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Emergent BioSolutions, Inc. (NYSE:EBS)

Q2 2012 Earnings Conference Call

August 2, 2012 05:00 PM ET

Executives

Daniel J. Abdun-Nabi - President and CEO

R. Don Elsey - SVP Finance & Administration, and CFO

Adam R. Havey - EVP and President, BioDefense Division

W. James Jackson, Ph.D - SVP and Chief Scientific Officer

Robert Burrows - VP of Investor Relations

Analysts

Cory Kasimov - JP Morgan Chase & Co

Nicholas Bishop - Cowen and Company, LLC, Research Division

Mario Corso - Caris & Company

Matthew Miksic - Piper Jaffray & Co.

Operator

Good day ladies and gentlemen and welcome to the Emergent BioSolutions Second Quarter of 2012 Financial Results Conference Call. My name is Ian 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 this conference. (Operator Instructions) And as a reminder, this call is being recorded for replay purposes.

I’d now like to turn the call over to Bob Burrows, Vice President of Investor Relations. Please proceed, sir.

Robert Burrows

Thank you, Ian. Good afternoon, ladies and gentlemen. Thank you for joining us today as we discuss Emergent BioSolutions second quarter of 2012 financial results.

As is customary, our call today is open to all participants. In addition, the call is being recorded and it’s copyrighted by Emergent BioSolutions. The call today will start with a brief prepared comments by our President and Chief Executive Officer, Dan Abdun-Nabi, who will give an overview of our financial performance for the second quarter, a brief business update and our 2012 forecast, including revenue expectations for the third quarter. Then, our CFO, Don Elsey will go through the financials in detail before we open up the call for your questions. We have several other members of senior management available to respond to your questions.

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 filing 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 replay, this call is held and recorded on August 2, 2012. 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/news.

And with that introduction, I’d 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. In my prepared comments, I will review our results for the second quarter and year-to-date, discuss our achievements for this quarter, and highlight certain near-term milestones. I will conclude my remarks with our guidance for the third quarter and for the full-year.

To begin, our total revenues for the second quarter were just over $70 million. This is within the guidance that we provided during our May conference call. Year-to-date total revenues were approximately $121 million. Net income for the quarter was $7.6 million and was approximately $800,000 for the first six months of the year.

Turning to our achievements during the second quarter, we made progress on a number of initiatives. We commenced the manufacturing of consistency lots in Building 55. This represents a significant step towards licensure of this large scale BioThrax manufacturing facility. Once completed the consistency lot material will be used in our pivotal non-clinical study.

The data from that study together with other comparability data, will be reviewed by FDA as part of our licensure package. Last year FDA indicated its overall support for our plan for regulatory approval of Building 55 without the need for conducting clinical trials. This regulatory plan is based on achieving specified end points in our proposed comparability and non-clinical studies. More recently during the second quarter, FDA notified us that they concurred with the design of our pivotal non-clinical study. If we’re successful in this plan, we remain confident that licensure could occur in late 2014.

As a remainder, we’re receiving development funding from BARDA to support the licensure of Building 55 for the manufacturer of BioThrax. In terms of BioThrax improvements we accomplished two important milestones during the second quarter. First, FDA approved an amendment to our BioThrax generally used prophylaxis or GUP label. The BioThrax label not provide for a three-dose primary series with booster doses thereafter. This is an important milestone that was achieved with significant support by the U.S. government .We believe the achievement of this milestone addresses a key requirement and enhances the value of BioThrax to our principle customers within the U.S. government.

Second, we completed enrolment in the pivotal immunogenicity study of BioThrax for a post-exposure prophylaxis or PEP indication. This is being conducted under our current BARDA contract. We also secured an additional BARDA contract to support a Phase 2 non-interference study related to a PEP indication for BioThrax.

Regarding PreviThrax, a recombinant anthrax vaccine candidate, we recently reviewed our progress with representatives from BARDA. Based on that review we believe that BARDA will exercise an upcoming one-year option under the current development contract that we have with them. We expect to receive formal notice of this exercise in the third quarter of this year.

Lastly, HHS has awarded us a contract to establish a Center of Innovation in Advanced Development and Manufacturing. This contract will involve the use of both our Baltimore and Gaithersburg sites. Contracts were also awarded to Novartis, and Texas A&M, which is partnered with GlaxoSmithKline. These centers will address several HHS goals regarding public health emergencies including ensuring that the U.S. can quickly develop and manufacture medical counter measures, reducing U.S. dependents on vaccines made in other countries and developing the next generating of Americas biotechnology workforce.

