Emergent BioSolutions Inc (EBS) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions Second Quarter 2017 Earnings Conference Call. (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.

Thank you, Latoya, and good afternoon, everyone. My name is Bob Burrows, Vice President of Investor Relations for Emergent's. Thank you for joining us today, as we discussed our second quarter and first 6 months of 2017 financial and operational results. As is customary, today's call 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. A Q&A session will follow at the conclusion of our prepared comments, and other members of senior management will be available to participate if need to be.

Before we getting on, I am compelled to 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 the 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 tables found in today's press release regarding our use of adjusted net income and EBITDA and the reconciliations 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 August 3, 2017. Since then, Emergent may have made announcements related to topics discussed during today's call. Emergent BioSolutions assumes no obligations to update information in today's press release or as presented on this call except as may be required by applicable laws and regulations. You're once again encouraged to refer to our most recent press releases and SEC filings, all of which can be found on the Investors home page of our website. 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, and good afternoon, everyone and thank you for joining us. Today, we will -- I will touch on our financial results and then highlight some of our recent business accomplishments. And I'll then turn the call over to Bob Kramer, who will review our financial performance and guidance in greater detail. So as we pass the halfway point for the year, we have made significant progress in growing and diversifying our business, expanding our portfolio, progressing our pipeline and driving towards the achievement of our 2017 goals. As announced in today's press release, I reported financial performance is strong. In the second quarter, we generated total revenue of $101 million, up 10% from the same period of last year. Product sales were $64 million, up 32% from last year. And EBITDA was $18 million, 3x the amount generated last year in the second quarter.

Now let's review some of the accomplishments this year that highlight our operational progress. First, we continue to demonstrate our ability to build our business based on our core competency in government contracting. Earlier this year, we signed a 2-year contract with BARDA to deliver $100 million of BioThrax to the SNS. This contract is separate and distinct from our $911 million contract with the CDC for BioThrax procurement. We anticipate all the deliveries under the BARDA contract will be completed in 2017. We also signed a contract modification with BARDA to manufacture and store bulk drug substance for BAT®, a botulism antitoxin with the value of up to $53 million. We anticipate that a significant portion of this revenue will be realized in 2018. To address emerging infectious diseases, we were awarded a task order from BARDA to develop therapeutics for viral hemorrhagic fever. This represents with fourth task order awarded to us under our CIADM program and provides revenue of up to $30 million. Revenue is expected to begin to be recognized in 2017 with a significant portion of the work and revenue expected in 2018. And most recently, building upon our auto-injector capabilities and expertise, we signed a 5-year agreement to develop a novel, multi-drug auto-injector for the delivery of nerve agent antidotes for the department of Defense. The objectives of this agreement is to support DoD's requirement for a novel, auto-injector platform that is easy to use and capable of rapid delivery. This agreement has a total value of up to $23 million with revenue beginning to be realized this year. So during the course of this year, we continue to advance our diversification goals through meaningful progress in our clinical development pipeline. We continue to advance our NuThrax development program and are currently in the process of manufacturing an engineering lounge in Building 55 to support our plans to initiate a Phase III study in 2018. This could then lead to an Emergency Use Authorization designation from NuThrax followed by procurement by BARDA under our NuThrax development and procurement contract valued at up to $1.5 billion.

In February, we initiated a Phase I trial for UV-4B, a Dengue therapeutic built on our proprietary broad-spectrum antiviral platform and along with that, we continue to target initiating 2 additional clinical studies in 2017 for emerging infectious disease therapeutics based on our hyperimmune platform. The first is a Phase II trial, targeting seasonal influenza and the second is a Phase I trial to address Zika. And most recently, we signed a license agreement with Valneva for global exclusive rights to their Zika vaccine technology. This vaccine will add an additional product to our clinical pipeline with dual market potential and is synergistic with our Zika hyperimmune that I previously mentioned. Under the agreement, we plan to codevelop the vaccine with Valneva and we're targeting a Phase I clinical trial to commence in late 2017 or early 2018.

