Earnings Call Transcript - EBS Q4 2014

Operator, Operator

Good day, everyone, and welcome to the Fourth Quarter 2014 Emergent BioSolutions Earnings Conference Call. My name is Jackie, and I will be your operator for today. At this moment, all participants are in listen-only mode. We will have a question-and-answer session toward the end of today’s presentation. I would now like to turn the conference over to the company. Please proceed.

Robert Burrows, VP, Investor Relations

Thank you, Jackie. Good afternoon everyone. My name is Robert Burrows, Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss our financial results for the fourth quarter and 12 months of 2014 and our outlook for 2015. 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 with prepared comments will be Dan Abdun-Nabi, President and Chief Executive Officer. Following Dan's prepared comments we will conduct a Q&A session at which time other members of senior management will be available to participate specifically Bob Kramer, Executive Vice President and Chief Financial Officer; Adam Havey, Executive Vice President and President of our BioDefense Division; and Barry Labinger, Executive Vice President and President of our BioSciences Division. Before we begin I will remind everyone that during today’s call either in our prepared comments or the Q&A session, management may make projections and other forward-looking statements related to our business, future events, and our 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. Please review our 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. During our prepared comments or the Q&A session, we also may 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, EBITDA, and adjusted EBITDA and a reconciliation between these non-GAAP financial measures and our GAAP financial measures. For the benefit of those who may be listening to the replay, this call was held and recorded on March 05, 2015. 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 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' President and CEO. Dan?

