Earnings Call Transcript - EBS Q2 2008

Operator, Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Emergent BioSolutions Inc. earnings conference call. My name is Katina and I will be your coordinator 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) I would now like to turn the presentation over to our host for today's call Mr. Robert Burrows. Please proceed.

Robert Burrows, VP, Corporate Communications

Thank you, Katina. Good morning, ladies and gentlemen. Thank you for joining us today as we discuss Emergent BioSolutions financial results for the second quarter and for six months of 2008. As is customary, our call today is open to all participants. In addition, the call is being electronically recorded and is copyrighted by Emergent BioSolutions. Joining me on the call this morning 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 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 comments on corporate accomplishments in Q2 2008 and key objectives for the remainder of 2008. Don will then discuss the 2Q and for six months of 2008 financials as well as comment on our 2008 financial guidance. We will finish the call with the 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 earlier 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/Press Release. And with that introduction, I would now like to turn the call over to Fuad El-Hibri, Emergent's Chairman and CEO. Fuad?

Fuad El-Hibri, Chairman and CEO

Thank you, Bob. Good morning, ladies and gentlemen, and thank you for joining us today. This morning we reported financial results for the second quarter of 2008. I am very pleased with our financial results for the second quarter and first half of 2008. Our revenues for the first half of the year are a record for our company and we continue on the path for our seventh year of operational profitability. In a moment, Don will take you through a more detailed review of our results for the second quarter and first six months of 2008. For my portion of the call this morning, I will provide an update on our operational accomplishments including marketing and sales, product development, manufacturing, and business development. But, first, for those investors who are new to Emergent, let me briefly tell you about our mission and business focus. In short, we are dedicated to one simple mission: to protect lives. We develop, manufacture, and commercialize vaccines and biotherapeutics that assist the body's immune system to prevent or treat infectious and other life-threatening diseases. We consider ourselves a leading biopharmaceutical company that is focused on immune-related biologics. Within immune-related biologics, we are currently focused on infectious diseases that will continue to offer significant opportunity with other immune-related candidates. As we continue to develop Emergent's leadership position in the biopharmaceutical landscape, we believe that our business focus will continue to build long-term value for our customers, partners, and shareholders. With that introduction, let me now turn to our operational accomplishments for the second quarter. I will begin with an update on our marketing and sales revenues. During the third quarter, we continued to deliver BioThrax to HHS for inclusion in the Strategic National Stockpile under our current multiyear contract. As a reminder, this is a $448 million contract that includes the procurement of a total of 18.75 million doses of BioThrax over a three-year period. We anticipate delivering approximately 7 million to 8 million doses under this contract this year and the balance in 2009, ahead of schedule. We expect to complete delivery under this contract sometime during the second half of next year. The Department of Defense requirement for BioThrax is projected to remain at a historical level due to the ongoing need for doses under the existing mandatory Anthrax vaccination program. These levels have historically ranged between 1.5 to 2 million doses per year. By the end of this year, we anticipate entering into a separate contract with the U.S. government for the procurement of BioThrax to meet the requirements of the military's active immunization program. Also, separately, we have begun discussions with HHS regarding additional dose requirements for the SNS, above and beyond the 18.75 million doses under the current HHS market. As you may recall, we have applied to the FDA to extend the expiration dating of BioThrax from three years to four years. In the event that the FDA approves this extension of dating, HHS has agreed to increase the price per dose under the agreement of 13.25 million doses sold under this contract. The aggregate value of this price adjustment is $34 million, of which approximately $60 million could be recognized as 2008 revenue if approval is received this year. Internationally, we completed another meaningful sale of BioThrax to an allied foreign government. We continue to pursue licensing for BioThrax in select foreign markets, which we believe will facilitate sales to governments in these markets for both military and civilian stockpiling purposes. We remain confident that the demand for BioThrax will continue to come from both the U.S. government and from other international governments. Let me now turn to our key product development accomplishments for the quarter. First, regarding our biodefense portfolio. For our licensed