U.S. Markets closed

Edited Transcript of EBS earnings conference call or presentation 3-May-18 9:00pm GMT

Q1 2018 Emergent BioSolutions Inc Earnings Call

Rockville May 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Emergent BioSolutions Inc earnings conference call or presentation Thursday, May 3, 2018 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Adam R. Havey

Emergent BioSolutions Inc. - Executive VP of Business Operations

* Daniel J. Abdun-Nabi

Emergent BioSolutions Inc. - CEO & Director

* Richard S. Lindahl

Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer

* Robert G. Burrows

Emergent BioSolutions Inc. - VP of IR

* Robert G. Kramer

Emergent BioSolutions Inc. - President & COO

================================================================================

Conference Call Participants

================================================================================

* Christopher John Staral

Goldman Sachs Group Inc., Research Division - Research Analyst

* David William Maris

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Eric Thomas Schmidt

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* François Daniel Brisebois

Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst

* Jessica Macomber Fye

JP Morgan Chase & Co, Research Division - Analyst

* Keay Thomas Nakae

Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics

* Lisa Springer

Singular Research, LLC - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions 1Q 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to the company, Emergent BioSolutions. You may begin.

--------------------------------------------------------------------------------

Robert G. Burrows, Emergent BioSolutions Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, Glenda, and good afternoon, everyone. My name is Bob Burrows, Vice President of Investor Relations for Emergent. Thank you very for joining us today as we discuss the operational and financial results for first quarter 2018.

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

Participating on the call with prepared comments will be Dan Abdun-Nabi, Chief Executive Officer; Bob Kramer, President and Chief Operating Officer; and Rich Lindahl, our new appointed Chief Financial Officer. Other members of the senior team are present and available during the Q&A session that will follow our prepared comments.

Before beginning, I will remind everyone that during today's call, either on our prepared comments or the Q&A session, management may make projections and other forward-looking statements related to our business, future events, our prospects or future performance. These forward-looking statements are based on our current intentions, beliefs and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate.

Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. Investors are therefore cautioned not to place undue reliance on any forward-looking statement. Any forward-looking statements speaks only as of the date of this press release, and except as required by the law, we do not undertake to update any forward-looking statement to reflect new information, events or circumstances. Investors should consider this cautionary statement as well as the risk factors identified in our periodic reports filed with the SEC when evaluating our forward-looking statements.

During our prepared comments as well as during the Q&A session, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Emergent's operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income and EBITDA and the reconciliations between our GAAP financial measures and these non-GAAP financial measures.

For the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on May 3, 2018. Since then, Emergent may have made announcements related to topics discussed during today's call. You are once again encouraged to refer to our most recent press releases and SEC filings, all of which may be found on the Investors homepage of our website.

And with that introduction, I will now like to turn the call over to Dan Abdun-Nabi, Emergent BioSolutions' CEO. Dan?

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Bob, and good afternoon, everyone, and thank you for joining our call today. Let me begin by discussing recent executive management changes made to further enhance execution of our growth strategy.

I'm extremely pleased that Bob Kramer has been promoted to the newly created position of President and Chief Operating Officer. Bob has been a strong and dedicated leader at Emergent for many years with extensive knowledge of all aspects of our business that make him uniquely qualified to oversee our global operations.

I'm also delighted to welcome Rich Lindahl to Emergent as our Chief Financial Officer. Rich brings a wealth of financial leadership experience in large growth-oriented public companies, including CEB, Sprint Nextel Corporation, Nextel Communications and MCI Communications. We're pleased to have Rich on the team and present on this call, his first earnings call with Emergent.

During our call today, I'll focus my remarks on our view of recent trends in the public health threat market and our growth strategy to address those threats and serve that market. Bob will discuss our progress in our global operations. And finally, Rich will provide financial details about our first quarter performance and financial guidance.

Now let's turn to the topic at hand, global public health threats and Emergent's strategy to address those threats. Recently, we have seen, with horrific consequences, the use of chemical weapons and increase in the CBRNe threat posed by both state and non-state actors, along with the increased threat posed by emerging infectious diseases. In the face of these experiences, across the globe, we are witnessing an enhanced level of concern and focus on the importance of medical countermeasures to address these threats.

Domestically, we are seeing U.S. government initiatives that focus on preparedness and the need to develop and stockpile medical countermeasures to protect the nation. Most recently, the federal government stressed the importance of protecting the nation from these public health threats in a very meaningful way, specifically through an increase in funding for the medical countermeasure enterprise.

