Emergent BioSolutions Inc.
Q4 2008 Earnings Call Transcript

Published: 6 Mar 2009

[Operator:]

Good day ladies and gentlemen and welcome to the Emergent BioSolutions fourth quarter and full year 2008 financial results conference call. My name is Komisha and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call Mr. Robert Burrows. Please proceed sir.

[Robert Burrows:]

Thank you, Komisha. Good morning ladies and gentlemen, again, my name is Robert Burrows. I am the Vice President of Investor Relations. Thank you for joining us today as we discuss Emergent BioSolutions financial results for calendar year 2008. As is customary, our call today is open to all participants. In addition, the call is being recorded and is copyrighted by Emergent BioSolutions. Joining me on the call this afternoon is Fuad El-Hibri, our Chairman and Chief Executive Officer, and Don Elsey, our Chief Financial Officer. Additional members of our senior management team will be present on the call for purposes of the Q&A session if need be. The agenda for today's call is as follows. Following my brief introduction, Fuad will provide a review of our key corporate accomplishments during 2008. Don will then provide more details on our financials indicated today’s press release. In addition, both Fuad and Don will comment on our financial values for 2009. Following the prepared comments, we will finish the call with a customary Q&A session. Please note that any statements about the Company's prospects or future expectations are forward-looking statements. As you know, forward-looking statements involve substantial risks and uncertainties and actual results may differ materially from expectations. Please refer to the press release issued today and importantly to our filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ. Also, Emergent BioSolutions assumes no obligation to update the information in today's press release or as presented on this call except as may be required by applicable laws or regulations. Today's press release may be found on our website at www.emergentbiosolutions.com under Investors. And with that brief introduction, I will now turn the call over to Fuad El-Hibri, Emergent BioSolution’s Chairman and CEO. Fuad?

[Fuad El-Hibri:]

