Ladies and gentlemen thank you for standingby and welcome to the Third quarter 2019 Emergent BioSolutions Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. And now I would now like to introduce your host for today's program Bob Burrows, Vice President, Investor Relations. Please go ahead..

Thank You Jonathan and good afternoon everyone. Again it's Bob Burrows, VP of investor relations for the company. Thank you for joining us today as we discuss the operational and financial results for the third quarter and nine months of 2019.

As is customary today's call 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 will be Bob Kramer, President and Chief Executive Officer, and Rich Lindahl, Chief Financial Officer.

Other members of the senior team are present and available during the Q&A session that will follow our prepared comments.

Before beginning 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 are based on our current intentions, beliefs and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate.

Investors should therefore realize that if underlying assumptions prove inaccurate or unknown risks are uncertainties materialized actual results could differ materially from our expectations.

Any forward-looking statement speaks only as of the date of this conference call and accepts as required by law we do not undertake to update any forward looking statement to reflect new information, events or circumstances.

Investors should consider this cautionary statement as well as the risk factors identified on our periodic reports filed with the SEC when evaluating our forward-looking statements.

During our prepared comments as well 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 table found in today's press release regarding our use of adjusted net income, EBITDA and adjusted EBITDA and the reconciliation between our GAAP financial measures and these non-GAAP financial measures.

For the benefit of those who may be listening the replay of the webcast this call was held and recorded on November 6, 2019 since then Emergent may have made announcements related to topics discussed during today's call.

You are once encouraged to referred to our most recent press releases and SEC filings all of which may be found on Investor's homepage of our website. And with that introduction I would now like to turn the call over to Bob Kramer, Emergent BioSolutions President and CEO.

Bob?.

Thank you Bob. And good afternoon to everyone. Thank you for joining our call today. as with last quarter I'll provide a brief overview of our financial performance for the quarter and year-to-date periods and then I'll discuss select operational accomplishments achieved since our second quarter earnings call.

The areas of near-term focus which are key for us include first an update on our medical countermeasure business including the state of our anthrax vaccine franchise and the ongoing shift from biotracks to the next-generation vaccine candidate AV7909, the status of our small pox franchise including our award during the quarter of $2 billion 10-year procurement contract by HHS for ACAM2000 and a new award as noted in our press release from HHS to deliver BAT or botulism antitoxin product into the stack pile over the next 10 years.

Secondly, I'll provide an update on our devices business and in particular our NARCAN nasal spray and auto injector platform opportunities. Third, I'll provide an update on our CDMO business and finally I'll touch upon our development pipeline. Let me begin by putting these updates into context.

Many of you will recall that we entered the year with a number of goals critical to achieving our guidance numbers for 2019.

These included the transition of our anthrax vaccine program from BioThrax to AV7909 the renew of our contract for our smallpox vaccine ACAM2000 as well as the contract for our treatment for small pox vaccine complications VIGIV. I'm pleased to say that we successfully achieved all of these milestones in the first nine months of the year.

With these contracts in place we now have an unprecedented portfolio of long-term procurement contracts facilitating continued growth of our medical countermeasure business. With that as background I'm glad to note that we achieved strong financial and operational performance during the quarter keeping us on track to achieve our goals for this year.

Turning to our key businesses. First let's touch upon our anthrax vaccine franchise and the transition from our FDA licensed vaccine BioThrax to our next-generation vaccine candidate AV7909 currently in development.

You would recall that we began the process of manufacturing AV7909 earlier this year and in July BARDA exercised its first contract option to procure 10 million doses under in existing $1.5 billion development and procurement contract with BARDA.

This 10 million dose contract award was in addition to an earlier commitment by BARDA for 3 million doses under the base portion of the same BARDA contract. In the third quarter we began shipping AV7909 to the Strategic National Stockpile and we remain on target to ship all 13 million doses currently under contract by the middle of next year.

Turning to our smallpox franchise, we achieved a major milestone with the receipt of a contract award by the U.S. government for the ongoing procurement of ACAM2000 valued at approximately $2 billion over the next 10 years. Our ACAM2000 vaccine is the only FDA-licensed smallpox vaccine administered in one dose.

It's also the primary smallpox vaccine designated for use in a bioterrorism emergency and forms the majority of the U.S. government's smallpox vaccine stockpile.

