Q1 2022 Emergent BioSolutions Inc Earnings Call
Good day, and thank you for standing by and welcome to the first quarter 2022 emergent bio solutions earnings conference call.
This time all participants are in a listen only mode can you speak a presentation that will be a question and answer session.
A question during the session you will need to press star one on your telephone and if you require any further assistance. Please press star zero.
I now like to hand, the conference over to management. Please go ahead.
Thank you Victor and good afternoon, everyone. My name is Bob Burrows VP of Investor Relations Officer for the company. Thank you for joining US today as we discuss the operational and financial results for first quarter of 2022.
As is customary today's call is open to all participants in the call's 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 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 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 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 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 merchants 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.
I'm Rich Lindahl, Chief Financial Officer, who will speak to the financials for one to 2022, which will also discuss the updated 2020 guidance.
This will be followed by a Q&A session, where additional members of the executive leadership team are present and available as needed.
Finally for the benefit of those who may be listening to the replay of the webcast. This call was held and recorded on April 28, 2022. 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 section begins with slide six.
Thank you Bob and good afternoon, and thank you everyone for joining the call.
I'm pleased to share details about our performance and progress in the first quarter and as Bob indicated my comments are summarized on slide seven of the deck.
The entire team at emergent remains focused on our strategic vision to grow business.
Carefully by choosing and investing in public health threat markets in which we believe we can make a difference for our patients.
Every day, we deliver on this promise with a diversified business model and disciplined operating approach.
Enables us to navigate through uncertain environments, such as what we've experienced and been through throughout the COVID-19 pandemic.
While our report today reflects a mix of both positive progress and challenges to address we remain financially strong with the resources to continue pursuing our vision of <unk>.
Tempting and enhancing 1 billion lives by 2030.
Our first quarter results were solid as we hit the upper end of our forecast range for total revenues and exceeded street consensus estimates for other key performance metrics.
Through the first quarter, the output and achievements of the commercial and medical countermeasures business lines is indicative of the strength and resilience of our core products segment.
We also contribute continue to advance our R&D pipeline in line with the research and development objectives, we shared in the last call.
Such investments in R&D are consistent with our view toward development projects and sources of potential future organic growth for the company and possibly for further expansion of our impact on public health preparedness and response.
On that point last week, we completed our BLA submission to the FDA for AVP, seven nine, Illinois, and our new Anthrax vaccine candidate and lead R&D program we.
We anticipate receiving confirmation from the FDA within 60 days.
Whether our submission has been accepted and the timing of the review typically a priority review would take approximately six months and a standard review would take up to 10 months from the time a deal is the acceptance.
Also we successfully are enrolling participants in the pivotal phase III clinical trial for a single dose chikungunya virus DLP vaccine candidate.
And also we initiated a phase one study of Cheyenne or potential intranasal treatment for cyanide poisoning.
With respect to our commercial and medical countermeasures business lines, Let me make a couple of comments first our nasal naloxone franchise, which includes narcan nasal spray and the authorized generic licensed two and distributed by Sandoz continues to perform in line with our project.
<unk> across key customer segments.
We continue to expand access to ensure narcan is broadly available in the community millions of doses of our nasal naloxone products were distributed this last quarter. We continue to see demand from our long time public interest customers in the United States and continued growth in demand in Canada.
Also our medical countermeasures business continues to deliver on long term contracts with the U S and Allied governments, and we look to evaluate opportunities in international markets as part of our 2024 strategic plan.
I'd like to publicly commend our medical countermeasures team and the work they're doing in light of the war in Ukraine, and the potential for intentional or naturally occurring biologic threats as well as chemical threats. The team has been working closely with the United States and Allied governments as well as global.
Nongovernment organizations to identify and mobilize supplies of medical countermeasures. One case in point, we recently received an urgent request from the Ukrainian Ministry of health that resulted in emergence donation of 200 vials of botulism antitoxin additional requests.
And orders are currently being assessed.
The tragedy in Ukraine, and the potential threat of biologic or Kim. We'll go tax is a reminder of emergence critical role and helping prepare the United States and our allies to respond in the event that the unthinkable becomes reality.
Let me now turn to the <unk> business, our non Covid related <unk> business continues to show durability, we are retaining current clients and garnering new business across the network of sites. However, as is the case with the rest of the health care sector, we're seeing a slowdown in coated demand.
As needs when we enter a new phase in the pandemic Johnson.
