Good day, ladies and gentlemen, and welcome to the Emergent BioSolutions Inc. First Quarter 2019 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 call over to the company. Please go ahead.

Thank you, Skylar, and good afternoon, everyone. My name is Bob Burrows, Vice President of Investor Relations for Emergent. Thank you for joining us today as we discuss the operational and financial results for the first quarter of 2019. 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 Bob Kramer, President and Chief Executive Officer, and Rich Lindahl, Chief Financial Officer. Other members of the senior team are present and available during the Q&A session 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 made 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. Any forward-looking statement 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. Investors should consider this cautionary statement, as well as the 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 Emergent's operating performance. Please refer to the tables found in today's press release regarding our use of adjusted net income or loss, 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 the replay of the webcast, this call was held and recorded on May 2, 2019. Since then, Emergent may have made announcements related to topics discussed during today's call. You are once again encouraged to refer to our most recent press releases and SEC filings, all of which may be found on the Investors homepage of our website. And with that introduction, I would now like to turn the call over to Bob Kramer, Emergent BioSolutions' President and CEO. Bob?

Thank you, Bob, and good afternoon and thank you for all joining us on the call this afternoon. In my prepared remarks, I'll provide a brief overview of our financial performance for the quarter and then touch upon certain operational accomplishments, but the majority of my comments this afternoon will focus on four areas of near-term focus for the company. These include: first, the state of our anthrax vaccine business, namely BioThrax and AV7909; second, the status of our smallpox vaccine contract negations with the U.S. government; third, the state of our NARCAN nasal spray business; and finally, key development programs, including details on certain projects we acquired from Adapt Pharma. First a word on our financial performance. Our first quarter financial results were in line with our expectations and reflect the impact of the four near-term focus areas I just described. Importantly, we're in the early stages of transitioning our anthrax vaccine business in coordination with the United States government. The United States government has initiated the slowdown of procurement of BioThrax, and at the same time signaled its intent to procure AV7909, which we've been developing as the next-generation anthrax vaccine. Meanwhile, we're also transitioning to two new contracts for our smallpox franchise. The financial implications of the anthrax and smallpox transitions with the U.S. government is that our financial results for 2019, namely revenue and more significantly profitability, will be heavily weighted to the second half of the year. Importantly, we remain confident in achieving our full-year financial forecast, as well as operational objectives. Rich will talk to these in greater detail in a moment. With that, let me turn to the BioThrax AV7909 transition. As you know, the United States government has a goal to protect 25 million U.S. lives from the threat of anthrax. BioThrax…

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call. For my prepared comments today, I will walk through the first quarter performance across the P&L, then shift to the balance sheet and address the state of our capital structure and wrap up with comments on our forecast for 2019, as well as the second quarter. As a reminder, we provided all the numbers related to our first quarter results, as well as the requisite reconciliation tables, in a press release we issued this afternoon. Therefore, my goal today is to focus only on the highlights. Results for the first quarter of 2019 reflect both continued execution against our financial and operational goals, as well as the ongoing diversification of our business. Total revenues were $191 million, a 62% increase. Adjusted net loss was $6.8 million, lower versus prior year. And adjusted EBITDA was $7.4 million, an increase of $4 million versus the prior year. As we said on our last earnings call, we continue to anticipate that our revenues, and more significantly our earnings, will be heavily backend weighted in 2019, and these first quarter outcomes are consistent with that expectation. Digging into more details, let's discuss a few key contributing factors to first quarter 2019 performance. First and foremost, the first quarter includes the impact of the PaxVax and Adapt acquisitions, both of which were completed in the fourth quarter of 2018, increasing the scale and scope of our enterprise. NARCAN nasal spray revenue was $65 million. This performance reflects the impact of ongoing community access programs addressing the public interest market, as well as the initial spike in demand following adoption of naloxone co-prescription in the State of California on January 1. As observed with the introduction of Co-Rx in other states, such demand…

Thank you. [Operator Instructions] Our first question comes from Brandon Folkes with Cantor Fitzgerald. Your line is now open.

Hi, thanks for taking my questions. Firstly, on the chikungunya vaccine, your product showed some compelling data compared to its nearest competitor. So could you just help us think about, one, what the market opportunity is for chikungunya vaccine and at your market? And how a single dose versus a two-dose vaccine may play out in that market. And any advantages if it does in fact have a faster time to produce neutralizing antibodies than any competition. Thank you.

I'm going to turn this question over to Abbey Jenkins, who runs our Vaccine and Anti-Infective Business Unit and is responsible for the chik program. So, Abbey?

Sure. Thanks, Bob, and hi, Brandon. Nice to speak with you again. I think your first question was on the size of the market, if that's correct?

