Emergent BioSolutions Inc. (NYSE:EBS) Q4 2023 Earnings Call Transcript
Emergent BioSolutions Inc. (NYSE:EBS) Q4 2023 Earnings Call Transcript March 6, 2024
Emergent BioSolutions Inc. misses on earnings expectations. Reported EPS is $-0.77 EPS, expectations were $-0.33. Emergent BioSolutions Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, everyone. I'm the operator for today's call. Thank you for joining today as Emergent discusses their Operation and Financial Results for the Fourth Quarter and Full Year. As is customary, today's call is open to all participants, and the call is being recorded and is copyrighted by Emergent BioSolutions. In addition to today's press release, there is a series of slides accompanying this webcast available to all webcast participants. Turning to Slide 3. During today's call, Emergent may make projections and other forward-looking statements related to their business, future events, their prospects or future performance. These forward-looking statements are based on their current intentions, beliefs and expectations regarding future events.
Any forward-looking statements speaks only as today of this conference call. And as expected by required by law, Emergent does not undertake to update any forward-looking statement to reflect new information, events or circumstances. Investors should consider this cautionary statement as well as risk factors identified in Emergent's periodic reports filed with the SEC when evaluating their forward-looking statements. During today's call, Emergent may also discuss 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 table found in today's press release. Turning to Slide 4. The agenda for today's call will include Joe Papa, President and Chief Executive Officer, who will comment on our focus and priorities; Paul Williams, SVP and Head of the Products Business, will provide comments on NARCAN Nasal Spray; and finally, Rich Lindahl, EVP and Chief Financial Officer, who will speak to the current state of the company and financials for fourth quarter and full year and guidance for full year 2024.
This will be followed by a Q&A. Finally, and for the benefit of those who may be listening to the replay of this webcast, this call was held and recorded on March 6, 2024. Since then, Emergent may have made announcements related to topics discussed during today's call. And with that, I would like to turn the call over to Rich Lindahl for opening remarks. Rich?
Rich Lindahl: Thank you, Jonathan. Good evening, everyone, and thank you for joining us tonight. Before we get into our results for the fourth quarter and full year, I'd like to take a moment to introduce our new President and Chief Executive Officer, Joe Papa, who joined us a few weeks ago. We are thrilled to have him on our team and look forward to benefiting from his over 35 years of experience in the healthcare and pharmaceutical industry, along with his proven record as a transformational leader. Let me turn it over to Joe to say a few words.
Joe Papa: Thank you, Rich, for the warm welcome. Good afternoon, everyone. I'm delighted to join the team and further Emergent's vision of protecting and enhancing the lives of patients. A lot of people have asked me what drew me to Emergent. That's easy. I've always been driven by the ability of pharma to save lives, and Emergent plays a unique and critical role in addressing public health crisis. As a leading biodefense contractor, we're addressing the most pressing and urgent threats, like the opioid epidemic, where data tells every six minutes an American dies from an opioid overdose, to anthrax, the number one bacterial infectious threat, to smallpox, the number one viral threat, to botulism, the most lethal biologic toxin, Ebola, hemorrhagic fever, and chemical threats like nerve gas that have implications to our service men and women.
Emergent has capabilities not many can match. Or in other words, we have a significant moat around our business. Also, the near-term challenges that Emergent has been facing, notably our debt, have impacted our ability to achieve our full potential. I'm eager to work with the team and tackle these challenges head on. Based on my three decades of experience in the industry and now knowing the determination of the Emergent Board and the leadership team, I believe we can successfully navigate through these issues that Emergent faces today. I'd like to bring your attention to Slide #6 of our presentation. While I am only two weeks in to my CEO role, we will move forward with a multiyear plan to stabilize, turn around and then transform our company.
Of course, a business transformation isn't going to happen overnight. The first phase, stabilizing Emergent, we expect will take us three to six months and we'll focus on continuing to build credibility with our key stakeholders, including employees, customers, government regulators, shareholders and debt holders. For example, that means looking to strengthen the engagement of all of our employees and focusing on our exciting mission to protect, enhance and help save lives. Also, it is clear we must derisk our balance sheet and reduce our debt now. In that regard, today, we announced that we've entered into a forbearance agreement through April 30, 2024, with our lenders. Rich will take us through this in more detail later on. The next phase, our turnaround, will begin in 2024 and will span into 2025.
