Earnings Call Transcript - EBS Q1 2009

Operator, Operator

Good afternoon, my name is Antoine and I will be your conference operator today. At this time I would like to welcome everyone to the Emergent BioSolutions Q1 Financial Results Conference Call. (Operator Instructions) I would now like to turn the call over to Mr. Robert Burrows. Please proceed, sir.

Robert Burrows, Vice President, Investor Relations

Thank you, Antoine. Good afternoon ladies and gentlemen. My name is Robert Burrows, Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss Emergent BioSolutions financial results for the first quarter of 2009. 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 will be Fuad El-Hibri, Chairman of the Board and Chief Executive Officer, and Don Elsey, Chief Financial Officer. Additional members of our senior management team will be present on the call for the Q&A session, including Dan Abdun-Nabi, President and Chief Operating Officer, and Dr. Jim Jackson, Chief Scientific Officer. 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 or 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 handled and recorded on May 7, 2009. 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 presented today 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. 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 of the Board, Chief Executive Officer

Thank you, Bob. Good afternoon ladies and gentlemen. We appreciate your participation on this call. At the close of the market today, we reported financial results for the first quarter of 2009. I am very pleased with Emergent’s overall performance during the quarter. We delivered strong sales and earnings results, and we remain firmly on the path to achieving our financial and product development goals for the year. In reflecting on today’s results, I would like to provide a brief update on selected aspects of our business. To begin, let me update you on our biodefense franchise. Specifically, I would like to address our ongoing core BioThrax business and our recombinant anthrax vaccine opportunity. First, I will discuss BioThrax. As you know, BioThrax is the only vaccine licensed by the FDA for the prevention of anthrax infection. We are currently manufacturing and delivering doses of BioThrax to HHS and the Strategic National Stockpile under a multi-year contract for 18.75 million doses valued at up to $448 million. The product sales reported this quarter are a result of delivering many doses to the SNS under this current contract. We are contracted to complete deliveries of BioThrax under this contract by September 2009, if not earlier. We have also secured a follow-on contract with HHS for an additional 14.5 million doses of BioThrax valued at up to $405 million. We will transition into this new contract upon completing delivery under the current contract without interruption. As a result, we have BioThrax sales visibility for the next 24 months. Along with this, we expect that the U.S. government will continue to purchase BioThrax in the medium and long term. In addition to the market opportunity for BioThrax in the U.S., we continue to address growing demand for the product worldwide. Recently, we announced that BioThrax received market authorization in India. This development, in parallel with similar efforts in other foreign jurisdictions, is intended to achieve greater market penetration of BioThrax outside the U.S. Now let me briefly describe the various BioThrax enhancement efforts that are currently underway. First, FDA approved and changed our BioThrax license, providing for an intramuscular route of administration and a reduction to a five-dose schedule over 18 months. This license change was supported and funded by the CDC, and we continue to work with them to achieve a three-dose schedule over six months. Second, at the beginning of this year, we applied to the FDA to extend the shelf life of BioThrax from three years to four years. We anticipate FDA approval of the application sometime this year. This will trigger a price increase for doses delivered under the current contract, resulting in the company receiving an additional payment of approximately $34 million. In addition to the financial benefit, four-year dating provides BioThrax with a further competitive advantage for stockpiling. Finally, we are making progress on a post-exposure indication for BioThrax, which is funded by HHS. As you can see, we continue to enhance our flagship product with multiple initiatives designed to meet growing government needs. Next, let me update you on the RTA opportunity. Last year, we acquired an advanced recombinant anthrax vaccine candidate, responding to an HHS RSP to develop and deliver up to 25 million doses of rPA, and entered into contract negotiations with BARDA regarding an award. If awarded, the contract is anticipated to have a value in excess of $500 million, with terms of five to eight years. Recently, HHS amended the solicitation requiring bidders to submit a comprehensive regulatory plan to the FDA by June 15. Since then, we met with BARDA, which advised us that they remain fully committed to this award. In response to the request, we expect to submit the required regulatory documentation to the FDA by the end of this month, ahead of schedule. Although BARDA has not specified a revised timetable for an award, we remain confident that our proposal will be responsive, and we continue to expect to receive an award. Turning to our commercial pipeline, let me begin with a brief update on our TB candidate. Last year, we announced the formation of a joint venture between Emergent and the University of Oxford to develop the world's most clinically advanced vaccine under development to prevent tuberculosis. Just recently, we initiated a phase IIb efficacy trial for our TB vaccine in South Africa, with an intended enrollment of over 2,700 infants and largely funded by the Wellcome Trust and the Aeras Global TB Vaccine Foundation. The trial is expected to last approximately two years. In terms of market opportunity, TB is a truly global epidemic. It is the world's