Emergent BioSolutions Inc. (NYSE:EBS) Q4 2022 Earnings Call Transcript

Emergent BioSolutions Inc. (NYSE:EBS) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good day and thank you for standing by. Welcome to the Emergent BioSolutions Fourth Quarter and Full Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Bob Burrows, Vice President of Investor Relations. Please go ahead.

Bob Burrows: Thank you, Michelle, and good afternoon, everyone. Thank you for joining us today as we discuss the operational and financial results for fourth quarter 2022, as well as full year 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 three and four. 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 statement 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 income loss, net income loss, adjusted EBITDA and adjusted gross margin, and the reconciliations between our GAAP financial measures and these non-GAAP financial measures.

Turning to slide five. 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 Q4 2022 and FY 2022, Rich will also discuss our forecast for FY 2023, including Q1 2023 revenue 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 replay of the webcast, this call was held and recorded on February 27, 2023. 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.

Bob?

Bob Kramer: Thank you, Bob, and good afternoon, and thank you for joining the call this afternoon. A summary of my remarks begins on page six. As you have read in our press release, our fourth quarter and fiscal year 2022 results are largely in line with the guidance that we provided at the end of last year and then reaffirmed again in our January 9th press release. Our 2022 results and the 2023 guidance we will share with you today should serve as a more realistic baseline from which we will grow at a more — at a rate more consistent with pre-COVID trends and Rich will walk through those numbers with you in a minute. Today I’d like to provide some context with respect to sharpening our focus on our core businesses and maximizing outcomes for all stakeholders, patients, customers, employees, equity investors and debt capital providers.

We last gave our long-term view of the business at our Investor Day in November of 2019. Much has changed since then and I think it’s safe to say that, that view no longer matches this post-pandemic environment. By the end of this year, we will share an updated view informed by the outcomes of several strategic initiatives already underway. First, we have prioritized our foundational products business, which includes our portfolio of medical countermeasures such as treatments and vaccines for anthrax and smallpox, a business that has contributed on average $620 million of revenue in each of the last three years. This focus also includes making life-saving treatments like NARCAN nasal spray more accessible to patients who need them. Let me give you three clear examples of this prioritization in practice.

In January, we announced a new contract to supply RSDL kits to the U.S. Department of Defense, underscoring our continued partnership with the government to address threat they have identified. Also, earlier this month, we announced an agreement to sell our travel health business to Bavarian Nordic, which accomplishes two goals, it will help ensure that Vaxchora and Vivotif remain available to the international travelers and other patients who need them, and upon close, it will generate approximately $270 million in cash and includes the potential for another $110 million in sales based and development based milestones. Also on February 15th, we successfully presented our rationale for making NARCAN available over the counter to an FDA joint advisory committee and I will touch upon that more in a minute.

The second strategic initiative is aimed at strengthening our culture of quality and compliance and enhancing our manufacturing capabilities to support both our internal products, as well as services to our long-term partners. Third, we are making capital structure and expenditure decisions to build enterprise value for the benefit of both stakeholders and creditors. For example, in January, we announced organizational changes and other cost reduction initiatives expected to result in annualized savings of over $60 million when fully implemented. And finally, as Rich will discuss, we are managing our balance sheet to restructure and extend our debt obligations. To be clear, these decisions are not taking lightly and they have real consequences and impact on many of our emerging colleagues.

To those affected by these decisions, I want to again express my gratitude for your commitment to our patients and customers, and to our mission to protect and enhance life. Turning to our core businesses, we see continued strength in the medical countermeasure products. We successfully delivered the second shipment of TEMBEXA under the BARDA procurement contract at the end of 2022 and are planning for an additional contract modification to be exercised in late 2023. As mentioned previously, we announced a $380 million procurement contract to supply RSDL kits for use by all branches of the U.S. Military. We expect deliveries to be consistent with previous years, but this new contract does account for surge capacity should the Department of Defense require additional supplies.

With respect to ACAM2000, our smallpox vaccine, we continue to work with the U.S. government on terms for the next delivery into the strategic national stockpile. We have previously disclosed that these options are not always exercised on a consistent, predictable time line, yet we remain confident that we will reach agreement with the U.S. Government embolden by comments from the Assistant Secretary of Preparedness and Response before the Senate Health Committee last September stating that ACAM2000 remains and I quote, the first line of defense to vaccinate Americans in the event of an ex-metal or intentional release of smallpox, end quote. We are also pleased with the progress toward making NARCAN nasal spray available over the counter. Since announcing the FDA’s priority review of our application last December, we continue working closely with the agency leading up to the expected approval by March 29th of this year.

