Emergent BioSolutions Inc (EBS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions fourth-quarter and full-year 2010 financial results conference call. My name is Jeff, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Robert Burrows, Vice President of Investor Relations. Please proceed, Mr. Burrows.

Thank you, Jeff. Thank you, everyone for joining us today as we discuss Emergent BioSolutions financial results for 4Q and the full-year 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 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 March 10, 2011. Since then, Emergent may have made announcements relating to products 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. With that introduction, I would now like to turn the call over to Fuad El-Hibri, Emergent BioSolutions Chairman and CEO. Fuad?

Thank you, Bob. Good afternoon, everyone, and thank you for joining us on today's conference call. For my prepared comments, I will review our financial performance for 2010 and forecast for 2011, discuss major accomplishments during 2010, and highlight key milestones for 2011.

To begin, let me review our financial results for 2010. We achieved revenues of $286 million, and net income of $52 million. This financial performance reflects the strengths of our core anthrax franchise, and demonstrates our continued success in growing revenue from the sale of our flagship product, BioThrax. This performance also reflects our continued ability to manage our overall expenditures, while investing in the advancement of our pipeline of vaccines and therapeutics targeting key disease areas. These results also take into account our successful acquisition of Trubion in October of last year. Also today, we reaffirm our 2011 forecast for total revenues of $320 million to $340 million, and net income of $35 million to $45 million.

In 2010, we made progress on a number of key initiatives. First, let me address our accomplishments related to BioThrax. I'm pleased to report that in 2010, we delivered 8.9 million doses of BioThrax to the strategic national stockpile, under our current contract. This delivery level was achieved through higher-than-normal production yields, combined with gaining an extra month of production through a shift in the timing of our annual maintenance shut down.

Moreover, in December, we received notice that CDC intends to expand the current contract to allow for delivery of up to an additional 3.4 million doses of BioThrax. We are diligently working on securing this contract expansion. Beyond that, we continued discussions with CDC representatives regarding a follow-on procurement contract. We anticipate this contract will cover a multi-year period, and will be structured to secure substantially all of our projected BioThrax capacity in Building 12. We expect to finalize this follow-on contract before the end of September of this year.

Let me now review the major accomplishments in the area of business development. First, the BioThrax scale-up contract. 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. In Building 55, we anticipate the future annual output to be at least 26 million doses of BioThrax, which is a significant increase over our current capacity of 7 million to 9 million doses a year. Since the award, we initiated scale-up activities in Building 55 and completed a number of characterization runs. We also made progress on gearing-up activities in support of process validation, which we expect would allow the initiation of the manufacturer consistency lots in late-2011. We believe that the US Government considers this contract the key component in meeting its stated requirement of 75 million doses of licensed Anthrax vaccine for the SNS.

Next, the rPA contract. In September, BARDA awarded us a multi-year development contract of up to $187 million to fund activities through final formulation of PreviThrax. There are additional milestone based options under this contract, including ultimately, the manufacture of consistency lots. Since the contract award, we have completed selection of final product formulation candidates, and initiated our key stability study. Additionally, we have continued process development activities, and are working toward a final manufacturing process.

Next, the third-generation Anthrax vaccine contract. In August, BARDA awarded us a multi-year development contract of up to $29 million to fund continued work on NuThrax, which combines BioThrax with a novel CPG adjuvant under license from Pfizer. This contract, which is the second round of government funding, is designed to develop this vaccine candidate through a Phase II clinical trial. We initiated a Phase I clinical study of NuThrax in December of last year.

The combined potential value of these three development contracts awarded to us in 2010 is up to $320 million of additional funding, and clearly underscores the Government's commitment to the development of medical counter-measures against bioweapons. Finally in October, we completed the acquisition of Trubion Pharmaceuticals, which added two new clinical stage products, addressing multiple indications in oncology and autoimmune disorders, as well as partnerships with Pfizer and Abbott. In addition, the acquisition brought us two therapeutic platforms, and the scientific expertise for developing innovative candidates using these novel platforms.

Let me now review the major accomplishments in the area of product development. I will begin with our biodefense programs. For Anthrivig, our polyclonal antibody candidate, otherwise known as AIG, we completed dosing in an ongoing clinical trial in 2010, and expect the final study report in the second quarter of 2011. Late last year, representatives from FDA and other agencies agreed on the regulatory path toward licensure under the FDA's animal rule. In response to our request, we submitted to BARDA a proposal to fund continued development of this therapeutic candidate through licensure.

