Emergent BioSolutions Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Emergent BioSolutions Q2 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference to Emergent BioSolutions. Please go ahead.

Thank you, Joel, and good afternoon, everyone. My name is Bob Burrows, Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss the operational and financial results for the second quarter and six months ended June 30, 2020. As is customary, today's call is open to all participants, and in addition, the call is being recorded and is copyrighted by Emergent Biosolutions. The agenda for today's call will follow a traditional path with prepared comments from Bob Kramer, President and Chief Executive Officer, and Emirates Lindahl, Chief Financial Officer. Other members of the senior team are present and available during the Q&A session following our prepared comments. Before beginning during today's call, either on our prepared comments or the Q&A session, management 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. We cannot guarantee that any forward-looking statement will be accurate. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. 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 our prepared comments as well as during 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 emergence operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income and adjusted EBITDA and the reconciliations between our GAAP financial measures and these non-GAAP financial measures. One final housekeeping item. During the Q&A session, because of the fact that we are all in separate locations and practicing the necessary social distancing per CDC guidelines, we will have CEO Bob Cramer fielding all questions to begin with, and then he will verbally hand off to other members of the team for additional answers as warranted. Finally, for the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on July 30, 2020. Since then, Emergent may have made announcements related to topics discussed during today's call. You are once again encouraged to refer to our most recent press releases and SEC filings, all of which may be found on the investor's homepage of our website. And with that introduction, I would now like to turn the call over to my colleague, Bob Kramer.

