Emergent BioSolutions Inc (EBS) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2016 Emergent BioSolutions Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to the Company for opening remarks. Please go ahead.

Thank you, Crystal, and 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 third quarter and first nine 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 at that point.

Before we begin, I will remind everyone that during today's call, either on 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, our 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 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 a reconciliation between our GAAP financial measures and these non-GAAP financial measures.

For the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on November 7, 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 maybe required by applicable laws or regulations. Today's press release may be found on the Investors homepage 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 our call today. On today's call, I'll give an overview of our third quarter financial results and highlight some of our recent business achievements. Following that, Bob Kramer will finish with a more detailed discussion of our financial performance.

So let me start with our financial results for the quarter. As you can see by our press release earlier today, we reported total revenues from continuing operations of $143 million. Our GAAP net income from continuing operations was $20 million, and adjusted net income was $28 million. As stated in our press release today, we will continue to temporarily postpone our financial guidance for 2016 until our follow on BioThrax Procurement Contract with the CDC is complete. We have made substantial progress in that regard and expect that contract to be completed in the coming weeks. Once completed, we will announce the terms of the contract.

Now let me highlight a few of our key business and operational developments. First, let's start with our current 2011 BioThrax procurement contract. In September, we announced that the CDC exercised option contract option to purchase all of the remaining BioThrax doses under this contract. We're pleased to report that we have delivered the full 44.75 million doses to the CDC.

Recently, we also announced a new contract in NuThrax, our next generation anthrax vaccine. This BARDA contract, with a five-year base period of performance valued at $200 million provides for the advanced development of procurement of 2 million doses, following Emergency Use Authorization designation by the FDA. It also has options for procuring 7.5 million to 50 million additional doses, as well as options for additional studies and post marketing commitments. Total value of the NuThrax contract, if all options are exercised in full, is up to $1.6 billion. We see the BARDA contract and the anticipated CDC contract as defining the US government's evolving strategy in national anthrax preparedness. That being BARDA [funded] development of the next generation anthrax vaccine while CDC continues to stockpile the current vaccine. Over the next five years, we expect to see a transition, whereby procurement levels of NuThrax begin to rise, following the Emergency Use Authorization and levels of levels BioThrax decrease.

On the manufacturing side, the transition from Building 12 to Building 55 is now complete, with Building 55 in full operations manufacturing BioThrax at levels sufficient to satisfy our anticipated CDC contract, as well as international demand. This transition included a reduction in headcount to reflect the efficiencies of Building 55 operations, as well as expected product demand. In 2017, we anticipate that Building 55 will be fully deployed, both with the manufacturing of assets, as well as supporting the development and validation of the NuThrax manufacturing process for the planned Phase III clinical trial.

Finally, we are evaluating how both Building 12 and Building 55 could be used to manufacture alternate countermeasures in order to fully utilize the capabilities of both facilities long-term.

Going forward, we will continue to focus our future growth opportunities in the CBRNE public health threats and emerging infectious diseases markets. We see these as globally expanding markets and are committed to remaining a leader for the US and other governments in providing medical countermeasures for the preparedness and response initiatives. We expect our growth to be driven by diversification of our product and revenue mix, both organically and through M&A, and the expansion of our customer base.

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, everyone. Thank you for joining our call. To begin, let me first speak to the concept of financial reporting on continuing operations, which we're using for the first time. As we reported on August 1, we successfully completed the spin-off of biosciences business into a separately publicly traded company, Aptevo Therapeutics. As a result, we are required under GAAP principles to report our financial statements to reflect the fact that we are no longer -- we no longer have these operations which are treated as discontinued operations. These are reflected on the face of the P&L in one line item titled income loss from discontinued operations, net of tax, which summarizes the financial results of the Aptevo operations.

Importantly, in today's press release, we provided a reconciliation of our statement of operations, both for the quarter and year-to-date periods in 2016 that presents our financial results by line item across three columns: first, continuing operations; second, discontinued operations; and lastly, combined, which reflect our previous consolidated operations inclusive of Aptevo.

Now let me talk about our results for 3Q on a continuing operations basis. During the recent period, total revenues of $143 million were lower than 3Q of last year by $15 million. This was primarily due to lower BioThrax sales, which were impacted by CDC's decision to not commit to procuring all of the remaining doses under the 2011 contract until late in Q3, resulting in a portion of the planned 3Q deliveries being shipped in Q4. However, we realized incremental year-over-year growth in our contract manufacturing business, as well as a slight step up in contract and grant revenues, which partially offset the decrease in product sales revenue.

