Emergent BioSolutions (EBS) Q1 2022 Earnings Call Transcript

Emergent BioSolutions (EBS 5.88%)
Q1 2022 Earnings Call
Apr 28, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the first quarter 2022 Emergent BioSolutions earnings conference call. [Operator instructions] I would now like to hand the conference over to management. Please go ahead.

Bob Burrows -- Vice President of Investor Relations

Thank you, Victor, and good afternoon, everyone. My name is Bob Burrows, VP and investor relations officer for the company. Thank you for joining us today, as we discuss the operational and financial results for first quarter of 2022. As is customary, today's call is open to all participants and the call is being recorded and is copyrighted by Emergent BioSolutions.

In addition to today's press release, there is a series of slides accompanying this webcast available to all webcast participants. Turning to Slides 3 and 4, during today's call, we may make projections and other forward-looking statements related to our business, future events, our prospects or future performance. These forward-looking statements are based on our current intentions, beliefs and expectations regarding future events. Any forward-looking statement speaks only as of the date of this conference call and except as required by law, we do not undertake to update any forward-looking statements to reflect new information, events or circumstances.

Investors should consider this cautionary statement, as well as the risk factors identified in our periodic reports filed with the SEC when evaluating our forward-looking statements. During today's call, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Emergent's operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income, adjusted EBITDA and adjusted gross margin and reconciliations between our GAAP financial measures and these non-GAAP financial measures. Turning to Slide 5, the agenda for today's call will include Bob Kramer, president and chief executive officer, who will comment on the current state of the company; and Rich Lindahl, chief financial officer, who will speak to the financials for 1Q '22.

Rich will also discuss the updated '22 guidance. This will be followed by a Q&A session where additional members of the executive leadership team are present and available as needed. Finally, for the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on April 28, 2022. Since then, Emergent may have made announcements related to topics discussed during today's call.

And with that introduction, I would now like to turn the call over to Bob whose section begins with Slide 6. Bob?

Bob Kramer -- President and Chief Executive Officer

Thank you, Bob, and good afternoon, and thank you to everyone for joining the call. I'm pleased to share details about our performance and progress in the first quarter. And as Bob indicated, my comments are summarized on Slide 7 of the deck. The entire team at Emergent remains focused on our strategic vision to grow business carefully by choosing and investing in public health threat markets in which we believe we can make a difference for our patients.

Every day, we deliver on this promise with a diversified business model and disciplined operating approach that enables us to navigate through uncertain environments, such as what we have experienced and been through throughout the COVID-19 pandemic. While our report today reflects a mix of both positive progress and challenges to address, we remain financially strong with the resources to continue pursuing our vision of protecting and enhancing 1 billion lives by 2030. Our first quarter results are solid as we hit the upper end of our forecast range for total revenues, and exceeded Street consensus estimates for other key performance metrics. Through the first quarter, the output and achievements of the commercial and medical countermeasures business lines is indicative of the strength and resilience of our core products segment.

We also continue to advance our R&D pipeline in line with the research and development objectives we shared on the last call. Such investments in R&D are consistent with our view toward development projects, as sources of potential future organic growth for the company and possibly for further expansion of our impact on public health preparedness and response. On that point, last week, we completed our BLA submission to the FDA for AV7909, our new anthrax vaccine candidate in lead R&D program. We anticipate receiving confirmation from the FDA within 60 days, whether our submission has been accepted and the timing of the review.

Typically, a priority review would take approximately six months, and a standard review would take up to 10 months from the time of BLA's acceptance. Also, we successfully are enrolling participants in the pivotal Phase 3 clinical trial for a single dose chikungunya virus VLP vaccine candidate. And also we initiated a Phase 1 study of SIAN, our potential intranasal treatment for cyanide poisoning. With respect to our commercial and medical countermeasures business lines, let me make a couple of comments.