second leading cause of death from infectious disease in adults after HIV. According to a recent WHO report, over one-third of the world's population is latently infected, and approximately 1.7 million people die of TB every year. As of 2007, over 140 countries in the world, including countries in Europe and Asia, continue to vaccinate infants, adolescents, and adults with VCG, the only available vaccine against TB today. More recently, it is estimated that VCG is administered to over 70 million infants annually in both the developing and developed worlds, including Europe, India, and China, and is routinely given to adult patients with respiratory TB. Given the continuous emergence of drug-resistant strains of TB and the variable efficacy of VCG, medical experts have identified a need for a new immunization strategy. Our TB candidate is a recombinant vaccine and is intended to augment immune response in individuals previously immunized with VCG. If proven to be safe and effective, our TB vaccine could address a sizable unmet global need with potential annual requirements approaching 100 million doses. Now moving on, let me update you on the status of our manufacturing infrastructure. In connection with our ongoing negotiations with HHS for the rPA contract, we recently committed to dedicate our new large-scale manufacturing facility in Lansing to the development and manufacture of rPA. We believe that large-scale domestic manufacturing capacity is necessary for receiving a large contract award. Pre-award activities are ongoing in this facility. In addition, we have initiated plans to expand our BioThrax manufacturing capacity to address growing market opportunities. Lastly, let me comment on our 2009 forecast. We are reaffirming our forecast for total revenues of approximately $225 million to $240 million and net income in excess of $20 million. Let me remind you that this forecast does not reflect any financial impact from an rPA award. Furthermore, let me point out that with or without an rPA award this year, our core business remains strong and our reaffirmed guidance represents significant revenue growth over last year. That concludes my prepared comments, and I will now turn it over to Don, who will take you through the numbers in greater 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 first quarter of 2009. I encourage everyone to take a look at the press release, which is currently available on our website. We plan to file our quarterly report on Form 10-Q with the SEC by the close of business tomorrow, Friday, May 8, 2009. The 10-Q when filed will also be available on our website. Now let me discuss the financial results. The first quarter was very strong for our company. Our product sales came in at $61.7 million, which is an increase of 49% over Q1 2008. The growth in sales quarter-over-quarter was driven by a 52% increase in the number of doses delivered to the SNS. Contracts and grants revenue was $2.8 million, a 134% increase over Q1 2008. This growth reflects the impact of contracts we received from BARDA and NIAID in September 2008, as well as the continuation of work under earlier contracts and grants. Our gross profit on product sales for Q1 was $46.3 million, which is an increase of 38% over Q1 2008, and our gross margin on product sales remains strong at 75%. With respect to R&D spending, we continue to advance the development of our product pipeline with activities including enhancements to BioThrax. For the quarter, development spending was $15.9 million, which was an increase of 39% over first quarter 2008. Compared to the fourth quarter of 2008, the growth in R&D spending was only 12%. The growth over the fourth quarter of 2008 was driven primarily by an increase in development for new product candidate programs, including rPA, anthrax monoclonal antibody, as well as preparing for the initiation of the phase IIb tuberculosis trial. Our SG&A spending of $16 million was a 32% increase over first quarter 2008; however, when compared to the fourth quarter of 2008, SG&A increased by only $2.1 million or 15%. The main increase versus the fourth quarter 2008 was a result of implementing FAS 141R, which required us to expense $1.4 million of deal expenses associated with the terminated protein sciences proposed transaction, which were previously capitalized in 2008. If this expense had not been required to be recognized, the sequential increase would not have been significant. We continue to focus on tightly controlling the growth in general and administrative expenses. Our bottom line net income for the quarter was $11.1 million, or $0.37 per basic share, compared to $7 million or $0.24 per basic share for Q1 2008. For the first quarter, the most notable items on our balance sheet were cash and accounts receivable. Our balance of cash and cash equivalents was $61.4 million, and our accounts receivable balance was $74.1 million. The majority of this balance was received early in Q2, giving us cash balances well in excess of $100 million. Finally, as Fuad stated, we are reaffirming our 2009 financial guidance. As we have discussed in previous earnings calls, our product revenues and, in turn, our net income will fluctuate from quarter to quarter. Despite a pre-established target delivery schedule, our shipments to the government each quarter can vary significantly based on certain factors including manufacturing yield, product release, and SNS logistics. We expect that this variability will continue on a quarterly basis. In conclusion, our financial performance as reported today positions us well to achieve our objectives for year-over-year revenue growth and year-end profitability. The strength of our operations and our ability to effectively manage our business in pursuit of our strategic initiatives remains on track. We look forward to achieving our eighth consecutive year of profitable operations while making progress toward advancing to ultimate licensure our pipeline of clinical programs. That concludes my prepared 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, please proceed.

