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Text: This is Bob Burrows, Investor Relations Officer for the company.
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 three and four.
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 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 3Q 2021 as well as the forecast for full year 2021.
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'll provide an update on the progress that we've made at our Bayview site and then talk a little bit about our recent accomplishments and milestones and further talk about the business enhancements we've implemented to better focus on our customers.
I'll also discuss our revised full year guidance and our decision to end our involvement in the Center for Innovation in Advanced Development and Manufacturing or CIADM program with the US government.
My comments are summarized across slides seven and eight in the deck accompanying the call.
So let's get started.
As you've seen this year, our Emergent team and our business have shown their strength and resilience as we've made substantial progress in the quarter.
Some of the recent highlights include the following.
First, we've made significant progress in Bayview resuming operations and production for Johnson & Johnson at the end of July and more recently completing all remaining work on behalf of AstraZeneca.
As of the end of the quarter, we've contributed over 100 million dose equivalents of COVID-19 vaccine for global distribution.
Importantly, we look forward to continuing to support J&J's ongoing vaccine production in the months ahead, while continuing to support their regulatory path for their vaccine.
Next we secured key ongoing commitments from the US government on two core medical countermeasure products.
First, we received the contract modification exercising and funding the second of nine annual options to supply ACAM2000 to the Strategic National Stockpile valued at approximately $182 million.
Secondly, we received a contract modification exercising and funding the procurement of additional doses of AV7909 for the SNS valued at approximately $399 million over the next 18 months.
Also our NARCAN Nasal Spray team continues to perform well above expectations in the midst of a worsening opioid crisis helping ensure this critical product gets in the hands of the patients and caregivers who need it.
We also launched our pivotal Phase III trial for our chikungunya vaccine CHIKV VLP, a key milestone for us because it's the first Phase III drug development program that Emergent has funded on its own.
More importantly, it underscores our commitment to progressing our pipeline programs in pursuit of critical public health threats and expanding our travel health vaccines franchise.
And finally, we continue to grow our CDMO operations securing a new multiyear contract to produce Providence Therapeutics' mRNA COVID-19 vaccine candidate at our site in Winnipeg.
As these highlights demonstrate, our core strategy and diversified business model remains strong.
In addition, today we're announcing that the Department of Health and Human Services and Emergent have mutually agreed to end our partnership in the CIADM program.
The agreement will close out all open obligations and task orders issued under CIADM base contract including the task order related to COVID-19 response.
We're proud of the work all of our employees have done over the last nine years to honor our CIADM commitments.
And you'll recall that the program was initiated in 2012 in recognition of the shortage of domestic manufacturing capability needed to respond to an unforeseen widespread public health threat following the H1N1 influenza pandemic.
While an innovative idea execution of the CIADM program and the necessary operational investments by all administrations fell short of what was needed to maintain capability in case of an emergency.
In fact, when the COVID pandemic struck, Emergent was just one of two original partners remaining in the program.
Despite the issues, we responded swiftly engaging several of our facilities to meet the government's needs and made incredible progress in a time frame never before attempted under very challenging conditions.
Our COVID-19 work with BARDA under the CIADM program included a number of activities.
These included: a reservation of capacity at our Bayview, Camden and Rockville sites; a direct capital investment by the government in additional fill/finish capacity at our Camden and Rockville sites; both drug substance manufacturing for AstraZeneca in the reserved space at Bayview; and finally, drug product manufacturing for various COVID-19 therapeutic candidates in the reserved space in Camden.
As a reminder, the COVID-19 work under the CIADM program was always expected to end this year and importantly our decision does not affect our work with Johnson & Johnson as it was never part of our CIADM contracting.
We will continue to produce their COVID-19 vaccine drug substance at our Bayview facility.
And as I mentioned at the top of the call, we're extremely proud that our collaboration with J&J and in addition to AstraZeneca has contributed over 100 million dose equivalents of COVID-19 vaccine for global distribution.
So while we conclude our involvement in the CIADM program and bring to closure this important chapter in our business, it needs to be said that the work we accomplished under the program and related task order contracts with the US government served a critically important purpose one that our entire organization is immensely proud of.
Despite the setbacks we had earlier in the year the team's been committed to our mission of protecting and enhancing life and steadfast in learning from our past to be even better.
I'm proud of the team's resilience and the positive impact on millions of lives across the globe and importantly we're not done yet.
As we look forward, we're encouraged and optimistic about the opportunities we see ahead across our entire business.
Let me now pivot to recent business changes we've implemented in support of our strategy.