We are encouraged by the unanimous vote of the FDA Advisory Committee on February 15th in support of over-the-counter NARCAN. And assuming the time line remains the same, we anticipate NARCAN appearing on shelves by the end of the summer. We are engaging with stakeholders, including retail pharmacy chains, the Centers for Medicare and Medicaid Services, and congressional offices to ensure to switch to over-the-counter NARCAN continues to expand access to this potentially life-saving medicine. Notably, we also expect consistent public interest demand for NARCAN regardless of the outcome of the FDA review. We have invested in relationships across this market and have a sophisticated and mature system in place that enables us to deliver product to these customers in a timely and affordable manner.

Turning to CDMO. With respect to this piece of the business, we are currently making investments on our existing network to both deliver our internal products and service external customers, including strengthening operational quality and compliance systems across the enterprise to provide reliable delivery of products and services, as well as bringing online new assets across the manufacturing sites like the high speed fill finish drug product line in Rockville that will differentiate us in this growing market, specifically in the mammalian sector. As we have said before, executing on these strategic investments will take time to complete and we are committed to getting it right. As these investments come to fruition, we will continue to engage potential new customers and evaluate how best to deploy these assets across our network in order to deliver the fastest returns.

Turning now to our financial guidance. Our sharpened focus on core areas of sustainable growth and other related actions we are taking will have an impact on our business performance and Rich will go into more detail our 2023 guidance. But our range of total revenues of $1.1 billion to $1.2 billion and our adjusted EBITDA range of between $75 million and $125 million and our adjusted gross margin performance of between 41% and 44% reflects the impacts of these actions in the short-term. As we look ahead to the rest of 2023, the management team and I are executing against the following priorities; first, improving overall profitability by focusing on our — both our core products and existing services businesses; secondly, successfully closing on the sale of the travel health business that we announced earlier this year; next, completing the transition of AV7909 from development to procurement and close partnership with the U.S. Government; fourth, getting FDA approval for over-the-counter NARCAN and launching that product later this year; next, further delivering and strengthening our quality and compliance culture and systems; and finally, working with our creditors to restructure and extend our debt obligations.

The full benefit of these actions we are taking will not be realized overnight and our actions demonstrate our belief in the importance and necessity of the work Emergent does to help protect against ongoing and future threats to public health, as well as economic and national security. Again, thank you for attending and participating on the call today and I will now turn it over to Rich.

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Rich Lindahl: Thank you, Bob, and good afternoon, everyone. We appreciate you joining the call. I will start on slide nine and begin my remarks by reinforcing the financial implications of sharpening our strategic focus and maximizing stakeholder outcomes as Bob has described for you today. First, we are committed to sustaining revenue growth and improving profitability. We plan to leverage our capabilities in medical countermeasures and NARCAN nasal spray, and develop the potential of our CDMO services business with the combined effect to establish a platform for solid future growth. The position elimination and other actions we announced earlier in the year, in combination with the sale of our travel health business, will better align our cost structure with our revenue trajectory as we continue to strengthen quality and compliance and operationalize the network investments made over the past three years.

Our 2023 guidance reflects our expectations for solid progress in a multiyear journey towards these objectives. Second, we are addressing near-term challenges to our credit profile. Improved profitability, stronger cash flow and disciplined resource allocation are important short-term objectives that are reflected in our recent actions. The sale of the travel health business will provide enhanced liquidity as we work with our lenders to replace the current credit facility and extend the October 2023 maturity. To that end, our lender group has been constructive in these efforts as evidenced by their consent to the travel health sale and a limited waiver of covenant compliance described in our 8-K filing on February 15th related to the announced divestiture.

We are working diligently with the lender group to extend the debt maturity and resolve these concerns as soon as possible. With that, let’s now turn to a review of financial results, which continue to be mixed in the fourth quarter. On the positive side, total revenues were in line with our guidance as the Product segment continued to deliver solid contributions, including NARCAN nasal spray, TEMBEXA and other products. These outcomes partially offset the disappointing circumstances related to ACAM2000, which did not contribute any revenue in the period. Similarly, the Services segment was once again a modest topline contributor as we continue to make steady progress in stabilizing and incrementally improving the performance of the CDMO services business across our core sites at Winnipeg, Camden, Rockville and Bayview.

At the same time, our profitability measures reflect underutilization of our CDMO capacity, as well as ongoing incremental costs to address the Camden warning letter and further strengthen our systems, processes and culture of quality and compliance in our manufacturing plants and across the enterprise. As indicated on slides 10, 11 and 12, financial highlights include; total revenues of $331 million, a decrease over the prior year, driven by lower sales of our key franchise products, substantially reduced CDMO services revenue and lower contract and grant revenues. And as expected, our key profitability measures declined versus the prior year with net loss of $88 million, adjusted net loss of $15 million and adjusted EBITDA of positive $34 million.