Daniel J. Abdun-Nabi, President and CEO

Well thank you, Bob and good afternoon everyone and thank you for joining our call. Today I would like to provide an overview of our 2014 performance, highlight some of our recent business achievements, and lastly discuss our 2015 outlook. Let's start with a review of our 2014 performance. We recognize fourth quarter total revenue of $148 million, up 51% from 2013, and full year total revenue of $450 million, up 44% from last year and at the top of the range given at the JP Morgan Conference on January 11th. Our GAAP net income in the fourth quarter was $30 million, up 98% from 2013 and full year GAAP net income was $36.7 million, up 18% from last year. Adjusted net income in the fourth quarter was $34.6 million, up 104% from 2013, and full year adjusted net income was $54.2 million, up 44% from last year. EBITDA in the fourth quarter was $53.3 million, up 84% from 2013, and full year EBITDA was $92.2 million, up 46% from last year. We closed 2014 with a cash position of $280 million, an increase of $101 million compared to 2013. Shifting over to 2014 business achievements I’d like to start with our BioDefense Division and Building 55, which is our large scale BioThrax manufacturing facility. We continue to work on progressing Building 55 to licensure and last month we announced that the primary endpoints in our pivotal study were met. The study showed that the vaccine produced in Building 55 is comparable to that manufactured in Building 12, our currently approved facility. We have sent a summary of key data to the FDA and plan to submit, and to meet, we’re done this month to discuss our SBOA filing strategy. The remainder of 2015 will entail completing the final study report, the prior approval inspection of the facility, and the SPOA. We continue to work towards the goal of obtaining approval in late 2015 or early 2016. We have also made progress towards securing a post exposure or peripheral access or PEP indication for BioThrax. Last November we submitted our application to the FDA for this indication which included data from a dozen non-clinical studies as well as three clinical trials. This label expansion will further support BioThrax’s position as the leading medical countermeasure against Anthrax disease. The application is currently under review and we expect a decision to be made sometime in the second half of this year. We have also advanced our progress on ANTHRASIL, our anthrax immune globulin product being developed to treat toxemia associated with anthrax disease. In July of last year we submitted a BOA to the FDA and this application is currently under review with the PDUFA date at the end of this month. There was a $7 million milestone payment associated with FDA approval. Finally, as part of our focus on expanding our presence and product portfolio in the attractive BioDefense market, at the end of 2014 we announced our expansion into the broad-spectrum antibiotics space through the acquisition of a series of molecules from Evolva. This acquisition further aligns us with the U.S. government's strategic objective of combating antibiotic-resistant bacteria. The lead molecule GC072 is being developed for the treatment of Burkholderia under a contract with the DOD. The unique feature of this series is that it offers the potential for commercialization of broad-spectrum antibiotics to protect against multi-drug-resistant range of bacterial infections for both BioDefense and commercial application. Within the BioSciences Division, we have now successfully completed the integration of Cangene which delivered better than expected revenue in 2014. Included in the product development portfolio we acquired from Cangene was Xfinity, a recombinant coagulation factor 9 for the treatment of hemophilia B. This product is currently under review with the FDA and has a PDUFA date at the end of April. We anticipate launching Xfinity later this year. Finally, we made significant progress on advancing our ADAPTIR platform in the very exciting immuno-oncology space. Our focus with the ADAPTIR platform is on redirected T-cell cytotoxicity, which generates a T-cell-mediated immune response specifically targeting tumor cells. Our lead candidate is MOR209/ES414 for prostate cancer, and we made good progress in 2014 toward starting a Phase 1 trial. We also established a partnership with MorphoSys to co-develop and commercialize this product. Under the terms of the agreement, we received a $20 million upfront payment in 2014 and in the future may receive development and regulatory milestone payments of up to $163 million. As part of our growth strategy, we continue to seek additional partnerships for other product candidates using our ADAPTIR platform. Overall, 2014 was a very exciting and successful year for Emergent, and as many of you know, in early January we forecast continued significant growth through 2015 both in our product portfolio and our corresponding financial performance. That forecasted growth was attributable to a number of factors including a full year of Cangene operations, expanded grant and contract revenue, and increased year-over-year deliveries of BioThrax. That brings me to the very recent developments described in our press release regarding an ongoing internal BioThrax manufacturing investigation. Beginning on January 28, 2015, during standard quality inspections performed in accordance with customary procedures, we discovered foreign particles in a limited number of vials in two manufactured lots of BioThrax. In order to determine the source of the foreign particles, we have been investigating our operations as well as those of our suppliers and contract manufacturers. Under our quality standards, these two BioThrax lots will be rejected. Currently there is no evidence that any other BioThrax lots have been affected. But as a precautionary measure, we have quarantined 13 additional lots in inventory pending the findings of our investigation. It is our goal to complete this investigation within the next 60 days. Consequently, no BioThrax deliveries will be made in the first quarter. Based upon current information and depending on the disposition of the quarantined lots, the impact on previously forecasted 2015 BioThrax revenues is anticipated to be between zero and $65 million. This ongoing investigation does not impact any of our other products or manufacturing operations, including our Building 55 operations and plans for licensure. Furthermore, there is no current evidence that product and distribution are impacted. Since the investigation is ongoing and the full scope of the issue has not been determined with certainty, the actual impact may be greater than anticipated. As we are unable to definitively assess the impact on 2015 financial results, we have suspended previously issued 2015 guidance. Guidance will be forthcoming following completion of the ongoing investigation. In closing, I want you to know that I am extremely confident in our operating systems and controls and the depth, breadth, and quality of our teams, including the team addressing this issue. While there is more to be done, I wholeheartedly believe that we will work through this issue and that later this year, we will be achieving the high levels of performance that we have come to expect from our organization, as evidenced by some of the following anticipated near-term events. First, progress in our Ebola countermeasure programs, as well as the progress in the Phase 1 clinical trial for MOR209/ES414, and further progress on advancing the regulatory approval for Building 55. On the regulatory approval front, we are anticipating three approvals; first, the approval of a path indication for BioThrax. Second, the approval for ANTHRASIL, our Anthrax immune globulin. And finally, regulatory approval and commercial launch of Xfinity as a therapeutic bringing the familiar. Finally, we continue to anticipate progress in our efforts to go through synergistic and accretive acquisitions. That concludes my prepared remarks and now I will turn the call over to the operator to begin the question-and-answer session.

Unidentified Analyst, Analyst

Hey guys, this is Ryan in for Jessica. Thanks for taking my questions. I guess I just have two right now. So, does the FDA need to re-inspect the facility after you guys have completed your investigation? And then second in terms of your ability to fulfill the contract post 2016 do the economics change, thanks?

Daniel J. Abdun-Nabi, President and CEO

Well thank you for the question. So first as to FDA re-inspection, no, investigations like this are customary in our business if there was a deviation. We routinely conduct investigations, we complete our reports, and at the next normal inspection cycle for the FDA they will review this along with any other reports that we have developed in our normal manufacturing processes. So, no special FDA re-inspections or approvals are required. And second, with respect to your question on the CDC performance, I am not sure I really understood it; if you could repeat it or clarify for me that would be helpful.

