Good day, and thank you for standing by. Welcome to the Q4 2021 Emergent BioSolutions Incorporated Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Bob Burrows, Vice President of Investor Relations. I will now turn the call over to the company. Please proceed.

Thank you, Didi, and good afternoon, everyone. Thank you for joining us today as we discuss the operational and financial results for fourth quarter 2021 as well as full year 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, adjusted EBITDA and adjusted gross margin 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 4Q '21 and FY '21, which will also discuss in detail the '22 forecast, including 1Q '22 revenue guidance. 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 February 24, 2022. 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 my colleague, Bob Kramer. Bob, please proceed.

Thank you, Bob, and good afternoon, everyone. Thank you for joining the call this afternoon. Today, I'd like to provide a brief recap of 2021, share some important highlights from each of our business lines, as well as our R&D pipeline and then turn our attention to 2022 and beyond. My comments are summarized across Slides 6 through 8 in the deck that's accompanying this call. Before I go any further, I want to thank our entire emergent team now more than 2,500 strong for their continued focus and commitment to our mission of protecting and enhancing laws. Today's results demonstrate our team's resilience and I couldn't be more grateful for their work delivering meaningful outcomes for patients while continuing to fight the COVID-19 pandemic. I'd also like to acknowledge Emergent's Founder and Executive Chairman, Fuad El-Hibri, who has announced his retirement effective April 1 of this year. On behalf of everyone at Emergent, both past and present, I want to thank Fuad for his vision, his dedication and building Emergent into the company that it is today. Turning to our results. I first want to underscore a few key accomplishments for the year. First, we achieved record revenues in 2021 of $1.8 billion with more than $500 million in adjusted EBITDA and positive cash flow. 2021 continue to trend toward achieving our 2024 financial goals. Second, with the latest announcement regarding AstraZeneca vaccine drug substance, we've supplied more than 130 million dose equivalents of COVID-19 vaccine for use around the world. Next, we realized more than $600 million in government contract options being exercised in the second half of 2021 alone, including for our smallpox vaccine, ACAM2000 and our next-generation anthrax vaccine AV7909. Fourth, we initiated the rolling BLA submission for AV7909 and the pivotal Phase III clinical trial…

Thank you, Bob. Good afternoon, everyone, and thank you for joining the call today. I'll start on Slide 10 and open my remarks with some summary thoughts to put today's earnings report into context. Our fourth quarter execution was solid and continues to illustrate the strength and durability of our diversified business model. Our medical countermeasures platform remain the foundational element of our business with strong predictable contributions from anthrax vaccines, ACAM2000 and our other medical countermeasure products. Our nasal naloxone product showed another strong period of performance across both the public interest and retail channels. As Bob commented earlier, we responded to the formation of a generic nasal naloxone market by activating our supply agreement with Sandoz for their distribution of an authorized generic. We also continue to make steady progress in stabilizing and incrementally improving the performance of the CDMO services business across our core manufacturing sites at Bayview, Camden and Winnipeg. And finally, we further advanced our R&D programs, most notably with the initiation of the AV7909 BLA rolling submission and the launch of the chikungunya vaccine Phase III trial. With that, let's turn to the numbers, which were especially strong in the fourth quarter, demonstrating the operating leverage and earnings potential inherent in our business model. As indicated on Slide 11, highlights include total revenues of $723 million, an increase over the prior year period and in line with our guidance, principally due to increased sales of anthrax vaccines and nasal naloxone products. Our key profitability measures also increased compared to the prior year period, including adjusted EBITDA of $348 million and adjusted net income of $243 million. Other notable items in the quarter include anthrax vaccine sales of $138 million higher than the prior year due to timing of deliveries of AV7909 to the U.S.…

[Operator Instructions] Our first question comes from Brandon Folkes of Cantor Fitzgerald. Please proceed.

Maybe just digging into the guidance revision. On the CDMO business, it wasn't too long ago that you issued guidance. So, I guess, just given what we saw with the other contract last year, is there any way to characterize whether you -- that contract is actually in dispute with J&J? I heard -- I did hear you talk about that the contract hasn't changed and the decision to undertake maintenance was through a discussion. But is there any way you can characterize what the J&J is still paying you? Does that $100 million -- is that just pushed to 2023? How do we sort of look at that contract and characterize that relationship currently? And then maybe secondly, coming back to your base business, A couple of years ago, I think you had set the goal of 10% of the business being international. Obviously, we've had a very different road for a while there. But how do you look at that international opportunity going forward, maybe especially in light of recent international events?

