Q2 2020 Emergent BioSolutions Inc Earnings Call

July 30, 2020

[music], ladies and gentlemen, thank you for standing by and welcome to them.

I didn't buy solutions Q2 earnings conference call at this time, all participants I know listen only mode. After the speaker presentation. There will be a question and answer session. As good question dangerous session. You want me to press Star one on your telephone if you acquire any further since then.

He's got Star zero.

And Alex hand, the comp instead emergent Biosolutions. Please go ahead.

Thank you draw and good afternoon, everyone. My name is Bob Burrows, Vice President Investor Relations for emergent.

Thank you for joining us today as we discussed the operational and financial results for the second quarter and six months ended June 32020.

As is customary today's call is open to all participants and in addition to call is being recorded and is copyrighted by emergent biosolutions.

The agenda for todays call will follow traditional path with prepared comments from Bob Kramer, President and Chief Executive Officer, and Rich Lindahl, Chief Financial Officer. Other members of the senior team, our president and available during the Q and a session. Following our prepared comments before beginning during today's call either on our prepared comments or the Q and a session.

Management may make projections and other forward looking statements related to our business future events, our prospects or future performance. These forward looking statements are based on our current intentions beliefs and expectations regarding future events.

We cannot guarantee that any forward looking statement will be accurate investors should realize that underlying assumptions prove inaccurate or unknown risks or uncertainties materialize actual results could differ materially from our expectations any forward looking statements speak only as of the data This conference call and except as required by law, we do not undertake to update any forward looking statement.

To reflect new information events or circumstances.

Investors should consider this cautionary statement as well as the risk factors identified in our periodic reports filed with the SEC.

When evaluating our forward looking statements during our prepared comments as well as during the Q and a session. We may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures.

To provide greater transparency regarding emergence operating performance.

Please refer to the tables found in today's press release regarding our use of adjusted net income and adjusted EBITDA and the reconciliations between our GAAP financial measures in these non-GAAP financial measures.

One final housekeeping item during the Q and a session because of the fact, we are all in separate locations and practicing the necessary social distancing per CDC guidelines, we will have CEO, Bob Kramer fielding all questions to begin with and then you will verbally hand off to other members of the team for additional answers as warranted.

Finally for the benefit of those who maybe listening the replay of the webcast. This call was held and recorded on July 32020.

Since then emergent may have made announcements related topics discussed during today's call. You are once again encouraged to refer to our most recent press releases and SEC filings all of which may be found on the investments on page of our web sites and with that introduction I would now like to turn the call over to my colleague Bob Kramer Bob.

Thank you Bob and good afternoon, everyone. Thank you for joining the call.

Let me start by acknowledging the extraordinary contributions of my 202000, plus teammates at emergent who have worked tirelessly to enable the company to meet its commitments to public health and importantly take on a significant amount of new additional work related to our coconut 19 initiative.

As both in the therapeutic area as well as the CDMO business unit area.

They are achieving extraordinary results in one of the most challenging environments we've ever encountered.

For more than 20 years, and emergent has prepared for threats like the one posed by cobot 19.

Our experience addressing previous public health crises, our expertise and vaccine in drug development and our ability to manufacture on the large scale has positioned us to contribute to the cobot 19 pandemic response like no other organization.

The demand for our services, both from industry and government both in the immediate term and over the next several years has substantially increased in the last few months.

Many of you will recall that in our most recent Investor day. This past November we outlined our strategy to expand and build scalable leadership positions in current and new public health threat markets as well as to invest in capabilities innovation and operational excellence.

What we Didnt anticipated time was just how soon and unprecedented public health threat would emerge and how broadly we would have an opportunity to play a meaningful role as a result.

Over the past six months, we've shown how our mix of expertise capabilities and readiness have positioned us to respond in a way that few others can.

We continue to focus on strong customer centricity, including our ability to meet the needs of the U.S. government and other government customers as well as deliver solutions for federal innovators and other commercial customers and most importantly for our patients.

These principles underpinned the durability of our core business and the potential of our long term strategy.

We've put the strategy outlined at our Investor day into action and today, we're experiencing a step change in both the size of our organization as well as the pace of our growth.

The financial results for the second quarter and year to date periods demonstrate the strength of our core business and an acceleration of our 2024 strategy. As a result, we're announcing today an increase in our financial forecast for 2020.

In addition, we now believe that this acceleration meaningfully increases the contribution of our organic revenue toward our goal of $2 billion in revenue by 2024 versus what we assume just nine months ago. When we first unveiled our 2020 through 2024 strategic.

Plan.

With that said there continued to be multiple paths to achieving our 2024 strategic objectives.

Before we discuss the longer term expectations. Let me were first review recent business developments, starting with a pandemic response.

At the outset of the crisis, we were able to quickly begin development of our own coded 19 therapeutic treatment candidates while at the same time deploy our contract development and manufacturing expertise for customers from the us government to some of the world's leading pharmaceutical.

Technology innovators, including Johnson, and Johnson and Astrazeneca.

As a follow on to the 135 million dollar Tech transfer and capacity reservation agreement signed with JNJ in April we signed the industry's first coded 19 commercial supply agreement a five year agreement for large scale drug substance manufacturing for JNJ easily.

Cobot 19 vaccine candidate beginning in 2021, the contract is valued at approximately $480 million over the first two years with commitments for the remaining three year period of 2023 through 2025 to be determined next year.

In June in an award valued at approximately $628 million emergent joined the U.S. government in a landmark public private CDMO partnership as part of operational warp speed committing our development and manufacturing services for production of Cobot 19 vaccine.

Candidates for commercial innovators through 2021 at a minimum.

This agreement Securus capacity for drug substance manufacturing.

And drug product manufacturing at our three Maryland based facilities. It also includes an incremental investment of $85 million for the rapid expansion of our viral and non viral CDMO drug product fill finish capacity at our Baltimore, Camden and Rockville facilities.

As a result of this expansion and Camden in Rockville emergent is now the only molto location, CIA ATM offering broad services, including drug product drug substance and development and manufacturing services.

The expansion also extends our CIO ATM designation by the U.S. government to drug product, making emergent the only such facility.

Also in June we announced a partnership to manufacture Astrazenecas, leading vaccine candidate under that agreement valued at approximately 87 million emergent will provide development services technology transfer analytical testing drug substance processed and performance qualification.