Looking at the rest of the income statement, the fundamentals of the business remain very healthy. During the quarter, our gross margin was 64%, within our expected range of 60% to 70%. Net R&D costs continued to be managed carefully to the point or during 3Q of 2016, our net R&D was fully funded, continuing the favorable trend started three years ago following our decision to focus predominantly on non-dilutive funding for our R&D efforts. SG&A expense of $41 million was measurably higher than the prior-year period expense of $26 million. This unfavorable variance includes a total of over $12 million of costs related to both the spin-off of Aptevo as well as restructuring costs associated with the transition of BioThrax manufacturing from Building 12 to Building 55.

The third quarter restructuring costs included severance costs for the recently completed headcount reduction initiative in Lansing, as well as the write-down of certain Building 12 fixed assets due to transition of BioThrax manufacturing to the new facility. These transition costs were originally planned to be incurred in 2017. As Dan mentioned, this transition was largely completed in the fourth quarter. For the quarter. our effective tax rate was 39%, well above our historical range of 30%. This was largely attributable to one-time non-cash charges incurred to complete the Aptevo spin-off.

Turning to the year-to-date performance, through the nine months of 2016, our business is performing well, as evidenced by the following. First, our gross margin of 61% is in line with expectations. Second, our contract and grant revenue of $96 million exceeded our R&D costs for the period of $81 million. This net R&D result is $15 million better than the prior-year nine-month result. Third, while the SG&A spend of $108 million is $22 million above last year, over half of this increase is attributable to costs associated with planning and executing the Aptevo spin-off, as well as costs incurred to transition BioThrax manufacturing to the new facility. And finally, the business generated $82 million of EBITDA during the first nine months, reflecting the ongoing strength of the core business.

On the balance sheet, at quarter end, our cash balance was $299 million, down from the second quarter balance of $328 million. Reduction in 3Q cash in part reflects a $45 million contributed to Aptevo as part of the spin-off. The final cash contribution of $20 million is scheduled to be paid to Aptevo in the first half of 2017, pursuant to the promissory note. Overall, our liquidity position remains very strong and will continue to be well positioned to support our operations and strategic M&A initiatives.

With the completion of the spin-off of Aptevo Therapeutics and our decision to focus on opportunities in the growing public health threat market, particularly those related to chemical, biological, radiological, nuclear and explosives, it is imperative that our operational administrative costs is sized and aligned to support our growth in these specialized markets. We must enhance the utilization of our operating facilities to the fullest extent possible, we must also continue to carefully manage our portfolio of R&D projects by leveraging third-party funding while being open to making at-risk investments when we see long-term value. Finally, we intend on stepping up our efforts to manage SG&A costs to ensure that they support our operations and growth plans while being appropriately sized relative to our business footprint.

Lastly, in terms of 2016 guidance, we continue to defer re-establishing this guidance until the CDC follow-on contract for BioThrax has been finalized, which has Dan indicated earlier, is expected in the coming weeks.

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

(Operator Instructions) Jessica Fye, JPMorgan Chase.

Hey, guys. This is Ryan on for Jess. I appreciate you taking our questions. So, I guess, given completed delivery of all the doses under the 2011 procurement contract, can you talk about manufacturing of BioThrax? Is that ongoing now? Are you doing fill and finish or is it just producing the API?

Yes. Thank you for participating, and thanks for the call. Yes, the facility is in full operation, and it's meeting our expectations in terms of efficiency, and we are producing all the way through fill/finish. As I mentioned, production is really targeted towards meeting our expected contract with the CDC, as well as any international demand. So yes, operations are ongoing, and all the way through fill/finish.

Okay. And can you give us a little bit more color on the cadence of interactions with the FDA? Is this waiting for like an official meeting, or rather do you need to -- are there sort of milestones that you need to complete before to solidify the contract?

So, our interactions with the FDA are complete. The facility has now been licensed. Right now, what we do is produce and then submit full release. As with every licensed vaccine, you submit to the FDA full release on a lot by lot basis. So we're in standard operating mode with FDA.

Keay Nakae, Chardan.

Yes, two questions. First, as far as the other product sales in the quarter, can you talk about the timing of that and what we should expect there with respect to your government contracts moving forward?