product, BioThrax, we remain on track with several enhancement programs for our Anthrax vaccine, namely, the dose reduction study, and the move towards intramuscular administration, and the expansion of the product label to include post-exposure use. We expect to conclude these initiatives over the next two years. Our other key contract initiative is our program to extend the shelf life to four years from the current three years, which I mentioned earlier. We filed an application for the four-year extension with the FDA in 2007 and anticipate we will receive approval later this year, or sometime next year. During the first half of the year, we completed two key acquisitions that certainly bolster our BioThrax portfolio. First, we acquired the Recombinant Anthrax Vaccine Candidate, rPA 102, which will enhance our offering. Recent improvements to the formulation of the rPA vaccine were made to enhance the product's stability. As a result of these improvements, we believe that it is well-positioned to be a leading candidate for an award under an RFP recently issued by HHS for the procurement of up to 25 million doses of the recombinant anthrax vaccine for the SNS. As we announced last week, we submitted what we believe to be a strong proposal in response to the HHS RFP. The government has stated that they will make the award by the end of the year. Importantly, our rPA candidate has the potential to become a complementary product to BioThrax, the world's only FDA-licensed anthrax vaccine. We believe that the U.S. government will continue to buy BioThrax in addition to an rPA vaccine, including ours, when available for the SNS over the long term. Also, earlier this year, we acquired a polyclonal anthrax monoclonal therapeutic from AVANIR. This product is a fully human monoclonal antibody that blocks toxin activity through a novel mechanism of action compared to other monoclonal candidates. We have submitted the development proposal to the U.S. government in response to an RFP that will fund the advanced development of this candidate. Consequently, we expect that this advanced development award to be in the tens of millions of dollars, and regarding future procurement opportunities. Based on an existing HHS procurement contract with another company, we estimate the current market opportunity for anthrax monoclonal therapeutic to be in the hundreds of millions of dollars. Finally, in light of our anthrax franchise, our anthrax IG therapeutic continues to advance under the $9.5 million development contract we were awarded last year from BARDA specifically to conduct the necessary non-clinical trials in advance of initiating the typical human trial which we expect to commence by the end of the year. Based on an existing HHS procurement contract with another company, we estimate that the current market opportunity for anthrax IG therapeutic to also be in the hundreds of millions. In summary, with our multiple product offerings for anthrax, we are well-positioned to provide both the U.S. government and other governments internationally with a complete range of medical countermeasures to protect both military and civilian populations. Regarding our other biodefense franchise, Botulism, we recently received an NIH grant of approximately $2 million to further develop our novel recombinant trivalent botulinum vaccine. In addition to the development of the botulinum vaccine, we are looking at opportunities for the development of a potential botulinum therapeutic. Concerning our commercial portfolio, let me briefly comment on our clinical program. For our single-dose, oral typhoid vaccine candidate, we initiated a Phase IIb trial in the United States following a successful Phase II trial in Vietnam which was completed last year. Importantly, this product will be the world's first single-dose drinkable typhoid vaccine, which would offer significant advantages over the two currently licensed typhoid vaccines in the U.S. In terms of market opportunity, we see significant potential market growth in providing a differentiated product for typhoid. Analysts estimate the market to be near $200 million annually within five years. However, our product candidate would be a single-dose oral product with potential effectiveness in young children among other attributes. We are confident that our product offering could expand the market not only in the U.S. and EU, but also within endemic regions and specifically, in the growing populations in India and China. The economic conditions are increasingly improving in both India and China and even a small percentage uptick from these countries would provide a substantial additional market opportunity for our oral typhoid vaccine. Regarding our hepatitis B therapeutic vaccine candidate, we have been conducting a Phase II study in the U.K. and Serbia to evaluate the safety and immunogenicity of this oral vaccine as a standalone monotherapy for chronic HB carriers. We have already completed recruitment for the first of three study cohorts; however, the enrolment of appropriate subjects into the remaining cohorts has proven to be challenging in the current standard of care in the developed world. As a result, we have key recruitment delays for this trial, and we will be completing the study as soon as feasible. Data collected from all enrolled subjects will be analyzed in full accordance with the study cohort. However, given