Emergent BioSolutions Inc (EBS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Emergent BioSolutions earnings conference call. My name is Jeremy and I will 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)

I would now like to turn the conference over to your host for today, Mr. Bob Burrows, Vice President of Investor Relations.

Thank you, Jeremy. Good afternoon, ladies and gentlemen. Thank you for joining us today as we discuss Emergent BioSolutions' fourth-quarter and full-year 2011 financial results. 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 am 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 March 8, 2012.

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. For my prepared comments, I will review our financial performance for 2011, address the forecast for 2012, including revenue expectations for the first quarter, and discuss the current status of the Company.

To begin, let me review our financial results for 2011. For the full year, we achieved total revenues of approximately $273 million, which is within the $270 million to $275 million range we provided in January. In addition, we realized net income of $23 million, which is within the $20 million to $24 million range we previously provided. At year end, we held cash and accounts receivable of $220 million.

Looking ahead, we are reaffirming our full-year 2012 guidance of total revenues of $280 million to $300 million, split between product sales of $220 million to $230 million, and contracts and grants revenue of $60 million to $70 million. We are also reaffirming our full-year 2012 net income of $15 million to $25 million. In addition, we anticipate first-quarter 2012 total revenues of $40 million to $50 million.

Turning now to the status of the Company, let me first talk about our BioDefense division. In 2011 we continued to manufacture and deliver as many doses of BioThrax into the SNS as possible. To that end, we completed deliveries under the prior 17.9 million dose contract and began deliveries under the new CDC contract.

The new contract, which was awarded in September, is for approximately 45 million doses valued at up to $1.25 billion to be delivered to the SNS through September 2016. This is a significant commitment by the US government, and further affirms BioThrax as a critical component of the government's bio-preparedness arsenal for years to come.

In response to the government's stated requirement to build a stockpile of 75 million doses of anthrax vaccine, we continue to make progress towards licensure of our large-scale facility, Building 55. This new facility is designed to manufacture up to 25 million doses of BioThrax per year on a single production line. If needed, this facility could, with the addition of a second production line, produce up to 50 million doses per year.

We have presented to FDA a comprehensive plan for regulatory approval based on comparability and non-clinical studies without clinical data. During pre-submission discussions, FDA indicated its overall support for a plan that does not require clinical studies, and provided a specific guidance on expanding the scope of non-clinical studies. This may translate in obtaining approval potentially one year ahead of schedule.

In 2012, we plan to complete consistency lot manufacturing, and we anticipate licensure could occur as early as late 2014. In partnership with BARDA, we continue to enhance the value of BioThrax as one of the leading bio-defense countermeasures. These initiatives include obtaining post exposure indication, optimizing the dosing schedule, and extending the product shelf life.

We are also developing BioThrax in combination with a novel adjuvant in pursuit of a two dose vaccination schedule administered over a two-week period. In addition, with respect to our other anthrax directed programs, including our rPA vaccine candidate and our two therapeutic candidates, we plan to complete ongoing studies and secure total on development funding from BARDA.

In pursuit of expanding the scope of our BioDefense business, we established a separate BioDefense division with its own growth objectives. We evaluate M&A opportunities targeting areas where BARDA has indicated a high degree of interest and where development contracts have been awarded. We are pursuing product development and manufacturing opportunities across multiple disease areas and are looking at products, such as antimicrobials, which have the added benefit of addressing both government and commercial markets.

Let me now turn to our biosciences division. Our lead program in our biosciences division is MVA85A, our TB booster vaccine candidate. Given the potential to significantly reduce the TB disease burden worldwide, our vaccine candidate has gained substantial support and funding commitments from renowned global NGOs. As you know, approximately 2 billion people, or one-third of the world's population, are estimated to be infected with the bacterium and are at risk of developing TB.

According to the WHO, in 2010 there were 8.8 million new cases of TB, resulting in 1.4 million deaths. Clearly TB represents a substantial global unmet medical need. In 2011, with support from our partners, the Wellcome Trust and heirs, we completed vaccination of all 2800 infants in our Phase 2b efficacy study in South Africa. These infants are now being observed and we continue to anticipate efficacy data from this study in late 2012.

If this data are promising, and given the heavy disease burden worldwide, we anticipate pursuing accelerated licensure in selected countries. Our TB vaccine candidate is also in a second Phase 2b efficacy trial involving approximately 1400 HIV-infected adults in South Africa and Senegal. Both clinical trials have funding support from NGOs and a European government agency. If successful, MV85A would be the first vaccine license for TB since the introduction of BCG more than 80 years ago.

