Earnings Call Transcript - EBS Q1 2014

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Q1 2014 Emergent BioSolutions Incorporated Earnings Conference Call. My name is Ben and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes. And now, I'd like to hand over to the company. Please proceed.

Robert Burrows, VP of IR

Thank you, Ben. Good afternoon everyone. My name is Robert Burrows, I'm Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss our financial results for Q1 2014. As is customary, our call today is open to all participants. The call is being recorded and is copyrighted by Emergent BioSolutions. Participating on the call with prepared comments will be Dan Abdun-Nabi, President and Chief Executive Officer; Adam Havey, Executive Vice President and President of our BioDefense Division; Barry Labinger, Executive Vice President and President of our Biosciences Division; and Bob Kramer, Executive Vice President and Chief Financial Officer. Following prepared comments, we will conduct a question-and-answer session. Before we begin, I am compelled to remind everyone that during today's call and our prepared comments, management may make projections and other forward-looking statements related to our business, future events, our prospects, or future performance. We may also make forward-looking statements during the Q&A session. These forward-looking statements reflect Emergent's current perspective on existing trends and information. Any such forward-looking statements are not guarantees of future performance and involve substantial risks and uncertainties. Actual results may differ materially from those projected in any forward-looking statements. These forward-looking statements reflect Emergent's current perspective on our existing trends and information. You are encouraged to review Emergent's filings with the SEC on forms 10-K, 10-Q, and 8-K for more information on the risks and uncertainties that could cause actual results to differ. We will also refer to certain non-GAAP financial measures that involve adjustments to GAAP reviews. In order to provide greater transparency regarding Emergent's operating performance, please refer to the table which can be found in today's press release regarding our use of non-GAAP financial measures and the reconciliation between our non-GAAP financial measures and GAAP financial measures. For the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on May 8, 2014. Since then, Emergent may have made announcements related to topics discussed during today's call. So again, please reference our most recent press releases and SEC filings. Emergent BioSolutions assumes no obligation to update the information in today's press release or as presented on this call except as may be required by applicable laws or regulations. And with that introduction, I would now like to turn the call over to Dan Abdun-Nabi, Emergent BioSolutions' President and CEO. Dan?

Dan Abdun-Nabi, President and CEO

Thank you, Bob. Good afternoon everyone and thank you for joining our call today. For my prepared comments, I will review the first quarter financial results and year-to-date operational accomplishments for 2014. I will then ask Adam Havey to provide an update on our BioDefense division, followed by Barry Labinger who will talk about our Biosciences division. Finally, Bob Kramer will finish with the discussion of our financial performance. For the first quarter of 2014, total revenue was $53.9 million as compared to $43.1 million in 2013, an increase of 25%. This was towards the upper end of the guidance we previously provided at $45 million to $55 million. Our net loss during the first quarter was $20.2 million compared to $8.1 million during the same period in 2013. Our adjusted net loss for the first quarter was $14.6 million as compared to $6.7 million in 2013. We are reaffirming our 2014 total revenue guidance of $415 million to $445 million and reaffirming our 2014 GAAP net income guidance of $30 million to $40 million. In addition, we are providing guidance for 2014 adjusted net income between $40 million to $50 million. Operationally during the first quarter we advanced both our BioDefense and Biosciences businesses. In our BioDefense division, we finalized with the FDA the path forward for the license share of Building 55 and commenced the manufacture of BioThrax consistency lots. We also secured orphan drug designation for BioThrax for PEP indication. Further, we expanded the approved sales use for RSDL to include pesticide related chemicals and advanced our AIG product towards the filing of the BLA this summer with expected approval early next year. Finally, we continued to advance our clinical programs under funding from BARDA. As a final point, following the announcement of our Cangene acquisition, we have seen increased interest from domestic and international customers in our expanded suite of BioThrax products. This is consistent with one of the strategic goals of the acquisition, and we're pleased by this early progress. Adam will discuss these developments and provide an update on business operations in greater detail in a moment. In our Biosciences division, we completed the Cangene acquisition and integration is progressing well. We also finished our portfolio assessment and have selected IXinity as a promising opportunity. IXinity, which came with the Cangene acquisition, is a recombinant Factor IX product for the treatment of hemophilia B. The FDA is presently reviewing the BLA for IXinity with a PDUFA date of July 29. If the regulatory process remains on track, we anticipate the product could be launched later this year. Barry will discuss this and other developments in greater details during his prepared remarks. So overall we had a productive start to the year, and as a reminder, our 2014 operational goals continue to be completing the integration of Cangene, advancing Building 55 comparability and non-clinical work to enable submission of our sBLA in the first half of 2015, securing partners for products based on our ADAPTIR platform technology, and completing an additional strategic acquisition that leverages our core competencies and aligns with our growth plan. That concludes my prepared comments, and I'll now turn it over to Adam Havey, who will provide an update on the BioDefense division. Adam?

