Emergent BioSolutions Inc.

Good afternoon, everyone. I'm the operator for today's call. Thank you for joining today as Emergent discusses their operational and financial results for the first quarter of 2024. 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 is a series of slides accompanying this webcast available to all webcast participants. Turning to slide three, 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 statements 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 Emergent's operating performance. please refer to the tables found in today's press release. Turning to slide four, the agenda for today's call will include Joe Papa, President and Chief Executive Officer, who will comment on key business and product updates. Rich Lindahl, Executive Vice President and Chief Financial Officer, who will speak to the current state of the company and financials for first quarter fiscal year 2024 and Q2 2024 guidance. This will be followed by a Q&A. Finally, and for the benefit of those who may be listening to the replay of this webcast, this call was held and recorded on May 1st, 2024. Since then, eBurgit 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 Joe Popper, Chief Executive Officer, for opening remarks. Joe?

Hello, everyone, and thank you for joining us to discuss our first quarter 2024 results. I'm joined today by Rich Lindahl, our Chief Financial Officer. Following my opening comments, Rich will detail our Q1 performance, provide updated guidance for the second quarter, as well as our full year outlook for 2024. I'll then talk about future growth drivers and catalysts at Emergent. First, I want to begin by addressing the announcement made earlier today to reduce our enterprise footprint consolidate operations, and prioritize the capabilities most critical to executing that emergence core business. When I stepped into the role of CEO in February, I talked about a multi-year plan to stabilize, turn around, and transform our company. Also, we identified a near-term challenge surrounding our debt position as a critical component of our stabilization plan. We understood that reducing our total debt would require improving operating performance, reducing working capital, and evaluating product or asset sales. I've seen firsthand that our employees are inspired and driven by the company's mission to protect, enhance, and help save lives. And that is why Any type of impact on our workforce is very difficult. However, after a careful review by our board and management team, we need to restructure the way we operate, create a customer-focused, leaner, more flexible team, and a streamlined manufacturing footprint that will still allow us to supply all of the products needed by our customers. Beyond the business restructuring on page six, We highlight the plans in Q1 2024 achievements in our first phase or stabilization of our multi-year transformation plans. Going forward, we will focus on key business areas and implement a simplified organization to improve our cost structure and enable key actions, including meeting the opioid crisis demand and exploring opportunities to grow Narcan nasal spray, protecting our medical countermeasures business, and identifying new growth opportunities support our existing customers in our CDMO services business, and always ensuring patient safety and product quality underpin everything we do. An item that will not change is Emergent's focus on making challenging, difficult products that are needed by our customers. As I mentioned during our last earning call, we reviewed the moat around our business, and we believe the unique products and capabilities we offer across significant public health threats underscores the value we deliver. We'll continue to focus on executing our multi-year plan to bolster our position as a leader in global public health. During the first quarter, we also achieved significant improvements in a number of business performance metrics, including revenue, which is ahead of internal and consensus expectations, adjusted gross margin, reduced operating expenses, and adjusted EBITDA. Overall, it was a great first quarter and a great start to 2024. As you know, Last quarter, we entered into a forbearance agreement with our lenders through April 30th. Our conversation with the bank group continued, and just yesterday, we are delighted to announce a new bank amendment. This amendment will extend our runway to execute on a go-forward business plan and stabilize our financial position. We also strengthened our relationship with key stakeholders during the quarter. Over the last three months, we've held over a dozen collaborative meetings with key stakeholders across U.S. and international government agencies, including BARDA, Department of Defense, Strategic National Stockpile, and the White House to gain clarity on their needs for medical countermeasures products. These meetings have been incredibly productive, and the results are reflected in our improved revenue guidance. These conversations also reflect a renewed willingness to engage with emergent to improve planning and communications, which are critical to driving long-term success. Consistent with our comments in March, we also initiated efforts to divest products and or sites. We've already received multiple orders for one of our sites, albeit one of our smaller sites. We hope to have more to say about this initiative in the near future. Our prioritization commitment to instilling a culture of quality and compliance across the company was also evident in the first quarter as we announced our Baltimore Bayview Manufacturing Facility received no action indicator or NAI status classification from the FDA. We are proud of our colleagues who have worked relentlessly to achieve this status and will continue to adhere to the highest standards of quality and compliance across the organization. I'll now turn it over to Rich to review our Q1 2024 business and our revised 2024 full-year guidance.

