Emergent BioSolutions Inc. (EBS) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2017 Emergent BioSolutions 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 that time. [Operator Instructions] I would now like to turn the call over to the company. Please go ahead.

Thank you, Anna. 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 third quarter and first nine 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, the Executive Vice President and Chief Financial Officer. A Q&A session will follow at the conclusion of our prepared comments, and other members of senior management will be available to participate, if need 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 for 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 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 November 2, 2017. Since then, Emergent may have made announcements related to topics discussed during today's call. Emergent BioSolutions assumes no obligation to update information in today's press release or as presented on this call, except as may be required by applicable laws or regulations. You're once again encouraged to refer to our most recent press releases and SEC filings, all of which may be found on the Investors home page of our website. With the 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 us. As you can see from today's announcement, we had a very strong performance in the third quarter as well as year-to-date across all aspects of the business – operational, financial and business development. We look to continue that strong performance through to the end of 2017 and into 2018. Looking at the latest quarter, the performance of the core business was strong across the key metrics of total revenue, net income and EBITDA. Operationally, we completed two acquisitions on schedule, we secured several contracts that support the development of a number of our products, addressing serious public health threats and we successfully enhanced our financial position through a new $200 million credit facility that has the flexibility to increase to $300 million with a better cost of capital, less stringing covenants and a stronger bank syndicate. Overall, 2017 is shaping up to be a foundation strengthening year for the company as we diversify our business, execute on our growth strategy and drive towards achieving our 2020 goals. With that overview, I will now summarize the key developments for each of our four business units. As a reminder, these four units are Vaccines and Anti-infectives, Antibody Therapeutics, Devices and Contract Manufacturing. Each unit has its own technologies, market opportunities and growth potential that uniquely contributed to the growth of our overall business and drive us towards our 2020 goals. I'll begin with an overview of the Vaccines and anti-infectives business unit led by Adam Havey. Early this year, we received German regulatory approval to market BioThrax produced in Building 55. This positions us to pursue licensure in additional countries within the European Union, based on the mutual recognition procedure. Our current plan is to file for regulatory approval in five European countries as well as in Canada in 2017, with approvals targeted in 2018. In March, we signed a contract with BARDA to deliver $100 million of BioThrax to the Strategic National Stockpile. Although, the product delivery schedule extended for up to 24 months, we have now completed deliveries under that contract. As a reminder, the BARDA contract is separate from, and in addition to, our existing $911 million 5-year procurement contract with the CDC. In July, we signed an agreement with Valneva for exclusive global rights to their Zika vaccine technology. We have made significant progress in the development of that vaccine candidate and are targeting a Phase I clinical trial to commence in early 2018. And most recently, in October, we acquired Sanofi's ACAM2000 smallpox business, which included ACAM2000, the only FDA-licensed smallpox vaccine, along with an existing CDC procurement contract with a remaining value of approximately $160 million, live viral manufacturing facilities and approximately 100 employees. An sBLA was filed by Sanofi with the FDA for licensure of the bulk manufacturing facility in Massachusetts, and we continue to target first delivery of ACAM2000 to the CDC next year, following regulatory approval of the facility. Throughout the year, we have continued to advance our NuThrax program under our BARDA development and procurement contract, valued at up to $1.5 billion. We are on track to file for Emergency Use Authorization designation in 2018, which will then allow procurement and delivery to the SNS under our contract. We are also still on track to initiate a Phase III study in 2018 for NuThrax. Next, let me highlight several accomplishments by our Antibody Therapeutics business unit, led by Laura Saward. In March, we signed a contract modification with BARDA to manufacture