Q1 2021 Emergent BioSolutions Inc Earnings Call
Thank you for standing by and welcome to day emergent Bio solutions first quarter 2021 earnings conference call. At this time, all participants are in listen only now which if he would like to speak for the public comment. Please press star, one and with free it needs to be announced.
If you recall any further assistance please press star zero.
Thank you I would now like to hand, the conference over to Bob Burrows. Please go ahead.
Thank you Cindy and good afternoon, everyone. My name is Bob Burrows Investor Relations Officer for emergent bio solutions. Thank you for joining us today as we discuss the operational and financial results from the first quarter of 2021.
As is customary today's call is open to all participants on the call is being recorded and is copyrighted by emergent bio solutions. In addition to today's press release, there was a series of slides accompanying this webcast available to all webcast participants.
Turning to slides three and four in the slide presentation. During today's call, we 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 any forward looking statement speaks only as of the date of this conference call and except as required by law, we do not undertake to update any forward looking statements to reflect new information events or circumstances investors should consider this cautionary statement as well as the risk factors.
<unk> and our periodic reports filed with the SEC when evaluating our forward looking statements. During today's call. We may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding emergent is operating performance.
Please refer to the tables found in today's press release regarding our use of adjusted net income adjusted EBITDA and adjusted gross margin and the reconciliations between our GAAP financial measures and these non-GAAP financial measures.
Turning to slide five of the agenda for today's call will include Bob Kramer, President and Chief Executive Officer, who will comment on the current state of the company.
And rich Lindahl, Chief Financial Officer, who will speak to the financials from <unk> 21, as well as the forecast for calendar 2021. This will be followed by a Q&A session, where additional members of the executive leadership team are present and available as needed.
Finally from the benefit of those who may be listening to the replay of the webcast. This call was held and recorded on April 29, 2021. Since then emergent may have made announcements related to topics discussed during today's call and with that introduction I would now like to turn the call over to Bob Who's comments begin with slide six Bob.
Thank you Bob and good afternoon, everyone. Thank you for joining the call as.
As you know we've been in the press in the news lately, primarily related to our COVID-19 manufacturing activities as.
As a result, and given that our core business continues to operate pretty much as planned.
Focus my prepared remarks around the news unless a core business performance speak for itself. My comments are summarized on slide seven in the deck accompanying this call.
The executive management team and I remain committed to providing you with accurate information and open communications.
Like to start by addressing our ongoing role in the involvement and the urgent battle against COVID-19.
Since our founding emergent has been steadfastly committed to quality.
That started in 1998 from the day, we acquired our first manufacturing facility in Michigan and work with the U S Department of defense and the FDA to make it state of the art.
The last two decades, we've dedicated ourselves to delivering on our mission to protect and enhance life through the quality of our products.
Prior to 2020, we were operating our Bayview facility as a clinical development site we.
We've been preparing to seek licensure from the FDA for the facility to transition it to a commercial site than.
Then the pandemic hit.
Thousands of lives are being lost daily.
We stepped up along with the U S government and our partners to increase global vaccine production capacity.
We took him that herculean task of progressing Bay view from a facility originally designed to develop and manufacture 50 million doses of a single influenza vaccine to one capable of producing hundreds of millions of COVID-19 vaccines.
This was a remarkable accomplishment given the circumstances, but a necessary one given the severity of the pandemic.
There's been a lot of misinformation about what happened to Bayview before I discuss the details I wanted to say upfront.
Full responsibility and you have my commitment that we're going to do everything we can to resolve these issues quickly and as safely as possible.
As you know manufacturing biologics products is difficult and complex and there are many intricate and detailed steps required.
In parallel with those steps our checks.
And sales sites.
Product loss occurs for a variety of reasons, especially during the early stages of the scale up of a biologic product as biologic processes and repeatability can be incredibly challenging.
But the loss of the batch for a viral contamination is extremely serious and we treated it as such.
The FDA did as well, which is why they initiated in April of this year, a four cause inspection of the to be licensed facility.
We had implemented layers of disinfection and other protocols to lessen the inherent risk of cross contamination.