Operator, Operator

(Operator Instructions) Your first question comes from Cory Kasimov with J.P. Morgan.

Mona Ashiya, Analyst, J.P. Morgan

This is actually Mona for Cory. In your prepared remarks, you mentioned that you expect sales of BioThrax to continue beyond 2011. I wondered if you could expand a bit on the basis for this confidence and how you think that might change the availability of an rPA vaccine.

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

This is based on several discussions that I have had with representatives of BARDA and HHS where they have stated that they continue to pursue a multi-product, multi-supplier strategy. BioThrax has several important attributes that continue to meet government requirements. With all the enhancements we’re making to that product, we anticipate that the government will continue to purchase not only under this current contract but beyond that. If you go back since we acquired the facility ten years ago from the state of Michigan, we have been under contract with either DOD or HHS for more than ten years.

Mona Ashiya, Analyst, J.P. Morgan

Okay, and sort of related to that, you mentioned that you have this dedicated manufacturing facility in Lansing for the production of rPA. Given the delay there now, how do you handle that? At what point do you decide that you want to use this all for BioThrax?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

The facility isn’t sitting idle, and we are conducting pre-award activity for rPA there. Obviously, if there are more than the expected delays with this rPA award, we would reevaluate whether we would continue with the pre-award activities or revert back to BioThrax. Rest assured that we are very interested in keeping this critical asset fully utilized. Currently, in anticipation of the award, we are conducting pre-award activity on rPA.

Mona Ashiya, Analyst, J.P. Morgan

Okay, and one more strategic question—it is something that we have touched on in the past, but you have spoken about targeting this bar of $20 million for profitability, and I am wondering at what point you would feel comfortable targeting a higher profitability level? I realize it is a balance between investing in the commercial pipeline and letting it flow to the bottom, but how do you think about that for your business?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

That is a very good question. We are very excited about our commercial pipeline of products, and pipeline translates into future growth and other licensed products. There is a tension between investing more money in the pipeline as it advances and maintaining profitability. So, we try to balance that, at least for now, by maintaining profitability around the $20 million level. Now, as more products advance into late-stage clinical trials, that equation may change, but for now, our objective is to remain profitable.

Mona Ashiya, Analyst, J.P. Morgan

Actually, just on the commercial pipeline, of your various commercial candidates, which do you believe would make it to market first, and when would that be given where they are right now?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

What I can say is that our TB vaccine, which we are very excited about given the large potential market demand, is in a phase IIb study right now. We expect to know whether this product is safe in that indication within two years. If it is, we will certainly accelerate the further development of the program and get it into phase III as quickly as possible. With the support of NGOs such as the Wellcome Trust and Aeras, we believe that we will have funding that will complement our own. So we are very excited about the TB opportunity. It is difficult to project, but this study will take around two years. Normally a phase III study might take two to three years, so you can take it from there. With respect to hepatitis B, which is also an advanced program, we have now transferred the manufacturing process to a Chinese DMO. We have identified a Chinese TRO and we expect to file an IND there to start up a phase II efficacy trial as soon as possible thereafter in China. We are very excited about that. And why China? Because hepatitis B disease is highly prevalent there, and there are many chronic carriers. So, it facilitates enrollment and the quick completion of an efficacy trial there.

