Good day, ladies and gentlemen. And welcome to Emergent BioSolutions Inc. Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. I would now like to turn the conference over to your host, Bob Burrows, Vice President of Investor Relations. You may begin.

Thank you, Nicole, and good afternoon, everyone. Thank you for joining us today as we discuss the operational and financial results for the third quarter and nine months of 2018. As is customary, today's call is open to all participants. And in addition, the call is being recorded and is copyrighted by Emergent BioSolutions. Participating on the call with prepared comments will be Dan Abdun Nabi, Chief Executive Officer; Bob Kramer, President and Chief Operating Officer; and Rich Lindahl, Chief Financial Officer. Other members of the senior team are present and available during the Q&A that will follow our prepared comments. Before beginning, I will remind everyone that during today's call either on our prepared comments or the Q&A session, management may make projections and other forward-looking statements related to our business, future events, our prospects, or future performance. These forward-looking statements are based on our current intentions, beliefs and expectations regarding future events. We cannot guarantee that any forward-looking statement will be accurate. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could differ materially from our expectations. Investors are therefore cautioned not to place undue reliance on any forward looking statements. Any forward looking statements speaks only as of the date of this conference call. And except as required by law we do not undertake to update any forward-looking statement to reflect new information, events or circumstances. Investor should consider this cautionary statements as well as risk factors identified in our periodic reports filed with the SEC when evaluating our forward-looking statements. During our prepared comments as well as during the Q&A session, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures, in order to provide greater transparency regarding our operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income, EBITDA and adjusted EBITDA and the reconciliations between our GAAP financial measures and these non-GAAP financial measures. For the benefit of those who may be listening to a replay of the webcast, this call was held and recorded on November 1, 2018. Since then, Emergent may have made announcements related to topics discussed during today's call. You're once again encouraged to refer to our most recent press releases and SEC filings, all of which may be found on the Investors home page of our Web site. And with that introduction, I would now like to turn the call over to Dan Abdun Nabi, Emergent BioSolutions' CEO. Dan?

Thank you, Bob. Good afternoon, everyone and thank you for joining us. During today's call, I'll focus on recent trends in the public health threats market, and Bob will provide updates on our global operations. Rich will then summarize our financial performance for the third quarter and first nine months of the year, and discuss the revisions to our financial guidance for the full year 2018. As you saw from the press release this afternoon, our performance during the third quarter and year-to-date is solidly in line with expectations. And we are confident in a strong finish to the year, driven primarily by growth in our organic business, as well as the incremental impact of the PaxVax acquisitions. The public health threats market is greatly influenced by federal, state and local legislation, policy and funding, both in the United States and internationally. And recently, we have seeing significant progress across all of these fronts. In the United Sates on September 28th, the President signed into law the labor HHS and education appropriations bill for fiscal year 2019. Key bio security programs were funded above the President's requested level and at or above 2018 levels. This included project Bioshield at $735 million, BARDA at $562 million and the SNS at $610 million. The bill also included $50 million to establish an infectious disease rapid response reserve fund to allow HHS to quickly respond to a pandemic. In addition as of October 1, advanced research, development and stockpiling of medical countermeasures are now under the office of the Assistant Secretary for Preparedness and Response. This move consolidates strategic decision-making around the development and procurement of medical countermeasures and streamlines leadership to enable nimble responses to public health emergencies. The 2019 appropriations bill also included substantial funding and other mechanisms to address the…

Thank you, Dan and good afternoon, to everyone and thank you for joining our call. For my prepared comments today, I'll focus on summary updates on the operations in each of our four business units. But before doing so, I would like to take a moment and give a brief update on the recently closed acquisitions of PaxVax and Adapt Pharma. With the closing of these two transactions, we have exceeded our 2018 operational goal of completing an acquisition that will generate revenue and be accretive within 12 months of closing. To that important point, we continue to expect that the Adapt and PaxVax operations will contribute combined revenue in the range of between $270 million and $300 million in 2019 and be accretive to full year 2019 adjusted net income and adjusted EBITDA. Focusing first on the PaxVax acquisition, since the closing in October 4th, we've begun the integration of PaxVax's products, pipeline and sights into both our vaccine and our infectious business unit, as well as our CDMO business unit. As reminder, PaxVax adds to our portfolio two FDA approved vaccines, Vivotif for typhoid and Vaxchora for cholera, as well as two development candidates, a Phase 2 chikungunya vaccine and an adenovirus Types 4 and 7 vaccine being developed in collaboration with the U.S. Department of Defense. The acquisition also expands our international manufacturing footprint with the addition of a cGMP Biologics facility in Bern, Switzerland, which we view as an important strategic step in our approach to addressing the needs of customers in Europe. They also bring in experienced marketing team and global specialty salesforce and distribution network, focused on the growing travelers market. Shifting to the Adapt Pharma acquisition. On October 15th, we announced the closing of this significant transaction and have now begun the integration…