And we'll reserve certain large scale manufacturing capacity through 2020.

Earlier this week, we announced an additional agreement with Astrazeneca to manufacturer drug substance at large scale for commercial supply.

The contract is valued at approximately $174 million through 2021, and it brings the total astrazeneca commitment to just over $260 million.

The agreement leaves open the option to enter into additional commercial manufacturing commitments as the candidate progresses over the next three years.

Given the scale and the ongoing nature of the threat as well as our diverse offering across development services drug substance drug product and our leading development and manufacturing expertise, we anticipate significant demand for our CDMO business for the next several years across small mid.

And large pharma and biotech as well as the us government and end Geos.

To be clear, we have three capital investment projects ongoing and supported this growth.

And scale of the CDMO business unit first we're nearing completion of the $15 million expansion at our Camden facility in Baltimore, where drug product site that we announced in 2018.

Secondly, we will be investing approximately $80 million in our Rockville, Maryland location to broaden our drug product capabilities and third we will be investing $75 million in our canton, Massachusetts facility to expand our viral based service offering to include viral vector and gene therapy.

Capabilities.

Together. This represents a 200 million dollar expansion of our manufacturing capability and capacity, adding strength diversity and durability to our network.

Turning to the pandemic response within our Therapeutics business unit. We're currently developing two potential hyper immune treatments for cobot 19.

First is our cobot HIV G using our validated human Hyperimmune platform and second is our coded EEG using our validated equine hyperimmune platform that target patient populations for each of these programs are the severe hospitalized cobot 19 patients as well as in.

Vigils, whose occupation places them at higher risk.

In partnership with BARDA and NIAD, we have quickly advance the evaluation of cobot HRG for treatment of hospitalized patients with a phase III clinical trial to start in August.

Earlier this month, we announced a collaboration with Mount Sinai Health systems, as well as Immunotec bio centers and the use to part of the defense, which is providing approximately $35 million of funding to facilitate the development of our cobot HIV GE candidate.

This collaboration includes the establishment of new plasma collection capabilities at Mount Sinai and organization at the epicenter of the Cobot 19 crisis in the United States as well as the development and manufacturing of the product candidate.

The collaboration also includes a clinical trial to be conducted at Mount Sinai to evaluate coded HIV GE for the use as a prophylactic treatment for populations at high risk of potential exposure, such as healthcare workers and military personnel.

Our other therapeutic treatment program is the cobot EEG product candidate. This candidate uses the validated platform and infrastructure from our botulism antitoxin therapeutic program. We're currently vaccinating the horses and we'll complete proof of concept studies to determine the potential to advance this pro.

Graham to the clinic to evaluate it as a treatment for cobot 19.

Expect having data this summer and will provide updates as events warrant.

Also during the quarter the therapeutics business unit continues to make progress on additional pipeline programs to strengthen our leader ship position antibody therapeutics and focus on the acute care hospital space.

There remains a high unmet need for treatments to reduce the overall burden of severe influenza that results in IC EU hospitalizations respiratory support in mortality each year, our lead clinical candidate flu I GE Ivy is in late stage clinical development for patients Hospital.

Wise with severe influenza eight we're currently in the process of reviewing the phase two clinical data and will be determining the next steps and timelines as part of that review.

Turning next to the vaccine business unit.

Our core medical countermeasure business inclusive of our anthrax and smallpox franchises continue to proceed on plan for the year as with rich will discuss in more detail in a few minutes.

We have continued to make deliveries of our anthrax vaccine candidate 87, nine on nine to the strategic National stockpile and earlier. This month in July we secured an option to provide additional doses to the us government over the next 12 months.

With respect to their smallpox Sexing a camp 2000 in May we secured the first annual option exercise under last year's contract for additional doses to the delivered over a 12 month period that started in June of this year.

We also have a number of other updates related to the vaccine business units since last quarters earnings call first the initiation of our phase three clinical trial for our single dose vaccine for chicken Dunja will likely push into 2021, primarily driven by the timing of certain operate.

Additional matters, namely the manufacturing prep out of our Bern, Switzerland site, where we plan to manufacture our clinical material.

Secondly in April this year immersion was notified that we will receive a $15 million in funding from seppi.

To support the advanced development of our loss of vaccine program supporting Nonclinical and phase one studies.

And lastly, a note about our travel health business.

While small contributor to our overall total revenue the travel health business has been impacted by the halt and global travel this negative impact will likely continue until the pandemic impact lessons. Nonetheless, we continue to believe this global pandemic may serve as a catalyst to raise awareness of the rig.

Thanks and opportunities to protect against vaccine preventable travel related illnesses.

Turning finally to the devices business unit, let me start by taking a minute to comment on the devastating impact coated 19 is having around the world and in the United States regarding the ongoing opioid crisis for.

For some of the Cobot 19 pandemic and result in social distancing in isolation has resulted in an increase of stress depression anxiety and fair.

Unfortunately in many instances these mental and emotional stressors have led to increase.

The substance abuse and subsequently opioid emergencies.

We were therefore very pleased to see that the FDA in their recent announcement, requiring all labels for opioid pain medication and medicine to treat opioid use disorder. The updated to include information about naloxone.

As the number of opioid overdose deaths continued to rise during that pandemic increased access awareness and availability of Naxal of naloxone is more important than ever right now.

The FDA is new leading new labeling requirement is an important step and the nationwide effort to more widely distributed and improve the availability of no OXXO on four at risk individuals.

We will continue to focus on expanding awareness of the risks of opioids, increasing the public's accessibility to oxon, and making affordability of New York and nasal spray a priority.

And we remain committed to the supporting federal state and local organizations in their efforts to combat the opioid crisis.

During the quarter retail pharmacy sales of nor can nasal spray were stronger than I anticipated and there was a significant rebound in may and June from the decline in April caused by the initial impact of the pandemic.

Sales of currently trending above pre coded 19 levels and states with co prescription requirements in place as well as in states, where no current requirements for co prescribing exist.

In addition, standing order volume has increased approximately 27% since the middle of May.

These increases are in part due to growing awareness and concerns about the rise in opioid overdoses compounded by the pandemic as well as the concerted efforts by state public health organizations community organizations retail pharmacies and physicians to expand.

Awareness of the need for naloxone.

