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

Good morning, everyone. My name is Jess Fye. I'm a senior biotech analyst with JPMorgan. And welcome to the 40th Annual JPMorgan Healthcare Conference. Pleased to be kicking off the day with Emergent BioSolutions. We're joined by the company's CEO, Bob Kramer. I'm going to pass it over to him for a presentation, and then we'll turn to Q&A after that. There's a blue Ask a Question button on your screen. So if you want to send me a question on the portal to ask during the Q&A session, please use it, and you can hear those after the presentation. With that, let me turn it over to Bob.

Thanks, Jess. Good morning, everyone. Thanks for joining the call. And Jess and JPMorgan, thanks for the opportunity to present and participate in the health care conference this year. Look forward to a great couple of days. So for the benefit of the folks on the call, just a couple of reminders. First of all, on Page 2. I will be making some forward-looking statements as part of my prepared remarks this morning. The actual results may differ from those results and statements. And for a full discussion and disclosure of the risks associated with our business, I simply refer you to the filings we have in place with the SEC. Similarly, on Page 3, I will use and make reference to non-GAAP measures and metrics as part of the presentation and discussion today. There is a full reconciliation in both our press release that we issued yesterday as well as in the appendix of this presentation on GAAP versus non-GAAP. So on Page 4, what I'm going to cover today in about 15 to 20 minutes are a couple of things. First of all, a very brief overview of who Emergent is, what we do, what our strategic principles include. I'll talk a little bit about the performance of the business across the 3 different business units of medical countermeasure, CDMO and commercial space, then I'll talk a little bit about the financial performance, both in terms of 2021 preliminary that we issued yesterday afternoon as well as the guidance numbers for 2022 and then wrap it up with a couple of key takeaways. So on Page 6, at a very high level for those of you who have followed us, you know that for now going on 24 years, we have focused as a company on a mission of protecting and enhancing life through focusing on public health threats. We see this as a very large and growing market, comprised of both products and services, which in the aggregate, is close to a $50 billion market opportunity. For over 20 years now, we focused on a very simple principle of defending people against what we hope will never happen to them, whether it be chemical, biologic, nuclear threats or emerging infectious disease threats like what we all face today with COVID-19. Our current -- in the middle of this panel, we capture the 5 key elements of our 2020 through 2024 growth strategy, and I'll talk about those as part of my comments today. But very simply, we continue to focus on the core business that I'll describe. We continue to be focused on looking opportunistically at M&A transactions that are strategically on point for the proper value. We continue to build scalable capability across our enterprise to be able to efficiently grow as we go forward. Always looking for opportunities to strengthen our R&D portfolio and of paramount importance is continuing to strengthen our overall culture in the company. In 2019, when we first published our 2020 through 2024 growth strategy, we set a couple of key financial goals to accomplish by the end of 2024. One was to achieve a $2 billion revenue number and the other was a profitability metric, aimed at contributing adjusted EBITDA margin for that $2 billion in revenue in the range of 27% to 30%, and we're still kind of in range to deliver that, and I'll talk about that in a minute. So let's jump in on Page 7 to the overall profile of the business. On the left-hand side of this, we focus on the products that we have in our portfolio as well as in development, and the products piece of our business is really split into 2 different business units, one focused on medical countermeasure or government business and the other is on commercial. And then on the right-hand side of the page is the other area of the business, which is our services business, which is focused on contract development and manufacturing services. All 3 of those are in service to this growing public health threat market that is kind of captured in the middle. So let me talk a little bit on -- back to the left-hand side of this in terms of on the products area, within the government piece, we have key and leading franchise assets in spaces like anthrax, smallpox and botulism. We also have a portfolio of chemical treatment and nerve agent antidotes through our auto-injector platform. Again, this is how we started the business 23 years ago, focused on chemical, biological, radiological, nuclear and explosive threats. And since then, we've also added a commercial business which is more focused on things like opioid use disorder through our NARCAN Nasal Spray product as well as travel health assets with vaccines. On the right-hand side, just turning quickly to the CDMO services. This business unit was first put in place in 2017. At that time, it had a revenue contribution of under $70 million. And as I'll talk about going forward, we've seen some pretty significant growth in the service offering as we offer both development services, drug substance manufacturing as well as drug product. So all 3 to a growing portfolio of small, medium and large companies that are across multiple platform technologies that I'll go into in a minute. On Page 8, then -- I'm sorry, on Page 9. Let me jump into the medical countermeasure business and talk a little bit in more detail about the products and the assets that we have accomplishments for 2021 and what you should expect from this business unit going forward. So as I mentioned, we have leading franchise assets and positions in the anthrax threat space, including 2 different anthrax vaccines, BioThrax and AV7909. We also have an anthrax therapeutic, Anthrasil. Similarly, in the smallpox threat category, we have a vaccine, ACAM2000 and as well as a therapeutic product, VIG, IV plus our bat therapeutic. So again, in this area of the business, it's comprised of vaccines, therapeutics as well as drug device combinations. In the middle panel, under the market dynamic, we try to capture a little bit of the profile and the description of this business in terms of the customers are typically both the U.S. government as well as outside the U.S. governments. In many cases, these medical countermeasure products like anthrax vaccine and smallpox vaccines and therapeutics are part of our U.S. government stockpiling strategy to make sure that there is a certain number of vaccines and therapeutics in our country's stockpile to protect civilian and the military personnel. These procurement contracts are typically characterized by