Unidentified Analyst, Analyst

Great, sorry. When you say what's the current contract that you have with BioThrax with the delay in sort of sending back those lots to the government in that contract are there sort of penalties for delay in delivery of product?

Daniel J. Abdun-Nabi, President and CEO

Okay, now I understand. No, I think interactions with the CDC, the delivery schedules have been quite flexible. We have adjusted them from time to time and at this point the CDC is looking to secure as many doses as we can deliver in order to satisfy the contract so, I don’t see any issues in adjusting delivery schedules under the contract that we presently have. Nor do I presently anticipate that there would be delays beyond the ultimate delivery date in the contract.

Unidentified Analyst, Analyst

Okay, great. Thank you very much.

Marc Frahm, Analyst

Hi, thanks for taking my call. I was just wondering if you could give us a little bit more details on kind of what needs to happen for the best case scenario of your no financial impact and then alternatively for the $65 million impact and what gives you confidence that that’s the high end?

Daniel J. Abdun-Nabi, President and CEO

Yes, thank you for the question. So the first thing that we need to do is complete the investigation, and the outcome of the investigation will inform us as to ultimately what the impact is on the lots that we presently have. As you know, we have identified two lots that have been impacted and I indicated those two lots will be slated for rejection. The remaining 13 lots we have absolutely no evidence to suggest that they are implicated in any way in this particle, this foreign particle issue, so presently I have no basis to conclude that any of those lots would be adversely affected. But we need to await the final disposition of the investigation to have a conclusion on that, and it’s really the 13 lots that are driving the ultimate issue with respect to impact your revenue.

Marc Frahm, Analyst

So I mean I guess the zero would be if all 13 are cleared and ultimately delivered and the 65 is if all 13 of those are ultimately rejected?

Daniel J. Abdun-Nabi, President and CEO

That is the way we are thinking about it presently; that’s correct.

Marc Frahm, Analyst

Okay, and then I mean I understand and the last question you don’t anticipate the FDA having inspection on this. Has there been communication already with the FDA about this from you?

Daniel J. Abdun-Nabi, President and CEO

Yes, we have voluntarily advised the FDA to keep them abreast of the issue.

Marc Frahm, Analyst

And I mean have they responded to any of that or no?

Daniel J. Abdun-Nabi, President and CEO

You know I really don’t want to get into the interactions with the agency that we have. What I would tell you is I would consider the discussions with the FDA to be normal, standard, and collegial.

Marc Frahm, Analyst

Okay and then last question I have, believe there may have been – so Eric who I work with has a recollection that there was a similar issue maybe a handful of years ago and is that an accurate recollection and then can you remind us what that is?

Daniel J. Abdun-Nabi, President and CEO

Yes we’ve never had an issue like this issue in our history. This is the first, so we are proceeding very cautiously in terms of how we handle it. We want to make sure that we have full information before making final decisions and I think that’s appropriate. In terms of prior history, I don’t have any recollection like that. Adam, is there anything ringing a bell with you on that?

Adam R. Havey, EVP and President, Biodefense Division

No, not on this type of investigation. I think there was one incident in the first quarter where we didn’t deliver batches but it was unrelated to anything like this result, potency standard requalification.

Marc Frahm, Analyst

Oh yes, we were requalifying a standard at that time; that’s right.

Jim Molloy, Analyst

Thank you for taking my questions. In the first quarter, BioThrax had little revenue, around $30 million to $25 million, making it one of the lowest quarters. Does the $65 million impact the second quarter as well?

Daniel J. Abdun-Nabi, President and CEO

So your recollection about first quarter deliveries and the magnitude is correct and I am not sure I understand your follow on, on the second quarter. Bob, did you understand that question?

Jim Molloy, Analyst

The question is how do you get the $65 million in the first quarter, or does that necessarily mean that the first quarter to be zero and we could cut second quarter in half as well?

