Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Emergent BioSolutions Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to Bob Burrows, VP of Investor Relations. You may begin.

Thank you, Sonya, and good afternoon, everyone. Thank you for joining us today as we discuss the operational and financial results for the fourth quarter and 12 months of 2018. 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, Chief Executive Officer; Bob Kramer, President and Chief Operating Officer; and Rich Lindahl, Chief Financial Officer. Other members of the senior team are present and available during the Q&A session that will follow our prepared comments. Before beginning, 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 are based on current intentions, beliefs and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. Any forward-looking statement speaks only as of the date of this conference call and, except as required by law, we do not undertake to update any forward-looking statement to reflect new information, events or circumstances. Investors should consider this cautionary statement as well as the risk factors identified in our periodic reports filed with the Securities and Exchange Commission when evaluating our forward-looking statements. During our prepared comments as well as during the Q&A session, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Emergent’s operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income, 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 February 21, 2019. Since then, Emergent may have made announcements related to topics discussed during today's call. You are once again encouraged to refer to our most recent press releases and the SEC filings, all of which may be found on the Investors homepage of our website. And with that introduction, I would now like to turn the call over to Dan Abdun-Nabi, Emergent BioSolutions' CEO. Dan?

Thanks Bob. Good afternoon everyone and thank you for joining us. I would like to begin with the previously announced senior leadership transition at Emergent. On January 4, we announced that I will be retiring and that Bob Kramer will be assuming the role of President and CEO effective April 1, 2019. This will be my last quarterly earnings call and I would like to thank you for your support of Emergent and of our management team throughout the years. It’s certainly been an honor to have contributed to the company’s 20 year history of delivering products to protect those vulnerable to public health threats. And it’s been a privilege to lead and serve Emergent’s talented team of employees. I am confident that our efforts to realize our vision of becoming a Fortune 500 company, recognized for protecting and enhancing life, driving innovation and living our values will continue under Bob’s leadership. Bob has been a committed leader since he first joined the company in 1999 as Chief Financial Officer. As President and COO, Bob has an extensive knowledge of all aspects of the company’s operations and the ability to add decisively and strategically in the company’s best interest making him uniquely qualified to step into this role. I am excited about Emergent’s future and have full confidence in Bob’s ability to lead the organization and to continue to create shareholder value. So with that I would like to turn the call over to Bob. I will remain available to answer your questions during the Q&A session. Bob?

Thank you, Dan, and good afternoon and thank you all for joining us on the call today. Let me just start by taking a moment to thank Dan, the company had clearly thrived under his leadership and I am honored to take on the CEO role building on the momentum that we have gained over the last few years as we have executed against our strategic plan. I also look forward of leaving a talented and experienced team as we continue to broaden our reach into the public health threats market, strengthened our product portfolio, serve our customers and partners and continuing to create shareholder value, all the while working to fulfill our mission to protect and enhance life. In my prepared remarks today, I'll briefly touch on our 2018 results and then transitioned to our outlook and priorities for this year 2019 within each of the business units. Rich will follow with a walkthrough of the fourth quarter and full year 2018 financial results as well as our forecast for 2019. First, let's look at 2018. Our 2018 results reflect another strong year of financial and operational performance with year-over-year growth in revenues of 39%, growth in adjusted net income of 25% and growth in adjusted EBITDA of 13%. In addition to achieving our financial goals for the year, we also accomplished a tremendous amount operationally. I’d like to highlight a few of those. First, we submitted the Emergency Use Authorization filing for NuThrax as well as securing licensure of BioThrax in six additional countries, increasing our pipeline of advanced stage clinical candidates to a total of four and securing non-dilutive funding for a certain of the key programs. We put in place a financing package of up to $1.1 billion to support current and future M&A and finally…

