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Emergent BioSolutions Inc. (NYSE:EBS)

Q3 2008 Earnings Call Transcript

November 6, 2008 4:30 pm ET

Executives

Robert Burrows – VP, IR

Fuad El-Hibri – Chairman & CEO

Don Elsey – SVP, Finance & Administration and CFO

Analysts

Eric Schmidt – Cowen & Company

Cory Kasimov – JPMorgan

David Moskowitz – Caris & Company

Daniel Mallin – WBB Securities

James Molloy – Caris & Company

Ed Kelly [ph] – EDS [ph]

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Emergent BioSolutions Incorporated earnings conference call. My name is Latrice; I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. (Operator instructions)

At this time I would like to hand the presentation over to your host for today's call, Mr. Robert Burrows, VP of Investor Relations. Please proceed, sir.

Robert Burrows

Thank you, Latrice. Good afternoon, ladies and gentlemen. Thank you for joining us today as we discuss Emergent BioSolutions financial results for the third quarter and first nine months of 2008. As is customary, our call today is open to all participants. In addition, the call is being recorded and is copyrighted by Emergent BioSolutions.

Joining me on the call this afternoon is Fuad El-Hibri, our Chairman and Chief Executive Officer, and Don Elsey, our Chief Financial Officer. Additional members of our senior management team will be present on the call for purposes of the Q&A session if need be.

The agenda for today's call is as follows

Following my brief introduction, Fuad will provide comments on key corporate accomplishments from 3Q 2008. Don will then provide more detail on the financials for the periods indicated in today's press release.

In addition, both Fuad and Don will comment on our updated financial guidance for 2008. Following prepared comments, we will finish the call with the customary Q&A session.

Please note that any statements about the Company's prospects or future expectations are forward-looking statements. As you know, forward-looking statements involve substantial risks and uncertainties and actual results may differ materially from expectations. Please refer to the press release issued today and importantly to our filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ.

Also, 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 and regulations. Today's press release may be found on our Web site at www.emergentbiosolutions.com under Investors/Press Release.

With that brief introduction, I would now like to turn the call over to Fuad El-Hibri, Emergent's Chairman and CEO. Fuad?

Fuad El-Hibri

Thank you, Bob. Good afternoon, ladies and gentlemen, and thank you for joining us today. At the close of the market today, we reported financial results for the third quarter and first nine months of 2008. I am very pleased with the performance we have achieved thus far this year. Year-to-date we have delivered strong sales and earnings results and we remain firmly on the path to achieving our financial and product development goals for the year.

In reflecting on today's results, I would like to spend just a few minutes discussing certain key accomplishments. First, let me brief you on our initiative to strengthen our biodefense franchise, which is comprised of our anthrax and botulism programs.

Let's start with our anthrax program and the progress we have made with our flagship product BioThrax. In Q3, we devoted significant effort to securing an additional commitment from the U.S. government for BioThrax beyond last year's contract of up to $448 million, which includes the delivery of 18.75 million doses to Q3 2009. As a result of that effort, and as previously reported, we secured the follow-on contract valued at up to $404 million to supply HHF with an additional 14.5 million doses of BioThrax into the Strategic National Stockpile beginning in Q3 2009 and ending in Q3 2011.

Putting this in perspective, within the span of just over one year, we have been able to secure over $850 million in procurement contracts with the U.S. government for the delivery of over 33 million doses of BioThrax into the SNS, and as a consequence, we have substantial revenue visibility for the next twelve quarters or three years.

Let me move onto the second generation anthrax opportunity and specifically, our advanced rPA candidate. As announced earlier this year, we acquired the recombinant anthrax vaccine candidate from VaxGen. Based on improvements to the formulation of the rPA candidate to enhance its stability, we recently submitted our response to the HHS RFP to procure up to 25 million doses of the recombinant anthrax vaccine for the SNS.

In September, we were notified that our submission was technically acceptable and within the competitive range. In short, we are in a good position to receive an award under this RFP.

Please note that this award, should it come to fruition, would have both a development funding component as well as a procurement component with an expected contract value in the hundreds of millions of dollars.

As to an update on timing, we anticipate notification from HHS regarding the award early next year. This rPA award would be in addition to the existing HHS contract to purchase up to 33 million doses of BioThrax.

Rounding out my update on our biodefense franchise, during this quarter, we significantly strengthened our anthrax and botulism development programs by securing up to an additional $60 million in funding from the U.S. government.

Over the next two years to three years these funds will support the continued development of three key programs that represent future opportunities for Emergent, namely our third generation anthrax vaccine, our anthrax monoclonal antibody candidate, and our recombinant trivalent botulinum vaccine.

An important note to mention is that these development contracts not only cover our development costs, thereby mitigating our development risks, but they also provide a profit.

Looking ahead and building on yet another quarter of solid performance in our biodefense franchise, we are now in an even stronger position to solidify our leadership in this sector to securing additional development and procurement companies.

