Q2 2023 Emergent BioSolutions Inc Earnings Call

Good day, and thank you for standing by and welcome to the Q2 2023 emergent Bio Solutions, Inc earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question answer session.

To ask a question during the session you will need to press star one one on your telephone.

You will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker, Matt Heartbreak.

Thank you.

Good afternoon, everyone. My name is Matt hardware.

Yeah.

<unk> for the company.

My pleasure to welcome you to todays call.

We'll be discussing the operational and financial.

For second quarter 2023.

As is customary today's call is open to all participants in the call.

<unk>.

And is copyrighted by emergent.

Yes.

In addition to today's press release, there is a series of slides accompanying this 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.

Your performance.

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.

Except as required by law, we do not.

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.

Our forward looking statements.

During today's call. We may also refer to certain non-GAAP financial measures.

Adjustments to GAAP figures in order to provide greater transparency regarding emerging operating performance.

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

Adjusted EBITDA and adjusted gross margin in there.

Conciliations between our GAAP financial measures and these non.

non-GAAP financial measures.

Turning to slide five.

For today's call will include.

Our newly appointed interim Chief Executive Officer, and Rich Lindahl, EVP and Chief Financial Officer.

Following prepared comments from both Haywood and rich we will conduct a Q&A session, where additional members of the executive leadership team are present and available as needed.

Track for <unk> for the treatment of Ebola.

These contract awards reinforced the value of emergence business and products.

Likewise emergent has stepped forward to meet the demand for narcan nasal spray in the midst of the ongoing devastation caused by Americas opioid crisis.

We will continue to fulfill the growing needs of our public interest customers. While also preparing for the launch of Narcan nasal spray as an over the counter opioid reversal treatment.

The launch remains on track for later this summer.

This will be an important step in expanding access to this potentially life saving medicine for millions of Americans.

While these achievements have helped strengthen emergence financial position the board and management team have taken an in depth review of the company's business and strategic direction to ensure the sustainability of emergent and its future growth.

After careful review of the board and management team determined that a strategic shift in how emergent deploys its resources as necessary.

As we announced this morning, moving forward, we will be reducing investment and deemphasizing focus on.

On growth in our services business.

Instead, we will prioritize advancing emergence core products business and continue to take advantage of related opportunities.

We are also addressing our cost structure by better aligning our operations to the changing volumes of U S government procurement of medical countermeasures.

As noted noted in the press release. These changes will have an impact on our colleagues something we do not take lightly.

We are committed to helping them transition to new opportunities.

Emergent is a resilient company that has been managing through significant change and uncertainty over the past two years.

Working with the board and management team I will be focused on the following priorities.

First.

Continuing to take decisive actions to strengthen our merchants financial position and operations as we meet current demands for our products, including the OTC launch of Narcan nasal spray and take advantage of future opportunities and our products business.

Second <unk>.

Delivering quality products for our current customer base and maintaining the manufacturing standards necessary to remain a leader in the MCM market.

Finally.

To position emergent for strategic future growth by preserving its unique capabilities to help and protect life.

Before turning it over to rich I want to acknowledge and thank Bob Kramer for his contributions and leadership.

Bob and bodies emergence mission to protect and enhance life and.

And helped instill a culture unafraid to do big things.

Emergent has never lost focus on its mission or its people and that is one reason I am confident in its future as emergent prepares to celebrate its 25th anniversary in September I am honored to serve in this role to help shape emergence impact on patients and public health for the next 25 years.

Again, thank you for your participation now I'll turn it over to rich.

Thank you Heyward good afternoon, everyone. We appreciate you joining the call.

Starting on slide 10, I will open my remarks with the key messages I'd like you to take away from our call today.

First there were several clear positives in the quarter.

We followed through on the critical initiatives, we discussed on our last call by closing the sale of our travel health business to Bavarian Nordic.

Securing a $120 million order from the U S government for <unk> 2000.

And successfully completing an amendment to our secured credit facility that extends its maturity to may 2025.

We also saw accelerating momentum in sales of Narcan nasal spray driven by continued strength in the U S public interest market and in Canada.

These trends provide a favorable tailwind as we prepare for the near term launch of our over the counter product.

And we delivered strong revenue, which exceeded our prior guidance as well as strong adjusted EBITDA.

Second our decision to deemphasize growth and CMO as both immediate and near term implications.

While we are committed to serving our existing customers. The change in growth expectations is the principal driver behind the CMO asset impairment charge reported in the second quarter.

Additionally, we are significantly reducing the operational footprint of our Bayview facility, which is a major contributor to the over $100 million of annualized savings, we announced earlier today.

Third while we remain confident in the long term prospects for our medical countermeasures business based on recent dialogue with the U S. Government, we have lower expectations for 2023 revenue and our anthrax and smallpox franchises.

The approval of <unk> is a clear positive and sets the stage for continued procurement by the U S government for this product.

