Emergent BioSolutions Inc (EBS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions second-quarter 2013 financial results conference call. My name is Philip 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). And 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, sir.

Thank you, Philip. Good afternoon, ladies and gentlemen. Again, my name is Bob Burrows. Thank you for joining us today as we discussed Emergent BioSolutions' financial results for the second quarter and first six months of 2013. As is customary, our call today is open to all participants. 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 prepared comments, we will conduct a question-and-answer 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 August 5, 2013. Since then, Emergent may have made announcements related 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.

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 Q2, and year-to-date annual guidance for the third quarter and the full year of 2013. I will then discuss the Q2 performance and operational developments related to our biodefense and biosciences divisions. Finally, I will review the key milestones for the remainder of the year.

To begin, total revenue for the second quarter was $82 million, which is slightly above the $70 million to $80 million range that we provided on our call in May. Total revenues for the first six months was $125.5 million. Net income for the second quarter was $10.5 million, or $0.29 per share; and year-to-date net income was $2.4 million, or $0.07 per share.

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

Let me now provide a summary of the key developments for each of our operating divisions, and let me start with biodefense. Last Friday we closed on the acquisition of the Healthcare Protective Products Division from Bracco Diagnostics, and with it the RSDL product. RSDL was cleared for marketing by the FDA for removing our neutralization of chemical warfare agents from the skin, and is the only personal chemical skin decontamination deployed by the US Department of Defense to protect military personnel.

The acquisition of RSDL diversifies our product revenues with the addition of a second licensed countermeasure in our portfolio, bringing with it multiyear procurement contracts with both US and foreign government agencies. In addition, RSDL broadens our biodefense franchise into chemical countermeasures, which we believe is an attractive and growing market. For the remainder of the year, we look to expand the sales opportunity for RSDL, and to evaluate potential later expansions, such as the toxic industrial chemicals and pesticides.

This acquisition is an important milestone towards 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.

With respect to key developments regarding BioThrax, as of Q2 2013, we have delivered approximately 12.4 million doses, representing approximately [$330 million] to the SNS under our existing 44.75 million dose, $1.25 billion contract. We look to continue to deliver doses under this multiyear contract, which extends through September 2016.

In July, we received approval to market BioThrax in Germany from the Paul-Ehrlich-Institut, making BioThrax the only vaccine approved in Germany for the prevention of anthrax disease. The German approval provides for a three-dose primary series over six months, with triannual boosters thereafter. With this approval, we expect to further expand international registration of BioThrax through mutual recognition within the EU to support member states' efforts to protect their citizens against the dreaded anthrax.

Regarding the BioThrax label expansion program, we have made further progress on two remaining trials associated with the post-exposure prophylaxis, or PEP, indication. We recently announced that the Phase III clinical study evaluating the immunogenicity and safety of a three-dose BioThrax PEP regimen met its primary and key secondary endpoints. We have now submitted the final clinical study report to BARDA and the FDA.

Additionally, we have completed enrollment and patient dosing in the pivotal antibiotic non-interference trial, with the final study report submission targeted for mid-2014. Following that, we expect to be in in a position to submit our application to the FDA to expand the BioThrax label to include post-exposure use.

Finally, let me provide an update on our progress to secure licensure of Building 55 for large-scale manufacturing. As we have discussed in the past, we have reached an agreement with the FDA on our comparability acceptance criteria and the endpoints of our nonclinical study. Based on that understanding in Q2, we submitted to the FDA comprehensive data package related to product manufactured in B55 to be used for the nonclinical study.

That data package included, among other things, our proposed selection of key proteins present in BioThrax that we believe will demonstrate comparability between material produced in Buildings 12 and 55. We recently received FDA's feedback on the comparability profile. Specifically, they requested that we expand the number of proteins to be used to establish comparability. We expect to address this request directly with the FDA in the next 60 days. And in the meantime, we have initiated the additional analytical work responsive to FDA's request.

Consequently, we anticipate completing both the comparability analysis and the nonclinical study in 2014, and submitting all supplemental BLA filing in late 2014 or early 2015, with FDA approval in due course thereafter. We will keep you apprised of our progress with FDA as we continue to move ever closer to this important milestone for the Company.

Let me now to rent to our biosciences division and provide a summary of recent developments regarding our lead clinical candidate, TRU-016, which was recently assigned the generic name otlertuzumab. Earlier this year, we completed enrollment in the Phase II study of otlertuzumab in combination with bendamustine in relapsed CLL. We will present data from the treatment phase of the study at ASH in December of this year. Patients will continue to be followed to determine the duration of response and progression-free survival.