Importantly going forward, we expect to manufacture this vaccine in our recently expanded Bayview facility. We have also seen promising developments during 2017 in other aspects of our operations. Earlier this year, we received German regulatory approval to market BioThrax produced in Building 55. This approval was for both GUP and PEP indications and positions us to pursue BioThrax licensure in additional countries within the European Union based on the mutual recognition process. We are targeting the first half of 2018 for the first of these approvals. We continue to see elevated international interest across our product portfolio, which is translating into higher ex U.S. sales of our products this year. As we had noted in the past, in addition to our vaccine and therapeutic products, Trobigard, our nerve agent antidote auto-injector has been a meaningful contributor to this growth with international orders and interest exceeding our initial 2017 supply capacity. To address this, we are working with Amaya, a recognized world leader in the design development and manufacturing of drug delivery devices to double manufacturing capacity by the end of this year with further expansion in 2018. I'm also pleased with the growth that we have been experiencing in our CMO business, this growth is being driven by our expanding capacity and increased demand for both bulk manufacturing and fill-finish work. We continue to see the CMO business as an important contributor to our growth plans. In that regard in May, we announced the completed expansion of our Bayview, CIADM facility in Baltimore, Maryland. This facility now totals 112,000 square feet and is designed to enable cGMP production of a broad portfolio of biological products as well as to support surge manufacturing of medical countermeasures to address urgent public health threats. As previously announced, we plan to produce both raxibacumab, which we are acquiring from GSK and the Zika vaccine that we license out from Valneva in this facility. Finally, we are taking steps to further expand our portfolio through acquisitions. Last month, we entered into an agreement with Sanofi to acquire their ACAM2000 smallpox business. In this transaction, we will be acquiring the only FDA-licensed smallpox vaccine and existing CDC procurement contract with a remaining value of approximately $160 million, live viral manufacturing facilities and approximately 100 employees. Also last month, we entered into an agreement with GSK to acquire raxibacumab, an FDA-approved anthrax monoclonal antibody and plan to assume responsibility for an existing BARDA contract with a remaining value of approximately $130 million. As I noted earlier, we are planning to move manufacturing of this product from GSK to our Bayview facility in Baltimore. The acquisitions of the ACAM2000 smallpox business and raxibacumab are both expected to close by the end of the year. We -- as we previously announced, we anticipate both acquisitions will be accretive to earnings. Specifically, raxibacumab is expected to be accretive upon first product delivery under the current [Audio Gap] anticipated within 3 to 6 months of closing. For ACAM2000, the transaction is expected to be accretive beginning with anticipated product deliveries in 2018, following FDA licensure of the U.S. based manufacturing facility. We continue to evaluate additional M&A opportunities to drive our growth plans. These include, revenue-generating businesses and products in the vaccines, therapeutics and device spaces as well as pipeline candidates that can be acquired with grant and contract funding that will leverage our core competencies and contribute to our financial goals. In summary, I'm very pleased with the progress we have made so far this year towards achieving our 2017 goals.

Moreover, we see these developments as positioning the company for significant growth in 2018 as we march towards achieving our 2020 goals. That concludes my prepared remarks and I will now turn the call over to Bob Kramer, for details on our financial performance and guidance. Bob?

Thank you, Dan, and good afternoon to everyone, and thank you, again for joining the call. Today, I will comment on our financial results for the second quarter and first 6 months of 2017 compared to last year, walking through the P&L as well as select elements of our balance sheet. I will then discuss our 2017 guidance, both for the full year and for Q3. As a reminder, we continue to present our comparative 2016 financials on the basis of continuing operations, which excludes the Aptevo operations following the spinoff last year of our Biosciences business into a separate publicly traded company, Aptevo Therapeutics. Now to the numbers. Overall, the second quarter was another period of solid performance by the company. Total revenues were $101 million, $10 million above the same period last year. Of that total, product sales were $64 million, which is 32% above second quarter of 2016. BioThrax sales accounted for $52 million of the $64 million in product sales. This was up approximately $12 million from last year. The increase in BioThrax revenue is strictly timing related as determined by the delivery schedule of our contracts.