We have demonstrated our ability to secure government contract. We have established a track record as a proven, reliable supplier to the government, and we have managed our business in a financially sound manner. All of these factors combined afford us significant competitive advantages in the biodefense sector as well as financial flexibility to pursue our product development objectives for our commercial pipeline.

Let me now turn to our commercial pipeline. In July, we announced the formation of a joint venture between Emergent and the University of Oxford to develop and commercialize the world's most clinically advanced new vaccine to prevent TB.

As you know, Oxford is a world leader in tuberculosis research and vaccine discovery. Oxford has exclusively licensed the MVA basic vaccine to the joint venture. With the joint venture, we also secured development funding for this product. Specifically, an upcoming Phase II efficacy trial will be financed by the Wellcome Trust and the Aeras Global TB Vaccine Foundation.

The Wellcome Trust, as you know, is the largest charity in the UK with a stated mandate to fund innovative biomedical research. They spend over 600 million pounds annually in pursuit of this mission.

The Aeras Global TB Vaccine Foundation is dedicated to the development of an effective TB vaccine regimen that will prevent TB in all age groups. Aeras is primarily funded by the Bill and Melinda Gates Foundation, and has received funding of up to $300 million to-date.

This product candidate is a single dose recombinant, attenuated vaccine designed to enhance immune responses in individuals previously immunized with the only licensed vaccine against TB, namely VCG. VCG is administered at birth in many countries around the world. The target market is infants, adolescents, and adult populations vaccinated with VCG.

In terms of market opportunity, TB is a truly global epidemic. It is the world's second leading cause of death from infectious disease in adults after HIV. Over one-third of the world's population is latently infected, and approximately 1.7 million people die of TB every year. As of 2007, over 140 countries in the world, including countries in Europe and Asia continue to vaccinate infants, adolescent, and adults with VCG.

As to our other advance stage commercial candidates, we continue to pursue the development of our single dose oral typhoid vaccine, and our hepatitis B therapeutic vaccine, both of which are in Phase II.

In respect to our preclinical product pipeline, we are continuing to pursue development initiatives that focus on utilizing our oral bacterial vector spi-VEC, and our injectable viral vector, MVAtor techonology.

Moving on, let me briefly update you on our M&A expectations. Let me reiterate that we remain active in our efforts to acquire late-stage product candidates. One of the companies which we have announced a transaction is Protein Sciences Corporation. Last spring, we executed an asset purchase agreement to acquire PSC's novel flu vaccine candidate, their cell-based platform technology, and other related assets of PSC.

We have experienced certain obstacles in closing that transaction. In July, we filed a lawsuit against PSC and its management team and litigation continues. In parallel, we are working with PSC's board of directors to determine a way forward to complete that transaction.

In addition to our efforts to acquire a flu vaccine candidate, and consistent with our strategic objective to compliment organic growth with strategic M&A transactions, we remain inquisitive and continue to evaluate opportunities.

Finally, let me briefly comment on our expectations for the remainder of 2008. In light of our year-to-date financial performance, we are updating our financial outlook for 2008.

First, we are reaffirming our expectations for full-year total revenues of between $180 million and $195 million. Second, we are revising upward our expectations for full-year net income between $21 million and $25 million or between $0.70 and $0.83 cents per share. Importantly, these projections do not reflect the potential acquisition of Protein Sciences Corporation, which may significantly affect our financial projections.

And one final comment. It is important to remind everyone that our business continues to be relatively lucky, based of the timing of deliveries of BioThrax to HHS. While I can appreciate the desire to focus on the quarter-to-quarter performance, it is our view that the true measure of performance for our business should be annual financial results.

To wrap up, let me say again that I am very pleased with our results of the year-to-date. Our financial performance reflects the strength of our operations. We remain comfortable with the prospect of achieving our goals for 2008 as well as realizing additional growth opportunities across both our biodefense and our commercial portfolios over the next 12 months to 15 months.

With that I will now turn it over to Don, who will take you through the numbers in greater detail. Don?

Don Elsey

Thank you, Fuad. Good afternoon, everyone. As Fuad mentioned, following the close of markets today, we released our financial results for the third quarter and first nine months of 2008. I encourage everyone to take a look at the press release, which is currently available on our Web site. We plan to file our quarterly report on Form 10-Q with the SEC at the close of business tomorrow, Friday, November 7, 2008. The 10-Q, when filed, will also be available on our Web site.

Now, let me discuss the financial results. First, let me talk about product revenues. Our third quarter 2008 product revenues came in at $55.5 million, which was an increase of 33% over Q3 2007. The growth and revenue quarter-over-quarter was driven by a 34% increase on an average sales per dose. You may recall that our initial shipments under our current contract, delivered during Q3 2007 called for a reduced price per dose based on a slightly diminished remaining shelf life of those initial doses.

On a year-to-date basis, 2008 product revenues were $139.3 million, an increase of 55% over 2007. The increase was driven by both a higher number of doses shipped as well as the higher average price per dose.

