Ladies and gentlemen, thank you for standing by and welcome to the Emergent BioSolutions Inc. 3Q 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session [Operator Instructions] I would now like to hand the conference over to your speaker, Bob Burrows, Vice President of Investor Relations. Please go ahead.

Thank you, Amanda, and good afternoon, everyone. Thanks for joining us today, as we discuss the operational and financial results for the third quarter and nine months ended September 30, 2020. As is customary, today's call is open to all participants and the call is being recorded and is copyrighted by Emergent BioSolutions. In addition to the webcast there is a series of slides accompanying the webcast that we are pushing out to all webcast participants. During today's call, we may make projections and other forward-looking statements related to our business, future events or prospects for future performance. These forward-looking statements are based on our current intentions, beliefs and expectations regarding future events. Any forward-looking statements 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 today's call, 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, adjusted EBITDA, and adjusted gross margin and the reconciliations between our GAAP financial measures and these non-GAAP financial measures. The agenda for today's call will include Bob Kramer, President and Chief Executive Officer; who will comment on the current state of the company; Rich Lindahl, Chief Financial Officer, who will speak to the financials for 3Q and year-to-date 2020, as well as our updated guidance for full year 2020. And given the acceleration in the growth of our Contract Development and Manufacturing Services business my colleague Syed Husain, SVP and Head of the CDMO Business will provide a combination refresher, as well as progress report on the status of this key BU. This will all be followed by a Q&A session where additional members of the senior team will be present and available as needed. Finally, for the benefit of those who may be listening to the replay of this webcast, this call was held and recorded on November 5 2020. Since then Emergent may have made announcements related to topics discussed during today's call. And with that introduction, I would now like to turn the call over to our President and CEO Bob Kramer. Bob?

Thank you, Bob, and good afternoon to everyone. Thank you for joining today's call. First and foremost, I want to take a minute at the beginning of the call here to acknowledge my Emergent colleagues for their hard work and dedication and their ongoing efforts to combat the global COVID-19 pandemic. In this challenging environment our team has continued to excel. For more than 20 years, Emergent has prepared for threats like COVID-19. Our experience in addressing public health threats, including our capabilities, our products, technologies and people is unparalleled. Also it's worth noting a very special anniversary for Emergent. 50 years ago yesterday BioThrax, the company's vaccine for immunization against disease caused by anthrax was approved for use becoming the first and to this day only vaccine approved by the FDA for protection against anthrax. This important approval is a legacy that inspires all of us here at Emergent still today. So let's get started with the quarterly review. Overall, we continue to experience strength in our core business including continued deliveries of our medical countermeasure products coupled with substantial growth in the CDMO business resulting in quarterly revenues of $385 million. Clearly our strategy of diversification and profitable growth is fueling this strength as reflected in our strong quarterly and nine-month financial performance. Taking into consideration our year-to-date results and our visibility through to the end of the year, we also updated 2020 financial guidance, maintaining the same midpoint of $1.55 billion for total revenue for the year, as well as increasing our profitability ranges. Rich will discuss all of this in greater detail in a minute. Beyond 2020, we remain well-positioned and confident in our ability to achieve the long-term revenue and profitability guidance outlined late last year at our Analyst and Investor Day. With that as…

Thank you, Bob. Good afternoon everyone and thank you for joining the call. I'm pleased to report that Emergent is sustaining the operational and financial momentum we highlighted on our last earnings call in July. As you've just heard from Bob, our employees are meeting the challenges of this unprecedented year and deploying our products, services and capabilities to help our country face the global pandemic brought on by COVID-19. Our financial performance during the third quarter and year-to-date in 2020 reflects the strength and durability of our diversified business as evidenced by solid year-over-year increases in total revenues, adjusted profitability and operating cash flow. During the quarter, we strengthened our balance sheet by enhancing our liquidity and completing a highly successful inaugural bond offering. We have now refined our revenue guidance and raised our profitability outlook. As a result of all these factors, we are confidently moving forward and poised to extend our strong progress, as we approach 2021. With that, let's first look at the details of our third quarter performance. Highlights include total revenues of $385 million, an increase of $73 million or 24% versus the prior year; adjusted EBITDA of $168 million, an increase of $62 million or 58% versus the prior year; and adjusted net income of $119 million, a $54 million or 84% improvement versus the prior year. Breaking down quarterly revenue a bit further, let's review the elements of product sales. NARCAN Nasal Spray sales were $89 million, reflecting strong and durable demand for this critical drug-device combination product for opioid overdose reversal; anthrax vaccine sales were $74 million, reflecting the strong delivery volumes associated with the continued transition from BioThrax to AV7909 in the strategic national stockpile; ACAM2000 sales were substantially lower-than-expected due to a timing delay that will push deliveries into…

