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Executives

Dan Abdun-Nabi - President & CEO

Analysts

Karen Jay - J.P. Morgan

Emergent BioSolutions Inc. (EBS) 31st Annual J.P. Morgan Healthcare Conference Call January 8, 2013 1:00 PM ET

Karen Jay - J.P. Morgan

Hi, good morning. Thank you for coming. I am Karen Jay from the Biotech team at J.P. Morgan. It’s my pleasure to introduce Emergent BioSolutions. Just a reminder, for questions there is a breakout session down the hall in the Sussex Room to my right.

And with that I'll turn it over to the CEO, Dan Abdun-Nabi.

Dan Abdun-Nabi

Good morning ladies and gentlemen and thanks for attending the Emergent presentation today and a special thank you to J.P. Morgan for the invitation to participate in this year’s Annual Healthcare Conference. We really appreciate it.

Just a reminder, my presentation today will include forward-looking statements and actual results might differ, so I encourage you to review our SEC filings for a complete description of the risks and uncertainties facing our business.

Just in terms of overview, Emergent is a specialty pharmaceutical company that seeks to protect and enhance life by offering specialized products to healthcare providers and governments to address medical needs and emerging health threats. We are uniquely positioned for growth and that's what really this presentation is all about. What's the growth plan for Emergent? I would like to walk you through that.

Before doing so, let's talk about the history a little bit. We were founded in 1998 and that was through the acquisition of MBPI, Michigan Biologics Products Institute; a state-owned laboratory in Lansing, Michigan over the last 15 years or so. We have expanded dramatically. We have eight locations now worldwide spanning across the US, the West Coast, the Midwest, the East Coast, Western Europe and an outpost in Singapore to support sales and marketing operations.

We are about 850 employees globally and we have one marketed product that is BioThrax. BioThrax is the only FDA approved vaccine for the prevention of anthrax disease. We have five clinical stage candidates. Three of them operate in the BioDefense space and yes, three of them operate in the BioDefense space and we have two that operate outside in other specialty markets in the infectious disease space. We have a candidate that is addressing tuberculosis disease, that’s called MVA85A. We are completing a Phase IIb efficacy study and we expect to see some data within the coming month or so and the results of that study, it is a blinded trial, so the data should be out in about a month.

The other candidate TRU-016 is targeting CLL. It is in a Phase II study right now underway. It started last year. It's a combination study with bendamustine and we expect to see some data forthcoming the middle of this year. We are focused on two specialty markets, BioDefense as well as other specialty areas which I will talk about as part of our growth plan.

In terms of financials set of glance, for 2012, we recently announced the preliminary results for the year with revenues coming in between $280 million and $284 million and bottomline, $21 million to $24 million. Significantly, our cash position is quite strong. Cash investments and accounts receivable coming in at $235 million; so a very strong balance sheet. Historically, we’ve had significant growth year-over-year both in terms of revenue and net income. Over the last ten years, we're seeing a CAGR of in excess of 17% for both the revenue and the net income side.

Over the last five years, a very solid financial performance. You can see on the left, on top, total revenues continue to decline and net income we have been positive in terms of net income. Every year since the year 2002 and that has allowed us to accumulate a significant cash investment and account receivable balance as I indicated for last year targeting around $235 million.

Significantly, I want to point out a couple of things; one is on the revenue side, you can see the last few years we started to flatten out and that is really attributable to the fact that BioThrax, the licensed product that I mentioned is capacity constrained. We manufacture it in our facilities in Lansing; we are able to produce somewhere between 7 million and 9 million doses per annum; we are at the max and we are delivering every dose that we can produce to the US government for purposes of stock piling in their strategic national stock pile. As a result, we are evaluating and in the process of completing expansion plans for BioThrax, it’s known as Building 55, a large scale facility and I will talk a little bit about that in terms of how that drives our growth going forward.

On the net income side, we have been historically over the last five years reinvesting our cash into our pipeline in order to advance the portfolio that’s within Emergent. And consciously, we want to maintain profitability, but we have been targeting a $20 million number in terms of net income. The philosophy that we have adopted has enabled us to advance our pipeline to the state now where we are going to see some efficacy results on the TB vaccine as well as see some promising hopefully results on our TRU-016 candidate middle of this year.

