Emergent BioSolutions Inc. Q1 2023 Earnings Call

Okay.

Good day, and thank you for standing by and welcome to the emergent bio solutions first quarter 2023 financial results conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one.

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Please be advised that today's conference call is being recorded I would now like to hand, the conference over to the company. Please go ahead.

Okay.

Thank you Jarrod and good afternoon, everyone. My name is Bob Burrows, Vice President of Investor Relations for the company. Thank you for joining US today as we discuss the operational and financial results for the first quarter of 2023.

As is customary today's call is open to all participants in the call is being recorded and is copyrighted by emergent bio solutions.

In addition to today's press release, there is 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 fees.

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 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 our operating performance.

Please refer to the tables found in today's press release and in the slides regarding our use of adjusted net income and loss adjusted EBITDA and adjusted gross margin.

And the reconciliations between our GAAP financial measures and these non-GAAP financial measures.

Turning to slide five 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 All Williams SVP and head of the products business, who will comment on the state of the Narcan nasal spray franchise as we migrate to a nonprescription form of those key medical countermeasure, and rich Lindahl, EVP and Chief Financial Officer, who will speak to the.

<unk> for Q1, 2023, and then pivot to a revised forecast for full year 2023, as well as Q2 2023 total revenues.

He'll be followed by a Q&A session, where additional members of the Jacob's leadership team are present and available as needed.

Finally, and for the benefit of those who may be listening to replay of this webcast. This call was held and recorded on May nine 2023. Since then emergent may have made announcements related to topics discussed during today's call and with that I would now like to turn the call over to Bob Kramer Bob.

Thanks, Bob and good afternoon to everybody. Thank you for joining the call. My comments. This afternoon begin on slide six our first quarter performance was generally in line with expectations.

Revenues came in above our guidance range, but were offset by higher than expected operating costs that had a bearing on our profitability for the period and rich will provide more detail in his prepared remarks.

We continue to strengthen our core businesses and build a foundation for sustainable long term growth.

No signs of abating, and we remain committed to working with federal state and local governments and advocacy groups across the nation to ensure more naloxone reaches communities patients and those in need to help reverse the trend of increased opioid related overdose deaths.

One reason why we view the fda's approval of our application to make narcan nasal spray the first and only opioid reversal treatment approved for over the counter use is a significant step forward in our efforts to expand access and availability of this life saving medicine.

Since acquiring the product in late 2018, we've consistently supported efforts to expand awareness of and access to naloxone.

<unk> maintained our commitment to affordability and support for public interest partners, who often are responsible for responding to opioid overdose emergencies.

We believe greater access to Narcan nasal spray as a result of the OTC designation will help save countless slides.

As we've said following approval, we're targeting a late summer launch for the OTC product and are in discussions with potential retail partners to support this critically important initiatives.

We continue our commitment to making narcan nasal spray affordable while pricing the OTC product in a sustainable manner to support our continuous manufacturing and unique distribution capabilities.

As a result of the ongoing epidemic, we're seeing continued growth in demand from the U S public interest channel as well as in Canada.

Paul Williams, our senior Vice President of the products business will join us today to provide more details about narcan following my remarks.

Third we continue to sustain strong partnership with the U S government focused on preparedness and response and to helping provide medical countermeasures for the public health threats. It has identified and prioritized.

With respect to our smallpox franchise. We recently received a notice of intent to procure eight Cam 2000, our smallpox vaccine for delivery in 2023. This follows a similar neuro sort of intent to procure for our D. I G IV therapeutic product.

The exact details are not yet final, but the values for each are reflected in our guidance for smallpox.

Similarly, we've also received a notice of intent to procure our botulism antitoxin or bat product, which is reflected in the other products guidance.

These notices demonstrate our continued support of and partnership with the U S government as they seek to address potential public health threats. These.

These would be the second third and fourth contract awards in the last six months. Following the January contract announcement earlier this year with the U S Department of defense to procure or SDL.

