Emergent BioSolutions Inc. (EBS) Earnings Call Transcript & Summary

Hi, everybody. Thank you for joining the Emergent BioSolutions fireside chat. This is Albert Hwang from Morgan Stanley speaking. And again, thank you for joining. I have with me Rich Lindahl, the CFO of Emergent; and Bob Burrows, the Head of Investor Relations at Emergent. I will be -- there is no corporate presentation, but you can find it on their website. I will start with a few questions, but if you do have any questions, please feel free to ask them. So maybe I can start. Rich, if you can give maybe a little bit about your background and then the current state of Emergent. The stock has actually done very well over the past few months. So I'd be curious to hear what you think that's attributed to.

Sure. Thank you very much, Albert, and good afternoon, everyone. Appreciate you taking the time to participate in our fireside chat today. So my name is Rich Lindahl. I'm the CFO of Emergent. I joined the company about 2.5 years ago. Prior to that, I spent 8 years as CFO of a company called Corporate Executive Board, CEB, up until the point where it was acquired by Gartner. And prior to that, I spent about 15 years in the telecom industry, most of that with Nextel and then with Sprint for several years after they merged. So I'd love to just tell you a little bit about the company. I'm sure some of you, maybe most of you are familiar, but just to sort of set the stage and level set for everyone, I'd let you know that Emergent is a company that has been around for 22 years. We've always been focused on providing solutions to complex public health threats. We've done that by partnering and collaborating with a range of partners, including the United States government as well as other allied international governments; strategic partners, including most recently Johnson & Johnson and AstraZeneca; and also some third parties, including SEPI and the Gates Foundation. The public health threats that we focus on come in several categories, including what we refer to as CBRNE, or Chemical, Biological, Radiological, Nuclear and Explosive; emerging infectious diseases; opioid overdose; and other emerging health crises and also the travel health market. We currently have a portfolio that has 10 commercialized products on the market across vaccines, therapeutics and drug-device combinations, many of which are purchased by governments under long-term procurement contracts. Our products are both stockpiled for potential emergency use as well as actively used to support the preparedness and response capabilities of our customers. In addition to the products that we have commercialized and available on the market, we also have 15 pipeline candidates in various stages of development across, again, all those elements of vaccines, therapeutics and drug-device combinations. We've also organized ourselves into 4 business units: vaccines, therapeutics, devices and our CDMO business. Our CDMO business leverages a manufacturing network that has 9 manufacturing and development sites, most of which are located in North America. They support both our internal supply chain needs as well as a growing list of external customers. This year, we've seen significant growth in that business, and I'm sure we'll dive a little bit deeper into that as we go through the rest of the program here today. But importantly, that business has been growing, and we're also investing to support future growth. We currently have about $200 million of capital programs in flight right now to expand capacity and capability. A significant portion of that is being funded by the United States government. Back in November, we laid out the parameters of our long-term growth strategy at our Investor Day that we held in New York. We laid out some key targets there for what we wanted to achieve by 2024, including to double our revenue to $2 billion, driven by a combination of both organic growth and strategic M&A. We also look to -- we also provided a profitability target of a range of 27% to 30% adjusted EBITDA as a percentage of revenue. Now this year has been the first year of our execution of that strategic plan, and we've experienced significant growth, a lot of that driven by a major increase in our CDMO business, a portion of which -- or a large portion of which was -- is a result of the work that we're doing to address the COVID pandemic. In total, we've put $1 billion -- $1.5 billion worth of new contract value on the books related to the CDMO business and that is complementary to the more than $3 billion of long-term contract value that we've put in place in 2019, primarily in our medical countermeasures business. So we also have 2 therapeutic products that are in development right now to address the COVID-19 pandemic. And so when we combine all of this, we're very bullish on prospects for the business going forward. As we look at this year, we recently raised our guidance at our second quarter earnings call. And the new guidance implies that we are on track to achieve a third consecutive year of 40%-plus top line revenue growth with high visibility to improving profitability and cash flow. We also remain very interested in pursuing additional M&A and looking for things that are both strategically [ on point and defendable ] from a valuation perspective across our business units. And finally, we've continued to enhance our liquidity position and to strengthen our balance sheet, most recently with an opportunistic high-yield bond financing to -- that diversified our access to capital, extended our maturities and refreshed the full amount of our $600 million revolver. So we're in a great position as we move towards the end of this year to continue to leverage that operating momentum and drive additional shareholder value as we go forward. So with that, Albert, maybe I'll turn it back to you for the first question. It seems like you're on mute, Albert.

You started to talk about the COVID therapies and contracts that you have. Obviously, CDMO is just, as you said, one out of 4 of the businesses but seems to be the one that's most active in the last few months. I guess if you can mention why J&J and AZ -- AZ just had a clinical hold, then it was taken off. And does that impact your business at all? Is it purely success-based? How do those contracts work? And how are you impacted or not impacted by those?