The 2018 omnibus spending bill included an increase of over $600 million across all accounts in the enterprise, including increased funding for the Strategic National Stockpile, for the BioShield Special Reserve Fund, for BARDA and for the National Institute of Allergy and Infectious Diseases. Moreover, the President's FY 2019 budget request continues to place the priority on funding for and harmonization of the MCM enterprise, including by elevating the procurement and management responsibilities of the SNS to the Assistant Secretary of Preparedness and Response.

Importantly, over the past few months, both Houses of Congress have been working to reauthorize the Pandemic, All-Hazards and Preparedness Act (sic) [Pandemic and All-Hazards Preparedness Act] which could include 5-year funding of $2.6 billion to advance the country's preparedness and response capability, including the development and stockpiling of critically needed medical countermeasures. We expect this legislation to be completed later this year.

Internationally, we're seeing an increasing awareness of public health threats and a growing market that includes the need to acquire and stockpile critical medical countermeasures to protect both civilian and military populations. In response to these risks, we've seen a series of European Union directives focused on building a stronger EU health security framework. The European Commission decision on serious cross-border threats to health provided a basis to improve preparedness and strengthen capacity for a coordinator response to health emergencies. That directive was followed by the EU joint procurement mechanism, which allows EU member states to come together to procure and stockpile medical countermeasures.

In 2017, a European Commission directive on combating terrorism was adopted, mandating that EU member states procure and stockpile medical countermeasures, specifically to address CBRNe threats to protect their civilian populations. In addition, in 2017, the European Commission published an action plan to enhance preparedness against CBRN security risks.

We are witnessing a similar level of awareness and concern in other regions of the globe, including the Middle East and Asia. Our 2020 growth plan is focused on addressing this growing global public health threat market, and diversification is a key component of our strategy. To that end, earlier this year, we announced the completion of the Mutual Recognition Procedure for market authorization of BioThrax in 5 Concerned Member States within the EU. We expect national licenses will be issued shortly by these countries, which include Italy, the Netherlands, Poland, the U.K., and France. Based on this regulatory approval, we look forward to further expanding our impact within the EU. And we now count more than 40 countries worldwide as customers, and that list has been growing.

Turning to our plans for this year. We remain on track to achieve our 2018 goals, including advancing new threats to enable an Emergency Use Authorization filing with the FDA and establishing a multiyear follow-on contract for the continued supply of ACAM2000 to the SNS, which we expect to be completed by year-end.

Finally, we continue to advance our product pipeline and have made real intangible progress in the first quarter. On the M&A front, we have set a goal for this year of executing an acquisition that will generate revenue and be accretive within 12 months of closing. We are focusing on product and business acquisition in the public health threats market, including CBRNe threats and emerging infectious diseases, especially in opportunities with potential for dual market application. While the timing of any M&A transaction is always uncertain, we believe we can achieve this goal given our pipeline of target opportunities.

So in summary, global public health threats are growing. While that is a development that concerns all of us, we believe that Emergent is uniquely positioned to enable the U.S. and allied governments to address many of these threats based on our growing portfolio of medical countermeasures, decades of experience and expertise in government partnering and contracting and our broad and deep manufacturing capabilities.

I look forward to updating you on our progress as we work towards our longer-term goals and the fulfillment of our mission to protect and enhance life. That concludes my prepared remarks. I will now turn the call over to Bob Kramer for details on our operational performance. Bob?

--------------------------------------------------------------------------------

Robert G. Kramer, Emergent BioSolutions Inc. - President & COO [4]

--------------------------------------------------------------------------------

Thank you, Dan, and good afternoon to everyone. Thank you for joining the call. For my comments today, I'm going to focus on the current state of our operations with an emphasis on our business unit structure that we adopted in April of 2017.

Just as a reminder, the business unit structure encompasses the following 4 focus areas: first, vaccines and Anti-infectives currently run on an errand basis by Adam Havey; next is our Antibody Therapeutic business unit run by Dr. Laura Saward; next is the Device business unit run by Doug White; and finally, our Contract Development and Manufacturing unit, or CDMO services, run by Sean Kirk. Importantly, these business units are all supported by enterprise-wide functions, including sales and marketing, human resources, finance, legal, regulatory, quality and others. We continue to make steady progress in aligning our operations across these lines of business and expect to continue to realize the benefits of the structure.

With that overview, let me highlight some specific accomplishments in each business unit during the first quarter. And let's start with Vaccines and Anti-infectives. As a reminder, the Vaccines and Anti-infectives business unit consists of BioThrax and ACAM2000 as well as a portfolio of development programs, notably NuThrax, our Zika and flu vaccines and the anti-infective candidates.

