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

Great. Good morning, everyone, and welcome to the JPMorgan Healthcare Conference. My name is Jess Fye. I'm one of the Senior Biotech Analysts at JPMorgan. And we're kicking off the conference for my coverage with Emergent BioSolutions. I'm joined by the company's CEO, Bob Kramer. And before he gets started, I just want to remind everyone that you can hit the blue "Ask a Question" button, it will send questions to a portal, and then I can ask the management team those questions during the Q&A which will follow the presentation. So with that, Bob, let me turn it over to you.

Great. Good morning, everyone. Thank you for joining today's presentation of Emergent BioSolutions. I want to say a special thanks to Jess and her team at JPMorgan for the opportunity to participate again in the conference and for their continued support of our company over the last 15 years. To begin, on Slide 2, as part of my prepared remarks this morning, I may make forward-looking statements about the business. Future results may vary from these statements. And I'd ask you to review the filings we have with the SEC for a complete account of the risks associated with the business. Similarly, on Slide 3, we've included some non-GAAP financial measures in the prepared materials I'm going to share with you this morning. There's a complete reconciliation of the GAAP to non-GAAP results in the appendix to this presentation. So moving to Slide 4. It doesn't seem possible, but we started our business 22 years ago by partnering with the U.S. government on one very real public health threat, that being that anthrax will be used as a biologic weapon to harm Americans. Since those very modest beginnings of having a single product, BioThrax, a single partner, the U.S. Department of Defense and a single manufacturing site with 170 colleagues, we've built a growing diversified public health threat business focused on helping governments, NGOs, commercial customers and strategic partners do one very simple thing, protect and enhance life. I've said many times over the recent years that, in many respects, as a company, we've grown up in the public health threat market alongside the U.S. government in their efforts to create and implement many of the programs, the agencies and the initiatives that are in place today. You need only to look at what's been accomplished during the last year by the entire network of public-private partnerships to fight COVID to appreciate how far we've come as an industry and how far we've come as a company. Along the way, we've continued to execute a strategy that's designed to do 2 things: first, build leadership positions in the public health threat market where we're best positioned to compete by leveraging what we do best; and secondly, grow our revenue, our patient and customer reach, if you will, in a way that diversifies the business and importantly, results increased profitability and value creation for our shareholders. Turning to Slide 5. In order to best drive the efficient execution of this strategy across a very broad public health threat landscape, we've organized our business into 4 different business units. Each business unit is led by an experienced executive and further supported by enterprise-wide functions that are matrix into the business units. These include vaccines, where our focus is on injectables and orally-delivered products; therapeutics, where the focus is on plasma-derived hyperimmune products, as well as monoclonal antibodies, devices which includes intranasally-delivered products like our NARCAN Nasal Spray and a portfolio of auto-injector products, plus other drug-device combinations; and finally, our contract development and manufacturing services business unit, otherwise known as CDMO, which a complete -- which includes a complete molecule to market services offering of development services, drug substance manufacturing as well as drug product and drug packaging services. Importantly, the CDMO business unit supplies both the supply chain solutions for our Emergent products as well as for a growing number of third-party collaborators and partners. What these 3 business -- or 4 business units have in common is the following: multiple products against significant public health threats, a robust pipeline using proprietary technology modalities and the fact that they've all developed into very trusted partners in terms of partnering with the U.S. government, our NGOs as well as our strategic collaborators. On Page 6, while the entire public health threat market is difficult to quantify, our focus is on specific product and service segments captured on this page, which in the aggregate, represents an opportunity set for us of about $50 billion. We see growth opportunities in both segments and importantly, across all 4 business units as these markets continue to evolve, mature and grow. Additionally, we see continued opportunities to capture market share within these segments through M&A, as we've done in the past, always looking to leverage our core competencies in the following areas: first, quality-minded biologics manufacturing and development; second, our ability to forge effective public-private partnerships and collaborations with a broad array of organizations; and finally, always adhering to strict financial disciplines about how we use our capital and how we expect appropriate returns on that capital. We always do that, again, building upon leadership positions that we've created or to create new ones and finally, to continue to look for opportunities to grow revenue in a diversified and profitable way. To be clear, we don't aspire to compete or operate in all