So, we're not sure that we understood that question. You're saying with respect to other product sales in the quarter?

Botulism and other products?

And the question was?

You may a note in the press release, there was a timing issue about those sales?

Yes, that's typical lumpiness in terms of the delivery. I think there was BioThrax sales, which were not delivered in Q3 that are being delivered in Q4, and now is associated with the late exercise by CDC of the final procurements. And then there was some botulinum revenue that was being moved from 2016 to 2017. So that also, I think, explains some variability in the other product sales. I think that's what you referenced.

Yes, it was really the other product sales besides BioThrax, but with respect to BioThrax, do you anticipate delivering product in Q4 under the new contract?

So, we have completed the delivery of the 44.75 million. As Bob mentioned, some of those doses because of the rate exercised by CDC, in fact, moved into Q4. So, any additional deliveries that might be forthcoming under the CDC contract, we'll later update you and the other investors once that CDC contract is completed.

David Maris, Wells Fargo.

Hi, everybody. It's [Brendon] in for David. Thanks for taking the question. I have a couple, if you don't mind. So, with the timing of BioThrax, I remember last quarter you said there was about $120 million, $125 million remaining on the contract, you did $94 million. This quarter you said, the rest of that goes into 4Q. So, my guessing that there's just extra $30 million than going into 4Q that we can count on. I know you're going to not provide other timing on the BioThrax there.

And the other question really comes down to international demand. In the prepared remarks, it seems like there's a lot of talk of international opportunities, and gearing up for manufacturing for international, it seems to be a bit of a departure from previous comments. So could you maybe speak to that a bit more, if possible? Thank you.

Sure. So, on the international demand side, I don't want to overstate. Clearly it's part of our focus on a portfolio basis to ensure that we're addressing across the portfolio that we've got international requirements and needs of governments that are existing customers as well as prospective customers. BioThrax is one of the many products that we do offer on a portfolio basis. So, I don't want to leave the impression that this is a significant number. The US market clearly is the leading market for BioThrax. But we do anticipate modest orders. And historically that's been the case, that too has been very lumpy but we hope to build on those orders over time.

So, Brendon, this is Bob here. To your first observation, I'll call it, we have -- as Dan indicated, we have completed all deliveries under the existing contract with CDC for the 44.75 million doses. So, to the extent that there were pending or open shipments at the end of Q3, those have now been shipped. So that contract is complete.

Yes, we can assume that number of about [$122 million] is still good from previous?

That's correct.

Okay. And then if I could also just add, could you provide any update with Emergard and the RDSL products, just to get some more color on the other Bio D where those maybe you are -- I know you're working on expanding capacity for Emergard?

Yes. So, there are a number of interesting opportunities that we're focused on with respect to Emergard, and customer interest and demand has been significant. Adam, maybe you could just take a couple of minutes and just walk through some of the things that we're looking at with respect to that platform in terms of potentially driving growth over the coming year, could you?

Sure. Thanks. So, as we've talked about before, Emergard is a platform technology. And as we've expanded the manufacturing capacity, as Dan mentioned, we're seeing some additional demand in the ex-US markets. I think the primary driver as we look at Emergard moving forward is to start to partner with the US government and get an FDA license for the technology, in particular our lead product, which would be [Tropogard], which is a combination nerve agent antidote. So, we expect to see more activity internationally as we move into 2017, as well as some work with the US government in 2017.

I'm glad you brought it up, because over the course of the coming years, we do expect that Emergard could be a real contributor to top line and bottom line growth of the Company.

Jim Molloy, Laidlaw.

In the SG&A, R&D, these levels that -- sort of the levels we're seeing currently, these are kind of the go-forward levels we should expect for the remainder of the year and 2017 and going forward?

And then on contracts and grants, fully funded the R&D contracts and grants above the R&D, typically there is some R&D there, what are the -- I guess you're now making money off the R&D that the US government is sort of supplying you with?

Yes, Jim. This is Bob. Thanks for joining the call, and thanks for the question. So, in general, Jim, in terms of your question are these ongoing run rates for both SG&A and R&D that you should expect, I think you have to consider a couple of things. First of all, for 2016, there are a number of non-recurring costs associated with executing the spin-off of Aptevo as well as some significant costs that were incurred in 2016 to implement the transition of manufacturing from Building 12 to Building 55, most of which was put or included in SG&A costs that will not be included or incurred going forward. So, the run rate will not be as significant as implied with the year-to-date numbers.

