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

[Audio Gap] Bob Burrows, Vice President of Investor Relations; and Rich Lindahl, our Chief Financial Officer. For those of you that don't know, Emergent BioSolutions is a kind of a global biopharmaceutical company that is specialized in kind of public health threats and combating public health threats. And with that, I'll go ahead and turn over to Rich, I don't know if you want to do an introduction or just kind of an overview and maybe talk about some of the recent events, and then we get into more of the dialogue here.

Sure. So thank you very much for having us. I appreciate it. Yes, as Larry said, we're a company that focuses on providing solutions to public health reps, whether they be kind of naturally, accidentally or deliberately occurring. To that end, we have a suite of products and services, which we'll talk about in more detail as we go through the conversation centered around vaccines, therapeutics and drug-device combinations. We also have a contract development and manufacturing operations services group as well. We're organized into 3 business lines: Medical countermeasure, government services, which comprises the products that are sort of the core of the business historically. They are characterized by being procured by, as the name implies, the U.S. government and other allied government partners. They're typically under long-term contracts with highly visible recurring revenue streams. We have a commercial business line, of which our naloxone nasal spray products and revenue stream is the largest component. Our NARCAN nasal spray is the biggest piece of that, which has undergone a transformation in terms of the characteristics of the market with the entry of a generic competitor at the very end of last year. Our Travel Health business is also in the commercial business line. And then the CDMO services are in the CDMO business lines. So I guess with that I'll just go ahead and turn it over to your questions.

Okay. Great. Thank you. First, I want to express the condolences on the passing of your founder.

Thank you.

I think that's obviously very notable. But along those lines, I know there's been a number of changes you made recently with the way of governance and management. Can you just speak to some of those changes and the kind of the direction that you're kind of proffering here, how to move forward? And maybe you can just touch on that in the context as well as in terms of some of the 2024 strategic goals that you've laid out and identified and how that kind of one plays into the other, if you will?

Sure. So more recently we announced a new Chairman of the Board. This was actually planned even before the sad passing of our founder, Fuad El-Hibri but Zsolt Harsanyi, who's been on the Board for a long time is now the Chairman of our Board of Directors. We also brought on a new Director, Keith Katkin, and he started as of earlier this month. And then in addition, we brought on 2 new senior executives Coleen Glessner, who is Executive Vice President and Head of Global Quality and Compliance, who joins us from most recently from Alexion Pharmaceuticals, where she had a similar role. And then Bill Hartzel, who is now going to head our CDMO business unit, and he's an executive with significant experience with Catalent, among other companies in the CDMO business. In addition, we have an oversight that the Board implemented for the manufacturing and quality operations through a special committee that was formed just over a year ago. And all of those changes have been operating to continue to further strengthen and focus our efforts as we move forward to continue to improve our quality and manufacturing operations going forward. Larry touched on our strategy, which we first articulated back in 2019. It was the third -- we started putting in kind of multi-year strategic plans, the first one in 2012, the second one in 2016. And then this new one is to cover the period of 2020 through 2024. There are 5 key elements of that strategy. The first being to execute on the core business or the organic business to make sure that we're delivering on our commitments and continuing to provide solid steady growth in that part of our business. The second is to invest in R&D capabilities to build out a robust pipeline of candidates that can help support growth not only in this current 5-year period, but also to position for additional growth as we move beyond 2024. The third is to evaluate and invest in attractive M&A opportunities. We're looking for opportunities that expand the surface area of public health threats and solutions that we provide to those threats. And we look for opportunities that are, first and foremost, revenue-generating and accretive in nature. We also are interested in and acquiring additional candidates to enhance and expand our pipeline. We take a very disciplined approach there. And they need to not only fit our strategic criteria, but obviously make good financial sense for the company. The fourth element is to invest in capabilities and infrastructure to expand and drive our ability to leverage all of those opportunities. And the fifth is to continue to evolve our culture in support of the same as well. So that's a thumbnail sketch of our strategy, which we continue to execute against as we move forward.

Just kicking over to the product side a little bit, thought maybe we just talk about some of the franchises, starting with the anthrax side, which I think the contract runs through 2023. And kind of the -- I know you have the BLA submission that ties in that as well. Can you just talk about the outlook of that product? And if you've got some guidance, we have guidance in place, but even beyond '23 with the submission, what that presents?

