Earnings Call Transcript - EBS Q4 2008

Operator, Operator

Good day ladies and gentlemen and welcome to the Emergent BioSolutions fourth quarter and full year 2008 financial results conference call. My name is Komisha and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call Mr. Robert Burrows. Please proceed, sir.

Robert Burrows, Vice President, Corporate Communications

Thank you, Komisha. Good morning ladies and gentlemen, again, my name is Robert Burrows. I am the Vice President of Investor Relations. Thank you for joining us today as we discuss Emergent BioSolutions financial results for the calendar year 2008. As is customary, our call today is open to all participants. In addition, the call is being recorded and is copyrighted by Emergent BioSolutions. Joining me on the call this afternoon is Fuad El-Hibri, our Chairman and Chief Executive Officer, and Don Elsey, our Chief Financial Officer. Additional members of our senior management team will be present on the call for the purposes of the Q&A session if need be. The agenda for today's call is as follows. Following my brief introduction, Fuad will provide a review of our key corporate accomplishments during 2008. Don will then provide more details on our financials indicated in today’s press release. In addition, both Fuad and Don will comment on our financial values for 2009. Following the prepared comments, we will finish the call with a customary Q&A session. Please note that any statements about the Company's prospects or future expectations are forward-looking statements. As you know, forward-looking statements involve substantial risks and uncertainties and actual results may differ materially from expectations. Please refer to the press release issued today and importantly to our filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ. Also, 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. Today's press release may be found on our website at www.emergentbiosolutions.com under Investors. And with that brief introduction, I will now turn the call over to Fuad El-Hibri, Emergent BioSolutions’ Chairman and CEO. Fuad?

