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Edited Transcript of EBS earnings conference call or presentation 30-Apr-20 9:00pm GMT

Q1 2020 Emergent BioSolutions Inc Earnings Call

Rockville May 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Emergent BioSolutions Inc earnings conference call or presentation Thursday, April 30, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Laura Saward

Emergent BioSolutions Inc. - Senior VP & Therapeutics Business Unit Head

* 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 & Executive Director

* Syed T. Husain

Emergent BioSolutions Inc. - Senior VP & CDMO Business Unit Head

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Conference Call Participants

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* Boris Peaker

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

* Brandon Richard Folkes

Cantor Fitzgerald & Co., Research Division - Analyst

* Dana Carver Flanders

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Jacob William Hughes

Wells Fargo Securities, LLC, Research Division - Senior 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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Emergent BioSolutions Earnings Conference Call. (Operator Instructions) Please be advised that today's conference call may be recorded.

I would now like to hand the conference over to the company for opening remarks.

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

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Thank you, Valerie, and good afternoon, everyone. My name is Bob Burrows. I'm Vice President of Investor Relations for Emergent, and thank you for joining us today as we discuss the operational and financial results for the first quarter of 2020. 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.

The agenda for today's call will be a slight modification to our normal approach. Participating on the call with prepared comments will be Bob Kramer, President and Chief Executive Officer, and Rich Lindahl, Chief Financial Officer. However, in acknowledgement to recent announcements from the company, in between Bob and Rich will be my colleagues, Syed Husain, Senior Vice President and Head of our CDMO Business Unit, and Dr. Laura Saward, Senior Vice President and Head of our Therapeutics Business Unit. Both will be providing comments on our response to the COVID-19 pandemic. Other members of the senior team are present and available during the Q&A session following our prepared comments.

In addition, I will point out that there is a slide deck accompanying today's call. These slides are intended as a supplement to the prepared comments and include additional information pertinent to the topics discussed today. The slides are accessible from the Investors landing page of our website under the header Company Events.

Before beginning, 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. 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 public 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 adjusted EBITDA, and the reconciliations between our GAAP financial measures and these non-GAAP financial measures.

Some additional housekeeping items: the Q&A session, because of the fact that we are all in separate locations and practicing the necessary social distancing, per CDC guidelines, we will have our CEO, Bob Kramer, fielding all questions to begin with, and then will verbally hand off to other members of the team for additional answers, as warranted.

For the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on April 30, 2020. 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 like to turn the call now over to my colleague, Bob Kramer. Bob?

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

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Thanks, Bob, and good afternoon, everyone. Thank you for joining the call today. Let me start by sending our thoughts and prayers to everyone impacted by the current COVID-19 pandemic, and by expressing a huge thank-you to all those on the front line of this fight: the first responders, doctors, nurses, and medical staff who are taking care of the thousands of patients battling this disease. And especially, thanks to our employees, who continue to make sure that we deliver on our commitments to public health during this global emergency.

But before I discuss our views going forward, I want to take a moment and share how excited I am about the recent addition of Dr. Karen Smith as our newly appointed chief medical officer. Karen's primary responsibility will be to lead Emergent's clinical development, medical affairs, and regulatory affairs functions, and we very much look forward to her contributions.

Now turning to recent developments and our outlook. When we reported our fourth quarter results in late February, we discussed our goals for 2020 and noted the strong momentum we had coming into the year. As part of that discussion, we highlighted our expertise in vaccines, therapeutics, and in contract development and manufacturing. We stated that our strategy includes expanding our leadership position in current and new public health threat markets and continuing to make investments in capabilities, innovation, and operational excellence. As we will discuss in more detail in a few minutes, our company achieved strong results during the first quarter, and that trend continues into Q2. Our team remains focused on execution, and our core business remains strong, with the majority of our business units and product lines performing at or above our expectations.

At the time, the emerging threat of the novel coronavirus was just beginning to come into focus, and as we all know, the world has changed significantly in the last few weeks. In this unprecedented time, pharma and bio companies are joined together in new ways to address this global pandemic. They are accelerating testing and detection, advancing health services, speeding the development of vaccines and treatments, and expanding manufacturing capabilities. Emergent is uniquely positioned in this environment. We're deploying decades of experience in vaccines and therapeutic development and manufacturing. We're also activating our well-established platform technologies and our development and manufacturing capabilities to address this new threat. In many cases, we're doing this in concert with longstanding partners, but we're also joining with new collaborators. Our goal is to create multiple innovative solutions to deliver on our commitments to our customers and our patients. This includes working with leading innovators in our fields. Our efforts are focused on 2 our platforms, contract development and manufacturing, and therapeutics.

First, we're taking our history of working hand-in-hand with the U.S. government to be able to develop and manufacture critical vaccines and therapeutics, and applying those skills to help our fellow innovators, such as J&J, Novavax, and Vaxart, to accelerate the development of their COVID-19 candidates and be in a position to manufacture them in significant quantities. Secondly, we're leveraging our long history of manufacturing our own therapeutics and vaccines to develop 2 COVID-19 product candidates, which we'll discuss in more detail later on the call.