Notable revenue elements in the quarter include; anthrax vaccine sales of $51 million lower than the prior year due to timing of deliveries of AV7909 to the U.S. Government’s Strategic National Stockpile. Nasal naloxone product sales of $91 million, lower than the prior year but demonstrating the continuing role of NARCAN in addressing the ongoing opioid epidemic, especially in the U.S. public interest segment. TEMBEXA, our newest acquired medical countermeasure product, generated its first product sales during the quarter, contributing $118 million under the 10-year contract to supply doses of the smallpox therapeutic to the SNS. Other product sales were $46 million, slightly lower year-over-year, but demonstrating the impact of our other MCM products.

And combined CDMO service and lease revenues were $18 million, significantly lower than the prior year as we continue to support existing customers and re-baseline the business following our COVID-19 response. Turning to operating expenses. Cost of product sales in the quarter was $167 million, higher than the prior year driven by TEMBEXA and offset by lower sales of anthrax vaccines, ACAM2000 and nasal naloxone products. Note that cost of product sales includes $51 million of inventory step-up related to the TEMBEXA acquisition that has been adjusted out of our non-GAAP metrics. Cost of CDMO was $52 million, significantly lower than the prior year due to reduced production across the CDMO network, partially offset by higher costs at the Camden site, resulting from additional investments in quality enhancement and improvement.

R&D expense of $58 million lower than the prior year, reflecting a non-cash write-off in 2021 of a contract asset balance resulting from the termination of the CIADM contract with the U.S. Government. This reduction was partially offset by higher costs associated with the CHIKV Phase III trials, an SG&A spend of $94 million, in line with the prior year. With that, let’s move to slide 13 and review segment performance during the quarter. In the Products segment, revenues were $306 million, a decrease from the prior year as strong performance from the anthrax franchise, NARCAN and TEMBEXA were offset by lower ACAM2000 sales, and adjusted gross margin was $190 million or 62%, both decreases over the prior year, reflecting lower sales volume and a less favorable product mix.

As for the Services segment, revenues were $18 million, a significant decrease from the prior year and adjusted gross margin was negative $34 million, a decrease versus the prior year, driven primarily by lower lease revenues as compared to 2021. Next, I will share key results related to the full year period, which are shown on slides 14 and 15. Total revenues were $1.1 billion, lower than the prior year, but in line with our previous guidance. While revenues in the CDMO business were substantially lower than the prior year period due to all the same issues that impacted fourth quarter performance, anthrax vaccines came in higher than prior year, TEMBEXA contributed significantly and other products were slightly higher, offset by slightly lower nasal naloxone sales and significantly reduced ACAM2000 revenues.

As to profitability, we reported adjusted net loss of $112 million and adjusted EBITDA of $26 million, both substantially lower than the prior year. Lastly, gross margin of 36% and adjusted gross margin of 41% were both lower year-over-year, reflecting the impact of less favorable product mix combined with negative services gross margins. On slide 16, we present the segment performance for the full year periods. In the Products segment, revenues were $966 million, slightly lower from the prior year and adjusted gross margin was $596 million or 62%, both slight decreases over the prior year, reflecting lower sales volume and less favorable product mix. As for the Services segment, revenues were $113 million, a significant decrease from the prior year, primarily due to reduced production at Camden and the cessation of operations at Bayview as we continue to reposition the site to initially support select internal products.

And adjusted gross margin was negative $156 million, a substantial decrease versus the prior year due principally to declining revenues related to the COVID-19 response, coupled with incremental costs associated with the Camden facility remediation efforts, and investments in quality and compliance across our manufacturing network. Moving on to slide 17, I will touch on select balance sheet and cash flow highlights. We ended the fourth quarter with $643 million in cash as we took down the remaining approximately $360 million of available revolver capacity to further strengthen our liquidity position at year-end. As of 12/31/22, our net debt position was $771 million. Turning to cash flows, for the year, our operating cash flow was negative, primarily influenced by the ACAM2000 order that did not materialize in 2022.

In addition, capital expenditures were $116 million, over $100 million lower than the prior year. Please turn to slides 18 and 19 for a review of our 2023 forecast and associated assumptions. You will note that we are now guiding to sales by threat area instead of by individual product and therefore have introduced two new groupings. Anthrax Medical Countermeasures or MCM, which comprises AV7909, BioThrax, Anthrasil and raxibacumab. And smallpox medical countermeasures, which includes ACAM2000, TEMBEXA and VIGIV. In the financial forecast section of our press release, for comparison, you will see the 2022 actual revenue for each grouping next to the 2023 forecast. For the full year 2023, we are guiding to the following; total revenues of $1.1 billion to $1.2 billion; Anthrax MCM sales of $260 million to $280 million; NARCAN nasal spray sales of $290 million to $310 million, taking into account our assumptions regarding impact of over-the-counter NARCAN across all customer channels; smallpox MCM sales of $235 million to $255 million; other product sales of $165 million to $185 million; CDMO services revenues of $115 million to $135 million; adjusted net loss of $30 million to $80 million; adjusted EBITDA of $75 million to $125 million and adjusted gross margin of 41% to 44%.

