Emergent BioSolutions Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Emergent BioSolutions fourth quarter 2020 earnings conference call. At this time, all participants' lines are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. I would now like to hand the conference over to management. Please go ahead.

Thank you, Catherine, and good afternoon, everyone. My name is Bob Burrows, VP of Investor Relations for the company Thank you for joining us today as we discuss the operational and financial results for the fourth quarter and 12 months into December 31, 2020. As is customary, today's call is open to all participants, and the call is being recorded and is copyrighted by Emergent BioSolutions. In addition to today's press release, there's a series of slides accompanying this webcast available to all webcast participants. Turning to slides three and four, during today's call, we may make projections and other forward-looking statements related to our business Future events are prospects for future performance. These forward-looking statements are based on our current intentions, beliefs, and expectations regarding future events. Any forward-looking statement speaks only 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 statement. 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 emergency operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income, adjusted EBITDA, and adjusted gross margin, and the reconciliations between our GAAP financial measures and these non-GAAP financial measures. Turning to slide five, the agenda for today's call will include Bob Kramer, President and Chief Executive Officer, who will comment on the current state of the company, and Rich Lindahl, Chief Financial Officer, who will speak to the financials for 4Q and full year 2020, as well as our forecast for 2021. This will then be followed by a Q&A session where additional members of the senior team are present and available as needed. Finally, for the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on February 18, 2021. Since then, Emergent may have made announcements related to topics discussed during today's call. And with that introduction, I would now like to turn the call over to our President and CEO, Bob Kramer, whose segment begins with slide six.