Johnson <unk> Johnson recently announced that they were suspending guidance related to the sales of their COVID-19 vaccine because of the current oversupply in the market. Given this uncertainty we are temporarily suspending our CMO specific guidance and which we'll share more on guidance in a moment we remain in <unk>.
<unk> with J&J on their future COVID-19 vaccine needs and importantly, our contract within remains in place.
As is our commitment to delivering on our obligations under it.
In addition, we've made progress with the previously planned modifications and enhancements, which are now underway at our Bayview facility. These changes will improve the ability to manufacture viral and non viral products as well as strengthen babies offerings for both internal and external clients as part of its planned future.
Were all within our CD Mo network, we anticipate completing these enhancements in Q3 of this year as you may recall <unk> was always intended to be a multi product facility. We have begun the tech transfer of our raxibacumab product into the facility prior to the pandemic and the urgent needs of the pandemic put.
Those plans on hold.
Before I touch on some personnel updates I want to take a moment to remember emergence founder for new Hebrew, who passed away last Saturday flaws entrepreneurial spirit and bold vision serve as the foundation of our company.
And our mission to protect and enhance lives our thoughts and prayers go out to his family and friends.
On a personnel related matter last month, we were pleased to announce Youll Hershey Ani is the newly appointed chairman of the board of directors and Keith's Catkin as a new independent director both assume their new roles effective April one.
We've also recently hired three experienced industry experts to fill key roles on our leadership team.
Reinforcing our focus on our culture of quality and compliance choline glessner rejoined as the executive Vice President for global quality, and ethics and compliance reporting directly to me.
Colleen previously worked at Alexia on Pharmaceuticals, where she served as senior Vice President and Chief quality Officer.
Also Joe Philip Rose joins Us as senior Vice President and Chief Ethics, and compliance officer reporting to Colleen. Joe also previously worked at <unk> Young and served in the role of VP U S and enterprise compliance and finally, Bill Hartzell joined the team as senior Vice President and head of.
The <unk> business unit reporting directly to Adam Havey, Bill came to us from Woodstock sterile solutions, where he was chief commercial officer and previously worked for Catlin.
As I wrap up and in conclusion, even as market dynamics shift and emergence business evolves. We continue to deliver for current patients and customers. We continue to make progress in advancing our R&D pipeline and we continue to seek new opportunities to protect and enhance life against public health threat.
Yes.
Look forward to your questions and will now turn the call over to rich for a deeper look into the financials rich.
Thank you Bob.
Good afternoon, everyone and thank you for joining the call.
I will start on slide nine and open my remarks, with some summary thoughts to put today's earnings report into context.
We have previously noted that 2022 is a rebase lining year for emergent as we transition our business from the significant demands of the Covid related work of the prior two years back towards the long term trajectory, we envisioned as we exited 2019.
Our first quarter performance was solid on a standalone basis, even as the year over year results reflect the bolus impact of the BARDA task order in 2021.
We had stable contributions from our products business with year over year increases in products revenue and gross margin at.
At the same time, we experienced short term challenges in our services business, most notably reduced revenue from the Bayview facility stemming from the late February announcement to temporarily pause manufacturing.
We are confident the challenges in the services business will be short lived and expect services gross margin to improve in the future as we garner more meaningful contribution from the Bayview facility.
During the quarter. We also continued investments in progressing our development pipeline and we began assessing our operating performance by focusing on two reportable segments, a product segment, consisting of the government medical countermeasure and commercial products business lines and a services segment consisting of the CMO services business line.
Together, our performance this quarter underscores the strength and durability of our diversified products and services business model.
Turning to slide 10, before I walk through the results for the quarter. It is important to address our decision to temporarily suspend elements of our 2022 forecast.
As we are all aware recently Johnson <unk> Johnson announced that they would not project a COVID-19 vaccine sales for this year, citing a global supply surplus and vaccine hesitancy in developing countries as the basis for this change.
While our commercial supply agreement has not been modified and remains in place. We are temporarily suspending CMO guidance until we have further clarity on their requirements.
As a result, we're also temporarily suspending guidance on total revenues adjusted net income adjusted EBITDA and gross margin and refraining from providing second quarter revenue guidance.
Having said that it is important to note that our assumptions with respect to our product segment revenues remain unchanged.
