U.S. Markets closed

Edited Transcript of EBS earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q2 2019 Emergent BioSolutions Inc Earnings Call

Rockville Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Emergent BioSolutions Inc earnings conference call or presentation Thursday, August 1, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* C. Douglas White

Emergent BioSolutions Inc. - Senior VP & Head of Devices Business Unit

* 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. - CEO, President & Director

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

Conference Call Participants

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

* Brandon Richard Folkes

Cantor Fitzgerald & Co., Research Division - Analyst

* David William Maris

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Jessica Macomber Fye

JP Morgan Chase & Co, Research Division - Analyst

* John Thomas Scott

Cowen and Company, LLC, Research Division - Associate

* 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 Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to your host, Mr. Bob Burrows, Vice President, Investor Relations. Sir, you may begin.

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

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

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

Thank you, Valerie, and good afternoon, everyone. Thank you for joining us today as we discuss the operational and financial results for the second quarter and 6 months of 2019. 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 Bob Kramer, President and Chief Executive Officer; and Rich Lindahl, 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 therefore realize that, if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations.

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 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 or loss, EBITDA, and adjusted 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 August 1, 2019. 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 would now like to turn the call over to Bob Kramer, Emergent BioSolutions' President and CEO. Bob?

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [3]

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

Thank you, Bob, and good afternoon, and thank you all for joining us on the call today. In my prepared remarks, I'll provide a brief overview of our financial performance for the quarter and year-to-date periods, and then discuss select operational accomplishments. The majority of my comments will focus on 4 areas of near-term focus for the company. These include, first of all, the state of our anthrax vaccine franchise, specifically the ongoing shift to the next-generation vaccine, AV7909, as the primary post-exposure asset for our country's strategic national stockpile for anthrax response; second, the status of the smallpox franchise, including our recent award of the Vaccinia immune globulin intravenous contract, as well as ongoing contract negations with the U.S. government related to ACAM2000, the only FDA-licensed smallpox vaccine; third, the state of the NARCAN nasal spray business; and finally, progress on a few key programs within our development pipeline.

Before we get into the state of the business, I wanted to share a piece of good news on the government's efforts to strengthen national security. On June 24th, the Pandemic All Hazards Preparedness Act was reauthorized. This is the second reauthorization of the original act, which was signed in 2006. As background, the original act established the United States' framework for responses to threats that may result in a public health emergency. This included establishing the Medical Countermeasures Enterprise and the role of the Assistant Secretary for Preparedness and Response. It also included the stockpiling and procurement of medical countermeasures in the strategic national stockpile. And finally, it included the development of medical countermeasures to protect the American public from threats like smallpox, anthrax, botulism, among others.

This reauthorization expands the 2006 act by further strengthening the ability of both the Department of Health and Human Services and the ASPR to combat any public health emergency, whether manmade or naturally occurring. The combination of the reauthorization with the publishing of the White House National Biodefense Strategy in 2018 solidifies the government's commitment to public-private partnerships and provides a clear demonstration of the government's unwavering focus on safeguarding our nation's health security.

Now I'd like to transition to Emergent's business, starting with our financial performance for the quarter. Our second quarter financial results were in line with expectations and reflect the trends we anticipated for the year. As expected, and as we've discussed previously, the timing of the progression of both our anthrax and smallpox vaccine programs shift both revenue and earnings more toward the back half of calendar year 2019.

As you'll see from today's press release, revenue in the first half of the year is approximately 40% of our full year guidance, tracking as expected. Further, as I'll cover in more detail in a few minutes, each of our programs continues to evolve at the pace that was planned. To that end, as noted in the press release, we have reaffirmed all of our financial guidance metrics for 2019.

Now let's discuss each of the 4 areas of near-term focus for the company; first, the addition of the next-generation anthrax vaccine, AV7909, to our existing product line. As a reminder to those of you who may be less familiar with the company, Emergent is the only provider of an FDA-licensed anthrax vaccine, BioThrax. We've been working for more than a decade in partnership with the U.S. government on developing a next-generation anthrax vaccine, AV7909. This new vaccine candidate, which expands our portfolio beyond BioThrax, is designed to offer the benefits of a shorter dosing regimen plus a rapid and more robust immune response, making it well-suited for use in a general population under a post-exposure scenario.

