Thank you for standing by, and welcome to the Emergent BioSolutions First Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Bob Burrows. Please go ahead..

Thank you, Cindy. Good afternoon, everyone. My name is Bob Burrows, Investor Relations Officer for Emergent BioSolutions. Thank you for joining us today as we discuss the operational and financial results for the first quarter of 2021.

As is customary, today's call is open to all participants and the call is being recorded and is copyrighted by Emergent BioSolutions. In addition to today's press release, there is a series of slides accompanying this webcast available to all webcast participants. Turning to Slides 3 and 4 in the slide presentation.

During today's call, we 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.

Any forward-looking statement speaks only as of the date of this conference call and except 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 in our periodic reports filed with the SEC when evaluating our forward-looking statements.

During today's call, 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, adjusted EBITDA and adjusted gross margin and the reconciliations between our GAAP financial measures and these non-GAAP financial measures. Turning to Slide 5.

The agenda for today's call will include Bob Kramer, President and Chief Executive Officer, who will comment on the current state of the company; and Rich Lindahl, Chief Financial Officer, who will speak to the financials for 1Q '21 and as well as the forecast for calendar 2021.

This will be followed by a Q&A session where additional members of the executive leadership team are present and available as needed. Finally, for the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on April 29, 2021.

Since then, Emergent may have made announcements related to topics discussed during today's call. And with that introduction, I would now like to turn the call over to Bob, whose comments begin with Slide 6.

Bob?.

Thank you, Bob, and good afternoon, everyone. Thank you for joining the call. As you know, we've been in the press and in the news lately, primarily related to our COVID-19 manufacturing activities.

As a result and given that our core business continues to operate pretty much as planned, I'll focus my prepared remarks around the news and let the core business performance speak for itself. My comments are summarized on Slide 7 in the deck accompanying this call.

The executive management team and I remain committed to providing you with accurate information and open communications. I'd like to start by addressing our ongoing role and the involvement in the urgent battle against COVID-19. Since our founding, Emergent has been steadfastly committed to quality.

That started in 1998, from the day we acquired our first manufacturing facility in Michigan and work with the U.S. Department of Defense and the FDA to make it state-of-the-art. Over the last two decades, we've dedicated ourselves to delivering on our mission to protect and enhance life through the quality of our products.

Prior to 2020, we were operating our Bayview facility as a clinical development site. We've been preparing to seek licensure from the FDA for the facility to transition it to a commercial site, then the pandemic hit. Thousands of lives were being lost daily. We stepped up, along with the U.S.

government and our partners to increase global vaccine production capacity. We took on that Herculean task of progressing Bayview from a facility originally designed to develop and manufacture 50 million doses of a single influenza vaccine to one capable of producing hundreds of millions of COVID-19 vaccines.

This was a remarkable accomplishment given the circumstances, but a necessary one, given the severity of the pandemic. There's been a lot of misinformation about what happened at Bayview.

Before I discuss the details, I want to say upfront that I take full responsibility and you have my commitment that we're going to do everything we can to resolve these issues quickly and as safely as possible. As you know, manufacturing biologics products is difficult and complex, and there are many intricate and detailed steps required.

In parallel with those steps are checks, tests and fail safes. Product loss occurs for a variety of reasons, especially during the early stages of the scale-up of a biologic product as biologic processes and repeatability can be incredibly challenging. But the loss of a batch for a viral contamination is extremely serious, and we treated it as such.

The FDA did as well, which is why they initiated in April of this year, a for cause inspection of the 2B license facility. We had implemented layers of disinfection and other protocols to lessen the inherent risk of cross contamination.

We believe that the batch was likely contaminated when one or more of these precautions did not function as anticipated resulting in the transmission of the AstraZeneca virus to the Johnson & Johnson production suite.

Importantly, our rigorous safety and quality protocols worked as designed, identifying this contamination batch to ensure they never left our facility. Much has been made about the choice to put 2 viral product candidates in one facility.

