Emergent BioSolutions Inc (EBS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q4 2006 Emergent BioSolutions Earnings Conference Call. My name is Rob, and I'll be your Operator today.

[OPERATOR INSTRUCTIONS]

At this time, I would like to turn the conference over to your host for today's call, Mr. Robert Burrows.

Thank you, Rob. Good morning, ladies and gentlemen, and thank you for joining us on this, the first financial results call for Emergent BioSolutions as a public company. As is customary, our call today is open to all participants. In addition, the call is being electronically recorded, and is copyrighted by Emergent BioSolutions. No reproductions, retransmissions or copies of this conference call may be made without the written permission of Emergent BioSolutions.

My name is Bob Burrows, and I am Vice President, Corporate Communications. Joining me today will be Fuad El-Hibri, Emergent BioSolutions' Chairman and CEO, and Don Elsey, our Chief Financial Officer. Other members of our senior management team are present, and will provide comments if and when necessary.

As you know, this morning we released two announcements, one related to our 2006 financial results, the other related to senior level promotions among our management team. Both announcements will be discussed during this morning's call. The agenda for today's call will be as follows. Following my brief introduction, Fuad will provide general comments concerning 2006 accomplishments.

Don will then provide a review of 2006 financials as well as 2007 financial guidance. And then Fuad will come back with brief comments regarding our management promotions, followed by a discussion of our corporate milestones over the next six to 18 months. Please note that any statements about the company's prospects for future expectations are forward-looking statements.

And as you know forward-looking statements involve substantial risks and uncertainties, and actual results may differ materially from expectations. Please refer to each of the press releases issued earlier today, and importantly to our filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ.

Also, Emergent BioSolutions assumes no obligation to update the information in this morning's press release or as presented on this call, except as may be required by applicable laws or regulations. Both press releases issued today may be found on our website at www.emergentbiosolutions.com under investors/press releases.

Finally, I want to take a moment to point out to everyone that for the company's future quarterly results, while we will be issuing the requisite press release and filing a requisite current report on Form 8-K and quarterly report on Form 10-Q, we will however not be conducting conference calls related to our quarterly financial results. Again, here forward, we are planning no conference calls related to interim financial results.

And with that brief introduction, I would now like to turn the call over to Fuad El-Hibri, Emergent BioSolutions' Chairman and CEO. Fuad?

Thank you, Bob. Good morning, ladies and gentlemen. Thank you, and welcome to our first conference call as a public company. This morning, we released our financial results for calendar 2006, which showed record revenue. This is our fifth consecutive year of profitable operations.

Before Don discusses these financial results in greater detail, I would like to summarize our 2006 accomplishments in the areas of corporate development, and our two business segments, Biodefense and Commercial.

These accomplishments were driven by our core strategies for growth which are; pursue dual-market segments, Biodefense and Commercial, focus on development versus research, leverage CG&P manufacturing core competencies, grow through M&A and mitigate development costs through non-dilutive relationships and collaborations. With respect to our corporate development accomplishments, we completed an initial public offering raising approximately $58 million, and listed our common stock on the New York Stock Exchange.

We finalized a license and development agreement with Sanofi Pasteur for the continued development of a Meningitis B Vaccine. And we've gained access to an MVA, that's modified vaccinia Ankara, technology platform through the acquisition of Vivacs. And finally, we received certification and designation of BioThrax as a qualified anti-terrorism technology by the Department of Homeland Security, which the first vaccine to receive this recognition.

With respect to the Biodefense business segment, let me first discuss our flagship product and that is BioThrax. We completed the required deliveries to HHS under our initial 5 million dose contract seven months ahead of schedule. We completed a contract modification with HHS for the delivery of an additional 5 million doses of BioThrax, with over 4 million doses delivered by December 2006.