Fuad El-Hibri, Chairman and Chief Executive Officer

Thank you, Bob. Good afternoon ladies and gentlemen, and thank you for joining us today. At the close of the market today, we reported financials for the full year 2008. I am very pleased with Emergent's overall performance. During the year, we delivered strong sales and earnings, advanced our products, extended our manufacturing infrastructure, and made strategic acquisitions that enhance our ability to create value over the long term. In reflecting on today’s results, I would like to discuss our key accomplishments across various aspects of our business. First, let me brief you on our initiatives to strengthen our bio-defense franchise, which is comprised of our anthrax and botulism programs. Let us start with our anthrax program and the progress we have made with our flagship product BioThrax. During 2008, we secured an additional US government contracts valued at up to $105 million to supply HHS with 14.5 million additional doses of BioThrax for the Strategic National Stockpile or SNS. Delivery of doses under this contract will begin in Q3 2009 and will continue until Q3 2011. This contract is in addition to our 2010 multiyear HHS contract valued at up to $448 million for the delivery of 18.75 million doses of BioThrax into the SNS. We continue to deliver doses under the 2007 contract. Also last year, we expanded significant resources to enhance BioThrax, as part of the multiyear studies on anthrax funded by CDC. We obtained FDA approval for a change to our BioThrax license. This license change provides for an IM administration and a reduction for a five-dose schedule over 18 months. We have continued to work with CDC to complete additional data sets in an effort to further reduce the number of required doses to three. In addition, we are working to add a post-exposure prophylaxis indication to provide funding supported largely by government contracts. Let me move to the next aspect with an acquisition candidate that we acquired last year. This acquisition allowed us to respond to an HHS request for proposal to procure up to 25 million doses of rPA for the SNS. In September, we were notified that our proposal was within the competitive range and since that time, we have been engaged in contract negotiations with representatives from HHS. If awarded, this is expected to be a multiyear contract consisting of both development funding components as well as a procurement component, with an expected value in excess of $500 million. We are working diligently with HHS to complete the contract shortly. Also in 2008, we continued to make progress on our anthrax immune globulin therapeutic or AIG. We completed preclinical studies, manufactured two consistency lots, and collected sufficient plasma to enable us to manufacture doses in 2009. We also finalized specifications for a critical clinical trial designed to test safety and pharmacokinetics of AIG, which we expect to initiate shortly. Moving on now to our anthrax programs; last year, we acquired an anthrax monoclonal antibody therapeutic candidate and shortly thereafter secured a four-year $24 million development contract with the government to fund our manufacturing efforts, nonclinical studies, and a Phase I clinical study. Additionally, we secured a three-year development contract with the government valued at up to $30 million to fund nonclinical safety and efficacy studies, manufacturing clinical lots, stability studies, and a Phase I clinical trial. Looking at our anthrax program perspective, within the span of approximately one year, we have accomplished a great deal. First, we secured HHS procurement contracts valued at up to $852 million for the delivery of over 33 million doses of BioThrax to the SNS, thereby providing revenue visibility through the third quarter of 2011. Second, we acquired two additional anthrax product candidates, one vaccine and one therapeutic. Third, we were awarded over $58 million in multiyear contracts to continue development of the majority of our anthrax programs. Let us go to our botulism program in collaboration with the Health Protection Agency in the United Kingdom. We are developing a recombinant trivalent botulinum vaccine candidate for protection against stereotypes A, B, and E. Last year, we secured up to $1.8 million in funding from the government to support ongoing preclinical studies. The plans focus on developing our recombinant botulinum vaccine candidate not only as a prophylactic vaccine but also for use in a donor stimulation program for producing a human botulism immunoglobulin product for the government. Looking