Mona Ashiya, Analyst, J.P. Morgan

That is very helpful. Thanks so much.

Operator, Operator

Your next question comes from David Moskowitz with Caris & Company.

David Moskowitz, Analyst, Caris & Company

First of all, the number of doses that you guys shipped in the quarter, and really just as importantly, how many of the 18.75 million doses for the current contract have you shipped thus far to the government?

Don Elsey, Chief Financial Officer

Let me answer it this way: We normally don’t give out specific dose shipment numbers in any given quarter. However, we have about two million in change that are left on this particular contract. We expect, as Fuad mentioned in his comments, that we will transition immediately over to the new contract, so from a shipment perspective, a manufacturing perspective, it is going to be fairly transparent.

David Moskowitz, Analyst, Caris & Company

Okay, very good. You guys have until September to complete those shipments, is that correct?

Don Elsey, Chief Financial Officer

We actually have until September of 2010 to complete the shipments on the current 18.75 million doses, so we will be completing delivery of that approximately a year early.

David Moskowitz, Analyst, Caris & Company

I got it. If you are able to make 7.5 billion doses a year and you’ve got about 2 million left, so that means you can make about 1.8 a quarter. It seems to me like there is going to be some flexibility in terms of shipment this quarter. I know there is some overseas demand. You guys mentioned, I think, in the prepared comments about growing the penetration overseas. So, could you talk a little bit about that, and also I think the pricing element of that would be important.

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

Remember there are several factors that go into delivery. One is, of course, our manufacturing schedule. The other is the FDA release of each launch, which may vary in time. Ultimately, there are also the logistics, which Don said earlier: when the CDC can receive the shipment. All I can tell you so far is we have pretty much shipped everything that we produce as quickly as possible within our schedule at least to the governments, and typically the government has been able and willing to receive our shipment. I want to highlight the point that Don made earlier: There is variability from quarter to quarter based on the schedule of the delivery and when they actually accept the shipment. As you look at it, we are manufacturing at full capacity right now, and minus the growing international sales that we position, we are delivering everything else to HHS.

David Moskowitz, Analyst, Caris & Company

You guys in the past had talked about, about 5% of BioThrax revenues, or doses, I can’t remember what that statistic was, leaving the U.S., or not being shipped to the U.S. government. What percentage of doses, or sales, do you expect to go overseas this year?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

Our sales are in the millions of dollars annually, and our objective, of course, is to keep growing those sales. As I said before, given our flexibility and schedule with HHS, we can allow the doses contracted with foreign governments to be shipped, even if it means that we might have a few less doses to deliver to HHS for a particular quarter. So far, we have always been ahead of schedule. We have managed quarter-to-quarter shipments to the extent we can accommodate international sales, and it hasn’t been a problem so far.

David Moskowitz, Analyst, Caris & Company

Maybe I am looking at this wrong. Was there a significant amount of overseas shipment this past quarter?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

We don’t really comment on that.

David Moskowitz, Analyst, Caris & Company

Okay. It looks like R&D was a little bit light this period relative to the historical trends. I am just wondering if there is anything notable about that. Also, your tax rate was 42% in the quarter. Is that the run rate we should be looking for going forward?

