Ladies and gentlemen, thank you for standing by, and welcome to the Emergent BioSolutions Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to the company. Please proceed..

Thank you, Cherry and good afternoon, everyone. This is Bob Burrows, Investor Relations Officer for the company. Thank you for joining us today as we discuss the operational and financial results for the third quarter 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.

During today's call, we may make projections and other forward-looking statements related to our business, future events or 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 3Q 2021 as well as the forecast for full year 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 November 4, 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?.

product quality and patient safety standards; our human capital and employee-focused programs; our existing charitable and volunteer programs; our work to safeguard the environment and health of our communities and employees; as well as our corporate governance and business ethics principles and practices.

I also wanted to note that on a personnel front Mary Oates, previously our Head of Global Quality has decided to pursue a new career opportunity and has left Emergent. We're conducting an external search for a new Head of Global Quality.

In the meantime, I'm confident, that our team of talented dedicated professionals will continue the important quality advancements made in the last several months. To conclude our third quarter operational results demonstrate, that our business remains resilient and poised for growth, in line with our strategy.

We continue on our path of both organic opportunities and potential M&A informed by prudent capital deployment all aimed at generating enhanced shareholder value. With that I'll turn the call over to Rich, who will take us through the detailed results for the quarter.

Rich?.

no raxibacumab revenue this year; the naloxone market remains competitive with at least one new entrant this year, which we actually saw with a branded competitor coming on market in Q3; no generic entrant prior to the resolution of our patent litigation case, and the continued manufacturing of J&J's COVID-19 vaccine at Bayview.

The considerations that have been revised are as follows. We have incorporated the financial implications of our mutual agreement to terminate the CIADM agreement and related task orders, including the expected payment in Q4 of the relevant agreed upon amounts.

And the expected range of adjusted gross margin is now 54% to 56% taking into account both year-to-date performance and anticipated performance in the fourth quarter. On a different note given the changes, we have seen in our business during the pandemic we've received a number of questions about what to expect from the business going forward.

As you know, our custom has been to provide a first look at annual guidance at the beginning of each calendar year once our budgeting process is complete. We expect to maintain that practice for 2022, but I would like to offer a few thoughts on directional trends, so you can better understand the shape of the underlying business.

In terms of top line revenue, we haven't finished our budgeting process for 2022, but the current analyst consensus for total 2022 revenue directionally seems to be in line with our thinking.

More specifically, we anticipate that our medical countermeasures business will remain steady with high visibility provided by the long-term contracts, we currently have in place. The opioid crisis has been worse than we anticipated when we acquired the program and as a result NARCAN Nasal Spray revenue has continued to exceed expectations.

Of course, the question on everyone's mind is what will happen, if a generic competitor enters the market. More than half of our market is in the public interest space and so not necessarily subject to the usual automatic switch for AB rated products.

And for the remaining product markets as Bob said, we are prepared to launch an authorized generic in partnership with a large generics company. All-in-all, we are confident that, it will continue to be a meaningful contributor to both our top and bottom line going forward.

On the travel health front, we are monitoring and calibrating our expenses to international travel conditions and do not anticipate meaningful revenue from our travel vaccines next year, although we are expecting upticks in travel following that.

For CDMO, we expect we will continue to support J&J out of our Bayview site, and build on the opportunities we see to serve customers from several of our other revenue-generating sites.

In terms of profitability, we are making investments in our manufacturing and quality systems that are putting pressure on our CDMO gross margins, but we expect these will continue to gradually improve over time.

And we are taking a disciplined approach to managing our SG&A expenses, as we prepare for a return to stronger top line growth in 2023 and 2024. With respect to R&D, we continue to invest in long-term value drivers as well as programs with non-dilutive funding, but we are balancing those investments with some anticipated portfolio rationalization.

As a result, we currently anticipate that these trends may constrain adjusted EBITDA margins to a level that is at or below, the ranges we saw in 2018 and 2019. We will refine these views, and expect to provide more definitive information early in the New Year. Conclude please turn to slide 18 for some summary comments.

In the third quarter of 2021 we continued to deliver solid performance in certain key aspects of our business. Anthrax vaccines, ACAM2000 and the rest of the core medical countermeasure products, the Narcan, Nasal Spray franchise as well as the new business wins in CDMO services.

We also experienced continued forward progress at scaling up the production capabilities at the Bayview site in support of J&J. And we realized an important pipeline milestone with the CHIK vaccine Phase 3 trial launch last month.

While our guidance for this year has been revised a bit to reflect the termination of the CIADM agreement as well as current profitability trends in our CDMO business bringing the CIADM agreement to a conclusion was a clarifying step forward for the company.

Finally, our conviction in the long-term growth potential of our business is as strong as it has ever been. That completes my prepared remarks.

And I'll now turn the call over to the operator, so that we can start the question-and-answer session, Operator?.

[Operator Instructions] Your first question comes from the line of Brandon Folkes with Cantor Fitzgerald. Your line is now open..

Hi. Thanks for taking my questions.