As we disclosed previously, we began manufacturing AV7909 in March of this year, and we anticipate beginning delivery of the initial 3 million doses to the stockpile this quarter as part of our $1.5 billion development and procurement contract with BARDA. As a reminder, that contract includes both a 3 million dose delivery under the base portion of the contract plus options to procure up to an additional 50 million doses of AV7909 over the term of the contract. To that end, as you saw in the separate announcement issued on Tuesday of this week, the U.S. government has now exercised the first contract option, valued at $261 million, to procure approximately 10 million doses of AV7909. These doses, on top of the base 3 million doses, are expected to be delivered to the stockpile over the course of the next 12 months.

During the second quarter, we also continued to deliver BioThrax into the stockpile under our existing procurement contract. Importantly, while the U.S. government is looking to mainly stockpile AV7909, moving forward, for post-exposure use, we expect the government to continue to procure BioThrax to support pre-exposure immunization programs, such as the U.S. Department of Defense's longstanding practice to immunize personnel prior to deployment into high-threat areas.

To be clear, we see a continuing demand for BioThrax due to its unique indication for pre-exposure protection from anthrax. Both of these are significant milestones, and we're very pleased with the progress that we're making across the anthrax vaccine business.

Turning to our smallpox franchise, we have significant progress to report here as well. In June, we announced a contract award by the U.S. government valued at approximately $535 million over a 10-year period for the continued supply of Vaccinia Immune Globulin intravenous into the stockpile as a treatment for complications resulting from smallpox vaccination. As many of you know, VIGIV, together with our ACAM2000 smallpox vaccine, are integral to the government's overall preparedness and response strategy to have a sustainable and sufficient supply of medical countermeasures in the stockpile to protect the U.S. population against the threat of smallpox.

With the VIGIV contract secured, momentum regarding contract negotiations for ACAM2000 has accelerated with the U.S. government. We have continued to manufacture product and ensure sufficient supply chain availability to meet our shipment obligations once we land on the final contract. As a result, we have a high degree of confidence in our ability to provide substantial number of doses to the stockpile during the second half of this year, further supporting our reaffirmed guidance.

Next, I'd like to talk about the opioid crisis, and in particular the role of NARCAN nasal spray in helping curb the devastating impact of opioid overdoses. As a reminder, current estimates show that there are approximately 34 million Americans who are in an elevated risk of an opioid overdose, according to CDC guidelines. This is roughly 10% of our country's population. We remain focused on continuing to raise awareness of the threat of opioid overdoses and to work on increasing access to and maintaining the affordability of NARCAN nasal spray.

To these ends, we're working closely with insurers and pharmacy benefit management companies and have achieved a 97% excess across all payer types. We've established new statewide distribution programs to increase the breadth of availability of NARCAN nasal spray access through state and local agencies. We continue to work with different organizations in addition to our program for schools, public libraries, and YMCAs to increase awareness of the dangers of opioids and expand access of NARCAN nasal spray to help them be prepared for potential opioid overdose emergencies.

As an example, Delta Airlines recently stated that it would be joining United, Alaska, and Frontier Airlines in having NARCAN nasal spray in their emergency medical kits on board commercial aircraft. Finally, we continue to work with states to help them implement co-prescription legislation. In Q2, New Mexico became the 9th state to implement co-prescription legislation, joining the states of Virginia, Rhode Island, Vermont, Arizona, Florida, Washington, Ohio, and California. New Mexico now requires a Naloxone co-prescription for high-risk opioid prescriptions and any prescription over a 5-day supply.

