Emergent BioSolutions Inc (EBS) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Emergent BioSolutions third quarter 2010 financial results conference call. My name is Jennifer and I'll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded for replay purposes.

I would like to hand the call over to Mr. Bob Burrows. Please proceed.

Thank you, Jennifer. Good afternoon, ladies and gentlemen. My name is Bob Burrows. I am Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss Emergent BioSolutions financial results for the third quarter 2010.

As is customary, our call today is open to all participants. In addition, the call is being recorded and is copyrighted by Emergent BioSolutions. Joining me on the call this afternoon with prepared comments will be Fuad El-Hibri, our Chairman and Chief Executive Officer, and Don Elsey, our Chief Financial Officer. Additional members of our senior management team will be present on the call for purposes of the Q&A session.

Before we begin, I'm compelled to remind everyone that during the call management may make projections and other forward-looking statements regarding future events and the Company's prospects for future performance. These forward-looking statements reflect Emergent's current perspective on existing trends and information. Any such forward-looking statements are not guarantees of future performance, and involve substantial risks and uncertainties. Actual results may differ materially from those projected in any forward-looking statements. You are encouraged to review Emergent's filings with the SEC on Form's 10-K, 10-Q and 8-K, for more information on the risks and uncertainties that could cause actual results to differ.

For the benefit of those who may be listening to the replay, this call was held and recorded on November 4, 2010. Since then Emergent may have made announcements relating to topics discussed during today's call, so again, please reference our most recent press releases and SEC filings. Emergent BioSolutions assumes no obligation to update the information in today's press release, or as presented on this call, except as may be required by applicable laws or regulations.

Today's press release may be found on our website at www.emergentbiosolutions.com under Investors/Press Releases.

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

Thank you Bob. Good afternoon everyone and thank you for joining us today on our conference call. For my prepared comments I will review our financial performance for the third quarter, reaffirm our 2010 financial forecast, discuss updates regarding our product sales activities and development programs and highlight our recent acquisition of Trubion Pharmaceuticals.

To begin, let me review our financial results for the third quarter of 2010. Our revenues of approximately $74 million and net income of $13 million include the scheduled deliveries of BioThrax to the SNS as well as progress payments under existing development contracts.

With respect to our guidance, we reaffirm our 2010 forecast for total revenues of $275 million to $300 million and net income of $40 million to $50 million including the recently acquired Seattle operations.

As we stated last quarter, this forecast is supported by the modification to our current BioThrax contact with CDC which increased the number of doses we can deliver into the SNS during 2010. Furthermore our forecast is also supported by an increased volume available -- of available doses due to a high production yield which we have experienced throughout 2010.

Let me now provide an update on our product sales activities, specifically BioThrax. We continue to deliver doses into the SNS under a multiyear procurement contract. As I stated, we are experiencing high production yields which are principally due to our multiyear drive to optimize the manufacturing process of our current facility, Building 12. These improved yields will enable us to deliver at least 8.5 million doses to the SNS this year. As a result, we're projecting that deliveries of BioThrax under the current contract will be completed by the end of the second quarter next year.

In terms of a follow-on procurement contract, we're currently in discussions with CDC representatives. We anticipate this contract will cover a multiyear period and will be structured to secure substantially all of our projected capacity. We expect to finalize this follow-on contract in the first quarter of 2010. 2011, my apologies.

Let me now provide an update on our product development activities beginning with our anthrax franchise. First, BioThrax scale-up. As you know in mid-July BARDA awarded us a contract valued at up to $107 million. This contract funds activities through FDA licensure for large-scale manufacturing of BioThrax at our state of the art facility in Lansing. This development contract consists of a two-year base period of performance valued at $55 million and three option years that if exercised by BARDA would increase the contract value to $107 million.

The majority of this value can be realized in the first three years of performance from mid-2010 to mid-2013. This contract funds our development efforts to achieve an annual output of 26 million doses of BioThrax which is a significant increase over our current capacity. We believe that the US government considers this contract a low-risk approach to meeting its stated requirement of 75 million doses of licensed anthrax vaccine in the shortest period of time.

