EBS
#Thank you, John.
Good afternoon, everyone.
Thank you for joining us today as we discuss our financial results for the third quarter and first nine months of 2015, our forecast for full year 2015, and our operational goals for the year.
As is customary, our call today is open to all participants and, in addition, the call is being recorded and is copyrighted by Emergent BioSolutions.
Participating on the call with prepared comments will be <UNK> <UNK>, President and Chief Executive Officer, and <UNK> <UNK>, Executive Vice President and Chief Financial Officer.
There will be a Q&A session at the conclusion of our prepared comments.
Other members of senior management will be available to participate.
Before we begin, I will remind everyone that during today's call, either in our prepared comments or the Q&A session, management may make projections and other forward-looking statement related to our business, future events, our prospects or 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, so please review our 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.
During our prepared comments or the Q&A session 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, EBITDA and adjusted EBITDA, and the reconciliations between our gap financial measures and these non-GAAP financial measures.
For the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on November 5, 2015.
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 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 the investor's home page of our website.
And with that introduction, I would now like to turn the call over to <UNK> <UNK>, Emergent BioSolutions President and CEO.
<UNK>.
Thank you, <UNK>.
Good afternoon, everyone, and thank you for joining our call.
During the call today I'll give an overview of the third quarter financial results, provide an update on our previously announced BioSciences business spinoff, and highlight some of our recent business achievements.
<UNK> <UNK>, our chief financial officer, will finish with a more detailed discussion of our financial performance.
Let me start with our financial performance for the quarter.
As you can see by our press release earlier today, we reported a very strong quarter with total revenues of $165 million, a 20% increase year-over-year.
Our GAAP net income for the quarter was $37 million, and adjusted net income was $40 million.
That represents a year-over-year increase of 69% and 59%, respectively.
As we announced in our press release today, we are increasing the lower end of our 2015 revenue guidance and reaffirming our guidance for net income.
Now let me highlight a few of our key business and operational developments.
During our August earnings call, we announced our plan to pursue a tax-free spinoff of our BioSciences business into a separate, standalone, publicly-traded company.
The new company will be called Aptevo Therapeutics.
As we stated earlier in the year, the spinoff will enable each company to pursue its own unique and focused growth strategies and plans.
Emergent will focus on biodefense, emerging infectious diseases and other public health threats.
Aptevo will focus on the highly attractive immune-oncology field.
We continue to make progress in this transaction and plan to announce the Aptevo board of directors and senior management team in early 2016.
We also anticipate filing the Form 10 with the SEC late in the first quarter of next year with a target to complete the spinoff by midyear.
I will now discuss our progress in our 2015 operational goals.
We have secured two product approvals and launched two new products in 2015.
Our first product approval and launch this year was IXINITY, a new treatment for hemophilia B in adults and teenagers.
The launch has gone as planned since we announced approval in April and started shipping product in June.
Both patients and healthcare providers have responded very positively to having this new treatment option available to them, and we expect revenues to continue to increase as IXINITY gains market share.
In August we announced the further expansion of our medical countermeasures portfolio with the launch of Emergard, a military grade autoinjector.
Emergard is designed for intramuscular self-injection of antidotes and other emergency response medical treatments that can address exposure to certain chemical agents and other similar emerging health threats.
We have commenced sales internationally to multiple allied governments and we are seeing strong demand.
Further, we see significant demand for Emergard in the US government market and have established our plans to address this unmet medical need.
Another goal for this year is to finalize the sBLA submission for Building 55, our large-scale BioThrax manufacturing facility.
First and critically important, the pivotal rabbit final study report has now been finalized with the primary endpoints of lot consistency and noninferiority all confirmed to have been met.
Further, in our recent meeting with the FDA to review sections of our submission, the FDA acknowledged that our facility is ready for inspection.
The FDA has also requested that we perform a reanalysis on one of the more than 30 assays used for comparability before filing our submission.
