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

Okay. Well, thanks, everyone, for joining us. Our next panel is with Emergent BioSolutions. My name is Franklin Jarman. I'm a high yield health care analyst here and very excited to have Rich Lindahl, who is the EVP and CFO of the company; and Bob Burrows to his left, who is the Vice President of Investor Relations.

Maybe just to level set for everyone, I mean I think you guys have a fascinating business. And so I'd love to just maybe have you provide a little bit of an overview around the business model, some of your products and really how you think about the value proposition to the customer base overall.

Sure. Thank you, Frank, and thank you for having us here at the conference, and thank you all for taking the time to participate in the chat today. Yes. So Emergent BioSolutions is a company that has been around for 24 years now. We have spent the entire history of the company, providing solutions that address public health threats, whether they be occurring naturally, accidentally or intentionally. We provide a series of products that are both vaccines, therapeutics as well as drug device combinations. And we also have a services business where we provide contract development and manufacturing operations. We are organized into 3 business lines. We have a medical countermeasure or a government business line. And the key products that are in that are we have an anthrax vaccines product line, a smallpox product called ACAM2000. We have a botulism antitoxin, and we have some other therapeutics as well. All of these -- or the vast majority of these products are sold to the United States government and for placement in something that's called the Strategic National Stockpile as part of the government's overall preparedness and response strategy against these public health threats. Our second business line is our commercial business line. In that area is where we have our nasal naloxone product revenues. The primary product there is NARCAN Nasal Spray, which is a product that is administered to someone who is either known or suspected of suffering an opioid overdose, and it is a rescue therapy that revives them and buys them time so that they can then get to a hospital or otherwise receive appropriate care. That product is marketed into 2 distinct segments: one, which is the traditional retail pharmacy segment. And the other is in what we call a public interest segment, which is a highly fragmented marketplace, but think first responders, community organizations, municipal entities, et cetera. And that's a product that we acquired from a company called Adapt Pharma back in 2018. The other part of the commercial business line is our travel health business, where we have 2 marketed products today. One is called Vivotif, which is for an oral vaccine for typhoid fever; and the other is called Vaxchora, which is an oral vaccine for cholera. And these are sold to individuals who are traveling to areas of the world where these -- where the risk of contracting these diseases is high. That part of our business, as you might imagine, due to the pandemic and the significant reduction in international travel has been very muted over the last couple of years. We expect that to recover probably as we come out of this year but certainly into next year as international travel rebounds. And then the third part of our business line is our contract development and manufacturing operations, where we serve 71 customers today. We provide a suite of services from development services through a drug substance spoke manufacturing to drug product fill/finish services as well. And we provide both viral and nonviral services across a range of modalities. And that business is something that we -- that got started when we acquired a company called Cangene in 2014, which came along with one site that was already operating as a CDMO, and we have grown that business over time since that period and it is part of our forward growth strategy as well. Speaking of strategy, I should articulate that we did put in place a 5-year growth strategy back in -- at the end of 2019 to cover the period from 2020 through 2024. There are 5 core elements of that strategy. The first is to execute on the core business, so the existing products and services that we have today continue to execute crisply and grow those businesses organically. The second is to invest in R&D, to develop a robust pipeline that will contribute to revenue not only in the 2020 through 2024 time frame, but really position us for additional growth in the period that comes after that. And we have several candidates today that are in process. The third element is to pursue M&A that fits within our strategy and that provides both revenue and profit accretion over time and also potentially can serve as a vehicle for acquiring other R&D candidates that can fill out our pipeline further. The fourth is to invest in infrastructure and capabilities to improve our operations and allow us to grow efficiently and effectively as we pursue the strategy. And then the fifth is to continue to evolve our culture to support all of those elements as we go forward. So as part of that strategy that we announced at the end of 2019, we also set 2 key financial goals. One was to achieve $2 billion of revenue by 2024 and the other was to do so at an adjusted EBITDA margin of 27% to 30% by 2024 as well. So -- and we've articulated that there are multiple paths to achieving those financial outcomes that include contribution from organic growth, but also from M&A. So maybe I'll just pause there, having given that thumbnail sketch.

Great. Super helpful. And maybe before we dig into some of the businesses, I just wanted to ask more sort of something that's been topic across the broader pharma space, which is focused on inflation and supply chain. I'm curious how you guys are managing some of those cost headwinds? Are you seeing them? And how are you sort of adapting to what seems to be an evolving world out?

Yes. I mean we're certainly monitoring the environment and inflation specifically. To date, we have not seen a material impact in our cost structure. A significant portion of our costs are labor-related. And certainly, as the environment for talent continues to evolve and remains competitive, we're certainly responding as needed to those kinds of situations. But we're not seeing material cost pressures, either in the labor component or in the other elements of our cost structure.

