Emergent BioSolutions Inc (EBS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Emergent BioSolutions, Inc., Earnings Conference Call. My name is Ann, and I will be a coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. (Operator Instructions) I would now like to turn the presentation over to Mr. Robert Burrows. Please proceed, sir.

Thank you, Ann. Good afternoon, ladies and gentlemen. Again, my name is Robert 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 and full nine months of 2011.

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 Forms 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 3, 2011. 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. 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 our call today. During the third quarter we continued to execute on our operating plan. We manufactured and delivered doses of BioThrax into the S&S, we advanced the development of our infectious disease, oncology and autoimmune programs. And we made progress on Building 55 scale up.

I am pleased to report that at the end of the quarter, as expected, we received an award for the supply of BioThrax to the S&S over the next five years. This clearly underscores the government's continued commitment to procure BioThrax as a critical medical countermeasure in the strategic national stockpile.

In terms of our third quarter results, we achieved total revenues of approximately $59 million, which is within the $50 million to $60 million guidance we provided in our previous earnings call. We also realized net income of $1.5 million.

In terms of the remainder of the year, we are reaffirming our full-year 2011 guidance of total revenues of $270 million to $290 million and net income of $15 million to $25 million.

Turning now to the status of BioThrax manufacturing and current yields. During the quarter, we completed deliveries under the original 14.5 million dose contract and began to make deliveries of the 3.5 million doses under the contract modification. We remain on track to complete deliveries of all 17.9 million doses under this modified contract by the end of the year.

As discussed last quarter, we have been experiencing yields that put us at the lower end of the historic 7 million to 9 million dose range. Over the course of the year, we have identified additional steps to our ongoing process optimization initiatives to further improve our sublot success rates. Some of these steps we have already implemented. As a result, we are starting to see improvements to our yields.

Once we implement the remaining steps, we expect to increase the output to a range of between 8 million to 10 million doses per year. With these measures, we expect to deliver between 8 million to 8.5 million doses under the first year of the new award. Under the terms of the award, we retain the ability to modify the timing of deliveries from year to year depending on manufacturing yields and other factors.

On September 30th, we received a notice of award from the CBC to supply 44.75 million doses of BioThrax over the next five years with a total value of up to $1.25 billion. The total value includes a premium of less than $1.00 per dose for delivery of five-year dated product, which we anticipate in the later portion of the contract term, plus a modest annual price escalation.

Deliveries under the award are expected to commence in December immediately following the completion of deliveries under our current contract.

Turning now to recent developments in our clinical stage product pipeline. Let me begin with our Biodefense Division.

For the last decade we have built a broad portfolio of anthrax countermeasures to meet the requirements of the US government. Our anthrax franchise consists of the only FDA licensed anthrax vaccine, BioThrax, and several novel vaccines and therapeutics in development with funding support from BARDA and NIAID. To date, we have delivered over 55 million doses of BioThrax to the US government, and since 1998, over 10 million doses have been administered to more than 2.6 million people.

In partnership with BARDA, we are developing a number of enhancements to BioThrax in order to strengthen its utility for the government. These include a reduced dosing schedule of three doses over six months with subsequent boosters for the general use prophylaxis of BioThrax on its own, and a potential two-dose schedule for post exposure dose of BioThrax with a novel action.

We also continue to develop PreviThrax, an rPA-based vaccine candidate under a multi-year, $187 million development contract from BARDA. We have developed a promising new formulation that we believe will provide long-term stability.

In addition, we have established a manufacturing process using disposable technology that generates very high yields. We expect this process to generate sufficient doses that would exceed the entire US government requirements using one single-use bioreactor at the 500 liter scale. We believe this gives us ultimate flexibility in the manufacturing location and the transferability of the process.

In addition to a portfolio of vaccines for anthrax, we are currently developing two therapeutic candidates for the treatment of symptomatic patients. Our lead candidate, Anthrivig, is a polyclonal IG that is supported by approximately $11 million of BARDA funding.

Now that we have agreed with FDA on the regulatory path forward under the animal rule, we have initiated two non-clinical studies to advance the program. However, continued progress requires additional funding from the US government, and we are waiting for an opportunity to re-engage in a dialog with HHS regarding future funding.

The goal of our biodefense division is to strengthen the nation's arsenal of medical countermeasures and provide products that will support the government's biopreparedness efforts. Now that we are comprehensively addressing the anthrax franchise, we are exploring other opportunities to develop medical countermeasures for the SNS.

