Bob Burrows - VP of IR Dan Abdun-Nabi - President and CEO Bob Kramer - EVP and CFO Adam Havey - EVP of Business Operations and President of Biodefense Division.

Keay Nakae - Chardan Katie Brennan - Wells Fargo Jessica Fye - JPMorgan Lisa Springer - Singular Research Joseph Thome - Cowen and Company François Brisebois - Laidlaw.

Good day, ladies and gentlemen, and welcome to the Q1 2017 Emergent BioSolutions Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce the company for opening remarks. Please go ahead..

Thank you, Vincent, and good afternoon, everybody. My name is Bob Burrows, Vice President of Investor Relations for Emergent, and thank you for joining us today, as we discuss our first quarter 2017 financial and operational results.

As is customary, today's call today is open to all participants, and in addition, the call is being recorded and is copyrighted by Emergent BioSolutions. Participating on the call with prepared comments with be Dan Abdun-Nabi, President and Chief Executive Officer; and Bob Kramer, Executive Vice President and Chief Financial Officer.

A Q&A session will follow at the conclusion of our prepared comments, and other members of our senior management will be available to participate if need be.

Before we begin, I will remind everyone that during today's call, either on our prepared comments or the Q&A session, management may make projections and other forward-looking statements related to our business, future events, our 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.

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 as well as during the Q&A session, we may also 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 the reconciliations between our GAAP financial measures and the non-GAAP financial measures. For the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on May 4, 2017.

Since then, Emergent may have made announcements related to topics discussed during today's call. So again, please reference to 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 Homepage of our website.

And with that introduction, I would now like to turn the call over to Dan Abdun-Nabi, Emergent BioSolution's President and CEO.

Dan?.

Thank you, Bob. Good afternoon, everyone. Thank you for joining us. During the call today, I will make a few introductory remarks, and then turn the call over to Bob Kramer who will review our recent financial performance and guidance for 2017. This was a quiet, business-as-usual quarter for us.

I'd like to begin with a summary of where we stand against our 2017 financial and operational goals. As a reminder, those goals are to achieve total revenue of between $500 million and $530 million as well as other financial metrics that Bob will discuss later on the call.

Also to initiate 3 Phase I or Phase II clinical studies for emerging infectious disease therapeutics, advance the development of NuThrax, our next generation anthrax vaccine, to enable the initiation of a Phase III study in 2018, initiate 2 human factor studies for a nerve agent antidote autoinjector.

And finally, to complete an acquisition that generates revenue within 12 months of closing. So starting with our revenue goal. We remain on track to achieve forecasted total revenue of between $500 million and $530 million. In doing so, we anticipate that we will more than double our international sales revenue over last year.

Our anticipated growth in international sales is expected to be driven by orders across our product portfolio from repeat, as well as new, customers from a number of countries across the globe.

On the therapeutic side, we're expecting to increase sales of both of BAT, our Botulism Antitoxin and VRG, our vaccine immunotherpeutic for the smallpox vaccine.

On the vaccine side, the recent German approval for a large-scale manufacturing of BioThrax, positions us to pursue licensure across targeted countries within the EU, providing a foundation for our efforts to expand international sales of BioThrax.

On the device side, RCL continues to be a contributor to our international revenue, and we have experienced market growth in international demand for TROBIGARD, our nerve agent antidote autoinjector.

Orders for an interest in TROBIGARD has exceeded our initial 2017 supply capacity, and working with Demara, a recognized world leader in the design, development and manufacturing of drug delivery devices, we plan to double our manufacturing capacity by the end of this year and triple that capacity in 2018.

The outlook for our international sales growth this year provides us with confidence in our ability to steadily drive towards our 2020 goal of having at least 10% of our revenue derive from ex- U.S. sales. Moving onto our operational goals.

In the first quarter, we commenced, with the support of the NIH, a Phase Ib study evaluating the safety and tolerability of UV 4V, our novel anti-bio candidate being developed as a potential oral treatment for dengue viral infection. 2 additional product candidates are scheduled for clinical study initiation later this year.

