Ladies and gentlemen, thank you for standing by, and welcome to the Emergent BioSolutions Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Bob Burrows, Investor Relations Officer for the company. Please proceed.

Thank you, Michelle and good afternoon everyone. Thank you for joining us today as we discuss the operational and financial results for the second quarter of 2021. 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 Slides 3 and 4. During today’s call, we 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. 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 today’s call, 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 and adjusted EBITDA and the reconciliations between our GAAP financial measures and these non-GAAP financial measures. Turning to Slide 5. The agenda for today’s call will include Bob Kramer, President and Chief Executive Officer, who will comment on the current state of the company; and Rich Lindahl, Chief Financial Officer, who will speak to the financials for 2Q 2021 and as well as the forecast for full year 2021, including guidance on 3Q 2021 total revenue. This will be followed by a Q&A session where additional members of the executive leadership team are present and available as needed. Finally, for the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on July 29, 2021. Since then, Emergent may have made announcements related to topics discussed during today’s call. And with that introduction, I would now like to turn the call over to Bob, whose comments begin with Slide 6. Bob?

Thank you, Bob and good afternoon everyone. Thanks for joining us on the call this afternoon. Today, I’d like to spend some time talking about the progress we’ve made at our Bayview and then talk more broadly about the health of the overall business and our continuing dedication and focus on public health threats. Our second quarter performance reinforces the strength of our strategy and we are maintaining our overall guidance for 2021. Rich will go over in more detail those numbers in a few minutes. My comments are summarized across Slide 6 and 7 in the deck accompanying the call. Turning first to our efforts to produce COVID 19 vaccines. There’s been a great deal of attention paid to Emergent’s history as a public health risk company with a leadership role in working with the U.S. government on biodefense. When the pandemic struck, America turned to Emergent because of our history and unique capabilities, while millions of COVID-19 vaccine doses that we manufactured are currently protecting people around the world. We faced serious challenges along the way. We didn’t always live up to expectations, including those that we set for ourselves. However, we have learned some important lessons which are allowing us to improve our operations and at the same time strengthening America’s public health response for the future. The FDA inspection of Bayview earlier this year identified a number of areas for improvement. Along with Johnson & Johnson, we established a comprehensive, robust quality improvement plan, which includes facility improvements, capability building and deployment of enhanced tools and controls. We reviewed this plan with the agency and immediately began its implementation. We also made additional investments during the quarter in quality, compliance and operations. All of this work is in order to satisfy both ourselves as well as…

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call. I'll start on Slide 9. As you can see from today's earnings press release, during the second quarter of 2021, we had solid top line performance, which was consistent with our expectations while our expenses were clearly impacted by financial ramifications associated with the situation at our Bayview facility, including direct costs associated with remediation efforts and inventory write-downs, as well as other costs to support and defend our corporate reputation. Despite recent challenges, we have continued to execute across all aspects of the business, vaccines, therapeutics, devices, and CDMO. Our financial condition remained strong with the liquidity and financial flexibility to fund our operations and pursue opportunistic investments. And we remain steadfast in our unwavering commitment to supporting global preparedness and response to public health threats. Today's announcement that we are clear to resume manufacturing at Bayview is a Testament, not only to that commitment, but also to the strong teamwork and organizational discipline that had been hallmarks of this company throughout it’s nearly 23-year history. With that, please turn to Slide 10 and let's first look at the details of our second quarter performance. A quick run through of key highlights include, total revenues of $398 million, an increase of $3 million versus the prior year and in line with our guidance and adjusted EBITDA $50 million and adjusted net income of $18 million both decreases versus the prior year due to a variety of one time and other expenses, which we will discuss in a moment. Breaking down quarterly revenue into its components, anthrax vaccine sales were $52 million lower than the prior year due to timing of deliveries. NARCAN nasal spray sales were $106 million, an increase over the prior year, driven by…

Thank you. [Operator Instructions] Your first question is from the line of Brandon Folkes with Cantor Fitzgerald. Please go ahead.

Hi, thanks for taking my questions and congratulations on all the progress. Firstly, on the CDMO backlog, would you be able to just give some color around the $108 million negative contract modification, even if it's just a comment where it is COVID related or not. And then along those lines, yes, can you comment at all, if there've been any efforts to recover any revenue by J&J or BARDA? And then secondly, congratulations on the announcement this morning, can you just help us understand the difference between resuming manufacturing at Bayview versus all out EUA for that facility? Does this have any impact at all on your ability to deliver to J&J? Or is it sort of, yes, I don't want to be flippant, but a bit more procedural and you have no limit – you are now able to completely fulfill the needs of J&J? Thank you.