Simply put, Emergent it built for this challenge. Given the developments over the past several weeks, we're going to depart from our typical earnings call format by having 2 of our business unit heads, Syed Husain, our CDMO BU head, and Dr. Laura Saward, head of our therapeutics business unit, to join and discuss the details of our COVID-19 initiatives that we've announced to date. Before Syed and Laura join us, I'll briefly touch on the impact of the current pandemic on Emergent as well as provide an update on our vaccine and devices business units.

As you'd expect, Emergent has a comprehensive, robust business continuity program in place to guide how we operate during any form of crisis. The priorities of this program are as follows: first, to ensure the health and wellbeing of our employees, and that our workplaces are safe for our on-site employees to carry out their critical work. Teams that can work remotely are doing so. We're providing those responsible for manufacturing and advancing our therapies with personal protective equipment, and safety protocols are in place. No Emergent employee is allowed in any of our workplaces without an appropriate face covering. And we've also delivered PPE to all of our employees' homes worldwide.

Secondly, to protect and ensure the strength and continuity of our supply chain, we've assessed all elements of the supply chain, including critical raw materials, service providers, safety stock, and contractor performance, just to name a few. We've taken measures to secure and protect the critical components of our supply chain.

And third, to deliver on our growing number of commitments. This includes the goals that we shared with all of you at our Investor Day 6 months ago as well as the additional, critically important initiatives related to COVID-19. The outbreak will undoubtedly have an impact on our operations in 2020. As one example, global travel has effectively come to a standstill, and demand for travel health medications has declined for the time being, putting pressure on our travel health business revenue. While we had strong sales and growth of the NARCAN product in Q1, we're seeing pressure on the retail pharmacy segment of the NARCAN business, as doctors' office visits have dropped, elective surgeries have been postponed, and retail pharmacy traffic has slowed. As a result, prescriptions across the industry are down. However, the public interest segment has remained strong, as states, community organizations, and first responders remain focused on the opioid crisis and being prepared for opioid overdose emergencies.

Overall, these near-term pressures on travel health and NARCAN businesses are being offset by the increased demand for our development and manufacturing capabilities in the CDMO business unit. As a result, we're maintaining our full guidance for 2020, and Rich will elaborate more on our full-year outlook in a few minutes.

Turning to our vaccines business unit, we've had a number of developments during the first quarter. First, our core medical countermeasure vaccines, which remain the majority of our vaccine-based revenue for 2020, are stable and on track. Second, as I mentioned a few moments ago, our growing travel health business has been impacted by the halt of global travel, but this event may serve as a catalyst to raise awareness of the opportunities to protect against vaccine-preventable, travel-related illnesses.

Finally, I'd like to note that we anticipate the initiation of our Phase III trial for CHIKV VLP, our chikungunya virus-like particle vaccine candidate, by the end of 2020. Of course, we continue to assess the potential impact of the pandemic on this as well as all of our other clinical programs.

Turning to the devices business unit, in addition to the business trends I discussed a few minutes ago, we remain focused on continued innovation and have submitted a data package to the FDA in support of extending the shelf life of NARCAN Nasal Spray from 24 to 36 months. At this time, we will expect a review of the application to take approximately 6 months.

Finally, we're aware of several states with upcoming co-prescription legislation as well as activities by local medical boards to update guidelines, and we remain optimistic that additional states may implement requirements for co-prescribing Naloxone with high-risk opioid prescriptions in 2020.

Before I turn the call over to Syed, Laura, and Rich, let me conclude with a few summary thoughts. First, Emergent is uniquely prepared to answer the call for medical solutions to the COVID pandemic. We have proven manufacturing capabilities in place and, in concert with the U.S. government, have built the ability to quickly advance early-stage candidates through development to commercial-scale manufacturing. We're working with leading innovators in support of their efforts to develop vaccines, while at the same time advancing 2 potential therapy of our own.

Second, there's no organization better prepared to take on this challenge than the 2,000-person-strong Emergent team. Their continued commitment to our patients and customers, to each other, and to our mission to protect and enhance lives is unwavering.

Third, we are attacking this problem from a position of strength. We entered 2020 with strong momentum, which continues today. Each of our business units is executing well against their strategic plans, and our diverse model of complementary capabilities and revenue streams is driving us forward, keeping us on track to achieve both our current and long-term goals. I'm proud of what we're achieving at Emergent every day, and I look forward to keeping you apprised of our continued progress.

With that, I'll turn the call over to Syed Husain and Dr. Laura Saward to speak to the significant contributions of their organizations in the fight against COVID-19. Syed?

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Syed T. Husain, Emergent BioSolutions Inc. - Senior VP & CDMO Business Unit Head [4]

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Thank you, Bob. I would also like to thank everyone for joining the call today. It is a great honor and privilege to provide an update with respect to our CDMO business. I would like to turn your attention to the CDMO overview slide in our presentation supplement. At our last Analyst and Investor Day, I shared the vision for the CDMO business to be the leader in molecule-to-market biologic services in 3 distinct areas in the development and manufacturing continuum, namely across development services, drug substance manufacturing, and drug product manufacturing.