Last year, we completed the acquisition of the ACAM2000 business from Sanofi, which brought the licensed smallpox vaccine as well as live viral manufacturing and fill/finish facilities and a contract with CDC for the delivery of ACAM2000 to the Strategic National Stockpile. Our integration of the acquired operations in Canton, Massachusetts and Rockville, Maryland is essentially complete, and we can now turn our attention to planning for the anticipated new ACAM2000 contract, which we expect to have in place by the end of this year, to support the ongoing supply of this critically needed medical countermeasure to the U.S. government's SNS.

Similarly, we have ramped up our discussions with the global customers who, like the U.S. government, have previously procured smallpox vaccine as part of a stockpiling strategy to protect their military and civilian populations against the threat of smallpox.

For our next-generation anthrax vaccine program, NuThrax, we continue to progress toward EUA submission by the end of this year. If successful, this will enable BARDA to procure NuThrax for delivery to the SNS in 2019 under our existing development and procurement contract valued at up to $1.5 billion. First quarter activities centered on the continued manufacturing of engineering runs, which will support the initiation of PPQ lots required for submission.

As Dan mentioned, we further expanded BioThrax licensure with the successful completion of the Mutual Recognition Procedure for market authorization of BioThrax in 5 Concerned Member States within the EU. These included Italy, the Netherlands, Poland, the U.K. and France. We achieved this on the basis of our existing market authorization of BioThrax in Germany, which was granted by the Paul-Ehrlich-Institut. We look to leverage this success across other EU countries as we execute on our longer-term goal of generating product sales from markets outside the U.S. in excess of 10% of our total revenue by the year 2020.

Next, we initiated, in partnership with Valneva, a Phase I clinical trial in United States to evaluate the safety and immunogenicity of VLA1601, our vaccine candidate against the Zika virus. This candidate leverages Valneva's validated expression platform, and we expect data from this trial in late 2018 or early 2019.

And finally, the Defense Threat Reduction Agency, or DTRA, exercised an option under our existing contract to fund development of an oral therapeutic for melioidosis using our GC-072 antibiotic series of molecules.

Next, let's turn to the Antibody Therapeutic BU. As a reminder, the Antibody Therapeutics business unit consists of Anthrasil, BAT, VIGIV and raxibacumab as well as a portfolio of development programs, notably the flu and Zika hyperimmune candidates. Last year, we completed the acquisition of raxi from GSK, along with a multiyear contract with BARDA to supply the product to the SNS through November of 2019. GSK is acting as our CMO for this product over the next 2 years.

During the first quarter, we continued to execute on our plan to tech transfer the manufacturing of this product to our Bayview CIADM site.

During the first quarter, we initiated a Phase II study to evaluate safety, pharmacokinetics and clinical benefit of FLU-IGIV or anti-influenza immunoglobulin being developed as an intravenous treatment for serious illness caused by influenza A infection in hospitalized patients and developed on our hyperimmune platform. The clinical study was successfully initiated with the first patient dosed in 2018, and we'll remain open to continue enrollment in a second influenza season. The study is expected to be completed in 2019.

Lastly, we were awarded a 1-year $26 million contract with CDC for the continued supply of VIGIV into the Strategic National Stockpile. VIGIV, as you know, is indicated for the treatment of complications due to smallpox vaccination and is a critical component of the U.S. government's smallpox preparedness plan.

Next, let's look at the Device business unit. As a reminder, the Devices BU consists of RSDL and TROBIGARD as well as a portfolio of development programs, notably the SIAN device and various other generation auto-injector constructs. We continue to deliver both RSDL and TROBIGARD against existing contracts and are actively working on procurement of these products by new government customers. During the quarter, we continued to make incremental progress on our SIAN device being developed with funding from BARDA and our dual chamber, or D4 auto-injector, being developed with funding from DoD.

Lastly is the Contract Development and Manufacturing business unit, or CDMO. Let me update you on the general condition of this business. We advanced our pilot plant expansion at the CIADM facility at the Bayview site. This is a key component of our partnership through joint investment with the U.S. government in establishing core capabilities at the site in support of pandemic and emerging infectious disease response needs of our government customer. We also continue to make steady progress on our Camden fill/finish expansion plans. This effort will enable our continued success and growth through the addition of capacity and capabilities along with the growing needs of current and potential commercial customers.

And lastly, the business unit continues to successfully support both Emergent internal product supply requirements as well as those of our external clients. In summary, our operations are running smoothly and are well positioned to deliver on our financial and operational goals for this year.

That concludes my prepared remarks. Now I'll turn it over to my colleague Rich Lindahl, who will take you through the numbers. Rich?