During the quarter we've shifted our operating structure to now have three business lines each focused on distinct customer or market types.
They are: the newly created government or medical countermeasure business; the commercial business; as well as the services or CDMO business, which remains essentially unchanged.
To be clear, all three of these report to our Chief Operating Officer, Adam Havey.
The government or MCM business will be led by Paul Williams who was previously running the vaccines business unit.
This new structure will better serve our customers by sharing their breadth and depth of experience as one team and reduces the complexity with multiple touch points going into the government on different business units.
The commercial business will be led by Doug White, who previously ran the devices business unit.
He will now drive our core commercial capabilities and seek new investment opportunities.
Doug's portfolio includes NARCAN Nasal Spray, travel vaccines and other similar customer facing products.
This organizational change provides an opportunity to put the strategic and operational pieces of this business under one umbrella that were previously across multiple business units, positioning us to expand into new markets and efficiently integrate newly acquired products in the future.
The services or CDMO business, the head of which we're continuing to accurately recruit for will continue to service our pharma and biotech innovator customers providing development, drug substance, and drug product manufacturing services that capitalize on our core skills and capabilities.
As for our R&D programs, we established a centralized and cross-functional product development committee that will govern the R&D portfolio.
We're also creating a science and innovation team led by Dr. Laura Saward, who previously ran the therapeutics business unit.
Overall this new structure positions us to execute effectively on our strategic plan and deliver long-term success, strengthening our foundation and providing new opportunities for growth.
So getting back to the operational highlights.
As I mentioned we resumed production of J&J's COVID-19 vaccine at our Bayview facility in late July, following the implementation of rigorous and comprehensive quality enhancements and the FDA's permission to restart.
Over the last five months, we've invested millions of dollars to overhaul cleaning procedures, upgrade our facilities, implement additional quality control and oversight practices, and make significant improvements to the processes for batch record keeping, personnel training, data integrity and lab testing.
Emergent teams along with support from our J&J colleagues oversee all operations and materials transfer.
We took the added step to bring in a recognized independent consultancy, who is expert in quality control and who are now reviewing and performing certifications prior to release of any batches.
We continue to work closely with the FDA and J&J toward increasing our production level consistent with these new procedures.
Finally, I want to commend our team whose around the work efforts over the last 18 months that accelerated the transformation of our Bayview facility from a clinical stage facility to one that is poised to support much larger scale production.
Now moving to our core government or medical countermeasures business.
Our work helping the US government protect Americans against smallpox, anthrax and other Category A biologic agents remains a top priority for the company.
Recall that we previously announced the US government exercised and funded, the next term extension for ACAM2000 under our 10-year contract and we also secured the next option exercise for our smallpox therapeutic, VIGIV.
We recently filed that up with the US government exercising the final option under the existing contract to supply doses of our next-generation anthrax vaccine candidate, AV7909 to the Strategic National Stockpile valued at approximately $399 million over the next 18 months.
As a reminder, the current contract for AV7909 facilitates procurement by the SNS, while we seek full FDA approval.
And to that end I'm pleased to announce two important updates today on the ongoing regulatory path for AV7909.
First, the FDA has agreed to our request for a rolling review of the AV7909 BLA.
The rolling review allows us to submit sections of the application to the FDA as they're completed rather than waiting until the entire BLA package is compiled.
We anticipate initiating the BLA submission in mid-December.
Based on this timing, we anticipate BLA approval by the FDA in late 2022 or early 2023.
Second, the FDA has granted orphan drug designation for AV7909.
This designation provides development incentives including a waiver of the BLA filing fee as well as potential seven-year marketing exclusivity upon regulatory approval.
On the R&D front we recently initiated our pivotal Phase three safety and immunogenicity study for our single dose chikungunya vaccine candidate.
CHIKV VLP is the only virus-like particle based vaccine candidate currently in development for active immunization against chikungunya disease.
The study expects to enroll 3,150 participants in 50 US sites in the coming months.
I'd like to congratulate the teams across our organization, who've made this significant milestone possible and who are advancing the development pipeline that will help fuel the long-term growth of the company.
We look forward to updating you on this program as we make progress.
Finally, with the launch -- the potential launch of a few other Phase I studies anticipated over the next year, as well as continued progress across our auto-injector platform programs focused on chemical threats, I remain encouraged by the contribution of our R&D programs and the effect they could have on our growth in the coming years.
Moving next to our CDMO business.
I want to highlight that we continue to see growth in this area both related to the pandemic and beyond.