and store bulk drug substance for BAT, our Botulism Antitoxin with a value of up to $53 million over a five-year period. We are executing under that contract this year and expect to recognize revenue starting in 2018. In October, we acquired Raxibacumab, the only fully human monoclonal antibody, approved by the FDA for the treatment and prophylaxis of inhalational anthrax, from GSK and assume responsibility for an existing BARDA contract with a remaining value of approximately $130 million. We anticipate deliveries will begin by the end of this year, with modest revenue of approximately $9 million. With additional deliveries contemplated next year, we expect this transaction to be accretive to 2018 earnings. Finally, we plan to initiate two additional clinical studies for therapeutics based on our hyperimmune platform technology. The first is a Phase II trial for seasonal flu, targeted for initiation in 2017 and the second is a Phase I trial for the Zika virus, expected to begin in early 2018. This demonstrates our ability to develop dual-market clinical-stage candidates using our licensed hyperimmune platform to address public health threats for both government and commercial customers. Moving on to our Devices Business unit, led by Doug White, who recently joined the company. In July we signed a $23 million agreement to develop a novel multi-drug auto-injector designed to deliver nerve agent antidotes for the Department of Defense. Work has been progressing and we expect to execute a formative human factor study by the end of the year to facilitate the downselect of a final product design. In September, we were awarded a contract valued at approximately $63 million by BARDA to develop an antidote delivered in a nasal spray device for the treatment of known or suspected acute cyanide poisoning. This product also has dual market potential for addressing not only the needs of the U.S. government, but also the needs of a broader customer base such as first responders and hospitals. We also had a couple of important developments for RSDL, our marketed product for the decontamination and neutralization of select chemical agents from the skin. In September, we were awarded a 5-year follow-on contract, valued at up to $171 million, to supply RSDL to the DoD for use by all branches of the U.S. Military. Additionally, having been procured by the U.S. Military for over 10 years and deployed in over 30 countries, RSDL is now available for the first time direct-to-consumers through Amazon.com. Finally, in October, we were awarded a contract, valued at up to approximately $25 million, to supply TROBIGARD, our nerve agent antidote auto-injector, to the U.S. Department of State. We anticipate that deliveries under this contract will commence this year and be completed in 2018. Wrapping up with the business units, let me finish with our CMO business led by Sean Kirk. Through September 30, the CMO business has experienced substantial growth, resulting in year-to-date revenues that exceed the total for all of 2016 driven by increased market demand. We are currently in the final stage – stages of designing for a significant fill/finish expansion that will enhance our technologies and add capacity to our operations. We offer many unique services, including the recent addition of live viral bulk manufacturing and live viral fill/finish capabilities that we acquired with the ACAM2000 smallpox business. The CMO business offers the ideal complement of innovative technologies and strong customer-centric flexibility, developed through many years of government contracting. As you can see, our business units all have unique attributes, with each adding value and contributing to an attractive corporate profile. Emergent now has eight marketed products, four of which are only-in-class, meaning that they are the only products licensed by the FDA for the stated indications. We also possess a growing pipeline of vaccines, therapeutics and devices addressing national security needs and public health threats, several of which have dual market potential as well as the potential for a priority review voucher. We also possess an expanding manufacturing footprint with unique capabilities and innovative technologies well suited for a rapid response. And finally, multiple platforms and technologies, including broad-spectrum antibacterials and antivirals that can address serious public health threats. The company profile positions us for continued growth in 2018 and moves us towards achieving our stated 2020 goals. As you may have seen, we have scheduled our Analyst and Investor Day on December 7 in New York. We invite you to attend the meeting, learn more about our business, and spend time with our management team. Both details and RSVP information can be found on our website under Investors. That concludes my prepared remarks. And I will now turn the call over to Bob Kramer, for details on our financial performance and updated guidance. Bob?