As Fuad mentioned, our product revenues can fluctuate from quarter-to-quarter. Despite a pre-established target delivery schedule, our shipments to the government each quarter can vary significantly based on certain factors, including manufacturing yield, product release, and SNS logistics. We expect that this variability will continue on a quarterly basis, but will be relatively predictable on an annual basis.

Let's move to contracts and grants revenues. On a quarterly and year-to-date basis, our contracts and grants revenue was relatively flat. Contracts and grants revenue is determined by the level of activity accomplished during the period and invoiced to the customer, primarily the U.S. government.

During the quarter, as announced, we significantly strengthened our anthrax and botulism development programs by securing an additional $50 million in funding from the U.S. government, to support the continuing development of our third generation anthrax vaccine, our anthrax monoclonal antibody candidate, and our recombinant trivalent botulinum vaccine. As Fuad mentioned these development contract revenues carry with them a profit margin positively impacting the bottom line.

Now, with respect to gross margins, for the quarter and year-to-date, we continue to experience very strong gross profit margins on product sales. While cost of product sales increased on an absolute basis, due to an increased number of doses shipped, this was partially offset by improved manufacturing yield.

As we have discussed before, biological manufacturing presents specific challenges in terms of actual production yield, and as a result our gross profit is subject to variability due to normal fluctuations in our yield.

Turning now to spending, first taking a look at product development. During the quarter and year-to-date, we continued to advance the development of our product pipeline, which includes enhancements to our licensed products, and efforts to advance our clinical candidates in our preclinical programs.

For the quarter, development spending increased 30% over third quarter 2007, which was driven primarily by an increase in development for new product candidate program, including rPA, Anthrax Monoclonal Antibody, and the establishment of the tuberculosis joint venture with Oxford. For year-to-date, development spending grew by 9%, which was driven by the same primary drivers as for the third quarter.

As I mentioned just a moment ago, the development spending for the Anthrax Monoclonal Antibody program, and the third generation anthrax vaccine, resulted in the receipt of a development contract for both of these products. In addition, development spending for our rPA program enabled us to submit a proposal for the anthrax rPA RFP that was issued by the government.

Our SG&A spending for both the quarter and year-to-date periods was flat on a comparative basis. Our spending for SG&A has been primarily driven by establishing an infrastructure that is allowing us to grow the business, execute on our contracts, and comply with regulatory requirements. We are very focused on tightly controlling the growth in general and administrative expense.

The bottom line, our net income for the quarter was $10.4 million or $0.35 per basic share, and for year-to-date, net income was $19.2 million, or $0.65 per basic share. Both of these were a substantial improvement over the prior year results.

Let's go to our balance sheet for a moment. On September 30, our balance sheet continued to be strong. We continue to generate cash from our operations and our cash and cash equivalents on September 30, 2008 was $104.7 million.

Our outstanding long-term debt declined to approximately $43 million and has supported our investments and the expansion of our manufacturing facility in Lansing and our facilities in Maryland.

Finally, with respect to our 2008 financial guidance. As Fuad stated earlier, we are updating our financial outlook for full-year 2008. First, we are reaffirming our expectations for total revenues of between $180 million and $195 million. Second, we are revising upwards our expectations for net income to between $21 million and $25 million or between $0.70 and $0.83 per basic share in EPS.

In conclusion, our financial performance as reported today, positions us well to achieve our objective for year-over-year revenue growth, and year-end profitability. Our recently signed contract with HHS for the delivery of 14.5 million additional doses of BioThrax to the SNS provides us with revenue visibility through Q3 2011.

This contract, coupled with recently executed development agreements with the U.S. government, allows us to position the Company for continued growth through both acquisitions and advancement of our product development programs. We have been able to advance our product pipeline candidates, and add exciting new candidates and collaborations while tightly managing spending.

In summary, the strength of our operations and our ability to effectively manage our business, in pursuit of our strategic initiatives, remains on track and we look forward to achieving our seventh consecutive year of profitable operations.

That concludes my prepared comments. I will now turn the call over to the operator so that we can begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator instructions). And our first question comes from the line of Eric Schmidt with Cowen & Company. Please proceed.

Eric Schmidt – Cowen & Company

Good afternoon, gentlemen. Congratulations on a nice quarter. Don, last quarter, you had us believe that the revenues would come in toward the lower end of the range, so I guess you are actually widening the range with one quarter left here in the year. Now, we are not complaining, mind you, but what's now led you to believe to remove that restriction on the upper end of the range?

Don Elsey

Basically, as we go back to the range that we established at the first part of the year, which we established back in January of 2008, we believe that there are some opportunities that may allow us to achieve a slightly higher revenue position than we were looking at before. As you recall, one of the key inputs to our projections earlier in the year was four-year gating, and we had estimated that impact of four-year gating is approximately $15 million. Four-year gating, while we remain very optimistic with eventual approval of four-year gating, may not occur in 2008. It may be up into 2009. What we have been able to, by managing the business very carefully to bring in some additional revenue into the 2008 period.