areas of public health. There are many organizations much better positioned and capable of adding value in certain segments. However, in the segment side on this page, we believe we're well positioned to compete, add value and at the end of the day, provide a benefit to a growing patient and customer base. On to Slide 7. With the product segment of the -- within the product segment of the opportunity set, we focused on the following threat areas. And let's start with emerging infectious diseases, which is in the right-hand -- upper right-hand corner of the slide. Historically, we've done a lot of work in the area of Ebola, Lassa, Zika and now, COVID-19. Following down and below in travel health, we have both a licensed vaccine for cholera and typhoid as a result of our acquisition of PaxVax a couple of years ago, plus a late-stage development candidate for chikungunya that I'll talk about in a minute. In the bottom right-hand corner in the area of emerging health crises, our recent focus has been on helping curb the opioid crisis through our acquisition of NARCAN Nasal Spray in 2018. Bottom left-hand corner talks to the acute and emergency care area, and this segment includes poison control, burn treatments and hospitalized influenza, just to name a few. And then upper left-hand corner is really where we started the business 22 years ago, which is in the chemical, biological, radiological, nuclear and explosive threat space. On Page 8, our current portfolio includes 10 FDA-approved products, plus another 2 development stage candidates that are actually generating revenue now, our second-generation anthrax vaccine, AV7909, which is highlighted in blue, as well as our auto-injector technology platform under the name of Trobigard. Consistent with our strategy of building leadership positions, many of our products represent the only FDA-approved product for its indicated use. Examples of this are: BioThrax for the protection against anthrax; ACAM2000, our single-dose smallpox vaccine; and our botulism antitoxin therapeutic product. Consistent with the diversification focus of our strategy, our portfolio includes products represented in all 3 of the product-driven business units noted on the left: vaccines, therapeutics and drug-device combinations. They also include both government as well as commercially focused products and finally, represent multiple channels of distribution serving an adverse customer and patient base. Turning to Slide 9. In addition to the product portfolio, we're also investing in a portfolio of development candidates, which we expect to contribute longer-term to our continued revenue and patient reach. Many of these development initiatives are part of a public-private partnership, which typically include non-dilutive funding, such as our second-generation anthrax vaccine, our human COVID-19 therapeutic candidate, as well as several of our drug-device combination products. This has been a hallmark of what we've done for 22 years. For further development investments, such as in our travel health business, we see long-term opportunities in certain disease areas like chikungunya where we're preparing for a Phase III trial for a vaccine candidate to be initiated later this year. On Slide 10. So far, I've spoken about the product-focused business units; vaccines, therapeutics and devices, and I'd like to spend a little bit of time on the fourth business unit, which is our contract development and manufacturing services business unit. This unit has experienced significant growth since we first stood this up just 4 years ago, further accelerated by the COVID-19 vaccine contracts that we put in place last year totaling $1.5 billion and included collaborations with organizations like HHS, BARDA, J&J, AZ and several others. Similar to our approach to focusing on segments of the public health threat market where we're best positioned to compete and execute our strategy, we take a similar approach to how we utilize our extensive product development and manufacturing services capabilities to generate value for a combination of government, NGO, as well as pharma and biotech customers. Our molecule of market focus seeks to leverage service capabilities across development services, drug substance, as well as drug product and packaging to select customers and collaborators to drive long-term value. And as you can see, during the fourth quarter of 2020, we continue to onboard new business, approximately $55 million worth, while we also contribute and continue to expand our opportunity funnel, which now stands at nearly $700 million. Moving on to Page 11. Our manufacturing and development network includes 9 sites, 8 of which are in North America. Our CDMO network, which today includes 5 sites generating revenue, is capable of supporting multiple technology platforms as well as service offerings. As we've spoken in the past, we plan on expanding the utilization of the network to include all 9 sites by the end of 2024. Some of this expansion will naturally occur as we make more sites and services available, while other sites like Canton, Massachusetts and Rockville, Maryland, are locations where we previously announced capacity and capability expansion plans totaling over $200 million in new capital investments coming on board in the coming years. In 2020, the CDMO generated revenue accounted for approximately 1/3 of our total revenue. For 2021, we expect this to be even higher as we continue to execute the CDMO expansion strategy and continue, most importantly, the critical work we're doing to support COVID-19. On to Slide 12. So far, I've made reference to the 2 principles of our strategy and provided some color on the first one, which is