Cross contamination is a well-known risk when producing drug substance for multiple viral products in a single plant, which is exactly why there are so many fail safes and quality control measures in place. But the odds of one or more COVID-19 vaccines in development failing was extremely high, which is why the government bet on multiple candidates.

It's easy to go back and second-guess these decisions that were made in the early stages of the pandemic. At the time, no one knew how fast we could get to a clinically viable vaccine and which candidates would be most successful. We committed to manufacture J&J's COVID-19 vaccine candidate at Bayview and the U.S.

government reserved the remainder of our capacity and subsequently directed us to manufacture the AZ candidate in the same facility. Everyone should keep in mind that this rapid scale of manufacturing had never been done before. We took a process that normally takes years and condensed it into months.

We didn't flinch that challenge because that's what this company was built for. We take on public health challenges that others won't.

What's important now is getting an accurate account of the challenges we faced and using the lessons we learned to ensure that Emergent, the government and our other partners can be best prepared to get us out of this pandemic and ready for the next public health crisis.

We're disappointed that the situation has been reported in a way that may have eroded public trust in our ability to deliver.

For things we should have done differently, my leadership team and I bear full accountability, but I take issue with the unfair criticism of the dedicated team of more than 400 professionals in Baltimore Bayview have been - who have been working literally night and day for over a year to make sure that vaccine can be available to the public.

In all of this, they are no different from our frontline health care workers. None of us are perfect and I take responsibility for our ultimate performance as a company. I do want to acknowledge that many people have sent messages of support and encouragement to our team. It's greatly appreciated.

Those who have stuck with us recognize the challenge we have taken to combat the pandemic and are rooting for us to succeed because when Emergent succeeds, the public benefits, and that's what this is really all about. We've welcomed the FDA's involvement and strength of their independent scientifically rigorous review.

They have issued us their inspection findings, and our team is expected to submit within days, a comprehensive response to those findings that's designed to meet or exceed the FDA standards. We are appreciative for the constructive ongoing dialogue with J&J and their support as we work this path forward.

If the FDA is comfortable with the approach we propose, I'm hopeful that we can soon return to producing the tens of millions of doses per month. I'll stop there and turn the call over to Rich, who will take us through the results for the first quarter.

Rich?.

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call. I'll start on Slide 9. As you can see from today's earnings press release, during the first quarter of 2021, we delivered solid financial performance, which was consistent with our expectations.

Our team continued to execute across all aspects of the enterprise, despite continuous challenges caused by the COVID-19 pandemic. Our financial outcomes in the quarter clearly reflect the strength and durability of our diversified business, evidenced by a significant revenue growth and corresponding profitability.

Our financial condition remains strong, with the liquidity and financial flexibility to fund our operations and pursue opportunistic investments. Despite more recent headwinds, we remain steadfast in our unwavering commitment to supporting global preparedness and response to public health threats.

With that, please turn to Slide 10, and let's first look at the details of our first quarter performance. Highlights include total revenues of $343 million, an increase of $151 million or 78% versus the prior year.

Adjusted EBITDA of $124 million, an increase of $108 million versus the prior year and adjusted net income of $84 million, an increase of $83 million versus the prior year.

Breaking down quarterly revenue into its components, anthrax vaccine sales were $55 million, consistent with the prior year and aligned with historical norms for the first quarter.

NARCAN Nasal Spray sales were $74 million, similar to the prior year and reflecting persistent and durable demand for this critical drug-device combination product for opioid overdose reversal.

Other product sales were $9 million, lower than the prior year and reflecting reduced sales of certain products due to timing as well as the impact that reduced global travel demand is having on our travel health vaccine sales and significant growth in CDMO services as revenues increased to $184 million.

This level of performance primarily reflects the continuing contribution from the services we are providing to our government and innovator partners in response to the COVID-19 pandemic.

