Thank you for standing by. My name is Kris and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2024 Emergent BioSolutions Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Frank Vargo, Assistant Treasurer. Please go ahead.

Good afternoon everyone. Thank you for joining today as Emergent is discussing their operational and financial results for the third quarter 2024. As is customary, today's call is open to all participants, is being recorded and is copyrighted by Emergent BioSolutions. In addition to today's press release, a slide presentation accompanying this webcast is available to all webcast participants. Turning to Slide 3. During today's call, Emergent may make projections and other forward-looking statements related to their business, future events, their prospects, or future performance. These forward-looking statements are based on their current intentions, beliefs and expectations regarding future events. Any forward-looking statement speaks only as of the date of this call and except as required by law, Emergent does not undertake to update any forward-looking statements to reflect new information, events or circumstances. Investors should consider this cautionary statement as well as the risk factors identified in Emergent's periodic reports filed with the SEC when evaluating their forward-looking statements. During today's call, Emergent may also discuss certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Emergent's operating performance. Please refer to the tables found in today's press release. Turning to Slide 4, the agenda for today's call will include Joe Papa, President and Chief Executive Officer, who will provide an update on the company's multi-year plan progress, key product highlights and turnaround actions. Rich Lindahl, EVP, Chief Financial Officer and Treasurer, will speak to key achievements in the third quarter, the financial results for Q3 2024 as well as full year guidance. This will be followed by Q&A. Finally, for the benefit of those who may be listening to the replay of this webcast, this call was held and recorded on November 6, 2024. Since then, Emergent may have made announcements related to topics discussed during today's call. And with that I'd like to now turn it over to Joe Papa for opening remarks. Joe?

Hello and thank you for joining us today to discuss our third quarter results and our 2024 financial outlook. I'm joined today by Rich Lindahl, our Chief Financial Officer. Following my opening remarks, Rich will detail our quarter three performance as well as our full year guidance update. I will close the call with a discussion of our path forward as we continue to make significant progress on our turnaround efforts. Then we'll open up the call for question and answers. Earlier this year we embarked on a multi-year plan to stabilize, turnaround and ultimately transform the Emergent business. Based on the great efforts of the entire Emergent team I am pleased to share that we have now completed our first phase, the stabilization phase ahead of our expectations. Emergent is now embarking on the next phase or turnaround as part of our multi-year plan to transform and strengthen our business. I'd like to recognize all of our Emergent team members who have demonstrated their commitment to delivering against our multi-year plan to stabilize, turnaround and transform the business. This stems from our collective passion to Emergent's mission to protect, enhance and save lives against leading public health threats around the world. We plan to continue our operational improvement initiatives and focus on driving profitable growth to create sustainable value for shareholders. Beginning on Slide 6, I will review several important updates from the third quarter as well as the full year efforts. First, the third quarter was another strong quarter and paired with a great first six months of 2024. We are very pleased with the results year-to-date. I'd like to emphasize that Emergent finished the quarter in its strongest financial position since 2021. Reflecting on our strong third quarter financial performance, we are once again raising the revised…

Thanks, Joe. Good afternoon everyone. We appreciate you joining the call. As Joe has just discussed coming out of the third quarter, our significant progress against our operational and financial priorities is enabling us to transition from the stabilization phase to the turnaround phase. Our financial foundation has been meaningfully strengthened as a result of the following positive developments, which are highlighted on Slide 8 in the earnings presentation. We completed $117 million of asset sales and received a $50 million payment from Janssen Pharmaceuticals as a result of the confidential settlement agreement. Operating cash flow through September 30th was $139 million, an improvement of approximately $377 million as compared to the same period in the prior year, and net working capital improved $98 million versus the previous quarter and $100 million as compared to the prior year. These liquidity enhancements supported the refinancing of our prior secured credit facility as we entered into a new $250 million term loan from Oak Hill Advisors extending the maturity of our debt to August 2029 and we closed a $100 million asset backed revolving credit facility led by Wells Fargo, also maturing in 2029. These activities resulted in the following major improvements to our credit profile. Net debt was reduced to $551 million, a $206 million reduction since the beginning of 2024. Moody's and S&P both upgraded our corporate family credit rating to B3 and B- respectively with stable outlooks. And based on our improved financial position when we file our 10-Q, you will note that we have removed the prior going concern qualification. Now shifting to key business highlights depicted on Slide 9. We received total medical countermeasure contract modifications of over $500 million this year for Anthrax MCM, Smallpox MCM and BAT, further strengthening our revenue diversification. We also announced…