building leadership positions in segments of the public health threat market where we think we can most effectively compete and add value. The second principle deals with profitable, diversified revenue growth and is best shown on the 2 panels on Page 12. For clarity, we issued a press release yesterday afternoon, providing an update on our preliminary 2020 financial guidance and our financial guidance for 2021, both of which have been incorporated into the information on Page 12. The panel on the left shows our revenue history during the last 6 years of 2016 through projections for 2021 and shows a fourfold increase in representing of 33% compound annual growth rate for top line revenue. In terms of diversification, as you can see, the contributions from product versus CDMO versus contracts and grants has expanded over time. In fact, the number of products in our portfolio has increased from 5 in 2016 to 12 products and candidates I mentioned on an earlier slide. The panel on the right speaks to the progress we've made on the profitability front and shows a more than fivefold increase in adjusted EBITDA during the same time period or a 44% compound annual growth rate. The adjusted EBITDA margin also improves from 29% in 2016 to 39% in 2021. Turning to Slide 13. Looking beyond 2021, let me talk a little bit about what you should expect from us going forward. As we discussed during our last Analyst and Investor Day in December of 2019, our strategic plan for 2020 through 2024 should look very familiar to folks who have been associated with us for the last decade. We continue to drive execution on the 2 strategic principles I've discussed today, informed by these key pillars. First of all, our core business continues to be strong. The leadership positions we've built are durable and well-positioned to perform going forward. Also, our portfolio of development candidates is maturing and positioned to contribute revenue during the same period. Secondly, we continue to see opportunities to build upon our leadership positions or even create new positions in niche markets through M&A across all 4 business units. Next, we'll be working to strengthen our development candidate portfolio to ensure that there are revenue contributors in the queue during the tail end of the 2020 through 2024 period, which will carry us into the next 5-year period. We'll also build and continue to build enterprise-wide capabilities which are scalable and value-added to ensure that we can continue to grow efficiently without any hiccups. The management team has done a great job over the years identifying and addressing the need for investments in order to stay ahead of growth. These investments have included investments in our IT systems, our talent development programs and our supply chain solutions, just to name a few. And perhaps most importantly, we will continue to invest in our people and our culture. Our 2020 through 2024 strategic plan included a goal of reaching $2 billion in revenue by 2024, essentially doubling where we were at the end of 2019. As I reviewed earlier, the midpoint of our guidance for this year anticipates that we get to that point already by the end of 2021. It's a familiar place for us, reaching a long-term goal earlier than planned, and requires that we revisit the 2020 and 2024 expectations, given the significant growth and the progress that we experienced in 2020. And while our first priority will be to make sure that we successfully execute on our broad COVID-19 initiatives, we've already begun a review of our long-term goals and look forward to sharing updates with investors later this year. Finally, on Page 14, as I wrap up my prepared remarks, I want to recognize the incredible effort, commitment and contributions of the thousands of individuals who have persevered during last year to produce unprecedented results in our collective fight against COVID-19. My Emergent colleagues have been among the many folks who have struggled to overcome extraordinary personal and professional challenges in order to do what we need them to do to fight this virus. I can't thank them enough. I hope the presentation today has furthered your understanding of our business and specifically, how Emergent views the opportunity set within a growing and evolving public health threat market, also how we've positioned our 4 business units, vaccines, therapeutics, devices and contract manufacturing and development services, to execute a fairly straightforward strategy built on 2 key principles of building leadership positions in niche public health threat markets and then profitably in a diversified way, growing our revenue and expanding our patient and customer reach. Also, I hope you will appreciate further how the successful execution of the strategy over the last near term, 6 to 8 years, has resulted in superior financial results and value creation for our shareholders. And finally, an appreciation why the management team and I are excited and confident in our ability to continue to execute this strategy and at the end of the day, achieve a long-term aspirational goal of protecting and enhancing 1 billion lives by 2030. Again, thank you for spending time with us this morning. We'll now begin the pivot to the Q&A session, where I'll be joined by a number of my executive team members, including Rich Lindahl, our Chief Financial Officer; Dr. Karen Smith, our Chief Medical Officer; Adam Havey, our EVP of Business Operations; Sean Kirk, our Executive Vice President of Manufacturing and Technical Operations; Syed Husain, who runs our growing CDMO business unit; and Bob Burrows, who heads up our Investor Relations. So with that, Jess, I'll turn it over to you for Q&A.

