Emergent BioSolutions Inc. (EBS) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions conference call to discuss its Q2 2015 financial results and the spin-off of the Biosciences business. [Operator Instructions] I would now like to turn the call over to the company for opening remarks.

Thank you, Liz. Good morning, everyone. My name is Bob Burrows, Vice President of Investor Relations for Emergent. Thank you for joining us today, as we discuss our financial results for the second quarter and first six months of 2015, our outlook for the third quarter and full year 2015 and our plan to spin-off our Biosciences business. As is customary, our call today is open to all participants. In addition, the call is being recorded and is copyrighted by Emergent BioSolutions. Participating on the call 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 able to participate. Before we begin I will remind everyone that during today's call, either in our prepared comments or the Q&A session, management may make projections and other forward-looking statements related to our business, future events, our prospects or future performance. These forward-looking statements reflect Emergent's current perspective on existing trends and information. Any such forward-looking statements are not guarantees of future performance and involve substantial risks and uncertainties. Actual results may differ materially from those projected in any forward-looking statements. Please review our filings with the SEC on Forms 10-K, 10-Q and 8-K for more information on the risks and uncertainties that could cause actual results to differ. During our prepared comments or 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 loss, adjusted net income, EBITDA, and adjusted EBITDA and a reconciliation between these non-GAAP financial measures and our 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 6, 2015. Since then Emergent may have made announcements relating to topics discussed during today's call. So again please reference our most recent press releases and SEC filings. Emergent BioSolutions assumes no obligation to update the information in today's press release or as presented on this call, except as may be required by applicable laws or regulations. Today's press release may be found on the Investors home page of our website. 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 morning, everyone, and thank you for joining our call. Today's call have three parts: first, I will highlight some of our recent business achievements; then Bob Kramer will discuss our financial performance; and lastly I will finish with an overview of today's press release, in which we announced our intent to spin-off the Biosciences business into a separate standalone publicly traded company. Now, turning to our recent business achievements, I will start with a discussion of our Biodefense division and with an update on Building 55, our large scale BioThrax manufacturing facility. We have a meeting set up next month with the FDA to discuss the CMC section of our sBLA and finalize the path for filing. With all the progress that we have made to date, we continue to target regulatory approval of Building 55 in early 2016. Moving to our latest Ebola efforts, last month we were awarded a two-year $19.7 million contract from BARDA to develop and manufacture cGMP lots of three Ebola monoclonal antibodies in cell line at a 2,000 liter scale. The monoclonal antibodies will be developed and manufactured at our Bayview Campus in Baltimore, which is our CIADM site. The last item to discuss from our Biodefense division is Emergard, the auto-injector that we acquired and announced on Monday. Emergard is a ruggedized, military-grade auto-injector device, which is designed for intramuscular self-injection of antidotes and other emergency response medical treatments that can address exposure to certain chemical agents and other similar threats. We have received preliminary interest for Emergard from countries outside the U.S. and anticipate making our first deliveries in limited quantities in Q4 of this year. We acquired rights to the device through an exclusive worldwide license agreement with Pharma Consult of Austria, which has been selling the auto-injector in limited quantities to select allied nations. We are excited to have the Emergard auto-injector platform to our portfolio, which allows us to supply critical medical countermeasures in militaries and countries across the globe. Based on internal market research, we estimate the annual worldwide market for military-grade auto-injectors to be between $100 million and $200 million. We intend to build upon our broad capabilities in government contracting and distribution to drive revenue growth. Shifting over to our Biosciences division, last quarter we announced that IXINITY, our treatment for Hemophilia B in adults and teenagers, would be available to patients by the end of the quarter. We're very pleased that patients and healthcare providers are now using IXINITY to better manage this disease. So with this launch successfully underway, we look forward to growing IXINITY revenues during the remainder of 2015 and 2016. On May 19, we announced signing a long-term manufacturing agreement with Prometic Life Sciences. This deal leverages our manufacturing of plasma fractionation expertise at our Winnipeg facility and creates opportunities for future revenue growth. Under the terms of the agreement Prometic has minimum purchase obligations that increase over the 15-year life of the contract. The aggregate total of the minimum fees over the life of the contract is in excess of CAD100 million. This agreement is another example of our ability to create additional value to our acquisition strategy. In summary, we've had a very strong first half of the year, achieving three of our 2015 goals, including securing FDA approval of Anthrasil, initiating the Phase I trial of the ES414 and launching IXINITY. We remain on track to deliver our remaining 2015 goals, including finalizing the sBLA submission for Building 55, securing a post exposure prophylaxis indication for BioThrax, completing an additional strategic acquisition that aligns with our core competencies and supports our growth plan and announcing our next multi-year growth plan in late 2015. That concludes my business updates. And I'll now turn the call over to Bob Kramer for details on our financial performance. Bob?