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call. For my prepared comments today, I will walk through the P&L performance for the fourth quarter and full year periods then shift to the balance sheet and address the state of our capital structure. I will then wrap up with comments on our reaffirmed 2019 forecast. As a reminder, we provided all the numbers related to our quarter and full year performance as well as the reconciliation tables in the press release we issued this afternoon. Therefore, my goal today is to focus only on the highlights. With that, let's first look at our fourth quarter performance. As has been the case for the last few years, we tend to report annual results that are back-end weighted and 2018 was no different, with particularly strong performance in the fourth quarter. Results for the fourth quarter of 2018 reflect both continued execution against our financial and operational goals as well as the ongoing diversification of our business. Total revenues were $271 million, a 40% increase. Adjusted net income was $38 million, a 1% increase versus the prior year and adjusted EBITDA was $75 million, a 12% annual increase. Let me look now at the year. Our financial performance for 2018 was like the fourth quarter very strong and consistent with the range we previewed in early January. Total revenues were $782 million, a 39% increase versus 2017. Adjusted net income was $120 million, a 25% increase from the prior year, and adjusted EBITDA was $199 million, a 13% increase versus 2017. Digging into more details, let me highlight a few key contributing factors to the full year performance. BioThrax revenue of $278 million was consistent with prior year levels; ACAM at $117 million was also a significant contributor…

Thank you. [Operator Instructions] Our first question comes from Brandon Folkes of Cantor Fitzgerald. Your line is now open.

Hi. Thanks for taking my question. Firstly, I'm wondering, if you could just give us insight into the full quarter pro forma NARCAN sales and then secondly how do you think about NARCAN going forward, the growth, particularly if a branded competitor came and how do you see that affecting price? And then secondly, you mentioned gross margin expansion. Is that just a function of mix? Or are there efficiencies you expect to capture during the year? Thank you.

Thanks, Brandon. This is Bob. So, let me tackle the NARCAN question and then maybe Rich, you can comment further on the gross margin expansion theme. So I would say Brandon overall we’re really encouraged by the overall performance of the NARCAN business realizing that we're only a couple of months into this, as we talked about on the call when we announced the transaction, we see a highly experienced team of professionals that we have turned the transition now to the Emergent team from Adapt as being very experienced in this space and we're happy with the transition so far. We continue to focus on the overall awareness of the opioid crisis as well as ensuring that accessibility to these products are promoted and driven as well as being conscious of the affordability sensitivity in terms of looking for opportunities to increase coverage and reduced co-pays with the insurance companies. And as we talked about on the call when we announced this leveraging the strong state and local government expertise of the Adapt Pharma organization with Emergent's strength at the federal level, we see that there is a significant opportunity there and it's already starting to show some progress with the number of co-rx states increasing from five to eight already. We can talk more about that if you'd like. As well as at the federal level we've seen increased interactions by the company with the government on opportunities to drive availability and accessibility of naloxone to the patient groups who needed. So, as you know, we participated in the advisory committee meetings with the FDA in December. It gave us the opportunity to discuss our thoughts on how expanded opportunities in the co-rx program could drive availability of naloxone to more patients. We also had the opportunity to share with the advisory committee our investment and capacity expansion, so that we're prepared to meet a potential uptick in the overall demand for the product. When it comes to your question about price and competition, we clearly expect additional competition in this space. We model it when we’re doing the deal valuation almost six months ago. It's very difficult to predict exactly what that's going to look like, but again we think that as the government considers a number of initiatives, including co-prescription and eventually OTC that we're well positioned with NARCAN to compete in either of those basis going forward. And maybe with that Rich, you can talk a little bit about your comments about gross margin…

Sure.

Improvement and expansion.

Sure. So, yes, Brandon, I think, the – a predominant factor in improvement is the mix. We do see more product revenue in the year in 2019 and in 2018 relative to the more services oriented revenue in the CDMO business. So, as you know, that product revenue comes with a higher margin profile and that higher mix is improving the overall gross margin. In addition to that, we do have an ongoing continuous improvement program across the manufacturing operations, which are also yielding some incremental improvements and some incremental profitability enhancements.

Great, thank you very much.

