Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Emergent BioSolutions Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to the Company. Please go ahead.

Thank you, Chanel. Good afternoon, everyone. My name is Bob Burrows, Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss our financial and operational results for the first quarter of 2016 as well as our 2016 forecast. 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 and other members of senior management will be available to participate. Before we begin, I will remind everyone that during today's call, either on our prepared comments or the Q&A session, management may make projections and other forward-looking statements related to our business, future events, our prospects 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 the actual results to differ. During our prepared comments as well as during the Q&A session, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Emergent's operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income, EBITDA and adjusted EBITDA, and the reconciliations between our GAAP financial measures and these non-GAAP financial measures. For the benefit of those who may be listening to the replay of the Webcast, this call was held and recorded on May 5, 2016. 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 Web-site. And with that introduction, I would now like to turn the call over to Dan Abdun-Nabi, Emergent BioSolutions' President and CEO. Dan?

Okay. Thank you, Bob. Good afternoon, everyone, and thank you for joining us. During the call today, I will provide a brief summary of our first quarter financial results, give an update on our recent business achievements, and then discuss the upcoming transition to a follow-on BioThrax procurement contract with the CDC. Following my prepared comments, Bob Kramer will review our financial performance in greater detail. So let me start with a summary of our financial performance during the first quarter. Total revenues were $111 million, right in the middle of the guidance that we provided. GAAP net income was $4 million and adjusted net income was $7.5 million. And finally, our EBITDA was $17.3 million on a GAAP basis or $19.6 million when adjusted. As announced in our press release today, due to the lack of clarity on the specific number of BioThrax doses to be delivered to the CDC in the second and third quarters, we concluded that it was prudent to temporarily postpone our financial guidance for 2016. Before I discuss this in greater detail, I would like to highlight progress on our planned spin-off of Aptevo Therapeutics. This spin-off is intended to unlock the full value of each business for our stockholders and establish each as a pure-play company, Emergent in the public health threats and emerging infectious disease field and Aptevo in the immuno-oncology field. Last month, we announced the filing of the Form 10 Registration Statement for Aptevo with the SEC, which is a major milestone in the spin-off process. The spin-off remains subject to the approval of Emergent's Board of Directors and the satisfaction of certain other customary conditions, including the SEC declaring the Form 10 effective. Our target for completion of the spin-off remains mid-2016. Now let me turn to Building 55…

Thank you, Dan, and good afternoon to everyone and thank you for joining the call. As you heard from Dan, we've had a very productive start to the year with submission of the sBLA for Building 55, the initial filing of the Form 10 in support of the spin of Aptevo Therapeutics, and then the more recent confirmation by CDC of their intent to issue a follow-on procurement contract ensuring an uninterrupted supply of BioThrax in the SNS at the conclusion of our existing contract, all our top priorities we identified for completion in 2016. We were pleased to have progressed all three so early in the year. I'm going to keep my comments on our quarterly financial performance brief as our press release and 10-Q, which will be filed by the end of the week, provide the details of the financial metrics for the quarter compared to last year. I will focus my comments instead on trends in the business. First, operations continued to perform extremely well, as evidenced by our revenue growth and our margin performance. Our gross margin for the quarter was 64%, comfortably in the middle of our expected range. Secondly, our net R&D cost continued to be managed carefully, and as a result, continued the favorable trend started two years ago following our decision to look for non-dilutive funding and collaboration opportunities for some of our development assets. For the quarter, net R&D expenses were $2.4 million, down from Q4 of last year of $7.6 million. Next, SG&A expense continued to be impacted by costs associated with executing the spin of Aptevo Therapeutics as well as the execution of our strategic plan, specifically diligence cost to support M&A. Following the completion of the spin, SG&A costs are projected to be significantly reduced. Also, our EBITDA continues to improve and trends favorably on a trailing 12-month basis, with an additional $17 million contributed in the first quarter of this year. Lastly, our balance sheet remains very strong. With a cash balance at quarter-end of approximately $340 million, we continue to maintain a very sound capital base from which to execute on our business plan and pursue the achievement of the 2020 financial and operational goals. Before concluding my comments, let me reiterate our thinking around the decision to temporarily postpone guidance. Based upon the recent communications with CDC, we think it's prudent to wait to collect more information about CDC's plans before commenting on our financial projections for 2016. We expect to continue the dialog with CDC in the near term, and as we have committed to do in the past, we expect to be able to provide information to you within the next 60 days as we better understand CDC's procurement plans for BioThrax. That concludes my prepared remarks and I'll now turn the call back over to the operator to begin the question-and-answer session. Operator?

