Emergent BioSolutions Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports unaudited fourth-quarter results. This is an annual report, not a standalone quarterly filing. Emergent operated two segments: Biodefense and Biosciences.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenue | $522.8 million | $450.1 million | +16% |
| Operating income | $96.0 million | $58.1 million | +65% |
| Operating margin | 18.4% | 12.9% | +5.5 percentage points |
| Net income | $62.9 million | $36.7 million | +71% |
| Net margin | 12.0% | 8.2% | +3.8 percentage points |
| Diluted EPS | $1.41 | $0.88 | +60% |
| Operating cash flow | $44.5 million | $112.3 million | Down $67.9 million |
| Capital expenditures | $44.8 million | $30.7 million | Up $14.1 million |
| Cash and cash equivalents | $312.8 million | $280.5 million | Up $32.3 million |
| Working capital | $439.0 million | $339.2 million | Up $99.8 million |
| Long-term indebtedness | $253.0 million | $251.0 million | Up $2.0 million |
Revenue comprised $356.9 million of product sales, $43.0 million of contract manufacturing and $122.9 million of contracts, grants and collaborations. The operating cash-flow decrease chiefly reflected a $64.4 million increase in accounts receivable, largely due to timing of collections, and higher inventory. Operating cash flow less capital expenditures was approximately negative $0.4 million, before acquisitions and other investing activity.
Biodefense generated $450.1 million in external revenue and $125.6 million in segment net income. Biosciences generated $72.7 million in external revenue and recorded a $55.6 million segment net loss. BioThrax revenue was $293.9 million, up 20%, primarily reflecting delivery timing under the CDC contract. Contract-manufacturing revenue rose 39%, mainly reflecting a full year of acquired Cangene operations and Ebola-vaccine services. Biosciences product sales declined 7%, primarily due to lower international WinRho sales.
Fourth quarter: Revenue was $168.1 million, operating income $49.9 million, net income $33.3 million and diluted EPS $0.71. In Q4 2014, these were $148.0 million, $44.6 million, $30.1 million and $0.66, respectively.
Liquidity, debt and financial position
- Current assets were $538.6 million and current liabilities $99.6 million, implying a current ratio of approximately 5.4x.
- Total assets were $1.044 billion; stockholders’ equity was $660.0 million.
- Debt included $250 million of 2.875% convertible senior notes due 2021 and $3 million of other long-term indebtedness. The $100 million revolving credit facility was undrawn at year-end.
- The credit facility requires, among other terms, minimum liquidity of $50 million and specified leverage and debt-service coverage ratios; the company reported compliance at year-end.
Material changes, outlook and unusual items
- Revenue growth and higher operating profit reflected increased BioThrax deliveries, acquired contract-manufacturing activity and increased government development funding. SG&A rose 21%, including post-acquisition costs, IXINITY launch costs, spin-off preparation and a $3.5 million reserve for a potentially uncollectible receivable.
- Emergent planned a tax-free spin-off of Biosciences into Aptevo Therapeutics, targeted for mid-2016, subject to approvals and other conditions. Emergent expected to contribute approximately $60 million in cash. Management anticipated greater strategic focus and improved operating margins after separation; these benefits were not assured.
- Management announced a 2016–2020 growth plan focused on public-health-threat countermeasures, platform-based development, acquisitions and net-income growth. The filing provides no numerical 2016 revenue or earnings guidance.
- In December 2015, Emergent and MorphoSys changed MOR209/ES414 dosing and planned to resume recruitment under an amended protocol around mid-2016. The restructuring reduced future milestone payments to up to $74 million and changed development-cost sharing, increasing Emergent’s share to 75% in 2016.
- A potential toxicity issue for the EV-035/GC-072 program led to a $9.8 million non-cash impairment charge and reduced the asset’s carrying value to $0.7 million. The company also recorded a $3.5 million allowance for doubtful accounts in Biosciences.
- The BioThrax CDC contract covered up to 44.75 million doses through September 2016, with a maximum value of approximately $1.25 billion subject to funding. By year-end, approximately $1.1 billion had been committed and about $1.0 billion recognized on deliveries. Building 55 scale-up licensure remained pending; the company anticipated an FDA supplement submission in mid-2016 and licensure by year-end 2016.
- HHS and its agencies accounted for 81% of 2015 revenue; BioThrax sales and government development funding remain exposed to appropriations, contract timing and procurement decisions. Manufacturing, regulatory, clinical-development, single-source-supplier and spin-off execution risks are also material.
Investor verification priorities
- Track CDC appropriations, BioThrax deliveries and contract status as the existing procurement period ends in September 2016.
- Verify the timing, final terms, tax treatment, required approvals and actual cash contribution for the proposed Aptevo spin-off.
- Monitor collections of the elevated year-end receivables, particularly amounts due from HHS, and assess any further credit-loss exposure.
- Assess Building 55 FDA approval progress, manufacturing capacity and the company’s dependence on Building 12 for BioThrax supply.
- Follow MOR209/ES414’s amended trial and cost-sharing terms, and assess further safety or impairment developments for GC-072/EV-035.
- Review debt covenants, liquidity and convertible-note dilution exposure; the notes’ conversion price was approximately $32.38 per share.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also reported effective disclosure controls and financial-reporting controls as of December 31, 2015.