Emergent BioSolutions Inc.

Good afternoon, everyone. I'm the operator for today's call. Thank you for joining today as Emergent discusses the operational and financial results for the third quarter of 2023. As is customary, today's call is open to all participants and the call is being recorded and is copyrighted by Emergent Buyer Solutions. In addition to today's press release, there is a series of slides accompanying the webcast available to all webcast participants. Returning to slides three and four, during today's call, emergent may make projections and other forward-looking statements related to their business, future events, their prospects, or future performance. These forward-looking statements are based on their current intentions, beliefs, and expectations regarding future events. Any forward-looking statement speaks only as of the date of this conference call and except as required by law Emergent does 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 Emergent's periodic reports filed with the SEC when evaluating their forward-looking statements. During today's call, Emergent may also discuss 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 and in the slides regarding their use of adjusted net income and loss, adjusted EBITDA, and adjusted gross margin, and the reconciliation between emergence GAAP financial measures and these non-GAAP financial measures. Turning to slide five, The agenda for today's call will include Haywood Miller, Interim Chief Executive Officer, who will comment on the current state of the company. Paul Williams, SVP and Head of the Product Business, will provide brief remarks on Arcana Nasal Spray. And finally, Rich Lindahl, EVP and Chief Financial Officer, who will speak to the financials for Q3 2023, and then pivot to emergence revised forecast for full year 2023 as well as Q4 2023 total revenues. This will be followed by a Q&A session where additional members of the executive leadership team are present and available as needed. Finally, and for the benefit of those who may be listening to the replay of this webcast, this call was held and recorded on November 8, 2023. Since then, emergent may have made announcements related to topics discussed during today's call. And with that, I would now like to turn the call over to Heywood Miller. Heywood?

Good afternoon, everybody, and thank you for joining us today. My comments this afternoon begin on slide seven. After my remarks, Rich will detail our third quarter performance and provide updated guidance for 2023. I've also asked Paul Williams, Senior Vice President and Head of our Products Business, to join us to provide additional detail on the broad availability of Narcan nasal spray as we continue to battle the ongoing opioid crisis. With a full quarter at Emergent now under my belt, I remain encouraged by the progress we're making to improve performance. We are strengthening our fundamentals, and we are continuing to advance our core products business. We are focused on delivering value through our lifesaving products and shaping Emergent to return to growth as we continue to further advance public health and preparedness. Over the past few months, we've made strategic and operational adjustments to strengthen Emergent's financial position and right-size our business. We are prioritizing our core products and have aligned our operations with our medical countermeasures customers, namely the US government. We continue to achieve important milestones across our businesses, including key contract awards that reinforce the value of our products as an essential part of the government's preparedness planning. Let me walk through some of the progress we're making across our core products and additional achievements throughout the quarter. First, a brief update on Narcan nasal spray. At the end of August, we officially launched Narcan nasal spray as an over-the-counter opioid overdose reversal treatment. This is an important milestone for our company that expands access to naloxone. as we seek to help save more lives and fight against the devastating opioid crisis in America. Political support and expansion of funding avenues remain strong to address the public health crisis. We continue to maintain a market-leading position and have expanded our addressable market through the introduction of over-the-counter availabilities. As a result, we expect Narcan nasal spray to remain a strong contributor to revenue in the near to medium term. Paul will speak more about this in a moment. Now, I'll turn to our medical countermeasures business. In response to changes in the volume of US government procurements of medical countermeasures, we are delivering on our commitments across our smallpox franchise, anthrax, and other products. As demonstrated by our deliveries of the ACAM 2000 this year, our partnership with the U.S. government remains strong. Also, just yesterday, we announced the submission of our supplemental biologics license application to the U.S. Food and Drug Administration, seeking approval for the expansion of the indication for ACAM 2000 to include immunization against MPOX virus. This milestone is an example of how to evolve our existing product pipeline to address current public health threats. We continue to operate under our current contract for the advanced development and delivery of Cyphendis, our anthrax vaccine, while we work to transition future procurement to SNS. We expect this year's remaining procurement to occur by year end. However, it's possible delivery may shift in the next year. Rich will cover the impact on our guidance. As we look ahead, we will continue to service our long-term USG contracts and meet the needs of our international customers. We have also made significant progress on our sustained efforts to strengthen our quality and compliance across our manufacturing network and our enterprise. At this point, we are moving forward with our efforts from remediation to sustaining our high standard of compliance as we focus on delivering for the needs of our customers. We have had successful inspections at multiple sites by regulators. In addition, with respect to our Camden facility in Baltimore, following a reinspection in July, August of 2023, we received notification from the FDA that we have addressed the matters contained in their August 22 warning letter, the FDA has also communicated that both the inspections that began in February 2022 and July-August of 2023 are considered closed. As we have shared on prior calls, significant investments were made to upgrade our physical capabilities and further strengthen our culture of quality and compliance across the manufacturing network and enterprise. allowing us to close this action expeditiously. Finally, we are taking steps to streamline our cost structure and de-emphasize the growth of our CDMO business, which we expect will strengthen our financial position in the coming quarters. As we discussed last quarter, the strategic actions and cost reduction initiatives already underway are expected to result in annualized savings of over $100 million when fully implemented next year. Before I turn the call over to Paul, I'd like to mention that we've enhanced our board with two new independent directors, Neil Fowler and Don DeGoglia. They bring several decades of combined biopharmaceutical industry experience and have held multiple C-suite positions, including as CEOs, throughout their careers. We look forward to benefiting from their unique and extensive industry expertise. With that, I will now turn the call over to Paul.