September announcement of the ACAM2000 contract followed the June 2019 announcement of an award from HHS valued at approximately $535 million over the next 10 years for the continued supply of VIGIV into the stockpile in support of smallpox preparedness. Now let me turn to our botulism antitoxin or BAT opportunity.

As we announced in our press release today we have been awarded a new procurement contract with HHS for BAT the only FDA-approved treatment for botulism that covers all seven serotypes. The contract is valued at up to $490 million and consists of two deliverables which we expect to begin delivering in 2020.

The first valued at approximately $90 million is for the delivery of 100000 doses of final drug product into the Strategic National Stockpile during the next 10 years.

The second deliverable was maybe worth up to $400 million is for the production of an additional 100000 doses of bulk drug equivalent and other related activities to sustain supply chain for BAT over the same 10-year period. The value of the second deliverable will be negotiated and finalized over the next 180 days.

This contract like other recent contract awards continues our long-standing partnership with the U.S. government in support of their commitment and preparedness and response.

In summary these four contract awards totaling in excess of $3 billion of procurement potential established a solid foundation for future growth of our medical countermeasures business.

Turning next to the Devices business, over the last few quarters we have been sharing with you our continued progress that we have been making in order to help fight the opioid crisis in America.

Sales of NARCAN nasal spray in the most recent quarter clearly indicates continued robust demand for this critical component in the arsenal combating the tragic epidemic. We remain focused on raising awareness of the risk of opioids and the threat of opioid overdoses while increasing access to and maintaining the affordability of NARCAN nasal spray.

To that end in the area of awareness and education there are now nine states that have adopted co-prescription legislation for high-risk opioid prescriptions and we continue to work with retail pharmacy chains government and community organizations to help educate and raise awareness.

On the affordability front over 97% of insured lives have coverage including Medicare and Medicaid with a national average co-pay of $19 for a carton of two devices. We continue to expand access through expanded distribution to state and local governments public health community-based organizations and first responders.

In addition to our focus on addressing opioid overdose reversal treatments we are also working on new treatments for options associated with opioid use disorder.

Specifically we received a 2-year research grant awarded by the National Institute on Drug Abuse or NIDA valued at approximately $6 million for the continued development of AP007 a sustained release formulation of nalmefene another opioid antagonist specifically for the treatment of opioid use disorder.

We also made progress in expanding our portfolio of drug device combination development candidates addressing chemical threats specifically nerve agents. During the third quarter we were awarded a $20 million contract to develop and manufacture an auto-injector containing diazepam to treat nerve agent-induced seizures.

Under the multiyear agreement awarded through The Department of Defense's Medical CBRN Defense Consortium we will develop a device conduct studies to demonstrate consistent manufacturing functionality and usability of the final device and complete regulatory activities required to obtain FDA approval of the combination product.

Next let me turn to our CDMO business. Before I begin this discussion I'd like to take a moment to welcome the newest member of our executive team Syed Husain. Syed was recently appointed to head our CDMO business unit joining us from Alcami Corporation where he was Chief Commercial Officer.

Earlier in his career Syed gained experience at Lonza Wyeth as well as Pfizer. We're excited to welcome Syed and look forward to his execution of our strategic vision to grow this business unit in the years ahead. Syed will be sharing his thoughts on the CDMO business during the upcoming Investor Day in New York later this month.

For now let me comment on one of these projects that being the expansion of our drug product capacity and capabilities in our Camden facility in Baltimore. Expansion is a significant capital investment that will generate measurable benefits for our clients as they progress their innovative products through the clinic and through commercialization.

It encompasses state-of-the-art flexible technology using an isolator and closed fill line capable of filling vials syringes and cartridges. Before I close I'd like to highlight one of our key development programs.

As many of you know we are developing a virus-like particle vaccine candidate for chikungunya which is an illness that spreads through mosquito bites and for which there is no vaccine or treatment currently available. Shortly after the end of third quarter our vaccine candidate was granted priority medicines or PRIME designation by the EMA.

The PRIME designation enhances support and development of medicines that target an unmet medical need that may offer a major therapeutic advantage over existing treatmentsor benefit patients without preventative or treatment options.