A seasonal flu therapeutic and a Zika therapeutic these candidates, as well as NuThrax and our autoinjector program remain on track with their development timelines. Now regarding our M&A goal, we continue to pursue a number of opportunities that will leverage our core competencies.

These targets include businesses and revenue generating products in the vaccines, therapeutics and device spaces, as well as pipeline candidates that can we acquired with grant and contract funding that will contribute to our revenues. I remain confident that we are on track to execute at least one meaningful acquisition in 2017..

This 5-year contract to manufacture and store bulk drug substance will enable future filling and deliveries of that final drug product to the SNS. These contract actions with BARDA highlight our ongoing relationship with the U.S. government, as a trusted partner in the public health led preparedness efforts.

As a reminder, our 2017 goals are designed to advance us incrementally towards achieving our 2020 goals, which are to achieve $1 billion in total revenues, with at least 10% derived from ex-U.S.

sales, achieve a net income of at least 13% and achieve a portfolio that includes 6 products in clinic or advanced development, 3 of which are dual market opportunities. I will now turn the call over to Bob Kramer for details on our financial performance during the quarter.

Bob?.

Thank you, Dan, and good afternoon to everyone and thanks for joining the call. Today, I'll comment generally about our financial results for Q1 of 2017 compared to last year, walk you through the P&L as well as select elements of our balance sheet. I will then discuss our 2017 guidance, both for the full year as well as for the second quarter.

As a reminder, following the successful spinoff last year of our Biosciences Business into a separate publicly traded company, Aptevo Therapeutics, we now present our 2016 financial comparisons on the basis of continuing operations, which exclude the Aptevo operations. Now to our results. Overall, we started the year with a solid first quarter.

Total revenues were $117 million, 13% above the first quarter of 2016. Breaking that down, product sales were $82 million, 29% above first quarter of last year.

Included in the product sales were BioThrax sales of approximately $44 million down $15 million from last year as well as other product sales of approximately $38 million, which were $33 million higher than last year. The lower BioThrax revenues are strictly timing-related, as determined by the delivery schedule of our contracts.

While the higher, other product, revenue was driven by BAT shipments originally scheduled for Q4 of last year, which were moved to Q1 of this year, as we communicated back in November of 2016. Moving to CMO services. Our contract manufacturing revenues were nearly $18 million for the quarter. That's $10 million higher than 2016.

This performance was driven by a couple of factors, including the timing of fill finish services; secondly, work we're performing for Aptevo on an ongoing basis as part of the CMO agreement; and third, growth from existing CMO customers and importantly, new customers.

The higher CMO revenue versus last year reflects our commitment to look aggressively for opportunities to more fully utilize our available manufacturing capacity. Concluding the revenue discussion, contracts and grant revenue were just over $17 million for the quarter, significantly lower than 2016. But that was expected.

This is a reflection of the timing of ongoing development activities, as well as activities under contract in 2016, which have since begun to wind down, or in some cases, are complete. We anticipate that this year trend will continue throughout 2017. First quarter gross margin came in at 53%, below our expected range of between 60% and 70%.

The lower gross margin reflects the impact of revenue mix during the period.

Most notably, a combination of the lower BioThrax sales, which accounted for 37% of our total revenues in Q1 of '17, versus accounting for 57% of those revenues in 2016, as well as the substantial larger revenue contributions from lower margin, other product sales in CMO services.

Looking ahead, and based on the revenue mix projected for the remainder of the year, we anticipate the performance for the full year to be in the historical range of 60% to 70%. Turning to expenses. Quarter one gross R&D spend was $20.5 million, or $5.6 million lower than last year.

On a net basis, our R&D expense, after adjusting for grant and contract revenue for the first quarter, was slightly over $3 million. As we stated in the past, we regard investment in the development of new medical countermeasures, both funded and unfunded, as an important component to our strategy to grow and diversify the business.

