Earnings Call Transcript - EBS Q1 2011

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions First Quarter 2011 Financial Results Conference Call. My name is Anne and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Bob Burrows. Please proceed, sir.

Robert G. Burrows, Vice President, Investor Relations

Thanks, Anne. Good afternoon ladies and gentlemen. Again, my name is Bob 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 2011. 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 with prepared comments will be 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. Before we begin, I’m 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 you may be listening to the replay, this call was held and recorded on May 05, 2011. 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/Press Releases. With that introduction, I would now like to turn the call over to Fuad El-Hibri, Emergent BioSolutions’ Chairman and CEO. Fuad?

Fuad El-Hibri, Chairman and Chief Executive Officer

Thank you, Bob. Good afternoon, everyone and thank you for joining us on our earnings call today. In my prepared comments, I will review our financial performance for the first quarter of 2011, provide guidance on the second quarter revenue, discuss relevant updates to our business, and highlight key near-term milestones. Before I begin, I’d like to take a moment to comment on our news earlier this week. On Monday, May 2, we announced a modification to our current BioThrax procurement contract with CDC. The contract was expanded by 3.4 million doses with a total additional value of up to $101 million. This brings the total number of doses to be delivered under the contract to 17.9 million. Deliveries are contracted to be completed by the third quarter of this year. In addition, we continue to have discussions with CDC representatives regarding to form a multi-year procurement contract. We anticipate an award by the end of the third quarter this year. Now, let me review our first quarter financial results. We achieved total revenues of $18.5 million and realized a net loss of $21 million. As you may remember from our March earnings call, we anticipated reduced deliveries in the first quarter. We redeployed our potency testing capacity primarily to the qualification of replacement reference standards. This process, which is required to enable the continued release of BioThrax doses, has now been substantially completed. Moving onto guidance, we maintain our full year 2011 guidance of total revenues of $320 million to $340 million. We expect second quarter total revenues of $80 million to $90 million, reflecting a return to normal levels of product growth. We anticipate catching up to our total revenue guidance by the end of the year. We also maintained our full year 2011 net income guidance of $35 million to $45 million. Let me now discuss the relevant updates to our business since our March earnings call, beginning with our BioDefense division. I’m pleased to report substantial progress across key programs. We completed multiple engineering runs in Building 55 under our funded multi-year program to license the large-scale manufacturer BioThrax. We completed qualification activities and are preparing a BLA supplement to obtain regulatory approval for a second fill/finish contractor for BioThrax as part of our risk mitigation strategy. We completed dosing patients in the Phase I safety study for both Thravixa, our monoclonal Anthrax therapeutic, and NuThrax, which combines BioThrax with an old novel regimen. We also submitted proposals totaling over $95 million to fund Continued development of Anthrivig, our polyclonal Anthrax therapeutic, Thravixa, and post-exposure indication vaccine. With respect to our BioSciences division, the last of about 2800 infants have been vaccinated and they’re at Phase IIb efficacy trial evaluating our MVA based TB vaccine candidate. This is the largest infant clinical study for a next-generation TB vaccine conducted to date. We’re pleased to be developing this product in partnership with the University of Oxford, Aeras, The Wellcome Trust, and our South African CRO. We look forward to a final study report in the second half of 2012. In addition, for TRU-016, our anti-CD37 therapeutic candidate, which is being developed with Abbott under a collaboration with them, we recently began dosing patients in a Phase Ib2 combination study with Bendamustine in relapsed chronic lymphocytic leukemia patients. Finally, I’d like to provide an update on the key milestones we expect to achieve through year-end. First, in terms of additional U.S. government contracts. For BioThrax, we expect to secure a multi-year procurement contract, which will commit substantially all of our current handling capacity. And for Anthrivig, Thravixa, and BioThrax post-exposure, we expect to secure additional multi-year development funding of up to $95 million. Second, in terms of anticipated milestone payments, we expect to achieve a TRU-016 development milestone, which will trigger a $6 million payment from Abbott. Third, in terms of clinical development milestones, starting with the advanced stage programs for Anthrivig, we anticipate issuing the final study report for the recently completed pivotal clinical trial. For the TB vaccine candidate, we expect the initiation of a Phase IIb efficacy study in HIV-infected adults and adolescents sponsored by Aeras. And for SBI-087 in rheumatoid arthritis, we anticipate completing enrollment for a Phase II dose regimen finding study. And with respect to our Phase I programs, we anticipate filing for TRU-016, initiating a Phase II combination study for CLL, and a Phase I combination study for Anthrivig. For SBI-087, completing a Phase I safety and PK study for systemic lupus erythematosus and for Thravixa completing a Phase I safety and PK study for Anthrax. Fourth, in terms of manufacturing infrastructure milestones, for our Baltimore facility, we’re on track to substantially complete facility modifications and to initiate step transfer for our first product candidate. And for our Lansing facility, we are on track of initiating the manufacture of consistency lot of BioThrax in Building 55 by year-end. Additionally, we continue to pursue acquisition and licensing opportunities to advance our R&D pipeline and expand our sources of revenue. In conclusion, we continue to execute on this year’s operating plan. We look forward to updating you throughout the remainder of the year on our progress toward achieving our key 2011 milestones. That concludes my prepared comments and I’ll now turn it over to Don who will take you through the numbers in greater detail. Don?

