Earnings Call Transcript - EBS Q1 2018

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions 1Q 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to the company, Emergent BioSolutions. You may begin.

Bob Burrows, VP, Investor Relations

Thank you, and good afternoon, everyone. My name is Bob Burrows, Vice President of Investor Relations for Emergent. Thank you for joining us today, as we discuss the operational and financial results for the first quarter of 2018. As is customary, today's call is open to all participants, and in addition, the call is being recorded and is copyrighted by Emergent BioSolutions. Participating on the call with prepared comments will be Dan Abdun-Nabi, Chief Executive Officer; Bob Kramer, President and Chief Operating Officer; and Rich Lindahl, our newly appointed Chief Financial Officer. Other members of the senior team are present and available during the Q&A that will follow our prepared comments. Before beginning, I'm compelled to remind everyone that during today's call, management may make projections and other forward-looking statements related to our business, future events, our prospects, or future performance. These forward-looking statements are based on our current intentions, beliefs, and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. Investors are therefore cautioned not to place undue reliance on any forward-looking statement. Any forward-looking statements speak only as of the date of this press release, 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 risk factors identified in our periodic reports filed with the SEC when evaluating our forward-looking statements. During our prepared comments as well as during the Q&A session, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures, in order to provide greater transparency regarding Emergent's operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income and EBITDA, and the reconciliations between our GAAP financial measures and these non-GAAP financial measures. For the benefit of those who may be listening to a replay of the webcast, this call was held and recorded on May 3, 2018. Since then, Emergent may have made announcements related to topics discussed during today's call. You're once again encouraged to refer to our most recent press releases and SEC filings, all of which may be found on the Investors home page of our website. And with that introduction, I would now like to turn the call over to Dan Abdun-Nabi, Emergent BioSolutions' CEO. Dan?

Dan Abdun Nabi, CEO

Well, thank you Bob and good afternoon everyone, and thank you for joining our call today. Let me begin by discussing recent executive management changes made to further enhance execution of our growth strategy. I am extremely pleased that Bob Kramer has been promoted to the newly created position of President and Chief Operating Officer. Bob has been a strong and dedicated leader of Emergent for many years, with extensive knowledge of all aspects of the business that make him uniquely qualified to oversee our global operations. I am also delighted to welcome Rich Lindahl to Emergent as our Chief Financial Officer. Rich brings a wealth of financial leadership experience in large growth-oriented public companies, including CEB, Spring Nextel Corporation, Nextel Communications, and MCI Communications. We’re pleased to have Rich on the team and present on this call, his first earnings call with Emergent. During our call today, I'll focus my remarks on our view of recent trends in the public health threat market and our growth strategy to address those threats and serve that market. Bob will discuss our progress in our global operations and finally, Rich will provide financial details about our first quarter performance and financial guidance. Now let’s turn to the topic at hand: Global public health threats and Emergent’s strategy to address those threats. Recently, we have seen, with horrific consequences, the use of chemical weapons and an increase in the CBRNE threat posed by both state and non-state actors, along with the increased threat posed by emerging infectious diseases. In the face of these experiences, across the globe we are witnessing an enhanced level of concern and focus on the importance of medical countermeasures to address these threats. Domestically we’re seeing U.S. government initiatives that focus on preparedness and the need to develop and stockpile medical countermeasures to protect the nation. Most recently, the Federal Government stressed the importance of protecting the nation from these public health threats