And for Thravixa, our anthrax monoclonal antibody candidate, we commenced dosing the first patient in a Phase I clinical trial in September. The study involves 50 healthy volunteers in an dose-escalation study designed evaluate safety and peaking. We expect to complete dosing by mid 2011, and issue a final study report by the end of this year. In addition, Thravixa was recently granted fast track and orphan drug designation by FDA.

Now let me turn to our major product development accomplishments in our biosciences programs. For our TB vaccine candidate, as of the end of 2010, we had enrolled over 2,200 infants in our ongoing Phase II-b efficacy study in South Africa. As of March 1, that enrollment number has increased to just under 2,600. This study is designed to enroll 2,700 infants and is supported by the Wellcome Trust and Aeras. We expect to complete enrollment by the end of May this year, with a final study report anticipated in 2012. Based on the data from this efficacy study, we are pursuing accelerated market authorization opportunities in South Africa.

In addition, we anticipate commencing a separate Phase II-b study of 1,400 HIV-infected adults and adolescents, largely funded by a European Agency and NGOs. This study is expected to begin in the second half of this year. For our anti-CD20 therapeutic candidate, SBI-087, a Phase II dose regimen finding study was initiated with patient with RA, one of the most serious autoimmune diseases. This candidate is being developed by Pfizer under license agreement from us.

For our anti-CD37 therapeutic candidate, TRU-016, we initiated a Phase I expanded cohort study in relapsed NHL and CLL patients, two of the most prevalent B-cell malignancies. More recently, we started a Phase Ib-2 combination study with Bendamustine in relapsed CLL patients. This candidate is being developed with Abbott under a collaboration agreement.

Finally, we have a very busy year coming up, and I would like to highlight the key milestones we expect to achieve in 2011. First, in terms of additional US government contracts. For BioThrax, we expect two events. The execution of contract expansion for up to 3.4 million doses under the current contract and the execution of the multi-year procurement contract. For Anthrivig, the securing of additional multi-year development funding of up to $40 million. And for Thravixa, the securing of additional multi-year development funding of up to $100 million.

Second, in terms of milestone payments, we expect to achieve development milestones, related to our SBI-087 and TRU-016 programs, which will trigger payments to us from our partners. Third, in terms of product development, for Anthrivig, we anticipate completing a clinical study report for the pivotal clinical trial. For PreviThrax, we anticipate completing the final product formulation studies and making significant progress toward demonstrating product stability. For Thravixa, we anticipate completing a Phase I safety and PK study. For the TB vaccine candidate, we expect to complete enrollment in our ongoing Phase II-b efficacy study in infants and to initiate the additional Phase II-b efficacy study in HIV-infected adults and adolescents.

For SBI-087 in RA, we complete completing enrollment for the Phase II dose regimen finding study. For SBI-087 in SLE, we anticipate completing dosing of the Phase I safety and PK study. For TRU-016 in CLL, we anticipate initiating the Phase II combination study with Bendamustine, and for TRU-016 in NHL, we anticipate initiating a Phase I combination study with Bendamustine and Rituxan.

Fourth, in terms of manufacturing infrastructure, for our Baltimore facility, we anticipate substantially completing the facility modification, which will allow for simultaneous manufacturing of viral and non-viral product candidates, and for our Lansing facility, we plan to initiate manufacture consistency lots of BioThrax in Building 55. And fifth, we will continue to pursue acquisition and licensing initiatives that have the potential to broaden our R&D pipeline, as well as expand our sources of revenue.

In conclusion, 2010 was another year of success. We grew revenues from both product sales and development contracts and grants. We also continued to invest in our R&D pipeline, while maintaining profitability. We secured in excess of $300 million of additional multi-year development funding for our biodefense programs. We completed a major acquisition, expanding our pipeline to now include clinical therapeutic candidates targeting oncology and autoimmune disorders. We also acquired novel antibody-based platform technologies that will enable us to develop new therapeutic candidates, and we took substantial steps toward completing our plan to expand our manufacturing infrastructure, which we consider a core competency as well as a competitive advantage. Looking ahead, we anticipate 2011 to be another year of growth and expansion opportunities. 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 fourth quarter and full-year 2010. I encouraged everyone to take a look at the press release, which is currently available on our website. We plan to file our annual report on form 10-K with the SEC no later than the close of business tomorrow, Friday, March 11. The 10-K will also be available on our website.

