Earnings Call Transcript - EBS Q3 2013

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions third quarter 2013 financial results conference call. My name is Brittney, and I'll be the operator for today. (Operator Instructions) At this time, I would like to turn the presentation over to your host for today, Mr. Bob Burrows. Please proceed, sir.

Robert Burrows, Vice President, Investor Relations

Thank you, Brittney. Good afternoon, ladies and gentlemen. Thank you for joining us today as we discuss Emergent BioSolutions' financial results for the third quarter and first nine months of 2013. As is customary, our call today is open to all participants. In addition, the call is being recorded and is copyrighted by Emergent BioSolutions. Participating on the call this afternoon with prepared comments will be Dan Abdun-Nabi, our President and CEO; and Bob Kramer, our Chief Financial Officer. Following the prepared comments we will conduct a question-and-answer session. Before we begin, I am compelled to remind everyone that during the call management may make projections and other forward-looking statements regarding future events and the company's prospects for future performance. 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. 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. For the benefit of those who may be listening to the replay, this call is held and recorded on November 7, 2013. Since then, Emergent may have made announcements relating 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. Today's press release may be found on our website at www.emergentbiosolutions.com under investors/news. And with that introduction, I would now like to turn the call over to Dan Abdun-Nabi, Emergent BioSolutions' President and CEO. Dan?

Daniel Abdun-Nabi, President and CEO

Thank you, Bob. Good afternoon, everyone, and thank you for joining our call today. During my prepared comments I will discuss our Q3 and year-to-date financial results, our 2013 financial guidance and our recent operational performance. Total revenue for the third quarter was $89 million, which is above the $70 million to $80 million range that we provided on our call in August. Total revenue for the first nine months was $215 million. Net income for the third quarter was $13.5 million or $0.37 per share, and year-to-date net income was just under $16 million or $0.44 per share. Bob Kramer will provide more details on our financial performance in a moment. As announced in today's press release, we are revising upward our 2013 forecast to the upper end of our previous guidance. Specifically, we anticipate total revenue of $300 million to $310 million, including product revenue of $250 million to $255 million and contracts and grants revenue of $50 million to $55 million. We also anticipate net income of between $25 million to $30 million. Now, I'll summarize our recent operational performance starting with Biodefense. Through Q3 2013 we have delivered approximately 15 million doses of BioThrax under our existing supply contract, which caused a delivery of a total of 44.75 million to the SNS. Total revenues realized today under this contract is approximately $400 million at a total contract value of $1.25 billion. Deliveries are on schedule, and we currently anticipate that deliveries under this contract will continue through Q3 2016. In July we received approval from the Paul-Ehrlich-Institut to market BioThrax in Germany with a three-dose primary schedule over six months with triennial boosters thereafter. This approval makes BioThrax the only vaccine approved in Germany for the prevention of anthrax disease. With this approval, we are now initiating a mutual recognition process to obtain BioThrax licensure in other key EU countries. A key objective for Emergent in the U.S. government is to obtain a post-exposure prophylaxis or PEP indication for BioThrax. To this end, we completed a pivotal study evaluating the immunogenicity and safety of the proposed three-dose PEP regimen. The study met its primary and key secondary endpoints and we have submitted the clinical study report to the FDA. Additionally, all vaccinations and visits have now been completed in a separate antibiotic non-interference study and we expect to be in a position to submit the final study report for this trial in mid-2014. Our current plans contemplate that we will be submitting a supplemental BLA for the PEP label indication later next year. Next, let me provide an update on our progress to secure licensure of Building 55 for large-scale manufacturing of BioThrax. We have completed our data package in response to the FDA's comments on our proposed comparability profile and analysis. Due to the government shutdown, our submission of that data package through the FDA was delayed but is now complete. We are now coordinating with the FDA on a meeting date to address the analysis and we expect that meeting to occur later this year. We continue to plan for sBLA approval of Building 55 in late 2015. As announced in today's press release, RSDL revenue in Q3 was $7 million, which exceeded our expectations. We successfully integrated the operation of this business and look to continue to grow sales of RSDL and realize the benefits from this transaction. Let me now turn to our operations in the Biosciences division. We have completed patient enrollment and patient dosing in Phase 2 study of Otlertuzumab in combination with Bendamustine in relapse CLL. Additionally, we continue to enroll patients in the extended portion of the Phase 1b combination study involving Otlertuzumab with Rituximab. This includes a lower dose front-line cohort and a new relapsed/refractory cohort. We expect to complete enrollment in these expanded cohorts by the year-end. The variable data from these two studies will be presented at ASH in December. As we've discussed in the past, the key objective for Emergent is to partner our Biosciences development programs. I am very pleased with our progress in that effort. We have received substantial partnering interest for Otlertuzumab and we are working to complete a collaboration by the end of the year or into the first part of 2014. We also continue to receive interest from multiple parties for our ADAPTIR bispecific technology and the preclinical programs developed using that technology. Finally, with respect to M&A, we continue to target acquisitions of products or companies that leverage our core competencies and drive further progress towards the achievement of our growth plan. In summary, we are extremely pleased with the continued strong performance of the company across both divisions, and hope to continue to advance our partnering programs in our M&A strategy in furtherance of the goals set out in the growth plan. That concludes my prepared comments. I'll now turn it over to Bob Kramer, our CFO, who will discuss our financial results in greater detail.