Thanks, Dan, and good morning to everyone. I'd first like to make some comments about our financial results for the second quarter of 2015 compared to last year and our performance year-to-date. Then I'll comment on our balance sheet, focusing on our cash position. And finish up with details related to our 2015 full year forecast, including our thoughts on Q3 revenue guidance as well as the implications for revenues and net income in the second half of this year. Our financial performance in the second quarter and through midyear has been very strong. The second quarter total revenues were $126.1 million or $15.8 million above Q2 of last year, representing a 14% improvement. The increase in revenue is primarily due to an increase in contracts, grants and collaboration revenues related to our various product development initiatives for which we receive funding from third parties. We also experience increased BioThrax sales during the period, as we delivered a total of 14 lots to the CDC, reflecting our resumption of full manufacturing in Building 12. We continue to convert the substantial backlog of sub lots, which were produced during the investigation period earlier this year and moving them through to the process of FDA release and shipment. As a result, we remain confident that we'll be able to be fully caught up with our planned BioThrax deliveries by the end of Q3 of this year. Gross margin on a consolidated product and CMO revenue for the quarter was 70%, at the upper-end of our normal range of 60% to 70%. This again reflects the significant profit contribution of BioThrax revenues during the period. Gross research and development spend for the quarter was $40.9 million or $3.5 million higher than prior year. Taking into account the offsetting effect of our contracts, grants and collaboration revenue, our net R&D spend for the quarter was $5.7 million versus $14.5 million compared to last year. SG&A for the quarter was higher year-over-year by $6 million, due primarily to the launch cost associated with IXINITY and professional service costs to support our strategic growth initiatives. For the quarter, we earned $14.1 million in net income on a GAAP basis or $0.32 per diluted share versus $5 million or $0.13 per diluted share in the same period for 2014. On an adjusted basis, we earned $17 million or $0.36 per diluted share in Q2 of 2015 versus $9.4 million or $0.25 per diluted share in 2014. Similarly, EBITDA for the second quarter was $29.6 million or $0.62 per diluted share, and adjusted EBITDA for the period was $31 million or $0.65 per diluted share. Again, reflecting the significant contribution of BioThrax revenues during the quarter. Turning to the year-to-date performance. The six month financials reflect the continued fundamental strength of the Biodefense business, aided by the company's efforts to managed net R&D costs. For the six month period of 2015, our GAAP net loss was $7.4 million and includes $5.6 million of adjustments for acquisition-related costs and other non-recurring and non-cash expenses. After adjustments, the year-to-date adjusted net loss was $1.8 million or $0.05 per diluted share. EBITDA on a year-to-date basis was $9.6 million or $0.25 per diluted share and adjusted EBITDA for the period was $12.2 million or $0.32 per diluted share. In addition to the strengthening financial performance reflected in our income statement, our balance sheet continues to reflect a strong capital position, highlighted by our cash balance at the end of the quarter of $215 million. We also recorded $100 million of receivables at quarter end, which in part is a result of the timing of the BioThrax shipments late in Q2. In addition our inventory balance is larger than normal at the end of Q2 due to the backlog of BioThrax product, which serves to further underscore the shift for the second half of 2015 in terms of BioThrax revenues for the year. As a result of the financial performance through midyear, we put ourself in a good position to deliver increasingly strong financial results in Q3 and Q4. And accordingly we are reaffirming our forecast for total revenues of between $510 million and $540 million for the full year of 2015, including $270 million to $285 million of BioThrax sales. Further, net income, we're reaffirming that $50 million to $60 million on a GAAP basis for the year and $60 million to $70 million on adjusted basis. We're also forecasting Q3 total revenues of between $140 million and $155 million. That concludes my remarks, and I will now turn the call back over to Dan, who will take you through the spin-off that we announced earlier this morning.

