Emergent BioSolutions Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; amounts below are in millions of dollars except per-share data. Emergent is a life sciences company with government and commercial medical-countermeasure products and contract development and manufacturing (CDMO) services.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Revenue | $307.5 | $343.0; down 10% |
| Operating income | $6.4 | $95.4 |
| Net income (loss) | $(3.7); $(0.07) per diluted share | $69.7; $1.28 per diluted share |
| Operating margin | 2.1% | 27.8% |
| Cash from operations | $(37.3) | $5.1 |
| Capital expenditures | $32.2 | $56.1 |
| Cash and cash equivalents | $435.8 | $576.1 at December 31, 2021 |
| Current assets / current liabilities | $1,100.3 / $249.2 | $1,272.1 / $373.8 at December 31, 2021 |
| Debt, carrying value | $833.1, including current portion | $841.0 at December 31, 2021 |
Product revenue was $237.1, with reported product-segment gross margin of $156.8 (66.1%). CDMO revenue was $60.8; Services segment gross margin was a loss of $14.8. Total reported gross margin was $142.0, or 46.2% of revenue. These gross-margin figures precede certain corporate expenses and are not equivalent to operating income.
Operating cash use reflected working-capital outflows, including inventory accumulation and payments of accrued expenses, compensation and other liabilities, partly offset by receivable collections. Financing cash use was $70.5, including $57.5 of share repurchases and $8.5 of term-loan principal payments. The company reported $597.8 of unused revolving-credit capacity and said it expected to have sufficient liquidity for the next 12 months.
Material changes and business developments
- Product sales increased 72% to $237.1. Anthrax vaccine sales rose to $103.6, primarily due to timing and volume of U.S. government deliveries; nasal naloxone sales rose to $93.1, supported by public-interest and Canadian customers and the Sandoz-authorized generic launch.
- CDMO revenue fell 67% to $60.8. Lease revenue declined to $9.0 from $116.2, chiefly because BARDA’s COVID-19 development and manufacturing partnership, which generated $97.5 of lease revenue in Q1 2021, was terminated in November 2021.
- CDMO services revenue declined 23% to $51.8. Maintenance and modification work at Bayview limited manufacturing activity; increased activity at Camden and Winnipeg partly offset the decline. Higher Bayview professional-services costs and increased manufacturing activity also contributed to higher CDMO costs.
- Contracts and grants revenue fell 55% to $9.6, reflecting the BARDA agreement termination and lower activity on other externally funded development projects. Research and development expense declined 12% to $46.4, mainly due to lower COVID-19 therapeutic candidate spending, partly offset by costs for a Phase 3 chikungunya vaccine study.
- Inventories rose to $400.7 from $350.8 at year-end. The company repurchased 1.1 million shares for $52.2 during the quarter; $85.3 remained under its $250.0 authorization at March 31.
- Management changed its internal segment reporting to Products and Services and recast historical segment information for consistency.
Outlook, risks and contingencies
- The filing provides no specific quarterly or annual revenue or earnings guidance. Management cautioned that quarterly results can vary with government order and delivery timing, CDMO activity and development funding. It reported approximately $1.1 billion of future contract value on unsatisfied performance obligations, with most expected to be recognized within 24 months; timing can change.
- Key business risks include U.S. government appropriations and procurement decisions for anthrax vaccines and other countermeasures; AV7909’s pending FDA review and lack of approval; manufacturing quality and compliance, including the Bayview facility; and the timing and scale of CDMO customer demand. The company also cited supply-chain and pandemic uncertainties.
- NARCAN faces generic competition. The Federal Circuit affirmed a ruling for Teva in the 4 mg patent case, and Emergent said it intended to seek rehearing. The 2 mg case remained stayed pending the 4 mg case outcome.
- Shareholder securities and derivative litigation concerning statements about COVID-19 vaccine manufacturing capabilities remained pending. The company said it could not reasonably estimate potential losses. It also reported document requests or inquiries from congressional bodies and multiple government agencies and said it would continue cooperating.
- Debt includes $388.1 principal outstanding on the term loan due 2023 and $450.0 of 3.875% notes due 2028. The company reported compliance with credit-agreement covenants at the filing date. It has interest-rate swaps with $350.0 notional value; a one-percentage-point rise in the eurocurrency rate was estimated to add approximately $0.4 annually to interest expense.
- Management reported disclosure controls were effective as of March 31, 2022 and no material quarter-specific change to internal control over financial reporting.
Investor verification priorities
- Track FDA review and potential licensure of AV7909, and the timing and funding of U.S. government anthrax-vaccine orders.
- Assess Bayview manufacturing remediation, compliance status and effects on CDMO volumes, costs and customer commitments.
- Monitor replacement revenue and utilization after BARDA’s contract termination, including progress on the $1.1 billion of remaining performance obligations.
- