Emergent BioSolutions Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone quarterly filing; selected fourth-quarter figures are noted below. Results reflect continuing operations after the August 1, 2016 spin-off of Aptevo Therapeutics, except where net income is identified as including discontinued operations.
Business context and financial performance
Emergent develops, manufactures and sells medical countermeasures for public health threats and emerging infectious diseases. Its marketed portfolio included BioThrax, antibody therapeutics and decontamination products, alongside contract manufacturing services. The U.S. government was its primary customer and a major source of development funding.
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $488.8 million | $489.3 million | Flat |
| Product sales | $296.3 million | $329.0 million | Down 10% |
| Contract manufacturing revenue | $49.1 million | $43.0 million | Up 14% |
| Contracts and grants revenue | $143.4 million | $117.4 million | Up 22% |
| Operating income | $105.5 million | $141.5 million | Down 25% |
| Continuing-operations net income | $62.5 million | $91.4 million | Down 32% |
| Net income, including discontinued operations | $51.8 million | $62.9 million | Down 18% |
| Diluted EPS, continuing operations | $1.35 | $2.02 | Down |
| Diluted EPS, including discontinued operations | $1.13 | $1.41 | Down |
Operating margin was approximately 21.6%, versus 28.9% in 2015; continuing-operations net margin was approximately 12.8%, versus 18.7%. The filing does not present a single consolidated gross-margin measure that captures the different revenue streams.
Fourth quarter: Revenue was $151.7 million, operating income $50.9 million and continuing-operations net income $32.3 million. In Q4 2015, the corresponding figures were $159.8 million, $65.1 million and $42.5 million.
Cash flow, liquidity and debt
- Cash and cash equivalents were $271.5 million at year-end, down from $308.3 million in the comparative balance-sheet data. Working capital was $404.4 million.
- Net cash provided by operating activities was $53.5 million; investing activities used $76.3 million, primarily for Bayview CIADM expansion and other capital investment; financing activities used $18.6 million, including the $45 million cash distribution to Aptevo.
- Capital expenditures were $76.3 million. Cash declined by $41.3 million during the year.
- The company had $250 million principal amount of 2.875% convertible senior notes due 2021; carrying value of long-term indebtedness was $248.1 million. No amounts were drawn on its $100 million revolving credit facility, which expires in 2018, subject to its terms.
- A separate $20 million payment to Aptevo under the spin-off arrangements was made in January 2017. The credit facility requires, among other conditions, at least $50 million of liquidity; the company reported compliance with its covenants at year-end.
Material changes and unusual items
- BioThrax revenue declined 19% to $237.0 million, primarily reflecting the timing of CDC deliveries, including reduced fourth-quarter deliveries while the follow-on contract was being finalized. Other product sales rose 69% to $59.2 million, while development funding and contract manufacturing grew.
- Cost of product sales and contract manufacturing increased 22% to $131.3 million, including higher BioThrax cost per dose associated with lower production yield. SG&A rose 19% to $143.7 million, partly reflecting Lansing restructuring, strategic growth professional services and IT investment.
- FY 2016 included approximately $9.7 million of Lansing restructuring costs and a further $2.0 million charge for employee retention payments. The effective tax rate rose to approximately 37% from 33%, partly due to spin-off-related tax effects and a valuation allowance on Aptevo deferred tax assets.
- Aptevo’s spin-off transferred its former biosciences business out of Emergent; prior-period results were recast as discontinued operations. Emergent contributed $65 million in total cash under the separation arrangements, with the final $20 million paid in January 2017.
- Building 55 received FDA approval for BioThrax manufacturing in August 2016. The facility has stated potential capacity of 20–25 million doses annually on one manufacturing train.
Outlook, commentary and principal risks
- In December 2016, Emergent signed a CDC follow-on contract for up to approximately 29.4 million BioThrax doses through September 2021, with potential value of approximately $911 million if all options are exercised. A separate BARDA notice of intent covered approximately $100 million of BioThrax procurement; management intended to negotiate a contract in the first half of 2017. These amounts are contingent on awards, options, funding and delivery terms.
- A September 2016 BARDA contract for NuThrax has a five-year base period valued at approximately $200 million and potential total value of up to approximately $1.6 billion, including options. Management anticipated possible FDA emergency-use authorization as early as 2018 and initial SNS deliveries in 2019; neither timing nor option exercise was assured.
- Management expected to continue relying substantially on BioThrax sales to the U.S. government and government-funded development programs. Revenue and profitability may fluctuate with procurement timing, appropriations, grant activity and contract work. The filing provides no general numerical revenue or earnings guidance.
- Key risks include dependence on U.S. government demand and funding; NuThrax regulatory and development uncertainty; the ability to win procurement contracts and use Building 55 capacity; manufacturing, yield, lot-release and compliance risks; reliance on certain single-source suppliers; and debt-service and credit-facility restrictions.
- A purported securities class action alleges misleading statements concerning BioThrax demand and expected renewal of a prior government contract. The company filed a motion to dismiss and said it intended to defend the claims; potential loss could not be estimated.
- The filing also identifies tax-free treatment of the Aptevo spin-off, product liability, regulatory inspections, competition and acquisition integration as material risks. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether CDC procurement options and funding support the expected BioThrax delivery schedule, and whether BARDA awarded the separate anticipated procurement contract.
- Actual BioThrax production yield, lot releases and utilization of Building 55, and whether cost per dose improves.
- NuThrax development, FDA EUA pre-approval and licensure milestones, and any exercise of BARDA procurement options.
- Cash generation and working-capital movements, including collection of government receivables, capital spending and the impact of the Aptevo separation.
- Convertible-note dilution and repayment exposure, compliance with credit-facility covenants, and developments in the shareholder litigation and spin-off tax arrangements.