Thanks, Heywood, and hello, everybody. As Heywood noted in his remarks, the opioid epidemic continues to worsen and the need for Narcan is growing. As a result, we are seeing increased demand for Narcan nasal spray in both our U.S. public interest channel and Canada. With our official launch of Narcan nasal spray as an over-the-counter treatment in September, we have delivered on our commitment to broaden access and make it available both online and on retail shelves. We are now able to offer Narcan on all fronts from the most vulnerable populations via the U.S. public interest channel and via the retail channel as an over-the-counter treatment that anyone can access without a prescription to help give someone another chance during an opioid overdose emergency. In September, we shipped hundreds of thousands of boxes to over 32,000 locations, including major pharmacy retailers and e-commerce sites. While expansion of access is critical, so is the need to broaden awareness. To that end, Emergent proudly launched our Ready to Rescue national public awareness campaign in October. Ready to Rescue aims to break down the stigma associated with opioid overdose and educate the public, particularly college-age adults, around the risks associated with opioids and how to be prepared with Narcan nasal spray. There's an immense need for Narcan. We are seeing continued bipartisan support to address the opioid crisis, and many prominent public figures have been vocal around the importance of carrying naloxone. We have ongoing engagement with leaders across government, retail, and advocacy groups to increase access and availability of naloxone, as well as educate the public on the risks of opioid overdoses and the real-world need to be prepared with Narcan nasal spray. The over-the-counter launch is a critical advancement of our efforts to expand access, increase awareness, and fulfill our mission to protect and enhance lives by saving more lives with Narcan. With the backdrop of all this, we continue to be well prepared from a manufacturing and supply standpoint to meet the anticipated demand. With that, I'll turn it over to Rich.