Thanks, Joe. Good afternoon, everyone, and thank you for joining the call. As Joe has just discussed, we're making significant progress against our near-term priorities of stabilizing the business and strengthening our financial foundation. Our report today reflects several key accomplishments. We delivered strong first quarter results with all parts of the business delivering year-over-year growth. We're taking aggressive actions to further improve our operating performance as we seek to reduce our debt. We further amended our credit facility to support our ability to execute against our 2024 priorities. And we are significantly raising our profit outlook, driven by increased clarity on near-term U.S. government procurement, combined with reduced operating expenses. Turning to our results, we had strong revenue in the quarter, which exceeded our first quarter guidance. As indicated on slide eight, highlights in the first quarter include total revenues of $300 million, an increase of 83% versus the prior year driven by Narcan, Anthrax MCM, Smallpox MCM, and BAT. Total segment adjusted gross margin of 51% versus 5% in the prior year. Adjusted EBITDA in the quarter of $67 million, a material improvement over the negative $102 million reported last year. An adjusted net income of $31 million also materially improved compared to negative $163 million last year. Diving deeper into quarterly revenues, important items on slide 9 include Narcan sales of $118 million, up 18% year-over-year, demonstrating the continued strength and durability of this product, driven by higher branded Narcan sales to U.S. public interest channels and sales of OTC Narcan, partially offset by lower Canadian retail sales of branded Narcan. Anthrax MCM sales of $56 million, an increase of 155% versus the prior year, driven by syphendous deliveries to the U.S. government's strategic national stockpile, including final shipments under the $75 million contract option provided by BARDA that we announced on November 28 of last year. Smallpox MCM sales of $50 million, up $43 million year-over-year, driven by ACAM 2000 and VIGID. Other product sales of $49 million, an increase of $41 million versus the prior year, primarily related to BAT and RSDL. And total bioservices revenues of $18 million, reflecting our continued transition to focus on existing customers. Turning to operating expenses on slide 10, cost of commercial product sales in the quarter was $52 million, driven by strong sales of Narcan. Cost of MCM product sales in the quarter was $62 million, driven primarily by Syphendis sales volume and other medical countermeasure products, partially offset by a decrease in shutdown costs. Cost of bioservices of $30 million, reflecting actions taken to improve profitability. R&D expense of $15 million, reflecting the impact of the travel health divestiture to Bavarian Nordic, as well as the impact of cost management activities taken in 2023. an SG&A spend of $85 million, including expenses supporting key Narcan initiatives, offset by reduced expenses related to restructuring initiatives. Note, total operating expenses were down 16% compared to the prior year, as we focused on improving profitability and cash flow to manage our debt position. With that, let's move to slide 11 and review segment performance during the quarter. In the commercial segment, revenues were $118 million comprised entirely of Narcan, and segment adjusted gross margin was $66 million, or 56%. In the MCM segment, revenues were $155 million, driven by anthrax, smallpox, and bat. The segment adjusted gross margin was $94 million, or 60%. As for the services segment, revenues were $18 million, and segment adjusted gross margin was negative $12 million. I'll now turn to slide 12 and touch on select balance sheet and cash flow highlights. We ended the first quarter with $78 million in cash and liquidity, including availability under our revolving credit facility. The change in cash and liquidity versus the prior quarter was due to sales timing and collection of AR. Operating cash flow was negative $63 million, which improved significantly versus the prior year. Capital expenditures were $11 million in the first quarter, which is a 28% reduction versus the first quarter of 2023. As of March 31st, 2023, our net debt position was $827 million. Earlier today, we announced a set of strategic actions to improve our cost structure, enable turnaround efforts, and support our key priority to reduce our debt. These actions include the difficult decision to reduce our organization footprint effective July 1, 2024, prioritizing only those capabilities most critical to executing our core MCM and Narcan nasal spray businesses. We estimate that the changes we're making will result in annualized savings of approximately $80 million when fully implemented. The costs associated with these actions are estimated to be approximately $18 to $21 million and are expected to be incurred in the third quarter of 2024. We are confident that these efforts, let me amend that, they're expected to be incurred in the second quarter of 2024. We are confident that these efforts are an important step to achieving greater consistency in operating performance and improving future profitability. We also announced yesterday that we have entered into another amendment to our senior secured credit facilities. This amendment will support our ability to execute against our 2024 priorities by granting certain waivers provided