Thank you, Bob. Good afternoon ladies and gentlemen, and thank you for joining us today. At the close of the market today, we reported financials for the full year 2008. I am very pleased with emergence overall performance. During the year, we delivered strong sales and earnings, advanced our products, extended our manufacturing infrastructure and made strategic acquisitions that enhance our ability create value over the long term. In reflecting on today’s results, I would like to discuss our key accomplishments across variant aspects of our business. First, let me brief you on our initiatives to strengthen our bio-defense franchise, which is comprised of our anthrax and botulism programs. Let us start with our anthrax program and the progress we have made with our with our flagship product BioThrax. During 2008, we secured an additional US government contracts valued at up to $105 million to supply HHS of 14.5 million additional doses for BioThrax for the Strategic National Stockpile or SNS. Delivery of doses unto this call on contract will begin in Q3 2009 and will continue until Q3 2011. This contract is in addition towards 2010 of multiyear HHS contract valued at up to $448 million for the delivery of 18.75 million doses of BioThrax into the SNS. We continue to deliver doses under the 2007 contract. Also last year, we expanded significant resources to enhance BioThrax, as part of the multiyear studies, anthrax funded by CBC. We obtained the FDA approval for a change to our BioThrax license. This license change provides for an IM administration and a reduction for a five-dose schedule over 18 months. We have continued to work with CBC to complete additional data outset and an effort to further reduce the number of required doses to three. In addition, we are working to add a post-exposure prophylaxis indication to provide [Inaudible] largely funded by [Inaudible]. Let me move to the covenant aspect with an acquisition candidate that we acquired last year. This acquisition allowed us to respond to an HHS’s request for proposal to procure up to 25 million doses of rPA for the SNS. In September, we were notified that our proposal were within the competitive range and since that time, we have been engaged in contract negotiations with representatives from HHS. If awarded this is expected to be a multiyear contract consisting of both development funding component as well as a procurement component, with an expected value in excess of $500 million. We are working diligently with HHS to complete the contract shortly. Also in 2008, we continued to make progress on our anthrax immune globulin therapeutic or AIG. We completed preclinical study, manufactured two consistency lots and collected sufficient plasma to enable us to manufacture a [Inaudible] during 2009. We also finalized speculations for a critical clinical trial designed to attest safety and pharmacokinetics of AIG which we expect to initiate shortly. We move on now to our anthrax programs, last year, we acquired an anthrax monoclonal antibody therapeutic candidate and shortly thereafter secured a four-year $24 million development contract with the government to fund, give out manufacturing efforts, nonclinical studies and a Phase I clinical study. And with respect to our advanced contract during 2008 was secured a three-year development contract with the government valued at up to $30 million to fund nonclinical safety and efficacy studies, manufacturing of clinical lots, stability to study and a Phase I clinical trial. Looking our anthrax program into perspective, within the span of approximately one year we have accomplished a great deal. First, we secured HHS procurement contract valued at up to $852 million to the delivery of over 33 million doses of BioThrax to the SNS, thereby providing revenue of visibility through the third quarter of 2011. Second, we acquired two additional anthrax product candidates, one vaccine and one therapeutic. And three, we were awarded over $58 million at multiyear contract to continue development the majority of our anthrax. Let us go to our botulism program in collaboration with the Health Protection Agency in United Kingdom. We are developing a recombinant trivalent botulinum vaccine candidate for protection against stereotypes A, B and E. Last year, we secured up to $1.8 million in funding from the government to support ongoing preclinical study. The plans to develop are recombinant both candidates not only as a prophylactic vaccine but also for use on a donor stimulation program for making a human bought from IG product for the government. Looking ahead, we anticipate opportunities to secure additional development and procurement funding for both our anthrax and botulism programs. We also anticipate opportunities to expand our bio-defense franchise beyond anthrax and botulism. There are additive areas that the government continues to focus on as part of a comprehensive bio-defense strategy. Let me now review our progress in growing our commercial type. I will begin with TB. Last year, we announced the formation of a joint venture in Emergent and the University of Oxford to develop and commercialize the world’s most multi clinically advanced vaccine under development to prevent tuberculosis. With a joint venture, we also secured significant development funding for the stroke product. Specifically, the Phase II b efficacy trial that is designed to enroll over 2,700 infants in South Africa is expected to begin shortly and is funded primarily by the Wellcome Trust and the Aeras Global TB Vaccine Foundation. Our TB candidate is a single dose recombinant, attenuated vaccine that targets individuals previously immunize with VCG, the only marketed vaccine against TB. VCG is administered at birth to over 70 million infants, anyway in both develops and developing countries around the world. Next, let me speak to our Hepa-B therapeutic candidate. During 2008, we see enrolling patients in our Phase II a clinical trial in United Kingdom and Serbia which was designed to evaluate the safety and immunogenicity of our therapeutic vaccine in chronic Hepa-B carriers. Enrollment in the study was halted as a result of recruiting difficulty related to the standard of care in the developed world because our trial was designed to administer our product candidate as a monotherapy. We are working to identify alternative sides in an endemic area of the world where we reciprocate recruitment rate will be nice. We plan to continue to pursue that initiative in 2009. Wrapping out our advanced commercial portfolio, let me update you on Typhella, our single dose oral typhoid vaccine candidate. Last year, we completed at Phase IIa clinical study in children ages five to 14 living in Vietnam and reported Typhella was highly immunogenic and well tolerated. We also initiated the Phase II b clinical trial in healthy patients in the US which is nearing completion. With respect to our preclinical product pipeline, we continue to focus on development additional vaccine candidate targeting other infectious diseases on our platform technology, specifically our oral bacterial vector spi-VEC and our injectable viral vector, MVAtor. In addition, we are developing a recombinant vaccine in last years of medical proposal for funding and respond to an HHS request for application. Next, let me review our recent developments relating to our manufacturing infrastructure. In connection with our ongoing negotiation with HHS for the rPA contract, we recently connected to dedicate our new large scale manufacturing facility in lasting to the development and manufacture of rPA. We believe that this commitment enhancive our prospect for successful rPA award. At the same time we have initiated the plans to expand our BioThrax manufacturing capacity at current sales to address future market opportunities. In addition, during 2008, we enhanced the capability to [offer our pilot plan] which was designed to support our product development program. Moving on, let me summarize our 2008 M&A activity. On the bio-defense side, we acquired two opportunities associated with anthrax, one being the rPA candidate, which is well positioned to receive an HHS contract award shortly, and the other being the anthrax monoclonal therapeutic which is already received development planning of 24 million from the government. On the commercial side, we formed the joint venture with Oxford for which we acquired our clinically advanced vaccine and secured funding for both Wellcome Trust and Aeras. Consistent with our growth strategy, we are diligently pursuing additional opportunity both bio-defense and commercial that will complement our product type. Now let me comment on our 2009 forecast. We anticipate the 25% to 35% growth in total revenues to approximately $225 million to $240 million in revenues and net income in excess on $20 million. We have noted that this forecast does not take into accounts in rPA award. The government award up to our rPA contract, we will update our 2009 quarter. In conclusion, I am very pleased with our results for 2008. Our financial performance reflects the strength of our growing operations, more importantly we look forward to building on this success and we strive to realize additional growth opportunities plus both our bio-defense and commercial portfolios for the next 12 or 18 months. With that I will now turn it over to Don will take you through the numbers completed details. Don?

[Don Elsey:]