Thanks Bob. I'll now walk you through the investors slide presentation that provides an overview of our Biosciences spin-off. Just a reminder on Page 2, the presentation does include forward-looking information and actual results may differ. Now, turning to Page 3. As we announced this morning, the Board of Directors has authorized management to pursue a tax-free spin-off of the company's Biosciences business into a separate, standalone publicly-traded company. For purposes of this presentation, we'll refer to that company as SpinCo. Upon separation, it's expected to create two independent public companies with distinct strategic plans, growth strategies, and operation on development priorities. Emergent will remain a global specialty biopharmaceutical company focused on providing specialty products for civilian and military populations that address intentional and naturally emerging public health threats. SpinCo will focus on advancing a portfolio of immuno-oncology therapeutics based on its proprietary ADAPTIR platform technology. It will receive a fixed cash contribution from Emergent, and also rely upon ongoing revenues from its existing commercial products sales, as well as partnership funding. And finally, it will be managed by a dedicated and separate management team as well as a separate Board of Directors. The spin-off is anticipated to be completed middle of 2016. Turning to Page 4. The spin-off has compelling rationale for both the companies as well as its shareholders. It enables each company to tailor its business strategies to best address the opportunities within its target market and enhances the business focus for both and better aligns resources to achieve their strategic priorities. It allows each company to pursue distinct capital structures as well as capital allocation strategies, as well as enabling each company to target an investor base attracted to its business profile. Turning now to the benefits to Emergent on Page 5. This spin-off will establish Emergent as a pure play company recognized as a leader in the Biodefense and Emerging Infectious Diseases fields. Spin-off also enhances its financial returns and operating margins through reductions in burdens on cash flow associated with oncology R&D and it eliminates sales, marketing and G&A costs associated with biosciences business. And all this allows for greater flexibility and capital allocation, including acquisitions that are synergistic with the core business and consideration of stock buybacks and dividends. Turning to the company profile on Page 6. The business direction and focus remains the same. We will be focused on CBRNE, Chemical, Biological, Radiological, Nuclear, Explosive, as well as Emerging Infectious Disease markets. We see this is a well-established and growing market opportunity. We'll have six products focused in that area as well as a robust pipeline of clinical and preclinical candidates including vaccines, therapeutics and devices. All of the manufacturing capabilities within the company today will remain with Emergent, including the cGMP manufacturing and the fill/finish and CMO services at the sites located at the bottom of your screen there. We will also retain our commercial operations capability with domestic and international distribution and sales. We'll be focused on three platform technologies, including our MVAtor technology, which was used for the manufacturing of our Ebola vaccine that is currently in clinical testing; our Hyperimmune platform, which is the background for our BAT, VIG and Anthrasil products; and Emergard, which is the ruggedized, military-grade, auto-injector device platform that we announced earlier this week. The leadership for Emergent will remain the same. Robert Kramer, will remain as CFO and I will continue as CEO and Adam Havey will continue as President of the Biodefense Division. Looking now at the financial profile on Page 7, the spin-off is designed and will result in an enhanced financial performance for Emergent. We anticipate continued revenue growth, both organically and through M&A across all of our revenue streams; product sales, contracts, grants, and collaborations as well as CMO revenue. One change to highlight is that the CMO revenue will increase as a result of the manufacturing of products for SpinCo. Those are the commercial products that SpinCo will have after the spin. The spin-off will also enhance our cost structure and enhance EBITDA performance by the elimination of oncology R&D, the elimination of selling and marketing expenses for commercial products as well as the elimination of G&A costs within the biosciences business. The reduced cost structure increases EBITDA $40 million to $50 million and that's based on pro forma estimates looking at 2014 results. This picture significantly enhances the balance sheet and allows us to pursue optimal capital deployment opportunities, including targeted R&D investments that are aligned with our recognized core focus and capabilities; acquisitions that are synergistic with the core business; and consideration of stock buybacks and dividends. Turning to the benefits of SpinCo or to SpinCo on Page 8, it establishes SpinCo as a pure play biopharmaceutical company in the highly attractive field of immuno-oncology. It enables SpinCo to target its investments and operations through the development of bi-specific therapeutics using the proprietary ADAPTIR platform technology that enables increase awareness of the RTCC mechanism of action, which we believe is a very promising approach within the immune-oncology field. And finally, it provides greater visibility into its innovative platform technology and its product candidates to attract potential collaborators and partners. Looking at the company profile on Page 9, SpinCo is well-positioned as a biopharmaceutical company, focused on novel oncology and hematology therapeutics to meaningfully improve patient lives. On spin, it will have four commercial products along with the portfolio of clinical and preclinical candidates and significantly the ADAPTIR bi-specific oncology immuno-therapeutic platform technology. It will have research and development capabilities through the product development operations in Seattle, as well as commercial capabilities through the commercial operations that take place centered in Berwyn, Pennsylvania. The organization would be led by Marvin White, as the President and CEO. He is currently a Director with Emergent, and has been so since 2010. He has former leadership positions in the healthcare arena, including CFO at St. Vincent's Health; Executive Director and CFO at Lilly U.S.A.; and positions in Corporate Finance at Eli Lilly. The remaining members of the management team and the Board of Directors will be identified and announced at a later date. And the headquarters for this SpinCo operation will be located in Seattle, Washington. Turning to Page 10, with a discussion on the technology that is really core to the SpinCo company and that's the ADAPTIR platform. It's a promising, novel approach for the generation of immuno-therapeutics and it's suitable for producing multiple immuno-therapeutics targeting oncology or autoimmune or inflammatory diseases using different modes of action, including redirected T-cell cytotoxicity or targeted cytokine delivery. It has a successful history of product candidate generation, target validation and clinical development. And in preclinical studies, the bi-specific platform demonstrated superior properties in terms of high potency, long half-life, minimal side effects and antibody-like manufacturing. Looking at the financial profile on Page 11, the entity will be capitalized to create value with a fixed contribution from Emergent of between $50 million to $70 million. Ongoing R&D investments will be partially offset by the growing revenue contribution from IXINITY, as well as stable contribution from revenues of the mature products, WinRho, HepaGam and VARIZIG and continued funding from its existing ES414 partnership with MorphoSys. The company is also well-positioned for future funding to support development programs through new collaborations around the ADAPTIR platform, as well as independent access to the capital markets. Turning now to the transaction details on Page 12. As I mentioned earlier, the transaction is to be structured as a tax free distribution to Emergent shareholders of common stock of SpinCo. The stock distribution ratio has not yet been determined. And what is, it will be announced. The timing, it is anticipated that this will be completed in mid-2016, and subject to the closing conditions I'll discuss in just a moment. The corporate name for SpinCo has not yet been determined, and once determined, it will be announced at a later date. Emergent BioSolutions will retain its name. Emergent expects to incur transaction-related expenses of between $2 million to $4 million during 2015, and those costs have been incorporated and included in our reaffirmed 2015 financial guidance. We expect additional costs to be incurred in 2016 leading up to the spin-off. The closing conditions include: receipt of a favorable opinion from outside tax counsel; receipt of a favorable private letter ruling from the Internal Revenue Service; execution of a number of inter-company agreements between Emergent and SpinCo; the effectiveness of the Form 10 registration statement, which must be filed with the Securities and Exchange Commission; and final approval of the transaction by Emergent's Board of Directors. So in summary on Page 13, the spin-off is expected to create two independent public companies with distinct strategic plans, growth strategies, and operational and development priorities. It enables Emergent to establish itself as a pure play company in the Biodefense and Emerging Infectious Diseases fields. It enables SpinCo to establish itself as a pure play company in the highly attractive immuno-oncology field and enables each company to target an investor base interested in its business profile. That concludes my remarks. And I'll turn it to the operator to open the Q&A.