Now to briefly touched upon the Teva litigation on June 15 for this year. The US District Court of New Jersey entered a decision and the patent litigation regarding nor can nasal spray in favor of the defendants Teva pharmaceuticals.

We are appealing this decision to the court of appeals for the Federal Circuit.

Despite the decision we remained focused and committed to expanding awareness and affordable access and continue to build partnerships with state and local governments and community organizations as we focus on getting nor can nasal spray two vulnerable communities and individuals.

Taking all of this into consideration we continue to expect meaningful contributions from this franchise over the near medium and long term.

As we shared with you all in the past we've factored in the potential generic competition into our planning and continue to believe that we provide differentiated value in raising awareness of the need for naloxone and getting it to the patients who need it.

Now before I turn the call over to Rich, let me conclude with a few summary thoughts.

Immersion is uniquely prepare to answer the call for coated 19 pandemic.

We have proven manufacturing capabilities in place and we're working with the us government and leading innovative pharmaceutical and biotech companies in support of their efforts to develop vaccines, while simultaneously advancing to potential therapeutic treatments of our own.

The strength and durability of our business model is clear and the pace at which we are driving our strategy has materially accelerated.

As a result, we are significantly increasing our financial guidance for 2020, as rich will discuss in detail and a few minutes.

Finally, I'd like to once again, thank our talented team here at immersion.

Stepped up to the challenging throughout this global pandemic. They remain committed to our mission to protect enhance life I couldn't be more proud of the great strides they and we are making it emergent and I look forward to keeping you apprised of our progress as we execute on our strategy.

With that that concludes my prepared remarks, and I'll now turn the call over to our Chief Financial Officer, Rich Lindahl rich.

Thank you Bob.

Good afternoon, everyone and thank you for joining the call.

It's abundantly clear that our financial performance in the second quarter and year to date in 2020 has been the strongest in the company's history and builds upon the integrated nature of our strategic plan and the investments we have made in our infrastructure and operations.

As Bob referenced earlier, our financial and operational success for the first half of 2020 reflects the strength and durability of our core medical countermeasures business. The resilience of our diversified revenue portfolio and the robust acceleration of our molecule to market CDMO services by securing about.

$1.5 billion in long term contracts.

Can be sure, hoping 19 has posed challenges to certain aspects of our business in operations and our teams continue adapting to related disruptions on personal professional and supply of levels.

Even so we ended the second quarter was strong momentum and positive financial tailwinds across all of our business units.

We anticipate continued strong performance in the second half of the year and have significantly raised our 2020 guidance.

With that let's first look at our second quarter performance.

Highlights include total revenues of $395 million, an increase of $152 million or 62% versus the prior year.

Adjusted EBITDA of $156 million, an increase of $127 million or 431% versus the prior year.

And adjusted net income of $106 million, a 96 million dollar improvement versus the prior year.

Breaking down quarterly revenue a bit further anthrax vaccine sales were $132 million, reflecting the continued transition from Biothrax Avi seven nine on nine in the strategic National stockpile.

Mark can nasal spray sales were $73 million continuing the consistent quarterly performance of this critical drug device combination product for opioid overdose reversal.

HM 2000 sales were $70 million as we commenced deliveries to the SNS. Following the first annual option exercise, which was received during the quarter.

Other product sales were $23 million, primarily reflecting sales are STL and back.

We also saw substantial growth in CDMO services as revenues more than tripled to $73 million in the quarter versus the prior year.

This outcome reflects the contribution of recently announced partnerships, most notably our landmark public private CDMO part in partnership with BARDA in support of the U.S. government operation works the program.

Looking beyond revenue. The quarterly results also include combined product and CDMO gross margin of 65%, reflecting the impact of overall product mix as well as improved contribution from CDMO services.

Net R&D expense on $24 million or 7% of adjusted revenue in line with our ongoing disciplined approach to discretionary development investments.

SGN ate spend of $76 million, reflecting ongoing investments in capabilities and capacities to support future growth.

And the impact of an increase in share based compensation expense due to a onetime $15 million special broad based immediately invested equity awards employees below the senior Vice president level.

Our financial performance for the first half of 2020 was also very strong driven by all the factors just discussed for the second quarter.

Key highlights include total revenues of $587 million, an increase of $153 million or 35% as compared to last year.

Total product sales of $447 million up $110 million or 33%.

This includes $184 million from anthrax vaccines $145 million from Marchionne nasal spray $70 million for making 2000 and other products sales of $48 million.

And it's also worth highlighting that sales of anthrax vaccines and ATM 2000 are both up meaningfully versus the prior year and that the recent option exercises for 87 nine on nine an ATM 2000 reflect the U.S. government continued execution against our long term contracts and sustained focus on preparedness against other threats.

Even in the context of the current global pandemic.

CDMO services revenue of $94 million reflects the significant expansion of this business through the recently announced arrangements across development services drug substance and drug product offerings in response to the covered pandemic.

These new collaborations reflect a balanced mix of clinical and commercial activity led by our landmark public private CDMO partnership with the U.S. government, which was designed to pave the way for innovators to leverage our proven us manufacturing supply chain.

Combined product and CDMO gross margin of 62%, reflecting the impact of mix and the improved contribution from CDMO.

Net R&D expense of $44 million or 8% of adjusted revenue inline with our ongoing disciplined investments in select internally funded development programs.

SGN ate spend of $146 million, reflecting the increase in share based compensation and continued investment in staffing to support future growth.

And in terms of year to date profitability, adjusted EBITDA of $171 million or 29% of total revenue and adjusted net income of $106 million or 18% of total revenue both reflect the influence of product mix operational execution and cost management balanced with prudent investments and a sustained focus.

Profitable growth.

In terms of the balance sheet, we continue to maintain a strong financial position with ample liquidity to capitalize on opportunities for growth.

At June 32020, we had cash of $269 million on accounts receivable of $259 million.

These current liquid assets of over $525 million are the highest in our company history.

In addition, we ended the quarter with remaining borrowing capacity of $244 million under our revolving credit facility.

Year to date Capex of $59 million reflects ongoing projects to scale the business, specifically CDMO drug substance and drug product capacity and capability investments and our Maryland locations as well as our Canton, Massachusetts site.

Net net are accelerating momentum creates favorable conditions for us to execute on our growth strategy and deliver solutions to address global public health threats.

I'll move on now to our updated guidance.

