Emergent BioSolutions Inc (EBS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Emergent BioSolutions Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the call over to the company.

Thank you Amanda, 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 fourth quarter and 12 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 our senior management will be available to participate, if need be.

Before beginning, I'm compelled to 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 or future performance. These forward-looking statements are based on our current intentions, beliefs and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate. Investor should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. Investors are therefore, cautioned not to place undue reliance on any forward-looking statement. Any forward-looking statement speaks only as of the date of this press release and this call and except as required by law, we do not undertake to update any forward-looking statement to reflect new information, events or circumstances. Investors should consider this cautionary statement as well as the risk factors identified in our periodic reports filed with the Securities and Exchange Commission when evaluating our forward-looking statements.

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 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 February 22, 2018.

Since then, Emergent may have made announcements related to topics discussed during today's call. You are once again encouraged to refer to our most recent press releases and SEC filings, all of which may be found on the investors homepage 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. Good afternoon, everyone, and thank you for joining our call today. During the call, I'll focus on our accomplishments in the fourth quarter of 2017 as well as our plans for growth in 2018.

As you saw from today's press release, we had a strong fourth quarter to finish a very successful 2017. We completed 2 acquisitions, strengthened our financial position and closed on new contracts with government customers.

First, our recent acquisitions. In October, we completed the acquisition of raxibacumab from GSK. This product is a fully human monoclonal antibody approved by the FDA for the treatment and prophylaxis of inhalational anthrax.

We assume responsibility for a multiyear contract with BARDA to supply the product to the SNS through November 2019. On the closing date, this contract had a remaining value of up to approximately $130 million and we began product deliveries in the fourth quarter of last year.

In October, we also completed the acquisition of the ACAM2000 business from Sanofi. This acquisition included ACAM2000, which is the only FDA licensed smallpox vaccine in the world, live viral manufacturing and fill/finish facilities that expand and strengthen our manufacturing capabilities and a 10-year contract with the CDC for the delivery of ACAM2000 to the SNS. On the closing date, this contract had a remaining value of up to approximately $160 million.

With the FDA approval in November of our Canton manufacturing facility, we began product deliveries in the fourth quarter of last year.

We expect both raxibacumab and ACAM2000 to be key contributors to our growth in 2018 and beyond. During the fourth quarter, we also enhanced and strengthened our financial position.

We converted substantially all of the convertible senior notes that we have outstanding, Bob will discuss this in greater detail during his presentation. This followed shortly after we replaced an existing $100 million credit facility with a new credit facility that provides up to $300 million in borrowing capacity at a lower cost of capital and with less stringent covenants. These actions collectively position us to effectively pursue our growth strategy, which includes growth through acquisitions. Finally, in the fourth quarter, we secured 2 new government contract awards that expanded our customer base and diversified our product sales. First, we were awarded a contract valued at up to $25 million by the U.S. Department of State to supply TROBIGARD, an emergency use autoinjector device, designed for self-administration of a nerve agent countermeasure.

This contract is significant in that it shows increased demand for our TROBIGARD product. It confirms the value of our autoinjector platform, it broadens our overall portfolio of government customers and it represents the first sale of this unique product to the U.S. government.

The second government contract signed in the fourth quarter was awarded by the Canadian Department of National Defence for the supply of Anthrasil, our anthrax-immune globulin product for the treatment of inhalational anthrax. This contract award followed the recent approval of the Anthrasil by Health Canada under its Extraordinary Use New Drug Regulations.

So in summary, we had a very productive and successful fourth quarter. We executed on our strategy, diversified and expanded our product portfolio and customer base, enhanced our financial position and ended the year poised for continued growth into 2018.

This year, we look forward to continuing to advance towards our 2020 goals. Specifically, we expect to increase revenues derived from our marketed products and services, achieve significant development milestones across our product pipeline and continue to execute on our growth strategy.

