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

Good afternoon, everybody, and thank you for joining Day 3 or Monday of the Morgan Stanley Global Healthcare Conference. With me, I have Emergent. And before we get started, I'm going to read a quick disclaimer. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So again, thanks for joining this fireside chat. I'm Albert Hwang. I'm a Managing Director and Co-Head of the U.S. Healthcare Group at Morgan Stanley in the Investment Banking division. And maybe what I'll do is turn it over to Rich Lindahl, the CFO of Emergent, to introduce the team. And perhaps, Rich, just to kick us off, you can give a 5-minute overview and update on what's going on at Emergent.

Great. Yes. Thanks, Albert. I appreciate it. And thank you, everyone, for tuning in to the fireside chat today. My name is Rich Lindahl. I'm the Executive Vice President and CFO of Emergent BioSolutions. I'm joined by my colleagues, Adam Havey, who is our Executive Vice President and Chief Operating Officer; and also Bob Burrows, who is our Vice President and Investor Relations Officer. And so just maybe I'll take a few minutes to talk through some of the key elements of the Company to be aware of. The key message overall is that we have a diversified business, which remains fundamentally strong as we come through 2021. I want to touch on a couple of key elements of that business, including our focus on medical countermeasures, our work in the CDMO industry, our work addressing the opioid crisis as well as a couple of other key highlights of the business. So, starting with medical countermeasures. That portion of our business continues to show significant strength and stability as we deliver on our contractual commitments related to the U.S. government's procurement of products for the Strategic National Stockpile. We have leadership positions in several key areas, in particular, in anthrax, in smallpox, and in botulism. In each of these areas, we've secured multi-year contracts that to supply the Strategic National Stockpile. In anthrax, we have AV7909, which is our next-generation vaccine, being procured under pre-emergency use authorization as well as BioThrax, which is currently our licensed vaccine for anthrax. For smallpox, we have ACAM2000 as well as our therapeutic VIGIV, both of which have not only long-term contracts, but we've secured option exercises for additional doses this year. And then finally, in botulism, we have BAT, and we also recently secured an option exercise for additional doses for that. I would comment that the government's commitment to continued readiness against the threat of biological threats is as strong today as it's ever been. I think you see that in the President's FY '22 budget submission, where there's clearly an ongoing commitment to sustaining, if not increasing funding levels for development and procurement. And the threat landscape remains constant. If anything, COVID has really further highlighted the need for public health threat preparedness. So, in addition to the products that I just talked about that are being procured, we also have a robust development pipeline of related candidates. I talked about AV7909. We're working through a process where we've completed the Phase III trial of AV7909, and we're on track to submit our BLA to the FDA by the end of this year. We have another late-stage medical countermeasure program called Trobigard, which is an auto-injector platform for nerve agent antidote. It has 2 different chambers. And we've recently completed meetings with several key agencies, including the FDA, the CDC, and the Department of Defense regarding pursuing a potential emergency use authorization for Trobigard, which could come as soon as next year. I'd also point out that this is a really an ongoing validation of our auto-injector portfolio and the potential opportunity that it represents. So that's medical countermeasures. Moving on to CDMO. That business unit continues to focus on winning new business, both with existing or repeat customers as well as with new innovators who are seeking biologic-focused support. And we offer 3 different service pillars: development services; drug substance production; and drug product or fill/finish services. We offer these services across 5 different manufacturing and development facilities, which are part of our global network of 9 sites. And we always balance the supporting the needs of our internal products with the growing base of customers that represent our CDMO business base. At our Bayview facility, which is where we're performing the COVID-19 drug substance manufacturing services for Johnson & Johnson. We've made the decision to maintain that as a single product facility in the near-term in order to focus on delivering against our commitments to Johnson & Johnson and doing a critically important work that we have there. So in the near term, that means that our ability to use that facility is somewhat constrained, but over the long term, we have opportunities to more fully leverage it and leverage the significant capabilities that we've built over the last several years and that are currently being enhanced and established at the site. In addition, we are always looking for additional ways to enhance the capabilities and capacity that we have across the network. A couple of examples of that is that we are nearing completion of a new high-speed viral fill/finish line in our Rockville, Maryland facility, and we recently completed a second line capability in our Baltimore, Camden facility as well. So, turning to the opioid crisis. As you know, we entered this business with our acquisition of Adapt Pharma and the NARCAN Nasal Spray product back in 2018. We have been engaged in helping to battle the opioid crisis, which has only expanded as time has gone and really has been exacerbated by the COVID pandemic. Our team has been working tirelessly to really focus on 3 fundamental objectives as it relates to the opioid crisis. One is increasing awareness of the risks of taking prescription opioids as well as the need to have ready access to a naloxone product. Two, to make sure that we increase the availability of naloxone products like NARCAN Nasal Spray. And three, to ensure that NARCAN Nasal Spray is affordable to everybody who needs it. And so we stand ready to continue showing meaningful impact from these products, addressing the crisis. Finally, I'll highlight a couple of other elements. One is in our Travel Health portfolio. Our Travel Health business has certainly been impacted by the COVID pandemic, and we've seen a pullback in the revenue associated with that business. We don't expect a full return to pre-COVID levels until 2023 at the earliest and potentially longer into 2024. However, we do have an exciting opportunity in that part of our business with our chikungunya candidate. And we are continuing to develop that product. We're looking to launch our Phase III trial by the end of this year, which will likely take up to 2 years to complete, and we will continue to invest significant discretionary funds in that product. Right as we sit here today, there's nothing currently available to combat this mosquito-borne infectious diseases, and we're optimistic that our single-dose candidate will have a role to play in countering the threat of this EID. I guess I'll just finish by highlighting that we continue to focus on executing against our 2020 to 2024 growth strategy that we put in place in 2019. We're in year 2 of that 5-year plan. We continue to look to achieve $2 billion in total revenue and adjusted EBITDA in a range of 27% to 30% by 2024. And as it has been since we launched the plan, there are multiple avenues that we can pursue to get there. But we continue to stay focused on those goals and objectives, and our platform is positioned for us to continue to achieve those goals both through organic means and through opportunistic M&A activity. So with that, Albert, I'll turn it back to you for Q&A. I think you're on mute, Albert.