Since the award we have initiated scale-up activities in Building 55 and are currently conducting characterization runs. We're also gearing up activities in support of process validation which we expect will lead to an initiation of consistency lots in late 2011.

Next, BioThrax optimization initiatives. By year end we anticipate a response from FDA to our application in support of a schedule of three doses over six months with a booster every three years. We believe that the data will lead to final approval from FDA within the next 12 months. In addition, we recently submitted to FDA a separate application in support of a five-year expiry dating. We are confident the data will lead to final approval from FDA by year-end 2011, further increasing the value of BioThrax to the US government.

Next, the rPA opportunity. In September BARDA awarded us a multiyear development contract, up to $187 million to fund activities including process characterization, assay validation and final formulation. There are additional milestone based options which include completion of a phase 2 clinical study, non-clinical studies, process validation and consistency lot manufacturing.

Over the initial two-year base period we plan to complete the selection of a final vaccine formulation, the optimization of a scalable manufacturing process and a qualification of required assays to assess product quality attributes.

Now our next-generation anthrax vaccine candidate. In August, BARDA awarded us a multiyear development contract of up to $29 million to fund continued work in this program which combines BioThrax with a novel adjuvant CpG under license from Pfizer. This contract represents a second round of government funding for this important program. It is designed to support activities including manufacturing, process characterization, assay validation and clinical trial preparation for our phase 2 drug. We anticipate initiating a phase 1 clinical study of this candidate next month.

For our anthrax monoclonal antibody candidate, we recently commenced dosing the first patient in a phase 1 clinical trial for this novel therapy. The study involves 50 healthy volunteers in a dose-escalation study designed to evaluate safety and pharmacokinetics. We expect to complete dosing by mid-2011 and a final study report by the end of 2011. In addition, our anthrax [MAT] was recently granted fast-track and orphan drug designation by FDA.

For our monoclonal antibody candidate, AIG, we completed dosing in an ongoing clinical trial and expect a final study report in the first quarter of 2011. With respect to the required pivotal animal studies for this program, we expect NIAID and FDA to agree on the design of an appropriate model under the animal rule in 2011.

Now let me turn to our other development programs. For our TB candidate, enrollment continues in our existing phase 2b efficacy study of 2,700 infants in South Africa, supported by Wellcome Trust and Aeras. We have now completed dosing of approximately two-thirds of the infants in this field trial. We anticipate the final study report by 2012. We are also looking at accelerated licensing opportunities for this candidate in South Africa and other countries with a high disease burden based on the data from this efficacy study.

In addition, preparations continue toward initiating a separate phase 2 study of 1,400 HIV infected adults and adolescents largely funded by European agency and NGOs. This study is expected to begin in the second half of 2011.

And for our typhoid vaccine candidate, Typhella, we continue to make preparations for a human challenge study in the UK in collaboration with the [help] of protection agency, the Wellcome Trust and the University of Oxford. We are also pursuing a business arrangement with a suitable manufacturing and development partner.

And finally, let me discuss the Trubion acquisition. As you all know one week ago today we announced the successful completion of the acquisition of Trubion based in Seattle. Let me take a moment to review with you the business, scientific and financial rationale for this transaction.

From a business perspective, we added two clinical stage programs in oncology and autoimmunity as well as the related large pharma partnerships which provide sales and marketing infrastructure. From a scientific perspective, we now own two novel therapeutic platforms and the scientific expertise for developing innovative candidates using these platforms. And from a financial perspective, the net cash outflow was relatively modest and the ownership dilution was only about 10% at closing.

As we complete our 2011 budget, we will be reprioritizing the combined development portfolio to manage our R&D spending responsibly.

In conclusion, we are pleased with our achievements during the third quarter of 2010. For the coming months we anticipate securing a follow-on procurement project for BioThrax and achieving additional milestones for our now expanded product pipeline. We also expect strong financial performance for the remainder of the year as reflected by our reaffirmed 2010 revenue and net income forecast.

That concludes my prepared comments and I will now turn it over to Don who will take you through the numbers in greater detail. Don?