First, our nasal naloxone franchise, which includes NARCAN Nasal Spray, and the authorized generic licensed to and distributed by Sandoz, continues to perform in line with our projections across key customer segments. As we continue to expand access to ensure that NARCAN is broadly available in the community, millions of doses of our nasal naloxone products were distributed this last quarter. We continue to see demand from our longtime public interest customers in the United States and continued growth in demand in Canada. Also, our medical countermeasures business continues to deliver on long-term contracts with the U.S.

and allied governments. And we look to evaluate opportunities in international markets as part of our 2024 strategic plan. I'd like to publicly commend our medical countermeasures team and the work they're doing in light of the war in Ukraine and the potential for intentional or naturally occurring biologic threats, as well as chemical threats. The team has been working closely with the United States and allied governments, as well as global non-government organizations to identify and mobilize supplies of medical countermeasures.

One case in point, we recently received an urgent request from the Ukrainian Ministry of Health that resulted in Emergent's donation of 200 vials of Botulism Antitoxin. Additional requests and orders are currently being assessed. The tragedy in Ukraine and the potential threat of biologic or chemical attacks is a reminder of Emergent's critical role in helping prepare the United States and our allies to respond in the event that the unthinkable becomes reality. Let me now turn to the CDMO business.

Our non-COVID related CDMO business continues to show durability. We are retaining current clients and garnering new business across the network of sites. However, as is the case with the rest of the healthcare sector, we're seeing a slowdown in COVID demand as needs wane, and we enter a new phase in the pandemic. Johnson & Johnson recently announced that they were suspending guidance related to the sales of their COVID-19 vaccine because of the current oversupply in the market.

Given this uncertainty, we are temporarily suspending our CDMO specific guidance, and Rich will share more on guidance in a moment. We remain in discussions with J&J on their future COVID-19 vaccine needs and are -- importantly, our contract with them remains in place, as is our commitment to delivering on our obligations under it. In addition, we made progress with the previously planned modifications and enhancements, which are now underway at our Bayview facility. These changes will improve the ability to manufacture viral and non-viral products, as well as strengthen Bayview's offerings for both internal and external clients as part of its planned future role within our CDMO network.

We anticipate completing these enhancements in Q3 of this year. As you may recall, Bayview was always intended to be a multi-product facility. We've begun the tech transfer of our raxibacumab product into the facility prior to the pandemic, and the urgent needs of that pandemic put those plans on hold. Before I touch on some personnel updates, I want to take a moment to remember Emergent's founder, Fuad El-Hibri, who passed away last Saturday.

Fuad's entrepreneurial spirit and bold vision serve as the foundation of our company and our mission to protect and enhance life. Our thoughts and prayers go out to his family and friends. On a personnel related matter, last month, we were pleased to announce Zsolt Harsanyi as the newly appointed chairman of the board of directors and Keith Katkin as a new independent director. Both assumed their new roles effective April 1.

We've also recently hired three experienced industry experts to fill key roles on our leadership team. Reinforcing our focus on a culture of quality and compliance, Coleen Glessner joined as the executive vice president for global quality and ethics and compliance, reporting directly to me. Coleen previously worked at Alexion Pharmaceuticals, where she served as senior vice president and chief quality officer. Also Joe Philipose joins us as senior vice president and chief ethics and compliance officer reporting to Coleen.

Joe also previously worked at Alexion and served in the role of VP U.S. and enterprise compliance. And finally, Bill Hartzel joined the team as senior vice president and head of the CDMO business unit, reporting directly to Adam Havey. Bill came to us from Woodstock Sterile Solutions, where he was chief commercial officer and previously worked for Catalent.

As I wrap up, and in conclusion, even as market dynamics shift, and Emergent's business evolves, we continue to deliver for our current patients and customers, we continue to make progress advancing our R&D pipeline, and we continue to seek new opportunities to protect and enhance lives against public health threats. I look forward to your questions and will now turn the call over to Rich for a deeper look into the financials. Rich?

Rich Lindahl -- Chief Financial Officer

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call. I will start on Slide 9 and open my remarks with some summary thoughts to put today's earnings report into context. We have previously noted that 2022 is a rebaseline year for Emergent, as we transition our business from the significant demands of the COVID-related work of the prior two years, back toward the long-term trajectory we envisioned as we exited 2019.