Great. Thanks, Bob. And just a reminder for those of you watching the webcast, you can use the "Ask a Question" button to send questions to me via the portal. But until those come in, I guess I'll ask my own question. So the first one, with this big move hire in the CDMO business on the back of vaccine contracts and now those vaccines kind of starting to -- at least some vaccines in the market starting to roll out, have the relationships between you and your partners evolved at all? How do you anticipate HHS using that capacity it's contracted for? And does that have any impact on the opportunity for EBS?

Yes. Let me start out, and then I'll ask Syed and Sean to join in as well. I think in terms of the relationships with our collaborators, just -- they continue to be exceptionally strong. As you know, we're working with firms like J&J as well as AstraZeneca. We've done work for Novavax, for Vaxart and some other firms. It continues to evolve. It continues to get stronger. Our focus clearly during 2020 was to initially ensure that we're standing up the manufacturing muscle, if you will, to be able to support the large-scale vaccine manufacturing capability for a number of candidates. I think the relationship also with BARDA and OWS and HHS continues to be very strong. I think it's important to understand just as backdrop before I turn it over to Syed and Sean, that the CDMO business unit for us is only 4 years old. We stood it up initially in early 2017 when we reorganized the business and set the business units up. At the time, there was literally only 1 of our 9 sites in any meaningful way doing CDMO work. Since then, with the good work of both Sean and Syed, we've put in place a strategy for continued execution and growth of the business. We initially announced a couple of capital expenditure programs, first at our Camden site and then in our Canton site last year. Last year gave us the unique opportunity to partner with a number of collaborators to apply that manufacturing and development muscle to COVID-19 in a very great way for our collaborators and for us, quite frankly. We're thrilled to be able to make the contribution that we're making. We've got a lot of hard work ahead of us along with our collaborators. But we think that business is well positioned for long-term growth. I can't tell you exactly how that growth will continue after 2021, but I think, candidly, there are multiple paths for sustainability and durability of that growth. One is probably more of a COVID-19 heavy vaccine play, the other is, quite frankly, how we started the business 4 years ago, which is focusing on growing demand within the commercial and clinical market for manufacturing and development services. So maybe with that, Syed and Sean, you all can weigh in as well.

Thank you, Bob. The one element I'd like to add is, overall, when you look at the strength of these relationships on the innovator side and on the government side, it continues to reinforce an acceleration of our credibility as a Tier 1 reliable and viable biologic CDMO option. And we are leveraging that, and we continue to see momentum with that across a multitude of manufacturing technologies.

Yes. And the only thing that I would add, I think, are 2 things. Number one, the boots on the ground, collaborative strength between the organizations and the government is unprecedented. And that makes me very optimistic that it's a strong foundation for future expansion of the partnership. And then the last thing would be, we have been pleased over the years to leverage our Center for Innovation in Advanced Development and Manufacturing pandemic preparedness capability at the Baltimore Bayview facility to fight Zika, to fight Ebola. But obviously, this is the most significant leveraging of that capability to date. And we remain optimistic that we will continue to play a significant role in pandemic preparedness beyond COVID-19, both in partnership with these organizations, but certainly in partnership with the government. Thanks, Bob.

Okay. Great. So you updated the size of the CDMO opportunity funnel and also talked about the contracted business you secured in the fourth quarter. Are there any metrics that you can put around the opportunity funnel to help investors think about its tangible potential, think about things like a projected conversion rate so that we can kind of get a better feel for what this number really means?

Sure. Syed, do you want to cover that one?