Moving to CMO services. Our contract manufacturing revenues were just over $16 million or $6 million higher than 2016. This performance was driven primarily by the timing of fill/finish services as well as CMO work we're performing for Aptevo on an ongoing basis, which was not occurring in Q2 of last year. We look to continue this year-over-year trend of higher CMO revenue as we remain committed to aggressively seeking opportunities to growing this business and more fully utilizing in our available manufacturing capacity. Completing the revenue discussion, contracts and grant revenue was $20 million for the quarter, which was significantly lower than 2016. But as expected, due to the timing of R&D activities related to certain funded development programs that are either ongoing, winding down or complete, we anticipate that this year-over-year trend will persist throughout the remaining reporting periods of 2017. Second quarter 2017 gross margin came in at 57%, which is slightly below our revised range of 60% to 70%. The reduced gross margin for the period reflects the impact of revenue mix during the second quarter. Looking ahead, based on the revenue mix projected for the remainder of the year. We expect the performance for the full year will be in the 60% to 70% range.

Turning to expenses. Our growth R&D spend was $26 million for the second quarter, $2 million below that for 2016. On a net basis, after adjusting for grant and contract revenue, our R&D expense for the second quarter was slightly under $5 million or 6% of net revenue. As we stated in the past, we will continue to regard investment in the development of new medical countermeasures, both funded and unfunded, as an important component of our strategy to grow and diversify our business. SG&A expenses for the quarter were $32 million or $4 million lower than last year. As a percent of total revenue, second quarter SG&A was 32% versus 39% in the prior year, reflecting our commitment to carefully manage our operating expenses. During the quarter, the business generated $18 million of EBITDA, or 18% of total revenue, significantly higher than prior-year period and reflecting the continued strength of the core business. And finally our GAAP net income for the quarter was $5 million, an improvement over the $2 million loss in second quarter of 2016.

Turning now to the performance, year-to-date. Through 6 months of 2017, our business is performing well as evidenced by the following: Total product sales of $146 million, an increase of $33 million or 30% versus prior-year. CMO services revenue up $63 million or 90% versus the same period last year. Next, our gross R&D spend was $8 million below prior year, reflecting the successful completion of certain funded development programs and the continued controlled investments in our pipeline. Our SG&A spend of $64 million is flat with last year as a percent of total [Audio Gap] SG&A expenses of 31% of revenue in 2017 versus 35% in the prior year period. And finally, our net income of $15.1 million versus $9.8 million last year, while generating $43 million in EBITDA compared to $35 million last year. On the balance sheet, our midyear cash balance was $316 million. When combined with a receivables balance of $102 million, we continue to reflect a strong liquidity position to support our operations and strategic M&A initiatives. Finally, looking at cash flow, through midyear we generated over $95 million in net operating cash. We anticipate continued strong operating cash flow generation for the business, which will be used to support capital needs, principally working capital, CapEx and M&A. With our recent news flow regarding our plans to acquire the licensed smallpox vaccine ACAM2000 and its related business from Sanofi, and the licensed anthrax monoclonal therapeutic raxibacumab from GSK, we will be using approximately $174 million of our cash, or roughly half the current balance to fund the upfront portions of this transactions. The remaining cash is sufficient to cover normal working capital needs of the business. As for 2017 full year forecasts, we are reaffirming our guidance namely, total revenues of between $500 million and $530 million, including $265 million to $280 million of BioThrax sales under our contractual arrangements with both CDC and BARDA. We are reaffirming net income guidance of between $60 million and $70 million for the year. Adjusted net income of between $70 million and $80 million for the year and finally, EBITDA of between $135 million and $145 million. Please keep in mind that we do not include any M&A activity in our annual guidance, except for the provision of specific diligence-related expenses required to support our ongoing M&A efforts. Regarding recent announced deals, we will deferred updating our forecast for 2017 until we close on each transaction. Additionally, through the third quarter of 2017, we estimate total revenues of between $115 million and $130 million. That concludes my prepared remarks. And I'll now turn the call over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions) The first question is from Keay Nakae of Chardan.