Let me now turn to our Biosciences division. For TB, there are updates on two Phase 2 trials. The first relates to the efficacy trial involving 2,800 infants in South Africa. All patients have been vaccinated and now are being monitored. We continue to anticipate final results in 2012.

The second trial relates to the efficacy study involving approximately 1,400 HIV-infected adults, age 18 to 50, in South Africa and Senegal. This trial has been initiated and has primary funding from a European development agency.

For TRU-016, enrollment of the Phase 1b portion of a study evaluating our candidate in combination with Bendamustine in patients with relapsed CLL has been completed. We anticipate in the near term dosing patients in the Phase 2 portion of the study, which will examine the safety and efficacy of TRU-016 with Bendamustine versus Bendamustine alone.

And, finally, for SBI-087, enrollment in a Phase 2 dose regimen study in RA has been completed. We will provide updates as agreed upon with our development partner, Pfizer.

Turning now to our manufacturing infrastructure, let me update you on our Lansing and Baltimore operations. For our Lansing facility, Building 55, our plans for process development and product comparability continue to make steady progress under the existing $107 million development contract from BARDA. We have completed characterization and engineering runs and have initiated non-clinical studies.

We are making preparations to initiate manufacturing of consistency lines. We recently met with FDA to discuss our overall comparability plan. FDA was supportive of our plan, and we are in the process of now finalizing our path to licensure without the need for a clinical study.

For our Baltimore facility, we continue to be on track to substantially complete facility modifications and to initiate tech transfer for our TB candidate, the first product candidate for this site by year-end.

Finally, in terms of M&A, we continue to pursue acquisition and licensing opportunities with a focus on late-stage or revenue-generating products.

In conclusion, for the remainder of 2011, we look forward to continuing deliveries of BioThrax to the US government and advancing our clinical stage development programs.

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 2011. 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 10-Q with the SEC no later than the close of business tomorrow, Friday, November 4th. The 10-Q will also be available on our website.

Now, for a brief overview of our financial results. Total revenues for third quarter 2011 were $58.8 million as compared to $74 million for Q3 2010. Total revenues for the first nine months of 2011 were $165.4 million compared to $182.9 million for the same period in 2010. As you know, total revenues are a combination of revenue from product sales and contracts and grants.

Product sales revenues in Q3 2011 were $43.7 million, a decrease of $23.6 million from the prior year. This decrease was due to a 38% decrease in the number of BioThrax doses delivered due to the lower production yields we experienced earlier in the year. Product sales revenues for the quarter consisted of BioThrax sales to HHS at $43.6 million and aggregate, international, and other sales of $85,000.

Product sales revenues for the first nine months of 2011 were $120.7 million and consisted of $119.4 million in BioThrax sales to HHS, and aggregate, international, and other sales of $1.4 million. The decrease of $41.3 million from product sales revenue for the same period of 2010 -- the decrease resulted primarily from the 29% decrease in the number of BioThrax doses delivered due to the redeployment of our potency testing capacity from BioThrax release testing to qualification of replacement reference standards and other development testing during the first quarter of 2011 coupled with the lower production yields.

For Q3 2011, contracts and grants revenues consisted of $15.1 million, an increase of $8.4 million over the prior year. Contracts and grants revenues for the first nine months of 2011 were $44.7 million, an increase of $23.8 million over the same period in 2010. This increase is primarily due to revenues from our contract with BARDA for large-scale manufacturing of BioThrax, revenues associated with increased activity under other development contracts with NIAID and BARDA, as well as revenues from our collaborations with Abbott and Pfizer.

Our gross profit in Q3 2011 was approximately 75% and approximately 77% for the first nine months of 2011. These are both within our typical gross margin range of between 70% and 80%.

Our Q3 2011 R&D expense was $29.2 million, an increase of $8.1 million, or 38% over the prior year. This increase primarily reflects higher contract service and personnel-related costs and includes increased expenses of $4.5 million for product candidates and technology platform development activities in our Biosciences segment including those acquired in our acquisition of Trubion late last year; $2 million for product candidates in support of our Biodefense segment; and $1.5 million in other research and development activities.

Our R&D expense for the first nine months of 2011 was $95.5 million, an increase of $35.8 million, or 60% from the comparable period of 2010. This increase primarily reflects higher contract service and personnel-related costs as well as increased expenses of $30.8 million for product candidates and technology platform development activities in our Biosciences segment; $3.1 million for product candidates in our Biodefense segment; and $1.9 million in research and development and support of central research and development activities.

