Emergent BioSolutions Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparative periods are 2018. Unaudited consolidated results. Emergent is a life sciences company serving public health threat markets, including biodefense, infectious disease, traveler health, and opioid overdose. The U.S. government is its largest customer. The October 2018 acquisitions of Adapt and PaxVax materially affect year-over-year comparability.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $311.8 million | $173.6 million | $745.7 million | $511.7 million |
| Operating income | $70.7 million | $21.3 million | $36.4 million | $78.6 million |
| Net income | $43.2 million | $20.9 million | $7.6 million | $66.2 million |
| Diluted EPS | $0.83 | $0.41 | $0.15 | $1.29 |
| Operating margin | 22.7% | 12.3% | 4.9% | 15.4% |
Q3 revenue rose 80%, led by ACAM2000 deliveries and NARCAN sales from the Adapt acquisition. Nine-month revenue increased 46%, but operating income fell 54% and net income fell 89%. Higher R&D, SG&A, intangible amortization and interest expense—largely associated with the acquisitions and related borrowing—contributed to the year-to-date earnings decline. Q3 net income increased despite higher expenses, alongside substantially higher revenue.
- Revenue mix: Q3 product sales were $256.2 million, contract manufacturing $20.0 million, and contracts and grants $35.6 million. NARCAN contributed $75.0 million and ACAM2000 $112.1 million. For the nine months, NARCAN contributed $213.5 million and ACAM2000 $164.1 million.
- Cash flow: Nine-month operating cash flow was $65.9 million, versus $207.6 million in 2018. Investing used $60.8 million, including $50.8 million for property, plant and equipment and other purchases and a $10.0 million milestone payment. Financing provided $22.0 million. Cash and restricted cash increased $27.0 million to $139.4 million; unrestricted cash was $139.2 million.
- Liquidity and debt: Current assets were $700.0 million and current liabilities $275.3 million at September 30. Balance-sheet debt was $823.4 million, including $10.1 million current and $813.3 million non-current; the debt note reports $835.4 million before debt issuance costs and current classification. Management said available liquidity was sufficient for operations over the next 12 months.
- Margins and balance sheet: Q3 operating margin improved to 22.7% from 12.3%; nine-month operating margin decreased to 4.9% from 15.4%. Total assets were $2.334 billion, including $727.7 million of net intangible assets and $268.6 million of goodwill. Stockholders’ equity was $1.035 billion.
Material changes and business developments
- Product sales increased 92% in Q3 and 52% year to date. The acquired NARCAN business contributed $83.7 million of revenue and $4.9 million of operating income in Q3; the acquisitions together contributed $246.8 million of revenue and $9.3 million of operating income year to date.
- ACAM2000 revenue increased following the September award for continued supply to the Strategic National Stockpile. BioThrax sales declined as government deliveries were lower and procurement shifted toward AV7909. AV7909 deliveries began in September; BARDA exercised a $261 million option for doses to be delivered through June 2020.
- Contracts and grants revenue rose 96% in Q3 and 94% year to date, primarily reflecting AV7909 clinical-trial activity. Contract manufacturing revenue declined 10% in Q3 and 24% year to date.
- Operating expenses rose 58% in Q3 and 64% year to date. Nine-month interest expense increased to $29.3 million from $1.8 million, primarily due to acquisition-related borrowing; intangible amortization increased to $43.9 million from $11.7 million.
- Additional government awards announced in 2019 included a roughly $2 billion, 10-year ACAM2000 supply contract; a roughly $535 million, 10-year VIGIV contract; and a BAT supply letter contract with a maximum value of $490 million, with approximately $90 million of deliverables agreed to and remaining deliverables to be negotiated.
Outlook, risks and unusual items
- The filing provides no formal revenue or earnings guidance. Management expects to fund operations, capital spending and debt service from cash, product and manufacturing revenue, development funding and credit facilities. It cautions that quarterly results may vary; future revenue tied to government contracts depends on appropriations, options, delivery timing and development outcomes.
- Approximately $659.6 million of revenue was allocated to unsatisfied performance obligations at September 30; the company expected to recognize most within 24 months. The amount and timing may change with government funding and program progress.
- Key risks include reliance on government procurement and development funding; AV7909 regulatory authorization and licensure; manufacturing and supplier continuity; acquisition integration; and debt servicing, variable interest rates and credit-facility covenants. A one-percentage-point increase in the eurocurrency rate was estimated to increase annual interest expense by $4.7 million, after considering swaps.
- NARCAN faces patent challenges from Teva and Perrigo. Teva received FDA approval for a generic NARCAN product in April 2019 and could launch at risk while litigation continues. The patent review board instituted reviews of three NARCAN-related patents.
- Debt covenants were amended in June 2019; the company reported compliance as of the filing. The credit agreement limits restricted payments to $25 million until filing of the 2019 Form 10-K. The company had not repurchased shares under its $50 million repurchase authorization.
- Management concluded disclosure controls were effective, but its assessment excluded internal controls at Adapt and PaxVax, whose operations were included in the financial statements. The filing also reports a $4.2 million interest-rate-swap liability and $4.2 million of nine-month unrealized hedge losses in other comprehensive income.
Important facts for investors to verify
- Whether AV7909 deliveries, EUA and eventual FDA licensure proceed as expected, and how the transition affects BioThrax procurement and revenue.
- The timing, funding and delivery schedules for government contracts, including ACAM2000, VIGIV, BAT and the remaining AV7909 options.
- The commercial impact of Teva’s approved generic and the outcomes of the Teva and Perrigo patent litigation and patent reviews.
- Whether acquired businesses meet integration and performance expectations, and whether acquisition-related costs, amortization and debt service affect future earnings and cash flow.
- The filing reports contract liabilities of $81.6 million on the balance sheet but a $89.6 million ending balance in the note’s rollforward; reconcile this difference. Also verify the relationship between the stated $659.6 million of remaining performance obligations and the reported contract-liability balances.