Yes, Brandon. So a couple of comments about our decision in Bayview. As both Rich and I commented, we're taking this opportunity to make some facility improvements in Bayview to both improve and strengthen the supply chain for J&J. It's critically important to us and the number one commitment that we've made. But also looking forward to eventually having additional non-pandemic work being done in Bayview down the road. I want to make sure that it's best positioned to be able to capitalize on those opportunities and have a bit of an optionality to how we use Bayview longer term. So that's really what's behind, as we both have said, the contract is in place. There's nothing in dispute, just to be clear. And we're taking this opportunity to lean forward, look forward a bit and make those modifications that we've long wanted to make. In terms of your second question on the international markets, I think that is one growth opportunity that we've commented on over the last couple of years in the MCM business. Those markets continue to develop. They are a little longer in terms of how long it takes to create an opportunity. But we think there's some growth opportunity there. Historically, international revenues have been kind of in the neighborhood of 10% of our product revenue and we expect that to continue going forward. So we see pockets of opportunity. Clearly, given the macro environment that we're in today, the world is not as stable as it was a year or two ago. So those are opportunities that we'll continue to pursue.

Our next question comes from Jessica Fye of JPMorgan. Please proceed.

I got a few. Following up on Brandon's question, can you just maybe like elaborate on that J&J communication you alluded to about evaluating their COVID vaccine supply chain? Like what does that mean? I know your contract is in place, but what's the implication there?

Yes, Jess. I think it's as simple as we described, which is we were recently made aware that they are looking at their -- and evaluating their global demand for their vaccine in the supply chain that is supporting it. I'm not sure when we will hear the results of that, I expect probably in the second quarter, but it's as simple as that. We're just made aware recently that they're doing this evaluation and assessment. And as a result, Emergent in coordination with J&J has decided to go ahead and make these facility improvements and modifications that we talked about.

Maybe on a couple of other topics. Do you need to validate the Camden fill finish line as well or just Rockville? And then in the nasal naloxone public interest market, what are you seeing in terms of uptake for Hikma's KLOXXADO? And what about the generics? Are you seeing any uptake in the public interest segment there? And is Sandoz trying to get uptake there or just Teva?

Yes. Great questions. So I'll try to take them in order. So for Camden, that was an investment in a new high-speed line that we executed and installed a couple of years ago and brought online last year I believe. So that work is essentially complete. It's more about fully utilizing that line. So, it's different just in the Rockville scenario where we installed the new viral fill finish line in Rockville in 2021 and we look to qualify and validate that in 2022 and then kind of bringing online and operationalize it early next year. In terms of the naloxone, the nasal naloxone market, I think the -- first of all, in the public interest market, we see some penetration of that market by the generic product. As we talked about on the prior call, we expected in the retail side of the market, which historically accounts for about 30% to 35% of the NARCAN nasal spray revenues that you will see that typical branded versus generic competition and the generics will claim 80% to 90% of the market and that's every indication that we see two months into this. That's what's happening. On the public interest market side, however, it is a little more fragmented and harder to penetrate plus as we've talked about, the economics are a little different where they already discounted NARCAN nasal spray product at 40% of the retail space. So we do see some generic competition there. To be clear, the Sandoz authorized generic product is not competing in the public interest market. It's just the other generic product that's in there versus the branded product, NARCAN. I don't have much to say about the KLOXXADO product. It's I think a little too early to tell what that market impact might be.

Bob, I might just jump in there and just, Jess, I think one thing we are seeing is that while it's very early in the game, things are playing out as we would have anticipated at this stage. So there's -- we're not surprised by the way things are developing in the markets, either on the retail side or on the public interest side.

Okay. So the public interest side is kind of playing out as you expected?

At this point, although, again, it's early in the game.

We're just -- we're two months into it, Jess. So, again, I think we're overall not surprised by what we see on either the retail side or the public interest market side. So, it's behaving as we expected.

Our next question comes from Jacob Hughes of Wells Fargo. Please proceed.

With respect to CDMO and Bayviewi, just provide an update on EUA approval. And does your comments here imply that this could potentially be opened up to beyond J&J sooner?

So really, the regulatory status is really something that is best directed to J&J. I mean they control the regulatory filing, whether it's EUA or eventually the BLA filing that's really up to them. In terms of the future use of Bayview, I think all we're saying, Jake, is that we know that there are some facility improvements and modifications that would both benefit short term, our ability to stabilize and strengthen the J&J supply chain, as well serve Emergent's use longer term in terms of doing that nonpandemic work that we accounted on several years ago. So, we get the benefit of both stakeholders with that investment.

And then maybe just with respect to your capital allocation, you generated about $100 million free cash flow this year and you're using it to buy back your stock. You also have this $2 billion revenue target that you reaffirmed in January. So, the question is, what are the buckets you think you need to have to hit the $2 billion? And given where valuation is today, is M&A going to be a bigger part of that goal? And how do you balance that with maybe using your cash to buyback your own stock?