Adam Havey, Executive Vice President and President of BioDefense Division

Thank you, Dan. In the first quarter of 2014 and so far this quarter, the BioDefense division has focused on our core BioThrax business, expanding RSDL sales, and integration of our three newest products, AIG, BAT, and VIG. These types of products represent our current BioDefense portfolio. Let me give you an update on this portfolio and our BioDefense business. Starting with BioThrax, this quarter we continued to deliver doses to the Strategic National Stockpile under our current five-year $1.25 billion contract with the CDC. In April, we announced the successful completion of our non-interference study, the results of which will be used to support a supplemental BLA filing for BioThrax used as a post-exposure total access for anthrax disease. We are targeting to submit this sBLA in the fourth quarter of this year. In April, we also received orphan drug designation from the FDA for the PEP indication for BioThrax. Orphan drug status has several advantages, including up to seven years of market exclusivity and waiving the sBLA regulatory filing fee. Next, I'd like to give you an update on our large-scale BioThrax manufacturing facility Building 55. In April, we announced that the FDA and Emergent had finalized our comparability protocols, enabling us to proceed with manufacturing consistency lots. The next step is to initiate a final non-clinical study in the third quarter of this year as we continue to work towards our first half 2013 sBLA filing. Moving on to RSDL, our product for the removal or neutralization of chemical agents, consistent with our earlier announced plan, we recently extended the field of use for this product to include many pesticide-related chemicals. This expansion was based on organophosphate studies conducted by our research scientists. Many of our domestic first responders and international customers see enhanced value in a product to protect against not only classic chemical warfare agents but also pesticide-related chemicals. As a result, we are excited about the prospect of increased demand for RSDL from existing and potential new customers. With the acquisition of Cangene, three additional BioDefense countermeasures were added to our portfolio. This includes VIG, BAT, and AIG, all of which met their first quarter sales targets. While all three of these products play a key role in the BioDefense division, most of the activities this past quarter have been with AIG. We continue to work actively towards filing our BLA for AIG this summer with expected approval in early 2015. These efforts are fully funded under our BARDA contract valued at up to $161 million. Approval will trigger our payment of approximately $7 million and will enhance our ability to drive international sales. Our newest AIG contract with BARDA provides $63 million for AIG product procurement. We have made progress in costing plasma for the manufacture of AIG and are on target for the first delivery to BARDA, which is scheduled to take place in the second quarter of this year in accordance with our first contractual milestone. Next, I'd like to provide an update on our U.S. government contracts and grants. For BioThrax, our recombinant rPA-based anthrax vaccine candidate, we received a positive in-process review and in April exercised the next option year of the contract, which has allowed us to continue the rPA vaccine development work. Our other contracts with BARDA and NIAID are ongoing and we continue to pursue new opportunities as they become available. Following our acquisition of RSDL and Cangene, we have seen an increased level of interest from international governments and other customers in our expanded portfolio of medical countermeasures. We are actively pursuing these opportunities and anticipate achieving measured progress over the course of the coming year. That concludes my prepared comments. And I'll now turn it over to Barry, who will provide you an update on the Biosciences division. Barry?