Thank you, Rich. Good afternoon to everyone. Thank you for joining today's call. I'm incredibly pleased to be here today to provide a deep dive into the CDMO business. As Bob noted earlier, we have demonstrated significant revenue and portfolio growth by deploying our expertise across development services, drug substance manufacturing and drug product manufacturing with both industry and government customers. While much of the recent growth has been driven by collaborations on COVID-19 programs, I want to emphasize the durability and sustainability of our CDMO business. Our ongoing investment in both capacity and new capabilities will increase our ability to meet the expected long-term demand leading to significant long-term growth. I'll start my remarks with a key factor that has led to our current success and will continue to be a differentiating factor going forward. As an integrated CDMO, Emergent occupies a particularly unique position in the landscape, combining the customer focus and dedication of a pure-play CDMO with the expertise and experience of a CDMO embedded in a pharma company. We have the distinct mindset to provide services to bring products all the way from concept to market. There is no other CDMO with this unique position in the landscape and resulting value proposition. Next I'd like to highlight that we are trying to address a $20 billion market opportunity. The approximate dollar value for each of the components is shown on the slide, so I'm not going to address each one separately. Individually they all represent sizable markets and we are confident in our ability to increase our long-term market share in each. Our confidence is based on several factors. First, we have an extremely successful track record of development and manufacturing abilities. Bob alluded to the history of Emergent in his comments and that legacy continues…

Amanda, are you there please? Operator?

I do apologize, I was on mute. [Operator Instructions] And your first question comes from Jacob Hughes with Wells Fargo Securities.

Hey, good afternoon. Maybe if we could just have two questions. One is on NARCAN. If we take the mid to high point of your guidance it implies some softening in the fourth quarter from the third quarter. Maybe if you could just talk about the key drivers of that? And then on, on the CDMO business maybe you could provide some additional detail on the cost that you're currently incurring related to your COVID-19 contracts? And then, longer-term, if a vaccine is successful, how should we think about the economics on a per dose basis for those contracts? Thanks.

Yeah. This is Bob. Thanks Jacob for the questions. Thanks for joining the call. So on the first one the Q3 versus implied Q4 NARCAN. I mean, first of all, the Q3 revenues for NARCAN were at an all-time high of roughly $89 million, roughly 10% above Q2. As we talked about throughout the year our annual view and guidance on NARCAN was predicated on a couple of things. First of all, that there would be no generic entrant or competitor to NARCAN Nasal Spray during 2020. Second, that there would be a couple more states that would adopt co-prescription either policy or legislation, which could potentially give a bit of a lift to the overall revenues. So we continue to be quite bullish and optimistic for that franchise in that product. I think what you might be implying in our Q4 number that you backed into it, it is maybe a little lower than $89 million. But again, we'll continue to monitor. What I will say is in Q3 both the retail component of NARCAN Nasal Spray revenues as well as the public interest market were higher in part on the PIP market driven by some of the state programs in California, New Jersey, Michigan and Georgia. So, again, we're quite optimistic. On COVID-19 and the contracts. In terms of the economics, I guess, I would say that we continue to evaluate the economics and what that additional revenue brings to the business. Our sole focus right now during the first really eight months of these contracts has been to make sure that we are honoring our commitments and obligations to stand up a many -- a robust manufacturing process and supply chain here in the United States for a number of our collaborators, including J&J and AZ. We'll evaluate longer-term the economics of what those contracts might look like under the commercial supply agreement. But as we have commented on right now those contracts in addition to the contract with BARDA and OWS are meaningfully contributing to both revenue and profitability during 2020 and we expect the same for 2021.

Thanks a lot, Bob.

Sure.

And your next question comes from Jessica Fye with JPMorgan.

Hey, guys. Good evening. Thanks for taking my question. I appreciate you providing that additional detail on the CDMO business. I'm trying to better understand the potential for near-term upside from that business. I think you said you're investing in building on sites in Maryland and Massachusetts. So how much of your capacity is spoken for at this point? And how much do you think you could still contract out over the next kind of year or two?

Sure. Thanks Jess for the question and good to hear your voice again welcome back. I guess, on the capacity issue, it suggests that you will look at it in a couple of different ways. First of all, as Syed has articulated we have a fairly broad and diverse network of nine different CDMO development and manufacturing sites. And as you know just from following us for quite some time, all of those manufacturing sites are a bit different. If you talk about capacity for COVID-19 vaccine development manufacturing in BayView, which is where the majority of that work is being done. I think we've said out loud that we're pretty much capacity maxed out right now with the work that we're doing with J&J, with AZ, with Novavax, and as well as with Vaxart. How that looks going forward will be somewhat dependent upon what the eventual yield is for many of those products. But I'll turn it over to Syed. He can comment more -- in more detail about the other kind of non COVID-19 sites including what we're doing in Canton to build that site out for future development.