Thank you, Bob and good afternoon everyone, and thank you for joining the call. For my prepared comments today, I will walk through the P&L performance for the third quarter, as well as the year-to-date period, and then shift to the balance sheet and address the state of our capital structure. I will then wrap up with comments on our revised 2018 guidance. With that, let's first look at our third quarter performance. Results for the third quarter and first nine months of 2018 were strong and reflect both continued execution against our financial and operational goals, as well as the ongoing diversification of our business. Third quarter total revenues were $174 million, substantially higher than the prior year. Compared to the same period in 2017, quarterly revenue highlights are as follows; first, product sales. Product sales during the quarter were $133 million, up $19 million due primarily to sales of ACAM2000 and Raxibacumab, which were both acquired in the fourth quarter 2017, partially offset by lower BioThrax revenues, which were consistent with our contracted delivery schedule; second, contract manufacturing services. CMO revenues were $22 million, up over $3 million year-over-year due primarily to increased contract manufacturing services for existing commercial customers at our Camden Baltimore facility; and third, contracting grants. C&G revenue with $18 million, up $2 million due primarily to increased research and development activities associated with reimbursable product development programs. Gross margin for the quarter was 53%. As we stated before the mix of product and CMO revenue significantly influences our blended gross margin. In addition, our gross margin in the third quarter reflects 200 basis point headwind from non-cash amortization costs. Turning to operating expenses. Gross R&D spend was $37 million in the quarter, an increase of $14 million year-over-year. After adjusting for contracting grants revenue,…

[Operator Instructions] And our first question comes from Brandon Folkes from Cantor Fitzgerald.

I've just got two, one, I'd like to get your thoughts on the potential that we saw recently with the guidance of a OTC Naloxone and how do you think that fits into the overall goal of providing affordability and access to the patients? And then secondly, could you just provide a little bit more color how you see the competitive landscape shaping up around the branded Naloxone coming to markets to compete with NARCAN? Thank you.

Thanks Brandon for participating and for the question. So, it’s a really interesting observation that you raised, because the keys around OTC is to ensure access and affordability and that those who actually need to product are receiving and securing it. And our approach right now on assets and affordability, as Bob mentioned in his prepared remarks, there are standing prescriptions that are unable individuals to walk into a pharmacy and secure on the product without an individualized prescription. In addition, we’re seeing coverage by about 97% of insurance companies providing coverage, many at local pay and predominantly $10 or less. So really the whole importance of an OTC strategy is to ensure public availability. And right now, the programs that the Company have in place, I think, are really enabling that access with education programs underway. Additional thoughts about how we can expand on that availability. So it's an area that we continue to evaluate. But given the present circumstances on the availability and access is something that I think is being addressed with the current programs. I'll ask Bob -- anything you want to add to that Bob.

No, I think that’s complete and accurate, Dan. The programs that were put in place under the Adapt management are taking hold, they’re working and they’re reinforcing the affordable access principals. Whereas the co-prescription program, the standing order program, the awareness and education programs that we have recently announced. So from our perspective, things are working well and we will continue to evaluate what we need to do with this product going forward.

And maybe just on the competitive landscape, how are you guys shaping up?

We have Doug White, who is Head of the Business Unit for Devices. Doug, maybe just a little perspective on the branded naloxone.

Yes, we continue to evaluate the marketplace and understand that there are other companies that are doing work and studies with plans to enter the market. We have anticipated that through our initial analysis and valuation as part of the acquisition and we believe that NARCAN is a very strong brand and that based on our current position, we feel very strongly about our ability to maintain a strong position in the marketplace.