Bob? Bob Kramer Thank you, Bob, and good afternoon to everyone. Thank you for joining with us this afternoon. Actually, I'm going to start on slide seven, and I'd like to start the call today by recognizing the extraordinary efforts of the entire emergent team over the course of 2020. In spite of the significant challenges created by the pandemic, we maintain our focus on the business. This has meant not only working on the production of COVID-19 vaccine candidates, but also innovating with the development of novel polyclonal COVID-19 treatments, all the while continuing to protect lives against a broad range of public health threats, including the worsening opioid epidemic. Our focus and strong execution on mission absolutely would not have been possible without the incredible contributions of the entire emergent team that is now more than 2,300 employees strong. And I'm pleased to report that it has resulted in the strongest year in our 22-year history. As you know, in early January, we provided a 2021 financial forecast with total revenues of $2 billion and adjusted EBITDA of $780 million, both at the midpoint, which we are reaffirming today. Our current five-year strategic plan targets $2 billion in revenue by 2024. With a significant growth in our business during last year, 2020, we're now reevaluating our long-term objectives and expect to provide an update later this year. For the majority of my prepared remarks today, I want to focus on four key aspects of our current business, all of which we believe have important potential implications for the continued growth of the company. So turning to slide eight, first, our key priority is to address the immediate need stemming from COVID-19 pandemic. We're playing a critical role in the fight against COVID-19 with the development and manufacturing of clinical and commercial materials across our three CDMO service pillars for a variety of customers, most notably Johnson & Johnson, AstraZeneca, as well as a number of other biotech innovators, including the newest publicly announced partnerships with Humanogen and Providence Therapeutics. In addition, we're developing our own innovative COVID-19 treatments based on our proprietary validated hyperimmune platforms. With multiple coronavirus strains emerging, data suggests that the disease spreads more easily and quickly, which could further burden healthcare resources and potentially lead to an uptick in both hospitalizations and deaths. As a consequence, we believe that vaccination and the development of effective treatments will be needed for many years to come. As part of the arsenal of treatments that will be needed to combat this long-term threat, scientists early on identified the potential value of having polyclonal treatments in the likely case of virus mutation. To address this need, Immersion has focused on the rapid deployment of our polyclonal plasma-derived treatment based on our validated hyperimmune platform. As a reminder, our COVID-19 human hyperimmune or COVID-HIG product candidate contains concentrated consistent amounts of polyclonal antibodies directed against SARS-CoV-2 and is manufactured using plasma from healthy donors with elevated levels of neutralizing antibodies. These antibodies have undergone additional purification and safety steps for viral removal using our proven manufacturing platform that currently supports several FDA-approved products. As a polyclonal treatment, COVID-HIG contains many different antibodies that can bind to the virus at multiple sites, so its efficacy may be less impacted by strain variability or emergence of resistance, unlike monoclonal antibodies that bind to a single site. We believe this may ultimately provide an advantage as a treatment and could deliver a meaningful impact to treat COVID-19 patients. COVID-HIG is currently being evaluated as a treatment for hospitalized patients in a Phase III clinical trial led by NIH. The trial, also known as INSIGHT-13, has an expected data readout within the next two months, and assuming the data is positive, we would file an application for emergency use authorization for this candidate thereafter. A second clinical program is also underway to evaluate COVID-HIG as a post-exposure prophylaxis to prevent infection in individuals at risk of exposure. Over the last 18 months, we've also rapidly introduced and scaled up the infrastructure and processes to support our CDMO service offerings. Our vision for this business has always been more than just maintaining a pandemic response capability. From day one, we've positioned our CDMO as a multipurpose set of offerings for both pharma and biotech innovators and government and NGO partners across multiple sites and multiple technologies. Biologics manufacturing is an exacting process that requires specialized equipment disciplined processes, and a highly trained staff and typically takes years. The timelines related to COVID-19 have been substantially compressed with everything occurring in less than one year. This pandemic has highlighted the growing mammalian and viral vaccines market and shown that service providers must have durable, scalable, and compliant manufacturing infrastructures. Immersion has been able to thrive in this environment Our differentiated CDMO value proposition has been validated by our eight and counting CDMO COVID-19 partnerships and our growing pipeline and portfolio. We've carved out a leading position as a tier one biologics CDMO organization. As you may know, owning and controlling our own manufacturing capacity and capabilities has always been a critical strategic importance to us, particularly for biologics. We, unlike most standalone CDMOs, bring the expertise from manufacturing and handling some of the most complex biologic products in the world and the experience of having to operate in challenging rapid response situations in partnership with the U.S. government. Unlike most embedded CDMOs, this is not a utilization play. Rather, it's a strategic set of offerings across three service pillars and five platform technologies, and we have specifically built a service business with that in mind. All of this has driven expansion of our manufacturing capabilities both organically and through M&A over the last decade and spurred us to create a dedicated CDMO business unit four years ago. We feel that decision is has been validated, particularly over the course of this pandemic, as it has accelerated our position as a Tier 1 biologic option for outsourcing decisions. And we expect our CDMO business to continue to be a significant contributor to our future growth and expansion. As we've seen with COVID-19, public health emergencies can cause significant disruption. They're unpredictable, and you need to prepare in advance. To that end, I would like to recognize the foresight of the U.S. government and its investment in preparedness efforts. As you know, we've partnered with the U.S. government throughout our 22-year history. An important example of this partnership was the 2012 expansion of our Bayview facility in Baltimore that was co-funded by the U.S. government and subsequently used to address the Zika and Ebola outbreaks. And it's now playing a primary role in response to COVID-19, where we are producing drug substance for both J&J as well as AstraZeneca under multi-year CDMO agreements. As critical and successful as our partnership with the U.S. government has been, we can and need to do more to expand preparedness efforts across a broad range of public health threats. The Bipartisan Commission on Biodefense in its most recent report emphasized that being prepared means not only being primed to respond to viral outbreaks like SARS-CoV-2, but also other threats like anthrax, smallpox, botulism, and many others. Further, it recognized the importance of substantial investments to broaden the options available for a rapid response in advance to combat novel threats when they arise. The U.S. government continues to stockpile our preparedness medical countermeasures, including ACAM2000, AV7909, BioThrax, BAT, Anthroxyl, Raxibacumab, and VIG, and we continue to work with them on the development of new medical countermeasures across a variety of biologic and chemical threats. Turning to slide nine, now the opioid crisis. As you well know, it's been significantly worsened by this pandemic. Preliminary data from CDC shows overdoses up 18% as of May of 2020, and soberingly, over 81,000 drug overdose deaths in the 12-month period ending May 2020, the largest number of drug overdose deaths for a 12-month period ever recorded. In its latest health alert, the CDC recommended expanding the provision and use of naloxone and overdose prevention education to combat the opioid epidemic. As a result, it's been essential for us to make sure that there's enough Narcan nasal spray available to reverse overdoses. Our team worked tirelessly in 2020 to ensure that our 6,000 plus public interest customers have had an uninterrupted supply of Narcan nasal spray, and that's been made available to patients and their caregivers despite the disruption of a number of our normal communication, outreach, and awareness channels. We remain as committed as ever to combating this terrible crisis head on. Finally, as you all know, the travel sector has been significantly disrupted through the course of the pandemic, and our travel health business is no exception. However, we continue to believe that as we get through the pandemic, global travel will resume and the health and safety of travelers will be of ever greater importance and focus. We plan to reintroduce Vivotif and Vaxcora to the market as travel resumes and we'll also continue to invest in R&D efforts in this area, most notably with our chikungunya VLP vaccine candidate, which we expect to begin a phase three clinical trial later this year. In summary, over the course of last year, our unique and diversified business model has exhibited both its strength as well as its durability, despite a very challenging environment, and we expect this to continue well into the future. I'm very encouraged at the prospects for continued growth and for continuing to expand our impact and reach in terms of patients and customers. I'm going to stop here and turn the call over to Rich, who will do a deeper dive into the financial performance of the company, both for the fourth quarter as well as total year 2020. Rich?