I guess, secondly, in terms of the ratio of grants and contracts to R&D expense, the grant in contract revenue is driven by a number of factors including how we recognize or how we are required to recognize revenue from those activities. So, that is not as linear or as predictable as you might expect. I think, going forward, we will likely incur gross R&D expense as well as some net R&D expense. How significant? We'll have to evaluate as soon as we get the CDC contract negotiated, and I think we will incorporate those thoughts into the 2017 guidance that we are prepared to give in early January.

And then on the international contracts that you touched on briefly, we've talked about in the past, can you talk a little bit about the magnitude? Would it be half of your typical US revenue of 10%, 5% is that so you guys have any idea on where would be? And then I think in the final weeks of the BioThrax contract, any indications on size and duration?

So, I'm not sure I missed it on the international side, you are asking if the -- are you looking for 2016? I'm not sure which you're referring to in terms of the size.

My apologies. Last year, BioThrax $293 million. This year what? $280 million, perhaps. Is that -- can you sign a $280 million international contract or will it be more like a $10 million international contract?

No, I wouldn't think of it in those terms. These are modest orders. And again, we're taking a portfolio approach because oftentimes customers have some interest in countermeasures for a whole broad portfolio of targets, and so we think about it more in terms of the cross-functional needs as the customers rather than simply targeting one product or another. So, don't think about it in terms of BioThrax only and the significance of the BioThrax order, we are looking at our international sales opportunity as an aggregate and how do we drive that growth across the portfolio. And there, I think we're making significant progress. And I think as time goes on, we'll continue to see significant increases albeit it's a small base from which we're working, but nevertheless we're making real progress in driving those numbers. And I'm not really ready to give you any specific forecast other than the trend is in the right direction.

Joseph Throem, Cowen and Company.

Hi, this is Joe on for Eric. Thank you for taking my call. You said a couple of things in the opening remarks and I'm curious if maybe you can elaborate a little bit. You indicated that you are producing BioThrax in Building 55 in anticipation for the demand from the CDC going forward, and that you anticipate BioThrax sales to sort of taper as NuThrax comes up. And so, can you maybe give us a little indication of how, I guess, like the rate that you're producing in anticipation quarter-to-quarter and how you anticipate this looking over the five-year contract coming up?

Yes. So again, I think, on the contract side, let's wait for definitive terms, then we will be able to more clearly and correctly answer that question. But your general observation about the government's interest in the transition to NuThrax is one that is important for people to understand, and I think it came through in our NuThrax press release. And I hope, in our comments today, the target goal here is for the government to get to NuThrax because of all the benefit it provides. It's a two-dose product versus a three-dose product. So therefore the timeline to protection, the number of doses that need to be stored in the stockpile to protect the target population is reduced as well. So there is a real incentive for the government to migrate as quickly as possible to NuThrax for all the benefits it provides. And so right now, I think, the target that is out there is sort of that 2019 timeline, late 2018 into 2019 when we might be able to secure Emergency Use Authorization and begin that transition. So that's part of the government's planning process and part of what we're integrating in terms of how we think about the manufacturing.

Great, thank you. And then one more, can you update us maybe on the Building 55 approval process at Germany? I think it was previously anticipated by year-end, if there's an update on that?

Yes. That's a great question, and thanks for asking. We have submitted all the documents required. So it's now with the regulators, and the timing of their decision is really outside of our control. But we've completed what's expected of us.

Lisa Springer, Singular Research.

Did I understand correctly that there is going to be similar transition costs for the move to Building 55 recognized in the fourth quarter?

I think, the -- Lisa, thanks for the call. The transition cost for moving from Building 12 to Building 55 are essentially complete. There may be some minor insignificant costs, but for the most part they've been incurred and there will not be any meaningful costs going forward.

Gregory Macosko, Montrose Advisors.

I'd just like to -- a question to understand, when you made the transition and the spin-out of Aptevo, you talked about a $40 million to $50 million EBITDA change difference there. Is that in adjusted or is that in straight EBITDA?