Taking a closer look at our marketed products and services, we expect that our revenue growth will be driven by several factors. In our Vaccines and Anti-infectives business, we expect continued deliveries of BioThrax to the SNS, under our current 5-year contract with the CDC. In addition, we anticipate completing deliveries of ACAM2000 under our current contract and then negotiating a multiyear follow-on contract to ensure an uninterrupted supply on this critical countermeasure to the SNS.

In our Antibody Therapeutics business, we expect to continue raxibacumab deliveries under our existing multiyear BARDA contract, while advancing the tech transfer of raxibacumab manufacturing to our Bayview facility, thereby providing a key anchor product for that site. In addition, we anticipate that deliveries of Anthrasil, BAT and VIG to existing and potentially new customers will contribute to our overall revenue growth.

Turning to our Device business, revenues will continue to be driven by TROBIGARD orders under the recently announced Department of State contract, delivery of RSDL under our multiyear contract with the DoD, and our targeted expansion in international markets.

Finally, we expect a significant annual revenue contribution from our CBMO business leveraging our broader portfolio of manufacturing facilities and capabilities. Growth in the business is driven by an increase in global demand, improved capacity utilization and a full suite of concept-to-market product development and manufacturing capabilities. As I mentioned earlier, we are targeting a number of significant development milestones across our product pipeline.

First, this year, we expect to file an application with FDA for Emergency Use Authorization designation for NuThrax, our next-generation anthrax vaccine. If successful, this would enable BARDA to procure NuThrax for delivery to the SNS in 2019, under our existing development and procurement contract, valued at up to $1.5 billion.

We have been working closely with BARDA on the development of the EUA package. Steps remaining to be completed are the validation of the manufacturing process and the analytical methods. We are targeting submitting this package to the FDA late this year and we expect an FDA review time of between 4 to 6 months.

Looking at our product pipeline targeting emerging infectious diseases, in January, we initiated a Phase II study of FLU-IGIV, our anti-influenza immunoglobulin being developed as an intravenous treatment for serious illness caused by influenza A infection in hospitalized patients.

The widespread and serious nature of the influenza outbreak over the past several months has made this a particularly timely study.

This product candidate is being developed using our established human hyperimmune platform, on which several marketed antibody therapeutics have been licensed. If we are successful in completing patient enrollment as planned, we expect to have data late this year or early in 2019.

Turning to our efforts focused on Zika in the first quarter. We expect to initiate a Phase I trial on VLA 1601, our Zika vaccine candidate based on a validated manufacturing technology that we licensed from Valneva and with whom we are codeveloping this important countermeasure.

If enrollment occurs as planned, we expect Phase I data for our Zika vaccine candidate to be available in late 2018 or early 2019. We also plan to advance on Zika IG, our Zika virus immunoglobulin therapeutic into the clinic by initiating a Phase I clinical trial in 2018.

This product candidate is also being developed using our established human hyperimmune platform. Importantly, last December, the product candidate was granted fast-track designation by the FDA. We also have a number of device development programs underway. Last year we announced 2 contract awards. One for the development of our multidrug autoinjector for nerve agent antidote delivery for the DoD and the other was a BARDA contract to develop an antidote intranasal spray device for the treatment of acute cyanide poisoning.

Both projects are well underway and we have plans for formative human factor studies for the autoinjector to be completed this year. Additionally, we are actively exploring opportunities for the development of additional drug-device combinations for chemical countermeasure market, and have a development project underway for a single drug autoinjector, adaptable to multiple drug formulation options.

So in summary, with the anticipated progress of our pipeline candidates, we believe we are well positioned to achieve over 2018 goal of at least 4 product candidates in advanced development. It also brings us significantly closer to our 2020 product development goal of 6 candidates in advanced development with at least 3 (inaudible) market.

Finally, a few short comments on our acquisition strategy. This year, we have set a goal of executing an acquisition that will generate revenue and be accretive within 12 months of closing. In the near term, we continue to focus on product and business acquisition in the public health threats market, including CBRNe threats and emerging infectious diseases with particular interest in opportunities that provide the potential for dual market application.