Taking into consideration the performance for the first half of the year our outlook for the remainder of the year across all of our business units and the expectation that challenges in some parts of our business will be offset by expansion in other parts, we're raising our overall forecast for the full year 2020. This forecast consists of the following elements.

Total revenue of 1.5 billion to $1.6 billion, an increase of 27% versus the midpoint of the prior range.

In terms of product specific detail anthrax vaccine sales of between 320 million and $350 million, an increase of 18% versus the midpoint of the prior range.

Our revised outlook for anthrax vaccines reflects improved visibility into this year's anticipated deliveries of 87, nine or nine as we continue to gain more experience with this development stage product candidate.

Mark in nasal spray sales of between 285 million and $350 million unchanged from the prior guidance.

And income 2000 sales of between $180 million and $200 million also unchanged from prior guidance.

For the CDMO business, we now anticipate arrangement between $440 million and $460 million or more than three times higher at the midpoint versus the prior guidance range.

This new Ics expectation for 2020 illustrates the important role emergence playing in the covert 19 response and more broadly reflects the transformation occurring in our CDMO business unit to provide long term sustainable growth as evidenced by our ability to secure $1.5 billion in long term contracts across.

Our target markets pharma biotech and the U.S. government.

Our profitability guidance includes adjusted net income of $340 million to $390 million, an increase of 97% at the midpoint versus the prior range and adjusted EBITDA of 535 million to $600 million, an increase of 72% at the midpoint versus the prior range and a clear indication.

On the earnings potential of our overall operations.

Importantly, our revised 2020 guidance takes into account the following considerations.

First improvement a full year gross margin by 400 to 600 basis points, driven by product mix and increased contribution from our CDMO business.

Second the delay into 2021 of the launch of the phase three clinical study to the check me VLP program due to the timing of certain operational factors.

Third the deferral into 2021 I've a follow on procurement contract with the U.S. government directly back to map due to the impact of the prioritization of the operation Works Me program on our efforts to tech transfer the raxibacumab process to the Bayview Baltimore site.

Fourth continued significant disruption of global travel through at least the end of 2020, which greatly reduces the best Cora Nvvault keep revenues and finally on assumption of no generic competition in 2020 monarch hand nasal spray.

We also continue to assess the business and operational implications associated with the Kobin 19 pandemic and to utilize numerous measures to mitigate the risk of disruption to our business from this public health correct.

Lastly, we are providing guidance on third quarter total revenue of between $420 million and $450 million.

Taking all of this into consideration let me also reaffirm what you heard earlier from Bob regarding the clear progress toward our 2000 22024 growth strategy.

To that end, our 2024 year end targets continue to be $2 billion in topline revenue with an adjusted EBITDA margin of 27% to 30%.

As we have discussed there are many different paths to reaching these targets, but with the acceleration of our CDMO business unit, we have an even greater confidence that these targets can be reached on an organic basis.

Nevertheless, our strategy has not changed and we are continuing to pursue growth organically as well as through M&A as we had previously communicated.

We are pleased by the resilience and durability of our business model as well as the impact of our strategy of diversifying our revenue mix and expanding the range of public health threats that we address.

Let me conclude by reaffirming what I said 90 days ago, our previous call.

At emerging we have built a strong and resilient business with the financial strength and contingency planning needed to maintain and in some cases expand our ability to to deliver preparedness and response solutions.

Our business is not immune to the effects of the pandemic, but the very nature of this crisis illustrates why emergence products and services are critical to addressing public health threats.

Our current outlook combined with what we have announced thus far this year you tangible evidence of the durability and viability of our unique business model and the role that replay in protecting enhancing the lives of many across the globe.

The current environment provides an opportunity for emerging illustrate our capabilities and the purpose for which we were built.

I know I speak for all our employees in saying that we are truly proud to be part of this company executing on our mission to protect and enhance like at this critical moment.

That completes my prepared remarks, and I'll now turn the call over to the operator to begin the question and answer session operator.

Thank you as a reminder to ask a question you will need to test bottom line on your telephone to withdraw your question based upon key please standby will be come back to Q and Dave Austin.

Our first question comes from vending folks with Cantor Fitzgerald. Your line is now open.

Hi, Thanks for taking my questions then congratulations on all the progress during the quarter.

He asked me can you just elaborate perhaps than we.

In terms of capacity utilization within the CDMO business and then and then maybe following on from that in terms of how much additional capacity investments you are non.

We'll provide and.

And then secondly, maybe just the NOL Ken and.

Any thoughts on now that needs this potential for generic to come to market do you think coke describing gained a bit of momentum here just because.

Hey, the perhaps more willing to get behind it and then last need maybe one just on the guidance then.

[laughter] Twentytwenty EBITDA margin I'm coming out at about 36.6%, obviously this is quite well above.

Range for 2024, and given that some of the contract.

Uncoated onto reserve capacity on can you just to provide some color in terms of whether you've assumed a cost of production against those pesky reactivation contract for any additional color you can provide in terms of the cost youre, adding into the 2020 guidance around that thank you.

Great. Thanks, Brandon appreciate the questions and thanks for joining the call. So.

Let me take a shot at the first couple of questions and then I'll ask rich to comment on your last question around the EBITDA margin implied as well as our 2024 range that we provided which is that 27% to 30% range. So I think on the on the.

Hello capacity.

And site can can join in here as well, it's really difficult metric to establish.

Overall across the enterprise given the fact that we have nine manufacturing facilities that are.

In play and capable of providing those CDMO services and the nature of how those facilities are being used to support both our internal candidates as well as the CDMO.

I can give you want to get a little more granular and look at the.

The Bayview facility, where the majority of the covert 19 vaccine development work is being done.

Again as result of the task order that we executed with BARDA and with operational warp speed and the fact that we're doing support work in manufacturing and scale up for.

For a different covert 19 candidates JNJ AC novavax and Vacs art, it's pretty much locked up right now.

And that was by design to us covenant wanted to make sure.

That operation Warp speed had full unfettered access to the full power of that manufacturing facility and broader network around fill finish capability to support the cobot 19 vaccine initiatives. So thats, how would I would answer that.

And our can nasal spray.

Your question about the potential momentum impact of of co prescription as well as the generic.

I think as FCTA announced recently with their requirement on the label change I think of that will.

We will help obviously.

Oh prescription initiatives and momentum.