Emergent's state-of-the-art infrastructure, proven track record, and expertise in development and manufacturing as well as commercialization of solutions that address public health threats, provide the foundation for a differentiated CDMO that allows us the ability to work with 5 technology platforms and deploy our network of 9 development and manufacturing sites. We leverage these strengths to pave the way for fellow innovators to progress their clinical candidates to benefit patients. We have been, and continue to be, built for this.

Through this foundational experience, Emergent has been able to rapidly respond and deploy capability, capacity, and expertise in response to the COVID-19 pandemic. On the next slide, let's review the recent CDMO COVID-19 partnerships that we have formed, first, Novavax. We secured an agreement to provide molecules and market services across development services, drug substance, and drug product manufacturing to support their clinical trial needs, which they anticipate to commence Phase I in May of 2020.

Next, Vaxart. We secured an agreement to provide development services and drug substance manufacturing to support their clinical trial needs, which they anticipate to commence Phase I in the second half of 2020.

And finally, Johnson & Johnson. We secured an agreement, valued at approximately $135 million, to provide drug substance manufacturing services and to reserve certain large-scale capacity anticipated to start manufacturing in 2021. A long-term commercial supply agreement is under negotiation.

Our 3 COVID-19 collaborations show the depth and breadth of our customizable CDMO offering, built on our fundamental understanding of an innovator's perspective and the following 4 pillars. First, customer centricity and our ability to serve the needs of small, mid, and large pharma and biotech as well as the needs of the U.S. government and NGOs, leveraging our unparalleled experience, track record, and state-of-the-art infrastructure.

Secondly, and as mentioned earlier, our best-in-class biologics technology platforms across mammalian, microbial, viral, plasma, and advanced therapies. Third, our rapid and flexible deployment of capability and capacity to support the entire drug development lifecycle, as evident with being able to support the clinical timelines of Novavax and Vaxart as well as large-scale manufacturing readiness, with a validated process for Johnson & Johnson, supported by our operational capacity of up to 300 million doses annually.

Fourth, the implementation of a scalable and harmonized organization, processes, and systems, resulting in the creation of operating leverage through a balanced portfolio of clinical and commercial projects. Being an active contributor to the fight against COVID-19 as a viable, patient-minded, services solution provider, we are proud of our differentiated CDMO business, especially in the context of serving our customers and the potential to impact the lives of patients affected by disease.

The CDMO business continues to be an integral part of our overall Emergent offering, and it expects to contribute accordingly, as we progress towards our enterprise goals laid out for 2024. The solid start has reiterated our confidence in this business and provides a potential opportunity to accelerate its growth as we progress towards our successful penetration of the pharma and biotech market through our established and expanding capability, capacities, and expertise.

That concludes my prepared comments, and I will now turn the call over to my colleague, Dr. Laura Saward. Laura?

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Laura Saward, Emergent BioSolutions Inc. - Senior VP & Therapeutics Business Unit Head [5]

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Thank you, Syed. As Bob outlined, we are focused on having a meaningful impact on the COVID outbreak and to reducing that overall burden on the healthcare systems by focusing on the rapid development of treatments. And to meet this need, and most important, to go fast and provide a treatment that can be used in patients, we look to leverage our proven manufacturing technologies and infrastructure for plasma-derived hyperimmune. So this foundational capability was outlined in our Analyst and Investor Day in November, is based on 4 decades of experience, and supports 6 existing FDA-licensed products.

So these hyperimmune platforms can be leveraged to expedite development of new COVID treatments, such as Emergent's human hyperimmune COVID-HIG, which has the aggressive target of starting clinical trials in patients by the end of the summer.

As you can see on the slides that we've prepared, giving a pictorial representation, hyperimmune treatments are made from the antibodies from individuals who have recovered from exposure to a pathogen, like the novel coronavirus that causes COVID-19. Individuals that have fully recovered from COVID can have protective antibodies, and these antibodies can be isolated from the blood in the plasma fractions. Now these specific antibodies combine to the virus to neutralize and clear it. To help patients recover more quickly and reduce the severity of the disease by binding at multiple parts of the virus, rather than a single isotope, the hyperimmune treatment is less impacted by strain variability or the emergence of resistance.

To produce a well and licensable treatment, hyperimmunes can be made using the COVID antibodies that are pooled from multiple donors, then purified and concentrated through a validated manufacturing process, with additional steps to add safety to the product. The final product, then, is a concentrated dose with consistent amounts of antibodies targeting COVID-19.

Our plasma-derived hyperimmune, COVID-HIG, is being developed as a potential treatment for severe, hospitalized patients and it may speed up recovery as well as the high-risk patients with COVID, and prevent progression to severe disease. So in addition, COVID-HIG will be evaluated as an important option to protect at-risk individuals, such as the healthcare workers who have been significantly impacted during this outbreak.