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call. I'll start on slide 11. I'm pleased to report that Emergent finished 2020 in a position of unprecedented strength. Our team is executing sharply across the entire enterprise, even as the world remains challenged by the COVID-19 pandemic. The company's financial outcomes during both the fourth quarter and full year of 2020 reflect the substantial strength and durability of our diversified business as evidenced by record total revenues, profitability, and operating cash flow. Our balance sheet is in excellent shape with the liquidity and financial flexibility to pursue opportunistic investments in assets, capabilities, and capacity to drive incremental returns on capital. As a consequence, we enter 2020-2021 confident that we will deliver another year of strong growth as we further extend our impact on the state of global preparedness and response to public health threats. With that, please turn to slide 12 and let's first look at the details of our fourth quarter performance. Highlights include total revenues of $583 million, an increase of $223 million or 62% versus the prior year. Adjusted EBITDA of $291 million, an increase of $157 million or 117% versus the prior year. An adjusted net income of $199 million a 116 million or 140% improvement versus the prior year. Breaking down quarterly revenue into its components, let's first review the elements of our product sales. ACAM 2000 sales were $129 million as we resolved the timing delay discussed on our third quarter call and continued deliveries to the United States Strategic National Stockpile under the latest option exercise from Health and Human Services. Anthrax vaccine sales were $116 million, reflecting once more the strong delivery volumes associated with the transition from BioThrax to AB7909 in the Strategic National Stockpile, a process that we now anticipate will return to more normalized historical levels in the coming year. Narcan nasal spray sales were $77 million, driven by ongoing strong and durable demand for this critical drug-device combination product for opioid overdose reversal, and other product sales were $19 million, primarily reflecting sales of VAT and RSDL. We also had significant growth in CDMO services as revenues increased to $199 million in the quarter. This level of performance reflects the continuing contribution from the approximately $1.5 billion of initial contract value related to COVID-19 secured last year, most notably our landmark public-private CDMO partnership with BARDA in support of vaccine manufacturing, as well as the tech transfer and commercial supply agreements with Johnson & Johnson and AstraZeneca. Importantly, we also continue to win new projects and extend existing projects. And with the inclusion of Humanogen and Providence Therapeutics in the first quarter of 2021, we have now secured eight CDMO COVID-19 partnerships, with the most recent highlighting our ability to provide CDMO services from our Winnipeg, Manitoba, Canada facility. Looking beyond revenue, the quarterly results also include net R&D expense of $17 million, or 3% of adjusted revenue, reflecting discretionary development investments across our vaccines, therapeutics, and devices R&D pipelines. SG&A spend of $82 million, or 14% of total revenues, an increase of 14 percent over the prior year and reflecting ongoing hiring to support our growth, and combined product and CDMO gross margin on an adjusted basis of 69 percent, reflecting the impact of overall product mix as well as improved contribution from CDMO services. Turning to slide 13, in today's press release, we also provide updates to two CDMO metrics that we introduced on our last earnings call. we secured $53 million of new contracts during the fourth quarter. And second, the opportunity funnel was $689 million as of December 31st. Accordingly, in the second half of 2020, we secured about $113 million in new business via new projects and existing project extensions. And the opportunity funnel increased from $475 million to $689 million. You will also note that we introduced a third CDMO business metric, CDMO backlog, which was $1.34 billion as of December 31st. CDMO backlog represents the remaining unrealized value of all contracts that are in place as of a given date. CDMO backlog replaces the previous secured portfolio metric as we believe it provides a more useful way to assess the ongoing growth of the business. Now let's turn to slide 14 and review the full year. Our financial performance for the 12 months of 2020 was equally strong, driven by all the factors just discussed for the fourth quarter. Key 2020 highlights include total revenues of $1.56 billion, an increase of $449 million, or 41 percent, compared to 2019. CDMO services revenue of $451 million, an increase of $371 million compared to 2019, reflecting our first full year of active commercialization as accelerated by the significant contribution of new business wins with both innovators and the U.S. government related to COVID-19 response. Combined product and CDMO adjusted gross margin of 67 percent, R&D investment of $235 million in our pipeline, which we view as potential sources of future organic growth, and net R&D expense of $90 million reflecting the substantial risk mitigation of contract, grant, and other non-dilutive funding. SG&A expense of $303 million, or 19% of total revenues, compared to 25% in the prior year, as we continue to scale our business to support our growth. And all-time highs in profitability, with adjusted EBITDA of $630 million, or 41% of total revenues, and adjusted net income of $424 million, or 27 percent of total revenues. Now, please turn to slide 15 for a review of our balance sheet and cash flow. We again ended the quarter in the strongest liquidity position in the company's history with $621 million in cash and $231 million of accounts receivable, bringing current liquid assets to over $850 million. We also had undrawn revolver capacity of $600 million. Our net debt position at year end 2020 was $264 million. And as a result, we ended the year with a ratio of net debt to adjusted EBITDA of less than one times. Our cash flow highlights include 2020 operating cash flow of $536 million, which is also the strongest in our history and reflects the cash generation capability of our diversified mix of products and services. We spent $141 million on gross capital expenditures, and when factoring in third-party reimbursements, the net CapEx for the year was $99 million. These investments are targeted at a variety of capacity and capability expansions that we have previously discussed. Lastly, free cash flow, which we define as operating cash flow less CapEx, was $395 million in 2020. In summary, our accelerating operating and financial momentum positions us to capture additional growth and operating leverage across the coming year as we execute on our growth strategy and deliver solutions to address global public health threats. Please turn to slide 16 for a review of our 2021 forecast. As detailed in today's press release, we are reaffirming the guidance for 2021 that we announced on January 10th, which is as follows. Total revenues in a range of $1.95 billion to $2.05 billion. Anthrax vaccines in a range of $280 to $310 million. ACAM 2000 in a range of $185 million to $205 million. Narcan nasal spray in a range of $305 million to $325 million. CDMO services revenue in a range of $925 to $965 million. adjusted EBITDA of $750 million to $810 million, and adjusted net income of $475 million to $525 million. Other key assumptions for 2021 include gross margin of approximately 65 percent on a GAAP basis, capital expenditures net of reimbursement of between 8 to 9 percent of total revenues, continued progress across our development pipeline programs, including one or more Phase III starts and one BLA filing, an RFP and follow-on procurement contract with HHS related to Raxibacumab, our anthrax monoclonal therapeutic for inclusion in the SNS, and no generic entrant against Narcan nasal spray until the conclusion of the appeal, which is expected in the second half of 2021. We are also providing first quarter 21 total revenue guidance of $330 million to $370 million, which at the midpoint represents approximately 18% of our total revenues for 2021 in line with historical patterns. And lastly, please turn to slide 17 for some summary comments. We delivered exceptional financial results in 2020 and are poised for continued growth in 2021. We have built a strong and resilient business with the capabilities, capacity, and financial strength needed to deliver preparedness and response solutions to a wide range of public health threats. Our employees have risen to the challenge as we stepped up meaningfully to confront the crisis brought on by the COVID-19 pandemic, and we have proven that our durable business model plays a critically important role in protecting and enhancing lives across the globe. Our journey continues, and we go. That completes my prepared remarks, and I'll now turn the call over to the operator to begin the Q&A session. Operator?

Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. Our first question comes from Brandon Foulkes with Cantor Fitzgerald. Your line is open.

Hi, thanks for taking my questions, and congratulations on another good quarter. Maybe, yeah, just see what you can say about this, but... You know, I think we've seen some talk coming out about sort of J&J's vaccine only having a few million doses in March. And I think, you know, I see your 1Q guidance as well. Granted, on J&J's earnings call, sort of they reaffirmed their target of supplying 100 million doses by June. So maybe, is there anything you can comment in terms of if there are any manufacturing challenges or if this is just part of the process timetable that was initially set. And then maybe secondly, I'll just wrap this in because it's also CDMO related, but thank you for the backlog and opportunity funnel. I think that's very helpful. Any color you can give around capacity utilization, you know, maybe of the 1.3 billion and then, you know, in this opportunity funnel, could you add that on top of this 1.3 billion without additional capacity utilization? And if I'm correct, I'd be recognized for one to three years. Thank you.

Thanks, Brandon. Appreciate the question. Thanks for joining the call. Let me say a few things about the first question related to J&J and our collaboration agreement with them. And then I'll ask Saeed Hussain, who runs the CDMO business unit, to comment a little bit about the the backlog metric and the capacity question you raised, Brandon. So just as a reminder to everyone, our two key deliverables to J&J, and it goes for AstraZeneca as well, as we've stated before, are pretty clear. First, we were to have established a large-scale manufacturing infrastructure and tech transfer their candidates to this infrastructure to our Bayview facility outside of Baltimore during 2020 and early into 2021. And that is essentially complete. The second commitment or obligation, if you will, is to manufacture and supply drug substance for their vaccine candidates in support of their global supply chain goals, which they have been pretty open about in terms of the number. And we're right on line, Brandon, with doing that timing-wise as well as capability for both J&J and AstraZeneca. Specific to J&J, you know what they said in terms of their short-term goal, is to provide as many as 100 million doses to the U.S. government in the first half of 2021, and we're right on schedule to support that. So that's really all of the update, other than to say and acknowledge that, you know, companies like Emergent and many other companies have done human's work over the last 10 to 12 months in bringing this additional Saeed Khan- capacity online and being on the verge of literally being able to make available hundreds of millions of doses of multiple vaccine candidates and we couldn't I couldn't be more proud of our team. Saeed Khan- Who has played a critical role in doing that, and maybe with that site i'll turn it over to you and let you talk a little bit about the backlog and the capacity portion of brandon's question.