Looking beyond revenue, the quarterly results also include gross R&D expense of $53 million, reflecting our continued commitment to investing in our pipeline of development programs across our 3 product focused business units, net R&D expense of $31 million or 10% of adjusted revenue, SG&A spend of $81 million or 24% of total revenues, and combined product and CDMO gross margin on an adjusted basis of 69%, reflecting the impact of overall product mix, as well as improved contribution from CDMO services.

Turning to Slide 11. We also provided updates to our key CDMO metrics as follows. In the first quarter, we secured $187 million of new business, reflecting momentum in our marketing initiatives with innovators and others. As of March 31, the backlog was $1.34 billion and includes the new business secured, offset by revenue recognized during the period.

And as of March 31, the opportunity funnel was $807 million. I would note that these figures do not include certain adjustments that will be made during the second quarter to reflect the impact of recent events, including the U.S. government's decision to ramp down production of the AstraZeneca COVID-19 vaccine at Bayview.

Having said that, we continue to build a track record of success for this still relatively new component of the Emergent business as can be seen by the sequential trends over the last 3 quarters, shown on Slide 12. Moving to Slide 13 for a review of our balance sheet and cash flow.

We ended the quarter in a strong liquidity position with $548 million in cash and $184 million of accounts receivable, resulting in aggregate current liquid assets of over $730 million. We also still have undrawn revolver capacity of just under $600 million.

At the end of the first quarter, our net debt position was $321 million, and our ratio of net debt to trailing 12-month adjusted EBITDA was, once again, less than 1x. Please turn to Slides 14 and 15 for a review of our 2021 forecast and associated key considerations.

As detailed in today's press release, we are updating our 2021 outlook to incorporate the anticipated impact of recent events on our financial performance.

Beginning with the items that are unchanged, anthrax vaccine revenues in a range of $280 million to $310 million, ACAM2000 revenues in a range of $185 million to $205 million, and NARCAN Nasal Spray revenues in a range of $305 million to $325 million. The following items have been revised.

Total revenues in a range of $1.7 billion to $1.9 billion, CDMO services revenue in a range of $765 million to $875 million, adjusted EBITDA of $620 million to $720 million, and adjusted net income of $395 million to $470 million. The primary driver of these changes is our revised outlook for CDMO services revenue.

The forecasted range of expected CDMO services revenues has been reduced primarily due to the hold of certain COVID-19 vaccine bulk drug substance lots, as well as our commitment not to initiate new manufacturing at Bayview, pending further review by the FDA.

Even assuming FDA concurrence to reinitiate new manufacturing and/or release of lots, we expect a delay in the timing of expected revenue. We also now expect lower other product revenue, principally due to our assumption that a new raxibacumab contract will be awarded later than previously planned.

Other key assumptions for 2021 include revised gross margin of approximately 63% to 65% on a GAAP basis, capital expenditures, net of reimbursement, of between 8% to 9% of total revenues, unchanged from our prior assumption, continued progress across our development pipeline programs, including one or more Phase III starts and one BLA filing, unchanged from our prior assumption, and that the naloxone market will remain competitive with at least one new entrant to the market by year-end, and that no generic competitor will enter the market prior to the anticipated appellate court decision, which is expected in the second half of 2021.

We are also providing second quarter 2021 total revenue guidance of $370 million to $430 million, which at the midpoint represents approximately 22% of our total revenues for 2021 at the midpoint, in line with historical patterns. To conclude, please turn to Slide 16 for some summary comments.

We continued to deliver strong financial results in the first quarter of 2021. We have built a robust and resilient business with the capabilities, capacity and financial strength needed to deliver preparedness and response solutions to a wide range of public health threats.

Our dedicated employees have put their hearts and souls into confronting the crisis brought on by the COVID-19 pandemic. Our durable business model plays a critically important role in protecting and enhancing lives across the globe. And while there are current challenges we face across our business, we remain confident in our future growth.

That completes my prepared remarks, and I'll now turn the call back to Bob Kramer, who has some final comments to make.