We signed the contract amendment with DoD for the delivery of approximately 1 million additional doses of BioThrax, with final delivery scheduled by September 2007. And received from DoD a notice of intent to procure up to an additional 11 million doses over five years. We have also made progress in positioning the sale of BioThrax to additional domestic and international customers.

In our effort to expand the domestic customer base for BioThrax, we have approached first responders. These include fire, police, emergency medical personnel. We have had numerous discussions with first responders at the state and local level. In our effort to expand our international presence, we opened two offices, one in Munich and one in Singapore, and hired personnel to develop international market opportunities.

We have signed agreements with marketing representatives to develop regional markets where we see sales opportunities. These additional markets represent important potential areas of opportunity for diversifying our BioThrax customer base. In order to expand our manufacturing capacity and to meet the needs of our current and future customers, we have completed the construction phase of the large-scale manufacturing facility located in Lansing, Michigan.

This facility is designed to manufacture up to 40 million doses per year on a single train and it's potentially expandable to up to 80 million doses of BioThrax with the introduction of a second [strain]. I want to point out that we are constructing this facility as a large-scale commercial manufacturing plant that can be used to produce multiple vaccine products in addition to BioThrax. This is a high-tech, state-of-the-art facility designed for flexibility, including both upstream and downstream manufacturing.

Now let me comment on our BioThrax enhancement program. In terms of extended shelf life, BioThrax has a current shelf life of three years and in December 2006. We applied to FDA to extend the shelf life to four years. In terms of route of administration, BioThrax is currently administered subcutaneously. We applied to FDA to add intramuscular injections as an additional route of administration. We believe that IM may reduce local reactogenicity.

In terms of dosing scheduling, we continued our collaboration with the CDC on an ongoing trial to support the reduced dose schedule to as few as three doses of BioThrax over six months with booster doses up to every three years. And finally in terms of post-exposure prophylaxis, we filed an IND with the FDA to support the use of BioThrax in combination with antibiotics to treat individuals who have been exposed to anthrax.

In 2006, we started a Phase I immunogenicity trial and efficacy study in animals. And just last month, the FDA granted this program fast-track designation. In addition to pursuing a post-exposure indication for BioThrax, our Biodefense portfolio includes our Anthrax Immune Globulin, our AIG, product that we're developing as a therapeutic treatment for patients who present with symptoms of the anthrax.

We received a development grant from National Institute of Allergies and Infectious Diseases of up to $3.7 million to support pivotal animal studies, and assay development for our AIG product. We also entered into an exclusive agreement with Talecris to produce our AIG product using their FDA licensed manufacturing process. And finally, we completed the manufacture of the first consistency lot of our AIG product candidate at Talecris.

And now, let me summarize the 2006 accomplishments in our commercial business. For our single-dose drinkable typhoid vaccine candidate, we've completed a Phase I clinical trial in adults in Vietnam, where typhoid is pandemic and we initiated a Phase II clinical development program for trial in adolescents and children, also in Vietnam. For our Hepatitis B therapeutic vaccine, we initiated a Phase II clinical trial in chronic carriers in the UK, and we expanded the clinical sites for this trial to accelerate recruitment.

And for our group B strep program, we completed a Phase I clinical trial with a vaccine candidate that uses a single novel recombinant protein. And building on the promising results of that study, NIAID agreed to conduct a Phase I clinical trial for an advanced vaccine candidate that adds a second novel recombinant protein. In summary, we've had an exciting and productive year, and I'm pleased with what we have accomplished.

Let me now turn to my colleague, Don Elsey, Emergent's Chief Financial Officer who will take you through our numbers for 2006 and provide guidance for 2007. Don?

Thank you, Fuad. Good morning, everyone. As Fuad mentioned, we released our 2006 financial results earlier this morning, and we will be filing the Form 10-K early next week with the SEC. The release is available on our website today, and the Form 10-K will also be available on file on our website and on the SEC's website.

