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Emergent BioSolutions, Inc. (NYSE:EBS)

Q3 2010 Earnings Call Transcript

November 4, 2010 5:00 pm ET

Executives

Bob Burrows – VP, IR

Fuad El-Hibri – Chairman and CEO

Don Elsey – CFO, SVP of Finance & Administration, Treasurer

Analysts

Eric Schmidt – Cowen & Company

David Moskowitz – Madison Williams

Steve Brozak – WBB Securities

Jim Molloy – Caris & Company

Greg Wade – Wedbush

Operator

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions third quarter 2010 financial results conference call. My name is Jennifer and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Mr. Bob Burrows. Please proceed.

Bob Burrows

Thank you, Jennifer. Good afternoon, ladies and gentlemen. My name is Bob Burrows. I'm Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss Emergent BioSolutions' financial results for the third quarter of 2010. 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 with prepared comments will be 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.

Before we begin, I'm 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 for 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 you may be listening to the replay, this call was held and recorded on November 4, 2010. 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/Press Releases.

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

Fuad El-Hibri

Thank you, Bob. Good afternoon, everyone and thank you for joining us today on our conference call. For my prepared comments, I will review our financial performance for the third quarter, reaffirm our 2010 financial forecast, discuss updates regarding our product sales activities and development programs and highlight our recent acquisition of Trubion Pharmaceuticals.

To begin, let me review our financial results for the third quarter of 2010. Our revenues of approximately $74 million and net income of $13 million include the scheduled deliveries of BioThrax to the SNS, as well as progress payments under existing development contracts.

With respect to our guidance, we reaffirm our 2010 forecast for total revenues of $275 million to $300 million, a net income of $40 million to $50 million including the recently acquired Seattle operations. As we stated last quarter, this forecast was supported by the modification to our current BioThrax contract with CDC, which increased the number of doses we can deliver into the SNS during 2010.

Furthermore, our forecast is also supported by an increased volume available – of available doses due to high production yields which we have experienced throughout 2010.

Let me now provide an update on our product sales activities specifically BioThrax. We continued to deliver doses into the SNS under a multi-year procurement contract. As I stated, we are experiencing high production yields which are principally due to our multi-year drive to optimize the manufacturing process at our current facility dosing trough.

These improved yields will enable us to deliver at least 8.5 million doses to the SNS this year. As a result, we are projecting that deliveries of BioThrax under the current contract will be completed by the end of the second quarter, next year.

In terms of a follow-on procurement contract, we are currently in discussions with CDC representatives. We anticipate this contract will cover a multi-year period and will be structured to secure substantially all of our projected capacity. We expect to finalize this follow-on contract in the first quarter of 2010 – 2011, apologies.

Let me now provide an update on our product development activities beginning with our BioThrax expansions. First, contract scale, as you know in mid-July BARDA awarded us a contract, valued at up to a $107 million. This contract funds activities through FDA licensor for large scale manufacturing of BioThrax and our state-of-the-art facility in Lansing.

This development contract consists of a two-year base period of performance valued at $55 million and three auctioneers that effects to side by BARDA with increased contract value to $107 million. A majority of this value can be realized in the first three years of performance from mid 2010 to mid 2013.

This contract funds our development efforts to achieve an annual output of 26 million doses of BioThrax, which is a significant increase over our current capacity. We believe that the U.S. government considers this contract a low-risk approach to meeting its stated requirement of 75 million dosed of licensed anthrax vaccine in the shortest period of time.

Since the award, we have initiated scale-up activities in building 55 and are currently conducting centralization [ph] runs. We are also giving up activities in support of process validation, which we expect will lead to initiation of consistency loss in late 2011.

Next BioThrax optimization initiatives. By year-end, we anticipate response from FDA to our application in support of a schedule of three doses over six months with a booster every three years. We believe that the data will lead to final approval from FDA within the next 12 months.

In addition, we recently submitted to FDA a separate application and support a five-year expiry dating. We are confident the data will lead to final approval from FDA by year-end in 2011, further increasing the value of BioThrax through the U.S. government.

Next, the rPA opportunity. In September, BARDA awarded us a multi-year development contract, up to $187 million to form activities including process characterization, assay validation and final formulation. There are additional milestones based options, which include completion of a Phase II clinical study, non-clinical studies; process validation and consistency lock manufacturing. Over the initial two-year base period, we plan to complete the selection of a final vaccine formulation, the optimization of a scalable manufacturing process and the qualification of required assays to access product quality attributes.