We believe that the batch was likely contaminated when one or more of these precautions did not function as anticipated, resulting in the transmission of the astrazeneca virus to the Johnson and Johnson production suite importantly, our rigorous safety and quality protocols worked as designed.
Identifying this contamination back to ensure that never left our facility.
Much has been made about the choice to put two viral product candidates in one facility.
Cross contamination is a well known risks when producing drug substance for multiple viral products in a single plan, which is exactly why there are so many fail safe and quality control measures in place.
But the odds of Warner more COVID-19 vaccines in development failing was extremely high which is why the government bent on multiple candidates.
It's easy to go back and second guess these decisions that were made in the early stages of the pandemic.
At the time no one knew how fast we could get to a clinically viable vaccine and which candidates would be most successful.
We are committed to manufacturer J&J as COVID-19 vaccine candidate at Bay view in the U S government reserves, the remainder of our capacity and subsequently directed us to manufacture the AZ candidate in the same facility.
Everyone should keep in mind that this rapid scale of manufacturing had never been done before we took a process that normally takes years and condensate into months.
We didn't flinch of that challenge because that's what this company was built for.
We take on public health challenges that others won't.
What's important now is getting an accurate account of the challenges we face and using the lessons we learned to ensure that emergent the government and our other partners can be best prepared to get us out of this pandemic and ready for the next public health crisis.
We're disappointed that the situation has been reported in a way that may have eroded public trust and our ability to deliver.
Four things, we should have done differently my leadership team and I were full.
Accountability, but.
But I take it.
Issue with the unfair criticism of the dedicated team of more than 400 professionals in Baltimore, Bayview, who have been who have been working literally night and day for over a year to make sure that vaccine can be made available to the public and all of this they are no different from our frontline health care workers.
None of us are perfect and I take responsibility for ultimate performance as a company.
I do want to acknowledge that many people have sent messages of support and encouragement to our team. It's greatly appreciated those who have stuck with us recognize the challenge we have taken to combat the pandemic and are rooting for us to succeed because when emergent succeeds the public benefits.
And Thats what this is really all about.
We have welcomed the ftes involvement and strength of their independent scientifically rigorous review.
We have issued us their inspection findings and our team is expected to submit within days a comprehensive response to those findings.
Moving to meet or exceed the FDA standards.
We are appreciative for the constructive ongoing dialogue with J&J and their support as we work this path forward.
If the FDA is comfortable with the approach we propose im hopeful that we consumed return to producing that tens of millions of doses per month.
I'll stop there and turn the call over to rich, who will take us through the results from the first quarter rich.
Thank you Bob.
Good afternoon, everyone and thank you for joining the call.
I'll start on slide nine.
As you can see from today's earnings press release during the first quarter of 2021, we delivered solid financial performance, which was consistent with our expectations.
Our team continued to execute across all aspects of the enterprise despite continuous challenges caused by the COVID-19 pandemic.
Our financial outcomes in the quarter, clearly reflect the strength and durability of our diversified business evidenced by our significant revenue growth and corresponding profitability.
Our financial condition remains strong with the liquidity and financial flexibility to fund our operations and pursue opportunistic investments.
Despite more recent headwinds we remain steadfast in our unwavering commitment to supporting global preparedness and response to public health threats.
With that please turn to slide 10, and let's first look at the details of our first quarter performance higher.
Highlights include total revenues of $343 million, an increase of $151 million or 78% versus the prior year.
Adjusted EBITDA of $124 million, an increase of $108 million versus the prior year.
And adjusted net income of $84 million, an increase of $83 million versus the prior year.
Breaking down quarterly revenue into its components.
Anthrax vaccine sales were $55 million consistent with.
With the prior year and aligned with historical norms for the first quarter.
Narcan nasal spray sales were $74 million similar to the prior year, and reflecting persistent and durable demand for this critical drug device combination product for opioid overdose reversal.
Other product sales were $9 million lower than the prior year, and reflecting reduced sales of certain products due to timing as well as the impact that reduced global travel demand is having on our travel health vaccines sales.
And significant growth in <unk> services as revenues increased to $184 million.