So a couple of things, and I'll ask Rich to weigh in as well. M&A has always been an important priority for Emergent, particularly when we look to build our various areas of the business and get them to scale quickly, as well as build and establish leadership positions in segments of the public health threat market where we think we can compete most effectively. So M&As continue to be important. Exactly how much M&A adds to getting to that $2 billion in revenue by 2024, Jake, is hard to say. I think what we said two years ago was with the organic business, we saw a high single-digit growth rate in the organic business, which will get us about half of the way there and we were at $1.1 billion back in 2019 and M&A would most likely make up the balance. And I don't think we see it too differently kind of two years into this other than there are a lots of different paths to get into that $2 billion number by 2024. It could be substantially organic with the growth opportunities that we see in the MCM business, as well as the CDMO business and commercial. So we'll have to wait and see. In terms of your comment about valuation, obviously, we are hypersensitive to finding good assets to add that are strategically aligned with what we're trying to do, but also offer good value going forward. So we're not going to overpay for assets. Maybe with that, Rich, you can talk a little bit about capital allocation and how we look at potential uses of the capital to support programs like the buyback program that we're in the middle of now as well as M&A.

So our capital allocation priorities still remain as they have been, which is we're very focused on investing in the business to drive growth, whether that be through organic growth opportunities in R&D or in capital expenditures to expand the capabilities and capacity of the network or to pursue M&A that fits with our strategy and that's going to be accretive to our value over time. At the same time, as we've articulated, we believe that we can judiciously use some of our capital to buy back stock at times when we feel that it's at an attractive level and also to use some of that capital to manage dilution from employee equity compensation. I think our balance sheet is at a place. You heard me talk about both the liquidity position, as well as the net leverage position are both very favorable. And with the continued cash flow generation potential of the business, we can continue to manage our balance sheet to a place where we can incur additional leverage as necessary and when necessary to pursue additional acquisition opportunities if needed. We're very comfortable operating in a net leverage ratio of 2x to 3x, which compares to the well under 1x place we are today. And so I think that we have flexibility to balance these priorities and again make decisions and allocate capital in productive ways to create value for the company.

That's helpful. Maybe just last one for me is, the CDC panel going to adopt their recommendation for collar vaccination in children and adolescents. I think prior it was over 18 years old or related to Vaxchora. I was just wondering is that a tailwind we should be thinking about for you guys? Or how are you thinking about that?

Yes. Maybe, Jay, thanks for the question. Maybe I'll ask Adam to weigh in here in terms of that CDC recommendation and whether we think that will have a meaningful impact on our plans for Travel Health or Vaxchora, Adam?

I mean I think at a macro level, we've been evaluating when the right time to relaunch Travel Health is and that's really been the focus. I think the ACIP recommendation is, I think, more, I'll say, some positive momentum that that's going to return and those products are going to be needed. And so, it just came through and was just announced. I don't think we've had a kind of a new take on the market sizing, especially in the U.S. traveler. But I think the take-home message right now is we're excited to relaunch that Travel Health business once we get past this pandemic.

Our next question comes from Keay Nakae of Chardan. Please proceed.

Bob, just back to the guidance on CDMO revenue. When are you taking the downtime to do the maintenance and upgrades? In which quarters out of the year, do we take the $100 million of CDMO revenue out of?

So I'm not going to tell you which quarter to adjust your model. What I will say is we're already beginning to transition to be able to make the facility enhancements and modifications that I've talked about. We expect that we will be back into production in late Q2. There may be some additional enhancements that we want to make later in the year, but that's our current thinking, Keay, on timing.

Okay. And at what point during the year would you expect J&J to come back to you with the decision on exercising options for '23 and beyond?

Yes. I think, Keay, that based on what they shared with us, they're going through their assessment right now. It may be another 30 to 45 days before they have that complete and give us some feedback. So sometime in Q2, I think we'll have a better idea of what the overall long-term demand for that product is and how our Bayview facility kind of plays into their global supply chain solution going forward. We'll have some updates probably in the future.

Okay. And then just for the CHIKV clinical trial, can you give us any guidelines for either completing enrollment or when you think you might have top line data?

Sure. Adam, do you want to take that one?

Yes, sure. So I think, Keay, as -- we've said this, I think, previously, but I think the trial, the way it's enrolling, I think we expect to complete that here in the first half of the year. And then there's some follow-up periods. So, I don't think we'll see any top line data until maybe the middle of '23. So this year is mostly about executing the trial and next year, it'll be kind of analyzing the data and sharing some top line recommendations.

[Operator Instructions] Our next question comes from Lisa Springer of Singular Research. Please proceed.

I was just wondering if you have any updates you can share with us regarding negotiating the new contract for roxidecumet?

So I think we're waiting, Lisa, to see when the request for proposal may come out from the government. That's really the first step in terms of following through. So, we're not actively involved, to be clear, in any negotiations with them right now. We're waiting for that RFP to come out and then we will respond accordingly.

I would now like to turn the conference back to Bob Burrows for final remarks.

Thank you, Didi. 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. Thank you again, and we look forward to speaking with all of you in the future. Goodbye.

Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.