Absolutely. Thank you, Bob, and thank you, Brandon, for the question. So I'll touch on both of those, starting off first on capacity. So as we've said, our CDMO services utilizes a network of multiple development and manufacturing facilities, so we look at capacity across the entire network. Currently, of our network of nine sites, five are CDMO revenue generating. Of these five revenue generating sites, our Bayview drug substance facility is highly utilized, but our other four revenue generating facilities have available capacity and they have been rapidly onboarding new projects as a part of the new business that we've been winning between new projects and existing project extensions. When it comes to the backlog and the opportunity funnel, so the backlog does take into account secured business that is spread across our network of development and manufacturing sites specifically the the revenue generating sites that we've mentioned out of those nine the opportunity funnel takes into account proposals that we have issued and discussions that we are in across those across that network of nine development and manufacturing sites those are potential opportunities that if awarded would be additive to the backlog over the next one to three years.

Great. Thank you very much to both of you.

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

Hey, good afternoon. Can you hear me?

You can hear you fine, Jake. Thanks for joining.

Hey, just a couple of questions. Thanks for the additional disclosure. Just on the backlog, is there a breakout or some directional commentary around COVID-19 versus non-COVID work in the backlog? Secondly, I think Novavax announced a memorandum of understanding with a company called Gabby. I was just wondering if that was part of your work. partnership with them. And then finally, just on Narcan, I think you reiterated the guidance, but some of the commentary around generic entry change versus what you indicated at the beginning of the year. So I was just trying to get some additional clarity on that. Thanks.

Sure. Thanks to the questions, Jake. So I'll take the Novavax question and comment also about Narcan. And then Saeed, I'll throw it back to you for the backlog question of Jake's. So I think first of all, Jake, when it comes to Novavax, just to be really clear, we did some early work with the Novavax COVID-19 vaccine candidate in the kind of the middle of 2020. to tech transfer that candidate into our Bayview facility and do some development, later stage development work, and then manufacture the phase two clinical trial material for that candidate. They are now working with a number of other contractors, both on drug substance as well as final drug product services, so I really can't comment on exactly what they're doing and with whom. On the Narcan nasal spray question, again, I think we've been pretty clear that our guidance number for 2021 assumes, as Rich indicated as part of his prepared comments, that there will be a generic entrant as soon as the appeal process is complete. We can't exactly say the month and date of that timing, but we expect it in the second half, and hence our revenue range for Narcan is predicated on some generic entrant into that market in the second half of this year. We also know that, as I said in my prepared remarks, unfortunately the opioid epidemic is getting more critical, not less. The number of overdoses and unfortunately overdose related deaths is increasing. So it's imperative even more so that we emergent make sure that we fulfill our commitment and obligation around education of the individuals who are at risk of an opioid overdose. We educate, and most importantly, we make available as many units of Narcan as we can while we're doing that education process. So we're committed to that as we ever have been, and it's making a difference. So with that, Said, I'll let you handle the backlog question that Jake raised.

Thank you, Bob, and thank you, Jake, for the question. So first off, with respect to the backlog, we don't provide a further breakdown of that number. But what I can comment on is that the backlog is a mix of COVID and non-COVID. It's a mix of clinical and commercial scope projects. It also includes a mixture of the two customer segments that we target. One is pharma and biotech with small, mid, and large size innovators, as well as governments and NGOs. Just as a reminder, the CDMO services business continues to be indication agnostic, and we deploy these services to a mix of COVID and non-COVID opportunities. The critical thing from a COVID-19 standpoint is that it reiterates the importance of mammalian and viral vaccine technology platform within the industry, which are at the heart of our CDMO offerings.

Thanks for taking my questions, guys. Thanks, Jake.

Our next question comes from Jessica Fye with JP Morgan. Your line is open.

Hey, guys. Good evening. Hope you're well. I had another one on the CMO backlog. Specifically, how does the backlog number of $1.34 billion reported today translate from the $1.8 billion of, I think you were calling it an established current portfolio that was reported with 3Q to Are these metrics representing the same thing? And with about $200 million sort of converted to revenue recognized over the fourth quarter and about $50 million added to the backlog in 4Q, what else would have contributed to the $500 million decline if they are representing the same concept?

Yep. Thanks, Jess. So, Saeed, Maybe a combination of you and Rich can kind of reconcile the numbers for Jess.

Sure. Why don't I take the first cut at that, Bob, and then, Saeed, you can jump in and fill in any gaps. But, Jess, first of all, thanks for the question. So the secured portfolio represented the total number of contracts that had been secured and put in place. During any given period, the backlog is going to represent revenue that's been realized from those contracts, so that serves to reduce the backlog. And then it will be increased by any contract value that has moved from the opportunity funnel into backlog itself. So it's really, again, representing an ongoing point in time figure that that gives you the outlook for the next one to three years in terms of revenue generation potential of the CDMO business.

Can you help me bridge from the 1.8 to the 1.34 when it seems like there is 200 million of revenue recognized? And that's what I'm kind of struggling with.

So the 1.8 was a full year. So from the beginning of January, And so you take the full $450 million of CDMO revenue that was recognized and subtract that from the 1.8, and then you add back in the revenue, the new contract business that had been realized.