Now, our net generation anthrax vaccine candidate. In August, BARDA awarded a multi-year development contract to up to $29 million to fund the continued work with this program, which combines BioThrax with a novel adjuvant CpG under license from Pfizer. This contract represents the second round of government funding for this important program.

It is designed to support activities including manufacturing, process characterization, assay validation and clinical trial preparation for a Phase II drug. We anticipate initiating a Phase I clinical study of this candidate next month.

For our Anthrax monoclonal antibody candidate, we recently commenced dosing with first patient in a Phase I clinical trial for this novel therapy. The study involves 50 healthy volunteers and a dose escalation study designed to evaluate safety and pharmacokinetics. We expect to complete dosing by mid 2011 and the final study report by the end of 2011.

In addition, our anthrax med was recently granted Fast Track and Orphan Drug Designation by FDA. For our polyclonal antibody candidate at AIG, we completed dosing in an ongoing clinical trial and expect a final study report in the first quarter of 2011.

With respect to their acquired pivotal animal studies for this program, we expect (inaudible) and FDA to agree on the design of an appropriate model under the animals rule in 2011.

Now, let me turn to our other development programs. For our TB candidate, enrollment continues in our existing Phase IIb efficacy study of 2700 infants in South Africa supported by the Wellcome Trust and Aeras. We have now completed dosing of approximately two-thirds of the infants (inaudible).

We anticipate a final study reports by 2012. We are also looking at accelerated licensing opportunities for this candidate in South Africa and other countries with a higher disease based on the data from this efficacy study. In addition, separations continue toward initiating a separate Phase II study, a 1,400 HIV infected adults and adolescences, largely funded by European agency and NGOs.

This study is expected to begin in the second half of 2011. And for our typhoid vaccine candidate, Typhella, we continue to make preparations for human challenge study in the U.K. in collaboration with the Health Protection Agency, the Wellcome Trust and the University of Oxford. We are also pursuing a business arrangement with the suitable manufacturing and development partner.

Finally, let me discuss the Trubion acquisition. As you all know, one week to go today, we announced the successful completion of the acquisition of the Trubion based in Seattle. And we take a moment to review with you the business, scientific and financial rationale for this transaction.

From our business perspective, we have added two clinical stage programs in oncology and autoimmunity as well as the related large pharma partnerships, which provide sales and marketing infrastructure.

From a scientific perspective, we now own two novel therapeutics platforms and the scientific expertise for developing innovative candidates using these platforms. And from a financial perspective, the net cash flow outflow was relatively modest and the ownership dilution was only about 10% at closing. As we complete our 2011 budget, we will be reprioritizing the combined development portfolio to manage our R&D spending responsibility.

In conclusion, we are pleased with our achievements during the third quarter of 2010. Over the coming months, we anticipate securing a follow-on procurement contract for BioThrax and achieving additional milestones for our now expanded product platform.

We also expect strong financial performance for the remainder of the year as reflected by our reaffirmed 2010 revenue and net income forecast. That concludes my prepared comments. And I will now turn it over Dan, who will take you the through the numbers in greater detail. Don.

Don Elsey

Thank you, Fuad. Good afternoon, everyone. As Fuad mentioned calling the close of the markets today, we released our financial results for the third quarter of 2010. I encourage everyone to take a look at the press release which is currently available on our website.

We plan to file our quarterly report on Form 10-Q with the SEC, no later than the close of business tomorrow, Friday, November 5. The 10-Q will also be available on our website.

Let me now briefly discuss the financial results. For the third quarter 2010, total revenues were $74 million comprised of $67.3 million of product sales and $6.7 million of grants in contracts revenue. Product sales revenue compares to revenue of 39 million in third quarter 2009. Product revenues were 72% above those in 2009 due to the 46% increase in the number of doses of BioThrax delivered coupled with an 18% increase in the sales price per dose.

Contracts and grants revenue compares to revenue in the third quarter, 2009 of $4.3 million for an increase of 57%. For the nine month period of 2010, total revenues were a $182.9 million compared to a $181 million in 2009.

