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