What happened

Shares of Avid Bioservices (NASDAQ:CDMO) rose over 22% today after the company reported fiscal second-quarter 2020 operating results. The company is a pure-play contract development and manufacturing organization (CDMO), which means it manufactures pharmaceutical drug compounds as a service. After shuffling operations in the past 24 months or so, it appears that the business is finally on a sustainable trajectory. 

Avid Bioservices reported strong revenue growth, delivered much-improved gross margin, and reported an operating loss of only $529,000 during the most recent quarter. Important facility upgrades were made (with more on the way) and the backlog held a healthy $52 million in future work. All the progress gave management confidence to maintain fiscal full-year 2020 revenue guidance of $64 million to $67 million. 

As of 12:41 p.m. EST, the pharma stock had settled to a 15.9% gain.

A woman pumping her fist in excitement while viewing her laptop.

Image source: Getty Images.

So what

In the most recent quarter, facilities benefited from past technology upgrades and operating at a higher run rate. That confluence of factors enabled a gross margin of 18% in the quarter, up from just 3% in the year-ago period. Avid Bioservices generated 75% of fiscal first-half 2020 gross profit in the most recent quarter. 

Metric

First-Half Fiscal 2020

First-Half Fiscal 2019

Change (YOY)

Revenue

$33.6 million

$22.8 million

47%

Gross profit

$4.4 million

$1.5 million

191%

Gross margin

13.3%

6.7%

658 basis points

Operating income

($3.9 million)

($4.5 million)

N/A

Data source: Press release. YOY = year over year.

There's still significant room for improvement. Avid Bioservices recently opened a new process development lab, which will allow the company to help customers both earlier in the drug manufacturing process workflow and to work out scale-up issues. Later this fiscal year, the CDMO will upgrade all water systems to meet strict pharmaceutical industry guidelines. And there are a number of additional regulatory qualifications and standards the company can strive to obtain.

Now what

Avid Bioservices is making progress against a long list of strategic initiatives. It will take time for the tiny company to deliver sustainable revenue growth, which is still exposed to choppiness from quarter to quarter, but the business appears to be headed in the right direction.