For third quarter 2010, net income was $13.1 million or $0.42 per share. This compares to net income of 949,000 for third quarter 2009. The increase in net income was a direct consequence of the increase and the shipments of BioThrax in the current period.

For the nine month period of 2010, net income was $25.5 million or $0.82 per share compared to $26.9 million or $0.89 per share in 2009. As you heard me state before, the quarterly results are in line with our internal expectations. They support the annual guidance we are reaffirming and again they provide an example of the limited value of looking at our quarterly results as an indicator of our annual performance.

Now, with respect to gross profit and gross profit margins. For the third quarter 2010, our gross profit was 83%, an increase year-over-year on an absolute basis due to the consistently high production yields, we have been experiencing.

On an ongoing basis, our expectation for gross profit margins remains between 70% and 80%. However, if our yields continue to be as robust as they have been this year then margins could be at the high-end of that range as we experience this past quarter.

Turning now to spending, first looking at product development spending, our third quarter 2010 R&D expense was $21.2 million versus $18.8 million for third quarter 2009. For the nine month period of 2010, R&D expense was $59.7 million versus $55.4 million in 2009.

We continue to invest in the development of our product pipeline, which includes programs that will enhance the usability of BioThrax and various trials to advance our clinical stage candidates focused on anthrax, tuberculosis and typhoid as well as our pre-clinical anthrax in flu programs. At the same time, we have redirected resources previously dedicated to hepatitis B and Chlamydia.

R&D spending will continue to fluctuate quarter-to-quarter driven by the development stage of our various pipeline candidates. I want to remind everyone that what I’ve just discussed is our gross R&D spend. It is important to take into account the fact that we have contracts and grants revenues, which are development funding from the U.S. government and then support of a majority of our anthrax-related programs and essentially offset a portion of our R&D.

For third quarter 2010, contracts and grants revenues were $6.7 million and for the nine months period, they were $20.9 million. With respect to SG&A spending for the third quarter 2010, SG&A was $20.7 million, an increase of less than 1% – $1 million or 5% over the third quarter 2009.

For the nine months period of 2010, SG&A expense was $54.5 million versus $55.1 million in 2009. We remain focused on managing the growth in our general and administrative expenses.

Turning now to the balance sheet. For third quarter 2010, we continued to be cash flow positive and ended the quarter with cash and cash equivalents of $151.2 million and accounts receivable balance of $7.9 million.

Finally, let me address our 2010 financial forecast. As Fuad noted earlier, we reaffirm our 2010 forecast, specifically, our financial forecast anticipates total revenues of $275 million to $300 million and net income after tax of $40 million to $50 million.

As we have mentioned in previous earnings calls, our revenue spending and in turn our net income are lumpy on a quarterly basis. Both the 2009 third quarter and year-to-date financials are prime examples of this lumpiness. Our year-to-date performance is in line with our internal projected ranges. However, our total revenues are driven by delivery schedules and product development milestones whereas our spending patterns are driven by technical requirements and regulatory filings.

In January of this year, when we constructed our guidance for full year 2010, we reviewed the delivery schedule we have at the SNS and projected our spending for R&D and SG&A. And we have reviewed and revised as appropriate this information each quarter. However, I must remind everyone that there are many factors not entirely within our control that can cause significant variability in our actual final results. These include on the revenue side, the timing and magnitude of SNS deliveries and on the expense side, the spending patterns within R&D and the technical requirements and regulatory filings driven – driving such spending.

I would like to conclude with the same remarks I made during our last earnings call. We continue to deliver on our government contracts, progress the development of our product candidates and advance qualification and validation of our large scale manufacturing facility in Lansing, now supported by the $107 million BARDA contract.

In summary, third quarter 2010 was a success. Our business remains strong and we are on track to achieve our 2010 forecast. We look to build on our current success throughout the final quarter of 2010 and to continue to drive success from our product development efforts and financial performance from our product sales efforts.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Eric Schmidt with Cowen & Company. Please proceed.

Eric Schmidt – Cowen & Company

Good afternoon, gentlemen. Question on the guidance, it’s a pretty wide range on for Q4 at $25 million range on the top line, $10 million on the bottom-line and furthermore if there is some uncertainty as to my mind is to whether the revenues will be coming from BioThrax or contracting others in Q4. Could you help us on both fronts?

Don Elsey

Good afternoon, Eric. Good to hear from you. Certainly, as you know as we’ve experienced in years gone by we have a delivery schedule for Q4 that it was perfectly predictable. We could come out with a much narrower range. As you’ve seen in the past we – it’s been very easy for 2, 3, 4, 5 lots of product that are scheduled for a particular delivery in December to slip over into January.

And so the delivery schedule is not perfectly predictable. So, we take a look at what we anticipate on BioThrax deliveries as well as the milestones to be achieved on the contracts and grant side and we come down to a range that we feel are high degree of confidence in. However the composition of that between BioThrax deliveries and contraction grants can vary and can vary rather substantially even this close to the end of the year, considering that we have both November and December deliveries to be concluded.

So, hence the range in top line and the range in top line, of course, is directly responsible for the range in the net income projections.

Eric Schmidt – Cowen & Company

Implied (inaudible) on conference earlier in producing 8.5 million doses plus during the course of this year, if you were to ship all of that Don, would you be at the high R&D range?

Fuad El-Hibri

No actually, this is Fuad, Hi Eric. The 8.5 million given our projected contract revenue would bring us to the lower side of the range. So we’re confident that we would achieve at least 8.5 million. And as Tom said, we may be able to produce, release and shift another 4, 5 additional loss which translates into another 700,000, 800,000, 900,000.

So if you do the math you will end up with a higher range. But there is also some variability with respect to what revenues we can recognize based on what we’ve done with respect to the contract in advance, that price it a little less. But both still have an impact on where we land within the range.

Eric Schmidt – Cowen & Company

Okay. One last question before I beat the dead horse on this topic. In Q4, are there specific potential contracts in granting milestones that can lumpy and make for a much higher fourth quarter than we’ve seen year-to-date or shouldn’t we expect that line to potentially grow much?

Don Elsey

I would say that the sensitivity on contracts and brands is not very significant so that the bulk of what drives the total revenue is really the product delivers. So, I wouldn’t encourage much variability on that side.

Eric Schmidt – Cowen & Company

Great. Thank you. On a different topic in terms of the negotiations on your next BioThrax contracts as part as there are several variables here. You mentioned a multi-year contract for it could be 2, 3, 4, I guess, maybe you have some insights on which you are hoping to get there in addition whether you think you can negotiate for more doses per year delivery given you higher production yields. And lastly on the price different variable, where you think you might end up?

Don Elsey

Yeah, that’s a very good question Eric. And historically we started off in that early years and early 2012 – one year contract and then they’ve offered two year contracts which now we have 3 years contracts. And I think the government is very mindful of the importance of having longer-term contracts in order to schedule resources and allocate resources more on a long-term basis. And, also the reinvestments that make in process optimization and various other activities that enhances the BioThrax manufacturing process.

So having said that, I think the government understands its importance. If I were to share – my hope is that it would be somewhere between three and five years, I hope we would achieve at least three years so that we are consistent with previous contracts and as far as capacity is concerned I think there has been a desire, a stated desire by the government to attract substantially secure our entire capacities, and that has been the case for the last 12 years. So, I don’t see that that is going to change.

So, I expect that the government will allow some room for international sales, but substantially ask for us to provide close to full capacity to them. And we are diligently looking at what that might be over the next three years, they are still in the prime facility. We hope thereafter we will start talking about the large scale facility and there, with recently, as I mentioned before experienced high production yields which I believe is a result of all the hard work that you might put into finding ways to optimize process.

So, again with biologics manufacturing you don’t know whether you can always exactly sustain it at that level, but overall I think we may have reached a slightly higher plateau of output. And indirectly incorporate that in our discussions and negotiations with CDC.

Eric Schmidt – Cowen & Company

And price?

Don Elsey

The hype so far has been really – there was a tight redetermination in 2003 as a result of – or even 2002 I think it was when we renovated the facility and we had an audit by DOD and there was an agreed price of re-determination that was there for the government and fair for us. Since then we had price – normal price inflation adjusted price escalations, except for the one-time where we thought an adjustment for full year dating, which was also again an equitable adjustment by the government. So, we anticipate that there is going to be the normal escalation adjustment every year.

Eric Schmidt – Cowen & Company

Thanks a lot.

Don Elsey

Thank you, Eric.

Operator

Our next question comes from the line of David Moskowitz with Madison Williams. Please proceed.