Yes. So the high-level takeaway is that, that $1.5 billion of revenue is something that we can expect to realize, substantially all of it, regardless of what happens with the vaccine candidate trials. It's the way those contracts have been structured. But let me walk through what comprises the $1.5 billion to give you a better feel for how that's all going to play out. So first of all, we have -- we received a $628 million task order from the U.S. government from BARDA back in May that had 2 components. The first component is a $543 million apportioned to reserve manufacturing capacity across several sites in our manufacturing network that gave the government the right to direct how that capacity would be utilized. That $543 million is being recognized on a straight-line basis, on a monthly basis from May of 2020 through December of 2021, and it's a take-or-pay arrangement. The $85 million, which is the other component of the task order relates to investing in expanded capacity in our fill/finish network, primarily at our Rockville viral fill/finish facility. That is reimbursement plus a markup for the capital that we're investing to bring that capacity online. That will be recognized this year and next year as we satisfy certain milestones and work towards completing the construction project. Now the way the accounting for that is going to work is that the revenue -- the funding will come through as revenue on our income statement, but the costs will come through as capital expenditures on our cash flow statement and then as depreciation on the income statement as that equipment gets depreciated. So on both a gross margin and an adjusted EBITDA margin basis, that revenue is effectively -- that portion of the revenue is effectively 100% margin for us. So next, we have contracts with both Johnson & Johnson and AstraZeneca, and I'll come back to why they chose to do business with us in a moment, but in terms of the contracts, each of them we have 2 separate contracts with. One is for what I'll call setup, if you will, so development services, tech transfer, other manufacturing readiness to prepare for large-scale manufacturing of the bulk drug substance for their vaccine candidates. In the case of Johnson & Johnson, that first contract was $135 million, about 1/3 of which we will realize and recognize this year and the remainder next year. In the case of AstraZeneca, that first piece was a $87 million contract that will be recognized across both years. Then we have commercial service agreements with both of those companies. In the case of Johnson & Johnson, it's a 5-year agreement. We have announced the first 2 years of value associated with that. So that's $480 million or $240 million in years 1 and 2 of that contract. The remaining 3 years are still to be finalized and determined and will be disclosed at the appropriate time. In the case of AstraZeneca, it's a 3-year agreement, and we disclosed the year 1 contract value of $174 million. And again, years 2 and 3 are to be finalized and disclosed at a future date. So that's how all of those contracts are structured. Now in terms of why they chose us, quite simply, it's the history we have of high-quality manufacturing of delivering on complex problems of the fact that we had capacity available in the -- primarily in the Bayview facility that we have, which was designed expressly for the purpose in partnership with the government of dealing with an emergency just like COVID. It was actually -- the emergency that was contemplated was a pandemic flu situation, but there are 4 separate manufacturing suites that are very flexible, and each one can handle a different set of applications and be set up to move very rapidly, and that's exactly what we're doing right now. So it's really that history we have plus the capacity we had available that gave both of those companies the confidence that we were the right partner for them in this situation. You're on mute, again, Albert, sorry.

I'm just going to stay off of that. I'm not really going to hear anything. So -- and then in terms of the contract with AZ, so the put on clinical hold or what if the AZ vaccine doesn't work, how does that impact your future with either of these companies?

Yes. So that particular event, by the way, is a very common sort of event when you're going through a clinical trial, is that these sort of adverse events will occur, and the program will be paused to investigate and then resume. It's -- obviously, given all the attention that's on COVID, this one kind of found its way onto the front page of the Wall Street Journal, whereas I think these kinds of things happen all the time in various clinical trials. So -- but that's sort of a tangential point. But to your question, the way this contract is structured, it really -- we're not -- first of all, we're not providing clinical material for AstraZeneca. We're really preparing and will be manufacturing the bulk substance. Even if the trial didn't resume or the candidate failed, we would still be entitled to that contract value, substantially all of it that we talked about, the $174 million. So what would happen in years 2 and 3, obviously, that might be a different story. But in terms of what we've actually disclosed, that value is substantially all going to be realized.

Okay. Great. How does this -- how do these contracts affect your existing CDMO business? Does that get put on the back-burner? Or do you have some capacity set aside? How does that work?

Yes. So business that was already kind of sealed and in the queue before we entered into these arrangements, we're fulfilling all those requirements. So that -- the only capacity we've sold was above and beyond the capacity that was needed for that business. And then what happened is, effectively, all the capacity in Bayview has been allocated now through at least '21 and then it starts to free up a bit starting in '22. But again, all the existing arrangements we had were honoring.