in a very meaningful way, specifically through an increase in funding for the medical countermeasure enterprise. The 2018 omnibus spending bill included an increase of over $600 million across all accounts in the enterprise, including increased funding for the Strategic National Stockpile, for the Bioshield Special Reserve Fund or BARDA, and for the National Institute of Allergy and Infectious Diseases. Moreover, the President's FY 2019 budget request continues to place a priority on funding for and harmonization of the MCM enterprise, including by elevating the procurement and management responsibilities of the SNS to the Assistant Secretary of preparedness and response. Importantly, over the past few months, both houses of Congress have been working to reauthorize the Pandemic All-Hazards and Preparedness Act, which could include five-year funding of $2.6 billion to advance the country’s preparedness and response capability, including the development of stockpiling critically needed medical countermeasures. We expect this legislation to be completed later this year. Internationally, we are seeing an increasing awareness of public health threats and a growing market that includes the need to acquire and stockpile critical medical countermeasures to protect civilian and military populations. In response to these risks, we’ve seen a series of European Union directives focused on building a stronger EU health security framework. The European Commission decision on serious cross-border threats to health provided a basis to improve preparedness and strengthen capacity for a coordinated response to health emergencies. That directive was followed by the EU joint procurement mechanism, which allows EU member states to come together to procure and stockpile medical countermeasures. In 2017, a European Commission directive on combating terrorism was adopted mandating that EU member states procure and stockpile medical countermeasures, specifically to address CBRNE threats to protect their civilian populations. In addition to 2017, the European Commission published an action plan to enhance preparedness against CBRNE security risks. We are witnessing a similar level of awareness and concern in other regions of the globe, including the Middle East and Asia. Our 2020 growth plan is focused on addressing this growing global public health threat market, and diversification is a key component of our strategy. To that end, earlier this year, we announced the completion of the mutual recognition procedure for market authorization of BioThrax in five concerned member states within the EU. We expect national licenses will be issued shortly by these countries, which include Italy, the Netherlands, Poland, the UK, and France. Based on this regulatory approval, we look forward to further expanding our impact within the EU, and we now count more than 40 countries worldwide as customers, and that list has been growing. Turning to our plan for this year, we remain on track to achieve our 2018 goals, including advancing new threats to enable an emergency EUA authorization filing with the FDA and establishing a multi-year follow-on contract for the continued supply of ACAM2000 to the SNS, which we expect to be completed by year-end. Finally, we continue to advance our product pipeline and have made real and tangible progress in the first quarter. On the M&A front, we have set a goal for this year of executing an acquisition that will generate revenue and be accretive within 12 months of closing. We are focusing on product and business acquisition in the public health threats market, including CBRNE threats and emerging infectious diseases, especially in opportunities with potential for dual market application. While the timing of any M&A transaction is always uncertain, we believe we can achieve this goal, given our pipeline of target opportunities. So in summary, global public health threats are growing. While that is a development that concerns all of us, we believe that Emergent is uniquely positioned to enable the U.S. and allied governments to address many of these threats based on our growing portfolio of medical countermeasures, decades of experience and expertise in government partnering and contracting, and our broad and deep manufacturing capabilities. I look forward to updating you on our progress, as we work towards our longer-term goals and the fulfillment of our mission to protect and enhance life. That concludes my prepared remarks. I will now turn the call over to Bob Kramer for details on our operational performance. Bob?