In addition, earlier this year, we completed enrollment in the Phase Ib study in combination with rituximab in front line CLL. More recently, we amended the study by adding two additional cohorts. And in July, we enrolled the first patient in the lower-dose cohort of the expanded portion of the study. We expect to complete enrollment of the amended phase of the study by year-end.

And we plan to present data from the original cohort of the study, as well as available data from the amended protocol of the study, at ASH in December. We will continue to follow these patients to determine the duration of response and progression-free survival.

As we have discussed during prior calls, we are looking to partner otlertuzumab and our preclinical candidates and platforms, consistent with the objectives set out in our growth plan. To date, our partnering efforts have generated significant interest from multiple parties, driven primarily by the promising data seen thus far, as well as the additional data anticipated later this year. We continue to target announcing the partnering deal by the end of this year, or in Q1 2014.

Finally, let me wrap up with the operational milestones for the remainder of 2013. We anticipate completing the pivotal BioThrax PEP antibiotic non-interference study positioning us for the submission of the sBLA, the FDA in late 2014. We also anticipate completing the NuThrax two-dose PEP Phase II safety and immunogenicity study, the results of which will position us for initiating Phase III studies.

We also look to complete enrollment in the otlertuzumab Phase Ib combination study and the reporting treatment data in the Phase Ib and the Phase II combination studies at ASH in December, and look to secure partners for otlertuzumab and our preclinical programs. Finally, we look to announce other acquisitions of additional products or companies that leverage our competencies and drive further progress towards the achievement of our growth plan.

That concludes my prepared comments, and I will now turn it over to Bob Kramer, our Chief Financial Officer, who will give you more details on our financial results.

Bob?

Thank you, Dan. Good afternoon, everyone. Let me start by adding a bit of color to Dan's earlier comment on our revenue and net income guidance for 2013. Then I'll turn to our performance for the quarter and for the first six months of 2013. We are reaffirming our forecast for full-year 2013 total revenues of between $290 million and $310 million, and net income between $20 million and $30 million.

With respect to revenue mix, we forecast product sales of $235 million to $245 million, inclusive of RSDL sales, which we anticipate will contribute approximately $5 million to $8 million in additional product sales over the remainder of this year. We also forecast contracts and grants of between $55 million and $65 million. Lastly, we anticipate third-quarter total revenue of between $70 million and $80 million.

I'll now turn to our financial performance for the quarter and year to date. Let me start out by saying that our core business generated another solid quarter of financial results, as evidenced by our total revenue for the quarter coming in at $82.4 million, which included $65.6 million in product sales and $16.8 million in grants and contracts, which is 17% better than Q2 of the prior year, which was $70.4 million in total revenue. The year-over-year increase was the result of increased BioThrax sales and the higher average selling price per dose.

The gross margin for the quarter was 74%, within our typical 70% to 80% range. Our gross R&D expenses were slightly lower than prior year. Our SG&A expense was higher than the prior year by approximately $2.6 million. I'll touch on this variance when we get to the year-to-date performance, as the explanation is essentially the same, both quarter and year to date.

To conclude the Q2 P&L discussion, we reported net income of $10.5 million compared to net income of $7.6 million in 2012, a 37% increase. These Q2 results were very strong, and exceeded our expectations. On the year-to-date basis, our financial performance reflects equally strong execution against our revenue and net income goals for the year. Total revenues stand at $125.5 million compared to $120.7 million in 2012, a 4% increase.

Gross profit for the period was $73.3 million, a $6.5 million improvement versus 2012. Gross margin for the first six months of 2013 was 76%, identical to last year.

R&D expenses were higher than prior period by approximately $4.1 million, primarily due to the following. First, our Baltimore facility is now in service, with depreciation of approximately $2 million year to date being included in R&D expenses. And secondly, as we have previously stated, we continue to invest in our biosciences, technologies, and programs in furtherance of our initiatives to better position these assets for future partnering.

Similarly, our SG&A expense was higher than prior year for the year-to-date period by $3.1 million. The increases in the second quarter and first six months of 2013 were due largely to costs associated with restructuring our UK operations, coupled with higher professional service fees. We anticipate that SG&A expense will continue to be higher in 2013 versus 2012, due principally to these restructuring costs, along with costs associated with additional and ongoing M&A efforts, including our HPPD acquisition and efforts to partner our biosciences candidates and platform technologies.

In the first six months of 2013, net income stands at $2.4 million, up $1.6 million from last year. Our financial performance year to date is in line with our expectations and is reflective of the strength of the core business. We are further encouraged by our year-to-date performance knowing that the addition of RSDL to our existing biodefense business will be a good first step toward diversification and expansion of the core business.

