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Emergent BioSolutions Inc. (NYSE:EBS)

JPMorgan Healthcare Conference

January 14, 2014 12:00 PM ET

Executives

Daniel Abdun-Nabi - President and CEO

Analysts

Whitney Ijem - JPMorgan

Whitney Ijem - JPMorgan

Good morning everyone, thank you for joining us. My name is Whitney Ijem. I am on the biotech team here at JPMorgan. Presenting this morning will be Emergent BioSolutions and presenting on their behalf is President and CEO Daniel Abdun-Nabi. If you can please hold your questions until the end of the presentation we will take questions in the breakout room which is the [Sussex] room just down the hallway. So with that I will turn it over to you.

Daniel Abdun-Nabi

Well thank you very much, I stumble over my name all the time, so don’t feel bad. Good morning everyone and thank you for attending the presentation on Emergent BioSolutions. Before I get started I want to thank JPMorgan for the invitation this year to the annual healthcare conference. About seven years ago, actually November of 2006 JPMorgan was our lead banker for our IPO and they have been a very strong supporter of the company over the years and I want to thank you for the longevity of that support.

The presentation today will include forward looking information, included in that forward looking information is the planned closing of our Cangene acquisition that we announced last month and that is sprinkled throughout the presentation. Actual results may differ and I direct your attention to our SEC filings for a more complete description of the risk and uncertainties that face our business.

So Emergent is a specialty pharmaceutical company that has a long history of growth and is really well positioned to continue that trajectory and tradition. This is our 15th anniversary year; we’re very excited about that. We were formed in 1998 through the acquisition of the Michigan State Biologics Manufacturing facility in Lansing, Michigan. It was a vaccine manufacturing facility with multiple products, since original incorporation in ‘98 we have grown substantially as you can see from the footprint on the map. We have multiple manufacturing locations that are located across the country, multiple R&D facilities globally, we have commercial sales and operations and our headquarters are in Rockville, Maryland.

In addition, we have expanded significantly in terms of the portfolio of products that we offer with a closing of the Cangene acquisition we’ll be up to nine revenue generating products in addition multiple clinical and non-clinical products in development. And two very valuable platform technologies that are part of our portfolio. Our disease area focus has expanded significantly as well across the CBRN threats, infectious disease, oncology and other specialty markets. You may have seen our release yesterday where we announced preliminary unaudited results for 2013. Revenues are coming in at $311 million to $313 million, significant increase over 2012. Net income on a GAAP basis coming in at $30 million to $32 million. We have a very strong balance sheet, limited debt with the cash and account receivable of approximately $240 million.

In addition yesterday we announced the guidance for 2014, top line revenue growing significantly, from 2013 results we are targeting 415 million to 445 million in top line revenue for 2014 along with net income between $30 million and $40 million.

As you can see from this slide presentation we are really delivering very strong financial performance. 2012 to 2013 significant uptick on the revenue side similarly on the net income side 23 million to 31 million significant uptick on the net income side. Both of the revenue and the net income figures exceed the guidance that we issued for last year and we’re very proud of that. It’s really based on the significant and strong work of the employees across the organization and I commend the employees for their work last year.

So at this point we are very well positioned for growth into 2014, based on a number of factors but significantly the growth plan that we announced for the organization back at the very end of 2012. The growth plan just by way of review is really providing a roadmap for the company and for investors to understand how we're going to growth the business and create value for shareholders. The growth strategy is really based on two principals, expand the reach and what we believe is a very attractive biodefense market and we'll spend some time on that in a moment and diversify into additional specialty markets, which we believe can create value. And as we do this, we really want to focus on the core competencies that Emergent has, things that we do better than the competition that can enable us to really drive growth in the organization. Things like leadership in biodefense or a track record of value added acquisitions, expertise in biologics manufacturing and partnering with government and NGO organizations. Those are real core competencies that are leverageable across a series of objectives and really the idea is to achieve specific growth targets for the organization by the end of 2015. And the top line is to expand and diversify revenue and also to grow net income.

So, by the end of 2015, we're targeting having product sales in excess of $500 million driven by at least three marketed revenue generating products and to grow our net income with a CAGR 2012 to 2015 CAGR of in excess of 15%.

And the recent acquisitions that we announced last year really aligned with the growth plan objectives that I have just gone through for you and they do drive to the achievement of the goals that we set for the organization by the end of 2015. RSDecon and Cangene are the two announced acquisitions during the last six months, both of them make significant sense from the standpoint of strategic, operation and financial rationale. So, we look at RCO, RCO is a chemical decontamination lotion that is provided to military and other users to protect individuals that have been exposed to chemical agents.