Ladies and gentlemen, please stand by.

Howard, can you hear us? I can hear you, sir. I hear you now.

I'm going to start at the beginning of the guidance section. Is that where we drop?

Yes.

Okay. So turning to 2024 guidance, please slide 13. While our efforts to improve operating performance will not happen overnight, we're making significant progress towards those goals, which is giving us the confidence to raise our 2024 outlook at this time. As announced in our press release this evening, we're providing guidance for full year 2024 as follows. Total revenues of $1 to $1.1 billion. We're forecasting commercial product sales of $460 to $500 million, as we expect continued strong demand for Narcan in the U.S. public interest channel and Canada, combined with further growth with OTC Narcan in the retail channel. We're forecasting MCM product sales of $440 to $490 million. Since our last report on March 6th, we've continued to engage with our U.S. government stakeholders to improve the procurement visibility for Sifendis and other medical countermeasures. As a result of those conversations, we have a better understanding of the US government's intention for the near and medium term and are therefore narrowing the range of potential 2024 revenue outcomes in this segment. We're forecasting services segment revenue of $70 to $80 million, reflecting our commitment to serve our existing customers. Shifting to profitability metrics, we're forecasting adjusted EBITDA of $125 to $175 million, reflecting the impact of our 2023 cost reduction actions, the additional organizational changes announced today, our capacity utilization profile, and the range of revenue expectations across our segments. For the full year of 2024, we're forecasting total segment adjusted gross margin of 44 to 47%, an increase over the 2023 level, primarily reflecting the impact of our profitability improvement efforts. Finally, we're forecasting Q2 revenue in a range of $160 to $210 million. We've also included some additional assumptions around our four-year guidance. Interest expense is forecasted to be $82 million, reflecting terms around our new credit agreements. Total R&D spend as a percentage of revenues is anticipated at approximately 6%, weighted average fully diluted shares of $52 million, CapEx spend of approximately $32 million, and $111 million of depreciation and amortization. That is all for the financial update. I'll now turn the call back over to Joe for some further thoughts.

