Emergent BioSolutions Inc. (EBS) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Four Quarter 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 at that time. [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, Amenda. 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, 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 or 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 are based on our current intention, beliefs and expectations regarding future events. We cannot guarantee that any forward looking statement will be accurate. Investors should realize that if underlying assumptions proved inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. Investors are therefore caution not to place undue reliance on any forward looking statement. Any forward looking statements speaks only as of the day 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. Investor should consider this cautionary statement as well as risk factors identified in our period 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'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 on our call today. During the call, I'll focus on our accomplishment 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 two acquisitions, strengthened our financial positions 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 ACAM2000 business from Sanofi. This acquisition included an ACAM2000 which is the only FDA license Smallpox vaccine in the world, live viral manufacturing and fill/finish facility 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, 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 had outstanding. Bob will discuss this in greater detail during his presentation. This follow shortly after we replaced an existing $100 million credit facility with a new credit facility that provide up to $300 million in borrowing capacity at a lower cost to capital and with less stringent covenant. These actions collectively position us to effectively pursue our growth strategy which includes growth through acquisitions. Finally, in the fourth quarter we secured two 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 US Department of State to supply TROBIGARD, an emergency use auto-injector device designed for self administration of a nerve agent counter measure. This contract is significant and that it shows increased demand for our TROBIGARD product. It confirms value of our auto-injector platform, it broadens our overall portfolio of government customers and it represents the first sale of this unique product to the US government. The second government contract signed in the fourth quarter was awarded by the Canadian Department of National Defense for the supply of Anthrasil or Anthrax Immune Globulin product for the treatment of inhalational anthrax. This contract award followed the recent approval of 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, enhance our financial position and ended the year poised for continued growth in 2018. This year we look forward to continue to advance towards our 2020 goals. Specifically, we expect to increase revenues derived from our marketed product 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 product and services, we expect that our revenue growth will be driven by several factors. And our vaccines and anti-infective business, we expect continued deliveries of BioThorx to the SNS under our current five 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 of this critical counter measure to the SNS. In our antibiotic therapeutic 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 side. In addition, we anticipate that the 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 the significant annual revenue contribution from our CMO 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 the FDA for emergency use authorization designation for new 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 validated up to $1.5 billion. We've been working closely with BARDA on a development of the EUA package. Steps remaining to be completed are a 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 and managing infectious disease, in January, we initiated a Phase 2 study of FLU-IGIV, our anti-influenza immunoglobulin developed as an intravenous treatment for serious illness caused by influenza infection and hospitalized patients. The widespread and seriousness nature of the influenza outbreak over the past several months has made this particularly timely study. This product candidate is being developed used by our established human hyperimmune platform on which several marketed antibody therapeutic 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 1 trial of DLA1601, our Zika vaccine candidate based on a validated manufacturing technology that we licensed from Valneva and we are currently are co-developing this important counter measure. If enrollment occurs as planned, we expect Phase 1 data for our Zika vaccine candidate to be available in late 2018 or early 2019. We also plan to advance our Zika IG, our Zika virus immunoglobulin therapeutic into the clinic by initiating a Phase 1 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 two contract awards. One for the development of a multi drug auto-injector for nerve-agent antidote delivery for the DoD. And the other was a BARDA contract to develop an antidote intern nasal 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 auto injected to be completed this year. Additionally, we are actively exploring opportunities for the development of additional drug device combination for chemical counter measure market and have a development project underway for a single drug auto-injector 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 our 2018 goal of at least four product candidates in advanced development. It also brings a significantly closer to our 2020 product development goal of six candidates in advance development with at least three residual markets. Finally, a few short comments on our acquisition strategy. This year we set a goal of executing on 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 acquisitions in the public health threats market including CBRNe threats and emerging infectious diseases. With particular interest in opportunities that provides the potential for dual market applications. 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. 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'll 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, 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 public traded company at 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 fourth quarter 2017 revenue comparison 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 utilized 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 US 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 out expected range of 60% to 70%, again, reflecting the impact of revenue mix during the period. Turning to our operating expenses, gross R&D spent 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 stated in the past, we continue to regard as 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 cost 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 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 is resulted in a five 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 to 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 spent is over $11 million below prior year reflecting the successful completion of certain funded development programs. And the continued selected 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’ve heard earlier during the quarter, we put in place a new credit facility valued at $200 million with a $100 million recording 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 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 a review of the quarter and full year results. I’d now like to discuss our 2018 guidance. As Dan commented upon earlier, we’re experiencing a fair amount of momentum in the business as we came off a very strong 2017. And have the two 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 $561 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 25% 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 broader 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 increased work related to development projects, funded by the US government, increased investment and discretionary development projects funded by the government, funded by the company, targeting opportunities in medical countermeasures for emerging infectious disease and lastly anticipated or reduced tax rate starting approximately 22% resulting from the originals to the US 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] Thank you. Our first question comes from the line of Jessica Fye of JP Morgan. Your line is open.