The one thing I would want to emphasize, as you probably know, Eric, is as we sell BioThrax to the Government, that it's usually in 180,000 dose lots or approximately $4.3 million at a time. So, one lot or two lots in either direction is a significant swing to our revenue projections, but we are working very hard to bring in some revenue to make up for the four-year gating that at this point in time is not part of our projection for 2008.

Eric Schmidt – Cowen & Company

So, within that revenue guidance, could you help us on where you generally think BioThrax is going to be for the full year? I know you're capacity constrained again.

Don Elsey

I tell you, I am really at a loss to say other than when we got into the lower end of the range we felt very, very confident in that. We still feel confident in that. We see some opportunities to go beyond that, but until they are signed, sealed and delivered, probably as late as the third week in December we are not going to know for certain.

Eric Schmidt – Cowen & Company

Will some of the funding that you brought in during Q3, the third generation anthrax vaccine and monoclonal antibody, the botulinum vaccine, will that start contributing in Q4?

Don Elsey

That will have some modest impact, Eric. The primary activity on those contracts is in 2009, 2010. We are certainly looking at that very carefully. My comment is that as the activities are accomplished and invoiced, revenue can be recognized, and we'll probably see some impact from those this year, but modest.

Eric Schmidt – Cowen & Company

Okay. And then maybe a question for Fuad. I think, Fuad, both you and Don alluded to M&A activity in your preamble, and obviously, the valuations out there must be looking relatively more attractive. Could you talk a little bit about what your ideal candidate might be, whether it be in a biodefense side of things or the commercial side, and what exactly you would hope to bring in terms of product or late stage development candidate, et cetera?

Fuad El-Hibri

Yes. Hi, Eric, and thank you for your questions. Let me start by saying that on the – as far as our biodefense franchise is concerned, the anthrax base, we are pretty much as deep and as broad as we can get. We have first, second, third generation candidates on the vaccine side, and we have two therapeutic, one is monoclonal, the other a polyclonal candidate. So, we're very happy with the breadth of our biodefense, our anthrax program.

With respect to botulism, we have, as you know, a trivalent recombinant botulinum vaccine that's advancing nicely, and on the vaccine side we feel we're in a good position. And on the therapeutic side, this vaccine will hopefully be the basis for a botulinum IG product. First, the vaccine needs to go into the clinic, which we anticipate will happen pretty soon and thereafter we plan to immunize donors and start our botulinum IG program, which like the AIG program, would be based on a licensed fractionation process so the development timeline would be relatively short compared to other products.

So, on the biodefense side, really the therapeutic piece, in addition to a botulinum IG product that may be of interest to us, and we have mentioned earlier this year that we are looking at a monoclonal botulinum, a monoclonal antibody candidate. So, that's one candidate we are looking at with respect to our biodefense franchise. And, of course, opportunistically, as the government comes up with requirements in other areas, we may look at acquiring other biodefense products. Now, the focus, however, is on the commercial side where we would like to see in addition to our TB, typhoid and hepatitis B advanced products that are currently in Phase II, another product that is in late stage, at least one other product, and of course, PSC's flu vaccine is one example, but we are also looking at other potential candidates. Our goal remains to acquire, as soon as possible, a late stage product to broaden our commercial pipeline and to bring in the revenue potential earlier rather than later in our portfolio.

Eric Schmidt – Cowen & Company

And one last question if I could. You mentioned guiding to a possible rPA contract in early 2009. Is there very little or no chance that could happen in the fourth quarter of 2008?

Fuad El-Hibri

Well, the government has originally indicated their desire to complete the process by year-end, that's why we were also hoping that that would end by year-end. However, one of the bidders recently filed a protest against the process, which is not uncommon, and there is a process actually that the government goes through, the government accounting, the General Accounting Office gets involved, the GAO, they evaluate the merit of the protest and then (inaudible) as to whether it has any effect on the awards, the assumed award. Our view is that it typically does not affect the process other than potentially delaying it by 90 days to 100 days. So, that's why we guided that we now anticipate an award some time early next year.

Eric Schmidt – Cowen & Company

Right. Thanks for the color.

Operator

And our next question comes from the line of Cory Kasimov from JPMorgan. Please proceed.

Cory Kasimov – JPMorgan

Hey, good evening. Thanks for taking the questions. A couple of them are already asked. I was wondering though how we should think about the impact of the recent declaration by HHS back in October, the emergency declaration that they made regarding anthrax, and specifically, BioThrax, that's in effect until the end of 2015, and how this may potentially impact BioThrax if there are favorable implications here beyond the most recent contract that you just disclosed that is good through the third quarter of 2011.