I think the fact that we continue to see states.

Such as New Jersey, either through a legislative means or a policy means continue to adopt co prescription is a good thing again every time one of those states adopt that it means greater access greater availability.

And education on the need for the locks on and getting it to into the very patients who need it. So obviously, it's a good thing and maybe with that I'll let.

I'll let.

First a rich talk a little bit about the EBITDA number and then site if theres anything more you want to add around the capacity issues on CDMO you can weigh in as well.

Okay. Thanks, Bob and thanks, Brandon So I would point to kind of three primary drivers of the the EBITDA margin expansion in our new guidance relative to what we had before.

First is the capacity reservation element of the.

Of the task order that we received from BARDA.

As you mentioned there there are very minimal costs associated with the reservation piece itself the costs really come through ads.

As manufacturing of candidates comes through the plant. So so thats certainly is a positive factor as it relates to the margin. The second is there's a little bit of an accounting nuance associated with the capital portion of the task order in and that's where we're being where the government is investing the $85 million and.

Helping us expand the capability and capacity at some of our plans that $85 million of the portion. That's recognized this year will come through as revenue, but the spending associated with those activities goes to the cash flow statement at capital expenditures and then ultimately flowed through the income statement as depreciation so as it relates strictly too.

Adjusted EBITDA on does a very beneficial impact of that revenue.

And then the third piece is just overall product mix and as you've seen as we've adjusted our product level guidance.

And as we're realizing greater revenue on some of our products. We're realizing additional economies of scale on those products as well which helps to.

Provide incremental EBITDA contribution as well so those are really the main drivers.

Great. Thanks, Rich side anything you want to add to the CDMO discussion.

Yes, Thank you Bob.

The thing couple of things that I would just add there in addition to what Bob reference.

It's important thing that each one of our collaborations as a specific scope of work and we have capacity thats tied to that.

I think scope of work, whether its clinical support or commercial support and in general when you take a step back and look at our entire network at capabilities capacities and expertise.

We do have the opportunity to add more add more business, whether its colgate related or non Colgate related we strive to have a continuous funnel of opportunities and match that against our available capacities Q opportunity.

From an expansion standpoint, just to put a little bit of color on that so our canton, Massachusetts expansion in added viral vector and gene therapy capability of 2000 leader scale, which is the ideal sweet spot for clinical and commercial supply within that growing market and then Camden the dry.

Product investment there from a non viral standpoint will double the capacity for that site to support clinical and commercial supply and then finally, the Rockville, Maryland investment.

Within viral drug product, killing finish will also double the capacity for that site to support clinical and commercial supply. So with these expansions as well as the portfolio mix that we've been able to secure we're matching up very well our capacity that we had and then paving the way for additional opportunities.

To grow the portfolio as well.

Thanks, I think Brian and I really speaks to our.

Comfort and confidence and the durability and the sustainability of sites business unit around CDMO, The fact that.

She shared with everyone last fall that we have a very diverse service offering.

It is attractive to all size companies.

Whether they have an interest in a need for clinical material or commercial supply agreements like we've now signed with with JNJ and Astra Zeneca, I think our unique product offering and growing capability network.

Really gives us confidence that.

That business unit has quickly been brought to scale and we'll continue to grow over the coming years.

Great. Thank you very much everyone very company launches I appreciate it thank you.

Sure.

Thank you. Our next question comes from CICC of used with Wells Fargo.

Line is now open.

Hi, good afternoon.

No and could you.

Talk about how you're approaching the appeal and what what sort of pricing up as you might have with versus the potential generic and then also just a follow up on the seasonal growth. Some of these contracts will theoretically expire.

Recall that beyond 21 of you think you can grow off that base or does that where does that come down from these from these level. Thanks sure. Thanks, a question shake thanks for joining the call. So on the on an art can.

Question.

As I shared during my prepared comments.

Going back to the.

The diligence and the work that we did prior to acquiring the product from adapt a number of years ago, we fully expected in modeled.

Both branded as well as generic competition and eventually coming into the market I.

I think what gives us some comfort.

And continued optimism about the viability in the sustainability of of the product is the fact that.

Again, FDA announcement earlier about supporting label change I think that will further education and awareness of the need for the locks on and as we talk about on every call. There is a significant underserved patient population who is either unaware.

Or cannot get access to the locks on so that market continues to grow we are prepared to compete in that market for market share weathers in the generic space or the branded space and whether it's at the retail market or the public interest market.

We're in this for the long haul and we think we have a very differentiated high value added product in arc and nasal spray that meets the unique needs of patients. So.

So we're we're excited about the future for that product unexpected again to meaningfully contribute to revenue going forward.

On the on the CDMO question in terms of again getting at your I think your question around the sustainability and whether there is going to be any drop off after 2021.

If you look at just to say it out loud if you look at the contracts.

That rich referred to that make up that 1.5 billion dollar aggregate value, whether it's the AC contracture JJ or the task order with BARDA slash operational warp speed the majority of that value.

We expect to realize over the next 24 month period and as Syeed has just kind of described.

Whether post 2021 that firepower and capability is continued to be leverage and used in supportive cobot 19 vaccine candidates.

Or whether we should start to market and sell that capacity and those services to the more traditional market. The site described last fall that 20 billion dollar addressable market for the CDMO, we'll have to wait and see but we're not anticipating significant drop off.

In revenue after 2021, when that $1.5 billion number or value.

Just a term I guess the other thing I'd say is on the JNJ as an example, we've put in place the five year commercial supply agreement.

The first two years of wish or $480 million valued.

And it's contemplated and we expect that whether it's JJ or AC. After 2021, we expect to be in actively in this cobot 19 vaccine supports space.

Great. Thanks, So just one follow up just on M&A. How active are you guys will the pipe on look like in what sort of assets are you looking to.

Yes, so I think the.

The landscape looks about the way it did when we shared our thoughts with investors last fall if anything it's probably.

Not in a little more busy and populated Jake.

There are a number of opportunities across literally all four of our business units that we are evaluating again to riches point.

The fact that we have in our words, a greater profitability of getting to that 2 billion dollar revenue number by 2024 through organic sources only.

Doesn't change our view that we think that there are unique assets out there that we can use to build upon and create leadership positions in segments of the the public health threat market, where we think we are best positioned to win we're still highly engaged.

There.

And opportunistic and interested in looking at.