David Moskowitz – Madison Williams

Okay. Thanks very much. Good afternoon

David Elsey

Hi David, how are you?

David Moskowitz – Madison Williams

Good. I am just going to run a little math for you guys – hopefully this is going to shed a little bit more light on the top line. I if take $28 a dose and I multiply that by 8.5 million doses, I get to $240 million. If I take your prior contract in grants, I get to $21 million for the first three quarters. So add this two up and I get about $250 million. That leaves you $25 million shy at the low end of your guidance. That’s not right.

Don Elsey

Sorry, I thought you said 240 plus 21…

David Moskowitz – Madison Williams

Correct.

Don Elsey

61.

David Moskowitz – Madison Williams

Right. I didn’t ask you have to mention this, it’s fussy math, okay. Let’s go back to regular math, that’s right. So $260 million that leaves about $15 million shy of your low end of your guidance range. So, if there is a $15 million plug to the low end that’s substantially more than what you’ve been running in the past couple of quarters. Right, past couple of quarters has been $6.5 million to $7 million. So, at least doubling that in the fourth quarter to get to the low end of your guidance, can I have you guys speak at that a little bit?

Fuad El-Hibri

I think you are not far off with your math I can say that – if you take into account the fact that there are two large contracts that are just now ranking up at building 55 in RPA, you can see how maybe the fourth quarter grants and contracts revenue is going to be larger than the historic quarters, and I would project that to be in the future as these two big contracts ramp up.

David Moskowitz – Madison Williams

So – again so, I just want to clarify so we should be expecting, of course, there is some variability of how much BioThrax can deliver, but it seems like at least baseline $15 million in contracting ramps, would you like to add that any waiting in with regard to maybe that could be higher because, again you’re just barely talking about the low end of your guidance range?

Don Elsey

Well again I think there will be less variability and as far as the grants revenues is going to be, what you have outlined is generally in line with our projections. So that the rest would come from product sales.

David Moskowitz – Madison Williams

Okay. And then you also were saying that if that math is right and let’s say we are in the 15 range maybe plus or minus; there still could be more about the 8.5 million doses that could deliver this year?

Don Elsey

Yes, yes when I said that I am confident for at least 8.5, I am allowing for and I am hoping for a greater than impact in that dosage.

David Moskowitz – Madison Williams

Okay. And that’s obviously subject to shipments and so we were – but that’s how you get to the rest of your guidance range. So the rest of the guidance range is not off the table. It just has to come from maybe slightly more contracted grants and better than expected BioThrax?

Don Elsey

Yeah, not better than expected, I guess I might be little be conservative by saying at least 8.5, but our target as we’ve had guidance, this is somewhere between 275 and 300 million. So, our target is in that range. What I wanted to communicate with that was that we feel confident that we will at least achieve the lower end of the range.

David Moskowitz – Madison Williams

And is the $10 million variable in net income, is that pre-directly correlated to that 275 to 300 or is there leverage as we move up to the 300?

Don Elsey

For the most price that’s directly correlated, now there are other factors that will influence that by yearend such things as the acquisition cost for the Trubion acquisition et cetera, et cetera. But the driving force between the low end of that range and the high end of that net income range is directly correlated to the revenues that we just discussed.

David Moskowitz – Madison Williams

Got it. Thanks very much, Don. And does the $40 to $50 million of that include the Trubion costs?

Don Elsey

It does.

David Moskowitz – Madison Williams

Okay. So, you are able to do that even at less absorption of Trubion in the fourth quarter?

Don Elsey

That is correct.

David Moskowitz – Madison Williams

That’s pretty interesting. Okay and last question, just on the margins could you repeats on what the ranges and you had mentioned getting to the high end of that range, it seems to me with the margins you produced in the third quarter, and if you could, it seems like you can have a pretty good fourth quarter, at least discuss in the third quarter, it seems like your margin should be high again and you should be well above the range that you normally would see?

Don Elsey

Well, I’ll lead it up with saying that we built forecast gross margins on the quarter, it pays that’s but yes, I think that’s a reasonable extrapolation. We continue to see the higher yields which are very encouraging. In my conservative opinion, and now even more conservative than lot. As we see these data points continue through time, I’ll pick a little lot more comfort in some of the forecast in gross profit. But, traditionally we’ve been 70 to 80 and very comfortable with that range. We are into the low 80s now and hopefully we could maintain that with us, with the higher yields we’ve been seeing.