While the timing of any M&A transaction is always uncertain, we believe we can achieve this goal given our pipeline of target opportunities. This is an exciting time for Emergent and I look forward to updating you on our progress throughout the year as we work towards our longer-term goals and the fulfillment of our mission to protect and enhance life.

That concludes my prepared remarks. 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, and thank you again for joining the call. I'd first like to make some general comments about our financial results for the fourth quarter of 2017 compared to last year and then I'll turn to our performance for the full year as compared to prior year including select elements of our balance sheet. I'll then finish up with a review of our 2018 guidance.

But before I begin, as a reminder, we continue to present our comparative 2016 financials on the basis of continuing operations, which excludes the Aptevo operations following the August 2016 spin-off of our biosciences business into a separate publicly traded company Aptevo Therapeutics.

Now to the results. Overall, the fourth quarter was another period of solid performance for the company. Total revenues were $194 million, approximately $42 million higher on a year-over-year basis. Compared to the same period in 2016, the quarter -- fourth quarter 2017 revenue comparisons is as follows: first, product sales. Product sales during the quarter were $162 million, 85% above fourth quarter of 2016.

The increase is attributable to significantly higher BioThrax shipments under the current CDC procurement contract as well as expanded other product sales, specifically, increased TROBIGARD sales and initial SNS deliveries of both ACAM2000 and raxibacumab, both of which were acquired in the fourth quarter.

Second, CMO services. Contract manufacturing revenues were $16.2 million for the quarter, slightly lower than 2016. The performance reflects continued steady output of fill/finish and bulk manufacturing services to commercial customers as well as other CMO work.

We look to continue to aggressively seek opportunities to grow this business and more fully utilize our available manufacturing capacity.

And finally, grants and contracts. C&G revenue was $16 million for the quarter, substantially lower than the 2016 level of $47 million, but as expected, this change was due to a reduction in revenue associated with the successful completion of multiple U.S. government development contracts as well as reduced R&D activities related to certain ongoing funded development programs.

Fourth quarter gross margin came in at 61%, within our expected range of 60% to 70%, again reflecting the impact of revenue mix during the period.

Turning to our operating expenses. Gross R&D spend was $28 million for the quarter, slightly higher than 2016. On a net basis, after adjusting for grant and contract revenue, our net R&D expense for the fourth quarter was $12 million or 7% of net revenue which is calculated as total revenue, less grant and contract revenue. As we've stated in the past, we continue to regard as an important component of our strategy, the investment and development of new medical countermeasures, including those mentioned by Dan earlier, specifically, our Zika Therapeutic, our Zika vaccine and Flu Therapeutic.

SG&A expenses for the quarter were $42 million, more than $6 million higher than 2016 and driven primarily by costs associated with compensation and professional fees during the period. As a percentage of total revenue, Q4 SG&A expenses were 22% versus 23% in the prior year, reflecting our commitment to continually and carefully manage our operating expenses as we grow the business.

During the quarter, the business generated $65 million of EBITDA or 34% of total revenue, again reflecting the continued strength of the core business.

And finally, our GAAP net income for the quarter was $34 million, $2 million higher than fourth quarter of 2016.

Turning to the full year performance. Throughout 2017, our business performed well, as evidenced by the following: total revenue of $561 million, which was an increase of $72 million or 15% above prior year and continuing the growth trend begun in 2012, which has resulted in a 5-year compound annual growth rate for our revenue of 15%.

Total product sales of $422 million were up $125 million or 42% over last year and includes BioThrax sales of $287 million and other product sales of $135 million, which was a $76 million increase over prior year. The increase in other product sales includes higher revenue for RSDL, TROBIGARD, VIG and in particular, BAT, as well as modest initial sales from ACAM2000 and raxi.

In addition to other product sales -- in addition, other product sales represented 24% of our total revenue, up from 12% in 2016, further evidence of our continuing revenue diversification effort.