Our other key biosciences program is our monoclonal antibody candidate, TRU-016, targeting lymphomas. For TRU-016 and CLL, we have completed enrollment of the Phase 1b portion of a study evaluating our candidate in combination with bendamustine in patients with relapsed CLL. Safety data from this stage 1b portion was recently reviewed by an independent data monitoring committee, which authorized advancement into Phase 2. As a result, we started dosing patients in the Phase 2 portion of this study, which will examine the safety and efficacy of TRU-016 with bendamustine versus bendamustine alone.

In 2012 we expect to complete enrollment in the Phase 2 combination study. For TRU-016 and NHL, we have completed enrollment in a Phase 1b combination study. We expect to complete the Phase 1b study, and will then assess whether the data supports initiation of Phase 2 in 2012.

Let me now update you on our manufacturing infrastructure. We have made significant progress towards licensure of Building 55. The regulatory path is now clear, and in 2012 we plan to complete consistency lot manufacturing. We anticipate licensure could occur as early as late 2014.

For our Baltimore facility, we have completed renovations and are installing disposable manufacturing technology for the simultaneous production of bacterial and viral products in multiple production suites. We believe disposables will improve output, scalability, and flexibility in our production process. We have met with FDA regarding our build-out and utilization plans, and they indicated their support for concurrent manufacturing in the facility. Over the next 12 months, we plan to introduce our first product into the facility, our MVA85A TB vaccine candidate. In addition, the facility will be capable of manufacturing new BioDefense medical countermeasures, as well as our monoclonal antibody candidates.

Before I turn this over to Don, I wanted to make a few brief remarks about the leadership transition that is underway at Emergent. Since 1998, it has been my great honor to serve as Emergent's Chief Executive Officer. Therefore, it was with mixed emotions that in December last year I announced my retirement as CEO, effective April 1, 2012.

It has always been my intention to relinquish this role, it was simply a matter of when. As our Company has grown and matured, we have achieved many significant accomplishments since its inception. We have grown revenues from $2.5 million in 1998 to approaching $300 million in 2011. We have realized profitability for the last 10 years; we have established a global footprint, growing from 4 to over 800 employees; our R&D pipeline has grown from zero to eight clinical stage product candidates; and we have become the premier BioDefense government contractor.

I hand over the reins knowing that the Company has a strong infrastructure and skilled leaders, and as a result is well-positioned for continued growth and success. Dan Abdun-Nabi, our current Chief Operating Officer, will assume the role of Chief Executive Officer effective April 1, 2012. Dan and I have worked closely together for eight years, during which time he has proven to be an accomplished leader with an extraordinary capacity to act both decisively and strategically in the Company's best interests.

The Board of Directors, executive management team, and I have every confidence in his ability to continue to drive the Company's growth and to fulfill our mission to protect life. I will continue to serve as Emergent's Executive Chairman. In this role I will spend approximately 50% of my time leading the activities of our Board of Directors, providing ongoing advice to them and the executive team, and working with the executive team on external relations, corporate strategy, and mergers and acquisitions.

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. Before I get into the financial results, I would like to congratulate Fuad on his final earnings call, and thank Fuad for his support and leadership to the Company since its founding.

So, following the close of the markets today, we released our financial results for the fourth quarter and full-year 2011. I encourage 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 9. The 10-K will also be available on our website.

Let me now briefly discuss the numbers. Full year 2011 total revenues were $273.4 million versus $286.2 million in 2010. 2011 revenues were comprised of $202.4 million of product sales, a decrease of 19% over the prior year, and $71 million of contracts and grants which is an increase of 104% over the prior-year. The lower product sales in 2011 is primarily due to our decision in the first quarter, as you recall, to redeploy our potency testing capacity from BioThrax release testing to qualification of replacement reference standards and other development testing, as well as to lower production output we experienced during the first half of 2011.

Production output improved over the remainder of the 2011 production period, which led to increased product sales, as evidenced by our fourth quarter product revenues of $81.6 million (sic - see press release). Moreover, fourth quarter 2011 total revenues were $107.9 million compared to $103.2 million in 2010.

Turning to gross margins, our full year 2011 gross margin was 79%, a slight decrease over 2010. Our expectation for gross margins remains within our historic norm of between 70% and 80%. Turning to the bottom line, full year 2011 net income was $23 million or $0.65 per share. Although this is below our 2010 net income, primarily due to lower revenues, it is within the range we forecasted earlier in 2011. 2011, I am pleased to say, is our 10th consecutive year as a profitable Company. Fourth quarter 2011 net income was $28.7 million or $0.80 per share.