Bob? Bob Kramer Thank you, Bob, and good afternoon to everyone. Thank you for joining the call. Let me start by acknowledging the extraordinary contributions of my 2,000 plus teammates at Emergent who have worked tirelessly to enable the company to meet its commitments to public health and, importantly, take on a significant amount of new additional work related to our COVID-19 initiatives, both in the therapeutic area as well as the CDMO business unit area. They are achieving extraordinary results in one of the most challenging environments we've ever encountered. For more than 20 years, Emergent has prepared for threats like the one posed by COVID-19. Our experience addressing previous public health crises, our expertise in vaccine and drug development, and our ability to manufacture on a large scale has positioned us to contribute to the COVID-19 pandemic response like no other organization. The demand for our services, both from industry and government, both in the immediate term and over the next several years, has substantially increased in the last few months. Many of you will recall that at our most recent investor day this past November, we outlined our strategy to expand and build scalable leadership positions in current and new public health threat markets as well as to invest in capabilities, innovation, and operational excellence. What we didn't anticipate at the time was just how soon an unprecedented public health threat would emerge and how broadly we would have an opportunity to play a meaningful role as a result. Over the past six months, we've shown how our mix of expertise, capabilities, and readiness have positioned us to respond in a way that few others can. We continue to focus on strong customer centricity, including our ability to meet the needs of the U.S. government and other government customers, as well as deliver solutions for fellow innovators and other commercial customers, and most importantly, for our patients. These principles underpin the durability of our core business and the potential of our long-term strategy. We've put the strategy outlined at our investor day into action, and today we're experiencing a step change in both the size of our organization as well as the pace of our growth. The financial results for the second quarter and year-to-date periods demonstrate the strength of our core business and an acceleration of our 2024 strategy. As a result, we're announcing today an increase in our financial forecast for 2020. In addition, we now believe that this acceleration meaningfully increases the contribution of our organic revenue toward our goal of $2 billion in revenue by 2024 versus what we assumed just nine months ago when we first unveiled our 2020 through 2024 strategic plan. With that said, there continue to be multiple paths to achieving our 2024 strategic objectives. Before we discuss the longer-term expectations, let me first review recent business developments, starting with the pandemic response. At the outset of the crisis, we were able to quickly begin development of our own COVID-19 therapeutic treatment candidates, while at the same time deploy our contract development and manufacturing expertise for customers. from the US government to some of the world's leading pharmaceutical and biotechnology innovators, including Johnson & Johnson and AstraZeneca. As a follow-on to the $135 million tech transfer and capacity reservation agreement signed with J&J in April, we signed the industry's first COVID-19 commercial supply agreement, a five-year agreement for large-scale drug substance manufacturing for J&J's lead COVID-19 vaccine candidate beginning in 2021. The contract is valued at approximately $480 million over the first two years with commitments for the remaining three-year period of 2023 through 2025 to be determined next year. In June, in an award valued at approximately $628 million, Emergent joined the U.S. government in a landmark public-private CDMO partnership as part of Operation Warp Speed, committing our development and manufacturing services for production of COVID-19 vaccine candidates for commercial innovators through 2021 at a minimum. This agreement secures capacity for drug substance manufacturing, and drug product manufacturing at our three Maryland-based facilities. It also includes an incremental investment of $85 million for the rapid expansion of our viral and non-viral CDMO drug product fill finish capacity at our Baltimore, Camden, and Rockville facilities. As a result of this expansion in Camden and Rockville, Emergent is now the only multi-location CIADM offering broad services including drug product drug substance and development and manufacturing services the expansion also extends our ciadm designation by the u.s government to drug product making emergent the only such facility also in june we announced a partnership to manufacture astrazeneca's leading vaccine candidate under that agreement valued approximately 87 million Emergent will provide development services, technology transfer, analytical testing, drug substance process and performance qualification, and will reserve certain large-scale manufacturing capacity through 2020. Earlier this week, we announced an additional agreement with AstraZeneca to manufacture a drug substance at large scale for commercial supply. The contract is valued at approximately $174 million, through 2021 and it brings the total AstraZeneca commitment to just over $260 million. The agreement leaves open the option to enter into additional commercial manufacturing commitments as the candidate progresses over the next three years. Given the scale and the ongoing nature of the threat, as well as our diverse offering across development services, drug substance, drug product, and our leading development and manufacturing expertise, We anticipate significant demand for our CDMO business for the next several years across small, mid, and large pharma and biotech, as well as the U.S. government and NGOs. To be clear, we have three capital investment projects ongoing in support of this growth and scale of the CDMO business unit. First, we're nearing completion of the $50 million expansion at our Camden facility in Baltimore, where drug product site that we announced in 2018. Secondly, we'll be investing approximately $80 million in our Rockville, Maryland location to broaden our drug product capabilities. And third, we'll be investing $75 million in our Canton, Massachusetts facility to expand our viral-based service offering to include viral vector and gene therapy capabilities. Together, this represents a $200 million expansion of our manufacturing capability and capacity, adding strength, diversity, and durability to our network. Turning to the pandemic response within our therapeutics business unit, we're currently developing two potential hyperimmune treatments for COVID-19. First is our COVID-HIG using our validated human hyperimmune platform, and second is our COVID EIG using our validated equine hyperimmune platform. The target patient populations for each of these programs are the severe hospitalized COVID-19 patients as well as individuals whose occupation places them at higher risk. In partnership with BARDA and NIAID, we have quickly advanced the evaluation of COVID HIG for treatment of hospitalized patients with a Phase III clinical trial to start in August. Earlier this month, we announced a collaboration with Mount Sinai Health Systems, as well as Immunotech Biocenters, and the U.S. Department of Defense, which is providing approximately $35 million of funding to facilitate the development of our COVID-HIV candidate. This collaboration includes the establishment of new plasma collection