As you have now learned, in 2006 we delivered record revenues and substantially strengthened our balance sheet. With that background, I would like to begin the discussion of our financial results with revenues. We achieved total revenues in 2006 of $152.7 million. This is up 17% from $130.7 million in 2005. Product sales in 2006 consisted of BioThrax sales to HHS of $109.8 million, sales to DoD of $37.4 million and aggregate international and other sales of approximately $800,000.

Moving on to contracts and grant revenues, we reported an increase of $1.3 million, or 39%, to $4.7 million for 2006, up from $3.4 million in 2005. Contracts and grant revenues for 2006 consisted of $3.2 million in upfront and development program revenues from the Sanofi Pasteur collaboration, and $1.5 million in grant revenues from the Wellcome Trust.

Before talking about expenses, let me comment on the bottom line results. For 2006, we reported net earnings of $22.8 million or $0.99 per share. This is a significant improvement over our reported net earnings in 2005 of $15.8 million or $0.77 per share. For the year, our share-based compensation was approximately $700,000.

As Fuad mentioned, 2006 was our fifth year of consecutive profitability. In our earnings release distributed earlier today, 2006 net income was characterized as record net income. In fact, in 2002 when our operating subsidiary was a private company, that company had higher net income than we had in 2006. This was primarily due to minimal provisions for income taxes given that that subsidiary was able to apply historical NOLs at that time. Please refer to our SEC filings for further detailed information.

Moving on to our overall gross profit margin on product sales, this came in at 84% in 2006 compared to 76% gross profit margin in 2005. This 8 percentage point improvement was driven primarily by the full year impact of manufacturing efficiencies implemented in 2005. R&D expenses in 2006 were $45.5 million or 30% of total revenues, as compared to $18.4 million of R&D expense in 2005 or 14% of total revenues.

The growth in R&D expenses reflects increased expenses of $11.8 million in the Biodefense segment, and $15.9 million in the Commercial segment, partially offset by a reduction of approximately $600,000 in other research and development expenses. The Biodefense spending was attributable to increased efforts on all Biodefense programs related to beginning and completing various studies and trials.

The increase in Commercial spending was driven by the increased efforts across all five products within the Commercial portfolio. The decrease in spending on other research and development expenses was primarily attributable to discontinuation of certain pre-clinical programs.

For the full year 2006, selling, general and administrative expenses were $44.6 million or 29% of total revenue, as compared to $42.8 million or 33% of total revenue in 2005. For 2006, SG&A expenses related to the Biodefense segment decreased by approximately $500,000 to $35 million for 2006, from $35.5 million for 2005. SG&A expenses related to the Commercial segment increased by $2.3 million, or 32% to $9.6 million for 2006 an increase from $7.3 million for 2005.

The increase in the Commercial segment was primarily attributable to an increase in general and administrative expenses of $1 million resulting from the addition of personnel and increased legal and other professional services for the company's headquarters and an increase of approximately $900,000 related to the addition of personnel for the company's commercial development subsidiary in the United Kingdom.

Turning now to our balance sheet, cash and cash equivalents totaled $76.4 million at year-end 2006, as compared to $36.3 million at year-end 2005. The net increase in cash and cash equivalents resulted primarily from the proceeds from our initial public offering and additions to indebtedness, partially offset by increases in capital expenditures, and cash used in operations, including research and development expenses.

And finally, to our 2007 financial guidance. For the full year 2007, we anticipate growth in total revenues of 10 to 15%. As a reminder, this guidance assumes that our revenues will continue to be derived predominantly from product sales of BioThrax under follow-on contracts with HHS and DoD. Over the past two years, BioThrax deliveries under our contracts with HHS and DoD, have totaled in excess of 6 million doses per year.

Our projection of revenue growth is based on a continuation of the trends experienced over the past two years. With respect to net income, we expect to achieve positive net earnings for 2007. Please note that any statements about the company's prospects or future expectations are forward-looking statements.