Great, thanks for taking my question. I was hoping for a little more color on the first quarter revenue guidance. What’s driving the change and the timing of those BioThrax deliveries, if can elaborate on that? And then second I believe Bavarian Nordic had some recent data out, curious what you -- what your interpretations on top line press releases?

So thanks Jess for participating in today’s call and for the two questions. So maybe I’d 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.

Yes, so Jess again thanks for the question, the timing and the BioThrax shipments in revenues are consistent with what was experienced in the past. There is some variability around the timing of the entire manufacturing and 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 and the recent announcement on – in the new Smallpox vaccine under development by Bavarian Nordic. I think the important -- I’m not going to comment on the data or our prospects for success for that product in front of FDA, but 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 US 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 previously none existed. The other point I would make is; it’s my understanding that, that is a two dose vaccine err whereas ACAM2000 is a single dose, in order to establish protection. So again I don’t want to comment on their data or impact that that data might have on the regulatory review process but that as far as our take of it.

Thank you our next question comes from the line of Eric Schmidt Cowen and Company. Your line is open.

Thanks for the questions and all the updates, maybe a couple more for Bob on the guidance. First on 2018, the implied margin guidance, which suggest, lower margins in 2018 versus what you disposed 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?

Yes, Eric, thanks for the question and for the participation in the call. 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’re trying to achieve by the end of 2020, when we laid out the billion dollar revenue goal. The SG&A expenses of less than 25%, the net R&D of less than 15% and at the bottom line, the net income margin contribution of 14% or greater. So if you look at the midpoints, so what we’ve put out there, guidance wise for 2018 they almost identically line up with that. The difference I think you maybe 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% of greater net income contribution at the 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 is it a time to start thinking about that 14% being on a lower end as well?

So as you will recall when we first put up 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 till we have better clarity around exactly how we’re going to benefit from that or being a bit cautious and bit careful. We’ll continue to evaluate and we already factored in 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.

Thank you our next question is from the line of David Maris of Wells Fargo, your line is open.

HI. 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 time line 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. Thanks.

Thanks David for joining the call and for the couple of questions. 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, I’m 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 is a very traditional killed vaccine that I think will enable us to quickly assess the prospects or 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 exclusives as while as emerging infectious diseases. The number of revenue generators that are out there are, 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 and to forecast but nevertheless we do remain confident that we should be able to pull something together and get something executed this year.

Thank you our next question is from the line of Dana Flanders of Goldman Sachs. Your line is open.

Hi, thank very much for the questions. 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 and a 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 appear strong from a science or clinical perspective. Obviously those two would hopefully align but just curious how you think about that?

Yes, thank you for joining the call and for the questions. 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 were always mindful of what the US government is looking for by way of counter measure development and we are opportunistic as we look at the needs of customers out there. Having said that what we look at from the standpoint of independent funding is really driven by 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 to 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. Clearly see in my mind an opportunity to have robust government participation as a customer. But also an opportunity for those products to be solid in a more traditional patient market, hospital market specialty clinic market. For our advantage point, that kind of development program has a number of benefits. We are leveraging capabilities. We are using validated platform. 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 what we have in our platform base and the technologies that we own and control, where we are potentially the leader or at least A leader or where it could only in class or 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 times we spend at risk via to get a product to a certain point in its development cycle with the expectation and thought that once we get to a certain point in development, we will be able to secure government funding to enable that product to complete its development cycle and go all the way to regulatory approval and procurement. So hopefully that's answers helpful for you.