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

Hi. Thank you very much for taking my questions. My first one is just on NARCAN. I believe the Teva 30-month stay is coming up. Can you just remind us from a timeline perspective just what we should be watching for this year on the legal front with generics? And then I have one quick follow-up.

Sure. Dana, thanks for joining the call. So, I'm going to ask Atul Saran to comment on the Teva element of your question.

Hi, Dana. Thanks so much for your question. This is Atul. You are correct the 30-month stay is coming up at the end of March, and we are anticipating a trial sometime later this year. The trial date has not been set, and we've had discussions with the judge in the court, but we don't have the exact timing on the scheduling yet.

Okay. And just on ACAM2000, does guidance reflect kind of an improved contract term or does guidance reflects kind of what ACAM has historically been doing since you acquired it?

Sure. So, as we've talked about, Dana, we’re in the middle of these negotiations right now. The guidance for 2019 represents our best estimate of the outcome of those negotiations both in terms of the terms as well as the timing. So that's really all we can say right now about the process other than the government seems fully engaged in the negotiations process and is committed to getting this done in a timely way.

Okay. And maybe just one other quick one, just on gross margins again, I know you had a very strong Q4. You also put up a big BioThrax number. So just any sense of just the magnitude of gross margin improvement we could see in 2019. I assume taking a Q4 kind of run rate not the right method given the BioThrax number this quarter, but just any sense of magnitude of improvement we could see? Thank you.

Yeah, I'd be really careful about taking Q4 and extrapolating it going forward. I mean clearly that was impacted by a fairly ready mix of BioThrax revenue in there. I think, you've interacted with us long enough to know that we continue to put a focus on operating efficiency, operational excellence continuous improvement. So, while there is no one or two individual items that are going to drive that, we aim to increase the capacity utilization of the sites that we operate and drive the gross margin improvement over time. So, I think, I'll just leave it that for now.

Okay, thank you.

Thank you. And our next question comes from Jessica Fye of JPMorgan. Your line is now open.

Hey guys, good evening. Thanks for taking my questions. Maybe just going back to NARCAN, can you talk about your latest expectations for that products revenue in 2019 even just directionally relative to the 200 to 220 you gave when you announced the acquisition over the summer? Would you say you're feeling better about that? Have seen any change there? And when we think about the volume growth for NARCAN, can you remind us what proportion of scripts using the IQVIA data is capturing as we try to track that product growth. I'm also curious if you could tell us the average or blended price per pack that you're realizing for NARCAN, given the different retail price versus local government price?

Sure. Thanks, Jess. So I'll turn this over to Doug White, the Head of the Business Unit for Devices maybe to comment on the IQVIA percent of the scripts if we have that or even the blended price per package or per carton. But in terms of the 2019 kind of guidance that we initially gave when we announced the transaction, you're right, we were in that 200 to 220 range. I think we feel increasingly confident and encouraged about the state of the NARCAN business as I said in my prepared remarks. We'll probably see that operating at the higher end of that range. And we're pleased with the overall progress and transition that we've made under Doug's leadership and the Adapt team over the last three or four months. So, Doug, anything to comment about the IQVIA data?

Jess, I want to clarify your question. Was your question specific to the IQVIA data that it captures the majority of the retail Rx sales? Is that what you're asking?

That and sort of related to that, what proportion of the overall packages you are selling is that capturing. So, sort of implicit in that as a question about the not captured sales to municipalities that are relative to what's running through retail?

I understand. So, well, let's – first in terms of the retail measurement by IQVIA is the vast majority of volume that's going through the retail chains. And then, secondly, the mix is approximately 50:50 between public interest market and the retail. It's in that range.

Okay. Is there anything you can say on the kind of average price you're realizing when we blend those two?

No, just to confirm that we have not raised our price. Our list price is 125 and that the tip price, the discounted price is $75 for a pack of two, but no, we’re not commenting to the mix.

Okay.