Correct, yes.

Okay. I think when you look at the number of travelers who we project would be traveling around to the various chikungunya endemic areas, we project that there are 64 million potential trips estimated starting as early as next year, and that represents about 35 million civilian travelers going to chikungunya endemic areas. So if you try to translate that into what is the financial market opportunity, I know my – our competitors have quoted in the range of $300 million to 500 million in euros that they believe is a potential global opportunity for chikungunya. I think that certainly seems reasonable within the range of what could be potentially feasible for a product like this. I think your second question was related to the benefits of a single dose versus two doses. I think for this particular market, travelers, what we found from our market research is that travelers are highly compliant with a single dose regimen and they may not be as compliant with a two-dose regimen. Often travelers do not invest the needed time to prepare for their travel, so again, a single dose offers that kind of last minute vaccination. And with the 98% immune response within the seven-day time frame, I think that will still allow for that kind of late travel planning vaccination and preparedness as well. I'm not sure what your third question. I was trying to write it down, but could you restate what your third question was?

No, you addressed it. It was the onset to produce neutralizing antibodies. So thank you very much. Perhaps one follow-up, if I may, just financially. You reiterated guidance, but could you talk us through whether you changed any assumptions within your guidance, especially around ACAM2000 and NARCAN? Thank you.

Yes, Brandon. Good question. We didn't. On the whole, we feel and remain confident in our ability to meet the financial guidelines that we put out there in January. As you can appreciate, there are always some puts and takes along the way, but on the whole, there have been no significant changes in the overall assumptions around the composition of the financial guidance.

Great. Thank you very much.

Our next question comes from Jessica Fye with JP Morgan. Your line is now open.

Great. Thanks for taking my question. Maybe just following up on the guidance. Bob, were your comments on BioThrax and the next-gen vaccines suggesting that there could be perhaps fairly low U.S. BioThrax deliveries in 2019 relative to historic levels? And can you help us think about your expectation for the proportion of your revenue guidance that will be driven by the anthrax franchise in general and how much of that might be from 7909?

I think as we have signaled quite a number of quarters ago, we anticipated then and are living today the early innings of the transition that we've been talking about with BioThrax and AV7909. It's a little too early and premature to say with any level of certainty what the composition of our anthrax vaccine revenue between BioThrax and AV7909 will be this year. However, again, we remain confident in the assumptions we use to build our budget for this year that went directly into the guidance numbers for 2019. I guess perhaps what might be helpful is that for those guidance numbers for 2019, we assumed and are remaining confident in the contribution of anthrax vaccine, both with BioThrax and with AV7909, being any level that's going to end the historical range of anthrax vaccine revenue that you've seen from us over the last four or five years. So I think that will give you some color and indication of its contribution this year.

Okay. That's helpful. And then, again, just following up on I think one of the prior questions about NARCAN. I think you've now recorded about 30% of the upper end of that $200 million to $220 million range you had talked about, and it sounds like you're not changing that. So just to be clear, you're expecting that subsequent quarters on average will be lower than this quarter?

That's right, Jess. Again, we're pleased with the relative over performance in Q1. And as we've talked about, that was strongly and primarily the result of the Co-Rx adoption legislation in California. Going forward, we expect that the revenue to be at a more normalized level, save for these periodic blips and spikes because of additional states perhaps adopting Co-Rx as well.

Okay, great. And makes sense, I know you've talked previously about the split between retail and public interest, but I think both revenue and volume being roughly 50/50. Was that split different in the first quarter with the California dynamic?

No, it was pretty much the same. Not materially different.

Okay, great. Thank you.

We see both markets growing.

Our next question comes from Keay Nakae with Chardan. Your line is now open.

Yes. With respect to NARCAN, does the company anticipate any shifts in your strategic marketing of the product with the entry into the market of competitive products?

As we've talked, and when we went through our diligence process last year, we thoroughly analyzed kind of the competitive profile for NARCAN nasal spray, as well as potential competition coming in. I think we've shared with everyone that we anticipated competition into this market, whether it be generic or branded or even OTC competitors down the road. So again, we remain focused on making sure that we stay tuned in to attending to the needs of patients in that 34 million patient group that I described in my opening remarks. And making sure that we're doing everything we can do drive awareness, increase access to and control the affordability of what we think is a very unique and critically important naloxone product in NARCAN nasal spray.

Okay. If I could ask a second question that relates to the new OUS customers for BioThrax. Can you give us anymore color on the nature of those contracts and what the potential is going forward?