Thanks, Dan. Good afternoon, everyone and thank you for joining the call. For my prepared comments today, I'm going to review the financial results for both the third quarter and the nine months of 2017 compared to last year, walking through the P&L as well as select elements from our balance sheet. I'll then finish up with our revised 2017 guidance and the basis for the upward revision. Before I begin, and as a reminder, we continue to present our comparative 2016 financials on the basis of continuing operations, which excludes the operations of our Biosciences business, which was spun off last year into a separate publicly traded company, Aptevo Therapeutics. Now to our results. Let me first focus on the quarter. Overall the third quarter was another period of solid performance for the company. Total revenues were $149 million, approximately $7 million above the same period last year and well above the guidance range, which was between $115 million and $130 million. The favorable performance, compared to our guidance range, was primarily the result of higher-than-expected BioThrax shipments, plus higher other product sales in the quarter. Compared to the same period in 2016, the Q3 revenue comparisons are as follows: first, for product sales, product sales during the quarter were $114 million, nearly 20% above 3Q of 2016. The increase is attributable to expanded other product sales, specifically the timing of BAT deliveries to the SNS and RSDL shipments to DoD, along with international sales of VIG and TROBIGARD. BioThrax sales came in at $84 million, lower on a year-over-year basis due to timing of deliveries under current CDC and BARDA procurement contracts. Second, CMO services. Contract manufacturing revenues were approximately $19 million or $4 million higher than 2016. The increase reflects higher fill/finish, bulk manufacturing services and development services for commercial customers as well as other CMO work. We look to continue to see year-over-year trend of higher CMO revenue, as we remain committed to aggressively seeking opportunities to grow this business. Finally, contracts and grants. C&G revenue was $16 million for the quarter, substantially lower than 2016 as expected, 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. We anticipate that this year-over-year trend will continue in the fourth quarter of 2017 as well. For the quarter, gross margin came in at 67%, falling comfortably within our expected range of between 60% and 70%, reflecting again the impact of revenue mix during the period. Turning to operating expenses. Gross R&D spend was $23 million for the quarter, $5 million lower than last year. On a net basis, after adjusting for grant and contract revenue, our net R&D expense for Q3 was $7 million or 5% of net revenue. As we've stated in the past, we continue to regard investment and the development of new medical countermeasures, both funded and unfunded, as an important component of our overall strategy to grow and diversify the business. SG&A expenses for the quarter were $35 million, approximately $6 million lower than last year. As a percent of total revenue, Q3 SG&A expenses were 23% versus 28% in the prior year, again, reflecting our commitment to carefully manage our operating expenses as we grow the business. During the quarter, the business generated $58 million of EBITDA, which was 27% of our total revenue, higher than the prior-year period and reflecting the continued strength of the core business. And finally, our GAAP net income for the quarter was $34 million, a significant improvement over the $20 million in net income from continuing operations generated in Q3 of 2016. Turning to the year-to-date performance. Through nine months of 2017, the business is performing well, as evidenced by the following: total revenues of $367 million, which was an increase of approximately $30 million or 9% above the prior year; second, total product sales of $260 million, which was up $51 million or 24% and includes other product sales of $80 million, a $65 million increase over prior year. The increase in other product sales includes higher revenue for RSDL, TROBIGARD, VIG and in particular, BAT. Net CMO services revenue was up $20 million or 62% versus the same period as last year, gross profit was $187 million for the 9-month period and the margin was 60%, in line with our target range. Our net R&D expense for the 9-month period was 5% and growth R&D expense is over $12 million below prior year, reflecting the successful completion of certain funded development programs and the continued controlled investments in our pipeline. Our SG&A spend of $102 million is $7 million lower than prior year. As a percentage of total revenue, SG&A expenses are 28% of revenue versus 32% in 2016. And finally, our net income was $49 million versus $30 million last year, while generating over $100 million of EBITDA compared to $80 million in the prior year. On the balance sheet, our quarter-year cash balance was $341 million. When combined with a receivable balance of $129 million, we continued to maintain a very strong liquidity position. Note that in October, we used nearly $200 million of cash to pay for the acquisitions of ACAM2000 and Raxi. In addition, we put in place a new $200 million credit facility with a lower cost of capital, less stringent covenants and a stronger banking group. This credit facility includes a $100 million accordion feature, which brings the total capacity to $300 million. As a result of the new credit facility and the $129 million of cash generated in the business year-to-date, we remained well capitalized to support our operations and M&A opportunities. That concludes the review of the quarter and year-to-date results. I'd now like to discuss our new guidance for 2017. As Dan commented earlier, we're experiencing a fair amount of momentum in the business as we complete 2017 and look forward to 2018. As a result, we're now in a better position to estimate the impact of a number of positive trends in our business and are amending our guidance as follows. For total revenues, we're increasing and narrowing the range to between $540 million and $560 million from the prior range of $500 million to $530 million. For BioThrax revenues, specifically, we're increasing and narrowing the range to $280 million to $290 million from $265 million to $280 million. For GAAP net income, we're increasing the range to between $70 million and $80 million, from the prior range of $60 million to $70 million and for adjusted net income, we're increasing the range to between $85 million and $95 million from $70 million to $80 million. And finally, for EBITDA, we're increasing the range to between $150 million and $160 million from the prior range of $135 million to $145 million. Please note that our amended guidance includes the expected impact of the two closed acquisitions in 2017. That concludes my prepared remarks. And I'll now turn the call over to the operator to begin the Q&A session.