[Operator Instructions] Our first question comes from the line of Eric Schmidt with Cowen and Company.

Maybe for Bob, it doesn't look like that Bioscience is positioned at a particularly good quarter. Was there anything amiss amongst those more mature products that you're now hoping to spin-out? And can you give us a sense of maybe what a normalized annual sales rate would be for the products that are going with the SpinCo?

So I don't think there was anything of particular note in Q2 for the Biosciences division or the revenue generating products. As we have talked about before, those commercial products are fairly mature. So we don't expect a lot of growth from those revenue generating products overtime. In terms of the annualized run rate for those products, which will go into SpinCo, I think if you go back to prior calls that we had, including the initial call on the Cangene acquisition, we refer to the fact that in the prior year with the Cangene acquisition that company had total revenues of $127 million for the last fiscal year. And we talked about how the equal parts between Biodefense, what is now the Biosciences commercial revenue and the CMO business, it was roughly a-third, a-third, a-third in that $127 million. And not much has really changed in that mix over the last year-and-a-half, and we don't except much going forward, except for the fact that now that we've launched IXINITY, we expect that revenue to contribute favorably going forward.

Any sense of what the gross margin is these days on those, I don't know, $40 million to $45 million or so in Bioscience sales?

Again, I think as we talked about on a consolidated basis for the former Cangene business, their gross margin was in the 30% to 40% range. We've never really broken out the gross margin components for those three areas. So for modeling purposes, I think that's the best you can do for now.