Barry Labinger, Executive Vice President and President of Biosciences Division

Thanks Adam. As you know, our acquisition of Cangene closed in the middle of the first quarter, and we have successfully completed the first phase of integration. First and foremost, we've maintained business continuity, with Cangene employees seamlessly transferring to Emergent systems and all of the business relationships required for the manufacture and sale of the marketed products transferring as necessary. In short, it's been business as usual with respect to production and revenue generation. In our first partial quarter, the business we acquired from Cangene performed as expected financially. Revenue was on plan for the commercial products and will finish CMO businesses. We are on track to deliver upon the financial targets we set when we announced the deal in December, specifically a 2014 pretax profit contribution of 4% to 6% on sales of at least $100 million for the 10 months post close. We made good progress toward achieving the initial synergies implied in those targets and we are on track for further expansion of operating margins in future years to at least 15% beginning in 2015. We have identified savings in SG&A, identified some operational efficiencies in manufacturing, and we have reduced spending on certain R&D programs. Let me comment a little bit more on Biosciences R&D. We've completed our preliminary assessment of the R&D portfolio across the combined Biosciences business. As a result, we have halted investment in certain programs in the Cangene pipeline, most notably the development of our recombinant human growth hormone candidate which we will seek to out-license. We've also revised the Otlertuzumab development program, putting on hold some planned Phase 2 studies, unless and until we enter into a partnership. We'll continue to follow patients in ongoing Otlertuzumab clinical trials and continue ongoing discussions with potential partners. We have also confirmed our plan to advance ES414, our ADAPTIR bispecific for metastatic prostate cancer into a Phase 1 trial by the end of this year. Finally, we've advanced our plans to prepare for the potential launch of IXinity, a proprietary recombinant coagulation Factor IX product candidate, which was acquired as a part of the Cangene acquisition and is under review currently by the FDA. Cangene licensed IXinity after the first test review of the BLA, which resulted in a complete response due to antibodies in clinical trial subjects. Cangene refined the manufacturing process to eliminate those antibodies and further responded to the complete response letter this past January. The FDA accepted the submission and assigned an action date of July 29. Factor IX is used for the control and prevention of bleeds in patients with hemophilia B, the second most common form of hemophilia. There are about 4,000 patients with hemophilia B in the U.S. and the U.S. market for Factor IX is about $400 million. The market has been dominated for many years by Benefix from Pfizer, which was the only recombinant Factor IX on the market. In recent weeks, Biogen Idec launched Alprolix, the first of the longer-acting Factor IX products, which can be dosed once every seven to ten days compared to twice weekly for the shorter-acting factors. We believe that long-acting Factor IX products represent an advance for certain patients and may even capture the majority of the market over time. However, significant segments of the market are good candidates to continue to receive short-acting Factor IX, to which they're very accustomed. For example, many adolescents and young adults with hemophilia B lead active lives and could benefit from the flexibility of maximizing the factor levels when they most needed, rather than sticking to a strict schedule of infrequent infusions of long-acting factor. For these reasons and others, the short-acting Factor IX products will continue to occupy a place in the treatment of hemophilia B. We believe that IXinity will compete effectively in this short-acting segment of the Factor IX market, with a clinical profile at least as favorable as its competitors, specifically Benefix and Rixubis, which was launched late last year by Baxter. So, we are planning for the potential launch of IXinity in the U.S. later this year, assuming we receive FDA approval. We recognize that this market is increasingly competitive. Given that most of the development costs have already been incurred, there is a near-term opportunity for revenue growth and earnings growth, even with modest market penetration. Importantly, this product fits nicely into the commercial infrastructure we acquired with the Cangene deal. So, our next steps will be to secure marketing authorization, generate more supplies, and complete the commercial plans for a potential launch later this year. We'll finalize those plans over the coming months and you'll hear more about this as we progress. With that, I'll turn it over to Bob Kramer, who will take you through our financials in more detail. Bob?