So we -- historically the company had a single product called BioThrax, which was the first fully licensed vaccine to protect against both pre and post exposure situations as it relates to anthrax. That product is still in place. It's a 3-dose regimen. And we have been working with the government to develop the next-generation anthrax vaccine, which we refer to as AV7909. Back in 2016, we were awarded a $1.5 billion contract, which was both for development of AV7909 as well as for procurement of the product up until the point where it was a licensed product. The development piece was about $250 million. That development process has culminated in us filing the BLA, and we're moving forward through the rest of that process and anticipating licensure later this year or early or sometime next year. In addition, subject to pre-EUA authorization, the government has been procuring doses of AV7909. And I should mention that's a 2-dose regimen as opposed to the 3-dose regimen. So it generates a faster immune response than BioThrax. And most recently, we received a contract modification late last year to span for an 18-month period for $399 million. And the idea behind that modification was to take us through to licensure of the product and then a new contract would be negotiated and put in place after that -- after licensure to take us through to continue to supply the strategic national stockpile requirements going into the future.

Okay. Would that frame the context of looking out beyond that $400 million over 18 months or $399 million or thereabout, is that how we should look at beyond '23 presuming a -- assuming a future license arrangement?

Yes. So historically the annual procurement has averaged in the range of $250 million to $300 million is what the stockpile has been procuring for the anthrax vaccine. So I think it's reasonable to assume that something in that level would continue going forward. But obviously that's subject to us negotiating and executing a contract.

Okay. On the NARCAN side, the naloxone franchise, could you just speak to the -- obviously the introduction of the generic and you are offsetting authorized generic Sandoz relationship. Can you just talk about the framework around the market? I know we've touched on it earlier today, but kind of the public market and for the retail market and the -- I want to call it, but the infrastructure on the public market, how that affords you some protection if you will?

Sure. Yes. No, I think one thing that's really important to understand about the formation of the generic market for naloxone nasal sprays is that the characteristics of this market are very different from what you would typically see in a generic situation. So there's -- there are 2 different distinct segments to that market. One is the traditional retail pharmacy segment. And the other is what we refer to as a public interest segment. And in that public interest segment, think of first responders, community organizations, other municipal organizations. That is a highly fragmented marketplace with many points of distribution. It is one that has relied on kind of relationships and services in addition to simple procurement of the product. And it's one where we have been active and established those relationships and really satisfy virtually the entire needs of that segment of the market for quite some time. So in that part of the market, we anticipate that we will, based on our presence and based on the nature of that market, be able to maintain a very significant market share of that market going forward. Certainly there will be some impact from the entry of generics, but we feel very good about our positioning there. On the retail side, we expect that to follow a much more traditional kind of brand erosion curve that you would find in a generic market situation. We are seeing that unfold as we go through the early part of this year. And so the branded product in the retail segment, we expect will end up with a low market share. But we are participating, to your point, in the retail side through the authorized generic that is being provided by Sandoz, where we have a partnership with them to participate in some of the economics that result from that.

Does -- the public interest side, is there any way to frame kind of the mix of that product in terms of revenues, public versus retail, has that -- maybe openly discuss?

Yes. Well, so before the generic market was formed, we had said that the public interest represented over 60% of our revenue versus the retail channel. And so in totality, I think it's fair to assume that percentage has increased because of the brand erosion on the retail side, even though that's being offset to some degree by the authorized generic.

Okay. So it's north of 60% dating back. Okay. Can you speak to the outlook for ACAM2000 as well?

Sure.

I know you've talked about, I think, $50 million of sales in the quarter, you're projecting $200 million for the year. Just speak to like kind of relationships and the cadence around that product in particular.

Sure. So ACAM2000, we were awarded a 10-year contract back in 2019, and that included a base year of performance and then 9 annual option exercises, and that comprise the 10 year. In total that was valued at $2 billion across the 10-year period. And the base year of performance, the value was approximately $170 million, and there's a price escalator of 3.5% per year that goes through each option following that. So if you kind of carry that forward, the first 2 options were exercised annually after that, we're now into the next option year. That carries forward into over about $180 million is what we would expect from the option exercise this year. And then the remainder is for potential international opportunities, which really were comprised of the first quarter [indiscernible].

Okay. And away from that, can you also talk about, I guess, your travel health opportunity. I know you have a franchise and you're talking about, if I'm going to get this right, Chikungunya franchise? I don't know how to say that. But can you speak about that and the related trial and how that fits within that travel franchise?