Our first quarter performance was solid on a stand-alone basis. Even as the year-over-year results reflect the bolus impact of the BARDA task order in 2021. We had stable contributions from our products business with year-over-year increases in products revenue and gross margin. At the same time, we experienced short-term challenges in our services business, most notably, reduced revenue from the Bayview facility, stemming from the late February announcement to temporarily pause manufacturing.

We are confident the challenges in the services business will be short-lived and expect services gross margin to improve in the future, as we garner more meaningful contribution from the Bayview facility. During the quarter, we also continued investments in progressing our development pipeline, and we began assessing our operating performance by focusing on two reportable segments, a product segment, consisting of the government medical countermeasure and commercial products business lines; and a services segment, consisting of the CDMO services business line. Taken together, our performance this quarter underscores the strength and durability of our diversified products and services business model. Turning to Slide 10, before I walk through the results for the quarter, it is important to address our decision to temporarily suspend elements of our 2022 forecast.

As we are all aware, recently Johnson & Johnson announced that they would not projects COVID-19 vaccine sales for this year, citing a global supply surplus and vaccine hesitancy in developing countries as the basis for this change. While our commercial supply agreement has not been modified and remains in place, we are temporarily suspending CDMO guidance until we have further clarity on their requirements. As a result, we are also temporarily suspending guidance on total revenues, adjusted net income, adjusted EBITDA and gross margin, and refraining from providing second quarter revenue guidance. Having said that, it is important to note that our assumptions with respect to our products segment revenues remain unchanged, therefore, we are reaffirming our guidance and it's listed on Slide 10.

For anthrax vaccines, ACAM2000, nasal naloxone products and other products plus contracts and grants, which in the aggregate represent three-quarters of our previous total revenue range, or about $1 billion at the midpoint. Additionally, I would note that over half of our prior CDMO guidance was represented by our Camden, Gaithersburg and Winnipeg sites, which continued to deliver quality services to our CDMO customers. At the appropriate time, we will communicate additional information and update our overall forecast. With that, let's turn to the numbers.

As indicated on Slides 11 and 12, highlights include total revenues of $308 million, a decrease over the prior year period, but at the high end of our guidance, driven by across the board increases in our product revenue categories and offset by lower CDMO sales, and contracts and grants revenues. As expected, our key profitability measures also declined versus the prior year, with adjusted EBITDA of $36 million and adjusted income of $9 million. Other notable items in the quarter include, anthrax vaccine sales of $104 million, higher than the prior year due to timing of deliveries of AV7909 to the U.S. government's strategic national stockpile; ACAM2000 sales of $14 million, reflecting deliveries to non-U.S.

government customers, seeking to protect against the threat of smallpox; nasal naloxone product sales of $93 million, higher than the prior year and comprised of strong unit sales of branded NARCAN to U.S. public interest and Canadian customers, as well as solid contributions from sales of the authorized generic product licensed to Sandoz, which launched in December 2021. As expected, we also saw lower branded NARCAN sales in the U.S. commercial retail market, as a result of the generic launch late in the fourth quarter last year.

Other product sales were $26 million, significantly higher than the prior year, driven primarily by deliveries to the U.S. government, and combined CDMO service and lease revenues of $61 million, significantly lower than the prior year, largely due to two key factors. In CDMO services revenues, the decline reflects the impact of the decision to initiate maintenance and other modification-related work at our Bayview site, which reduced manufacturing activities during the quarter. Offsetting this factor was an increase in manufacturing activities at our Camden and Winnipeg sites in support of drug substance and drug product manufacturing services for certain commercial customers.

