Emergent BioSolutions CEO Discusses Q1 2011 Results - Earnings Call Transcript

May. 5.11 | About: Emergent BioSolutions (EBS)

Emergent BioSolutions Inc. (NYSE:EBS)

Q1 2011 Earnings Call

May 5, 2011 5:00 pm ET

Executives

Robert G. Burrows – Vice President, Investor Relations

Fuad El-Hibri – Chairman and Chief Executive Officer

R. Don Elsey – Chief Financial Officer

Analysts

Eric Schmidt – Cowen & Company

Greg Wade – Wedbush Morgan

Karen Jay – JPMorgan

Operator

Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions First Quarter 2011 Financial Results Conference Call. My name is Anne and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Mr. Bob Burrows. Please proceed, sir.

Robert G. Burrows

Thanks, Anne. Good afternoon ladies and gentlemen. Again, my name is Bob Burrows, Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss Emergent BioSolutions financial results for the first quarter of 2011. 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 May 05, 2011. 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 on our earnings call today. In my prepared comments, I will review our financial performance for the first quarter of 2011, provide guidance on the second quarter revenue, discuss relevant updates to our business, and highlight key near-term milestones.

Before I begin, I’d like to take a moment to comment on our news earlier this week. On Monday, May 2, we announced a modification to our current BioThrax procurement contract with CDC. The contract was expanded by 3.4 million doses with a total additional value of up to $101 million. This brings the total number of does to be delivered the under the contract to 17.9 million. Deliveries are contracted to be completed by the third quarter of this year.

In addition, we continue to have discussions with CDC representatives regarding to form multi-year procurement contract. We anticipate an award by the end of the third quarter this year.

Now, let me review our first quarter financial results. We achieved total revenues of $18.5 million and realized a net loss of $21 million. As you may remember from our March earnings call, we anticipated reduced deliveries in the first quarter. We redeployed our potency testing capacity primarily to the qualification of replacement reference standards. This process, which is required to enable continued release of BioThrax doses, has now been substantially completed.

Moving onto guidance, we maintain our full year 2011 guidance of total revenues of $320 million to $340 million. We expect second quarter total revenues of $80 million to $90 million, reflecting return to normal levels of product growth. We anticipate catching up to our total revenue guidance by the end of the year. We also maintained our full year 2011 net income guidance of $35 million to $45 million.

Let me now discuss the relevant update to our business since our March earnings call, beginning with our BioDefense division. I’m pleased to report substantial progress across key programs.

We completed multiple engineering runs in Building 55 under our funded multi-year program to license the large-scale manufacturer BioThrax. We completed qualification activities and are preparing a BLA supplement to obtain regulatory approval for a second fill/finish contractor for BioThrax as part of our risk mitigation strategy.

We completed dosing patients in the Phase I safety study for both Thravixa, our monoclonal Anthrax therapeutic and NuThrax, which combines BioThrax with an old novel regimen. We also submitted proposals totaling over $95 million to fund continued development of Anthrivig, our polyclonal Anthrax therapeutic, Thravixa, and post-exposure indication vaccine.

With respect to our BioSciences division, the last of about 2800 infants have been vaccinated and they’re at Phase IIb efficacy trial evaluating our MVA based TB vaccine candidate. This is the largest infant clinical study for a next generation TB vaccine conducted to date. We’re pleased to be developing this product in partnership with the University of Oxford, Aeras, The Wellcome Trust, (inaudible) our South African CRO. We look forward to a final study report in the second half of 2012.

In addition, for TRU-016, our anti-CD37 therapeutic candidate, which is being developed with Abbott under a collaboration with them, we recently began dosing patients in a Phase Ib2 combination study with Bendamustine in relapsed CLO patients.

Finally, I’d like to provide an update on the key milestones we expect to achieve through year end. First, in terms of additional U.S. government contracts. For BioThrax, we expect to secure a multi-year procurement contract, which will commit substantially all of our current handling capacity. And for Anthrivig, Thravixa and BioThrax post exposure, we expect to secure additional multi-year development funding of up to 95%.

Second, in terms of anticipated milestone payments, we expect to achieve a TRU-016 development milestone, which will trigger a $6 million payment from Abbott.

Third, in terms of clinical development milestones, starting with the advanced stage programs for Anthrivig, we anticipate issuing the final study report for the recently completed pivotal clinical trial. For the TB vaccine candidate, we expect the initiation of a Phase IIb efficacy study in HIV infected adults and adolescents sponsored by Aeras. And for SBI-087 in RA, we anticipate completing enrollment for a Phase II dose regimen finding study.

And with respect to our Phase I programs, we anticipate to file for TRU-016, initiating a Phase II combination study for CLL, and a Phase I combination study for ANthrivig. For SBI-087, completing a Phase I safety and PK study for SLE and for Thravixa completing a Phase I safety and PK study for Anthrax.