Thank you. And our next question comes from Boris Peaker of Cowen. Your line is now open.

Great, thanks for taking my questions. The first one I wanted to ask is on NuThrax. Can you just comment on what contracts and when we could expect them?

Yes, Boris, thanks. You're a little faint, but I think your question was really around the transition to NuThrax and the contracts that are in place to support that transition. So, I'll make a couple comments and then ask either Abby or Adam to weigh in with additional color. So as we've talked about for the last year or so, we see 2019 being the beginning of the transition for the Anthrax Franchise from BioThrax to NuThrax. As you know, there are two contracts with the government in place today that support that transition, the one contract which is a procurement contract for BioThrax, which is a five-year contract and then the NuThrax contract is both a development as well as procurement contract for the next five years as well. So, exactly the pace and the cadence for that transition from BioThrax to NuThrax, during 2019, is yet to be determined, but there are contractual mechanisms and support in place to take care of that. And as I said in my opening remarks and comments, we’re working through operationally. The transition of the manufacturing facility in Lansing from a BioThrax only to a NuThrax transition later this year, so we're slowing down production of BioThrax and we’ll be increasing production of NuThrax as we work through this transition. Abby, is there anything else you want to add?

No, I think you covered it well, Bob.

And on the pricing are they going to be similar BioThrax to NuThrax or there's premium for NuThrax over BioThrax?

So, what's contemplated and actually already negotiated, Boris, is a pricing structure that's tiered. As we've commented in the past, there will be a lower price per dose under Emergency Use Authorization deliveries as contemplated in the contract, there will be a step up in price per dose once NuThrax is licensed by the FDA. So it's again tiered pricing based on volume as well as tiered pricing based on the stage of development for NuThrax.

Got you and my last question is for NARCAN. I'm just curious; you have the convenience of nasal administration. I'm just curious how important is that nasal administration because it seems to me that the person actually receiving the drug after an overdose is likely they are unconscious. So, it doesn't really matter nasal administration versus any other route administration?

Yes. I'll ask, Doug, to comment here in a minute, but one of the benefits and the features of NARCAN nasal spray is its convenience, its ease of use, it’s incredibly easy to use by individuals like you and I. It requires no medical training. So, the application of the device is very easy to use and not intimidating at all. If you watch the 60 minutes program where it was featured, I think, that gives you a pretty good indication of again its ease of use and not training required to administrate it. Doug, anything to add?

No, Bob. That pretty much covers it.

All right, well, great, thank you very much for taking my questions.

Thank you. Our next question comes from Sameer Kandola of Wells Fargo Securities. Your line is now open.

Hi. Thanks for taking my questions. So, a few weeks ago, the DC Police Department announced they would buy approximately 50,000 NARCAN kits. So, I was just wondering how quickly do you expect them to replenish their supply. And then do you expect other large police departments to do the same. Just wondering could this be additional upside to NARCAN estimates?

Yeah. Thanks Sameer for the question and you're right those activities have occurred and continue to give us again encouragement on the overall performance of the business unit whether it's again at the state and local level or at the federal level. Doug, I don't know if you can comment on any other similar opportunities that are near-term.

Well, just to be clear, we currently do have a large number of police departments that utilize NARCAN nasal spray. Many are supplied through the public health or directly. We continue to work with local, state public health organizations to provide NARCAN. In some cases, they're using federal funds to purchase NARCAN and they will themselves distribute out to the different first responders and community groups. So, we do anticipate continuing that activity.

Okay, got it. And then maybe a quick follow-up. So Opiant Pharma the company that develop NARCAN nasal spray, I believe that's another product that it's developing for opioid overdose called Nalmefene. And I was just wondering, do you see this as a potential competitor in NARCAN in the coming few years. I know its early stage and would you consider a partnership on as a life cycle management strategy for NARCAN? Thank you.