Next, SG&A expenses for quarter 1 and '17 were $35.2 million, slightly higher than the 2016, and includes the impact of nonrecurring restructuring costs associated with the administrative cost an assessments performed earlier this year. As a percent of total revenue, first quarter SG&A costs were 30% versus 31% in the prior-year.

We continue to work aggressively towards achieving a level of SG&A costs at or below 25% of total revenue. The business generated over $25 million of EBITDA, and/or 22% of total revenue during the quarter. While lower than the prior-year period, the continued positive EBITDA performance reflects the strength of the core business.

And finally, our GAAP net income for the quarter was $10.5 million, slightly below Q1 of 2016, largely reflecting the impact of the revenue mix in the quarter. As a percent of total revenue, net income margin of 9% for the first quarter was in line with our expectations.

On the balance sheet, at quarter end, our cash balance was approximately $270 million, which, when combined with our accounts receivable balance of $128 million, continues to reflect a very strong liquidity position to support our operations and strategic M&A initiatives.

Finally, looking at cash flow, we generated over $42 million in net operating cash during the quarter. In addition, our cash flows reflect the $20 million paid to Aptevo during the first quarter, which completed all payments pursuant to the August 1, 2016 spinoff last year.

We anticipate continued strong operating cash flow from the business, which we will use to support our capital needs, namely working capital, capital expenditures, M&A investments and the potential return of capital to shareholders through a buyback program.

Before I turn to this discussing our forecast for 2017, I'd like to remind everyone that last year, in anticipation of the spinoff of our Biosciences business, we undertook an assessment of our operational and administrative cost structure for the purpose of ensuring that we have the right structure with the right resources and skill sets to execute on our 2020 financial and operating goals.

We are in the process of implementing our new matrix structure, with the expectation of achieving annual expense savings compared to 2016 of approximately $20 million per year beginning in 2018. As for full year 2017 forecast, we are reaffirming our guidance.

Specifically, total revenues of between $500 million and $530 million, including BioThrax sales of between $265 million and $285 million under our contractual arrangements with both CDC and with BARDA. Second, GAAP net income of between $60 million and $70 million. Adjusted net income of between $70 million and $80 million.

And finally, EBITDA of between $135 million and $145 million. Please keep in mind that we do not include any M&A activity in our annual guidance, except for the provision for specific diligence related expenses required to support our ongoing M&A efforts.

Additionally, for Q2 of 2017, we estimate total revenues of between $100 million and $115 million. That concludes my prepared remarks. And I'll now turn the call over to the operator to begin the question-and-answer session.

Operator?.

[Operator Instructions] Our first question is from Keay Nakae of Chardan..

Two questions. First, with respect to the full year guidance, relative to the guidance for Q2 and the performance in Q1, that implies in at the high end of the Q2 guidance that you're going to do about $40 million more in the second half.

Can you talk about where that's going to come from? Is that increased BioThrax or something else?.

Yes, Keay. This is Bob. Thanks for the question and joining the call. I think, if you looked historically at our revenue over the quarters in comparison to the total year, 2017 should be much like 2016 and 2015.

On average, we generally have about 40% of our total revenues occur in the first 6 months of the year, with what we performed in Q1 and midpoint of the range for Q2 that provided, we're going to be right around that 40% of revenue number for the total. So we're right in line with what we've done historically.

And again, we've provided the BioThrax component of that, of between $265 million and $280 million, and we're right on the mark with our contractual delivery schedules to meet that..

Okay. And my second question has to do with a comment I thought I heard you make regarding potential for a stock buyback. And just help me understand if that is in fact what you said.

How that type of action is consistent with your goals for M&A? It would seem to suggest, normally, not necessarily in your case, that remains the best option as opposed to investing in acquisitions..

As we've talked over the last year or so, Keay, our priority for use of capital is, first of all, to support the ongoing working capital needs of the business. Second, to support our capital investments and our infrastructure and facilities. Then to go to M&A.