[Operator Instructions] Our first question comes from the line of Jessica Fye of J.P. Morgan. Your line is now open. Please go ahead.

First one is on the other Biodefense line, it came in a little light versus our number, but I remember when you guided, you guided well above where we had been. It's a tough one for us to get visibility or kind of insight into, but love to get a sense of how to think about the progression of that line over the next couple of quarters.

So I assume you're looking at the revenue line on other Biodefense products, and as you know, that includes other portfolio products in the procurement area other than BioThrax. We have not given guidance on a by-product basis in the past and don't intend to going forward. I think as we progress the marketing plans for those products, we will be reporting in the Q some visibility of those numbers, so it will help your forecasting and model building. But for right now, we have not provided any guidance in that area.

Okay, got it. Can you maybe just help me understand a little bit about the, maybe not looking forward [indiscernible] guidance, but just the strength in the BioThrax number this quarter, was this your strongest 1Q BioThrax number ever and kind of what's behind that?

I don't recall if it's the strongest first quarter for BioThrax, but it's certainly one of the strongest. And again, I think just as a continuance of the strong operational performance of the Biodefense division, in particular the Lansing manufacturing operations, we had a bit of momentum building in the latter half of last year as we fully recovered from the first quarter of 2015 in having no BioThrax shipment. So that momentum had started to build in 2Q and 3Q of last year. It clearly has followed on in Q4, which is really when the material for Q1 of this year was manufactured. So, it's a follow-on.

Okay, got it. And last question, just on the kind of negotiation over the next contract, obviously good news that the CDC wants another one, but as you negotiate that prior to the approval of Building 55, which I recognize should kick in prior to the actual beginning of the contract, I guess how do you deal with that, do you kind of like parallel track it and have like if/then in there or how does that work?

Great question, because we have a confluence of a number of factors, right, we've got the migration to Building 55, the completion of the current contract, the new contract coming in, and I think the intersection may actually be closer than you might expect in terms of the confluence of all those things coming together. So, they are going to be parallel tracked. As you know, different agencies have different responsibilities for different aspects of it. We know full well that those agencies communicate with each other and they try to assess the timelines for each component. So we'll be having separate conversations with the various agencies involved, but I think there is going to be a pretty tight confluence of the events as we move into the fall this year.

Our next question comes from the line of Marc Frahm of Cowen and Company. Your line is now open. Please go ahead.

Congratulations on having a profitable first quarter. So when we think about the contract that's remaining, can you confirm how many doses are actually remaining on that contract? And then, there is kind of disconnect here between CDC seemingly telling you they're going to take less than that contract in the next two quarters, but then have a much larger dosage contract coming right after that, right, and maybe if you can give a little bit more clarity on the machinations of government and how that makes sense on their part?

Great question. So I think you will see in the Q that we had about 5.5 million doses remaining on the contract. And as I indicated, they will be buying additional quantities Q2, Q3 and we'll get some more clarity around that. And I really don't see any inconsistency between they are saying that there may be reductions in Q2 and Q3 and the need for a significant follow-on contract that goes for multiple years. They have repeatedly advised policymakers as well as appropriators, publicly and privately, that they intend to purchase all of the doses of the anthrax vaccine that are being produced in order to address the stated requirement. And so, this is truly a transition [indiscernible] exercise and a timing exercise. So I don't see this as inconsistent. I think it's part of a migration that needs to be done in I'll call it ordinary course. In some respects, to explain the machinations of the government agencies and how they work is probably beyond the length of the call that we have available to us, but suffice it to say that we as a team have extensive experience in understanding how they think and what might be the best way to address the concerns that they might have. So I remain confident at the end of the day we're going to come out with a satisfactory conclusion for both Emergent and for our customer.

Okay. And then with the PAI, you mentioned that's part of that timeline [indiscernible], has that actually been scheduled yet, and either way, do you plan on informing us when that has occurred?

So, good follow-up question. No plan, no formal planning on that. We know it will occur sometime between now and the end of the approval process, and we anticipate a four-month review cycle which would be normal for this kind of application. So in terms of putting out an announcement on every development associated with the advancement of our sBLA, I'm not sure I will commit to that right now. Let me caucus and develop a better thought around that, and we will let you know. But certain key developments that are significant, investors should be aware of, we'll certainly get back to you on that.

Okay. And then final question, just your guidance previously had implied about $300 million in non-BioThrax revenue. Has anything changed kind of in the business there and changing what your assumptions were, or is that kind of being removed just because it's all baked in together?