Thank you Fuad. Good afternoon everyone. As Fuad mentioned, following the close of the markets today we released our financial results for the third quarter of 2010. I encourage everyone to take a look at the press release which is currently available on our website. We plan to file our quarterly report on form 10Q with the SEC no later than the close of business tomorrow, Friday, November 5, 2010. The 10Q will also be available on our website.

Let me now briefly discuss the financial results. For the third quarter 2010, total revenues were $74 million comprised of $67.3 million of product sales and $6.7 million of grants and contracts revenue. Product sales revenue compares to revenue of $39 million in third quarter 2009. Product revenues were 72% above those in 2009 due to the 46% increase in the number of doses of BioThrax delivered, coupled with an 18% increase in the sales price per dose.

Contracts and grants revenue compares to revenue in the third quarter 2009 of $4.3 million for an increase of 57%. For the nine-month period of 2010, total revenues were $182.9 million compared to $181 million in 2009.

For third quarter 2010, net income was $13.1 million or $0.42 per share. This compares to net income of $949,000 for third quarter 2009. The increase in net income was a direct consequence of the increase in the shipments of BioThrax in the current period.

For the nine-month period of 2010 net income was $25.5 million or $0.82 per share compared to $26.9 million or $0.89 per share in 2009. As you heard me state before, the quarterly results are in line with our internal expectations. They support the annual guidance we are reaffirming and again they provide an example of the limited value of looking at our quarterly results as an indicator of our annual performance.

Now with respect to gross profit and gross profit margins, in the third quarter 2010 our gross profit was 83%, an increase year over year on an absolute basis due to the consistently high production yields we have been experiencing. On an ongoing basis, our expectation for gross profit margins remains between 70% and 80%. However, if our yields continue to be as robust as they have been this year, the margins could be at the high end of that range as we experienced this past quarter.

Turning now to spending, first looking at product development spending, our third quarter 2010 R&D expense was $21.2 million versus $18.8 million for third quarter 2009. For the nine-month period of 2010, R&D expense was $59.7 million versus $55.4 million in 2009. We continue to invest in the development of our product pipeline which includes programs that will enhance the usability of BioThrax and various trials to advance our clinical stage candidates focused on anthrax, tuberculosis and typhoid as well as our preclinical anthrax and flu programs.

At the same time we have redirected resources previously dedicated to hepatitis B and chlamydia. R&D spending will continue to fluctuate quarter to quarter driven by the development stage of our various pipeline candidates.

I want to remind everyone that what I've just discussed is our gross R&D spend. It is important to take into account the fact that we have contracts in grants revenues which are development funding from the US government and in support of a majority of our anthrax related programs and essentially offset a portion of our R&D.

For third quarter 2010, contracts and grants revenues were $6.7 million and for the nine-month period they were $20.9 million.

With respect to SG&A spending for third quarter 2010 SG&A was $20.7 million, an increase of less than 1% of $1 million or 5% over the third quarter 2009. For the nine-month period of 2010 SB&A expense was $54.5 million versus $55.1 million in 2009. We remain focused on managing the growth in our general and administrative expenses.

Turning now to the balance sheet, for third quarter 2010 we continued to be cash flow positive and ended the quarter with cash and cash equivalents of $151.2 million and accounts receivable balance of $7.9 million.

Finally let me address our 2010 financial forecast. As Fuad noted earlier, we reaffirm our 2010 forecast. Specifically our financial forecast anticipates total revenues of $275 million to $300 million and net income after tax of $40mn to $50 million. As we have mentioned in previous earnings calls, our revenue, spending and in turn our net income are only on a quarterly basis. Both the 2009 third quarter and year to date financials are prime examples of this lumpiness.

Our year to date performance is in line with our internal projected ranges, however our total revenues are driven by delivery schedules and product development milestones whereas our spending patterns are driven by technical requirements and regulatory filings.

In January of this year when we constructed our guidance for full year 2010, we reviewed the delivery schedule we have with the SNS and projected our spending for R&D and SG&A. And we have reviewed and revised as appropriate this information each quarter.