[Operator Instructions] Our first question is from Jessica Fye with JPMorgan. Your line is now open.

Hi. This is Yuko on the call for Jessica. Thank you for taking our question. Acknowledging you announced a couple of deals already this year, are you still seeking additional business development opportunities? And if yes, what are the key metrics you're focused on when evaluating strategic fit for the company?

Yes, Thanks, Yuko. Thanks for joining the call today. Thanks for the question. We are pleased to have the two transactions announced and now closed, and integration activities underway. But we do continue to look at opportunities and the criteria are very much the same criteria that we've communicated to you and others in the investment community. We're targeting revenue generators that fit within our core competencies, things that we can leverage. We're looking for products in the public health threat space, and so CBRN, explosives, emerging infectious diseases. We're looking to enable growth on the top line as well as be accretive to earnings within 12 months of acquisition. So the two transactions are certainly, as I think about it, real bull's-eyes along the criteria that we previously announced. And we continue to have a very healthy funnel and pipeline of opportunities that fit those criteria. But M&A transactions are difficult to conclude, as you know. It takes time and it takes an awful lot of effort. And so it happens sporadically, it's hard to predict exactly when those transactions might occur, if ever.

Thank you.

Our next question is from Keay Nakae with Chardan. Your line is now open.

Yes, thanks. Question on NuThrax. As you prepare to position for 2018 clinical study, is there any clinical past items that need to be completed, before you're ready to advance into this study? And can you give us any further color on how much of the grant revenue could be realized in 2018 associated with that?

Yes, thanks for the question. Thanks for joining the call. So there are the normal and traditional customary activities that need to get underway in order to commence the trial and then subsequently file for Emergency Use Authorization. So you've got to be able to manufacture the material, you have to release it appropriately under the assays that are required. And, you know, I have to set up the clinical trial sites and the lights – nothing that would be out of the ordinary or unusual or unexpected. And that continues apace, and we do remain on track to initiate that study next year. In terms of contributions for next year, that will be embedded within our guidance when we issue our guidance early next year.

Okay. And then for ACAM, are you anticipating a fairly straightforward review and approval? And then at what point do you start renegotiating the contract?

Yes, two good questions. So the approval path for ACAM is really very similar to the approval path we had in Building 55. Since this a facility approval, and so an application has been submitted. So you have your typical – there'll be an inspection of the facility by the FDA, there'll be interactions with the FDA to address any issues or concerns that they may have. And after that traditional back-and-forth, we would expect to be in a position to secure that license and then commence deliveries of products. We expect all of that to happen in 2018, is our current thinking and our current timeline. In terms of negotiating the follow-on contract, so we have a number of doses remaining to be delivered under the existing contract. And as we think about next steps, probably – we're envisioning a no-cost extension to allow for the completion of the delivery of doses under the existing contract. And as we get close to completing the deliveries that are currently in that contract, we'll begin discussions with the CDC as to what might be the proper time for the follow-on. But we'll learn a lot more as we engage with the CDC in the coming months regarding the contract and the future for the contract. So stay tuned, we'll keep you posted as time goes on.

All right. Thanks.

Our next question is from Laura Christianson with Cowen. Your line is now open.

I'm wondering about some of the details of your plans with TROBIGARD. I know you're planning on initiating some human factor studies to get the FDA approval by – I'm wondering if you have any more clarity on the exact pathway and how long it'll take to get that approval and start selling in the U.S.?

Yes, thank you for the question. So we're actually quite excited about working with the DoD to develop a device which really addresses their specific concerns. So the human factor studies that I noted were really – it's a new device, which is specifically being designed according to specifications that the DoD has shared with us. And those studies are now intended to enable DoD to assess the designed features of that prototype, and then ultimately downselect to a final design that they would determine to be acceptable. So that's really the first step. So I just wanted to make sure that you understand that process. And I think it's premature, at this point, to give expected FDA timeline for review and approval. We'll have much better clarity as we move forward with the DoD on what that design specification might look like.

Got it. Okay, thank you.

Our next question is from Lisa Springer with Singular Research. Your line is now open.

Thank you. With the big jump in revenue from other products, I was wondering at what point you might start breaking out the other products separately?

Sure, Lisa. This is Bob. Thanks for the question. Thanks for being on the call. We'll continue to evaluate that, Lisa. We haven't made a call one way or the other. So we'll balance the potential need for having greater transparency as we go forward. Right now, we're only calling out BioThrax.

Thank you.

[Operator Instructions] Our next question is from François Brisebois with Laidlaw. Your line is now open. François Brisebois: Hi, thanks for taking the question and congrats. I was actually – it's just been answered. I was just wondering how the other – Biodefense had a nice jump? And I was just wondering, kind of, any clarity you can give on what to expect from there going on out? But I guess, you guys probably won't be…

Yes, Frank. Again, thanks for joining the call. I think what you all can probably do that will be most productive is just look at the general trend of the last several years, in terms of what percentage the other product revenue has been compared to total, and I would anticipate that those trends will continue. And as we talked about earlier this year that we had the occurrence where some back revenue was moved from one quarter to another, which provided a bit of a lump. We had a similar but smaller opportunity with one of the products in Q3. So again, I think the best thing is just look at either on a trailing 12-month basis or an annual basis. François Brisebois: All right. That’s helpful. Thank you, that’s it for me.

And I'm showing no further questions. I would now like to turn the call back to Bob Burrows for any further remarks.