That acquisition strategically makes a lot of sense for Emergent. It broadens our footprint in the biodefense space, it leverages core competencies in terms of manufacturing and relationships and partnering with governments, both domestic and international. And from a financial standpoint, it contributes additional revenue immediately and it’s immediately accretive on the bottom line. And in addition it does offer opportunities for cross-selling with BioThrax to expand additional revenues from the RCO product.

Later in the year, in December we announced the acquisition of Cangene, we are targeting that close as I mentioned earlier in the first quarter of this year. It too has significant rational from the strategic, operational and financial perspective. It solidifies our leadership in biodefense market. It brings a portfolio of biodefense products that are currently under procurement contracts.

It establishes for the first time our presence in an attractive hospital based and specialty clinic market and it broadens our manufacturing core competencies with the CMO, revenue generating CMO business that we will be inheriting.

On the financial side, there is significant contribution to top line for 2014 that’s anticipated. We are targeting about a $100 million from the Cangene portfolio coming into the business and the net income as well with opportunities for expansion down the road. So, very excited about this acquisition and we look forward to closing that.

As you can see from this slide, we are making real progress towards achieving the 2015 growth plan goals. On the revenue side, you can see in the upper left hand corner, we are marching steadily towards the $500 million mark and we think we're in reach of that by the end of 2015, we think that’s eminently achievable. In terms of the goal of diversifying the revenue with multiple products our target was three. As you can see from this slide with the acquisition of Cangene, we are up to nine revenue generator, so we are well ahead of schedule on that one. And on the net income CAGR of greater than 15%, you can see by the yellow marker on each of the bars that we are tracking well ahead of the 15% target.

So, overall we are tracking, we are ahead of plan and we look forward to continuing to drive growth through our two operating business divisions. As you know we've got biodefense and biosciences which are the core of our operations and each one is a fully integrated standalone business with revenue generating products. As you can see biodefense has five, bioscience has four along with the CMO business, so we have diversification in revenues, manufacturing core competencies and facilities which is Biologics, Small Molecules, Bulk and Fill & Finish with a commercial infrastructure that sales and marketing and distribution network that enables very effective distribution and sales of the products that are within the portfolio and an innovative pipeline as we drive this forward to achieve our growth goals.

Now let me talk about each of the divisions in a little bit more detail. Our Biodefense division is really operating in large diversified market with numerous product opportunities. So, we are looking at vaccines and therapeutics and devices, diagnostics and detection systems that are really required to protect the nation against multiple threats chemical, biological, radiological and nuclear, the CBRN for short. Broad portfolio of target customers in the US, we are talking about federal agencies such as HHS or DHS or DOD, you got state and local governments, there are also first responder market, NGOs and customer markets.

On the rest of world looking at ministries of health, ministries of defense, the government agencies such as NATO and commercial users. And in the US the market is driven significantly by the US Government, whereby the government over the last three years has allocated over $5.5 billion per year for civilian biodefense funding. So real significant opportunity. And we have a real presence in this space. We offer vaccines and therapeutics and devices primarily in the chemical and biological space to the customers that you see highlighted in red, presence with a number of the federal agencies, state and local governments and first responders outside of the U.S., ministries of health, ministries of defense, NGOs and NATO. But there is real opportunity for expansion. When you think about the products that can be offered in this space not only other vaccines, therapeutics and devices but diagnostics and detection systems so we can expand our presence in the chemical and the biological side of the house and enter for the first time radiological and nuclear threat areas with a portfolio products. So real opportunities for growth but I think we can build on the footprint based on what we currently have in our portfolio.

Let me talk about the portfolio for just a minute and let me start with BioThrax. BioThrax is the only FDA licensed vaccine for the prevention of Anthrax disease. We are currently supplying BioThrax to the U.S. government for placement into the strategic national stockpile. We’re operating under a five year contract that runs through Q3 2016, so we have delivery scheduled out through that period. It is 44.75 million doses that are under contract and the contract values about $1.25 billion. We’re well on track to achieving the contracture of the deliveries. RSDL, also this is as I mentioned a personal decontamination lotion. It is the only personal decon, chemical decontamination lotion that is been procured by the U.S. Department of Defense for the protection of the military forces, so we’re very proud of that.