As we think about addressing all the markets' needs for NARCAN nasal spray, it's important to remember that our product is clearly differentiated as a community use product. It's convenient and does not require any medical training or certification to administer. As a result, we continue to be encouraged by the fact that NARCAN nasal spray is clearly the preferred choice across our broad base of potential end users as evidenced by the business outperforming our plans year-to-date. Bottom line, NARCAN nasal spray is making a significant difference, and we will continue to work hard to address areas of unmet need while continuing to stress expanded access and availability, increased awareness, and sustained affordability of this critical asset in response to the opioid crisis. We have more work to do, but we remain confident in our ability to play a significant role in reducing deaths caused by opioid overdose.

Now I'd like to provide an update on our leading clinical development programs. First, we continue to make progress in the development of innovative improvements and new products in our development programs focused on the opioid crisis, including extending the shelf life of NARCAN nasal spray, developing a higher-dose Naloxone prefilled syringe for medical personnel use; and finally, developing a single nasal device that can deliver multiple 4-milligram doses of Naloxone.

Second, I'm pleased to note that a few weeks ago, just after the end of Q2, we completed enrollment in our phase 3 AV7909 study ahead of schedule. As a reminder, this study is being conducted to evaluate the lot consistency, immunogenicity, and safety of AV7909 in healthy adults. Announced in March, this phase 3 study, which is fully funded by BARDA, plan to enroll 3,850 adults across 35 U.S. sites with an overall study duration of approximately 20 months.

Third, you will recall that, in April, we announced positive results from our interim analysis of our phase 2 study evaluating a series of dosing regimens for our chikungunya virus VLP vaccine candidate. During the second quarter, we selected the dose strength for a single dose administration to support phase 3 clinical studies anticipated in 2020 and eventual commercialization.

And fourth, during the second quarter, we completed phase 2 trial enrollment of our flu IGIV therapeutic for severe illness caused by influenza A infection in hospitalized patients. We anticipate data from this trial in the first half of 2020, which will drive the next phase of development with the design of the phase 3 trial.

In summary, we continue to successfully execute against our operational plans for the year. The second quarter and year-to-date results demonstrate the progress we're achieving toward our operational goals. The back half of the year promises to be very active and exciting. Importantly, we remain on track with our plans and remain confident in our outlook for the year.

Looking beyond the current year, we're completing our new 5-year strategic plan covering the period of 2020 through 2024. We expect to introduce the new plan and to provide an in-depth review, along with management presentations and invited speakers, at an Analyst and Investor Day that we're planning for Q4. More details on that will be forthcoming shortly.

That concludes my prepared comments, and I'd now like to turn the call over to Rich Lindahl. Rich?

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

Richard S. Lindahl, Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer [4]

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

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call. For my prepared comments today, I will walk through our performance for both the second quarter and first half of the year, then shift to the balance sheet and address the state of our capital structure, then wrap up with comments on our forecast for the rest of the year. As I have said on previous calls, my aim is to focus only on the highlights as we have provided all the numbers related to our second quarter and year-to-date results, as well as the corresponding reconciliation tables, in the press release issued this afternoon.

Results for the second quarter of 2019 reflect continued execution against our financial and operational goals and the ongoing diversification of our business. Total revenues were $243 million, a 10% increase, largely driven by the contribution of products stemming from the acquisitions of Adapt and PaxVax in the fourth quarter of 2018, as well as an increase in contracts and grants revenue. Adjusted net income was $6.3 million, lower versus the prior year, and adjusted EBITDA was $26.2 million, also lower versus the prior year. The reduced profitability compared to last year is largely due to product mix as 2019 sales of our higher margin products are more heavily back-end weighted. Additionally, we have made strategic investments in R&D during the first half of the year. Our overall performance in the second quarter was as we anticipated and discussed in our Q1 earnings call in May.

Digging into more details, let's discuss a few key contributing factors to second quarter 2019 performance. First and foremost, second quarter performance reflects the continued impact of the Adapt and PaxVax acquisitions, both of which were completed in the fourth quarter of 2018, increasing the [diverse] scale and scope of our enterprise. The second quarter also reflects a slower pace of U.S. government purchases of BioThrax, consistent with our expectations, as we support the U.S. government's shift to our next-generation anthrax vaccine, AV7909, as the primary vaccine in the strategic national stockpile for post-exposure response against anthrax.