the number of vaccinations given today as well as the small number of subjects, we do not expect the data to be sufficient to demonstrate human proof of concept from this trial. That said, we are in the process of identifying alternative trial sites in endemic areas of the world where we hope recruitment of suitable chronic carriers will be more feasible and that will allow us to adequately test the effectiveness of this therapeutic candidate. As a result, we are reducing development spending for our hepatitis B vaccine candidate until the new human proof of concept study is initiated in an endemic area in the near future. Finally, let me address the status of our Group B Streptococcus vaccine candidate. As we have outlined in the past, we rigorously evaluate all of our candidate programs to optimize the allocation of resources in the future. As a result of this consideration, in light of additional new programs we have acquired, we are deprioritizing the Group B Streptococcus vaccine candidate. Given the lengthy clinical development timeline and the complexity of multiple working candidate projects, we have concluded that other development candidates in our pipeline are of higher near-term priority. Accordingly, we expect that spending on the Group B Streptococcus candidate will be reduced for the foreseeable future. Let me now turn to our manufacturing accomplishments for the quarter. Regarding our new state-of-the-art large scale manufacturing plants in Michigan, we are currently conducting facility, equipment, and utility validation activities. We are also performing engineering support to facilitate process development in preparation for manufacturing consistency lots in 2009. Remember, this facility is scalable; it has been designed and constructed to enable us to manufacture on a large scale basis for BioThrax as well as for other vaccine products, including our recently acquired Recombinant Anthrax Vaccine Candidate. As for our existing facility, we plan to continue manufacturing at capacity. Our output target for 2008 remains at around 7 million to 8 million doses. Lastly, let me review key accomplishments regarding our business development objectives. Consistent with one of our strategic goals of growth through selected acquisition, we have pursued a two-pronged approach for expanding our product pipeline. As mentioned earlier, on the biodefense side, we acquired both an advanced recombinant anthrax candidate for our anthrax vaccine portfolio as well as a human monoclonal antibody candidate for our anthrax therapeutic portfolio. On the commercial side, we have recently announced an exciting joint venture with Oxford University to develop a novel next-generation tuberculosis vaccine. This is the world's most advanced next-generation TB candidate. The Oxford-Emergent consortium is working with the Aeras Global TB Vaccine Foundation to evaluate the efficacy of this candidate and have been in a Phase IIb proof of concept trial, which we anticipate will begin in early 2009. As you know, TB is a significant global health issue. Over 2 billion people worldwide have been infected with the bacteria, and 1.5 million to 2 million people die from TB each year. This meaningful joint venture was formed specifically to support the manufacturing and clinical development of this candidate. The University of Oxford has exclusively licensed this candidate and related technology to the consortium. We are pleased that the consortium has already secured approximately $60 million from the Wellcome Trust and the Aeras Global TB Vaccine Foundation to fund this Phase IIb proof of concept trial. Under agreements with the consortium, Emergent BioSolutions has the exclusive right to commercialize the MVA Phase IIb vaccine candidate in the developed world and selected developing countries, while the Aeras Global TB Vaccine Foundation will have distribution rights in the rest of the developing world to ensure availability and access to the vaccine for those in need. The other commercial initiative I would like to update is our proposed transaction with Protein Sciences Corporation regarding the acquisition of their Novel flu vaccine, FluBlok, which we announced in May. As you may be aware, bringing the transaction to closure is taking longer than expected. We have filed a lawsuit against Protein Sciences and we continue to pursue our legal options in this matter. At the same time, we will continue to engage in discussions with the Protein Sciences board of directors. It is important to note that we are still exploring ways to find a positive manner in which to complete this transaction. FluBlok would be an excellent addition to our infectious disease vaccine portfolio, and we will benefit from the application of our core expertise in product development, manufacturing, and government contracts. Lastly, we continue to devote time and attention this year to securing additional NGO and government grant funding to advance multiple products in our pipeline. In conclusion, we are building on our past achievements and making further progress towards achieving our goals for this year. This momentum is the reason why I remain confident that we will continue on a path towards achieving our goals in the near and medium term. That concludes my prepared comments. Don will now discuss our financial results for the second quarter and first six months of 2008.

