Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Mr. Bob Burrows, Vice President, Investor Relations. Sir, you may begin.

Thank you, Valerie, and good afternoon, everyone. Thank you for joining us today as we discuss the operational and financial results for the second quarter and six months of 2019. 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 Bob Kramer, President and Chief Executive 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 our current intentions, beliefs and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate. Investors should therefore 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 SEC, 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 or loss, 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 August 1, 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 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 Bob Kramer, Emergent BioSolutions' President and CEO. Bob?

Thank you, Bob, and good afternoon, and thank you all for joining us on the call today. In my prepared remarks, I'll provide a brief overview of our financial performance for the quarter and year-to-date periods, and then discuss select operational accomplishments. The majority of my comments will focus on four areas of near-term focus for the company. These include, first of all, the state of our anthrax vaccine franchise, specifically the ongoing shift to the next-generation vaccine, AV7909, as the primary post-exposure asset for our country's strategic national stockpile for anthrax response; second, the status of the smallpox franchise, including our recent award of the Vaccinia immune globulin intravenous contract, as well as ongoing contract negations with the U.S. government related to ACAM2000, the only FDA-licensed smallpox vaccine; third, the state of the NARCAN nasal spray business; and finally, progress on a few key programs within our development pipeline. Before we get into the state of the business, I wanted to share a piece of good news on the government's efforts to strengthen national security. On June 24th, the Pandemic All Hazards Preparedness Act was reauthorized. This is the second reauthorization of the original act, which was signed in 2006. As background, the original act established the United States' framework for responses to threats that may result in a public health emergency. This included establishing the Medical Countermeasures Enterprise and the role of the Assistant Secretary for Preparedness and Response. It also included the stockpiling and procurement of medical countermeasures in the strategic national stockpile. And finally, it included the development of medical countermeasures to protect the American public from threats like smallpox, anthrax, botulism, among others. This reauthorization expands the 2006 act by further strengthening the ability of both the Department of Health and Human Services and the…

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call. For my prepared comments today, I will walk through our performance for both the second quarter and first half of the year, then shift to the balance sheet and address the state of our capital structure, then wrap up with comments on our forecast for the rest of the year. As I have said on previous calls, my aim is to focus only on the highlights as we have provided all the numbers related to our second quarter and year-to-date results, as well as the corresponding reconciliation tables, in the press release issued this afternoon. Results for the second quarter of 2019 reflect continued execution against our financial and operational goals and the ongoing diversification of our business. Total revenues were $243 million, a 10% increase, largely driven by the contribution of products stemming from the acquisitions of Adapt and PaxVax in the fourth quarter of 2018, as well as an increase in contracts and grants revenue. Adjusted net income was $6.3 million, lower versus the prior year, and adjusted EBITDA was $26.2 million, also lower versus the prior year. The reduced profitability compared to last year is largely due to product mix as 2019 sales of our higher margin products are more heavily back-end weighted. Additionally, we have made strategic investments in R&D during the first half of the year. Our overall performance in the second quarter was as we anticipated and discussed in our Q1 earnings call in May. Digging into more details, let's discuss a few key contributing factors to second quarter 2019 performance. First and foremost, second quarter performance reflects the continued impact of the Adapt and PaxVax acquisitions, both of which were completed in the fourth quarter of 2018, increasing the diverse…

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

Firstly, I know you mentioned that on NARCAN there were higher public interest sales during the quarter. Could you just give us some color of the split between the first responder public interest and the retail market I know historically has been 50/50. Is that still within range?

Yes, Brandon, thanks for joining the call, and thanks for the question. The split is essentially consistent with what we said before, which is that 50/50 split. So it hasn't changed much at all.

And then, maybe the next one, can you just provide some color historically for BioThrax regarding the procurement there? How much has actually been under the DOD immunization pre-exposure program compared to post-exposure?

Yes. So, historically, if you look at the prior contracts going back any number of years, the government has procured somewhere between 9 and 10 million doses per year of BioThrax in pursuit of building the stockpile that they would ideally like to have sufficient to protect the 25 million lives. The exact split, Brandon, between what's used by DOD for active immunization versus what goes into the stockpile to build the 25 million lives protected number is not exact, so I'd hate to speculate on that split. But the vast majority of the product has gone into the stockpile for protection of civilians.

You mentioned that you expect to conclude the ACAM contract this quarter. Can you just help us think about the process from once you conclude that contract to actually making deliveries of that? Do you have inventory on hand, and any lead-time we should think about? Thank you.

Sure. No, good question. Again, I think as Rich stated, as well as I did in my prepared comments, we have been manufacturing ACAM2000 and are prepared to deliver significant quantities in the second half of this year consistent with the estimates that we included in our 2019 guidance. So, process-wise, I think it's important to remember that the U.S. government has had a longstanding practice and strategy of having sufficient medical countermeasures between the therapeutic product as well as the vaccine product, ACAM2000 sufficient to protect all American civilians, roughly 300 million doses of smallpox vaccine. So the fact that we were able to complete our VIGIV negotiations earlier this year in June with the 10-year, $535 million contract gives us, again, every confidence that our negotiations that we're in right now with ACAM2000 will be completed in time for us to begin deliveries in Q3 for ACAM2000 under the new contract.