We continue to receive interest from both existing clients, and new prospects from small, mid and large-sized companies as well as governments and other organizations.
Importantly, we're winning new business across all three service pillars of development services, drug substance and drug product including drug packaging.
For example, during the quarter we signed a new five-year agreement with Providence Therapeutics to support its mRNA vaccine development out of our Gaithersburg and Winnipeg facilities.
Building off an existing agreement this new baseline agreement is valued at $90 million and uses portions of all three of our integrated service capabilities, demonstrating the value of our integrated molecule-to-market model for customers.
We will continue to cultivate growth, expansion and maturation of this core business.
With respect to NARCAN Nasal Spray, our focus on the public health threat posed by the opioid epidemic is as strong as ever.
Our NARCAN team has worked tirelessly to ensure that NARCAN Nasal Spray is available and affordable as overdoses continue to devastate families and communities nationwide.
We remain committed to combating this crisis, not only through our work on NARCAN, but also through outreach efforts and public campaigns to elevate awareness of the dangers of opioids.
On the ongoing patent infringement litigation front, recall that the US Circuit Court of Appeals held final oral arguments on August two of this year.
While timing is up to the appellate court we continue to believe a decision could come by the end of this year.
Importantly, in the event of a generic entry we are prepared to launch an authorized generic product in partnership with a large generics company, and are confident in our ability to maintain significant market share.
Longer term we see Narcan and more broadly our opioid-related portfolio a core component of our portfolio of solutions impacting public health.
Finally, let me update two important corporate updates.
First, I'm pleased to announce that we intend to publish our inaugural ESG or sustainability report later this month.
The report will provide insight into our environmental, social and governance practices.
These include: product quality and patient safety standards; our human capital and employee-focused programs; our existing charitable and volunteer programs; our work to safeguard the environment and health of our communities and employees; as well as our corporate governance and business ethics principles and practices.
I also wanted to note that on a personnel front Mary Oates, previously our Head of Global Quality has decided to pursue a new career opportunity and has left Emergent.
We're conducting an external search for a new Head of Global Quality.
In the meantime, I'm confident, that our team of talented dedicated professionals will continue the important quality advancements made in the last several months.
To conclude our third quarter operational results demonstrate, that our business remains resilient and poised for growth, in line with our strategy.
We continue on our path of both organic opportunities and potential M&A informed by prudent capital deployment all aimed at generating enhanced shareholder value.
I'll start on slide 10 and open my remarks with some summary thoughts to put today's earnings report into context.
As you just heard from Bob, solid execution in the third quarter continues to illustrate the strength and durability of our differentiated business.
Our medical countermeasures platform was further reinforced by the ACAM2000 option exercise in July and the AV7909 contract modification on September 30.
We have restarted operations at Bayview and are helping J&J deliver on commitments related to their COVID-19 vaccine candidate.
The NARCAN Nasal Spray franchise is gaining momentum as we support the battle against the continuing public health crisis in opioids.
We are making steady progress building our CDMO business as evidenced by recent contract awards.
And we are advancing our R&D programs, most notably with the recent launch of the chikungunya Phase III trial.
Having said that, there are clearly several topics that merit further explanation, starting with the primary drivers of our revised 2021 financial guidance as laid out on slide 11.
The biggest influence relates to our mutual agreement with the US government to terminate the CIADM contract and associated task orders.
This change will be partially offset by the recognition of $60 million in deferred revenue and other final payments related to the CIADM base agreement.
You'll also note that given continued strong momentum in NARCAN Nasal Spray, we increased the full year forecast range of that product by $95 million.
After taking into account various other puts and takes, we have tightened the range of our total revenues which lowered the midpoint by $50 million.
During the third quarter, following a review of our revenue recognition policy, we determined that it was appropriate to reclassify certain suite reservation fees from stand-ready obligations to leases and therefore to apply lease accounting guidance.
You will note that our income statement now has separate line items for CDMO services and CDMO leases.
This change should also allow you to better understand the underlying fundamentals of our CDMO service-related revenue.
Under the lease accounting guidance, based on uncertainty regarding collectability of the full contracted amount, we converted to a cash basis of accounting for the BARDA task order.
Accordingly, in the third quarter we adjusted our revenue to align with the $315 million of cumulative cash collected under the BARDA task order from May 2020 through September 2021.
Looking ahead to the fourth quarter, pursuant to the termination of the CIADM agreement, we expect to recognize $215 million of revenue, comprised of $155 million of task order closeout payments and the $60 million of deferred revenue and other I just discussed.