However, I must remind everyone that there are many factors not entirely within our control that can cause significant variability in our actual final results. These include on the revenue side the timing and magnitude of SNS deliveries, and on the expense side, the spending patterns within R&D and the technical requirements and regulatory filings driven -- driving such spending.

I would like to conclude with the same remarks I made during our last earnings call. We continue to deliver on our government contracts, progress the development of our product candidates and advance qualification and validation of our large-scale manufacturing facility in Lansing now supported by the $107 million BARDA contract.

In summary, third quarter 2010 was a success. Our business remains strong and we are on track to achieve our 2010 forecast. We look to build on our current success throughout the final quarter of 2010 and to continue to drive success from our product development efforts and financial performance from our product sales efforts.

That concludes my comments. I will now turn the call over to the operator so that we can begin the question and answer portion of the call.

Operator, please proceed.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Eric Schmidt with Cowen & Company. Please proceed.

Good afternoon gentlemen. A question on the guidance, pretty wide range, Don, for Q4, a $25 million range on the top line, $10 million on the bottom line and furthermore, there's some uncertainty at least in my mind as to whether the revenue is going to be coming from BioThrax or a contract and others in Q4. Can you help us out on both fronts?

Good afternoon, Eric. Good to hear from you. Certainly. As you know, as we've experienced in years gone by, we have a delivery schedule for Q4 that if it was perfectly predictable, we could come up with a much narrower range. As you've seen in the past, we've -- it's been very easy for two, three, four, five lots of product that are scheduled for a particular delivery in December to slip over into January.

And so the delivery schedule is not perfectly predictable, so we take a look at what we anticipate on BioThrax deliveries as well as the milestones to be achieved on the contacts and grants side and we come down to a range that we feel a high degree of confidence in. However, the composition of that between BioThrax deliveries and contracts and grants can vary and can vary rather substantially even this close to the end of the year, considering that we have both November and December deliveries to be concluded.

So hence the range in top line and the range in top line of course is directly responsible for the range in net income projections.

Fuad expressed some confidence earlier in producing 8.5 million doses plus during the course of this year. If you were to ship all of that, Don, would you be at the high end of your range?

No, actually, this is Fuad, Eric. The 8.5 million, given our projected contract revenue, would bring us to the lower side of the range, so we're confident that we would achieve at least the 8.5 million. As Don said, we may be able to produce, release and ship another 4 or 5 additional lots which translates into another 700,000, 800,000, 900,000, so if you do the math, you'll end up at the higher range.

There's also some variability with respect to what revenues we can recognize based on work we've done with respect to the contract and grants but that drives it a little less. But both still have an impact on where we land within the range.

Okay. One last question before the beat the dead horse on this topic. In Q4 are there specific potential contract, grant and milestones that could be lumpy and make for a much higher fourth quarter than we've seen here today or shouldn't we expect that line to potentially grow much?

I would say that the sensitivity on contracts and grants is not very significant so that the bulk of what drives the total revenue is really the product deliveries. So I wouldn't encourage much variability on that side.

Great, thank you. A different topic in terms of the negotiations on your next BioThrax contract, Fuad. There are several variables here. You mentioned a multiyear contract, Fuad. It could be two, three, four, I guess maybe you have some insights on what you're hoping to get there, in addition whether you think you can negotiate for more doses per year delivery given your higher production yields.

And lastly on price, the third variable, where you think you might end up.

Yes, that's a very good question Eric, and historically we started off in the early years in early 2000 with one-year contracts and they evolved into two-year contracts which now we have three-year contracts. And I think the government is very mindful of the importance of having longer term contracts in order to schedule resources and allocate resources more on a long-term basis. And most of the reinvestments that we make in process optimization and in various other activities that enhances the BioThrax manufacturing process.

So having said that, I think the government understands it's important. If I were to share, my hope is that it would be somewhere between three and five years. I hope we achieve at least three years. We're consistent with previous contracts and as far as capacity is concerned, I think there has been a desire, a stated desire by the government to perhaps substantially secure our entire capacity and that has been the case for the last 12 years, so I don't see that that is going to change, so I expect that the government will allow some room for international sales but substantially ask for us to provide close to full capacity to them.

