Emergent BioSolutions Inc (EBS) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions first quarter 2013 financial results conference call. My name is Caris and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. Now I would now like to hand the call over to your host for today, Mr. Bob Burrows. Please proceed.

Thank you, Caris. Good afternoon, ladies and gentlemen. Again, my name is Bob Burrows. I'm Vice President of Investor Relations for Emergent. And thank you for joining us today as we discuss Emergent BioSolutions' first quarter 2013 financial results.

As is customary, our call today is open to all participants, and in addition the call is being recorded and is copyrighted by Emergent BioSolutions.

Participating on the call this afternoon with prepared comments will be Dan Abdun-Nabi, our President and CEO, and Bob Kramer, our Chief Financial Officer. Following the prepared comments, we will conduct a 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 May 2, 2013. 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/News.

And with that introduction, I would now like to turn the call over to

Dan Abdun-Nabi, Emergent BioSolutions' President and CEO. Dan?

Thank you, Bob. Good afternoon, everyone, and thank you for joining our call today. During my prepared comments, I will briefly touch on our financial performance for the quarter and our guidance for the full year and the second quarter. I will then discuss our year-to-date operational performance and highlight the key milestones for the remainder of 2013.

To begin, total revenue for the first quarter was $43.1 million. This is within the $40 million to $50 million range that we reaffirmed last week. During the first quarter we realized a net loss of $8.1 million, or $0.22 per share.

In terms of guidance, for the full year 2013 we reaffirm our forecast of total revenue of $290 million to $310 million and net income of between $20 million to $30 million. For the second quarter of 2013, we forecast total revenues of between $70 million to $80 million. Bob Kramer will provide more detail on both our financial performance and our guidance in a moment.

Let me now turn to the operational performance of each of our business units during the first quarter. Beginning with the BioDefense Division, we continue to manufacture and deliver doses of BioThrax to the SNS under our current $1.25 billion contract. We also continue to advance the program for large-scale manufacturing of BioThrax in Building 55.

Specifically, after having successfully completed the pilot non-clinical studies this quarter, we received written confirmation from the FDA that the design of our pivotal non-clinical study was acceptable.

This is a very important step towards licensure of Building 55, and we remain on track to submit our sBLA filing to the FDA in 2014, with regulatory approval possibly in late 2014 or early 2015. Timing of both the filing and approval, of course is dependent on interactions and feedback with FDA, among other factors.

In addition, as part of our ongoing efforts to expand the BioThrax label to include a post-exposure prophylaxis, or PEP, indication, we initiated a pivotal antibiotic non-interference clinical study. We anticipate completing this study later this year, which would position us for submitting our sBLA in 2014.

Turning to our BioSciences Division, let me focus on TRU-016, our ADAPTIR protein therapeutic candidate, currently in clinical trials targeting CLL. During the quarter, TRU-016 received orphan medicinal product designation by the European Commission. We also initiated engineering runs of TRU-016 in our Baltimore facility to support clinical and ultimately commercial manufacturing of the product.

More recently, we completed enrollment in study 16201, the Phase 2 open-label combination study with bendamustine in relapsed-refractory CLL.

We also announced our intention to expand study 16009, the Phase 1 open-label combination study with rituximab in front line CLL. The decision to expand study 16009 is based on a combination of strong patient enrollment and encouraging early safety and efficacy data. The efficacy signal that we are seeing in patients is strong enough that we want to explore whether efficacy is similarly robust at a lower dose.

The expanded protocol will actually include two new cohorts. One will examine a lower dose of TRU-016 with rituximab in front line CLL, while the other will evaluate the combination in a wholly new population, specifically relapsed-refractory CLL patients. Additionally, we released exciting preclinical data on certain of our other ADAPTIR-based candidates, which we believe further supports the partnering efforts that are underway.