We'll focus on key growth opportunities and investments that will drive profitable growth by improving our operating performance, reduce our working capital and may include product and/or asset divestitures. We expect these actions will be critical in our efforts to reduce our debt and to derisk our balance sheet. Our final phase, transformation, is planned for 2026 and beyond. We'll focus on strategically transforming Emergent to achieve durable and sustainable growth and profitability. I also want to note an important driver of Emergent's past and future success is quality and compliance. Quality and compliance are key value drives for Emergent and will remain a top priority. Our products are relied upon to save lives in a time of crisis.
Our patients and customers depend on us. We must continue to provide the highest quality products to ensure that customers, government agencies and patients have confidence in us as a trusted partner. In 2023, Emergent manufacturing facilities have been successfully inspected by five regulatory agencies from around the globe and five other inspectional bodies for a total of 18 inspections, including three by the FDA that resulted in either an NAI status or VAI status. This includes the successful closeout of the Baltimore Camden warning letter in just 14 months. That's very significant. Truly remarkable accomplishment by the Emergent team, the leadership team, their teams and the broader organization. To this end, over my first two weeks, I've had the pleasure of meeting many of the talented and dedicated employees that work at Emergent and will continue to visit more Emergent facilities in the coming weeks.
The commitment to the mission and values are so clear in each and every employee that I've met with. I look forward to visiting with more sites in the next few weeks and speaking directly with our team members. I'm confident that team insights will enhance how we deliver value to our customers, partners, patients and shareholders. I'm going to take that feedback from the team, setting clear goals that we can line around together as an organization and that's what's going to drive the results. It's a privilege to lead Emergent and chart a new chapter in this vital space whether it's increasing access to NARCAN Nasal Spray, to help combat the opioid epidemic or continue to deliver important medical countermeasures to customers around the world.
Emergent is providing critical products to address global health crisis in an increasingly dangerous world. I'm confident that these important treatments provide for a bright future and I look forward to advancing the company's progress, improving its financial position and driving value for shareholders. Given my two week tenure at the company, Rich will provide an overview of the quarter. Before that, I'll turn it over to Paul to discuss NARCAN Nasal Spray, our largest product, representative of the important work Emergent does for patients, families and communities and will no doubt be an important value driver to the company going forward. So, Paul, let me turn it to you.
Paul Williams: Thank you, Joe, and hello, everyone. Turning to Slide 8 of the presentation, I'd like to start by reviewing the state of the opioid crisis. The latest CDC data show 105,000 people sadly died from drug overdose over the latest 12-month period, of which nearly eight in 10 were opioid related. Today, opioid overdose is the leading cause of accidental death in the U.S. And with the recent rise in synthetic opioids, such as fentanyl, we see very little sign of abatement. These are unsettling and staggering statistics with so many families, loved ones, friends and communities behind these lives lost. Since adding NARCAN Nasal Spray to our portfolio in 2018, we continue to play a key role in responding to the devastating opioid crisis.
And this past year was filled with historic patient and customer-first milestones that broadened access and increased awareness of our lifesaving opioid overdose reversal treatment. 2023 began with a favorable FDA advisory committee's unanimous vote in support of our products OTC use and then FDA approval of that designation in March. We believe NARCAN Nasal Spray should be immediately accessible alongside AED kits at businesses and workplaces as well as across small businesses, in schools and on airplanes because an opioid overdose can happen to anyone, anywhere and at any time. Our OTC retail launch of NARCAN Nasal Spray in August has provided access and availability across 32,000 outlets, spanning mass, drug, grocery and online retailers and e-commerce sites.
In 2024, we will expand access further into businesses, workplaces and other channels as well as planning for the introduction of future line extensions. In the U.S., public interest channel continues to grow. Our one-of-a-kind and proprietary distribution platform, NARCAN Direct, supports our customers' needs and helps facilitate seamless ordering and distribution of the product to the many thousands of endpoints that are critical in dispensing NARCAN Nasal Spray into the hands of those who need it. This past year, our ability to meet increasing demand enabled us to distribute approximately 22 million doses or 11 million two-dose cartons in the U.S. and Canada to get NARCAN into the hands of those who need it the most and provide a chance to save a life.