Turning now to spending. Our R&D expense for the full year 2011 was $124.8 million, a 40% increase over 2010. Fourth quarter 2011 R&D expense was $29.4 million, in line with $29.6 million spent in the fourth quarter of 2010. Recall that contracts and grants revenues and costs associated with non-controlling interest offset a portion of our R&D expenses. Taking into account these adjustments, our net R&D for full year 2011 was $47 million, which is a 6% decline from 2010.

With respect to 2011 SG&A spending, for the full year SG&A expenses were $74.3 million, a decrease of 3% over 2010. Fourth quarter 2011 SG&A expenses were $18.3 million versus $21.7 million in 2010. As always, we remain focused on managing growth in our general and administrative expenses.

Turning now to the balance sheet. For the full year 2011, we continued to be cash flow positive, and ended the year with cash and cash equivalents plus investments of $145.9 million, and an accounts receivable balance of $74.2 million.

Finally let me address our 2012 financial forecast. As Fuad noted earlier, we are reaffirming our 2012 forecast of total revenues of $280 million to $300 million and net income after tax of $15 million to $25 million. In addition, for the first quarter of 2012 we are anticipating total revenues of between $40 million and $50 million.

I would like to wrap up my remarks by noting our 2011 achievements. We delivered on our government contracts. We secured a significant new procurement contract for BioThrax that provides five years of revenue visibility. We progressed in the qualification and validation of Building 55, and we advanced the development of our clinical candidates.

For 2012 we look forward to building on the successes of 2011. Our business remains strong and we are confident about prospects in 2012, in terms of financial performance, contractual success, and progress in product development. Additionally, we continue to focus 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) Cory Kasimov.

Thanks for taking the questions, and Fuad, let me add my congratulations to you on your retirement. First of all with BioThrax, with regard to the upcoming consistency lot manufacturing of Building 55, how long do expect those runs are going to take, and how do you think you -- or are you expecting to disclose the result?

Thank you, Cory, for your kind words. To answer your question, we are in the process of gearing up consistency lot manufacturing. We have, in addition to the consistency lots, of course, non-clinical studies that need to be completed. And we will be continuing to manufacture in this facility, to keep it warm, and to build up an inventory of product. Should we then be licensed in late 2014 to early 2015, we actually would have some product available for delivery.

Okay, and then on the model, two quick questions. One is on your first quarter revenue guidance of $40 million to $50 million. Seems kind of low, relative to your full year guidance. Is this, once again, being driven by lower yields to start the year, or is it something having to do with timing of deliveries or contract revenue or something else? And then the second one on the model. Of your planned R&D spend in 2012, can you provide a rough split of how much is attributed to BioDefense relative to biosciences? Thanks.

Yes. Let me take your first question first, which is Q1 guidance. If you look back historically at our first quarter, it has always been less than average, and the reason being is that we do our annual shutdown for maintenance, annual maintenance, every year in the September/October timeframe.

So given that four months' production cycle, the four to six weeks that we are shut down usually demonstrate themselves in the first quarter. So historically, the first quarter is always a bit less than average. Now, with respect to the R&D spend, we don't really break that down in terms of BioDefense and biosciences.

Eric Schmidt.

Good afternoon and my congratulations, Fuad, to you as well on your new role. It sounds like you will be spending a little bit more time focusing on strategy, and I guess I am just wondering what exactly that might entail, whether you will be looking more closely at cash redeployment, M&A, buybacks, dividends, et cetera? Or maybe you could just describe a little bit more about how you will be functioning with the Company.

Thank you, Eric, for the congratulations. I do look forward to transitioning to the new role, and in that new role I will be focusing mostly on the M&A piece. Of course, with it is strategic -- continued strategic development. We have a strategic plan that the entire executive team has worked very closely together and we are all aligned, and we are executing. And there are strategic processes that we are implementing and have implemented to make sure that the process, the growth process, is optimized within the organization.

M&A is something that we have been growing through mergers and acquisitions in the last few years. We remain acquisitive, and have now more time to personally spend on evaluating candidates, and then once we have identified the right targets, and hopefully to negotiate and complete a deal.

Okay, and then a question for Don on the tax rate. It tweaked up to 41%, I think, in the year 2011. Could you discuss why that might be and provide a directional guidance that you might want on 2012?

Sure. If you take a look back over the past X number of years, Eric, you will see that our tax rate has generally hovered around 40%. Now in 2010 there were a number of different adjusting activities, some from prior years, et cetera, that caused the rate to be below 40% for 2010.