Bob Kramer, President and COO

Thank you, Dan. And good afternoon to everyone. Thank you for joining the call. For my comments today, I am going to focus on the current state of our operations, with an emphasis on our business unit structure that we adopted in April of 2017. Just as a reminder, the business unit structure encompasses the following four focus areas. First, Vaccines and Anti-Infectives, currently run on an interim basis by Adam Havey. Next is our Antibiotic Therapeutic Business unit run by Dr. Laura Saward. Then is the Device Business Unit run by Doug White. And finally, our contract development and manufacturing unit or CDMO Services, run by Sean Kirk. Importantly, these business units are all supported by enterprise-wide functions including sales and marketing, human resources, finance, legal, regulatory, quality, and others. We continue to make steady progress in aligning our operations across these lines of business and expect to continue to realize the benefits of the structure. With that overview, let me highlight some specific accomplishments in each business unit during the first quarter. Let’s start with vaccines and anti-infectives. As a reminder, the vaccines and anti-infectives business unit consists of bio threats and ACAM2000, as well as a portfolio of development programs, notably NuThrax, our Zika and flu vaccines and the anti-infective candidates. Last year we completed the acquisition of the ACAM2000 business from Sanofi, which brought the licensed smallpox vaccine, as well as live viral manufacturing and fill/finish facilities, and a contract with CDC for the delivery of ACAM2000 to the Strategic National Stockpile. Our integration of the acquired operations in Canton, Massachusetts, and Rock Hill, Maryland is essentially complete, and we can now turn our attention to planning for the anticipated new ACAM2000 contract, which we expect to have in place by the end of this year to support the ongoing supply of this critically needed medical countermeasure to the U.S. government's SNS. Similarly, we have ramped up our discussions with the global customers who, like the U.S. government, have previously procured smallpox vaccine as part of a stockpiling strategy to protect their military and civilian populations against the threat of smallpox. For our next-generation Anthrax program, NuThrax, we continue to progress toward EUA submission by the end of this year. If successful, this will enable BARDA to procure NuThrax for delivery to the SNS in 2019, under our existing development and procurement contract that will add up to $1.5 billion. First quarter activity centered on the continued manufacturing of engineering runs, which will support the initiation of PPQ lots required for submission. As Dan mentioned, we further expanded BioThrax licensure with the successful completion of the mutual recognition procedure for market authorization of BioThrax in five concerned member states within the EU. These include Italy, the Netherlands, Poland, the UK, and France. We achieved this on the basis of our existing market authorization of BioThrax in Germany, which was granted by the Paul-Ehrlich-Institut. We look to leverage this success across other EU countries, as we execute on our longer-term goal of generating product sales from markets outside the U.S. in excess of 10% of our total revenue by the year 2020. Next, we initiated, in partnership with Valneva, a Phase 1 clinical trial in the United States to evaluate the safety and immunogenicity of DLA1601, our vaccine candidates against the Zika virus. This candidate leverages Valneva's validated expression platform, and we expect data from this trial in late 2018 or early 2019. Finally, the Defense Threat Reduction Agency or DTRA exercised an option under our existing contract to fund the development of an oral therapeutic 4 million doses using our GCO-72 antibiotic series of molecules. Next let’s turn to the antibiotic therapeutic business unit. As a reminder, the antibiotic therapeutics business unit consists of Anthrasil, BAT BIGIV, and Raxibacumab, as well as a portfolio of development programs, notably the flu and Zika hyper immune candidates. Last year, we completed the acquisition of Raxibacumab from GSK along with a multi-year contract with BARDA to supply their product to the SNS through November of 2019. GSK is acting as our CMO for this product over the next two years. During the first quarter, we continued to execute on our plan to tech-transfer the manufacturing of this product to our Bayview CIADM site. During the first quarter, we initiated a Phase 2 study to evaluate the safety, pharmacokinetics, and clinical benefit of flu IGIV, our anti-influenza immune globulin being developed as an intravenous treatment for serious illness caused by influenza A infection in hospitalized patients and developed on our hyper immune platform. The clinical study was successfully initiated with the first patient dosed in 2018 and will remain open to continue enrollment in a second influenza season. The study is expected to be completed in 2019. Lastly, we were awarded a one-year $26 million contract with the CDC for the continuing supply of DIGIV into the Strategic National Stockpile. DIGIV, as you know, is indicated for the treatment of complications due to smallpox vaccination and is a critical component of the U.S. government's smallpox preparedness plan. Next, let’s look at the device business unit. As a reminder, the devices business unit consists of RSDL and TROBIGARD, as well as a portfolio of development programs, notably the high-end device and various other generation auto-injector constructs. We continue to deliver both RSDL and TROBIGARD against existing contracts and are actively working on procurement of these products by new government customers. During the quarter, we continued to make incremental progress on our salient device being developed with funding from BARDA and our dual-chamber or D4 auto-injector, being developed with funding from DoD. Lastly is the contract development and manufacturing business unit or CDMO. Let me update you on the general condition of this business. We advanced our pilot plant expansion at the CIADM facility, the debut site. This is a key component of our partnership through joint investment with the U.S. government in establishing core capabilities at the site and support of pandemic and emerging infectious disease response needs of our government customer. We also continue to make steady progress on our Camden fill/finish expansion plans. This effort will enable our continued success and growth through the addition of capacity and capabilities along with the growing needs of current and potential commercial customers. The business unit continues to successfully support both Emergent internal product supply requirements as well as those of our external clients. In summary, our operations are running smoothly and are well positioned to deliver on our financial and operational goals for this year. That concludes my prepared remarks. Now I'll turn it over to my colleague Rich Lindahl who will take you through the numbers. Rich?