However, as we sat back, when I was appointed CEO we sat back and evaluated what the growth plan ought to be for Emergent to bring us back to our more traditional historical growth over the last 10 years; and we developed the plan that was really designed to grow both topline and bottomline growth from now to the end of 2015.

As we have built this plan and it’s pretty straight forward, we identified a core strategy which is really what are the markets that we want to work in, and how are we going to expand in those markets. We did a self assessment in terms of what the core competencies of the organization are and how we leverage those core competencies; what are the key objectives over the next couple of years and how do we drive growth, and ultimately what are the goals that we want to achieve between now and the end of 2015. So in terms of the strategy, we are going to continue to expand our reach in what we believe is a very attractive BioDefense market and diversify our product offerings in other specialty markets where we think we can make a significant difference.

The core competencies I'm going to walk through in detail for you, so you can better understand why we believe these are core competencies and why we think we can leverage them across the objectives that you see here to drive towards our goals. Growth goals towards the end of 2015 we intend to achieve greater than $500 million in product sales from a minimum of three marketed specialty products BioThrax being one of them. In addition, we are targeting growing our net income at a compound annual growth rate of a minimum of 15% over that same period.

So let me see if I can walk you through, how we developed this plan and why we think it is an effective and achievable plan, growing the business over the next couple of years. First in terms of our market focus, the BioDefense industry we believe is a robust and vibrant industry and very sustainable. Through the leadership of the US government, we have seen a tremendous investment in this marketplace because of the significant strategic importance to having medical countermeasures that can protect the nation against biological threats.

You can see significant investment over the past 10 years, and we are seeing a commitment to future investment to this important marketplace. The US government recently announced, and this is fairly significant, a strategic plan and an implementation plan in terms of what products ought to be developed and what products ought to be procured over the next cycle of their development program. And it’s really right within our wheel house. You are seeing anthrax vaccines, anthrax anti-toxins, Botulinum anti-toxins as well as [bot] peptone antibiotics and nerve agent antidotes.

So that's a market that we think is ripe for our continued involvement and we would like to continue to expand our role in participation in this attractive market. On the specialty market side we see niche opportunities for Emergent to play a significant role in this marketplace. First in terms of a customer base we believe governments are an area where we have core competency. We have a proven track record of being able to negotiate and deliver on contracts with governments so we see that as a customer base that would spill over from BioDefense to other commercial opportunities.

In terms of other key settings, we are looking at hospitals, specialty clinics. What we want to do is we want to stay away from the large family practice, general practice markets where we have to establish large sales forces. We are looking at a very targeted sales force that will be able to synergistically work with the commercial capabilities that we have today with focusing on infectious disease, hematology, oncology and auto immune.

So by focusing on these two attractive markets, we think we've identified niches which could drive growth for Emergent. Let's talk about the core competencies that we have, we believe we have that will enable us to effectively penetrate these markets. First we are recognized leader in BioDefense and that's demonstrated both on the procurement side as well as on the development contract side.

On the left side of the screen you can see since 2002 we have a strong track record of securing procurement contracts primarily with various agencies with the US government including DOD, HHS and CDC. We have contracts either delivered or underway for an over 96 million doses of BioThrax to the SNS. Currently we are performing under 44.75 million dose contract with delivery scheduled to continue until Q3 2016.

On the total value of those contracts by the way is approximately $2.7 billion. So that is a strong track record in terms of securing those kinds of value enhancing contracts. On the development side, since 2002, 25 development contracts have been awarded to Emergent, and I think that demonstrates a strong track record of being able to not only secure the contract but effectively deliver on the commitments that we made to US government in terms of the obligations there, and it's all the way from very early stage development programs to later stage candidates, it's process and analytical development, formulation, clinical manufacturing and the like.

The programs that we've been contracted to work on include anthrax, botulinum influenza and tuberculosis, and more significantly in the middle of last year, we were selected as a Center for Innovation and Advanced Development and Manufacturing, I’ll say ADM for short it’s a mouthful. We were one of three sites selected across the country to work with the US government over a base period of performance of eight years, extendible up to 25 years. So this is a long-term vision that government has set for itself in terms of working with various innovative manufacturing facilities across the country. We're in good company. One of the three, the other two, Novartis, in their North Carolina campus as well as GlaxoSmithKline and Texas A&M down in Austin, Texas.