Therefore, we are reaffirming our guidance and it's listed on slide 10 for Anthrax vaccines, a cam 2000, nasal naloxone products and other products plus contracts and grants, which in the aggregate represent three quarters of our previous total revenue range or about $1 billion at the midpoint.
Additionally, I would note that over half of our prior <unk> guidance was represented by our Camden, Gaithersburg, and Winnipeg sites, which continued to deliver quality services to our CMO customers.
At the appropriate time, we will communicate additional information and update our overall forecast.
With that let's turn to the numbers.
As indicated on slides 11, and 12 highlights include total revenues of $308 million a decrease over the prior year period, but at the high end of our guidance driven by across the board increases in our product revenue categories, and offset by lower CD ammo sales and contracts and grants revenues.
As expected our key profitability measures also declined versus the prior year with adjusted EBITDA of $36 million and adjusted net income of $9 million.
Other notable items in the quarter include anthrax vaccine sales of $104 million higher.
Higher than the prior year due to timing of deliveries of 87 nine O nine to the U S government strategic national stockpile.
A cam 2000 sales of $14 million, reflecting deliveries to non U S government customers seeking to protect against the threat of smallpox.
Nasal naloxone product sales of $93 million higher than the prior year and comprised of strong unit sales of branded Narcan to U S public interest in Canadian customers as well as solid contributions from sales of the authorized generic product license to Sandoz, which launched in December 2021.
As expected we also saw lower branded Narcan sales in the U S commercial retail market as a result of the generic launch late in the fourth quarter last year.
Other product sales were $26 million.
<unk> higher than the prior year, driven primarily by deliveries to the U S government.
And combined C D amongst service and lease revenues of $61 million significantly lower than the prior year largely due to two key factors in.
And CD amongst services revenues the decline reflects the impact of the decision to initiate maintenance another modification related work at our beta site, which reduced manufacturing activities. During the quarter offsetting this factor was an increase in manufacturing activities at our Camden in Winnipeg sites in support of drug substance and drug product manufacturing services for <unk>.
Certain commercial customers.
And in CD I'm, a lease revenues the substantial decline was planned and reflects the completion late last year of our public private partnership with BARDA in response to the COVID-19 pandemic.
Turning to operating expenses cost of product sales in the quarter was $80 million higher than the prior year due to greater product sales.
Cost of CD ammo was $76 million higher than the prior year due to professional services in support of quality functions at the baby's site as well as higher costs, both the Camden in Winnipeg site, resulting from increased manufacturing activities during the period.
R&D expense of $46 million lower than the prior year, primarily due to a decline in costs associated with the development of our COVID-19 therapeutic product candidates offset by an increase in costs from the check the phase III study.
And SG&A spend of $85 million slightly higher than the prior year due to an increase in professional services and marketing costs in support of the expansion of our business operations as well as costs associated with defending and supporting our corporate reputation.
Turning to additional financial information lets move to slide 13, and review the status of our CD ammo business line across key performance metrics.
As of March 31, our total customer count was 71, an increase of one on a sequential basis in the first quarter, we secured new business up $34 million on continuing steady demand for our services. A majority of this new business is from existing customers as we target non COVID-19 molecules.
Regarding C D M. A backlog as is well understood. This metric includes value from the Johnson <unk> Johnson contract given our suspension of C. D. M. Our revenue guidance at this time, we are also temporarily suspending <unk> backlog until we have further clarity on their requirements.
We will resume providing this metric at the appropriate time.
Next please turn to slide 14, as I opened my remarks, I mentioned that we have now introduced segment reporting information by products and services. The performance for each segment is a SaaS based on two metrics revenue and adjusted gross margin importantly.
Importantly segment revenue includes external customer sales, but excludes any inter segment revenues.
Additionally, we are not including our segment reporting we're not including in our segment reporting any allocation for R&D SG&A amortization of intangibles interest expense other income or taxes.
With that let's dig into the specifics of the first quarter segment performance in the product segment revenues were $237 million an increase over the prior year period, and adjusted gross margin was $157 million or 66% of product revenues both increases over the prior year and reflecting the impact of higher sales volume and product mix.
As for the services segment revenues were $61 million a decrease from the prior year period, and adjusted gross margin was negative $15 million, reflecting the decline in revenue at the Bayview facility. As a result of three factors one the completion of our arrangement with BARDA to the pause in manufacturing activities for improvement.
Modifications and three the increase in professional services costs.