Let me now briefly discuss the financial results. For the full-year 2010, total revenues were $286.2 million, comprised of $251.4 million of product sales, and $34.8 million of grants and contracts revenue. Product sales revenue compares to revenue of $217.2 million in 2009. Product revenues were 16% above those in 2009, due to a 15% increase in the number of doses of BioThrax delivered, which is a function of the higher-than-normal production yields, combined with gaining an extra month of production through a shift in the timing of our annual maintenance shut down. Contracts and grants revenues compared to revenue in 2009 of $17.6 million, for an increase of 98%.

For the fourth quarter of 2010, total revenues were $103.2 million, compared to $53.8 million in 2009. For full-year 2010, net income was $51.7 million or $1.63 per share. This compares to net income of $31.1 million for 2009. The increase in net income was a direct consequence of the increase in shipments of BioThrax throughout the year. For the considering fourth quarter of 2010, net income was $26.2 million or $0.78 per share, compared to $4.2 million or $0.14 per share in 2009.

Now with respect to gross profit margins for the full year of 2010, our gross profit was 81%, an increase year-over-year on an absolute basis, due to the higher production yields we experienced during the year. For the fourth quarter of 2010, gross margin was 81% as well. On an ongoing basis, our expectation for gross profit margins remains between 70% and 80%.

Turning now to spending. First, looking at product development spending, our full year 2010 R&D expense was $89.3 million, versus $74.6 million for 2009. For the fourth quarter of 2010, R&D expense was $29.6 million, versus $19.2 million in 2009. We continued to invest in the development of our biodefense and biosciences portfolios, including our latest product candidates SBI-087 and TRU-016, which are results of the Trubion acquisition.

On the subject of Trubion, please note that our 2010 R&D expense includes two months worth of activities, related to our operations. As a reminder R&D spending will continue to fluctuate quarter to quarter, driven by the development stage of our various pipeline candidates. Furthermore, it is important to take into account the fact that we have contracts and grants revenues of $34.8 million in 2010, that directly offset a portion of our R&D expense. These revenues represent development funding for the US government and directly support the majority of our Anthrax-related programs.

With respect to SG&A spending for the full-year 2010, SG&A spending was $76.2 million, an increase of $2.4 million or 3% over 2009. For the fourth quarter of 2010, SG&A expense was $21.7 million, versus $18.7 million in 2009. We remained focused on managing the growth in our general and administrative expenses. Turning now to the balance sheet, for the full year 2010, we continued to be cash flow positive, and ended the year with cash and cash equivalents, plus investments of $171 million, and an accounts receivable balance of $39.3 million.

Finally, let me address our 2011 financial forecast. As Fuad noted earlier, we are reaffirming our 2011 forecast of total revenues of $320 million to $340 million, and net income after tax of $35 million to $45 million. Now as you have heard me state before, our quarterly results can be and oftentimes are lumpy. This is principally caused by the timing of our fulfilling orders for BioThrax and work done under new and existing development contracts and grants. Rarely is any one quarter an accurate indication of our annual performance.

With that said, starting this year, in addition to providing annual guidance, we will also be providing revenue guidance for the upcoming quarter. For the first quarter of 2011, we are anticipating total revenues of $20 million to $30 million, we have temporarily redeployed our potency testing capacity from BioThrax release testing, to qualification of replacement reference standards. This is required to enable continued product release. As a result, we anticipate ramping up deliveries under the current contract in the second quarter, and completing deliveries for the current contract in the third quarter. Moreover, we anticipate achieving substantial delivery levels in the second half of the year, that supports our reaffirmed revenue forecast. From a contract standpoint, we are still anticipating signing before the end of the first half, a modification of the current contract for delivery of up to an additional 3.4 million doses, and regarding the follow-on contract, we remain confident that we will sign a multi-year procurement contract before the end of September this year.

Moving now to my concluding remarks, let me wrap-up with the following. In 2010 we achieved a great deal. We delivered on our government contracts, we secured significant additional government funding for our biodefense programs, we advanced the development of all of our product candidates. We progressed in the qualification and validation of our large-scale manufacturing facility in Lansing, and we acquired world-class clinical and technical assets, as a result of the Trubion transaction.

For 2011, we look forward to building on the success of 2010. Our business remains strong, and we are confident about prospects for growth in 2011, both in terms of financial performance, but also contractual success, and progress in product development. And, as always, we remain focused on growing our business through M&A. 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 Cory Kasimov, with JPMorgan. Please proceed.

Good afternoon, guys. Thanks for taking the question. First of all, Fuad, are you surprised that a follow-on BioThrax procurement contract hasn't yet materialized?