We are pursuing two alternative paths in parallel either of which could address this.
One path could be finished quickly; the other should be completed in the first half of 2016.
Under either scenario, we anticipate no adverse impact to our 2016 financial performance, as we expect to manufacture BioThrax in Building 55 on an ongoing basis following our expected German approval of the facility in the first half of next year.
That will enable us to deliver doses to the CDC under the anticipated multi-year follow-on contract that would commence in Q4 of next year.
On that point, we have had an initial meeting with the CDC to discuss the follow-on multi-year procurement contract to address the stated requirement of securing 75 million doses of an anthrax vaccine for the Strategic National Stockpile.
We are now targeting a follow-up meeting in early 2016 to begin negotiating the next contract.
This is right in line with where we expected to be at this point.
As many of you know, 2015 marks the end of our current multiyear growth plan that we announced in 2012.
In summary, we are on track to meet or exceed our goals for revenue, net income growth, and the number of products in our portfolio.
We are particularly pleased with our net income growth.
At the midpoint of our 2015 forecast, our net income CAGR over the three-year period exceeds 30%, which is more than double our target growth rate.
We are finalizing our next growth plan, which will be a five-year plan taking us to 2020.
This plan will be presented in January at the JPMorgan Healthcare Conference in San Francisco in concert with the announcement of our preliminary 2015 financial results and the forecast for 2016.
That concludes my prepared comments and I'll now turn the call over to <UNK> <UNK> for details on our financial performance.
<UNK>.
Thank you, <UNK>.
Good afternoon, everyone, and thank you for joining our call.
I would first like to make some general comments about our financial results for the third quarter of 2015 compared to last year, and our performance year-to-date.
I will then comment on our balance sheet, focusing on our cash position, before finishing up with details related to our revised 2015 forecast.
From an operational perspective, we had an exceptional quarter.
And, in fact, our financial performance during the period was the strongest in the Company's history.
For the third quarter, total revenues were $164.9 million, or $27 million above Q3 of last year, a 20% improvement.
The increase in revenue is primarily due to BioThrax sales during the period.
Gross margin on product and CMO revenue for the quarter was 72%, which is above our normal range of 60% to 70%, and again reflecting the significant product contribution of BioThrax revenues during the period.
Gross R&D spend for the quarter was $41.9 million, a $2.3 million decline versus prior year, taking into account the offsetting effect of our contracts, grants and collaboration revenues.
Our net R&D spend for the quarter was $12.2 million.
This is a significant increase versus prior year and it is the result of the recognition in Q3 of 2014 of $15.3 million in the upfront fee that we received from MorphoSys related to the ES414 collaboration agreement.
SG&A for the quarter was higher year-over-year by $1.3 million due primarily to IXINITY launch costs and professional services to support our strategic growth initiatives including the proposed spinoff of our BioSciences business.
For the quarter our GAAP net income was $36.9 million, or $0.79 per diluted share versus $21.8 million, or $0.49 per diluted share in the same period of last year.
On an adjusted basis for the quarter we earned $39.8 million, or $0.83 per diluted share, versus $25 million, or $0.54 per diluted share, in 2014.
EBITDA for the third quarter was $61.8 million, or $1.29 per diluted share, and adjusted EBITDA for the period was $63.2 million, or $1.32 per diluted share, again reflecting the significant contribution of BioSciences revenues during the periods.
Turning to the year-to-date performance, the nine-month financials reflect the continued fundamental strength of the core business aided by the Company's efforts to manage net R&D costs and control SG&A expenses.
For the nine-month period of 2015, our GAAP net income was $29.5 million, or $0.69 per diluted share, and after adjustments our year-to-date adjusted net income was $38 million, or $0.81 per diluted share.
EBITDA year-to-date was $71.5 million, or $1.52 per diluted share, and adjusted EBITDA for the period was $75.6 million, or $1.61 per diluted share.
Across-the-board, our bottom line performance year-to-date is substantially improved year-over-year.