ahead, we anticipate opportunities to secure additional development and procurement funding for both our anthrax and botulism programs. We also foresee opportunities to expand our bio-defense franchise beyond anthrax and botulism. There are additional areas that the government continues to focus on as part of a comprehensive bio-defense strategy. Let me now review our progress in growing our commercial pipeline. I will begin with tuberculosis (TB). Last year, we announced the formation of a joint venture between Emergent and the University of Oxford to develop and commercialize the world's most clinically advanced vaccine under development to prevent tuberculosis. With this joint venture, we also secured significant development funding for the stroke product. Specifically, the Phase IIb efficacy trial designed to enroll over 2,700 infants in South Africa is expected to begin shortly and is funded primarily by the Wellcome Trust and the Aeras Global TB Vaccine Foundation. Our TB candidate is a single-dose recombinant, attenuated vaccine that targets individuals previously immunized with BCG, the only marketed vaccine against TB. Next, let me discuss our Hepatitis B therapeutic candidate. During 2008, we began enrolling patients in our Phase IIa clinical trial in the United Kingdom and Serbia designed to evaluate the safety and immunogenicity of our therapeutic vaccine in chronic Hepatitis B carriers. Enrollment in the study was halted due to recruiting difficulties related to the standard of care in developed countries, as our trial was designed to administer our product candidate as a monotherapy. We are working to identify alternative sites in areas of the world where we expect recruitment rates to be more favorable. We plan to continue pursuing that initiative in 2009. Wrapping up our advanced commercial portfolio, let me update you on Typhella, our single-dose oral typhoid vaccine candidate. Last year, we completed a Phase IIa clinical study in children ages 5 to 14 living in Vietnam, and it was reported that Typhella was highly immunogenic and well-tolerated. We also initiated a Phase IIb clinical trial in healthy patients in the US, which is nearing completion. Regarding our preclinical product pipeline, we continue to focus on developing additional vaccine candidates targeting other infectious diseases using our platform technology, specifically our oral bacterial vector spi-VEC and our injectable viral vector, MVAtor. Furthermore, we are working on a recombinant vaccine in response to a recent proposal for funding to respond to an HHS request for application. Next, let me review our recent developments concerning our manufacturing infrastructure. In connection with our ongoing negotiations with HHS for the rPA contract, we recently dedicated our new large-scale manufacturing facility in Lansing to the development and manufacture of rPA. We believe that this commitment enhances our prospects for a successful rPA award. At the same time, we have initiated plans to expand our BioThrax manufacturing capacity at our current facility to address future market opportunities. Additionally, during 2008, we enhanced our capabilities to support our product development programs. Moving on, let me summarize our 2008 M&A activity. On the bio-defense side, we acquired two opportunities associated with anthrax, one being the rPA candidate, which is well positioned to receive an HHS contract award shortly, and the other being the anthrax monoclonal therapeutic which has already received a development contract of $24 million from the government. On the commercial side, we formed the joint venture with Oxford for which we acquired our clinically advanced vaccine and secured funding from both the Wellcome Trust and Aeras. Consistent with our growth strategy, we are diligently pursuing additional opportunities in both bio-defense and commercial sectors that will complement our product pipeline. Now let me comment on our 2009 forecast. We anticipate a 25% to 35% growth in total revenues to approximately $225 million to $240 million and net income in excess of $20 million. We have noted that this forecast does not take into account the potential rPA award. In conclusion, I am very pleased with our performance for 2008. Our financial performance reflects the strength of our growing operations. More importantly, we look forward to building on this success as we strive to realize additional growth opportunities within both our bio-defense and commercial portfolios over the next 12 to 18 months. With that, I will now turn it over to Don, who will take you through the numbers in more detail. Don?