multiyear, long-term contracts, 5 or 10 years. They typically have a fairly well-defined delivery schedules associated with them and the typical pricing profile is for there to be firm fixed price contracts with annual price escalators. So it's a fairly predictable business that we have been involved in for many, many years. A couple of the key 2021 accomplishments include contract wins for ACAM2000 and our second-generation anthrax vaccine, AV7909. Secondly, we continue to make progress in expanding our reach outside of the U.S. by working with international governments to do the same for their citizens that the U.S. government is doing for ours, namely increasing the level of preparedness and response for chemical and biologic threats. And then finally, an accomplishment was the designation by the Belgian Health Authority as approval for our Trobigard auto-injector platform. Again, this is a product that we'll speak more of as part of the presentation, but we see significant progress and growth opportunities for that piece of the business going forward. In terms of -- on the far right-hand column, what to expect from the business in 2022 and throughout the strategic planning period, again, we're going to continue to focus on supporting the U.S. government in terms of the maintenance and replenishment of the strategic national stockpile for the medical countermeasures that we support. Finally, to look at also grant in contract opportunity. One of the things that's a key feature of this piece of the business is the opportunity to partner with multiple agencies within the federal government, whether it's BARDA or NIH or NIAT or DARPA in order to develop new medical countermeasures for which there are no available products today. That's been a constant staple of our business for many, many years, and we look forward to continuing to participate and partner with the government to develop those new products. And then finally, continue to look for making traction outside the U.S. in terms of the portfolio. On Page 10, let me turn to the commercial product business unit, which, as I mentioned, includes kind of key positions in opioid use disorder with NARCAN Nasal Spray as well as a travel health position that is small, but we expect to grow over time. As many of you can appreciate, it's been a very busy period over the last couple of years for the NARCAN Nasal Spray team dealing with the fact that there is a growing pandemic in terms of overdose and overdose deaths related to opioids. Part of our focus from day 1 has been to continue to focus on what we refer to as the 3 As of this business. first of all, making sure that there is an awareness of the risks associated with patients taking opioids. Second, to make sure that there is a growing traction around access to make sure that, that very patient population who is at risk, number one, is aware that you need to have ready access to some form of naloxone, whether it's NARCAN Nasal Spray or an injectable form in order to protect lives. And then third, affordability. So we are constantly working with insurance providers to expand coverage as well as reduce co-pays to make sure that NARCAN is affordable to the millions of patients who need it and kudos to the team. They've done a tremendous job over the last 3 or 4 years, in particular with respect to the last point I'll make which is the generic entrant in late 2021, our team worked very hard in 2021 to prepare for the launch and support in connection with Sandoz of our authorized generic licensed product. So late in 2021, that generic market started to form. Our team was ready and prepared to -- with Sandoz, introduce our authorized generic product with Sandoz, and they did a tremendous job of being ready and executing and couldn't be more pleased with how that's happened. In terms of the things to look forward to going forward, again, we're going to continue to support the 3 As of NARCAN Nasal Spray. We're going to continue to look for opportunities to expand our footprint in the travel health space. One of the things that I'll talk about in a minute in our R&D portfolio is our Chikungunya VLP candidate that is in a Phase III right now, which is an exciting opportunity. But before I go to R&D -- well, let's go to R&D now in terms of Page 11. So before I go to the CDMO services, the third BU, let me just make mention of a couple of the more advanced development programs that we have in play right now. So at the top of the page, we have AV7909, which is our second-generation anthrax vaccine that it's in a Phase III program today in cooperation with the U.S. government, HHS and BARDA in particular. We have the Chikungunya VLP candidate that I just mentioned, that's also in the Phase III. And then we have a number of other earlier stage candidates, including our COVID, hyperimmune or HIG program that's being supported and partnered with DoD and NIAID. We have a UniFlu or a universal flu program that's in a Phase I status and then several other drug device combinations, including combiguard as well as our naloxone multidose nasal spray formulation or twin dose that is really a product line extension from NARCAN that is in the preclinical stage. Overall, in 2021, the team made significant progress in advancing a number of the portfolio candidates through the clinical development stage, including AV7909 and the CHIP program and the ones that I mentioned. So we're making good progress, good traction in the overall maturity of the portfolio. So in terms of things to be looking for in 2022 and 2023, keep an eye on check, keep an eye on AV7909 and some of the things that we're doing with UniFlu that we'll be sharing as we make progress. So with that, on Page 12, let me turn to CDMO. CDMO has been an extremely busy business unit for us over the last couple of years. As I mentioned that business unit has grown from around $70 million in revenue when we first formed the business unit in 2017 to where it is in 2021, the midpoint of our -- the last guidance that we provided was close to $450 million in revenue, so there's been a significant growth in that area. I mentioned earlier, I believe that we have 9 different manufacturing and development sites in our network that are supporting the CDMO business unit. On this page, we specifically refer to 5 that are actively generating revenue with third-party customers. And before I go any further, let me just make it clear that since the beginning of the company, we've had a strong preference and placed a priority on owning our own supply chain solutions for all the products that I just mentioned with the exception of NARCAN, where we're relying on third-party collaborators for. But supply chain control is a key priority for us. So our 9 network of manufacturing and development sites supports both our internal programs as well as a growing number of customers, which by the end of 2021 was somewhere around 60 different customers that we're supporting. What's unique about our CDMO business is that in addition to the broad facility offering of 5 sites, we have the ability to offer development services, drug substance manufacturing at large scale as well as drug product capability at a number of our sites, and we try to capture that here on the slide. 