Emergent BioSolutions Inc (EBS) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2016 Emergent BioSolutions earnings conference call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the call over Emergent BioSolutions. Please go ahead.

Thank you, Charlotte. Good afternoon, everyone. My name is Bob Burrows, Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss our financial and operational results for the second quarter and first six months of 2016.

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 with prepared comments will be Dan Abdun-Nabi, President and Chief Executive Officer, and Bob Kramer, Executive Vice President and Chief Financial Officer. There will be a Q&A session at the conclusion of our prepared comments. Other members of senior management will be available to participate.

Before we begin, I will remind everyone that during today's call, either in our prepared comments or the Q&A session, management may make projections and other forward-looking statements related to our business, future events, our prospects, or 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. Please review our 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.

During our prepared comments, as well as during the Q&A session, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Emergent's operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income, EBITDA, and adjusted EBITDA, and the reconciliations between our GAAP financial measures and these non-GAAP financial measures.

For the benefit of those who maybe listening to the replay of the webcast, this call was held and recorded on August 4, 2016. 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 the Investors home page of our website.

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 us. So, during the call today I will give an overview of our second quarter financial results and then provide an update on our recent business accomplishments. Following my prepared comments, Bob Kramer will finish with a more detailed discussion of our financial performance.

So, let me start with a brief summary of our financial results. Total revenues for the quarter were $101 million, bringing our 2016 revenue to $212 million. GAAP net loss for the second quarter was $10.9 million, and adjusted net loss was $7.1 million. As announced during our last call, and again in the press release today, due to the lack of clarity on the current and potential new HHS contracts, we will continue to temporarily postpone our financial guidance for 2016.

Now let me highlight a few of our key business achievements so far this year. Earlier this week we announced completing the spin-off of Aptevo Therapeutics. I would like to thank all the employees at Emergent and Aptevo for all of their hard work in achieving this significant milestone. We wish everyone at Aptevo our best wishes for their future success.

So with the spin-off complete, we are now better positioned as a pure-play company recognized as a leader in the public health threats and emerging infectious disease fields. The spin-off also contributes to improving our cash flow from operations through the elimination of Aptevo-related R&D, sales and marketing, and G&A costs.

Importantly, this spin also provides a greater flexibility in our capital allocation decisions. Along these lines, last month we announced that our Board of Directors has authorized management to implement a stock repurchase program of up to $50 million of our common stock. This gives us an opportunity to create long-term shareholder value while maintaining our financial flexibility to invest in our business and to continue to pursue our acquisition strategy.

Now we'll discuss where we stand with our US government contracts. As we've previously reported, by letter dated April 26, 2016, the CDC indicated that it anticipates that the quantity of BioThrax it plans to purchase for the remaining term of the existing contract will be less than the total remaining doses available to be purchased. The CDC also advised us on their intent to purchase additional doses of BioThrax in the second and third quarters.

Consistent with that advice, the CDC did purchased BioThrax in the second quarter, now leaving 4.2 million doses available for purchase under the current contract with a value of approximately $122 million. The CDC has not specified how much of this remaining quantity they intend to purchase.

On June 21, 2016, the US Department of Health and Human Services issued two solicitation notices with respect to the development and procurement of anthrax vaccines for the Strategic National Stockpile. First, HHS issued a sole-source notification indicating its intention to award Emergent a contract for the purchase of 29.4 million doses of BioThrax by September 23, 2016 with a period of performance of five years. This solicitation does not state the number of doses to be procured per year, nor does it specify a price per dose.

So, the next steps in this process are for the CDC to publish an RFP for this procurement and, following that, Emergent will submit its proposal to the CDC for consideration. Finally, the parties will endeavor to finalize the contract by CDC's targeted completion date of September 23.

The second solicitation issued by HHS was an RFP seeking a next-generation anthrax vaccine for post-exposure prophylaxis with the ability to confer protection in one or two doses and meeting additional specific criteria relating to safety, efficacy and manufacturing. The contract is for the development of the vaccine candidate to licensure as well as for the purchase and delivery of an initial 2 million doses to the SNS, with potential additional procurement of 12 million doses, up to 25 million dose regimens, of final drug product. HHS has confirmed that this equates to 50 million doses of NuThrax.

Earlier today we responded to the RFP, so the next steps in this process are for HHS to determine if NuThrax will be selected for contract negotiations and, if selected, Emergent and HHS will endeavor to finalize the contract. HHS stated in its solicitation notice a target completion date of August/September.

While there can be no assurance that HHS will select NuThrax, we believe that NuThrax, with its intended two-dose schedule, is well positioned and distinctly suited to satisfy all of the stated requirements in the RFP. We are not aware of any other vaccine candidate that meets all of those minimum requirements.