The promise of the plasma-derived treatments has been highlighted by many leading key opinion leaders, including recent comments by Dr. Peter Marks, Director of the Center for Biologics Evaluation and Research at the FDA. We are excited to continue our partnership with the U.S. government and leverage the established platforms and infrastructure that are part of the important work that we've done to advance hyperimmune treatments for life-threatening illnesses, such as anthrax, smallpox vaccine complications, and botulism, and now these provide a sustainable capability for responding to emerging infectious diseases such as COVID-19.

Emergent is committed to the goal of getting treatments to patients as quickly as possible in clinical trials, with the potential to reach more patients under emergency use authorization and the availability of a commercial supply. As announced at the beginning of April, BARDA awarded us $14.5 million to develop and manufacture Emergent's hyperimmune COVID-HIG as a potential treatment for COVID-19. The development of COVID-HIG treatments on this platform has been accelerated by using the existing GMP scale manufacturing and validated process and assays as well as the clinical experience and safety database from our other products licensed on this platform, to support the regulatory application to go directly into patients in a Phase II clinical trial.

Now similarly, our development of a treatment for sever hospitalized influenza, the FLU-IGIV program that we've discussed, is based on the same hyperimmune platform and supported the direct entry into Phase II clinical trials in that development program. In the instance of COVID-19, we have been able to use the existing FLU-IGIV infrastructure to quickly initiate work on the COVID-HIG program.

Another key government partner for our program is the National Institute of Allergy and Infectious Disease, part of the National Institute of Health. This partnership is important to expedite our COVID-HIG program, by joining their clinical trials and to accelerate the collection of convalescent plasma from their clinical network for the manufacture of the hyperimmune. We continue to expand our partnerships, working closely with several lead institutions to collect plasma from recovered patients and evaluate the treatment in clinical trials as quickly as possible.

Emergent initiated work on these programs as soon as the COVID outbreak was apparent, and we have quickly advanced this treatment candidate. The goal is to manufacture GMP products in the next quarter, as soon as plasma is available, and we anticipate providing treatment to patients in the clinical setting by the end of the summer. We are engaged with the FDA, and recently completed our pre-IND meeting, and will continue to drive towards regulatory approvals to make the treatments broadly available.

A second COVID solution is being developed, using our equine hyperimmune platform, COVID-EIG, and we have quickly advanced this program as well, by leveraging the infrastructure in place for our botulism antitoxin that is licensed by the FDA. We are using our well-established procedures and manufacturing technology to develop high-affinity COVID antibodies, with the goal of providing a rapidly scalable source of plasma to manufacture COVID-EIG hyperimmune and evaluate it as a potential treatment for sever hospitalized patients.

I'd like to take this opportunity just to acknowledge the dedicated and talented team that have been working tirelessly to move these programs ahead as quickly as possible. And this outbreak has been challenging for many people and their families, and our team has dedicated their best knowledge, energy, and commitment to address this threat, and really deserve our thanks.

That concludes my prepared comments, and I'll now turn the call over to our CFO, Rick Lindahl.

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Richard S. Lindahl, Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer [6]

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Thanks, Laura. Good afternoon, everyone, and thank you for joining the call. Before I begin, let me reiterate the sentiments expressed earlier by Bob. These are extraordinary times, and all of us at Emergent BioSolutions are pulling together to maintain our existing commitments, while also embracing our role as a key contributor to the global response to the public health threat posed by COVID-19.

To summarize our results from a financial perspective, our first quarter performance was solid overall, and consistent with the expectations we shared in February. The largest contributors to revenue were our NARCAN Nasal Spray and anthrax vaccines. We saw improved year-over-year profitability at the gross margin level as well as increased levels of adjusted EBITDA and adjusted net income, and we exited the quarter in a very solid liquidity position.

We also reaffirmed our full-year guidance, which considers a range of risks and opportunities to 2020 performance. As in any year, certain parts of our business are facing challenges, even while others are seeing new avenues of growth. Of course, the COVID-19 situation is unlike any in recent memory, and none of us knows exactly where this crisis is going, from either a public health or economic perspective. Nevertheless, we believe the overall demand for our solutions remains strong in this environment. We will continue monitoring the situation and evaluate appropriate actions as new facts emerge. But as we see the world today, we are feeling responsibly confident in our ability to sustain momentum in this uncertain environment.

With that, let's dive a little deeper into the numbers. Our results for the quarter reflect the diversity, durability, and expanding nature of our business model, centered on specialty products and services addressing global public health threats. Key highlights of the quarter include total revenues of $193 million, a 1% increase versus the prior year; adjusted EBITDA of $15 million, an 82% increase versus the prior year, and adjusted net income of $300,000, an improvement of $5.5 million versus the prior year.

Breaking down quarterly revenue a bit further, NARCAN Nasal Spray sales were $72 million, continuing the consistent performance since we acquired ADAPT Pharma in the fourth quarter of 2018. These results also reflect the impact of ongoing community access programs addressing the public interest market, where demand continues to be robust as well as the ongoing influence of awareness campaigns and co-prescription legislation, and their combined impact on the retail channel, sales from our anthrax vaccines of $52 million, in line with our manufacturing plan and delivery schedule to the strategic national stockpile. Consistent with our expectations, there were no sales of ACAM2000 in the quarter, as we continue to work on securing an option exercise to deliver additional doses to the SNS this year.