This full year 2023 forecast reflects the following key considerations. It excludes the potential impact of the sale of our travel health business. We will update our guidance accordingly after the transaction closes, which is anticipated in the second quarter. It assumes the over-the-counter launch of NARCAN by the end of the summer with continued strong demand in the U.S. public interest channel, as well as continuing demand in Canada. Continued procurement and delivery of anthrax, smallpox and other medical countermeasure products to the U.S. and allied governments, and continued re-baselining of the CDMO services business overall and the impact of reduced production output from the Camden facility. Note that we expect revenues and profits in 2023 will be more heavily weighted towards the second half of the year, and as a result, we have provided a revenue outlook for the first quarter of $130 million to $150 million.

To conclude, please turn to slide 20 for some summary comments. Our results in the fourth quarter reflect a mix of strong performance in certain core areas of our products business, offset by ongoing challenges in other aspects of our products business and our services business. We are committed to sustaining revenue growth and improving profitability and we are addressing near-term challenges to our credit profile. Finally, as always, we remain confident in the impact we are having on patients and customers focused on health security and pandemic preparedness. That completes my prepared remarks and I will now turn the call over to the, Operator, so that we can start the question-and-answer session. Operator?

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Q&A Session

Operator: Thank you. And our first question comes from the line of Jessica Fye with JPMorgan.

Nick Lenard: Hey. This is Nick on for Jess. Thanks for taking our question. Two from us. First one is, for your 2023 NARCAN guidance, can you just help quantify how much of that $290 million to $310 million revenue range is associated with potential OTC use?

Bob Kramer: Yeah. Nick, I think you mentioned 2022 guidance. I think you probably mentioned

Nick Lenard: Yeah.

Bob Kramer: or that 2023.

Nick Lenard: 2023, sorry, about that.

Bob Kramer: Yeah. No problem. So as Rich indicated in his script and prepared remarks, we are assuming that FDA grants approval for OTC treatment of NARCAN and they will be launching this product into the OTC market in the summer. So it’s really difficult to break out how much of the revenue guidance of $290 million to $310 million is attributable to OTC market versus continuing in the prescription market. So, again, we can tell you our assumptions, and again, it’s kind of based on the timing of when that product will likely be launched.

Rich Lindahl: The only thing I might add there, Bob, is I do think it’s fair to say that we do expect the public interest market to remain the majority of sales and that’s factored into the guidance.

Bob Kramer: Yeah. That’s right, Rich. Thanks.

Nick Lenard: Okay. Thank you. And just a quick follow-up. For the anthrax and smallpox guide, it includes potential contributions, but the same potential quantifier is not there for the other products such as NARCAN or CDMO. Kind of how — have you heard any — have you heard commitments from the U.S. Government on taking the 2023 options there for ACAM2000 or anthrax?

Bob Kramer: Yeah. So let’s start with the smallpox threat category and specifically on ACAM. I think as I remarked in my comments, Nick, we continue to be in active dialogue with HHS around the next procurement of ACAM2000. So we have actually factored that into the guidance that we have given around the smallpox threat category. And as Rich indicated, we have pivoted to more of a threat-based guidance format as opposed to an individual product. As it relates to anthrax vaccines, clearly, we are in the kind of nearing the end of the transition in terms of almost a five and a half-year development/procurement relationship with the U.S. Government, BARDA, in particular. We have got the PDUFA date later this year for AV7909. We have assumed continued procurement of AV7909 into the stockpile as we kind of position that product from a development stage product to a licensed state later of this year, early next year.

So those are just some of the assumptions that we put into our guidance for those two threat categories.

Nick Lenard: Great. Thanks so much.

Bob Kramer: Sure.

Operator: Thank you. And one moment for our next question. Our next question comes from the line of Brandon Folkes with Cantor. Your line is open. Please go ahead.

Brandon Folkes: Hi. Thanks for taking my questions. I appreciate all the guidance and congrats on all the work done this year. Maybe just following on from that first question. Just high level, can you just elaborate maybe on how you see the NARCAN OTC market evolving? Is this something that you think takes time, do you think it could move quite quickly? And then how would you contemplate the 2023 gross margin guidance for the company going forward? Are we at sort of steady state from here, I know you haven’t announced pricing it — on NARCAN OTC, but how could the NARCAN OTC opportunity affect that gross margin going forward?