Emergent BioSolutions Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
Emergent develops and sells public-health-threat countermeasures and commercial products, and provides contract development and manufacturing (CDMO) services. Its two reportable segments are Products and Services. U.S. government procurement, including anthrax vaccines and ACAM2000, is an important revenue source. The company acquired worldwide rights to brincidofovir, including TEMBEXA, from Chimerix during Q3.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $240.0 | $329.0 | $790.2 | $1,069.5 |
| Operating income (loss) | $(42.0) | $(34.7) | $(107.6) | $75.2 |
| Net income (loss) | $(75.7) | $(32.7) | $(135.8) | $41.6 |
| Diluted EPS | $(1.52) | $(0.61) | $(2.71) | $0.77 |
| Operating cash flow | Not separately presented for the quarter | $(126.9) | $(7.9) |
- Q3 revenue fell 27%; nine-month revenue fell 26%. Q3 product sales declined 31% to $186.2, while nine-month product sales rose 12% to $660.5, mainly reflecting delivery timing for anthrax vaccines.
- CDMO revenue was $36.4 in Q3, down 13%, and $95.4 for nine months, down 77%. Lower Janssen and AstraZeneca activity and the end of the BARDA COVID-19 partnership were key factors.
- Product-segment adjusted gross margin was $101.3 in Q3 versus $168.2 a year earlier, and $406.1 for nine months versus $355.2. Services adjusted gross margin was a loss of $26.7 in Q3 and $122.1 for nine months; the prior-year nine-month figure was positive $108.7 and included BARDA lease revenue.
- Cash and cash equivalents were $240.9 at September 30, down from $576.1 at year-end 2021. Working capital was $850.1. Operating cash use was $126.9; investing cash use was $335.9, including the TEMBEXA acquisition; financing provided $128.1, largely from revolver borrowings.
- Debt was $1,062.3 gross, including $238.0 outstanding on the revolver and $371.3 on the term loan. The $450.0 of 3.875% senior notes mature in 2028. Revolver capacity remaining was $360.7.
Changes, outlook and key risks
- Going concern: Management concluded that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The $238.0 revolver balance and $371.3 term loan mature in October 2023. Refinancing is planned and management was working with lenders, but it was not considered probable until completed.
- Janssen dispute: The parties issued competing termination and breach notices regarding the COVID-19 vaccine manufacturing agreement. Emergent reported $131.0 of related raw-material inventory for which it expects reimbursement, plus approximately $13.6 in other assets tied to termination penalties and inventory items. No related contingent liability was recorded for Janssen’s allegations; the parties dispute amounts due.
- Manufacturing and compliance: The FDA issued an August 2022 warning letter concerning the Camden facility, citing equipment cleaning/maintenance and aseptic-processing deficiencies. The company retained a third party for review and oversight. Manufacturing compliance issues could affect CDMO activity and product supply.
- Acquisition: Emergent paid $238.0 at closing for TEMBEXA rights and may owe up to $124.0 in U.S. government procurement-option milestones, up to $12.5 in regulatory milestones, and certain royalties.
- Unusual items: A $19.2 tax valuation allowance was recorded because U.S. deferred tax assets were judged more likely than not not to be realized. Other expense included a tax-indemnity receivable write-off and foreign-currency losses. Q3 2021 included an $86.0 reversal of BARDA lease revenue.
- Management outlook: No specific revenue or earnings guidance is provided in the supplied filing text. The company disclosed approximately $453.9 of remaining performance obligations, with a majority expected to be recognized within 24 months; timing depends on customer needs, manufacturing availability, and government funding and delivery schedules.
- Other exposures: Shareholder securities and derivative litigation and government inquiries related to manufacturing capabilities remained pending; possible losses were not reasonably estimable. NARCAN sales face generic competition. The company cited government procurement and funding uncertainty, supply-chain and manufacturing risks, and refinancing and interest-rate risks.
Most important facts for investors to verify
- Whether the 2023 secured credit facilities were refinanced or amended, on what terms, and whether the going-concern uncertainty was resolved.
- Developments in the Janssen dispute, including recoverability of the $131.0 inventory and other related assets.
- Progress on FDA warning-letter remediation and any resulting effects on Camden operations, customer activity, or product supply.
- Actual TEMBEXA procurement-option exercises, milestone obligations, and commercial revenue contribution.
- Product and CDMO revenue trends, especially generic pressure on NARCAN and timing of U.S. government anthrax-vaccine deliveries.
- Updates to shareholder litigation and government investigations, for which the filing states potential losses could not be reasonably estimated.