Our contract consistent with an initial eight-year cost reimbursable, cost share base period of performance, with a fixed price component that would result in funding to us, up to a $163 million. The base contract period includes securing a pandemic influenza vaccine candidate, constructing additional facilities to support pandemic influenza vaccine production and obtaining facility licensure to manufacture a pandemic influenza vaccine at the Baltimore site.

The contract also contemplates up to 17 additional one-year options. Further BARDA may issue task orders for additional services including the manufacture and delivery of up to 50 million doses of influenza vaccine in the event of a pandemic and developing and manufacturing services to other companies developing counter measures against CBRN anthrax.

We’re currently evaluating several potential flu vaccine candidate that meet HHS requirements and that could be manufactured in our Baltimore site. We expect to make our final selection in the near-term. This award represents a long-term public private partnership with BARDA to help achieve our common goal of strengthening the nations preparedness and response to pandemic.

Turning now to the second half of this year, we anticipate achieving the following key milestones in both our BioDefense and Bioscience divisions. In terms of our BioDefense programs, we expect to initiate the BioThrax PEP Phase 2 antibiotic noninterference study, in addition we expect to initiate a Phase 2 clinical study of NuThrax also for a PEP indication.

Regarding milestones for our Bioscience program, for TRU-016 in NHL, we will complete the Phase 1b comparative study and we will make a determination regarding going forward with the Phase 2 study for TRU-016 in CLL recruitment is ongoing and patient dosing continues in the Phase 2 combination study. The success of this Phase 2 combination study will determine whether a Phase 3 study is warranted. We anticipate making that determination in mid 2013.

For MVA85A, our tuberculosis vaccine candidate, we anticipate receiving the data from the 2,800 infant Phase 2b field efficacy study at the end of the year or shortly thereafter. As you may recall, MVA85A is a one dose booster to BCG. That’s in Asian Phase of the trial, it has been completed and these entrants are now being observed.

Let me take a moment to discuss the public health red globally that should tuberculosis represents. Approximately 2 billion people or 1/3 of the worlds population are estimated to be infected with the bacteria and our risk of developing tuberculosis. According to the WHO approximately 1.5 million people die from TB every year worldwide. Tuberculosis is the second leading cause of death from infectious disease globally and according to the CDC is the leading cause of death among HIV infected individuals.

As I had mentioned in prior calls, the public health challenge has been intensified by the rise of TB strains that fail to respond to the most affected TB treatments. The global healthcare community is increasingly focused on the TB issue. In fact, in a press release issued in March of this year, the President of the Global Health Program at the Bill and Melinda Gates Foundation said, and I quote there is an urgent need for the global community to support the full range of tools to eliminate tuberculosis. But the development of TB vaccines that can prevent men, women, and children from developing the disease would be the single greatest events in the global fight against TB.

We’re actively participating in a number of organizations worldwide involved in addressing the global health concern, collaborated with Aeras, The Wellcome Trust, SATVI, NIAID, Oxford University, EDCTP and other key opinion leaders all in pursuit of the solution to this substantial unmet global heath need. This collaborations have enabled us to conduct the field efficacy study as well as other clinical trials and to engage in other efforts in order to clarify a rapid path to licensure. We’ve also engaged in discussions with representatives of the WHO regarding MVA85A and our approach to the TB issue.

Given the heavy disease burden worldwide and the recognized need for a new TB vaccine, we may depending on the data from the ongoing study be in a position to pursue accelerated or conditional approval for MVA85A in selected countries. With respect to the market opportunities for MVA85A we’ve four commercial rights to approximately 55 high income and middle income countries, including in the EU, Russia and Brazil as well as in the private markets in both India and China.

Within our commercial market, there are an estimated 45 million to 50 million births annually. Even at a modest price per dose and assuming a one dose booster regimen, this represents a significant market opportunity for Emergent. So in summary, MVA85A offers a promise of addressing a significant global health threat, while representing a substantial commercial opportunity for Emergent.

Finally, let me conclude with our guidance. In the third quarter we’re forecasting total revenues between $60 million to $70 million and the full-year we’ve reaffirm our guidance of total revenues between $280 million to $300 million and net income between $15 million to $25 million.

