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Text: As is customary, today's call is open to all participants and the call is being recorded and is copyrighted by Emergent BioSolutions.
Turning to Slides 3 and 4.
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.
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 2Q 2021 and as well as the forecast for full year 2021, including guidance on 3Q 2021 total revenue.
This will be followed by a Q&A session where additional members of the executive leadership team are present and available as needed.
Since then, Emergent may have made announcements related to topics discussed during today's call.
Today, I'd like to spend some time talking about the progress we've made at our Bayview and then talk more broadly about the health of the overall business and our continuing dedication and focus on public health threats.
Our second quarter performance reinforces the strength of our strategy and we are maintaining our overall guidance for 2021.
Rich will go over in more detail those numbers in a few minutes.
My comments are summarized across Slide 6 and 7 in the deck accompanying the call.
Turning first to our efforts to produce COVID 19 vaccines.
There's been a great deal of attention paid to Emergent's history as a public health risk company with a leadership role in working with the U.S. government on biodefense.
When the pandemic struck, America turned to Emergent because of our history and unique capabilities, while millions of COVID-19 vaccine doses that we manufactured are currently protecting people around the world.
We faced serious challenges along the way.
We didn't always live up to expectations, including those that we set for ourselves.
However, we have learned some important lessons which are allowing us to improve our operations and at the same time strengthening America's public health response for the future.
The FDA inspection of Bayview earlier this year identified a number of areas for improvement.
Along with Johnson & Johnson, we established a comprehensive, robust quality improvement plan, which includes facility improvements, capability building and deployment of enhanced tools and controls.
We reviewed this plan with the agency and immediately began its implementation.
We also made additional investments during the quarter in quality, compliance and operations.
All of this work is in order to satisfy both ourselves as well as J&J and demonstrate to the FDA that we've achieved a level of sustainable compliance that will allow us to resume production.
We've made significant progress toward this goal and as we announced earlier today, we received the green light from the FDA to resume production at the site, which will continue to be the subject of routine inspections by the FDA.
They know at the end of the day, that's what matters most.
I also want to recognize our strategic partners and particularly the strong collaboration with our J&J colleagues.
We continue to work closely with them and the FDA as previously manufactured batches of COVID-19 drug substance are released and added to J&J's emergency use authorization, helping protect tens of millions of lives around the globe.
We're awfully proud of both of these accomplishments.
The hard work and investments that we've made in Bayview over the last decade, in particular the last few months are starting to pay off.
In addition, we continue to work collaboratively with AstraZeneca to complete all documents related to their drug substance.
So they and the U.S. government can make decisions regarding the disposition of this material.
Moving more broadly to our overall business.
We're in year two of our 2020 through 2024 strategic plan and continue to make meaningful progress against that plan.
So let's start with our core medical countermeasure business.
Our work supporting the U.S. government's priorities to protect the American public against smallpox, anthrax and other category aid biologic agents remained stable.
With respect to our smallpox franchise, in the second quarter, the U.S. government has exercised and funded the next term extension for ACAM2000 under our tenure contract.
This option exercise is valued at approximately $182 million and requires all doses to be delivered by the end of this calendar year.
This quarter, we also secured the next option exercise for our smallpox therapeutic VIGIV product valued at approximately $56 million.
For our next generation anthrax vaccine candidate, AV7909, we continue to engage with the government regarding exercising the final option under the existing contract to procure additional doses for inclusion into the strategic national stockpile.
The current procurement contract for AV7909 was put in place in 2016 and facilitated procurement by the SNS starting in 2019, while we seek full approval by the FDA.
We continue to make good progress toward our target of submitting our AV7909 BLA later this year.
In addition, we recently secured a procurement contract to supply doses of Anthrasil, our polyclonal antibiotic therapeutic for treating inhalational anthrax to the Canadian government as part of their anthrax preparedness strategy.
On the R&D front, in addition to our anticipated BLA filing for AV7909, we advanced the number of our medical countermeasure programs, and I'd like to highlight two of them.
Specifically, we continue work on our COVID-HIG candidate, which is being developed in collaboration with NIAID, BARDA and the U.S. Department of Defense as an early treatment option to address at risk COVID-19 populations.
COVID-HIG leverages our polyclonal hyperimmune platform and continues to show neutralizing activity against variants of SARS-CoV-2 virus in, in vitro models.
We anticipate in the near-term, the initiation of a Phase 3 study led by NIAID assessing the effect of hyperimmunes on patient populations that have not yet progressed to severe disease to determine the progression can be impacted.
In addition, we recently obtained approval for our Trobigard auto-injector from the Belgian Regulatory Authority.
Several years ago, through interactions with various governments around the world, we identified their need to have auto-injectors available in case of nerve agent attacks.
And as a result we invested in building that capability.
Achieving this first approval from our auto-injector platform is a key milestone in the maturity of our auto-injector platform.