CMO service revenues were up $20 million or 40% versus the same period last year and our gross profit of $295 million and gross margin of 60% were in line with our targeted range. Our net R&D margin is 5% for the year and our gross R&D spend is over $11 million below prior year, reflecting the successful completion of certain funded development programs and the continued selective investments in our pipeline. Our SG&A spend of $143 million for 2017 is flat compared to prior year. As a percentage of total revenue, SG&A expenses were 26% of revenue versus 29% in 2016.

And finally, our net income was $82.6 million versus $62.5 million last year, while generating $166 million in EBITDA compared to $142 million last year or an EBITDA margin in 2017 of 30% again in line with our target level.

On the balance sheet, our year-end cash balance was $179 million and reflects the impact during the fourth quarter of our paying approximately $200 million to close the acquisitions of raxibacumab and ACAM2000. When combined with a receivable balance of $144 million, we continue to reflect a very strong liquidity position. Also, as you heard earlier, during the quarter, we put in place a new credit facility valued at $200 million with a $100 million accordion feature, resulting in $300 million of dry powder to support our operations in M&A activities.

Looking at cash flow, at the end of 2017, we generated over $208 million in net operating cash. We anticipate continued strong operating cash flow generation from the business, which will be used to support a variety of capital needs across the business, principally working capital, CapEx and M&A.

Finally, with respect to our $250 million convertible senior notes due in 2021. In late December, we converted approximately $239 million of the notes in exchange for approximately 8.5 million shares of our common stock. In parallel with this, we also repurchased approximately 800,000 shares of our common stock in the fourth quarter of 2017 under our board-approved share repurchase program.

This was intended to offset the anticipated dilutive effect of the additional shares issued in accordance with the make whole provision associated with the conversion of the notes.

That completes the review of the quarter and full year results. I'd now like to discuss our 2018 guidance.

As Dan commented upon earlier, we are experiencing a fair amount of momentum in the business as we came off a very strong 2017 and have the 2 acquisitions contributing full year revenue in 2018.

As a result, for the full year 2018, we are reaffirming our previously provided guidance. Namely, for total revenues, we anticipate a range of between $715 million and $755 million. The midpoint of $735 million represents a 31% increase over 2017 full year of $551 million.

For pretax income, we anticipate a range of between $120 million and $140 million. For GAAP net income, we anticipate a range of between $95 million and $110 million. The midpoint of $102.5 million represents a 24% year-over-year increase.

For adjusted net income, we anticipate a range of between $110 million and $125 million, the midpoint of $117.5 million representing a 23% year-over-year increase.

And finally, for EBITDA, we anticipate a range of between $175 million and $190 million.

Our full year 2018 outlook includes the impact of the following items: first, continued deliveries of BioThrax to the SNS, under our follow-on procurement contract with the CDC. Deliveries of ACAM2000 to the SNS under the CDC procurement contract plus deliveries of raxibacumab to the SNS under the BARDA procurement contract.

Domestic and international sales of other medical countermeasures, within other product sales and continued expansion of our CMO services business unit. Also, increased grant and contract revenue due to anticipated increase work related to development projects funded by the U.S. government, increased investment in discretionary, development projects funded by the government -- funded by the company targeting opportunities in medical countermeasures for emerging infectious diseases; and lastly anticipated a reduced tax rate targeting approximately 22%, resulting from the revisions to the U.S. Tax Code.

Finally, the 2018 outlook does not include estimates for potential new corporate development or other M&A transactions, except for the provision of specific diligence-related expenses required to support our ongoing M&A efforts.

Additionally, for the first quarter of 2018, we are estimating total revenues of between $125 million and $150 million, which is a revision to our previous revenue forecast for the quarter of between $145 million and $160 million.

This revision primarily reflects the timing of anticipated BioThrax shipments. 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) Our first question comes from the line of Jessica Fye of JPMorgan.