NARCAN nasal spray revenue was $73 million. As was the case in the first quarter, this increase was fueled by higher public interest sales as well as sustained high levels of demand following adoption of Naloxone co-prescription in the state of California on January 1. To a lesser extent, NARCAN nasal spray sales in second quarter also reflect the initial impact of co-RX adoption in New Mexico. We do not anticipate these factors to continue, and therefore, in the second half of the year, we expect NARCAN nasal spray demand to reflect a lower normalized quarterly run rate in the high $50 million to low $60 million range.

Other product sales were $76 million. This increase primarily reflects the contribution of Raxibacumab and the travel health vaccines. BioThrax revenue was $28 million. As in the first quarter, this amount reflects fewer doses shipped to the stockpile during the period. As we have previously discussed with you, 2019 is an important year for the anthrax vaccine franchise, as we work with the U.S. government to initiate deliveries in the third quarter of the next-generation vaccine, AV7909.

CDMO revenue was $19 million. While below the level in 2018, the prior year period included onetime items that did not recur in 2019. Combined product and CDMO gross margin was 50%. This metric is similar to the first quarter and continues to reflect the influence of revenue mix on our ongoing efforts to diversify our revenue sources and customer channels. Additionally, during the quarter, we had an increase in facilities-related expenses that we consider to be onetime in nature and which adversely affects gross margin. Operating expenses, both R&D and SG&A, are higher and largely reflect the continuing impact of incremental operating and integration-related costs from the Adapt and PaxVax acquisitions.

Turning to year-to-date performance, through the first half of 2019, our business has performed as expected. Key highlights include total revenue of $434 million, an increase of $96 million, or 28% as compared to last year. Total product sales of $336 million, up $81 million, or 32%. This figure includes $138 million from NARCAN nasal spray, which benefited from both the California co-RX lift, which has now stabilized, and higher orders from public interest customers.

For the second half, we are forecasting a more normalized quarterly run rate that would imply full year NARCAN nasal spray revenue in the $240 million to $260 million range, which is an increase from the prior $200 million to $220 million. Total product sales also reflect a large contribution from increased sales of Raxibacumab as well as contributions from Vivotif and Vaxchora. These increases were offset by lower BioThrax and ACAM2000 sales.

CDMO services revenue was $35 million, lower by $15 million, or 31% versus the same period last year due to onetime items in 2018 that did not recur. Gross margin was 48%, which is below our target range but indicative of the influence of product mix and our efforts to continue to diversify our revenue sources, as well as increased facilities expenses, as mentioned earlier. For additional context, as a percentage of total product and CDMO revenue, BioThrax represented 11% versus over 30% in the prior year period. Product mix will continue to be the primary driver of gross margin, and we expect that, for the full year, this metric will be in our normalized target annual range of 55% to 60%.

Net R&D expense was $47 million, or 13% of adjusted revenue, reflecting our ongoing discretionary investment in select development programs, including those acquired as part of the Adapt Pharma and PaxVax acquisitions. SG&A spend of $136 million, or 31% of total revenue, is higher than prior year and reflects the addition of the operations and integration-related costs associated with the Adapt and PaxVax acquisitions, as well as professional services costs in support of our strategic initiatives.

Adjusted net loss was just below break-even, and adjusted EBITDA was $33 million, both as anticipated for the first half period. In terms of the balance sheet, we continue to maintain a solid liquidity position as evidenced by cash of $177 million and an accounts receivable balance of $218 million as of June 30. Total debt increased about $50 million compared to year-end 2018. Our current capital structure continues to reflect a solid credit profile and positions us for sustained growth and expansion.