R. Don Elsey, Chief Financial Officer

Thank you, Fuad. Good afternoon everyone. As Fuad mentioned, following the close of the market today, we released our financial results for the first quarter of 2011. 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, no later than the close of business tomorrow, Friday, May 6. The 10-Q will also be available on our website. I’ll now provide a brief overview of our financial results for the first quarter of 2011. As we previously guided, our total revenues in Q1 were light. Total revenues were $18.5 million, which were comprised of $5.6 million of product sales and $12.9 million of contracts and grants revenue. As Bob has already discussed, during the quarter we redeployed our potency testing capacity to the qualification of replacement reference standards and other development testing. This process, which is required to enable continued release of BioThrax doses, has now been substantially completed. Looking at the contracts and grants revenues, this increased by 63% or $5 million over the $7.9 million recognized in the first quarter of 2010. This growth was driven by increases in reimbursement revenues related to Building 55 and further contracts awarded in 2010 as well as collaboration revenues from Abbott and Pfizer. On the spending side, our R&D expense in Q1 2011 was $34.8 million versus $19.9 million for Q1 2010, an increase of 74%. On a sequential basis relative to Q4 2010, our R&D expense increased by 17%. In both instances, the growth in Q1 2011 reflects the impact of the programs we acquired as part of the acquisition of Trubion late last year. If one takes into account the contracts and grants funding we have for many of our programs, our net R&D spend for Q1 2011 was $20 million. We expect our total R&D spending will continue to fluctuate quarter-to-quarter due to the various development stages of our pipeline candidates. Our SG&A expense in Q1 2011 was $18.2 million, an increase of $2 million or 12% over Q1 2010. On a sequential basis, our SG&A spending decreased 16% relative to the fourth quarter of 2010. We expect to continue to carefully manage our growth in overhead. As a result of both revenue and continuing investment in our product pipeline, we recorded a Q1 2011 net loss of $21.4 million or $0.61 per share. Finally, let me briefly comment on the balance sheet. Our combined cash, cash equivalents, investments, and accounts receivable totalled $155.2 million as of March 31, 2011 compared with $210.3 million at December 31, 2010. Turning now to our 2011 financial forecast. As Fuad noted earlier, we are reaffirming our 2011 forecast of total revenues of $320 million to $340 million and net income after tax of $35 million to $45 million. For the second quarter of 2011, we are anticipating total revenues of between $80 million and $90 million. Importantly, we remain confident that we will sign a multi-year procurement contract with the U.S. government before the end of September this year. As we stated in our call of March 10 of this year, calendar 2011 is a year of execution. We look forward to completing deliveries of BioThrax under our current U.S. government contract as recently modified, and we expect to begin delivering under a follow-on multi-year contract. We continue to make significant progress with the modifications to our Baltimore facility and the process of licensing for Building 55. We anticipate achieving important development milestones in many of our clinical development programs. We also will continue to focus on growing our business through M&A and are actively reviewing opportunities that would bring near-term value. That concludes my comments. I’ll now turn the call over to the operator so that we can begin the question-and-answer portion of the call. Operator, please proceed.

Eric Schmidt, Analyst, Cowen & Company

Good afternoon. Thanks for taking the question. Just wondering if you could provide a little bit more detail on what substantially completed means, what's actually left to be completed? And I guess in addition, given it sounds like you haven't started reshipping to the stockpile, how you have confidence that the runs that you've been accumulating will pass potency lab testing?

R. Don Elsey, Chief Financial Officer

Thank you Eric. Let me start by saying that with substantially completing the process, we mean that we’ve done most of the testing that is part of the process of qualifying a reference lot. Of course after that, we need to put the package together, analyze the data, compile it, and submit it to FDA, and get back to any time through the process. With respect to the delivery issue, we haven’t shipped yet, but we do expect to ship by the end of this second quarter. As we have shown in our guidance for the second quarter, which is $80 million to $90 million in total sales, which as usual a significant portion of that is product sales. So we do anticipate getting product released by the end of the quarter, and actually shipping by the end of the second quarter.

Eric Schmidt, Analyst, Cowen & Company

So, Fuad, just to be clear then, you've obviously been accumulating a lot of product and that's waiting around to be potency tested once you've finished the qualification. And your best guess, of course, is that most of those lots will pass testing and be shipped this quarter?

Fuad El-Hibri, Chairman and Chief Executive Officer

Correct, absolutely. And also Eric, you remember that we have annual maintenance shutdowns that were performed and the one that we performed last year was towards the latter part of the year, which means that anyway even if we had reallocated our potency testing capacity, the first quarter would have been limited in terms of product release anyway because it takes about three to four months from the time we reinitiate after a shutdown until we get FDA release of our product. So there are certainly lots in the queue that we’re confident are going to test within the normal range for testing throughout the year. So that’s at the – by the end of the second quarter we would have the ability to achieve the guidance that we provided.