Other product sales were $24 million, reflecting a normal first quarter cadence of sales of countermeasure products, addressing a wide range of chemical, biological, emerging infectious disease, travel health, and emerging health crisis threats. And finally, CDMO services revenue up $22 million, a measurable increase driven by continued demand for our molecule-to-market services as well as improved marketing and sales efforts.

Looking beyond revenue, the quarterly results also include combined product and CDMO gross margin of 55%, reflecting the impact of mix, most notably, deliveries of anthrax vaccines and NARCAN Nasal Spray as well as improved contribution from CDMO services.

Net R&D expense was $20 million, or 12% of adjusted revenue, in line with our ongoing disciplined approach to discretionary development investments. SG&A spend of $70 million reflects ongoing investments in capabilities and capacities to support future growth. And in terms of bottom-line performance, adjusted EBITDA of $15 million and adjusted net income of $300,000 both reflect the normal operating outcomes of the first quarter, as we balance product mix, operational execution, and cost management with prudent investments and a sustained focus on profitable growth.

Finally, in terms of the balance sheet, we ended the first quarter in a solid liquidity position, as evidenced by cash of $182 million and an accounts receivable balance of $162 million, for a combined total of $344 million of current liquid assets. At the end of the first quarter, we also had $245 million of undrawn capacity under our revolving credit facility, further enhancing our ability to sustain business operations and make growth investments, even as the pandemic continues.

Additionally, outstanding debt decreased approximately $23 million versus year-end, largely due to a $20 million pay down on our revolving credit facility. And our net leverage declined modestly to the low 2x area.

Let me now turn to guidance. Taking into consideration the performance for the first quarter, our outlook for the remainder of the year across all of our business units, and the expectation that challenges in some parts of our business will be offset by expansion in other parts, we are reaffirming our forecast for the full year 2020. This forecast consists of the following items: total revenue of $1.175 billion to $1.275 billion, which reflects the following product-specific detail: NARCAN Nasal Spray sales of between $285 million and $315 million; anthrax vaccine sales of between $270 million and $300 million; and ACAM2000 sales of between $180 million and $200 million. Our profitability guidance includes adjusted net income of $160 million to $210 million, and adjusted EBITDA of $300 million to $360 million.

We are also sharing a full-year CDMO forecast in this quarter's report. Our recently announced collaboration agreements are providing solid tailwinds in our CDMO business. We now expect a greater revenue contribution from CDMO than previously thought, which mitigates the softness we are seeing in our travel health business. Each of these agreements contains multiple, distinct milestones and deliverables to be provided to the customer. Revenue related to these agreements will be recognized as these performance obligations are met over a multiyear period. As a result, we currently see 2020 CDMO full-year revenue in a range of $125 million to $145 million, representing 55% to 80% growth as compared to 2019.

In addition, in 2020, we continue to make progress on our strategic and financial objectives, including the expansion of the CDMO services businesses and its contribution to the overall business, as just described; improvement of full-year gross margin by 200 to 400 basis points, driven by an improved product mix and operating efficiency relative to 2019; investment in discretionary development projects, funded by the company, that further our pipeline of potential future drivers of incremental growth; and adherence to a prudent capital deployment philosophy focused on maintaining sufficient capital to both invest in the business as well as execute on attractive M&A opportunities, should they arise.

In terms of revenue mix, in 2020, we forecast that product sales will account for approximately 80% of total revenue, with the remainder split between CDMO services and contracts and grants revenue. And in terms of the cadence of revenue and earnings between the first half and second half, we also continue to anticipate that 2020 will follow a similar pattern to that seen in 2019, with approximately 40% of revenues delivered in the first half of the year.

Finally, we're providing guidance on second quarter total revenue of between $270 million and $300 million. This forecast reflects a number of elements. First, anticipated resumption of shipments of ACAM2000 to the SNS under an option exercise by HHS; second, continued shipments of anthrax vaccines to the SNS; third, ongoing contributions of our other products addressing governments' needs to address chemical and biological threats, offset by anticipated lower revenue from travel health vaccines; fourth, short-term COVID-related reductions to NARCAN Nasal Spray revenue, due to challenges being faced in both the retail and PIP channels; and finally, anticipated contribution of CDMO services revenue, resulting from recently announced agreements.

Let me conclude by stating the following: at the present time, we at Emergent have put in place a strong and resilient business, with the financial strength and contingency planning needed to maintain, and in some cases expand, our ability to deliver preparedness and response solutions. Our business is not immune to the effects of the pandemic, but the very nature of this crisis illustrates why Emergent's products and services are critical to addressing public health threats. Our current outlook, combined with what we have announced thus far this year, give tangible evidence of the durability and viability of our unique business model and the role that we play in protecting and enhancing the lives of many across the globe. We are here for the long haul and prepared to meet our commitments to all our stakeholders. That completes my prepared remarks.