Let me turn now to guidance. First, our full year 2019 forecast. As stated in the press release, we once again reaffirm our full year guidance. This includes total revenue of $1.06 billion to $1.14 billion, which reflects the following key revenue components - anthrax vaccine procurement by the U.S. government comprising a mix of both BioThrax and AV7909 pursuant to existing contracts at a combined level anticipated to be consistent with historic annual ranges; ACAM2000 sales, including anticipated deliveries in the second half, assuming execution of a follow-on contract with the U.S. government in the third quarter; and NARCAN nasal spray sales across both public interest and retail channels, which we expect to yield full year revenue in a range of $240 million to $260 million. I would also note that we have been manufacturing both AV7909 and ACAM2000 in anticipation of the second half deliveries contemplated by our guidance.

Additionally, our full year outlook includes net income of $80 million to $110 million, adjusted net income of $150 million to $180 million, EBITDA of $255 million to $285 million, and adjusted EBITDA of $280 million to $310 million. We are also providing a forecast for third quarter 2019 revenue of $245 million to $275 million.

As we stated in May, the financial picture for the year continues to unfold as we had anticipated. We expect total revenue to be in our historic range of 40% in the first half versus 60% in the second half, while earnings will be largely concentrated in the second half.

To wrap up, let me conclude with a reminder of our financial priorities for the full year 2019. They're straightforward and include the following. First, on key performance metrics, we expect to realize incremental annual improvements to our key metrics of gross margin and SG&A as a percentage of revenue, as well as adjusted EBITDA margin. On integration, we remain focused on ensuring we realize the full potential of integrating the operations of both Adapt and PaxVax into our overall business. On capital structure, we seek to maintain a solid credit profile and anticipate our net leverage ratio will end the year at the low end of our target range of 2X to 3X net debt to adjusted EBITDA. And finally, on liquidity, we continue to focus on having sufficient capital to both invest in the business as well as execute on attractive M&A opportunities, should they arise.

That completes 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) Our first question comes from Brandon Folkes of Cantor Fitzgerald.

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

Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [2]

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

Firstly, I know you mentioned that on NARCAN there were higher public interest sales during the quarter. Could you just give us some color of the split between the first responder public interest [that’s in] the retail market? I know historically has been 50/50. Is that still within range?

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [3]

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

Yes, Brandon, thanks for joining the call, and thanks for the question. The split is essentially consistent with what we said before, which is that 50/50 split. So it hasn't changed much at all.

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

Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [4]

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

And then, maybe the next one, can you just provide some color historically for BioThrax regarding the procurement there? How much has actually been under the DOD immunization pre-exposure program compared to post-exposure?

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [5]

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

Yes. So historically, if you look at the prior contracts going back any number of years, the government has procured somewhere between 9 and 10 million doses per year of BioThrax in pursuit of building the stockpile that they would ideally like to have sufficient to protect the 25 million lives. The exact split, Brandon, between what's used by DOD for active immunization versus what goes into the stockpile to build the 25 million lives protected number is not exact, so I'd hate to speculate on that split. But the vast majority of the product has gone into the stockpile for protection of civilians.

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

Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [6]

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

You mentioned that you expect to conclude the ACAM contract this quarter. Can you just help us think about the process from once you conclude that contract to actually making deliveries of that? Do you have inventory on hand, and any lead-time we should think about? Thank you.

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [7]

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

Sure. No, good question. Again, I think as Rich stated, as well as I did in my prepared comments, we have been manufacturing ACAM2000 and are prepared to deliver significant quantities in the second half of this year consistent with the estimates that we included in our 2019 guidance. So process-wise, I think it's important to remember that the U.S. government has had a longstanding practice and strategy of having sufficient medical countermeasures between the therapeutic product as well as the vaccine product, ACAM2000 sufficient to protect all American civilians, roughly 300 million doses of smallpox vaccine.

So the fact that we were able to complete our VIGIV negotiations earlier this year in June with the 10-year, $535 million contract gives us, again, every confidence that our negotiations that we're in right now with ACAM2000 will be completed in time for us to begin deliveries in Q3 for ACAM2000 under the new contract.

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

Operator [8]

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

Our next question comes from Jessica Fye of JPMorgan.