And we are very diligently looking at what that might be over the next three years, still in the current facility. Thereafter we'll start talking about the large scale facility and there recently, as I mentioned before, experienced high production yields which I believe is a result of all the hard work that [GMS] has put into finding ways to optimize the process.

So again, with biologics manufacturing you don't know whether you can always exactly sustain it at that level but overall I think we may have reached a slightly higher plateau of output. And we'll certainly incorporate that in our discussions and negotiations with CDC.

And price point?

Sorry?

Price as well, yes.

Oh, you know the price so far has been really -- there was a price redetermination in 2003 as a result of -- or even in 2002 I think it was when we renovated the facility and we had an audit by DoD and there was an agreed price redetermination that was fair for the government and fair for us. Since then we've had price -- normal price -- inflation adjusted price escalations except for the one time where we got an adjustment for four-year dating, which was also, again, an equitable adjustment by the government. So we anticipate that it is going to be the normal escalation adjustment every year.

Thanks a lot.

Thank you, Eric.

Our next question comes from the line of David Moskowitz with Madison Williams. Please proceed.

Okay, thanks very much. Good afternoon.

Hi David. How are you?

Good. I'm just going to run a little math by you guys and hopefully this is going to shed a little more light on the top line. If I take $28 a dose and I multiply that by 8.5 million doses I get $240 million. If I take your prior contract and grants I get to $21 million for the first three quarters. So add those two up and I get about $250 million. That leaves you $25 million shy of the low end of your guidance. That's not right.

Sorry, the math -- I thought you said $240 million plus $21 million.

That's correct.

That's $61 million.

Right. I forgot to mention it's fuzzy math. But okay, let's go back to regular math. That's right, so $260 million. That leaves about $15 million shy of your -- the low end of your guidance range. So if there's a $15 million plug to the low end, that's substantially more than what you've been running in the past couple of quarters, right? The past couple of quarters have been $6.5 million to $7 million so you're at least doubling that in the fourth quarter to get to the low end of your guidance. Can I have you speak to that a little bit?

Yes, I think you're not far off with your math. I can say that if you take into account the fact that there are two large contracts that are just now ramping up at Building 55 and rPA, you can see how maybe the fourth quarter grant and contracts revenue is going to be larger than the historic quarters and I would project that to be in the future as these two big contracts ramp up.

So again, so I just want to clarify, so we should be expecting, of course there's some variability of how much BioThrax you can deliver but it seems like at least baseline $15 million in contract and grants, (a) would you like to add that anything in with regard to maybe that could be higher, because again you're just barely talking about the low end of your guidance range.

Well again, I think there will be less variability in as far as the grants revenue is going to be but what you've outlined is generally in line with our projections. So that the rest would come from product sales.

Okay, and so, and then you also are saying that if that math is right and let's say we're in the $15 million range, maybe plus or minus, there still could be more above the 8.5 million doses that could deliver this year.

Yes, yes. When I said that I'm confident that at least 8.5 million I'm allowing for and I'm hoping for greater than 8.5 million doses.

And that's obviously subject to shipments and (inaudible), but that's how you get to the rest of the guidance. So the rest of the guidance range is not off the table. It just has to come from slightly more contract and grants and better than expected BioThrax.

Not better than expected. I guess I might be a little bit conservative by saying at least 8.5 million. Our target, as we have guided is somewhere between $275 million and $300 million so our target is in that range. What I wanted to communicate with that was that we feel confident that we'll at least achieve the lower end of the range.

And there's the $10 million variable in net income. Is that pretty directly correlated to that $275 million to $300 million or is there leverage as we move up to the $300 million?

For the most part that's directly correlated. Now there are other factors that will influence that by year end. Such things as the acquisition costs for the Trubion acquisition, etcetera, etcetera. But the driving force between the low end of that range and the high end of that net income range is directly correlated to the revenues that we just discussed.

Got it. And thanks for reminding me, Don. Is the $40 million to $50 million, does that include the Trubion costs?