This fast track designation this follows the fast track designation by the FDA for this candidate and reflects our approach to both pursuing U.S. as well as EU regulatory PASS in parallel. Importantly we have been invited to represent industry at FDA's upcoming VERPAC meeting to be held this Friday.

The VERPAC discussion hopefully will provide clarity on the Phase III requirements for our chikungunya virus vaccine with particular attention to what expectations will be required in the design of the Phase III trial. As we have said we are working toward initiating our Phase III for our product in 2020.

So we look forward to sharing our expertise and participating in this important discussion and coming to a more clear understanding of the path forward of a solution increased to the increasing threat from this viral disease.

In summary the third quarter marked the achievement of numerous operational milestones setting us up for a firm foundation to further grow our medical countermeasure business as well as our commercial business. Earlier this year, we completed a strategic plan to further diversify and expand our business and to scale over the next five years.

We look forward to sharing our plans with you at the upcoming Analyst and Investor Day meeting to be held in New York on November 21 and our hope is that you'll be able to join us there. With that please allow me to turn the call over to our Chief Financial Officer Rich Lindahl..

first on key performance metrics we expect to realize incremental movements to our key metrics of gross margin SG&A margin adjusted net income margin and adjusted EBITDA margin. On integration although now essentially completed we remain focused on ensuring we realize the full potential of integrating the operations of both PaxVax and Adapt.

On capital structure we seek to maintain a solid credit profile and anticipate our net leverage ratio will trend toward the lower end of our target range of two to 3x net debt to adjusted EBITDA.

And finally on liquidity we continue to focus on having sufficient capital to both invest in the business as well as execute on attractive M&A opportunities should they arise.

Finally as Bob mentioned we look forward to hosting our Analyst and Investor Day on November 21 in New York City where we will provide further insights into our business and share details on our new 2020 to 2024 growth strategy.

That completes my prepared remarks and I'll now turn the call over to the operator to begin the question-and-answer session.

Operator?.

Certainly. [Operator Instructions] Our first question comes from the line of Brandon Folkes from Cantor. Your question please..

Hi, thanks for taking my question. Congratulation on the progress in the quarter, firstly I think we started NARCAN.

There's a lot of noise around NARCAN and everyone is always coming out with something for a reversal but can you provide us some color in terms of the feedback you get both from the first responders and the retail channel? In terms of the brand loyalty around NARCAN it just seems that it would be it would take a lot for people to move away from NARCAN itself.

And then secondly the briefing documents that came out today for the chikungunya vaccines meeting on Friday. Any thoughts on those documents and how this may impact your development strategy? And what we may see coming out of that meeting on Friday? Thank you..

Thanks Brandon. So on the first question NARCAN it's I think a good observation on your part. Just I think it's important for everyone to remember how easily NARCAN then can be used. I mean it was designed to be user-friendly easy to apply not requiring any medical training.

We've seen great uptake in all of the markets whether it's in the local market the state market by first responders police fire. So we are really pleased with that.

But big picture our focus continues to be on making sure that there is the appropriate level of education by patients and customers who would benefit from using a naloxone product in our case NARCAN nasal spray as well as having access to it.

So the work that we are doing both with the public interest market at the local community state and federal level is important. Our work in terms of making product available through the libraries the high schools is important. And then the last piece is making sure that it is affordable.

And we are doing everything we can by working with the insurance companies and payers to again ensure that NARCAN is affordable to the very patients and customers who need it. On the second question about chikungunya, so the VERPAC meeting is the day after tomorrow.

We expect to learn a great deal about what the expectations and requirements of the FDA will be for the Phase III clinical trial so we can plan appropriately our Phase III clinical trial for 2020. I don't know that there's much more to say about that..

Okay. No, that's very helpful. Thank you very much..

Our next question comes from the line of Jacob Hughes from Wells Fargo Securities. Your question please..

Thank you, Just wondering if you could comment on Teva's proposed framework to give away free naloxone if this is a risk to your business at all? And then secondly could you just talk about what drove the lower other product sales in the quarter versus 2Q?.

Sure Jacob. Thanks for joining the call, so on the Teva announcement it will really be inappropriate for us to comment. I don't know what they're thinking about whether it's what form of naloxone. So I think they're probably looking at sub-naloxone for that product donation not our product but we will see what they have. It's a treatment.

It's not a drug compared to NARCAN.

