Emergent BioSolutions Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts are in U.S. dollars unless noted. The financial statements are unaudited.
Business context
Emergent operates in Biodefense and Biosciences. BioThrax sales to the U.S. government remained the principal business driver. In August 2013, the company acquired substantially all assets of Bracco’s Healthcare Protective Products Division, adding RSDL, a decontamination product. Biosciences remained a loss-making development business.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $89.1m | $66.6m | $214.6m | $187.3m |
| Product sales | $76.3m | $54.0m | $172.3m | $141.5m |
| Contracts and grants | $12.8m | $12.6m | $42.4m | $45.8m |
| Income from operations | $18.1m | $9.8m | $19.5m | $5.9m |
| Net income attributable to Emergent | $13.5m | $6.6m | $15.9m | $7.4m |
| Diluted earnings per share | $0.36 | $0.18 | $0.44 | $0.20 |
Operating margin was approximately 20.4% in Q3 2013 versus 14.7% a year earlier, and 9.1% for the first nine months versus 3.2%. These are calculated from reported revenue and operating income. Cost of product sales rose to $20.1m in Q3 and $42.7m year to date; RSDL contributed $3.8m of costs in the nine-month period. The filing does not provide a separate reported gross margin.
Cash flow and liquidity: Cash and equivalents were $172.6m at September 30, 2013, up from $141.7m at December 31, 2012. Current assets were $234.0m and current liabilities $56.6m. Nine-month operating cash flow was $88.3m, investing cash flow was negative $58.5m, and financing cash flow was positive $1.1m. Operating cash flow benefited substantially from a $66.0m decrease in accounts receivable, primarily collection timing for amounts billed to the CDC.
Debt: Principal debt outstanding was $59.4m, including $4.5m current and $55.0m long-term carrying amounts on the balance sheet. The company identified balloon payments of $3.5m due in November 2014 and $15.3m in December 2014.
Material changes and unusual items
- Revenue increased 34% in Q3 and 15% year to date. Product sales rose with BioThrax delivery timing and the addition of $7.0m in RSDL sales after the acquisition. The filing attributes BioThrax dose-delivery increases of 26% in Q3 and 14% year to date to timing.
- Year-to-date contract and grant revenue declined 7%, primarily reflecting lower BioThrax PEP and PreviThrax funding, the end of certain collaboration revenue, and the absence of a 2012 technology sale; higher CIADM revenue partly offset the decline.
- The HPPD acquisition involved $24.1m cash paid and $16.2m initial fair value of contingent consideration; the September 30 liability was $16.6m. Potential payments are based on 5%–10% of RSDL net sales through July 2028. The purchase-price allocation was preliminary, and approximately $1.8m for remaining assets was expected to be paid in Q4 2013.
- Year-to-date SG&A included $2.8m of UK restructuring costs. The restructuring followed unsuccessful Phase IIb tuberculosis vaccine results; the company ceased further development and expected OETC funding to be minimal while it was liquidated.
- 2012 results included a $9.6m impairment of the SBI-087 in-process R&D asset and $1.7m of business-interruption insurance recovery; neither item recurred in 2013.
- Management disclosed correction of an immaterial prior-period cash-flow classification error of approximately $3.0m for the nine months ended September 30, 2012. It had no effect on total cash flows, earnings, or balance sheets.
Outlook, commentary, and risks
The filing gives no specific numerical financial guidance. Management expected revenue and profitability to continue varying by quarter, largely with BioThrax delivery timing and work performed under contracts and grants. It expected to fund operations, capital expenditures, and debt service with existing cash, product sales, government development funding, and potentially other financing. The company said future capital needs depend on sales, acquisitions, facility investment, development spending, and government funding.
- The CDC contract covers up to 44.75m BioThrax doses through September 2016 and could pay up to $1.25bn, subject to government funding. Approximately $704m had been committed, and about 15.0m doses had been delivered through September 30, 2013. The company remains materially dependent on U.S. government demand and appropriations.
- Manufacturing yield, lot release, facility validation and approval, and reliance on a single BioThrax manufacturing site and certain sole-source suppliers could disrupt supply, revenues, or development.
- Building 55 still required regulatory approval for large-scale BioThrax manufacturing. Execution of government-funded development contracts, including PreviThrax and CIADM, also remained a risk.
- Management identified acquisition integration, product-development and regulatory uncertainty, competition, and the need for external development funding as risks. Financing, if needed, could involve dilution or restrictive debt terms.
- Disclosure controls were assessed as effective at a reasonable assurance level. The assessment excluded internal controls of the acquired HPPD operations.
Important facts for investors to verify
- CDC funding, procurement decisions, BioThrax delivery schedules, and remaining contract commitments.
- BioThrax production yields and regulatory progress for Building 55; RSDL sales, margins, and contingent-payment assumptions.
- Cash generation quality, particularly the contribution from receivable collections, and the ability to meet 2014 debt maturities.
- Progress and spending in funded development programs, including CIADM and PreviThrax, and any further changes to the Biosciences pipeline.
- Final HPPD purchase-price allocation and completion of the remaining asset acquisition.