Okay. So then thinking ahead, just to make sure you understand, with north of $900 million of CDMO revenue set to be recognized this year, assuming you're somewhere in the in line with the guidance, out of that $1.3 billion backlog, it seems like that would leave about $400 million of kind of locked-in business for the CDMO in the future, beyond which you would have to kind of secure more business from the funnel. Is that the right way to think about it?

That is right, yes. And as Saeed indicated, we are working hard and securing new business as we move through the year. And we'll continue to update you each quarter in terms of the amount of new business that has been secured each quarter.

Okay, perfect. And maybe just the last one on the numbers. You mentioned that at the midpoint of the first quarter revenue guidance, that comes out to about 18% of the full year projection. Can you just talk about which revenue lines in particular you expect to be more back-end weighted?

Yeah, so a couple things there. So if you look at kind of the first quarter performance last year versus this year, there's similar patterns on a year-over-year basis across the portfolio, with the exception of CDMO, which we expect to be meaningfully higher in the first quarter than it was in the first quarter of last year. The medical countermeasure products related to anthrax vaccines and ACAM 2000 are the ones that are going to be a little bit lower in the first quarter than you saw in the fourth quarter of last year. And the reasons for that on ACAM being, as we mentioned in the prepared remarks, we have fulfilled the last option exercise. So we are working towards another option exercise for ACAM 2000, which we fully expect to obtain here, consistent with the long-term commitment of the 10-year contract that we signed back in 2019. And then with anthrax vaccines, there's some seasonality in the production and delivery patterns that is consistent here with prior years as well. And so So you'll see a similar type of pattern unfold there.

And I think, Rich, you commented on, but Jess, I think you all should expect that 2021 will have a similar quarterly revenue cadence to what we've had for the last four or five years, which is roughly 40% in the first half, 60% in the second half. And as Rich said, the midpoint of that Q1 revenue number of 18% is right in line with what we were last year as well as the last couple of years. So as hard as we try to remove some of the lumpiness, it tends to stick with us.

Okay, great. And maybe if I could just follow up on, I think it was Brandon's question from the beginning related to J&J timing. Within the CDMO business and just the kind of quarter-to-quarter variability, is that a factor in the kind of quarterly cadence of CDMO revenue, or should we think of that revenue line as being fairly stable over the course of 2021?

Yeah, Rich, you want to comment on that? I mean, I would just remind you, Jess, and Brandon, and everyone else that, you know, for 2021, we're operating against a couple of CDMO contracts, including the task order with HHS, as well as the commercial supply agreements with AZ and J&J, which are more, I'll say, production slot driven as opposed to dose driven. So back to Brandon's question, if folks are thinking that our revenue for CDMO is overly tied to the delivery of doses by J&J or AZ, that's probably not the best way to think about it.

And so to answer your question, Jess, I think On balance, we do expect a smoother and more level pattern of revenue in CDMO. Having said that, there is some ramping as well that is occurring as we go through the year, so the first quarter is likely to be a little bit less for the full year than the other quarters of the year. I did want to also just go back and make one additional comment to our backlog and opportunity funnel conversation, and just to make sure it's clear that the opportunity funnel does not include any potential value of the extensions of the existing commercial service agreements with either J&J or AstraZeneca. So those are additional potential opportunities that are not captured in the opportunity funnel as we sit here today.

Got it. Thanks so much for taking my questions.

Thanks, Jess.

Thank you. Our next question comes from Dana Flanders with Guggenheim. Your line is open.

Great. Thank you very much for the questions. My first is I was wondering if you could just elaborate a little bit on your COVID HIG program, which I know you mentioned, Bob, in your prepared remarks. Wondering if you could just help frame for people kind of the data set that you're expecting here shortly and just the level of benefit you're hoping to show, and then how you see that fitting into the treatment paradigm potentially in and I guess also kind of the amount of data you'd expect to see in different strains as well. And then I have a follow-up.

Okay, great. So I'm going to introduce and invite Dr. Laura Sayward, who runs our therapeutics business unit and is shepherding this critically important HIG treatment to answer the questions. And so, Laura, if you could weigh in here, that would be great.

Okay, thank you, and thanks for the questions, Veena. I'll try to add a little bit of extra color from the remarks that Bob included. You can probably tell that our trial that was in collaboration with NIH, the INSIGHT-13 trial, has finished its recruitment, so we're sort of in that successful stage of getting to review the data soon, and we'll be looking at the opportunity to move forward then to EUA. And that data set that we'll be seeing This was a trial that was run with NIH with a number of hyperimmune products in it. So there will be a combined data set as well as individual data sets for each product. And what we were looking for, you know, this is hospitalized patients, so it is looking at patients that are further through the course of the disease, so within 12 days of symptoms. And it uses an ordinal scale, so looking at meaningful benefit across some of the patients factors that contribute to the disease outcome. So in hospital, whether they're on respiratory support, whether they're in ICU and looking for a meaningful shift so that there's less time in hospital or a faster recovery for those patients. In terms of your variant question, you know, this is an interesting question and certainly an evolving landscape. I mean, we are seeing a number of variants come up with COVID. This isn't unexpected, but certainly there is a mixture as we see different strains of the virus emerge. So the trial was an international trial. It did run in a number of sites and countries, and so we will be looking at that data set to try to understand if there may be some data reflective of different variants, but we're not expecting the clinical data set to be able to sort of tease that out. I will say we have collaborations ongoing to test the product against variants, and I think this will be an important data set to understand how a polyclonal product can help to address some of this additional challenge. So hopefully I answered your question, but let me know if I missed anything, Dana.