Robert Kramer, CFO

Thanks, Dan. Good afternoon, everyone. Let me start by adding some additional color to Dan's earlier comment on our 2013 revenue and net income guidance, and then I'll turn to our performance for the quarter and for the first nine months of the year. Based on our results to date and supported by the visibility we have through year-end, we are revising upwards our revenue and net income guidance for the year. Specifically, we're narrowing guidance to the upper end of the previous ranges and are now forecasting total revenues of between $300 million and $310 million and net income of $25 million to $30 million. With respect to the revenue mix, we're now forecasting product sales of between $250 million and $255 million comprised of BioThrax and RSDL sales, and contracts and grants revenue of between $50 million and $55 million. I'll now turn to our financial performance, starting with the quarter. Our core business turned in solid financial results evidenced by total revenues of $89 million, which include product sales of $76 million and contracts and grants of $13 million. Drilling a bit deeper, product sales for the period included $69 million in BioThrax sales and $7 million of RSDL sales. Total revenue for the quarter was 34% better than Q3 of the prior year and reflects increased shipments of BioThrax as well as the initial sales of RSDL. Gross margin for the quarter was 74%. Importantly, the third quarter gross margin reflects the impact of RSDL sales. Going forward, we anticipate the consolidated gross margin will continue in historical range of 78%, inclusive of the lower margin RSDL sales. For Q3 2013, our gross R&D cost was slightly higher than the prior year, adding increase by $1.5 million as we invest in our development programs to enable the partnering of certain assets. Our SG&A expense was higher than the prior year by $2.8 million. For both research and development as well as SG&A, the variances will be further explained when I get to the year-to-date performance, as the explanation in both instances is essentially the same for the quarter and year-to-date periods. To conclude the quarter discussion, we reported net income of $13.5 million compared to net income of $6.6 million in 2012, a doubling year-over-year. These third quarter results are very strong and exceeded our expectations. For the year, our financial performance reflects solid performance against revenue and net income targets. Total revenue stands at $215 million compared to $187 million in 2012, a 15% increase driven by significantly expanded shipments of BioThrax doses as well as the first-time revenue for RSDL sales. Gross profit for the period was $130 million, a $19 million improvement over 2012. Gross margin for the first nine months of 2013 was 75%, right in the middle of the historical range of 70% to 80%. Year-to-date research and development expense was higher by $6 million or 7%. The increases in the third quarter and the first nine months of 2013 were primarily due to two developments. First, our Baltimore facility is now in service and the associated depreciation with this facility is included in R&D expenses. Secondly, we continue to invest in our Biosciences technologies and programs in furtherance of our initiatives to better position these assets for future partnering. SG&A expense was higher than prior year for the year-to-date period by $6 million or 11%. The increases in the third quarter and first nine months of 2013 were largely due to professional service costs attributable to M&A and other activities related to our growth plan. In addition, the year-to-date period also reflects the added impact of costs related to the restructuring of our U.K. operations, which were $2.8 million and were announced earlier this year. Net income for the first nine months of 2013 was $15.9 million, more than doubled the net income of $7.4 million in the first nine months of 2012. As a reminder, the 2012 period included the one-time non-cash charge of $9.6 million associated with the impairment of the SBI-087 program. As with the quarter, our financial performance year-to-date has exceeded our expectations and reflects the strength of our core business and positions us well to continue to execute on our growth plan. Let me now turn to the balance sheet. Total cash, cash equivalents, and accounts receivable at the end of the quarter were $203 million, consisting of $173 million in cash and $30 million in accounts receivable. In addition, the company's current debt stands at $59 million. That concludes my comments. I will now turn the call over to the operator so that we can begin the question-and-answer portion of the call.