Thank you, Fuad. Good afternoon, everyone. As Fuad mentioned, following the close of the markets today we released our financial results for the fourth quarter and full year 2008. I encourage everyone to take a look at the press release which is currently available on our website. We filed our annual report on Form 10-K with the SEC and the next day or two. The 10-K where in the file will also be available on our website. Now, let me discuss our 2008 financial results, but again let me provide an overview. For the full year 2008, total revenues were $178.6 million in line with the anticipated $179 million as announced earlier this year, and the net income was $20.7 million or $0.69 per share above the anticipated range of $15 million to $20 million announced earlier this year. The 2008 revenues were primarily driven by sales of BioThrax. Compared to 2007, revenues were slightly less due to a reduce level of contracts and branch revenues. Full year 2007 total revenues were $182.9 million and net income was $22.9 million or $0.79 per share. For the fourth quarter of 2008, total revenues were $35.8 million as compared $89.6 million in 2007 and net income was $1.5 million or $0.05 per share as compared the net income of $27.7 million or $0.93 per share in 2007. Now let me talk in more details, and to start let us take a look at the product sales. Our full year 2008, product sales of $169.1 million which was essentially flat versus full year 2007. The consistency in full year 2008 product sales resulted from a 16% decrease in the number of dosage of BioThrax delivered offset by an 18% increase in the average sales by [16.22] in 2008. Importantly, as you may recall, an additional $12 million of BioThrax revenue originally planned to the fourth quarter of 2008 was not realized due to three lots of BioThrax that were delayed in the completion of final testing. This delay stemmed from an equipment failure that the Company addressed and has resolved. We expect to deliver these three lots to HHS in the quarter of 2009. For the annual sales have remained stable when looking at the fourth quarter of 2008 versus 2007, we experience to drop and fails in Q4 2008. In 2008, the revenue of both prior quarter was fairly evenly distributed. In comparison, revenues for 2007 were backend weighted of 49% of the total year revenue realized in Q4. Our shipments to the government each quarter converted significantly based on certain factors including manufacturing new product release and strategic national stockpile logistics. We expect that this variability will continue on a quarterly basis or will be relatively predictable on an annual basis. Moving on to contracts and grants revenues and grants revenues. For 2008, we are lower levels of contracts and grants revenues. Specifically 2008 contracts and grants revenues decreased by $3.7 million or 28% to $9.4 million. Contracts and grant revenues were determined by the local of activity and incurred during the period and invoiced to the customer. As Fuad mentioned, in 2008, we significantly strengthen our anthrax and botulism development programs by securing an additional $58 million in funding from the US government to support the continuing development of our advanced BioThrax vaccine, our anthrax monoclonal antibody candidate, and our recombinant trivalent botulinum vaccine. Importantly, these development contract revenues carry with them a profit margin which will act as the bottom line over the life of these contracts. As a result, we anticipate that our 2009 contracts and grants revenues will be higher than in 2008. With respect, let us now move to gross margins. For 2008, we continued to experience strong gross profit margins on our product sales. The decrease on the cost of product sales on an absolute basis was primarily due to the decrease on the number of dosage delivered. As we have discussed before, biological manufacturing presents specific challenges in terms of actual production yield and as a result our gross profit is subject to variability due to normal fluctuations in our yield. Turning now to spending, first taking a look at product development. During 2008, we continued to advance the development of our product pipeline which includes enhancements to our licensed products and efforts to advance both our clinical stage candidates and our preclinical programs. For the year, development spending increased 10% over 2007 and this spending increase was driven primarily by an increase in the development for new product candidate programs including rPA, our anthrax monoclonal antibody and the establishment of tuberculosis joint venture with Oxford. The increase was also driven by an increase in the development for Typhella, our typhoid vaccine candidate which was involved in multiple Phase II trials during 2008. As I mentioned just a moment ago, the development spending for the advanced BioThrax vaccine and the anthrax monoclonal antibody programs resulted in the receipt of a development contract for both of these productivities. In addition, development spending for our rPA program enabled us to submit our respond to the HSS’s request for proposal. As Fuad mentioned, the contract is expected to be multiyear indurations consist in both development funding component and a procurement component with a total value expected to achieve $500 million. We are working diligently with HHS to complete our contract sure off. Our SG&A spending for 2008 was flat on a comparative basis. Our spending for SG&A has been primarily driven by establishing an infrastructure that is allowing us to grow our business, execute on our contracts and comply with regulatory requirements. We remain focused on controlling the growth in general and administrative expense. For 2008, net income was $20.7 million or $0.69 per basic share, which was a decline of $2.2 million from 2007 but above what we previously announced in early January of this year. Turning to our balance sheet. At year end 2008, our balance sheet remained strong as we continue to generate cash from our operations. Our cash and cash equivalents of December 31st, 2008 were $91.5 million. In addition, we ended 2008 with a note receivable of 10 million from Protein Sciences related to a bridge loan which we have provided to Protein Sciences earlier in 2008, a loan to secure substantially all of PS assets including intellectual property. We are currently working with [PLP] to receive our payment of the $10 million loan. Our outstanding long term debt declined to approximately $42 million and has supported our investments and the expansion of our manufacturing facility in Lansing and the purchase of our facilities in Maryland among other initiative. Currently, we will remain all capitalize, the finance, the continued growth of our business. Finally, our financial guidance for 2009. As Fuad stated earlier, our financial outlook for 2009 anticipate 25% to 35% growth in total revenues or approximately $225 million to $240 million. We also anticipate 2009 net income in excess of $40 million. These forecasts do not take into account depending contract award on the US Department of Health and Human Services related to the development and procurement of 25 million doses of our recombinant anthrax vaccine for the strategic national stockpile. It should the rPA contract be awarded by the US government, we will update our 2009 for that. In conclusion, our 2008 financial performance as reported today exceeded what we previously discussed in early January. Our accomplishments in 2008 again include a continued delivery of dosage of BioThrax under our current HHS contract. The follow on contract with HSS for the delivery of 14.5 million additional doses as well as the resulting revenue visibility through Q3 2011, the $58 million in development contracts that we have secured in 2008 that was underwrite a substantial proportion of our product development and certain key opportunities and depending rPA award which is anticipated again to be valued over $500 million of our multiyear period. For 2009, we report to building Emergent success of 2008. Our business remained strong and we are confident about prospects to growth as evidence by our current 2009 value of 25% to 35% revenue growth in continued profitability. Finally, as Fuad mentioned, we continue to pursue acquisitions that will complement our product pipeline and capitalize our expertise and infrastructure. That concludes my prepared comments. I will now turn the call over to the operator so that we can begin the question-and-answer portion of the call. Operator, please proceed.

