMO) that offers highly differentiated capabilities in the development, fill and finish of sterile, injectable pharmaceutical products in syringes and vials. As a leading manufacturer of premium, injectable grade Hyaluronic Acid (HA), Lifecore brings 37 years of expertise as a partner for global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories to bring their innovations to market.
Lifecore's biomedical business is the core focus of the company, generating $71.7 million in revenue and $2.3 million in net income from continuing operations during the nine months ended February 26, 2023. The company's natural foods business, Curation Foods, was divested in fiscal 2023, allowing Lifecore to concentrate solely on its CDMO operations.
Business Overview
Lifecore's CDMO business is comprised of two integrated activities: CDMO and Fermentation. The CDMO segment provides aseptic formulation and filling of syringes and vials with precisely formulated medical grade HA and non-HA materials for injectable products. The Fermentation segment manufactures and sells pharmaceutical-grade sodium hyaluronate in bulk form to its customers.
Lifecore separates itself from competitors through five key areas of expertise: establishing strategic relationships with market leaders, expanding medical applications for HA, utilizing manufacturing infrastructure to meet customer demand, maintaining flexibility in product development and supply relationships, and delivering consistent quality. Lifecore's vertically integrated development and manufacturing capabilities allow it to offer a variety of contractual relationships with global corporate partners, ranging from supplying HA raw materials to providing technology transfer, development services, and manufacturing aseptically filled, finished sterile products.
Lifecore's unique expertise, coupled with ongoing industry trends towards outsourcing of new drug development and its 40 years of experience in creating a world-class quality management system, position the company as a preferred partner to provide CDMO services for new injectable drug applications. Approximately 55% of all new drug applications are injectables, and prefilled syringe demand is growing at an estimated 13% compound annual rate, providing a significant opportunity for Lifecore.
Financials
For the fiscal year ended May 28, 2023, Lifecore reported annual revenue of $103.3 million and a net loss of $102.2 million, which included $21.0 million in losses from the divestiture of the Curation Foods business. The company's annual operating cash flow was -$34.5 million, and annual free cash flow was -$55.2 million, reflecting investments in capacity expansion and the impact of the Curation Foods divestiture.
In the fourth quarter of fiscal 2023, Lifecore's segment revenue increased 14.2% to $31.5 million, driven by a 38% increase in HA raw material manufacturing revenue and a 9% increase in CDMO revenue. Segment gross profit, however, decreased $4.9 million to $8.5 million, representing a gross margin of 26.9%, compared to 48.4% in the prior year period. The decline in gross margin was primarily due to an unfavorable rate variance of $6.8 million, driven by a lower volume of higher-margin development revenues and inflationary impacts on certain legacy contracts, partially offset by the higher volume of fermentation revenues.
Lifecore's segment adjusted EBITDA for the fourth quarter was $6.1 million, representing a margin of 19.3%. For the first quarter of fiscal 2024, the company expects Lifecore's adjusted EBITDA to be approximately breakeven, excluding the burden of the corporate overhead segment, which will be consolidated into Lifecore's results starting in Q1 2024.
Looking ahead, Lifecore expects revenue and adjusted EBITDA to show accelerated improvement in the second quarter of fiscal 2024, with revenues growing by nearly 40% and adjusted EBITDA growing at approximately twice the rate of revenues compared to the prior year period. This improvement is expected to be driven by the commencement of commercial shipments that were delayed, strong fermentation revenues, and the onboarding of new pipeline development projects.
Capacity Expansion and Operational Excellence
To support the growth in its development portfolio and meet increasing customer demand, Lifecore is investing in capacity expansion initiatives. The company has manufactured and is in the final stages of factory acceptance testing for two new isolator fillers, a 5-head and a 10-head, which are expected to be GMP ready by Q1 of calendar 2024. These new fillers will allow Lifecore to double its theoretical filling capacity to approximately 45 million units, putting the company in a strong position to meet market needs.
Additionally, Lifecore is transitioning its fermentation production from a single shift to a full 24/7 staff, which is expected to increase its sterile HA capacity by 50% by June 2024. This capacity expansion is driven by the increased HA volume requirements associated with Lifecore's expanded supply agreement with Alcon.
Alongside these capacity investments, Lifecore continues to focus on operational excellence, with initiatives such as its Lifecore University training program and Lean certification program. These efforts are aimed at attracting new talent, developing the existing team, and creating an efficient environment for enhanced cross-functional communication.
Development Pipeline and Customer Diversification
Lifecore's development portfolio has grown significantly, with the number of active projects increasing from 24 at the end of fiscal 2022 to 29 as of the end of fiscal 2023. These projects span early phase clinical development, Phase I and II clinical development, and Phase III clinical development and scale-up commercial validation activity, with 5 new projects added in the fourth quarter from 5 new customers.
The company's targeted and focused sales approach has also highlighted and identified 44 prospective projects in its development opportunity pipeline as of the end of the fiscal fourth quarter. These opportunities span multiple end markets, classes of drugs and medical devices, and include a diverse mix of both large and small companies, demonstrating the attractiveness of Lifecore's CDMO capabilities.
Notably, approximately half of Lifecore's current development opportunity pipeline is related to drug products, representing the potential to expand relationships with some of the larger pharmaceutical companies in the industry. The company also continues to see substantial interest from customers who want to utilize its HA expertise for highly viscous products, further diversifying its customer base.
Liquidity
As of May 28, 2023, Lifecore had $147.2 million in net term and revolver debt, including $19.1 million in cash and cash equivalents. The company's capital structure was significantly impacted by a comprehensive refinancing that closed in the fourth quarter of fiscal 2023.
The refinancing included the termination of Lifecore's prior term loan facility and the entry into a new $140 million term loan facility with Alcon Research, LLC as the lender. The new term loan facility has a fixed interest rate of 10% per annum, with interest payable-in-kind until the third anniversary of the closing date and then partially payable in cash thereafter.
Additionally, Lifecore entered into an equipment sale and leaseback agreement with Alcon, where the company sold $10 million of equipment associated with the production of sodium hyaluronate and leased it back from Alcon. These transactions have provided Lifecore with additional liquidity, eliminated its noncompliance with financial covenants, and reduced its near-term debt service costs.
Risks and Challenges
While Lifecore's outlook appears promising, the company faces several risks and uncertainties that investors should consider. The company's reliance on a limited number of large customers, the potential for delays in the commercialization of its customers' products, and the impact of inflationary pressures on its legacy contracts could all pose challenges to its financial performance.
Additionally, Lifecore's increased dependence on Alcon as both a significant customer and its primary lender introduces new risks related to the nature and significance of this relationship. The company's material violation of the Alcon supply agreement could trigger an event of default under the new term loan facility, putting significant pressure on Lifecore to comply with the agreement's terms.
Conclusion
Lifecore Biomedical is a promising CDMO poised for significant growth in the coming years. The company's unique expertise, capacity expansion initiatives, and diversified development pipeline position it well to capitalize on the growing demand for injectable pharmaceutical products. While the company faces some risks and uncertainties, its comprehensive refinancing and strategic focus on its core CDMO business provide a solid foundation for future success. Investors should closely monitor Lifecore's progress as it navigates the next phase of its growth and development.