This level of performance primarily reflects the continuing contribution from the services, we're providing to our government and innovator partners.
In response to the COVID-19 pandemic.
Looking beyond revenue the quarterly results also include.
Gross R&D expense of $53 million, reflecting our continued commitment to investing in our pipeline of development programs across our three product focused business units.
Net R&D expense of $31 million or 10% of adjusted revenue.
SG&A spend of $81 million or 24% of total revenues.
And combined product and CMO gross margin on an adjusted basis of 69%, reflecting the impact of overall product mix as well as improved contribution from <unk> services.
Turning to slide 11, we also provided updates to our key <unk> metrics as follows.
In the first quarter, we secured $187 million of new business, reflecting momentum in our marketing initiatives with innovators and others.
As of March 31, the backlog was $134 billion.
That includes the new business secured offset by revenue recognized during the period.
And as of March 31, the opportunity funnel was $807 million.
I would note that these figures do not include certain adjustments that will be made during the second quarter to reflect the impact of recent events, including the U S government's decision to ramp down production of the Astrazeneca COVID-19 vaccine at Bayview.
Having said that we continue to build a track record of success for this still relatively new component of the emergent business as can be seen by the sequential trends over the last three quarters shown on slide 12.
Moving to slide 13 for a review of our balance sheet and cash flow. We ended the quarter in a strong liquidity position with $548 million in cash and $184 million of accounts receivable, resulting in aggregate current liquid assets of over $730 million.
We also still have undrawn revolver capacity of just under $600 million.
At the end of the first quarter, our net debt position was $321 million and our ratio of net debt to trailing 12 month adjusted EBITDA was once again less than one times.
Please turn to slides 14, and 15 for a review of our 2021 forecast and associated key considerations.
As detailed in today's press release, we are updating our 2021 outlook to incorporate the anticipated impact of recent events on our financial performance.
Beginning with the items that are unchanged and.
And Frac vaccine revenues in a range of $280 million to $310 million.
Hey, Cam 2000 revenues in a range of 185 million to $205 million and.
And narcan nasal spray revenues in a range of $305 million to $325 million.
The following items have been revised.
Total revenues in a range of $1 7 billion to $1 9 billion.
CMO services revenue in a range of 765 million to $875 million.
Adjusted EBITDA of $620 million to $720 million and.
And adjusted net income of 395 million to $470 million.
The primary driver of these changes is our revised outlook for <unk> services revenue.
Our forecasted range of expected <unk> services revenues has been reduced primarily due to the hold of certain COVID-19 vaccine bulk drug substance lots as well as our commitment not to initiate new manufacturing at Bay view pending further review by the FDA.
Even assuming FDA concurrence to Reinitiate, new manufacturing <unk> release of loss, we expect a delay in the timing of expected revenue.
We also now expect lower other product revenue principally due to our assumption that a new raxibacumab contract will be awarded later than previously planned.
Other key assumptions for 2021 include revised gross margin of approximately 63% to 65% on a GAAP basis.
Capital expenditures net of reimbursement of between 8% to 9% of total revenues unchanged from our prior assumption.
Continued progress across our development pipeline programs, including one or more phase III starts and one BLA filings unchanged from our prior assumption.
And that the naloxone market will remain competitive with at least one new entrant to the market by year end and net no generic competitor will enter the market prior to the anticipated appellate court decision, which is expected in the second half of 2021.
We are also providing second quarter 2021, total revenue guidance of 370 million to $430 million, which at the midpoint represents approximately 22% from our total revenues for 2021 at the midpoint in line with historical patterns.
Conclude please turn to slide 16 for some summary comments.
We continued to deliver strong financial results in the first quarter of 2021, we.
We have built a robust and resilient business with the capabilities capacity and financial strength needed to deliver preparedness and response solutions to a wide range of public health threats.
Our dedicated employees have put their hearts and souls into confronting the crisis brought on by the COVID-19 pandemic.
Our durable business model plays a critically important role in protecting and enhancing lives across the globe.
And while there are current challenges we faced across our business, we remain confident in our future growth.
That completes my prepared remarks, and I'll now turn the call back to Bob Kramer, who has some final comments to make Bob.
