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Executives

Robert G. Burrows - Vice President, Investor Relations

Daniel J. Abdun-Nabi - President and Chief Executive Officer

Robert G. Kramer - EVP, Corporate Services Division, Chief Financial Officer and Treasurer

Scott C. Stromatt - Senior Vice President and Chief Medical Officer

Analysts

Cory Kasimov - JPMorgan

Eric Schmidt – Cowen & Company

James Molloy - Janney Montgomery Scott

Emergent BioSolutions Inc. (EBS) Q2 2013 Earnings Conference Call August 5, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions Second Quarter 2013 financial results conference call. My name is Philip, and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. Robert Burrows, Vice President of Investor Relations. Please proceed, sir.

Robert G. Burrows

Thank you, Philip. Good afternoon, ladies and gentlemen. Again, my name is Bob Burrows. Thank you for joining us today as we discuss Emergent BioSolutions' financial results for the second quarter and first six months of 2013.

As is customary our call today is open to all participants. In addition, the call is being recorded and is copyrighted by Emergent BioSolutions. Participating on the call this afternoon with prepared comments will be Dan Abdun-Nabi, our President and CEO; and Bob Kramer, our Chief Financial Officer. Following prepared comments we will conduct a Q&A session.

Before we begin I am compelled to remind everyone that during the call management may make projections and other forward-looking statements regarding future events and the company's prospects of future performance. These forward-looking statements reflect Emergent's current perspective on existing trends and information. Any such forward-looking statements are not guarantees of future performance and involve substantial risks and uncertainties.

Actual results may differ materially from those projected in any forward-looking statements. You are encouraged to review Emergent's filings with the SEC on forms 10-K, 10-Q and 8-K for more information on the risks and uncertainties that could cause actual results to differ.

For the benefit of those who may be listening to a replay this call is held and recorded on August 5, 2013. Since then Emergent may have made announcements relating to topics discussed during today's call. So again, please reference our most recent press releases and SEC filings. 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 or regulations. Today's press release may be found on our website at www.emergentbiosolutions.com under investors.

And with that introduction I would now like to turn the call over to Dan Abdun-Nabi, Emergent BioSolutions' President and CEO. Dan?

Daniel J. Abdun-Nabi

Thank you, Bob. Good afternoon everyone. And thank you for joining our call today. During my prepared comments I will briefly touch on our financial performance for Q2 and year-to-date and our guidance for the third quarter and the full year of 2013. I will then discuss the Q2 performance and operational developments related to our biodefense and biosciences divisions. Finally I will review the key milestones for the remainder of the year.

To begin, total revenue for the second quarter was $82 million, which is slightly above the 70 to 80 million range that we provided on our call in May. Total revenues for the first six months was a 125.5 million. Net income for the second quarter was 10.5 million or $0.29 per share and year-to-date net income was $2.4 million or $0.07 per share. In terms of guidance we are reaffirming our full year 2013 forecast for total revenue of 290 million to 310 million and net income of between $20 million to $30 million. For the third quarter we forecast total revenues of between $70 million to $80 million. Bob Kramer, our CFO will provide more detail on both our financial performance and guidance in a moment.

Let me now provide a summary of the key developments for each of our operating divisions and let me start with BioDefense. Last Friday we closed on the acquisition of the Healthcare Protective Products Division from Bracco Diagnostics and with it the RSDL products. RSDL is cleared for marketing by the FDA for removal or neutralization of chemical warfare agents from the skin and is the only personal chemical skin decontamination deployed by the U.S. Department of Defense to protect military personnel. The acquisition of RSDL diversifies our product revenues with the addition of a second licensed countermeasure in our portfolio bringing with it multi-year procurement contracts with both U.S. and foreign government agencies.

In addition RSDL broadens our BioDefense franchise into chemical countermeasures which we believe is an attractive and growing market. For the remainder of the year we'll look to expand the sales opportunity for RSDL and to evaluate potential label expansion such as toxic industrial chemicals and pesticides. This acquisition is an important milestone towards the implementation of our growth plans and provides insight into how we believe we can build our business and achieve our growth targets through highly effective synergistic value-added transactions.

With respect to key developments regarding BioThrax as of Q2, 2013 we have delivered approximately 12.4 million doses, representing approximately $330 million to the SNS under our existing 44.75 million doses, $1.25 billion contract. We look to continue to deliver doses under this multi-year contract which extends through September of 2016. In July we received approval to market BioThrax in Germany from the Paul-Ehrlich-Institut making BioThrax the only vaccine approved in Germany for the prevention of Anthrax disease.