With respect to the biologics license application or BLA for Anthrax vaccine candidate <unk> seven nano nine we continue to have constructive engagement with the FDA and believe that we remain on track for the <unk> date in July we are working closely with the government to transition this product.

To post exposure or post approval procurement as a reminder, in 2000 1980 799 was the subject of a pre emergency use authorization package submitted to the FDA and since then the U S. Government has been procuring this product for placement into the.

Strategic National stockpile.

These actions are consistent with the repeated comments and budget recommendations from the department of health and human services and specifically the assistant Secretary for preparedness and response about the necessity of maintaining Americas preparedness and response capabilities.

As we have noted previously government contracting does not always work on the schedule private industry sets or suggests understanding that we remain confident in the value placed by the U S government and maintaining domestic medical countermeasure manufacturing capabilities in the important role of public private.

Ships, and addressing known and unknown public health threats.

Fourth we continued to implement our strategy of improving and strengthening our quality and compliance infrastructure and culture.

While not largely visible externally.

This work is fundamentally critical to our success in delivering for our current customers and ensuring both our products and services businesses are positioned for sustained growth well into the future.

And finally, we're actively managing our business and the balance sheet to improve efficiencies, while securing and maintaining sufficient liquidity and access to capital with.

We've completed the organizational changes announced in January which are expected to result in approximately $60 million in annualized savings.

The anticipated sale of the travel health business will provide an additional $270 million in cash proceeds and we're actively working with our lenders to restructure and extend our debt obligations. We expect to have an agreement in place by May 17th of this year.

I've said it before but it bears repeating while our strategy is already driving improvements the full benefits of the actions we have taken and our plan will not be realized overnight for.

For 25 years emergent has been at the forefront of helping protect Americans from serious public health threats. Our intention is to continue doing so for another 25 years and more and the actions. We're taking will help make that a reality with that I will now turn the call over to Paul to speak brief.

Flea about our plans for Narcan nasal spray before rich shares more on our financial performance for the first quarter of this year Paul.

Thanks, Bob and Hello, everyone. My comments are summarized on slide nine and 10.

As Bob noted the ongoing told the opioid crisis remains top of mind for all of us at emerging.

Take seriously our responsibility to work with all stakeholders and developing solutions to help those who experienced an opioid overdose get a second chance.

It is why we see the approval of Narcan nasal spray to be sold over the counter as a historic milestone in the fight against the opioid crisis. It allows the merchant to make narcan nasal spray available through pharmacies convenience stores vending machines online retailers and anywhere else OTC products can be found.

A significant opportunity to expand access and build on our continued commitment to our public interest partners across the country.

With our FDA approval, we can now move forward confidently with our plans first we are meeting with retail partners to finalize contracts and distribution plans.

Not in a position to share specifics at this time suffice it to say these are the partners you would expect.

As we announced in April we are targeting a consumer out of pocket price of less than $50 a box.

Two four milligram doses.

This is significantly lower than the currently available prescription wholesale price of $125 for a box of team.

Second currently our supply chain manufacturing efforts are focused on supporting the new OTC configuration with the goal of having product on shelves by late summer we.

We are confident we have the capacity to fulfill demand across all channels.

And importantly, as we transition our existing packaging and manufacturing to support OTC use four milligram narcan nasal spray will remain and readily available supply to current channels.

Third we remain committed to working with our public interest partners, including providing innovative solutions for organizations lacking large scale logistical support.

Short Narcan is available to the underserved.

Communities, who need it.

Public interest partners are critical to maintaining the broad access to narcan nasal spray.

Lastly, we continue to seek new ways to serve markets outside the United States, namely in Canada, where the need for opioid overdose treatments continues to grow this is reflected in our revised guidance for 2023.

As Bob stated Narcan nasal spray is the first and only opioid overdose reversal medicine approved for over the counter.

We expect competitive entrants in the market, we don't expect those until early to mid 2024.

Since its introduction in February of 2016, more than 44 million doses of Narcan and distributed in the U S and Canada and as a result of giving countless people a second chance.