As Bob stated earlier, forward-looking statements involve substantial risks and uncertainties, and actual results may differ materially from expectations. Please refer to our press release on our financial results issued earlier today, and importantly to our filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ.

Finally as Bob mentioned earlier, we have decided not to conduct quarterly conference calls in connection with future interim reporting periods. We made this decision based on our view that our quarterly performance is not necessarily indicative of our annual performance, given that historically our revenues have been tied predominantly to the scheduled deliveries under our HHS and DoD government contracts.

We will of course be presenting at healthcare and other conferences throughout the year to discuss our business and product development progress. We also expect from time to time to conduct conference calls to present significant business developments or corporate events.

At this point, I'd like to turn the call back over to Fuad for a discussion of 2007 milestones.

Thank you, Don. And before I brief you on our upcoming corporate milestones, I would like to address the other news release we issued this morning. In that release, we announced a series of management promotions to support the company's global business development strategy and manufacturing initiatives.

Let me take you through what we are doing. Dan Abdun-Nabi will become President of Emergent BioSolutions, overseeing a majority of the company's corporate functions. Bob Kramer will become Executive Vice President of Manufacturing Operations, with responsibility for global manufacturing.

In this new capacity, Bob will continue to report directly to Ed Arcuri, our Chief Operating Officer. Bob will also continue as President of Emergent Biodefense Operations Lansing. Denise Esposito will become Senior Vice President and General Counsel. And Mauro Gibellini will become Senior Vice President of Corporate Development.

Finally, we announced that Steve Chatfield will be joining the Health Protection Agency based in the UK in the Fall of 2007. Steve will remain with us in his current capacity as Chief Scientific Officer and President of our UK-based Commercial Portfolio Development Group through August 2007 in order to ensure a smooth transition. In the meantime, we have begun recruiting for a new CSO.

I would like to emphasize that Steve has played a significant role in the development of our product pipeline, and has been an ambassador for the company in communicating our mission, our technologies and our products to industry partners, investors and potential customers. Steve has also been instrumental in building a solid product development infrastructure to support our ongoing development plan.

While he will be missed when he eventually joins HPA, we take comfort in the fact that he's headed to a significant opportunity with direct impact on the people of the United Kingdom. Of course we wish him continued success in the future. Turning now to my final comments, I'd like to take you through some of the key potential value drivers for our two business segments over the next six to 18 months.

First, let me address the anticipated value drivers for the Biodefense businesses. These include securing a follow-on contract with HHS for BioThrax. Securing a follow-on contract with DoD for BioThrax. Completing the commissioning and validation process for the new large scale manufacturing facility in Lansing, Michigan for BioThrax, and other vaccines.

Completing the Phase I immunogenicity study, and the efficacy study in one of the two animal models for BioThrax for the post-exposure label expansion program. And, commencing the pivotal clinical and animal efficacy studies for AIG, or Anthrax Immune Globulin Program.

Now, let me address the anticipated value drivers for the Commercial business segments. These include in our typhoid program, completing the Phase II trial in Vietnamese adolescents and children in collaboration with Wellcome Trust, which is funding this clinical trial, and initiating a Phase II study in younger children in India in preparation for Phase III.

Submitting, in collaboration with NIAID, an IND for the Phase I clinical trial for our advanced group B strep vaccine candidate to be funded and conducted by NIH. Continuing our development program with Sanofi Pasteur for a Meningitis B Vaccine. And finally, initiating a proof of concept study of our MVA vector platform technology for a broadly cross-protective flu vaccine.

In conclusion, our accomplishments in 2006 have positioned us well for future growth over the next six to 18 months. We continue to work on the advancement of our Biodefense and Commercial product portfolios, as well as projects related to our manufacturing capability and our corporate operations. It is important to remember that we remain committed to our core strategies for growth, all of which we are pursuing in 2007.

With that, I thank you all for your support of our business and let's now open up the lines so that we can field your questions. Operator, please proceed with the Q&A.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Sir, I have your first question today coming from Gene Mack from HSBC.