And most recently, in January of this year, we announced the shelf life extension of NARCAN Nasal Spray from 36 months to 48 months in the United States. We believe this will increase adoption and access to the product. We've also made a tremendous impact with our Ready to Rescue campaign, which aims to break down the stigma associated with opioid overdose and educate the public, and in particular, college age adults. We continue to partner with public figures and notable influencers to expand awareness of the risks associated with opioid use and the importance of being paired with NARCAN Nasal Spray. In the coming quarters, we'll continue to execute on our plans to broaden access and availability of NARCAN Nasal Spray and meet the demand as we seek to help save more lives.
Now, I'd like to turn it over to Rich to discuss the fourth quarter performance in more detail.
Rich Lindahl: Thanks, Paul. I'll begin by expanding on the 8-K filing that Joe mentioned earlier in the call. Today, we announced that we have entered into a forbearance agreement with our lenders through April 30, while we continue our initiatives to increase operational performance, improve working capital and pursue certain product or asset sales. As Joe highlighted, the transformation of the company will be a multiyear process with the near term being heavily focused on strengthening our credit profile and capital structure. All decisions will be made through the lens of improving overall performance and enhancing enterprise value. While the details of the sale processes are confidential, we seek to generate additional cash proceeds that can be used to further reduce our debt and enable credit improvement as we transform the business.
The forbearance agreement provides further evidence of the constructive relationship we continue to have with our lenders, and we look forward to providing further updates on our capital structure in the future. During the fourth quarter, Emergent made great progress improving the fundamentals of our business and advancing our core products. We continue to reduce costs and right-size operations in order to de-risk the business and strengthen our financial position. These actions reflect our sharpened strategic focus and the ongoing transformation of our business as we concentrate on enhancing revenue, improving operational efficiencies and reducing debt. Throughout 2023, we maintained a very positive relationship with the U.S. Government and other key medical countermeasure customers.
As a result, we achieved significant contract awards that reinforce the value of our products as an essential part of the government's preparedness planning, which continues to evolve. Having said that, as I'll expand on in a few minutes, our 2024 forecast has more variability than in years past. In October, we appointed two pharmaceutical industry veterans to the Board, Neal Fowler and Don DeGolyer, who bring more than 70 years of combined biopharmaceutical industry and sales experience. We believe their expertise will be valuable as we continue to grow NARCAN sales, advance our other products and partner with governments to prepare for public health threats. Let me walk through some of the progress we're making across our core products as highlighted on Slide 10.
As you just heard from Paul, after many years of research and development and in partnership with the FDA, we officially launched NARCAN Nasal Spray as an over-the-counter opioid overdose reversal treatment in August last year. This is a monumental milestone for our company that expanded access to naloxone. Throughout the year, we've been able to meet the ever increasing demand for NARCAN, resulting in expanded access and broader awareness of NARCAN and underpinned by strong support from federal and state programs. As we look ahead, we expect NARCAN Nasal Spray to remain a key contributor to our growth in the near term. We also secured several important contract wins last year across our other core products, including a new $379.6 million U.S. Department of Defense contract for RSDL, a $75 million option to extend Emergent's existing contract for CYFENDUS, and a 10-year contract with BARDA valued at $704 million for the development and manufacturing scale up and procurement of Ebanga, our licensed treatment for Ebola virus.
And we've already announced a contract award for 2024 with the U.S. Department of Defense valued at $235.8 million to supply BioThrax, a form of the anthrax vaccine. This new contract award is a testament to the importance of our medical countermeasure portfolio to the U.S. Government's preparedness and response plans. Finally, we achieved many important R&D milestones this year. In July 2023, we received U.S. FDA approval of CYFENDUS, a two-dose anthrax vaccine for post-exposure prophylactic use. We received Health Canada regulatory approvals for our ACAM2000 vaccine and TEMBEXA drug that each address smallpox. We also submitted a supplemental BLA to the FDA that would extend ACAM2000's indication to include immunization against the Mpox virus.