2021 was extremely busy for the group. We secured over $400 million of new contract business during the year. Second, we significantly expanded our service capability and offering at a number of our sites, including Winnipeg, Canada, which is where we have our center of excellence for the therapeutics hyperimmune platform. In late last year, we announced a new relationship with Providence Therapeutics, whereby we will be assisting in the development and the manufacture of their mRNA COVID-19 vaccine candidate. So again, it adds another platform technology to our service offering and couldn't be more pleased with the relationship that we're growing with Providence. The last comment I'll make about 2021 is the fact that we brought online a number of capital projects and activities that we had previously announced, including some high-speed fill finish lines at our facility in Camden. We installed a similar line, high-speed line in Rockville, and then, again, the additional facility capacity in Winnipeg that we've made. Looking forward, you'll hear us talking about utilization improvements, efficiency improvements throughout the 9 network facility as well as potentially making new investments to go after what we see as a high demand in the market for this service offering. On the next Page 13, let me go into a little bit more detail on one of our sites, which is Bayview. Bayview, as many of you have probably heard, has been at the center of our country's COVID-19 response through the work that we've been doing with J&J for the last roughly 18 months. It's received a lot of attention. And let me clarify a couple of things. Earlier in 2021, we were supporting both the AZ product as well as the Johnson & Johnson product. As a result of a particular issue that happened in Bayview in April, the decision by all the stakeholders was to have AZ removed from the facility. So we could singularly focus on J&J going forward. During the months of April, May, June and July, we dedicated those 4 months to significantly improving the capability at the site by going through a number of improvements, whether it be man and material flow, training, some things that we spend a lot of time on improving the profile with the help of J&J. We got the green light from the FDA to resume production in early August, which we are now in. And as a result of that, we have made available more than 120 million doses of COVID-19 vaccine for both AZ and J&J during 2021. It's been a challenging time. But I think the team feels really good about where we are, kind of heading out of 2021 and into 2022. So the focus here is going to be on strengthening the foundation and the capability for making the J&J COVID-19 vaccine going forward. And then longer term, looking at ways to more fully utilize Bayview because right now, it's dedicated as a single product for J&J, single product site for the near term. Let me turn to some of the financial highlights, and then we'll open it up for Q&A. So on Page 15, one of the key strategic principles that we follow for many, many years is, again, to look for ways to build leadership positions in niche segments of the public health threat market and in doing so, doing that in a very profitable way with diversified revenue growth. The panel on the left kind of captures what we've been able to do with the business since 2017 and also reinforces the 2024 target of $2 billion in revenue in the next couple of years. So we've made significant progress clearly benefited in 2020 and 2021 as a result of COVID and the important work that we're doing with all of our strategic and U.S. government partners and feel very comfortable about the long-term goal of the $2 billion. Importantly, this diversification theme that I mentioned has paid huge dividends over the last 5 years as we had significantly greater balance between commercial business, the medical countermeasure business as well as the CDMO contribution over the last couple of years. On the right-hand side, we kind of capture the profitability profile of the business during that same period of 2017 through 2022, again, with reference to the long-term goal of 27% to 30% adjusted EBITDA margin by the end of 2023. In some cases, we've exceeded that 27% to 30%, namely in 2017 and most notably in 2020. The last year, 2021 was kind of right in the sweet spot in the middle of that range, we'll dip down a little bit in 2022, but have full expectations that through a number of measures that we're actively pursuing and taking specifically related to capacity utilization and efficiency improvements throughout the 9 network site, every expectation that we'll get back to that 27% to 30% number by the end of 2024. On Page 17, quickly, let me wrap up before we open up to Q&A with just a couple of observations. First of all, the strength of the core business keeps us on track with obtaining and reaching those 2024 goals both financially and operationally. The new or revised operating structure we put in place late last year to focus on medical countermeasure products versus commercial products versus CDMO services clearly aligns us with our patients and customers more definitively, the prior version of the business unit structure was more product focused. I think the new customer and market focus is clearly how we should be looking at the business and sets us up for success going forward. Third, I mentioned the commitment and the interest in developing and advancing multiple development candidates through the clinical programs and hopefully to a commercial state, which will help us grow revenue longer term. Fourth, the 9 network site for development and manufacturing continues to strengthen. Again, the number of sites that we have, the variable platform technologies that we can support, the service offering between development services, drug substance and drug product, I think, is important. And then finally, the new CapEx, both that we've -- are bringing on board and prospectively, maybe making investments in longer term to meet a growing demand for these services is significant. And then I finally say at the back end of this M&A continues to be a focus of ours, again, in furtherance of building upon leadership positions in select areas of the public health threat space, where we think we can compete most effectively and most importantly, contributing to this theme of diversified, profitable revenue growth for the business going forward. So the management team and I, many of which are on the call today are super excited about the momentum that we have coming out of 2021, look forward to executing on the business and the strategy in 2022 and 2023. And maybe with that, just, we'll take a pause and open up to questions that you and some of the participants may have.