And I think the other thing to add to this is, this is a crisis -- a healthcare crisis that we've not experienced before as a country and there is a real need for products like the NARCAN Nasal Spray to be available. And as we look at the landscape, increased education, increase awareness, increased avenues for availability, this is a growing marketplace. It's not static and fixed. And particularly when we see some of the state initiatives and the federal government allocating grant money for block grants to the states and the utilization of those funds by the states to address the opioid crisis in the way they see fit. This is an expanding market. So it's not static whereby an additional product or two coming into the market actually affects the growth prospects for the NARCAN Nasal Spray. So you have to think of it in those terms as well.

Thank you. And our next question comes from Dana Flanders from Goldman Sachs. Your line is now open.

Hi, thank you very much for the questions. My first is just, maybe you can speak to PaxVax and how you think or where you think you can take operating margins for that business. I know you said accretive by year-end '19. What's kind of the long-term margin profile you think you can achieve? And then, on Vaxchora specifically; again, I know it's in launch mode, but how you're thinking about that long-term market opportunity? And then I just have a quick follow-up.

So Dana, thanks for the question. I think as we spoke, when we announced the PaxVax transaction, we expected both it as well as the Adapt transaction to be operating consistent with the profile that we established several years ago for our 2020 financial profile in terms of its contribution, it's profitability profile, so our thinking has not changed there. I'll let Abi Jenkin, who runs the Vaccine business unit talk about the specific opportunities for Vaxchora. But in general, I'd say our thinking is consistent with what it has always been in terms of the profitability profile on our expectations for the business. Knowing that we are going through a bit of a transition process, having just gotten our hands on the wheel of this less than a month ago and there is an ongoing integration process and assessment that needs to continue for quite some time. But Abi with that anything -- any color you want to add?

In terms of Vaxchora growth specifically, I think the travelers market is, as you mentioned Bob, strong and growing, and Vaxchora unit; numbers of prescribers who are using Vaxchora and the units per physician are increasing. We've got a great relationship with Passport Health and a number of factors under way and it is the only approved cholera vaccine in the US. So, just a lot of momentum behind the launch that we expect to continue for the remainder of '18 and into '19, for sure.

Okay. And then, on the upcoming panel to discuss naloxone and I know you mentioned that a couple of states have already adopted co-prescribing it with opioids. I mean what's happened to volumes in those states when that legislation or that state legislation is passed? I mean what's the example of how much volumes pick up and I know it's a state by state basis, but curious if you have an example that you can point to for how we should think about the incremental volume opportunity, assuming this goes through or other state adopt this? Thanks.

Sure, it is. You're correct. It is state by state specific and there are now six states where the co-prescription program has been implemented. There are two others that are scheduled to be implemented soon. But Doug, maybe you want to provide some color on the experience so far in terms of the impact on those sales.

Absolutely. So in states where the co-prescription legislation has been implemented, we do see a spike in volume that happens very shortly after the legislation goes into place and then we see a continued maintenance on -- increase in that state on a weekly basis in terms of prescription. So it does have an impact and we have seen that demonstrated consistently with all of the states that have initiated legislation.

And it's a little difficult to tell, exactly, Dana what the impact will be knowing that on the date of enactment, there are a certain percentage of prescriptions that maybe 15 days old, 30 days old, 60 days old. So there may be a bit of a delay in when the impact from the co-prescription program will be felt or seen through the channel. So it's really on a state by state, almost patient by patient basis.

Thank you. And our next question comes from Boris Peaker from Cowen. Your line is now open.

I just want to focus more on the smallpox vaccine, maybe a little. With BioThrax and ACAM2000, what are some of the key timelines for negotiating future contracts with key milestones that you'll be able to report on that will be more visible to us as investors?

So, Boris, as we said in our remarks, I think it's a good indication that the government came out with their pre-solicitation notice and their request for proposal to which we have now responded. So it opens the door for us to have more transparent conversations around what an ultimate long-term solution looks like. I think realistically, when you will get visible or tangible evidence of progress when -- is going to be when we announce a contract award.

I think that's right, Bob. I think that's the next visible milestone for investors to see the progress there. I will say that this has been the countermeasure that's been one of the highest priorities of the US government going back decades. And for them to have a vaccine that's available in their stockpiles to protect every man, woman and child in the country has been a priority. As I said, going back decades. So we fully expect and all indications are that that commitment remains. And in fact, as you've seen, they're looking to expand populations with immune compromised as well being available to be protected. So this is a key priority. It's a capability that's unique in this country and so, we fully expect -- the commitment is there; certainly we see the funding is being there, the will is there. So, very much similar to the contract negotiation process we've undertaken so many times with the US government. So, just a little color there for you, Boris.