Sure. Yes. So our travel health business, which we acquired when we bought PaxVax back in 2018. There are 2 marketed licensed products today. One is called Vivotif, which is to protect against typhoid fever and the other is Vaxchora, which protects against Cholera. And those 2 products are sold to people traveling primarily from the U.S. or from Europe into regions where those diseases are endemic. That business has certainly been impacted by the pandemic as international travel has essentially ground to a halt at that point in time. It's starting to resume a bit. And so we expect some contribution from those products this year, but we would expect that to resume more significantly beginning in 2023 and beyond. The Chikungunya product that we are developing is a vaccine to protect against that disease. We initiated a Phase III trial. By the way, that product was also -- that candidate was acquired as part of the PaxVax at that location as well. And so it came through Phase II. And then we initiated the Phase III trial last year. We're still in the enrollment phase. And then we would expect a data readout sometime next year on that and then move forward, assuming success to move to licensure and marketing, commercialization after that.

Okay. Flip out of this because and go to the services side now, obviously on the CDMO side. You continued, I guess, rebalance, if you will, the J&J contracting obviously with your guidance. Can you speak to that -- the J&J contracts in particular and how it's creating some volatility in your message here?

Sure. So we put in place a 5-year contract with J&J back in 2020, under which they committed to the first 2 years of volume related to that contract. And we've been working with them in production over the last 1.5 years. There was a tech transfer agreement that preceded that to kind of get our Bayview site operational. It's been well documented that there was a cross-contamination event at Bayview that occurred in early 2021. We, at the time, had been also manufacturing the AstraZeneca's COVID-19 vaccine in that plant. The AstraZeneca production was halted at that point in time. And then we dedicated Bayview solely to Johnson & Johnson's COVID-19 production. We've been working through that. And more recently Johnson & Johnson, as you, I'm sure, are aware, suspended their product guidance for sales of their COVID-19 vaccine. And we've been in ongoing discussions with them about what their requirements are going to be for the vaccine, not only this year but in the years to come. So we are awaiting clarity on those requirements. And as a result, at this point in time, we made the decision that it was the most responsible action to take was to suspend guidance on the CDMO revenue until those requirements were clarified. That had a ripple effect in terms of our total revenue guidance and our profitability guidance as well, which were also suspended. Although we did reaffirm our product guidance for anthrax vaccines for ACAM2000 and for the naloxone nasal spray revenues.

Okay. Along those lines, can you update us kind of the status of the Bayview facility itself? And an extension to that, I know you've made other investments in [indiscernible] Camden and so forth. Can you just speak to bring on the incremental alliance and your CDMO relationships broadly and what that you could actually bring to the table in terms of incremental contractual relationship.

Yes. So back in February, we did announce that as J&J had begun the efforts to evaluate their global supply chain requirements, we had made the decision in coordination with them to kind of suspend manufacturing and pull forward the annual shutdown that we -- and maintenance period that we perform at Bayview. And in addition to take that opportunity to make some modifications and improvements to that facility that would not only strengthen our ability to execute against Johnson & Johnson's requirements, but then would also enable that facility to take on multiple products going forward in a very effective and efficient manner. And those products could be our own internal products or they could be external CDMO products for other parties. So that work is continuing and ongoing. We expect it's going to extend into the third quarter, at which point we'd be in a position to resume production for Johnson & Johnson pending clarification of their requirements and/or begin initiation of either transferring in other products or marketing other services. So ultimately, the capacity for Bayview is something that provides significant potential for us to generate additional revenue from that site over time, and that's a key part of the CDMO growth proposition as we look forward. In addition, as you touched on, we have 2 new lines, one at our Baltimore Camden facility, which is a non-viral drug product fill/finish facility. Construction on that was completed back in late 2020, early 2021, and we have begun marketing and generating revenue on that line, although it's not fully utilized at this point. So there is opportunity to drive additional revenue off of that line as we move forward. And then also in our Rockville, Maryland viral fill/finish facility, we constructed a new line there, a new full/finish line that was completed last year, and we are working to qualify that line this year and would anticipate marketing and generating revenue off that line beginning as early as next year. And that also provides a significant opportunity to realize additional capacity utilization and generate additional revenue going forward.