Just in terms of the reaffirmation of the guidance. Understanding that the business is lumpy, can you help us understand your confidence in your delivery schedule, maybe, particularly for BioThrax that your confidence in hitting the guidance for the full year?

Sure, Keay, this is Bob. Thanks for the question and thank for joining the call. As we've discussed in the past, the BioThrax shipments are per our delivery schedule under the contracts we have with the U.S. government. I think to your specific question, if you look at the shipments to date of BioThrax, they account for about 35% of our indicated range of between $265 million and $280 million for the year, it's similar to what we have experienced in prior years. I think 200 -- In 2016, the number was closer to 42%. So this is not an unusual pattern for us. And importantly, we have the contracts existing to support those deliveries, and again reaffirm the number for 2017 for the full year. So we're quite confident in our ability to meet those numbers.

Okay, and then just thinking about the timing and ability to close the 2 acquisitions. What would be the major hurdles to completing each of those before the end of the year, as you're looking at them now?

Thanks for the question Keay, and again, thank you for joining the call. I don't think, there's anything extraordinary in the process for completing the transactions. These are typical notifications that need to made with the U.S. government under Hart-Scott-Rodino and there's some transition work that is under way, but nothing in particular to call out as unusual or extraordinary.

And one final question, if I can. With respect to the auto-injector contract, you just signed or you were just granted. Can you give us any color on the types of deliverables there, that are under that 5-year contract?

Yes, thanks for that. It's a pretty exciting opportunity for the company in that it expands the types of devices that we'll be working on and establishes a collaboration with the DoD, which for us I think, is a real significant step forward, as we look to strengthen that relationship. But under the contract, we are expected to develop the device, then we need to conduct the test to demonstrate that there's consistency in manufacturing. We also have to demonstrate the functionality according to the specs and overall usability of that device. And then final steps along the continuum would be regulatory approval and all the filings and submissions necessary in order to secure our FDA licensure of the device. So as mentioned in the release for that announcement, it's a 5-year contract and total funding is approximately $23 million.

And does it specify needing to get approval for any specific antidote?

It doesn't specify approval for any specific? I didn't catch the last word.

Specific antidote, that you need to get FDA approval for just the device itself?

Maybe I'll ask Adam to comment on that.

Yes, so, the device will not just only be -- the approval won't be just for the device, it will be for the device with the active ingredients.

The next question is from Jessica Fye of JPMorgan.

This is Ryan on for Jess. I kind of wanted to touch about the dynamic with BioThrax and I know Nuthrax is coming up -- it's progressing in the pipeline. So bigger picture, how does -- how do you -- what color can you give us on sort of how they're thinking about, if the stockpile was like with dual BioThrax, NuThrax combo there. Is there sort of a preference that ultimately it goes all NuThrax or would they stock both?

Yes, thanks you, Ryan, for the question and for participating. So there is -- I think in the way the government is looking at this, a transition from BioThrax for the postexposure indication, because of the benefits that NuThrax provides over BioThrax, NuThrax vaccine much more rapid immunogenicity uptake and protection for recipients of the vaccine. So in that postexposure setting, NuThrax is -- provides clear advantages over BioThrax, which is 3 doses and a longer time to protection. So -- but BioThrax is also being used in a general use prophylaxis setting for military personnel. So I don't envision, at least as occurs -- as it's currently configured that is would completely replaced BioThrax. So there will be a need in their general use prophylaxis setting for BioThrax and there would be continued roll there. The exact numbers and the timeline, I don't have enough of a sense of what the government might be thinking about and how it's planning that. But they have positioned large-scale procurement of NuThrax under the development of procurement contract that we have got to enable protecting up to 25 million lives with the NuThrax procurement. So they are positioning the U.S. government and the SNS to be able to have sufficient NuThrax for 25 million lives.