Yes, Brandon, thanks for joining the call. Thanks for the series of questions. So I'll tackle a couple of them and then I'll ask Rich to comment on specifically on your question about the $108 million adjustment. So maybe first of all, your question about attempts to recover any money, let me just hit that one square on. Our assumptions going forward in the guidance number is that Rich talked about it and I talked about assume we continue to execute against the existing contracts that we have in place. And we have every expectation of being successful and in doing so. Your question, which is a good one around kind of resuming production versus emergency use authorization approval, so I think as you know up to now, the FDA has approved the use of certain batches of material from J&J under an exemption or an exception to their emergency use authorization. And we expect that will continue as it relates to product that has already been manufactured. Going forward with I’ll say new campaign production, there are a number of variables that kind of go into that mix, Brandon but just to be clear. Our – the nature of our contract with J&J is that we get paid when we successfully manufacturer drug substance. It really doesn't hinge on FDA approval of doses to be released to the public. So with that Rich, can I ask you to comment on Brandon's first question regarding the $108 million number?

Yes. Thanks Bob, and thanks Brandon for the question. So in terms of what drove the $108 million of contract modifications, the biggest component relates to the wind down of our work at Bayview with AstraZeneca. But I'd note that there were also a number of contract modifications with other clients that came about due to change orders in the ordinary course. So that gives a little more color on the $108 million.

Rich would you – just to confirm, would you be able to say that that $108 million did not come through outside of the AstraZeneca portion, I guess through BARDA or J&J?

I think we're not going to confirm specifically, but I would say that under the contracts, as Bob said, our guidance assumes that we're going to fulfill the obligations that we have under our existing contracts.

No, thank you. And I appreciate that. Thank you to your bias. There's a lot of good color. Congratulations. I know there's a lot of work.

Thanks, Brandon.

Your next question comes from the line of Jessica Fye with JPMorgan. Please go ahead.

Hey guys. Good afternoon. Thanks for taking my question. Maybe just first one, I think you had previously considered updating your long-term guidance at some point this year. Is that something we should still think about for 2021?

Yes. Jess, thanks for joining the call, thanks for the question. So you're exactly right. We are now kind of going through a process of we call it strategy refresh. If you will adjust, what we're looking at the principle assumptions that we put together in the fall of 2019 for the five-year period of 2020 through 2024, and making sure that those are still kind of valid assumptions. Obviously the business has gone through a bit of change over the last 15 to 18 months and we hope to be able to update and provide some color either later this year or early next year at some type of annual investor day.

Okay, great. And then another question on COGS, I notice the change in the COGS or gross margin guidance. There was a line in the press release that said something along the lines of, many of the items impacting COGS this quarter are expected to be temporary. I was curious if you could elaborate on which were not conflict the inventory right off, probably is temporary, but what else kind of is and isn't? And should we – I think really about – you're changing 2021 COGS that is, how should we think about the kind of residual impact to COGS saying 2022 and beyond?

Great, thanks. Rich, you want to take that one?

Sure. So in terms of things that were temporary you're right. The inventory write-off is the biggest one. When we looked at efforts to execute our quality enhancement plan, there were a number of remediation costs, things like decontamination, some work to update operating procedures and documentation, training of staff, things of that which really were more incurred on a one-time basis. Some may continue for a short – for a little bit longer, but are not going to be necessarily in the magnitude they were in the second quarter persistently some of the other costs were increased investment in additional staff as well to ensure that we had the ability to really execute our functions and processes at Bayview in a CGMP compliant manner. So that's really what the differentiation is there. In terms of our overall COGS guidance, I mean, I think somewhere in that kind of low to mid-60s area in terms of gross margin is not a bad assumption. I mean, it's always going to depend on the mix of products and services. And so we'll have to see how that evolves from year-to-year in over time, but that's – overall fundamentally the business hasn't changed.

Okay, great. And maybe just one last one slightly related to this, any change in the way you're thinking about the company's need for CapEx investments going forward?

Yes, I don't think so, Jess. I think we continue to look particularly in the CDMO area for opportunities. Again the demand clearly is there for the full portfolio of service offering that we have in our network. So we continue to look for opportunities there. Other than that, I think it's the normal kind of course of roughly maintenance CapEx given our nine network facilities and normal investments and things like IT, infrastructure and preparing the organization for continued growth.

Great. Thank you.

Your next question comes from the line of Jacob Hughes with Wells Fargo Securities. Please go ahead.

Hi, thanks for taking my question. On the NARCAN guidance based on the first half I think of $180 million in revenue that assumes deceleration in the back half of the year. Could you provide some color on your assumption there?

