EBS

Emergent BioSolutions Inc. - Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Emergent BioSolutions Inc. is a biopharmaceutical company focused on biodefense and commercial vaccines. Its primary revenue driver is BioThrax, the only FDA-licensed anthrax vaccine, sold predominantly to the U.S. Department of Health and Human Services (HHS) and the Department of Defense (DoD). The company operates two segments: Biodefense and Commercial.

Key Financial Metrics

Margins: Gross margin on product sales was approximately 75% ($61.7M revenue vs. $15.4M cost). Operating margin was approximately 27% ($17.3M operating income vs. $64.5M revenue).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 51% year-over-year, driven by a 49% increase in product sales ($61.7M vs. $41.5M). This was primarily due to a 52% increase in BioThrax doses delivered to HHS.
• Profitability: Net income attributable to Emergent increased 58% to $11.1M, despite higher operating expenses.
• Expense Increases:
  • Cost of Product Sales rose 92% to $15.4M due to higher volume and reduced production yield.
  • Research and Development (R&D) expenses increased 39% to $15.9M, driven by biodefense programs (rPA vaccine, anthrax immune globulin).
  • Selling, General and Administrative (SG&A) expenses increased 32% to $16.0M, including a $1.4M charge for expensing previously capitalized acquisition costs under new accounting standards (SFAS 141(R)).
• Cash Flow: Operating cash flow turned significantly negative ($25.4M used) compared to the prior year ($5.0M used), primarily due to a $49.3M increase in accounts receivable from HHS billings not yet collected.

Guidance, Outlook, and Risks

• Contract Outlook: The company is executing a contract to supply 18.75 million doses of BioThrax to the Strategic National Stockpile (SNS) through 2010. A subsequent contract for up to 14.5 million additional doses through 2011 was signed in September 2008. Pricing for the final 13.25 million doses of the first contract is contingent on FDA approval to extend the vaccine's shelf life from three to four years; approval is expected in 2009.
• Manufacturing: A new 50,000 sq. ft. facility in Lansing, Michigan, is being converted to manufacture the recombinant protective antigen (rPA) anthrax vaccine candidate. The company is awaiting a contract award from HHS/BARDA for this program.
• Key Risks:
  • Government Dependence: Substantially all revenue is derived from U.S. government contracts. Funding is subject to Congressional appropriations and political priorities.
  • Regulatory Approval: Future revenue growth depends on FDA approval for the four-year shelf-life extension and potential approval of the rPA vaccine.
  • Litigation: Ongoing legal proceedings against Protein Sciences Corporation (PSC) regarding a $10M loan and asset acquisition. The company has agreed to a forbearance agreement until May 31, 2009.
  • Manufacturing Capacity: Reliance on a single facility for BioThrax and a single contract filler (Hollister-Stier) creates supply chain risks.

Investor Verification Checklist

• Accounts Receivable Collection: Verify the collection of the $74.1M accounts receivable balance (noted as largely collected in April 2009) to confirm cash flow recovery.
• FDA Shelf-Life Decision: Monitor the FDA's decision on the BioThrax four-year expiry dating supplement, which impacts pricing on ~$34M of potential revenue.
• rPA Contract Award: Track the status of the HHS/BARDA request for proposal for the recombinant anthrax vaccine, critical for the utilization of the new Lansing facility.
• PSC Litigation Resolution: Review the outcome of the forbearance agreement with Protein Sciences Corporation and the status of the $10M note receivable.
• Debt Covenants: Confirm compliance with debt covenants given the significant cash burn in operating activities during the quarter.