Marc, this is Bob. Our thoughts around the non-BioThrax revenue for 2016 remain unchanged. As you will recall, in our original guidance in total revenue between $600 million and $630 million, $305 million to $320 million was BioThrax related and the other is what you're talking about, and we see no fundamental changes in that revenue.

Our next question comes from the line of Jim Molloy of Laidlaw. Your line is now open. Please go ahead.

It was a remarkable first quarter. Typically one of your weaker quarters historically, I think this may well be the highest first quarter that we have seen. Was that due to the fact that you had an idea that the second and third quarter, the government could have said, we might be weak, so you sort of [indiscernible] stuff through, but got a bigger bolus of product through in the first quarter?

No, I think, Jim, that's strictly the result of their continued successful operations of the BioThrax manufacturing in Lansing and we continued to have favorable success rate performance by that group in the latter part of last year and is carrying through this year. So, as you know, we manufacture and ship according to the delivery schedule and it's simply a result of that.

None would deny Adam Havey works miracles with the creaky old Building 12. I imagine you wouldn't want to sort of slow that team down. Would you stockpile the excess, would you sell it to ex-U.S., any discussions about ex-U.S. sales?

That's a great question. No intention at all to slow down manufacturing. The team has been doing an incredible job and the output has been quite promising. So, what I would say there is, I'll revert back to my comment about the CDC's desire to meet the nation's requirements for the stockpile. So we do not anticipate any slowdown on the manufacturing. And also with the B-55 process being accelerated, we're now looking at plans to implement that manufacturing earlier than previously expected.

All right, thank you. I don't imagine if there's any, or would you even want to, are there any provisions in the contract that the U.S. government doesn't take full delivery that you guys can sort of get paid the rest anyway?

No, the contract doesn't work that way. Again, I'm not perceiving that as a reasonable risk or something that we need a contingency plan around. The history with the CDC has been such as I described it. So I totally expect we're going to come out on this with a clear understanding of an appropriate path forward, and I'm quite excited about 2016 given where we're positioned right now.

Maybe a couple of last questions. I know that it was April 18, I believe, you made the announcement that the rolling submission had been finalized. So is it August 18 that we should expect the answer? I know that the government works in mysterious ways sometimes, but on or about there, is that the thinking?

That's right, that would be about the four-month timeline that we would expect, and we'll certainly update you as we get further clarity from the agencies around timelines.

Okay, great. And last question, with the Aptevo spin-off verging completion, does that put a hold on M&A activities until you sort of get this other thing taken care of?

That's a great question, Jim, and the answer is, absolutely not. We have been very, very active. And again, I'm excited about the opportunities that we are looking at. I think they are falling squarely within our core competence. And of course, M&A was always difficult to execute. It takes more time than any of us might want. But you know us, we are very prudent, we are very methodical, we have clear criteria that we meet. It's got to be a value-add to shareholders. When we announce it, we want you to be able to understand clearly why it works and the rationale behind it. There should be no head scratching associated with it. So that continues to move forward and I'm actually very pleased with where we stand right now in terms of potential M&A opportunities.

Great. Good to hear. Thank you for taking the questions.

Our next question comes from the line of David Maris of Wells Fargo. Your line is now open. Please go ahead.

My questions have been answered. Thank you.

Our next question comes from the line of Keay Nakae of Chardan. Your line is now open. Please go ahead.

Just trying to gain a little insight into the way the government thinks about the transition of the contract. Assuming that the product from the old facility and the new facility are equivalent, other than perhaps your cost, why would they not be indifferent to where it came from, or are they, can you help us understand that a little bit?

Why would they not be indifferent to – could you say that word again?

To where the product came from, if they are seeking simply to fulfill the stockpile requirement.

So the real difference there is the volumes that are being produced and therefore the potential cost associated with it to the government, and we've always informed our investors that with higher volumes expected for annual deliveries, that the government would likely request and we would likely grant a price concession. So, smaller volumes are higher cost as their COGS are higher. So in some respects, it very much could be a cost consideration for the government.

Okay, thanks. That's helpful. And then just with respect to the two letters that you received, while I know you're still negotiating the terms, are any of the other characteristics of the contract known to you, such as duration or anything else?

We're not going to comment on any of the terms until the final contract is completed. They all tie in together. As you can appreciate, it's one big, beautiful package. So when we are ready to announce the contract, I look forward to laying out all the terms so you can fully understand where we are.

Our next question comes from the line of Robert Maltbie of Singular Research. Your line is now open. Please go ahead.