Turning now to our balance sheet, we remain in very sound financial condition. Our combined cash and accounts receivable balance totaled $210 million, consisting of $156 million in cash and $54 million in receivables at the end of the quarter. This compares to combined balances for Q1 of 2013 of $193 million, and year-end 2012 of $238 million, respectively. Rounding out the balance sheet, our long-term debt was $60.5 million, consisting entirely of real estate back notes.

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

Operator, please proceed.

(Operator Instructions). Cory Kasimov, JPMorgan.

Hey, guys. Good afternoon. Thank you for taking the questions. I guess my first question is on the FDA feedback you received regarding the ongoing work to validate Building 55. So, I'm wondering, if you expand the number of proteins to be used as the Agency suggested, how might that impact the timelines you gave, or does it?

Yes. Good afternoon, Cory. This is Dan. Thanks for joining us today. So, it does; the way we look at it now, first we want to sit down and talk with the FDA about their comment to us. But as I mentioned in the prepared remarks, we have initiated the analytical work that would support moving forward in the face of that comment. And then what we look to do is complete the nonclinical, as well as the comparability testing, for the facility in 2014.

So, the reality is, we had previously split up nonclinical and compa data into two separate steps. We're now going to do those at the same time period. So we've collapsed those, in some respects.

Okay. But so you don't know how long it may push timelines back if you have to do what the FDA is currently asking?

So, again, in my prepared remarks I did anticipate that we'd be in a position to complete all of our work next year, and then file for the BLA late next year, or into 2015.

Okay. And then with the German approval of BioThrax, I guess this really applies to any other country internationally. At one point do you believe international sales could become a material revenue driver for Emergent? Is this all contingent on Building 55? Or is it even contingent on the second train in Building 55?

Well, I think Building 55 will provide sufficient capacity for us to meet the US government's requirement and still have a meaningful number of doses for international sales. As we have discussed with investors in the past, we don't see the international market as large as the US market. While we see it as a significant contributor, we do believe that Building 55 capacity will allow us to address that market opportunity.

Okay.

And this is without -- to get to your last point -- without the need for a second train.

Okay. And then my last question is just wondering why you lowered the dose of TRU-016 in the front line CLL study.

Generally, what we are looking to do is see if we achieve the same levels of efficacy with a lower dose, which could have significant commercial advantages for us. It is unrelated to any adverse event profile because we have not seen any issues at all on the safety side with the product. So this is really more around being able to expand the number of doses that we can deliver out of our manufacturing facility than for any other reason.

Scott Stromatt, our Chief Medical Officer, is on the line as well. Scott, do you want to add to that?

You've covered it perfectly, Dan. There were no adverse event signals. And so we're doing basically dose exploration to see if we can replicate the same type of efficacy we're seeing at the higher dose with a lower dose. We will presenting this data at ASH in December.

All right, sounds good. Thanks for taking the questions.

Eric Schmidt, Cowen and Company.

Thanks for taking my questions. Dan, maybe another follow-up on the Building 55 process going forward. What do you think led the FDA to ask for your inclusion of a greater number of proteins?

Thanks for joining the call today. I appreciate the question. It's an excellent question. So, what we put together was a protein profile of the product that we thought was decisive and demonstrated clear comparability. The product does consist of quite a number of proteins. And I think what the FDA wanted to do was to expand the list, maybe to generate a broader, more robust comparability profile. But the data set we put together I think comprises a substantial portion of the product, in terms of the composition of it. From an efficacy standpoint, that profile; in the nonclinical, show that it was an efficacious product.

So we think that the initial list that we assembled and submitted to FDA was appropriate and adequate. So we need to understand when we sit down with FDA what they're trying to get at with the expanded list. And I'm pretty confident there. They look at the words perhaps a little differently than we do sometimes, but they are always rational and they are open to scientific explanations in discussions. And I think they have a key objective here of getting this accomplished, so I'm pretty confident that our dialogue with them will be productive, and we'll find an appropriate solution to our next steps.

So you're not absolutely sure that, at the end of the day, they are actually going to require you to generate these data on greater numbers of proteins. Is that right?

No, that's right, we're not. Because they haven't seen all the data that we have. We have a fair amount of data. It leads us to question the appropriateness of some of the proteins that they've identified. And they haven't seen that data, and supporting some of the proteins that we have in our [real] set that they may not have focused on. So I think it's just a bit of a dialogue to educate them on the science behind it. And, as I said, they are very science-oriented; they are driven by data. So I think once we sit down and share all the information we've got, they'll come up with an appropriate list that satisfies both parties.

And did you just say the data and that you have on an incremental number of proteins, a larger set, suggest that you are seeing consistency across the building materials?