Bob?.

Thanks, Rich. Before we move to Q&A, I have a couple of personnel updates I want to announce. First of all, Dr. Mary Oates, our Senior Vice President of Global Quality, who joined us in November, will now report directly to me and become a member of my executive management team. Dr.

Oates has 30 years of biopharmaceutical experience in quality, manufacturing operations and regulatory affairs. Prior to joining Emergent, she spent 25 years at Pfizer, holding multiple leadership roles in operations and quality. She's also held positions at Glaxo as well as Lachman Consulting Services.

Since joining us, Mary has been able to build the talent of her team with experienced professionals who are improving the strength of our quality organization every day. Mary has also been leading our response to the Bayview 483 observations. Secondly, Sean Kirk, our EVP of Manufacturing and Technical Operations is taking a personal leave of absence.

For nearly 18 years, Sean's proven track record across multiple functions in multiple roles has greatly contributed to our growth and success. Since the beginning of that pandemic, in his role at the helm of our manufacturing operations he has been laser-focused on fighting COVID-19 every hour of every day for more than a year.

We all hoped and expected that by now, he begins to transition to a less rigorous schedule, but unfortunately, the opposite has happened. Given the great public need, Sean has set aside several important personal matters over the last 15 months, and we look forward to him using his leave to address those matters and return to a more balanced pace.

Third, Adam Havey, our EVP of Business Operations, will assume full responsibility for manufacturing including working in coordination with Mary on our Bayview remediation plan. Many of you know and have interacted with Adam in the past. He's been a valuable member of my executive management team and has been part of Emergent for almost 18 years.

Finally, I want to notify you that Syed Husain, the Head of our CDMO business unit will be leaving Emergent to pursue another opportunity. Syed has put in place a strong strategy and a strong group of talented leadership, and we thank him for his many contributions.

We've asked Catherine Hanley on his team to serve as the Interim Head of the CDMO business unit, while we actively recruit Syed's replacement. With that, I'd now like to turn the call over to the operator to begin the question-and-answer session.

Operator?.

[Operator Instructions]. Brandon Folkes. Your line is now open..

Bob, I appreciate the frankness and echo your comments about your work. I do have a number of questions. So maybe firstly, can you - what can you say in terms of the performance causes for the J&J and the HHS contract? Similar to that, what are you contemplating your guidance in terms of a return to production? And again, just rolling it all in.

Any context in terms of the impact in April to the CMDO service opportunity funnel, how that may be impacted in April? Any customer losses there? And then the other side of it, it was great to see the $187 million, I think it was, in business win.

So just any context around that those wins? Are they COVID related? Any color you can give us there as well..

Sure, Brandon, thanks for the question. You covered a lot of territory there. So let me focus on a couple.

First of all, as we've said over and over, our number one priority right now is to make sure that we do everything we can to respond fully to the 483 observations of the FDA, get our response in and do everything we can to support their review of that document and resume production as quickly as the FDA feels comfortable that we can.

So that's our number one goal. It's J&J's number one goal, all in furtherance of stabilizing and strengthening the supply chain for this much needed vaccine. In terms of the CDMO services impact and losses, I'll say a couple of things. First of all, to my knowledge, we've not experienced any losses in the current customer base.

I think people understand that we jumped into this pandemic response in a big way, unusual way, but that's what we do. I mean that's how we built this business over 22 years. I think we still see strength in the core business. And as we've talked about, the network itself includes 9 manufacturing sites.

Those 9 manufacturing and development sites are capable of supporting 5 different platform technologies across a very broad service offering of development services, drug product, as well as drug substance.

So the bones of that business are very strong, and they are very high in demand in terms of the diversity of the customer base that we're going after. So I'm pleased to see the continued strength in that business with the new contracts that we're able to put in place in Q1, and we'll be able to comment on Q2 in time..

Dana Flanders. Your line is now open..