These contracts have been with multiple agencies as well HHS and the NIH and as you can see, significant contributions in terms of topline to Emergent’s growth. Next core competency, I would really like to talk about is our ability to identify and close on value enhancing acquisitions. As I mentioned earlier, the company was founded to the acquisition of MBPI that led to the continuous procurement and delivery of BioThrax $2.7 billion since 1998. We acquired in 2003, a small publicly traded company who is probably about under $10 million acquisition. It gave us research and development capabilities core competencies in a number of areas and that generated the 25 development contracts that I referred to providing total revenue of over a $0.5 billion during the last 10 years.

Following that in 2006, we had a very small company acquisition company called Vivax it was the MVA technology Modified Vaccinia Ankara it’s a viral vector that is being used to deliver antigens in a vaccine setting, and what we are seeing here is that that technology and the capabilities in the MVA space have enabled us to establish a joint venture with Oxford University and secure rights to MVA-85A, the Phase IIB clinical candidate for tuberculosis that I mentioned earlier, and we are excited in that we expect to see some clinical data on that in the next month or so.

The Trubion acquisition is the largest acquisition we have undertaken. It was $100 million plus or minus, it was in 2010. So far we have seen some very promising data on the lead candidate TRU-016 as I mentioned earlier that’s now in a Phase II in the combination for relapse refractory CLL and that combination is with bendamustine. The data has also supported the initiation of a Phase IB study in front line in combination with Rituximab. We are expecting to see some data on that candidate in both trials by the middle of this year, with data probably coming out in a more formal fashion at ASH.

We have also been successful in identifying and acquiring product candidates which have led to significant value enhance since we believe for Emergent. They are identified there in the slide I won’t go through each in detail, the latest example is PreviThrax, it’s a Recombinant Protective Antigen vaccine within a year’s time we were able to secure a large multi-year development contract with BARDA to continue the advancement of that product candidate.

Lastly the facilities; we acquired a Baltimore manufacturing facility in 2009. It’s about an $8 million acquisition. We completely gutted the facility and restructured it. We introduced some very flexible manufacturing capability in that. We presented that as part of the ADM program to BARDA and we were very fortunate in securing that long term contract with BARDA to utilize that facility for advanced development and manufacturing. So the point here is that Emergent possesses unique skills in identifying undervalued assets that we can turn into value enhancements for the company and that's a leverage-able capability that we intend to deploy as we move forward.

We have established expertise in Biologics manufacturing and development. I've talked about Michigan and I've talked about Maryland. Michigan is where we produce BioThrax. Currently, we have as I said earlier we are capacity constrained in Building 12; currently producing between seven to nine million doses; working with the US government, we are seeking to Building 55 online large scale manufacturing. We've initiated consistency-wide manufacturing and our target for this year is to complete the non-clinical and comparability testing so we can get a data package into FDA sometime next year with approval following thereafter. Both sites have very complete manufacturing development capabilities including pilot plan, process and analytical development formulation and the like everything you would expect to see from a qualified manufacturer in the biologics space another core competency that we intend to leverage as we build this business.

Last is, our partnering capabilities, not only with government agencies which I've talked about a bit, but also with non-government organizations, NGOs. And in both instances we need to have capabilities that allow us to really understand what their budgeting processes are, what their funding processes are, how they allocate and prioritize their programs; what their expectations are with respect to deliverables; how they ought to be working with us and in alliance management function and how do we deliver to meet expectations and exceed expectations?

So from that vantage point, I think we've demonstrated both on the US government and the NGO side unique capabilities in this field. The partners who are listed on the screen, I would like to mention at least on the NGO side those are primarily attributable to our tuberculosis candidate, that's now in development and as I said expecting to see data. We have been working closely with Aeras, a Gates Foundation funded organization that's been leading the clinical effort down in South Africa along with Oxford University Welcome Trust, a key funder, EDCTP and SATVI the clinical sites down in South Africa.

So experience here I think is going to be a key component of how we build the business going forward and we intend to leverage all of these core competencies across the several objectives that we've set for ourselves over the next few years. We want to drive organic growth; we want to acquire revenue generating assets that can contribute to the top and the bottomline. We are going to focus our R&D efforts on the later stage candidates particularly where we have external funding and we want to continue the productive efforts around partnering with governments and NGOs.

All to the effect of achieving the goals that we’ve set out here expanding and diversify our revenues and they are specifically targeting more than $500 million in product sales and this is incremental to and in addition to the normal grant and contract revenue that we typically have contributing to our topline and we are looking to have at least three marketed specialty products in the portfolio by the end of that period. And growing net income, as I mentioned, get to our more traditional historic success in building the business; more than 15% CAGR through the period.