Great. That was a very good summary of all the components of your business. And as you said, it's diversified. Why don't we go through each one, separately. First, the CDMO business, you had mentioned that right now, you have the J&J contract. How do you think about how long that will last? And then, number two, what do you see as the opportunity at that facility beyond COVID-19? Or do you have any other non-COVID-19 contracts?

Sure. Yes. So I think I'll answer the first part of that question, and then I'll invite Adam to take on the second part. So our contract with J&J, it's a 5-year agreement. When we announced the contract, we announced that Johnson & Johnson had committed to the first 2 years under the agreement for an estimated value of $480 million. We are -- we have completed the tech transfer and other start-up capabilities required for that product. We did come through this year -- in the events earlier this year in Bayview that where we had a manufacturing pause. We have restarted production in Bayview and are working to ramp to whole scale again as we go through the coming weeks and months. So we're in the early days of fulfilling that to your commitment. And as we make further progress, we will continue to engage in conversations with Johnson & Johnson, with whom we have a very strong and positive relationship at this point and stand ready to provide additional capacity as they -- should they seek to exercise volume commitments under the remaining 3 years of the 5-year agreement. So, with that, I'll hand it over to Adam.

Thanks, Rich. As far as the non-COVID contracts, maybe just to zoom out a minute, Albert, and give folks a little bit of the contours of the business. We have 3 kind of important lines of business that we work with innovators on is development services, drug substance and drug product. The Bayview work is obviously focused on the drug substance component of that. And I think as we think about the business now and into the future, I think that will hinge primarily on the J&J work that Rich outlined. But for the rest of the business, and particularly on the development services side and the drug product side, we have many non-COVID-related programs and projects. And I think one thing to remember, especially on the drug product side, is many of those are repeat customers. So once we get these customers into the filling suites and we perform like we've been doing over a number of years, it's got some stickiness. So many of -- much of that work in many of our sites is repeat business, and I think you're going to continue to see strong growth on the drug product side of the business in '22 and '23.

Okay. And I guess as you take on additional business, what kind of capacity do you have for additional CDMO business? I mean, whether it's COVID related or otherwise? What does your capacity look like? And do you plan to add to it?

Adam, go ahead.

Sure. So I think, right now, I mean, I think we've shared before, I mean, we've kind of taken this model of being an integrated CDMO. And so depending on the site and the location, the utilizations kind of vary. But I would say at this point, we're not capacity constrained, especially on the development services and drug product side. I think where we have some constraints right now, Albert, because we've dedicated Bayview to J&J, the drug substance piece has -- is a bit constrained by capacity and/or capability at this point. But right now, there's nothing really limiting us. If you remember, we made a capital investment a few years back in Camden. We added a new line. We were able to launch that during the COVID work. We actually also built a new line in Rockville that Rich talked about, and we're going to bring that online, probably in the middle of next year. So we've got new capacity, especially in the drug product and filling areas, inspection and packaging areas that need to be -- that will be tapped and they'll be available for customers. So not constrained on the drug product or development services front. And we've got to work through kind of the demands of COVID and what J&J wants to do with that facility in Bayview, and then once we determine that, there'll also be some capacity there for drug substance, in particular, viral manufacturing capacity in Bayview.