On the other question of other product sales maybe Rich you want to weigh in on that?.

Sure and thank you for the question. So if you look at the other product revenue in the quarter it was really comprised primarily of our travel health products our RSDL product and our BAT product. And so those were the primary contributors to other product sales in the quarter.

And it's not uncommon for there to be some lumpiness in the way that various products deliver as we go throughout the course of the year, so nothing unusual there..

Okay. And if I could just ask one more question.

Is there an update on the Teva patent case? Do you still expect something before the end of the year?.

Yes. So what we know Jacob is that the trial is substantially complete say for some closing arguments. So that is basically done. We're not going to speculate on the timing of what it will or how long it may take the judge to come to conclusion.

What I will share with you is our continued belief and the strength of the overall patent family of surrounding NARCAN and our bullish view of the NARCAN nasal spray product in general in terms of playing a significant role in reversing this nasty trend for opioid overdose deaths..

Okay. Thanks for taking my questions. .

Thank you. Our next question comes from the line of Dana Flanders from Guggenheim. Your question please..

Hi, This is Devin Geiman for Dana Flanders. Congrats on the quarter. Just a few for me on the anthrax franchise and chikungunya vaccine, first it seems as though anthrax sales were relatively low this quarter given the historical run rates have been circa $250 million to $285 million. And today you guided to $170 million to $190 million.

Could you provide some additional detail on that? And if it's just due to the lumpy cadence of the contracting business or the transition between your two products? And then secondly on chikungunya could you just provide any comments? I know chemists bios also working on designing a Phase III trial. So any commentary on that would be helpful..

Sure Devin. Thanks for joining the call. So on the first question the anthrax vaccine franchise I guess I'd offer a couple of observations. First of all we are just really three months into operationalizing the fact that BARDA has now exercised the first option under the contract for the 10 million doses of AV7909.

And while we have been anticipating this transition in 2019 we will be supporting both BioThrax as well as AV7909 going forward with AV7909 as a development stage candidate. We are building the kind of robust infrastructure and supply chain for it that we have in place for BioThrax.

And we are confident in our ability to deliver on the 13 million doses of AV7909 by the middle of 2020 as well as the continued supply of BioThrax. And just keep in mind that our anthrax vaccine will continue to be composed or comprised of both of these products BioThrax and AV7909 going forward. As an example the U.S.

Department of Defense will continue to procure BioThrax to support their active immunization program for military personnel while HHS is pivoting the procurement to AV7909 for use in stockpiling anthrax vaccines to protect civilians from the threat of anthrax.

So your observation about a relatively light 2019 versus historical is just a matter of timing and building that infrastructure around AV7909. We would expect 2020 to kind of return to that historical run rate for total anthrax vaccine that you mentioned.

On the chik question yes there is another product in development and we expect that both us as well as the other party will be keenly interested in the VERPAC discussion on Friday as will both be held to kind of the same standard for going forward with our respective Phase III activities..

Thank you. .

Thank you our next question comes from the line of Jessica Fye from JPMorgan. Your question please. .

Hi this is Daniel for Jessica Fye. Thanks for taking question.

For NARCAN can you please update us on your latest expectations for the timing of additional branded in generic competition? And what would be your interest level and settling the NARCAN litigation?.

Yes. Daniel so thanks for the question and thanks for joining the call. So again we expect and always have that there will be additional competition in this naloxone market. We modeled that when we were evaluating the business almost 1.5 years ago.

And whether that first point of entry by a competitor will be a branded product or a generic we will see how that goes. But again back to my initial comment our focus is on making sure that NARCAN nasal spray in particular is made available to the very patients and customers who need it going forward.

In terms of the settlement question we are not actively engaged and really are not going to comment on that. We'll see how things go. And again we can just reiterate our belief and our confidence in the overall strength of the patent portfolio..

And if I ask if I can ask one more question.

For AV7909 can you update us on the progress there and talk about the next milestone for that program?.

So the next milestone from the development perspective is the Phase III which we completed enrollment on. And as you're aware that product is being procured by BARDA under emergency use authorization and in concert with the $1.5 billion contract that we put in place a number of years ago..

So the next milestone from the development perspective is the Phase III which we completed enrollment on. And as you're aware that product is being procured by BARDA under emergency use authorization and in concert with the $1.5 billion contract that we put in place a number of years ago..