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

Jessica Macomber Fye, JP Morgan Chase & Co, Research Division - Analyst [9]

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

First one is just around guidance. Using the midpoints of the third quarter revenue and full year guidance, it appears that the fourth quarter will make up about 40% of your 2019 revenues. Can you help us think about the proportion of 2019 net income that we should model for 4Q? I appreciate the kind of first half/second half breakdown, but with negative net income in the first half, or closer to flat on an adjusted basis, just hoping we could focus in a little more on how to split up 2019 net income guidance between the third and fourth quarters.

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [10]

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

Thanks for the question. Again, I think your math is spot-on in terms of if you look at the midpoint of the Q3 range that Rich just provided, which is roughly $260 million in revenue. If you add that to the year-to-date revenue that we reported, you get pretty close to a $700 million number through Q3 on a projected basis.

So we've got a little bit less than 40% to make up in Q4. As you know, and as indicated by Rich, the product mix for the second half sales, particularly in the product sales, will be a significant contributor to turning around the overall profitability of the business in the second half. I don't want to speculate on what the split between Q3 and Q4, similar to the split in revenue. We are confident that, again, we're going to get this ACAM2000 contract across the finish line in sufficient time to begin shipments in Q3 and Q4, and that's really going to drive the overall profitability.

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

Richard S. Lindahl, Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer [11]

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

I think one thing I might add, Bob and Jess, is that, as you know, we have a high degree of fixed cost in our business, and so we do get significant operating leverage as revenue increases. And so you can certainly expect a high percentage of the increase in revenue in the fourth quarter will flow through to profitability in the fourth quarter. So hopefully that helps in terms of thinking about the spread a little bit.

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

Jessica Macomber Fye, JP Morgan Chase & Co, Research Division - Analyst [12]

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

Another question maybe just following up on the last one on NARCAN, it sounds like with this new updated NARCAN range, it's implying sales for that product in the back half lower than in the first half even though weekly retail scrips so far in the third quarter are averaging above what they were, for example, in the second quarter. So are you expecting a reversal? Or is it possible that there is some mix shift happening that we're not able to kind of discern in the public versus retail side of that business?

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [13]

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

Yes, I'll take a first shot at that, Jess, and then ask Doug White, who runs the Devices business unit, to weigh in as well. You're right. The first 6 months of NARCAN sales of roughly $138 million are a bit more weighted in the back half. A lot of that, as Rich and others have indicated, is really the result of the California co-RX and some other developments. While we see opportunities for additional states to adopt co-prescription legislation in the second half of the year, we have not baked any of that potential upside into that $240 million to $260 million range. I'll let Doug talk to the second half of the year question around any developments within the mix of what makes up that revenue.

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

C. Douglas White, Emergent BioSolutions Inc. - Senior VP & Head of Devices Business Unit [14]

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

Jess, thank you for the question. So in terms of the numbers in the prescription numbers that you're referencing, New Mexico just implemented legislation in the middle of June, and we're still seeing the impact of that spike that we anticipate when a state implements co-prescribing legislation. So that has been happening in July. We anticipate that will start to come back down. While it will still be higher than it was prior to the legislation kicking in, we anticipate that will bring the numbers back to a lower normalized level.

In addition to the comments that Bob made, in the first half of the year, in addition to California co-prescribing legislation having an impact, the spike that we've talked about in the past having a significant impact on the overall numbers, there are also some onetime purchases in the public interest market that we realized in the first half that we don't anticipate in the second half of the year. However, with the expansion of the commercial team, we anticipate continued growth in the public interest area as additional states start to implement programs with public health organizations and first responders.

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

Jessica Macomber Fye, JP Morgan Chase & Co, Research Division - Analyst [15]

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

Can you quantify those onetime public interest purchases?

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

C. Douglas White, Emergent BioSolutions Inc. - Senior VP & Head of Devices Business Unit [16]

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

We haven't communicated that, and no, I can't.