Don Elsey, Chief Financial Officer

Thank you, Fuad. Good afternoon, everyone. As Fuad mentioned, following the close of the markets today, we released our financial results for the fourth quarter and full year 2008. I encourage everyone to take a look at the press release, which is currently available on our website. We will file our annual report on Form 10-K with the SEC in the next day or two. The 10-K will also be available on our website. Now, let me discuss our 2008 financial results, but first let me provide an overview. For the full year 2008, total revenues were $178.6 million, in line with the anticipated $179 million announced earlier this year, and the net income was $20.7 million or $0.69 per share, above the anticipated range of $15 million to $20 million previously announced. The 2008 revenues were primarily driven by sales of BioThrax. Compared to 2007, revenues were slightly less due to a reduced level of contracts and grants revenues. Full year 2007 total revenues were $182.9 million and net income was $22.9 million or $0.79 per share. For the fourth quarter of 2008, total revenues were $35.8 million as compared to $89.6 million in 2007, and net income was $1.5 million or $0.05 per share as compared to the net income of $27.7 million or $0.93 per share in 2007. Now, let me delve into more detail, starting with product sales. Our full year 2008 product sales were $169.1 million, which was essentially flat versus full year 2007. The consistency in full year 2008 product sales resulted from a 16% decrease in the number of dosages of BioThrax delivered, offset by an 18% increase in the average sales price. Importantly, as you may recall, an additional $12 million of BioThrax revenue originally planned for the fourth quarter of 2008 was not realized due to three lots of BioThrax that were delayed in the completion of final testing. This delay stemmed from an equipment failure that the Company addressed and has since resolved. We expect to deliver these three lots to HHS in the first quarter of 2009. Revenues for the annual sales have remained stable when looking at the fourth quarter of 2008 versus 2007; however, we experienced a decline in sales in Q4 2008. In 2008, the revenue from both prior quarters was fairly evenly distributed. In comparison, revenues for 2007 were back-end weighted, with 49% of the total year revenue realized in Q4. Our shipments to the government each quarter varied significantly based on several factors, including manufacturing, new product release, and strategic national stockpile logistics. We expect that this variability will continue on a quarterly basis, although revenues will appear relatively predictable on an annual basis. Moving on to contracts and grants revenues; for 2008, we experienced lower levels of contracts and grants revenues. Specifically, contracts and grants revenues decreased by $3.7 million or 28% to $9.4 million. Contracts and grants revenue was determined by the level of activity incurred during the period and invoiced to the customer. As Fuad mentioned, in 2008 we significantly strengthened our anthrax and botulism development programs by securing an additional $58 million in funding from the US government to support the ongoing development of our advanced BioThrax vaccine, our anthrax monoclonal antibody candidate, and our recombinant trivalent botulinum vaccine. Importantly, these development contract revenues carry with them a profit margin that will positively impact the bottom line over the life of these contracts. As a result, we anticipate that our 2009 contracts and grants revenues will be higher than in 2008. Regarding gross margins; for 2008, we continued to experience strong gross profit margins on our product sales. The decrease in the cost of product sales in absolute terms was primarily due to the reduced number of dosages delivered. As we have discussed before, biological manufacturing presents specific challenges in terms of actual production yield, and as a result, our gross profit is subject to variability due to normal fluctuations in our yield. Turning now to spending, let's start with product development. During 2008, we continued to advance the development of our product pipeline, which includes enhancements to our licensed products and efforts to advance both our clinical stage and preclinical programs. For the year, development spending increased by 10% over 2007, primarily driven by increases in the development of new product candidate programs, including rPA, our anthrax monoclonal antibody, and the establishment of the tuberculosis joint venture with Oxford. The increase was also driven by funding for Typhella, our typhoid vaccine candidate, which underwent multiple Phase II trials during 2008. As I mentioned earlier, development spending for the advanced BioThrax vaccine and the anthrax monoclonal antibody programs resulted in the receipt of a development contract for these productivity improvements. Additionally, development spending for our rPA program enabled us to respond to HHS’s request for proposal. As Fuad mentioned, the contract is expected to be multiyear in duration, comprising both development funding and procurement components, with a total value expected to exceed $500 million. We are working diligently with HHS to complete our contract negotiations. Our SG&A spending for 2008 was flat on a comparative basis. Our spending for SG&A has primarily been driven by establishing an infrastructure that allows us to grow our business, execute our contracts, and comply with regulatory requirements. We remain focused on controlling the growth of general and administrative expenses. For 2008, net income was $20.7 million or $0.69 per basic share, which was a decline of $2.2 million from 2007 but above what we previously announced in early January of this year. Turning to our balance sheet; at year-end 2008, our balance sheet remained strong as we continue to generate cash from our operations. Our cash and cash equivalents as of December 31, 2008 were $91.5 million. In addition, we ended 2008 with a note receivable of $10 million from Protein Sciences related to a bridge loan, which we provided to Protein Sciences earlier in 2008, a loan secured by substantially all of PS’s assets, including intellectual property. We are currently working with them to receive payment for the $10 million loan. Our outstanding long-term debt declined to approximately $42 million and supported our investments in the expansion of our manufacturing facility in Lansing and the purchase of our facilities in Maryland, among other initiatives. Currently, we remain well-capitalized to finance the continued growth of our business. Finally, our financial guidance for 2009; as Fuad stated earlier, we anticipate 25% to 35% growth in total revenues to approximately $225 million to $240 million. We also anticipate 2009 net income in excess of $40 million. These forecasts do not take into account the pending contract award from the US Department of Health and Human Services related to the development and procurement of 25 million doses of our recombinant anthrax vaccine for the strategic national stockpile. Should the rPA contract be awarded by the US government, we will update our 2009 guidance accordingly. In conclusion, our 2008 financial performance, as reported today, exceeded what we previously discussed in early January. Our accomplishments in 2008 again include continued delivery of dosages of BioThrax under our current HHS contract, the follow-on contract with HHS for the delivery of 14.5 million additional doses, as well as the resulting revenue visibility through Q3 2011, and the $58 million in development contracts that we secured in 2008 that will underwrite a substantial proportion of our product development. Additionally, the pending rPA award, anticipated to be valued over $500 million over a multiyear period, is significant. For 2009, we look to build on the success of 2008. Our business remains strong, and we are confident about prospects for growth, as evidenced by our current 2009 forecast of 25% to 35% revenue growth and continued profitability. Finally, as Fuad mentioned, we continue to pursue acquisitions that will complement our product pipeline and capitalize on our expertise and infrastructure. That concludes my prepared comments. I will now turn the call back to the operator so we can begin the question-and-answer portion. Operator, please proceed.

Operator, Operator

(Operator Instructions) Your first question comes from the line of Craig Gordon - Cowen & Co.

Craig Gordon, Analyst

A couple of questions. First, I was not sure if I heard this right. Is rPA on clinical hold?

Fuad El-Hibri, Chairman and Chief Executive Officer

No.

Craig Gordon, Analyst

Okay. Yes, that is right, Fuad. In terms of the contract, are you still expecting it to occur in late Q1 ’09, and are you able to give us some sense of what percent of the $500 million is upfront versus development versus procurement?