Thank you for joining us today, Cory. No, I'm not surprised at all. I think if you look back at the previous follow-on contracts we received, some of them were received only months before the end of the existing ones. Some even a month or two after. So, but we are still, we are still confident that by the end of the second quarter, we would have a, that the RFP would be out and we would be substantially complete with the negotiations on it. And certainly, we are confident that by the end of the third quarter, we would have it executed.

On that note, can you talk a little bit about the process? The Government issues the RFP, and how long might it take once the RFP is out for you to negotiate a final contract?

Yes. That's the question. So what once the RFP comes out, we will have then a clear definition of what the requirements are. We expect it to be a multi-year contract, which we'll try to secure the substantial majority of our manufacturing capacity. So, but we'll know the exact numbers. We then basically sit down and negotiate.

Now it's not something, we don't have much experience with in the country. We've done this several times before. So it should be a relatively straightforward negotiation process. And the points of discussion, should be relatively few. Because again, we have had several contracts, but only with the DoD, and then with BARDA, but also a previous contract with CDC.

Okay, and is there a risk out there that could prevent a follow-on contract from materializing at all? Obviously, there's a lot of talk of budgetary pressures and things like that. Are all the funds that would be there for this contract, already things like Project Bioshield?

All indications we have had so far from the CDC is that they are committed to issuing the RFP, and we anticipate it coming out pretty soon. And so, it is our understanding, is right now, as far as the members of Congress are concerned, that they understand and continue to understand the risk of an Anthrax attack. Actually, if you look at some of the reports issued, they say that there is a very strong likelihood of another attack. So nothing, I've seen nothing that would indicate that the government would not continue with their procurement of vaccine.

In the contrary, they would like us to scale-up. They continue to be very committed to our Building 55 scale-up contract. So, Cory, there is really, even in this environment, where one might think that it might have some potential negative repercussions on the size, and commitment of that procurement, here we haven't seen any of that.

All right. Perfect. Thank you very much for taking the question.

Thank you, Cory.

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

Good afternoon. Thank you for taking my questions, as well. Fuad, with respect to the follow-on contract, is the requirement for an RFP, a new piece of information?

Sorry, a new piece of information?

Yes. I wasn't aware --

No the government always issues RFPs in advance of a solicitation. In advance of a procurement. So this has been, this is the case. Even with our development contracts. So it's very, very typical, it's required, actually, to have an RFP, that comes up.

Greg, this is Don. I would add one thing. This is going to most likely be a sole-source procurement. The RFPs in the past have specifically called out BioThrax. Of course we are the only ones that can supply BioThrax, but as Fuad says, this is standard operating procedure for the Government.

That is a good point, Don, because there are two types of RFP. One is an open RFP and the other is kind of a sole-source type of RFP.

With respect to some work that's being done in manufacturing, could I just get a little more granularity into this reference testing versus release testing work? And during the time that this release testing I guess is going to be unavailable for release of manufacturing, will the Company still be able to manufacture BioThrax for release later? In order to build up sort of a bolus of material that can help you to achieve your full-year numbers? Is that the case? Thanks.

Yes, that is a very good question. And to be clear, we are continuing manufacturing. So sub-lots are being manufactured. We are formulating lots. So while we are deploying the potency testing capacity to qualify additional reference lots, we obviously cannot release, and until the new reference lot is approved, we will continue to release test and then put, after we've completed this exercise, we will continue to release test, and once the approval is in place, release those lots.

Great, thanks for the clarification.

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

Yes, hello. Good afternoon. Just a question on the release. You guys talked about reaffirming your guidance, driven by a number of items, and you talked about milestones from the Trubion partnership assets. So I'm wondering, is that necessary for you to meet your guidance to get milestones from those partnerships? I guess is that included in the $65 million to $75 million guidance for grants?

Yes, it is. It contributes. It doesn't contribute largely, but it does contribute.

Okay. Are you willing to give us sort of a rough percentage of what that means in the grant guidance?

No. We don't really go into that granularity in providing this information.

I appreciate it, Fuad. If I could just, you are saying it's a small contribution so roughly, 10% to 20%? Or is it in the higher end like a 50% or something like that?

It doesn't -- it contributes, but it is not the major contributor.

Would it be possible to meet the low-end of that guidance if the if you didn't get the milestones?

It is a combination of factors that we very carefully calibrate and estimate. We have several contracts, and several collaboration agreements. That each one single factor may not, necessarily, cause any deviation from the range. Obviously, if there are several things that happen simultaneously, we might. But we will inform you if we feel that our outlook and views change in the future.

Okay. I appreciate that. And in terms of the BioThrax capacity expansion in Building 55, are you able to give us an update on how that's progressing and what kind of milestones we could expect over the next couple of quarters?