Termination of the CIADM agreement also results in asset write-downs of approximately $38 million.
So we expect the net addition to pre-tax income in the fourth quarter related to this event to be approximately $177 million.
During the quarter, our new business wins were $118 million, a very strong performance for the organization, primarily reflecting the impact of the Providence Therapeutics contract for COVID-related work.
As for backlog, the sequential change reflects the impact of the termination of the BARDA task order.
Regarding the opportunity funnel, the period-to-period decrease reflects both the conversion of opportunities into secured business as well as two large contract opportunities that we did not win.
One is a company that decided to take the work in-house and the other is one that decided to defer the work to a future time.
That said, we continue to identify new leads and secure new business and this period-to-period fluctuation is not surprising as we pursue opportunities.
Lastly, gross margins and profitability.
As we have previously discussed, our gross margins are primarily driven by revenue mix across several dimensions: product sales proportion of products versus services and the types of services delivered.
The adjusted gross margins on our products continue to remain stable and consistent with historical patterns.
On the CDMO services side however, we are currently seeing several trends which are applying pressure to margins.
These include: lower capacity utilization for drug substance production at Bayview while it is solely dedicated to J&J's COVID-19 vaccine candidate; the additional investments we are making at Bayview in support of our quality enhancement plan; and higher raw material costs than originally anticipated.
While these factors are currently producing CDMO gross margins below our expectations over time we anticipate that CDMO profitability will improve as we continue to grow our CDMO revenue base, increase network utilization drive a higher mix of drug substance manufacturing, realize scale efficiencies and improve productivity.
With that let's turn to the third quarter numbers.
As indicated on slide 12 highlights include total revenues of $329 million below the prior year period and our guidance principally due to the $86 million reversal of revenue for the BARDA task order I mentioned earlier.
And adjusted negative -- adjusted EBITDA of negative $3 million and adjusted net loss of $19 million both significantly below the prior year period and due to a variety of factors which we will discuss in a moment.
Other key items in the quarter include: NARCAN Nasal Spray sales were $133 million an increase over the prior year reflecting a clear continuation of this franchise's robust performance and 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 United States as well as increased Canadian sales.
ACAM2000 sales were $81 million higher than the prior year due to timing of deliveries following our announcement in July of the US government's exercise of the second option under the existing 10-year procurement contract.
As we have stated previously we expect to complete all related deliveries under this option exercise by the end of 2021.
Anthrax vaccine sales were $16 million lower than the prior year due to timing of deliveries as the modifications of the BARDA contract for AV7909 was not made until the last day of the quarter.
Other product sales were $41 million consistent with the prior year.
And CDMO revenues came in at $42 million lower than the prior year period due primarily to our move to cash basis revenue accounting for the BARDA task order and partially offset by $38 million in out-of-period adjustments related to our change in CDMO services revenue recognition policy which will be detailed in our 10-Q filing.
Looking beyond revenue we are now breaking out cost of goods sold between product and CDMO services.
Product cost of goods sold in the quarter were $103 million a $17 million decrease from the prior year largely due to one-time charges in the prior year offset by increases in the current year due to higher product sales.
CDMO cost of goods sold were $114 million an $86 million increase over the prior year reflecting the impact of out-of-period adjustments of $37 million as well as incremental costs at our Bayview facility as mentioned previously.
Gross R&D expense of $50 million lower than the prior year primarily reflecting a non-recurring $29 million impairment charge in the prior year.
Net R&D expense of $33 million or 10% of adjusted revenue in line with the prior year.
SG&A spend of $82 million or 25% of total revenues an increase over the prior year reflecting growth in headcount and professional services.
And gross margin was 30% in the quarter.
As I mentioned earlier we are now providing two additional gross margin metrics.
Adjusted product gross margin was 62% of product sales consistent with the prior period.
And adjusted CDMO services gross margin was 10% lower than the prior period primarily reflecting the impact of increased operating costs at our Bayview facility and the implementation of our quality enhancement plan.
Turning to slide 13 we will now review our key CDMO metrics.
In the third quarter we secured new business of $118 million reflecting robust demand for our services.
As of September 30 the rolling backlog was just over $1 billion a 9% decline from the second quarter reflecting the impact of the BARDA task order termination.
And lastly as of September 30 the opportunity funnel was $284 million down from $672 million at June 30 as I said before primarily reflecting a significant new business win in the current quarter as well as the loss of two large opportunities.
On slide 14 you can see the sequential trends in these metrics over the last five reporting periods.