Okay. No, that was great. Thank you. And then just as a follow-up on the Anthrax franchise, can you just comment on timing of when you'd expect to get a new contract in place and price expectations?

Yeah, Dana. I think as we've talked about the transition for the strategic national stockpile from BioThrax to AB799 and BioThrax, we started in 2019. It really kind of kicked into higher gear in 2020. will continue to execute in 2021. I think our expectation is that the Phase III clinical trial for AB 7909 will likely run through the end of this year, 2021, and we'll be sharing that data, obviously, with the government, and we'll start some discussions around the follow-on contract perhaps in the second half of this year or first half of next year. I think we've been pretty clear about what the pricing expectations are from our prior conversations. And as you know, initially, we negotiated a slightly lower price per dose for AB799 versus BioThrax, given the EUA nature of the use, and as well as the fact that the U.S. government had committed, a fair amount of development capital to co-develop that product. So, that all will be taken into consideration when we sit down and talk to them about the longer-term contract.

Male Speaker Okay. And if I could just squeeze in one last quick one. Rich, I know you just mentioned that the commercial options with AZN and J&J are not assumed or not included in that opportunity funnel. And I assume those kind of discussions are ongoing, but just wondering if there's any kind of trigger points that we should think about for potential extension of those commercial contracts. I think AZN, if I'm not mistaken, just goes through 2021 as it is now. So just wondering if you could frame that for us. Thanks.

Sure. And so, you know, these contracts, as you as you recognized, Johnson & Johnson is a five year contract. You know, the first two years have been committed, and then AstraZeneca has a three-year contract with the first year only being committed at this point in time. You know, clearly, as we are planning for production in the facilities, you know, there's a point in time at which we need to obtain commitments for that capacity that's available, and so with a sufficient lead time in advance of when that would otherwise be available, that's when those discussions would commence. So we will certainly keep you posted if and when we have additional information to provide you on that front.

Okay, thank you.

Thank you. Our next question comes from Kee Nakai with Chardin. Your line is open.

Yes, thanks. So Rich, you gave us an estimate for gross margin for the year and specific to CDMO activities. As you move more into the drug substance parts of your contract, we would expect that to remain at the higher end of what we would see from CDMO. My question is, how should we think about OWS activity as it pertains to scheduling the slots, as Bob mentioned, with your commitments to J&J and AZ?

So I just want to make sure I understand the question. So how should we think about available drug substance capacity as it relates to those contracts?

Well, just the activities you're performing under those contracts that are going to produce the gross margin guidance that you gave us, how do we think about when the OWS activities layer in to what you're already committed to doing for J&J and AZ?

So if what you're asking is how does the BARDA task order relate to all of that, Certainly, there is still an element of the task order that remains in play for 2021. As you know, there were two components. Of the $628 million task order, there was the reservation fee, which is being amortized monthly from May of 2020 through December 31. So there's a portion of revenue that's contributing to both revenue and gross margin in 21. And then there was reimbursement for certain capital expenditures as we invest in expanding the capabilities and capacity primarily in Rockville but also in our Camden facility. So, you know, those in combination with the production activities under the other two commercial service agreements are all influencing along with other business that we continue to produce outside of those contracts. All of that is combined to influence the margins in 2021.

Okay. Switching to the follow-on contracts, starting with ACAM options, is COVID impacting the ability to conduct and secure agreement on the exercise of the option?

Yeah. Okay. That's a great question. We haven't seen any evidence of a slowdown or a delay or a deprioritization of kind of business as usual in that medical countermeasure part of our business, so we're not expecting any delay there.

Okay, and then for Raxi, Bob, I know they're looking to move forward with the next contract there. So are you guiding, is the expectation you'll secure that late second half or, you know, help us out in the timing of that if you can give us a little more clarity? Okay.

Sure. So it will all be driven, Kay, by the U.S. government initiating the request for proposal process to which we will quickly respond. And then it will follow the normal back and forth response with the U.S. government and contract negotiations. It's really difficult to predict with any level of precision the exact timing, but our expectation is that the RFP will come out, will respond. We will be engaged in contract negotiations during this year, 2021, and we expect to put the new contract in place this year.

Okay. Thanks.

Sure. Thank you.

