Q1 2024 Emergent BioSolutions Inc Earnings Call

Participants

Joseph Papa; President, Chief Executive Officer; Emergent BioSolutions Inc

Richard Lindahl; Chief Financial Officer, Executive Vice President, Treasurer; Emergent BioSolutions Inc

Paul Williams; Senior Vice President - Products Business; Emergent BioSolutions Inc

Presentation

Operator

Good afternoon, everyone. I'm the operator for today's call. Thank you for joining today as Emergent discusses their operational and financial results for the first quarter of 2024. 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 slide 3. During today's call, Emergent may 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, belief and expectations regarding future events.
Any forward-looking statements speaks only as of the date of this conference 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 emerges periodic reports filed with the SEC when evaluating their forward-looking statement.
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 comment on key business and product updates. Rich Lindahl, Executive Vice President and Chief Financial Officer, who will speak to the current state of the company and financials for first quarter fiscal year 2024 and Q2 2024 guidance.
This will be followed by a Q&A finally and for the benefit of those who may be listening to the replay of this webcast. This call was held and recorded on May first, 2024. Since then, Emergent may have made announcements related to topics discussed during today's call.
And with that, I would now like to turn the call over to Joe Papa, Chief Executive Officer, for opening remarks. Joe?

Joseph Papa

Hello, everyone, and thank you for joining us to discuss our first quarter of 2024 results. I'm joined today by Rich Lindahl, our Chief Financial Officer. Following my opening comments, Rick will detail our Q1 performance, provide updated guidance for the second quarter as well as our full year outlook for 2024. I will then talk about future growth drivers and catalysts at Emergent. First, I wanted to begin by addressing the announcement made earlier today to reduce our enterprise footprint, consolidate operations and prioritize the capabilities most critical to executing that Emergent's core business.
When I stepped into the role of CEO in February, I talked about a multi-year plan to stabilize turnaround and transform our company. Also, we identified a near term challenge surrounding our debt position as a critical component of our stabilization plan.
We understood that reducing our total debt would require improving operating performance, reducing working capital and evaluating product for asset sales. I see firsthand that our employees are inspired and driven by the company's mission to protect, enhance and help save lives. And that is why any type of impact on our workforce is very difficult.
However, after a careful review by our Board and management team. We need to restructure the way we operate, create a customer focused, leaner, more flexible team and a streamlined manufacturing footprint that will still allow us to supply all the product needed by our customers beyond the business restructuring.
On page 6, we highlight the plans in Q1 2024 achievements in our first phase or stabilization of our multiyear transformation plan. Going forward, we will focus on key business areas and implement a simplified organization to improve our cost structure and enable key actions, including meeting the opioid crisis demand and exploring opportunities to grow Narcan nasal spray, protecting our medical countermeasures business and identifying new growth opportunities, support our existing customers in our CDMO services business and always ensuring patient safety and product quality underpin everything we do.
An item that will not change the merchants focus on making challenging difficult products that are needed by our customers as I mentioned during our last earning call, we reviewed the moat around our business and we believe unique products and capabilities we offer across significant public health threats underscores the value we deliver.
We'll continue to focus on executing our multiyear plan to bolster our position as a leader in global public health. During the first quarter, we also achieved significant improvements in a number of business performance metrics, including revenue, which is ahead of internal and consensus expectations, adjusted gross margin, reduced operating expenses and adjusted EBITDA.
Overall foods a great first quarter and a great start to 2024. As you know, last quarter, we entered into a forbearance agreement with our lenders through April 30. Our conversation with bank group continued and just yesterday we are delighted to announce a new bank amendment. This amendment will extend our runway to execute on a go-forward business plan and stabilize our financial position. We also strengthened our relationship with key stakeholders during the quarter.
Over the last three months, we've held over a dozen collaborative meetings with key stakeholders across U.S. and international government agencies, including Barda Department of Defense strategic national stockpile and the White House to gain clarity on their needs for medical countermeasures products. It may have been incredibly productive and their thoughts are reflected in our improved revenue guide.
These conversations also reflect a renewed willingness to engage with Emergent to improve planning and communication, which are critical to driving long-term success. Consistent with our comments in March, we also initiated efforts to divest products and or sites. We've already received multiple orders for one of our sites, albeit one of our smaller sites. We hope to have more to say about this initiative in the near future.
Our prioritization committed to instilling a culture of quality points across the company was also evident in the first quarter as we announced our Baltimore Bayview manufacturing facility received no action indicated or NAI status classification from the FDA. We are proud of our colleagues who have worked relentlessly to achieve this status will continue to hear the highest standard of quality compliance across the organization.
I'll now turn it over to Rich to review our Q1 2024 core business and our revised 2024 full year guidance.