Thanks for the question. That was not adjusted. And just to be really clear, that number of -- or the range of $40 million to $50 million of EBITDA pick up as a result of the execution of the spin was our best guess almost a year and a half ago, based on what would have happened in calendar year 2014 if the spin were executed 01/01/14 for the entire calendar year and it was comprised of the fact that there would be some revenue generating products and profit contribution from those products that would be part of Aptevo. It was also in recognition that there was significant R&D expense that would be awarded by Emergent going forward because it will be part of the Aptevo Therapeutics. So that $40 million to $50 million range was not an adjusted but is really based on what would have happened in calendar year 2014.

And then next, have you completed any of the buyback? You announced $50 million. Was there any update on that?

We have not initiated any buyback activity under the plan that we communicated earlier this year. The primary reason is that due to the prolonged contract negotiations with CDC, we have been unable to put a plan -- 10b5-1 plan in place. And as such, there has been no activity.

(Operator Instructions) David Maris, Wells Fargo.

I'm just wondering if you could provide any information about the capacity utilization at Building 55? Is that running at full utilization right now or [whereabouts of] that?

Yes, thanks for the other question. So, going into 2017, we anticipate Building 55 will be fully utilized and committed to BioThrax manufacturing as well as NuThrax manufacturing under our BARDA contract for NuThrax. And the BioThrax, of course, is to support ongoing deliveries to the US government for the Strategic National Stockpile, and NuThrax manufacturing would be in support of the consistency lots and manufacturing development, all towards the Phase III clinical trial that will be conducted following successful completion of that manufacturing. So, for 2017, it is fully utilized.

Okay. And any update on potential acquisitions? I know you mentioned in the prepared remarks looking at diversifying the portfolio, inorganic opportunities, any update and then any just potential timeline there you could provide?

Yes, thanks for the question. So M&A does remain a key component of our strategic growth plan. We do see a number of very interesting and attractive targets for the areas that we are focused on, that's CBRNE as well as emerging infectious diseases. So, that does remain a target for us and we're very active. So really stay tune. I'm not going to put a timeline out there, but it is something that we are committed to as a driver of our growth strategy going forward.

And remember the targets that we're looking at. I mean, they are not only in the space, but they're intended to be revenue generators and contributing to the bottom line within 12 months following the acquisition. So, we really are targeting things that can drive our top line and bottom line growth. And importantly, we're also looking at opportunities that have the potential to (inaudible). So, not only government stockpiling or procurement, even if it's stockpiling, but also have some commercial portability to a broader customer base.

Okay. And then if I may just ask one more. You also mentioned in that same prepared remark about organic opportunities and doing some at-risk R&D investment. Any timelines there, anything that's started off? It looks like from the R&D spend during the quarter that wouldn't be the case, but maybe just some more commentary on that would be helpful.

Yes, sure. On the organic side, Emergard has already come up as a growth opportunity for us. So we see continued investments in that platform to address customer needs as being suitable and actually very well justified in light of market demand and market interest. RSDL as well, broadening the label for that to expand the customer base. Our hyperimmune platform, we think, has real application in areas beyond the products that are currently licensed. So we're looking at target opportunities there. So across those two (inaudible) I think we have a number of directions we can go to expand and grow top line as well as bottom line. And those would justify some R&D investment.

Okay. Any timing on Emergard as far as Department of Defense or anything, any orders there?

Nothing that we're prepared to share at this point, but please stay tuned because it's an area of focus for the Company.

Gregory Macosko, Montrose Advisors.

Yes, just one brief. With regard to Zika, you mentioned that on the last call and I guess wondered if there -- you said that you were the only government contract relative to Zika. Could you give us any update on that?

Yes. So the Zika work in the ADM facility continues. And as you may recall, this was a vaccine candidate that we brought in. And Adam, maybe give a little color on where we stand there and what hope and expectation is there.

Yes. So, as we mentioned I think on the last call, we're as part of our ADM, Advanced Development Manufacturing, program with of the government. So there's a task order that was initiated and we signed to develop, and basically manufacture a vaccine candidate for Zika, and we're in the process of doing that process development and manufacturing work with the idea of progressing that down the road into some clinical studies. So we're moving that forward in partnership with the government.

And would that be funded R&D like?

Yes, that would be right now.

Thank you, and I'm showing no further question from our phone lines. I would now like to turn the conference back over to Bob Burrows for any closing remarks.

Thank you, Crystal, and 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's website.

Thank you again, and we look forward to speaking with all of you in the future. Good-bye.

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