Emergent BioSolutions Inc. — Q3 2017 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2017. Emergent develops and sells medical countermeasures and provides contract manufacturing services; the U.S. government is its primary customer and a major source of development funding. The company reported one operating segment. Prior-year results reflect Aptevo as discontinued operations following its August 2016 spin-off.
Financial results
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $149.4 | $142.9 | $367.1 | $337.1 |
| Income from operations | $47.8 | $35.5 | $71.2 | $54.6 |
| Operating margin | 32.0% | 24.8% | 19.4% | 16.2% |
| Continuing-operations net income | $33.6 | $20.4 | $48.7 | $30.2 |
| Net income | $33.6 | $21.3 | $48.7 | $14.4 |
| Diluted earnings per share | $0.68 | $0.45 | $1.03 | $0.36 |
Q3 revenue increased 5%; nine-month revenue increased 9%. Product sales rose 18% in Q3 and 24% year to date, while contract manufacturing revenue rose 29% and 62%, respectively. Contracts and grants revenue declined 48% in Q3 and 43% year to date. BioThrax sales declined 11% in Q3 and 7% year to date; growth in other product sales more than offset the decline.
Cost of product sales and contract manufacturing was $44.5 million in Q3 and $125.4 million for the nine months, up 12% and 35%, respectively. R&D expense fell 17% in Q3 and 15% year to date, to $22.7 million and $68.9 million. SG&A fell 15% in Q3 and 6% year to date, primarily reflecting prior-year Lansing restructuring costs. The filing does not present a consolidated gross margin measure.
Cash, liquidity, and debt
- Cash and cash equivalents were $341.0 million at September 30, 2017, versus $271.5 million at December 31, 2016; an additional $1.0 million was restricted cash.
- Current assets were $556.0 million and current liabilities $75.4 million. The balance sheet reported total liabilities of $360.5 million and total assets of $1.024 billion.
- Operating cash flow was $129.2 million for the nine months, compared with $67.3 million in 2016. Investing cash outflow was $42.4 million, mainly for infrastructure and equipment; financing cash outflow was $17.3 million. Cash increased $69.5 million.
- Long-term indebtedness was $249.0 million, principally the $250 million 2.875% convertible notes due 2021. The company repaid a $20 million Aptevo note during the period.
- A new five-year senior secured credit facility provides up to $200 million, with a conditional $100 million accordion; nothing was drawn at quarter-end. It includes financial covenants and liens on substantially all company assets.
Material changes, outlook, and risks
- Revenue and margins: Product and contract manufacturing growth was partly offset by lower government development funding as contracts concluded or activity slowed. Nine-month R&D was no longer fully funded: net R&D expense after contracts and grants was $14.4 million, versus a $14.7 million net contribution in 2016.
- Contract accounting: Changes linking BARDA’s BioThrax and NuThrax arrangements resulted in deferred revenue, including $5.6 million of BioThrax revenue deferred in Q3 and $6.3 million for the nine months. The company expects to adopt Topic 606 in Q1 2018 using the modified retrospective method and said its analysis indicated revenue recognition changes for multiple-deliverable contracts.
- Acquisitions after quarter-end: Emergent acquired raxibacumab on October 2 for $76 million upfront, with up to $20 million in milestones, and acquired the ACAM2000 business on October 6 for $117.5 million, with up to $7.5 million additional. The company said the combined cash outflow was $193.5 million. Each acquisition brought government supply contracts; the ACAM2000 contract is due for renewal or extension in March 2018.
- Other awards and development: After quarter-end, the company reported a U.S. Department of State Trobigard contract worth up to approximately $25 million. During 2017 it also reported awards for RSDL supply (up to approximately $171 million), cyanide antidote development (approximately $63 million), and a nerve-agent auto-injector program (up to approximately $23 million). Contract values are conditional on contract terms and, in some cases, options.
- Outlook: The filing gives no specific consolidated revenue or earnings guidance. Management expects to fund operations, capital spending and debt service from cash, product sales, government contracts and grants, contract manufacturing, and available credit. Future capital needs depend on sales, acquisitions, development spending, government funding and other factors.
- Key risks: Revenue remains substantially exposed to U.S. government demand, appropriations, contract options and BioThrax delivery timing. NuThrax EUA pre-approval and FDA licensure are uncertain. The company also identified manufacturing, regulatory inspection, supplier, acquisition integration, and contract-renewal risks. It must obtain FDA approval of the ACAM2000 manufacturing-transfer supplement before making remaining deliveries under that contract; raxibacumab manufacturing transfer also requires FDA approval.
- Litigation and controls: A securities class action alleging misleading statements about BioThrax demand and contract renewal was in discovery after the court denied the company’s motion to dismiss; potential loss could not be estimated. Management concluded disclosure controls were effective as of September 30, 2017 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- BioThrax delivery schedules, government appropriations, and the terms and funding of procurement contracts; the filing says approximately $100 million of revenue had been recognized on about 3.4 million doses under the CDC contract through September 30.
- FDA and manufacturing milestones for ACAM2000 and raxibacumab, including delivery eligibility, supply arrangements, and the upcoming ACAM2000 contract renewal or extension.
- The impact and timing of Topic 606 adoption on deferred revenue and U.S. government multiple-deliverable contracts.
- Post-quarter acquisition cash effects and any additional milestone payments; the September 30 cash balance predates the $193.5 million combined acquisition outflow.
- Progress and potential exposure in the securities class action; the filing provides no clear estimate of possible loss.
- Cash-flow figures: the cash-flow statement reports operating cash provided of $129.2 million, while MD&A reports $129.1 million; confirm the stated presentation and reconciliation.