Can you speak to just your broader pipeline? I know you touched on a couple of the submission and so forth. Can you just talk about what kind of frame the R&D pipeline, if you will?

Sure. So yes, we talked about AV7909, which is in the BLA process now. We talked about Chikungunya, which is in Phase III. We've recently announced a couple of other Phase I trials, including for what we call our UniFlu or universal flu treatment and then also for what we call cyan, which would be a cyanide poisoning treatment for -- in a nasal spray form as well. There are a number of other preclinical products as well. So we've got these kind of Phase III sort of late-stage candidates. We've got a number of Phase I or preclinical candidates. We're certainly looking for additional not only to advance those earlier ones through into Phase II and beyond, but then potentially to acquire some additional candidates as well.

Yes. That was going to be my next question is, how do you see the environment for acquisitions going forward in terms of what you see out there in terms of valuations? You obviously have been fairly fluid liquidity, a lot of capacity. So what do you see out there in terms of those opportunities?

Yes. No, I think we've got a strong team that is evaluating a number of opportunities and has continuously done so over the last several years. I think as always, a lot of this comes down to timing in terms of kind of when these things come up for sale, either kind of through a process or through more of a one-on-one negotiated approach. I think we're optimistic that we'll be able to execute on some opportunities over time here. And obviously we don't have anything to announce today, but it remains a key part of our strategy as we go forward.

Okay. Great. I realized, I mean, kind of hogging stage here. And if there's any questions in the audience, please just feel free to raise your hands. Otherwise, I can just keep running on here, if you want. I don't see any questions. But as an extension of that, I guess, someone just answered the question. But in terms of capital allocation priorities, is it M&A front and center or is it share purchases or is a little bit of a reflection of what one playing into the other, what opportunities you see filling in and so forth?

Yes. So we've been pretty consistent in talking about our capital allocation priorities as first and foremost, I want to make sure we stay in a strong financial position in order to fund our operations and continue to execute on our core business. Secondly, to invest in opportunities to grow the business going forward. And so R&D is an important part of that as well as M&A and also investing in capital expenditures to expand the capacity and capabilities in our network. And then after that, we look at potentially cash returns to shareholders through things like the buyback, we did announce, our Board did authorize a $250 million buyback back in November of last year. Through the end of the first quarter, we had executed on $165 million of that. So there's $85 million remaining, and that authorization remains through November of this year, and we'll certainly keep people updated on our progress there as we go forward. But that -- clearly, the notion of investing for growth is a significant priority for us going forward.

Okay. I know the goal that you laid out for, I think, it was '25, the $2 billion, or into '24. Is that -- I presume M&A is built and there's some assumption around M&A activity that's built into that thinking longer term?

Yes. I mean I think there's -- what Larry is referring to is that as part of our 2020 through 2024 plan, strategic plan. We articulated a $2 billion revenue goal by 2024 and an adjusted EBITDA margin of 27% to 30%. And we've always said that there are multiple paths that we see in order to get there. Certainly, organic growth, we would see playing a very important role for that. But M&A is another component of that objective as well.

Okay. Questions in the audience? So kind of run through my questions. I didn't know if anyone wanted to jump in here. But I had one other question, really a couple of questions, but one relates to obviously, you talked about the public health market. And again, this is what you talked about earlier. I know this is largely undefined, but Teva obviously is out in the market kind of discussing a negotiated settlement where they could -- they would be potentially introducing some product into the market. Do you expect that that could influence in any way that you're -- kind of your market, particularly on the public interest side?

Yes. I mean, I think that's -- Teva has announced a few settlements with, I think, 3 different states at this point, where as a component not the whole component, but as a component of their settlement, they are agreeing to give away some products over an extended period of time. So that's something that we are obviously monitoring. I do think our sense is that most of the states would prefer to have the cash as opposed to the product and then use that cash in whatever way makes more sense. I think as part of that, they're also evaluating kind of the logistics and the services element of something like that versus what they can get through other means, including us. So -- but I can't really comment much further than that at this point other than we continue to monitor.

Right. But as we touched on earlier, there's absolutely -- there's an infrastructure on the public interest side as opposed to the retail side.

That's absolutely right.

Very, very different model. Yes. Okay. Any other questions? If not, we will go ahead and wrap up. Questions in the audience? Okay. We want to thank you, Rich.

Thank you.

Thanks for taking the time for joining us. Appreciate it.

Thanks for having us.