capabilities at Mount Sinai, an organization at the epicenter of the COVID-19 crisis in the United States, as well as the development and manufacturing of the product candidate. The collaboration also includes a clinical trial to be conducted at Mount Sinai to evaluate COVID-HIG for the use as a prophylactic treatment for populations at high risk of potential exposure, such as healthcare workers and military personnel. Our other therapeutic treatment program is the COVID EIG product candidate. This candidate uses the validated platform and infrastructure from our botulism antitoxin therapeutic program. We're currently vaccinating the horses and will complete proof of concept studies to determine the potential to advance this program to the clinic to evaluate it as a treatment for COVID-19. We expect having data this summer and we'll provide updates as events warrant. Also during the quarter, the therapeutics business unit continued to make progress on additional pipeline programs to strengthen our leadership position in antibiotic therapeutics and focus on the acute care hospital space. There remains a high unmet need for treatments to reduce the overall burden of severe influenza that results in ICU hospitalizations, respiratory support, and mortality each year. Our lead clinical candidate, flu IGIV, is in late stage clinical development for patients hospitalized with severe influenza A. We're currently in the process of reviewing the Phase II clinical data and will be determining the next steps and timelines as part of that review. Turning next to the vaccine business unit, our core medical countermeasure business, inclusive of our anthrax and smallpox franchises, continue to proceed on plan for the year. as what Rich will discuss in more detail in a few minutes. We have continued to make deliveries of our anthrax vaccine candidate, AV7909, to the Strategic National Stockpile, and earlier this month in July, we secured an option to provide additional doses to the US government over the next 12 months. With respect to their smallpox vaccine, ACAM2000, in May, we secured the first annual option exercise under last year's contract for additional doses to be delivered over a 12 month period that started in June of this year. We also have a number of other updates related to the vaccine business unit since last quarter's earnings call. First, the initiation of our phase three clinical trial for our single dose vaccine for chikungunya will likely push into 2021, primarily driven by the timing of certain operational matters namely the manufacturing prep out of our Bern, Switzerland site, where we plan to manufacture our clinical material. Secondly, in April this year, Immersion was notified that we will receive a $15 million in funding from CEPI to support the advanced development of our Lassa vaccine program, supporting non-clinical and phase one studies. And lastly, a note about our tribal health business. While a small contributor to our overall total revenue, the tribal health business has been impacted by the halt in global travel. This negative impact will likely continue until the pandemic impact lessens. Nonetheless, we continue to believe this global pandemic may serve as a catalyst to raise awareness of the risks and opportunities to protect against vaccine-preventable travel-related illnesses. Turning finally to the devices business unit, let me start by taking a minute to comment on the devastating impact COVID-19 is having around the world and in the United States regarding the ongoing opioid crisis. For some, the COVID-19 pandemic and resulted in social distancing and isolation has resulted in an increase of stress, depression, anxiety, and fear. Unfortunately, in many instances, these mental and emotional stressors have led to increased substance abuse and subsequently opioid emergencies. We were therefore very pleased to see that the FDA in their recent announcement requiring all labels for opioid pain medication and medicine to treat opioid use disorder be updated to include information about naloxone. As the number of opioid overdose deaths continue to rise during the pandemic, increased access, awareness, and availability of naloxone is more important than ever right now. The FDA's new labeling requirement is an important step in the nationwide effort to more widely distribute and improve the availability of naloxone for at-risk individuals. We will continue to focus on expanding awareness of the risks of opioids. increasing the public's accessibility to naloxone, and making affordability of Narcan nasal spray a priority. And we remain committed to supporting federal, state, and local organizations in their efforts to combat the opioid crisis. During the quarter, retail pharmacy sales of Narcan nasal spray were stronger than anticipated, and there was a significant rebound in May and June from the decline in April caused by the initial impact of the pandemic. Sales are currently trending above pre-COVID-19 levels in states with co-prescription requirements in place, as well as in states where no current requirements for co-prescribing exist. In addition, standing order volume has increased approximately 27% since the middle of May. These increases are in part due to growing awareness and concerns about the rise in opioid overdoses compounded by the pandemic, as well as the concerted efforts by state public health organizations, community organizations, retail pharmacies, and physicians to expand awareness of the need for naloxone. Now to briefly touch upon the TEVA litigation. On June 5th of this year, the U.S. District Court of New Jersey entered a decision in the patent litigation regarding Narcan nasal spray in favor of the defendants, Teva Pharmaceuticals. We are appealing this decision to the Court of Appeals for the Federal Circuit. Despite the decision, we remain focused and committed to expanding awareness and affordable access and continue to build partnerships with state and local governments and community organizations as we focus on getting Narcan nasal spray to vulnerable communities and individuals. Taking all of this into consideration, we continue to expect meaningful contributions from this franchise over the near, medium, and long term. As we've shared with you all in the past, we factored in the potential generic competition into our planning and continue to believe that we provide differentiated value in raising awareness of the need for naloxone and getting it to the patients who need it. Now, before I turn the call over to Rich, let me conclude with a few summary thoughts. Immersion is uniquely prepared to answer the call for COVID-19 pandemic. We have proven manufacturing capabilities in place, and we're working with the U.S. government and leading innovative pharmaceutical and biotech companies in support of their efforts to develop vaccines while simultaneously advancing two potential therapeutic treatments of our own. The strength and durability of our business model is clear, and the pace at which we're driving our strategy has materially accelerated. As a result, we are significantly increasing our financial guidance for 2020, as Rich will discuss in detail in a few minutes. Finally, I'd like to once again thank our talented team here at Immersion that has stepped up to the challenge throughout this global pandemic. They've remained committed to our mission to protect and enhance life. I couldn't be more proud of the great strides they and we are making it emergent, and I look forward to keeping you apprised of our progress as we execute on our strategy. With that, that concludes my prepared remarks, and I'll now turn the call over to our Chief Financial Officer, Rich Lindahl. Rich?

