Emergent BioSolutions Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and period highlights
Emergent operates in Biodefense and Biosciences, selling vaccines, therapeutics and related products and conducting contract manufacturing and government-funded development. The U.S. government is a major customer, particularly for BioThrax. On February 21, 2014, Emergent acquired Cangene for approximately $221.8 million, expanding its product portfolio and manufacturing capabilities. The results include Cangene only from the acquisition date.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $53.9 | $43.1 |
| Operating loss | $(25.5) | $(13.4) |
| Net loss attributable to Emergent | $(20.2) | $(8.1) |
| Loss per diluted share | $(0.55) | $(0.22) |
| Operating cash flow | Approximately $(29.2) | Approximately $(4.6) |
- Revenue rose 25%. Product sales increased 18% to $35.8 million; contracts and grants increased 21% to $15.4 million; contract manufacturing contributed $2.7 million, primarily from Cangene.
- BioThrax sales were $24.5 million, down from $30.4 million, mainly because fewer doses were delivered to the Strategic National Stockpile during the quarter. Newly acquired products contributed sales, including RSDL ($7.5 million), WinRho ($1.7 million) and HepaGam B ($1.3 million).
- Cost of product sales and contract manufacturing increased to $19.0 million from $5.7 million. Operating expenses also reflected higher selling, general and administrative costs ($30.1 million versus $20.0 million); research and development expense was broadly flat at $30.3 million.
- Revenue growth did not prevent a larger operating and net loss. The company reported an approximate operating loss margin of 47% of revenue, compared with 31% in Q1 2013.
- At March 31, cash and cash equivalents were $160.2 million, accounts receivable $62.9 million, and current assets $327.2 million against current liabilities of $72.3 million. The current ratio was approximately 4.5.
- Cash decreased $19.1 million during the quarter. Investing outflows were $182.8 million, including the Cangene acquisition net of acquired cash ($178.2 million) and capital expenditures ($4.6 million). Financing inflows were $192.9 million.
- Long-term indebtedness was $251.0 million. This primarily reflects $250.0 million of 2.875% convertible senior notes due 2021. The $62.0 million revolving-credit borrowing was repaid; the $100 million revolving facility was undrawn at quarter-end.
Material changes versus the prior period
- The Cangene acquisition added products, contract manufacturing revenue, inventory and manufacturing assets, as well as $40.4 million of acquired intangible assets, $8.5 million of in-process research and development and $31.8 million of goodwill. The preliminary purchase-price allocation remained subject to revision.
- Acquired Cangene inventory included a $6.2 million fair-value step-up expected to increase product and contract-manufacturing costs over approximately five years.
- Interest expense increased following the convertible-note issuance, and Emergent expensed $1.8 million of costs related to the terminated term-loan facility.
- BioThrax sales declined while total product sales increased, reflecting sales from RSDL and Cangene products. Cangene contributed $10.6 million of revenue and a $2.9 million net loss from acquisition through March 31.
Outlook, management commentary and risks
- No specific quarterly or annual revenue or earnings guidance is provided in the supplied filing text. Management expects continued variability in quarterly results, particularly from the timing of BioThrax deliveries and government contract and grant reimbursements.
- Management expects to fund operating expenses, capital expenditures and debt service from existing cash, product sales, development funding and available credit. It may seek additional financing; the filing notes an effective shelf registration allowing up to $180 million of securities issuance.
- Key risks include dependence on U.S. government procurement and appropriations for BioThrax and government-funded programs; contract delivery timing; acquisition integration and realization of expected benefits; product development and regulatory approval; manufacturing capacity, yields and quality; and competition and product-market acceptance.
- The credit agreement includes financial covenants, including a $50 million minimum liquidity requirement and leverage and debt-service coverage limits. Substantially all company assets and specified subsidiary assets secure the facility.
- Other notable items include $3.7 million of Cangene transaction costs recorded in the quarter, a $412,000 increase in contingent purchase consideration expense, liquidation of the Oxford tuberculosis consortium with a $453,000 adjustment recorded in SG&A, and a $436,570 payment to terminate the Rockville headquarters lease early.
- Management concluded disclosure controls were effective at the reasonable-assurance level. Its assessment excluded internal controls at the acquired Cangene and HPPD operations. Legal proceedings were reported as not applicable.
Important facts for investors to verify
- Future U.S. government funding, procurement levels and delivery schedules under the BioThrax contract, including the remaining committed doses and contract funding.
- Post-acquisition revenue, profitability, cash generation and integration progress for Cangene and HPPD, and any revisions to Cangene’s preliminary purchase-price allocation.
- The impact of acquired inventory step-up, amortization, acquisition-related costs and contingent purchase consideration on future margins and earnings.
- Liquidity and compliance with credit-facility covenants as operating cash use, debt service and business investment continue.
- The filing reports operating cash used as $29.245 million in the cash-flow statement and approximately $29.240 million in MD&A; confirm the precise reported figure against the filed statements.