Thank you, Rich. As I mentioned last quarter, another key element of our turnaround is driving long-term profitable growth. One of the first steps we announced earlier today is the initiation of a search for an emergent chief scientific officer reporting to me This individual will bring together all of our science innovation efforts, improving our long-term product pipeline. The search will include both internal and external candidates. Let me now provide an update on our core products and future growth drivers, starting with Narchia nasal spray. Turning to slide 15, a vital way emergent health saves lives through our efforts to combat the opioid crisis by expanding access, awareness, and the availability of Narchia nasal sprays. The opioid epidemic continues to have a devastating impact across the world. As the leader of opioid reversal space, we remain committed to getting Narcan to everyone who needs it. To be clear, we do expect Narcan share market will be impacted by generic competitors over time. However, we also expect market forces like opioid settlement funds, continuing opioid overdoses, and the need for increased Narcan access will continue expand total Narcan demand. Year to date, Narcan nasal spray is tracking to plan with strong performance driven by the U.S. Public Interest Channel Canada. Since the OTC launch, hundreds of thousands of Narcan cartons are made available to purchase at mass drug, grocery, online retailers, and e-commerce sites. And we continue to be well prepared to meet anticipated demand from a supply and manufacturing perspective. This quarter, We also expanded access to Narcan by creating a direct ordering platform called NarcanWorkplace.com. This facilitates getting the life-saving treatment directly into the workplaces. We have engaged with new partners like the National Safety Council to educate and reach businesses around the importance of workplace safety. In addition, the Emerson Group has been brought on to support penetration to a broader set of retailers. Sadly, there is still immense need for NARCA and nasal spray to reduce the number of lives lost. The data from our recently completed survey that we just released today suggests the number of opioid deaths is unacceptable to Americans, and especially looking at the impact on younger adults. We are seeing continued bipartisan support to address the opioid crisis and have ongoing engagement with leaders across government, retail, and advocacy groups to increase access and the availability of naloxone. On page 16, would highlight several of the catalysts and future drivers of Narcan growth. We continue to prioritize efforts to reduce barriers to access for Narcan. This includes encouraging businesses and school districts to carry naloxone, supporting policy to ensure health spending accounts and flexible savings accounts are eligible for naloxone, and working with state Medicaid agencies to provide coverage. We've been working closely with Health Canada with a goal to distribute Nalaxone convenience kits containing Narcan. Finally, we're exploring opportunities to expand access internationally beyond the US and Canada, either internally or through partnerships that we believe will increase Narcan growth. Turning to slide 17 to review our MCM business, we continue to deliver on our commitments to the US and allied governments, maintaining open lines of communication, and engaging in discussions about how we can support their plans for long-term sustainable public health threat preparedness. During the last few months, we also received clarity from the government regarding future purchase orders for Sifendis, our post-exposure anthrax vaccine. For the strategic national stockpile, we are finalizing modifications on our ACAM contract. In addition, we have received notices of intent to procure from the U.S. government in 2024 for BAP, our Botulism antitoxin product, and VIG, which is a treatment used following complications resulting from smallpox. This level of clarity demonstrates continuous U.S. government support across our portfolio. On page 18, we review MCM catalysts and growth drivers. As referenced on our last call, as a leading biodefense contractor, we're addressing the most pressing threats around the world, including anthrax, smallpox, botulism, Ebola, and chemical threats. We believe that our role in global public health preparedness remains vital. Finally, on slide 19, I'd like to take a few moments to focus on future growth drivers for the organization based on the potential expansion of our inline products. First, we believe international expansion will be an important growth driver across our business. Global public health and preparedness have never been more vital, and our collaboration with international partners is a key factor in improving global health security. We are seeing increased focus on public health preparedness and believe we're well positioned to fulfill the needs of our international partners with our critical product. In the year ahead, we will continue building these partnerships to expand access to our products across the globe. Our product portfolio today has significant impact to help protect, enhance, and save lives against public health threats around the world. With a refreshed lifecycle management initiative, We are well positioned to fuel future growth drivers to meet customer and patient needs. In summary, although it's early in our transformation process, I'm encouraging by the progress we are making to execute our turnaround strategy. Importantly, we have more stability, clarity, and financial flexibility than just a few months ago. This progress is reflected in our first quarter results in our full year 2024 guidance improvements. We believe there will be significant opportunities to partner with domestic and international partners to address the public health crisis with our important and innovative products. We look forward to continue to work with key stakeholders to prepare for and respond to a range of public health threats while returning emergent to greater property and ability for our shareholders. With that, we'll open up the call for questions. We also invited Paul Williams, our head of Narchian and the medical countermeasures business, to join us for the Q&A. Operator, let's open up the line for questions, please.

Yes, sir. Ladies and gentlemen, if you have a question or comment at this time, please press star 11 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 11 again. Again, if you have a question or comment, please press star 11 on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Jessica Fi from JP Morgan. Ms. Fi, your line is open.

