Emergent BioSolutions Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with the three months ended March 31, 2014 unless otherwise noted. The company operates in Biodefense and Biosciences, with substantial reliance on U.S. government purchases and funding.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $63.6 million | $53.9 million | Up 18.1% |
| Product sales | $18.3 million | $35.8 million | Down 49% |
| Contract manufacturing revenue | $12.2 million | $2.7 million | Up $9.5 million |
| Contracts, grants and collaborations revenue | $33.1 million | $15.4 million | Up $17.7 million |
| Operating loss | $(28.3) million | $(25.5) million | Loss increased |
| Net loss | $(21.5) million | $(20.2) million | Loss increased |
| Diluted loss per share | $(0.57) | $(0.55) | — |
| Net cash used in operating activities | $(65.9) million | $(29.2) million | Cash use increased |
Revenue growth reflected higher contract manufacturing and government/collaboration funding, partly offset by the sharp decline in product sales. BioThrax generated no CDC product-sales revenue in Q1 2015. Research and development expense rose 28% to $38.7 million and selling, general and administrative expense rose 15% to $34.5 million. Cost of product sales and contract manufacturing was $18.7 million; the filing does not present a single consolidated gross-margin measure.
At March 31, 2015, cash and cash equivalents were $216.5 million, down from $280.5 million at December 31, 2014. Current assets were $405.8 million and current liabilities $80.3 million. Long-term indebtedness was $251.0 million, including $250 million of senior convertible notes; the company also reported a senior secured revolving facility with up to $100 million of capacity. Capital expenditures were $9.1 million. Inventory rose to $82.1 million from $65.7 million, while contingent consideration liabilities totaled $48.5 million.
Material changes and notable events
- Foreign particles were found during January quality inspections in a limited number of vials from two BioThrax lots. The lots were rejected and shipments to the CDC were suspended, causing the absence of Q1 BioThrax sales. The company announced that full BioThrax manufacturing operations resumed on April 22, 2015.
- FDA approved Anthrasil for inhalational anthrax treatment on March 25. The approval triggered a $7.0 million BARDA milestone, recorded in product-sales revenue; the product also received seven years of market exclusivity under orphan-drug designation.
- Higher Anthrasil development funding, including plasma-collection activity, and a $5.0 million MorphoSys milestone following initiation of a Phase I study contributed to growth in contracts, grants and collaborations revenue.
- On April 29, 2015, after the quarter-end, FDA approved IXINITY for Hemophilia B. The company then began treating its related in-process research and development asset as a definite-lived intangible asset.
- Operating cash use reflected the quarterly loss, timing of income-tax balances, payment of 2014 bonuses and a $16.5 million inventory increase, which the company attributed in part to minimal BioThrax shipments.
Outlook, risks and contingencies
The filing provides no specific numeric revenue or earnings guidance. Management expects funding needs to be met through cash, product sales, government and collaborative funding, and available credit, while noting that additional financing may be sought. The company reported having been profitable in each of the five years ended December 31, 2014, but emphasized that quarterly results fluctuate with product-delivery timing and development work.
Key risks include dependence on U.S. government appropriations and BioThrax procurement; manufacturing quality, lot-release and facility-approval risks; execution of development programs and regulatory approvals; and the ability to obtain external funding and integrate acquisitions. The filing reports $251 million of consolidated indebtedness and warns that cash flow may not always be sufficient to service debt. The Evolva acquisition carries contingent development and regulatory milestone obligations, plus potential sales royalties. Legal proceedings were reported as not applicable. Management concluded disclosure controls were effective at the reasonable-assurance level as of March 31, 2015.
Investor verification priorities
- Track BioThrax shipment resumption, acceptance and revenue recognition after the rejected lots, including any effect on CDC deliveries and inventory.
- Review the timing and sustainability of government funding and collaboration revenue, particularly Anthrasil funding and the CDC BioThrax contract, which is subject to funding availability.
- Assess the drivers of operating cash use and inventory growth, and reconcile cash-flow disclosures: the cash-flow statement reports operating cash use of $65.873 million, while the MD&A table reports $65.898 million.
- Monitor IXINITY commercialization following its April 29 approval, alongside development spending and regulatory milestones for other candidates.
- Evaluate debt-service capacity, revolver availability and the potential size and timing of contingent consideration payments.