Fuad El-Hibri, Chairman and Chief Executive Officer

Well, let me first mention that the contract negotiations with HHS are ongoing. We did not say that we expect to perhaps finalize it by the end of 2009. We actually said that it would happen shortly, and estimating any more specific timing than shortly is difficult as we are finalizing contract negotiations. Now, with respect to how much of it is procurement versus development, I can tell you that there are two significant components and in terms of advance payments and milestone payments, which can point out to what has typically involved an upfront payment of 10% and milestone payments up to 50% of total contract value.

Craig Gordon, Analyst

Great. That really helps. And then in terms of the BioThrax, you had mentioned that you would be expanding a current facility to produce more. What would be the timeline for that being able to expand, validate, get approval, and start selling products from that?

Fuad El-Hibri, Chairman and Chief Executive Officer

Yes. What I can share with you is that certainly expanding at the current scale as opposed to beginning something new is less of a regulatory exercise and more of a challenge regarding timelines. That is why we decided to keep the BioThrax production at this point and dedicate our large-scale manufacturing facility to rPA in response to HHS requirements. We are going to expand as quickly as possible at the current scale and have already identified space for doing that. As you can imagine, we had been asked to dedicate the facility to rPA only in the last couple of months, which means we are still in the planning stages regarding the expansion of BioThrax at the current site. It will not be by the end of next year.

Craig Gordon, Analyst

Okay. And it’ll be good to keep us up on that. That will be great. On the development payments that you might receive for rPA from the government, would there be a catch-up portion of that? In other words, you indicated in the prepared remarks that you spent money on advancing rPA as well as on the projects; would there be some part of the funding that would be accelerated to pay for retroactive work done on rPA?

Fuad El-Hibri, Chairman and Chief Executive Officer

I can answer that generally by saying that under a fixed price contract, the expectation is to deliver within the price. So, to the extent that some expenses had already been incurred, those will be factored into the contract. That is separate from a cost-plus development contract where you actually get reimbursed for costs incurred.

Craig Gordon, Analyst

That makes perfect sense, but from an investor standpoint, my question would be maybe this is more for Don, what would that look like in terms of how you book the revenues? Could we expect a larger proportion to come in, in the first quarter, assuming that you are going to get the contract based on some catch-up work?

Don Elsey, Chief Financial Officer

David, the complexity for this is as you may guess is governed by accounting standards, and until our contract is completely negotiated, we cannot determine exactly how revenues will be recognized and when. If we receive an upfront payment at the beginning of this contract, we would anticipate that it would be booked as deferred revenue, which will then be amortized or recognized over a period of time, but again you will have to look at the facts and circumstances of the contract.

Craig Gordon, Analyst

That is great. Thanks, Don. And one last question is on the PSC. It is kind of playing out in an interesting way. I guess the first question would be what are the chances that this company—last I checked they did not have any resources—what are the chances that they are going to get $10 million together to repay you versus the chance that you can get these assets for the initial $10 million loan, and what would be the plans if you would get those properties back?

Don Elsey, Chief Financial Officer

We can share with you that we are in discussions to work out the repayment of this loan.

Greg Wade, Analyst

Don, I wonder if you might just give us a little more granularity on the financial guidance with respect to the top line. What component is going to be product sales versus contracts and grants, and what component do you expect to be cash? Where are the costs of SG&A and R&D, and what do you expect for share count? What kind of depreciation should we factor in, CapEx, and then changing cash for the year as well?

Don Elsey, Chief Financial Officer

Now that is a comprehensive question. What I would say is that we build guidance line item by line item; however, we forecast top-line and bottom-line growth. I will tell you that as we look at this guidance in forecasting 25% to 35% top-line growth, we expect that the manufacturing will allow us to produce and sell everything that we can push out from the plants in Lansing. So, we anticipate receiving our four-year dating revenues next year and beyond. That said, we do not guide on specific categories of revenue, but we can speculate that we expect to manufacture at more or less capacity. There is always room for marginal improvements, but we are basically there, so you can speculate how much that will translate into overall product sales.

Greg Wade, Analyst

So, what are your follow-ups for a couple of things then? With respect to the income that you are projecting, is that GAAP income?

Don Elsey, Chief Financial Officer

That is not on a GAAP basis, that is correct.

Greg Wade, Analyst

Can you just tell me then just to let us get the cash flows sort of aligned with what we are expecting? What is your expected change in cash going to be this year towards the end of next year?