Rich before we move to Q&A I have a couple of personnel updates I want to announce.
First of all Dr. Mary <unk>, our senior Vice President of global quality, who joined US in November will now report directly to me and become a member of my Executive management team.
Dr. <unk> has 30 years of biopharmaceutical experience in quality manufacturing operations and regulatory affairs prior to joining emergent. She has spent 25 years at Pfizer holding multiple leadership roles in operations and quality.
She has also held positions at glaxo as well as Lockman consulting services.
Since joining us <unk> been able to build the talent of her team with experienced professionals, who are improving the strength of our quality organization. Every day Mary has also been leading our response to the Bay view 43 observations.
Secondly, Sean Kirk our EVP of manufacturing and technical operations is taking a personal leave of absence for nearly 18 years <unk> proven track record across multiple functions in multiple roles has greatly contributed to our growth and success since the.
The beginning of the pandemic.
In his role at the helm of our manufacturing operations. He has been laser focused on fighting COVID-19 every hour of every day for more than a year. We had all hoped and expected that by now can begin to transition to a less rigorous schedule, where unfortunately, the opposite to happen.
Given the great public need shown is set aside several important personal matters over the last 15 months and we look forward to him using gives leaves to address those matters and a return to a more balanced pace.
Third Adam Havey, our EVP of business operations will assume full responsibility for manufacturing, including working in coordination with Mary on our baby remediation plan. Many of you know and have interacted with Adam in the past he has been a valuable member of my Executive management.
Team and has been part of emergent for almost 18 years.
Finally, I wanted to notify you that size, we've seen the head of our <unk> business unit will be leaving emergent to pursue another opportunity.
<unk> has put in place a strong strategy and a strong group of talented leadership and we thank him for his many contributions we've asked Catherine handily on his team to serve as the interim head of the <unk> business unit, while we actively recruit science replacement.
With that I'd now like to turn the call over to the operator to begin the question and answer session operator.
Thank you.
As a reminder, you will need to press star one on your.
Telephone keypad to speak further public comments.
Ken Please press star one week from your name to be announced.
Please standby will be comprised of kidney investing.
And Brandon Folkes here notice your line is now open.
Hi, Thanks for taking my questions and.
Bob I appreciate the frankness and your comments about your work.
There are a number of questions.
Firstly can you what can you say in terms of the performance causes for the J&J and HHS.
Contracts.
Yes.
I think from linked to that what are you contemplating your guidance in terms of a return.
Production.
And again, just rolling it all day.
Any context in terms of the impact in April <unk> service opportunity.
I know how that may be impacted from April.
Customer losses, and then the other side of it it was great to see.
$197 million I think it was in business won so just any context around that those wins are they private related any color you can give us sales.
You very much.
Sure Brian Thanks for the questions you've covered a lot of territory. There. So let me focus on a couple of first of all.
As we said over and over our number one priority right now is to make sure that we do everything we can to respond fully to the 43 observations of the FDA get our response in and do everything we can to support their review of that document.
And resume production as quickly as the FDA feels comfortable that we can so that's our number one goal. It's J&J is number one goal all in furtherance of.
Stabilizing and strengthening the supply chain from this much needed vaccine.
In terms of the CMO services.
Impact.
And losses.
Say a couple of things first of all to my knowledge, we've not experienced any losses in the current customer base I think people understand that we jumped into this pandemic response in a big way unusual way, but thats, what we do and that's how we built this business over 22 years I think we still see strength in the <unk>.
Core business and as we've talked about the net work itself includes nine manufacturing sites and those nine manufacturing and development sites are capable of supporting five different platform technologies across a very broad service offering of development services drug product as well.
As drug substance so the bones of that business are very strong and they are very high in demand in terms of the.
The diversity of the customer base that we're going after so.
I am pleased to see the continued strength in that business with a new contract that we were able to put in place in Q1, and we will be able to comment on Q2 and in time.
Okay. Thank you very much.
Thanks Brendan.
And Dana Flanders. Your line is now open.
Great. Thank you very much for the questions.