Great. Thanks, Bob, for that presentation. And as a reminder, if you hit the blue, Ask a Question button, you can send me a question on the portal to ask the management team. So far, no questions on the portal. So I wanted to start with the CDMO business. You talked about kind of improving utilization over time, what are the facilities where you are seeing high capacity utilization and higher margins? And where are the facilities where you're seeing lower capacity utilization and margins, just kind of give us a current baseline and then help us think about that evolution over the next few years as you see utilization improving?

Sure. So of the 9 sites, as I mentioned before, just 5 of them are actively involved in kind of third-party service offerings to external clients. We are looking carefully at whether the additional 4 may be suitable for kind of CDMO offerings going forward. But maybe just refocusing on the existing 5, I think as I mentioned, Winnipeg is kind of on the uptick of capacity utilization, particularly as a result of some of the contracts that were signed in 2021, most notably the Providence Therapeutics and bringing on some additional fill-finish capability. Camden next with the capacity and capability and CapEx that we announced several years ago, we brought that online in 2021 and expect that to be more fully utilized in 2022 and beyond. And then Rockville is a site that up until now has been exclusively used to support the fill finish for our ACAM2000 product. In 2021, we installed a new high-speed line in Rockville and expect that to be brought online, maybe late in 2022 and be operationalized, so that will have a margin and a capacity utilization benefit. And then the other sites, we intend to kind of ramp up. But I think the big picture is that across that network of 5 external-facing facilities, there's an opportunity to increase both the utilization and efficiency. And maybe just one word and then I'll open it up to Adam if he wants to add some color. Bayview in particular, just is a facility that, as you know, was designed and constructed for multiple manufacturing suites to be operated and supporting products. Right now, we've designated that as a single site dedicated to J&J's COVID-19 vaccine in order to strengthen the supply chain for their drug substance solution. Longer term, there is significant dry powder in terms of economic value in that facility that we need to realize longer term. But right now, it's going to remain a single product site dedicated to J&J until we have reason to believe that we can execute otherwise. Adam, anything you want to add to that?