Robert Kramer, Chief Financial Officer

Thanks Barry and good afternoon everyone. I'd first like to make some general comments about our consolidated performance for the first quarter of 2014 compared to prior year and then turn to some highlights of our two operating divisions and wrap up with some details related to our 2014 guidance. For Q1 of 2014, total revenue was $53.9 million, up $10.8 million or 25% from prior year of $43.1 million. The increase is due to the revenue associated with the two acquisitions, RSDL and Cangene, partially offset by lower BioThrax sales. The total revenues for the period were as expected and are within the guidance range we provided. Our gross profit on product sales and contract manufacturing was $19.5 million, which resulted in a gross margin of 51%. This is lower than our historical margin of 70% to 80% on product revenue and primarily reflects the impact of three factors. First, the timing of BioThrax shipments, second, the timing of the annual maintenance shutdown of our Baltimore contract manufacturing facility during the month of March. And finally, the addition of RSDL and Cangene products to our sales mix, which operate at a lower gross margin. Variations in the timing of the BioThrax shipments and the annual maintenance shutdown of the CMO facility are normal course of business factors incorporated into our annual guidance. The gross margins associated with RSDL and the Cangene products and our CMO business, which are lower than those we have enjoyed with BioThrax, are now part of our ongoing business. Over time, as we continue to execute on our integration of the Cangene business and work to extract improvements and contribution from a substantially more diversified product and service revenue mix, we expect to improve the blended gross margin above what we experienced during the most recent period. Total R&D spend for the quarter was $30.3 million, flat versus the prior year, as a reduction in spending for Otlertuzumab was offset by increased investment in ES414 and the Factor IX program mentioned earlier. SG&A was higher year-over-year by $10 million, due primarily to $4.2 million in transaction and integration-related costs associated with the acquisition of Cangene and $4 million in SG&A costs incurred by the newly acquired Cangene and HPPD operations, as compared to last year. GAAP net loss was $20.2 million versus an $8.1 million loss in the same period of 2013. Taking into account approximately $8 million of non-recurring acquisition-related and financing costs and non-cash amortization charges, our adjusted net loss for the first quarter came in at $14.6 million compared to a $6.7 million loss in 2013. A table reconciling GAAP net income to adjusted net income is included in the press release today. Going forward, we will continue to report adjusted net income in addition to GAAP net income in order to more appropriately reflect the financial performance of our core business. As experienced in prior years, our first quarter financial results typically result in a loss due to delivery schedules for our products and the timing for the annual maintenance shutdown activities for our facilities. Historically, this pullback has been reversed in Q2 and Q3, and we expect the same trend to occur in 2014, supporting revenue and profit contribution growth throughout the remainder of 2014, putting us in good shape to achieve our near and longer term financial goals. Let me turn now to a couple of comments regarding our balance sheet. At quarter end, our balance sheet continued to reflect a very strong capital position highlighted by our combined cash and accounts receivable balance of $223 million. In January, we completed a $250 million convertible debt offering, the proceeds of which we used to finance the Cangene acquisition and repay $62 million of debt obligations previously on our books. Recurring costs associated with this financing are reflected in higher interest expenses, which will continue to serve us over the term of the convertible notes. At the division level, the BioDefense unit, whose portfolio now consists of five medical countermeasures addressing CBRN anthrax, generated revenues for the period of $47.5 million. This included better than expected sales of RSDL of $7.5 million, as well as initial sales from the Cangene BioDefense contracts, beginning February 21, 2014. Also contributing to the BioDefense revenue is approximately $15.4 million in grants and contracts. For the Biosciences division, Q1 2014 reflected $6.4 million of product sales as well as contract manufacturing and related service revenues, the first such revenues for this division following completion of the Cangene acquisition earlier this year. Turning to guidance, we're reaffirming our 2014 guidance for total revenues between $415 million and $445 million, which represents a year-over-year growth between 33% and 42%. We're also reaffirming our guidance for 2014 net income between $30 million and $40 million on a GAAP basis. In addition, and taking into account the expected impact of certain non-recurring, non-core costs, including transaction and integration costs, as well as non-cash amortization charges, we're introducing a forecast of 2014 adjusted net income of between $40 million and $50 million. And finally, for Q2, we're forecasting total revenues between $95 million and $110 million. That concludes my comments. I'll now turn the call over to the operator, so that we can begin the question-and-answer portion of the call.