And then maybe shifting back to the Emergent BioSolutions side, obviously you're on track to get Building 55 approved. And just kind of wondering if you can give us an update on your discussions either with the U.S. government or other purchasers of the incremental capacity or when you might be in position to say a little bit more about the potential demand here?

So we have had initial meeting with the CDC, and we anticipate that probably in the fourth quarter further discussions will continue. And I think they'll heat up, as we get into the first and second quarters next year. So perhaps a traditional route with respect to contract negotiations with CDC, beginning usually a year ahead of expiration, and then accelerating as we approach the end of the contract.

Our next question comes from the line of Jessica Fye with JPMorgan.

I guess, maybe first a bigger picture question on kind of Biosciences business. Why now? And then a follow-up to that, I know you mentioned potentially a dividend would be additional cash flow post-spin. Can you talk in little bit more detail about how you weigh a dividend relative to continued business development?

In terms of the, why now, there has been quite a bit that's changed between then and today, I would say. First, I think there have been significant business developments in the marketplace. And what I mean by that, Biodefense has now really established itself as a growing market opportunity, with a focus not only on the traditional Biodefense arenas of anthrax and smallpox and botulinum, but really in the emerging infectious disease arena, and you've seen that with Pan Flu and Ebola and other emerging infectious disease threat. So we see the market is maturing and expanding and very attractive. And we think the investment community is recognizing that. On the business side, we significantly expanded our portfolio on the Biodefense arena to address that expanding market. So our portfolio has expanded with depth and breadth of the organization, internally is now well-positioned to take advantage of that growing market. And similarly on the Biosciences side, there is more than an increased focus now on the potential for immuno-oncology, which is really the most exciting field in immuno-oncology research. And the ADAPTIR platform has now demonstrated itself, as very well-positioned, to participate in that growing field. We now have a candidate in the clinic in partnership with MorphoSys, utilizing the RTCC mechanism of action, which we believe is very promising. And in order to realize value, associated with those operations and really create shareholder value as well as unlock the potential for each of those companies, this is an opportune time to announce and implement that spin-off. The second question with respect to the potential for dividends, really what we're looking at is proper allocation of the capital that we will generate in the business. We see growing revenues, as we continue to expand in this market. We see an improved cost structure and we see generation of increased cash flow that can be used to support R&D as well as M&A. But we anticipate the potential for additional cash to be available to be deployed for either buybacks or dividends. The Board is actively evaluating that. And we have not made a final decision as to timing or amount, but we think it's reasonable to put it out there that that's on the table for evaluation and consideration.

Our next question comes from the line of Jim Molloy with Laidlaw.

I guess, my questions might be instead of why now, why not right now, why mid-2016? And what's sort of the reasons for that being the best time versus this current quarter or even last year. Can you talk a little bit about was there any interest from strategic acquirers instead of a spin-out?

Now is the time, the process however requires a great deal of work. Documents needs to be prepared and filed with the Securities and Exchange Commission. There is a review process. We need to restructure the organization here internally. Assets need to be transferred in position. So there is some groundwork that needs to be undertaken before we can actually effective spin-out. At 12 month time horizon, it's really not unusual or unreasonable, and that's just how long it takes. And so the second part of your question in terms of strategic sale, so as we look at this we think the best opportunity for creating value for the companies and shareholders is through the spin. It unlocks the value associated with the ADAPTIR platform and it's potential. In a sale transaction, of course, those proceeds don't go directly to the shareholders. There are shareholders are receiving the common stock and are able to make their investment decision with respect to that enterprise. And of course, any sale transaction is subject to tax at the corporate level, so for a number of reasons we think that this is the optimal structure.

Then can you talk a little bit, about how much will EBS own, if any, of SpinCo? And why you guys see them $50 million to $70 million, a pretty good chunk of change?

The answer to the first quarter is Emergent will not retain any ownership interest in SpinCo. 100% of SpinCo will be distributed to our common stockholders. With respect to the $50 million to $70 million level, it's a really good question. I'm going to ask Bob Kramer to tackle that one for you.

I think, Jim, when we looked at a number of factors including some very preliminary SpinCo financial projections and what they will likely do with the business, we also looked at Emergent's ongoing sources and uses of cash for the next several years. We clearly had some discussions with our advisory partner JPMorgan on the level of funding that's customary for these types of transactions and clearly centered on our belief that $50 million to $70 million cash contribution was an adequate number. It's not an overly conservative number. It's not an overly aggressive number. And it allows the appropriate level of funding to support SpinCo's path to near-term value creation. So it was a bit of an art, but we feel very comfortable that's appropriate level.