Moving next to our contract development and manufacturing business, or CDMO.
When we first laid out in our last strategic plan, the goal was to leverage further our drug manufacturing network of nine sites to provide development services, drug substance and drug product services, to a diverse customer base.
We obviously have seen significant growth related to the pandemic, which was unanticipated at the time, but beyond COVID-19, we continue to see strong interest from current and potential clients and are winning new clients and projects in all three service pillars, those being development services, drug substance and drug product and drug packaging.
Interest is coming from small, mid and large companies, as well as governments and other organizations.
Rich will provide detailed information on new business, the backlog and our rolling opportunity funnel.
But I like to emphasize that even though we expect variation quarter-to-quarter as we grow the business, the growth over the 2019 baseline in our strategic plan is considerable.
Overall, the key takeaways that our CDMO business unit remains strong as the industry's demand for biologics manufacturing services continues to grow, while we pursue becoming an increasingly important service provider in support of pharma and biotech innovation.
Finally, a third pillar of our 2024 strategy was to continue our focus on public health threats, while diversifying our customer base beyond the U.S. government.
And I'm pleased to report the continued progress on that front as well.
As you know, the opioid crisis has been a public health threat, and it's claimed far too many lives and made even worse by the pandemic.
As announced earlier this week, we're very proud to be working with several nonprofits to help raise awareness of the risk of accidental opioid overdose through a month long public awareness campaign called Reverse the Silence.
In addition, as we have previously discussed, the U.S. circuit court of appeals has scheduled the oral argument for NARCAN U.S. appeal for August 2 on the ongoing Patent Infringement Litigation.
Based on this timing, we believe a decision is likely by the end of the year.
Regardless of the outcome of the appellate court's ruling, we continue to focus on the public health threat and our role as a provider of solutions to address the opioid epidemic.
Continuing with the diversification theme, while the travel space-travel health space has been understandably challenging, we continue to make good progress with building our development stage vaccine candidates.
We still expect to initiate a Phase 3 trial for Chikungunya virus VLP vaccine in 2021.
In addition, and then supported this important development program, we recently announced positive two-year persistence data from a Phase 2 clinical study that indicated that our vaccine candidate appears to generate a rapid and durable immune response.
We intend to publish the results of this study in the near term.
We also plan to initiate a Phase 1 study in late 2021 and early 2022, related to a number of vaccine candidates in the pipeline, including our Shigella, Lassa and universal flu vaccine candidates.
As you can see, we expect that the remainder of 2021 will be busy for our product development teams, including clinical regulatory and quality as our pipeline continues to mature.
That wraps up my comments regarding the business overall.
On the personnel front, we recently issued an 8-K announcing the reorganization of my direct reports, Rich Lindahl, our Chief Financial Officer; Karen Smith, our Chief Medical Officer and Katy Strei, our Chief Human Resources Officer continued to report directly to me.
In addition, rounding out my direct reports, Adam Havey's role has been expanded to include overall responsibility for all of our business units, as well as global manufacturing operations.
Mary Oates role has been expanded to include a focus on operational excellence in addition to current responsibility for global quality.
And finally, Nina DeLorenzo role has been expanded to include the management of the Global Communications and Public Affairs function, as well as the Global Government Affairs team.
As part of this reorganization, the role of Executive Vice President for Manufacturing and Technical Operations that has been held by Sean Kirk has been eliminated and consequently Sean is leaving the company.
We have a deep appreciation for Sean's 18 years of service at Emergent and wish him the very best for him and his family going forward.
We believe this organization and reorganization of our management team allows us to best position for the long-term success of the strategic plan.
To conclude, as you'll hear from Rich, our second quarter results demonstrate that Emergent's business remains durable, resilient, employees for growth.
We're on track with our 2024 strategy and Emergent is well positioned to play a meaningful role in strengthening our national public health threat preparedness.
And I continued to be proud of each member of the Emergent team who come into work every day, focused on a mission to protect and enhance life.
I'll start on Slide 9.
Despite recent challenges, we have continued to execute across all aspects of the business, vaccines, therapeutics, devices, and CDMO.
Our financial condition remained strong with the liquidity and financial flexibility to fund our operations and pursue opportunistic investments.
And we remain steadfast in our unwavering commitment to supporting global preparedness and response to public health threats.
Today's announcement that we are clear to resume manufacturing at Bayview is a Testament, not only to that commitment, but also to the strong teamwork and organizational discipline that had been hallmarks of this company throughout it's nearly 23-year history.
A quick run through of key highlights include, total revenues of $398 million, an increase of $3 million versus the prior year and in line with our guidance and adjusted EBITDA $50 million and adjusted net income of $18 million both decreases versus the prior year due to a variety of one time and other expenses, which we will discuss in a moment.
Breaking down quarterly revenue into its components, anthrax vaccine sales were $52 million lower than the prior year due to timing of deliveries.