I was hoping for a little more color on the first quarter revenue guidance. What's driving the change in the timing of those BioThrax deliveries, if you can elaborate on that?

And then second, I believe Bavarian Nordic had some recent data out, curious what you -- what your interpretation of that top line press release is?

So maybe I would ask Bob to comment on the Q1 guidance and the new range that we've identified. And then we can come to the second part of your question about the press release by Bavarian Nordic on their smallpox vaccine.

The timing of the BioThrax shipments and revenues are consistent with what we've experienced in the past. There is some variability around the timing of the entire manufacturing and the regulatory approval process for those doses and those lots. And we are simply recognizing, as we have in the past from time to time, incurred some quarter-over-quarter timing differences.

Importantly to remember for folks who have been watching and listening to our story in the past, when that does occur from time to time in prior years, we have consistently met the overall annual expectations and we again reaffirm the total year guidance.

So Jess, maybe I'll take the second part of the question in the recent announcement on Imvamune, the smallpox vaccine under development by Bavarian Nordic. I think the important -- I'm not going to comment on the data or prospects for success for that product in front of FDA, but what I will say is that the target population for that product candidate is immune compromised and that population is very different within the population that we target.

It represents a fairly small percentage of the U.S. population and therefore, we don't anticipate this affecting the ACAM2000 business at all.

I think it's something that the government is looking to have another countermeasure to address the needs of that special population where previously none existed.

The other point I would make is, it's my understanding that, that is a two-dose vaccine, whereas ACAM2000 is a single dose in order to establish protection.

So and again, I don't want to comment on their data or impact that data might have on the regulatory review process, but that's so far is our take on it.

Our next question comes from the line of Eric Schmidt of Cowen and Company.

Maybe a couple more for Bob on the guidance. First, on 2018, the implied margin guidance would suggest lower margins in 2018 versus what you just posted in 2017. And if anything the trends coming into current year are all quite favorable. So is that just a healthy degree of conservatism on your part? Or are you really expecting to spend more somewhere?

I think if you look at our guidance for 2018, it lines up almost identical to the profile for the P&L that we articulated for what we are trying to achieve by the end of 2020, when we laid out the $1 billion revenue goal; the SG&A expenses of less than 25%, the net R&D will be less than 15%, and at the bottom line, the net income margin contribution of 14% or greater.

So if you look at the midpoints of what we've put out there guidance-wise for 2018, they almost identically line up with that.

The difference, I think you may be alluding to in terms of 2018 versus 2017, it really is around the fact that, as we communicated, we will be likely spending more at-risk R&D as we continue to invest in some of the projects that Dan mentioned during his script.

We think that there are opportunities to continue to control other forms of operating expense including SG&A and really staying consistent with that 14% or greater net income contribution to bottom line.

Okay, I guess my other question is on that 14% longer-term net income target. You obviously are now going to benefit, Bob, from a lower tax rate. So isn't it time to start thinking about that 14% being on the lower end as well?

So as you will recall, when we first put out the 2020 guidance or expectations, that number was closer to 13%. After looking at the benefits that we should expect under the tax code and tax reform, we increased that up to 14%.

Again, until we have better clarity around exactly how we are going to benefit from that, we're being a bit cautious and a bit careful. We'll continue to evaluate and we have already factored in, it -- with the 13%, Eric, some tax rate improvement as we look to have a larger international footprint. So some of that was already baked into that 13% to begin with.

Our next question is from the line of David Maris of Wells Fargo.

A couple of questions. First, on the pipeline, on the Zika data later this year, what specifically are you looking for? And tell us what the timeline is, assuming a positive outcome from that point forward, based on your best guess. And then separately, tell us a little bit about what you're seeing deal-wise. I know that you've executed on a number of deals recently and you expect to continue, but are you seeing good deal flow? Do you feel increased confidence that you'll get something done or multiple things done this year?