Don Elsey, Chief Financial Officer

First off, with regards to the R&D expenditure, the activities in our pipeline clearly ebb and flow with regard to finishing trials, entering new trials, etc. Particularly with typhoid and hepatitis B, you will see from the spending outline for those two products as we are transitioning those to the end that we talked about earlier. The actual out-of-pocket spend is a little bit less than in periods past. It was a combination of factors, so you can’t take a look at the quarterly spending as indicative of a particular trend. I would just say this quarter was a combination of activities in the various candidates that caused it to be a little less spending this quarter than in the past. Regarding the tax rate, our annual basis is in the area of 40% plus or minus depending on what is going on at any point in time and where our shipments are. We are not able to disclose externally where we ship to the SNS, but clearly it has an impact with regard to taxation and our overall effective rates, along with the whole tax picture. Generally speaking, we have managed it in the 40% range, maybe a little bit less than that when considering the year in total.

David Moskowitz, Analyst, Caris & Company

I have one last question on product. When you guys went over the pipeline, I didn’t hear anything about the AIG product. I think that is a pretty exciting technology. If I understand it properly, you could get an HHS contract sometime next year for that product. Could you talk about that a little bit in terms of timing and the potential opportunity?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

Indeed, AIG remains a very cutting-edge program for us. We started what we hope to be the pivotal clinical trial, and that is ongoing. There is not much to report other than that we started that about a month ago, and we still believe rPA is likely to come out sometime next year. Our goal is to position ourselves with this product to be competitive.

David Moskowitz, Analyst, Caris & Company

How big could that RFP be?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

Previously, the government has expressed a requirement for about 100,000 doses for each; the AIG program product and also one of the anthrax monoclonal product requirements. So far, only 10,000 doses have come back, so 90,000 are still up for grabs, assuming that requirement remains the same, which we have no reason to believe that it will change.

David Moskowitz, Analyst, Caris & Company

And the price per dose for the 10,000 doses?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

The previous price for the 10,000 doses was around $14,000. Again, using a round number $10,000 per dose, 90,000 doses would translate to about $900 million. This is a large opportunity; it is a very important product because it is a therapeutic, and we are very excited about that opportunity. We are also making progress on our anthrax monoclonal candidate, which I wish I had more time to talk about in my prepared comments, but we are excited about each of those candidates.

Operator, Operator

Your next question comes from Eric Schmidt from Cowen & Company.

Eric Schmidt, Analyst, Cowen & Company

Fuad, I was hoping you might comment on which you expect to receive first: either the rPA contract or another contract for BioThrax.

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

That is an interesting question, Eric, because those are basically on parallel tracks. Looking back at our history and contracting with the government, we have annual contracts. Lately, the government has been willing to give us a three-year, multi-year contract. So far, we are on two or three-year contracts. We are excited with this longer-term commitment that the government is willing to do. I would think that in the last year of the contract, the government will focus on negotiating the next three-year contract. We always hope that we might get their attention a little earlier than that, but we believe that a year in advance of the expiration of the current contract would be a time when we would start entering discussions with BARDA again.

Eric Schmidt, Analyst, Cowen & Company

I take that to mean you don’t expect a BioThrax contract until maybe the second half of next year?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

Yes, something like that. Let me put it this way: I would expect discussions to start sometime next year. We won’t start on the new contract until the third quarter this year. We would like to make two or three deliveries under the current contract before we go back to the government to ask for more.

Eric Schmidt, Analyst, Cowen & Company

Are you optimistic for rPA this year, or could that slip into next?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

I asked Dan to participate today. Dan is our president and COO. He has been spearheading the discussions and negotiations with BARDA, and he can share with you his discussions with BARDA representatives recently.

Dan Abdun-Nabi, President, Chief Operating Officer

Sure, Fuad. As Fuad indicated, we met with BARDA after they amended the solicitation requiring the regulatory plan be submitted to the FDA by June 15. At that meeting, they laid out what they saw as the steps toward completing the contract process. They indicated that they are very committed to completing the process. They have gotten assurances from the FDA that the FDA will review the submission on the regulatory materials very quickly and respond to the bidders with any comments that the FDA might have. Following receipt of the comments, we expect to confer and address those observations in a submission that we would then make to BARDA. We would modify anything that needs to be changed to accommodate the FDA’s observations. At that point, BARDA would undertake its own review. They have a technical panel process at BARDA, and the plan would then be referred to the technical panel for evaluation as well. Then we would enter into contract negotiations to the extent modifications are required. Our expectations around this is that this could be a good 12-month process.