David Moskowitz – Madison Williams

Again, thanks for correcting my fuzzy math, sorry about that.

Don Elsey

There are moments. Good talking, hey David.

David Moskowitz – Madison Williams

So Balkans are back in, so fuzzy math is here again.

Don Elsey

Thank you.

Operator

Our next question comes from the line of Steve Brozak with WBB Securities. Please proceed?

Steve Brozak – WBB Securities

Hey. No political statements here. I am going to skip now and still I am going to get out of the Trubion acquisition, because there’s something there that I am – I want to get my hands around. You’ve made an acquisition which frankly is an exceptional one if you look at the math, but there is also a difference in it, you’ve got a lot of new partnerships now with a lot of established names in pharmaceutical industry, that have gone up there and worked on products that are for “the retail consumer”, tell me about dual purpose programs, because a lot of this stuff that you’re working on in theory, it doesn’t just apply to “the drug dealer consumer” but can also be applied to government contracting, can you give us some – I hate the words granularity, but since you borrowed our term lumpiness, I’d like to use the term granularity on that and then another follow-up question for that?

Don Elsey

That’s fine, Steve. We can exchange words anytime. And so, yeah, that’s a very good point, I mean, one of the attractive features of this acquisition to us is kind of and continues to be that. First of all, the pharma Trubion really hasn’t used this platform to address any infectious disease candidate. And second, really it hasn’t leveraged this technology to get a government contract. And I think this is what we can bring to the table in addition to those with large pharma partnerships. It’s a partnership with government on developments of some of the pre-clinical products that are in the pipeline and potentially others that we might develop to meet government requirements.

Steve Brozak – WBB Securities

So then – basically summing up basically you can do some off balance sheet financing in terms of product development, is that and in later lines could lead to significant revenue for programs that basically the government is going to have to spend on for defense purposes.

Don Elsey

Yeah. I would characterize it as non-dilutive funding which government contracts typically are and so and again I think there is more and more focus by the government on real emerging diseases, infectious diseases. And I see a great opportunity here to use this platform and to address some of the government needs.

Stephen Brozak – WBB Securities

And again, congratulations on the year – quarter of the year and the acquisition. Thank you, Don.

Don Elsey

Thank you very much, Steve. Appreciate it.

Operator

Our next question comes from the line of Jim Molloy, Caris & Company. Please proceed.

Jim Molloy – Caris & Company

Hey, guys. Thanks for taking my question. Can you talk a little bit about several lag time between one of you are making mile tracks and you are shipping out the door and sort of what kind of visibility you have, here, we are almost half way through the fourth quarter and to what you guys would be able to make for the year versus and how much, how much of the variability on the year-end sales going another door relates to whether you can make the stuff in time or the order will come in and the other ship of the door?

Fuad El-Hibri

No. That’s Jim. Thank you for your question and this is a very good question. As we have shared in the past, the production cycle – the co-production is about four months and it starts with several block manufacturer and we formulate the logs and we shipped it off to our contract killer they fill it comes back, we do all the testing on it.

And then we send the released testing to FDA for approval. So as you can see that there is some variable in that process in terms of the contract killer in terms of FDA, a review of submitted releases and things like that so that’s one variability. The other variability is delivering to the SNS because we can’t just say, okay, we have another four months ready please take them to mark send us.

So there is some coordination on the CDC side for deliveries into the SNS, which is a very highly controlled delivery. So it needs to be planned in advance and we don’t always have full flexibility or control over the schedule, I mean we might want to schedule on a certain date, might be acceptable, might be brought forward, it might be delayed. So we work with the government and we happily work with the government to accommodate them.

It just makes precise projections, a difficult, given our yields right now given normal introduction cycles, given a normal a no major delivery challenges. We would comfortably fall within that in $275 million to $300 million record new range. Was that helpful, Jim?

Jim Molloy – Caris & Company

It certainly was. And maybe a follow-on BioThrax contract out of your hand in many ways. But has been any communication – recently that would give in a better shot as to when they will come in and what type of range you must be looking at for that?

Fuad El-Hibri

You mean portfolio on contract.

Jim Molloy – Caris & Company

Yes, sir.