Maybe firstly just on the CIADM contract can you maybe just elaborate in terms of your relationship with HHS and maybe the individuals responsible for that contract versus any impact on your relationship with the Strategic National Stockpile? Just any clarification on the statement that there's reversal of the revenue base due to lack of cash collection, did they stop paying you before the mutual termination of that agreement? And then secondly maybe just on Narcan do you expect a generic entry or an AG to expand the market at a faster rate than it is currently expanding or is price not really a limitation in that market at this stage? Thank you..

Thanks, Brandon. So I'll take the first part of the first question. I think we all recognize that the CIADM as it was contemplated back in 2012 was a good idea at the time. But unfortunately it didn't work out as it was anticipated. I think secondly, likewise, the task order for COVID-19 work that we've been doing was also a good idea.

And to be clear the government and the public in general has benefited significantly from the activities that were conducted under that task order.

I think the government's decision to remove the AstraZeneca product from Bayview and to not direct additional work to Bayview to take its place made it pretty clear that they no longer needed that reserved space.

And while we were legally entitled to receive the full payment under the task order and the contractual obligations we made the business decision after discussions with the government the best way forward was to kind of end the task order and the CIADM relationship.

Part of your question was really related to the relationships between kind of the CIADM and the SNS. And to be clear CIADM is governed overseen by BARDA under HHS. The Strategic National Stockpile is really under the ASPR the Assistant Secretary for Preparedness and Response. So it's a sister organization but not directly under BARDA.

Maybe I'll turn to Rich in terms of the accounting and the cash question Brandon..

Yeah. So Brandon to answer your question, yes, the government had been behind on payments related to the task order. As you can appreciate every quarter we do an assessment of our accounts receivable and based on our assessment at the end of the second quarter we had believed that it was probable that we were going to collect those amounts.

As we came to September 30th, based on where we were at that point in time we determined that it was no longer probable that we were going to collect 100% of the contracted amount. And as a result that triggered a need for us to convert to cash basis of accounting for that under the lease accounting guidance.

And so that is why when we compared the amount of revenue that we had accrued up to that point with the amount of cash that we actually collected, there was a difference of $86 million which we reversed in the third quarter..

Thanks Rich. Brandon I'll address your second question which is -- I think if I understand it correctly you were asking whether or not a generic entrant and an authorized generic entrant into the kind of naloxone space would have any material impact on the overall market size. I think it's a little too early to guess what that impact would look like.

To be clear I think the nasal delivered naloxone market as you can probably attest to is still developing. Our focus since acquiring the asset three years ago has been really to increase awareness to educate and to make sure that product is available to the millions of patients and customers who need ready access to it.

So, I don't anticipate much of an impact, but we'll have to wait and see..

Great. Thank you. I appreciate the additional color. Thank you..

Thanks Brandon..

Your next question comes from the line of Jessica Fye from JPMorgan. Your line is now open..

Hey guys. good evening. Thanks for taking my questions. So, appreciate you kind of bridging us from the -- kind of through the decline in the opportunity funnel. I'm curious.

Approximately how many potential clients are represented in the current opportunity funnel now and what's the average kind of contract size in there? And second, over what time frame do you typically get clarity on whether a contract is moving forward or not? So, I guess, how long does pitched business kind of sit in the funnel before you get clarity?.

Yes Jess. Thanks. Great question. So, we haven't broken out the number or the average potential deal size in the opportunity funnel. I think as Rich indicated the two opportunities that he called out one was kind of taken off the table because the party decided to take it internal versus putting it out for bid and going to an external CDMO relationship.

And I guess the other was deferred. So, that may come back but no assurance that it will Jess. I'd be guessing quite frankly at the duration of how long things sit in the funnel.

I think we have pretty good clarity that once there is a request for a proposal that is given to us and that we respond to, I would think within probably three to six months we know or have a pretty good idea whether it's going to be acted upon or actionable or not. So, that would be my estimate Jess..

Okay, great. And maybe just two more. One following up on the last question on NARCAN.

Maybe bigger picture when you talk about that representing a core part of the long-term portfolio, can you elaborate on what that looks like how you envision it remaining a core part longer term? And then lastly and I think you kind of addressed this, but I was curious if there's any positive CDMO lease revenue in the third quarter that's being offset by the BARDA negative revenue item.

And I think based on the 86 you just cited before maybe it's like 15.

Is that right?.

Yes, just to knock that one off quickly yes there was $15 million of positive lease revenue that was offset by the negative $86 million related to BARDA..

Okay..

Yes. Jess on your first question regarding NARCAN and I guess our view that its core, I'll say a couple things. Clearly, it's outperforming our expectations today and clearly the expectations that we had when we bought the asset a number of years ago. As Rich articulated, $400 million in revenue projected for this year.

The range of $400 million to $420 million is clearly a positive impact.

Even in a generic setting, where there is a generic entrant and our authorized generic product competing for space, just to be clear, as we've talked about on prior calls, we see that kind of competitive dynamic looking different in the retail market than in the public interest market for a couple of important reasons.

Most notably in the public interest market as you know, the product is already discounted at a 40% discount. So the attractiveness economics is not the typical kind of branded versus generic fight it out for market share in that retail space.