Richard Lindahl

Thanks, Joe. Good afternoon, everyone, and thank you for joining the call. As Joe has just discussed, we're making significant progress against our near-term priorities of stabilizing the business and strengthening our financial foundation. Our report today reflects several key accomplishments.
We delivered strong first quarter results with all parts of the business delivering year-over-year growth. We're taking aggressive actions to further improve our operating performance as we seek to reduce our debt. We further amended our credit facility to support our ability to execute against our 2024 priorities.
And we are significantly raising our profit outlook, driven by increased clarity on near term US government procurement, combined with reduced operating expenses.
Turning to our results, we had strong revenue in the quarter, which exceeded our first quarter guidance.
As indicated on slide 8. Highlights in the first quarter include total revenues of $300 million, an increase of 83% versus the prior year, driven by Narcan anthrax, MCM, smallpox MCM and back. Total segment adjusted gross margin of 51% versus 5% in the prior year.
Adjusted EBITDA in the quarter of $67 million, a material improvement over the negative $102 million reported last year. And adjusted net income of $31 million also materially improved compared to negative $163 million last year.
Diving deeper into quarterly revenues. Important items on slide 9 include NARCAN sales of $118 million, up 18% year over year, demonstrating the continued strength and durability of this product driven by higher branded in our can sales to US Public Interest channels and sales of OTC NARCAN, partially offset by lower Canadian retail sales of branded Narcan and fracs, MCM sales of $56 million, an increase of 155% versus the prior year, driven by Santos deliveries to the US government's Strategic National Stockpile, including final shipments under the $75 million contract option provided by Barda that we announced on November 28 of last year.
Smallpox MCM sales of $50 million, up $43 million year over year, driven by ACAM2000 and VIGIV. Other product sales of $49 million, an increase of $41 million versus the prior year, primarily related to BAT and RSDL and total bio services revenues of $18 million, reflecting our continued transition to focus on existing customers.
Turning to operating expenses on slide 10, cost of commercial product sales in the quarter was $52 million, driven by strong sales of Narcan cost of MCM product sales in the quarter was $62 million, driven primarily by Penta sales, volume and other medical countermeasure products, partially offset by a decrease in shutdown costs.
Cost of bio services of $30 million, reflecting actions taken to improve profitability, R & D expense of $15 million, reflecting the impact of the travel health divestiture to Burberry in Nordic as well as the impact of cost management activities taken in 2023 and SG and A. spend of $85 million, including expenses supporting key marketing initiatives, offset by reduced expenses related to restructuring initiatives. Of note, total operating expenses were down 16% compared to the prior year as we focus on improving profitability and cash flow to manage our debt position.
With that. Let's move to slide 11 and review segment performance during the quarter. In the commercial segment, revenues were $118 million, comprised entirely of an Arcam and segment adjusted gross margin was $66 million or 56%.
In the MCM segment, revenues were $155 million, driven by anthrax, smallpox and back the segment, adjusted gross margin was $94 million or 60%. As for the Services segment, revenues were $18 million and segment adjusted gross margin was negative $12 million.
I'll now turn to slide 12 and touch on select balance sheet and cash flow highlights. We ended the first quarter was $78 million in cash and liquidity, including availability under our revolving credit facility. The change in cash and liquidity versus the prior quarter was due to sales, timing and collection of a AR.
Operating cash flow was negative $63 million which improved significantly versus the prior year. Capital expenditures were $11 million in the first quarter, which is a 28% reduction versus the first quarter of 2023 and as of March 31, 2023, our net debt position was $827 million.
Earlier today, we announced a set of strategic actions to improve our cost structure, enable turnaround efforts and support our key priority to reduce our debt. These actions include the difficult decision to reduce our organization footprint effective July 1, 2024, prioritizing only those capabilities most critical to executing our core MCM and Narcan nasal spray businesses.
We estimate that the changes we're making will result in annualized savings of approximately $80 million when fully implemented. The costs associated with these actions are estimated to be approximately $18 million to $21 million and are expected to be incurred in the third quarter of 2024.
We are confident that these efforts, Millennium and that they're expected to be incurred in the second quarter of 2024. We are confident that these efforts are an important step to achieving greater consistency in operating performance and improving future profitability.
We also announced yesterday that we have entered into another amendment to our senior secured credit facilities. This amendment will support our ability to execute against our 2024 priorities by granting certain waivers.