Thank you, Bob, and thank you for the question. Just -- so the perspective that I would add on top of Bob's comment is to really reiterate the network effect from a utilization standpoint. So, if you go back to my prepared comments with respect to first off the offerings. So we have three distinct offerings between development services, drug substance and drug product. The ability to offer those individually and in an integrated fashion across all the technologies, allows us to still continue to onboard new business across the network that we have. That $500 million funnel is spread across opportunities that could go across our network. And that even takes into account, as I mentioned, facilities that we don't routinely reference such as the one in Lansing, Michigan as well as Winnipeg, Canada. And it also takes into account facilities that are coming on stream based on our committed capital investments. So for example the expansion in Rockville Maryland is coming on stream at the end of 2021. The investment in Canton, Massachusetts, which really puts us into advanced therapies from a gene therapy standpoint, comes online in 2023. So this network as well as our ability to partner with customers across each of these offerings as well as the $500 million funnel, will allow us the opportunity to over the years, including this year and next year continue to leverage available capacity that we have, and be set up to utilize capacity that's coming on stream with the committed investments.

Okay. Got it. Just two kind of follow-up to that. How flexible are the suites you're building out for the COVID vaccines? And to the extent that those partners ended up not meeting your capacity, can you help us understand how simple or complicated it would be to switch over that capacity to other products for a different client? And then the last question is just, what's the current operating margin for the CDMO business? And what do you think of it as on a normalized basis?

Absolutely. So, I'll answer the first question, and then pass it over to my colleague Rich for the second one. With respect to the first question, all of our development and manufacturing facilities are predicated on being multi-purpose. So they are designed to handle multiple products. They have foundational technology platforms that then allow them to be customized for the specific product and process that we're working on, and specifically, when we talk about the drug substance facility in Baltimore which is known as our BayView facility. So, right now that is predicated on multiple products being in there. If for any reason, those products are not successful, certainly with our deal structures that we've provided information on previously, we're protected from a financial standpoint. But then also, given the fact that they're multi-purpose facilities we can pretty readily transition to other opportunities either through those same innovators or opportunities that are in our funnel. And in parallel to that, while we focus our efforts on our drug substance facility, we're able to onboard new relationships and development services and in drug product as we've done over the past quarter.

And in terms of the profitability of CDMO, so on a normalized basis longer term, we would expect the margins to be in the 45% area somewhere in the mid-40s with an opportunity to improve from there. As we look at this year and next year, we're experiencing better margins than that just driven by a number of factors including the fact that because the facilities are so highly utilized right now, there's a much higher degree of absorption of the overhead in those facilities as well as some benefits we're receiving on some of the capacity reservation fees. So, several clicks higher this year and next year, major contributor to that 400 to 600 basis point blended gross margin improvement. And that's -- but on a longer-range basis, more normalized than kind of the 45% maybe higher-margin area.

Great, Thanks.

And your next question comes from Brandon Folkes with Cantor Fitzgerald.

Hi, thanks for taking our question. Congratulations on the quarter. I'll change pace a little bit here. You talked about the headwinds in the travel vaccines business and that's completely understandable just given the environment. Does that change how you're thinking about the development time line for your chikungunya products? Is this something you may look to push out just given what is going on with the travel world? Any color there just in terms of what we should expect would be great. thank you.

Yes. Thanks Brandon for the question and thanks for joining the call. And we continue obviously to evaluate our ability to execute the development plan for the chikungunya candidate. Our best information tells us that we should be able to start that clinical trial in 2021. And clearly I think you're right in identifying that there may be some risk to starting that because of the macro issues around COVID-19. But I mean again as we stand here today, we plan on initiating in 2021.

Great. Thanks very much.

Sure.

And your next question comes from Keay Nakae with Chardan.

Hi guys, thanks. I just want to talk about some of the guidance for some of the product revenue. Bob your anthrax vaccine travel guidance much higher. What does this imply for next year? Generally speaking we do see these numbers on a year-over-year basis fairly steady. This is going to be an upsized year. How do we think about 2021?

Yes, Keay, thanks for joining the call. So, let's take one year at a time. I mean 2020 as you note we were able to increase the range from last quarter from -- it was $320 million to $350 million now it's $350 million to $370 million. So, again, I will readily acknowledge that. But I will also acknowledge that on ACAM2000 we had to take a little bit of a haircut on the bottom side of the range. And this is all due to our best view of our ability to meet delivery schedules and to supply the appropriate number of doses for, in this case, both anthrax vaccines as well as ACAM2000. And you know from our many years of conversations the risks associated with the supply chain around biologic products whether it's the production cycle or the testing cycle or regulatory and review cycles, it ebbs and flows a bit. So there's a little bit of variability around that. And we've been able to manage that effectively when it comes to anthrax vaccines in 2020 to the point where we were able to up the guidance a bit. And as Rich indicated with ACAM2000 the smallpox vaccine, we've provided essentially a little bit of a different range just in recognition of some of the supply chain challenges that go with biologics. So, we will give some guidance as we always do for 2021 probably in early January of next year. As we've talked about in the past we expect there to be -- the run rate for anthrax vaccines which have historically been in that $250 million to $300 million range we expect that going forward. I think what we're experiencing in 2020 is a little bit of maturity quite frankly in the transition of the strategic national stockpile from BioThrax only to a BioThrax and AV7909 stockpile. So, it's just part of the evolution the maturity of that transition, Keay.

