Emergent Biosolutions Inc. CEO Robert Kramer assured investors that he takes “full responsibility” for woes that beset the firm after the FDA’s Form 483 found serious manufacturing problems at the Baltimore, Md.-based Bayview plant. “You have my commitment that we're going to do everything we can to resolve these issues quickly, and as safely as possible,” he said during an April 29 conference call on first-quarter financial results.
The trouble started when Emergent, while checking quality of the COVID-19 vaccine made for Johnson & Johnson (J&J), identified a single batch of a drug substance that did not meet standards. The batch had not advanced to the filling and finishing stages and was then discarded. J&J, of New Brunswick, N.J., said the loss of the 15 million batches was a result of human error. The company had committed 100 million doses to the U.S. government for the first half of 2021.
Since the vaccine is given as a single dose, the batch was the equivalent of 30 million doses of the mRNA vaccines from Moderna Inc. or Pfizer Inc.-Biontech SE. Production at the facility was stopped April 19 while the FDA looked into the matter. Things got worse when details came to light.
The FDA listed nine observations related to cross-contamination issues, lack of employee training and poorly designed and maintained facilities surfaced. Kramer said officials at Gaithersburg, Md.-based Emergent are hustling to “do everything we can to support [U.S. regulators’] review of that [response to the Form 483] and resume production as quickly as the FDA feels comfortable that we can. That's our number-one goal in furtherance of stabilizing and strengthening the supply chain for this much-needed vaccine.” The company expects to submit a response “within days,” he said, and is “not expecting” a necessary reinspection before the Bayview site wins the go-ahead.
Regarding the CDMO’s prospects overall, Kramer said that “we still see strength in the core business. The network itself includes nine manufacturing sites” that support five separate platform technologies, “so the bones of that business are very strong,” he said, citing “very high in demand, in terms of the diversity of the customer base that we're going after.” Guidance from Emergent for fiscal year 2021, however, was reduced by 10%.
J.P. Morgan analyst Jessica Fye maintained caution on Emergent, seeing the stock “under pressure until concerns regarding COVID-19 vaccine manufacturing get resolved, and we start seeing more reassuring data points around the longer-term health of the CDMO,” she wrote in an April 30 report. “Along these lines, we are closely monitoring the J&J collaboration for any further extensions (or expansions) which could support the top-line longer term.” From a broad perspective, “without better visibility into the outlook for the CDMO business post-2022,” she held to her neutral rating.
Another potential risk for Emergent is the possibility of a generic entry for Narcan (naloxone), approved in November 2015 for opioid overdose. In the summer of 2018, Emergent brought aboard the product, developed by Santa Monica, Calif.-based Lightlake Therapeutics Inc., via the buyout of Adapt Pharma Ltd., of Dublin. The potential $735 million deal included $575 million in cash and $60 million in Emergent common stock up front, and up to $100 million in potential sales-based milestones through 2022. Another threat to the product: London-based Hikma Pharmaceuticals plc’s naloxone product, Kloxxado, approved April 30 by the FDA. The nasal spray contains twice as much active ingredient as Narcan.
But the most concerning situation for Wall Street in the near term has to do with fallout from the Bayview inspection. Cowen analyst Boris Peaker noted in his report that Emergent’s backlog metric, which includes estimated revenue remaining on signed contracts, has dropped somewhat. Company officials said the production pause at Bayview “will result in CDMO revenue being pushed out into the future but that the entire backlog should be recognized,” Peaker wrote. “They declined to give details whether any contracts in the backlog could have their value affected by the delayed timing.” He cited “risk to existing contracts, though we do believe most of the revenue will eventually be recognized.”
During the conference call, Guggenheim analyst Dana Flanders asked Kramer to “characterize your working relationship and dialogue right now with your U.S. government counterparts. I know the anthrax vaccine needs a new contract soon, and you've been in the news a lot lately.” Kramer pointed out that Emergent has “been at this for 22 years,” keeping “open, transparent relationships,” and those with the government “remain intact and strong.”
Chief Financial Officer Richard Lindahl addressed contract renewals specifically. “We are assuming that the option [for smallpox vaccine ACAM-2000] will be exercised in time for us to begin making deliveries in the second quarter of this year,” he said. Regarding anthrax vaccine AV-7909, “the next option exercise will occur in time for deliveries to begin in the third quarter of this year,” he predicted.
Raxibacumab, the fully human monoclonal antibody approved by the FDA for treatment and prophylaxis of inhalational anthrax, also came up during the call. Emergent in July 2017 acquired the product from Glaxosmithkline plc, of London, and assumed responsibility for the U.S. stockpile contract. “Basically, when we came into the year, we assumed that the [request for proposals] and bidding process would occur much earlier in the year than it looks like it's going to happen,” Lindahl said, adding that revenues would likely be recorded in 2022.