Robert G. Kramer, EVP and Chief Financial Officer

So, Jim, this is Bob. The zero to 65 is our best estimate of the potential range of impact based on the entire 13 lots that are under quarantine today. It is not specific to the first quarter; it is really a 2015 annual number. But to Dan’s point as well, your recollection of our typical Q1 BioThrax shipments in revenue, that’s correct, so that will not happen in Q1 of 2015.

Jim Molloy, Analyst

Assuming only a few lots are affected, this is a situation where you could cover the shortfall from the first quarter by shipping the lots currently in quarantine if they are clear.

Daniel J. Abdun-Nabi, President and CEO

That’s correct. I think as Marc had commented before, if all of these 13 lots at the conclusion of the investigation are released for commercial distribution, then we would expect a negligible impact on 2015.

Adam R. Havey, EVP and President, Biodefense Division

And I do want to reiterate that these in quarantine is really our cautionary approach because we really have no evidence to suggest that the two lots that had particles in them really still had any effect on any of the other lots in inventory. Moreover, each and every lot that we produce undergoes a visual inspection, 100% visual inspection twice over, so two 100% visual inspections and that’s a validated process. So I have a degree of confidence that those lots really are not affected by what we are seeing with the two lots that were rejected.

Jim Molloy, Analyst

Okay, great. So it may well be not as bad as it could be in the worst case, are there any penalties from the U.S. government on having the particles in BioThrax?

Daniel J. Abdun-Nabi, President and CEO

I still remember they are not released lots, these in our possession; they were never released or in distribution, and the answer to your question is no, no penalties for having lots that we reject for whatever reason, and what we are responsible for is delivering material that we released under the specifications and our quality control and approval standards that are expected of the product.

Jim Molloy, Analyst

Last two questions and I’ll step back in queue, any talk with the CDC about you have the 75 million doses in the FNS is what they want and obviously, soon finally, after a long journey, you should be able to that in a couple of years you know with the billing to be 5. Any talk of maybe that 75 becoming 150 or anything like that? And then lastly any updates on the award of an Ebola manufacturing contract? Thank you very much.

Daniel J. Abdun-Nabi, President and CEO

Thanks Jim. So nothing to report in terms of the CDC discussions at this point, but we will certainly keep people apprised as those start to develop and as you know we have been anxiously looking forward to the end of the Building 55 process as you have, and we are looking forward to engaging with the CDC to talk about how best to supply at Building 55. So we will certainly keep everybody apprised. In terms of the Ebola programs, we are very excited about the interactions with the agency and we hope to have something to announce in the near term.

Unidentified Analyst, Analyst

Hi, thanks for taking my question. I just want to understand what needs to happen over the next 60 days. So during the next 60 days are you going to focus on just investigating what if the 13 batches are okay for distribution? Or are you also going to focus on what has or on what went wrong, or have you already established what went wrong and you fixed it? Thanks a lot.

Daniel J. Abdun-Nabi, President and CEO

Sure, so the investigation is really designed to learn more about the root cause. How did this happen? What is the impact to the product? What potential impact it could be to our process? What improvements we might need to make? So it is really an investigation into a root cause to determine definitive or probable root cause for how this occurred. And then once we understand that, to also understand product impact both with respect to the two lots and finally with respect to the lots that we have in our inventory. So, it is comprehensive analysis to understand what went wrong and impact the product. That's the goal within the next 60 days.

Unidentified Analyst, Analyst

Okay, and 60 days and could it be sooner than that, or 60 days basically a best case scenario?

Daniel J. Abdun-Nabi, President and CEO

I don’t think it is a best case scenario. I think it is a reasonable timeline based on the activities that we have laid out for the team. The team has laid out actually for them to complete. So I think it is a reasonable time period. I don’t think it is in this case.

Unidentified Analyst, Analyst

Got it, and last question from me, so are you currently manufacturing products or have you suspended any type of manufacturing until the investigation is complete?

Daniel J. Abdun-Nabi, President and CEO

No, we are continuing to manufacture sub-lots but we have suspended formulation and filling activities at the CMO.

Robert Burrows, VP, Investor Relations

Thank you Jackie. With that ladies and gentlemen we now conclude the call. Thank you for your participation. Please note an archived version of the webcast of today's call will be available later today and accessible through the company website. Thank you again and we look forward to speaking to all of you in the future. Goodbye.

Operator, Operator

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.