Yes, certainly. It's progressing quite well. And I would say in the meetings we have with BARDA, they are satisfied with the progress we are making. We hope to be able to initiate manufacturing of the consistency lots for the scaled-up BioThrax by the end of this year. That is a key milestone that we are very, very excited about.

Excellent. Thanks for taking my questions and congratulations on a good quarter.

Thank you, David.

(Operator Instructions). Up next, we have Eric Schmidt, with Cowen. Please proceed, sir.

Thanks, good afternoon. I missed the first few minutes of the call, Fuad, so forgive me if I'm repeating. But the reason for the modest delay in the new procurement contract for BioThrax from Q1, say, into Q3, is that basically because you were given this 3.4 million dose extension and I guess that takes the pressure off the government in terms timing and delays the steps, for example the RFP from being issued?

First of all, we haven't secured the 3.4 million extension of the existing contract yet. That notice has been out, and we have been negotiating, and we expect this to be done shortly, but it's not finalized yet. But certainly you are right, that puts less pressure on getting the follow-on contract signed well in advance. Because the follow-on contract now can comfortably start in the fourth quarter of 2011.

Okay and what in terms of the negotiation of the 3.4 million extension is sort of rate-limiting? I thought that you had a good sense of price already in that extension?

Well we are really not comfortable sharing with you all the specific details, but every contract, whether it's with the government or a commercial party, has several points that are being negotiated. So all we can comment is that we hope that we will execute this contract in the very near future.

Okay. And in terms of the process on the next generation multi-year BioThrax contract, you mentioned the RFP comes out in response to a previous discussion. You indicated at that point you begin discussions or negotiations. I thought you had already had fairly advanced discussion about the terms and size, price per dose and things like that.

Meaning for the follow-on contract?

Yes.

So Eric, that's right. I mean we have, the government has asked us what's our capacity comfortably. We gave them the range, and that's -- we would very much like to have a multi-year contract, preferably five years. And so we submitted that information to, and some other information that they requested, to CDC. And I believe they are taking that into account, in finalizing the issuance of the RFP.

Okay, so that will be a starting point and then you will negotiate the finer details from there?

Yes, exactly.

Okay, and in terms of the new potency testing capabilities and capacity, could you just go into a little bit of detail about what exactly you are doing there? Is that impacting margins at all?

Sure. So, potency testing is part of what is required to release each and every lot. We get approval from we submit the potency information to FDA and we get approval on that submission, and then the lot is ready for release. For the last couple of months, we've kind of redeployed the potency testing capacity, to qualify additional reference lots, which is required for future releases. And while that is taking place.

I'm sorry, Fuad. I'm not sure I understand what that means. In kind of plain English.

Okay. So, where would you like me to start?

Well redeploying new potency testing to validation lots. Every lot has to be potency tested. But what's actually changed here, relative to what you were doing last year?

Okay. So, when the lot is ready to be potency tested, it goes into the potency testing facility for the testing. Now, the testing facility is basically not available for release testing, because we are testing or qualifying, I should say, reference lots. So those are reference standards that are required for future potency testing. So while we are doing that, it is using up the capacity. We can't be using, we can't be releasing, testing manufactured lots for release.

So we've looked at that, and we've looked at the impact, and we've looked at the projections. So it impacts the first quarter, but we started giving revenue guidance for the upcoming quarter, we explained this as being an important reason why we feel that in the next, in the second, third and fourth quarter, it will ramp up. But the guidance was built, based on every quarter's performance, as we have anticipated, and the ramp up, as we anticipate for the rest of the year.

So clearly the manufacturing lots during this period of redeployment, as you mentioned?

Yes.

You don't know which of those lots has failed or passed testing however?

Correct. They are awaiting testing.

Okay. Thanks for the clarification.

To your question, Eric, with regard to the gross profit, as you know, in a process manufacturing like this is, gross profit is really determined over the course of a full year of manufacturing. We are not estimating that this is, this takes us outside of the range that I talked to earlier, of the 70% to 80% gross profit margin.

And that range, Don, is obviously lower than what you achieved last year? This is your typical conservative nature? Or?

Guilty as charged.

Fair enough. Okay. I think that's it for me. Thanks for taking the questions.

Thanks Eric.

(Operator Instructions). Ladies and gentlemen, this will conclude the Q&A portion of the call. I would turn it over to Mr. Burrows for closing remarks.

Thank you, Jeff. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Please note today's call has been recorded and a replay will be available beginning later today through March 24. 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 speaking to all of you in the future. Goodbye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.