Great. Thank you very much for the questions. Bob, how would you just characterize your working kind of relationship and dialogue right now with your U.S. government counterparts. I know the anthrax vaccine needs a new contract soon, and you've been in the news a lot lately, which you've discussed and have a congressional hearing coming up.

So just wondering how you give kind of investors comfort that, that kind of relationship is still strong? And then my second kind of related question.

I'm wondering if there's any color you can give on the raxi contract and why that's being delayed and then if there's any read-through to the kind of upcoming anthrax contract negotiations later this year or early next year..

Thanks, Dana. I'll take a couple of those and then perhaps turn it over to Rich to talk about the discussions regarding the upcoming contract renewals. So first of all, on the U.S. government relationship, we've been at this for 22 years as a company.

We pride ourselves on open, transparent relationships, and we found that to be the case in the last 22 years as well as the current circumstances. So we are working in a very transparent way with all factions of the government, those within HHS and BARDA and others. So those relationships remain intact and strong.

And maybe, Rich, you can turn to exactly kind of where we are assumption wise for the - both the ACAM and the AV7909 options that are up for renewal..

Sure. Happy to do that. And thanks, Dana, for your question. So as it relates to ACAM2000, what we are assuming is that the option will be exercised in time for us to begin making deliveries in the second quarter of this year.

So we expect to see some amount of ACAM revenue in the second quarter and that the full amount of the full year guidance comes through as a result of that option being exercised.

Secondly, as it relates to ACAM - I'm sorry, AV7909, we also anticipate that the next option exercise will occur in time for deliveries to begin against that next option in the third quarter of this year.

And that's contemplated by our guidance and approximately half of our guidance relates to deliveries that would come in the third and the fourth quarter of the year.

And then as it relates to raxi, basically, when we came into the year, we assumed that the RFP and bidding process would occur much earlier in the year than it looks like it's going to happen at this point in time.

So based on where we are, our expectation is that it's likely that, that's going to happen later, and that, that revenue can push into 2022..

Jessica Fye. Your line is now open..

Just following up on Dana's question, can you elaborate for us just where we stand with the AV7909 contract. I think the base period might be coming to an end in the coming months.

So I guess, can you explain what the end of the base period means and what it doesn't mean? For example, should we expect you to start negotiating the next contract soon? And how many doses are possible for the government to buy with the remaining options on the current contract? Is there any time limit by which those options must be exercised?.

Yes, Jess, thanks for the question. So I think Rich has covered part of your answer, but just to go back at it a bit, the current contract for AV7909, we expect to be discussing with the government, the renewed option and the exercise of that option for the next annual period.

I believe that the current period of performance goes through the middle of this year. So we're looking at what's going to happen for the back half of 2021 and the first half of 2022. And we have certainly built some expectations of what the outcome of those negotiations will be in our guidance for 2021.

I think right now, that's all we can say other than that we are in discussions already with the government around the outcome of that..

Hi Jess, it's Adam Havey here. I just might add one other piece. When we established that contract, it had 2 kind of major pieces to it, the first was the development and licensure, essentially the BLA approval of the product and the second was procurement.

And so I think you could assume that as we work through that regulatory process, that the period of performance on that contract will expand. And once we get approval, then we'll talk about with the government, how to transition.

Once we get - or if we get approval, we'll talk about the government about how to transition like we did with BioThrax in the earlier years. But remember, the core work on that is the development work, and that's still active. We're on target, on plan, and that will move into 2022..

Okay. Great.

Can I just ask a couple about Bayview, you talked about getting back to the FDA regarding the 483 within the coming days? Will a reinspection be needed following that remediation before EUA?.

Yes. So Jess, we're not expecting that outcome. It's certainly a possibility. But we - again, we expect to deliver a very wholesome durable set of corrective actions in response to the observations. And look forward to working with the FDA if they have any questions as a follow-up once they get that document..

Okay.

And then going back to the shift in timing on the new raxi contract, what's the reason there? Is it because the product is made at Bayview? Or is the timing shift due to something else?.