Sadly the need for naloxone continues to grow.

We believe emergent is in a strong position to continue meeting that need based on our record of reliable service to our customers.

We're excited about the opportunities to expand awareness of and access to Narcan that the OTC designation creates and we look forward to providing additional details regarding our pricing and our go to market strategy closer to launch in late summer.

I'll turn it over to rich.

Thank you Paul Good afternoon, everyone. We appreciate you joining the call.

I'll start on slide 12, and touch on a few key financial highlights before walking through the first quarter details.

First as Bob noted, we anticipate closing on the divestiture of the travel health business in the second quarter, which will provide an infusion of upfront cash while furthering our stated objective of sharpening our strategic focus.

The impact of the sale is now incorporated into our updated guidance for 2023 and enables us to better align our cost structure with our current revenue trajectory.

Second as you heard from both Bob and Paul We continue to see robust demand for Narcan nasal spray in both the U S public interest and Canadian markets and that is reflected in our first quarter results.

These trends are leading us to significantly increase our narcan revenue guidance for this year.

In addition, our Narcan guidance also continues to reflect our assumptions regarding the impact of over the counter sales, which we are planning to initiate beginning in late summer.

Third the U S. Government has recently provided us with notices of intent to procure quantities of a cam bat and vig that all align with our prior expectations.

Fourth we are adjusting down our <unk> revenue guidance, driven principally by recent changes to customer requirements for Covid related products, we were manufacturing.

These impacts along with continued remediation costs and other investments to improve quality and compliance across our entire manufacturing network negatively affected first quarter adjusted gross margin and have a corresponding ripple effect on our updated full year adjusted gross margin forecast.

Calendar 2023, we will continue the process of rebuilding this business readying, our manufacturing capacity and positioning it for growth in the future.

Lastly, we are in the final stages of reaching agreement with our bank group to amend certain terms of our credit facility, including an extension of the October 2023 maturity date.

We anticipate closing this amendment on or before May 17th and will provide additional details at that time.

With that let's now turn to a review of our financial results, which can be found on slides 13, 14 and 15.

Highlights include total revenues of $165 million a decrease over the prior year driven by lower sales sales of our key medical countermeasure products and substantially reduce CMO services revenue offset by better than anticipated narcan sales in the quarter.

And as expected our key profitability measures declined versus the prior year with net loss of $183 million adjusted net loss of $159 million and adjusted EBITDA of negative $101 million.

Notable revenue elements in the quarter include.

And Fracs MCM sales of $22 million lower than the prior year due to timing of deliveries of 87, 909, and bio fracs to the U S government strategic national stockpile offset by increased sales of anthracite.

Narcan sales of $100 million.

Higher than the prior year, demonstrating the continuing durability of this product driven by consistently strong demand from the U S Pip channel and the growing market in Canada.

Smallpox MCM sales of $7 million lower than the prior year due to timing of <unk> 2000 and international sales.

Other product sales of $14 million slightly higher year over year, reflecting increased sales of <unk> kora, two vivo teams as well as the timing impact of several other products.

And combined senior most service and lease revenues of $15 million significantly lower than the prior year due to lower production activities in certain of our sites as we continue to support existing customers and re baseline the business. Following our COVID-19 response.

Turning to operating expenses cost of product sales in the quarter were $103 million higher than the prior year and driven primarily by lower overhead absorption combined with higher allocations of product Cogs at our Bayview facility offset by lower period cost that are burned facility and lower narcan royalty costs.

Cost of <unk> was $52 million significantly lower than the prior year due to reduced production across the <unk> network, partially offset by higher cost of the Camden site, resulting from additional investments and quality improvement initiatives.

R&D expense of $41 million lower than the prior year due primarily to lower spending on the chip program.

And SG&A spend of $101 million higher than the prior year largely due to professional services supporting transformation activities.

And one time costs related to the previously announced employee reductions.