Don Elsey, CFO

Thank you, Fuad. Good morning, everyone. As Fuad mentioned, we released our second quarter 2008 financial results this morning prior to the opening of the markets. The press release is available on our website. Today, we will be filing our quarterly report on Form 10-Q with the SEC. The 10-Q will also be available on our website and on the SEC's website once it has been filed. Our financial performance for the second quarter and first half of 2008 reflects significant progress towards attaining our financial goals for 2008. We continue to deliver doses of BioThrax for inclusion into the Strategic National Stockpile pursuant to our current multiyear contract with the U.S. government. We are also expanding our manufacturing and product development infrastructure, and we are investing in strategic acquisitions and partnerships to further bolster our product pipeline. Our acquisition of both a human monoclonal antibody as a therapeutic for anthrax infection and Advanced Recombinant Protective Antigen Anthrax vaccine during the first half of this year strengthened our anthrax franchise and enables us to offer solutions to all three phases of anthrax infection. Now, I would like to give a summary of our financial results for the second quarter and first six months of 2008. I will start with product revenues. Second quarter 2008 product sales increased by $19.8 million or 88% to $42.3 million, up from $22.5 million for the comparable period of 2007. The increase was primarily due to a 98% increase in the number of doses of BioThrax delivered. Product sales for the second quarter of 2008 consisted of BioThrax sales at HHS of $41.9 million, and an aggregate of international and other sales of $0.4 million. For the six-month period of 2008, product sales increased by $35.9 million or 75% to $83.8 million, up from $48.09 million for the comparable period of 2007. This was primarily due to an 82% increase in the number of doses of BioThrax delivered. Product sales for the six-month period of 2008 consisted of BioThrax sales at HHS of $83.1 million, and an aggregate of international and other sales of $0.7 million. Turning to contracts and grant revenues, second quarter 2008 contracts and grant revenues increased by $0.5 million or 74% to $1.2 million, up from $0.7 million for the comparable period of 2007. Contracts and grant revenues for the second quarter of 2008 consisted of $0.8 million from the Sanofi Pasteur collaboration related to the company's Meningitis B Vaccine candidate, and $0.4 million from NIAID. For the six-month period of 2008, contracts and grant revenues increased by $0.7 million, or 42%, to $2.4 million, up from $1.7 million for the comparable period of 2007. Contracts and grant revenues for the six-month period of 2008 consisted of $1.6 million of revenue from the Sanofi Pasteur collaboration and $0.8 million from NIAID. Moving on to the cost of product revenues and gross margins. In the second quarter of 2008, the cost of product sales increased by $2.8 million or 49%, to $8.7 million, up from $5.8 million for the comparable period of 2007. For the six-month period of 2008, the cost of product sales increased by $5.3 million or 47%, to $16.7 million, up from $11.4 million for the comparable period in 2007. The increase for both the second quarter and six-month period was primarily due to significant increases in both periods in the number of doses of BioThrax delivered. Turning now to research and development expense, second quarter 2008, R&D expenses increased by $3.9 million or 29% to $17.2 million, up from $13.3 million for the comparable period of 2007. This increase reflects higher contract service costs and asset and technology acquisition costs, and includes increased expenses of $2.6 million on product candidates that are categorized in the biodefense segment, $0.9 million on product candidates categorized in the commercial segment, and $0.4 million for other research and development expenses involving technology platforms and central research and development activities. For the six-month period of 2008, R&D expenses decreased by $0.2 million, or 1%, to $20.7 million from $28.9 million for the comparable period of 2007. This decrease reflects lower contract service costs and includes decreased expenses of $3.2 million for product candidates that are categorized in the biodefense segment, partially offset by increased expenses of $2.3 million for those that are categorized in the commercial segment and $0.7 million in other research and development expenses for support of technology platforms and central research and development activities. Next, SG&A expense. In the second quarter of 2008, SG&A expenses increased by $2.4 million, or 19%, to $15 million, up from $12.7 million for the comparable period of 2007. This increase was primarily attributable to an increase of approximately $2.1 million resulting from the