Operator, Operator

(Operator Instructions) And your first question comes from the line of Eric Schmidt.

Eric Schmidt, Analyst, Cowen & Company

Maybe just starting with you, Bob, the RSDL number looked quite a bit bigger than I think we had expected, at least, probably others as well, and probably above your guidance. Is this a run rate going forward that we should model off of?

Robert Burrows, Vice President, Investor Relations

No. I think, Eric, as we commented a couple of months ago, historically under the prior ownership, the annual sales of RSDL were in the $18 million to $20 million range. I think our initial experience with RSDL is better than what we expected. However, it is an IDIQ contract. So the sales will be a little bit lumpy and we continue to expect that. We can improve upon the history of what the prior owner did with the business and I would stick with the ranges that we gave before.

Eric Schmidt, Analyst, Cowen & Company

And maybe you said this, I could have missed it, the taxes in Q3 were below your guidance for what reason?

Robert Burrows, Vice President, Investor Relations

Well, we continue to benefit from the orphan drug treatment of certain R&D expenses and tax credits.

Eric Schmidt, Analyst, Cowen & Company

And that'll only last as long as TRU-016 continues?

Robert Burrows, Vice President, Investor Relations

It will be significantly impacted by the Otlertuzumab with the TRU-016 expenses, yes.

Eric Schmidt, Analyst, Cowen & Company

And then maybe just on TRU-016, maybe Dan, can you talk about whether the partners have already seen the data in the ASH abstracts and that's going to be presented at the meetings? And whether that's in any way accelerated the pace of discussions.

Daniel Abdun-Nabi, President and CEO

We're very excited about the data that's coming out on Otlertuzumab. And as we've indicated, there's strong interest and we are engaged in discussions with partners. So under the confidentiality, we have shared information and I think that data is supporting the negotiations and the confidence that we have moving this to a successful completion.

Eric Schmidt, Analyst, Cowen & Company

And last question, Dan, I think you had mentioned that you were hopeful for additional European approvals of BioThrax through the mutual recognition procedures. What countries in particular might approve it under that procedure, or where are you targeting your efforts?

Daniel Abdun-Nabi, President and CEO

We're staking that effort. We haven't finalized the sequential processing of that just yet. But it is primarily in some of the major countries there and we have prioritized it based on input from the countries that have expressed interest as well as where we see some particularly attractive market opportunities. Additionally, these approvals I think will support NATO interest in the product as well, so I think it has the dual effect not only country interest, but also potentially NATO interest. So from our standpoint, that will be a program that we will have, starting this year and continuing into next year. Our expectation is that you will see our own series of approvals being announced over the course of next year.

Operator, Operator

And your next question comes from the line of Cory Kasimov.

Whitney, Analyst, JPMorgan

This is Whitney on for Cory today. And I sort of hopped on late, so I apologize if this has already been answered, but relative to Building 55, I think you guys said that you're still on track to submit the sBLA by next year. So I was just wondering in terms of the FDA request whether you sort of ended up looking at a greater number of proteins or if maybe you're confident that the analytical data that you guys have will support the data you initially submitted.