At different assets to bring in.

Okay. Thanks, guys appreciate it.

Thank you.

Your next question comes from Dean Glendale, with Guggenheim Partners. Your line is now open.

Hi, This is a dozen going on for Dana Flanders. Thank you for the questions and congrats on a quarter.

Just the first one on CDMO.

Your guidance, it's 440 to 460 million per 2020, which is surprisingly a little higher than we had forecast initially.

Could you, perhaps walk us through your revenue recognition for the procured covered contracts to date and how the kind of balance broadly across 2020, and 2021 and I've a follow up after that again sure.

Rich you want to tackle that one.

Sure. So when you look at the the 628 million dollar Pete's broken up into two components, the 543 million dollar capacity reservation.

Which we are recognizing monthly on a straight line basis from when the path forward order was awarded in mid May of this year through December of 2021.

The 85 million dollar component related to the capital.

He is he is not recognized on a straight line basis, but is more related to progress against the up the capital projects. So a portion of that will come into 2020.

And the remainder going to into 2021.

And then the other programs our revenue recognition is just related to.

The delivery of certain milestones achievement of different aspects of the arrangement that we havent place.

Okay, Great and then just a question on.

No our can.

Your guidance assumes no generic launch in 2020.

What line of sight you guys have on the have you had ongoing conversations with Teva.

What makes you comfortable assuming that have a will not launch early within the cycle of the appeals process.

Yes, so Devon just to be clear, we have obviously no assurance that they will not.

They very well may do that.

Later in 2020 or in 2021.

Prior to the.

The expected appeal decision and the second half of the year.

We are we are now and we'll be prepared to.

Counter or to deal with whatever they decide to do whatever they decide to do it our best knowledge right now indicates that and we're assuming as rich said, we're we're not expecting them to but if they do that that's fun.

So we're maintaining our product guidance for dark and for 2020, and we'll talk more about our expectations in 2021, when we provide our guidance probably around January of.

Our next year.

Okay. Thank you.

Sure.

Is there another question Joel.

Sure.

Sure well are you there.

Hello to all you there.

Well I am on Cyclades, gentlemen, I'm.

Sending a message.

We apologize for the interruption. This has never occurred yes, rich can you hear us just to make sure the color so a lot.

Yes, I can.

All right. Thank you.

Thank you and your next question comes then the Kay.

Okay with Jpmorgan. Your line is now open.

Yes.

Hi, Thank you two questions the first where our with respect to market where are you with respect to your.

Product enhancement differentiation.

Launches to two again further differentiate your product versus anybody else's.

Yes, Thanks K for the question thanks for joining the call.

I assume you're referring to.

One of the.

Lifecycle product improvements or enhancements that we've talked about.

A twin dose or that by Ddos product.

That will at the end today.

Offer to four milligram nasal.

Delivered formulations of naloxone in a single device.

As opposed to.

Having patients or users use two different devices. So we're continuing to develop and evaluate.

That twin dose or by dose.

It's not going to be something that will come to the market in 2020.

Doug White I think you're on the call if you'd like to provide a little more color around the development status of that that would be helpful.

Sure. Thanks, Bob a couple of things the as well nearer term.

Lifecycle improvement, if you will and Thats we did.

Then data for the FDA or an expansion or.

Extension of our.

Dating from 24 months to 36 months. So we would anticipate that approval this year and thats for the the justice, although some loss enable sprayed on the multi dose a product that product is in development and we would anticipate.

Submitting.

Application to the FDA in 2021.

Okay great.

Second question.

As to what extent.

For the new CDMO contracts.

Have you negotiated higher gross margin and if so how many basis putting improvements over the prior business.

So just.

Clarification, Okay are you referring to.

Just the co had 19 vaccine seeding, yes, yes.

So yes, so the the nature of those as rich as described is it's a combination of.

Some initial tech transfer.

As well as capacity reservation based contracts with both JNJ as well as AC and.

The with BARDA, HHS and operational warp speed.

And then there are the commercial supply agreements, which are longer term more traditional CDMO contracts that are in place. So as rich described the first flavor of those contracts.

Our.

By design and by structure.

More favorable from a gross margin perspective, because the nature of the work.

The commercial supply agreements are more typical of a standard CDMO gross margin profile because of the nature of that work. So that's how I would look at that and clearly we are experiencing and 2020 and 2021, Oh a bit of.

Uplift in our margin profile because of those first category of contracts that will normalize longer term when those mature and are replaced with more traditional CDMO contracts.

Okay. Thank you Thats helpful.

Sure.

Thank you.

Reminded to ask a question you will need to pass Taiwan on your telephone. Our next question comes at least that's been going with singular research. Your line is now open.

Thank you.

Obviously, you've locked in a lot of the current about 15 minutes production capacity out there I just wanted to ask are there other vaccine developers that you might be in discussions with might we see some were definitely contracts.

Well this year.

Yes, Lisa Thank you for the question. Thank you for joining the call.

I think as we've described and as you've heard.

The government and the operation Warp speed folks comment.

Yes.

The government has prioritized.

The top tier of Cobot 19 vaccine candidates with five of the big players.

There are an additional.

Probably nine to 12.

Other candidates that are in development, there being supported at some level by the operation warp speed and by HHS.

Such that if any one of the top tier five.

Fail to meet their clinical endpoints or show.

Promise going forward, there's likely to be a substitution. So whats important I think to understand about the nature.

Of our contracts with operation Warp speed is that our capacity.

Has been basically.

Spoken for such that operation Warp speed and HHS can substitute different candidates so its entirely possible.

That we may have a substitute that that will be all fact dependent and two sides point earlier. The fact that we are continuing to invest and broader services across a broader platform of capabilities and locations.

We continue to be in discussion with any number of other developed there developers innovators for expanded business. So it's a it's a continuing process.

Okay. Thank you for the explanation.

Sure.

Thank you.

Not showing any further questions at this time I would now like to turn the call back over to Bob.

Moving on line.

Thank you do well and with that ladies and gentlemen, we now conclude the call.

Thank you all for your participation. Please note an archived version of the webcast of today's call will be available later today and accessible through the company website. Once again, thank you and we look forward to speaking with all of you in the future Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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Ladies and gentlemen, thank you for standing by and welcome to the emergent Biosolutions Q2 earnings Conference call. At this time, all participants are not listen only mode.