With that let's move to slide 16, and review segment performance during the quarter.

In the product segment revenues were $143 million a decrease from the prior year a strong performance from Narcan was offset by lower contribution from both anthrax MCM and smallpox MCM sales.

And adjusted gross margin was $44 million or 31% both decreases over the prior year, reflecting lower sales volume a less favorable product mix and the higher cost of product sales I just discussed.

As for the services segment revenues were $15 million a significant decrease from the prior year and adjusted gross margin was negative $37 million a decrease versus the prior year driven primarily by declining services revenues related to the COVID-19 response, coupled with incremental costs associated with facility remediation efforts.

And investments in quality and compliance across our manufacturing network.

Moving on to slide 17, I'll touch on select balance sheet and cash flow highlights we.

We ended the first quarter with $430 million in cash down sequentially from December 31 <unk>.

Operating cash flow was negative in the quarter due primarily to primarily to lower MCM and <unk> revenues.

As we said previously we expect the contribution of revenues earnings and operating cash flow to be weighted to the second half of the year.

Capital expenditures in the period were $15 million and as of March 31, our net debt position was $975 million.

Please turn to slides 18, and 19 for a review of our 2023 forecast and associated assumptions.

As announced in our press release. This evening, we're updating our guidance for full year 2023 as follows.

Importantly, our revised guidance reflects the impact of the previously announced sale of our travel health business, two Bavarian Nordic, which we anticipate to close in the second quarter.

Total revenues of 1.1 to $1 2 billion unchanged from prior guidance.

Anthrax MCM sales up $260 million to $280 million also unchanged from prior guidance.

Narcan nasal spray sales of $360 million to $380 million, an increase over the prior guidance, primarily reflecting robust demand from the U S public interest channel and the Canadian market.

Smallpox MCM sales of $235 million to $255 million.

Unchanged from prior guidance.

Other product sales of $120 million to $140 million lower than prior guidance, primarily reflecting the removal of travel health products. Following the anticipated completion of the divestiture.

C D. Most services revenue of $90 million to $110 million a decline from the prior guidance range for the reasons I highlighted earlier.

Adjusted net loss of $85 million to $35 million slightly lower versus the prior range, reflecting the impact of higher narcan sales and the impact of the travel health divestiture offset by lower <unk> revenues and an increase to our tax valuation allowance.

Adjusted EBITDA of $100 million to $150 million higher than the prior range, primarily reflecting the impact of the travel health business divestiture as well as the upward revision to narcan offset by the ongoing process of Rebase lining the CD ammo business and.

And adjusted gross margin of 39% to 42% slightly lower than the prior range of reflecting the impact of overall revenue mix.

Finally, we are guiding the second quarter revenues of $210 million to $230 million further emphasizing our anticipation that revenues and profits in 2023 will be more heavily weighted towards the second half of the year.

To conclude please turn to slide 20 for some summary comments.

Our results in the first quarter once again reflect a mix of strong performance in certain core areas of our business offset by ongoing challenges in other aspects of our business.

We are committed to sustaining revenue growth and improving profitability and we are addressing near term challenges to our credit profile. Finally as always we remain confident in the impact we're having on patients and customers focused on health security and pandemic preparedness.

That completes my prepared remarks, and I'll now turn the call over to the operator, so that we can start the question and answer session operator.

Thank you at this time, we will conduct a question and answer session.

To ask a question you will need to press star one on your telephone and lengthy name to be announced to withdraw. Your question. Please press star one again, please stand by while we compile the Q&A.

Yes.

Our first question comes from Jessica Fye of Jpmorgan. Your line is now open.

Okay.

Hey, guys. This is Nick on for Jeff. Thanks for taking our questions. A quick clarification question on the Narcan guidance.

Talked about the increase in that guidance from 290 310 to $3 63 80.

Is that I know you talked about some of the push and pulls there and what drove that increase but can we talk a little bit about how if its primarily due to an increase in demand from the public interest market Canadian markets or is there also kind of more upside when thinking about OTC as well I'm just thinking about those three together kind of what drove that any.