Okay. Thanks for taking the question. I guess the -- I've got a few questions. I guess the -- well the first thing, can you quantify how many ex-US doses of BioThrax were delivered in 2006?

Yes. Hi, Gene. Thanks for joining us on this call. Don?

In 2006, Gene, to the DoD, just over 1.5 million doses were delivered to DoD and recognized as revenue for HHS. That number is just over $4.5 million.

Okay. Okay. And the average price per dose for both of those?

For DoD doses, that was around $24.80 a dose and for HHS it was about $24.10.

Okay. And are you familiar with the DoD's published fiscal year budget? I think something came out in February 2007, it seems pretty -- fairly comprehensive, but it includes a long forecast out to 2009. And I'm just wondering, have you guys taken a look at this, and does it correlate with what your expectations are in terms of guidance and --?

We are looking at obviously budgets that come out and we're in the process of evaluation what impact that may have on us.

Okay. I guess, because I'm a little inexperienced when it comes to these sorts of things. I'm just wondering do you have any sense of how often these types of things are published, and what sort of -- how well the government -- how well DoD sticks to these types of things?

Well let me just bifurcate this question into two parts. One is, what the DoD's requirements may be, and the other is what their budget may be. With respect to the requirements, as we understand, the DoD periodically reviews their requirements based on their -- several policy issues. With respect to the budget, we understand there are annual appropriations approved by Congress for the purchase of our vaccine and other products.

Okay. Okay. Because it seems that they have the fiscal year 2006 as close to twice as much as what they wound up actually ordering, and then there's a little bit of dip in fiscal year '07. And it just doesn't seem to correlate well, and I'm just wondering if maybe there's any insight there. Okay.

Well then there's the third component, which is the actual utilization or vaccination program. It was administered previously at least for a year and a half approximately, under a voluntary program and we understand that it's now converting back to a mandatory program, and that may drive the actual usage of the vaccine.

Okay. Okay. That's helpful. Thank you. A couple of other questions. Some of these are just housekeeping. Can you give us what the share count was at the end of the fourth quarter, Don?

Yes, if you'd give me just a moment. The basic shares outstanding at 2006 were 23,039,794. The diluted shares 25,446,222.

Great. And I assume -- my sense is that you're -- the expenses related to stock compensation, that was probably included in the expense line items?

That is correct.

Okay. And I noticed on the balance sheet there's a pretty big increase in receivables, about 43 million. Can you walk us through sort of how that might get delivered? What sort of timing on that?

Gene, that is already cleared out in 2007 as you may have seen in earlier press releases, there were substantial deliveries in December to HHS and even later in the month to DoD. So those -- that accounts receivable balance were driven by those two shipments, and all of that AR was cleared out in the first quarter.

Okay. Okay. And then so cash and equivalents, can you let us know what cash and equivalents are as of today, for the most recent slice?

No, that -- we're not prepared to address that at this time, Gene.

Okay. Okay. And then I guess -- the only other question I had was regarding Steven, and given that he's headed to UK Health, I guess to UK Health Services, is he in a position to influence any vaccine purchases?

I don't think that in his current -- I mean as a Director of Emergency Preparedness that he would necessarily be purchasing products; I think his focus is going to be more on development and on actual preparedness. So, we've had programs in place with HBA for a few years, and those are -- their nature is development and not procurement.

Okay. Okay. Thanks a lot.

Thank you, sir. We'll go to --.

Thank you, Gene. Thank you.

Sorry. We'll go to Richard Smith from JPMorgan.

Yes, good morning, everyone. Just wondering if you could provide a little bit more clarity or any updates on the DoD contract, the $11 million sole-source contract. Can you say anything about that at the moment?