Thank you. Our next question comes from Boris Peeker with Gallant. Your line is open.

Great. Thanks for squeezing me in. A lot of questions have been already answered, so I just want to maybe probe a little further into the CDMO business. How does the margin, I'm just curious, in these future and potential future CDMO revenue compare to margins that you observe in 2020? And kind of in a similar context, are you seeing more competition in the CDMO business now and going forward than there was in 2020?

Yeah, Boris, great questions. Thanks for joining the call. So, Rich, you want to respond to the margin portion of Boris's question, and then maybe, Said, you can weigh in on the level of the competitive landscape for some of these contract opportunities in the funnel.

Sure. Thanks, Bob, and thanks, Boris, for the question. So the way we think about gross margins in the CDMO business on a normalized basis, on a go-forward basis, would be approximately 45% or potentially better CDMO gross margins. That would not come into play in all likelihood until 2022 or beyond, depending on, you know, based on the fact that in 2021 we are getting some support and lift to the gross margin profile from the BARDA task order, as we've highlighted and discussed in prior conversations.

Gotcha. And on the competitive side?

Yeah, thanks, Boris, for the question. So on the competitive landscape side, what we've seen is across our technology platforms and certainly in The acceleration of our credibility as a viable and reliable Tier 1 biologic CDMO option, there continues to be more demand out there than available capacity from credible Tier 1 biologic CDMO options or outsourcing decisions. So right now we see ourselves in a leading position from a competitive landscape. And our value proposition that Bob had mentioned in his prepared remarks, where we take into account the best of both worlds from a pure play CDMO and an embedded CDMO, has been very well received in the discussions to date with potential new opportunities.

Gotcha. And my last question also on CDMO space, when you outline these numbers, backlog numbers, for example, does that include any additional costs that would need to be made to invest in a facility to accommodate the specific requirements, or would that be on top of that, and whoever the other side of the contract would pay for it?

Male Speaker Yep. So, I think in general, Boris, that the opportunity, the backlog represents the remaining value that we have yet to be recognized. The opportunity funnel, Right now, the $689 million number, I think that represents the revenue opportunity for contracts that we are competing on. It does not address, I think, potential additional capital expenditure that we might have to invest or get reimbursed on or from the other side. So hopefully that helps a little bit. I know it doesn't exactly answer your question.

Gotcha. Okay, well, thanks for the answer then. Sure.

Thank you. Again, if you would like to ask a question, press the star and the one key on your touchtone telephone. Our next question comes from Lisa Stringer with Singular Research. Your line is open.

Thank you for taking my question. Given the company's very strong balance sheet and unused borrowing capacity, I'm wondering how likely it is we're going to see a return to M&A in 2021, and if we might see acquisitions in the COVID space.

Yeah, thank you, Lisa, for joining, and thank you for the question. I think we, in general, as we've talked about with analysts and investors, a little over a year ago, we remain keen on looking at strategic assets where we can build upon or establish new leadership positions across the niche markets of the large public health threat market where we think we can best compete in, whether that's in the areas of vaccines or therapeutics or devices or even the CDMO space. We remain very active in assessing and doing diligence on opportunities. So, again, it all is fact dependent upon kind of valuation expectations of the seller, but we continue to see interesting opportunities across all four business units to build and to scale those leadership positions. In addition to that, we remain interested in looking at development candidate opportunities for purposes of building a durable, robust pipeline of development candidates that will also help fuel our growth well into the future. So it will be a combination of both those activities, Lisa.

Could we see the company acquiring more manufacturing capacity?

I think that's always a possibility, Lisa, but I think as I and my colleagues have talked about, sometimes given the unique nature of our infrastructure as well as the technology platforms and our three pillars of the service offering, it might be more economical for us to build rather than buy. So I think we will continue to evaluate all options for growing that CDMO business unit.

Okay. Well, thank you, and congratulations on a very good year.

Thanks, Lisa. Appreciate it.

Thank you. And I'm showing no further questions in the queue. I'd like to turn the call back to Mr. Burrows for any closing remarks.

So, Bob, maybe before you do that, I just wanted to clarify one thing about the NARCAN guidance for this year. And that is first and foremost, as you all know, we are appealing the TEVA litigation decision and we are mounting a very strong appeal and we are, you know, making every effort to turn that back in our favor. So I just wanted to make sure that that was clear, number one. Number two, our guidance does assume that there will be competition in 2021. But the earliest that there could be any generic competition would be if and only if we were to lose the appeal process. And that's what is implied by the commentary that we made both in the press release as well as on the scripted call. So I just wanted to make sure that that was clear.

Terrific. Thanks, Rich. Thanks, everybody. And with that, ladies and gentlemen, we now conclude the call. Thank you for your participation. And please note an archived version of today's webcast as well as a PDF version of the slides using during today's call will be available later today and accessible to the Investors Landing page on the company website. Once again, thanks, everybody, 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, everyone. Have a great day.