Operator

Ladies and gentlemen, please standby.

Richard Lindahl

Now I'm going to start at the beginning of the guidance section where we dropped. So turning to 2024 guidance, please wider tv. While our efforts to improve operating performance will not happen overnight, we're making significant progress towards those goals, which is giving us the confidence to raise our 2024 outlook at this time.
As announced in our press release this evening, we're providing guidance for full year 2024 as follows. Total revenues of $1 million to $1.1 billion for forecasting commercial product sales of $460 million to $500 million as we expect continued strong demand for New York and in the US Public Interest channel and Canada,
Combined with further growth with OTC Narcan in the retail channel, we're forecasting MCM product sales of $440 million to $490 million since our last report on March 6, we've continued to engage with our US government stakeholders to improve the procurement visibility for site vendors and other medical countermeasures.
As a result of those conversations, we have a better understanding of the US government's intention for the near and medium term and are therefore narrowing the range of potential 2024 revenue outcomes. In this segment, we're forecasting services segment revenue of $70 million to $80 million, reflecting our commitment to serve our existing customers.
Shifting to profitability metrics. We're forecasting adjusted EBITDA of $125 million to $175 million, reflecting the impact of our 2023 cost reduction actions. The additional organizational changes announced today, our capacity utilization profile and the range of revenue expectations across our segment.
For the full year of 2024, we're forecasting total segment adjusted gross margin of 44% to 47%, an increase over the 2023 level, primarily reflecting the impact of our profitability improvements.
Finally, we're forecasting Q2 revenue in a range of $160 million to $210 million. We've also included some additional assumptions around our full year guidance. Interest expense is forecasted to be $82 million, reflecting terms around our new credit agreements.
Total R&D spending as a percentage of revenues is anticipated at approximately 6% weighted average fully diluted shares of $52 million. CapEx spend of approximately $32 million and $111 million of depreciation and amortization. That is all for the financial update. I'll now turn the call back over to Joe for some further thoughts.

