Emergent BioSolutions Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 1, 2024

There are 5 speakers on the call.

Operator

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 Q1 of 2024. As is customary, today's call is open to all participants and the call is being recorded and is by Emergent BioSolutions. In addition to today's press release, there is a series of slides accompanying this webcast available to all webcast participants.

Operator

Turning to slide 3, 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 statements speaks only as of the date of this conference call and is 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.

Operator

Please refer to the tables found in today's press release. Turning to Slide 4. 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 Q1 fiscal year 2024 and Q2 2024 guidance. This will be followed by a Q and 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 1, 2024.

Operator

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 Joe Papa, Chief Executive Officer, for opening remarks. Joe?

Speaker 1

Hello, everyone, and thank you for joining us to discuss our Q1 2024 results. I'm joined today by Rich Lindow, our Chief Financial Officer. Following my opening comments, Rich will detail our Q1 performance, provide updated guidance for the 2nd 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 on Emergent's core business.

Speaker 1

When I stepped into the role of CEO in February, I talked about a multiyear plan to stabilize, turnaround 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.

Speaker 1

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 6, we highlight the plans in Q1 twenty twenty four achievements 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 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 earnings call, we reviewed the moat around our business and we believe the unique products and capabilities we've offered across significant public health threats underscores the value we deliver.

Speaker 1

We'll continue to focus on executing our multiyear plan to bolster our position as a leader in global public health. During the Q1, 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 Q1 and a great start to 2024. As you know, last quarter, we entered into a forbearance agreement with our lenders through April 30. Our conversation with the bank group continued and just yesterday we are delighted to announce a new bank amendment.

Speaker 1

This amendment will extend our runway to execute on a go forward business plan and stabilize our financial position. We also strengthened our relationships with key stakeholders during the quarter. Over the last 3 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.

Speaker 1

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.

Speaker 1

Our prioritization commitment to instilling a culture of quality appliance across the company was also evident in the Q1 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 hear 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.

Speaker 2

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.

Speaker 2

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 combined with combined with reduced operating expenses. Turning to our results. We had strong revenue in the quarter, which exceeded our Q1 guidance. As indicated on Slide 8, highlights in the Q1 include total revenues of $300,000,000 an increase of 83% versus the prior year driven by Narcan, anthrax MCM, smallpox MCM and BAT.

Speaker 2

Total segment adjusted gross margin of 51% versus 5% in the prior year. Adjusted EBITDA in the quarter of $67,000,000 a material improvement over the negative $102,000,000 reported last year. And adjusted net income of $31,000,000 also materially improved compared to negative $163,000,000 last year. Diving deeper into quarterly revenues. Important items on Slide 9 include: NARCAN sales of $118,000,000 up 18% year over year, demonstrating the continued strength and durability of this product driven by higher branded NARCAN sales to U.

Speaker 2

S. Public interest channels and sales of OTC NARCAN, partially offset by lower Canadian retail sales of branded NARCAN. Anthrax MCM sales of $56,000,000 an increase of 155 percent versus the prior year driven by Sifendis deliveries to the U. S. Government's strategic national stockpile, including final shipments under the $75,000,000 contract option provided by BARDA that we announced on November 28 last year.

Speaker 2

Smallpox MCM sales of $50,000,000 up $43,000,000 year over year driven by ACAM2000 and BIGIV. Other product sales of $49,000,000 an increase of $41,000,000 versus the prior year primarily related to BAT and RSDL. And total bioservices revenues of $18,000,000 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 $52,000,000 driven by strong sales of NARCAN.

Speaker 2

Cost of MCM product sales in the quarter was $62,000,000 driven primarily by SIPENDIS sales volume and other medical countermeasure products, partially offset

Speaker 1

by a decrease in shutdown

Speaker 2

costs cost of bioservices of $30,000,000 reflecting actions taken to improve profitability R and D expense of $15,000,000 reflecting the impact of the travel health divestiture to Bavarian Nordic as well as the impact of cost management activities taken in 2023 and SG and A spend of $85,000,000 including expenses supporting key NARCAN initiatives offset by reduced expenses related to restructuring initiatives. Of note, total operating expenses were down 16% compared to the prior year as we focus 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 $118,000,000 comprised entirely of NARCAN and segment adjusted gross margin was $66,000,000 or 56%. In the MCM segment, revenues were $155,000,000 driven by anthrax, smallpox and BACT.

Speaker 2

The segment adjusted gross margin was $94,000,000 or 60%. As for the services segment, revenues were $18,000,000 and segment adjusted gross margin was negative $12,000,000 I'll now turn to Slide 12 and touch on select balance sheet and cash flow highlights. We ended the Q1 with $78,000,000 in cash and liquidity, including availability under our revolving credit facility. The change in cash and liquidity versus the prior quarter due to sales timing and collection of AR. Operating cash flow was negative $63,000,000 which improved significantly versus the prior year.

Speaker 2

Capital expenditures were $11,000,000 in the Q1, which is a 28% reduction versus the Q1 of 2023. And as of March 31, 2023, our net debt position was $827,000,000 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 approximately $80,000,000 when fully implemented. The costs associated with these actions are estimated to be approximately $18,000,000 to $21,000,000 and are expected to be incurred in the Q3 of 2024.

Speaker 2

We are confident that these efforts, let me amend that, are expected to be incurred in the Q2 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, provide Howard, can you hear us?

Operator

I can hear you, sir. I hear you now.