Fuad El-Hibri

Thanks, Cory, for participating today and for the question. We look at it as another affirmation as to the government's commitment to BioThrax. So, we believe that the more support we get in terms of certifications of the product and also from a product liability point of view, it reduces our risk. We feel that that was a very positive development and it's just another anticipation that the government sees BioThrax as a critical component, as a countermeasure in the (inaudible)

Cory Kasimov – JPMorgan

Okay. And then regarding FluBlok, and the potential Protein Sciences acquisition, appreciate the update you gave us, but is there – do you have at this point in time any idea when there may be an ultimate resolution to what takes place here, whether you acquire the company or not?

Fuad El-Hibri

Well, we are working very diligently with the Board and it's – as you could imagine, difficult when management isn't fully engaged in the process, but we continue to be optimistic with respect to our transaction and we continue to be interested in FluBlok as an interesting, novel candidate for the flu vaccine. And we, as you know, recently PSC filed a DLA, so that process has started.

Cory Kasimov – JPMorgan

So you are not exactly sure what the next steps are in this process then?

Fuad El-Hibri

Well, the next steps would be to complete the transaction and there are some obstacles that for competitive reasons I can't really get into, but we are tackling them head on and will continue to work diligently to complete it.

Cory Kasimov – JPMorgan

Okay, okay. And then lastly, and I apologize if you mentioned this already, but regarding the rPA contract that is on the table, do you have any idea or visibility into the number of players involved in this at this point in time?

Fuad El-Hibri

If you look at what those companies that announced, there were only two companies that announced that they were in the competitive range and that was PharmAthene and us.

Cory Kasimov – JPMorgan

Okay. That's all I heard. I don't know if there were any other smaller players who may be involved with this.

Fuad El-Hibri

There could have, but I would have thought that they would have made an announcement if they were in competitive range, and it might be one of those bidders that submitted a protest.

Cory Kasimov – JPMorgan

Right. Okay.

Fuad El-Hibri

(inaudible).

Cory Kasimov – JPMorgan

That's it. Thank you for taking the questions.

Fuad El-Hibri

Thank you, Cory.

Operator

And our next question comes from the line of David Moskowitz from Caris. Please proceed.

David Moskowitz – Caris & Company

Hey, thanks, good afternoon, everyone. I am going to be reiterating a lot of the questions. They are all the right questions to be asking. But just going back over that so, you said that it's not PharmAthene that submitted the complaint to the government on the rPA bid.

Fuad El-Hibri

First, David, thank you very much for participating and thank you for covering our stock. We really appreciate that.

David Moskowitz – Caris & Company

Hey, thanks for having me, Fuad.

Fuad El-Hibri

Thank you, and David, really I just want to put this into the right context. It's my view I can't state with certainty, but it's my view that I doubt that it was PharmAthene who submitted a protest. I don't have any point to prove that.

David Moskowitz – Caris & Company

Okay. And going back to the Protein Sciences timing, are there any sort of deadlines or hearings that we should be thinking about regarding this process that can give us a better idea of at least steps within the timing of advancement to closing the transaction?

Fuad El-Hibri

I can't think of any, quite frankly, David. I don't know that there are any major milestones that would be presented and reported.

David Moskowitz – Caris & Company

Okay.

Fuad El-Hibri

I hope you appreciate that it's a delicate situation and that we need to be careful what we say.

David Moskowitz – Caris & Company

Okay. So I am going to interpret that as there could be milestones but it's probably better off keeping them to yourselves right now?

Fuad El-Hibri

I don't know that you can necessarily build that bridge, but it's hard for me to comment.

David Moskowitz – Caris & Company

Alright. And if I look at the net income guidance, $21 million to $25 million, you're already at a little over $19.3 million for the year, so at the low-end of your range you're only at $2 million. So that suggests potentially thin first quarter which, number one, I would like to be somewhat prepared for that because your second quarter was a similar type of quarter, and apparently, the market wasn't well prepared for that. So, can you talk about getting from the top line, you're still within the guidance range we talked about, and perhaps on the lower end, but is it revenue that gets us to the low end of your guidance? Is it expenses that gets there? Can you walk us through, besides the top line, or can you tell us that it is specifically the top line that gets us to the low end of your guidance range?

Fuad El-Hibri

Well, the top line certainly contributes to the bottom line, is obvious, but as Don mentioned earlier, sometimes one or two lots that maybe moved from one delivery and acceptance from one or two lots that are moved from one quarter to another could have as much as an $8 million revenue effect, or when you take our gross margins and then the tax effects it as much as $3 million in net income effect. So certainly the deliveries drive profitability and we wish could down to one or two lots exactly project in the fourth Quarter how many lots we're delivering, but we can't.

And then the other thing that Don mentioned is something I want to repeat is that we are ramping up on a couple of development contracts that we were recently awarded and the ramp up itself depends on – provides opportunity to potentially recognize by the end of this year additional revenue. And it becomes a little difficult when we are talking about potentially weeks of time frames in which we can build that could generate additional revenue and profits associated with it.

David Moskowitz – Caris & Company

Now, is that the same situation where you guys are taking some lots offline to use for your AIG programs and other programs? Is that what you are specifically referring to?