It does.

Okay, so we're able to do that even with the absorption of Trubion in the fourth quarter.

That is correct.

That should be interesting. Okay, and last question, just on the margins, could you repeat, Don, what the range is and you had mentioned getting to the high end of that range. It seems to me with the margins you produced in the third quarter and if you could -- it seems like you're going to have a pretty good fourth quarter, at least as good as the third quarter, it seems like your margins should be high again and you should be well above the range that you normally would see.

Well, I'll lead it off with saying that we don't forecast gross margins on a quarterly basis but yes, I think that's a reasonable extrapolation. We continue to see the higher yields, which is very encouraging and in my conservative opinion, and I'm even more conservative than Fuad, you know as we see these data points continue through time, I'll take a whole lot more comfort in some of the forecasting of gross profit. But traditionally we've been $70 million to $80 million. I'm very comfortable with that range. We're into the low $80s million now and hopefully we can maintain that with the higher yields we've been seeing.

Okay. Thanks for correcting my fuzzy math. Sorry about that.

No problem David. We have our moments. Good talking to you, David.

The pumpkins are back in so fuzzy math is here again.

Thank you.

Our next question comes from the line of Steve Brozak with WBB Securities. Please proceed.

Okay, no political statements here. I am -- I'm going to skip math and instead I'm going to go to the Trubion acquisition because there's something there that I want to get my hands around. You made an acquisition which frankly is an exceptional one if you look at the math but it is also different in that you've got a lot of new partnerships now with a lot of established names in the pharmaceutical industry that have gone out there and working on products that are for quote-unquote "the retail consumer."

Tell me about dual purpose programs because a lot of the stuff that you're working in theory doesn't just apply to quote-unquote "the regular consumer," but can also be applied to government contracting. Can you give us some -- I hate the words granularity, but since you borrowed our term 'lumpiness,' I'd like to use the term granularity on that. And then I'll have a followup question for that.

That's fine Steve. We can exchange words any time, so yes, that's a very good point. One of the attractive features of this acquisition to us has been and continues to be that first of all, the former Trubion really hasn't used this platform to address any infectious disease candidate. And second, it really hasn't leveraged this technology to get government contracts. And I think this is what we can bring to the table in addition to those large pharma partnerships is a partnership with the government on the development of some of the preclinical products that are in the pipeline and potentially others that we might develop that meet government requirements.

So then in essence to basically sum it up, basically you can do some off balance sheet financing in terms of product development that in later lines could lead to significant revenue for programs that basically the government's going to have to spend on for defense purposes.

Yes, I would characterize it as non-dilutive funding which government contracts typically are, and so, and again I think there's more and more focus by the government on real emerging diseases, infectious diseases and I see a great opportunity here to use this platform to address some of the government's needs.

Again, congratulations on the quarter, the year and the acquisition. Thank you gentlemen.

Thank you very much Steve. We appreciate it.

Our next question comes from the line of Jim Molloy with Caris & Company. Please proceed.

Hey guys, thanks for taking my question. Can you talk a little bit about sort of the lag time between when you're making BioThrax and you ship it out the door and sort of what kind of visibility you have? Here we're almost halfway through the fourth quarter and to what you guys will be able to make for the year versus -- and how much of the variability on the year-end sales going out the door relates to whether or not you can make the stuff in time or whether or not the orders will come in the door?

No, that's -- Jim, thank you for your question. This is a very good question. As we have shared in the past, the production cycle, the full production cycle is about four months and it starts with sublot manufacture and then we formulate the lots and then we ship it off to our contract filler. It comes back, we do all the testing on it and then we send the release testing to FDA for approval.

So as you can see that there's some variability in that process in terms of the contract filler, in terms of FDA review, of submitted releases and things like that. So that's one variability.

The other variability is delivery to the SNS because we can't just say okay, we have another four lots ready. Please take them tomorrow. Send us -- you know. So there's some coordination on the CDC side for deliveries into the SNS which is a very highly controlled delivery, so it needs to be planned in advance. And we don't always have full flexibility or control over the schedule. We might want to schedule on a certain date. It might not be acceptable, might be brought forward, might be delayed, so we work with the government and we happily work with the government to accommodate them. It just makes precise projections difficult.