addition of personnel and increased legal and other professional services related to the company's headquarters and staff organization to support the overall growth of the company. There was also an increase of $0.2 million in sales and marketing expenses related to the growth of staff in this area and an increase in selling and marketing activities. For the six-month period of 2008, SG&A expenses increased by $3.2 million, or 14%, to $27.1 million, up from $23.9 million for the comparable period of 2007. This increase is also primarily attributable to an increase of approximately $2.8 million resulting from the addition of personnel and increased legal and other professional services related to the company's headquarters and staff organization to support the overall growth of the company. To finish up on the P&L, let's look at net income. For the second quarter of 2008, our reported net income was $1.8 million or $0.06 per basic and diluted share, a significant improvement from our net loss of $5 million or $0.17 per basic and diluted share for the second quarter of 2007. For the six months of 2008, our reported net income was $8.8 million or $0.30 per basic and diluted share, again a substantial improvement from our net loss of $7.7 million or $0.27 per basic and diluted share. In both cases, our average outstanding shares for the second quarter and first six months of 2008 increased by well over 1 million shares or approximately 5% over the share count for the comparable period of 2007. Turning to the balance sheet, cash and cash equivalents at June 30th, 2008 were $84 million compared to $105.7 million at December 31st, 2007, and $92.7 million at March 31st, 2008. The net decrease in cash and cash equivalents for the six-month period resulted primarily from net cash used in operating activities and investing activities amounting to $0.7 million and $22.5 million respectively, offset by net cash provided by financing activities of $1.6 million. Of the $22.5 million of cash used for investing, this includes $10 million advanced to Protein Sciences under our asset purchase agreement. Finally, I want to reiterate our 2008 financial guidance. As of today, we are reaffirming our expectations for full-year 2008 total revenues of between $100 million and $195 million, with the volumes gravitating towards the lower end of this range. It is important to note that our projections are driven by a number of variables, some of which may lead revenues towards the upper end of the range. In our projection towards the low end of the revenue forecast, we have not included the potential approval of the four-year dating. While we remain confident that the approval for the four-year dating is achievable, we perceive it may be in 2009 rather than 2008. As Bob mentioned, the impact of four-year dating for 2008 is estimated at approximately $60 million. Our projections do not reflect the potential acquisition of Protein Sciences. That concludes my prepared comments. I will now turn the call to the operator so that we can begin the question-and-answer portion of the call. I will take just one moment and note that it's been highlighted that I misspoke on our revenue guidance, I initially stated between $100 to $195 million which is quite a wide range; the correct range is between $180 and $195 million as we have guided in the past. So with that, I will turn it back to the operator. Thank you very much.

Eric Schmidt, Analyst, Cowen & Company

Hi, good morning. Thanks for taking my call. Don, in terms of the operating cash used in the quarter, are you owed some payments from HHS or shipments that have been delivered but haven’t received cash for which has caused operating cash to go down?

Don Elsey, CFO

The operating cash went down for a number of reasons, but yes, our accounts receivable has increased over what it was before, and we're now at an accounts receivable level of $22 million.

Eric Schmidt, Analyst, Cowen & Company

And in terms of the subtle change to revenue guidance towards the lower end of the previous range, is the only change there that you're now not necessarily confident about four-year dating or have you taken out any initial DoD revenues?

Don Elsey, CFO

Clearly, there are a number of factors that play into the overall revenue projections. I would say the primary influence is the four-year dating. I want to stress that we're not changing our view on the achievability of four-year dating, it's strictly a timing expectation that instead of this year, it might go out into the first quarter of next year.

Fuad El-Hibri, Chairman and CEO

Currently – let me just answer that question, if I may. We are confident that we will be delivering everything we produce this year. So, whether it is under HHS or DoD, this is something the government will work out between them. The point is that we believe that we will be able to sell all that we can produce this year.