So what are the key drivers that you should expect to see as we get to the 2015 endpoint for our plan? Increase sales at a building 12 incrementally, as you know, we're capacity constraint but we do manage a year-over-year to secure incremental improvements there to the extent we can until we have expanded capacity, add a building 55 to manufacturing and deliver BioThrax from that site.

We're looking to acquire assets with potential dual use. In other words, both government and commercial application, and there it's important to note that the US government has indicated a strong desire to get away from the one drug one bug paradigm and get products that are in the portfolio that will allow for not only government procurement, but also normal commercial procurement. So they are one of the many customers that exist out there for commercial items that are generally sold by the suppliers and we're looking for products that are already being purchased or potentially within the next 12 months or so have appeal to governments for procurements. So that’s again leveraging our competency in the commercial arena with government customers.

We want to spend beyond anthrax and beyond biologics. So small molecules are in our focus area, as long as they meet the specialty market paradigm that I have just gone through with you. Focused on late stage candidates and partner out is appropriate. Some of these candidates will require significant resources. In some instances, beyond our internal capabilities and where appropriate and where we can secure real value, we will partner those out and limit early stage development, unless it's funded by external sources.

An important point here to note is that this is a three-year plan. We announced it in November of last year. So this is the first year where we will begin implementation. So this is not going to be linear growth, year-over-year, step-wise to the end of 2015. This will be gradual with end growth going towards 2015, both on the revenue side and the net income side. I would like to take a moment and digress and just evaluate where we've been over the course of 2012 and where we are looking for over 2013.

In 2012 we continued to advance building 55 towards license here. We imitated the consistency loss and as I mentioned this year we hope to complete the non-clinical testing as well as the comparability testing necessary to get the data package in front of FDA. Working with BARDA, we continue to advance our PreviThrax that’s the rPA candidate further along in the pipeline and we completed follow up of all the infants in the MVA-85A Phase IIB efficacy study. No small task it was a difficult program and I am glad to say that we are now coming to the end looking for the data in the next month or so.

We initiated as I mentioned earlier two studies for 2016 and CLL, Phase IB and combination with Rituximab and this is previously untreated CLL so it’s front line Phase II in combination with bendamustine and this is relapse refractory for CLL. Significantly we also secured FDA approval for a three dose primary series with BioThrax and this is something that was really led by the US government. It was a critical requirement of theirs, a need of theirs led by the CDC, they conducted a multi-year study; they invested quite a bit of money in this. We were very pleased and we can collect the data working with the government, submit that to FDA and deliver on now a three dose schedule for the primary series of BioThrax something that the government was keenly interested in accomplishing.

As you may have seen in terms of 2013, going forward we issued our guidance yesterday, we are targeting total revenue for 2013 of between 290 and 310 net income of between $20 million and $30 million. As I indicated this is organic growth, it does not reflect any acquisitions that might come out of our efforts for this year. As you can see from our goals and milestones for 2013, we are clearly targeting acquiring revenue generating assets within the various markets that I've described to you.

We want to initiate TRU-016 manufacturing to enable the initiation of a Phase 3 study in CLL and we expect that study could begin in 2014, if we see promising data middle of this year. And last we want to continue to advance building 55 towards license share by getting the data necessary to get that package together and submit it to the FDA. So the key takeaways here we are specialty pharma that we believe well positioned for growth. We've got a very well defined roadmap for growth that incorporates a clear strategy. I hope it’s clear to you that now that now we've been through this presentation. We're going to leverage our core competencies which we think are validated based on our experience, and we have straightforward objectives in terms of how we are going to leverage those competencies and well defined financial and operational goals that we think that's useful for not only the investment community but for our organization internally and that will enable us to measure our progress towards the end of 2015.

For 2013 continue our history of strong financial performance while implementing the principles outlined in the growth plan that includes continuing our organic growth, structuring and completing some M&A transactions and really streamlining our R&D expenditures in the way I've described. So long term, we see top line growth, we see net income growth, and we also see clear value enhancements for our shareholders. So that completes my presentation for today and we would be pleased to see you in our breakout session in the Sussex room right down the hall. Thank you very much for your time.

Question-and-Answer Session

[No Q&A Session for this event]

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