Robert Burrows, Vice President, Investor Relations

So in terms of growth, we had submitted our data package addressing the protein profile for the product and we are looking to sit down with the FDA before the year-end and just go through that data package and reach agreement on the protein profile that will be demonstrated in the consistency lot showing comparability between 12 and 55. So we're optimistic candidly because, as I said in the prior call, it's really data-driven and the FDA is very science-oriented and data-oriented, so I think when we go through that package that we've submitted, we'll successfully target the important proteins that will demonstrate comparability and consistency with manufacturing and that will enable us to complete the comparability package and get that in front of the agency for targeted 2015 approval.

Operator, Operator

And your next question comes from the line of James Molloy.

James Molloy, Analyst, Janney Montgomery Scott

A couple of quick questions on the products, I am willing to ask a couple on omag. On the RSDL sales, I mean it was already asked, but higher than expected. It was higher than I expected as well. Anyway, the key drivers here besides just sort of the normal lumpiness in the contract and then you had spoken before about new formulations and ways to really boost sales. Any developments on new formulation potential for RSDL?

Daniel Abdun-Nabi, President and CEO

As you might expect when we originally disclosed the target customers for RSDL, it's DoD and NATO. There is a supply arrangement under both organizations and the predominant customer in this case was DoD, as Rob explained. There were also some NATO purchases, but to a much lesser extent. And as Bob indicated, this is an IDIQ indefinite delivery, indefinite quantity contract, so those sales will be lumpy based on need by the Department of Defense. So the other part of your question was about new formulations. We are still evaluating how best to address the new market opportunities that are presented by this product, and so we have not initiated any actions to start line extensions on it as of yet.

James Molloy, Analyst, Janney Montgomery Scott

And then quickly, any pull-forward from the fourth quarter on BioThrax? It was certainly a good quarter here, and I know that, again, BioThrax can be lumpy given the batch processing and delivery. Should we expect any quarter-to-quarter softness next quarter because some orders came in here?

Daniel Abdun-Nabi, President and CEO

I think we've now got the nine months figure out and we've given you the full year guidance and there will be a range there depending on final deliveries and release of product to be delivered, so there could be some variability, but I think it's a pretty tight range.

James Molloy, Analyst, Janney Montgomery Scott

Then lastly on omag, the data that came out, the Phase 2 data, it looked pretty strong. I mean, it's Phase 2, but for these refractory CLLs, I mean, Campath filed on three Phase 2s. I know you've discussed what you need in a Phase 3 before you could file, but is this something similar to Campath where someone could do another, smaller or a little bit larger Phase 2 and come into a Phase 4 later and then file on this thing? I mean could you compare sort of the data you put out versus a Campath?

Robert Burrows, Vice President, Investor Relations

I think it is exciting data. I think it supports the potential use of the product in combination setting. And as we said previously, this product plays well within a number of potential products. So I think it's got a wide bandwidth potentially moving forward, but in terms of the actual clinical program and what might be required, I'm going to ask Scott Stromatt, our CMO, to really address that question for you. Scott, are you online?

Scott Stromatt, CMO

Campath was approved a few years ago and the field has moved towards PFS data, and the latest trial, obinutuzumab was approved based on over 400 patients, so we expect that we'd have to have a similar number of patients. We will discuss this with the agency at our inter-Phase 2 meeting next year.

Operator, Operator

There are no further questions. I will now turn the call back over to Mr. Burrows for further comments.

Robert Burrows, Vice President, Investor Relations

Thank you, Brittney. Ladies and gentlemen, thank you for your participation. Please note that today's call has been recorded and the replay will be available beginning later today. Alternatively, there is an available webcast of today's call, and an archived version will be available later this evening, accessible through the company website. Thank you again, and we look forward to speaking to all of you in the future. Good luck.

Operator, Operator

Ladies and gentlemen, that concludes the presentation for today's conference. You may now all disconnect and have a wonderful day.