[Operator:]

(Operator Instructions) Your first question comes from the line of Craig Gordon - Cowen & Co.

[Craig Gordon:]

A couple of questions. First, I was not sure if I heard this right. Is rPA on clinical hold?

[Fuad El-Hibri:]

No.

[Craig Gordon:]

Okay. Yes, that is right Feud. In terms of the contract, are you able to I guess…are you still expecting it to be occurring in late Q1 ’09, and are you able to give us some sense what percent of the $500 million, let us say is upfront versus development versus procurement?

[Fuad El-Hibri:]

Well, let me first mention that or clarify that the contract negotiations for the HSS were ongoing. We did not say that we expect to perhaps at the end of 2009. We actually said that it would happen shortly and estimating, giving anything more prospects then shortly difficult and was still finalizing contract negotiations. Now, with respect to how much of it, how much of it is procurement versus a development well look at the guys in fact give you right now stated that there are two significant components both, and with respect to advance payments and milestone payments that can only, at this point, point out to what [Inaudible] yields at both right which is up to 10% down payment with normally 5% milestone payment up to 50% of total contract value.

[Craig Gordon:]

Great. That really helps. And then in terms of the BioThrax, you had mentioned that you would be expanding a current facility to produce more. What would be the [claim in terms] that being able to expanded, validated, get approval and start selling products from that?

[Fuad El-Hibri:]

Yes. What I can share with you is that certainly expanding at the current sale as opposed to still enough, specifically it is less of regular story exercise of challenge goodwill. So, that is why we decided to keep the BioThrax at this point and to dedicate our large scale facility to rPA in response to HHS requirement. We are going to expand as quickly as possible at the current scale and we do have identified space for doing that and we are in the declining stage. As you can imagine, we were going to scale our BioThrax and produce that in the large facility if only been in the last couple of months that we have been asked to dedicate the facility to rPA. But we are still in the planning stages with respect to expansion of BioThrax as a current sale. So, well, stage one.

[Craig Gordon:]

And then in terms of the potential sPLA for BioThrax being improved by FDA to get that price height, do you have anymore details as to when you think FDA might won at sPLA?

[Fuad El-Hibri:]

Are you talking about the four-year dating?

[Craig Gordon:]

Exactly.

[Fuad El-Hibri:]

Yes. We have been working very closely with FDA on fulfilling all their requirements to support and submitting the data and support the approval. We have submitted of what we believe to be the last submission to the last questions filed by FDA and they are currently reviewing that application and we anticipate sometime in 2009 but now that will be approved.

[Craig Gordon:]

Great. One other question, on AIG, do you anticipate the possibility of both submitting BLA and possible getting your main contract from HHS this year?

[Fuad El-Hibri:]

I think this year would be aggressive but certainly within the next 18 to 24 months is there a possibility before that because as you know IG products have already been in license and we are using a license manufacturing process to our contractor if adequate and we quite sure have one clinical trial to breach to the nonclinical study that was conducting. So, we believe we are pretty advanced in the development of this program and then anticipate again within the next 18 to 24 months that it would be potentially like visible.

[Operator:]

Your next question comes from the line of David Moskowitz - Caris.

[David Moskowitz:]

Just three questions. First of all about the BioThrax, the current facility building 12, can you talk about the timing, I know that is a tough question but can you sort give us a range and also can you talk about the percentage of capacity that it would be increased by.

[Fuad El-Hibri:]

As I said earlier we are still in the planning basis and we have to react very quickly and we are dedicating the facility on this large scale facility from BioThrax to RBA. So, it would be premature from me to give you guidance but to assure that I will go to expand as quickly as possible because we do believe that the government demand was strong not only in the US but also overseas. We hope to get that again we would be using the existing manufacturing process, existing scales, existing equipments, the type of equipment that we have employed and we have as you have seen I believe you have been to our facility, if you know we have quite expect. So, we believe that it is going to be and as relatively accelerated time.

[David Moskowitz:]

Okay. If I can just, I just want to try and find to that a little bit because I did have some capacity expansion on the late 2010 timeframe, so if I was to say your worse case, when could I expect that the latest has some capacity expansion or what were your expectations be for example as CEO?

[Fuad El-Hibri:]

Again, it is premature for me to really give if any guidance there simply because we have not finalized the plans to do so and have not gotten any contractors to give us timeline but one thing I can help you with that is probably it is not going to be by the end of next year.

[David Moskowitz:]

Okay. And it’ll be good, keep us up on that. That will be great. On the development payments that you might receive for rPA from the government, would there be a catch up portion of that, in other words, you guys you indicated in the prepared remarks that you guys spent money on advancing rPA as well as on the projects, would there be some part of the funding that would be I guess accelerated to pay for retroactive work done on rPA?