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call. It's abundantly clear that our financial performance in the second quarter and year to date in 2020 has been the strongest in the company's history and builds upon the integrated nature of our strategic plan and the investments we have made in our infrastructure and operations. As Bob referenced earlier, our financial and operational success for the first half of 2020 reflects the strength and durability of our core medical countermeasures business. the resilience of our diversified revenue portfolio, and the robust acceleration of our molecule-to-market CDMO services by securing about $1.5 billion in long-term contracts. To be sure, COVID-19 has posed challenges to certain aspects of our business and operations, and our teams continue adapting to related disruptions on personal, professional, and societal levels. Even so, we ended the second quarter with strong momentum and positive financial tailwinds across all of our business units. We anticipate continued strong performance in the second half of the year and have significantly raised our 2020 guidance. With that, let's first look at our second quarter performance. Highlights include total revenues of $395 million, an increase of $152 million, or 62% versus the prior year. adjusted EBITDA of $156 million, an increase of $127 million, or 431% versus the prior year, and adjusted net income of $106 million, a $96 million improvement versus the prior year. Breaking down quarterly revenue a bit further, anthrax vaccine sales were $132 million, reflecting the continued transition from BioThrax to AV7909 in the strategic national stockpile. Narcan nasal spray sales were $73 million, continuing the consistent quarterly performance of this critical drug-device combination product for opioid overdose reversal. ACAM 2000 sales were $70 million as we commenced deliveries to the SMS following the first annual option exercise, which was received during the quarter. And other product sales were $23 million, primarily reflecting sales of RSDL and VAT. We also saw substantial growth in CDMO services as revenues more than tripled to $73 million in the quarter versus the prior year. This outcome reflects the contribution of recently announced partnerships, most notably our landmark public-private CDMO partnership with BARDA in support of the U.S. government's Operation Warp Speed program. Looking beyond revenue, the quarterly results also include combined product and CDMO gross margin of 65%, reflecting the impact of overall product mix as well as improved contribution from CDMO services. Net R&D expense of $24 million, or 7% of adjusted revenue, in line with our ongoing disciplined approach to discretionary development investments. SG&A spend of $76 million, reflecting ongoing investments in capabilities and capacities to support future growth and the impact of an increase in share-based compensation expense due to a one-time $15 million special broad-based immediately vested equity award to employees below the senior vice president level. Our financial performance for the first half of 2020 was also very strong, driven by all the factors just discussed for the second quarter. Key highlights include total revenues of $587 million, an increase of $153 million, or 35%, as compared to last year. Total product sales of $447 million, up $110 million, or 33%. This includes $184 million from anthrax vaccines, $145 million from Narcan nasal spray, $70 million from ACAM 2000, and other product sales of $48 million. It is also worth highlighting that sales of anthrax vaccines and ACAM 2000 are both up meaningfully versus the prior year, and that the recent option exercises for AB 7909 and ACAM 2000 reflect the US government's continued execution against our long-term contracts and sustained focus on preparedness against other threats, even in the context of the current global pandemic. CDMO services revenue of $94 million reflects the significant expansion of this business through the recently announced arrangements across development services, drug substance and drug product offerings in response to the COVID pandemic. These new collaborations reflect a balanced mix of clinical and commercial activities led by our landmark public-private CDMO partnership with the U.S. government, which was designed to pave the way for innovators to leverage our proven U.S. manufacturing supply chain. Combined product and CDMO gross margin of 62%, reflecting the impact of MIX and the improved contribution from CDMO. Net R&D expense of $44 million, or 8% of adjusted revenue, in line with our ongoing disciplined investments in select internally funded development programs. SG&A spend of $146 million, reflecting the increase in share-based compensation and continued investment in staffing to support future growth. And in terms of year-to-date profitability, adjusted EBITDA of $171 million, or 29% of total revenue, and adjusted net income of $106 million, or 18% of total revenue, both reflect the influence of product mix, operational execution, and cost management balanced with prudent investments and a sustained focus on profitable growth. In terms of the balance sheet, we continue to maintain a strong financial position with ample liquidity to capitalize on opportunities for growth. At June 30, 2020, we had cash of $269 million and accounts receivable of $259 million. These current liquid assets of over $525 million are the highest in our company history. In addition, we ended the quarter with remaining borrowing capacity of $244 million under our revolving credit facility. Year-to-date CapEx of $59 million reflects ongoing projects to scale the business. specifically CDMO drug substance and drug product capacity and capability investments at our Maryland locations, as well as our Canton, Massachusetts site. NetNet, our accelerating momentum, creates favorable conditions for us to execute on our growth strategy and deliver solutions to address global public health threats. I'll move on now to our updated guidance. Taking into consideration the performance for the first half of the year, our outlook for the remainder of the year across all of our business units, and the expectation that challenges in some parts of our business will be offset by expansion in other parts, we are raising our overall forecast for the full year 2020. This forecast consists of the following elements. Total revenue of $1.5 billion to $1.6 billion, an increase of 27% versus the midpoint of the prior range. In terms of product-specific detail, Anthrax vaccine sales of between $320 million and $350 million, an increase of 18% versus the midpoint of the prior range. Our revised outlook for anthrax vaccines reflects improved visibility into this year's anticipated deliveries of AB7909 as we continue to gain more experience with this development stage product candidate. Narcan nasal spray sales of between $285 million and $315 million, unchanged from the prior guidance, and ACAM 2000 sales of between $180 million and $200 million, also unchanged from prior guidance. For the CDMO business, we now anticipate a range of between $440 million and $460 million, or more than three times higher at the midpoint versus the prior guidance range. This new expectation for 2020 illustrates the important role emergent is playing in the COVID-19 response, and more broadly reflects the transformation occurring in our CDMO business unit to provide long-term sustainable growth, as evidenced by our ability to secure $1.5 billion in long-term contracts across our target markets of pharma, biotech, and the U.S. government. Our profitability guidance includes adjusted net income of $340 million to $390 million, an increase of 97% at the midpoint versus the prior range. an adjusted EBITDA of $535 million to $600 million, an increase of 72% at the midpoint versus the prior range, and a clear indication of the earnings potential of our overall operations. Importantly, our revised 2020 guidance takes into account the following considerations. First, improvement of full-year gross margin by 400 to 600 basis points driven by product mix and increased contribution from our CDMO business. Second, the delay into 2021 of the launch of the Phase III clinical study for the CHIC-V VLP program due to the timing of certain operational factors. Third, the deferral into 2021 of a follow-on procurement contract with the U.S. government for Raxibacumab due to the impact of the prioritization of the Operation Warp Speed program on our efforts to tech transfer the Raxibacumab process to the Bayview, Baltimore site. Fourth, continued significant disruption of global travel through at least the end of 2020, which greatly reduces Vaxcora and VivoTeef revenues. And finally, an assumption of no generic competition in 2020 for Narcan nasal spray. We also continue to assess the business and operational implications associated with the COVID-19 pandemic and to utilize numerous measures to mitigate the risk of disruption to our business from this public health threat. Lastly, we are providing guidance on third quarter total revenue of between $420 million and $450 million. Taking all of this into consideration, let me also reaffirm what you heard earlier from Bob regarding the clear progress toward our 2020-2024 growth strategy. To that end, our 2024 year end targets continue to be $2 billion in top line revenue with an adjusted EBITDA margin of 27 to 30%. As we have discussed, there are many different paths to reaching these targets. But with the acceleration of our CDMO business unit, we have an even greater confidence that these targets can be reached on an organic basis. Nevertheless, our strategy has not changed, and we are continuing to pursue growth organically as well as through M&A, as we had previously communicated. We are pleased by the resilience and durability of our business model, as well as the impact of our strategy of diversifying our revenue mix, and expanding the range of public health threats that we address. Let me conclude by reaffirming what I said 90 days ago on our previous call. At Emergent, we have built a strong and resilient business with the financial strengths and contingency planning needed to maintain, and in some cases expand, our ability to deliver preparedness and response solutions. Our business is not immune to the effects of the pandemic. But the very nature of this crisis illustrates why Emergent's products and services are critical to addressing public health threats. Our current outlook, combined with what we have announced thus far this year, give tangible evidence of the durability and viability of our unique business model and the role that we play in protecting and enhancing the lives of many across the globe. The current environment provides an opportunity for Emergent to illustrate our capabilities and the purpose for which we were built. I know I speak for all our employees in saying that we are truly proud to be part of this company, executing on our mission to protect and enhance life at this critical moment. That completes my prepared remarks, and I'll now turn the call over to the operator to begin the question and answer session. Operator?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Brandon Foulkes with Cantor Fitzgerald. Your line is now open.