So the Zika vaccine trial that we expect to initiate in the first quarter with data year-end towards the later part of the year, over the early part of next year. It's a standard Phase I study, so we'd be looking for safety data. And timeline really does depend on what we see in terms of next steps and the structuring of the Phase II study and beyond. So too early to give real guidance on what the next steps might be for that program.

Having said that, I think, I personally am quite excited about the prospects for that candidate, given the fact that it's coming off a validated manufacturing platform that we license from Valneva. And the product profile on it is a very traditional killed vaccine that I think will enable us to quickly assess the prospects for future success once we see the safety profile on it. So we'll have more to say once we get further into the study and we start to see the data.

On the M&A front, yes, I am really pleased with the pipeline of potential acquisition candidates that we have out there, both from a business standpoint as well as product opportunities across the CBRN explosives as well as emerging infectious diseases. The number of revenue generators that are out there are meaningful and I think given that pipeline, we remain confident that we should be able to accomplish the goal we've laid out for the organization. Having said that, we all know M&A is inherently difficult to project into -- to forecast, but nevertheless, we do remain confident that we should be able to pull something together and get something executed this year.

Our next question is from the line of Dana Flanders of Goldman Sachs.

My first one here, maybe just on R&D and R&D spend. And taking a step back, I know you're pushing towards that, kind of, 15% target over the next couple of years. I mean, how do you just think about and balance kind of spending where government funding is increasing versus maybe other programs where that might not be the case but appears strong from a science or clinical perspective? Obviously, those 2 would hopefully align, but just curious how you think about that.

It's a really good observation. Clearly, when we deal with our government customers and there is a stated need and a requirement to fill a void that exists, we'll jump in particularly where we have strong capabilities, platform technologies or science-based approaches that we think can be successful. I think the devices experience has been meaningful in that regard and even across the vaccine platforms, we've been able to execute on that approach. So we are always mindful of what the U.S. government is looking for, by way of countermeasure development and we are opportunistic as we look at the -- at the needs of the customers out there.

Having said that, what we look at from the standpoint of independent funding is really driven by a couple of things. We have a number of platform technologies that we think are available to us to develop meaningful countermeasures that can not only address the needs of government customers but also could be provided in a dual market setting and I think that for example, the Zika vaccine is a great one. The influenza hyperimmune is another one. I clearly see in my mind an opportunity to have robust government participation as a customer, but also an opportunity for those products to be sold in a more traditional patient -- market -- hospital market, specialty clinic market.

So from my vantage point, that kind of development program has a number of benefits. We are leveraging capabilities, we are using validated platforms, and we are addressing dual market opportunities. So those are some of the criteria that we look at as we think about selecting R&D candidates that we want to pursue. We are also looking at opportunities where -- because of what we have in our platform base and the technologies that we own and control. We are potentially the leader or at least a leader where it could be an only-in-class or a best-in-class product that's being developed.

So that's part of the criteria that we use to evaluate where we jump in when we spend on our own. I guess the last point I would make is often time we'll spend at risk to get a product to a certain point in its development cycle, with the expectation and thought that once you get to a certain point in development, we'll be able to secure government funding to enable that product to completes its development cycle and go all the way through to regulatory approval and procurement. So hopefully those thoughts are helpful for you.

That's great and very helpful. Maybe just one quick follow-up. On your flu program, I know you mentioned it in your prepared remarks, obviously, a very strong flu season this year. Maybe just high level, how you see that program kind of fitting into the current treatment paradigm. And not to get too far ahead of ourselves, but just commercially first take, is this going to -- are you going to be targeting a specific cut of the flu population? Or do you think this could be used possibly more broadly?

We actually have Laura Saward, the head of our business unit for the Antibody Therapeutics, maybe Laura you could take that question?

Sure, thanks, Dan. Great question, so the flu immunoglobulin program is targeted at hospitalized patients with serious influenza A infections. So where we feel that this product really fits into the existing therapeutic paradigm, these are patients that are hospitalized with severe flu, they've already has access to standard of care which can be vaccines, other supports and antivirals. And there's still quite a high unmet need in that population. So we are targeting that in our Phase II trial, which will largely focus on our safety and PK, but also give us some indication on clinical benefit. So I think that will really help to inform where we go next on our Phase III trial.