And I'll now turn the call over to the operator to begin the Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brandon Folkes from Cantor Fitzgerald.

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

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Firstly, can you talk about the current capacity you have in your CDMO business, where you are in terms of the utilization currently, and how is that utilization in terms of your 2024 goals? And secondly, can you just elaborate a bit more on the visibility you have into delivery into the strategic national stockpile? Within the current situation we're in right now, are they accepting deliveries? Is it business as normal, or do you assume a change, maybe an opening up of the environment within your guidance for the strategic SNS delivery?

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

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Thanks, Brandon, for the question, and thanks for joining the call. I'll take the second question, and then I'm going to ask Syed to talk a little bit about the capacity that we have in our CDMO network.

So first of all, on the SNS deliveries, we don't see any change or interruption, if you will. It's pretty much business as usual in terms of scheduled shipments and our execution against outstanding and current contracts that we have for the various medical countermeasures that we have under contract. So we don't see, again, any interruption in that, hence our comfort, as Rich described, with both the overall revenue guidance that we provided as well as the categories of the different products.

So Syed, you want to weigh in on the CDMO capacity?

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Syed T. Husain, Emergent BioSolutions Inc. - Senior VP & CDMO Business Unit Head [4]

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Absolutely. Thank you for the question. So our capacities, capabilities, and expertise as a part of our CDMO business offering is predicated on being able to serve a broad and diversified customer and project base. We continue to evaluate, onboard, and execute multiple projects across our entire offering. We are actively in discussion on multiple additional opportunities across our service offering.

What's important to note is that the agreements that we've referenced within this call occupy appropriate portions of our capacity, based on their scope and timing. I referenced Novavax and Vaxart, our agreements to provide clinical supply material in 2020, and J&J is to enable large-scale manufacturing in 2021. Our drug substance site in Baltimore, as an example, is designed with 4 independent suites to support rapid clinical material as well as large-scale manufacturing. Additionally, we have a $50 million capital expansion at our Baltimore Camden drug product facility.

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Operator [5]

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Our next question comes from Jacob Hughes from Wells Fargo.

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Jacob William Hughes, Wells Fargo Securities, LLC, Research Division - Senior Analyst [6]

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Congrats on the partnership with J&J. I just had a question on the $135 million value. Is there -- how are you getting there, and is there any incremental details you can provide on that as well as the long-term commercial agreement? And then, secondly, just on NARCAN, I mean, I appreciate your comments on the short-term reductions in demand. Can you quantify that and then frame that within the puts and takes to your full-year guidance?

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

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Sure, Jacob. Thanks. So on the J&J agreement, the $135 million, I think Syed summarized it well in terms of the $135 million essentially is an enabling investment for us to get to large-scale readiness for their product and to have a validated manufacturing process in place to potentially manufacture a product for them. That second piece, as Syed described, will be part of a separate negotiation that's ongoing now in terms of the overall supply agreement for their product.

On the NARCAN Nasal Spray, I think, again, just as a reminder, even though we see a bit of softness on the retail side of things, that's being pretty much offset by continued strength on the public interest market, such that our expectations, again, are to continue in that range of $285 million to $315 million in terms of total revenue for the year.

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Richard S. Lindahl, Emergent BioSolutions Inc. - Executive VP, CFO & Treasurer [8]

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And Bob, I might just chip in that we do expect it's likely there will be a sequential decline in NARCAN for the second quarter, but it won't be material. But we do expect that to be made up, more than made up, by second-half performance.

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Operator [9]

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Our next question comes from Dana Flanders with Guggenheim.

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Dana Carver Flanders, Guggenheim Securities, LLC, Research Division - Senior Analyst [10]

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I'd just love to get your perspective on maybe just a bigger-picture question -- and I realize things are changing so rapidly, but just how do you think the COVID-19 pandemic will just shape kind of the government response and level of preparedness going forward, whether from a stockpiling or supply chain-related perspective? And maybe if you can comment on that just internationally as well, if you're seeing any changes on that front.

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [11]

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So on the broader question of the COVID-19 challenges and the government response, I mean, clearly, the work that we've been doing for now over 20 years I think is reinforcing of the fact that preparedness and response is critically important. I mean, the work that we've done for years and years and years, in partnership with the government, is critical. You hear a lot of talk about the importance today about public-private partnerships and all the good work that industry is doing, again, whether it's in the testing area or the medical supply area or PPE area. And now with many, many companies getting into the vaccine and therapeutic development space, I mean, I think that's all a testament to the fact that the U.S. government has been on this for quite some time. And we are obviously proud to be in a position of being able to help any way we can, whether it's directly with the therapeutic products that Laura went through, or through the good work that Syed and his team are doing on the CDMO front, to be able to lend our experience and capabilities and infrastructure to help other innovators and other partners do the work, I think that's great.

So I think there will be clearly some kind of postmortem done when this whole COVID-19 issue gets to the other side about what we can do differently, what we can do better as a country. But I think it will be all around and supportive of this public-private partnership around preparedness and response.