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

R. Don Elsey

Thank you, Dan. Good afternoon, everyone. Following the close of the markets today, we released our financial results for the second quarter of 2012. 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 August 3rd. The 10-Q will also be available on our website.

Let me now briefly discuss the numbers. Second quarter 2012 total revenues were $70.4 million versus $88.1 million in the second quarter of 2011. Total revenues for the first six months of 2012 were a $120.7 million versus a $106.7 million for the first half of 2011. Diving a little deeper, year-to-date product sales revenues were $87.5 million versus $77.1 million for the first six months of last year. This increase was driven by a 23% increase in the number of BioThrax doses delivered.

Year-to-date contracts and grants revenues were $33.2 million versus $29.6 million for the same period last year. This increase was primarily due to increased activity under our BARDA development contract for Building 55 and PreviThrax.

Turning to gross margins, our gross margin in Q2, 2012 was approximately 75%, which is within our typical range of between 70% and 80%. Gross margin for the first six months of 2012 was approximately 76%. Turning to the bottom line, second quarter 2012 net income was $7.6 million or $0.21 per basic share as compared to $14.2 million or $0.40 per basic share in the second quarter of 2011.

Net income for the first six months of 2012 was $800,000 or $0.02 per share as compared to a net loss of $7.2 million or a loss of $0.20 per share for the first half of 2011. Year-to-date net income reflects the impact of the $9.6 million non-cash charge in the first quarter. If you adjust for this non-cash charge, 2012 year-to-date net income were $7.8 million or $0.22 per share.

Turning now to spending. Our R&D expenses for the second quarter of 2012 were $30.6 million compared to $31.5 million in the same period last year. I’d like to highlight that contracts and grants revenues and costs associated with noncontrolling interest in our joint ventures offset a portion of our gross R&D expenses. When we take these into account, our net R&D for Q2 2012 was $11.3 million. R&D expenses for the first six months of 2012 were $56.9 million compared to $66.2 million in the first six months of 2011.

Again, adjusting for contracts and grants, revenues and noncontrolling interest in our joint ventures, the net R&D for the first half of 2012 was $20.4 million. Our SG&A expenses for the second quarter of 2012 were $17.9 million compared to $20.4 million in the second quarter of 2011. The decrease is primarily attributable to the restructuring charges related to our U.K. operations that we incurred in 2011. SG&A expenses for the first six months of 2012 were $37.4 million compared to $38.6 million for the first half of 2011.

Turning now to the balance sheet, we ended the second quarter of 2012 with cash and cash equivalents of $161.8 million and an accounts receivable balance of $46.8 million.

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

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

Cory Kasimov - JP Morgan Chase & Co

Hey, good afternoon guys and thanks for taking my questions. I have a few of them for you. First of all just wondering if the FDA approval of the new three dose primary series for BioThrax, if that has any impact on pricing going forward?

Daniel J. Abdun-Nabi

No, Cory. By the way, thanks for participating today. No, it doesn’t have any impact on pricing under the contract.

Cory Kasimov - JP Morgan Chase & Co

Okay. And then, Don are you able to talk a little bit about the logistics of your planned buyback, is there any granularity or anything you can give us there?

R. Don Elsey

Yeah, I think in terms of timing and next steps, we as you know have Board approval, we’ve announced that. We now through the mechanisms that would be established under a formal plan and we expect that would be initiated sometime in the very near term.

Cory Kasimov - JP Morgan Chase & Co

Okay. And then lastly, and I missed part of what you had said on the pending TB data. So, I am sorry if you’re repeating this; but do you have a sense of what your next steps are going to be if the Phase 2b results are positive at the end of this year?

R. Don Elsey

Yeah, I think what we’ve talked about and we’ve already had some preliminary discussions with some key opinion leaders and representatives in the public health community, an approach that might permit for either accelerated or conditional approval. And we do need to sit down with regulatory authorities and to find exactly how that will work. But big picture, the concept would be; we would be approved to manufacture and supply the product in select territories to start to begin to address the public health threat, while at the same time either undertaking follow-on Phase 3 study or some other level of activity that would support the data that we saw in the Phase 2b, and the exact parameters and what that might look like remains to be decided, but I think a lot is – as I said, a lot will be depending on what the data looks like.

Cory Kasimov - JP Morgan Chase & Co

Okay. So, something potentially along the lines of an accelerated approval for a cancer drug for example in the United States?