But given our yields right now, given normal production cycles, given normal -- no major delivery challenges, we would comfortably fall within the $275 million to $300 million revenue range.

Was that helpful, Jim?

It certainly was. And maybe the follow-on BioThrax contract, I know it's out of your hands in many ways, but has there been any communication recently that would give you a better thought as to when that may come in and what type of range we might be looking at for that?

You mean for the follow-on contract?

Yes, sir.

Yes, we are -- we've had discussions with CDC representatives and the requirement to purchase -- to meet their 75 million dose requirements still stands. The current stockpile level is significantly low, that requirement, so, and they've -- they're working on the -- a follow-on contract which we expect would happen some time first quarter next year.

So at this point you could see -- I'm likely fourth quarter. It's more like the first next year?

Yes, we were hopeful. You're right. Last earnings call we were still hopeful that we might complete it by the end of the year. We said end of fourth quarter or first quarter next year, so it's -- we're making progress. It's never as quickly as we hoped, so it looks more realistic right now that it's going to happen first quarter. But the CDC understands that it's important to secure a follow-on contract for them and for us and that time is of essence.

So it's out of your hands in many ways. Any thoughts on the size of the contract, what we should be thinking on, $400 million, $600 million, $2 billion?

As I said earlier, it depends on the duration of the contract. We hopefully would get at least the three-year follow-on contract. It could be as much as five years and so obviously that kind of contributes to the overall size. And then the number of doses per year, there I said that we expect them to want to secure most, if not substantially all of our capacity so we're arduously and diligently working out some reasonable projections as to what that might be given our recent higher production yields.

So there are several moving pieces but depending on the number of years and depending on what we determine as a reasonable commitment to the government in terms of output per year, that will define the overall contract size.

And this is a final question for Don, the AR is down substantially in the quarter, throwing off a lot of cash for you. Any thoughts behind what's going on there and what should we see going forward?

It's very typical that the timing of the shipments within the quarter permitted a payment cycle with the government that actually finalized a great deal of what the AR is. It usually is a late in the quarter set of shipments that caused the AR to go up significantly so as we go into the fourth quarter, I fully expect that we come out of the year in a similar position to prior years where there's a fair amount of AR balance left.

Yes, given that our AR is substantially government accounts receivable, all government accounts receivable and the government pays within a relatively short period of time, one way you might look at this is cash and accounts receivable combined and that varies. Sometimes we're -- if we've just gotten a large payment based on our invoice then our AR goes down substantially. If you catch us at the end of the month where we've just made a delivery, then our accounts receivable goes up. So, but if you combine the two and then you'll see less variability.

Thank you gentlemen for taking my questions.

Thank you, Jim.

Our next question comes from the line of Greg Wade with Wedbush. Please proceed.

Thanks and let me add my congratulations to the completion of the Trubion acquisition as well. A few questions, first up, can you tell us what you expect in terms of data for TRU-016 at the upcoming ASH meeting? And I've got some questions on BioThrax.

That's a very good question and thank you Greg for asking that. I'd like to ask Scott Stromatt to comment on that.

Good afternoon. We have a poster accepted for oral presentation on Sunday during ASH for the dose escalation study which we refer to as 16007. The results are a poster presentation on preclinical work that will also be presented for TRU-016 combination with various chemotherapeutics and biologics. Both of these will be available online through ASH here in the next couple of weeks.

Great, thanks, and if I just might turn now to BioThrax. So could you tell us what the existing yield capability is on sort doses per quarter run rate now?

Again, you know we don't really give quarterly guidance on production simply because it's very hard to predict that. There is annual maintenance shutdown and there are scheduling challenges with the contract filler, with potentially the FDA review, etcetera, so it is really hard. And we're not doing this because we're trying to keep information close to our chest, it's just very difficult to project with any amount of confidence and accuracy quarterly output.

Annually we've done reasonably well in the past in predicting how much we can deliver because it seems to be a normalizing effect quarter by quarter so that's the reason why we're more comfortable projecting annually.