--------------------------------------------------------------------------------

Richard S. Lindahl, Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer [5]

--------------------------------------------------------------------------------

Thank you, Bob, and good afternoon, everyone, and thank you for joining the call. I'm thrilled to be joining my first earnings call as Emergent's new CFO. There is a great deal going on here at Emergent, and I look forward to working closely with my new colleagues in pursuit of our business objectives as well as our mission and vision.

For my prepared comments today, I will walk through our first quarter results, starting with the P&L, then shift to the balance sheet and the state of our capital structure and finish up with comments on the full year and second quarter guidance.

With that, let's first look at the performance for the first quarter of 2018. As you can see in our earnings press release, our first quarter results reflect the delay in the timing of BioThrax deliveries, as we previously disclosed on February 22, as well as the delay in the timing of one ACAM2000 shipment. Despite otherwise solid execution to start the year, this shift of deliveries to the second quarter impacted our revenue and profitability in the first quarter. That said, we expect to complete these deliveries by the end of the second quarter, which is clearly reflected in our second quarter revenue guidance and has no impact on our full year guidance.

Turning now to the numbers. Total revenues were $118 million, slightly higher than the prior year. Compared to the same period in 2017, the Q1 2018 revenue highlights are as follows. First, product sales. Product sales during the quarter were $76 million, down 8% due principally to lower BAT and BioThrax sales, partially offset by an increase in other product sales, principally attributable to sales of ACAM2000 and raxibacumab, both of which were acquired in the fourth quarter of last year. Second, contract manufacturing services. CMO revenues were $26 million, up over 40% due primarily to the completion of a milestone related to the expansion of specific contract manufacturing capabilities at our Lansing site. And third, contracts and grants. Contract and grant revenue was $16 million, down 8% due to certain funded development programs that ended in 2017.

Gross margin came in at 43%, a reflection of the product mix during the quarter, which was largely influenced by the delayed shipments of BioThrax and ACAM2000 just discussed. We expect gross margin to improve in the second quarter as the product mix benefits from the completion of these deliveries and the related increase in product revenue.

Turning to operating expenses. Gross research and development spend was $29 million, up over 40%. After adjusting for contracts and grants revenue, our net R&D expense was $13 million or 13% of net revenue, which is calculated as total revenue less contracts and grants revenue. This spending reflects the investments in our portfolio that Bob described a few minutes ago.

SG&A expenses for the quarter were $40 million, up $5 million and driven primarily by a true-up related to stock compensation as well as additional professional services costs. While as a percentage of total revenue, first quarter SG&A expenses were 34%, we expect 2018's full year ratio to be in line with our 2020 goal of less than 25% of revenue.

For Q1 2018, the tax benefit in the amount of $4.5 million includes a discrete benefit of $2.3 million related to stock compensation activity, resulting in an effective tax rate of 48%. Excluding the discrete benefit, the Q1 2018 effective tax rate was 24%.

In terms of our profitably measures, our first quarter bottom line was also impacted by the revenue timing delays already discussed. As a result, we had first quarter EBITDA of $3 million, a GAAP net loss of $5 million and an adjusted net loss of slightly over $1.5 million.

Turning to the balance sheet. We are maintaining a strong liquidity position as we ended the quarter with $165 million of cash and a receivables balance of $122 million. As a reminder, we recently put in place a new credit facility that provides $200 million of current borrowing capacity and that can be increased by $100 million. Accordingly, we continue to have the capital resources necessary to support our operations and pursue M&A opportunities.

One final note on the balance sheet. We adopted a new revenue recognition accounting standard effective January 1, 2018. Based on our review of revenue contracts, we modified the revenue recognition methodology related to our CIADM contract with BARDA, which resulted in a $42 million increase to our deferred revenue balance and an offsetting $32.5 million adjustment, net of tax, to retained earnings. More information on this change will be available in our report on Form 10-Q, which we anticipate filing within the next day.

That completes a review of the quarter. Now let me turn to our guidance. We have reaffirmed our full year 2018 financial guidance, which reflects the new revenue recognition accounting standard and is as follows: total revenue of $715 million to $755 million, pretax income of $120 million to $140 million, net income of $95 million to $110 million, adjusted net income of $110 million to $125 million and EBITDA of $175 million to $190 million.

Importantly, the 2018 outlook does not include estimates for potential new corporate development or other M&A transactions, except for the provision of specific diligence-related expenses required to support our ongoing M&A efforts.

Lastly, we have guided for second quarter total revenue of $205 million to $230 million. This outlook reflects the deliveries of BioThrax and ACAM2000 previously expected in the first quarter plus additional deliveries in the current quarter. If you combine the second quarter revenue guidance with the first quarter actual revenues, you can see that we anticipate first half revenues of $323 million to $348 million or approximately 44% to 47% of the full year 2018 revenue forecast. Achieving this outcome would represent a strong first half and keep us squarely on track to achieve our annual financial objectives.