Turning to our balance sheet, it continues to reflect a strong capital position highlighted by our cash balance at quarter-end of $309 million along with an accounts receivable balance of $57 million.
As we have communicated in the past, our priorities related to capital deployment will continue to be focused on acquisitions that are synergistic with our core business, CapEx in support of our core business, and, third, consideration of stock buybacks and dividends.
Finally, as a result of the financial performance year-to-date, we are revising our full year revenue forecast by raising the lower end of the range by $10 million so that it now reflects a range of between $520 million and $540 million of revenue.
As for our full year earnings forecast, we are reaffirming our previous forecast of $50 million to $60 million of net income on a GAAP basis, and $60 million to $70 million of net income on an adjusted basis.
That concludes my prepared remarks and I'll now turn the call over to the operator for the Q&A session of the call.
Operator.
Thanks for joining the call, <UNK>, and thanks for the question.
No, they are mutually exclusive.
Both would allow us to pursue licensure and submit the application, so they are independent and both would be acceptable.
Sure.
So, the first question is a very good question in terms of the ability to [spin and acquire] at the same time, and it really does depend on what particular acquisition might be the subject of the deal.
Certainly, a product acquisition is different from a full company acquisition.
So, depending on what type of acquisition we're looking at, our capabilities to integrate will differ.
I think the other thing I would point out is it does take time between negotiating, signing and closing a deal.
So, I would expect that the spinout would not impact our ability to consummate one or more acquisition transactions, whether it's a product, a portfolio of products or a company.
Around the allocation of the R&D, <UNK>, do you want to handle that.
Sure.
<UNK>, thanks for the question.
Again, I think, again, it's safe to say that historically our approach to biodefense R&D, as we've talked about a number of times on the calls, is that we historically have wanted to keep that pretty much expense-neutral.
So, we are willing to spend money in R&D as long as it is funded by some type of government contract.
So, when you look at historically our net R&D, the net is really heavily weighted toward the biosciences portfolio.
So, as we talked about a bit on the call on August 6, we kind of outlined what we thought would be or could be achieved in terms of the split in overall impact on EBITDA in that $40 million to $50 million range.
So, I think with what we've reported in that kind of guidance you can get a good feel for what to expect going forward.
That's a great question.
I don't have an expectation either way.
There are some notice requirements that they must follow before the contract is awarded.
My experience is we can have some discussions with them ahead of any kind of notice coming out, but how they actually manage this particular negotiation, obviously not in our control.
If it's per history, I think we can have discussions with them and extensive discussions ahead of a formal notice being issued.
Okay, thanks for joining the call, <UNK>.
Good to hear your voice.
So, in terms of the contract, there is no standard.
It really is around reaching final agreement on all the key terms.
They certainly know what the current contract provides for in terms of duration and deliveries, and they clearly continue to have an expectation of continued supply.
So, I can't give you a definitive date.
We will know a lot more as we engage in the negotiations with the CDC.
Perhaps we will be in a better position to give guidance early next year in terms of likely timeline.
But I think that's probably the best I could say about that.
Ex-US, yes, I think the plan, as I outlined, is we're looking for German approval sometime in the first half of next year.
That will enable us to start triggering the manufacturing operations at Building 55, not only for the ex-US market, but in anticipation of delivering to the CDC.
And that production would be on an ongoing basis.
And the demand, we do have orders.
They are limited, and now is the time to start looking at the international market and determining how best to address it.
This is only a German approval, as we've described in the past, and we would want to now expand that approval across Europe through the mutual recognition process.
And we have targeted countries that we've identified in terms of prioritization for that registration.
So, it's the beginning and we look forward to expanding that market as time goes on.
And the last on the assay.
So, yes, I think the 30 assays were all well known to the FDA, they understood the parameters.
So, this is not something out of the blue in terms of what kind of assay is this and what does it mean.
I would say pretty much ordinary course, normal course, answering typical questions that the FDA would like to hear responses to.