Thank you. And my next question is on, if we look at PaxVax products, what is the opportunity in Europe or ex-US for these products?

So Abi, you want to comment on that?

Sure. So for the PaxVax travelers vaccines, they represent, in terms of product sales, about 30% of the total product sales we estimate for 2018 and it's also an area of growth both for the -- for products like Vivotif, which is the main PaxVax product that's available outside the United States, because Vaxchora hasn't launched yet, but also through our partner relationships where we sell other companies' products and where they sell and distribute ours. So that's definitely an area of continued growth moving forward as well, especially as we intend to launch Vaxchora outside the United States in 2020.

Thank you. And our next question comes from Keay Nakae from Chardan. Your line is now open.

A couple of questions related to the recent acquisitions that you've completed. Can you give us an estimate of both what do you expect the quarterly depreciation and amortization to be and also what you expect the quarterly interest expense to be?

What you'll see is we've got roughly $12 million to $13 million of additional D&A that we're expecting in the fourth quarter of 2018. So that's -- some of that is preliminary based on initial purchase accounting estimates and so that could move a little bit, but that's a reasonable estimate for now. And as far as interest expense is concerned, you should think of it in terms of roughly $8 million to $9 million per quarter as, again, a reasonable estimate.

Thank you. And our next question comes from Jessica Fye from J.P. Morgan. Your line is now open.

You've talked about some investment to support the growth of NARCAN, can you help us think about how aggressive you might be and what that mean for 2019 SG&A? And I have a couple others as well. I mean, if you want me to rattle them off now or go one by one.

So I think we will evaluate carefully how to best support the programs that Adapt Pharma has put in place and the resources that they had made use to deploy those programs. I think as we've said on the earlier call, they are fairly lean organization with just 50 employees worldwide supporting revenue base that we anticipate for 2019 is going to land somewhere between $200 million and $220 million in revenue. So they've been scrappy. They've been extremely effective and now we have to step back and evaluate those three principal initiatives around affordable access and awareness and how we can accelerate that, plus ensure that there is a robust, durable supply chain that supporting that product. So we'll be careful about that, but I think there is an opportunity to carefully make some additional investments to really boost the business overall. Some of this will be SG&A impacts and maybe capital investment related.

Okay. And then, is it possible to quantify what Raxi and ACAM2000 revenues were on the quarter? And if not, can you at least give us a sense of, say like, how much smaller the second largest product was relative to BioThrax this quarter? Sees like this is one of those ones where it could have been close?

We haven't typically broken out those other product sales revenue. We're really just disclosing the BioThrax revenue at this point. As we've talked about in the past Jess, those other -- we used to refer to them as other bio-defense product revenues are bit lumpy. They're subject to a delivery schedule under contract and it may be the case where we have one delivery per year for those products and they kind of trade off timing-wise; they smooth out over time. So again, if you look historically at the contribution of other product revenue and BioThrax on a trailing 12-months basis, it smooth out, but quarter-by-quarter, I think to your point, you question, it is a bit lumpy.

And then lastly, I think this is sort of following up on the prior question, with respect to that $50 million in pre-tax transaction and integration costs, can you talk about how much of that $50 million hits in the fourth quarter versus that's already in 3Q? And just kind of curious if you can give any more color on like the components of it and what lines that will hit?

If you look at the reconciliation tables, you will see a couple of components are highlighted. So you've got about $24 million of transaction and integration expenses, you've got $8 million of inventory step-up you've got; in addition we have another roughly $10 million of amortization; and about $7.5 million, $8 million of interest expense, incremental interest expense. So that's how you get to the $50 million and nearly all of that is in the fourth quarter.

Nearly all of it's in the fourth quarter. Okay, got it. Thank you.

Thank you. And our next question comes from David Maris from Wells Fargo. Your line is now open.

I have a few naloxone questions. So, first, on the OTC naloxone opportunity; is that something that EBS would plan to participate in and do support the idea of an over-the-counter naloxone. The second is, what do you think the impact could be on pricing? Also, do you have any IP around the use of nasally delivered naloxone in certain dosage strengths that the current FDA guidance for dosage strengths of 2 to 4 milligrams fall within? And that's -- those are my questions.