Richard Lindahl, CFO

Thank you Bob. And good afternoon everyone and thank you for joining the call. I'm thrilled to be joining my first earnings call as Emergent’s new CFO. There is a great deal going on here at Emergent and I look forward to working closely with my new colleagues in pursuit of our business objectives, as well as our mission and vision. For my prepared comments today, I will walk through our first quarter results, starting with the P&L and shifting to the balance sheet and the state of our capital structure, and finishing up with comments on full year and second quarter guidance. With that, let's first look at the performance for the first quarter of 2018. As you can see in our earnings press release, our first quarter results reflected the delay in the timing of BioThrax deliveries, as we previously disclosed on February 22, as well as a delay in the timing of one ACAM2000 shipment. Despite otherwise solid execution to start the year, this shift of deliveries to the second quarter impacted our revenue and profitability in the first quarter. That said, we expect to complete these deliveries by the end of the second quarter, which is clearly reflected in our second quarter revenue guidance and has no impact on our full-year guidance. Turning now to the numbers. Total revenues were $180 million, slightly higher than the prior year. Compared to the same period in 2017, the Q1 revenue highlights are as follows: First, product sales. Product sales during the quarter were $76 million, down 8% due principally to lower BAT and BioThrax sales, partially offset by an increase in other product sales, principally attributable to sales of ACAM2000 and Raxibacumab, both of which were acquired in the fourth quarter of last year. Second, contract manufacturing services. CMO revenues were $26 million, up over 40% due primarily to the completion of a milestone related to the expansion of specific contract manufacturing capabilities at our Lansing site. Third, contracting grants: Contracting grant revenue was $16 million, down 8% due to certain funded development programs that ended in 2017. Gross margin came in at 43%, a reflection of the product mix during the quarter, which was largely influenced by the delayed shipments of BioThrax and ACAM2000 just discussed. We expect gross margin to improve in the second quarter as the product mix benefits from the completion of these deliveries and the related increase in product revenue. Turning to operating expenses, gross research and development spend was $29 million, up over 40%. After adjusting for contracting grants revenue, our net R&D expense was $13 million, or 13% of net revenue, which is calculated as total revenue less contracting grants revenue. This spending reflects the investments in our portfolio that Bob described a few minutes ago. SG&A expenses for the quarter were $40 million, up $5 million and driven primarily by a true-up related to stock compensation as well as additional professional services costs. While as a percentage of total revenue, first quarter SG&A expenses were 34%. We expect 2018's full-year ratio to be in line with our 2020 goal of less than 25% of revenue. For Q1 2018, the tax benefit in the amount of $4.5 million includes a discrete benefit of $2.3 million related to stock compensation activity, resulting in an effective tax rate of 48%. Excluding the discrete benefit, the Q1 2018 effective tax rate was 24%. In terms of our profitability measures, our first quarter bottom line was also impacted by the revenue timing delays already discussed. As a result, we had first quarter EBITDA of $3 million, a GAAP net loss of $5 million and an adjusted net loss of slightly over $1.5 million. Turning to the balance sheet, we are maintaining a strong liquidity position as we ended the quarter with $165 million of cash and a receivables balance of $122 million. As a reminder, we recently put in place a new credit facility that provides $200 million of current borrowing capacity and can be increased by $100 million. Accordingly, we continue to have capital resources necessary to support our operations and pursue M&A opportunities. One final note on the balance sheet: We adopted a new revenue recognition accounting standard effective January 2018. Based on our review of revenue contracts, we modified the revenue recognition methodology related to our CIADM contract with BARDA which resulted in a $42 million increase to our deferred revenue balance and an offsetting $32.5 million adjustment, net of tax to retained earnings. More information on this change will be available in our report on Form 10-Q, which we anticipate filing within the next day. That completes the review of the quarter. Now let me turn to our guidance. We have reaffirmed our full-year 2018 financial guidance, which reflects the new revenue recognition accounting standard and is as follows: Total revenue of $715 million to $755 million, pretax income of $120 to $140 million, net income of $95 million to $110 million, adjusted net income of $110 to $125 million, and EBITDA of $175 to $190 million. Importantly, the 2018 outlook does not include estimates for potential new corporate development or other M&A transactions except for the provision of specific diligence-related expenses, required to support our ongoing M&A efforts. Lastly, we have guided for second quarter total revenue of $205 million to $230 million. This outlook reflects the deliveries of BioThrax and ACAM2000 previously expected in the first quarter plus additional deliveries in the current quarter. If you combine the second quarter revenue guidance with the first quarter actual revenues, we can see that we anticipate first half revenues of $323 million to $348 million, or approximately 44% to 47% of the full year 2018 revenue forecast. Achieving this outcome would represent a strong first half and keep us squarely on track to achieve our annual financial objectives. That concludes my prepared remarks, and I will now turn the call over to the operator to begin the question-and-answer session.

Operator, Operator

Thank you. Our first question comes from Dana Flanders from Goldman Sachs. Your line is now open.

Christopher Staral, Analyst

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

Dan Abdun Nabi, CEO

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

Christopher Staral, Analyst

That’s very helpful. And then the quick follow-up is, for the delay in ACAM2000 shipment can you maybe provide a little more color on what caused the delay and should we just be pushing now ACAM2000 revenues that would have been realized in Q1 into Q2, and is there any flow through for the calling quarters? And then my understanding was that the contract renewal was or extension was up in March 2018 so is it fair to assume that you were granted an extension and how long should we expect revenues to be coming out of the program through the extension?

Dan Abdun Nabi, CEO

Yeah. So great question. So the ACAM2000 delivery was delayed so we have put that into deliveries in the second quarter, and I would expect you could do the same. Now under the contract that recently expired we do have orders that are expected to take through the rest of this year to complete. We are scheduled to make deliveries through the balance of the year. We are expecting to negotiate a follow-on contract with the U.S. government for continued supply. We expect there will be a multi-year contract and we expect that to be in place by year-end. So, in terms of extension, there is really no need for extension because the orders that are in place right now for continued supply during the balance of the year remain effective.