The German approval provides for a three-dose primary series over six months with tri-annual boosters thereafter. With this approval we expect to further expand international registration of BioThrax through mutual recognition within the EU to support member states efforts to protect their citizens against the threat of Anthrax.

Regarding the BioThrax label expansion program we have made further progress on two remaining trials associated with the post-exposure prophylaxis or PEP indication. We recently announced that the Phase III clinical study evaluating the immunogenicity and safety of a three-dose BioThrax PEP regimen managed primary and key secondary end points. We have now submitted the final clinical study report to BARDA and the FDA.

Additionally we have completed enrollment and patient dosing in the pivotal antibody non-interference trial with final study report submission targeted for mid-2014. Following that we expect to be in a position to submit our application to the FDA to expand the BioThrax label to include post-exposure use.

Finally let me provide an update on our progress to secure licensure of Building 55 for large scale manufacturing. As have discussed in the past we reached agreement with the FDA on our comparability acceptance criteria and the endpoints of our non-clinical study. Based on that understanding in Q2 we submitted to the FDA comprehensive data package related to product manufacture in B-55 to be used with the non-clinical study. That data package included among other things our proposed selection of key proteins present in BioThrax that we believe demonstrate comparability between material produced in buildings 12 and 55.

We recently received FDA’s feedback on the comparability profile. Specifically they requested that we expand the number of proteins to be used to establish comparability. We expect to address this request directly with the FDA in the next 60 days and in the meantime we have initiated the additional analytical response to FDA’s request. Currently we anticipate completing both the comparability analysis and the non-clinical study in 2014 and submitting our supplemental BLA filing in late 2014 or early 2015 with FDA approval in the due course thereafter. We will keep apprised of our progress with FDA as we continue to move ever closer to this important milestone for the company.

Let me now turn to our BioSciences Division and provide a summary of recent developments regarding our lead clinical candidate, TRU-016, which was recently assigned the generic name Epratuzumab. Earlier this year we competed enrollment in the Phase II study of Epratuzumab in combination with Bendamustine in relapsed CLL.

We will present data from the [two main] dose of this study at ASH in December of this year. Patients will continue to be to watched determine the duration of the response and progression free survival. In addition earlier this year we completed enrolment in the Phase Ib study in combination with rituximab in front line CLL. More recently we amended this study by adding two additional cohorts and in July we enrolled the first patient in the lower dose cohort of the expanded portion of the study.

We expect to complete enrollment of the amended phase of the study by year-end. And we plan to present data from the original cohort of the study as well as available data from the amended protocol of the study at ASH in December. We will continue to follow these patients to determine the duration of response and progression-free survival. As we've discussed during prior calls we are looking to partner rituximab and our preclinical candidates and platforms consistent with the objectives set out in our growth plan.

To-date our partnering efforts have generated significant interest from multiple parties, driven primarily by the promising data seen thus far as well as the additional data anticipated later this year. We continue to target announcing the partnering deal by the end of this year or in Q1, 2014.

Finally let me wrap up with the operational milestones for the remainder of 2013. We anticipate concluding the pivotal BioThrax PEP antibiotic non-interference study positioning us for submission of the sBLA to FDA in late 2014. We also anticipate completing the NuThrax two dose PEP Phase II safety and immunogenicity study, the results of which will position us for initiating Phase III studies. We also look to complete enrollment in rituximab Phase Ib combination study and reporting treatment data in the Phase Ib and the Phase II combination studies at ASH in December and look to secure partners for both rituximab and our preclinical programs.

Finally we look to announce other acquisitions of additional products for the company to help leverage our competencies and drive further progress towards the achievement of our growth plan. That concludes my prepared comments and I will now turn it over to Bob Kramer, our Chief Financial officer who will give you more detail on our financial results. Bob?

Robert G. Kramer

Thank you, Dan. Good afternoon everyone. Let me start by adding a bit of color to Dan's earlier comment on our revenue and net income guidance for 2013 and then I will turn to our performance for the quarter, for the first six months of 2013. We are reaffirming our forecast for full year 2013 total revenues of between 290 million and 310 million and net income between 20 million and 30 million.