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Operator [12]

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Our next question comes from Keay Nakae from Chardan.

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Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [13]

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A question about your hyperimmune product: great that you're able to go directly into Phase II. Since you're working with NIAID, can we expect that this will be a randomized clinical study, given that the outcome you're hoping for is to be able to get EUA?

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [14]

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Laura, do you want to weigh in on the -- on some comments on what the clinical trial looks like?

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Laura Saward, Emergent BioSolutions Inc. - Senior VP & Therapeutics Business Unit Head [15]

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Sure, absolutely. So the clinical trials that are sort of at the protocol stage right now and about to get started are going to be random controlled clinical trials, and certainly, the data coming out of those are anticipated to support the applications for emergency use authorization.

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Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [16]

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Okay. And then, since you'll be treating hospitalized patients initially, what do you need to do to make the leap to be able to provide it to healthcare providers who are at greater risk?

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Laura Saward, Emergent BioSolutions Inc. - Senior VP & Therapeutics Business Unit Head [17]

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Sure, I'll answer that question, Bob, if that's fine.

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [18]

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Yes, please.

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Laura Saward, Emergent BioSolutions Inc. - Senior VP & Therapeutics Business Unit Head [19]

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Okay. So I think initially, we're very focused on trying to reduce that impact of the people already infected with COVID, and certainly looking at the sever hospitalized as being one of the greatest needs. But as well, the people who are early in their COVID infections that haven't yet been hospitalized, or early in their hospitalization but at high risk of the severe impact of the disease, so both of those, we feel, will really reduce the overall burden on the healthcare system. In parallel, though -- and we're in discussions with a number of clinical sites on the possibility of also setting up separate clinical trials to evaluate the ability to use the hyperimmune prophylactically to protect the healthcare workers, so it will be a separate stream of clinical effort. Certainly, looking at the numbers of how this outbreak has impacted the healthcare community, there does seem to be also a very high unmet need there.

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Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [20]

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Just a final question on this topic. Once you start the Phase II, how long do you think it will take to get an answer? That's it for me.

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Laura Saward, Emergent BioSolutions Inc. - Senior VP & Therapeutics Business Unit Head [21]

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At this time, I think our timelines are really dependent on getting the product into the clinic quickly, and then we'll look at the recruitment timelines in order to give a better estimate. Obviously, we're focused on trying to go as fast as possible.

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Operator [22]

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Jessica Fye.

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Jessica Macomber Fye, JP Morgan Chase & Co, Research Division - Analyst [23]

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Maybe just following up on the J&J agreement, can you quantify how much of the $135 million for the kind of first stage of the deal contributes to 2020 revenues versus 2021 or something thereafter?

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [24]

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Sure, Jess. Thanks for the question, thanks for joining. So I hope you can appreciate we're still sorting through the revenue recognition potential for the $135 million. But our best estimate today, Jess, is that around 25% of that $135 million contract value will be recognized in 2020.

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Jessica Macomber Fye, JP Morgan Chase & Co, Research Division - Analyst [25]

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Okay. Great. And then, as we think about the potential contribution from the subsequent commercial supply deal you're negotiating with J&J, is there any kind of framework you can provide to help us think about that revenue contribution going forward, obviously if the vaccine is successful?

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

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Yes, it really depends, Jess, on how much of a commitment our partner wants to make to manufacture doses. I think you've heard J&J say that they would like the ability to have a U.S.-based manufacturing capacity of up to 300 million doses annually for their product. So until we get really through the next phase of the agreement discussions with them, it's really inappropriate to speculate on what that might look like on the revenue side. And just to talk a little bit about the, perhaps the gross margin contribution on that, as we said before, our CDMO gross margin percentages are less than the product revenue, but in the aggregate, we expect the consolidated gross margin to still be at that 60% range. I think as we talked about last year and as Rich commented on his script today, we expect a 200 to 400 basis point gross margin improvement in 2020 versus 2019. I think even if we significantly expand that CDMO revenue in 2020, we would expect that gross margin range to fall in that same area.

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Jessica Macomber Fye, JP Morgan Chase & Co, Research Division - Analyst [27]

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Great. Maybe if I could just sneak one last one in, should we anticipate ACAM deliveries restarting in the second quarter, or could that skew into the back half of the year?

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

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Yes, our guidance that Rich described, both for the year as well as Q2, that $270 million to $300 million, assumes that we will resume shipments of ACAM2000 in Q2.

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Operator [29]

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Our next question is from Boris Peaker of Cowen.

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Boris Peaker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [30]

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Great, I have one on the hyperimmune plasma and the other one on NARCAN. Maybe we'll start with the hyperimmune. I'm just curious, how hard is it to actually get blood plasma from these prior-exposed COVID patients, and how much of it can you actually get in terms of generating quantities of a drug product?