Okay. Great. Combined, by my math, to get to 8.5 million doses for the year, you need to deliver about 2.7+ million in the fourth quarter. How many would be left then on the contract for Q1 and Q2 and would it be your expectation that the government might take additional doses of BioThrax early before the next contract would -- I think it ends in the middle of next year, or would you anticipate just manufacturing material to begin shipment through the (inaudible) basis in the latter part of 2011?

My expectation, Greg, is that the government will work with us so that if we continue to have high yield production and we are able to deliver prior to what we now say, second -- June of 2011, that they might add additional doses to the existing contract. So we still hope that the follow-on contract will be in place by then but should there be any delays, I think the government will work with us to ensure uninterrupted supply and that we would continue to supply full production to them.

Great. So, I know you're not guiding for next year of course but if we're able to [look] back into what we believe your run-rate is now on a quarterly basis and things work out that production continues to be this robust, it would probably make the most sense then, if I hear you correctly, to use that run rate throughout 2011 believing that the government will continue to take as much as you can make.

I think the government has been very flexible in working with us. They understand that there could be quarterly variations and even, as you've seen, is we recently signed an amendment to the CDC contract to accelerate delivery. So they're working with us on that. Now if there were any delays in delivery, we haven't experienced that yet, but we think the government will reasonably also work with us on that.

So obviously we'd like to contract as much as we can within reason because we want to maintain our credibility as a very reliable supplier to the US government, which we've enjoyed so far, and so we need to be reasonably conservative but also take into account that historically we're manufacturing at 7 million to 7.5 million output, and again that changed. It varies from year to year. Now this year we hope to be somewhere between 8.5 million and 9 million doses a year and we hope to be able to sustain that from year to year.

Okay, and then just last couple of questions. Should we read anything into the slight push in the timing of the contract that perhaps it's bigger or longer than perhaps the three years and there's more to do or it's just government timing? And lastly, when do you do your annual work in the production facility that can lead to a decreased amount of output? And thanks again for taking my questions and congratulations on a great quarter.

Yes, the schedule of the annual shutdown is very volatile. It depends on several factors so I can't give you an exact time frame and it does vary from year to year. The -- what was the other part of your question?

With respect to the --

The (inaudible) I mentioned earlier that I hope we would get at least three years. We're shooting for five years but we can't tell. The last contract was a three year contract so we hope that we can continue at least at a three year contract level.

Thanks for taking my questions.

Thank you.

The next question comes from the line of David Moskowitz with Madison Williams. Please proceed.

Hi David.

Hi David.

Mr. Moskowitz, your line is open.

Sorry about that. I had the mute on. So just reading at the line items, SG&A and R&D in the third quarter, trying to think about the top line that you guys provided some detail on and your bottom line guidance. Are you able to at least give us some level of increase that you would see in these line items for the fourth quarter of this year?

As you know, we don't give our quarterly guidance and particularly we don't give out quarterly guidance on a line by line basis. I think as you take a look at the top line forecast of $275 million to $300 million and the bottom line of $40 million to $50 million, and you take a look at nine year -- nine months year to date, you can extrapolate fairly easily how the math can get you from the top to the bottom.

And I think that as you take a look at the various pieces, you can estimate the gross profit percentage based on our comments here today. SG&A we're going to restrain as much as possible and basically you can fill in the other blanks and get to the number. So we don't give out guidance on (inaudible) but I think you can figure the math out fairly easily.

Right. Just back to my earlier question, you had said the low end to the high end to the top end does somewhat correlate to the low end and the high end of the net income guidance.

It absolutely does.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) If we have no further questions, I'd like to turn the call back over to Mr. Bob Burrows for closing remarks.

Thank you Jennifer. Ladies and gentlemen, that concludes today's call and we all appreciate your participation. Please note that today's call has been recorded and a replay will be available beginning later today through November 18. Alternatively there is available a webcast of today's call, an archived version of which will be available later today, accessible through the Company's website.

Thank you again and we look forward to seeing you all in the future. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.