Okay. Great. You touched on the 5-year growth plan, and you talked about core execution and investing in R&D. And maybe just to kind of kick the conversation off around the business opportunities that you see. Can you talk a little bit about the R&D pipeline and help us think about what the organic opportunity looks like for you over the next few years?

So we have 2 late-stage candidates at the moment. One is our second-generation anthrax vaccine, which goes by the name of AV7909. That is -- we have been developing that product in -- under a contract with the government that was put in place back in 2016. It was a $1.5 billion contract that had a $250 million allocation for development costs and then the rest of it for procurement of doses prior to licensure. The product has advanced through the Phase III clinical trial. We submitted the BLA application just in the first quarter, completed that process. And now we're moving forward with the government with the FDA to pursue full licensure as part of that, which we would expect potentially at the end of this year or if not in the early part of next year. As I said, the procurement contract was designed to bridge from the development stage through to full licensure, and the government has been procuring doses of AV7909 to put into the strategic national stockpile for several years now. Most recently, that contract was modified to provide a $399 million funding for an 18-month period that would then bridge us through to full licensure. So that product is getting very close to that stage. The other late-stage product candidate at the moment is a chikungunya vaccine. That will be part -- that is envisioned to be part of our travel health portfolio. It is in a Phase III trial right now. We are still enrolling participants in the trial. We would expect some data in 2023. And presuming success, would move on the commercialization path after that. The market for chikungunya, it's currently an unmet need, and we believe that it could be hundreds of millions of dollars in terms of the total addressable market. There is one other company that is also developing a vaccine candidate. So it's likely to be at least a 2-player marketplace. But we see a significant and attractive financial opportunity for chikungunya. The rest of our pipeline at the moment is really concentrated more in either preclinical or Phase I assets. We recently launched Phase I trials for a product that we call UniFlu, which is a universal flu vaccine. We also launched a Phase I trial for a product called SIAN, which is a nasal spray to address cyanide poisoning. And then there are a number of others in earlier stages as well. So we do have a bit of a barbell in terms of our overall pipeline. We don't really have anything in a Phase II. So that's an area that, obviously, we're going to look to progress out of Phase 1 into Phase II, but we're also looking potentially for -- over time to put more -- to acquire more candidates for that part of the pipeline.

Great. Very helpful. And maybe just touching on the core execution side of the story for a second. So as I think about your NARCAN drug franchise, generic competition has obviously been sort of an issue to think about and address. And I'd be curious, I think there was sort of the recent loss in appeal versus Teva. And I'd be curious, how do you think about navigating through the competitive environment? And how should we think about the path forward for your NARCAN drug?

Sure. Yes. So just to recap briefly, so we did file -- we did pursue litigation against Teva after they had filed their hand up for patent infringement. Unfortunately, we lost that case that ruled against us in June of 2020. We appealed and followed that process. We just recently earlier this year, received the decision there, which was, again, negative. Prior to that decision being finalized, Teva had made the decision to launch at risk and the generic market formed at the end of 2021. We responded immediately with a -- by announcing that we had entered into an agreement with Sandoz for them to be the exclusive provider of an authorized generic version of NARCAN nasal spring. And we have been sort of planning for this potential scenario to unfold really from when we acquired the product to begin with back in 2018. You'll recall earlier, I mentioned that there are 2 distinct segments in that market. And what we have anticipated for reasons I'll get into in a moment is that in the public interest segment, we would maintain a very strong share of that market even in a generic environment. And then in the retail segment that we would experience a more typical kind of erosion of the branded product market share, which we have been seeing in the earlier part of this year, but that we would participate in the generic side through the arrangement with Sandoz. On the public interest side, again, I mentioned earlier, it's a highly fragmented marketplace. There's many points of presence. It's a market that really values additional services in terms of logistics support, in terms of helping to drive awareness, helping to work through channels within the government to help secure additional funding for different municipalities and entities. And these are services that we have been providing for several years. And there are kind of 6,000-plus different buyer entities in that marketplace. It's not a construct that typically the generic manufacturers have looked to compete in because of the additional costs and operations and infrastructure that's required. Not to say that it can't be replicated, but we believe we have an advantage in that marketplace. And our assumptions, again, thus far, have proven to be holding in terms of our ability to hold share there. So as a result, while we do see our overall revenue stream coming down from last year to this year, we do believe that we're going to maintain a very significant revenue stream from our nasal naloxone products for the foreseeable future.