That concludes my prepared remarks. And I'll now turn the call over to the operator to begin the question-and-answer session. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Dana Flanders from Goldman Sachs.

--------------------------------------------------------------------------------

Christopher John Staral, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

This is Chris Staral on for Dana. So in 2016, I think Congress passed an extension that expanded the mandatory -- or the priority review program to include medical countermeasures that treat harm from biological, chemical, radiation or nuclear agents. And it seems to be right in your wheelhouse. So maybe can you comment on how we should think about this potentially impacting your ongoing development programs, including NuThrax? And do you know who makes the determination of what is identified as a material threat? And then I have a follow-up after that.

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Yes. Thank you, Chris, for joining the call, and thank you for sharing that observation. That's absolutely right. It's one of the many Congressional initiatives that's been adopted over the last 5 to 10 years, really trying to expand the enterprise and create incentives for companies to develop medical countermeasures against some of these serious threats. When you look at our portfolio, we do have a number of products that we've identified that could be eligible for priority review vouchers. I know you mentioned specifically NuThrax. NuThrax would not be eligible for a PRV in that. There is already an approved vaccine for the prevention of anthrax disease, and that's BioThrax. So PRV will not be available under those circumstances. But certainly, as we think about development programs across the portfolio, whether it's in the Vaccines and Anti-infectives or whether it's in the Antibody Therapeutics side, we are, as part of our analysis, looking at a PRV potential. So we do have several, actually, in the portfolio today that would be eligible for PRV designation. They include both the vaccine and the therapeutic for Zika. We have a flu vaccine. It would be a broad spectrum flu product -- universal flu product as the vaccine could be eligible, to name just a few. So it is a driver for us, and we see real economic value in migrating to a portfolio that includes products that are PRV eligible. So hopefully, that gives you a sense for potential impact as we look at the pipeline going forward.

--------------------------------------------------------------------------------

Christopher John Staral, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

That's very helpful. And then the quick follow-up is for the delay in ACAM2000 shipments, can you maybe provide a little more color on what caused the delay? And should we just be pushing our ACAM2000 revenues that we -- that would have been realized in 1Q up to 2Q? And is there any flow-through for the following quarters? And then my understanding was that the contract renewal was -- or extension was up in March 2018? So is it fair to assume that we -- that you are granted an extension? And how long should we expect revenues to be coming out of that program through the extension?

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Yes. So great questions. So the ACAM single delivery delay, so yes, we have put that into deliveries in the second quarter. I would expect you could do the same. And now under the contract that recently expired, we do have orders that are expected to take through the rest of this year to complete. And so we are scheduled to make deliveries through the balance of the year. And we are expecting to negotiate a follow-on contract with the U.S. government for continued supply. We expect that will be a multiyear contract, and we expect that to have -- to be in place by year-end. So in terms of extension, really no need for extension because the orders that are in place right now for continued supply during the balance of the year remain effective.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And our next question comes from the line of Eric Schmidt from Cowen and Company.

--------------------------------------------------------------------------------

Eric Thomas Schmidt, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [7]

--------------------------------------------------------------------------------

Maybe just on NuThrax, in order to get this year-end submission in, can you talk about the rate-limiting steps? And what has yet to be accomplished?

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [8]

--------------------------------------------------------------------------------

Thanks, Eric. Good to hear your voice. Thanks for joining the call. I'm going to ask Adam to walk you through the key steps on that lead to EUA submission. Adam Havey, as you know, our EVP for Operations and standing in as the head of the business unit for Vaccines and Anti-infectives. Adam?

--------------------------------------------------------------------------------

Adam R. Havey, Emergent BioSolutions Inc. - Executive VP of Business Operations [9]

--------------------------------------------------------------------------------

Thanks, Dan. So Eric, really there's 2 rate limiters. One is we're kind of in the process right now, as Bob mentioned, of working through some engineering runs. And that's the process validation essentially of the manufacturing process. We need to complete what we would call PPQ lots, basically consecutive lots that just show reproducibility of the manufacturing process. And in parallel with that, we need to validate our potency test. And really, those are the only 2 things that hold us back from submitting the EUA application.

--------------------------------------------------------------------------------

Eric Thomas Schmidt, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [10]

--------------------------------------------------------------------------------

And then, Adam, I think at one point, we were talking about maybe up to 10 million doses of NuThrax orders for next year. Is that still a possibility under this approval process?