Kris.

Yeah. Nick this is Bob Thanks for the question and thanks for joining the call.

Islands like in a minutes here Paul to weigh in but.

As we announced our guidance initially for 2023.

We made it clear that.

Our plans included an OTC switch sometime in <unk>.

In Q3 of this year. So the guidance that we initially provided that $2 90 to 310 number already had kind of.

Consideration for OTC switch in it I think what you see in our upgraded guidance now of $3 60 to 380 is primarily driven by what we see is increased demand.

And the two channels that we're distributing product today, primarily driven by again the public interest market in the United States as well as Canada, but Paul weigh in with some additional color.

Yeah, Thank you Bob and Nick.

Yeah.

The increase in guidance is directly attributable to both.

The U S Pip segment as well as the Canadian segment I think for the public interest segment in the U S. Obviously, given they serve just the you know.

The many vulnerable at risk populations with obviously continued increase of the opioid crisis the.

The demand flowing through that channel continues to grow and expand and similarly in Canada, we're seeing expanded access.

To meet the demand in Canada as well so.

Obviously the.

The update and the guidance I think reflects the trends that we are seeing as we start the year this year.

Great. Thank you and just maybe a quick follow up.

Can you provide a bit color on some of the conversations you've been having regarding potential insurance coverage for Medicare Medicaid patients for OTC Narcan.

Paul you want to take that one.

Right so.

I think for us.

Access is critical I think that's what that's what moving narcan to over the counter as well.

What really help and assist.

But I think our conversations and working with weather that CMS.

Or private payers to understand how they're going to think about potential coverage for Narcan OTC continues.

I think we've landed anywhere with any one particular payer CMS, yet, but we know that this is a top of mind for them and we continue to work with them and other stakeholders to ensure that.

We're able to balance the access with the affordability as we bring narcan OTC to market.

Great. Thanks, so much.

Thank you Pete and as a reminder, please limit yourself to one question and one follow up.

One moment for our next question.

Okay.

Our next.

Question comes from Brandon Folkes of Cantor Fitzgerald.

Okay.

Hi, Thanks for taking my question and thank you for the update.

Just firstly staying on Narcan.

Do we think about the potential for a non-profit fads come into the OTC market there.

From perhaps a client's ability to stop supine unaffected.

And if they do come to market do you think that's a big enough.

They become a bigger player in the retail first responder market there and then along the lines you can stay on that line of questioning.

What can you say about four milligram naloxone intranasal compared to perhaps a three milligram any data out there, suggesting they arent different differing assumptions.

Efficacy after two trucks.

Yep. Thanks, Brennan, so again I'll start and then invite.

Others to join in here as well so as it relates to your question about a potential nonprofit player in the.

The nasal naloxone mix I'm, not going to speculate Brendan on who might be out there and what they might be doing again, our focus continues to be as it has for the last five years.

Continue to look for opportunities to expand awareness.

Expand access and as Paul indicated continue to work with.

Both public and private insurance companies to make this as affordable as possible. So I think the moves that we're making.

We will make a big dent in that.

In terms of the nonprofit again I think we won't speculate on on what they might do in terms of the four milligram.

Formulation I don't know that there are any exact studies comparing three versus four milligram I think it's pretty widely.

Accepted that.

Given the work that the FDA did on this product to approve it back in February of 2016 to four milligram presentation is widely accepted as a very safe and effective dose. So Paul if you want to add some more additional color. Please do so.

I think you've got that one Bob.

Yeah.

Great. Thanks.

If I can count that as one question.

One <unk>.

And so just thinking turnkey procured AT&T thousand can you just and I apologize if you did explain from corn to infusion.

Does that mean versus the actual exercise of a contract option are there any additional steps between.

And to procure and the exercise of the contract option and that's it for me. Thank you very much.

Thanks, Brian it so.

The notice of intent to procure is.