But as we take a look at our overall tax profile, and unfortunately we don't have the luxury of certain foreign operations that might allow us to, if you will, shelter some of this income, 40% is pretty much what we expect on average year-over-year, until such time as we get into a different profile of either states or different countries that we are doing business in.

Eric, rest assured that we at Emergent try to manage our taxes as best as we can, and we have external advisors to see, to validate what we are seeing here. Unfortunately, that is the place we are in right now, and we always look at opportunities to reduce taxes, but that is where we are.

Yes, we pursue aggressively all of the R&D tax credits, manufacturing deduction credits, et cetera, et cetera, and it still comes out to be right around 40% on average.

Okay. And then last question on BioThrax. It looks like in the fourth quarter, sales were down about 9% on volumes that were down a little less than that, 6%. So is that the difference between, the delta of 3%, is that the difference in price between old and new contracts, or partial difference in price?

You are seeing some of the ramifications of that, yes, Eric.

Mario Corso.

Yes. Thanks for taking my question, and I echo congratulations to Fuad. I guess on the yield issue, I understand what you are saying about the shutdown in Q1 impact, but given what you have seen lately, do you feel good about where the yields are and your ability to produce the 8.5 million doses for this year?

Then a couple of things modeling-wise. Gross margin and contract revenue both jumped quite a bit in the fourth quarter. I am wondering if there was anything in particular happening there, and I am also wondering if there is any progress on potentially re-partnering through those 16 banks?

Thank you, Mario, also for the wishes. So to start with the first question on the yields, we are very pleased with the progress we are making in addressing the yields issues that we encountered last year. We are looking at processes that further optimize the process and minimize the chances of experiencing another lower than expected yield year.

As I have always said that there is inherent variability in the growth characteristics of the fermentation process when you produce a biologic, so -- and that range has been 7 million to 9 million doses a year. We always hope to be at the higher range, and we are taking steps to again increase the probabilities to get back up there.

Now with respect to the margins, why don't I ask you, Don, to address that issue? (multiple speakers)

Yes, when you take a look at margins generally speaking, and as we referenced in the comments, we expect gross margins, at least with regard to product, to stay in the 70% to 80%, and if you go back over the past couple of years, you are going to see that that has remained in that range rather consistently.

In any given quarter, yes, could you see it spike up a couple of percentage points? An awful lot of that, as Fuad mentioned, a -- of a four months production cycle, you are going to see certain activities that are impacting gross margin that actually happened a number of months before, depending upon how inventories are moving.

With respect to contracts and grants, I think as you take a look at the significant government contracts and grants, you are going to see that RPA and Building 55 generally are accounting for a very large proportion of contracts and grants, and on any given quarter you are going to see those go up and down.

Now, of particular influence in fourth quarter was recognition of contract and grant activity associated with Abbott. And so that is going to show that a little bit more spiking in activity in fourth quarter than normal, and you will see all of that in the 10-K.

To the third question as to re-partnering potential for our TRU-016, we continue to be excited about that candidate. The (technical difficulty), as we reported earlier, are ongoing and we hope that the results will be promising so that we can continue development of TRU-016 in both disease areas. We are open to re-partnering. We are looking at first generating the results and then evaluating the best timing to evaluate the whole partnering strategy.

(Operator Instructions) Jason Kantor.

Thank you for taking the question. I am getting a little feedback on my line. I hope it is not on yours as well. Just on the TRU-016 program, can you give us a sense of when you expect to get the efficacy data there? And then what kind of hurdles are you looking for in order to take that drug forward? I mean, it's becoming a very competitive space where you're looking. So I am just wondering. I assume we are going to see activity. The question is how much activity do you need to see to warrant moving forward?

Thank you, Jason. I have sitting here next to me Dr. Scott Stromatt, who is our Chief Medical Officer, and he is very familiar with the trials associated with TRU-016. So I will ask him to give you a greater detail.

(technical difficulty) -- CLL, finished Phase 1b enrollment. You will see that data at ASH this year. We will continue enrollment in the Phase 2. We should finish that this year. So we will have top-line data next year, and then, obviously, more data at the end of probably 2013 at one of the medical meetings. In terms of efficacy hurdles, usually in oncology it is like a 30% to 50% difference, and our sample size are geared towards that.

At this time there no questions in queue. I would like to hand it back to Mr. Bob Burrows.

Thank you, Jeremy. Ladies and gentlemen, that concludes today's call. We really appreciate everyone's participation, and please note that today's call has been recorded and a replay will be available beginning later today through March 22.

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, again at www.emergentbiosolutions.com and clicking on the investors tab. Thanks again, everyone, and we look forward to speaking to all of you in the future. Good bye.