And then finally look, when appropriate, for opportunities to return capital to shareholders, either through a buyback or even through a dividend program. We're not quite ready to go there yet. But as we announced last year, we have a $50 million buyback program that was authorized by the Board. To date, we have not pulled the trigger on that.

But we continue to assess our calls on capital, relative to the M&A opportunities that we see, and we haven't executed any buyback activity yet. We'll report that as part of the quarterly process going forward..

And your next question is from David Maris from Wells Fargo..

This is Katie Brennan on for David Maris.

Can you speak through your CapEx expectations for the Emergard supply capacity expansion? And also, when it is that you expect to SG&A get down to that 25% of revenue and where do you expect that leverage to come from?.

Sure, Katie, this is Bob. I'll answer the second question first. And then maybe turn to Adam, who is better positioned to respond to the Emergard capacity expansion initiative, and what that will cost and when. So on the SG&A. We've been pretty clear that our goal is to achieve that less than 25% of revenue for SG&A expense.

Now that's part of our 2020 financial goal objectives.

For 2017, as we'd indicated last call, we're taking certain administrative assessments and implementing those measures throughout 2017 such that beginning in 2018, we expect to be able to reduce the overall annual OpEx by $20 million, out of our SG&A structure and should be in a position to get pretty close to that 25% level by the end of 2018.

Maybe on Emergard, Adam?.

On the autoinjector side, we partnered with a great organization in Nemara, and really our capital requirements there are fairly modest and would be in line with anything we've done in total as an organization in the past. So, you wouldn't see any large spikes in capital allocation relative to the autoinjector program and - in the short-term..

Grade, and if I could just follow up that. The interest level that you've seen for it, do you expect that - I believe, you said you'd planned to double supply capacity this year.

Would you expect that, that would be sufficient for the interest level that you've seen? Or there would be excess interest there to fulfill?.

Yes, excellent question. So I think in the short term, doubling it gets us in line with where current demand as. We're going to continue to expand that capacity, because we believe there is - obviously, a pretty good market there, and we'll need more capacity as we move forward into '18 and '19. So this is a first step in '17.

We'll take another step in 2018..

Our next question is from Jessica Fye of JPMorgan..

Curious - forgive me if I missed this in the prepared remarks, but what are you expecting the percent of your revenue coming from international to be in 2017? And then within that other Biodefense line where you had a pretty strong number this quarter.

Are there any products you would call out that were driving that?.

Yes, so maybe, Jess, I'll take your second question, first. Similar to what we experienced in Q4 of 2016, we had higher than usual BAT revenue in Q4 as well as in Q1. We talked last year about the fact that we had roughly $30 million worth of BAT revenue that we anticipated was going to be shifted from Q4 of last year to Q1.

So when you look at that $38 million of other product revenue in Q1, the majority of that is BAT, and it's just - it's a timing. And those contracts are a little bit different from the delivery schedule associated with BioThrax, so that's, hence, the lumpiness of that other product revenue number..

Okay.

And then international?.

The first part of your question was around percentage of total revenue represented by international? Yes?.

Yes..

In 2017. Yes, so I think a good way to think of it, looking at last year's total international, as it related to total revenue, it was a couple of percent or so. And as you know, we are targeting to build that to the 10% level. So we're going to see significant progress this year towards that.

But it's going to be - until we get to that 10%, it's going to require a few years. So if you could think of that in that context. I think, it'll be good guidance for you..

Our next question is from Lisa Springer with Singular Research..

My question concerns the year-over-year growth in the contract manufacturing revenues.

Could you give us a sense of how much of that was from new CMO customers and how you go about getting new customers for that business?.

Thanks, Lisa for joining the call and for the question. I'll kick it off. And then perhaps Adam can discuss it in more detail. We really don't disclose how much of the growth is going to come from existing customers or new customers.

As we've talked about on prior calls, we see the CMO business unit as a growth opportunity for us, as we look to expand our customer base, but also look for opportunities to utilize, more efficiently, the capacity that we've invested in over the years.

So whether that's fill/finish, or whether it's in bulk drug substance, we are looking aggressively for all opportunities to serve customers in new ways.