Yes. It's not due to - no association with Bayview, Jess. I think it's simply a priority issue. And again, we expected, as Rich described, that the RFP would have been issued by now, and we would be working through with the government what that longer-term solution looks like. We're ready to do that when they're ready to have those discussions..

Okay. Great. And I just have a couple of just clarifying guidance. You talked about the timing of expected revenue being the reason behind the cut to the CDMO guidance. Does that mean we should just think of it as shifting into 2022? Or is the contract written such that delayed timing means a lower revenue opportunity overall? That's the first part.

And then second, should we still expect you to collect revenue from AstraZeneca this year?.

So in terms of the shift, we are anticipating that revenue would shift into 2022 to the degree that it's not recognized this year. I should say the key variable right now relates to next steps at Bayview.

And we obviously, as Bob referenced, we can't really comment on what the FDA's timing would be, but we've developed a range of scenarios, which are contemplated by the wider range of CDMO guidance that we have put out there. So that's really kind of how we're thinking about that going forward.

And then as far as AZ is concerned, we do anticipate recognizing incremental revenue from AZ this year. That's contemplated in our guidance. We're working through the ramp down process and determining the next steps with them..

Keay Nakae..

First, appreciate the transparency and publicizing the 483 findings.

With your proposed corrective actions, what kind of time frame are you anticipating it will take you to implement those corrective actions?.

Okay, thanks for joining. Thanks for the question. I'm not going to get into the nitty-gritty of the response, only to say that we commit to do whatever we have to do to partner with J&J, respond in a very thorough, robust way and be able to get back into production as quickly as possible.

So it's really inappropriate to speculate on anything other than that. But again, reinforcing our #1 priority is to get back into production soon, but obviously, only after completely responding and committing to corrective actions necessary and appropriate as identified by the FDA..

All right. Well, let me ask you another question, Bob.

While appreciating the rapid changes that you had to accommodate, given everything that's happened, what would you say are the key things you've learned from the experience?.

Yes, it's a great question. We've kind of internally debated that for a while. I think the lessons learned, quite frankly, are again, the importance of transparent open communications. I mean, clearly, we were in this situation this time last year, where we readily raised our hand. We stepped forward.

We ran at this opportunity in pandemic in a way that few, if any other organizations did. So I'm proud of the fact that we have stepped up and stepped into this in an aggressive way. No one could have anticipated, just to be clear, what the outcome of the work was.

And again, I think the lessons learned are the importance on preparedness and how critically important that is when it comes to emerging infectious diseases or chemical and biologic threats for that matter. So preparedness counts, response counts.

And again, I'm proud of the fact that we jumped into this and did everything we could, everything we can right now to stand up and stabilize the supply chain. And we would absolutely do it again..

[Operator Instructions]. And for your last speaker that's Lisa Springer..

Certainly, you've covered a lot on the call, and I just have a quick question regarding the travel vaccines.

With some of the European cruise line starting back, are you seeing any pickup in demand for your travel vaccines? And what's the outlook for that for the year, do you think?.

Yes, Lisa, thanks for joining the call. Thanks for the question. As we commented earlier in the year and late last year because of the COVID pandemic, we're not anticipating a huge revenue contribution from the travel health business. We remain interested in doing everything we can in that space.

And as you know, we have both commercial products as well as other candidates in development. We don't know quite yet what to read into your specific question about cruise lines opening up, we'll see how that plays out. But again, we don't expect that to be a huge contributor in 2021..

And there are no further questions from the public at this time. I'd now like to turn the call back over to the company for closing comments at this time..

Great. Okay. Then thanks, Cindy. With that, ladies and gentlemen, we now conclude the call, thank you for your participation. Please note an archived version of today's webcast as well as the PDF version of the slides used during today's call will be available later today, and accessible through the Investors landing page on the company website.

Once again, thank you, everybody, and we look forward to speaking with all of you in the future. Goodbye..