Speaking of partnering, let me take a few moments to discuss with you our approach to partnering. We're making real progress in our efforts to partner our BioSciences preclinical and clinical assets. As we have said, over the next 12 months we are looking to partner the [NBA] and ADAPTIR platform technologies as well as the preclinical and clinical product candidates based on these platforms, including TRU-016.

To date, we have received interest from a number of companies for these assets; and based on discussions thus far, we fully expect to be in a position to partner these programs in accordance with our growth plan.

Now, let me take a moment to talk about our news from a week ago. Last Thursday we announced an agreement to acquire the Healthcare Protective Products Division, or HPPD, from Bracco Diagnostics Inc. As you may recall, the principal asset is RSDL, an FDA-cleared, broad-spectrum, topical skin decontamination product intended to neutralize or remove chemical warfare agents including nerve agents, mustard gas, and toxins.

We're very excited about the HPPD business and its growth potential, because it will provide diversification of our business and broaden our BioDefense franchise into chemical countermeasures, which we believe is an attractive and growing market.

It will also expand our product sales through the addition of a second licensed product with multi-year procurement contracts with the US government and foreign government agencies.

Finally, it will enable us to leverage our full capabilities in manufacturing, government contract, government sales, and product distribution, as we look to substantially expand the sales of RSDL across US and international markets.

In terms of financial performance, HPPD's total revenues for 2010 through 2012 averaged approximately $20 million per year. In addition, the business comes with a five-year -- that's 2012 to 2017 -- IDIQ procurement contract with the DoD, valued at up to $240 million. We expect HPPD to contribute to our revenue and net income exclusive of transaction costs beginning in 2013, with further growth anticipated as we build and expand the current business.

The acquisition is a solid and promising start to the implementation of our growth plan, and provides insight into how we believe we can build our business and achieve our growth targets through highly effective, synergistic, value-added transactions. We continue to assess additional products and businesses that fit our criteria, and we remain confident that we will be successful in fully implementing our plan during the three-year plan period.

Finally, let me wrap up with our milestones. For the remainder of 2013, we anticipate advancing progress toward licensure of Building 55 by initiating the pivotal clinical studies, using consistency (inaudible) material; completing the two TRU-016 combination studies and reporting data at ASH in December; closing the HPPD acquisition, along with the integration of their operation into ours, and having RSDL contribute to our financial performance for the year; securing partners for our clinical and preclinical programs and our platform technologies; and targeting additional acquisition that drive us further towards revenue and net income flow.

I look forward to reporting our continued progress on all of these fronts throughout the rest of 2013. That concludes my prepared comments, and I'll now turn it over to Bob Kramer, our Chief Financial Officer, who will give you more details on our financial results.

Thank you, Dan. Good afternoon, everyone. I'd like to make some general comments about our guidance for the full year and second quarter, and then turn to both our consolidated performance for the quarter compared to prior year, and then details of the performance of our two operating divisions during the first quarter.

To start, we're reaffirming our full year forecast of between $290 million and $310 million in total revenues, split between $230 million to $240 million in product sales, and $60 million to $70 million of grant and contract revenue.

We're also reaffirming our full year net income forecast of between $20 million and $30 million. In addition, for the second quarter of 2013, we anticipate total revenues of between $70 million to $80 million.

As Dan referenced earlier, we've made the decision to expand study 16009, the open-label study combining TRU and rituximab in front line CLL. We've also made a decision to further support the ADAPTIR platform by strategically investing in several preclinical candidates using this technology.

Both efforts -- the extension of study 16009 and the investment in preclinical candidates -- are being done in support of our partnering strategy for these assets. While the R&D costs for these efforts will be higher than originally planned, they will not affect our net income guidance for 2013.

Turning to our consolidated financial performance, total revenues for the quarter were $43.1 million, which included $30.4 million in product sales and $12.7 million in grants and contract revenue. This compares to total revenue of $50.3 million for the prior year.