Eric Schmidt, Analyst, Cowen & Company

Thanks for the clarification. One more question on the $600,000 in sales to international and other customers. I think that may be the first time you've broken that number out, at least if my memory serves? Is this going to be something we see in the future? And is $600,000 about the kind of run rate or is this an aberrant quarter one way or another?

R. Don Elsey, Chief Financial Officer

So, Eric, this is Don. How are you?

Eric Schmidt, Analyst, Cowen & Company

Good. Thanks Don.

R. Don Elsey, Chief Financial Officer

Okay, we’ve broken that out in past calls and certainly in all of the filings with the SEC. So this is nothing out of the ordinary and we will continue to break it out as we go forward. As you know, as we have talked about the ex-U.S. market in the past, I don’t think one could point to a run rate for ex-U.S. As demands rise, and as we’re able to satisfy those demands with some capacity that may be available, we’ll do so. But I wouldn't project a run rate at this point in time.

Fuad El-Hibri, Chairman and Chief Executive Officer

I would like to add that we are seeking regulatory approval to market BioThrax in several countries globally. As we make progress towards this goal, which we hope will lead to market authorization in those regions, we believe that any additional capacity we secure could potentially boost future sales. While there are no guarantees, I wanted to provide more insight into our efforts to expand our international market.

Eric Schmidt, Analyst, Cowen & Company

Thank you.

Greg Wade, Analyst, Wedbush Morgan

Good afternoon. Thanks for taking my questions. First up, with respect to Building 55, could you give us a little more granularity into the milestones associated with licensure and the anticipated timeline for those? And then, Don, could you just tell us a little bit about what depreciation expense was in the quarter and how you think that's going to behave over the anticipated coming year and maybe next year as you guys get more manufacturing capacity under your belt? Thanks.

R. Don Elsey, Chief Financial Officer

Thanks for joining us today Greg. Let me try to answer the first question, which is that really we have a multiyear contract with BARDA to scale up the manufacturing of BioThrax in Building 55. And this is a development contract, which has normal development milestones that we achieve. We prepare invoices and get reimbursed for the activity that we conducted on the project. So the key milestones, I suppose, for this year are consistency lot manufacture. For next year, it’s clinical testing and nonclinical work, which goes on in parallel, and then hopefully thereafter BLA submission.

Fuad El-Hibri, Chairman and Chief Executive Officer

All right. Greg, good afternoon. With regards to depreciation for the quarter, it was about $2.2 million. And basically, it’s going to remain in that area until such time as Baltimore comes on. As you know, depreciation begins when an asset is put in place for its intended use. So Building 55 won't contribute to that stream until such time as it’s licensed. So Baltimore is probably the next significant asset investment and we would look at that beginning probably in 2012.

Greg Wade, Analyst, Wedbush Morgan

Great. Thanks for taking my questions.

Fuad El-Hibri, Chairman and Chief Executive Officer

Thank you, Greg.

Operator, Operator

(Operator Instructions) And our next question comes from the line of Karen Jay with JPMorgan. Please proceed.

Karen Jay, Analyst, JPMorgan

Good afternoon. It’s Karen for Cory Kasimov. I have two questions. The first is on, now that you've been awarded the bridging contract, is there any visibility into potential timing of the RFP for the renewal?

Fuad El-Hibri, Chairman and Chief Executive Officer

Yes, thank you for joining us, Karen. Yes, indeed we were very pleased to execute the modification which actually adds 3.4 million doses to the existing contract that we have been overall delivering early on, so that bridges us through September. The RFP is still being worked on. We have no reason to believe that it’s not forthcoming very soon. We remain confident that it’s going to come out. We remain confident that an award will be finalized by the end of the third quarter this year.

Karen Jay, Analyst, JPMorgan

Okay, great. And then my second question is on Building 55, any updates on whether or not bridging studies will be required?

Fuad El-Hibri, Chairman and Chief Executive Officer

We have dialogue with FDA on an ongoing basis. Once our consistency lots are completed, we will have another meeting with the FDA to discuss this in greater detail. So it’s a little premature now to comment and we’re prepared to do both; if there is a study to be done we’re prepared to do that. If we don't have to do one, it means earlier approval was also the same. So we’re timing as to what the situation might be. We’re happy that our Building 55 contract with the government allows and provides funding for the situation that we do have to do a clinical purchase.

Karen Jay, Analyst, JPMorgan

Great, thank you.

Fuad El-Hibri, Chairman and Chief Executive Officer

Thank you.

Operator, Operator

Ladies and gentlemen, we have no further questions. This concludes today's question-and-answer session. I’d now like to turn the call back over to Bob Burrows for closing remarks.

Robert G. Burrows, Vice President, Investor Relations

Thank you. And ladies and gentlemen that concludes today's call. Thank you for your participation. Please note that today's call is being recorded and a replay will be available beginning later today through May 19. Alternatively, there is available a webcast of the call, an archive version of which will be available later today accessible through the company's website. Thank you again, and we look forward to speaking to all of you in the future. Goodbye.

Operator, Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.