Don Elsey

Not in the fourth quarter, David. I know what you are referring to. This is some of the discussion we had on capacity for 2009. No, in fourth quarter, as I said, at any point in time we have a delivery schedule that's put in place with HHS basically at the beginning of the year that lays out by month the doses that, number one, we think we can supply, number two, they think they can logistically accept at any point in time, and then as we go through the year that can increase or decrease based upon their ability to accept and our ability to ship. And, as we get into the tail end of the year, one of the things as I said, we were trying to do was we were going to try to manage very carefully bringing in some doses into the FNS to make up the four-year gating that we had earlier projected. Now, that's going to happen, probably in December, and if everything doesn't go perfectly, and if HHS says, I can't accept them or something else just pushes it into the first week of January, clearly, according to revenue recognition, it doesn't hit our fourth quarter. So, that's the pivot of doses that we are talking about in Q4. Different than what we talked about with you next year where some doses out of our total capacity might go off for certain validation activities.

David Moskowitz – Caris & Company

Okay. Got it. And so, you named acceptance of shipments by HHS. Is there anything regarding the payment timing, the payment cycle for these products that could affect the top line?

Don Elsey

No, not really. It really is a logistical question with them. We are not at liberty to go into details about the strategic national stockpile, but there are logistical challenges with shipments and receipt of shipments so –

David Moskowitz – Caris & Company

So, in general, when we put all this together, are you more comfortable with the lower end of the range, the $21 million in net income, which is still higher than what you were projecting before.

Fuad El-Hibri

Yes, so what we would like to do is just stay with our guidance of $180 million to $195 million. We tried that quarter to be a little bit more granular and we felt that, that was not necessarily the right thing to do, so we want to stay with our guidance of $180 million to $195 million in revenues. We looked at our net income there we felt that it was appropriate to revise upward, given where we are right now and to start giving a range. So, please leave it at that.

David Moskowitz – Caris & Company

Okay. And one last one, and that is the on the contract revenue that you have just brought in. You said before there could be a little bit of a benefit to fourth quarter, so what I assume that the larger benefit that you expect, most of the revenue that you see over the next two years begins right in the first quarter of next year?

Don Elsey

Well, again, we're – and I sound like a broken record, we are not a quarterly story. I know that you guys on the research side have to come up with quarterly projections.

David Moskowitz – Caris & Company

That's why we are asking the questions.

Don Elsey

I know, and I appreciate that, I respect that, but especially dealing with government business, because even a development contract, there are certain approvals you should get to go from one month to another, within the government, and sometimes delays we are responsible for, sometimes delays government is responsible for. Very difficult to project quarter-by-quarter and that's why we give annual guidance. Annually we feel we that we have enough visibility to give you an indication as to where we believe we are going to end up and so far we have been pretty good at that. Quarter by quarter, even though I would like to accommodate that it's very, very difficult.

David Moskowitz – Caris & Company

Great. Thanks very much and congratulations on a phenomenal looking quarter.

Fuad El-Hibri

Thank you, David.

Don Elsey

Thank you, David.

Operator

And our next question comes from the line of Daniel Mallin of WBB Securities. Please proceed.

Daniel Mallin – WBB Securities

Hi, guys, thanks for taking my call. I was looking – I was thinking back about a year when you were selling to two government customers, DoD and HHS and then I guess it was about a year ago where the Presidential-elect Directive and GAO report resulted in the consolidation of that purchasing. I am wondering if you have any clarity as to whether or not the BioThrax that you are shipping is effectively going into the stockpile at HHS 100% or is some of that that's coming in the door being diverted over to the DoD or alternatively as suggested in the GAO report. Is there any indication as to whether or not the DoD is actually being supplied by short-dated doses that would otherwise be poised to expire?

Fuad El-Hibri

Thanks, Dan, for participating today, and your continued coverage of our company. I can say the following that in the context of negotiating and finalizing and securing the follow-on contract with HHS, the 14.5 million doses, $400 million approximately in value, we were told that, that included DoD's requirements. So, DoD remains committed, as we understand it, to the active immunization program. They continue to use product and all I can go back to or point to, is in the past, we understood that their requirements were between 1.5 million doses to 2 million doses per year, and there is no reason why we would believe that there is any change right now. So, the Presidential Directive which asked HHS and DoD to consolidate their stockpiling and consolidate their procurement efforts, which makes a lot of sense, it reduces cost for the government, but I feel confident that as DoD continues to draw on the stockpile and that they will continue drawing on that stockpile to meet their active immunization requirements.

Daniel Mallin – WBB Securities

Is it reasonable on a first approximation basis to say that based on the total number of doses shipped last year versus what you would expect to ship or expect to produce this year, that they basically take every dose that you produce and that from last year to this year, in spite of that change, that you haven't really seen any change or dramatic change in terms of the total number of doses shipped?