Moving on to slide 15, I will touch on select balance sheet and cash flow highlights. We ended the first quarter in a strong liquidity position with $436 million in cash and available revolver capacity of just under $600 million. Our net debt position was $405 million and net leverage remained less than one times.
In addition, while our operating cash flow was negative for the quarter from a capital deployment perspective, we sustained our commitment to both continued investments and opportunistic buyback activities as follows.
First quarter capital expenditures of $32 million, reflecting ongoing investment in expanded capabilities and capacity to support our diversified products and services business lines and in the first quarter, we repurchased approximately one 1 million shares at a cost of $52 million pursuant to the $250 million repurchase.
Amortization approved by our board of directors in November of last year.
Cumulatively, we have 100, we have spent $165 million to repurchase $3 8 million shares.
Importantly, the amount and timing of any additional repurchases will be determined by management based on the evaluation of market conditions and other factors and we will continue to report such activity on a quarterly basis.
To conclude please turn to slide 16 for some summary comments.
In the first quarter of 2022, we delivered another period of solid performance in our product segment offset by continued rebase lining and normalization of our services segment as we move past the influence of COVID-19 heightened activity.
We continue to see significant opportunity for our CMO offering given our capacity and capabilities and remain bullish on the long term potential of the services business. Additionally, our R&D programs continue to progress, while we maintain our commitment to prudent capital deployment in pursuit of our 2024 strategic goals.
We look forward to keeping you informed as we execute on these plans and deliver further proof points that demonstrate the long term growth potential of our strong diversified business that.
That completes my prepared remarks, I'll now turn the call over to the operator, so that we can start the question and answer session operator.
As a reminder to ask a question unit press Star one on your telephone to withdraw your question just press the pound key.
Please standby, we compile the Q&A roster.
Our first question will come from Lana Brandon Folkes from Cantor Fitzgerald. Your line is open.
Hi, Thanks for taking my questions just two for me around the J&J contract would you be willing to say when the last time J&J paid you and were there any payments in tens of contractual amounts currently in dispute.
And secondly, understanding that you have.
Any guidance due to visibility in the <unk> business would you be willing to say if you expect to continue to recognize any revenue from the J&J contracted <unk> business.
Remainder of the year or until you can't Cherokee from J&J on the demand and supply chain need. Thank you.
Yes, Thanks Brendan.
I appreciate you joining the call and thanks for the good questions. So I think maybe the place to start is just too.
Say what hasn't changed in terms of.
The relationship with J&J, and <unk> and in our operations and baby so.
Uh huh.
As we have stated all along our commitment to J&J is to stabilize and strengthen their supply chain for their COVID-19 vaccine.
And as we said on the call and hope by Rich and Bob myself.
The contract is in place.
And it's to be clear it's on file you can read it so rather kind of a brand and kind of describing some of the provisions that are in it I think it's probably best for you to look at that.
I won't comment specifically on <unk>.
When the last payment was made by J&J or spec.
Speculate on.
Projects are payments going forward other than to say that we continue to be in dialogue with them about their long term.
Needs for their vaccine and remain committed to supporting them. However, we can.
And again I think it's really the result of them.
Suspending their guidance on there.
<unk> as well as the knowledge that theyre going through their evaluation process on their global supply and.
And demand.
The lack of clarity from them to us that he has resulted in us needing to suspend.
The CDMA portion of our guidance.
Rich if theres anything else you want to add to that.
Yes.
The thing I would add is that they are current on their accounts receivable. So there is not an issue there.
Great. Thanks, I appreciate all the color on it.
Any color on whether you had.
Whether you believe that you will continue to recognize revenue this year from J&J the TD my business.
Or until you gain Turkey.
Yes.
Thanks.
Go ahead rich yeah, I was going to say I mean, I think that's really connected to the suspension of guidance. So I don't think we can really comment specifically on revenue recognition for <unk> at this point in time.
Okay Fair enough I appreciate the color. Thank you T y.
And our next question comes from the line of Jessica Fye from JP Morgan Your line is open.
Hi, Good afternoon. This is Daniel for Jessica.
You for taking my question.
One is not counted well this quarter can you give some additional color on the generic sure youre seeing in the public interest segment and following up on that given their reaffirmation of the guidance how should we think about the sales cadence for the rest of 2018 for the product.
Second understanding you are still in continued dialogue could you walk us through what it would mean if J&J ended the contract.