The timing and the requirements described in the two HHS solicitations align with the anticipated licensure of our new large-scale manufacturing facility, Building 55, where we expect to manufacture both BioThrax and NuThrax.

In June the FDA both accepted our sBLA and completed their pre-approval inspection of Building 55. At the end of that inspection, we received no observations from the FDA inspectors. With these two critical milestones successfully completed, the sBLA now has a PDUFA target date of August 15. Importantly, we are now in the process of ramping up production in Building 55 to facilitate a seamless transition to large-scale manufacturing.

In summary, we continue to believe that, taken together, these two solicitations, supported by the anticipated timing of Building 55 approval, represent the government's plan to transition from BioThrax to NuThrax. Moreover, based on the procurement levels specified in the HHS solicitations, we believe the government is continuing to drive towards establishing the capability of protecting 25 million people from the threat of anthrax.

And that concludes my prepared comments, and I will now turn the call over to Bob Kramer for details on our financial performance. Bob?

Thank you, Dan, and good afternoon to everyone. Thank you for joining our call. I'll keep my comments on our quarterly financial performance brief, as our press release and 10-Q, to be filed by the end of this week, provide the details of the financial metrics for the quarter and year-to-date periods compared to last year.

Q2 revenue of $101 million was $25 million below last year. The shortfall was attributable to lower BioThrax shipments, consistent with CDC's communication to us earlier this year in April that they intend to procure less than the total remaining doses under the existing contract.

As Dan discussed earlier, the near-term uncertainty around the level of BioThrax shipments, both for the remainder of existing contract, or Q3, as well as under the follow-on contract, or Q4, have together resulted in a continued need to temporarily postpone guidance. We expect to receive additional clarity upon completion of the contract negotiations, and we'll be sharing that with you as soon as practical.

While uncertainty remains in the short-term for BioThrax shipments in revenue, the fundamentals for our business remain very healthy. Let me comment on just a few examples.

First, our net R&D costs continue to be managed carefully and, as a result, continued the favorable trend started two years ago following our decision to look for non-dilutive funding and collaboration opportunities for some of our development assets. Year-to-date net R&D expenses were $5 million, less than half of what they were in the same period in 2015. Further to this point, on a trailing 12-month basis, our net R&D at the end of Q2 of 2016 was $25 million, significantly below the $63 million trailing 12-month net R&D expense total at the end of Q2 of 2014.

Secondly, the business continues to generate positive cash flows. As of Q2, 2016, our balance sheet includes $333 million in cash, an increase of $21 million compared to year-end 2015. And while $45 million of this was used to partially capitalize the spin-out of Aptevo Therapeutics earlier this week, we continue to have sufficient capital to support the execution of our growth strategy, a component of which is to have greater flexibility in how we allocate capital.

As previously announced, our Board authorized management to implement a stock repurchase program of up to $50 million of our common stock over the course of the next 15 months through the end of 2017.

Lastly, the performance of our manufacturing operations continues to strengthen, the most recent evidence being the initiation of the transition of BioThrax manufacturing from our current facility to Building 55. The transition is underway in Lansing in anticipation of a mid-August approval by FDA.

That concludes my prepared remarks, and I'll now turn the call over to the operator to begin the question and answer session for this afternoon. Operator?

(Operator Instructions) Jessica Fye, JPMorgan.

Thanks for taking my questions; I had a few. The first one is around NuThrax. I want to make sure I understand at what point we'll get clarity on whether or not that is the anthrax vaccine that the government ultimately transitions to and not some of the other candidates in development. I know you mentioned there could be feedback in the near-term. Will that be definitive, or is this sort of a longer-term decision that the government's making?

The second question is around guidance. Wondering if it's possible for you to give any color at least on the expense side, which is within your control, just in light of the spin and kind of a lot of moving pieces.

So, with respect to NuThrax, the process is pretty clear. The RFP is out. There is a deadline for submitting responses, and that deadline is tomorrow.

As I mentioned earlier, we have submitted our response today, and the government, the process by which they complete this is they evaluate the submissions and they make a determination as to whether any of the candidates that have been submitted meet the requirements, and they make a selection for contract negotiation, and then the parties engage in those contract negotiations.

This is near-team, the way the government has described it. They have a desire, an intent to complete it in the August-September timeline this year. We believe that's around utilization of funding in this fiscal year.

Having said that, the answer to your question is this is not a long-term, drawn-out process. We will know fairly quickly if NuThrax is selected and what the terms of that contract will be. And then, we fully expect to issue a release to advise the market when the contract is completed if we are so selected.