Well, all I can say is that the notice of intent to procure was issued last year. I think a lot of things happened last year. For one, there -- the program went from voluntary to mandatory. Or, the decision to do so went. Then there was a reevaluation as to which commands in the high threat areas would be immunized, and of course the level of presence of our soldiers in Iraq is another driver.

And we can't speak to policy, this is our view as to what they're going through right now, and we do understand that they're finalizing their requirements, and that will then drive their interests in procuring additional vaccines from us -- additional doses from us.

And that finalization or the requirement, is that a -- sort of a document they're putting together, or is there a time line on when they need to complete that?

We're not aware of any time line. All we can say is that our current contract expires in September this year, and that the DoD since our inception, since 1998, has had continual contractual relationship with us.

Okay. And just switching over to AIG. Now you have filed the IND and hopefully in 30 days it will be signed off. Is there a chance that you could get a contract from the government for -- to purchase that product? And what would you need to do in the meantime before you could deliver it?

Okay. So historically product has been eligible for a procurement contract as early as after an IND submission. We are aware, of course that HHS is developing a strategy, a procurement and development strategy, that they have recently published and are working on an implementation plan that will come out, we expect, in the next couple of months.

So, how that will affect their procurement decisions or the timing of the procurement decisions, we don't know. But as it stands today, we believe that our product has become eligible for an HHS procurement contract, and we work -- we are working towards positioning our AIG product vis-a-vis the HHS.

Okay. Thank you.

Thank you. We'll go next to Eric Schmidt --.

Thank you, Richard.

We'll go to Eric Schmidt from Cowen and Company.

Yes, good morning. Just a clarification on Gene's question about shares outstanding. Don, the 25.446 million fully diluted shares, was that an end of Q4 figure or an average for the quarter?

Yes, that was an average.

Okay. I think Gene had even asked at the end of the year, do you have a current or end of year share count?

Yes, the outstanding at the end of the year was 27,596,249.

Great. Thanks. And then a further question on gross margins, is the improvement that you saw in 2006 and the 84-ish percent gross margin, do you expect that can be maintained into 2007?

Eric, we're going to necessarily provide specific guidance on each line item. I will tell that clearly we're focused on maintaining that to the best of our ability, but we will of course be very diligent in managing costs and expenses throughout the course of the year.

Okay. How about a capital expenditure estimate for '07? Is that something you can give us?

Eric, really Eric, the -- as you're aware, we managed the business very carefully in response to the contracts and the demands that we have. While we clearly have put together plans that assume certain business levels, I'm not prepared to share a CapEx estimate at this point in time. I will tell you of course the predominant driver of our capital expenditure in 2007 will continue to be the expansion of the facility in Lansing. As we have published before, that's a $75 million facility in total.

In 2006, as you'll see in the K, we've spent approximately $37 million on that installation in 2006. There will be continued spending on that building. The rest of the capital expenditures, I can tell you, in 2007 are in general support of both our Frederick facilities and our R&D activities. But the driver is [still the] 55 in Lansing.

Okay. Fair enough. And could you give a little bit more detail on the international and other sales of $0.8 million, to which geographies or countries were those sales made in '06?

Bear with me just one moment, Eric. In 2006, the preponderance of that was to Canada. There were very modest shipments elsewhere, which we'd prefer not to disclose at this point, but Canada was the bulk of those dollars.

Great. That's it for me. Congrats on a nice year.

Thank you, Eric.

Thank you, Eric.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Sir, I have no further questions queuing up for you at this time.

Great. Thank you, Rob. Ladies and gentlemen, that concludes today's call. Thank you everyone for your participation. Please note that today's call has been recorded, and a replay will be available beginning later today and available through April 5, by dialing either 888-286-8010 or 617-213-8841 and using the following pass code, 16852790.

Alternatively, there is an available webcast of today's call, and an archived version of which will be available later today, accessible through the company's website at www.emergentbiosolutions.com. Thank you again, and we look forward to speaking to you all in the future. Goodbye.

Thank you, sir. Thank you again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines at any time.