And in CDMO lease revenues, the substantial decline was planned and reflects the completion late last year of our public private partnership with BARDA in response to the COVID-19 pandemic. Turning to operating expenses, cost of product sales in the quarter was $80 million, higher than the prior year due to greater product sales. Cost of CDMO was $76 million, higher than the prior year due to professional services in support of quality functions at the Bayview site, as well as higher costs of both the Camden and Winnipeg sites, resulting from increased manufacturing activities during the period. R&D expense of $46 million lower than the prior year, primarily due to a decline in costs associated with the development of our COVID-19 therapeutic product candidates offset by an increase in costs from the CHIKV Phase 3 study.

And SG&A spend of $85 million, slightly higher than the prior year due to an increase in professional services and marketing costs in support of the expansion of our business operations, as well as costs associated with defending and supporting our corporate reputation. Turning to additional financial information, let's move to Slide 13 and review the status of our CDMO business line across key performance metrics. As of March 31, our total customer count was 71, an increase of one on a sequential basis. And in the first quarter, we secured new business of $34 million on continuing steady demand for our services.

A majority of this new business is from existing customers as we target non-COVID molecules. Regarding CDMO backlog, as is well understood, this metric includes value from the Johnson & Johnson contract. Given our suspension of CDMO revenue guidance, at this time, we are also temporarily suspending CDMO backlog until we have further clarity on their requirements. We will resume providing this metric at the appropriate time.

Next, please turn to Slide 14. As I opened my remarks, I mentioned that we have now introduced segment reporting information by products and services. The performance for each segment is assessed based on two metrics, revenue and adjusted gross margin. Importantly, segment revenue includes external customer sales, but excludes any inter-segment revenues.

Additionally, we are not including our segment reporting -- we're not including in our segment reporting any allocations for R&D, SG&A, amortization of intangibles, interest expense, other income or taxes. With that, let's dig into the specifics of the first quarter segment performance. The product segment revenues were $237 million, an increase over the prior year period, and adjusted gross margin was $157 million or 66% of product revenues. Both increases over the prior year and reflecting the impact of higher sales volume and product mix.

As for the services segment, revenues were $61 million, a decrease in the prior year period, and adjusted gross margin was negative $50 million, reflecting the decline in revenue at the Bayview facility as a result of three factors. One, the completion of our arrangement with BARDA; two, the pause in manufacturing activities for improvement and modifications; and three, the increase in professional services costs. Moving on to Slide 15, I'll touch on select balance sheet and cash flow highlights. We ended the first quarter in a strong liquidity position with $436 million in cash and available revolver capacity of just under $600 million.

Our net debt position was $405 million, and net leverage remained less than one times. In addition, while our operating cash flow is negative for the quarter from a capital deployment perspective, we sustained our commitment to both, continued investments and opportunistic buyback activities as follows. First quarter capital expenditures of $32 million reflecting ongoing investment in expanded capabilities and capacity to support our diversified products and services business lines and in the first quarter, we repurchased approximately 1.1 million shares at a cost of $52 million pursuant to the $250 million repurchase authorization approved by our board of directors in November of last year. Cumulatively, we have spent $165 million to repurchase 3.8 million shares.

Importantly, the amount and timing of any additional repurchases will be determined by management, based on the evaluation of market conditions and other factors, and we will continue to report such activity on a quarterly basis. To conclude, please turn to Slide 16 for some summary comments. In the first quarter of 2022, we delivered another period of solid performance in our product segment offset by continued rebase lining and normalization of our services segment as we move past the influence of COVID-19 heightened activities. We continue to see significant opportunity for our CDMO offering, given our capacity and capabilities and remain bullish on the long-term potential of the services business.

Additionally, our R&D programs continue to progress while we maintain our commitment to prudent capital deployment in pursuit of our 2024 strategic goals. We look forward to keeping you informed as we execute on these plans and deliver further proof points that demonstrate the long-term growth potential of our strong diversified business. That completes my prepared remarks. I'll now turn the call over to the operator so that we can start the question-and-answer session.

Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question will come from the line of Brandon Folkes from Cantor Fitzgerald. Your line is open.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Hi, thank you for taking my questions. Just two for me around the J&J contract, would you be willing to say when the last time J&J paid you, and whether any payment in terms of contractual amounts are currently in dispute? And then, secondly, understanding that you have suspended guidance due to visibility in the CDMO business, would you be willing to say, if you expect to continue to recognize any revenue from the J&J contract in your CDMO business for the remainder of the year? Or until you gain clarity from J&J on the demand and supply chain need? Thank you.

Bob Kramer -- President and Chief Executive Officer

Yeah. Thanks, Brandon. I appreciate you joining the call. Thanks for the good questions.

So, I think maybe the place to start is just to say, what hasn't changed in terms of the relationship with J&J and in our operations in Bayview. So as we have stated all along, our commitment to J&J is to stabilize and strengthen their supply chain for their COVID-19 vaccine. And as we said on the call and both by Rich and by myself, the contract is in place and it's -- to be clear, it's on file. You can read it.

So rather, Brandon, than kind of describing some of the provisions that are in it, I think it's probably best for you to look at that. I won't comment specifically on when the last payment was made by J&J or speculate on projects or payments going forward, other than to say that we continue to be in a dialogue with them about their long-term needs for their vaccine and remain committed to supporting them however we can. And again, I think it's really the result of them suspending their guidance on their product, as well as the knowledge that they are going through their evaluation process on their global supply and demand, and the lack of clarity from them to us that has resulted in us needing to suspend the CDMO portion of our guidance. Rich, if there's anything else that you want to add to that?

Rich Lindahl -- Chief Financial Officer

Yeah. The only thing I would add is that they are current on their accounts receivable. So, there is not an issue there.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Great. I appreciate the color. Any color on whether you intend -- or whether you believe that you will continue to recognize revenue this year from J&J in the CDMO business, or until you gain clarity?

Rich Lindahl -- Chief Financial Officer

Yeah. I think that --

Bob Kramer -- President and Chief Executive Officer

Go ahead, Rich.

Rich Lindahl -- Chief Financial Officer

Yeah. I was going to say, I mean, I think that's really connected to the suspension of guidance. So, I don't think we can really comment specifically on revenue recognition for CDMO at this point in time.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

OK. Fair enough. Appreciate the color. Thank you.

Operator

And our next question will come line of Jessica Fye from J.P. Morgan. Your line is open.

Daniel Wolle -- J.P. Morgan -- Analyst

Hi. Good afternoon. This is Daniel for Jessica. Thank you for taking our question.

One is, NARCAN did well this quarter, can you give some additional color on the generic share you are seeing in the public interest segment? And following up on that, given the reaffirmation of the guidance, how should we think about the sales cadence for the rest of '22 for the product? Second, understanding you are still in continued dialogue, could you walk us through what would mean if J&J ended the contract? What would be the economics like in that scenario that is, how much would EBS be entitled to? Thank you.

Bob Kramer -- President and Chief Executive Officer

Yeah, Daniel, thanks for joining the call. Thanks for the questions. So on the first one, with respect to NARCAN Nasal Spray, it was another solid quarter of revenue for NARCAN and I think it's really a testament, Daniel, to the NARCAN team over the last several years, and the work that they've put in to educate, to create additional awareness of the importance of having ready access to some form of naloxone, as well as the education around the risks associated with taking prescription opioids, as well as what we've talked about over and over in terms of our commitment to increase the accessibility of the product, and ensure that it's made as affordable as possible to the patients and customers who need it. So I think a lot of the continued strength in the brand and in the business is as a result of the groundwork that's been done for years and years by the team.

In terms of your specific question about the share of the generics in the market, I think it's following pretty much what we thought what happened when we were faced with the generic market forming late last year and earlier this year, which is the generic products, whether it's the competitor products or the authorized generic that's been licensed to Sandoz that's as taking the vast majority of the retail piece of the market. And in the public interest space, we continue to hold ground and NARCAN Nasal Spray is performing as it was expected, which is, it's not holding all of the share, but it's holding its fair share of the market. Hence, the solid numbers that we reported in Q1. In terms of your second question on J&J, again, similar to my response to Brandon, the contract is on file.