[Fuad El-Hibri:]

I can answer that David generally by saying that under a fixed price, from the regime that the contract is responsible to deliver within the price. So, to the extent that some expenses had already been incurred and one would has price that into the contract and that is separate and distinct from cost plus development contract when you actually reimburse for cost if prior to fall back, but here with the fixed price certainly the government pick into accounts whether product is in terms of major development and looks at this local price and the development at fixed price as well as the procurement fixed price is something that is comprehensive and complete.

[David Moskowitz:]

That makes perfect sense, but from an investor standpoint I guess my question would be maybe this is more for Don but what would that look like in terms of how you book the revenues. So, could we expect a larger proportion to come in, I guess, in the first quarter assuming that you are going to get the contract based on some catch up work?

[R. Don Elsey:]

David, I think the complexity for this is as you may guess this; this will be governed by [EITFO] August 21 and into our contract has been completely negotiated and we know the exact facts and circumstances. This is going to be hard to say what can be recognized at revenue and at what time. If we receive an upfront payment at the beginning to this contract, my anticipation would probably be a deferred revenue booking that would then be amortized or recognized over some period of time but again you will have to look the fact and circumstances of contract by themselves to determine how [EITFO] August 21 would dictate that accounting.

[David Moskowitz:]

That is great. Thanks Dan. And one last question and that is on the PSC, it is kind of playing out in an interesting way. So, I guess the first question would be what are the chances that this Company I think last I checked they did not have any resources, what are the chances if they are going to get $10 million together and repay you versus the chance that you can get these assets for the initial $10 million loan that you made to that Company and I guess what would be the plans if you would get those properties back?

[R. Don Elsey:]

We can share with you that as we are in discussions to work out the repayment of this loan.

[Operator:]

Your next question comes from the line of Greg Wade - Wedbush Morgan.

[Gregory Wade:]

Don, I wonder if you might just give us a little more granularity on the financial guidance with respect to the top line. What component is going to be product sales versus contracts and grams and what component to that do you expect to be cash? Where is the cost of SG&A and R&D following…you are expected to be in share count? What kind of depreciation we should factor in CapEx and then changing cash for the year as well?

[R. Don Elsey:]

Now that is a comprehensive question. What I would say is just we have a process that we build guided by line item other than top line and bottom line. I will tell you that as we take a look at this guidance and we forecast the 25% to 35% top line growth and better than there of course is projections with regards to our progress on the development contracts that we have just filed last September, which is of course the hard is now the challenge is you anticipate exactly how quickly this will progress and when invoices can be sent by the government. Certainly, we anticipate that we will continue to produce and sell everything that we can push out at the plants in Lansing. So, that is certainly we are anticipating that we receive four-year dating next year and beyond that sort of general characterization of the rationale that supports at the top line growth. We do not guide with particular category or some category of revenue, but what is interesting if I may add some comments is that you can really speculate. We expect before that we are manufacturing more or less at capacity, there is always room to improve a bit but we are basically there so you can speculate how much that is in product sales. There is this $24 million four-year dating revenue piece that we have announced as part of the previous contract which depends on the four-year dating at approval, and we have announced the government contract and development contract that we have received and we typically do not take in contracts that we do not have and in those numbers we can kind of look at what the existing development contracts may project over the next couple of years and we did say that rPA included in that so that would be incremental, but there are some moving pieces and those pieces are the normal as Don likes to say lumpiness of our revenue from quarter-to-quarter, sometimes year-to-year, look at what happened last year. Last year in our view was a very good year, unfortunately we were $12 million short because three lots did not make the shipments which by the way now have been released, and we expect them to be part of the next shipments to HHS. So, there are these variables, I think this year is very variable quarter-to-quarter. The other variable of course are the various development contracts that we have and the speed at which we advance and the government pays all color of the revenues that we can recognize in any case. But I think you have basically all the [thesis] and I might encouraged you to look at what we have already done. The other things I guess I [Inaudible] and now we do not forecast. One of the things that we have always talked, number one on SG&A, we are going to try and manage that very tightly and in our R&D, it has always been one of those things. We are going to try and advance our products as quickly and effectively as possible and yet at the same time, live within our means. That is one of the biggest issue, if you will that we are going to turn on and off to ensure that we have remained in the profitable state that we have been in and continue to deliver a baseline profitability in the street. Hopefully, that gives you some additional points.

[Gregory Wade:]

So, what are these follow ups for the couple of things then? So, with respect to the income that you are projecting, is that GAAP income?

[R. Don Elsey:]

I am sorry. What?

[Gregory Wade:]

Income that you have deducted the $20 million of that on a GAAP basis or is that…?

[R. Don Elsey:]

That is not a GAAP basis. That is correct.

[Gregory Wade:]

It is not a GAAP basis, okay. Can you just tell me then just to let and get the cash flows sort of align with what we are expecting. What your expected change in cash is going to be this year towards the end of next year?

[R. Don Elsey:]

That is another one we do not give specific guidance on. We have got a lot of moving pieces that as we figure this early in the year. Certainly, the rPA contract review has a significant influence on that. If we were to close an acquisition as we are ambitiously pursuing and these are big moving pieces, hence we do not give out the guidance on each and every line item. I will tell you between [Inaudible] and myself we are pretty conservative. We would like to maintain 75 million to 100 million in cash. We will always going to have that everyday throughout the year? No, but that is certainly the level that we like to stay at.