We look forward to making further progress in this important part of our business as we move forward from here.
Moving on to slide 15, I'll touch on select balance sheet and cash flow highlights.
We ended the third quarter in a strong liquidity position, with $404 million in cash and undrawn revolver capacity of just under $600 million.
Our net debt position was $454 million, and our ratio of net debt to trailing 12 month adjusted EBITDA was one times.
Our year-to-date operating cash flow was negative $8 million, primarily reflecting timing of cash collections and increases in inventory balances.
Additionally, we reported cumulative year-to-date capital expenditures of $178 million.
Total revenue of $1.70 billion to $1.8 billion; NARCAN Nasal Spray sales of $400 million to $420 million; anthrax vaccine sales of $250 million to $260 million; ACAM2000 sales of $200 million to $220 million; and for the CDMO business we now anticipate a range of $600 million to $650 million.
Our profitability guidance includes adjusted EBITDA of $500 million to $550 million and adjusted net income of $315 million to $350 million.
These include: no raxibacumab revenue this year; the naloxone market remains competitive with at least one new entrant this year, which we actually saw with a branded competitor coming on market in Q3; no generic entrant prior to the resolution of our patent litigation case, and the continued manufacturing of J&J's COVID-19 vaccine at Bayview.
The considerations that have been revised are as follows.
We have incorporated the financial implications of our mutual agreement to terminate the CIADM agreement and related task orders, including the expected payment in Q4 of the relevant agreed upon amounts.
And the expected range of adjusted gross margin is now 54% to 56% taking into account both year-to-date performance and anticipated performance in the fourth quarter.
On a different note given the changes, we have seen in our business during the pandemic we've received a number of questions about what to expect from the business going forward.
As you know, our custom has been to provide a first look at annual guidance at the beginning of each calendar year once our budgeting process is complete.
We expect to maintain that practice for 2022, but I would like to offer a few thoughts on directional trends, so you can better understand the shape of the underlying business.
In terms of top line revenue, we haven't finished our budgeting process for 2022, but the current analyst consensus for total 2022 revenue directionally seems to be in line with our thinking.
More specifically, we anticipate that our medical countermeasures business will remain steady with high visibility provided by the long-term contracts, we currently have in place.
The opioid crisis has been worse than we anticipated when we acquired the program and as a result NARCAN Nasal Spray revenue has continued to exceed expectations.
Of course, the question on everyone's mind is what will happen, if a generic competitor enters the market.
More than half of our market is in the public interest space and so not necessarily subject to the usual automatic switch for AB rated products.
And for the remaining product markets as Bob said, we are prepared to launch an authorized generic in partnership with a large generics company.
All-in-all, we are confident that, it will continue to be a meaningful contributor to both our top and bottom line going forward.
On the travel health front, we are monitoring and calibrating our expenses to international travel conditions and do not anticipate meaningful revenue from our travel vaccines next year, although we are expecting upticks in travel following that.
For CDMO, we expect we will continue to support J&J out of our Bayview site, and build on the opportunities we see to serve customers from several of our other revenue-generating sites.
In terms of profitability, we are making investments in our manufacturing and quality systems that are putting pressure on our CDMO gross margins, but we expect these will continue to gradually improve over time.
And we are taking a disciplined approach to managing our SG&A expenses, as we prepare for a return to stronger top line growth in 2023 and 2024.
With respect to R&D, we continue to invest in long-term value drivers as well as programs with non-dilutive funding, but we are balancing those investments with some anticipated portfolio rationalization.
As a result, we currently anticipate that these trends may constrain adjusted EBITDA margins to a level that is at or below, the ranges we saw in 2018 and 2019.
We will refine these views, and expect to provide more definitive information early in the New year.
In the third quarter of 2021 we continued to deliver solid performance in certain key aspects of our business.
Anthrax vaccines, ACAM2000 and the rest of the core medical countermeasure products, the Narcan, Nasal Spray franchise as well as the new business wins in CDMO services.
We also experienced continued forward progress at scaling up the production capabilities at the Bayview site in support of J&J.
And we realized an important pipeline milestone with the CHIK vaccine Phase three trial launch last month.
While our guidance for this year has been revised a bit to reflect the termination of the CIADM agreement as well as current profitability trends in our CDMO business bringing the CIADM agreement to a conclusion was a clarifying step forward for the company.
Finally, our conviction in the long-term growth potential of our business is as strong as it has ever been.

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qtrly total revenue $329 million versus $385.2 million.
sees 2021 total adjusted net income of $315 million to $350 million.

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