As you know, the contracts and grants funding that we receive for many of our programs partially offsets our R&D expenses. Therefore, after consideration of this money and the portion of spending attributable to our joint venture partners, our net R&D spend for the third quarter was $12.4 million versus $13.3 million last year, and $45.6 million for the first nine months of 2011 versus $36.6 million in the same period of 2010.

We remain committed to investing in the development of our product pipeline and expect our total R&D spending will continue to fluctuate, quarter-to-quarter due to the varied development stages of our broad pipeline of candidates.

Our third quarter 2011 SG&A expenses were $17.4 million, a decrease of $3.3 million, or 16% over the prior year. This decrease is primarily due to decreased professional services including legal and other fees incurred in 2010 related to the Trubion acquisition. We remain focused on managing the growth in our general and administrative expenses.

Our SG&A expense for the first nine months of 2011 was $56 million, an increase of $1.5 million, or 3%, from the first nine months of 2010. This increase is primarily due to approximately $2.2 million in restructuring charges related to our UK operations.

With respect to earnings for the third quarter, net income was $1.5 million, or $0.04 per basic share. This compares to net income of $13.1 million, or $0.42 per basic share for third quarter 2010. For the first nine months of 2011, we experienced a net loss of $5.6 million, or $0.16 per basic share as compared to net income of $25.5 million, or $0.82 per basic share for the first nine months of 2010.

Turning to the balance sheet, our combined cash, cash equivalents, investments, and accounts receivable totaled $177.8 million as of September 30, 2011, compared to $210.4 million at December 31, 2010, and $174.4 million as of June 30, 2011.

Finally, as Fuad mentioned, we reaffirm our 2011 guidance of total revenues of $270 million to $290 million and net income of $15 million to $25 million.

By the end of this year, we look forward to completing deliveries of BioThrax doses under our current US government contract and to beginning deliveries under the recent award for 44.75 million additional doses. We have made significant progress with the licensure of Building 55 and the modifications to our Baltimore facility, and we continue to move these facilities forward.

On the business development front, as Fuad mentioned, we continue to evaluate M&A opportunities that would bring near-term value and help grow our business.

That concludes my prepared 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.

Thank you. (Operator Instructions) Karen Jay.

Hi, it's Karen Jay for Cory Kasimov. Thanks for taking my questions. I just have a couple. The first is I want to make sure I understand from your prepared comments -- it sounds as if you won't need to do any bridging studies for Building 55. And if that's the case, can you reconfirm the timeline that the plant could be operational or online in 2013?

Thank you for joining us today, Karen. This is Fuad. Obviously, it is good news that FDA was supportive of a plan that would not include a clinical trial. And a clinical trial is -- we estimated at between a year and a half to two years as a timeline.

This is, however, not the -- except savings and time that we would do other comparability studies, non-clinical studies that may take a bit longer than expense.

But, overall, I would say that we may gain something around a year's time due to this important development.

Okay, great, that's great news. Also, just around (inaudible) that the current extension contract will likely finish delivering in 4Q, and you will start deliveries under the new contract in 2011?

Yes, towards the end of 2011.

Okay. Just one more question -- the changes that you're implementing -- the remaining steps to increase yield -- is that going to require any shutdown or slowdown in manufacturing?

We don't anticipate that it will require any shutdown or slowdown. It will take a while until these improvements take effect, which we hope will happen during the first half of next year. So we are optimistic that these additional steps will help us get to the level of 8 million to 10 million range rather than the 7 million to 9 million, which we have historically experienced.

Now, again, even with the 8 million to 10 million range, and with those improvements there is still that variability in the manufacturing process. So the range -- the higher range with a midpoint of 9 million is still 8 million to 10 million.

Great, thank you very much and congrats on the new contract.

Thank you.

Thank you very much, Karen.

Nicholas Bishop.

I just wanted to follow up a little bit more on the Building 55 licensure path. I just wonder if you could elaborate a little bit more on exactly what the FDA has said you do or do not have to do and what issues remain to be decided and when those issues will become clear?

Well, we've had a very positive dialog with FDA recently, and our comparability plan, which is pretty comprehensive and detailed was commented on. And we're evaluating these comments. So it's really premature to tell you exactly the timeline (technical difficulty). I tried to explain to Karen that we're hoping that it might happen. All I hear is impact of pulling the timeline in. But we're still working through the exact ramifications with respect to the timelines.