Bob How would you just characterize your working relationship and dialog right now with your kind of U S government.
Counterparts.
The anthrax vaccine.
Need to new contract soon and you've been in the news a lot lately, which you've discussed.
Have a congressional hearings coming up.
Just wondering how you give kind of an.
Investors comfort that that kind of relationship is still strong.
And then my second kind of related question.
Wondering if there's any color you can give on the rack contract and why that's being delayed.
And then if theres any read through to the to the kind of upcoming anthrax.
Contract negotiations later this year early next year. Thank you.
Thanks, Dana I'll take a couple of those and then perhaps I'll turn it over to rich to talk about the discussions regarding.
The upcoming contract renewals. So first of all on the U S government relationship.
We've been at this for 22 years as a company.
We pride ourselves on open transparent relationships and we found that to be the case in the last 22 years as well as the current circumstances. So we are working in a very transparent way with the with all factions of the government.
Those within HHS, BARDA and others, so those relationships remain intact and strong.
And maybe rich you can turn to exactly kind of where we are assumption wise for the both the ATM and the Avi seven nano nine options that are up for renewal sure happy to do that and thanks Dana for your question.
So as it relates to <unk> 2000, what we're assuming is that the option will be exercised in time for us to make begin making deliveries in the second quarter of this year. So we expect to see.
Some amount of <unk> revenue in the second quarter.
And that the full amount of the full year guidance comes through as a result of that option being exercised.
Secondly, as it relates to <unk>.
I'm, sorry, 87 909.
We also anticipate that the next option exercise will occur in time for deliveries to begin against that next option in the third quarter of this year.
That's contemplated by our guidance and approximately half of our guidance relates to.
Deliveries that would come in the third and the fourth quarter past year.
And then as it relates to rack fee.
Basically when we came into the year, we assumed that the RFP and bidding process would occur much earlier in the year then it looks like it's going to happen at this point in time, so based on where we are.
Our expectation is that it's likely that that's going to happen later and that that revenue can push into 2022.
Okay. Thank you.
Okay, Jessica Fye your line is now open.
Hey, guys. Good afternoon, Thanks for taking my question.
Following up on Dana's question can you elaborate.
For us just where we stand with the Avi 799 contract I think the base period might be coming to an end in the coming months. So I.
I guess can you explain what the end of the base period themes and what it does it mean for example should we expect you to start negotiating the next contract season.
And how many doses are possible for the government to buy with the remaining options on the current contract is there any time limit I wish those options must be exercised.
Yes, just thanks for the from the question.
I think rich.
Part of your answer but just.
To go back a bit.
The current contract for <unk> 70 909.
We expect to be disc.
Discussing with the government the renewed option and the exercise of that option for the next annual period.
Believe that the current <unk>.
Period of performance goes through the middle of this year. So we're looking at what's going to happen for the back half of 2021 and the first half of 2022.
And we have certainly built some.
Expectations of what the.
The outcome of those negotiations will be in our guidance for 2021.
Right now Thats, all we can say other than that we are in discussions already with.
With the government around the outcome of that.
Thank you, Jeff as Adam Havey here I, just might add one other piece when we established that contract and then two kind of major pieces to it.
The first is the development and licensure.
Essentially the BLA approval of the product and the second was procurement.
I think you can assume that as we work through.
That regulatory process that the period of performance on that contract will expand.
And once we get approval then we will talk about with the government how to transition once we get or if we get approval. We will talk about the government about how to transition like we did with <unk> in the earlier years, but remember the core work on that as the development work and that's still active were on target on plan.
<unk>.
That will move into 2022.
Okay, great. Thank you ask a couple about Dave you talked about getting back to the FDA regarding Macquarie three within the coming days.
Reinspection beaded following that remediation.
Before EUA.
Yes, so adjusted.
We're not expecting that outcome.
It's certainly a possibility.
But we again, we expect to deliver a very wholesome.
Durable set of corrective actions in response to the observations and look forward to working with the FDA. If they have any questions as follow up once they get that document.
Okay.
Then going back to the.
On the shift in timing on the new Roxy contract.
What's the reason there is it because the product is made a debut or is the timing shift due to something else.