Thank you, Paul, and good afternoon, everyone. We appreciate you joining the call. I'll begin by providing some context for our decision to reschedule today's earnings release and conference call. You will note that in our press release, we reported limited third quarter and year-to-date results, as well as selected balance sheet and cash flow information. As part of our quarterly review process, the company determined that its state deferred tax liability was overstated as of December 31st, 2022, resulting in an understatement of the income tax benefits reflected on the company's income statement. While these non-cash items do not have any impact on the company's liquidity, cash flow, historical management compensation, or covenant compliance, we have concluded that it is appropriate to delay the disclosure of full third quarter and year-to-date earnings information and the filing of our quarterly report on Form 10-Q for the period ended September 30, 2023, while we work to correct our prior period financial statements. We expect to complete this work in the near future and accordingly are sharing as much information as we can at this time regarding our current results and financial position. With that, I'll move to slide nine and open my remarks with the key messages I'd like you to take away from our call. During Q3, we continue to make progress strengthening the fundamentals of the business. As we announced in August, our key focus going forward will be on the medical countermeasure and Narcan businesses while maintaining key commitments to our CDMO customers. There were several highlights in the quarter. As you just heard from Heywood and Paul, Narcan OTC hit retail shelves in September, and we are excited about the opportunity to expand access to this critical opioid overdose treatment to all individuals. The overall Narcan business had strong sales led by the public interest and Canadian channels. In medical countermeasures, procurement was in line with our expectations for Q3. The first shipment of the FDA-approved Siphendis was completed in September, and the smallpox franchise also had positive sales, primarily driven by VIGIV. Our decision to de-emphasize CDMO and focus on our existing customers supported cost reduction efforts in the third quarter. As previously disclosed, we expect the full annualized run rate of these actions will exceed $100 million of reduced costs across the organization beginning in the first quarter of 2024. Overall, we had strong revenue in the quarter, which exceeded our guidance range. Adjusted EBITDA was also solid in the quarter, slightly exceeding our expectations. I'd like to take a moment to highlight that our Camden Facility Warning Letter was closed out by the FDA after acknowledgement of the extensive remediation efforts completed since August 2022. This positive development is a testament to the dedication and skill of our quality and operations teams and positions the facility to return to normal operations as we support our existing customers going forward. We've updated our 2023 guidance to reflect our expectations for the rest of this year. A key driver is the continued momentum in Narcan sales as our public interest Canadian and now retail over-the-counter customers seek increased preparedness for the threat of opioid overdoses. On the medical countermeasure side, our sales forecast remains largely intact, with some uncertainty regarding the timing of U.S. government funding for the remaining 2023 Sifendis procurement. As a result, we are widening our guidance ranges. With those key updates, let's now turn to the numbers. As indicated on slides 10 and 11, highlights in the third quarter include total revenues of $271 million, primarily driven by Narcan momentum from the U.S. public interest market, the retail market in Canada, and the launch of Narcan OTC, and adjusted EBITDA of $20 million. Diving deeper into the quarterly revenues, important items include anthrax MCM sales of $33 million, including deliveries of biofrax and syphendis to the U.S. government's Strategic National Stockpile. Narcan sales of $142 million, demonstrating the continued strength and durability of this product, driven by consistent demand from the U.S. public interest channel and the growing market in Canada. Revenue in the quarter also includes initial contributions from the launch of Narcan OTC into retail channels. Smallpox NCM sales were $25 million. Other product sales were $50 million, including solid BAT sales. and combined CDMO service and lease revenues of $14 million reflect our continued transition to focus on existing customers. Turning to operating expenses, cost of product sales in the quarter was $133 million driven by sales of Narcan, Anthrax, and VAT. Cost of CDMO of $44 million reflects reduced production across the CDMO network and the actions taken on August 8th to reduce expenses. offset by investments in quality improvement initiatives at the Camden site. R&D expense was $15 million, and SG&A expense was $86 million, including expenses supporting key NARCAN initiatives. We also incurred a $218 million non-cash goodwill impairment charge in