Albeit the economics like in that scenario that is or how much would be entitled to.
Thank you.
Yes, Daniel Thanks for joining the call and thanks for the questions. So on the first one you would expect to Narcan nasal spray.
It was another solid quarter of revenue for Narcan I think it's really.
A testament Daniel to the the Narcan team over the last several years and the work that they've put in.
To educate.
To create additional awareness of the importance of having ready access to some form of naloxone as.
As well as.
Education around the risks associated with taking prescription opioids as well as what we've talked about over and over in terms of our commitment to increase the accessibility of the product.
Sure that's made as affordable as possible to the patients and customers who need it. So I think a lot of the continued strength in the brand and the business is as a result of the.
The the ground work that's been done for years and years by the team.
In terms of your specific question about the.
The share of the generics in the market I think it's following pretty much what we thought what happened when.
When we were faced with the generic market forming late last year and earlier this year, which is the generic products, whether it's the competitor products or the Austin, our authorized generic theres been licensed to Sandoz that is taking the the vast majority of the retail piece of the market.
And in the public interest space.
We continue to hold ground and Narcan nasal spray is performing as it was expected which is it's not holding all of the share but it's holding.
Our fair share of the market.
Hence the solid numbers that we reported in Q1.
In terms of your second question on J&J again, similar to my response to Brendan.
The contract is on file I think it's.
It's there for you all to read through and I'm not going to speculate on.
This happens then this is going to be the outcome.
Again, our commitment remains to be.
A solid partner to J&J to meet our commitments to strengthen their supply chain.
And we continue to.
Our reserve base view as a single product site in support of J&J for as long as they need us to do that important work so I'll leave it with that.
Thank you.
Bob I might just add one comment just to supplement some of your remarks on the nasal naloxone I do think it's a it's important for everyone to understand it's a dynamic marketplace.
And we remain focused on the key priorities as we've articulated of ensuring access availability and affordability.
And so we standby our full year guidance, but in terms of the quarterly spread.
That is something that will.
We will continue to monitor conditions, but we standby our annual guidance.
Thanks Rich.
Our next question will come from the line of Lisa Springer from Us.
<unk> singular research you may begin.
Alright, thank you.
Regarding the <unk> revenues from the March quarter could you comment on what the mix was between Covid versus non Covid revenue.
Yes, Thanks, Lisa for the question Thanks for joining.
<unk>.
As has been our practice, we don't really break out.
Elements of the CD Moe between Covid and non Covid.
We have said.
In prior calls that.
The.
At least.
Half of the CD MAU guidance the prior guidance that was provided for the year.
It was non COVID-19 related.
Non baby related.
I wouldn't.
At this point, we're not going to change our policy of commenting on elements of the CD more revenue overall.
Okay. Thank you.
And once again Thats star one for questions number one we have a falloff from Brandon Folkes from Cantor Fitzgerald. Your line is open.
Hi, Thanks, so much thanks for taking the follow up.
Two more from me if I may would you be willing to comment on how much of the chemo backlog.
December 31 at $837 million was J&J and then secondly, what are your thoughts on timelines, where you may consider reinstating guidance excluding J&J. Thank you.
Thanks for the follow up Brandon so on the prior backlog number of 837 I think what we said Brendan is.
A fairly good chunk of that is J&J related and what we've said as part of the commercial supply agreement with J&J, which has a five year agreement. The first two years of that commercial supply agreement, we're really valued at around $480 million.
Roughly 244 each of the first two years of that contract. So that'll give you. Some idea of the portion of that 837 that is J&J related.
And your second question again remind me.
What is your thinking I guess, obviously, we suspended guidance today.
Whats your thinking in terms of how long is J&J doesn't provide color that you might think about reinstating guidance, yes, but just X J&J.
Yeah. So I think it's clearly Brendan hinges on.
Our ability to understand with a high degree of confidence and certainty.
What role we are going to be needed to play with J&J as part of their COVID-19 vaccine work and how that has to be done in baby. So.
I hope that we'll be able to run that to ground you in the next quarter or so, but I really can't speculate on how long that will take.
Fair enough and I appreciate all the color and thank you for taking the follow ups.
Thank you and I'm not showing any further quite in the queue I'd like to turn the call back over to the speakers for any closing remarks.
Okay. Thank you Victor and 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's website. Thank you all very much again, and we look forward to speaking with.
All of you in the future.
Good night.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone.
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