--------------------------------------------------------------------------------

Adam R. Havey, Emergent BioSolutions Inc. - Executive VP of Business Operations [11]

--------------------------------------------------------------------------------

Yes. So I think when we've previously guided around, I think, anthrax vaccine delivery, as we've said, we expect approximately 10 million doses of delivery in 2019. I think the EUA really speaks to more of the enabling of the claims in the current procurement contract. And those claims kind of give a range of possibilities for BARDA. And we would expect post EUA that they would start to make the transition from BioThrax to NuThrax.

--------------------------------------------------------------------------------

Eric Thomas Schmidt, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [12]

--------------------------------------------------------------------------------

Okay. So you don't think you'll get a full year's order under EUA, in other words?

--------------------------------------------------------------------------------

Adam R. Havey, Emergent BioSolutions Inc. - Executive VP of Business Operations [13]

--------------------------------------------------------------------------------

No. I think we would absolutely get us a full year's order. I think it really just depends on the timing. The great thing about Building 55 is we've got increase capacity. It can produce up to 20 million to 25 million doses. And so even if the EUA comes a little bit later, we still have the capability to deliver quite a bit of NuThrax in 2019.

--------------------------------------------------------------------------------

Eric Thomas Schmidt, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [14]

--------------------------------------------------------------------------------

Okay. And then coming back to BioThrax. I know we've seen lumpy quarters before, and you've always normalized things on an annual basis. But I guess I was a little bit surprised by the weakness in Q1 given the updated guidance so late in the quarter in late February. I guess you're operating off of 2 contracts. Does that make it more difficult for you to guess the timing of deliveries? Or maybe any insight on what happened there.

--------------------------------------------------------------------------------

Robert G. Kramer, Emergent BioSolutions Inc. - President & COO [15]

--------------------------------------------------------------------------------

Yes, Eric, this is Bob. Thanks for the question. We wanted to offer Rich as the new CFO a traditional lumpy Q1. And really the addition of ACAM2000, quite frankly, is another potential source of variability in the overall delivery schedule. So there's really nothing new other than the fact that ACAM ended up pushing a shipment into Q2, as was asked and responded to earlier. So I wouldn't read anything more into it than that.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

And our next question comes from the line of Keay Nakae from Chardan.

--------------------------------------------------------------------------------

Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [17]

--------------------------------------------------------------------------------

I wanted to ask you about how we should think about the timing for any expanded sales into the EU. First step is to get the actual licenses. But how long after that do you think it takes to negotiate some supply contracts? And then also, with respect to what you're preparing to do in that facility, how do you stand in terms of having products available?

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [18]

--------------------------------------------------------------------------------

Yes, so Keay, thanks for joining the call and thanks for the question. It's pretty exciting, the regulatory approval for BioThrax in the EU. But it's a -- I'll call it a single data point. As you know, the threat matrix in EU is fairly significant. It's pretty high across the whole CBRNe, I'll call it enterprise. And the reality is the European Union is taking it quite seriously. And every country is developing their own policy in terms of how to address it, and they're at varying stages of their development in terms of allocating funding and developing the plans and identifying levels of procurement and stockpiling. So every country is a bit different. So there isn't a single answer to your question. And various countries prioritize different products differently. For example, some countries do prioritize an anthrax vaccine to protect military personnel and potentially some civilian population. So others look at smallpox as a higher threat level and keenly interested in starting to rotate stockpiles of smallpox that exist and have existed for a number of years in their stockpiles. Others are really focused on the chemical threat. We've seen, as you know, the attack in the U.K. We've seen the attack in Syria. And that's creating a high level of concern. So it's not simply around a single product or a single regulatory approval. It's really around having conversations with customers across the whole threat matrix and what opportunities they see within our portfolio to address the concerns that they have. So these are ongoing discussions, and it's not digital. It takes a while to have these conversations to the point where the government has now resolved its issues and internal issues in terms of prioritization of the threats they want to address, the amount of money they want to allocate, what countermeasures might be appropriate for their procurement and how they would stockpile and/or deploy them. So this is a continuum. We continue to see 2018 and 2019 as advancing the international sales opportunities for us. And we can see -- continue to see growth opportunity for international sales. As we said in the past, we do not expect international sales to come to the level of U.S. We're really targeting for our 2020 revenue performance on 10% of revenue coming from international markets. So that's our goal. And we think the landscape is evolving in such a way whereby we can achieve that.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

And our next question comes from the line of Jessica Fye from JPMorgan.

--------------------------------------------------------------------------------

Jessica Macomber Fye, JP Morgan Chase & Co, Research Division - Analyst [20]

--------------------------------------------------------------------------------

I wanted to follow up with the comment on prepared remarks about potential near-term business development. Specifically, how do you think about prioritizing commercial versus clinical or even like clinical-stage assets? And how does your 2020 target factor into those decisions?