the quarter related to medical countermeasures. The impairment was primarily a result of higher interest rates and our lower market capitalization. Overall, we continue to see long-term value in this area of the business. With that, let's move to slide 12 and review segment performance during the quarter. In the product segment, revenues were $250 million, driven by Narcan, Anthrax, and VAT, and adjusted gross margin was $121 million, or 49%. As for the services segment, revenues were $14 million, and adjusted gross margin was negative $22 million. Moving on to slide 13, I'll touch on select balance sheet and cash flow highlights. We ended the third quarter with $88 million in cash and $176 million of total liquidity, including availability under our revolving credit facility. Total liquidity increased $40 million and cash was roughly flat versus the second quarter of 2023. This reflects the collection of accounts receivable offset by debt repayments made in connection with the requirements of the May 2023 amendment to our senior secured credit facility. Operating cash flow was positive in the quarter, and capital expenditures in the period were $13 million. And as of September 30, 2023, our net debt position was $779 million. I'll now recap some of the progress we've made on our capital structure this year. Throughout 2023, we've taken significant steps to strengthen our financial position and de-risk the business. We have executed the travel health divestiture, implemented actions to save over $160 million of annualized operating expense, and announced a strategic shift to de-emphasize our CDMO business as a source of growth. We also amended and extended the maturity of our secured credit facility to May 2025. At the same time, we've achieved positive milestones in our core products business, including the receipt of about 250 million of U.S. government orders for ACAM, BIG, and BAT, the FDA approvals of Sifendis and Narcan OTC, new long-term contracts for RSDL and Ibanga, and the ongoing growth of Narcan. In short, our core business operations are fundamentally sound and healthy. Over the near to medium term, we will maintain our focus on optimizing our platform to further strengthen our business and credit profile, and we are confident that our access to capital will improve as a result. We will keep you informed as we make progress on this journey. Turning to guidance, please see slide 14. As announced in our press release this evening, we are updating our guidance for full year 2023 as follows. Total revenues of $1 to $1.1 billion consistent with prior guidance as the ongoing strength of Narcan is offset by potential funding timing related to the remaining 2023 procurement of the FDA-approved Sifentis product. We're forecasting anthrax MCM sales of $145 to $250 million, a wider range than our prior guidance given the timing uncertainty we just discussed related to the remaining 2023 Sifentis procurement. While our conversations to date are aligned to funding before the end of the quarter, with deliveries by year end, we are unable to have absolute confidence in this timing given the status of the U.S. government's continuing resolution. We're forecasting Narcan nasal spray sales of $480 to $490 million, an increase of $50 million at the midpoint over the prior guidance, primarily reflecting robust demand from the U.S. Public Interest Channel, Canada, and the launch of Narcan OTC in September 2023. We expect smallpox MCM sales of $180 to $185 million, a reduction of $8 million at the midpoint from the prior guidance. The reduction reflects a timing shift of international sales for the remainder of 2023. We expect other product sales of $100 to $110 million, a reduction of $5 million at the midpoint from prior guidance, primarily reflecting a slight reduction in revenue expectations for RSDL. We're forecasting CDMO revenue of $70 to $75 million, which is within our previous range. Shifting to profitability metrics, we're forecasting adjusted EBITDA of between negative $25 million to positive $75 million, a decrease of $50 million at the midpoint from the prior guidance range. This range reflects the potential funding timing for the remaining 2023 SIFENDAS procurement as well as potential one-time costs. And finally, we're forecasting adjusted gross margin of 32 to 38%, a reduction of 250 basis points at the midpoint from the prior guidance range. To conclude, please turn to slide 15 for some summary comments. Our results in the third quarter were strong, and we delivered on a variety of important milestones. We're continuing to progress on our initiative to strengthen our business fundamentals by focusing on our core products, serving existing CDMO customers, driving profitability, and improving our balance sheet. We continue to strengthen our quality and compliance across the organization and achieved a key milestone with the warning letter closeout at our Camden facility. In short, our progress through Q3 provides a strengthened foundation for the business to build upon going forward. That completes my prepared remarks, and I'll now turn the call over to Haywood for closing remarks.