Absolutely. Thank you, Bob. So I think, Jess, the first thing is, as a reminder, we're in year 1 of this 5-year commercial strategy, so we're still in the midst of assessing our progress. But when you look at the data points that we've seen so far, we see continued evolution quarter-over-quarter on the new business that we've secured, which shows a very promising trajectory. And the opportunity funnel itself, it continues to show that we are seen as a viable and reliable option, we have a seat at the table across a multitude of our sites, our technologies as well as across clinical and commercial opportunities and across a multitude of opportunities, not only with pharma and biotech innovators, but also government and NGO organizations. So as we look forward into 2021, we'll continue to look at opportunities to assess that and share with that -- share with everyone as appropriate. But the biggest takeaway from where we stand right now, especially on the opportunity funnel, is that there is a driving momentum that we continue to have opportunities, and we're continuing to add to the overall baseload of business.

So can you maybe give us some color on the time horizon then for the opportunity funnel? How long does it take for this proposed business to turn into revenue, like the start of revenue? And then how long the contracts typically last? Once you have that contracted revenue, does it materialize over a year, 3 years, 5 years?

Absolutely. So the first element is that the beauty of our service offerings across development services, drug substance and drug products, allow us to get into a contracted relationship with a partner very rapidly, and it allows them to choose an à la carte service offering menu approach. So the overall opportunity funnel, the best way to look at it is that it can progress anywhere from the next 1 to 3 years, and these are initial values of when the relationship could start. So once we enter into a partnership, it paves the way for cross-selling opportunities across the service offerings, it also paves the way for extensions. And when you look at the last 2 quarters where we shared the new business that's been secured, it is a mix of brand-new entrants into the portfolio, it's a mix of existing project extensions, it's also a mix of long-term agreements that we put in place as well. But overall, the time horizon can be the next 1 to 3 years, we continue to see new things come in. We continue to see conversion. And then the most critical element is the fact that it paves the way for further opportunities with projects as they progress across the clinical horizon and some that come directly while they're in the commercial phase.

Okay. Got it. So you also mentioned that you secured $55 million of new contract revenue in the fourth quarter. I guess we should think about it kind of coming in over the next 1 to 3 years, like you just said, but what proportion of that is COVID-related versus not COVID-related? Not that it's not revenue, all revenue is good revenue, right? But I think investors sort of are trying to think about what portion might be more sustainable, assuming we ever get this pandemic under control versus what portion might have a more finite time horizon in terms of the ability for those customers to kind of re-up with you over time?

Absolutely. So we don't break it down specifically, but what I can say is that it is a mix of COVID and non-COVID. As we've said, we're essentially indication-agnostic on the services side. The way we look at the COVID opportunities that are coming into place, it really reinforces our ability to support biologics development and manufacturing, and it also points to the fact that innovation is at an all-time high. So if you just look at COVID as an example, we had essentially, overnight, about 150 candidates in the clinic, and all of those innovators have a belief in their candidates, so they need a service provider behind it. So we'll continue to see an evolving mix, but we will also continue to work on COVID partnerships within our portfolio. But overall, it's a mix. And the other exciting element of what's been brought over the last quarter is that it is a mix of all 3 of the service pillars. It's a mix of clinical work as well as commercial work as well.

Yes. Thanks, Syed. So I know, Jess, that, that's -- I mean, this is top of mind for all investors and for analysts really to understand what the run rate for CDMO revenue in our business is in this area post 2021. And I would just remind folks that, again, we, Syed and Sean, are building this business. They've -- we're going through a significant acceleration of what we thought we'd be able to do, quite frankly, with our 9 network of manufacturing development sites. Last year was just unprecedented growth for the business unit. I think as we look forward to after 2021, first of all, we'll know a lot in the first 6 months of this year, 2021, which will give us perhaps a better view of what that long-term path looks like. But similar to just when we give kind of long-term financial guidance instead a $2 billion revenue number out there 5 years ahead, we can't tell you exactly the stepping stones to get to that $2 billion number, but we feel very confident in our ability that whether it's through organic growth or through M&A, we're going to be able to get there. So the similar story is, in CDMO, where we've built a strategy, Syed and Sean have, that was really COVID-agnostic or independent. A number of years ago, we're making capital investments throughout our network, the tune of $200 plus million. We're bringing on new manufacturing sites within the existing network to contribute to that CDMO revenue. And candidly, I would be very disappointed if long term, we're not in that $0.5 billion to $1 billion revenue number on a sustainable basis for the CDMO business going forward. It could be greater than that, but that's kind of the range that we're looking at.