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [21]

--------------------------------------------------------------------------------

Yes, thanks, Jessica, for joining the call, and thanks for the question. So our priority are revenue generators that can be accretive to earnings within 12 months. That's really what we see as the #1 priority, somewhat of the bull's-eye so to speak. And to put a finer point on it, we're looking at opportunities that, if we can, have dual market potential whereby it's not only to a government customer but also to be sold in a more traditional commercial market. Does that mean that completely off the table a product that's in advanced development that could be launched within a fairly short period of time but central to the wheelhouse? No, I wouldn't say it's completely off the table, but it's not priority #1. So as we look at the funnel, it's heavily, heavily weighted towards the first priority #1, meaning revenue generators that could be accretive. And there's a possibility that perhaps in a business acquisition, we get both a product revenue generator or 2 along with the pipeline of products which could fall within the description that you've provided. But in terms of the prioritization, it's really ensuring that when we look at an opportunity, it's got near-term revenue and can be accretive to the business. Hopefully, that answered your question, Jessica.

--------------------------------------------------------------------------------

Jessica Macomber Fye, JP Morgan Chase & Co, Research Division - Analyst [22]

--------------------------------------------------------------------------------

Yes, that's helpful. And I just wanted to ask about operating expenses. R&D, in particular, came in well below our forecast. Is that -- is the first quarter number a decent run rate to think about for the year? Or is this going to be an anomaly?

--------------------------------------------------------------------------------

Robert G. Kramer, Emergent BioSolutions Inc. - President & COO [23]

--------------------------------------------------------------------------------

Yes, so Jess, this is Bob. Again, I think we've been pretty clear that our longer-term net R&D goal of having R&D expenses less than 15% of revenue is where we would like to stay under. Historically, we've not been anywhere near that level. However, as Dan and Rich and Adam and I have all comment on, we see very exciting opportunities for carefully selected candidates to get some investment to get them to the point where they could potentially be funded or pick up some type of collaboration or joint venture. So we will be ramping up our net R&D spend over time, and you should expect that to ratchet up. It's not going to jump immediately, but it will inch up over the next year or 2.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And our next question comes from the line of Katie Kerfoot from Wells Fargo.

--------------------------------------------------------------------------------

David William Maris, Wells Fargo Securities, LLC, Research Division - Senior Analyst [25]

--------------------------------------------------------------------------------

It's David Maris. A couple of questions. So first, on the business development front, you had some comments. I may have missed them though. How active would you say you are and how confident? And I don't mean like, oh, we're very active. Are you getting multiple opportunities at this point? Or is it, no, 1 or 2 attractive and you hope to get 1 done this year? So maybe if you can give any sort of color about the range and the level of activity. And then the second is following up on your comment that, well, international sales, you hope to be large, but they won't be as large as the U.S. I think that's self-evident. But the question more is, when do you think that you'll have meaningful ex-U. S. sales? Is that 2019? 2020? Just sort of a time line or any sort of information about that, that will be great.

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [26]

--------------------------------------------------------------------------------

Sure. Thanks, David. Thanks for joining the call. Appreciate your participation. So in terms of BD, we have a very large funnel, I would say, for the company of our size. We have opportunities that are further advanced in their development, both in terms of diligence and evaluation and negotiation, and others that are much further back in the queue. So I don't want to say that we're very active because you asked me not to tell you that, but the reality is it's a pretty active team effort. And given the size of the company and the size of the team and the resources we have, there's so many opportunities that we can really focus on. So I'm very pleased with the target opportunities that are elevating, both in terms of what they look like, the profile of the opportunities, the valuations associated with them and where they would fit in our overall portfolio of products, both in a revenue generators and across the business units. So it's really hard to say. Last year, we ended up doing 2. You asked me to say if there is 1 or 2 or more. It's really hard to tell. As you know, in the M&A world, opportunities that you think are within your grasp can suddenly disappear for reasons quite unexpected. We've had that experience in years gone by. And others where you didn't expect it to materialize, in fact, do materialize. So you know this business as well as I do. M&A is tough to anticipate, but I'm comfortable that we're in the position now given the level of involvement and engagement, the number of opportunities and the types of opportunities. We should be in a position to achieve the goal that we set for the organization. On the international sales, actually, last year, I thought, was a very active year and successful year. I think we were up over $40 million in international sales last year, which was double-digit percentage of total revenue. So our goal, as you know, get to that 10% of revenue based on $1 billion revenue target for 2020. And that's going to require continued increases year-over-year over year, '18, '19 and '20. So that's the way we're looking at it, David. So I think last year was significant for perhaps the first time in our history. And over time, we look to continue to ramp that up as overall revenues continue to ramp up.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

And our next question comes from the line of François Brisebois from Laidlaw.