I think it's there for you all to read through. And I'm not going to speculate on if this happens, then this is going to be the outcome. Again, our commitment remains to be a solid partner to J&J to meet our commitments to strengthen their supply chain. And we continue to reserve Bayview as a single product site in support of J&J for as long as they need us to do that important work.

So I'll leave it with that.

Daniel Wolle -- J.P. Morgan -- Analyst

Thank you.

Rich Lindahl -- Chief Financial Officer

Bob, I might just add one comment, just to supplement on some of your remarks on the nasal naloxone. I do think it's important for everyone to understand, it's a dynamic marketplace. And we remain focused on the key priorities, as we've articulated, of ensuring access, availability and affordability. And so, we stand by our full year guidance.

But in terms of the quarterly spread, that is something that we'll continue to monitor conditions, but we stand by our annual guidance.

Bob Kramer -- President and Chief Executive Officer

Thanks, Rich.

Operator

Our next question will come from the line of Lisa Springer from Singular Research. You may begin.

Lisa Springer -- Singular Research -- Analyst

Great. Thank you. Regarding the CDMO revenues from the March quarter, could you comment on what the mix was between COVID versus non-COVID revenue?

Bob Kramer -- President and Chief Executive Officer

Yeah, thanks Lisa, for the question, and thanks for joining. As has been our practice, we don't really break out elements of the CDMO between COVID and non-COVID. We have said in prior calls that at least half of the CDMO guidance, the prior guidance that was provided for the year was non-COVID related and non-Bayview related. And I wouldn't -- at this point, we're not going to change our policy of commenting on elements of the CDMO revenue overall.

Lisa Springer -- Singular Research -- Analyst

OK. Thank you.

Operator

[Operator instructions] We have a follow-up from Brandon Folkes from Cantor Fitzgerald. Your line is open.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Hi. Thank you so much, thanks for taking the follow up. Two more from me, if I may, would you be willing to comment on how much of the CDMO backlog as of December 31, that $837 million was J&J? And then, secondly, what are your thoughts on timelines where you may consider reinstating guidance, excluding J&J? Thank you.

Bob Kramer -- President and Chief Executive Officer

Yup. Thanks for the follow-up Brandon. So on the prior backlog number of $837 million, I think what we said, Brandon, is a fairly good chunk of that is J&J related. And what we've said is part of the commercial supply agreement with J&J, which is a five-year agreement.

The first two years of that commercial supply agreement were really valued at around $480 million, roughly $240 million for each of the first two years of that contract. So that will give you some idea of the portion of that $837 million that is J&J related. And your second question, again, remind me.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

What is your thinking? I guess, obviously, you suspended guidance today. But what you're thinking in terms of how long if J&J doesn't provide color that you may think about reinstating guidance for EBS, but just ex-J&J?

Bob Kramer -- President and Chief Executive Officer

Yeah. So, I think it's clearly, Brandon, hinges on our ability to understand with a high degree of confidence and certainty, what role we are going to be needed to play with J&J as part of their COVID-19 vaccine work and how that is to be done in Bayview. So I hope that we'll be able to run that to ground in the next quarter or so. But, I really can't speculate on how long that will take.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Fair enough, and I appreciate all the color. Thank you for taking the follow ups.

Operator

Thank you. And I'm not showing any further question in queue. I'd like to turn the call back over to the speakers for any closing remarks.

Bob Burrows -- Vice President of Investor Relations

OK. Thank you, Victor. And with that, ladies and gentlemen, we now conclude the call. Thank you for your participation.

Please note, an archived version of today's webcast, as well as a PDF version of the slides used during today's call will be available later today and accessible through the Investors landing page on the company website. Thank you all very much again, and we look forward to speaking with all of you in the future. Good night.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Bob Burrows -- Vice President of Investor Relations

Bob Kramer -- President and Chief Executive Officer

Rich Lindahl -- Chief Financial Officer

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Daniel Wolle -- J.P. Morgan -- Analyst

Lisa Springer -- Singular Research -- Analyst

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