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [31]

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Yes, Boris, thanks for the question, and thanks for joining. I think you put your finger on the bit of the long pole in the tent here, and I'll ask Laura to weigh in as well, but that is a key issue for us to resolve. And as Laura commented, we're working with our government partners as well as with our corporate partners that are experts in this space, to get access to plasma sufficient to manufacture an initial clinical trial batch of material so we can start the Phase II clinical trial in the summer. And then, obviously, we're working and planning for greater and broader access to that plasma to support the potential needs of the program going forward. But Laura, do you want to weigh in on additional color here?

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Laura Saward, Emergent BioSolutions Inc. - Senior VP & Therapeutics Business Unit Head [32]

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Sure. Maybe I can just add to your comments, Bob. I think you highlighted the right parts. I think the medical community very quickly organized around getting convalescent plasma collection going and looking at this as a treatment that can be used in the short term. I think the way we've approached the partnerships in this area is really, as we start to transition from those programs to the hyperimmune, the supply of that convalescent plasma will be key to getting further hyperimmune manufacturing going. And I think overall, the idea is that as we start with the treatment's success on the convalescent plasma side, the hyperimmunes provide a much more uniform and licensable way of coming at treatment for the disease.

So right now, there's a lot of efforts around convalescent plasma collection, and certainly, our partnerships with BARDA and NIAID put us very well positioned to partner in these areas, and we're continuing to expand a lot of our network on the clinical side.

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Boris Peaker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [33]

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I just want to get a sense, like do you guys have right now enough plasma to even make enough drug product for the clinical studies, or is that going to be a limiting factor in some way?

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [34]

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Yes, so we're accumulating plasma today, Boris, to support that initial manufacture of the clinical trial material, and don't see any risk in being able to meet the timeline for that clinical trial initiation that Laura laid out.

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Boris Peaker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [35]

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Great, and my last question is on NARCAN. You mentioned expanding shelf life from 24 to 36 months. I'm just curious, just want to understand, how is that going to benefit you? And just trying to understand, how much NARCAN is actually used? How much of it is disposed due to just expiration date? And just trying to think how extending the expiration date is of any benefit to you guys.

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [36]

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Sure, so as we have spoken since we acquired the NARCAN Nasal Spray product in October of 2018, our focus continues to be on increasing the access to and the availability as well as the affordability for naloxone products to the patients and customers who need it. So we see the shelf life extension from 24 to 36 months as being entirely consistent with making sure that -- and this will mostly impact retail patients and customers, Boris, not the public interest market, where there is strong and constant pull-through from a procurement perspective. So for us, this is another value-added element to our accessibility, availability, and affordability themes for the retail patients.

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Boris Peaker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [37]

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But in the public interest market, do -- I'm curious, what fraction of their NARCAN do they actually throw out because it expires within 2 years versus how much do they actually end up utilizing?

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

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Yes, so our best guess is that the vast majority of the public interest customers are reordering within 6 months. It could be upwards of 90% or greater of those customers are reordering within 6 months. So I think to some of your earlier questions on prior calls, there isn't much of a stockpiling exercise in that public health or public interest market. That product is pulled through and used pretty quickly.

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Operator [39]

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(Operator Instructions) Our next question comes from Lisa Springer of Singular Research.

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

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My question concerns the plasma-derived therapeutics. Is the funding you got, the $14.5 million of funding, is that only to support the HIG product, or will that also support the EIG product?

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [41]

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Yes, Lisa, thanks for joining the call. The BARDA funding for the human IG product is limited to that product. We have decided on our own to go ahead and invest in parallel on the equine program, again, as a way to get a couple shots on goal here and potentially bring yet another product to the market and to the patients who need it quickly.

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Lisa Springer, Singular Research, LLC - Research Analyst [42]

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Okay. And are they roughly at the same stage of development right now?

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [43]

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Yes, I'd say pretty much. Laura, you want to weigh in here?

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Laura Saward, Emergent BioSolutions Inc. - Senior VP & Therapeutics Business Unit Head [44]

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Yes, I would say they're tracking pretty much in parallel at this time. We're in the same stage as the plasma generation as we are human and equine, and we are targeting getting into the manufacturing phase in the summer.

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Lisa Springer, Singular Research, LLC - Research Analyst [45]

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Okay. And with the equine product, would that give you an advantage in terms of cost and ability to scale?

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Robert G. Kramer, Emergent BioSolutions Inc. - CEO, President & Executive Director [46]

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Laura, you want to comment on the benefits?

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Laura Saward, Emergent BioSolutions Inc. - Senior VP & Therapeutics Business Unit Head [47]

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Sure thing. As Bob said, we were sort of focused on taking our platforms and seeing what solutions we could pull forward. They obviously have different sort of benefits on each side. As you highlight, on the equine hyperimmune product, some of the advantages there is you've got sort of a rapidly scalable plasma supply, much more controllable from a cost perspective, so that certainly would be the advantages when we look at how this could impact the need for doses.

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Operator [48]

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Thank you. I'm showing no further questions at this time. I'd now like to turn the call back over to the company for closing remarks.

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Robert G. Burrows, Emergent BioSolutions Inc. - VP of IR [49]

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

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Operator [50]

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Ladies and gentlemen, this does conclude today's conference. You may all disconnect. Have a great day.