So, on the M&A, we have a number of opportunities that we are evaluating there in various stages.
It would be premature for me to sort of gun-jump and give an expectation.
We are coming up on year-end.
It is a key focus for us, as you know, as we've said over the years to our growth strategy.
You know, you've known us long enough, we're very disciplined about M&A and these processes take some time.
So, I'm not all disquieted by where we are in the M&A process and we look forward to continuing to build the business through organic growth but as well through M&A.
And on the Aptevo spin, we really do believe it's a tremendous value creator for our shareholders.
It creates real opportunity to realize the value associated with the ADAPTIR technology.
It is intended to be tax-free, so no consequences to Emergent from a tax perspective.
Shareholders will receive the shares tax-free.
If they see the value that we anticipate could be realized, they'll hold it.
If they would prefer to see the cash benefit of the distribution, then they can realize that through a sale of the shares.
So, I think it provides tremendous flexibility for the shareholders and tremendous value creation for the shareholders as well as for the Company moving forward.
Yes.
The plan has not changed in terms of funding of the spinoff.
I will finalize those numbers as we get closer to filing with the SEC.
And the R&D question, <UNK>, I guess that's yours.
So, the steep jump, <UNK>, in R&D on a net basis, was that the question.
Yes.
So, the increase is really reflective of, <UNK>, in the third quarter of last year we had about $15.3 million associated with the MorphoSys collaboration agreement recognized in the quarter.
So, when you look at netting that out in Q3, it's kind of an artificially low number in the third quarter of last year.
Thanks, <UNK>, for joining the call.
We have in fact talked to the FDA about trying to coordinate that.
They understand from our perspective that could be preferable.
Preliminary indications were that they thought that might be workable as well, but they haven.
t committed to any timeline either for our inspection or for the inspection of Building 55.
So, we're sort of in a wait-and-see mode to see what ultimately happens.
And in answer to your second question, no, we haven't received our inspection as of yet.
It's really hard to second-guess what the FDA is ultimately going to do.
So, I don't want to give you a bum steer on that.
It really is entirely in their court.
We have expressed our desire and view on efficiency for our operation and for their inspectors.
They seem to acknowledge there is some benefit in that, but they are, as you know, free to do whatever they want to do and it's really out of our control.
That's a great question.
I think there has been a renewed awareness and interest and desire of the federal government to not only continue to protect the nation in the areas where they currently are focused in, but they are also expanding their focus beyond what has traditionally been the threat areas of concern ---+ small box and anthrax and botulinum and the like.
So, funding is going up.
The scope of responsibilities are going up, and what we expect to see is shoring up and expanding the capabilities of the government to protect the nation.
So, that is a long-winded way of saying we don't see any change in the appetite or the focus on addressing the threats to the country and doing that through the kinds of countermeasures that we manufacture and supply.
Thanks, John.
This is <UNK> <UNK>.
Before we conclude, my colleague, <UNK> <UNK>, wants to address the one question earlier.
So, sorry, <UNK>, you got cut off there before I could respond to your question about the 3Q R&D expense compared to Q1 and Q2.
I think if you look at how the R&D expense has been trending, not necessarily on a quarter-by-quarter basis, but more broadly on a trailing 12-month basis, you will continue to see that come down.
There are ins and outs quarter-over-quarter.
For example, earlier this year we had a $5 million payment associated with the initiation of the Phase 1 of ES414 that tends to knock down that earlier quarter number.
So, I think, again we can look at it quarter-by-quarter, but it's going to be a little bit choppy.
But the most important thing is just look at how the trailing 12 months are trending and I think you'll see a good trend there.
Great.
Thanks, <UNK>.
With that, ladies and gentlemen, that concludes the call.
Thank you for your participation.
Please note an archived version of the call and the webcast of today's call, specifically, will be available later today and accessible through the Company website.
Thank you all once again for participating and we look forward to speaking to all of you in the future.
Goodbye.