Okay. So, we shouldn't necessarily think that the upsized 2020 number is eating too much into what we would normally think on an average basis for 2021?

Yes. We'll talk about 2021 in a couple of months.

Okay. Switching to raxi, you mentioned with the focus on, COVID-19 and the impact on getting the follow-on contract, how far out should we think about that follow-on contract now being -- in terms of being able to secure that?

Yeah. I would hope that sometime during 2021, we'll get clear line of sight, in terms of the overall procurement and contracting process. I think it -- in part, it's impacted by the more macro issues around COVID-19. So we'll hope to flatten that out, in the first half of 2021.

Do you need to have advance, the U.S.-based manufacturing to a certain point, before you're able to successfully complete that contract?

You're back on raxi now, Keay?

Yeah. Yes. Sorry Bob. Yes.

Yeah, we will. As we've talked about in the past, our plans were to do a tech transfer from GSK to our Bayview facility. And right now the Bayview facility as Syed articulated is essentially full up and fully committed to COVID-19. So we'll work through the issues. I think we'll have again, clear line of sight in the first half of 2021 what the long-term implications if any for raxi will be.

Okay. Great. Thanks.

Sure.

[Operator Instructions] Your next question comes from Dana Flanders with Guggenheim Partners.

Hi. This is Devin on for Dana. Thanks for taking my questions. Just a few for me today, first the midpoints of your guidance imply, I believe, if my math is correct sequential decline in 4Q EBITDA margins. Could you provide some color on, what's driving that step down sequentially? And is this just a function of mix? And lower relative contributions of CDMO, in terms of percent of overall revenues or something else?

Yeah, Devin thanks for joining the call. Thanks for the question. Yeah. I'll make a couple of comments. And then, I'll ask Rich to weigh in as well. I think it's important to note, that in fact we have guided up, the adjusted EBITDA number for 2020, even from quarter two or earlier this year, which was significantly higher than, what we guided initially, in the beginning of 2020. So I think what you're probably referring to is, when you start doing the math and backing in, to what a Q4 number looks like, given the large revenue contribution. Again as a result of backing into the number, maybe the margin looks a little out of line, particularly if you look at it compared to Q3. I wouldn't read anything into that. It will be the result of mix of contributions, but I wouldn't read much into that Devin.

Yeah. I mean I -- we can go through that with you off-line but we are not expecting a decline -- a sequential decline, in the adjusted EBITDA margin in the fourth quarter.

Okay. Thank you. And then I guess just one follow-up. So on the CDMO business, I know you guys mentioned -- I didn't have the slides up but the -- you mentioned $1.8 billion in current portfolio $60 million in new business and existing projects and a funnel of approximately $500 million. I'm assuming that the $1.8 billion includes the COVID contracts. But is there any other COVID-related business, that rolled up into those other I guess, into the funnel or into the new contracts you signed this quarter? Thank you.

Yeah. So at a high level, you are correct. The $1.5 billion in COVID-19 contracts that we've announced and press released, during the first or nine months of this year are included in the $1.8 billion. Syed, I don't know if you have additional color or detail you want to comment about the remaining $300 million in terms of what's COVID versus what's non-COVID?

Yes absolutely. Thank you, Bob. So a couple of things. With respect to that 1.8 -- approximately $1.8 billion of that $300 million that's separate from the COVID response that is predominantly non-COVID. The other aspect is that $1.8 billion approximately $1.8 billion does not include existing project extensions from our current portfolio of customers like Johnson & Johnson or AstraZeneca which could be sizable. From an opportunity funnel standpoint that we had talked about which is as a snapshot right now approximately $500 million. We see a very diverse set of discussions within that $500 million. That does include some additional COVID opportunities as well as a very healthy mix of non-COVID opportunities as well.

Okay. Thank you.

And there are no further questions. I would now like to turn the conference back over to Bob.

Thank you, Amanda. With that ladies and gentlemen, we now conclude the call. Thank you for your participation. Please note an archived version of today's webcast as well as the PDF version of the slides used during today's call will be available later today and accessible through the Investors landing page on the company website. Thank you all again and we look forward to speaking with all of you in the future. Goodbye.

That does conclude today's call. You may now disconnect.