Fuad El-Hibri

Precisely. We basically – no matter how you cut it, and how you look at it, we are delivering everything we produce, except for maybe a few doses that we do sell to international governments, the actual bulk goes to the U.S. government, and so far it's worked seamlessly that they have basically procured our entire production, and we project that to be the case through Q3 of 2011 –

Daniel Mallin – WBB Securities

Thanks. That's very helpful. One quick question on the rPA program. When you acquired this program from VaxGen they had already completed a couple of different trials and I assume from your previous discussions on this that you basically acquired the intellectual property and your intention is just to manufacture the protein in, I guess, I presume the Lansing facility or whatever facility you otherwise choose. My question is that the reformulation work I assume that you did was involving the existing protein. I assume that it had been produced at the VaxGen facility and you combined it with other adjuvants and other things that helped to stabilize it. What I am concerned is that since the material is produced in the VaxGen facility, and you are planning to produce it in another facility, do you anticipate that an additional clinical trial might be required?

Fuad El-Hibri

Okay. That's a very good question, Dan. First, let me clarify that with respect to the stability of the product, after it was December I believe 2006 when the contract was terminated in the Government for VaxGen, VaxGen continued to address the formulation issue at their – on their own nickel, at their own risk. And since we have acquired the rPA candidate we continued to work on the formulation improvements, so we are confident that our improved rPA now is stable and meets government requirements. Now, as to the manufacturing piece of it, fortunately, we are talking about not adjuvant. We are talking about excipients, things that are really not major changes, buffers and excipients, which from a regulatory point of view, in our view, don't – aren't interpreted as being major changes to the product. Therefore, we feel that the tech transfer without a major challenge from the VaxGen facility to our facility in Lansing. As to an additional clinical trial, if there were any way additional clinical trials necessary, including the pivotal Phase III clinical trial that was planned. Whether we need to do a small bridging study in between is to be seen.

Daniel Mallin – WBB Securities

Okay. Thank you. And I guess the only other thing is any update in terms of the validation trials at Lansing, and in terms of timing as to when that plant will come on line?

Fuad El-Hibri

Okay, so, as you can imagine, we are very pleased that we've built building 55 in a containable to accommodate more than just one type of vaccine. And not that they can be manufactured simultaneously, but it's a containable facility so that you could campaign from one vaccine to another. Now, with our bids pending for the rPA candidate, we will have to see whether if there is an award, how much of the rPA work that needs to be done early on, what impact that would have to the BioThrax in the large – in validating BioThrax in the large facility. The good news is that we continue to produce at around a 7 million dose, maybe 8 million dose level in our current facility, and all that capacity is spoken for the next three years. So if there was a delay in validating BioThrax for the large scale production, it would not have any immediate effect as we see it on our revenues.

Daniel Mallin – WBB Securities

Okay. Thank you. Congratulations on the quarter and that's all I have.

Fuad El-Hibri

Thank you, Dan.

Operator

And our next question comes from the line of Jim Molloy from Caris. Please proceed.

James Molloy – Caris & Company

Hi, thanks for taking my question. I want to follow up on question, my esteemed colleague, Cory Kasimov, had on the number of bidders on the rPA contract. Is that one that it only comes out one bidder is going be winning, or is possibly can split that, and if it splits, how would that break up?

Fuad El-Hibri

Yes, thank you, Jim, for participating and asking this question. In the RFP itself, it said that up to two awards can be made, so we believe especially after the situation with VaxGen that the government is not going to put all eggs in one basket, so we believe that there is a good chance that two bidders are going to be awarded a contract.

James Molloy – Caris & Company

Any thoughts how that might split out? Do you think it will be 50-50 or something else?

Fuad El-Hibri

Well, that's difficult to say, but if you look at the economics of development and procurement, it's really – the cost of developing the product and delivering 12.5 million doses versus developing the product and delivering 25 million doses is not that substantially different. So, again, this is pure speculation on my side, it wouldn't surprise me if two 25 million dose awards would be made.

James Molloy – Caris & Company

Okay. And then, obviously with the change of President coming up, is that of any impact whatsoever on your – on the bidding process of the contracts, or is entirely separate?

Fuad El-Hibri

It's entirely separate because first of all, the whole commitment to Project BioShield, the bipartisan commitment, was overwhelming a bipartisan commitment, so I don't believe that the political hand will extend to Project BioShield. I think Project BioShield was approved in their bipartisan efforts simply because the Department of Homeland Security made some threat assessments that clearly called for the stockpiling and for the development of medical comfort measures against anthrax. So, I believe that this is not a political decision. It is one that's a national security issue, protecting civilians at home, and I believe that Obama would be just as committed as any other President to that mission.

James Molloy – Caris & Company

Have you had any discussions, granted it's early, only two days after the election – have you had any discussions with any incoming or any of your contacts about any potential changes along those lines or is this just your understanding that it likely won't change?

Fuad El-Hibri

It is my understanding that it likely won't change. We have had some discussions leading up to the election and we will just have to see now how – who is going to be appointed and then start the process of familiarizing them with the issue.