Fuad El-Hibri

Yes. I mean we are – we’ve had discussion with CBC representatives. And they – their requirement to purchase – to meet their $75 million those requirement still fans, the trend stop by a level (inaudible) that requirement so and paid from, they are working on the full one contract which we expect would happen sometime first quarter next year.

Jim Molloy – Caris & Company

I would – unlikely fourth quarter here is more like a first next year?

Fuad El-Hibri

Yes. I mean, we were hopeful, you are right. I mean, last earnings call we were so hopeful that we might complete it by the end of the year, by the end of fourth quarter or first quarter of next year. So it’s a – were making progress, progress as quickly as we hope. So it looks more realistic right now that’s going to happen first quarter. The CBC understands and important to secure a follow-on contract for them and for us and the time is the best.

Jim Molloy – Caris & Company

Certain, if we hand in many ways. Any thoughts on the size of the contract, what we should be thinking on a $400 million, $600 million, 2 billion.

Fuad El-Hibri

Well as I said earlier, depend on the duration of the contract we hope we would get at least three year following contract, the launch is five years. And so obviously that’s contributes so the overall sides. And then the number of (inaudible) we’ve expect them to want to secure more not substantially all of our capacity, so we are augustly and diligently working out some reasonable projections as to what that might be given our recent higher production yield. So there are several moving pieces but depending on the number of years and depending on what we determine is a reasonable commitment to the government terms of output for a year was that, that would be the fine trend overall constituent sides.

Jim Molloy – Caris & Company

We’re done, there’s a final question for Don, the AR is down substantially in the quarter for like cash for a year, any thoughts what’s going on there, what we see going forward?

Don Elsey

It’s very typical that the timing of the shipment within the quarter permitted a payment cycle with the government that actually finalize a great deal of what the AR is, it usually is a late in the quarter a set of shipments that cause the AR to go up significantly. So, as we go into fourth quarter I fully expect we come out of the year in a similar position the prior year where there’s a fair amount of AR balance less.

Fuad El-Hibri

Yes. Given that our AR is substantially government accounts receivable – all government accounts receivable and the government pays within the relative short period of time I – one way you might look at this as cash and accounts receivable combined and that vary sometimes we’re – we just gotten a large payment based on our – then our AR goes down substantially, if you catch us at the end of the month where we’ve just made the delivery then our accounts receivable goes up. So, but if you combine the two then you will see less variability.

Jim Molloy – Caris & Company

Thank you, gentlemen, for taking the questions.

Fuad El-Hibri

Thank you.

Operator

Our next question comes from the line of Greg Wade with Wedbush. Please proceed.

Greg Wade – Wedbush

Thanks. And let me add my congratulations to the completion of the Trubion acquisition as well. Two questions first up, can you tell us what you expect in terms of data for TRU-016 of the upcoming ASH meeting. Then I got some questions on BioThrax?

Fuad El-Hibri

That’s a very good question. And thank you Greg for asking that. I’d like to ask (inaudible) to comment on that.

Unidentified Corporate Speaker

Good afternoon. We have a poster excepted for all presentation on Sunday during ASH for the dose escalation study which we report to a 1607, result for a poster – at the posted presentation on preclinical work that will also be presented for – through 16 combination with various chemotherapeutic and biologic. Both of these will be available on line through ASH during next couple of weeks.

Greg Wade – Wedbush

Great. Thanks. And if I just might turn out to BioThrax, so could you tell us what is existing yield capability is on sort of doses for quarter run rate now?

Fuad El-Hibri

Well, again we don’t really give quarterly guidance on production simply because it’s very hard to predict that – there is annual maintenance shutdown and there are scheduling challenges with the contract filler, with potentially the FDA review et cetera.

So it is really hard and we’re not doing this because we’re trying to keep information closer our chest. It’s just very difficult to project with any amount of confidence and accuracy quarterly output. Annually, we’ve done reasonably well in the past and predicting how much we can deliver because it – there seems to be a normalizing effect quarter-by-quarter. So that’s the reason why we’re more comfortable projecting annually.

Greg Wade – Wedbush

Okay. Great. So if I’m going to ask to get $8.5 million doses for the year, you need to deliver about $10.7 plus million in the fourth quarter, how many would you left on the contract for Q1 and Q2 and what will be your expectation that the government might take additional doses of BioThrax early before the next contract during – I think and for next year or would you anticipate just manufacturing materials, just to begin shipments through in both spaces in the latter part of 2011?