Thank you, Rich. As we look forward, we see meaningful opportunity for Emergent’s in-line products and future growth drivers that have the potential to impact lives around the world. Let me dive deeper on Slide 17 with key highlights around NARCAN Nasal Spray. While there’s still a tragic number of deaths caused by an opioid, fentanyl or heroin, recent preliminary data from the CDC points to a meaningful decline in overdose deaths in the U.S. for the first time in decades. However, rates of overdose deaths still remain particularly high among various demographics of people and regions across the U.S. So we must remain focused on efforts to continue broadening access, increasing awareness and helping to maintain affordability of NARCAN Nasal Spray. To this end, demand for NARCAN, especially from public interest partners and expanded categories like business and retail channels remains on course. We believe the NARCAN Nasal Spray value proposition continues to support a differentiated price point for a public interest to customers and we tend to competitively price our NARCAN products. We also believe our best-in-class service, NARCANDirect, is a differentiated capability for our customers. In August we announced a new distribution center in Nevada to further demonstrate our customer-focused approach and continued investments in NARCAN supply-readiness efforts. Across Canada we are making significant strides increase access in British Columbia and Western Canada where take-home naloxone kits are becoming more readily available to perfect overdose deaths. Our efforts to broaden access through OTC channels in the U.S. help encourage individuals to ensure at home, at school, at work safety plans include NARCAN. These include our continued pledge to support the White House Challenge to Save Lives from Overdose through workplace and public safety measures, our engagement with the National Safety Council and other partners to educate and…

Thanks for taking my questions and congratulations on all the progress. Maybe just two from me. Can we just talk about the gross margin on NARCAN sort of longer term, obviously, I think, it was at about 50% this quarter. Looks very good. Just how do we think about that with the moving pieces on NARCAN? And then maybe – well, I’ll stop that and ask my second one afterwards.

Sure. Hi Brandon, this is Rich. I think certainly the gross margin has responded to the price reductions that we referenced earlier on the call. I think we’re starting to see some stabilization in the pricing environment. We’re also continuing to look for ways to improve the cost of goods sold there as well. So while I hesitate to give you a specific, long-term guide on gross margin there, I think, that we’re stabilizing the gross margin somewhere in the area of this level.

Thanks Rich, that’s very helpful. And then maybe Joe, obviously congratulations on all the progress here. Not to get greedy, but can you just elaborate on the seeking new opportunities aligned to your internal capabilities? Is that something that’s high on the priority list? Is that just in the infancy of exploration at this stage? And then how should we think about bringing in additional assets in 2025 and any preference there on commercial versus development stage given the additions to your team?

Sure. A lot of great comments there. Let me try to take them one by one. Certainly we’re delighted with the progress, we’re delighted to look at these financial results, we’re delighted to pay down the debt we’ve been able to pay down and certainly the net debt coming down by approximately $200 million. We think all that’s great. As we think though, about the future and the go forward, we’re very much focused on growth. And what can we do to increase the growth and where can we make the resource allocations for – to ensure growth for the future, so that’s what we’re focused on. I think it’s going to come both internally and through business development deals. On the internal side, clearly you’ve seen some of the comments I made today about what we’re doing. Rich talked about Ebanga. Clearly we have opportunities with TEMBEXA and what we’re doing there with the PANTHER trial and what we’re doing with working with the U.S. Government and BARDA. So there is a lot of things we can do internally. Raxibacumab is another one that we have for anthrax. A lot of those projects are ones where we think there are clear opportunities that leverage our existing infrastructure on the medical countermeasures side. On the other side, on the – what we’re doing with NARCAN, we clearly believe there is opportunities to expand with NARCAN, everything from kits that go into the business I mentioned about it last time. We’ve all seen, as you go into a restaurant, the defibrillator kits that are on the wall. We think that another product [indiscernible] clearly could be our NARCAN product to save lives. You know that clearly defibrillators cost somewhere around $1800, they save 1700 lives a year. We think we can…

Great. Thank you very much and congrats again on all the progress.

Thank you.

Thank you, Brandon.

Operator, our next question?

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

Hey, this is Nick on for Jess. Thanks for taking our questions. Two-parter here on NARCAN. Can you talk a little bit more of the factors that went into lowering that NARCAN guidance? Is it driven more by lower expected volumes? Or is it more on the competitive pricing pressures? And then also could you provide an update on what the latest mix of NARCAN revs is across the public interest markets, maybe some of those ex-U.S. revs in Canada and then OTC? And how we should expect that to evolve over time?