Given this transition procurement in 2023 is expected to be reduced and we anticipate the funding for increased levels of procurement will be available as soon as 2024.

In addition, we understand that while <unk> remains a core piece of the U S. Government's smallpox preparedness strategy. The next procurement of <unk> is being deferred into future periods.

Finally, this morning's announcement reflects decisive action to further streamline our cost structure and accelerate our return to profitability.

In addition to the changes I just mentioned that Bayview, we are reducing operations and our canton and Rockville sites in response to changes in the volumes of U S government procurement of our smallpox vaccine, while maintaining the manufacturing infrastructure critical to respond to the government's evolving needs for preparedness against public health threats.

And we are also reducing related support across our general and administrative functions.

While there will be some savings realized this year, we anticipate over $100 million of savings beginning in 2024.

With that let's turn to the numbers.

As indicated on slides 11, and 12 and 13 highlights in the second quarter include total revenues of $338 million an increase over the prior year, driven primarily by higher ATM 2000 sales due to timing and Narcan sales from the U S public interest market and the retail market in Canada.

And as expected our key profitability measures increased versus the prior year with adjusted EBITDA of $56 million and adjusted net loss of $54 million.

Diving deeper into the quarterly revenues important items include anthrax, MCM sales of $21 million lower than the prior year due to timing of deliveries of <unk> and <unk> to the U S government's strategic national stockpile offset by increased sales of amphora sell.

Narcan sales up $134 million higher than the prior year, demonstrating the continuing strength and durability of this product driven by consistent demand from the U S public interest channel and the growing market in Canada.

Smallpox MCM sales of $124 million.

Higher due to the exercise in full delivery during the quarter of the $120 million option by the U S government to procure AGM 2000.

Other product sales of $23 million level with the prior year as higher RSD L sales were partially offset by lower <unk> sales.

And combined CD, most service and lease revenues of 21 $29 million higher than the prior year due primarily to work at the cancer site for a <unk> customer as well as the resolution of a customer's outstanding contractual obligation.

Turning to operating expenses cost of product sales in the quarter of $135 million higher.

Higher than the prior year due primarily to higher product sales of <unk> 2000 and Narcan.

Cost of CD ammo of $56 million.

Lower than the prior year due primarily to reduced production across the <unk> network, partially offset by higher costs at the Camden site, reflecting additional investments and quality improvement initiatives.

R&D expense of $26 million lower than the prior year due primarily to the divestiture of our <unk> program, which was a significant contributor to the prior year period.

In SG&A spend of $92 million higher than the prior year, largely due to higher professional services fees supporting transformation activities.

Finally, we incurred a noncash impairment charge of $307 million in the quarter related to fixed assets at our <unk> sites in Maryland.

With that let's move to slide 14, and review segment performance during the quarter.

In the product segment revenues were $302 million, an increase from the prior year, driven by Narcan and ATM 2000, and adjusted gross margin was $170 million or 56% an increase over the prior year, reflecting the impact of higher sales volume and a more favorable product mix.

As for the services segment revenues were $29 million, an increase from the prior year and adjusted gross margin was negative $27 million and.

An improvement versus the prior year, driven primarily by one time costs in the prior year period that did not recur, partially offset by additional investments in quality enhancement initiatives at the Camden facility.

Moving on to slide 15, I'll touch on select balance sheet and cash flow highlights we.

We ended the second quarter with $89 million in cash down sequentially from March 31.

Primarily due to debt repayments made in connection with the amendment and maturity extension of our existing senior secured credit facility.

Operating cash flow was negative in the quarter and capital expenditures in the period were $13 million.

And as of June 32023, our net debt position was $821 million.

During the quarter, we initiated our aftermarket or ATM equity offering program.

For the quarter, we sold $1 1 million shares of our common stock for gross proceeds of $9 1 million, representing an average price of $8 22 per share.

Turning to guidance, please see slides 16 and 17.

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

Total revenues of one to $1 1 billion a.

A decrease of $100 million at the midpoint from prior guidance as the ongoing strength in Narcan is being offset by reduced expectations across our other products and services.

We're forecasting anthrax MCM sales of $200 million to $220 million, a decrease of $60 million at the midpoint.

With the recent FDA approval of <unk> secured we anticipate continued procurement by the U S government for this product.

We expect smallpox MCM sales of $180 million to $200 million.

A reduction of $55 million at the midpoint based.

Based on our latest discussions with HHS, we expect the U S government will defer additional purchases of <unk> for now as the U S government to terms that determines the appropriate volume and cadence of purchases going forward.

We're forecasting net narcan nasal spray sales of $425 million to $445 million, an increase of $65 million at the midpoint over the prior guidance, primarily reflecting robust demand from the U S public interest channel and from Canada, as well as taking into account our expectations regarding the launch of Narcan OTC.