As I think about Teva specifically, they've been in a process of trying to settle outstanding opioid litigation. And while it hasn't been accepted, one of their offers included a significant amount of naloxone offered to various states, presumably fairly lower or no price. How do you think that has an impact on the overall market to the extent that some type of arrangement like that has settled upon?

Yes. No, I mean, I think it's a fair question. It's certainly something that we are monitoring. I think it's far from clear that that would be a universal solution to all of the opioid litigation that's out there. There have been a couple of states that have struck those kinds of deals. I think that for many states, our understanding is that they have a strong preference to receive cash versus product, that they can then use to allocate to whatever their highest priorities are, including the potential acquisition of NARCAN or naloxone products. So again, at this point, we're not seeing a significant threat from those -- from that potential, but it's obviously something we're going to have to continue to monitor and watch as it unfolds.

Okay. Great. And then maybe as I shift over to the CDMO segment. Post COVID, the world's looked a little different particularly in light of J&J suspending their vaccine guidance. And so I'd be curious, what's your game plan around getting new customer wins and growing that segment? How are you addressing some of the specific pressures around quality control and specifically in some of your production areas like Bayview, Maryland and just broader feeding vaccine demand around COVID?

Sure. So we are, I think, in a transitional phase, not just for Emergent, but for a lot of companies in terms of how the pandemic is evolving, what the overall kind of profile of solutions for addressing -- preventing and addressing infection is unfolding. And certainly, that is something that is -- that we're experiencing in our business as well. There was certainly a bit of a bolus of revenue that came in, in 2020 and 2021, largely driven by the task order that we received from the government to receive the reserve capacity in our facilities, which has come to conclusion and is not part of the expectation going forward. Then there were the manufacturing contracts with Johnson & Johnson and AstraZeneca. And so we are moving forward. AstraZeneca, we are no longer producing their product in our Bayview facility. With Johnson & Johnson, you touched on withdrawing of their product guidance. As a result of that, we made the decision to suspend our CDMO guidance pending clarification of Johnson & Johnson's requirements because that is a significant portion of this year's prior guidance that we had put in place. Regardless of what their requirements end up being, we are working right now to position Bayview, which has been dedicated solely to Johnson & Johnson COVID-19 vaccine production to position that to be able to take on multiple products in the future, including potentially some of our own internal products or other third-party services. And that work is ongoing right now. And we expect as we come out of the year, we will -- that facility will be positioned to pursue a variety of different options at that point in time. So independent of Bayview, there's still a very robust business in CDMO for us. We're providing development services out of our Gaithersburg, Maryland site. We're providing nonviral drug product fill/finish services out of our Camden, Baltimore site. We're providing all 3 types of services, development drug substance and drug product out of our Winnipeg, Canada site. We completed construction of a new viral fill/finish line at our Camden site last year and have begun selling that capacity, but it is far from fully utilized at this point. So there's growth potential there. We completed construction of a viral fill/finish line at our Rockville, Maryland site last year, and we're qualifying that as we go through this year and looking to start selling that capacity beginning next year. So well, Bayview certainly has the opportunity, and we would expect will contribute to growth going forward. There's also significant growth potential across the rest of the business, which is also operating at a material level at this point in time.

That's helpful. And before we get into some questions around the balance sheet, just one more on the business. Historically, you've had sort of a strong relationship with the government. And in terms of the recent termination of the U.S. center for innovation and advanced development manufacturing contract, how does that affect the story and sort of the long-term path?

Sure. So that contract, the CIADM contract was put in place in 2012. It really related to -- primarily to naming Bayview as one of at the time 3 designated CIADM sites that the government had put in place. Its original purpose was to have that site available to prepare for response to a pandemic flu situation with the notion that the site would be positioned to be able to produce up to 50 million doses in response to that kind of situation. The idea was that throughout the contract period, that site would continue to grow and move through development into operational readiness by virtue of getting a series of task orders from the government to work on different projects and candidates. For a variety of reasons, that didn't end up coming to pass in the way that either party envisioned initially. And as a result, as we kind of came through the pandemic, we made the mutual decision to terminate that contract last year. So it was in the category of -- it was a good idea at the time. It didn't play out the way either party had anticipated, and so we moved off of that. Now that was independent of the significant contracts, long-term contracts we have in place in our medical countermeasures business for our anthrax vaccines, for smallpox, for botulism and some of the other things that we talked about at the very beginning here. And so we continue to maintain strong relations with the people who are responsible for preparedness and response and operating the strategic national stockpile, other elements of BARDA and the Department of HHS. And we continue to have significant experience in government contracting that we've had throughout our whole 24-year history that we can bring to bear as we move through into the future.