Okay. So as we think about -- the facility is now in the use for COVID-19 related, there's obviously a revenue base there. When you think about 2022 and onward, how should investors think about the growth of that business? Obviously, it depends on where COVID goes, but should they be thinking about this as growth beyond -- or above and beyond what you currently have, or is there a possibility of growing off of this 2021 base?

Yes. I mean I think there's a couple of factors to keep in mind. One is, certainly, we had with the government a reservation of capacity at several of our sites that runs through the end of December of this year. And so that, at this point, we anticipate that, that is going to expire under its terms and may or may not be renewed for next year. So I think it's quite likely that, that element of contribution that's been in place for the last 2 years will not be there as we go forward. So I think, in the near term, investors should expect that there would be kind of less revenue in CDMO as a result of that. However, going forward, among the factors that could contribute to future growth are: number one, ultimately, how does the business with Johnson & Johnson evolve, I mentioned the 5-year contract of which we've only committed to the first 2 years, and we're in the early stages there; number two, once we get to a point where we have fully strengthened and delivered on our commitments with Johnson & Johnson in Bayview, at some point, the utilization of Bayview could be expanded for other types of services in addition of Johnson & Johnson, but that's down the road; number three, there are these additional lines of capacity in our Rockville and Camden sites that will help us to maintain or grow the level of fill/finish capacity we have. Our Winnipeg site in Canada is one that has historically been part of the CDMO network, but has the potential to deliver a lot more on that front. You saw some early signs of that earlier this year when we announced a contract with Providence Therapeutics to do some fill/finish drug product work for their mRNA therapeutic candidate, and then, of course, the development services. So I think there's certainly potential to build off of the base that we have, both with existing customers as well as new customers and continue to grow that business over time.

Okay. Great. And the Bayview site, is it right now approved for EUA from the FDA?

It is not. Having said that, the FDA has been releasing batches under a special exemption that they have in their rules and policies. And so that does not appear to be a gating factor to continued back for lease out of the Bayview facility.

Okay. Great. Maybe we could move on to NARCAN. Can you give an update on the appeal process after the hearing last month?

Sure. So as you mentioned, there was a hearing held on August 2nd, before the 3 judge panel that is working on our appeal. We are waiting for that panel to issue their decision and opinion as it relates to review process. That could come really any day now or it could take several months. We believe the most likely scenario is that there will be a decision by the end of the year. And then we'll move forward on that basis.

Okay. And how do you think about your chances of success here on appeal?

Yes. Well, I mean it's hard to handicap exactly what the outcome would be, but I would say, if you think about kind of what happens in either scenario. So in the first scenario, they agree with our appeal, they grant it, and we continue on the path that we've been on and which is one where we're continuing to focus. Again, on that business, on the crisis on improving awareness, availability and affordability of the product. In the other scenario, where the appeal is rejected, and that certainly clears the path for a generic competitor to enter the marketplace. And I think what you'd be likely to see following that is, first, recall that, that part of our business is really divided into 2 distinct segments. One is what we call the public interest or PIP market, which is, think of first responders, municipal agencies, other community-based organizations that purchase our product, that represents about 60% of our revenue for NARCAN Nasal Spray today. And in that market, the characteristics are very different from retail pharmacy prescription type market. It's a very fragmented marketplace. There's a lot of different buyers and potential points of sale. We already offer a significant discount to the retail price to buyers in that market. We have a number of them under longer-term contracts. We have a direct ordering capability that we call NARCAN Direct that they can buy directly from us. And our brand name resonates and has strong appeal in that market. So we think that we will maintain -- we're likely to maintain a very significant share of that market going forward, even after a potential generic entrant. On the retail side, certainly, there would be erosion of the branded product in that marketplace, as is typical in a generic situation. However, we are prepared to potentially launch our own authorized generic product in that market, which would enable us to take a fair share of the volume or maintain a fair share of the volume in that marketplace. And so when you net those 2 together, I think you're likely to see that we'll have a very meaningful revenue stream from NARCAN for the foreseeable future.

Okay. And let's look at the public and the private. How should we think about the decline for the product if you lose the appeal, given the fragmentation of the market and given the authorized generic dynamic?

Yes. I mean I think on the public side, again, I think that you're likely to see a lot less erosion of our share there. I hesitate to give you a quantification, but I certainly think we'd be confident in maintaining the majority of our share, and just given all the dynamics I touched on. On the retail side, I think it's more likely to follow a more standard kind of erosion curve that you would see in a typical scenario like this. But with an authorized generic competitor in the marketplace, we'd be able to -- we feel we could take our fair share of the generic portion of the market.

Okay. Well, thank you. That was very comprehensive on the NARCAN side. Going to the base business, just to recap on the chikungunya program, can you just reiterate again the timing for the Phase III?