Operator, Operator

Thank you very much. The first question we have comes from the line of Cory Kasimov from JPMorgan. Please proceed.

Unidentified Analyst, Analyst

Hi, this is actually Britney on for Cory today. Thank you for taking my questions. So, first, can you provide your thoughts on what government contracts would look like after Building 55 approval? And also, can you provide an update on your partnership discussions with TRU-016? Thank you.

Dan Abdun-Nabi, President and CEO

Yeah. Thanks Britney for joining the call and thank you for your question. So, in terms of the Building 55 contract, our expectation is that those discussions with the government will likely take place and start beginning later part of this year as we get closer to the point in time where we're preparing to submit our sBLA to the FDA. So, probably around 9 to 12 months away from beginning those discussions. So, too early to tell exactly how that's going to work. We have some hypotheses that we've developed in terms of how the government might want to coordinate Building 55 deliveries in conjunction with Building 12, but those are simply hypotheses that we're going to need to discuss with the government in order to better determine what their needs are and how that need can be coordinated with our facilities. And on the second question, let's go to Barry for that one.

Barry Labinger, Executive Vice President and President of Biosciences Division

Sure. So, we do continue to have discussions ongoing with potential partners for Otlertuzumab. We haven't landed a deal yet, as you know, either heard about it. We get a pretty consistent theme from those who look at this program, that Otlertuzumab is a novel anti-cancer agent with clear clinical proof of concept demonstrated based on our randomized Phase 2 trials and a very favorable safety profile, which bodes well for its ability to combine with other agents, which really is the future for coming up with sustained remissions in CLL. Where most partners have hesitated is around the uncertainty of the commercial opportunity as you may know that CLL competitive landscape is really undergoing significant change right now, with recent launches of new agents. Particularly the small molecule tyrosine kinase inhibitors that do offer high response rates, but require chronic treatment. So, we think there is a significant opportunity to provide these sustained remissions without ongoing treatment with drugs that cost $100,000 a year and have the usual safety or resistance risks. But, it's clearly an uncertainty, and I think it's been a source of real hesitation from potential partners to have clarity around where our drug will fit once the market evolves with the entrance of these new agents. So, a lot of people are on the sidelines, waiting to see more data, waiting to see how the market evolves, and in the meantime, we've managed our spending on this program. We do have some new data coming out with the existing trials as we follow patients over the longer term. And we'll continue discussions with partners who can see the opportunity as we do. In the meantime, we'll hold off on new trials.

Unidentified Analyst, Analyst

Got it. Thank you.

Eric Schmidt, Analyst

Thanks for taking my questions. Maybe for Bob first. If you could provide what that number was in Q1 for revenues associated with Cangene, especially therapeutics, so I may have missed it.

Robert Kramer, Chief Financial Officer

No, we didn't break that out, Eric. We didn't provide a specific number.

Eric Schmidt, Analyst

Let's talk something, you're going - that won't be something, maybe you could talk about what type of revenue breakout you're going to be providing on a forward-looking basis?

Robert Kramer, Chief Financial Officer

Yeah. So, we will provide BioThrax, RSDL, and some of the other products, but we're not going to continue to report on how Cangene looked prior to the acquisition. So, you'll see these product revenues, you'll see CMO revenue and you'll see other revenue.

Eric Schmidt, Analyst

So in terms of product revenue lead BioThrax, RSDL and then other line, is that right, other products?