So to speak of presentation, there will be a question answer session.

Good question dangerous Akshay, you want it to press star one on your telephone if you acquire any or that's just then.

It's got Star zero.

Now, let's turn the conference to emergent Biosolutions. Please go ahead.

Thank you do well and good afternoon, everyone. My name is Bob Burrows, Vice President Investor Relations for emergent.

Thank you for joining us today as we discuss the operational and financial results for the second quarter and six months ended June 30 2020.

As is customary today's call is open to all participants and in addition, the goal is being recorded and is copyrighted by emergent biosolutions.

The agenda for todays call will follow traditional path with prepared comments from Bob Kramer, President and Chief Executive Officer, and Richmond Hill, Chief Financial Officer. Other members of the senior team, our president and available during the Q and a recession following our prepared comments before beginning during today's call either on our prepared comments or the Q1 day session.

Management may make projections and other forward looking statements related to our business future events, our prospects for future performance. These forward looking statements are based on our current intentions beliefs and expectations regarding future events.

We cannot guarantee that any forward looking statement will be accurate investors should realize that underlying assumptions prove inaccurate or on risks or uncertainties materialize actual results could differ materially from our expectations any forward looking statements speak only as of the date of this conference call, except as required by law, we do not undertake to update any for.

To reflect new information events or circumstances.

Investors should consider this cautionary statement as well as the risk factors identified in our periodic reports filed with the FCC.

When evaluating our forward looking statements during my prepared comments as well as during the current recession. We may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures.

To provide greater transparency regarding margins operating performance.

One final housekeeping item during that you announced session because of the fact, we are all in separate locations and practicing the necessary social distancing first CDC guidelines, you will have CEO, Bob Kramer fielding all questions to begin with and then you are verbally hand off to other members of the team for additional answers as warranted.

Finally for the benefit of those who maybe listening the replay of the webcast. This call was held and recorded on July 32020. Since then emerging may have made announcements related topics discussed during today's call.

You are once again encourage you referred to our most recent press releases and SEC filings.

All of which may be found on the investments homepage of our web sites and with that introduction I would now like to turn the call over to my colleague Bob Kramer Bob.

Thank you Bob and good afternoon and everyone. Thank you for joining the call.

Both in the therapeutic area as well as the CDMO business unit area.

They are achieving extraordinary results in one of the most challenging environments we've ever encountered.

For more than 20 years emerging has prepared for threats like the one imposed by cobot 19.

Our experience addressing previous public health crises, our expertise and vaccine in drug development and our ability to manufacture on a large scale has positioned us to contribute to the cobot 19 pandemic response like no other organization.

The demand for our services, both from industry and government both in the immediate term and over the next several years has substantially increased in the last few months.

Many of you will recall that our most recent investor day. This past November we outlined our strategy to expand and build scalable leadership positions in current and new public health threat markets as well as to investing capabilities innovation and operational excellence.

What we didn't anticipate at a time was just how soon on an unprecedented public health threat would emerge and how broadly we would have an opportunity to play a meaningful role as a result.

Over the past six months, we've shown how our mix of extra case capabilities and readiness have positioned us to respond in a way that few others can.

We continue to focus on strong customer centricity, including our ability to meet the needs of the U.S. government and other government customers as well as deliver solutions for fell innovators and other commercial customers and most importantly for our patients.

These principles underpinned the durability of our core business and the potential of our long term strategy.

We've put the strategy outlined at our Investor day into action and today, we're experiencing a step change in both the size of our organization as well as the pace of our growth.

The financial results for the second quarter and year to date periods demonstrate the strength of our core business and an acceleration of our 2024 strategy.

As a result, we're announcing today an increase in our financial forecast for 2020.

Dick plan.

With that said there continue to be multiple paths to achieving our 2024 strategic objectives.

Before we discuss the longer term expectations. Let me were first review recent business developments, starting with a pandemic response.

At the outset or the crisis, we were able to quickly begin development of our own cobot 19 therapeutic treatment candidates while at the same time deploy our contract development and manufacturing expertise for customers from the us government to similar the world's leading pharmaceutical and biotech.

Now the innovators, including Johnson, and Johnson and Astrazeneca.

Lee Cobot 19 vaccine candidate beginning in 2021.

The contract is valued at approximately $480 million over the first two years with commitments for the remaining three year period of 2023 through 2025 to be determined next year.

In June in an award valued at approximately $628 million emergent join the U.S. government and a landmark public private CDMO partnership as part of operational warp speed committing our development and manufacturing services for production of Cobot 19 vaccine candidates.

For commercial innovators through 2021 at a minimum.

Disagreements securus capacity for drug substance manufacturing.

And drug product manufacturing at our three Maryland based facilities. It also includes an incremental investment of $85 million for their rapid expansion of our viral and non viral CDMO drug product fill finish capacity at our Baltimore, Camden and Rockville facilities.

As a result of this expansion and Camden in Rockville emergent is now the only multilocation CDAI ATM offering broad services, including drug product drug substance and development and manufacturing services.

The expansion also extends our CIO ATM designation by the U.S. government to drug product, making emergent the only sex facility.

Also in June we announced a partnership to manufacture Astrazenecas, leading vaccine candidate under that agreement valued at approximately 87 million immersion will provide development services technology transfer analytical testing drug substance processed and performance qualification and we will.

Reserve certain large scale manufacturing capacity through 2020.

Earlier this week, we announced an additional agreement with Astrazeneca to manufacture a drug substance at large scale for commercial supply.

The contract is valued at approximately $174 million through 2021, and it brings the total astrazeneca commitment to just over a $260 million.

Agreement leaves open the option to enter into additional commercial manufacturing commitments as the candidate progresses over the next three years.

And large pharma and biotech as well as the U.S. government and NGL goes.

To be clear, we have three capital investment projects ongoing and supported this growth.

And scale of the CDMO business unit first we're nearing completion of the $15 million expansion at our Camden facility in Baltimore, where drug product site that we announced in 2018.

Secondly, we will be investing approximately $80 million and our Rockville, Maryland location to broaden our drug product capabilities and third we will be investing $75 million and our canton, Massachusetts facility to expand our viral based service offering to include viral vector and gene therapy.

Capabilities.

Together at this represents a 200 million dollar expansion of our manufacturing capability and capacity, adding strength diversity and durability to our network.