Yes. I think what we see is a general continuing maturity and interest outside of the U.S. for any number of our products in the portfolio, including BioThrax. As we've talked about, the international market for these products is just beginning to mature. It's rather in an infant stage. We stand prepared with our supply chain improvements to meet what we see as an increasing demand across the portfolio for BioThrax and for any of the other products that we manufacture. So again, we're pleased with the progress, but this is going to be a slow maturity over the next several years.

Okay, that's helpful. Thanks.

Our next question comes from Boris Peaker with Cowen. Your line is now open.

Great. Thanks for taking my question. I just want to probe a little further on NARCAN. I just want to maybe understand, for all the NARCAN that's being prescribed, curious what fraction of the inhalers are actually being used? And then how long is the shelf life of it, and what happens to the ones that aren't being used beyond their shelf life?

The shelf life is two years. As I said in my prepared remarks, we're looking at the data to potentially extend the shelf life. We think that that provides some additional value to patients. I'll ask Doug White, the Head of the Devices Business Unit, to comment on your other questions. But I'm not aware that we have insight into your other questions, but Doug, do you want to comment here?

So we actually do not have data or access to data around utilization in the retail market, in the pharmacy market. Usually the – actually the units that are being distributed out and someone's covered at home. So we really don't have a lot of data around that. We do know, though, that we anticipate there will be some expiration as we go forward. So we want to make sure that it's part of our commitment to continuing to build the value for the patient themselves that we extend the shelf life. So we're undergoing studies right now to do just that.

But I just want to kind of get a sense of for particularly majority of NARCAN that's purchased today maybe, is it mostly to replace expiring units, or is it mostly to replace actually used units or how does that kind of breakdown?

Yes, it's a good question. In the public interest market, there is some replacement, and we do have data that shows that utilization's about 5% to 10% among first responders and individuals in the public health space. However, when you think about the potential or the number of individuals that are at risk, the 34 million that was highlighted by Bob, we're currently at less than 5%. So the majority of the sales to the retail market are new patients; not replacement. And frankly, even in the public interest market, we are not fully saturated or the market's not fully saturated, and the large majority of the units that are being distributed are being distributed are new, not replacement.

Got you. And lastly, just following up on that. In terms of co-prescription in California, do you also have a sense of what fraction of opioid prescriptions actually get a NARCAN filled with them? And how frequently will these patients, then, will have to get a new inhaler? Is it just like once every two years, once every several certain number of prescriptions? Like how does that whole process work?

That's a great question. We have some data that we presented to the FDA at the FDA AdCom from IQVIA. And we did an analysis, and it appears that approximately 10% of individuals that could be eligible based on the fact that they're getting a higher risk prescription actually fill the prescription. It doesn't really indicate whether they're getting the prescription or not because there is – an abandonment rate is small. We can't estimate, but there's an abandonment rate. So I think – what was the other part of your question? You had another part to the question, I think.

Yes. No, I just wanted to know, I guess just the other part was how frequently will these patients receive new NARCAN inhalers by the new co-prescribing regulation. Is it just like once every two years or there is some other provision there?

No, it would just be based on whether or not they had to deploy it, they would replace it. And if it hadn't been deployed, it would be every two years for those patients that have already received a NARCAN prescription.

I think Boris, I think importantly, again, just to drive home the point, there are 34 million patients who are deemed to be at risk by even CDC guidelines, and a significant minority of those individuals by contrast are actually filling any type of prescription for a naloxone product. So I understand your questions around what's really driving the revenue stream and the demand. Clearly, it's in furtherance of co-prescribing in states to where it's adopted. It's at the pharmacy chains, which are now on a national and regional basis. So it's not being driven by simply expired product needing to be replaced. It's on the front end of that distribution.

Great. Thank you for the detailed explanation.

Our next question comes from Chris Sakai with Singular Research. Your line is now open.

Hi. I'm in for Lisa Springer today. Just had a question on the generic NARCAN product and what you're doing to address this generic NARCAN, and how is it affecting sales?

Obviously, as we've talked about, we're keenly aware of and tracking all types of competition in this space. And as we indicated earlier, we did a very robust diligence process prior to making this acquisition, including the potential competitors, but most importantly including the IP protection and the strength of the patent family that surrounds this product and got very comfortable very quickly that there is a durable business here. I think what's important to remember and just be reminded of is this is a growing epidemic. It's not yet matured. The market is growing every day. NARCAN nasal spray as a product has a unique profile in terms of its ease of use and ease of administration that fits nicely into both the prescription opioid side or patient group that I described, as well as the illicit drug use side of things. So while we're continuing to monitor potential competitors, including generic competitors, we are keenly focused on making sure that we're addressing the needs of this extremely large 34 million patient group. And just as a reminder, there is no active launched generic product in the market today. I think you're probably referring to Teva's approval recently by the FDA, but just to be clear, they have not launched at-risk, and we'll monitor what they're doing.