I'm substituting for Lisa Springer, so a little bit late to the call. I apologize if there is a redundancy here. As it relates to the targeted dosage needs of the government, I think the guidance there was about 75 million. First question is, has there been any change in that number?

It's not a repeat question, but no, we have not heard any adjustment to the government stated requirement.

Relating to I guess the playing field level of competition for Biodefense, and maybe specific to alternatives to the BioThrax product, how would you characterize that current level of competition for BioThrax versus BioThrax, then other competing products in Biodefense at this time?

That's a great question and I welcome that question in that the next anthrax – I assume you're talking about anthrax vaccine, specifically BioThrax – the next competitive, the closest competitive product is NuThrax, which is our product. It is BioThrax which is combined with an adjuvant. We are in advanced stages of development. And it is intended to be a two-dose regimen whereby you get increased speed to protection, so fewer doses, more rapid protection. And from that standpoint, it's addressing quite a number of the improvements that the U.S. government is looking for in terms of protecting civilians that might be exposed in a post-exposure setting. The government recently issued an RFI to identify sources that might be able to provide an advanced candidate such as NuThrax, and as we read the requirements for that RFI, we believe NuThrax is the only viable candidate to respond to what is likely then a follow-on RFP. So as we think about the next, if you want to call it, the next generation or the closest competitor to BioThrax, we see NuThrax in that space and we think the government also sees NuThrax holding that space.

Thank you. I wanted to just query a little bit about I guess the opportunity set for acquisitions in terms of valuations and scale. As per the fit with your strategic plans, how would you characterize the current availability and pricing of attractive or possibly attractive targets for you all?

So availability, as I mentioned earlier, I'm quite pleased with the number of potential targets in the CBRN, explosive, and emerging infectious disease space, which is now our core focus area, and leveraging the other core competencies that we have such as doing business with the government, biologics manufacturing, et cetera. So, I'm not at all concerned about the availability of opportunities and the potential for expanding beyond just chemical and biological, as well as going deeper into both of those spaces. So, that's an area of optimism for me and I do foresee new opportunities and transactions that could be executed upon. In terms of valuations, valuation is always a difficult question to answer. We are looking at opportunities that span value propositions from I'll say modest to something that could be more significant, and when I say more significant, when you look at our recent Cangene acquisition, that's something that would be in the significant category. So, it's looking at opportunities across a whole portfolio of product types and target areas as well as value propositions, is something that we have underway as we speak.

Terrific. And final question, relating back to the situation with your guidance and CDC, I came in a little late, so I apologize if this has been asked, you had previously issued some guidance in this regard, and did you say that guidance, that previous guidance is suspended or are you implying that the forward, the updated guidance would not be provided at this time and that guidance is still intact, the previous guidance?

Robert, this is Bob Kramer. So what we are saying is that we are suspending guidance going forward, and the guidance that we have given in the past is no longer appropriate and that we commit, as Dan and I have both commented, that within the next 60 days we anticipate being able to have sufficient conversations with CDC to allow us with more clarity to come back and update investors on guidance.

Thank you very much. That's all I have. Thank you, gentlemen.

Our next question comes from the line of Gregory Macosko of Montrose Advisors. Your line is now open. Please go ahead.

I'd like to just ask a few questions that don't relate directly to the new contract and the government situation. With regard to the sales overall, did you have any international sales in the quarter or have you had international sales in the last four quarters?

It's been very small, ex-U.S. government sales, so modest by any means.

And can you give any color as to your expectations around that and what the outlook is?

So as we have commented in the past, because of the capacity constraint and our contract with delivery requirements with the U.S. government, we really haven't been in the fortunate circumstance of having sufficient quantities to sell outside the U.S. Building 55, when we bring it online, will help a bit, but those international markets are still developing and it's a little too early to reliably predict what that international revenue might look like.

Okay, good, thank you. And then with regard to the revenue line, I just was looking at the contract manufacturing. Could you describe that and the change on a quarter-over-quarter, year-over-year basis, what that related to?

So in the first quarter of last year, there were some contract services related to our work on an Ebola vaccine that we did in our manufacturing facility in Baltimore that was a one-time almost $4 million opportunity. So the net difference between the two quarters is strictly attributable to that one-time event in Q1 of last year.

Okay. And so, then the contract manufacturing is shall we say a more stable business on a quarter-to-quarter basis?

It is.

All right. Thank you very much.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Bob Burrows for closing remarks.

Thank you, Chanel. 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's Web-site. Thank you again and we look forward to speaking to all of you in the future. Goodbye.

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