With respect to revenue mix we forecast product sales of 235 million to 245 million, inclusive of RSDL sales which we anticipate will contribute approximately $5 million to $8 million in additional product sales over the remainder of this year. We also forecast contracts and grants of between $55 million and $65 million. Lastly we anticipate third quarter total revenue of between $70 million and $80 million.

I will now turn to our financial performance for the quarter and year-to-date. Let me start out by saying that our core business generated another solid quarter of financial results as evidenced by our total revenue for the quarter coming in at 82.4 million, which included 65.6 million in product sales and 16.8 million in grants and contracts. This is 17% better than Q2 of the prior year which was 70.4 million in total revenue. The year-over-year increase was a result of increased BioThrax sales and the higher average selling price per dose.

The gross margin for the quarter was 74% within our typical 70% to 80% range. Our gross R&D expenses were slightly lower than prior year, our SG&A expense was higher than the prior year by approximately 2.6 million. I will touch on this variance when I give the year-to-date performance as the explanation is essentially the same both quarter and year-to-date.

To conclude the Q2 P&L discussion we reported net income of 10.5 million compared to net income of 7.6 million in 2012, a 37% increase. These Q2 results were very strong and exceeded our expectations.

On a year-to-date basis our financial performance reflects equally strong execution against our revenue and net income goals for the year. Total revenues stand at 125.5 million compared to 120.7 million in 2012, a 4% increase. Gross profit for the period was 73.3 million, a 6.5 million improvement versus 2012. Gross margin for the first six months of 2013 was 76%, identical to last year.

R&D expenses were higher than prior year period by approximately 4.1 million primarily due to the following: First, our Baltimore facility is now in service with depreciation of approximately $2 million year-to-date being included in R&D expenses. And secondly as we have been -- as we previously have stated we continue to invest in our BioScience's technologies and programs in furtherance of our initiative to better position these assets for future partnering.

Similarly our SG&A expense was higher than prior year for the year-to-date period by 3.1 million. The increases in the second quarter and first six months of 2013 were due largely to costs associated with restructuring our UK operations coupled with higher professional service fees. We anticipate that SG&A expense will continue to be higher in 2013 versus 2012 due principally to these restricting costs along with costs associated with additional and ongoing M&A efforts including our HPPD acquisition and efforts to partner our BioSciences candidates and platform technologies.

For the first six months of 2013, net income stands at 2.4 million, up 1.6 million from last year. Our financial performance year-to-date is in line with our expectations and is reflective of the strength of the core business. We are further encouraged by year-to-date performance knowing that the addition of RSDL to our existing BioDefense business will be a good first step towards diversification and expansion of the core business.

Turning now to our balance sheet we remain very, in very sound financial condition. Our combined cash and accounts receivable balance totaled $210 million, consisting of 156 million in cash and 54 million in receivables at the end of the quarter. This compares to combined balances for Q1 of 2013 of 193 and year-end 2012 of 238 respectively. Rounding out the balance sheet our long-term debt was 60.5 million consisting entirely of real estate backed notes.

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

Question-and-Answer Session

Thank you. (Operator Instructions). Your first question comes from the line of Cory Kasimov from JPMorgan. Please proceed.

Cory Kasimov - JPMorgan

Hey, guys. Good afternoon. Thank you for taking the questions. I guess my first question is on the FDA feedback you received regarding the ongoing work to validate Building 55. So I am wondering if you expand the number of proteins to be used as the agency suggested how might that impact the timelines you gave or does it?

Daniel J. Abdun-Nabi

Yeah, good afternoon, Cory, this is Dan. Thanks for joining us today. So it does, the way we look at it now, first we want to sit down and talk to the FDA about their comment to us. But as I mentioned in the prepared remarks we have initiated the analytical work that would support moving forward in the face of that comments and then what we'll look to do is complete the non-clinical as well as the comparability testing for the facility in 2014.

So the reality was we had previously split up our non-clinical and comparability into two separate steps. We are now going to do those in the same -- at the same time period. So we've collapsed those [in some respects] [ph].

Cory Kasimov - JPMorgan

Okay, so you don't know how long it may push timelines back if you have to do what the FDA is currently asking?

Daniel J. Abdun-Nabi

So again in my prepared remarks I did anticipate that we will be in a position to complete all of our work next year and then file for the BLA late next year or into 2015.

Cory Kasimov - JPMorgan

Okay, and then with the German approval of BioThrax I guess this really applies to any other country internationally, at what point do you believe international sales could become a material revenue driver for Emergent. Is this all contingent on Building 55 or is it even contingent on the second train in Building 55.