The U.S. DoD is buying under a five year in definite delivery and definite quantity procurement contract with a total value of over $240 million. In addition, we have a contract with NATO Support Agency whereby NATO members states can purchase under that agreement and procure RSDL for the protection of NATO forces. That has a contract -- that doesn’t have a specific contract value but enables for effective distribution. The three biodefense products that you see highlighted in blue are coming into the biodefense division through the acquisition of Cangene. Each as you can see is under active procurement contract for several years out. So in balance when you look at our portfolio it really does present a very attractive picture in terms of revenue visibility and opportunity for growth in two ways. We now have a suite of products, a portfolio of products that we can offer to customers to address the biodefense requirements. And in addition as we look at expanding label indications in particular for BioThrax and RSDL we see opportunities for growth there.

So let me talk about the pipeline for just a moment. We currently have a number of products that are in development under contract with the U.S. government. So these development contracts are revenue generators. As you can see from the table here the development contracts have a value of up to over $500 million. The first I’d like to talk about is BioThrax for post exposure prophylaxis or PEP indication. That means that the product on license could be administered in combination with the antibiotics to protect anyone exposed to an Anthrax agent or an Anthrax attack. This is an important label expansion. This is why the government is stockpiling the product, and from the government's standpoint it’s an important label expansion. And from international customers’ perspective, we also would like to have this label expansion to have it sold on-label for that indication.

Significantly, we’re also working with the government on expanding the manufacturing capacity for BioThrax. We are currently capacity constrained at 7 million to 9 million doses per year. With our Building 55 initiative underway with the government, we are targeting getting to a capacity of 20 million to 25 million doses per year. The objective there is really to address the stated requirement of the U.S. government to have 75 million doses of an anthrax vaccine in the strategic national stockpile to protect the nation. I’ll speak a little bit more about that in just a moment.

We’re also working with the government on NuThrax. NuThrax is BioThrax in combination with a novel adjuvant CPG and the target indication there is to have a two dose regimen over a two -- administered over a two week period, significantly reducing the time to protection particularly important in a post exposure or PEP setting.

Lastly, talk about the Center for Innovation in Advanced Development and Manufacturing, or ADM for short. In 2012, we were selected as one of three organizations to be an ADM site in partnership with the U.S. government. Significantly, the program that this is as HSS partners with organization such as Emergent in order to have rapid development and manufacturing of critically needed countermeasures to address emerging health threats.

The first one that they've target is pandemic influenza, and we’re working on a candidate towards that end. But importantly this program can be extended for up to 25 years and we’re very proud to be a partner with the U. S. government. We see tremendous value in working with the U.S. government over a 25 year period in developing, manufacturing and supplying critical countermeasures to address biodefense requirements.

So we think -- as we look at the biodefense drivers and what is really going to create growth over the coming years, organic growth, pipeline development and M&A. Organically, I think a key driver for the organization is the tripling of BioThrax manufacturing production through our Building 55 initiative. We are targeting licenser towards the end of 2015 and it’s really to address the CDC’s unmet medical need.

As you can see from the graph on the right, the CDC has identified a target or specified a target of 75 million doses of an Anthrax Vaccine in the stockpile, our estimate is they are not even at 30 million yet and they’ve been at this for quite a number of years. Given the fact that we are capacity constrained at 7 million to 9 million doses and that the product has a four year shelf life, we do not believe that building 12 current production is going to position them to achieve that objective. Hence, we’re working on manufacturing expansion through Building 55. Once that is approved we’ll be, I think in a position to address this requirement in full and by the way the 20 million to 25 million doses that we’re targeting is with one production train in the facility, the facility was designed to be expanded to add an additional production train that will take somewhere between 18 to 24 months to install and validate and get operational. So, if demand were so to require such we could double capacity to 40 million to 50 million doses.

On the M&A front, we’re really targeting, acquiring new products with existing procurement or advanced development funding with the idea of deepening our presence in the chemical and the biological threat areas, we’re expanding for the first time into the radiological and nuclear threat areas.

So the overall objectives in terms of our growth drivers for the bio defense division is to drive growth through organic expansion, acquire additional revenue generating counter measures within the CBRN spectrum.

Let me spend a few minutes on the biosciences division, through the acquisition of Cangene we will now have therapeutic products that address multiple disease areas, hematology, oncology, transplantation and infectious disease for the benefit of patients that are receiving their care through hospitals and specialty clinics. In addition, there is [contract] services which I’ll talk about in just a moment.

So, as we look at the portfolio, you can see we’re talking about multiple products, each of them are legacy products, they are not high-growth products but they do significantly contribute to the revenue in 2014 and 2015 on the biosciences division and they do address the disease areas which I have mentioned. Additionally the contract manufacturing organization brings to Emergent for the first time fill finish capabilities.

