Emergent BioSolutions Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. Emergent operates Biodefense, principally selling BioThrax anthrax vaccine to the U.S. government, and Biosciences, focused on development programs. The filing was signed May 2, 2013.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $43.1 million | $50.3 million; down 14% |
| Product sales | $30.4 million | $34.4 million; down 12% |
| Contracts and grants | $12.7 million | $16.0 million; down 20% |
| Gross profit on product sales | $24.7 million; 81.2% product gross margin | $26.8 million; 78.1% product gross margin |
| Operating loss | $13.4 million; operating margin -31.0% | $12.5 million; operating margin -24.9% |
| Net loss attributable to Emergent | $8.1 million; $0.22 per diluted share | $6.8 million; $0.19 per diluted share |
| Operating cash flow | $(4.6) million per cash flow statement | $13.8 million |
| Cash and cash equivalents | $130.2 million at March 31 | $141.7 million at December 31, 2012 |
| Total debt | $61.7 million principal outstanding | Cash exceeded debt by approximately $68.6 million |
At March 31, current assets were $237.1 million and current liabilities $43.5 million (current ratio approximately 5.4). Total assets were $538.4 million and stockholders’ equity $435.8 million. Capital expenditures were $7.7 million; investing cash outflow was $7.7 million. Cash declined $11.4 million during the quarter.
Material changes and management commentary
- BioThrax sales fell mainly because 14% fewer doses were delivered, largely due to timing of deliveries to the Strategic National Stockpile (SNS). Cost of product sales declined 24%, reflecting lower delivery volume and a testing-specification change that enabled sale of certain doses previously expensed.
- Contracts and grants revenue decreased following termination of Abbott and Pfizer collaborations in 2012 and lower activity on certain BARDA and NIAID programs. Q1 2013 contracts and grants revenue came from NIAID and BARDA.
- Research and development expense rose 17% to $30.7 million, primarily from increased Biosciences program and contract-service spending. SG&A increased 3% to $20.0 million, including $2.0 million of UK restructuring charges. No 2013 impairment charge was recorded; Q1 2012 included a $9.6 million SBI-087 impairment.
- In February 2013, Emergent reported that its MVA85A tuberculosis vaccine trial did not show statistically significant protection in infants and said it would cease further development. Management expected future tuberculosis-program spending to decline significantly.
- Biodefense reported $42.2 million revenue and $4.6 million net income; Biosciences reported $0.9 million revenue and an $11.4 million net loss. The company attributed quarterly variability primarily to BioThrax delivery timing and development-contract activity.
Liquidity, outlook, risks and unusual items
Management expects to fund operating needs, capital spending and debt service through existing cash, BioThrax sales, government development funding and other financing as needed. It reported no formal earnings guidance. The CDC contract covers up to 44.75 million BioThrax doses through September 2016, with a potential value of up to $1.25 billion subject to government funding. Approximately $477 million had been committed and about 10.0 million doses, representing approximately $265 million, had been delivered and recognized through March 31, 2013.
- Key risks include dependence on U.S. government procurement and annual appropriations, possible sequestration or funding delays, contract and delivery timing, and reliance on a single Lansing facility for approved BioThrax manufacturing. Manufacturing, regulatory approval, clinical-development and third-party supply risks also remain material.
- Debt included $17.8 million on a Lansing term loan, $4.1 million on a Gaithersburg mortgage, and $39.8 million in Baltimore construction and equipment loans. The filing highlights balloon payments of $3.5 million due November 2014 and $15.3 million due December 2014.
- The company adopted a UK restructuring plan expected to cost approximately $2.8 million, of which $2.0 million was incurred in Q1. It expected completion in 2013.
- Subsequent to quarter-end, Emergent agreed to acquire Bracco Diagnostics’ Healthcare Protective Products Division for $26.0 million cash plus contingent sales- and development-milestone payments; closing was expected in Q3 2013.
- In March, Emergent terminated a planned headquarters-building purchase. In April, it amended its Rockville lease, reducing remaining payments and providing a one-time termination right effective January 31, 2014.
- Management concluded disclosure controls were effective; no material change in internal control was reported. Legal proceedings were listed as not applicable.
Important facts for investors to verify
- Confirm the timing, funding and delivery schedule for CDC BioThrax procurement, including the gap between the contract’s potential value and amounts funded to date.
- Track cash conversion and working capital: the cash flow statement reports operating cash use of $4.6 million, while MD&A’s cash-flow table reports $4.7 million; clarify the presentation and reconciliation.
- Assess the impact of the MVA85A discontinuation and portfolio reprioritization on future Biosciences spending, collaborations and asset values.
- Review progress and costs for Building 55 and Baltimore facility programs, regulatory approvals, and the company’s ability to meet manufacturing and contract obligations.
- Evaluate refinancing and repayment plans for the 2014 debt maturities, and the cash and contingent obligations associated with the Bracco acquisition.
- Reconcile reported share counts: the balance sheet reports 36,117,853 shares outstanding at March 31, while the cover page reports 36,121,353 outstanding at April 30.