Hi, thanks for taking my questions and congratulations on all the progress during the quarter. Firstly, can you just elaborate perhaps on where you are in terms of capacity utilization within the CDMO business and then maybe following on from that in terms of how much additional capacity the investments you announced will provide? And then secondly, maybe just on Narcan, do you have any thoughts on now that there's this potential for generic to come to market, do you think co-prescribing gains a bit of momentum here just because payers are perhaps more willing to get behind it? And then lastly, maybe one just on the guidance. If I look at the 2020 EBITDA margin, I'm coming out at about 36.6%, and obviously this is quite well above your range for 2024. Um, given that some of the contracts on COVID are to reserve capacity, um, can you just provide some color in terms of whether you've assumed any cost of production against those capacity reservation contracts or any additional color you can provide in terms of the costs you are adding into the 2020 guidance around that? Thank you.

Great. Thanks, Brandon. Appreciate the questions and thanks for joining the call. So, uh, Let me take a shot at the first couple of questions, and then I will ask Rich to comment on your last question around the EBITDA margin implied as well as our 2024 range that we provided, which is that 27 to 30 percent range. So I think on the CDO capacity, and Saeed can join in here as well, it's a really difficult metric to establish. overall across the enterprise given the fact that we have nine manufacturing facilities that are kind of in play and capable of providing those CDMO services and the nature of how those facilities are being used to support both our internal candidates as well as the CDMO. I think if you want to get a little more granular and look at the The Bayview facility where the majority of the COVID-19 vaccine development work is being done, again, as a result of the task order that we executed with BARDA and with Operation Warp Speed and the fact that we're doing support work and manufacturing and scale-up for four different COVID-19 candidates, J&J, AZ, Novavax, and Vaxart. It's pretty much locked up right now. and that was by design. The U.S. government wanted to make sure that operational warp speed had full unfettered access to the full power of that manufacturing facility and broader network around fill finish capability to support the COVID-19 vaccine initiatives. So that's how I would answer that. On Narcan nasal spray, your question about the potential momentum impact of of co-prescription as well as the generic. I think as FDA announced recently with their requirement on the label change, I think that will help, obviously, co-prescription initiatives and momentum. I think the fact that we continue to see states such as New Jersey, either through a legislative means or a policy means, continue to adopt co-prescription is a good thing. Again, every time one of those states adopts that, it means greater access, greater availability, and education on the need for naloxone and getting it into the very patients who need it. So, obviously, it's a good thing. And maybe with that, I'll let first Rich talk a little bit about the EBITDA number and And then Saeed, if there's anything more you want to add around the capacity issues on CDMO, you can weigh in as well.