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

Operator [17]

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

Our next question comes from David Maris of Wells Fargo.

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

David William Maris, Wells Fargo Securities, LLC, Research Division - Senior Analyst [18]

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

First, what states currently have plans for co-prescribing, or are currently considering it, that you think could possibly kick in in the second half of the year? Then secondly, in July, INSYS announced that the FDA had accepted their Naloxone nasal spray. What can you tell us about your view of that product and what your response might be when and if it does come to the market? And then, lastly, just as a clarification, it seems like a lot of the concerns about being back-end loaded in the year are just explained away by the ACAM2000 kicking in at the late part of the year. So would that mean that next year should presumably be flatter? Even though it may be back-end loaded, it'll be flatter than this year? Thank you.

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [19]

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

Thanks for the questions. So I'll take a couple of them, and I'll ask Doug to weigh in on perhaps his thoughts and views of the INSYS product. So on co-RX, there are any number of additional states that we know are considering adopting co-prescription. It's a little dangerous to predict which ones may adopt and when they might, hence our reluctance to bake any of that potential upside into the $240 million to $260 million, so we're not really going to comment on which states and when.

In terms of the back-end loaded nature of 2019 being impacted by both AV7909, the second-generation anthrax vaccine, as well as ACAM2000, I think 2020 should not be as back-end loaded. I think we'll be working on the delivery schedules for both AV7909 and ACAM2000 as part of these contract negotiations. And as you can appreciate, we look to smooth out those deliveries. It's a better model in terms of the supply chain management, so we'll be looking to take some of those lumps out next year. And maybe, Doug, you can comment on the INSYS comment.

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

C. Douglas White, Emergent BioSolutions Inc. - Senior VP & Head of Devices Business Unit [20]

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

Sure. Thanks for the question, David. So yes, we're obviously well aware of INSYS' application. We understand that they are applying with an 8-milligram dose, which we believe will take additional work to validate that the dose is not only safe, I think there's been work done to look at children on that front, but also recognizing that the current standard is at 4 milligrams for intranasal spray. So while we have anticipated INSYS to enter the market as a branded competitor at some point, we're not ready to speculate when that is, but we are prepared in the event of that launch and absolutely anticipate the launch of the INSYS product.

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

Operator [21]

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

Our next question comes from Keay Nakae of Chardan.

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

Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [22]

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

Can you tell us when we should anticipate that your new product launch for NARCAN might be commercially available?

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

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

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

Thanks, Keay, for the question. I'm going to pass it over to Doug, let him comment on that.

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

C. Douglas White, Emergent BioSolutions Inc. - Senior VP & Head of Devices Business Unit [24]

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

Sure. So we anticipate getting our applications into the FDA in the second half of this year, specifically the multi-dose, intranasal, and the prefilled syringe. I'd be speculating to give you a time frame of when they would be cleared by the FDA but would anticipate some time in 2020.

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

Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [25]

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

Bob, as it pertains to the new contract for ACAM, while you're expressing your confidence via the guidance and your comments, if it were to bleed into Q4 to finalize that, could you still make up everything you're prepared to sell in Q4 such that you hit the number?

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [26]

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

Yes, there's a lot of assumptions baked into there, Keay. Again, I really don't want to speculate on what could happen or what might -- either might or might not happen other than to reiterate our every confidence in where we are with these negotiations. As you know, they've been ongoing for a while. And as we talked about for the last year, we recognized that, given the magnitude of this contract -- I mean, we're talking about a contract that could span the same duration as the VIGIV contract in order to support a 300 million dose stockpile, replenishment and rotation, these are critically important negotiations that have long-lasting impacts. And we strive to make sure that we get to a resolution that's fair for the U.S. government, as well as creates an opportunity for Emergent to continue to invest in the infrastructure for this critically needed medical countermeasure. So we remain confident, and we have planned on shipping product under the new contract in Q3, and we'll go from there.

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

Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [27]

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

With respect to the license fees and grants revenue line, we did see that uptick in Q2 related to I guess the clinical trial for 7909. Having completed enrollment, should we expect that revenue line to be lower in the back half of the year? Or how should we think about that coming off this $41 million in Q3?