The year-over-year reduction was primarily the result of two factors. First, fewer BioThrax doses delivered during the period -- the difference is essentially the equivalent of one BioThrax lot; and secondly, lower grants and contracts revenue due to payments we received in the first quarter of 2012 from Abbott and Pfizer related to the development partnerships associated with TRU-016 and SBI-087 respectively.

Our gross profit for the period was $24.7 million with a margin of 81%. Our R&D expense was higher than prior-year period by approximately $5 million, which I will address in a moment. And lastly, we reported a net loss of $8.1 million compared to a net loss of $6.8 million in 2012. These results were in line with our expectations.

Turning to the balance sheet, we continue to show a strong capital position. Our combined cash and accounts receivable balance totaled $193 million, consisting of $130 million in cash and $63 million in accounts receivables. As compared to the year-end 2012 balance of $238 million, the $45 million sequential reduction is comprised of a lower cash balance of approximately $11 million and a lower accounts receivable balance of approximately $34 million.

Rounding out the balance sheet, our long-term debt was $62 million, which was level with the amount at year-end 2012.

At the Division level, the BioDefense unit continued to manufacture and deliver doses of BioThrax under the current multi-year CDC contract, generating product sales of $30.4 million, down $4 million from 2012.

The reduction in product sales was driven primarily by fewer doses of BioThrax delivered during the period, which is attributable to the timing of deliveries. Based on our reaffirmed forecast for 2013, we expect deliveries to pick up as they historically have done in quarters 2, 3, 4, and therefore, we anticipate that BioThrax product sales will smooth out over the course of the remainder of the year.

The first quarter 2013 gross margin on BioThrax product sales was 81%, which is at the historical upper end of the range. This reflects continued solid operational performance at our Lansing manufacturing facility. By comparison, the quarter 1 2012 gross margin was 78%.

Turning to our other Divisions, the BioSciences unit continued to make progress on advancing development of our oncology and autoimmune programs and technologies. During the quarter, the Division incurred R&D expenses of $13.1 million, up from $8 million in 2012.

Of the $5 million increase, approximately $3 million is related to the elimination of the CVR liability associated with Pfizer's termination of the SBI-087 development program in 2012. The balance of the 2013 increase is attributable to additional investment in our BioSciences technologies and programs, namely TRU-016 and ADAPTIR, and furtherance of our initiatives to better position these assets for future partnering.

Finally, as we commented last week when we announced the HPPD acquisition, we anticipate this acquisition will have a modest contribution to our 2013 performance, as we integrate the RSDL product into our portfolio. We will be in a better position to quantify the amount of this contribution following the closing of the deal, which we anticipate will be in the third quarter.

That concludes my comments. I will now turn the call back over to the Operator so that we can begin the Q&A portion of the call. Operator, please proceed.

(Operator Instructions). Cory Kasimov, JPMorgan.

Hi, this is Whitney on for Cory. Two quick questions. First, on Building 55, just wondering if you guys have had any discussions with the government or have any updated thoughts on the logistics of supply if Building 55 comes online before your contract is up. And then, secondly, if you have any updated thoughts around your BD strategy post-HPPD acquisition.

So -- well, thank you for joining the call today. Appreciate it. With respect to 55, we continue to believe that there will be a feathering-in of doses from 55 to supplement Building 12 deliveries.

The actual mechanics and the timing and the quantities have yet to be worked out. That's something that we're going to have to have discussions with the CDC -- probably some time next year we would begin those discussions to work out the mechanics, the amounts, the timing, et cetera. We would expect that any of those deliveries would be pursuant to a new contract. But, again, the mechanics are yet to be discussed with the government.

In terms of future BD activities, as we said, our growth plan really targets acquisitions of revenue generators and products that -- or businesses that immediately contribute to the bottom line as well. So, I think the RSDL acquisition is a good example, just holistically, of the type of thing that we're looking for. Not necessarily in terms of size, but in terms of the way it contributes to our overall growth.