Eric Schmidt, Analyst, Cowen & Company

When do you expect that you might share some additional information on your rPA vaccine, such as stability or clinical data, or potentially an update on your manufacturing that you have ongoing in the background there?

Dan Abdun-Nabi, President, Chief Operating Officer

In terms of stability, I think we previously indicated that the formulations we have now believe have addressed the stability issues that VaxGen suffered when that product was in their hands, which gives us a great deal of confidence that this is a product that meets BARDA's requirements and can achieve the goals and objectives of the RFD and the contract.

Eric Schmidt, Analyst, Cowen & Company

What kind of duration of stability do you have now?

Dan Abdun-Nabi, President, Chief Operating Officer

I don’t have the specifics; it is well over a year, maybe approaching the 24-month time period, I think extended beyond what VaxGen previously had been able to demonstrate and I think it is satisfactory to meet the requirements of the RFD. In terms of specifics, we ought to get something out to investors at an appropriate time in the future so you can better understand the profile of the product and where we see it going. In terms of manufacturing, we think it is a fairly straightforward process that would be undertaken within building 55 using the standard fermentation capabilities that we have there. Building 55 is uniquely suited to address the large-scale manufacturing requirements for the rPA candidate. I am not sure there is anything special or unique that we need to share with you regarding manufacturing capabilities; however, it is a compliant site with quality control and assurance systems in place. It is also a secure facility. We have been manufacturing BioThrax there for many years, so we understand the regulatory requirements. From that side, I think we have checked all the boxes.

Eric Schmidt, Analyst, Cowen & Company

Great, thanks a lot.

Operator, Operator

Your next question comes from Daniel Mallin from WBB Securities.

Daniel Mallin, Analyst, WBB Securities

I have a couple of clarification questions on the rPA. I know that much has been made about the delay, but I am more interested in terms of the time frame to develop a successful rPA vaccine, assuming that one can ultimately be developed. I know that the contracts are actually eight years. I am wondering if you can sort of map out for me a little bit, assuming that a contract was awarded or two contracts were awarded: in other words, let’s say tomorrow you received a contract, where do you stand in terms of the development? I don’t think you have done any manufacturing validation trials. I guess you are still playing with lab-scale material that was either given to you by VaxGen or that you produced in small reactors on your own, but clearly to initiate an additional trial you would have to do some manufacturing validation trials. So, I guess if you could just try and map out for me a little bit under the presumption that a contract award is made henceforth, how quickly would we expect to have an additional trial begin? I assume it would be a phase II trial. From there, do you think that it is really eight years to deliver the 25 million doses, or is it conceivable that it can be done in five or six?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

That is a loaded question, Dan; let me see if I can answer each aspect of it as best as I can. First let me say that whenever there is a technology transfer from one facility to another, process validation would need to be conducted. We are in the process of transitioning from the VaxGen facility to our facility, so after the tech transfer is completed, we would start validation. Your assumption that the next clinical trial would be a phase II trial is correct. That would be done as soon as there is an award and we can gear up for that clinical trial. Regarding the duration, the government has given us five to eight years to do that. I think the failure of the previous rPA developer and executing this under stressed timelines has given the government the motivation to give developers more time for development. So, rather than setting us up for failure, the government wants us participating, and we would all like to see this completed as quickly as possible. The other variable is when we can deliver a product into the SNS. The answer is when it is EUA-able. The question still remains largely open: when is a product EUA-able? Is it when it has completed its phase III studies? When it has completed all the pivotal animal studies? Or sometimes it is before that, and there is still some question as to when a product can actually be delivered into the SNS. The conservative approach would be to say it might take the full eight years to get there.

Dan Abdun-Nabi, President, Chief Operating Officer

I have just one other observation in response to your comment regarding lab scale versus full scale. The material that we have was made at full scale, so we are not talking about highway patches or lab-scale material. This is manufactured at full scale, the commercial scale that we would take for the final product. So, I just wanted to clarify that. In terms of the next study, it would be very quickly after contract award would be the current plan so that we can continue the development path that had been started before we assumed control of the product.