Fourth, in terms of manufacturing infrastructure milestones, for our Baltimore facility, we’re on track to substantially complete facility modifications and to initiate step transfer for our first product candidate. And for our Lansing facility, we are on track of initiating manufacture of consistency lot of BioThrax in Building 55 by year end. Additionally, we continue to pursue acquisition and licensing opportunities to advance our R&D pipeline and expand our sources of revenue.

In conclusion, we continue to execute on this year’s operating plan. We look forward to updating you throughout the remainder of the year on our progress toward achieving our key 2011 milestones.

That concludes my prepared comments and I’ll now turn it over to Don who will take you through the numbers in greater detail. Don?

R. Don Elsey

Thank you, Fuad. Good afternoon everyone. As Fuad mentioned, following the close of the market today, we released our financial results for the first quarter 2011. 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, May 6. The 10-Q will also be available on our website.

I’ll now provide a brief overview of our financial results for the first quarter of 211. As we previously guided, our total revenues in Q1 were light. Total revenues were $18.5 million, which were comprised of $5.6 million of product sales and $12.9 million of contracts and grants revenue.

As Rob has already discussed, during the quarter we redeployed our potency testing capacity to the qualification of replacement reference standards and other development testing. This process, which is required to enable continued release of BioThrax doses has now been substantially completed.

Looking at the contracts and grants revenues, this increased by 63% or $5 million over the $7.9 million recognized in the first quarter 2010. This growth was driven by increases in reimbursement revenues related to the Building 55 and further contracts awarded in 2010 as well as collaboration revenues from Abbott and Pfizer.

On the spending side, our R&D expense in Q1 2011 was $34.8 million versus $19.9 million for Q1 2010, an increase of 74%. On a sequential basis relative to Q4 2010, our R&D expense increased by 17%. In both instances, the growth in Q1 2011 reflects the impact of the programs we acquired as part of the acquisition of Trubion late last year.

If one takes into account the contracts and grants funding we have for many of our programs, out net R&D spend for Q1 2011 was $20 million. We expect our total R&D spending will continue to fluctuate quarter-to-quarter due to the various development stages of our pipeline candidates.

Our SG&A expense in Q1 2011 was $18.2 million, an increase of $2 million or 12% over Q1 2010. On a sequential basis, our SG&A spending decreased 16% relative to the fourth quarter 2010. We expect to continue to carefully manage our growth in overhead.

As a result of both revenue and continuing investment in our product pipeline, we recorded Q1 2011 net loss of $21 .4 million or $0.61 per share.

Finally, let me briefly comment on the balance sheet. Our combined cash, cash equivalents, investments and accounts receivable totalled $155.2 million as of March 31, 2011 compared with $210.3 million at December 31, 2010.

Turning now to our 2011 financial forecast. As Fuad noted earlier, we are reaffirming our 2011 forecast of total revenues of $320 million to $340 million and net income after tax of $35 million to $45 million.

For the second quarter 2011, we are anticipating total revenues of between $80 million and $90 million. And importantly, we remain confident that we will sign a multi-year procurement contract with U.S. government before the end of September this year.

As we stated in our call of March 10 of this year, calendar 2011 is a year of execution. We look forward to completing deliveries of BioThrax under our current U.S. government contract as recently modified and we expect to begin delivering under a follow-on multi-year contract.

We continue to make significant progress with the modifications to our Baltimore facility and the process of license share of Building 55. We anticipate achieving important development milestones in many of our clinical development programs. We also will continue to focus on growing our business through M&A and are actively reviewing opportunities that would bring near-term value.

That concludes my comments. I’ll 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

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

Eric Schmidt – Cowen & Company

Good afternoon. Thanks for taking the question. Just wondering if you could provide a little bit more detail on what substantially completed means, what's actually left to be completed? And I guess in addition given it sounds like you haven't started reshipping to the stockpile how you have confidence that the runs that you've been accumulating will pass potency lab testing?

R. Don Elsey

Thank you Eric. Let me start by saying that with substantially completing the process, we mean that we’ve done most of the testing that is part of the process of qualifying and you reference lot. Of course after that we need to put the package together, analyze the data, put it together and submit it to FDA, and get back to any time through deal.

With respect to delivery issue, right we haven’t shipped yet, but we do expect to ship by the end of this second quarter. As we have shown in our guidance for the second quarter, which is $80 million to $90 million in total sales, which as usual a significant portion of that is being at product sales. So we do anticipate getting product released by the end of the quarter, and actually shipping by end of second quarter.

Eric Schmidt – Cowen & Company

So, Fuad, just to be clear then, you've obviously been accumulating a lot of product and that's waiting around to be potency-tested once you've finished the qualification. And your best guess, of course, is that most of those lots will pass testing and be shipped this quarter?