Sure. I’ll start with the first one in terms of what we’re doing at NARCAN. We’re looking at a couple of factors. Number one, we’re looking at the expanded volume that we are seeing with NARCAN. I think Rich mention though that we’re seeing about 7% year-to-date growth in volume with NARCAN and then within public interest space where we’re seeing about 14%, both of those versus last year numbers. So we’re seeing volume increase to be clear. Having said that, we’ve said before, and we’ll say it again, that we intend to price our product competitively so that we can hold on to our volumes that we think are available to us as the market leader. We want to make sure we’re holding on to those volumes. But competitive pricing it doesn’t mean we’re going to match all of the other players, but we want to be in the ballpark and competitive realizing that we provide other value beyond just simply the product because of our ability to have very good distribution capabilities for NARCAN. We obviously have the brand name NARCAN. We obviously have the manufacturing capability. So our view is that those are all important factors that we will look at to the future. And as we think about the future beyond, the next – this year, we certainly believe also that the amount of expenditures that are going to fund this area, the $54 billion over the next 10 years by the pharma companies that have to fund the opioid settlement is going to do a lot for expanding the volume and the awareness and the education that goes into opioid overdose. So we do think there’s a lot of opportunities to go around the table. Having said all that, I want to get to the other part of your question was what are some of the other issues that we face? And that clearly as we thought about NARCAN, we wanted to make sure that we took into account some of the initiatives that we did versus a year ago and looked at, for example, we discontinued the RX NARCAN last year. The prescription strength that was something that caused one impact in the quarter. We also looking at sales in Canada and what’s happening there and also what we are offset by some things we’re seeing on the OTC sales. There’s a lot of different factors going into it, but we, given, the diversity of our portfolio, we felt it was prudent at this time to look at that NARCAN number, manage that to where we think it could be. It could be upside too, but we want to manage to that. I think I got the first part of the question. Is there a second part as well?

Yes, the second part was…

[Indiscernible]

Yes, the mix between…

But I think you kind of touched on it.

Yes. The majority of the business by far is still the PIP business, somewhere in the 70% range of the totality of the business. I think that’s the question, right?

Yes. And then just to follow up there. In the PIP market, can you talk a bit more about some of the competitive dynamics you’re seeing there? I mean, just thinking about any contract between competitors in states that could be unfolding kind of similar to what we saw in the state of California?

Sure. Yes. We have followed that, as you would imagine very closely and we are doing well. Clearly, there are some like in the CalRx program that the competitor did pick up that business, but across all the different states, we’re doing very well. The one thing I probably should have mentioned, I don’t recall I said exactly, but we’re seeing pricing stabilize in the overall NARCAN business at least one of the things we follow, as you would imagine. We follow it on a weekly basis. But from July through October 2024, the pricing has been relatively stable. So we’re not seeing anything dramatically change with the pricing environment. And as you can tell by the amount of volume we have, we’re growing in terms of volumes up 7% for the total business versus last year. So relatively stable pricing environment. The prices, I’m sorry, the volume is going up about 7% for year-to-date numbers.

Great. And maybe if I could just squeak one last one in on Smallpox. On the $400 million of orders that you announced back in September, I believe it was, you noted $210 million. It hit through the end of that period, i.e., through end of 3Q, there is like a remaining $180 million or so more that is expected to hit over the course of maybe the next couple months or quarters. Can you just kind of talk about how that’s weighted across 4Q and say maybe early 2025? And how we should also think about that being broken down between various products?

Yes. Do you want to take it, Richard?

Sure, yes. I mean, I would say that certainly a portion of it is going to hit in fourth quarter. Most of will hit in 2025. But that’s – it’s all baked into our guidance that we’ve updated.

Great. Thank you.

Thank you for your question. Operator, next question?

[Operator Instructions] And your next question comes from the line of [indiscernible]. Please go ahead.

Hey guys, thanks for taking the question here. If I can belabor the NARCAN question one more time. Of the 30 odd percent decline in Q3, are you able to bucket out how much of that was the year-over-year, call it headwind from the initial ramp of OTC? How much of that is pricing? And how much of that was organic declines or increase? I know you guys have referenced the year-to-date figure, but if there’s any figure you can reference for the quarter, just to get a sense of how that segment has been performing sequentially, I think it’d be very helpful.

Yes. I think the stock in revenue from last year was in the – in between $10 million to $15 million. It was probably around $12 million or so. The rest of it is really more overall mix and really driven by the pricing impacts.