And Albert, an important point just to build off that point which you just made is that it's important for investors to understand that the CDMO business unit is comprised of 9 sites with a network of locations. So the CDMO business is not necessarily dependent on Bayview alone, it's just that the locus of the COVID response or response to COVID is through the Bayview site. With respect to the vaccines, the hyperimmune we're developing are all out of our Winnipeg facility, only separate.

Okay. Right, right. Okay. Great. Maybe anything we can cover on the therapeutic side that you have not covered? So the anthrax vaccine, the smallpox, how are those franchises doing?

Yes. So they're all doing very well. I referenced in my opening remarks that we've put in place $3 billion of long-term contract value across several of those franchises. On the anthrax franchise, you'll see that we are guiding to $270 million to $320 million of revenue this year. That's an increase versus where we were before. The U.S. government exercised the first -- or not the first, but the next option under that existing contract for AV7909. So the commitment there is clearly demonstrated that they continue to follow through and maintain the stockpile for anthrax. Similarly, for the smallpox vaccine, ACAM2000, the first annual option exercise happened in the second quarter as we expected. And that, again, we've guided to $180 million to $200 million of revenue for the ACAM2000 vaccine sales for this year. So definitely following through there. We also had an option exercise for the VIG product as well. So all indications and backed up not just by words but by action are that the government continues to place a high priority on preparedness and keeping the stockpile up-to-date with these products and programs that we have in place.

Okay. Great. Maybe moving on to the NARCAN Nasal Spray. Can you highlight how the business is doing, how it's integrated and how you've been able to deploy the product and then perhaps cover what the current status of the litigation is -- or the generic, the potential generic?

Sure. So -- well, first of all, the integration has gone very, very well. It's certainly been complete for some time now. And we've been very, very pleased with the acquisition and how the team has done that came along with the company. And that business has continued to perform very well. So this year, we're guiding to $285 million to $315 million of revenue for NARCAN Nasal Spray. That assumes no generic entrant, and I'll come back to that in a minute, but that would be growth over last year as well. So it continues to grow. The backdrop for this is that the opioid crisis certainly has not abated and, if anything, the pandemic has exacerbated the problem, just given the situation. And so the demand for a life-saving drug like NARCAN Nasal Spray, which is a very easy to use, intranasally delivered form of naloxone, remains robust and we expect will continue to remain so for quite some time. The way we have -- what we have done is we have continued to focus on what we call the 3 As, which is increasing awareness of not only the problem, but the fact that a drug like naloxone and NARCAN Nasal Spray more specifically exists to address it; number two, that it is as available as it can be through multiple channels of distribution; and number three, that it is as affordable as it can be with as many -- about 97% of insured lives are covered by this drug. And it is available by standing order in all 50 states. There is ongoing efforts to, again, promote awareness and education through things like the co-prescription legislation and the conversations that, that prompts between doctors and patients about the risks associated with high dose opioids, et cetera. So we're staying focused on all of that. The way our business is structured is that we have 2 distinct market segments associated with them. One is what we refer to as the public interest market in first responders and other kind of municipal or community groups. That is a highly fragmented market, where the distribution is very much relationship-based and that's something that we've been building our capabilities and our contact points over the course of the last 5 years in that space and about 60% of our revenue comes from that segment. The other 40% comes through the traditional retail channel and -- where you do need a prescription to obtain the product. So touching on the litigation. So as you know, we have been engaged in litigation with Teva for patent infringement. We did receive an adverse ruling on that in the early part of June from the judge. We are appealing that ruling. We have -- we filed our formal appeal several weeks ago. And we're going to vigorously pursue that and play that out. We don't expect a final resolution or decision on the appeal until probably about this time next year, sometime in the second half of 2021. And until that point -- at this point, it's status quo, and we're continuing to build out the business along the lines of what we talked about earlier. Teva would have the ability to launch at risk as they've had actually all along since their product -- since they received the initial approval of their product. They have not launched at risk to date. We don't know what their plans are, but we haven't seen any indication that they're planning certainly a near-term launch at risk, and hence, our assumption that there won't be a generic entrant this year. Whether they would launch next year remains to be seen. Before the -- whether they would launch before the appeal is resolved or not, it's hard to say. We're not sensing any sort of preparation at this point in time in the market, so we'll see. And again, we'll continue to -- along the same lines that we've been going down up to this point. And if they do launch either at risk or if the appeal does not result in a successful outcome for us, we feel like that presence we've built up in the public interest market gives us a very defensible position. We've already priced at a 40% discount to the retail WACC for participants in that marketplace. So it's a very affordable product at this point already. And in the retail space, we have some options and levers at our disposal that we can pursue to compete and respond if there was a generic entrant. So when you net all that out, we're very confident that there's going to be a very meaningful revenue contribution from this business for the foreseeable future with or without a generic entrant.

Got it. Okay. Well, it's a good piece of business in your overall portfolio, so I wish you luck with that.