No, Bob, I think you covered it.

Okay. And maybe just to follow-up on that last part. Is there some point in time if this J&J relationship persists long term? At some point, could you become comfortable enough to start producing other products at Bayview at the same time? Or is it sort of as long as J&J is there, you might -- this kind of lower utilization dynamic might continue?

Yes. I think for -- I think, Jess, we'll know, we, meaning J&J in Emergent and the regulatory authorities will know in sense when we have sufficiently stabilized and strengthened the drug substance supply chain solution for J&J. And at that point, we can begin to have dialogue with the FDA about potentially introducing a second product into Bayview. But right now, to be clear, our focus is on supporting J&J. It's been a tremendously effective and valuable partnership for Emergent, the help in the assistance and the partnership we've gotten from that organization has been tremendous. So our number one priority, as we've said, over and over again is strengthening and stabilizing the drug substance supply chain for that product.

Got it. Let's see. On the opportunity funnel, can you give us an update of the breakdown between kind of pandemic-related and nonpandemic-related opportunities in the funnel? It's a question we get asked as investors try to think about, if we get to a point where the pandemic recedes, what does that mean for the opportunity funnel? And is there kind of non-pandemic business in there?

Yes. So we haven't, as you know, broken out or done any kind of attribution of the funnel or the current business between kind of COVID and non-COVID I would say that just we continue to see and experience significant interest by third parties, some of which are COVID-related. I mean the Providence Therapeutics contract we signed in Winnipeg arguably, obviously, is a COVID-19. But obviously, it's not associated with anything having to do with CIADM with a task order or some of the more direct COVID-19 support we were doing for J&J and other partners. So we continue to see strong demand and interest in the development services in the CDMO services across the network. Perhaps longer term, when we look at kind of post the crest of the pandemic we'll break it out separately but right now, we're not doing that.

Okay. An investor question from the portal here, kind of following up on your comments about Bayview, saying -- basically saying, you made it sound like the ultimate revenue capacity at Bayview is greater than what it's contributing today, is without paying down on timeline -- timing of like when it could be greater. Is that accurate? Is that what we're supposed to take away from that?

Yes. I think the takeaway, Jess, is just a reminder that Bayview was designed and constructed to have 4 independently operating manufacturing suites. Right now, we have designated 2 of those 4 in support for J&J. The other 2 suites are not actively being used. So I think the takeaway is that there is underutilized capacity and capability in Bayview right now, as I mentioned earlier, we have dedicated the entire facility to make sure that we stabilize and strengthen the drug substance supply chain for J&J. At some point in time, we will have done that, and we're making significant progress in late 2021 and heading into 2022. At some point in time, it will be appropriate to have a conversation with the FDA and the regulatory authorities about potentially introducing another product or a new technology, but now is not the time to do that. But the takeaway is accurate. There is significant dry powder in that facility that's not being utilized today.

Okay. Got it. And I guess the stock kind of reacted sharply and has since pretty much recovered since you disclosed the kind of termination of the CIADM contract, I think part of the concern at the time was that the government would be scrutinizing its other relationships with Emergent. Can you talk about what you think the end of that CIADM contract means or maybe what it doesn't mean for your other government contracts?