We expect to hear back from the FDA by the third quarter of this year. These contracts and development advances reflect the U.S. Government's need to maintain a high level of preparedness against a wide range of potential threats that frankly are increasing as events unfold worldwide. Emergent is uniquely positioned to deliver these products in an efficient and cost-effective manner, and we are committed to supporting the U.S. Government's efforts to address emerging infectious diseases and strengthen future preparedness. In 2023, we also completed several initiatives to improve our credit profile and derisk our capital structure. As you know, we divested our travel health business, generating up to $380 million of proceeds, extended the maturity of our secured credit facility to May 2025, implemented actions to save over $160 million of annualized operating expense and announced a strategic shift to focus on our products business.
Turning to our results. We had solid revenue in the quarter, which led to full year 2023 revenue in line with the midpoint of our guidance range provided on November 8. Adjusted EBITDA was impacted by revenue timing and one-time write offs, which I'll provide further detail on shortly. As indicated on Slide 11, highlights from the fourth quarter include: total revenues of $277 million, driven by NARCAN and CYFENDUS; total segment adjusted gross margin of $86 million; adjusted EBITDA in the quarter of $3.4 million; and adjusted net loss of negative $40 million. Diving deeper into the quarterly revenues. Important items on Slide 12 include: Anthrax MCM sales of $112 million, driven by CYFENDUS deliveries to the U.S. Government's Strategic National Stockpile, including initial shipments under the $75 million contract option provided by BARDA that we announced on November 28.
NARCAN sales of $111 million demonstrating the continued strength and durability of this product driven by consistent demand from the U.S. public interest channel and the growing market in Canada. Revenue in the quarter also includes contributions from the launch of OTC NARCAN into retail channels. Smallpox MCM sales of $12 million driven by VIGIV. Other product sales of $15 million primarily related to RSDL and BAT. And total bioservices revenues $21 million reflecting our continued transition to focus on existing customers. Turning to operating expenses on Slide 13. Cost of Commercial Product sales in the quarter was $50 million, driven by strong sales of NARCAN. Cost of MCM Product sales in the quarter was $97 million, driven primarily by CYFENDUS sales volume and other medical countermeasure products as well as an increase to inventory write-offs.
Cost of bioservices of $38 million reflecting actions taken to improve profitability. R&D expense of $29 million which includes one-time costs associated with project terminations. And SG&A spend of $90 million including expenses supporting key NARCAN initiatives, reduced by expenses -- offset by reduced expenses related to restructuring initiatives. With that, let's move to Slide 14 and review segment performance during the quarter. Note that beginning with the fourth quarter of 2023, we now report our results in three segments: Commercial Products, MCM Products and Services. This change will provide increased transparency for investors as we move forward. In the Commercial segment, revenues were $111 million, comprised entirely of NARCAN, and segment adjusted gross margin was $61 million or 55%.
In the MCM segment, revenues were $138 million, driven by anthrax, RSDL and BAT. The segment adjusted gross margin was $42 million or 30%. As for the Services segment, revenues were $21 million and segment adjusted gross margin was negative $17 million. Shifting to Slide 15, I'll highlight our 2023 full year performance. Full year revenue was $1.05 billion, in line with the midpoint of our previously provided guidance. Full year total segment adjusted gross margin was $336 million or 33% at the low end of our guidance range. Full year adjusted EBITDA was negative $22 million, also at the low end of our range. And adjusted net loss was negative $319 million. Transitioning to Slide 16, I'll highlight the 2023 full year costs. Cost of Commercial Products was $210 million, driven by the continued strength of NARCAN Nasal Spray in the existing channels, as well as the launch of NARCAN Nasal Spray over the counter in late August 2023.
Cost of MCM Products was $306 million, which was influenced by sales volume, product mix and unabsorbed manufacturing overhead costs. Cost of bioservices was $190 million, heavily influenced by our cost structure in the first half of 2023, which was a primary focus of the cost reduction actions we announced on August 8. R&D expense was $97 million including the chikungunya cost prior to the divestiture of the Travel Health business. SG&A was $368 million, which included additional marketing expenses related to NARCAN, legal fees and restructuring expenses. Moving to Slide 17. Commercial Products segment revenue for the full year was $497 million, up roughly $100 million versus the prior year, with a segment adjusted gross margin of 58%, in line with the prior year and reflecting pricing reductions we took midyear on NARCAN Nasal Spray to improve access and affordability.