That's great and very helpful. Thank you. Maybe just one quick follow up. On your flu program, I know you mentioned it in your prepared remarks obviously a very strong position here. 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 kind -- are you going to be targeting a specific cut of the flu population or do you think this could be used possibly more broadly? Thank you.

Yes. Thanks for that follow up question. We actually have Laura Savard, the Head of our Business Unit for the antibody therapeutic. Maybe Laura you could take that question.

Sure. Thanks Dan. Great question so the flu and immunoglobulin program is targeted at hospitalized patients with serious influenza A infection. So where we feel that this product really fits into the existing therapeutic paradigm, either patient that is hospitalized with severe flu; they've already had access to standard of care which can be vaccine and other support and anti viral. And there is still quite high unmet need in that population. So we are targeting that in our Phase 2 trial, which will largely focus on our safety and PK and 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 3 trial.

Thank you. Our next question comes from the line of François Brisebois of Laidlaw. Your line is open. François Brisebois: Hey, guys. Thanks for taking the questions .So just a couple here. So in terms of M&A you discussed dual market potential. Is this something -- is there preference in terms of government or non-government. And why kind of get away a little bit from the government aspect there? And did I understand that it's -- you are still looking at companies that would be accretive within 12 months or is that change at all?

So thanks for joining the call and for the question. 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 advantage point and I think from the organization advantage point, it's a core competency of our ability to interact with government agencies, government contracting and government relation is something that we pride ourselves on. So it's a market that we want to continue to expand and focus on. But on the other hand, we also want to diversify and to the extent that we can diversify our customer base. That's a positive for us. Whether it's specialty clinic, whether its hospitals or target patient population that have a specific need, all that I think enable us to build the business in a more robust way. I think the second part of your question is, no, we remained focused on looking at opportunities that can be accretive within 12 months of acquisition. François Brisebois: Okay, great. And then lastly just on ACAM2000. In terms of negotiations to just to ensure that there is no -- there is uninterrupted supply, is that something that can be a little bit of negative in terms of negotiations or how do we ensure there will be interruptions there.

Yes. Thanks for that follow up. So I think the concept has been that this is a capability and when I say this, the manufacturing of the Smallpox vaccine particularly on US soil is something that a critical requirement of the US government, part of the contract that we assumed was the obligation to ensure that that was US based manufacturing. So once that core competency exists on American soil, my view at least and I think our collective view is that the US government want to ensure that competency remain, and is exercised and it's continuous. So that's one piece of it. And the other piece is of course as product in the stockpile as it ages, it needs to continuously be replenish and replaced. So there is I think a paradigm whereby the older products need to get removed and a newer product needs to come into the stockpile as replenishment. So the answer to your question is essentially twofold. Ensuring the capability remains and exist on US soil and the second is to ensure that the stockpile has what it needs within to protect the civilians in the country. Right now the stockpile I think is designed to carry a sufficient number of doses protect everybody in the US population.

Thank you. Our next question is from the line of Lisa Springer of Singular Research. Your line is open.

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 combination of new customers or deeper penetration of existing customers? And if fully utilized, what level of revenues could that business support?

Yes. Thanks for the question. I am very excited about the growth in the CMO business. I think the growth is being driven by a number of different factors. And I think I flag some of them during the prepared remarks. I think overall globally there is in increased demand for CMO capabilities and one of the things that we offer as an organization is a full suite of capabilities from our early product development all the way through to regulatory approval and supporting commercial launch. And the capabilities span from both manufacturing of biologic fill finish and biologics assay development and the like in 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 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 put out a long term forecast on where that business can go. So I think I will hold off from answering that question. But as time goes we will get a better sense for the trajectory of growth there which I think is going to be healthy.

Thank you. And at this time, I am showing no further question. I would like to turn the conference back over to the company for any closing remarks.

Thank you, Amenda. 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. Good bye.

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