[Operator:]

Your next question comes from the line of Jim Malloy from Caris & Company.

[Jim Malloy:]

Just a quick question, one of the points you guys mentioned was additional BioThrax sales to foreign governments. Could you talk a little bit about your thoughts on timing of that, it sounds as though it is opposed to 2011 deal, given what you said about expanding capacity of the building 12.

[Fuad El-Hibri:]

Not necessarily. We have some latitude in discussing particular shipments to HHS and so for example if we did have a foreign sale and we made shipments slightly less than next quarter. So, there is some flexibility there. Generally speaking, international sales even though we have been… we have had several customers, foreign government costumers typically marketing authorization in their country is very important and we are very happy to have announced that because market authorization in India and you can imagine that we are working on other countries too. So, I think that once more and more big market authorizations come in but we at least that Emergent scale marked optimistic and growing internationally.

[Jim Malloy:]

But it sounds that… if I understand correctly, you guy are making and selling everything that you can make. That sounds me answer that this should just be a reallocation of some of the perhaps US sales that you can move around a little bit and ship overseas. Is there anyway to look at that, these additional foreign sales as incremental to your guidance, or is it…?

[Fuad El-Hibri:]

Yes. The foreign sales we have announced previously typically are significantly the price per dose is significantly higher. So to the extent, we sell, let us say 100,000 doses to the foreign government. That is also 100,000 doses will generate higher revenue normally then selling to the US government.

[Jim Malloy:]

And if you were to upgrade the building 12 is that something that you had in the press release at the time or is that sort of something good to find out on the next call.

[Fuad El-Hibri:]

Once we have a clear picture as to what is the design is going to be and the capacity expansion, the scope and we have some reasonable timeline, like we did with building 55 which we will give you indicative dates and timelines and indicative capacity expansion. And the other thing is that we are at capacity we continue to work on process optimization opportunities in our existing facility, which may translate in additional capacity growth from year-to-year even at our current or I should say output growth given our current capacity. So again, we are doing everything we can to produce as many doses and your observation is correct that we have been able to sell, practically, all of the doses that we produced and we hope that will continue.

[Jim Malloy:]

Fine, unless maybe [Inaudible] about rPA. A couple of times on this call you said shortly on this contract we expected shortly. Is any recent conversation why shortly versus first half or any newer information on time on that issue?

[Fuad El-Hibri:]

It can when you have two party and you can maybe I should play some control over one party which is yourself. All I can say is that our relationship with HHS continues to be strong. We are very excited about this opportunity and we will try it in earnest and working on a contract and we want to make sure that this contract, which is we anticipate to be a large contract is well-defined, well-spoke, and well to government and our interest. So, I just takes time. I mean this $0.5 billion contract takes sometime to negotiate and remember that the government had originally wanted to finalize that by end of last year but there was a protest by one of the bidders, which I think was settled, that is only settled I believe it was February. So, we are actually very pleased with the progress at which the government is moving and in getting to resolve and to issue the award.

[Jim Malloy:]

Okay. Then the final question, you have just mentioned the prior questionnaire, ambitiously pursuing acquisitions. Where would be the idea of acquisition [Inaudible] absolutely look very good, this mission is going on there? What would be the idea of acquisition at this point assuming TFC has not been the acquisition to happen?

[Fuad El-Hibri:]

As we have guided before is that we would like to, we are looking at late stage products typically Phase II, Phase III. We are not of course to stay within our space of infectious diseases but we have also said that we would entertain other immune-related disease carriers and that we typically would like to have a technology platform associated with the acquisition whether it is an acquisition of company or an acquisition of our products, we usually like to have the platform behind them, and that was the nice thing about TV was really on [NBA], which is basically we have an [NBA] platform. So, if that is the single product in licensing makes sense to a strategic aside from the fact that we believe that is potentially highly valuable product. So, we do believe that in addition to organic growth that growth for acquisitions as we have done over the last two years continuously as the major statistic growth for us and if we use the words diligently or aggressively as we need to pay that, we are working very hard on them

[Jim Malloy:]

Okay. Thank you very much for taking my questions.

[Fuad El-Hibri:]

Thank you. The opportunities by the way are now given the market and I think it is very good, not only the market in general if there are some buying opportunities but specifically in the buyback scales, once the best tackle is I think mergers and consolidations will make.

[Operator:]

Your next question comes from the line of Daniel Mallin - WBB Securities.

[Daniel Mallin:]

Hi guys. Thank you for taking my question. I hope you can hear me okay.

[Fuad El-Hibri:]

Yes. Hi Daniel, we do. Thank you.