Joseph Papa

Thank you, Rich. As I mentioned last quarter, another key element of our turnaround is driving long-term profitable growth. One of the first steps we announced earlier today is the initiation of a search to bring Emergent Chief Scientific Officer reporting. To me, this individual will bring together all of our science innovation efforts, improving our long term product pipeline, search to include both internal and external candidates.
Let me now provide an update on our core products and future growth drivers, starting with Nokia nasal spray. Turning to slide 15, a vital way Emergent help save lives through our efforts to combat the opioid crisis by expanding access awareness and the availability of Narcan nasal spray.
The opioid epidemic continues to have a devastating impact across the world. As the leader of opioid reversal space, we remain committed to getting our Kinta everyone needs. To be clear. We do expect market share and market will be impacted by generic competitors over time.
However, we also expect market forces like opioid settlement funds, continuing opioid overdoses and the need for increased market access will continue to expand total market demand year to date, Narcan nasal spray is tracking to plan with strong performance driven by the U.S. Public Interest channel Canada.
Since the OTC launch, hundreds of thousands of Narcan cartons are made available to purchase at mass drug grocery, online retailers and e-commerce sites. And we continue to be well prepared to meet anticipated demand from a supply and manufacturing perspective.
This quarter, we also expanded access Narcan by creating a direct ordering platform called Narcan workplace.com. This facilitates getting the life-saving treatments directly into the workplaces. We have engaged with new partners like the National Safety Council to educate and reach businesses around the importance of workplace safety.
In addition, the Emerson group has been brought out to support penetration to a broader set of retailers. Sadly, there is still immense need for Narcan nasal spray to reduce number of lives. Lost the data from our recently completed survey that we just released today suggests the number of opioid death is unacceptable to American and especially looking at the impact on younger adults, we are seeing continued bipartisan support to address the opioid crisis and have ongoing engagement with leaders across government, retail and advocacy groups, increased access and availability of Natexis.
On page 16, we highlight several the catalysts and future drivers of market growth. We continue to prioritize efforts to reduce barriers to access for Narcan. This includes encouraging businesses and schools and districts to carry now excellence supporting policy to ensure health spending accounts and flexible savings account are eligible for now Glaxo and working with state Medicaid agencies, private coverage.
We've been working closely with Health Canada with a goal to distribute now excellent convenience kits containing Narcan.
Finally, we're exploring opportunities to expand Acsis internationally beyond the US and Canada, either internally or through partnerships that we believe will increase market growth.
Turning to slide 17 to review our MCM business. We continue to deliver on our commitments to you and Allied government, maintaining open lines of communication and engaging in discussions about how we can support their plans for long term sustainable public health threat preparedness.
During the last few months, we also received clarity from the government regarding future purchase orders for Santos, our post-exposure anthrax vaccine with the treat for the Strategic National Stockpile, we are finalizing modification to our ATM contract. In addition, we have received notices of intent to procure from the US government in 2024 for BAT, our botulism antitoxin product in big, which is treat you following complications resulting from small. This level of Clarix demonstrates continued US government support across our portfolio.
On page 18, review MCM catalysts and growth drivers. As referenced on our last call, we as a leading biodefense contractor for addressing the most pressing threats around the world, including anthrax, smallpox, botulism, Ebola and chemical threats. We believe that our role in global public health preparedness remains vital.
Finally, on slide 19, I'd like to take a few moments to focus on future growth drivers for the organization. Based on the potential expansion of our in-line products. First, we believe international expansion will be an important growth driver across our business.
Global public health preparedness have never been more vital in our collaboration with international partners, the key factor in improving global health security, we are seeing increased focus on public health preparedness and believe we're well positioned to fulfill the needs of our international partners for their critical product in the year ahead we will continue building these partnerships to expand access to our products across the globe.
Our product portfolio today has significant impact to help protect enhanced to save lives in public health threats around the world for the refresh lifecycle management initiatives, we are well positioned to fuel future growth drivers to meet customer and patient needs.
In summary, although it's early in our transformation process, I'm encouraging by the progress we are making to execute our turnaround strategy. Importantly, we have more stability clarity and financial flexibility than just a few months ago.
This progress is reflected in our first quarter results and our full year 2024 guidance improvements. We believe there will be significant opportunities to partner with domestic and international partners to address the public health crisis with our important and innovative product, we look forward to continue to work with key stakeholders to prepare for respond to a range of public health threats while returning Emergent to greater profitability for our shareholders.
With that, we'll open up the call for questions.
We also invited Paul Williams, our Head of Market and medical countermeasures business to join us for the Q&A. Operator, let's open the line for questions please.

Question and Answer Session

Operator

(Operator Instructions)
Jessica Fye, JPMorgan.

Hey this is Nick on Jess. Congrats on the quarter and thanks for taking my questions. First one on there. Can you just show continued growth of that product again year over year quarter over quarter, but maybe can you provide some additional details on the breakdown of that 1Q sales by the pet channel and OTCR. can and maybe also provide some color on how you're thinking about any generic competition that could come in to either those two segments throughout the course of this year.