We expect other product sales of $100 million to $120 million, a reduction of $20 million at the midpoint, primarily reflecting a reduction of revenue expectations for Troma guard, our auto injector product.

We're forecasting CMO services revenue of $60 million to $80 million, a reduction of $30 million at the midpoint, primarily reflecting lower anticipated sales as the Camden site continues to focus on quality and remediation efforts to scale back up operationally.

Shifting to profitability metrics, we are forecasting adjusted EBITDA of $50 million to $100 million.

A decrease of $50 million at the midpoint from the prior guidance range, primarily reflecting the impact of lower total revenues, partially offset by the impact of the facility and other cost actions discussed earlier.

We anticipate adjusted net loss of $195 million to $145 million, a reduction of $110 million at the midpoint.

And finally, we're forecasting adjusted gross margin of 36% to 39% a reduction of 300 basis points at the midpoint from the prior guidance range, primarily reflecting the impact of lower revenue volume and mix.

As to the quarter, we're guiding to revenues of $210 million to $250 million in the third quarter 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 18 for summary comments.

Our results in the second quarter were strong and we delivered on a variety of important milestones.

We are adapting our business to focus on products, while continuing to serve our existing customers.

We will continue to strengthen our quality and compliance across the organization.

And we are taking decisive action to better align our cost with our customer needs, while continuing to solidify our financial position.

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 we will now conduct a question and answer session. As a reminder to ask a question. Please press star one one on your telephone and wait.

For your name to be announced to withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

Our first question comes from Boris <unk> of TD Kelly Your line is now open.

Great. Thanks, This is Nick on for Boris.

Thank you for my first one on Narcan can you go into some more detail about the Narcan revenue that was recognized in Q2, 'twenty three and what makes that up mainly because when you look at the guidance.

<unk> guidance, which is great.

See that at the high end of guidance that would lead to about $105 million per quarter for the next few quarter. So I just wanted to see what that changes the differences and why <unk>.

<unk> 23 will be higher than <unk> or <unk>.

Sure Yeah. So part of the phenomenon, we saw in second quarter was.

A combination of some fiscal year end and some of the states and also some of the settlement money from the opioid litigations finding their way into the states, which drove increased purchasing that.

That certainly can continue as we move forward, but we feel like this is it appropriate forecast as we as we go forward from here.

Got it. Thank you that makes sense and then on CMO.

With the restructuring plan that you guys announced earlier today.

And the focus on the products do you anticipate like around the similar yearly run rate guidance over the next several years than what you have now and once the contracts for GMO customers are completed will you renew those contracts or search for new contracts or how will that work.

So we're focused on serving our existing customers and honoring the commitments that we've made to them.

And we were not prepared to provide future your guidance for <unk> at this point in time, but we will certainly do that as we come out of this year and into next year.

Yes.

Got it thanks for taking my questions.

Yes.

Okay. Thanks.

Standby for the next question.

Okay.

Our next question comes from Chris Sakai of singular research. Your line is now open.

Yes, hi, I'm in for Athene.

Can you please update us on your travel health business divestment and the status of accruing synergies from that divestment.

Sure. So the divestiture was completed in mid May just after our last earnings call.

And we are in the process of working through the transition we have a transition services agreement with Bavarian Nordic that will run through the.

At the end of this year.

And those activities that were planned are on track.

You did notice that in the quarter, we had lower R&D expense year over year. That's one of the elements of our reduced cost structure that came about as part of that transaction, but otherwise we are on track with the plan.

Okay. Thanks, and then can you update us on your.

Restructuring initiatives fully accomplished or are there further components that need to be negotiated.

So we completed the amendment and maturity extension to our to our secured credit facility in mid May that provide us an extension until May 2025.

So we will continue to evaluate our capital structure.

And make appropriate modifications.

Before before that maturity comes to comes to fruition, but at this point, we've completed that amendment and we are moving forward under that capital structure.

Okay. Thanks, and then last one for me how has been the narcan nasal spray.

Reception been so far do you expect to provide further disk current pricing in the near future.

Yes, Chris Thanks for the question.

Paul Williams head of the products business.

I think we're seeing a couple of things happening today with Narcan. One is obviously the opioid crisis continues to worsen this.

This has really led primarily to the increase in demand at the state and the local level through our public interest segment as well as Canada at the same time, we're excited and continue to be on track for the launch of our over the counter.

Put up later this summer.

The work has begun and with our retail and distribution partners and we're looking forward to having product on the shelves and available online as soon as possible.

Stay tuned.

Okay, great. Thanks for the answers.

I'm showing no more further questions at this time I would now.

Now like to turn the conference back to Matt <unk> for closing remarks.

Thanks, Chris 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. Thank you again, we look forward to.

Speaking with you all in the future Goodbye.

This.

Today's conference call. Thank you all for participating you may now disconnect.

Okay.

[music].