--------------------------------------------------------------------------------

François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [28]

--------------------------------------------------------------------------------

Just a couple here. What should we be looking at for the original data coming out late '18 or early '19 for VLA1601?

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [29]

--------------------------------------------------------------------------------

For the Phase I data on Zika, yes, let's ask Adam Havey to answer that one.

--------------------------------------------------------------------------------

Adam R. Havey, Emergent BioSolutions Inc. - Executive VP of Business Operations [30]

--------------------------------------------------------------------------------

Sure. Frank, thanks for the question. Really, we're looking at safety. This is a proven -- it's based on a proven platform. So it's really safety. I mean, we are looking at immunogenicity markets as well, but I think the primary endpoint for this is we're looking at safety for this product. And I think our thinking here -- our hypothesis is if we can show it based on this platform, we would be in a conversation with BARDA about funding. We plan to make this out of our Bayview facility. So it fits with our strategy. It fits with the Vaccines business unit, ideas around growth. It fits the dual market approach.

--------------------------------------------------------------------------------

François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [31]

--------------------------------------------------------------------------------

Okay. Great. That's helpful. And then in terms of the ACAM delivery that misses one delivery, out of how many? Or how should we think of that?

--------------------------------------------------------------------------------

Robert G. Kramer, Emergent BioSolutions Inc. - President & COO [32]

--------------------------------------------------------------------------------

Yes, it was just one shipment, Frank, to be clear. And again, as we've said, we anticipate that, that will get picked up in Q2 and we'll back on track.

--------------------------------------------------------------------------------

François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [33]

--------------------------------------------------------------------------------

Okay. And that's one shipment out of how many shipments that you might expect?

--------------------------------------------------------------------------------

Robert G. Kramer, Emergent BioSolutions Inc. - President & COO [34]

--------------------------------------------------------------------------------

I think it was one out of one.

--------------------------------------------------------------------------------

François Daniel Brisebois, Laidlaw & Company (UK) Ltd., Research Division - Healthcare Equity Analyst [35]

--------------------------------------------------------------------------------

Okay. Got you, okay, okay. And then when you answered David, I think I heard but -- so the $1 billion 2020 top line is still intact?

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [36]

--------------------------------------------------------------------------------

That continues to be our goal.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of Lisa Springer from Singular Research.

--------------------------------------------------------------------------------

Lisa Springer, Singular Research, LLC - Research Analyst [38]

--------------------------------------------------------------------------------

With the 5 additional EU members that you'll be able to sell BioThrax into, how much of the European market now do you feel that you would have covered? And what's the opportunity left? Are there other countries you would still like to get approval in?

--------------------------------------------------------------------------------

Daniel J. Abdun-Nabi, Emergent BioSolutions Inc. - CEO & Director [39]

--------------------------------------------------------------------------------

Yes, thank you for joining the call, Lisa, and thanks for the question. So when we went out with the Mutual Recognition Procedure, we identified, I think, that countries we thought were most important to address from a licensure perspective. So at this point, I think that's the candidate list. And we're pleased that we got approval and we've crossed that threshold in all 5 of those countries. Having said that, what I would say is that in the past, we've experienced procurements from countries even where regulatory approval has not been obtained based on regulatory approval, either in the United States or in certain countries outside the U.S. So I don't think it forecloses potential sales in other countries within the EU based on a licensure in Germany or the U.K. or France. But nevertheless, we felt these were the right countries for us to target, and we're pleased that we've crossed this milestone.

--------------------------------------------------------------------------------

Lisa Springer, Singular Research, LLC - Research Analyst [40]

--------------------------------------------------------------------------------

Okay. And were there any share repurchases during the quarter?

--------------------------------------------------------------------------------

Richard S. Lindahl, Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer [41]

--------------------------------------------------------------------------------

No. There weren't any purchases of stock during the quarter.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Thank you. And that concludes our question-and-answer session for today. I would like to turn the call back over to Mr. Burrows for closing remarks.

--------------------------------------------------------------------------------

Robert G. Burrows, Emergent BioSolutions Inc. - VP of IR [43]

--------------------------------------------------------------------------------

Thank you, Glenda. With that, ladies and gentlemen, we now conclude the call. Thank you for your participation. Please note, an archived version of the webcast of today's call will be available later today and accessible through the company website. Thank you all once again, and we look forward to speaking with all of you in the future. Goodbye.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.