Okay, thanks, Bob. And thanks, Brandon. So I would point to kind of three primary drivers of the EBITDA margin expansion in our new guidance relative to what we had before. First is the capacity reservation element of the task order that we received from BARDA. As you mentioned, there is minimal cost associated with the reservation piece itself. The costs really come through as manufacturing of candidates comes through the plant. So that certainly is a positive factor as it relates to the margin. The second is there's a little bit of an accounting nuance associated with the capital portion of the task order. And that's where we're being, where the government is investing the $85 million in helping us expand the capability and capacity at some of our plants. That $85 million or the portion that's recognized this year will come through as revenue, but the spending associated with those activities goes through the cash flow statement as capital expenditures. and then ultimately flows through the income statement as depreciation. So as it relates strictly to adjusted EBITDA, there's a very beneficial impact of that revenue. And then the third piece is just overall product mix. And as you've seen, as we've adjusted our product level guidance and as we're realizing greater revenue from some of our products, we're realizing additional economies of scale on those products as well, which helps to – provide incremental EBITDA contribution as well. So those are really the main drivers.

Great. Thanks, Rich. Syed, anything you want to add to the CDMO discussion?

Yes. Thank you, Bob. A couple of things that I would just add there in addition to what Bob referenced. I think it's important to note that each one of our collaborations has a specific scope of work, and we have capacity that's tied to that specific scope of work, whether it's clinical support or commercial support. And in general, when you take a step back and look at our entire network of capabilities, capacities, and expertise, we do have the opportunity to add more business, whether it's COVID-related or non-COVID-related. We strive to have a continuous funnel of opportunities and match that against our available capacities to opportunities. From an expansion standpoint, just to put a little bit of color on that, So our Canton, Massachusetts expansion is going to add viral vector and gene therapy capability up to 1,000 liter scale, which is the ideal sweet spot for clinical and commercial supply within that growing market. And then Camden, the drug product investment there from a non-viral standpoint will double the capacity for that site to support clinical and commercial supply. And then finally, the Rockville, Maryland investment within viral drug product fill and finish will also double the capacity for that site to support clinical and commercial supply. So with these expansions as well as the portfolio mix that we've been able to secure, we're matching up very well our capacity that we have and then paving the way for additional opportunities to grow the portfolio as well.

Thanks, Saeed. I think, Brandon, that really speaks to our comfort and confidence in the durability and the sustainability of Said's business unit around CDMO. The fact that, as he shared with everyone last fall, that we have a very diverse service offering that is attractive to all size companies, whether they have an interest in a need for clinical material or commercial supply agreements like we've now signed with J&J and AstraZeneca. I think our unique product offering and growing capability network really gives us confidence that that business unit has quickly been brought to scale and will continue to grow over the coming years.