Okay, thanks. And then just one quick one on the mechanics of the new BioThrax contract, and that is you mentioned that you could have a yield of up to 10 million doses, although you only expect to deliver in 2012, 8 million to 8.5 million. If you had a greater yield than you expected, is there any mechanism by which you could deliver more than that number on this contract?

Obviously, irrespective of the yields that we were actually experiencing this year, which are within the range, historic range of 7 million to 9 million, and that will continue to fluctuate as we go forward. With the new award, which has an average of about 9 million doses, we obviously are working towards shifting upward the range from the 7 million to 9 million to 8 to 10 million so that the average is about 9 million.

Again, we may have year-to-year fluctuations, and that's fine because the award allows for -- includes terms that allows for the acceleration of delivery or the postponement of delivery into the next delivery years. So there is flexibility. Our goal is to shift the paradigm so that, on average, we can deliver 9 million a year. But I have -- re-emphasize as I have always emphasized this is a biological manufacturing process with variability so we are historically 7 million to 9 million dose range. We hope to achieve by sometime next year the 8 million to 10 million range. We've already seen and implemented some of the steps, and they are looking promising, and we are excited about implementing the remaining steps.

Okay, but just to be clear -- oh, I'm sorry.

No, no, that's fine, thank you.

Okay. Just to be clear, I'm talking about next year if you happen to have a yield of greater than 8.5 million, for example, there would be some possibility of delivering those to HHS?

Absolutely. Again, under the terms of the award, we do retain the ability to modify the timing of our deliveries from year-to-year.

Okay, great. And then just one last financial one -- both R&D and SG&A have been on a declining trend through the year. I'm wondering if you can give any guidance on whether that trend is expected to continue? When they might start flattening out or just what we should be thinking about there?

Don, why don't you take that one?

Sure, happy to do that. Nick, as far as that trend of decline -- I really wouldn't characterize it quite like that. As you take a look, and let me treat them somewhat separately.

SG&A -- that's as evident in our notes and in the various filings, there have been a lot of one-time occurrences, either last year or this year. I think once you normalize for those types of one-time occurrences, and you take a look at the trend throughout the year, you will see SG&A is relatively steady throughout the year.

With regards to R&D, of course, that's going to fluctuate with where various product candidates are in their trials at any particular point in time. So you're going to see some volatility there. Again, I think, certainly, year-over-year you're going to see an increase in absolute R&D expenses as we picked up the Trubion product candidates and continue to drive those forward.

So I would say that with respect to the trends in those, relatively steady in SG&A and on an overall increase in R&D. But you're going to see up and down as one goes through the year.

Does that answer your question, Nick?

Greg Wade.

I wonder if we might just return to this Building 55 approval process. So our expectation was that there would be a package submitted to FDA at the end of this year, and that we'd find out sometime in 2012 as to whether clinical studies would be required. Will that package still be submitted? Or do you require additional preclinical studies to be done before that can be submitted, say, sometime in 2012 with an answer sometime in 2013?

Thanks for joining us, Greg. I'm not sure that we ever expected to submit a package, so to speak, to FDA. That is formally reviewed. We did develop a plan and submitted the plan for discussion purposes to the FDA, and we've had that dialog. So in a sense, we've had that discussion. And they commented that they agreed with our plan on that a clinical trial is not likely to be needed, but they made some comments as to some of the engineering runs and comparability aspects of our plan that might need additional work.

So we may save the time and effort involved in the -- not doing the clinical trial but, on the other hand, we might be doing a bit more on the non-clinical side. But net-net we still believe that we can bring the timeline in and, net-net overall, it's less of an effort. So it's good news.

Okay, I agree. I'd just like to understand the process, though. So you'll complete this work, and you'll be filing for approval of Building 55. When do you expect to submit for approval of Building 55?

Well, we expect -- again, we are amending our plan right now to reflect some of the changes. I would look at potentially sometime in late 2013, early 2014, that a BLA supplement could go in.

Okay, great, thank you. And then if I just might follow that up. Don, in terms of expected production in Q4 in order to hit your guidance, will you be looking for something in the range of 3.5 million doses to deliver to the SNS?

I think you can back into that. We normally don't give, Greg, as you know, dose forecasts, per se. But taking a look at our full-year forecast for revenue and backing out the first nine months, it's easy to see where a top line has to be. And you can do the math on the doses, if you want.

Okay, and then just if I -- one last question then -- according to our math, it looks like a significant uptick. Obviously, you have the benefit of October in your -- I'm sure you know exactly what's going on on a daily basis. So has the October production been to such a level that gives you great confidence then that the significant uptick is going to take place?