NARCAN nasal spray sales were $106 million, an increase over the prior year, driven by continued strong demand for this critical drug device combination product for opioid overdose reversal across both the retail and public interest channels in the U.S., as well as increased Canadian sales.
Other products sales were $24 million consistent with the prior year and CDMO services revenue came in at $191 million, an increase over the prior year and reflecting contributions from all three service pillars, primarily for our government and innovator partners response to the COVID-19 pandemic.
As Bob noted in his remarks, earlier in July, the U.S. government exercised the next ACAM2000 contract option that is valued at $182 million.
Accordingly, we now expect sales of ACAM2000 to resume in the third quarter and to complete all related deliveries by the end of 2021.
Looking beyond revenue, the quarterly results also include cost of goods sold of $228 million, a $98 million increase over the prior year.
And reflecting the increased costs associated with a substantial increase in CDMO services revenues, as well as $42 million of inventory write-offs, which I will return to in a moment.
Gross R&D expense of $49 million consistent with the prior year, reflecting our continued commitment to investing in our pipeline of development programs across our three product focused business units.
Net R&D expense of $24 million or 6% of adjusted revenue consistent with the prior year, SG&A spend of $91 million or 23% of total revenues, an increase over the primary prior year, and primarily reflecting the impact of higher costs to support and defend our corporate reputation and combined product and CDMO gross margin of $144 million or 39% of adjusted revenue, a decline of $97 million and reflecting the impact of $42 million of inventory write-offs due to raw materials and in-process batches at the Bayview facility that the company plans to discard as they were deemed unusable.
$43 million associated with the product and service revenue mix, which was weighted more heavily to lower margin products and services and $12 million associated with costs incurred to remediate and strengthen manufacturing processes at our Bayview facility, many of which are temporary in nature.
Turning to Slide 11, we will now review our key CDMO metrics.
In the second quarter, we continue to obtain incremental contract awards resulting in secured new business of $53 million.
However, this outcome was significantly offset by $108 million of negative contract modifications.
As of June 30, the backlog is $1.1 billion.
And lastly, as of June 30, the opportunity funnel was $672 million down from $807 million at March 31.
While the CDMO teams ongoing business prospecting and marketing initiatives continue to generate new opportunities.
For now, we are removing potential opportunities at Bayview as all manufacturing activities at that facility are currently prioritized to support the J&J COVID 19 vaccine.
As a reminder, the opportunity the funnel does not include any value associated with an extension of the commercial supply agreement with Johnson and Johnson into years three to five of the existing contract.
On Slide 12, you can see the sequential trends in these metrics over the last four reporting periods.
We remain committed to serving our existing customers and continue to execute on our marketing initiatives with pharma/biotech innovators across all three of our service pillars.
We look forward to making further progress in this important part of our business as we move forward from here.
Moving onto Slide 13 for a review of our balance sheet and cash flow, we ended the second quarter in a strong liquidity position with $448 million in cash and $262 million of accounts receivable resulting in aggregate current liquid assets of nearly $710 million.
This compares with approximately $732 million of aggregate current liquid assets as of the end of the first quarter.
We also still have undrawn revolver capacity of just under $600 million.
Finally, at the end of the second quarter, our net debt position was $416 million.
And our ratio of net debt to trailing 12 month adjusted EBITDA remained below one times.
These considerations include No Raxibacumab revenue until 2022.
The Naloxone market remains competitive with at least one new entrant this year, but no generic entrance prior to the resolution of our patent litigation case and the successful manufacturing of J&J's COVID-19 vaccine at Bayview.
On that last point, the FDA's green light to restart production at the site, which we confirmed earlier today is a key milestone toward that end.
One consideration that has been revised is that our expectation for gross margin for the full year is now approximately 61% to 63% on a GAAP basis, a reduction of 200 basis points from the prior range of 63% to 65%.
This change reflects the impact of the Q2 2021 performance as well as expectations for the remainder of the year.
We anticipate that this lower margin will be offset by cost savings related to R&D and SG&A.
Lastly, we are providing third quarter total revenue guidance of $400 million to $500 million.
In the second quarter 2021, we continue to deliver solid financial results that keep us on track with our full year outlook.
On a year-to-date basis, our revenues of $741 million represent approximately 41% of our full year 2021 forecasted total revenues at the midpoint, a similar waiting between first half and second half total revenues as has occurred in each of the last four years.
We remain confident in the strength of the business, which continues to be robust and resilient with the capabilities, capacity and financial strength needed to deliver preparedness and response solutions to a wide range of public health threats.

user
sees q3 revenue $400 million to $500 million.
reaffirms 2021 full year forecast for revenues and profit.
emergent biosolutions - in quarter, inventory write-offs related to raw materials, in-process batches manufactured at bayview facility.
emergent biosolutions - fy other product sales, expected to be impacted on assumption that a new raxibacumab contract to be awarded later than planned.

assistant