Thank you..

Thank you. Our next question comes from the line of Boris Peaker from Cowen..

Great, Congrats on the progress.

Just a few more questions on NARCAN, I'm just curious what fraction of the drug is actually used for opioid overdose versus what fraction just end up expiring? Kind of do you have a sense of how much the drug in the community is passed its expiration date? Just looking to see if there's kind of a recurring model just, replacing the expired stuff..

Yes Boris thanks for the question. Thanks for joining the call. We really don't have any visibility into the quantity of NARCAN that's in the market and how long it's I mean we know that there's a 2-year shelf life. I mean our expectation is this product is being procured and used as it should be..

So you don't have a sense of what fraction actually is end up being used for opioid reversal over the –.

We don't. .

Got you.

Maybe another question on NARCAN, how is the co-prescribing legislature impacting sales? And is it more of a you view it as a recurring demand going forward or kind of a onetime bolus on a state-by-state basis?.

Yes good question.

So what our experience has shown in the nine states that have adopted co-prescription is that there is an initial spike in the first let's say 30 to 60 days following adoption of co-prescription and whereas there might be and that spike could be six to 8x the pre-adoption run rate for prescriptions being filled and then after roughly a 45- to 60-day period it normalizes back down to a run rate as maybe three to 5x the pre-adoption rate.

So there is an additional spike but it normalizes at a multiple of what the pre-adoption rate was..

Great. And my last question also on NARCAN. Just curious with the overdoses being more linked to fentanyl going forward.

Are you developing a next formulation of NARCAN higher dose? And if so can you comment on that development?.

Yes. So as we stated on the call we are developing a nalmefene product that is intended to be longer-acting and release formula..

And that's nasal? Or is that a nasal nalmefene?.

No it's not Boris. I mean going back to your initial question we know that the 4-milligram nasal delivered form of naloxone is the effective dose. And we and the fact that we have two of those devices in one carton provides individuals with the ability to deliver eight milligrams if needed..

Got you. Okay. Great. Thanks for taking my question..

Sure..

Thank you. Our next question comes from the line of Keay Nakae from Chardan. Your question please. .

Yes, Bob just a question on the 2020 expectation for anthrax sales. It sounds like if I'm hearing you correctly maybe the control of how much product has been delivered is really due to your operations and not the orders for the product from the government.

Is that the fair way to read that?.

No Keay, first of all thanks for the question and thanks for joining the call. I think what we have learned over 2019 is the fact that AV7909 is a development stage candidate. We're three months into establishing a routine that is more similar to BioThrax in terms of the supply chain and operationalizing that supply chain.

We have essentially with the exercising of that initial option by BARDA we have 12 months to deliver the 10 million doses that were exercised and we continue to feel confident in our ability to deliver those 10 million doses between now and the middle of 2020.

And we are working through again this transition was both slowing down BioThrax and ramping up AV7909 to meet that ongoing demand for those two anthrax vaccine candidates..

Okay. Yes. Thanks for that. That's all I have. .

Thank you. [Operator Instructions] Our next question comes from the line of Lisa Springer from Singular Research. Your question please. .

Thank you. I apologize if this was already covered because I was a little bit late to the call.

But where do you stand in terms of negotiating the new contract for raxibacumab?.

Yes Lisa thanks for joining the call. So we expect that potentially an RFP for raxi will be out in the coming months and we will respond to it as we always do with opportunities like that but I'm not going to predict the exact timing of that..

Okay.

And then also do you still expect to be releasing some preliminary data from the seasonal flu therapeutic at the year-end?.

I don't believe so Lisa. I don't think that was ever in the cards but let me check with the team and we will get back to you..

Okay.

I thought at one point it was said that there was going to be some data available by year-end 2019?.

Lisa this is Adam Havey. So I think our plan was always to complete the Phase II this year and have an end of Phase II meeting with the FDA and then publish the data. So I think we have completed enrollment doing the data analysis. So I think you'll hear us talk about flu quite a bit in 2020.

And actually Laura will be talking about it at the Analyst Investor Day as well..

Okay. Good. Thank you..

Thank you and this does conclude the question and answer session of today's program. I'd like to hand the program back to Bob Burrows for any further remarks..

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

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..