Turning to the pandemic response within our Therapeutics business unit. We're currently developing two potential hyperimmune treatments for coated 19.

First as our cobot HIV Jade using our validated human Hyperimmune platform and second is our co that EEG using our validated equiped hyperimmune platform that target patient populations for each of these programs are the severe hospitalized coded 19 patients as well as in.

The vigils, whose occupation places them at higher risk.

In partnership with BARDA and NIAD, we have quickly advance the evaluation of Covance HRG for treatment of hospitalized patients with a phase III clinical trial to start in August.

Earlier this month, we announced the collaboration with Mount Sinai Health systems, as well as Immunotec bio centers and the us to part of the defense, which is providing approximately $35 million of funding to facilitate the development of our cobot HHG candidate.

This collaboration includes the establishment of new plasma collection capabilities at Mount Sinai and organization at the epicenter of the covert 19 crisis in the United States as well as the development and manufacturing of the product candidate.

The collaboration also includes a clinical trial to be conducted at Mount Sinai.

Uhhuh coded HIV for the use as a prophylactic treatment for populations at high risk of potential exposure, such as healthcare workers and military personnel.

Hi, Graham to the clinic to evaluate it as a treatment for coated 19.

Expect having data this summer and will provide updates as events warrant.

Also during the quarter the therapeutics business unit continues to make progress on additional pipeline programs to strengthen our leader shipped position an antibody therapeutics and focus on the acute care hospital space.

There remains a high unmet need for treatments to reduce the overall burden of Cyvera influenza that results in IC, you hospitalizations respiratory support and mortality each year.

Our lead clinical candidate flu I GE Ivy is in late stage clinical development for patients hospitalized with severe influenza eight. We're currently in the process of reviewing the phase two clinical data and will be determining the next steps and timelines as part of that review.

Turning next to the vaccine business unit.

Our core medical countermeasure business inclusive of our anthrax and smallpox franchises continue to proceed on plan for the year as what rich will discuss in more detail in a few minutes.

We have continued to make deliveries of our anthrax vaccine candidate 87, nine on a nine to the strategic national stockpile and earlier. This month in July we secured an option to provide additional doses to the us government over the next 12 months.

With respect to their smallpox vaccine at camp 2000 in May we secured the first annual option exercise under last year's contract for additional doses to the delivered over a 12 month period that started in June of this year.

We also have a number of other updates related to the vaccine business units since last quarters earnings call first the initiation of our phase three clinical trial for our single dose vaccine for chicken venue will likely push into 2021, primarily driven by the timing of certain operate.

Additional matters, namely the manufacturing prep out of our Bern, Switzerland site, where we plan to manufacture our clinical material.

Secondly in April this year immersion was notified that we will receive a $15 million in funding from seppi.

To support the advanced development of our loss of vaccine program supporting Nonclinical and phase one studies.

And lastly, a note about our travel health business.

While small contributor to our overall total revenue the travel health business has been impacted by the halt in global travel this negative impact will likely continue until the pandemic impact lessons. Nonetheless, we continue to believe this global pandemic may serve as a catalyst to raise awareness of the rich.

Thanks and opportunities to protect against vaccine preventable travel related illnesses.

Turning finally to the devices business unit, let me start by taking a minute to comment on the devastating impact coded 19, as having around the world and in the United States regarding the ongoing opioid crisis for.

For some the cobot 19 pandemic and result in social distancing in isolation has resulted in an increase of stress depression anxiety and fair.

Unfortunately in many instances these mental and emotional structures have led to increased substance abuse and subsequently opioid emergencies.

As the number of opioid overdose deaths continue to rise during that pandemic increased access awareness and availability of Naxal of naloxone is more important than ever right now.

The FDA, new leading new labeling requirement is an important step in the nation wide effort to more widely distributed and improve the availability of naloxone for at risk individuals.

We will continue to focus on expanding awareness of the risks of opioids, increasing the public's accessibility to oxon, and making affordability of narcan nasal spray a priority.

And we remain committed to the supporting federal state and local organizations in their efforts to combat the opioid crisis.

During the quarter retail pharmacy sales of nor can nasal spray were stronger than anticipated and there was a significant rebound in may and June from the decline in April caused by the initial impact of the pandemic.

Sales are currently trending above pre coveted 19 levels and states with co prescription requirements in place as well as in states, where no current requirements for co prescribing exist.

In addition, standing order volume has increased approximately 27% since the middle of May.

Awareness of the need for naloxone.

Now to briefly touched upon the Teva litigation on June 1st of this year. The US District Court of New Jersey entered a decision and the patent litigation regarding nor can nasal spray in favor of the defendants Teva pharmaceuticals.

We are appealing this decision to the court of appeals for the Federal Circuit.

Despite the decision we remain focused and committed to expanding awareness and affordable access and continued to build partnerships with state and local governments and community organizations as we focus on getting nor can nasal spray two vulnerable communities and individuals.

Taking all of this into consideration we continue to expect meaningful contributions from this franchise over the near medium and long term.

As we shared with you all in the past, we factored into the potential generic competition into our planning and continue to believe that we provide differentiated value in raising awareness of the need for naloxone and getting into the patients who need it.

Now before I turn the call over to Rich, let me conclude with a few summary thoughts.

Immersion is uniquely prepare to answer the call for coated 19 pandemic.

Earlier in the pace at which were driving our strategy has materially accelerated.

As a result, we are significantly increasing our financial guidance for 2020, as rich will discuss in detail and a few minutes.

Finally, I'd like to once again, thank our talented team here at immersion.

Stepped up to the challenging throughout this global pandemic. They remain committed to our mission to protect enhance life I couldn't be more proud of the great strides they and we are making at emergent and I look forward to keeping you apprised of our progress as we execute on our strategy.

With that that concludes my prepared remarks, and I'll now turn the call over to our Chief Financial Officer, Rich Lindahl rich.

Thank you Bob.

Good afternoon, everyone and thank you for joining the call.

It's abundantly clear that our financial performance in the second quarter and year to date in 2020 has been a stronger than the company's history and builds upon the integrated nature of our strategic plan and the investments we have made in our infrastructure and operations.

About $1.5 billion in long term contracts.

To be sure, hoping 19 has posed challenges to certain aspects of our business and operations and our teams continue adapting to related disruptions on personal professional and societal levels.