Oh, yes. We believe there is a strong body of evidence demonstrating consistency between the products produced in both buildings. And that was the data set that, in earlier studies -- in nonclinical studies -- was supportive of how we structured those studies, and supports the efficacy that we're seeing for 55. So, I think at this point we have a tremendous amount of proteomics and other data on the configuration of the product out of 55. We just need to get that data in front of the FDA and have the dialogue.

So you essentially know, even inclusive of the larger data set of proteins, but the material is going to be consistent?

Yes, we believe that is true. What we need to do is talk to the FDA about what is the agreed-upon protein profile for the products out of 12 versus 55.

Great, thanks. And one more question, Dan -- just on the M&A outlook now that you've completed the RSDL acquisition. Can you give us an update on your discussions out there with folks? Whether you're still seeing opportunities that look to be as good a fit as that one? When we might expect another milestone from you?

Well, we continue to target this year as a milestone for announcing another transaction. And we do believe that there are opportunities out there that are transactable, so we believe that's a realistic timetable.

Thanks a lot.

(Operator Instructions). James Molloy, Janney.

Thanks for taking my question. Can you walk through the timing of the filing between the BLA and the expected potential approval of licensure of Building 55? And then if you could talk a little bit about -- I know that you've made it clear in the last question that you expect the FDA will come around to your way of thinking, but what are the odds that they may not? They'll say, well, listen, that's not enough. We need some more proteins or some other data, post- your meeting with them.

Yes. Thanks for joining the call today, Jim, and good to hear from you. So, as to your first question on the time period from filing to approval, the PDUFA requirement is four months, I've been informed. So we typically plan for somewhere between six and possibly out to nine months between filing submission and approval, in our normal product development plans. So I think that's a reasonable time period for targeting. Of course, a lot depends on the interactions at that point, and what they see in the filing and the questions they may have. But those are the data points that we look at.

And then the second question with respect to reaching agreement with FDA, it's not so much convincing them that we are right and that they're not. That's really not what I was trying to suggest. What I'm suggesting is that there are potentially additional proteins that may make sense and others that may not make sense. And what we need to do is discuss with the Agency the right data set to be evaluating. And I'm not saying that we're not opposed to increasing the number of proteins that we would evaluate. But we want to make sure that as we increase it, the proteins that we're looking at are really meaningful from the standpoint of demonstrating comparability.

And I think that is where the dialogue is going to be the most productive, to be able to demonstrate why a particular protein may or may not be indicative of comparability. It's not so much the numbers; it's which ones are the right ones and for what reasons. And we all think science will prevail.

Fair enough. And then, I know that you have discussed in the past that should Building 55 come on board, and a potential tripling of production, at some point you would expect it's likely that you and the US government will sit down and discuss how that production would come on board and what a new contract might look like.

What are the timelines? I know that typically the last contract, about a year before, the contract is to start; you guys hammer out the negotiations. What's the timeline you think might happen should Building 55 be poised to come online, and you're about to say, listen, we can triple production. At some point you guys would need to sit down and talk about what the US government would want from you guys. And when you think that might happen?

Well, it's a great point, and one that we think about often. And typically, you're right -- it's about a year ahead of expiration of the ongoing contract, we're going to sit down. We are in an unusual situation, given 55 and the timing for 55. So I would expect as we get close to filing the BLA, or at filing, we'd be in a position to really sit down and discuss with them a new contract or delivery schedule for product coming out of 55.

Our preference would be ahead of it. But let's see what CDC's aptitude is -- or appetite, I should say -- appetite is, for having those discussions.

Great. And last question, I know that the gross margin in the quarter was down. It does tend to fluctuate. I certainly see that in past quarters. Anything in particular that jumped out? Or is this sort of a fluctuation that tends to happen here?

Jim, this is Bob. I'll take that one. I think when you look at the operating performance, you really need to look at it more than just quarter by quarter. It was 74% margin for the quarter, and year to date, 76%. If you look at the trailing 12 months, it was closer to 79%. And if you go back further, the last couple quarters and look at trailing 12 months, it's been around 79%, as well. So I would say that it's not indicative of anything that happened uniquely during the quarter, but just caution you guys to look at things more on a six-month or 12-month basis.

Okay. Thanks for taking the questions.

Ladies and gentlemen, this will conclude the question-and-answer portion of today's conference.

I would now like to turn the call over to Robert Burrows for closing remarks.

Thank you, Philip. Ladies and gentlemen, that's all the time we have today, and thank you for your participation. Please note that today's call has been recorded and a replay will be available beginning later today through August 12. Alternatively, there's 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, and you may now disconnect. Have a wonderful day.