Christopher Staral, Analyst

Thanks a lot.

Operator, Operator

Thank you. And our next question comes from the line of Eric Schmidt, Cowen and Company. Your lines are open.

Eric Schmidt, Analyst

So thanks for taking my question. Maybe just on NuThrax, in order to get this year-end submission in, can you talk about the rate limiting steps and what is yet to be accomplished?

Dan Abdun Nabi, CEO

Yeah. Thanks Eric, good to hear your voice. Thanks for joining the call. I am going to ask Adam to walk you through the key steps that lead to EUA submission. Adam Havey, as you know, our EVP for Operations and standing in as the Head of the Business Unit for vaccines and anti-infectives. Adam?

Adam R. Havey, EVP, Business Operations

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

Eric Schmidt, Analyst

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

Adam R. Havey, EVP, Business Operations

Yeah. So, I think when we guided around Anthrax vaccine delivery we had said we expect approximately 10 million doses of delivery in 2019. I think the EUA really speaks to enabling the claims in the current procurement contract and those claims kind of give a range of possibilities for BARDA, and we would expect post-EUA that they would start to make the transition from BioThrax to NuThrax.

Eric Schmidt, Analyst

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

Adam R. Havey, EVP, Business Operations

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

Eric Schmidt, Analyst

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

Bob Kramer, President and COO

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

Eric Schmidt, Analyst

Okay. Glad Rich is joining a team with lots of friends. Thanks guys.

Richard Lindahl, CFO

Yeah. Thank you, Eric.

Operator, Operator

Thank you. And our next question comes from the line of Keay Nakae from Chardan. Your line is now open.

Keay Nakae, Analyst

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

Dan Abdun Nabi, CEO

Thank you, Keay, for your question and for joining the call. The regulatory approval for BioThrax in the EU is indeed exciting, but it should be seen as just one data point. The threat landscape in the EU is quite serious, with a high level of concern across the whole CBRNE spectrum. Each country within the European Union is developing its own policies to address these threats and is at different stages with regards to funding allocation, plan development, and procurement strategies. This means there isn't a one-size-fits-all answer to your question, as different countries prioritize different products. Some focus on Anthrax vaccines for military and certain civilian populations, while others view smallpox as a more critical threat and are looking to update their smallpox stockpiles. Additionally, there's significant attention on chemical threats, particularly in light of recent attacks in the UK and Syria. Therefore, our discussions with customers are extensive and not as straightforward, as they involve understanding various threats and exploring how our product portfolio can meet their needs. This ongoing dialogue takes time, as governments need to resolve their internal priorities, budgets, and procurement strategies. We see 2018 and 2019 as key years for advancing our international sales opportunities, and while we do not anticipate international sales to match those in the U.S., we are targeting international markets to contribute about 10% of our revenue by 2020. We believe the landscape is changing in a way that will allow us to reach this goal.

Keay Nakae, Analyst

Okay. Thanks, that’s all I have.

Operator, Operator

Thank you. And our next question comes from the line of Jessica Fye from JPMorgan. Your line is now open.

Jessica Fye, Analyst

Hey guys. Thanks for taking my questions. I wanted to follow up with the comment in prepared remarks about potential near-term business development. Specifically, how do you think about prioritizing commercial versus clinical or even late clinical stage assets and how does your 2020 targets factor into those decisions? Thank you.

Dan Abdun Nabi, CEO

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

Jessica Fye, Analyst

I wanted to ask about operating expenses, particularly R&D, which came in well below our forecast. Do you think the first quarter number is a reasonable run rate for the year, or will this be an anomaly?

Bob Burrows, VP, Investor Relations

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

Jessica Fye, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question comes from a representative at Wells Fargo. Your line is now open.

David Maris, Analyst

Hi. It's David Maris. Couple of questions. So first, on the business development front you had some comments, I may have missed them though. How active or would you say you are, and how confident and I don't mean over very active. Are you getting multiple opportunities at this point or is it no, one or two you are attracted to and you hope to get one done this year? So maybe if you can give any sort of color about the range and level of activity? And then the second is, following up on your comment as well, international sales you hope to be large but they won't be as large as the U.S. I think that's self-evident, but the question more is, maybe you think that you'll have meaningful U.S. sales in 2019. 2020, just give us sort of a timeline or any sort of information about that would be great. Thank you.

Dan Abdun Nabi, CEO

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

David Maris, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you. And our next question comes from the line of François Brisebois from Laidlaw. Your line is now open.