Okay. Got it. And maybe building on one of Syed's comments about the contracting business you secured in the last quarter being sort of across the pillars of your offerings. With this focus on the 3 main service pillars of development, drug substance manufacturing, direct product manufacturing, just kind of broader -- more broadly beyond this most recent quarter business you've been talking about, which one of those pillars is maybe a larger driver relative to the rest, either in terms of size or in terms of profitability? Is one of them more common within the mammalian vertical, which I think you've highlighted as the largest opportunity among your technology offerings? Just trying to kind of get a better understanding of that business.

Syed, do you want to weigh in?

Sure. Thanks, Bob. Appreciate the question again, Jess. So I think just to kind of ground everyone, so -- I mean, we do see all 3 service pillars as viable and profitable, given the fact that we are in the biologics space, not in the small molecule space. Drug substance has typically the largest monetary contribution, given the activity -- the value-generating activity and the scope of work that comes into play when you look at the overall manufacturing and supply chain process of a candidate and a drug itself. If we -- so therefore, if we looked at top line contribution, we would probably put it in order of drug substance, drug product and then development services. And certainly, gross margin percentage across all 3 lead to a mix contribution that we publicly said, a greater than 45% gross margin. Gross profit will naturally be the most in drug substance given its revenue contribution to the overall pot across those 3 service pillars, followed by drug product and then development services. We expect to invest in all 3 and look to grow all 3 of these service pillars. The technology pillars that are in high demand and growing are in terms of our $20 billion addressable market are certainly across as we have a mix of traditional technologies as well as emerging technologies as well.

Okay. Great. Maybe shifting to the financial guidance you provided last night, and specifically on NARCAN, I think you said that the guidance reflects no generic competition prior to decision from the appeal court, which makes sense. But can you talk a little bit more about your assumptions in that number? So does it actually include generic competition coming in at some point in the year? And if so, when and to what degree? I think you've talked in the past about how you view, in particular, the -- kind of the more public health channels potentially more insulated from generic competition relative to the retail channel. So just curious kind of the underpinnings behind that guidance number for NARCAN.

Sure, Jess. Thanks. So to be clear, the appeal process is underway, and we expect resolution of that appeal process in the second half of this year 2021, and that, as you correctly observe, that has impacted and factored into our guidance for product revenue for NARCAN Nasal Spray in 2021. And while we remain confident in the strength of the intellectual property position for the product, candidly, it is a bit of an uphill battle during the appeal process. We were and remain buoyed a little bit by the fact that we did successfully defend the patent trademarks in the patent and trademark office litigation that was being done in parallel with the district court as well as the appeal court process, so that gives us a little hope that our rights and our protections will continue. But nonetheless, again, we can -- we expect that -- to the extent that if the appeal process goes against us in the second half, that a generic competitor will be in. So we built our forecast for 2021 around those assumptions, again, that a generic competitor will be in the market in the second half, probably late in the second half of 2021. And until then, we'll be doing everything that we can with the branded product to, again, serve the needs of the patients and customers. In terms of the split between the public interest market and the retail market, we continue to see that roughly in that a 60% public interest market, 40% retail market, much the same way that we've done for the last year or so. And you're right, I think it will be the case that the public interest market is a little more insulated from generic competition just because of the extensive work that we've been doing for the last 5 years since launching NARCAN Nasal Spray in February of 2016, the brand recognition, all the relationships that we've built, but we'll see how -- when and if that happens later this year.

Okay. Great. And we're almost out of time here, but I did want to get the one question and that we've gotten through the portal today, which is, just what proportion of revenues from product sales are generated outside the U.S.?

Yes. So Rich, help me out with that. I think historically, it's been roughly in that 10% range, Jess.

Yes, that's right.

That really holds for 2021 as well.

Okay. Great. Well, thanks so much. It looks like we're out of time, but good luck in the new year, and we look forward to keeping up with the progress.

Great. Thanks, Jess. Thank you, everybody, for joining.

Thanks.