Great. Thank you very much, everyone. Very comprehensive answers. I appreciate it. Thank you. Sure.

Thank you. Our next question comes from Jacob Hughes with Wells Fargo. Your line is now open.

Hi, good afternoon. Just on Narcan, could you, you know, talk about, you know, how you're approaching the appeal and what sort of pricing options you might have with, you know, versus a potential generic? And then also just a follow-up on the seeding and oil growth, you know, some of these contracts will theoretically expire soon. for COVID beyond 21. So do you think you can grow off that base or does that come down from these levels? Thanks.

Sure. Thanks for the questions, Jake. Thanks for joining the call. So on the Narcan question, as I shared during my prepared comments, going back to the diligence and the work that we did prior to acquiring the product from ADAPT a number of years ago, we fully expected and modeled both branded as well as generic competition eventually coming into the market. I think what gives us some comfort and continued optimism about the viability and the sustainability of the product is the fact that Again, FDA announcement earlier about supporting label change. I think that will further education and awareness of the need for naloxone. And as we talk about on every call, there is a significant underserved patient population who is either unaware or cannot get access to naloxone. So that market continues to grow. We are prepared to compete in that market for market share, whether it's in the generic space or the branded space, and whether it's at the retail market or the public interest market. We're in this for the long haul, and we think we have a very differentiated, high-value-added product in Narcan nasal spray that meets the unique needs of patients. So we're... we're excited about the future for that product and expect it again to meaningfully contribute to revenue going forward on the uh on the cdmo question in terms of again getting at your i think your question around the sustainability and whether there's going to be any drop off after 2021 and if you look at uh just to say it out loud if you look at the contracts that Rich referred to that make up that $1.5 billion aggregate value, whether it's the AZ contracts or J&J or the task order with BARDA slash operational warp speed, the majority of that value we expect to realize over the next 24-month period. And as Saeed has just kind of described, whether post-2021 that firepower and capability is continued to be leveraged and used in support of COVID-19 vaccine candidates, or whether we start to market and sell that capacity and those services to the more traditional market that Saeed described last fall, that $20 billion addressable market for the CDMO. I mean, we'll have to wait and see, but we're not anticipating a significant drop-off in revenue after 2021 when that $1.5 billion number or value comes to term. I guess the other thing I'd say is, you know, on the J&J, as an example, we put in place the five-year commercial supply agreement, the first two years of which are $480 million valued, and it's contemplated, and we expect that whether it's J&J or AZ, after 2021, we expect to be actively in this COVID-19 vaccine support space.

Great, thanks. And just one follow-up, just on M&A, you know, how active are you guys? What does the pipeline look like and what sort of assets are you looking at?

Yeah, so I think the – The landscape looks about the way it did when we shared our thoughts with investors last fall. If anything, it's probably gotten a little more busy and populated, Jake. There are a number of opportunities across literally all four of our business units that we are evaluating. Again, to Rich's point, the fact that we have, in our words, a greater probability of getting to that $2 billion revenue number by 2024 through organic sources only doesn't change our view that we think that there are unique assets out there that we can use to build upon and create leadership positions in segments of the public health threat market where we think we are best positioned to win. We're still highly engaged there. and opportunistic and interested in looking at different assets to bring in.

Great. Thanks, guys. Appreciate it. Sure.

Thank you. And our next question comes from Dana Flanders with Guggenheim Partners. Your line is now open.

Hi. This is Devin Guymon on for Dana Flanders. Thank you for the questions, and congrats on the quarter. Just the first one on CDMO, your guidance is $440 to $460 million for 2020, which is surprisingly a little higher than we had forecast initially. Could you perhaps walk us through your revenue recognition for the procured COVID contracts to date and how they kind of balance broadly across 2020 and 2021? And I have a follow-up after that. Thank you.

Sure. So, Rich, you want to tackle that one?

Sure. Sure. So when you look at the $628 million piece, it's broken up into two components, the $543 million capacity reservation, which we are recognizing monthly on a straight line basis from when the task order was awarded in mid-May of this year through December of 2021. The $85 million component related to the capital, is not recognized on a straight line basis but is more related to progress against the capital projects. So a portion of that will come into 2020 and the remainder into 2021. And then the other programs are the recognition is just related to, you know, the delivery of certain milestones, achievement of different aspects of the arrangements that we have in place.

Okay, great. And then just a question on Narcan. Your guidance assumes no generic launch in 2020. What line of sight do you guys have on this? Have you had ongoing conversations with TEVA? What makes you comfortable assuming that TEVA will not launch early within the cycle of the appeals process?