Our next question comes from Jessica Fye of JPMorgan. Your line is open.

First one is just around guidance. Using the midpoints of the third quarter revenue and full year guidance, it appears that the fourth quarter will make up about 40% of your 2019 revenues. Can you help us think about the proportion of 2019 net income that we should model for 4Q? I appreciate the kind of first half/second half breakdown, but with negative net income in the first half, or closer to flat on an adjusted basis, just hoping we could focus in a little more on how to split up 2019 net income guidance between the third and fourth quarters.

Again, I think your math is spot-on in terms of if you look at the midpoint of the Q3 range that Rich just provided, which is roughly $260 million in revenue. If you add that to the year-to-date revenue that we reported, you get pretty close to a $700 million number through Q3 on a projected basis. So, we've got a little bit less than 40% to make up in Q4. As you know, and as indicated by Rich, the product mix for the second half sales, particularly in the product sales, will be a significant contributor to turning around the overall profitability of the business in the second half. I don't want to speculate on what the split between Q3 and Q4, similar to the split in revenue. We are confident that, again, we're going to get this ACAM2000 contract across the finish line in sufficient time to begin shipments in Q3 and Q4, and that's really going to drive the overall profitability.

I think one thing I might add, Bob and Jess, is that, as you know, we have a high degree of fixed cost in our business, and so we do get significant operating leverage as revenue increases. And so you can certainly expect a high percentage of the increase in revenue in the fourth quarter will flow through to profitability in the fourth quarter. So hopefully that helps in terms of thinking about the spread a little bit.

Another question maybe just following up on the last one on NARCAN, it sounds like with this new updated NARCAN range, it's implying sales for that product in the back half lower than in the first half even though weekly retail scrips so far in the third quarter are averaging above what they were, for example, in the second quarter. So are you expecting a reversal? Or is it possible that there is some mix shift happening that we're not able to kind of discern in the public versus retail side of that business?

Yes, I'll take a first shot at that, Jess, and then ask Doug White, who runs the Devices business unit, to weigh in as well. You're right. The first 6 months of NARCAN sales of roughly $138 million are a bit more weighted in the back half. A lot of that, as Rich and others have indicated, is really the result of the California co-RX and some other developments. While we see opportunities for additional states to adopt co-prescription legislation in the second half of the year, we have not baked any of that potential upside into that $240 million to $260 million range. I'll let Doug talk to the second half of the year question around any developments within the mix of what makes up that revenue.

Jess, thank you for the question. So in terms of the numbers in the prescription numbers that you're referencing, New Mexico just implemented legislation in the middle of June, and we're still seeing the impact of that spike that we anticipate when a state implements co-prescribing legislation. So that has been happening in July. We anticipate that will start to come back down. While it will still be higher than it was prior to the legislation kicking in, we anticipate that will bring the numbers back to a lower normalized level. In addition to the comments that Bob made, in the first half of the year, in addition to California co-prescribing legislation having an impact, the spike that we've talked about in the past having a significant impact on the overall numbers, there are also some one-time purchases in the public interest market that we realized in the first half that we don't anticipate in the second half of the year. However, with the expansion of the commercial team, we anticipate continued growth in the public interest area as additional states start to implement programs with public health organizations and first responders.

Can you quantify those one-time public interest purchases?

We haven't communicated that, and no, I can't.

Our next question comes from David Maris of Wells Fargo. Your line is open.

First, what states currently have plans for co-prescribing, or are currently considering it, that you think could possibly kick in the second half of the year? Then secondly, in July, INSYS announced that the FDA had accepted their Naloxone nasal spray. What can you tell us about your view of that product and what your response might be when and if it does come to the market? And then, lastly, just as a clarification, it seems like a lot of the concerns about being back-end loaded in the year are just explained away by the ACAM2000 kicking in at the late part of the year. So would that mean that next year should presumably be flatter? Even though it may be back-end loaded, it'll be flatter than this year? Thank you.

So I'll take a couple of them, and I'll ask Doug to weigh in on perhaps his thoughts and views of the INSYS product. So on co-RX, there are any number of additional states that we know are considering adopting co-prescription. It's a little dangerous to predict which ones may adopt and when they might, hence our reluctance to bake any of that potential upside into the $240 million to $260 million, so we're not really going to comment on which states and when. In terms of the back-end loaded nature of 2019 being impacted by both AV7909, the second-generation anthrax vaccine, as well as ACAM2000, I think 2020 should not be as back-end loaded. I think we'll be working on the delivery schedules for both AV7909 and ACAM2000 as part of these contract negotiations. And as you can appreciate, we look to smooth out those deliveries. It's a better model in terms of the supply chain management, so we'll be looking to take some of those lumps out next year. And maybe, Doug, you can comment on the INSYS comment.