So, we -- yes, we believe there are a number of other opportunities out there, and we continue to focus on bringing one or more of those across the goal line over the course of the rest of the year. So, hopefully we'll be successful and be able to report out to you as those mature and occur.

Great. Thanks for taking the questions.

Jim Molloy, Janney.

Just a quick -- the $230 million to $240 million product guidance -- is that inclusive or exclusive of contribution from RSDL? And then, second, the R&D number still seems persistently kind of high. I know you guys are shelving a number of R&D projects. I mean, at which -- what point could we expect to see a meaningful decrease in the R&D number going forward?

Yes. So, first, Jim -- this is Bob -- on your revenue question, those guidance numbers exclude any impact of RSDL. Those have been guidance numbers that we communicated earlier. So, they -- just to be clear, they do not include any RSDL sales.

And I guess on the second question, the R&D spend -- as we've communicated in the past, 2013 will be a bit of a transition year for us as we fully implement the growth plan and the objectives around that, that we announced last fall. We clearly have some projects and products that we continue to be excited about, and we think hold a lot of value for the Company. And for us, it's a matter of making the right decisions in 2013 as we, again, transition from where we started with that portfolio to the end of the year.

Just to add to that, Jim, with respect to the guidance numbers, I think Bob indicated it's not clear exactly when this is going to close. We anticipate some time in Q3. So, we'll have much better visibility once the closing occurs, as to what the contributions might be to the financial performance, both top line and bottom line.

Okay. Maybe a couple of quick follow-ups, if I may. The gross margin is still excellent and in line with where it's been. Can you give your thoughts on where that could go to in 2014, should the HPPD close -- obviously a lower-margin business there?

And then on the capital structure, I mean, you guys have got a little bit of debt. Certainly, given the consistency of your earnings, there seems to be room to take on debt if you'd like to or if you wanted to. What's the thought on the capital structure, if you're looking to make an acquisition that -- you know, perhaps you have to go to the market, or you can't do from cash on hand?

Yes. On the gross margin question, clearly, the 81%, as I indicated earlier, is at the upper end of our historical range, if you look at where we've been over the last ten years. So, I -- again, I'd just return you to the historical range, which has been in that 75% to 80% range.

And it's too early to predict with certainty what the impact of the RSDL sales would have on that margin. I don't think we expect them to be that high, but we don't know for sure until we get them integrated in and part of Emergent going forward.

And on the capital structure side, we continue to look at the most efficient ways to use our balance sheet and our cash in furtherance of our growth plan. So, I don't want to get real specific, but we clearly have the ability to -- and flexibility, to do a number of things, as we look at these transactions. So, I think that's all we're willing to say for now.

Okay. Thank you very much for taking the question.

Nicholas Bishop, Cowen and Company.

Just a couple of questions, first on the HPPD. Just to aid with modeling, are you willing to tell us what the pre-tax operating margin of HPPD was at the time of the acquisition?

Yes. I'm not sure we're understanding the question. You're looking for the pre-tax operating margin in the hands of the seller?

That's right.

So, the EBITDA?

That would work too, yes.

So, I think what we said historically -- given the range of the revenue, which is sort of in the $20 million run rate that -- and we've given some estimates on the gross margin, which we expect to be around the 50% range, we haven't given -- I'll call it sort of the below -- further below the income statement guidance. And it's really difficult for us to do that at this juncture.

I think, again, the best course is to await further information once we get this integrated, and we'll have much better figures to give the investment community in terms of where this is headed.

Again, at the bottom line, we are anticipating the (inaudible) will be accretive beginning this year, after backing out the transaction costs. And then growing the business into 2014 and beyond, we believe contributions will further increase.

Okay. Just going back and reviewing the SEC filings of the predecessor to Bracco, the E-Z-EM entity, that was a more diversified business, but it had pre-tax operating margins in the range of about 8% to 10%. Obviously, this is before you grow the revenues. But is that an absurd range to be thinking about, or -- can you give me any help there?