Yeah, so Devin, just to be clear, we have obviously no assurance that they will not they very well may do that later in 2020 or in 2021 prior to the expected appeal decision in the second half of the year. We are now and will be prepared to counter or to deal with whatever they decide to do whenever they decide to do it. Our best knowledge right now indicates that, and we're assuming, as Rich said, we're not expecting them to, but if they do, that's fine. So we're maintaining our product guidance for NARCAMP for 2020, and we'll talk more about our expectations in 2021 when we provide our guidance probably around January of next year.

Okay, thank you.

Sure.

Is there another question, Joelle?

Joelle, are you there? Hello? Joelle, are you there?

Hold on one second, ladies and gentlemen. sending a message. We apologize for the interruption. This has never occurred.

Rich, can you hear us, just to make sure the call is still alive?

Yes, I can.

All right. Thank you.

Thank you. And our next question comes from . Your line is now open.

Hi. Thank you. Two questions. With respect to Narcan, where are you with respect to your product enhancement differentiation launches to, again, further differentiate your product versus anybody else's?

Yeah, thanks, Kay, for the question, and thanks for joining the call. I assume you're referring to one of the life cycle product improvements or enhancements that we've talked about is the twin dose or the bi-dose product that will, at the end of the day, offer two four milligram nasal delivered formulations of naloxone in a single device as opposed to having patients or users use two different devices. So we're continuing to develop and evaluate that twin dose or by dose. It's not going to be something that will come to the market in 2020. But Doug White, I think you're on the call. If you'd like to provide a little more color around the development status of that, that would be helpful.

Sure. Thanks, Bob. A couple things. There's one nearer term. life cycle improvement, if you will, and that's we did send data to the FDA for an expansion or extension of our dating from 24 months to 36 months. So we would anticipate that approval this year, and that's for the existing small dose Narcan nasal spray. On the multi-dose product, that product is in development, and we would anticipate submitting an application to the FDA in 2021. Male Speaker Okay, great.

Second question, to what extent for the new CDMO contracts have you negotiated higher gross margin, and if so, you know, how many basis point improvements over the prior business?

So just a clarification, Kay, are you referring to just the COVID-19 vaccine CDMO contracts?

Yes, Bob.

So yeah, so the nature of those, as Rich has described, is it's a combination of some initial tech transfer as well as capacity reservation based contracts with both J&J as well as AZ and with BARDA, HHS and Operation Warp Speed. And then there are the commercial supply agreements, which are longer term, more traditional CDMO contracts that are in place. So as Rich described, the first flavor of those contracts are by design and by structure more favorable from a gross margin perspective because of the nature of the work. The commercial supply agreements are more typical of a standard CDMO gross margin profile because of the nature of that work. So that's how I would look at that. And clearly we are experiencing in 2020 and 2021 a bit of an uplift in our margin profile because of those first category of contracts that will normalize longer term when those mature and are replaced with more traditional CDMO contracts.

Okay, thank you. That's helpful.

Sure.

Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. Our next question comes from Lisa Springer with Singular Research. Your line is now open.

Thank you. Obviously, you've locked in a lot of the coronavirus vaccine manufacturing capacity out there. I just wanted to ask, are there other vaccine developers that you might be in discussions with? Might we see some more manufacturing contracts until this year?

Yeah, Lisa, thank you for the question and thank you for joining the call. I think as we described and as you've heard the government and the Operation Warp Speed folks comment, the government has prioritized the top tier of COVID-19 vaccine candidates with five of the big players. There are an additional probably nine to 12 other candidates that are in development that are being supported at some level by Operation Warp Speed and by HHS, such that if any one of the top tier five fail to meet their clinical endpoints or show promise going forward, there's likely to be a substitution. So what's important, I think, to understand about the nature of our contracts with Operation Warp Speed is that our capacity has been basically spoken for such that Operation Warp Speed and HHS can substitute different candidates. So it's entirely possible that we may have a substitute, but that will be all fact-dependent. And to Said's point earlier, the fact that we are continuing to invest in broader services across a broader platform of capabilities and locations, we continue to be in discussion with any number of other developers and innovators for expanded business. So it's a continuing process.

Okay. Thank you for that explanation.

Sure.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Bob Burrows for closing remarks.

Thank you, Joelle. And with that, ladies and gentlemen, we now conclude the call. Thank you all for your participation. Please note, an archived version of the webcast of today's call will be available later today and accessible through the company website. Once again, thank you, and we look forward to speaking with all of you in the future. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.