So, I'll come back to the earlier answer that I provided, the real benefit of OTC is to ensure access and availability. And given the programs that are now in place and the systems that have been adopted and implemented, we're not perceiving a significant benefit to have the products available OTC over and above what's being provided today, because remember we've standing prescriptions, we have insurance coverage, and in many instances patients pay nothing for it or the co-pays could be under $10. It's hard to imagine that in OTC paradigm, where patients would be paying nothing or less than $10 for a product such as this. So we're not really seeing the benefit in terms of increasing accessibility I think -- our affordability and really -- or availability. So the real driver for OTC really has to be around the benefit that the product provides for addressing the crisis, the opioid crisis and I'm not sure that OTC is the answer. And I think the other thing that's--

So it wouldn't be detrimental, I mean, you don't see any downside to it from an access standpoint, do you?

It could very well be detrimental. Yeah. It could very well end up hurting the effort rather than improving the effort. Not sure that the discussions that are appropriate between pharmacist and patient to a recipient would take place -- not sure that the conversations that might be appropriate between physician and patient would take place certainly on the economic side. There isn't the opportunity to have it covered by insurance with little or no co-pay. So it actually might reduce and have a negative impact overall. It's hard to predict at this point. We're still early in the stages. So, I'm not sure if people are totally convinced that OTC is the right play here, if the importance of affordability, accessibility and distribution to address the crisis is the priority. So I think a lot remains to be learned. We do have the FDA Advisory Committee coming up. I think these discussions are going to be very important to gaining a more comprehensive, robust understanding. We expect to participate in those hearings. We expect to have an active voice in enabling the Advisory Committee to understand our perspective on the benefits and detriments, various ways in which naloxone treatments can address the crisis. So, this is an emerging space. There is no firm fixed answer to the problem. It's multifaceted, and as you can see by the various legislative initiatives that are out there. The government is looking at numerous ways on how best to address this crisis and reduce it. So OTC is not a silver bullet and shouldn't be construed as such. So I guess--

I had asked the questions around the IP and the 2 to 4 milligram dosing.

So on the IP question, we do have IP. Who is the best person in the room to answer that? Okay, Atul. Atul Saran our General Counsel, so if you could tackle that one for us Atul.

There are patents that have been issued that are protecting the NARCA Nasal Spray. It's something that we evaluated closely during the course of the acquisition process and came away with a strong comfort level that it will continue to help protect the NARCAN Nasal Spray as a branded product in the marketplace. And it does include kind of a range of different doses, in response to your questions.

Yes, but I just want to be specific about this, because the Company has said that the draft guidance that the FDA has put out, gives a 2 to 4 milligram dose strengths and that your IP actually -- if you came out with a dose at that level, would the -- a competitor may be violating your IP just by following the draft guidance? And is that -- do you believe that to be the case?

I mean, David, the patent law is a complex area, we'd have to assess it on a case-by-case basis if there are products that come up. I can't speculate as to any particular product, as to whether it may or may not infringe.

[Operator Instructions] And our last question comes from Lisa Springer from Singular Research. Your line is now open.

Thank you. I just wanted to ask a quick question about the expansion of the Camden facility. Could you tell us approximately how much of that $50 million is going to be spent in 2019 and is the expansion of the site going to be incremental or it won't really be available for use until the project is fully completed?

That number is about $30 million. And just to be clear, Lisa, that -- the investment we're making there as we several -- said in our prepared remarks is both a capacity expansion initiative doing more of the same, if you will, as well as a bit of a capability build. So we are looking for additional customers with new capabilities to which -- to build that business that we know there is a heavy demand for.

Will there be additional capacity available at that site in 2019?

A portion of it will be online and available in '19; clearly not all of it, Lisa. I think it's scheduled now to all be on board probably closer to the middle of 2020.

Thank you. And I'm showing no further questions at this time, I would now like to turn the call back to Bob Burrows, Vice President, Investor Relations, for any further remarks.

Thank you, Nicole. With that, ladies and gentlemen, we now conclude the call. Thank you for your participation. And please note, an archived version of the webcast of today's call will be available later today and accessible through the company website. Thank you again, and we look forward to speaking with all of you in the future. Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.