R. Don Elsey

I think that’s a fair comparator. But again it’s premature to give too much definition to it, but that’s our concept exactly.

Cory Kasimov - JP Morgan Chase & Co

Okay. All right, great. Thank you very much. That’s helpful.

Operator

Thank you for your question. The next question comes from the line of Nicholas Bishop of Cowen. Your line is live. Please proceed.

Nicholas Bishop - Cowen and Company, LLC, Research Division

Thanks. First just a couple of financial ones for Don. I wonder if you can give us any qualitative guidance on the contract and grants line over the next two quarters, I mean, I know you know what the annual guidance is, but you alluded to some potential new contracts in the third quarter. Is the third quarter likely to be higher than the fourth or is there any help you can give us there?

R. Don Elsey

Generally speaking as we take a look at the consolidation of contracts and grants and putting [Avium] aside for a moment. I would say that it’s a fairly straight line over the next two quarters Nick well we don’t breakout specific guidance on those, it of course depends on a variety of milestones that are being reached with various contracts and approval from various agencies to proceed with various steps. So it’s always a little hard to tell even from within the company.

But I think relatively evenly divided over the next couple of quarters on contracts and grants putting [Avium] aside, let me just make a quick comment on the [Avium] as we talked about earlier when we announced [Avium] we don’t anticipate it will have a material impact on 2012 and we anticipate that we will have the accounting for that scored away certainly in the latter part of this year and we’ll explain that more fully as we come to conclusion with the SEC and we’ll reflect that in our guidance for 2013 when we publish that in January of next year.

Nicholas Bishop - Cowen and Company, LLC, Research Division

Okay, great, that’s helpful. And then on BioThrax, I guess based on your guidance and the pattern for last year it’s reasonable to assume a pretty large fourth quarter on that; is that fair to say?

R. Don Elsey

That is correct, given our annual guidance reaffirmation and the Q3 guidance that we gave you its quick mathematical exercise and it will be a large fourth quarter.

Nicholas Bishop - Cowen and Company, LLC, Research Division

Okay. And then, just one last one; I wonder if you could on the Building 55 process, just remind us kind of the timing and kind of gating factors in completing the pivotal and comparability studies and what the design of those studies is?

Daniel J. Abdun-Nabi

Yeah, so let me start and then I would like to have Adam Havey the President of our BioDefense Division to add a little color. As we indicated really the plan that’s been worked out with FDA is based on comparability and non-clinical programs, and we have reached agreement as to what those endpoints are to look like. So we’re now initiating the process of conducting those studies and Adam can give you a little bit better clarity in terms of timeline and what the milestones going forward to BLA submission might look like.

Adam R. Havey

Yeah, thanks. At a high level as Dan mentioned we initiated our consistency lots which is the – kind of the first step in the process and we’ll wrap those up in this quarter, that will then lead into the start of our pivotal non-clinical study, and that will run primarily through 2013. And then we’ll prepare our FDA submissions, submit it to the FDA and go through the standard of regulatory approval process and hopefully with licensure late 2014.

Nicholas Bishop - Cowen and Company, LLC, Research Division

Okay, thanks. That’s very helpful.

Operator

Thank you for the question. Next question comes from the line of Mario Corso of Caris & Company. Please proceed.

Mario Corso - Caris & Company

Yes, thank you for taking my question. So for the second quarter, your revenue numbers came in towards the low-end of your guidance. So as we think about the BioThrax I’m wondering what you can say about the quarter and going forward, kind of where you are on a yield basis, where you are on a shipment basis, did something there not occur as well as it could have in order to hit a better part or the upper part of your guidance. And then in terms of the Building 55 lots, I assume that will be – [on serially] so will you be getting some data soon and will that be shared with us or is it just continue on as planned. And then finally on NHL, can you talk a little bit more there about what the go, no-go decision is going to be based upon? Thanks a lot.

Daniel J. Abdun-Nabi

Sure. Let me start – thank you for the question. So, in terms of the revenue, if you look back to the first quarter for example we were at the very upper ends of our guidance and this quarter it was sort of at the low-end of the guidance. So, we do our best based on the production schedule and deliveries and to give a sense for where we’re going to come out on the revenue basis, but it doesn’t always work perfectly according to plan. But, I think we typically, historically have said, look at the whole user. But in an effort to give further visibility to you as you look at our company, we’ve broken this down on a quarterly basis. So, sometimes it will come in, in the high side, sometimes it will come in, in the low side, but I think historically we’ve been pretty good about hitting our range numbers. So, I wouldn’t read anything into that. It’s just normal variance in terms of output and delivery.

In terms of the Building 55 lots, I am not sure I understand the question. The consistency lots are going to be produced, we’ve initiated, that would then lead into the conduct of the studies that Adam has described. So, I don’t think there’s any interim data that you would see, you would run the studies and you collect the data and then you submit the package to FDA, big picture. So, it’s not like there is an open-label study that’s being conducted that would allow for an interim analysis that we could give you some guidance on over the course of that period. And I guess on the NHL, can you repeat the question, I didn’t jot it down in time.

Mario Corso - Caris & Company

I just wanted to hear your thoughts about what the go; no-go decision is going to be based upon how you’re looking at that at this point?

Daniel J. Abdun-Nabi

Yeah, so as we said we're waiting in completion of that, we’ll look at the data and then make a specific determination. Jim Jackson, who is the Head of the Therapeutics on there and our CSO. Jim, you want to add a little color as to some of the metrics we all look at.

W. James Jackson, Ph.D

Sure, yeah. As Dan said we are in the process of analyzing the data from that 1b study. And as you know that was a study where we were looking at the additive effect of TRU-016 in combination with Bendamustine and Rituximab. It was a small study, only 12 subjects to it. We are probably looking somewhere around an improvement in the overall CR rate of about 30% over BR alone as kind of a threshold value for the additive effect of TRU-016. We are planning on getting this data together and presenting it later in the year probably at ASH, so that would be a time when we’ll really kind of roll this information out publicly.

Operator

Thank you for the question. Our next question comes from the line of Ian Somaiya of Piper Jaffray. Your line is live. Please proceed.

Matthew Miksic - Piper Jaffray & Co.

Hi, good afternoon everyone, it’s Matthew on for Ian. I just want to go back to the flu opportunity quickly. And I just was wondering if you could give a sense of maybe or an update on what your expectations are for – what we’ve been thinking about maybe just like a baseline volume for the flu contract. Obviously, total volume would be driven by the occurrence of a pandemic outbreak, but if you could maybe dimensionalize for us a little b4it what the baseline stock comp might look like and what the timing of that might be on an ongoing basis, that will be great. Thank you.

Daniel J. Abdun-Nabi

Yeah, thank you for your question, Matthew. So the [Avium] contract has a component to it that’s not fixed in terms of delivery of up to 50 million doses and that’s really not part of the base contract. Really what is contemplated now is that we would obtain licensure in a Baltimore site once we’ve selected the proper candidate and then I think it’s going to be really up to the government to determine it. What its requirements are? Which products it would procure, at what levels? Clearly the government is looking for multiple suppliers, multiple product candidates and is investing in the development to get them across the goal line and obtain licensure.

But I think it’s a little bit premature to be talking about specific contract procurements at this point. We hope as the program matures and develops, we’ll have better clarity and we’ll be able to pass that along to you with respect to vaccine stockpile amounts. But you know it is a priority from the government. They do have stockpiles in place today. They are developing additional candidates. They are now establishing these centers of innovation for advanced development and manufacturing. So, it remains a priority from the government and we’re quite pleased that we’re a part of it.

Matthew Miksic - Piper Jaffray & Co.

Okay, great. Fair enough. Thank you.

Operator

Thank you very much for your question. Just to let you know sir, at this time we have no further questions. (Operator Instructions) We have no further question’s that has come through into the queue. I would now like to turn the call back over to Mr. Bob Borrows for closing remarks. Please proceed.

Robert Borrows

Thank you, Ian. In conclusion the Emergent’s business is strong and growing as the premier provider of medical countermeasures against the anthrax with the U.S. Government. We continue to enhance the value and utility of BioThrax and to progress for a licensure of our large scale manufacturing facility. At the newly announced Center for Innovation in Advanced Development and Manufacturing we reported the long-term opportunity to help strengthen the Company’s commitment, public health preparedness and the key participants in the fight against TB. We continue to work with our partners, collaborators and key stakeholders worldwide to advance our leading TB vaccines candidate MVA85A.

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 reply will be available beginning later today through August 16. Alternatively, there is available a webcast of 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

Thank you, ladies and gentlemen for your participation in today’s call. This concludes your presentation. You may now disconnect. Good day.

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