Don Elsey, Chief Financial Officer

That is another area we do not give specific guidance on. We have many moving pieces, as we are still early in the year. Certainly, the rPA contract review has a significant influence on that. If we close an acquisition as we are ambitiously pursuing, it could materially change as well.

Jim Malloy, Analyst

Just a quick question; one of the points you guys mentioned was additional BioThrax sales to foreign governments. Could you talk a little bit about your thoughts on the timing of that? It sounds as though it is opposed to a 2011 deal, given what you said about expanding capacity in Building 12.

Fuad El-Hibri, Chairman and Chief Executive Officer

Not necessarily. We have some latitude in discussing particular shipments to HHS and, for example, if we do have a foreign sale and we made shipments slightly less than expected next quarter. There is some flexibility there. Generally speaking, international sales typically require marketing authorization in their respective countries, which is important, and we have been happy to announce that we achieved market authorization in India, and we are working on other countries as well. So, I think that with more major market authorizations coming in, we will be optimistic about growing internationally.

Jim Malloy, Analyst

But it sounds like, if I understand correctly, you guys are making and selling everything that you can produce. That sounds like your answer indicates this should just be a reallocation of some of the perhaps US sales that you can move around a little bit and shift overseas. Is there any way to look at these additional foreign sales as incremental to your guidance?

Fuad El-Hibri, Chairman and Chief Executive Officer

Yes. The foreign sales we announced previously would typically generate a significantly higher price per dose compared to the US government contract. So to the extent that we sell, let us say, 100,000 doses to a foreign government, that will generate higher revenue than selling the same amount to the US government.

Jim Malloy, Analyst

If you were to upgrade the Building 12, is that something that you would mention in the press release or is that more information we should expect to find on the next call?

Fuad El-Hibri, Chairman and Chief Executive Officer

Once we have a clear picture regarding the design and capacity expansion and scope, along with reasonable timelines, we will certainly provide indicative dates and timelines similar to what we did with Building 55. Additionally, we are still working on process optimization opportunities in our existing facilities, which may lead to additional capacity growth from year to year, given our current output.

Jim Malloy, Analyst

Fine, unless maybe I can finish up on rPA. A couple of times in this call you indicated shortly regarding this contract we expect to finalize shortly. Is there any recent information as to why shortly versus the first half of the year or any new timeline on that issue?

Fuad El-Hibri, Chairman and Chief Executive Officer

It depends on the negotiations between the two parties; I cannot control the other party. All I can say is that our relationship with HHS continues to be strong. We are very excited about this opportunity and are working diligently on the contract. We want to ensure that this contract, which we anticipate to be substantial, is well-defined and clearly articulated. So, it just takes time. This $500 million contract requires careful negotiation, and there was a protest by one of the bidders that was resolved in February.

Jim Malloy, Analyst

Okay. Then the final question, you have just mentioned the prior questionnaire, ambitiously pursuing acquisitions. Where would be the ideal spot for acquisition right now? Assuming TFC has not been the acquisition that you would consider?

Fuad El-Hibri, Chairman and Chief Executive Officer

As we have guided before, we are looking for late-stage products, typically in Phase II or Phase III. We are focused on infectious diseases but are also willing to consider other immune-related disease areas. Typically, we prefer to have a technology platform associated with the acquisition, whether it is an acquisition of a company or products. We would continue to seek growth through acquisitions, as we have done over the past two years.

Daniel Mallin, Analyst

Hi guys. Thank you for taking my question. First of all, I want to compliment you guys. It seems that over the last several years, bio-defense in particular has been the one steady ship amidst the turbulence in Wall Street, particularly healthcare and biotech, given uncertainties in terms of healthcare and the economy. It has been clear that increased government spending, procurement contracts, and development funding have been consistent themes since the anthrax attacks. What does the future outlook for bio-defense look like, especially with new administration policies coming in? What indicators do you see suggesting potential changes in future spending for bio-defense?