Sure. So maybe to put that into context, Jess, and for the benefit of all the participants, when I think about our relationship with the U.S. government, it really falls into kind of 3 different categories or buckets. First of all, there's the medical countermeasure business that I described as part of the presentation, meaning we have a broad portfolio of products and grant and contract development opportunities that we are supporting the U.S. government and international governments. But to strict -- focus strictly on the U.S. government, whether it's stockpile, maintenance and replenishment with anthrax vaccines, therapeutics, smallpox, botulism, that part of the business is stable, if not growing slightly, the grant and contract opportunities continue to be there for us to capitalize on. So that's one piece of the relationship. The second piece is really, again, that grant and contract piece, where we are always looking for opportunities to develop and partner and collaborate with multiple agencies within the federal government, whether it's NIAT or NIH or DARPA or BARDA in terms of the development of new medical countermeasures. And then the third piece is really offering manufacturing services for other government contractors and partners. So we are doing today a lot of fill finish work, for example, with a number of contractors that are under contract with the U.S. government, primarily in that drug product or fill finish base. So if you look at the depth and the breadth of that relationship, all of those elements are strong. And I know there was a natural concern that when people hear that the ADM contract was mutually terminated by Emergent and the government, there were some alarm bells that went off. But just to put it in the context that ADM contract was put in place in 2012. The original intent was to really build a capability around pandemic flu preparedness and response, the facility, in this case, Bayview, it was really never given task orders or work to fully operationalize the response capability we had, for a number of years, had discussions with HHS and BARDA about the need to really make better use of Bayview that never materialized. So it wasn't a big loss, quite frankly, that we mutually agreed to end the ADM contract. And the task order was always designed to end by the end of 2021 anyway. So I know a lot was made of that. And I think perhaps more was made than it was really worth warranted here. And the fact that in late 2021, I mentioned earlier, the contract wins that we had around ACAM2000 and AV7909, if people are looking for evidence of the continued strength of that relationship, look at what actually is being done, not the fear factor.

Okay. Got it. You mentioned AV7909, I guess with that product heading towards full approval, when should we expect kind of the next contract to be negotiated and announced?

Sure. So I'm going to let Adam answer that. He's closest to it. But just to get another voice in the mix here. Adam, do you want to answer that one?

Sure. I think we announced this earlier or in '21, Jess. So The current contract kind of takes us through approval in those deliveries. So I think right now, we're kind of actively pursuing and filing elements of the BLA. We would expect a regulatory review in '22 and an approval maybe late '22 and then a transition from BARDA to the SNS. So it's a '23 event for the transition.

Okay. Got it. Maybe with our last couple of minutes here, we could switch to NARCAN. It's been a real source of upside recently, although around year-end, we saw the first generic launch and you guys respond with an authorized generic. How are you envisioning that market kind of plays out over the next couple of years?

Yes. So the market clearly is still, I guess, forming, Jess, in terms of the generic element of that. As we've talked about on prior calls, NARCAN Nasal Spray really has 2 very separate markets where the product is distributed. One is the retail market and the other is the public interest market. So let me talk about that a bit. So in the retail market, we expect and have expected for some time that when and if a generic competitor comes in, it will be the typical generic versus branded competitive dynamic where the generics take the majority, the vast majority of the market, could be 80-plus percent and then the branded product, including NARCAN kind of fights for the remaining 20%. So we expect that dynamic to pan out. And I think in the early stages, it's only been a couple of weeks now since the generic market was formed that's kind of reinforcing of what we're seeing. On the public interest market, it's a little bit different. It's a more fragmented market. And importantly, that's a market where our 5- or now 6-year history of developing relationships with state, local procuring agencies and organizations, including first responders have -- will pay benefits. Secondly, the fact that we have historically offered already a 40% discount in that market. I think it makes it more difficult for a generic product to compete in. So in that market, rather than the generics taking the majority of the market, we expect the branded product, NARCAN, to maintain a majority of that market. And just again, as a reminder, what we saw at the end of 2021 was that public interest market accounted for about 70% of the overall market size for nasally delivered naloxone. So we think we're well positioned. And again, as I said in my prepared remarks, I couldn't be more proud of our team for the work that they did in late 2021 to be able to respond so timely and professionally with Sandoz on the AG product. They did a tremendous job.

Great. Well, we are out of time, so we'll leave it there. Thank you so much, and Happy New Year, everyone.

Thanks, Jess. Thanks, everybody. Thanks for joining.