Okay, and for the auto-injector, are you -- the nerve antidote is the -- are you developing that as well or is this something that the government already has and they're just formulating it into your device?

So if I could ask a clarification, are you talking about a new DoD contract that has been awarded?

Yes, yes.

Yes, again, I'll ask Adam Havey to comment on that.

Yes, so this would be something that DoD already has and we'll be kind of meeting their requirements and putting it in place. So we are not developing a novel, API for this D4 auto-injector.

Okay. And then would the -- would there be drug -- or sorry, drug device combos for each potential sort of application going forward? Or is that still sort of to be determined?

So right now I think we have identified their API of choice and the regulatory path for that. If you're asking about additional APIs that might be deployed in that device. I think that's a question that's TBD.

The next question comes from David Maris of Wells Fargo.

I am sorry, if I missed it. But can you remind us when you think that the facility and the first product will be delivered under the ACAM deal. You had mentioned that it would be the deal -- you'd expect to be accretive at that point, but I just don't know if we have a date that you expect it to close?

Yes, thanks, Dave for joining the call and for asking the question. So there is a process that we need to go through. The first thing that we need to do -- or really Sanofi needs to do at this point since we don't get on the business, is to submit to the FDA an sBLA for licensure of the facility, and the target for that is in the second half of this year. We understand it's approximately a 6-month period timeline associated with that. So we do expect that there would be facility approval in '18. In the normal course of that, there is the back and forth with the FDA, any questions that they've got would need to be answered. Obviously, there would be a prior approval inspection that would be required and then ultimately, licensure. So with that high level we would expect current course and speed to -- and we anticipate a regulatory approval in '18 and then we would commence shortly thereafter.

The next question is from Eric Schmidt of Cowen and Company.

Maybe a couple for Bob. It looks like you came at lower end of your Q2 revenue guidance. I'd say that's a bit out of character for you. So just wondering, if anything didn't materialize, that you had counted on or if anything slipped into Q3?

Not really, Eric, and thanks for the question. As we stated year-over-year that BioThrax business component is pretty predictable and as I explained earlier, we feel very comfortable in our ability to meet that indicated range of $265 million to $280 million for the year, and the pattern quarter-by-quarter for 2017 is similar to what we experienced in '15 and what we experienced in '16. So I wouldn't read anything into us being at the lower end of the range.

Okay, and then I understand the policy of -- not updating the guidance for the acquisitions until the acquisition has closed later this year. But just for kind of getting a sneak preview things, what income lines are going to change? It doesn't sound like we'll be getting material revenues. So are we just expecting a little bit of R&D to be added to the expense budget or might we see something else?

So I think, what you should expect, Eric, is -- and we have talked about a couple of different categories of financial impact. Clearly, when each of these assets is in our hands, there will be some transition cost and integration costs that begin to occur day 1 of it being in our hands, that will be additive to the various operating expense lines. There will also like -- could be some revenue addition as well. So again, until we sign the close process and have a clear indication of the impact in '17, we're going to be really careful about saying anything and we'll update you as soon as we close on them.

The next question is from François Brisebois at Laidlaw.

Any chance the process with ACAM, any chance that the sBLA -- you guys can actually close the deal before the sBLA is submitted or are we just waiting or Sanofi here?

Yes, so the closing on the transaction and the acquisition is completely separate and distinct from the submission of the sBLA. So those are 2 parallel paths and -- so don't think of them as linked at all in your mind.

Okay, great. That's good to know. And then how comfortable are you in your ability to just not have any interruption between basically the ACAM and raxi's end of the existing contract and the start of revenues kicking in for the follow-on. Is this something that you start negotiating while the existing contract is going on? Or how do we ensure that no interruption?