So, hopefully that answers your question on the NuThrax front. Bob, I'll turn it over to you on the guidance and the expense guidance.

On the OpEx side, I think you should expect that, if you continue to follow the trends in our spending pattern as we've reported for the last trailing 12 months, that those trends will continue. Obviously, as we've reported and included in our reconciliation between GAAP and adjusted net income, we've incurred some expenses related to the spin which, as of August 1, is now completed, so those expenses should begin to trail off. But, I wouldn't expect any significant changes in the spending pattern versus what we've reported.

Okay, got it. Thank you.

Jim Molloy, Laidlaw.

I was wondering, I know the buyback was just announced. Has that -- any purchases started on that yet, or any idea when the timing might be?

Then, on the next-gen vaccine, kind of a two-part question. Do you know if there are other people who submitted RFPs for that, and what do you do with Building 55 if they don't select NuThrax?

So, first on the buyback, as we previously announced, we intend to implement that buyback pursuant to a 10b5-1 program, so there's some legal requirements associated with putting that in place. We expect that the plan could be put in place sometime starting in September, so the initial purchases would happen earliest in that time frame in compliance with those legal requirements. So, hopefully that gives you some clarity around the process and the timeline for that.

So, with respect to NuThrax, we are not aware of any other product that meets the minimum requirements specified in the RFP other than NuThrax. And there are manufacturing requirements, there are dosing requirements, efficacy and safety requirements, clinical trial requirements. So, our belief is that NuThrax is very well-positioned.

I can't tell you if anybody else has submitted. We don't have visibility into that. Only HHS would know. But, I remain very bullish about the NuThrax opportunity, given the qualifications of NuThrax as measured up against the minimum requirements.

So, in terms of manufacturing in Building 55, the predominant manufacturing activities over the course of the next several years really will be BioThrax. NuThrax manufacturing, it's true, will be conducted in Building 55 but, over the near-term, it's really BioThrax that will be -- we've got primarily in Building 55 for manufacturing purposes.

Thank you. And you had mentioned in the past, or discussed the assumption that perhaps there'd be a much larger order for BioThrax -- that certainly has changed now -- and with that large order pricing coming down. Can you speak to what pricing looks like here on BioThrax before NuThrax comes in?

And what will happen should you complete this next BioThrax contract and NuThrax still isn't ready to go? Do you anticipate the US government would come back for more BioThrax until NuThrax would be ready?

So, there's a lot of speculation in the questions that you've asked. What I would say as a principle, we have in our communications with the government provided clarity that long-term contracts for large quantities do justify price reductions. I think the reverse is also true.

So, as I stated in my prepared remarks, Jim, there is no specification in the solicitation regarding the delivery schedule or the price per dose, so all of that remains to be negotiated.

So, while I appreciate there's some uncertainty here, I think we all need to be a little bit patient, allow us to work through this process with the US government on both contracts. And in the September time frame, if we keep according to the schedule that's specified, we'll have much greater clarity for the investors to see exactly where this is headed.

Great. Last question, then. In the past you've spoken about ex-US sales in Germany, of potentially approving Building 55 maybe before the US government does. Can you talk a little bit to what you might do with the excess Building 55 capacity? Are ex-US sales a potential near-term possibility?

And then, lastly, what are you seeing out there? What's looking most compelling for acquisitions at this juncture?

So, ex-US, let's start with that. As you all know, we have been capacity constrained with Building 12. We've been delivering everything that we produce out of that facility to the government under our current contract. With Building 55, to be sure, capacity will increase, and therefore availability of doses of BioThrax for international markets will be increased.

Having said that, I think we've consistently said the demand for anthrax vaccine and for BioThrax in the US far outstrips international demand. We don't think of the international market as being comparable to the US market.

When we think about the international market opportunities, we think about it in a portfolio approach. To be sure, we expect some sales of BioThrax. But, also I would like you to start thinking about it more broadly and thinking about Emergard, for example, where we've seen some real interest in that platform and the specific candidates or the specific products that are built on that platform, RSDL, as well.

So, we look at this as a portfolio approach to the international markets. And as we've stated with respect to our 2020 goals, we're looking to drive towards 10% of revenues from international sales. And given the increase in the portfolio that we have available to us, and hopefully as we continue forward with additional products that we either develop or acquire, we continue to see traction towards achieving that 10% threshold, or that 10% target.

So, what I'm saying, Jim, is don't think of it in terms of just BioThrax. There is a broader portfolio driven by the diversification of our business that's going to create the international opportunities for us.