Sure, Jacob. Thanks for joining the call. So as you know, and as you have kind of reconciled, we had roughly $74 million or $75 million of revenue for NARCAN in Q1 a much stronger quarter in Q2, as rich commented on. We see some potential kind of tailwinds going into Q3 and Q4. I mean, we see strength overall in that part of the business and we’ve set our guidance accordingly at that $305 million to $325 million range. And think that – again, we expect it to land within that range, but there are clearly some headwinds and some tailwinds that could impact that, but being a bit conservative, that’s where we’ve landed the revenue guidance for 2021.

Okay. And then on the follow-on raxi contract. I mean, has RFP then issued yet, and when do you think that could be awarded? I know previously you said that’s going to probably slip into next year, but could you provide an update on that?

Yes, Jacob, that’s still our belief is that it will be a 2022 event. So I think as we’ve commented on in the past, we’ve taken any raxi revenue out of the guidance and forecast for 2021 and still expect that to occur next year.

Okay. Thanks very much. Thank you.

Your next question comes from the line of Keay Nakae with Chardan. Please go ahead.

Yes. Thanks. Two questions. The first in terms of the CDMO pipeline. What kind of pushback were you getting from potential customers given the issues of Bayview?

Yes. Keay, thanks for joining the call. So as I included in my comments and Rich did as well, we still see support and interest in the broad service offering that we have throughout our network. Again, as we’ve talked about of the nine sites that we have in our network, five of them are generating revenue today. And if you look and walk across the development services, the drug substance, as well as the drug product capability that we have supporting as many as five different platform technologies. That’s a pretty unique product and capability offering that we have. So we still see strong demand from small, mid and large clients from clinical and commercial customers, government and strategic partners. So that business remains strong. The interest is strong. Again, admittedly, we need to get through this a bit of a firestorm in Bayview, which we’re in good place to go quickly. But we – again, see continued strength in that CDMO business unit long-term.

Okay. And for AV7909, under the 2016 contract, there were a number of options as you made the transition to that product. Can you remind us where we are in terms of remaining options? And then at what point do we start thinking about a new supply agreements?

Yes. So if you go back to the second half of 2016, that contract was structured in two pieces, Keay, there was a development piece worth roughly $250 million. And then there was a $1.2 billion or $1.3 billion sleeve, if you will that was earmarked for the procurement of up to 50 million doses over the next five-year period. The SNS and BARDA began procuring AV7909 under that second sleeve in 2019. And it’s our view that this next tranche or next exercise will help bridge between now and when we get full BLA approval in about a year and a half.

Okay. And does the agency view an approved product, any different than what you’re currently buying under the pre- EUA in terms of your possible economics?

Yes. I think when we put the contract pricing in place in 2016, we negotiated with both the development, as well as the procurement terms were going to be, okay. So that’s really all already been negotiated. And I’m not anticipating any significant change from what was done five years ago.

Okay. Thanks.

[Operator Instructions] Your next question comes from the line of Lisa Springer with Singular Research. Please go ahead.

Thank you. Good afternoon. And thank you for taking my question. My question is around the amount of cash on the balance sheet. I was wondering how likely are we to see an M&A activity in the second half of the year? And what is the Board’s current thinking regarding share repurchases?

Yes. Thanks, Lisa, for joining the call and thanks for the question. So I’ll let Rich talk a little bit about the cash that we have on the balance sheet. But in terms of its potential use, I’ll go back to what we said for many, many years in terms of our priorities for capital allocation, which is first obviously to support the working capital needs of the business, next to invest in capital expenditures to support the execution of the strategy and third is M&A. And then to the extent that there is excess cash liquidity, we will consider as we have in the past programs like buyback. So in terms of M&A, we continue to look for and look at opportunities that are of strategic importance and fit with our overall strategy across all areas of the business, vaccines therapeutics, devices and CDMO. So we continue to be again, active in looking at opportunities. I think that what we’ve built over the last five years is very scalable and leverageable for additional assets. But maybe with that Rich, you can talk a little bit about the cash that’s in the balance sheet today.

Yes. So we are certainly sitting, as I mentioned in my remarks in a very strong liquidity position as of June 30, both in terms of actual cash on the balance sheet accounts receivable as well as access to undrawn revolver. So we certainly have the flexibility to pursue all those options that Bob articulated and we’ll continue to maintain that solid position as we go forward.

Okay. Well, thank you for the color.

Sure.

Thanks, Lisa.

And I’m showing no further questions at this time. I’ll turn the call back over to you, Mr. Burrows.

Thank you, Michelle. With that ladies and gentlemen, we now conclude the call. Thank you for your participation. Please note an archived version of today’s webcast, as well as a PDF version of the slides used during today’s call will be available later today and accessible through the investor’s landing page on the company website. Thank you all again and we look forward to speaking with all of you in the future. Goodbye.

And this does conclude today’s conference call. You may now disconnect.