We are now able to leverage that and create some synergies with our existing operations and we think we can drive revenue through this acquisition over time. But really the opportunity here is to expand the revenue base, create some synergies with our existing opportunities and increase the operating margins based on this foundation for growth. Beyond the marketed products, we also have a pipeline of innovative product opportunities within the biosciences division.

I’d like to talk a minute about Otlertuzumab. Otlertuzumab is a Phase 2 candidate that we have in development to address CLL or Chronic Lymphocytic Leukemia. It is a serious disease, there is no cure for CLL, the treatment paradigm has been shifting from chemo therapy to other therapeutic agents with improved safety profiles associated with them. The candidate has shown an extremely positive safety profile in the clinical programs today.

The CLL market by the way is a rapidly growing market as we see it. We expect it could grow from 1.4 billion in 2012 to over 3 billion in 2021. So, we see real potential opportunity. The Phase 2 data that we announced at ASH last year show that the combination of Otlertuzumab with Bendamustine in re-lab setting produced higher response rates than with Bendamustine alone and I’ll go through that data in just a moment.

Our objective for this program right now is to partner it. So that we can advance the candidate into the Phase 3 study in collaboration with a commercial partner and then ultimately launch in collaboration with that partner.

So, taking a look at the data as a whole from the ASH presentation last year as you can see the overall response rate for Otlertuzumab in combination with Bendamustine was significant superior to that with Bendamustine alone, over a two times increase actually. And similarly as you would expect the complete response rate and the partial response rate shows similar results.

We’re very encouraged by the data. We believe Otlertuzumab will be a real player in the combination therapy treatment for CLL. The safety profile on this product in this program are significantly there was no increase in clinically significant severe adverse events when you combine Otlertuzumab with Bendamustine over Bendamustine alone in the study.

Following the clinical program that I just discussed, I’d like to talk a little bit about the ADAPTIR platform, we think this platform is very unique and it’s a real contributor to the future growth of the biosciences division. The adaptor can be developed as a mono-specific molecule such as Otlertuzumab sort of a designer monoclonal or it has the flexibility to be a bi-specific or multi-specific where we can add additional targets to the construct so we can create unique mechanisms of action and unique ability to address specific therapeutic areas of interest. We think this offers real competitive advantages over monoclonal alone, in that you can really target specific mechanisms of actions that you cannot achieve with a standalone monoclonal.

As I mentioned we produced Otlertuzumab using the ADAPTIR technology, moving forward in terms of bi-specific, we have created ES 414, pre clinically it’s shown to be a very encouraging candidate for the treatment of castration resistant prostate cancer, it expresses PSMA and anti-CD 3, unique mechanism of action and I think the preclinical data suggest that this could be a very exciting opportunity for us. And in this context I think this is where ADAPTIR really has the greatest potential for differentiation and competitive advantage over other bi-specific platforms. So we see real value in the ADAPTIR platform, both near term and long term, near term with respect to partnering the ADAPTIR platform, the preclinical candidates, longer term as we see commercial success for these products and they get commercialized, launched and commercialized generating some revenue.

So the bio sciences growth opportunities we think are real, we see organic growth through the introduction of product revenues, coming through the pricing and international expansion on the Cangene portfolio that we’re acquiring, we’re also looking for revenue contribution from the CMO business that’s coming into the bio sciences division, looking to secure partnerships on the Otlertuzumab that can advance that program into phase 3, they’ll be revenue, we believe associated with that relationship along with a clinical development and we’re looking to secure partnerships for the earlier candidates.

And on the M&A front we’re really pursuing additional acquisitions that are true to our growth plan, revenue generating assets that can be accretive within 12 months following acquisition, we want to leverage the core competencies that I talked about, biologics manufacturing or commercialization capabilities and really target the hospital and the specialty clinic markets all with the objective of driving the biosciences division to be a profitable standalone business unit and I think we’re on a good track and trajectory to do that.

Let me spend a minute talking about the target goals for the year. As you can see we’re targeting achieving consolidated total revenues within guidance 415 to 445, again a significant increase over 2013 performance, GAAP net income of $30 to $40 million. Also achieving comparability in non-clinical work on Building 55, that will enable to file our BLA with the FDA in the first half of 2015 and remain on target for FDA approval for large scale manufacturing by the end of the year, looking to partner Otlertuzumab to initiate the Phase III clinical study and move it towards commercial approval and launch, and completion of an acquisition of a product either or both in the bio defense and the biosciences space, that will generate revenue and be accretive within 12 months of acquisition and to control R&D costs through commercial partnerships and third party funding.

That completes my presentation this morning and I look forward to seeing you in the [Sussex] room. Thank you so much.

Question-and-Answer Session

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