Emergent BioSolutions Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Emergent is a life sciences company selling medical countermeasures and NARCAN and providing contract development and manufacturing (CDMO) services. The filing is unaudited.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $337.9 million | $242.7 million | $503.0 million | $550.2 million |
| Gross margin | $140.7 million; 42.5% | $65.6 million | $144.2 million; 29.4% | $207.6 million |
| Operating loss | $292.9 million | $72.0 million | $441.0 million | $65.6 million |
| Net loss | $261.3 million; $5.15 per diluted share | $56.4 million; $1.13 per diluted share | $444.3 million; $8.80 per diluted share | $60.1 million; $1.19 per diluted share |
Q2 revenue rose 39%, led by product sales and CDMO revenue. Six-month revenue fell 9%, reflecting lower product sales, CDMO services and contracts and grants. Q2 results included a $306.7 million non-cash impairment charge on CDMO long-lived assets and a $74.9 million gain on the travel-health business sale. Interest expense was $28.6 million in Q2 and $46.5 million for the six months, up from $7.8 million and $16.0 million, respectively, in 2022.
- Products: Q2 sales were $302.2 million, up 27%; six-month sales were $445.6 million, down 6%. Q2 NARCAN revenue rose 32% to $133.9 million; Smallpox MCM sales rose to $123.9 million, primarily following delivery of a $120 million U.S. government ACAM2000 option. Anthrax MCM sales fell 78% to $21.2 million due largely to order timing. Six-month product gross margin was 47%, down from 64%.
- CDMO services: Revenue was $29.1 million in Q2, compared with negative $1.8 million a year earlier; it was $44.3 million for six months, down 25%. Services gross margin remained negative: $(26.6) million in Q2 and $(63.6) million for six months. Management cited reduced activity, prior-period Janssen-related costs and ongoing quality-improvement spending.
- Cash flow: Six-month operating cash use was $298.4 million, versus $52.9 million in 2022. Investing provided $242.6 million, including $270.2 million net proceeds from the travel-health sale; financing used $497.4 million, mainly for debt repayments. Cash declined to $88.6 million from $642.6 million at year-end 2022.
- Balance sheet and liquidity: Current assets were $777.7 million and current liabilities $693.2 million, leaving working capital of $84.5 million. Total debt principal was $909.3 million; its reported net carrying amount was $903.2 million. Of the principal, $250.2 million was drawn on a $300 million revolver and $206.1 million was outstanding under the term loan. Revolver availability, net of letters of credit, was $49.3 million.
Material changes, outlook and risks
- Going concern and financing: The company stated that substantial doubt exists about its ability to continue as a going concern within one year after issuance of the financial statements. Its amended credit agreement extended secured-facility maturities to May 15, 2025, but requires at least $75 million of equity and/or unsecured debt by April 30, 2024, quarterly term-loan principal payments of about $3.9 million, and compliance with financial and liquidity covenants. Management expects to meet these conditions but said it cannot conclude success is probable. Debt was classified as current in part because of the capital-raise requirement.
- Debt amendment: Revolver commitments were reduced from $600 million to $300 million, incremental borrowing capacity was removed, covenant requirements were amended and additional collateral was pledged. The company used travel-sale proceeds and cash to repay about $487 million of term-loan and revolver principal. Floating-rate borrowing margins were set at 6% through March 2024 before stepping down based on leverage. A one-percentage-point rate increase was estimated to raise annual interest expense by about $4.6 million.
- Divestiture: On May 15, Emergent sold its travel-health business to Bavarian Nordic for $270 million cash, subject to customary adjustments. The company may receive up to $80 million in development and approval milestones and up to $30 million in sales-based earn-outs. The sale generated the $74.9 million reported gain.
- Restructuring: The January plan eliminated about 5% of staff; the company reported $9.6 million in six-month charges and expected annualized savings above $60 million when fully implemented. On August 8, after quarter-end, it announced a further reduction of about 400 employees and estimated $19–21 million of charges, primarily in Q3 2023, while reducing investment and growth emphasis in CDMO.
- Subsequent events: The FDA approved CYFENDUS on July 20, 2023. On July 31, Emergent received a 10-year BARDA Ebanga contract with a base and options valued at up to approximately $704 million if all options are exercised. The contract includes $6.3 million contingent consideration payable to Ridgeback and a possible additional amount of up to $50.4 million subject to stated conditions. These are not guaranteed revenues.
- Key risks and contingencies: U.S. government procurement and funding, delivery timing, manufacturing quality and regulatory compliance, CDMO performance and utilization, NARCAN generic competition, debt covenants and refinancing, and the required capital raise could materially affect results. Securities and derivative litigation and government inquiries relating to past CDMO manufacturing issues remain unresolved; possible losses were not reasonably estimable. The filing also noted an ongoing assessment of a cybersecurity incident involving a business partner.
- Guidance: The filing does not provide a clear company-wide revenue or earnings forecast. Management noted that quarterly results can vary with government option exercises, deliveries, manufacturing activity and funding decisions.
Important facts for investors to verify
- Progress toward the $75 million capital raise deadline and compliance with monthly liquidity, EBITDA, capital-spending and other credit covenants.
- Cash burn, working-capital movements and the pace of debt repayment relative to available liquidity.
- Whether CDMO performance stabilizes after the impairment, restructuring and planned reduction in investment, and whether quality remediation proceeds as expected.
- Timing and funding of U.S. government orders for anthrax and smallpox countermeasures, and the extent to which Ebanga contract options are exercised.
- Realized OTC NARCAN sales and competitive impact from generic products; collectability of the $154.0 million Janssen-related long-term asset and outcome of the arbitration.
- Subsequent restructuring costs, divestiture adjustments and contingent payments, and developments in litigation, government inquiries and the business-partner cybersecurity assessment.