Well, remember our production -- I'm sorry, Fuad -- remember our production cycle is such that October production is really going to manifest itself in Q1 2012. The shipments that we're making in Q4 are basically completed, going through their release testing, et cetera, et cetera.

If you take a look, as I suggested, and derive the fourth quarter revenue off of our guidance, and you compare it to the fourth quarter revenue of last year, you're going to see they're quite similar. So as far as a significant uptick, the uptick is not a whole lot different than it was last year.

I think what might be helpful here is that in terms of sublot manufacturing for this year, it's basically done. So we have a good idea, we know exactly what sublots have been produced. So now it's a question of filling and potency testing, et cetera. So, obviously, as we get closer to the end of the year, our confidence goes up in terms of meeting the guidance and today we reaffirmed our guidance.

(Operator Instructions) Jim Molloy.

I want to go through some of the timeline again. I apologize for beating on this one, but my understanding is consistency lot manufacturing that's wrapping up end of -- early next year, and then you complete validation and testing. And prior to this, we'd assumed the bridging study of a year, year and a half, and the second half of 2014 potentially getting Building 55 online.

Now is the bridging study gone? Has the consistency lot manufacturing extended or validation extended or -- you mentioned before perhaps late 2013 or early 2014 to submit a BLA for Building 55. What's filling the rest of that space?

Yes, thank you for joining us Jim. It's the non-clinical studies that we referred to earlier, which under the animal rule, you know that biodefense programs to show a consistency, one can also use animal results -- test results -- to demonstrate comparability. So that's what now we're looking at potentially expanding that aspect that I mentioned of our total plan. So it's kind of a trade-off. If we don't bridge through a clinical trial, we're bridging through enhanced non-clinical studies.

And, of course, as you know, we are continuing to look at the engineering runs in preparation for the consistency lots there. We've also received some comments, which are promising that we can get consistency lots relatively soon.

Okay, great. Then, maybe, could you walk through what exactly is the current pricing per vial? Any changes on that? And where there are vials, I assume there must have been vials made but not shipped from prior quarters that are going to be going out in the fourth quarter to get to the big bump there in the fourth?

I didn't quite get your question. Can you come again, please?

Yes, sure. Were there lots made but not shipped in prior quarters that are now getting shipped out the door in the fourth quarter? It seems like the numbers going out the door actually exceed production -- maybe they don't -- production capacity in the quarter?

Yes, I mean, again, the production cycles have variability from month to month. The delivery, when CDC can and is prepared to take delivery, there is scheduling, as always, something that needs to be completed. So it can very well happen. It seems to be a pattern with us that the fourth quarter seems to be more substantial quarters in terms of delivery.

So it just so happens we try to get out the door any lots as quickly as possible. So it's not like -- there's no keeping an inventory and trying to manage quarter-to-quarter deliveries.

Okay, great. And maybe a final question -- I still assume around $28.00 per dose on the current contract. Any thoughts on where that price goes to for the next contract? And then can you talk any specifics on what were the yield improvements that will drive yield?

Okay, so the first question -- we consider pricing is something that we don't disclose. But it is pretty straightforward. If you look at the (technical difficulty) 75 million doses, we've given you an indication that the five-year premium that would kick in in the latter half of a five-year period is really not significant an amount. And we've given you an idea of modest escalation.

So I think when you look at how many doses we have to deliver and the total contract price, you can't be too far off in terms of what the price-per-dose is.

Okay, great. Now, what exactly -- what were the -- the aha moment that increased yields here in the most -- or going forward from 7 million to 8 million and 8 million to 10 million?

Well, when you have a manufacturing process, as you know, you have process parameters within which you manufacture. And tightening some of these process parameters and looking at sometimes shifting, of course, with the approval of FDA -- everything has to be approved. We may improve the yield or the success rate of several productions. So it's a -- without getting too technical, and I don't know that I would even want to share all this technical stuff that we're doing, we feel that we have tremendous competency and -- fermentation manufacturing and this is one of our strengths. We are addressing those things that I've just discussed.

Ladies and gentlemen, with no further questions, this concludes our question-and-answer session. I would now like to turn the call over to Mr. Robert Burrows for closing remarks.

Thank you, Ann. Ladies and gentlemen, that concludes today's call. We appreciate everyone's participation. Please note that today's call has been recorded, and a replay will be available beginning with today through November 17th.

Alternatively, there is available a webcast of today's call. An archived version of which will be available later today, accessible through Company's website.

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

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.