Fuad El-Hibri

Correct, absolutely. And also Eric, you reminded that we have annual maintenance shutdowns that was performed and the one that we performed last year was towards the latter part of the year, which means that anyway even if we had and reallocate it. We redeployed our potency testing capacity, that the first quarter would have been like in terms of product release anyway because it takes about three to four months from the time we reinitiate after a shutdown until we get FDA release of our product. So there are certainly lots in the queue that we’re confident, are going to test within the normal range for testing throughout the year. So that’s at the – by the end of second quarter we would have an ability to achieve the guidance that we gave.

Eric Schmidt – Cowen & Company

Thanks for the clarification. One more question on the $600,000 in sales to international and other customers. I think that may be the first time you've broken that number out, at least if my memory serves? Is this going to be something we see in the future? And is $600,000 about the kind of run rate or is this an aberrant quarter one way or another?

R. Don Elsey

So, Eric, this is Don. How are you?

Eric Schmidt – Cowen & Company

Good. Thanks Don.

R. Don Elsey

Okay, okay. We broken that out in past calls and certainly in all of the filings with the SEC. So this is nothing out of the ordinary and we will continue to break it out as we go forward. As you know as we have talked about the ex-US market in the past. There I don't think one could point to a run rate for ex-US. As demands rise, and as we’re able to satisfy those demands with some capacity that may be available. We’ll do so. But I wouldn't project a run rate at this point of time.

Fuad El-Hibri

I would like to add to that, too, is that we are pursuing regulatory approval to market BioThrax in several countries around the world. And as we're making progress towards that and hopefully which will culminate in market authorization in those markets, we think that that's -- and assuming we do have a bit extra capacity that might increase future sales. Again there is no promise of that I am just giving you a little bit more color as to what we're doing in terms of potentially expanding our potential of our international market.

Eric Schmidt – Cowen & Company

Thank you.

Operator

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

Greg Wade – Wedbush Morgan

Good afternoon. Thanks for taking my questions. First up, with respect to Building 55, could you give us a little more granularity in to the milestones associated with licensure and the anticipated timeline for those? And then, Don, could you just tell us a little bit about what depreciation expense was in the quarter and how you think that's going to behave over the anticipated coming year and maybe next year as you guys get more manufacturing capacity under your belt? Thanks.

R. Don Elsey

Thanks for joining us today Greg. Let me try to answer the first question, which is that really we have a multiyear contract with BARDA to scale up the manufacturing of BioThrax in Building 55. And there are this is a development contract, which has normal development milestone that we achieve. We prepare invoices and get reimbursed for the activity that we extended on the project.

So the key milestones, I guess for this year is consistency lot manufacture. For next year, it’s clinical testing and nonclinical stuff, which go on in parallel, and then hopefully thereafter BLA submission.

Fuad El-Hibri

All right. Greg, good afternoon. With regards to depreciation for the quarter it was about $2.2 million. And basically it’s going to remain in that area until such time as Baltimore comes on. As you know, depreciation begins when an asset is put in place for its intended use. So Building 55 won't contribute to that stream until such time as it’s licensed. So Baltimore is probably the next significant asset investment and we would look at that beginning probably in 2012.

Greg Wade – Wedbush Morgan

Great. Thanks for taking my questions.

Fuad El-Hibri

Thank you Greg.

Operator

(Operator Instructions) And our next question comes from the line of Karen Jay with JPMorgan. Please proceed.

Karen Jay – JPMorgan

Good afternoon. It’s Karen for Cory Kasimov. I have two questions. The first is on, now that you've been awarded the bridging contract, is there any visibility into potential timing of the RFP for the renewal?

Fuad El-Hibri

Yes, thank you for joining us, Karen. Yes, indeed we were very pleased to execute the modification which actually adds 3.4 million doses to the existing contract that we have been overall delivering early on, so that bridges us through September. The RFP is still being worked on. We have no reason to believe that it’s not forthcoming very soon. We remain confident that it’s going to come out. We remain confident that an award will be finalized by the end of the third quarter in this year.

Karen Jay – JPMorgan

Okay, great. And then my second question is on Building 55, any updates on whether or not bridging studies will be required?

Fuad El-Hibri

We have dialog with FDA on an ongoing basis. . And once our consistency lots are completed, we will have another meeting with the FDA to discuss this discuss in greater detail. So it’s a little premature now to comment and we’re prepared to do both, if there is study to be done we’re prepared to do that. If you don't have to do one, it means earlier approval was also the same. So we’re timing as to what the situation might be. We’re happy that our Building 55 contract with the government allows and provides funding for the situation that we do have to do a clinical purchase.

Karen Jay – JPMorgan

Great, thank you.

Fuad El-Hibri

Thank you.

Operator

Ladies and gentlemen we have no further questions. This concludes today's question-and-answer session. I’d now like to turn the call back over to Bob Burrows for closing remarks.

Robert G. Burrows

Thank you. And ladies and gentlemen that concludes today's call. Thank you for your participation.. Please note that today call is being recorded and a replay will be available beginning later today through May 19. Alternatively there is available a webcast of call, an archive 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

Ladies and gentlemen we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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