Daniel J. Abdun-Nabi

No, I think Building 55 will provide sufficient capacity for us to meet the U.S. government's requirement and still have a meaningful number of doses for international sales. As we have discussed with investors in the past we don't see the international market as large as the U.S. market. While we see it as a significant contributor we do believe that Building 55 capacity will allow us to address that market opportunity. But this is without -- to get to your last point, without the need for a second train.

Cory Kasimov - JPMorgan

Okay. And then my last question is just wondering why you lowered the dose of TRU-016 in front line CLL study.

Daniel J. Abdun-Nabi

Yeah I mean generally what we are looking do is see if we achieve the same levels of efficacy with the lower dose which could have significant commercial advantages for us. It is unrelated to any adverse event profile; thus far we have not seen any issues at all on the safety side with the product. So this is really more around being able to expand the number of doses that we can deliver out of our manufacturing facility than for any other reason. Scott Stromatt, our Chief Medical Officer is on the line as well. Scott do you want to add to that.

Scott C. Stromatt

You have covered it perfectly Dan. There were no adverse event signals and so we are doing basically dose exploration to see if we can replicate the same type of efficacy that we are seeing at the higher dose with a lower dose. We will be presenting this data at ASH in December.

Cory Kasimov - JPMorgan

All right. Sounds good. Thanks for taking the questions.

Daniel J. Abdun-Nabi

Thank you.

Operator

And your next question comes from the line of Eric Schmidt from Cowen & Company. Please proceed.

Eric Schmidt – Cowen & Company

Thanks for taking my questions. Dan maybe another follow up on that Building 55 process going forward. What do you think led the FDA to ask for your inclusion of a greater number of proteins?

Daniel J. Abdun-Nabi

Thanks for the joining the call today, Eric. I appreciate the question. It’s an excellent question. So what we put together was a protein profile of the product that we thought was decisive and demonstrated full comparability. The product dose consists of quite a number proteins and I think what the FDA wanted to do was to expand the list maybe to generate a broader and more robust comparability profile. But the dataset we put together I think comprises a substantial portion of the product in terms of the composition of it, from an efficacy standpoint, that profile in the non-clinical so that it wasn’t efficacious with our product.

So we think that the initial list that we assembled and submitted to FDA was appropriate and adequate. So we need to understand when we sit down with FDA what they are trying to get at with the expanded list. I am pretty confident they looked at the world perhaps a little differently than we do sometimes but they are always rational and they are open to scientific explanations and discussion. And I think they have a key objective here of getting this accomplished. So I am pretty confident that our dialog with them will be productive and we will find an appropriate solution to next steps.

Eric Schmidt – Cowen & Company

So you are not absolutely sure that at the end of the day they are actually going to require you to generate these data on greater numbers of proteins, is that right?

Daniel J. Abdun-Nabi

No, that’s right, we are not because they haven’t seen all the data that we have. We have a fair amount of data. It's caused -- leads us to question the appropriateness on some of the proteins that they have identified and they haven’t seen that data. So and supporting some of the proteins that we have in our list that they may not have focused on. So it will take just a bit of a dialog to educate them on the science behind it and as I said they are very science oriented, they are driven by data. So I think once we sit down and share all the information we have got we'll come up with an appropriate list that satisfies both parties.

Eric Schmidt – Cowen & Company

And did you just say the data that you have on an incremental number of proteins or larger set suggest that you are seeing consistency across the building materials?

Daniel J. Abdun-Nabi

Yeah, we believe there is a strong body of evidence demonstrating consistency between the products produced in both buildings. And that was the dataset in earlier studies, the non-clinical studies, that's supportive of how we structured those studies and supports the efficacy that we are seeing over 55. So I think at this point we have a tremendous amount of proteomics and other data on the configuration of the product out of 55. We just need to get that data in front of the FDA and have the dialog.

Eric Schmidt – Cowen & Company

So you essentially know even inclusive of the larger data set of proteins that the material is going to be consistent?

Daniel J. Abdun-Nabi

Yeah we believe that is true. What we need to do is talk to the FDA about what is the agreed upon profile, protein profile for the products out of 12 versus 55.

Eric Schmidt – Cowen & Company

Great thanks. And one more question, Dan just on the M&A outlook, now you have completed the RDSL acquisition. Can you give us an update on your discussions out there with folks whether you are still seeing opportunities that look to be as good a fit as that one, when we might sort of expect another milestone from you?