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [28]

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

Yes, I would expect it to be about even, Keay. I wouldn't read too much into what happened in Q2.

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

Operator [29]

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

Our next question comes from Lisa Springer of Singular Research.

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

Lisa Springer, Singular Research, LLC - Research Analyst [30]

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

Regarding SG&A, I wonder if we should expect to see additional integration expense for PaxVax and Adapt Pharma in Q3 and Q4.

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

Richard S. Lindahl, Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer [31]

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

This is Rich. Thank you for the question, Lisa. We've been incurring integration expenses at a fairly steady rate throughout the first half, and that's going to continue through the second half. So I wouldn't expect a material increase in integration expenses in SG&A.

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

Lisa Springer, Singular Research, LLC - Research Analyst [32]

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

And I wonder if you could provide us with a little more color around the 55% increase in the other products category during the quarter.

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

Richard S. Lindahl, Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer [33]

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

The 55% increase in other product revenue?

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

Lisa Springer, Singular Research, LLC - Research Analyst [34]

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

Yes.

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

Richard S. Lindahl, Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer [35]

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

So that we delivered some additional quantities of some of our device revenue as well, the non-NARCAN nasal spray devices. And we also saw some additional deliveries of our raxibacumab product.

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

Operator [36]

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

(Operator Instructions) Our next question comes from Boris Peaker of Cowen.

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

John Thomas Scott, Cowen and Company, LLC, Research Division - Associate [37]

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

This is John Scott on for Boris. On NARCAN, firstly, do you see doses being replaced more or less consistently with the expected shelf life? Or are there potentially some expired doses still being stocked that you could try to get people to replace? And then, secondly, can you comment on any new discussion or movement toward a Naloxone co-prescribing policy at the federal level? Thanks.

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

Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Director [38]

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

Yes, John, thanks for joining the call. Thanks for the question. I'll field the latter question on federal co-prescription and then turn it over to Doug to comment on the first question. I mean clearly, a federal co-prescription is something that we see as an opportunity to make a much larger dent in the overall 34 million patient at-risk group for overdoses due to opioids. We think there's merit there. And as we shared with the AdCom meeting of the FDA in December, we think that there's an opportunity to significantly reduce opioid overdose-related deaths with a federally mandated co-prescription program.

Just look at the state experiences for the 9 states that have adopted it, and what happens within the first 60 days of adopting co-prescription legislation in those states, the results are pretty remarkable. If you further look at the results of the study that was done in Ohio in Hamilton County, where on a test or pilot basis the market was essentially flooded with NARCAN nasal spray, the resulting impact on the number of opioid-related deaths, as well as hospital visits, was remarkably lower. So all of which is to say we think that there's benefit, and we'll see what the federal government decides to do. And Doug, you can take the first part of John's question.

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

C. Douglas White, Emergent BioSolutions Inc. - Senior VP & Head of Devices Business Unit [39]

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

Sure. In terms of expiring product and replacement, we don't currently track in terms of whether the products being purchased is for replacement or new. I will say the vast majority, both in the co-prescribing or the prescription market, as well as in the public interest market, are new customers, if you will, new markets. There's still a significant way to go in terms of getting NARCAN out in a more expanded way. We do have some information that suggests in the emergency/first responder segment, they're utilizing approximately 10% of what they have in stock, but we don't have any data to support how much is being replaced stocking.

And this market is not -- I mean, it's not a stockpile market, obviously. Everything in the public interest is basically being deployed in the field.

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

Operator [40]

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

I'm showing no further questions at this time. I'd like to turn the conference back over to Bob Burrows for any closing remarks.

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

Robert G. Burrows, Emergent BioSolutions Inc. - VP of IR [41]

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

Thank you, Valerie. 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 again, and we look forward to speaking with all of you in the future. Good-bye.

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

Operator [42]

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

Thank you. Ladies and gentlemen, you may all disconnect.