Yes. Again, I think if you look at the composition of the Bracco Diagnostics' businesses, they were quite diverse. They included contract manufacturing operations as well as device. So, it's very difficult -- to Dan's point, very difficult for us right now, pre-closing on this, to say with certainty. It would be inappropriate for us to do that.

I think we've given sufficient guidance now, that -- where we think the revenue will be; where we think the gross margin will be. There will be some SG&A and some R&D. And again, we think it's going to -- we feel very confident it's going to contribute positively to our bottom line, and we'll be in a better position to clarify that after closing.

Okay. That's great. And I don't know if you've said before, but the mix of revenues that HPPD was receiving on RSDL -- was that primarily sales to the DoD, or was it more split between the DoD and others?

It was primarily DoD sales against that contract. Then they had some non-DoD sales, including sales to foreign governments. But it's predominantly DoD revenue.

I mean, the customer base is attracted to us because it's across the globe; we've got approximately 30 government agencies and ministries purchasing the products. So, from that perspective, it's a nice base to build upon. And we're also seeing purchases within the first responder community. Again, something that we think we can leverage and build upon. And there are growth potential markets that we look at for expanding RSDL sales, that we talked about previously.

So, it's a wonderful launching pad for us to expand upon. So, I don't look at the current book of business as really being the future book of business. And I think we -- you know, we'll come back and share with you some thoughts as to how we believe in the timing for growing the business over the next several years.

Okay. That's great. And if I could ask one more, and then I'll get back in the queue. Could you just talk a little bit about the composition of RSDL product, and kind of what the barriers to competition are, with that particular product?

Sure. I'll start, and then I'd ask Adam to contribute a bit. So, this product was initially developed by the Canadian government, and then US government, the DoD in particular, also contributed in its development and licensure by -- or clearance by FDA. So, its historical roots go back to government demand and need.

The way the product works -- I won't get into the specific composition; I'll ask Adam to address that. But the final device is packaged in a sealed foil wrapper, if you will. And it is a sponge that has been impregnated with the proprietary lotion that comes with the business.

And once an individual has been exposed to a chemical agent, or a compound, they simply rip open the sealed foil packet, pull out the sponge, and wipe down the exposed area. And the product is really designed to clear and decontaminate the skin from the exposure.

Adam, maybe you can get into a little bit greater detail about the lotion and its composition, and the protections that we have with respect to competition.

Sure. So, yes. As Dan mentioned, I mean, it's basically a small molecule that's formulated into a lotion, impregnated, as Dan mentioned, into a sponge. And then, as Dan mentioned, there was an original patent that was associated with that chemical entity.

But it's basically leveraging kind of typical or traditional neutralization chemistry when it comes to organophosphates or other nerve agents or toxins, to basically break bonds and neutralize those agents.

So, in terms of the competitive threat and the way in which we think we can maintain our position, there is tremendous know-how in terms of the way the formulation works and the way the sponge has been developed, and the application of the lotion to the sponge. That is proprietary. There are some exclusivity arrangements that we've got in place for some of the key components that are necessary in order to manufacture this product.

So, there's manufacturing know-how. There's proprietary formulation, if you will, or fill/finish information that is trade secret protected. And there is exclusivity around key components and ingredients that go into the product, along with the sponge itself, which is proprietary and unique to the RSDL platform.

Okay. That's very helpful. Thank you.

(Operator Instructions). And at this time there are no further questions in queue, and I would now like to hand the call back over to Mr. Bob Burrows for closing remarks.

Thank you, Caris. Ladies and gentlemen, that's all the time we have today. Thank you for your participation.

Please note that today's call has been recorded and the replay will be available beginning later today through May 17. Alternatively, there is available a webcast of today's call, an archived version of which will be available later today, accessible through the Company website at www.emergentbiosolutions.com, and clicking on the Investors tab.

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

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.