Fuad El-Hibri

My expectation, Greg is that the government will work with us. So that if we continue to have high yield up production and we are able to deliver prior to what we now say 2nd June of 2011 that they might add additional doses to the existing contracts. We still hope that the follow-on contract will be in place by then, but should there be any delays? I think the government will work with us to ensure uninterrupted supply and that we would continue to supply full production to them.

Greg Wade – Wedbush

Great. So I know you’re not guiding for next year, of course, but if we were able to go back into what we believe your run rate is now on a quarterly basis and things were healthy, your production continues to be this robust, you’d probably make the most sense than if I hear correctly to use that run rate throughout 2011, believing that the government will continue to take as much as you can make?

Fuad El-Hibri

You know, I think the government has been very flexible and working with us, I understand that that there could be quarterly variations and even as you’ve seen we’ve very recently signed an amendment to the CBC contract to accelerate delivery, so they are working with us on that now if there were any delays in delivery we have an experience that we had that express on – we think the government will reasonably also work with us on that.

So obviously, we would like to contract as much as we can within reason because we want to maintain our credibility as a very reliable on supplier to the U.S. government which was enjoyed so far and that so we need to be reasonably conservative but also take into account that historically we’re manufacturing at $7, $7.5 million output but again that change may vary from year-to-year and this year we hope to be somewhere between $8.5 and $9 million those as a year and we hope to be able to sustain that from year-to-year.

Greg Wade – Wedbush

Okay. And then just last couple of questions should we read anything into the slide portion the time of a contract that perhaps its bigger or longer then perhaps just three years and there is more to do or is just government timing. And lastly, when do you do your annual work in the production facility that can lead to decrease amount of output. And thanks again for taking my questions. And congratulations on a very great quarter.

Fuad El-Hibri

Yeah. The schedule of the annual shutdown is variable, it depends on several factors so I can’t give you an exact timeframe and it does vary from year-to-year. The – what was the other part of the question?

Greg Wade – Wedbush

With respect to the…

Fuad El-Hibri

In terms of the 3 to 5 you know, I mentioned earlier that that I hope we would get at least three years we’re shooting for five years we – but we can’t tell, I mean that the last contract was a three year contract so we hope that we can continue at least a 3 year contract level.

Greg Wade – Wedbush

Thanks for taking my questions.

Fuad El-Hibri

Thank you.

Operator

Your next question comes from the line of David Moskowitz with Madison Williams. Please proceed.

David Moskowitz – Madison Williams

Yes. Hi David.

Operator

Mr. Moskowitz, your line is open.

David Moskowitz – Madison Williams

Sorry about that I haven’t done. So just looking at the line items SG&A and R&D in the third quarter trying to think about the top line that you guys have provided some detail on and your bottom line guidance, are you able to at least give us some level of increase that you’ll see in these line items for the fourth quarter of this year?

Fuad El-Hibri

As you know we don't forward or give up our quarterly guidance and particularly we don't give our quarterly guidance on the line by line basis, I think as you take a look at the top line forecast of 275 to 300 and the bottom line of 40 to 50 and you take a look at 9 months year-to-date you can extrapolate fairly easily how the map can get you from the top to the bottom.

And I think that as you take a look at, I mean at the various pieces, you can estimate the gross profit percentage based on our comments here today SG&A were going to restrain as much as possible and basically you can fill on the other ways and get to the numbers. So we don't give our guidance, but I think you can figure out the map pretty easily.

David Moskowitz – Madison Williams

Right. And just back to my earlier question you just said. The low end to the high end of the top end, does somewhat correlates to the low end and the high end of the net income guidance?

Fuad El-Hibri

Yes, absolutely it does.

David Moskowitz – Madison Williams

Okay. Thanks.

Operator

(Operator Instructions). If we have no further questions, I would like to turn the call back to over Mr. Bob Burrows for closing remarks.

Bob Burrows

Thank you, Jennifer. Ladies and gentlemen, that concludes today’s call and we all appreciate your presentation. Please note that today’s call has been recorded and a replay will be available beginning later today to November 18. Alternative leader is available at webcast of today’s call an achieve 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. Good bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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