[Daniel Mallin:]

First of all, I want to compliment you guys and in that it seems that over the last several years bio-defense in particular has been the one steady ship in the turbulence of Wall Street in general, but certainly healthcare and biotech with the uncertainties that exists in terms of healthcare and the economy. It has been pretty clear over the last five years at the very least or at least certainly since the anthrax attacks that increased government spending on their Bioshield, increased procurement contracts, more development funding seems to have been the mantra, if you will over the last certainly at least five years. The $64,000 question, I am sorry, I guess this maybe the $64 million or $64 billion question is what does the future bring in terms of the outlook for the future of bio-defense ending in general? More specifically you have [Inaudible] basically no longer being the congressional point person overseeing HHS, new person coming in, new administration coming in. Now, you know several months back, it was we think we might have part of a $500 million rPA contract by late 2008, now, we are talking late 2009. Is that simply a function of the legal challenge? Is there perhaps a wait and see what the policy wins are because in my thinking, the new person comes in overseeing HHS and somebody says “hey, we got this proposal this year for $20 million. We want it to spend on AIG,” and they say “what, I will not give enough money over to AIG.” So, my real question is what should an investor use as a measuring stick or some sort of visibility in terms of what future policy or potentially policy changes might be coming down the line that could impact future spending on bio-defense in general?

[Fuad El-Hibri:]

Okay. Dan thanks for the question. Let me first find a clear and potential, confusion because that is the second time that we have heard someone refer, that we anticipate a contract award by end of 2009. If you have heard that we are not saying that. We are saying that it is… and we expect an award shortly. So, I hope that helps. The second is that if I think back about five to six years, it would be like a year or two after the letter is asked. There was a large confusion with not just the government but also bio-defense development as to what products to focus on. How much money to put there? How much government funding there is? And from my perspective, I have seen in the last four to five years a whole slew of legislation and other measures that the government has taken to actually show an absolute commitment to bio-defense and for practical matter, I mean when conventional welfare was the only warfare that one can imagine, government would developed defensively and now, I think bio-defense has shown that or biological agents have really shown these threats and I would think it would be inconceivable that a government like the United States or any large governments that would not defend itself against bioterrorists. It is just nonsensical when probably, bacteria and biological agents are easier to manufacture, deliver, and could cause tremendous damage to individual. I just think that two cuts of wire to really realize that there is a real threat, having said that you have real action. You have $5.6 billion Bioshield enactment which had pushed that money as high as in a special reserve subject to annual congressional appropriation, of which to my knowledge; maybe only half or 60% has been spent currently. So, there is still money there. Then, [Vargas] legislation has been passed recently and [Vargas] has been funded already to annual appropriation in addition to project match. So, I feel nothing right now that would signal near our company that the government is losing interest in bio-defense, like the contract. I think that what we have seen is that that the new administration is as concerned and committed to Bio-defense and quite frankly, I anticipate it that with the new administration coming in that the rPA award might be delayed by three or six months with the new focus to find their way around, but everything we heard so far and seen so far is the commitment to get these thing done as quickly as possible. So, I hope that I have helped you a little bit but that is our view.

[Daniel Mallin:]

No. Thank you that is helpful. I guess I am just curious if there is… if that is some sort of determination needs to be made within the Obama administration and that that will take some time and perhaps might lead to delays in large contracts being awarded or we are really in a business as usual type of environment. I am just wondering what some of the indicators might be as to any change in policy. I think you, you are very helpful in your response and I look forward to seeing how it all develops in the future.

[Operator:]

Your next question comes from the line of Mona Ashiya - JP Morgan.

[Cory Kasimov:]

Hey guys. Actually, it is Cory here. We have a little bit of problems over here with a conference call but Mr. Malloy actually stole few of my questions. So, I do have a couple left. To stay on this rPA subject and I thought you guys are quite clear that you are expecting something shortly and not late 2009. So, you are certainly sounding confident but the question I have regarding the pending award is I am wondering how susceptible upsizing it, maybe in this current economic environment if it is susceptible at all?

[Fuad El-Hibri:]

What do you mean by upsizing?

[Cory Kasimov:]

Well, the initial rFPs for $25 million doses and there is a lot to talk about multiple parties receiving an award and would it be two parties receiving $25 million doses each or splitting $25 million doses between two different companies.

[Fuad El-Hibri:]

Again, if you look at what our competitor [Pharmacin] and their expectation is a contract that is hundreds of millions of dollars and so is ours, I think it would not be at this point much of a presumption that the government would be going for the full $25 million with each of that to develop.

[Cory Kasimov:]

Okay. Great, that is helpful. Second question relating to spending on R&D in particular and I am just wondering what kind of flexibility you may have there with R&D spend especially as it relates to you commercial portfolio that this could be the either like partnerships or even prioritization of the pipeline. It seems that you have a lot of earnings leverage with the bio-defense portfolio but the commercial portfolio can act as a drain on that. Any thoughts about kind of releasing some of this top line revenue you are generating with the bio-defense and allow it to flow down to your profit.

[Fuad El-Hibri:]

Yes, we do. That is what we are trying to do is to target about a $20 million profitability level. We see the commercial portfolio, not so much as a wait or a drag. It is actually investing in the future. Our OpEx is stuck within the next few year that one or two of our existing or acquired commercial product may complement our bio-defense program and with revenue so that we now have additional work. Okay. The bigger question is doing just kind of stay with bio-defense business and run that as possibly as we can and thus, reinvest in the future growth of the company outside bio-defense or do you use the bio-defense revenues to reinvest partially in bio-defense but also in the commercial. In our view, it is very clear with articulating this and over and over again is that although we see continued the growth in bio-defense and continued leadership in the industry in bio-defense as we would like to get to that same stage one day and on the commercial.