How does this impact your announced intentions of acquiring another asset? You've been clear, you were expecting, hoping to do it near-term. Does this make that more likely or less likely? Does this increase or decrease the size of the transaction that you can now target given this will be moving off the books?

It really has no impact at all on our planned strategy of growth to acquisitions or our goal for the year of completing at least one acquisition. That is consistent with the growth strategy that we've laid out, so no impact.

The Ebola contract, good to see that that come through, and I guess there has been some talking about that and waiting on for a bit. We all have been. Is somewhat on the smaller side, is there any thinking that there maybe larger contract at some point or is this the type of contract that we should have been expecting and that's kind of it?

I'll ask Adam Havey, the President of Biodefense division to answer that one.

Essentially, as you know, and as we've all been kind of looking for and waiting for these passcode requests and contracts to come out, I think this is what the government initial strategy is going to be. I think if you look at the Zmax technology as well as these monoclonal that we're going to be working on, I think they're still in the early stages. And as we work on process development work in bringing those to the clinic, I think larger contracts may come in the future. But I think in the short term given the current status of the vaccine landscape on the Ebola side as well as where these monoclonal are, I think this is what we expect for right now.

Our next question comes from the line of Shubin Jha with Southpaw.

I just wanted to ask, adjusting at the debt and the convert stays with the Emergent, with the spin is there any change in the strike price or how does the adjustment take place there?

So the convert, first of all, stays with Emergent. None of that will be allocated or transitioned over to SpinCo. There will be adjustments to the conversion rate and the conversion price. The calculation is spelled out in the bond document itself. It's really based on the post-spin value for SpinCo and its relation to the post-spin value of Emergent going forward. So that map again is spelled out in the documents, but there will be an adjustment to the conversion rate and conversion price.

We have a follow-up question from the line of Eric Schmidt with Cowen and Company.

Just maybe another one for Bob on the SpinCo numbers financials. You've got $40 million to $50 million in EBITDA savings on a 2014 pro forma basis. I know the company has already had some good success in bringing down the net R&D, over of course the last few quarters there. Is there much of savings on a 2015 basis? And maybe you could just help us understand, where those savings are coming from? What kind of SG&A reduction you would have after the SpinCo?

So as Dan went through as part of the deck, there are a number of categories of cost that we expect to be reduced for Emergent post-spin, and those are identified as the R&D cost that are associated with the Seattle site; the sales and marketing expenses associated with the Berwyn, Pennsylvania site; the R&D expenses in Winnipeg. And then obviously, we're going to lose, Emergent will lose the gross margin impact of the commercial sales products post-spin. So when we look at all four of those elements plus other factors and try to give some reasonable range of EBITDA impact based on 2014, we got to the $40 million to $50 million range. Obviously, as our planning matures for execution of the spin and other factors are considered, those numbers will move around a little bit, but that's our best estimate today of what the potential benefit to EBITDA will be generated to Emergent going forward. Obviously, when we get deeper and more mature and thinking around 2016 and going forward, those estimates will be adjusted and will be incorporated into any future guidance we give, but right now that's our best estimate.

But Bob, you've already taken a fair bit of those cost sell on the R&D side, haven't you?

We have to some degree. But remember, Eric, that a lot of the reduction in net R&D over the last six to nine months has been a result of some of the upfront payments that we've received from the partnerships. So the spend will continue. We expect to continue to trend down on a gross basis, but that $40 million to $50 million number does not include the roughly $16 million in revenue that we booked as part of that MorphoSys agreement last year.

And then, one last question on the tax rate side. Does it impact your Emergent BioSolutions' tax rate going forward? And maybe you could provide just your longer-term thinking on where that tax rate is going to lie out?

So short-term, they won't have much of an impact, Eric, on the overall effective tax rate. Longer-term, again as we look to other M&A transactions, we are always looking for a more tax efficient way to bring new assets into the company. So we expect longer-term that that effective tax rate will trend down from the 30%, but that's going to be M&A dependent. Short-term with this transaction there won't be much of an impact on the tax rate.

I'm showing no further questions on the phone lines at this time. I'd like to turn the call back to Robert Burrows for closing remarks. End of Q&A

Thank you, Liz. And 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 to all of you in the future. Good bye.