What happened

Shares of Avid Bioservices (NASDAQ:CDMO) fell as much as 34.4% today after the company reported fiscal third-quarter 2020 operating results. The contract development and manufacturing organization (CDMO) encountered problems with a specific piece of equipment, which forced it to discard in-process manufacturing runs and delay parts of its manufacturing schedule. As a result, the business had to significantly reduce fiscal full-year 2020 revenue guidance.

Previously, the company had been expecting annual revenue of $64 million to $67 million. It now expects only $55 million to $59 million in revenue during the current fiscal year, which ends on the last day of April.

As of 1:54 p.m. EDT, the small-cap stock had settled to a 31.4% loss.

An angry fist pounding the table as a declining stock chart displays on a tablet below.

Image source: Getty Images.

So what

Avid Bioservices CEO Rick Hancock said he expected the operational setback would be limited to fiscal 2020. To that point, the company exited January (and its fiscal third quarter of 2020) with a revenue backlog of $58 millon. That marked a 12% increase compared to the fiscal second quarter of 2020. 

That said, investors might need to adopt a more cautious mindset for another quarter or two. Trust and track record are paramount to a CDMO. That's kind of the point. A drug developer relieves itself of all the engineering and regulatory headaches of drug manufacturing by hiring a CDMO. When the CDMO you hired or were thinking of hiring encounters a major operational setback, it doesn't create the best optics or foundation for building long-term trust. 

Then again, biomanufacturing isn't easy -- and the company's customers understand that. That's also kind of the point. If you're a drug developer, then better the CDMO encounter the manufacturing problem than you.

Now what

The recent operational setback isn't ideal, but broader industry headwinds could propel Avid Bioservices past the event relatively quickly.

The company is in the process of upgrading major equipment systems, which should make it a more attractive partner for drug developers. There's also a tidal wave of demand for biologic drug manufacturing capacity coming over the horizon. The U.S. Food and Drug Administration (FDA) estimates there are over 1,000 cell and gene therapy clinical trials underway right now, with an additional 200 expected every year for the foreseeable future. There are also over 550 clinical trials underway involving monoclonal antibodies.

Avid Bioservices seems well-positioned to capture the opportunity, but the latest update is a reminder that even obvious growth opportunities aren't guaranteed.