Full year MCM product segment revenue was $447 million and segment adjusted gross margin was 34%. The margin for the MCM business was influenced by sales volume, product mix, cost absorption and inventory write offs. And the Services segment had revenue of $79 million and segment adjusted gross margin of negative $103 million, influenced by sales volume and costs in the first half of 2023 prior to our restructuring efforts announced on August 8. I'll now turn to Slide 18 and touch on select balance sheet and cash flow highlights. We ended 2023 with $112 million in cash and $192 million of total liquidity, including availability under our revolving credit facility. The increase in cash and liquidity versus the prior quarter was due to sales timing and collection of accounts receivable.
Operating cash flow in the full year was negative, but in the second half of 2023, it was positive $92 million. Capital expenditures were $52 million in 2023. And as of December 31, our net debt position was $757 million. Turning to 2024 guidance, please see Slide 19. As announced in our press release this evening, we are providing guidance for full year 2024 as follows: Total revenues of $900 million to $1.1 billion. Commercial Product sales of $460 million to $500 million, as we expect continued strong demand for NARCAN in the U.S. public interest channel in Canada combined with further growth with OTC NARCAN in the retail channel. We're forecasting MCM product sales of $340 million to $490 million. As we previously noted, now that CYFENDUS is a fully licensed, the primary procurement will transition from BARDA to the Strategic National Stockpile.
We recognize that the U.S. Government is balancing multiple threat preparedness needs with the level of funding provided by Congress and that this fact could impact the magnitude and timing of, in particular, anthrax procurements in the near term, even as this potential threat remains a top strategic priority. As a result, we've provided a wide range of potential outcomes for the MCM segment. We continue to engage with our U.S. Government stakeholders to improve the procurement visibility that is needed to support this critical capability for the benefit of all United States citizen. As a final note on the MCM Products, we continue to see stable, consistent sales to the U.S. Government under the long-term contracts we have in place for our plasma and chemical decontamination products, VIGIV, BAT and RSDL.
We're forecasting Services segment revenue of $70 million to $80 million, reflecting our commitment to serving our existing customers. Shifting to profitability metrics. We're forecasting adjusted EBITDA of $50 million to $100 million, reflecting the impact of our 2023 cost reduction actions, our capacity utilization profile and the range of revenue expectations across our segments. For the full year of 2024, we're forecasting total segment adjusted gross margin of 40% to 45%, an increase over the 2023 level, primarily reflecting the full year impact of our profitability improvement efforts. Finally, we're forecasting Q1 revenue in a range of $200 million to $250 million. That's all for the financial update. I'll now turn the call back over to Joe for some final thoughts.
Joe Papa: Thank you, Rich. Before we go to questions, let's take a quick look at Slide #20. I just want to reinforce the human impact of our products on public health threats across the world. As I stated at the top of the call, every six minutes in this country, we lose a life to opioid overdose. So, in the past half hour, approximately five lives were taken. Let me take it one step further. In one 24-hour period, we lose approximately 240 individuals. It's like losing a 737 airplane every day. Think about that for just a second. We are working hard to change this statistic. I cannot stress enough that the work we do in support of our mission to protect and enhance lives and ultimately help save lives is what inspires us all.
Thank you again for joining us this afternoon. As you can see, the Emergent team has made notable progress this year, and I look forward to building on this momentum as we execute on our transformation and the important catalysts underway. I believe we have an incredible opportunity to play a key role in public health. I'm excited to work with our team, to meet with the key stakeholders across the organization and accelerate Emergent's return to growth. I know we are well positioned for success, driven by our focus on protecting communities and addressing the evolving landscape of the global health challenges. I look forward to speaking with all of you in the coming months to provide additional detail on perspectives and our near-term priorities and goals.
Operator, let's now turn it over to you, and open up the floor for Q&A.
Operator: Certainly. [Operator Instructions] Our first question comes from the line of Jessica Fye from JPMorgan. Your question please.
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