What the government typically use this as the next logical step to after they do a request for information and after they do a request for proposal and the contractor.

Our response to that RFP, then negotiations and sue.

And after those negotiations are pretty much done Brendan.

Would typically see a notice of intent to procure so while the exact details of the potential procurement.

That we referred to under the notice of intent to procure or we're not.

Detailing now they have been pretty much heavily negotiated.

And we expect that the contract modification to be executed.

In a in a fairly reasonable time period and as such is now baked into our smallpox franchise guidance for 2023, which is unchanged from earlier this year.

Two we go onto the next question Judah.

Yes, that's correct. Thank you.

For the next question.

Yes.

Our next question comes from Boris Picker SPD Cowen Your line is now open.

Alright. Thanks for taking my question. This is Nick on for Boris just a quick one for me, but how does the closing of the deal with ovarian affect the income statement because I know that you guys raised EBITDA guidance without really changing too much else.

Affecting net so I was just wondering how this deal with Bavarian will affect that.

Thanks for the question, Nick Rich you want to take that one.

Sure happy to.

So we have we've incorporated the impact into our guidance, assuming again I E Q2 closing.

The main impacts are that the other products revenue will decrease because the existing <unk> products will come out of our sales channel and move to Bavarian Nordic. In addition, there will be a positive impact on adjusted EBITDA driven primarily.

By lower R&D expense.

The chip program spend will also transition over to Bavarian Nordic as well.

So those are the contours of.

What the impacts are going to be.

We do not disclose.

The components of adjusted EBITDA below the total company level or the components of other product revenue, but those are the categories that are impacted.

Got it thanks, and then just a quick follow up on that so once the if.

Assuming the deal closes into Q, well, then everything related to chicken <unk> be sent over to them. There will be no more R&D cost from you guys on that or will you still have to finish out the phase III trial for on your expense an unfair and takes up.

They'll assume responsibility for the trial going forward.

Got it thanks very much.

Thank you next question please.

Okay.

Okay.

Okay.

Our next question comes from Christopher Sakai from singular Research. Your line is now open.

Thanks This is assumed.

Chris.

No.

I see that includes full guidance on Narcan.

93, and intend to pay 63 80 <unk>.

<unk>.

Maybe coincidentally there is also a decrease in gross margins.

41, 44 to 49, two obviously to an extent that you can give us color on how much of the decrease in gross margin is due to narcan because I also see that another major development is telehealth.

Net.

Yes. Thanks for the question Rich you want to field that one.

Sure, Yes, and you're right there are several moving parts I would say.

The biggest influence on gross margin guidance change is the change in CD MAU revenue guidance and the impact there as well as as I referred to on the call just be the impact.

In the first quarter itself of some of the activities. There. So those are really the things that are driving the change to full year adjusted gross margin guidance.

And as a follow up.

And now <unk>.

Quarterly cobalt.

The fourth quarter.

Depending on your conversations with the different channel partners, and our pricing and volume BDA boats.

It looks like and correct me, if I am wrong, along that your expectations in terms of what you would be.

Be able to charge for non Kansas is until the price well says you know what what could be at the at and has probably not changed.

Okay.

The assumption is correct.

So Paul you want to weigh in on that one.

Sure.

So I think us and thanks for the question by the way I think is as we've communicated we've targeted.

<unk> targeted a consumer out of pocket price.

For OTC to.

To be slightly less than $50, but.

But I would say that is consistent with the pricing in the public interest segment.

As we go forward so.

Again, we are in the process of finalizing our retail our contracts with our retail partners.

I would say of stakeholders in this there is committed to affordability as we are.

And once those contracts are finalized we can provide.

Pacific clarity on.

Where the actual consumer out of pocket price will end up but I think our goals are aligned in terms of affordability.

Thank you.

Thank you we see no further questions at this time and I will now turn it back over to the company.

Thank you jada 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 website. Once again, thank you and we look forward to speaking to all of you in the future.

Good night.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Okay.

Okay.

Yes.

Hum.

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