James Molloy – Caris & Company

Okay. Then you mentioned the '08 numbers, obviously, no Protein Sciences in there. Have you spoken at all about how that the '08 numbers might change if Protein Sciences would be in there?

Fuad El-Hibri

Well, I will give that one to Don, but with my limited understanding with an acquisition like that, there might be an amount that's going to be expensed rather than capitalized, so it may have some significant impact on our financials. So, Don, if you want to say a few more things?

Don Elsey

Yes, we have not discussed with anybody what our estimated impact of that would be, but in taking a look at that as $141 million, and applicability to an acquisition like this would be, I think it would be fair to say that there would be a fairly sizable non-cash charge of in-process R&D upfront in a transaction like this. As you are aware, $141 million is revamped on acquisitions that occurred after December 15 of this year, which totally turns the accounting for these on its head. So, we haven't given out any guidance on that, but it's primarily the in-process R&D impact to GAAP-reported numbers that would come about if we include this transaction in the very near future.

James Molloy – Caris & Company

Okay. Then I guess last question would be given any thoughts on how '09 might shape up?

Don Elsey

How 2009 will shape up?

Fuad El-Hibri

No, not today, but we will be, as we usually do give some preliminary guidance at the J.P. Morgan Conference in early January.

James Molloy – Caris & Company

Okay. Thank you very much for taking my questions.

Fuad El-Hibri

Thank you.

Operator

And our next question comes from the line of Ed Kelly [ph] from EDS [ph]. Please proceed.

Ed Kelly – EDS

How are you doing fellows?

Don Elsey

Hi.

Fuad El-Hibri

Hi. Who is this?

Ed Kelly – EDS

I am just a hockey player over here, living in New York, and I just wanted to tell you fellows, I believe in your company, I have a ton of people they just put a ton of money into your company. It wasn't that your stock was at $12, and we bought into it, and now off the board, I know it went to $17, and now it's in $18, I believe that tomorrow if a fellow like on CNBC, like Jim Cramer, gets a hold of this and just – he is not going to paralyze you. We believe in your company because we are the New York Rangers, and what we have done is that we've put together all the perspectives that we could possibly do and you definitely, in the Investors Business Daily, have already proved to us that you are a company that's not up and coming. You are a company that is there and are going to surge. And I just wanted to give you guys, with all the CEOs that are taking all their money and from everybody that's really receiving all the stuff that they don't deserve.

I just wanted to tell you fellows, listen, thank you very much, keep up the good work, go for it because I am telling we really do need vaccinations for anthrax and I am just like a little bit spellbound right at the moment. Because I have never been on a conference call, and now I am in a position to tell you fellows, you guys have done a great job. I am not asking you about anything in the background, but you guys are on the up and front, and it's a heck of a lot to say when everybody else is hiding, behind the shadows of golden parachutes. How is that? Now, take a deep breath. And that's the truth.

Fuad El-Hibri

Well, thank you very much, Ed. I appreciate your confidence in us and we will continue to work as hard as we can to continue growing this company.

Ed Kelly – EDS

I thank you so.

Fuad El-Hibri

Thank you.

Don Elsey

Thank you.

Ed Kelly – EDS

You bet.

Operator

And our final question comes from the line of Cory Kasimov with JPMorgan. Please proceed.

Cory Kasimov – JPMorgan

Hey, thanks for taking a follow-up here. It's tough to follow the latest statement, but Faud, at this point, do you have any indications of potential new anthrax RFD that could be posted in 2009?

Fuad El-Hibri

Okay, let's look at each generation separately. I think first generation, BioThrax, covered until almost the end of 2011. If you look at second generation, which is rPA, that RP is pending and we hope will come to conclusion pretty soon. And with respect to third generation we have already our anthrax with CPG 7909, an award of close to $30 million from NIAID secured. Now, NIAID is very active, they may come up with another third generation RFP next year, just to explore and evaluate new technologies that may be out there in terms of adjuvant, in terms of delivery systems, et cetera, but nothing as big as what we have already secured with BioThrax and what the rPA, RFP may offer.

Cory Kasimov – JPMorgan

Thank you.

Fuad El-Hibri

Thanks a lot. I appreciate that.

Operator

(Operator instructions). And there are no further questions in queue at this time. I would like to turn the call back over to management for closing remarks.

Robert Burrows

Thank you, Latrice. Again, this is Bob Burrows. Ladies and gentlemen, thanks. That concludes today's call. We appreciate everyone's participation. Please note that today's call has been recorded and a replay will be available beginning later today, November 20. Alternatively, there is available a webcast of our call today, and archive version of which will be available later today, accessible from our Web site at www.emergentbiosolutions.com under Investors.

Thank you, again, and we looking forward to speaking to all of you in the future. Please note that we will be presenting in next week's Rodman's conference, as well as the J.P. Morgan's Healthcare Conference in January. Thanks very much.

Operator

This concludes the presentation. You may now disconnect and have a great day.

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