Thank you, Rich. We look forward to answering your questions in a moment, but first I want to reiterate our go-forward priorities. We're continuing to strengthen Emergent's financial position and our operations by aligning to demand and capitalizing on opportunities in our products business. We are focused on delivering quality products, including Narcan nasal spray, and maintaining the manufacturing standards necessary to be a leader in the MCM business. And finally, we are Positioning emergent for strategic future growth by preserving our unique capabilities to help protect and enhance life. By focus on these three priorities, we are becoming a more agile organization that can manage across market cycles and support a broad range of customers. Over the past 25 years, Emergent has never lost focus on its mission or its people, and that is one of the many reasons why I am confident in its ability to drive value for all of our stakeholders and, importantly, continue protecting and enhancing life. Now I'll turn the call over to the operator for the Q&A session. Operator?

Certainly. Ladies and gentlemen, if you'd like to ask a question at this time, you'll want to press star 1-1 on your touch-tone phone. To withdraw your question, please press star one, one again. Please stand by, we'll be compiled again a roster. And I'm Sean, we have a question coming from the lineup for a speaker with TD Cowan. Your line is open.

Great, thanks. This is Nick on for Boris. One for me on Narcan. Can you speak a little bit more to the uptake in the public interest market in Canada I know that last quarter you said that you've seen an increase there, and this quarter you said that it's been strong. Have you also seen an increase there? And then also on the OTC launch, what are you seeing on that, and are you seeing an increase in the retail space? Just a little bit more granularity on Narcan revenue would be great. Thanks.

All right. Thanks, Nick. We have Paul on the line, and so I think, Paul, those are good questions for you to take on.

Yeah, Nick, thanks for the question. I think to the PIP and Canada question, I think the most important thing I think at the very top is the opioid crisis continues to worsen and that trend is growing this year. I think this has really led to an increased need and demand for Narcan at the state and local level through the PIP channel and recognizing that these organizations are at the front lines of the opioid crisis. In a similar fashion, we're seeing the similar trends happening in Canada as well as they look to allocate more funding to Narcan in both U.S. and Canada to address sort of what's happening at the, you know, at sort of this frontline level with the crisis. To your question around the OTC launch, I think we are in a really good spot. You know, about six weeks into the launch, I think we were able to ship to all of our retail customers and online customers and e-commerce customers that we expected to. This is a new channel for us, and as much as expanding access is critical for folks to be able to access it on the shelf or online, the awareness piece is equally as critical. And so, you know, the launch of the Ready to Rescue campaign on top of offering Narcan in a retail setting, you know, right now is really in line with what our expectations would be at the first phase of the launch.

Got it. That's helpful. And just to follow up on that, I know it's still early into the launch, of course, but But I know that you mentioned, at least when you first launched the OTC Narcan, that you shipped out thousands of doses. Are you planning to do it in a similar fashion? Will you be shipping out thousands of doses or will it be more like an as-needed basis to the different retailers, at least for retail? Because e-commerce, I'm sure, is different.

Yeah, I think initially we wanted to make sure that all of our partners were adequately stocked to meet demand. And I think as the demand continues to grow, we'll replenish that demand relative to what those individual retailers and e-commerce sites need in terms of what they want to keep in terms of on hand and what the run rate continues to move and progress at.

Great. Thanks very much.

Thank you. And our next question coming from the line up. Frank DiLorenzo with Singular Research. Your line is now open.

Good afternoon. Thanks for taking my call. I had a couple of questions around the updated guidance. One was related to the anthrax business and the lower guidance. The difference in the previous guidance and current, will some of that be made up into 2024? Is that a timing issue on procurement, et cetera? And then separate from that, can you give us a little more? granularity on the adjusted gross margin guidance and what's pressuring that there and will that subside into 2024? Thank you.

Yes, Frank. Thanks for the question. As far as the anthrax guidance is concerned, as we mentioned, The guidance at the high end contemplates the receipt of the next order for 2023 procurement. As we indicated, we're all aligned towards having that be received and in time for deliveries by the end of the year. But just given the current situation in Congress with the continuing resolution, there's some uncertainty about whether or not that could slip out of this year and into next year. So that's the way to think about that. As far as the adjusted gross margin, that's really just a mix element in terms of the overall product mix reflected by the revised guidance and some other one-time costs that have come into play throughout the course of the year.

Thanks. One other question this time on the Narcan business. Can you talk about maybe some

non-traditional markets if you're seeing any movement there there's potential for some penetration into areas such as maybe more industrial corporate penetration first aid kits things like that thank you sir paul you want to take that one yeah happy to right so while our initial launch was uh primarily geared towards uh the retail pharmacy um and you know e-commerce sites um obviously the as we as we call it the business to business segments is obviously a key area for us. And, you know, we're looking to, I think, launch into that segment fully, you know, in the beginning of the year. But we're in active conversations with multiple stakeholders across the B2B segment as we're defining it.

Okay. Thank you.

Thank you. And thank you all. And with that, ladies and gentlemen, we now conclude the call. Thank you for your participation. Please note an archived version of today's webcast as well as a PDF version of the slides used during today's call will be available later today and accessible through the Investors Lending page on the company website. Thank you again. We look forward to speaking with you all in the future. Goodbye.