Sure. This is Doug. Thanks for the question. While we are well aware of the development of Nalmefene. Just to be very clear naloxone is a very effective drug to counteract the effects of an opioid overdose, and that's very clear. There are some advantages to Nalmefene in terms of how long it last, but we see the Nalmefene opportunity more as a niche market segment not necessarily replacing the naloxone, naloxone as the ultimate solution.

Got it, thank you.

Thank you. And our next question comes from Keay Nakae of Chardan. Your line is now open.

Thanks, just a couple of questions about ACAM. Just looking at the revenue numbers you gave us, did you deliver much ACAM in Q4, number one. Number two, if you're going to complete the existing contract in Q1, I guess, my back of the envelope map is that's around maybe another 30 million or so of revenue and then does that. And then does that – number three does that mean that mean to finalize that contract that in Q2 we won't see much revenue from NARCAN or ACAM sorry.

Yeah. So, thanks for the question Keay and for joining the call. You're spot on with your Q1 back of the envelope number of about 30 for 2019. We will, as I said, we're in active negotiations and discussions with the government about the follow-on contract for ACAM. It's too early to predict the timing and the outcome of that yet. And I think that is in part why we've made the comments that both Rich and I did on the call today about the fact that in 2019 that the revenue cadence will follow a similar profile to the last couple of years and they will be back-end weighted. We'll see what the outcome of the negotiations are but for right now we're counting on the majority of the ACAM revenue to be second half of the year.

And just back to Q4 that mix of the other products, the $41 million or so, anything meaningfully different there versus Q3?

I don't believe so. But, Rich, anything you want to – any color we can add there?

No, I don't think we've broken out a lot in the other product revenue lines. So, historically, we're really just going to be disclosing the significant drivers of revenue in any period recognizing that we have diversified significantly away from only BioThrax, which historically was the primary component of revenue. So, you saw we disclosed NARCAN revenue in the fourth quarter and then for the full year ACAM. Those were the significant drivers in addition to BioThrax for those periods.

Okay, and just maybe just one last one quickly. Do you anticipate any OUS BioThrax revenue in 2019?

Yeah. So, I think, in terms of outside the U.S. revenue in general, Keay, we're still bullish on opportunities for the portfolio overall. So, not targeting it to BioThrax, but across the board with the medical countermeasure portfolio, we feel confident as we laid out in the 2016 through to 2020 growth plan that we'd like more than 10% of our revenue to the base from customers outside the U.S. We're on pace and on track to meet or exceed that percentage. So 2018 was a set forward. 2019 will be another step forward toward that 10% number, but I'm not going to comment on any individual product opportunity until it's realized and materialized then we'll share that with you.

Okay, thanks a lot.

Thank you. [Operator Instructions] Our next question comes from Francois Brisebois of Laidlaw. Your line is now open.

Thanks for taking the questions and congrats Dan on a great job over there. I just wanted to ask a little more about you mentioned raxi as anchor product. Can you just touch based on that again? What you meant by that?

Yeah, Frank, thanks for the call and the question. So, my comment was really that – with the completion of the tech transfer of raxibacumab from GSK whose contract manufacturing that for us today to our facility in Baltimore, our Bayview facility, we see that as the first FDA licensed product in that facility and we referred to that historically as kind of an anchor product being is the first licensed product in that Bayview facility to go along with all the other development work that we're doing.

Okay, great. That makes sense, but most of my questions have been answered. But I was just wondering quickly that was there a specific reason for displaying the amortization now that used to be part of the COGS on the income statement?

Yes, this is Rich. That's just really as we thought it would be useful to investors to be able to separate out the non-cash amortization to get a clearer view of gross margin, just make that calculation more transparent and easier for folks.

Understood, all right. Thank you very much.

Thank you. And ladies and gentlemen this does conclude our question-and-answer session. I would now like to turn the call back over to Bob Burrows for any closing remarks.

Thank you, Sonya. 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. Again thanks very much and we look forward to speaking with all of you in the future. Goodbye.

Ladies and gentlemen, this concludes today's program. You may all disconnect. Everyone have a great day.