Yes, we're expecting to launch the Phase III trial by the end of this year.

Okay. And are there other companies doing similar programs? And where do you sit relative to those other ones in the competitive dynamic?

Yes. Adam, would you like to comment on the other competitor Valneva, who is working on a candidate as well?

Sure. Thanks, Rich. So there is one competitor that has initiated their Phase III trial, Albert. And so we're probably maybe 6 to 9 months behind them from a starting Phase III process. They're taking a little bit of a different approach. They actually have 2 Phase III trials that they're running. One that they've completed, and they did a press release a few weeks ago or about a month ago, almost on the top line data. So we're definitely a little bit behind Valneva. I think the technology is inherent, our technology as opposed to their technologies has some differences. Ours a VLP technology, where theirs an inactivated whole virus. So there's some inherent product differences that we think can make us competitive and keep us competitive as well as we think it's a pretty healthy market opportunity. So we're excited to kick this off and hopefully get this to the finish line in the next few years and add it to our Travel Health franchise.

Okay. And has there been a delay on raxi, or has it moved on as you guys have expected?

Adam?

Yes. So there has been a bit of a delay. I think we had anticipated the government to initiate a request for proposal in this year, this calendar year. It seems like that's stalled a bit, and we're kind of now expecting it either to happen in the fourth quarter or maybe even spill into 2022. I think the -- like anthrax, smallpox and botulism, as Rich kind of talked about in the medical countermeasure space. I think from a requirements perspective, we haven't seen a lot of change. And I think this is just a matter of prioritization from a Strategic National Stockpile perspective.

Okay. And do you expect other competitors besides Valneva for that contract?

So, for raxi, I think there's a different company that's a competitor. And so -- and I think there was just a -- either a solicitation or a notice for Elusys in their products. So I think the strategy with the SNS has been to have 2 products in the stockpile. And I think at this point, raxi is kind of the lead product and Elusys is kind of the secondary product for a whole host of different reasons, and we would expect that to continue into the future.

Okay. And this is kind of a question we asked all companies in terms of COVID impacting your business. But given the Travel Health business that you have, do you expect COVID to impact your business for the near term? Both in terms of trial and just the recovery of the travel sector?

Yes. So as I commented in our opening remarks, I mean, I think we do think that the -- it's going to take a little while longer for the travel sector to recover, particularly international travel. And it's probably not back to pre cove levels until at the earliest, sometime in 2023, but more likely 2024. So having said that, we're very confident in the portfolio of products that we have and their appeal and resonance in that marketplace. So we'll be prepared to kind of relaunch those products at the appropriate time once we see the industry dynamics at the right place.

Okay. So we have only a few minutes left. Just maybe broadly on the corporate goals here. Can you recap some of the assumptions you're making for your 5-year target to 2024? I think you have set $2 billion in revenues. How confident do you feel about that? And how do you plan to get there?

Yes. So we had -- back in 2019, we laid out 2 key financial objectives. One was to achieve $2 billion in revenue by 2024, and the second was to achieve adjusted EBITDA margins of 27% to 30%. We also indicated that we saw multiple paths to get there, including on an organic growth pathway as well as a pathway complemented by M&A. So we are tracking along our plan. Obviously, there are some areas that are moving favorable to the plan, others are a little bit lighter. Travel Health, obviously, just given what's happened there, it's a little bit behind, but CDMO has moved faster than we had initially anticipated. So that's just an example of multiple pathways. But we're still moving strong towards achieving those objectives, and we're working hard to make that reality.

Okay. Well, maybe just with the last minute, Rich, any last comments you want to make to summarize or anything we didn't cover, please feel free to comment.

Yes. I think we covered a lot of the landscape here. I think again, I just want to reinforce that it's a diversified business that is fundamentally strong. We certainly have had some challenges in 2021 that we have been working hard to address. I think we -- the base business is on solid footing. The -- including not only medical countermeasures, but the NARCAN Nasal Spray business. The CDMO business is operating well irrespective of some of the challenges that we faced in Bayview. We are pleased that we're -- we have reinitiated manufacturing in Bayview and are committed to our relationship with Johnson & Johnson and looking to fulfill our commitments to them and strengthen and solidify their supply chain for their COVID-19 vaccine. We have a number of assets and a and a strong platform for growth that I think over time is going to be realized in terms of its full potential. So we're -- we have a dedicated team of folks who are working hard every day to make that reality.

Okay. Great. And it's right on time at 4:00 o'clock. Thank you, again, Rich, Adam and Bob, for your time, and thank you to the audience for participating in this fireside chat.

Great. Thank you, Albert. Thank you, everybody.

Thanks, Albert. Appreciate it. Bye-bye.

Bye-bye.