[Cory Kasimov:]

Okay.

[Fuad El-Hibri:]

And the other thing that I guess I believe in that any profit that we end up with, we pay taxes on it going at 40% and we see that is why taking some of the earning dollars and reinvesting it wisely, we hope, in our commercial portfolio that we actually the government is co-financing at the rate of 40%...

[Cory Kasimov:]

Very good, very straight to the point, and then my last question to follow up to the earlier question on Protein Sciences and just to ask another way, when is the repayment of the $10 million loan actually do so. In other words, when might we get resolution on this whole matter?

[Fuad El-Hibri:]

We are in A, in litigation]; and B, in confidential negotiation. So, I would like to answer that question but I will not… Sorry.

[Operator:]

We have a follow up question from David Moskowitz - Caris & Company.

[David Moskowitz:]

I have just a few, quick one, Don, CapEx for 2009, please.

[Don Elsey:]

Yes. I am going to frustrate you; we do not give out specific guidance on that. However, let me help you a little bit…

[David Moskowitz:]

Thank you.

[Don Elsey:]

The discussion that we had a few moments ago on expanding the capacity in licensing, one of the key elements of CapEx is that the construction of building 55 and the installation and the equipment and what have you was completed in 2008. That of course has significantly increased the capital expenditures for the last couple of years versus well our CapEx say is sort of a steady state. You can certainly, as you take a look at where we spent the CapEx over the last couple of years. Let us say, it is fairly down substantially from where that stands, again excluding any initiation of an expansion of building property investment there.

[David Moskowitz:]

Okay. Thanks and when you talk about the international sales before, so we assume that they are at the same prices what the United States government procures from you guys.

[Fuad El-Hibri:]

No. I would assume not because the United States government gets the official price from us and they buy and use volume and our pricing so far to foreign countries like Germany, Taiwan, and Canada, and there were some others that we cannot disclose, we are under our confidentiality, have all been a multiple of our government.

[David Moskowitz:]

Okay and I…

[Fuad El-Hibri:]

I said previously that it is somewhere between three to four times.

[David Moskowitz:]

Great. I appreciate that. The other thing is I know that last year you guys had set aside some product for I guess validation purposes, other experimentation with the product I guess for your dating and so forth. Is there excess capacity being set aside this year and could that come back into the revenues or be shifted overseas or your guidance range pretty much tied around what you expect us to produce?

[Fuad El-Hibri:]

Well, those were all very good questions because there are trade offs, some of the process optimization exercises that we do require, some of our product but we have done a lot of that and some of it is just a regulatory process catching up with. So, I think I am safe to say that we do not plan any major part of the capacity going into kind of development type of work.

[David Moskowitz:]

Okay and the last question, I promise. On the potential for you guys to do an acquisition [front], you have done a great job, I guess, bringing in distressed assets and paying very good prices and monetizing them well. So, as the risk of you guys announcing a distressed asset that perhaps we do not understand but has future value, could you talk about that? Is that, you mentioned that pricing is good at this point so can you talk about sort of your approach from an opportunistic perspective?

[Fuad El-Hibri:]

Well, it was more of a kind of a global observation that the markets right now is such… Maybe we are lucky, one of the few who does not believe but most of the companies in our sector are hurting and that translates into a more difficult time in raising money, more difficult time in restructuring, more difficult time in committing themselves to major development programs. So, we see that that might be an opportunity for us to add value and value to both parts because we do have some financial means that could help smaller company and we are certainly actively talking to, looking at opportunities right now and we would as soon as we have some term sheets finalized who would advise your company

[Operator:]

Your next question comes from the line of [Natalie Luchessi] from Rodman and Renshaw. Please proceed.

[[Natalie Luchessi]:]

I have a question, my question regards to the rPA contract. What are some of your major sticking point in the negotiation and is there are any, I assume, they must be financial and do you think that would anyway impact what you expect to receive in terms of margin for that product versus what you have expected before.

[Fuad El-Hibri:]

For competitive reasons, it is really very difficult for me to give you any more color on that. Maybe the one thing I can say is that it is not a question of other sticking point because there is always, as you have said, we negotiate. But it is really the complexity of the product. You are developing new vaccines. You have a lot of time line, a lot of milestones and lot of activity that even most parties need to feel comfortable with and ways to also risk to plan into the contract so that the development control move and it just takes time.

[[Natalie Luchessi]:]

I am so sorry, just a follow up. So, what do you expect in margins to be once all these is said and done? Have you gone to that?

[Fuad El-Hibri:]

For competitive reasons, I cannot. I cannot comment on that.

[Operator:]

Thank you. There are no more questions in queue. I will now turn the call back over to management for closing remarks.

[Fuad El-Hibri:]

Thank you. Ladies and gentleman that concludes today’s call. Thank you for your participation. Please note that today's call has been recorded and replay will be available beginning later today through March 19. Alternatively, there is an available webcast of today's call on, an archived version of which will be available later today accessible through the Company’s website. Once again, that is www.emergentbiosolutions.com. Thank you again and we look forward to speaking to all of you in the future. Good bye.

[Operator:]

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a wonderful day. Copyright policy