Fuad El-Hibri, Chairman and Chief Executive Officer

Thank you for the question. Let me clarify a potential misunderstanding noted. This is the second time we have heard someone refer to finalization of the rPA contract by the end of 2009. We are not saying that. We expect to finalize it shortly. In recent years, there have been numerous legislative and funding initiatives that indicate a strong ongoing commitment to bio-defense initiatives. I would find it inconceivable for any government, including the US, to ignore potential biological threats. Given that historical context and the strategic reserve allocations, I see no evidence that the new administration is losing interest in bio-defense or that this contract would become delayed.

Cory Kasimov, Analyst

Hey guys, actually it is Cory here. We had little bit of trouble with the conference call, but Mr. Malloy stole a few of my questions. I do have a couple left. To stay on the rPA subject, I thought you guys were quite clear that you are expecting something shortly and not late 2009. My question is regarding the pending award; is it susceptible to upsizing, potentially in this current economic environment?

Fuad El-Hibri, Chairman and Chief Executive Officer

What do you mean by upsizing?

Cory Kasimov, Analyst

Well, the initial RFP was for 25 million doses, and there has been talk about multiple parties receiving awards. Would there be two parties receiving $25 million doses each, or would it be split between different companies?

Fuad El-Hibri, Chairman and Chief Executive Officer

If you look at what our competitor and their expectations for a contract, we are looking at hundreds of millions of dollars. I think it would not be a misjudgment to expect the government to proceed with the full 25 million doses on this contract.

Cory Kasimov, Analyst

Great, that is helpful. Second question relating to spending on R&D in particular. I am wondering what kind of flexibility you have there concerning the commercial portfolio; whether partnerships or prioritization of the pipeline can help alleviate some of the burden on profitability.

Fuad El-Hibri, Chairman and Chief Executive Officer

Yes, we are aiming for a $20 million profitability target. We do not view the commercial portfolio as a drag but an investment in future growth. Our operating expenditures will remain stable, as we seek to balance investment in bio-defense growth while equally seeking growth opportunities within our commercial portfolio. Furthermore, any profit we realize will be subject to taxes, so it is wise to utilize a portion of our earnings to reinvest in both commercial and bio-defense initiatives. We are currently in litigation and confidential negotiations to settle the $10 million loan issue, and I am unable to provide further details on that at this moment.

Don Elsey, Chief Financial Officer

Yes. I am going to frustrate you; we do not give out specific guidance on CapEx. However, I can help you understand that the capital expenditures from the construction of Building 55 and equipment installation were completed in 2008, which has significantly increased our CapEx in recent years. Looking ahead, CapEx will stabilize unless we initiate expansion projects.

Fuad El-Hibri, Chairman and Chief Executive Officer

As we have conducted previous analysis, international sales yield a much higher price compared to US contracts. Usually, we secure higher revenue for doses sold to foreign governments. While we will not set aside a major part of our production capacity for development, we continually analyze options to capture efficiencies and further our regulatory processes. Investments in strategic R&D help create more robust pipelines, providing reassurance to our stakeholders regarding our future revenue potential.

Natalie Luchessi, Analyst

I have a question regarding the rPA contract. What are some major sticking points in the negotiation? Are they primarily financial, and do you think they will impact margins?

Fuad El-Hibri, Chairman and Chief Executive Officer

For competitive reasons, it is challenging for me to provide specific details. The complexities of developing new vaccines contribute to the timeline and milestones that both parties must be comfortable negotiating.

Natalie Luchessi, Analyst

Just a follow-up. What are you expecting in margins once everything is finalized? Have you come to a conclusion on that?

Fuad El-Hibri, Chairman and Chief Executive Officer

For competitive reasons, I can’t comment on that at this time.

Operator, Operator

Thank you. There are no more questions in queue. I will now turn the call back over to management for closing remarks.

Fuad El-Hibri, Chairman and Chief Executive Officer

Thank you, ladies and gentlemen. That concludes today’s call. Thank you for your participation. Please note that today's call has been recorded, and a replay will be available beginning later today through March 19. Alternatively, an archived version of today's webcast will be available later today on the Company’s website at www.emergentbiosolutions.com. Thank you again, and we look forward to speaking to you in the future. Goodbye.

Operator, Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a wonderful day.