Our next question comes on the line of François Brisebois of Laidlaw.

So just a couple here. So in terms of M&A, you discuss the dual market potential. Is this something -- is there a preference in terms of government or nongovernment? And why kind of get away a little bit from the government aspect there? And did I understand that it still -- you're still looking at companies that would be accretive within 12 months? Or has that changed at all?

Dual market is attractive for a couple of reasons. One is, it allows us to leverage our existing capabilities and relationships with the current government customers that we have. And from my vantage point, and I think from the organization's advantage point, it's a core competency of ours, our ability to interact with government agencies, government contracting and government relations is something that we pride ourselves on. So it's a market that we want to continue to expand in and focus on.

But on the other hand, we also want to diversify. And to the extent that we can diversify our customer base, then that's a positive for us. Whether it's specialty clinics, whether it's hospitals or target patient populations that have a specific need, all of that enables us to build the business in a more robust way. I think the second part of your question is, no, we remain focused on looking at opportunities that can be accretive within 12 months of acquisition.

Okay, great. And then lastly, just on ACAM2000, in terms of negotiations to, just to ensure that there is no -- there is an uninterrupted supply, is that something that can be a little bit of a negative in terms of negotiations? Or how do we ensure that there'll be no interruption there?

So I think the concept has been that this is a capability. And when I say this, manufacturing the smallpox vaccine, particularly on U.S. soil is something that's a critical requirement of the U.S. government. Part of the contract that we assumed was the obligation to ensure that there was U.S.-based manufacturing. So once that core competency exists on American soil, my view, at least, and I think our collective view is that the U.S. government wants to ensure that, that competency remains and it's exercised and it's continuous.

So that's one piece of it. And the other piece is, of course, as product is in the stockpiles, as it ages, it needs to continuously be replenished and replaced. So there is, I think, a paradigm whereby the older product needs to get removed and newer product needs to come into the stockpile as a replenishment.

So the answer to your question is essentially twofold: ensuring the capability remains and exists on U.S. soil and the second is to ensure that the stockpile has what it needs within it to protect the civilians in the country. Right now the stockpile I think is designed to carry a sufficient number of doses to protect everybody in the U.S. population.

(Operator Instructions) Our next question is from the line of Lisa Springer of Singular Research.

I was wondering if you might be able to give us a little additional color regarding what's driving growth in the CMO business. Is it a combination of new customers or deeper penetration of existing customers? And if fully utilized, what level of revenues could that business support?

I'm very excited about the growth in the CDMO business. I think the growth is being driven by a number of different factors, and I think I flagged some of them during the prepared remarks. I think overall, globally, there is an increased demand for CMO capabilities and one of the things that we offer as an organization is a full suite of capabilities, from early product development all the way through to regulatory approval and supporting commercial launch. And the capabilities span from bulk manufacturing of Biologics fill/finish of Biologics, assay development, and the like, and also fill/finish of small molecules. So I think the capability mix and the number of facilities that we have and the capabilities within those facilities is something unique that we offer that a lot of companies don't offer.

In addition, I think we have capacity to expand within the current footprint that we have. In some areas, we are going to have to make some investments. In others, it's simply a matter of increasing the utilization within the facilities that we currently have.

So we are well-positioned to drive growth in the CMO business. I don't think we've put out a long-term forecast, on where that business can go, so I think I'll hold off on answering that question. But as time goes on, we'll get a better sense for the trajectory of growth there, which I think is going to be healthy.

And at this time I'm showing no further questions. I'd like to turn the conference back over to the company for any closing remarks.

Thank you, Amanda. With that, ladies and gentlemen, we now conclude the call. 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 all again and we look forward to speaking with all of you in the future. Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This does concludes the program, you may now disconnect. Everyone, have a great day.