And with respect to acquisitions, we continue to identify and have been engaging in negotiations for acquisitions that meet the criteria that we talked about earlier and we continue to target as priorities, that those are revenue generators, and those are product that can be accretive to our business within 12 months.

They're out there. There are some very interesting opportunities, and we continue to target having a deal that we can announce in this year, in 2016.

Great. Thank you for taking the questions.

David Maris, Wells Fargo Securities.

My questions have been asked and answered. Thank you.

Eric Schmidt, Cowen and Company.

Just in terms of Building 55, given that throughput might be down a notch from where you had expected it to be, can you talk about how that impacts gross margins, or maybe since you don't know the price yet, how the price per dose manufactured might compare to Building 12?

So, as we've talked about, and obviously Building 55 was always intended for large-scale manufacturing, it's an extremely efficient building. And as we've talked about in the past, we anticipate being able to leverage the efficiencies. And as Dan indicated earlier, if the government is interested in long-term significant quantity purchases, we're willing to be aggressive on pricing.

We'll have to see how this all settles out with the follow-on contract, both procurement as well as development contract. And when we reinitiate guidance, all of the answers to your questions will be baked into that. But, right now, it's just premature to speculate on pricing and margins until we have those contracts negotiated.

Okay. In terms of the potential next-generation NuThrax contract and the selection process you'd hoped to wrap up in the August/September time frame, at that point in time would we know the size of a subsequent procurement contract, or would it just be explicitly a development contract?

The way it's structured in the RFP is the development, as well as procurement, is part of the base, and I think the initial dose quantities is 2 million doses with options to procure 12 million, up to 25 million dose regimens. And a dose regimen is the number of doses in order to protect an individual. And so, for NuThrax, it's a two-dose schedule, so that would be 50 million.

So, the way the contract is structured is development plus a preliminary procurement, and then options for additional procurement in that 12 million to 25 million dose range; so for us, 12 million to 50 million.

I should have been more specific, Dan. I guess you'll get the size of the development contract in terms of dollars. Will you also know the size of the procurement contract in dollars?

Yes. So, they do go together. There is specific numbers in the RFP with respect to the doses. And again, there is a base contract, and the 2 million is in the base, so that will be part of the award as is currently structured. We'll have to see what happens in the negotiations, of course.

And then, the options are just that. They are options to procure additional doses of the products at the government's discretion.

So, we'll know the price for the initial 2 million, but not necessarily the subsequent 25 million, is that right?

That remains to be seen as part of the negotiations.

Okay, and one last question. Assuming, of course, NuThrax is accepted or selected for this contract, what's the soonest possible date you think the vaccine could be approved?

The soonest date it could be approved or available for purchase? I'm not sure -- you're talking about approval?

However you want to -- sure, available for purchase.

So, as you know, there's this emergency use authorization process that's available for products that are in advanced development. And so, we would anticipate within the next two to three years the product could be available for purchase under emergency use authorization. The approval timeline, of course, is beyond that.

Any sense of the approval timeline?

Yes. I think the answer to that is we need to work that through with the government before we can give firm timelines within the plan.

Thank you.

Keay Nakae, Chardan.

Just want to go back to the comments you made regarding the operating expense, going forward. We can see what you were allocating to Aptevo. So, no longer having that allocation, is that simply going to be allocated to other projects? And if so, what?

Certainly the research and development expenses that we've reported that are attributable to the biosciences division, those obviously will no longer be incurred by Emergent after August 1.

However, if you're referring to the SG&A expenses and some of the other related costs, I wouldn't look at it as a straight elimination based on how those have been allocated or broken up between the two divisions. Again, as soon as we work our way through these contract negotiations, we will come out with some updated guidance which will incorporate the new spending patterns, going forward.

Okay; then second question. Once you're able to produce product from Building 55, is that going to be a complete switchover, notwithstanding what the cost of goods sold might be at initially lower volumes than expected?

Yes, I think the plan is to do a complete switchover for a host of reasons around why Building 55 is so much more effective, efficient, and favorable. So yes, it'll be a complete switchover.

And then, just timing on that, you're doing some prep work now. You've got the PDUFA date coming up here very shortly. How quickly does finished product come off the line?

So, I think we are right now in the process of making that transition, so we see this as a very near-term transition from Building 12 to Building 55.

Okay, very good. That's all I had; thanks.

Robert Maltbie, Singular Research.

Any developments on the initiatives with Zika? And second question, regarding the impact on your EBITDA from the spin-off of Aptevo, what are you looking at there, moving ahead?

Let me start with Zika, and I'm actually going to ask Adam Havey, President of the Biodefense division, to address that. As you know, it's in our Baltimore site, our ADM site. Adam?