So even with an authorized generic and generic competing in the retail space and some pressure and some competition in the public interest market, for us it's still a sizable asset going forward.

And that is notwithstanding the fact that we continue to look for additional assets and additional lifecycle management opportunities for NARCAN Nasal Spray including the work that we've done to date regarding dating and the temperature range for the product as well as the by dose product.

So we think it's an attractive area and importantly, it really is on point with our strategy of protecting and enhancing life..

Thank you..

Thanks Jess..

Your next question comes from the line of Keay Nakae from Chardan. Your line is now open..

Hi, guys. Thank you.

A couple of questions just to follow-up on the last one with respect to having an authorized generic, how much price pressure do you think that introduces in the retail market?.

Yeah. I think Keay -- thanks for joining the call and thanks for the question. I think as with any branded versus generic competition it's going to be much like it is anywhere else. So there's going to be significant pressure on price. When a generic comes in, we're clearly going to lose some market share.

We'll gain some back with our authorized generic. That dynamic again is going to be we think, different in the public interest market for the reasons they articulated. Not that it's going to be not be able to be penetrated by a generic but we think that competitive dynamic is much different in the public interest market versus the retail market..

Okay. And just going back also to an earlier question about your relationships.

How would you characterize the strength of your relationship with the people over at ASPR?.

Yeah. Keay, I think it's very strong. You can look to a number of proof points, including the two significant procurement contracts that were exercised and funded recently along with the VIGIV contract.

So I mean as we talked about earlier this year, we had a couple of very important contract modifications and extensions to kind of get across the finish line and I think the team and I are very proud of the fact that we've kind of worked through this.

I know that a lot of folks on the outside looking in at us were concerned that the challenges that we've had with COVID-19 response were going to somehow impact that core of the business. That's clearly not the case. And we move forward..

Okay. Final question. For your hyperimmunes for COVID, I know COVID-HIG recently went into a Phase 3.

Are you still doing development work for COVID-EIG?.

Not really, Keay. We've kind of put that on the back burner in order to prioritize our effort on the COVID-HIG side. And it's potentially at a stage where we could reinvigorate, but right now the focus is on COVID-HIG with NIAID..

Great. Thanks..

Your next question comes from the line of Lisa Springer from Singular Research. Your line is now open..

Hi. Robert Maltbie in for Lisa. Thank you for taking my questions.

Regarding the contract, CIADM contract and the amount the government -- how common is it for in your experience with the government to get behind? And what's the rationale in not collecting the balance owed?.

Yes. Robert thanks. It's been a while since we talked. Thanks for joining the call. I'm going to let Rich respond to the collectability or the responsiveness of payment by the government. But as you've followed us for many, many years you know that the government has always paid within a very short period of time.

I think this clearly is an unusual circumstance that was partly impacted by the complexity of the task order that we put in place, which just remember that that task order included reservation fee for a number of facilities, including capital expenditure investment by the government in a number of our facilities.

It included us doing a lot of work for fill/finish and drug products. So I think the complexity of the task order in large part impacted the timing. And at the end of the day, I think the government decided that they really didn't need that reservation. It took them a while to figure that out.

And once they figured it out, we had a productive conversation and mutually agreed to end the task order and end the ADM contract..

And one follow-up. Sorry, sorry go ahead..

Well, just to reinforce and I think Bob mentioned this earlier, but we did believe that we were legally entitled to the full payment.

But we did make a business decision in this circumstance after having discussions with the government that the most appropriate way to resolve the task order and the CIADM relationship more broadly was to come to this arrangement..

And a final follow-up related to the chikungunya vaccine. Could you comment on the potential value of the market for the vaccine and who would be the customers? Thank you..

Yes, Robert. Thanks again. I'm going to let my colleague Adam Havey talked about that. Adam again is our Chief Operating Officer, who runs now and oversees all three of our business units. So Adam I think you're on the call, if you could respond to that for Robert..

Sure. Thanks Bob. Thanks Robert for the question. So just as a reminder the chikungunya virus is carried by mosquitoes like malaria and Zika. The disease it causes can have both acute consequences and chronic ones somewhat like Lyme disease or -- and that's why vaccination is really, really critical. There's a significant unmet medical need here.

And we're looking at travelers from the US alone kind of pre-pandemic where there are approximately 35 million unique travelers per year going to chik-endemic regions. And that's about three times the number for typhoid and a much -- almost a log greater than diseases like cholera. So there's just a -- we think it's a significant opportunity.

We're developing our candidate based on that VLP technology that we've talked about. We believe it can deliver a really robust immunological response, a good safety profile and be very competitive in this market space. So we're excited about it and looking forward to getting the data and moving the product forward..

Thank you..

Thanks, Adam. Thanks. Robert..

[Operator Instructions] I am showing no further questions at this time. I would now like to turn the conference back to Mr. Robert Burrows..

Thank you Charity. 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 a 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.

Thanks everyone again for participating. We look forward to speaking with all of you in the future. Good night..

This concludes today's conference call. Thank you all for your participation. You may now disconnect..