Daniel J. Abdun-Nabi

Well, we continue to target this year as a milestone for announcing another transaction and we do believe that there are opportunities out there that are transactable. So we believe that's a realistic timetable.

Eric Schmidt – Cowen & Company

Thanks a lot.

Operator

(Operator Instructions). And your next question comes from the line of James Molloy from Janney. Please proceed.

James Molloy - Janney Montgomery Scott

Hey, thanks for taking my question, could you go through the time of the filing, the timing of the filing between the BLA and the expected potential approval of licensure Building 55? And then if you could talk a little bit about -- I know you said very clear in the last question that you expect the FDA will come around to your way of thinking but what are the odds that they may not, they will say, listen that's not enough, we need some more proteins or some other data post your meeting with them.

Daniel J. Abdun-Nabi

Yeah, thanks for joining the call today, Jim and good to hear from you. So as to your first question on the time period from filing to approval, the PDUFA requirement is four months, I have been informed. So we typically, and I typically plan for somewhere between six and possibly out to nine months between our filing submission and approval in our normal product development plans. So I think that's a reasonable time period we are targeting. Of course a lot depends on the interactions at that point and what they see in the filing and to the questions they may have. But those are the data points that we look at.

And then the second question with respect to reaching agreement with FDA, it's not so much convincing them that we are right and that they are not. That's really not what I was trying to suggest. What I am suggesting is that there are potentially additional proteins that may sense and others that may not make sense and what we need to do is discuss with the agency the right dataset to be evaluating. And I am not saying that we are not opposed to increasing the number of proteins that we would evaluate but we want to make sure that as we increase the proteins that we are looking at are really meaningful from the standpoint of demonstrating comparability.

And I think that is where the dialog is going to be most productive, to be able to demonstrate why a particular protein may or may not be indicative of comparability. It's not so much the numbers. It's which ones are the right ones and for what reasons. And they look at science will prevail.

James Molloy - Janney Montgomery Scott

Fair enough. And then I know that you have discussed in the past that should Building 55 come on board and tripling of, potential tripling of production. At some point you would expect it's likely that you and U.S. government will sit down and discuss how that production would come on board and what a new contract might look like. What are the timelines, I know that typically last contract about a year before the contract is to start you guys hammer out the negotiations, what the time that you think might happen should building 55 be poised to come on line and you have in service and we can triple our production at some point you guys will need to sit down and talk about what the U.S. government would want from you guys. When do you think that might happen?

Daniel J. Abdun-Nabi

No, it's a great point and one that we think about often. And typically you are right; it's about a year ahead of expiration of the ongoing contract where they sit down. We are in an unusual circumstance given 55 and the timing for 55. So I would expect as we get close to filing the BLA, at filing we will be in a position to really sit down and discuss with them a new contract or delivery schedule for product coming out of 55.

Our preference is to be ahead of it but let's see what CBCs aptitude is or appetite I should say, appetite is for having those discussions.

James Molloy - Janney Montgomery Scott

Great and last question I know that the gross margin in the quarter was down. It does tend to fluctuate and we've seen that in past quarters. Any in particular that jumped out or is it sort of a fluctuation that tends to happen here.

Robert G. Kramer

Yeah, Jim this is Bob. I will take that one. I think when you look at the operating performance you really need to look at it more than just quarter-by-quarter. It was 74% margin for the quarter and year-to-date, 76%. If you look at the trailing 12 months it was closer to 79%. If you go back further the last couple of quarters and look at trailing 12 months it's been around 79% as well. So I would say that it's not indicative of anything that happened uniquely during the quarter. But I just caution you guys to look at things more on a six month or 12 month basis.

James Molloy - Janney Montgomery Scott

Okay, thanks for taking the questions.

Operator

And ladies and gentlemen this will conclude the question-and-answer portion of today's conference. I would now like to turn the call over to Robert Burrows for closing remarks.

Robert G. Burrows

Thank you, Philip. And ladies and gentlemen, that's all the time we have today. Thank you for your participation. Please note that today's call has been recorded and a replay will be available beginning later today through August 12. Alternatively there is available a webcast for today's call, an archived version of which will be available later today, accessible through the Company's website. Thank you again and we look forward to speaking to all of you in the future. Goodbye.

Operator

Ladies and gentlemen that concludes today's conference. Thank you for your participation. And you may now disconnect. Have a wonderful day.

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