Yes, it's not due to the association with <unk> just.
I think it's simply a priority issue and again we.
Expected as rich described that the RFP would have been issued by now and we would be working through with the government what that longer term solution looks like we're ready to do that when they're ready to have those discussions.
Okay, Great and I just have a couple of just clarifying guidance can you talk about the timing of expected revenue.
And the reason behind the cut to the CMO guidance does that mean, we should just think of it as shifting into 2022 or is the contract written such that delayed timing meaningful lower revenue opportunity overall.
And then second.
Should we still expect you to collect revenue from Astrazeneca this year.
So in terms of the shift we are anticipating that revenue would shift into 2022.
To the degree that it is not recognized this year I should say the key variable right now relates to next steps at Bayview and we obviously as Bob.
A reference we can't really comment on what the Fda's timing would be but we've we've developed a range of scenarios, which are contemplated by the wider range of CMO guidance that we have put out there. So.
So thats really kind of how we're thinking about that going forward.
And then as far as AZ is concerned we do anticipate.
<unk> incremental revenue from AC this year, that's contemplated in our guidance.
We're working through the ramp down process and determining the next steps with them.
Great. Thanks.
And Kai Nicky.
Your line is now open.
Thanks.
First <unk>.
The transparency and.
The size and before these three findings.
With your proposed corrective actions, what kind of timeframe are you anticipating it will take to implement those corrective actions.
Okay. Thanks for joining thanks for the question.
I'm not going to get into the Nitty gritty of the response only to say that.
We commit to do whatever we have to do.
To partner with J&J respond in a very thorough robust way.
And be able to get back into production as quickly as possible. So.
It's really inappropriate to speculate on anything other than that but again reinforcing our number one priority.
Is to get back into production soon but obviously only after completely responding and committing to corrective actions necessary and appropriate as identified by the FDA.
Alright, well, let me ask.
Another question Bob.
While appreciating the.
Rapid.
Changes that you had to accommodate.
Given everything.
What would you say of Q4, we've learned from the experience.
That's a great question.
We've kind of internally debated that for awhile.
I think the lessons learned quite frankly are.
The importance of transparent open communications.
Clearly we were.
We were in a situation this time last year, where we are.
Readily raised our hand, we step forward, we ran at this opportunity and pandemic in a way that few if any other organizations did so I'm proud of the fact of.
We have stepped up and stepped into this.
In an aggressive way.
No one could have anticipated just to be clear what the outcome of the work was.
And again I think.
The lessons learned are the importance on preparedness and how critically important that is when it comes to emerging infectious diseases or chemical and biologic threats for that matter. So preparedness accounts response counts.
And again I'm proud of the fact that we jumped into this and did everything we could everything we can right now to stand up and stabilize the supply chain.
And we would absolutely do it again.
Okay. Okay.
Again as a reminder, if you would like to speak for the public comment. Please press star one.
Yes.
And for your loss.
Speakers that Lisa Springer Your line is now open.
Thank you.
Certainly you've covered a lot in the call and I just have a quick question regarding the travel vaccines.
With some of the European cruise line, starting back are you seeing any.
Pickup in demand for your travel vaccines and what's the outlook for that for the year do you think.
Yes, Alicia thanks for joining the call. Thanks for the question.
As we commented earlier in the year and late last year because of the COVID-19 pandemic.
We're not anticipating a huge revenue contributions from the travel health business.
We remain interested in doing everything we can in that space.
As you know we have both commercial products as well as other candidates in development.
Don't know quite yet what to read into the your specific question about cruise line is opening up.
We will see how that.
That plays out, but again, we don't expect that to be.
Huge contributor in 2021.
Okay. Thank you.
And there are no further.
That sounds pretty public comment at this time.
Great. Okay, then thanks, Cindy with that ladies and gentlemen, we now conclude the call. Thank you for your participation. Please note an archived version of today's webcast as well as a PDF version of the slides used during todays call will be available later today and accessible through the investors landing page on the company website.
Once again, thank you everybody and we look forward to speaking with all of you in the future Goodbye.
Okay.
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Yes.
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