Daniel Mallin, Analyst, WBB Securities

I assume you would have to manufacture some proteins specific for your next trial as opposed to using whatever protein you might have inherited from VaxGen, yes?

Dan Abdun-Nabi, President, Chief Operating Officer

Not necessarily. I don’t think that is necessarily a fair conclusion. We would formulate the product as we have now designed it and then proceed with the trial. That is part of our regulatory plan, and we think it is entirely reasonable. We have had outside consultants working with us on this, and everybody has agreed. We are going to meet with the FDA as indicated earlier, and we will get some visibility into their views as well.

Daniel Mallin, Analyst, WBB Securities

Are you currently developing this program with any government funding or grants, or is this all based on internal funds?

Dan Abdun-Nabi, President, Chief Operating Officer

When we met with BARDA, we asked if we could secure pre-contract funding for the continued development of the rPA. The response was that bidders in this RFD are not eligible to receive pre-contract award funding. So, we understand that would be true for all participants in this process.

Daniel Mallin, Analyst, WBB Securities

Thank you, and once again congratulations on the quarter.

Operator, Operator

Your final question comes from Greg Wade from Wedbush Morgan.

Greg Wade, Analyst, Wedbush Morgan

I was just wondering if you might give us the number of doses that were delivered to the SNS in the first quarter and how many doses remain under contract.

Don Elsey, Chief Financial Officer

The question was previously posed, and we don’t give out specific dose numbers, but I did allude to in answering the earlier question that approximately $2 million in change remain under the current contract; when that is completed, we anticipate beginning delivery under the 14.5 million-dose contract, so it will be fairly transparent.

Greg Wade, Analyst, Wedbush Morgan

Thanks so much.

Operator, Operator

I apologize for Eric getting in front of me; you know sometimes you just can’t control him. In terms of the BioThrax expansion for the facility, the timelines for that—is that a 2009 event where you think you can be more specific about that or should we think of more details behind that plan in the 2010 timeframe?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

Obviously, about a year ago, before the RFP for rPA, we had envisioned manufacturing BioThrax at large scale in the brand new automated facility. We were excited about it. Then when the RFP came out, we felt that this asset would be critical in securing large-scale orders for rPA manufacturing. Now that this facility, as I mentioned before, is currently dedicated to the pursuit of pre-award activity. Since then, we looked at additional options within and outside our facility; as you know, we have 12.5 acres with several buildings where we could look at relatively quickly to install additional capacity at the current scale. We are looking at different options, and as soon as we have a plan finalized, we will update you on that.

Craig Gordon, Analyst, Cowen & Company

Great, and in terms of Typhella, my understanding is we are still waiting on phase IIb data from the U.S. trial, or has that already gone into phase IIc? Can you just update us on the timelines for Typhella and when do you see that product going into phase III depending on the phase II data?

Fuad El-Hibri, Chairman of the Board, Chief Executive Officer

The clinical study reports are due to come out next month. The trial is done here in the United States, and we will report and publish that. Thereafter, we are planning to take Typhella along with hepatitis B to an Asian partner. It could be the same Chinese partner; it could be another partner, and with that then we would gear up for a subsequent clinical trial.

Craig Gordon, Analyst, Cowen & Company

Great, thank you very much for taking my questions.

Operator, Operator

This concludes the question-and-answer portion of today’s call. I will now turn the call back over to Mr. Robert Burrows.

Robert Burrows, Vice President, Investor Relations

Thank you, Antoine. Ladies and gentlemen, that concludes today’s call, and thank you all for your participation. Please note that today’s call has been recorded, and a replay will be available beginning later today through the 21st of May. Alternatively, there is a web cast of today’s call available, with an archived version accessible through the Company’s website. Again, that is www.emergentbiosolutions.com. Thanks again, and we look forward to speaking to all of you in the future. Good-bye.

Operator, Operator

Thank you for your participation in today’s conference call. This concludes the presentation. (Operator Instructions) Have a good day.