Got it. Great. And then maybe just shifting over to the balance sheet. So you ended this past quarter with roughly $1 billion of liquidity, $400 million of cash, $600 million revolver. You talked a little bit earlier about M&A as a partial driver to your 2024 growth targets. How do you think about deploying that cash today? How do you think about managing the balance sheet in terms of kind of financial risk versus growth opportunity tying that into the 2024?

Sure. Yes. So we are at a point in our balance sheet, as you mentioned, we have very strong liquidity. We have very low net leverage, less than 1x today. We are very comfortable operating in a 2x to 3x net leverage range. For the right opportunities, we'd be willing to take leverage up a little bit higher than that range, provided that we saw a visible path to deleveraging in a fairly short time frame after that. I think I can point you to back in 2018 when we acquired both Adapt and PaxVax. Pro forma for the closing of those acquisitions, our net leverage at the time was about 4x. But in the years that followed, we very rapidly de-levered down to that sub 1x level. So I think that's a good example of the kind of approach and philosophy that we would be likely to take, again, for the right M&A opportunity.

Great. And then in addition to that, in November, you did announce a share repurchase program. I think as of the end of this past quarter, you bought about $50 million of the $250 million target. And so I'd be curious, how should we think about the cadence of capital deployed towards share repurchase? And in sort of a volatile market, does that sort of change your approach to owning more of your equity?

Sure. So well, first, just to clarify, the -- that $55 million figure was just the first quarter activity. So we had purchased $110 million in the fourth quarter last year. So in total, through March 31, we had purchased $165 million, and we had $85 million remaining, which is authorized through November of this year. And we will keep the Street posted on our progress as we announce our quarterly results going forward. More kind of lifting up a level, though, when we think about capital allocation priorities, we've consistently articulated them in priority order as follows: first, to make sure that we maintain a strong financial position and that we have the capacity to fund our current operations and continue to support execution on the core business. Secondly, to invest in growth opportunities, whether they be R&D, whether they be M&A or whether they'd be investing in our CapEx to expand capabilities and capacity to further grow the business from there. And then after that comes a return of cash to shareholders through things like the buyback, I think the situation that presented itself at the end of November last year, and we had done 2 prior buybacks in our history before that. So it hasn't been a regular every year kind of approach, but we do want to make sure that we're offsetting dilution from employee equity compensation. And then when we get into a situation where we feel that the trading price is not reflective of the potential value of the company, then we want to take advantage of those opportunities. So I think, obviously, I'm not going to comment on exactly what we're doing today at this moment. But again, we'll update you at our next quarterly report and beyond.

Fantastic. Last question before I open it up to folks is you do have a first lien term loan maturing in 2023, it's $390 million. And so I'd be curious, what are your plans to address that refinancing with new first lien? Is that sort of the plan? Or do you have other sort of thoughts around how to handle that? And I guess, as a follow-on to that, you're recently downgraded by the agencies. Curious how that affects your thinking and approach going forward?

Sure. Well, so I guess as a first principle, we're very comfortable having debt on the balance sheet, as I articulated earlier. So I think we would certainly be much more inclined to refinance that outstanding balance in one way, shape or form. To some degree, that depends on what market conditions are like and what the relative attractiveness of different ways that we could do that. We have very strong relationships with our bank group with our syndicate that's led by Wells Fargo and JPMorgan. So I think that certainly amending and extending the existing facility is likely to be an option for us to pursue and we would evaluate that as a possibility. We are, as you know, in the high-yield market with our -- with the bond that we issued 2 years ago. We are very happy with the execution we achieved on that. Again, as we're sitting here today, the relative trading levels in the market are not the most attractive. So that would probably be a lower priority to pursue an add-on or an incremental offering. But there's time between now and then to see how things unfold.

Makes sense. We have a couple of minutes. So maybe I wanted to take an opportunity to open it up to the audience to see if anybody had any questions at the moment.

Sure. So just to make sure I understand the question, are you asking what do we think the feasibility of taking mRNA technology and applying it to things like the common cold?

Yes.

So I will start by saying I'm not an expert on the science of these things. So I can't really give you a specific answer on that. I mean, I think it certainly seems like it should be feasible given the experience to date, but that's a question for smarter minds than mine.

Great. Excellent. Well, with that, I believe we're out of time. So I want to thank you all, and I want to thank Emergent BioSolutions. Thanks very much, Rich.

Thank you, Frank.

Thanks so much, Bob. And with that, we'll wrap it up and move on to the next presentation. Thank you, guys.

Thank you, everybody.

Appreciate it. Thank you.