Richard Lindahl

So I'll say thanks, Nick. I'll take the first one. This is Rich. Yes, I mean, certainly the majority of the sales remain from the ship channel. We are still moving forward with our with our OTCR. rollout, and it's still it's gaining traction, but the majority is coming from the channel with some contribution from here?

Paul Williams

And I think the question relative to generic entrants, I think we've anticipated and expect there will be additional competitors entering the space this year. I think we continue to believe that our ability to service the channel and the retail OTC channel and equally with the capabilities that we have like our can direct to the partnerships. We're building them on the retail side, which support the forecast that we have for the rest of the year.

Joseph Papa

And finally, just to put a couple of other future-looking comments. I think what we look at New York and we look at a couple of important points, number one, the importance of inorganic brand. And obviously, that brand is very important when you're talking about years of experience with Narcan and importantly, you're dealing with life threatening situations that Marc introduced.
Number two, we have a strong distribution capability, and we believe that's an important part of what Paul and the team has built that that allows us to make sure that we get to the thousands of customers around around the United States that offer in Canada that are the quarter, our product.
And then finally, clearly, we've built up the manufacturing capabilities, be automated and able to to compete with anybody in this space. So yes, we may see some inroads over time. More importantly, we think the market growth is still going to be very significant. That allows us to have long-term opportunities with our kids business.

Great. And then maybe on the guidance, can you just provide a bit more color on the pushes and pulls that went into raising the MCM. product guidance of $404 million to $490 million, I believe from the $340 million to $490 million. Is that just more clarity around anthrax acts? Are there other are there other assumptions baked in there and that's really the primary driver.

Richard Lindahl

As we commented back in on our March call, there was less clarity. We had less visibility at the time. So we had a much wider range about potential outcomes there. Based on the conversations that we've had, we have better visibility into where we see Saipem this procurement this year. And as a result, we were able to narrow the range by lowering by raising the low end.

Okay, great. And maybe if I could just squeeze in one more on your understanding that this is not an easy decision around the two facilities. Can you maybe just provide some additional details on why you chose Rockville and Bayview as part of that, the restructuring announcement, and I know you said that there was some interest that you mentioned that you talk about later, but of those two facilities, can you provide any color on which, if any, you're seeing maybe strategic interest in today?

Paul Williams

Yes. Let me let me start with maybe the big picture and I'll get to your question. But the big picture is, first and foremost, we made the decision to focus our future in the areas of Lansing and Winnipeg, we think fit that probably the most important thing that was our first decision on what sites have the most flexibility. So that we can run a leaner company with streamlined facilities and still make sure we can provide all of our product availability.
So I think that was part of the first thing went into our decision. Once we did that, we looked at the other sites and I've made judgments as to based on what we saw during the opportunity, what the expenses were we made decisions to reduce our total operating expenses, but make sure that we could still provide access to the products that are so important to US government around the world and obviously to into some cheap and be ready to be able to help the opioid crisis.
And when we went through that and the sites that Bayview and in Rockville came out as sites that we would close down wind down and close the site. And that was really the way we went through this process. I will say that we did make mention of that, we had multiple offers on one site, albeit of a small site. I wanted to be clear in saying that I do hope, though, that we will continue this process and potentially have more to say about that in the future. But I mean probably restrict my comments to that going that far in terms of what we've had interest. So far.

I think I've got all those parts of the question.

Joseph Papa

Thank you so much.

Operator

Thank you. (Operator Instructions)

Paul Williams

Thank you very much, everyone, for your interest in Emergent. We look forward to having more to come in the future as we make progress on our multiyear turnaround transformation. We have obviously, the team has done a great job in this first quarter and look forward to having more to say as we continued on the path for 2024 and beyond. But thank you, everyone, for joining us and have a great day.

Operator

Thank you, and thank you all. And with that, ladies and gentlemen, we now conclude the call thank you for your participation. Please note and our current 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 more to you in the future. Goodbye.