Anything you want to add?.

I don't think there is too much to add. I think we're - as far as how we do that. We've got a sales team that's responsible for getting the bids and we're actively, at shows and other places, explaining our capabilities to folks. So it comes through active sales activities on that side of the business.

And we continue to see strong demand for our specialized capabilities..

Our next question is from Joseph Thome of Cowen and Company..

I just 2 on, essentially development of NuThrax.

What are the sort of gating steps prior to initiation of the Phase III trial for NuThrax that are left? And then are you anticipating a completely flip over - to NuThrax from BioThrax or do you anticipate or see the SNS maybe still taking a little bit of BioThrax for opposed exposure, prophylaxis indication after NuThrax is launched?.

Yes, thanks so much, for the call. Let me take the second part first and then ask Adam to talk about the key milestones or steps towards moving NuThrax into - to Phase III. So NuThrax, as you know, is the next generation - it's really designed to enable protection in a post-exposure setting in fewer doses than BioThrax.

BioThrax does have a PEP indication as well as a general use prophylaxis or GUP indication. So we do anticipate there will be continued demand for BioThrax with the GUP introduction for example, military personnel, active immunization program. Right now, that would be a BioThrax customer, as opposed to a PEP indication for NuThrax.

So we do see the opportunity for both products to remain in the marketplace as the development program migrates.

Adam, do you have any thoughts on the development side?.

Sure, so the gating items kind of fall into 2 kind of big buckets. One is, just preparation activity to start a clinical study, finalizing the protocols, getting the IRBs in place, getting the sites in place, getting the contract research organization that is going to help us perform that Phase III study.

But that's more of an operational and logistical. Really the gating items, from a product perspective are, we need to some validation of our assay, and in particular, a potency assay. And we need to do the process validation. So we run the - basically the validity of process prior to Phase III, and lease those batches.

Similar to what we had to do for Building 55 of BioThrax, we'll make some consistency loss and release those - submit that data to the FDA, and then move into the Phase III study. So, it's really the critical path items are the both the assay validation and that process validation before we start Phase III..

[Operator Instructions] Our next question is from François Brisebois of Laidlaw..

Thanks about the BAT. That helps to understand the lumpiness here. So last quarter, you guys reinstated the $1 billion topline revenue.

Do you guys breakdown, at all, if how much of that you expect to be internal versus M&A?.

Thanks, for the question and for participating today. We had not broken that down. But what we have said very consistently is M&A is going to be a key component to enabling the achievement of that goal. We will see organic growth to be sure.

But do we - as we look at the plan going forward, we are targeting M&As to be a meaningful contributor to hitting that $1 billion number..

Okay, great. And just to close up on M&A. I assume it's still CBRN, explosive, emergent infectious disease.

Any more clarity there or still also immediately accretive?.

Yes, so you're absolutely right. We're looking at the CBRN phase, we're looking at the explosive phases, emergent infectious diseases, vaccines, therapeutics, devices and in the device world, opportunities to do a market. Such as burn or wound care. And so all of those are squarely within the bulls eye for us.

And - So I think that is consistent with what we've said in the past and it remains what we're really focused on..

Great. Absolutely. And then lastly, in terms of the U.S. - ex-U.S. contribution here, with Building 55 approved in Germany.

So that building up - I believe Jessica asked this, but building up to 10%, is that after 2018 '19, '20 or that in 2017 or is it a slow kind of build up to that 10%?.

I think it's a slow build. We're seeing real interest across the portfolio from existing and new customers. So, I think, given what we're seeing now with the entire portfolio, and particularly as we expand that portfolio, potentially through M&A and otherwise, we do see incremental progress slowly growing to that 10% target.

But this year, I think we're going to see a meaningful jump from last year in terms of the contribution international sales is making to that target..

At this time, I see no other question in queue. I'll turn it back over to the company for closing remarks..

Thank you, Vince. And with that, ladies and gentlemen, we'll 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 with all of you in the future. Goodbye..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day..