Yes, it's a good question, and thanks for asking. As you know, both smallpox and anthrax are considered Category A bioterrorism agents by the CDC and these have been fairly long-standing contracts with the U.S. government to ensure supply of these critically required countermeasures to the SNS to protect the nation. So while we may be coming towards the tail end of both contracts, we feel pretty fit -- pretty strongly that these are medical countermeasures that are important and that will continue to be procured. The timing of that and what the contracts might look like, too early to tell and so it's a -- I don't want to comment on that, but just principally, I think the policy of the government -- U.S. government and the positioning of the government is to ensure that medical countermeasures for those Category A threats, as well as some other threats, are critically important. And that continued supply and having the capabilities and capacity in the country is something that's high priority. So we have a high degree of confidence that we will see those follow-on contracts executed.

Okay, great. And then couple of last quick ones here. In terms of the -- just thinking follow-on here, the $300 million for rexi that was over 8 years, I know that was a complicated $300 million, I know it's not direct, any color you can give on how that $300 million is -- was billed up?

Yes, I don't think I can really provide color. That contract was back, as you know, a number of years and it has been amended by GSK and U.S. government over that period of time. So, I'm not really in a position to share the details of that, but what I would say is that we're talking about in terms of the remaining value under the contract that we're assuming is that figure. So $130 million of remaining value -- up to $130 million of the remaining value to be delivered and that's the piece that remains under the contract before expiration.

Okay, and then just lastly here, in terms of -- you guys mentioned the upfront, $174 million, pretty much half of what you had. To get to the 2020 goal, you're still looking at acquisitions and stuff? How should we think about -- what are you guys ready to say in terms of your cash situation to get to this goal?

So as I said, I think we continue to target M&A and we are looking at products, we're looking at businesses. All would be eye towards revenue generators and products and businesses that can be accretive. We're targeting vaccines and therapeutics and devices, and all in areas where we can exercise our core competencies and create real value towards achieving our goal target. So that remains unchanged from where we were before. And in terms of the second part of your question, maybe, Bob you could pick up on that.

Sure Dan, thanks, and thanks for asking the question. Just to be clear, these transactions will be cash flow positive and accretive. So they will contribute to the existing base core business that we have today, which is strong and continuing to generate cash. And having said that, the upfronts that we have now committed, that's going to take a good chunk of our cash and leave us with a balance that's sufficient to cover the working capital needs of what we have today. We continue to evaluate potentially increasing our revolver, which right now stands at $100 million, could go as high as $200 million to provide us some additional near-term working capital. And as Dan and others have indicated, we continue to be very committed to additional M&A activities, complimentary to our strategy. And depending on the deal terms and the size, we will look at cash, debt and potentially equity as funding mechanisms for those M&A transactions, in that order.

(Operator Instructions) The next question is from Lisa Springer of Singular Research.

My question concerns the manufacturing operations that come with the ACAM2000 acquisition. Assuming the contract continues at the current run rate, is that manufacturing facility going to be totally devoted to that one product? Or would it be possible that you would have -- be able to move other products to it?

Yes, thank you so much for the question. So right now, it is a dedicated facility, dedicated to the production of that one product. In our hands, there is the -- there is another product that Sanofi does produce in that facility. It's not a product that we would be acquiring. We have agreed to make that product on a contract basis for them, from time to time, in order to meet their needs. So it does have flexible manufacturing capability. It is a live viral facility, so we anticipate future products that would go in there would be consistent with the configuration of that building, but certainly, it's capable of having multiple products run through the site.

(Operator Instructions) There are no further questions at this time, I'll turn the call back over to Bob Burrows for closing remarks.

Thank you, Victoria. With that ladies and gentlemen, we now conclude the call. Thank you for your participation. Please note that an archived version of the webcast for today's call will be available later today and accessible to the company website. Thank you all again, and we look forward to speaking with all of you in the future. Goodbye.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect. Good day.