Speaker 2

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

Operator

Yes.

Speaker 2

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 $1,000,000,000 to $1,100,000,000 We're forecasting commercial product sales of $460,000,000 to $500,000,000 as we expect continued strong demand for NARCAN in the U. S.

Speaker 2

Public interest channel in Canada, combined with further growth with OTC NARCAN in the retail channel. We're forecasting MCM product sales of $440,000,000 to $490,000,000 Since our last report on March 6, we've continued to engage with our U. S. Government stakeholders to improve the procurement visibility for CyFendis and other medical countermeasure products. As a result of those conversations, we have a better understanding of the U.

Speaker 2

S. 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 $70,000,000 to $80,000,000 reflecting our commitment to serve our existing customers. Shifting to profitability metrics, we're forecasting adjusted EBITDA of $125,000,000 to $175,000,000 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 full year impact of our profitability improvement efforts.

Speaker 2

Finally, we're forecasting Q2 revenue in a range of $160,000,000 to $210,000,000 We've also included some additional assumptions around our full year guidance. Interest expense is forecasted to be $82,000,000 reflecting terms around our new credit agreements. Total R and D spend as a percentage of revenues is anticipated at approximately 6%, weighted average fully diluted shares of $52,000,000 CapEx spend of approximately $32,000,000 $111,000,000 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.

Speaker 1

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 to bring Emergent Chief Scientific Officer reporting to me. This individual bring together all of our science innovation efforts improving our long term product pipeline. The search will include both internal and external candidates.

Speaker 1

Let me now provide an update on our core products and future growth drivers starting with NARCIA 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 NARCAN nasal spray. The opioid epidemic continues to have a devastating impact across the world as a leader of opioid reversal space. We remain committed to getting NARCAN to everyone who needs it. To be clear, we do expect NARCAN share in market will be impacted by generic competitors over time.

Speaker 1

However, we also expect market forces like opioid settlement funds, continuing opioid overdoses and the need for increased NARCAN access will continue to 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, 100 of 1000 of NARCAN cartons are made available to purchase at mass drug, grocery, online retailers and e commerce sites.

Speaker 1

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 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 narcoa 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.

Speaker 1

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, we 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 for coverage. We've been working closely with Health Canada with a goal to distribute nalaxone convenience kits containing NARCAN.

Speaker 1

Finally, we're exploring opportunities to expand access internationally beyond the U. S. And Canada either internally or through partnerships that we believe increase NARCAN growth. Turning to Slide 17 to review our MCM business. We continue to deliver on our commitments to the U.

Speaker 1

S. 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 Sifenis, our post exposure anthrax vaccine. For the strategic national stockpile, we are finalizing modification to our ACAM contract. In addition, we have received notices of intent to procure from the U.

Speaker 1

S. Government in 2024 for BAT, 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.

Speaker 1

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 take a few moments to focus on future growth drivers for the organization based on the potential expansion of our in line products. 1st, we believe international expansion will be an important growth driver across our business.

Speaker 1

Global public health and preparedness have never been more vital in 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 products. 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.

Speaker 1

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 Q1 results and our full year 2024 guidance improvement. 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 continuing to work with key stakeholders to prepare for and respond to a range of public health threats, while returning Emergent to greater profitability for our shareholders.

Speaker 1

With that, we'll open up the call for questions. We also invited Paul Williams, our Head of NARCAN and Medical Countermeasures Business to join us for the Q and A. Operator, let's open up the line for questions, please.

Speaker 3

First one on NARCAN. You guys are showing continued growth from that product kind of 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 on how you're thinking about any generic competition that could come in to either of those two segments throughout the course of this year?

Speaker 2

Thanks, Nick. I'll take the first one. This is Rich. Yes, 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 it's gaining traction, but the majority is coming from the FIP channel with some contribution from Canada as well.

Speaker 4

Yes. 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 channel and the retail MTC channel is uniquely with the capabilities that we have like Northland Direct, and through the partnerships we're building on the retail side, we can support the forecast that we have for

Speaker 1

the rest of the year. And finally, just to put a couple of other future looking comments. I think when we look at NARCAN, we look at a couple of important points. Number 1, 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.

Speaker 1

Number 2, 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 products. 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 generic 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 our Narcan business.

Speaker 3

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 to 4 $40,000,000 to $490,000,000 I believe from the $340,000,000 to $490,000,000 Is that just more clarity around anthrax backs or are there other assumptions baked in there?

Speaker 2

That's really the primary driver as we commented back in 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 a better visibility into where we see Sifenis procurement this year.

Speaker 2

And as a result, we were able to narrow the range by lowering by raising the low end of the range.

Speaker 3

Great. And maybe if I could just squeeze in one more. Understanding that this is not an easy decision around the 2 facilities, can you maybe just provide some additional details on why you chose Rockville and Bayview as part of that 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?

Speaker 1

Yes. Let me start with maybe the big picture and I'll get to your questions. I think the big picture is, 1st 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 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 that went into our decision.

Speaker 1

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 can still provide access to the products that are so important to U. S. Government, governments around the world and obviously 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.

Speaker 1

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 comments to that going that far in terms of what we've had interest so far.

Speaker 1

I think I've got all those parts of the question.

Speaker 3

Yes. Thanks so much.

Speaker 1

Thank

Operator

you. I'm showing 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.

Speaker 1

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. We 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.

Operator

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 Investors landing page on the company's website.

Operator

Thank you again. We look forward to speaking to you in the future.

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