Hey, this is Nick on for Jess. Congrats on the quarter and thanks for taking our questions. First one on Narcan. You guys are showing continued growth from that product year over year, quarter over quarter, but maybe can you provide some additional details on the breakdown of that 1Q sales by the PIP channel and OTC Narcan and maybe also provide some color in how you're thinking about any generic competition that could come in to either of those two segments throughout the course of this year?

Thanks, Nick. I'll take the first one. This is Rich. Yeah, I mean, certainly the majority of the sales remain from the PIP channel. We are still moving forward with our OTC rollout, and it's still gaining traction, but the majority is coming from the PIP channel with some contribution from Canada as well.

And I think the question relative to generic entrants, I think we've anticipated and expect there'll be additional competitors entering the space this year. I think we continue to believe that our ability to service the PIP channel and the retail OTC channel uniquely with the capabilities that we have, like Narcan Direct, and through the partnerships we're building on the retail side, we can support the forecast that we have for the rest of the year.

And finally, just to put a couple of other future-looking comments, I think what we look at at Narcan, we look at a couple of important points. Number one, the importance of the Narcan brand, and obviously that brand is very important when you're talking about the years of experience with Narcan, and importantly, you're dealing with life-threatening situations that Narcan has used. Number two, we have a strong distribution capability, and we believe that's an important part of what Paul and the team has built that allows us to make sure that we get to the thousands of customers around the United States that offer in Canada that order our product. And then finally, clearly, we've built up the manufacturing capabilities to be automated and able to compete with anybody in this space. So yes, we may see some near inroads over time. More importantly, we think the market growth is still going to be very significant that allows us to have long-term opportunities with ARDNR in business.

Great. And then maybe on the guidance, can you just provide a bit more color on the pushes and pulls that went into raising the MCM product guidance, the 440 to 490, I believe, from the 340 to 490? Is that just more clarity around anthrax facts, or are there other assumptions baked in there?

That's really the primary driver. As we commented back on our March call, there was less clarity. We had less visibility at the time, so we had a much wider range about potential outcomes there. Based on the conversations that we've had, we have better visibility into where we see Sifendis procurement this year. And as a result, we were able to narrow the range by raising the low end.

Great great maybe one more you know understanding that this is not an easy decision around the two facilities can you maybe provide some additional details on why you chose Rockville and Bayview as part of that the restructuring announcement and I know you said that there was some interest that you mentioned that you would talk about later but of those two facilities can you provide any color on which if any you're seeing maybe strategic interest in today.

Yeah, let me start with maybe the big picture, and I'll get to your questions. The big picture is, first and foremost, we made the decision to focus our future in the areas of Lansing and Winnipeg. We think that that's probably the most important thing. That was our first decision on what sites have the most flexibility so that we can run a leaner company with streamlined facilities and still make sure we can provide all of our products availability. So I think that was probably the first thing we went into our decision. Once we did that, we looked at the other sites and just made judgments as to based on what we saw in terms of the opportunity, what the expenses were. We made decisions to reduce our total operating expenses, but make sure that we could still provide access to the products that are so important to US government, governments around the world, and obviously to to treat and be ready to be able to help the opioid crisis. And when we went through that, the sites that Bayview and Rockville came out as sites that we would close down, wind down and close the site. And that was really the way we went through this process. I will say that we did make mention of that we had multiple offers on one site, albeit it was a small site. I wanted to be clear in saying that. I do hope, though, that we will continue this process and potentially have more to say about that in the future. But I'm going to probably restrict my comment to that, going that far in terms of, you know, what we've had interest so far. I think I've got all those parts of the question. Yeah. Thanks so much. Thank you.

Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Papa for any closing remarks.

Well, thank you very much, everyone, for your interest in Emergent. We look forward to having more to comment in the future as we make progress on our multi-year turnaround transformation. Obviously, the team has done a great job in this first quarter and look forward to having more to say as we continue down the path for 2024 and beyond. But thank you, everyone, for joining us today. Have a great day.

Thank you. 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 investor's landing page on the company's website. Thank you again. We look forward to speaking to you in the future. Goodbye.