Robert Kramer, Chief Financial Officer

That's correct.

Eric Schmidt, Analyst

Okay. In terms of the gross margins, they were a little bit lighter than I had expected in the quarter and just kind of wondering if you think we're going to see a rebound with it, better seasonality from BioThrax's, as soon as the subsequent quarters of 2014.

Robert Kramer, Chief Financial Officer

Yeah. I think yes, as I indicated in the remarks Eric, the first quarter is always below watermark for us and the effect that we had lower shipments in Q1 versus last year, certainly contributed to the overall lower margin, as well as the introduction of the RSDL and the Cangene products with lower margins. So, we expect that the overall blended margin will rebound in the balance of 2014.

Eric Schmidt, Analyst

That signal is kind of mid 60s.

Robert Kramer, Chief Financial Officer

We haven't been specific with a range, but I think, again, if you look at the mix, particularly the product mix and what we've experienced with BioThrax, with RSDL as well as the Cangene products, I think you should be able to come up with a blended gross margin rate, not too far from what you're looking at now.

Eric Schmidt, Analyst

Okay. Thanks. And -

Robert Kramer, Chief Financial Officer

Again, we have several quarters under our belt with particularly the Cangene sales. We don't want to bracket it as we have in the past with BioThrax, we have years and years of experience. So, as we gain more experience, we'll be able to bracket it for you, but not right now.

Eric Schmidt, Analyst

Okay. And last financial question on the R&D side. A lot of moving parts with the decreased expenditures on human growth hormone and Otlertuzumab and maybe increasing expenses on ES414. How do you look at the sequential quarterly progression in R&D relative to what you put up in first quarter?

Robert Kramer, Chief Financial Officer

Again, we don't give guidance on what the spend is going to be quarter-by-quarter for any element of the P&L. I think Barry talked to it in terms of the more disciplined approach to looking at the R&D programs. We've gone through, what we've now acquired with Cangene. Again we will be very careful about what we spend on a net basis. The spending actually went down in Q1 versus Q1 2013, when you factor in the BioD spending. But again, as we've indicated, our intention is to be more disciplined about R&D, looking for partnering opportunities and gradually trending that overall net R&D as a percent of revenue down to where our peers are.

Eric Schmidt, Analyst

Where do you think your peers are?

Robert Kramer, Chief Financial Officer

They're in that 15% to 20% range.

Eric Schmidt, Analyst

Okay. And then on the launch of IXinity, can you talk about what type of additions or costs you're going to need on the sales force side in order to make a go with that?

Dan Abdun-Nabi, President and CEO

Yes, Barry will address that.

Barry Labinger, Executive Vice President and President of Biosciences Division

Yeah, so one of the beauties of the hemophilia market is it's highly concentrated. There are about 4,000 patients in the U.S. that have this condition. There are a small number of hemophilia treatment centers, which is a subset of hospitals, and only about 200 of them drive a lot of the treatment decisions. So, it doesn't take a large sales force to cover this audience, looking at 15 to 20 people to cover the audience and a good portion of that will come from our existing sales infrastructure that we acquired in the Cangene acquisition. So, it's fairly modest. I mean no launch is free. But it's a fairly modest addition, both on the sales and the marketing side too, to get this product introduced.

Eric Schmidt, Analyst

Thank you.

Operator, Operator

Thank you very much for your questions. It appears there are no further questions in the queue. I would now like to turn the call back over to Bob Burrows for closing remarks.

Robert Burrows, VP of IR

Thank you, Ben. Ladies and gentlemen, that's all the time we had today. Thank you for your participation. Please note that today's call has been recorded and a replay will be available beginning later today. Additionally, there is an available webcast for today's call, an archived version of which will be available later today, accessible through the company's website. Thank you again and we look forward to speaking to all of you in the future. Goodbye.

Operator, Operator

Thank you, ladies and gentlemen, for joining today's conference. This concludes our presentation. You may now disconnect. Good day.