So, basically at this point, we've been awarded I think the only government contract related to Zika, and we're working very closely with BARDA developing a Zika vaccine with some technology that they provided to us.

And over really the next year, we're going to be doing some process development work, manufacturing vaccine that would be able to be tested in a Phase I study. So, we're excited about that technology and looking forward to leveraging that ADM contact in the facility in [Baden].

On the EBITDA question, so if you go back to what we included in our presentation when we announced the intent to spin the Biosciences business back on August 6 of 2015, we included a page that summarized that, when you looked at the revenue that would go with Aptevo, as well as the cost savings through R&D and SG&A, we were projecting that, if the spin were to have been in place for all of calendar year 2014, we were estimating an EBITDA pickup of somewhere between $40 million and $50 million.

I guess the other data point I would remind you of, or provide you, is when we reported EBITDA for 2015, it was $130 million. The initial guidance we gave in 2016, while that has now been postponed, was closer to $150 million, which would have incorporated a half a year of improvement in EBITDA as a result of the spin. So, those are a couple of data points that I'd suggest you consider when you look at that question.

And obviously, as we look to resume guidance at the appropriate time, we will incorporate current thinking on EBITDA savings as a result of the spin.

Thank you, Bob.

Jessica Fye, JPMorgan.

Just had a quick -- one more modeling question. Not to go back to the guidance, but when you originally provided your guidance -- I think it was in January, I don't think you gave a specific other Biodefense guide. But, given the BioThrax range and the overall revenues, you could back into something that looks like it was a good bit higher than where you're tracking to right now. Can you talk about your expectations for that part of the business for the remainder of the year, given that it's not really subject to this anthrax vaccine contract issue? Thanks.

We're going to resist the parsing out of partial guidance here on BioThrax, as well as the other Biodefense. Again, I think we'd ask that you be a bit patient. We expect to be able to work through these contract negotiations and discussions between now and the end of September.

And when we reinitiate guidance, it will incorporate all of the current thinking on all of the parts of the business, but, for now, we're not going to discuss or even give any partial guidance on pieces of the business.

Okay, thanks.

(Operator Instructions) Eric Schmidt, Cowen & Company.

First, just on the coming quarter, don't you already know in advance that you scheduled certain BioThrax deliveries, maybe even now for the next two months? And can't you use that as a basis for giving a sense of how many of these 4.2 million doses will be delivered?

We actually don't have sufficient visibility to give meaningful guidance to you and to the others on the call. So, I think it is important that we all be patient. Give us the latitude to work through this. And as we track towards completion and get these contracts signed, we'll be in a much better place to provide you with the guidance that you need and that we want to give you. But at this point, we just don't have adequate data to provide the kind of guidance that you would need.

Okay, fair enough. Maybe just on the stock repurchase, Dan, and not trying to be cheeky here, but you do have a lot of things that are up in the air that you're hoping to get visibility on over the next two or three months, yet you're moving forward with the stock repurchase plan. What gives you confidence that your stock is undervalued, or that this is a good investment at this point in time?

The way I look at this, and you've been with the Company -- you've been following the Company for a while -- these transitions with the government have always been difficult. You probably remember the last one. It was a very difficult negotiation. And in leading up to this, I think in the quarterly calls we had, I put out there that this is also going to be a difficult negotiation, and it's further complicated by the transition as we see it.

So, my belief is that the government remains firmly committed to the anthrax space. They're continuing to target that 25 million lives. BioThrax is the only available and licensed countermeasure by way of vaccines, both on a GUP and PEP indication. NuThrax is the leading next-generation candidate in the queue, having passed a lot of the tests.

So, we do have a great deal of confidence, given the fact that we've been partnering with the government, both on the development side and the procurement side, including when we think of development, the completion of the Building 55 scale-up for the desired purpose of having additional capacity to address the anthrax threat.

So, there are a number of indicators out there. You can look at the dose requirements, or the specifications of doses in the NuThrax contract, and prior statements by the government. So, we have, and I personally have a high degree of confidence that this is absolutely the right move for the organization and that, with the passage of time, we'll have much better clarity to share with you on where things stand with both NuThrax and BioThrax.

So again, I appreciate the comment and the question. I think, it's spot-on, but given our assessment of the landscape, we think this is the right move for the organization.

Thank you.

I'm not showing any further questions at this time. I would now like to turn the call back over to Bob Burrows for closing remarks.

Thank you, Charlotte. With that, ladies and gentlemen, we now conclude the call, and thank you for your participation. Please note, an archived version of the webcast of today's call will be available later today and accessible through the Company website.

Thank you again. We look forward to speaking with all of you in the future. Goodbye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.