Sure. Thanks for the question, David. So, yes, we're obviously well aware of INSYS' application. We understand that they are applying with an 8-milligram dose, which we believe will take additional work to validate that the dose is not only safe, I think there's been work done to look at children on that front, but also recognizing that the current standard is at 4 milligrams for intranasal spray. So while we have anticipated INSYS to enter the market as a branded competitor at some point, we're not ready to speculate when that is, but we are prepared in the event of that launch and absolutely anticipate the launch of the INSYS product.

Our next question comes from Keay Nakae of Chardan. Your line is open.

Can you tell us when we should anticipate that your new product launch for NARCAN might be commercially available?

Thanks, Keay, for the question. I'm going to pass it over to Doug, let him comment on that.

Sure. So we anticipate getting our applications into the FDA in the second half of this year, specifically the multi-dose, intranasal, and the prefilled syringe. I'd be speculating to give you a timeframe of when they would be cleared by the FDA, but would anticipate some time in 2020.

Bob, as it pertains to the new contract for ACAM, while you're expressing your confidence via the guidance and your comments, if it were to bleed into Q4 to finalize that, could you still make up everything you're prepared to sell in Q4 such that you hit the number?

Yes, there's a lot of assumptions baked into there, Keay. Again, I really don't want to speculate on what could happen or what might - either might or might not happen other than to reiterate our every confidence in where we are with these negotiations. As you know, they've been ongoing for a while. And as we talked about for the last year, we recognized that, given the magnitude of this contract - I mean, we're talking about a contract that could span the same duration as the VIGIV contract in order to support a 300 million dose stockpile, replenishment and rotation, these are critically important negotiations that have long-lasting impacts. And we strive to make sure that we get to a resolution that's fair for the U.S. government, as well as creates an opportunity for Emergent to continue to invest in the infrastructure for this critically needed medical countermeasure. So we remain confident, and we have planned on shipping product under the new contract in Q3, and we'll go from there.

With respect to the license fees and grants revenue line, we did see that uptick in Q2 related to I guess the clinical trial for 7909. Having completed enrollment, should we expect that revenue line to be lower in the back half of the year? Or how should we think about that coming off this $41 million in Q3?

Yes, I would expect it to be about even, Keay. I wouldn't read too much into what happened in Q2.

Our next question comes from Lisa Springer of Singular Research. Your line is open.

Regarding SG&A, I wonder if we should expect to see additional integration expense for PaxVax and Adapt Pharma in Q3 and Q4.

This is Rich. Thank you for the question, Lisa. We've been incurring integration expenses at a fairly steady rate throughout the first half, and that's going to continue through the second half. So I wouldn't expect a material increase in integration expenses in SG&A.

And I wonder if you could provide us with a little more color around the 55% increase in the other products category during the quarter.

The 55% increase in other product revenue?

Yes.

So that we delivered some additional quantities of some of our device revenue as well, the non-NARCAN nasal spray devices. And we also saw some additional deliveries of our Raxibacumab product.

[Operator Instructions] Our next question comes from Boris Peaker of Cowen. Your line is open.

This is John Scott on for Boris. On NARCAN, firstly, do you see doses being replaced more or less consistently with the expected shelf life? Or are there potentially some expired doses still being stocked that you could try to get people to replace? And then, secondly, can you comment on any new discussion or movement toward a Naloxone co-prescribing policy at the federal level? Thanks.

Yes, John, thanks for joining the call. Thanks for the question. I'll field the latter question on federal co-prescription and then turn it over to Doug to comment on the first question. I mean, clearly, a federal co-prescription is something that we see as an opportunity to make a much larger dent in the overall 34 million patient at-risk group for overdoses due to opioids. We think there's merit there. And as we shared with the AdCom meeting of the FDA in December, we think that there's an opportunity to significantly reduce opioid overdose-related deaths with a federally mandated co-prescription program. Just look at the state experiences for the 9 states that have adopted it, and what happens within the first 60 days of adopting co-prescription legislation in those states, the results are pretty remarkable. If you further look at the results of the study that was done in Ohio in Hamilton County, where on a test or pilot basis the market was essentially flooded with NARCAN nasal spray, the resulting impact on the number of opioid-related deaths, as well as hospital visits, was remarkably lower. So all of which is to say we think that there's benefit, and we'll see what the federal government decides to do. And Doug, you can take the first part of John's question.

Sure. In terms of expiring product and replacement, we don't currently track in terms of whether the products being purchased is for replacement or new. I will say the vast majority, both in the co-prescribing or the prescription market, as well as in the public interest market, are new customers, if you will, new markets. There's still a significant way to go in terms of getting NARCAN out in a more expanded way. We do have some information that suggests in the emergency/first responder segment, they're utilizing approximately 10% of what they have in stock, but we don't have any data to support how much is being replaced stocking. And this market is not - I mean, it's not a stockpile market, obviously. Everything in the public interest is basically being deployed in the field.

I'm showing no further questions at this time. I'd like to turn the conference back over to Bob Burrows for any closing remarks.

Thank you, Valerie. 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.

Thank you. Ladies and gentlemen, you may all disconnect.