Got it. And I know you guys took pricing down back in, I think it was August of last year when the drug went OTC. It sounds like you’ve taken down pricing since then to be more competitive with generics. Is that a reasonable assumption?

Yes, we’ve been responding, as Joe said, to be competitive. We haven’t been matching pricing, but we have remained competitive in the marketplace and that has resulted in us being, as Joe said, we’ve had some very good success in keeping a lot of the business that we had, even in light of some of the additional competition that’s been out there.

Okay. Switching gears just in terms of asset sales, obviously, great job on the $200 million that you’ve done so far. But you still have extra warehouse, you still have Canton, you still have Rockville, you still have 400 professional drive, you still have Bayview. Any updates on thoughts around those properties, any progress on asset sales there or anything else we should expect for the next 12 months whatever it is?

First, I compliment you on knowing our entire site network but…

Yes, appreciate that.

That is something we are absolutely looking at that all the time. I don’t want to make any specific comments about any individual site. But to be clear, we have reduced significantly the operating expense of our business as I mentioned and as Rich mentioned. So we are managing this to make sure that we bring down operating expense to manage it. But we do believe we have a little bit more flexibility now in terms of some of those sites in terms of what the long-term opportunities can be with them, especially as we’re thinking about other business development activities, things that we can bring within them to our portfolio for growth. So I think we got a little bit more latitude. I mean some of them are absolutely, the sites you talked about and some of them, when you talked about some of the operational centers in terms of manufacturing sites, they could be more important to us, but we’ll manage that. Others just don’t have – we don’t have a need. And we’re going to certainly try to divest certain locations like potentially warehouse that we don’t need. We divested one warehouse in Canton, Massachusetts as an example that was an unused warehouse. The more we can do those types of things, obviously, the better return on investment for our shareholders. So we’re going to be focused on it. But I don’t want to make any specific prognosis of when and where we’ll do that.

Could Bayview be used to manufacture GLP-1s?

Bayview is an extraordinary site that has been – a significant amount has been invested in the site by Emergent and other government agencies and we think there’s a lot of opportunities for that site in terms of capabilities, in terms of drug substance. But I don’t want to specifically talk about any individual product, but it’s a phenomenal site. I’ve had a chance to be in pharmaceutical business for over 35 years and I’ve been through probably hundreds of different sites. Bayview is unique. It’s a very significant opportunity and is everything is state of the art. So there is really good capabilities there. We just got to find the right place to kick off some significant opportunities there. But it is a very unique site, got a lot of capability.

Okay. Got it. Last one if I can. If we just look to like 2025 and beyond and obviously, I understand as well as anybody the lumpiness of the business. And there’s years where big orders come in or don’t come in, but if I just start with call it the midpoint of EBITDA guide $190 million, even like CDMO gross profit year-to-date is still $60 million. And if that’s approaching zero, I mean that’s a big uplift right there. Not to ask for forward guidance or anything, but if you had to look to 2025 and beyond, given the big undertaking you guys have taken on the cost side of things and stabilize the business, like, is EBS kind of like a $225 million, $250 million EBITDA business plus looking forward? Or how do you guys think about the long-term earnings power of this business?

I think you probably expect my answer, that we’re not going to make comments specifically about 2025. Having said that, I can certainly say that one of the things that we did is we took out ballpark of $130 million of operating expenses from the business. If you look at just even in the quarter, the operating expense reductions absent the impairment versus last year was $65 million just in the quarter. So it tells you we’re taking the steps to bring down the operating expense, number one. Number two, I’ve got to say this so that everyone understands, we are continuing to maintain the capabilities to manufacture our products and have the ability to manufacture all of our products and have expectations that over the next several years we have availability to make all the product, even with the reduction in the number of sites and the streamlining of our site network. So that probably is the best way I can answer the question in terms of we’ve brought down operating expenses significantly, as I said, $65 million in the quarter versus a year ago. And then of course we still maintain, although the network is streamlined, we still maintain the capabilities to make all of our products.

Got it. Thank you and best of luck with the balance of the year.

Thank you. Operator, next question?

And there are no questions at this time. I will now turn the call back over to Frank Vargo for closing remarks.

Hi, this is Joe Papa. I’ll take the closing remarks. So thank you again for everyone for joining us and we very much appreciate your interest in Emergent. We look forward to having a chance to talk to all of you in the near future. Rich and I will be out talking to more investors in the very near future and look forward to having a chance to catch up with any of you. Thanks again for joining us today. Have a great day everyone.

This concludes today’s conference call. Thank you all for joining. You may now disconnect.