Okay. Great. And then secondly, for BioThrax, how is that doing in Europe? How is that doing compared to what you forecasted?

So every year we include a conservative estimate of sales for ex-U. S. customers for the portfolio of products that we market, including BioThrax. As we've talked about on earlier calls, the market for our products including BioThrax outside the U.S. is still maturing, still developing. There are pockets in specific countries that have a keen interest in doing for their citizens and their military populations what the U.S. government is doing. But those markets are not nearly as large or not nearly as mature as the rather robust discipline process the U.S. government has gone through to prioritize chemical and biologic threats, and more importantly, develop the funding required to procure and build stockpile protections.

Okay. Thank you.

Our next question comes from Francois Brisebois with Laidlaw. Your line is now open.

Hi, thanks for taking the questions. I just quickly was wondering more on the ACAM side. In terms of contract negotiations, do you guys feel comfortable that the base case here would kind of be where the previous contract was at?

I think, just as a reminder to everyone, the last time the U.S. government negotiated a smallpox contract was in 2008, so 11 years ago. And we knew going into this as we completed deliveries under the old contract that when we got into active negotiations for the follow-on contract, it was going to be challenging. This is a critically needed medical countermeasure. Again, the U.S. government's committed strategy is to have sufficient supply for the protection of all civilians in the United States. So it's a huge stockpile. It's a huge rotation requirement. And to be honest, when we get into these negotiations on follow-on contracts, we want to make sure that the resulting outcome is a robust, durable, fair contract for both the government and for the company. And if it takes a little more time for us to come out with that outcome, we're going to take the amount of time it requires. So while it may have – while it may be perceived as taking longer than we expected, again, we're confident that we will get to an end result that's consistent with what we went into it and consistent with the guidance expectations that we put in the 2019 numbers.

All right, thank you. And then just as kind of a follow-on on Jessica's question about the NARCAN sales here tapering off a little bit if you keep the $200 million to $220 million guidance that was mentioned previously. Could you give us an idea of the breakdown of is this more of an impact of potential competition coming in or just the Co-Rx lumpiness? And is it more one or the other?

It's not competition, just to be clear. Our – we have kind of a cadence and a run rate expectation for the base NARCAN nasal spray business that is occasionally impacted and spiked a little bit because of states adopting the Co-Rx legislation. California was the key one impact or example of that. There will likely be spikes down the road in 2019 when other states adopt similar legislation, but that's highly dependent upon the size of the state and the population. California obviously was an oversized spike just because of the population. But we, again, are comfortable with the – or the $200 million to $220 million range of NARCAN revenue for 2019. As we said last call and reiterate on this call, it's operating at the upper end of that range. We'll see how things unfold over the next quarter or two. And if the over performance relative to our guidance continues to occur, then we'll be doing something with that guidance range.

Okay, great. And lastly, if I may just jump in. I was wondering, you mentioned delivery methods or basically a longer than two years usage of NARCAN. Do you have any idea what would be the optimal length of usage without maybe losing patients or without affecting the top line?

Yes. So, if you're referring to potential extension of shelf life for NARCAN…

Correct.

Currently it's two years, as I said. And we're evaluating the data, and the data will drive whether or not we think we can show extended use or extended shelf life or not. But we'll be clear on that when we get to that analysis point.

All right. That's it for me. Thank you.

Thanks Francois.

[Operator Instructions] Our next question comes from Richard Baxter [ph]. Your line is now open.

Thanks very much. Just can somebody explain to me how the approval of a generic product might have a – will not be kind of affecting your long-term forecast?

Any generic entrant into this market will impact obviously our market share. What we said last year when we evaluated this business is that the naloxone market, and particular in the NARCAN nasal spray, is a growing market. We don't know whether any generic competitor or branded or OTC product will come into the mix. We assumed, just to be clear, that there would be competition when we went through our internal evaluation of the MPV value of the business. So I think, just to be clear, a generic entrant would have an impact. However, I think it's important to understand that we have established significant brand awareness and reputation for the product. Number two, as I commented in my opening remarks, under the prior ownership, there was a very responsible and practical pricing adopted at launch that we have continued with. And in fact, we have not taken a price increase and don't expect to in the near future. So I think in terms of the typical experience with a generic, it's a little different potentially with NARCAN nasal spray in this naloxone market. But just to be clear, there will be an impact on the business. However, this market is still growing, it's still maturing. And again, we are doing everything we can to focus on these three areas of affordable access and awareness.

Thank you.

And at this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Burrows for any closing remarks.

Thank you, Skylar. And 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 does conclude the program. You may now disconnect. Everyone have a great day.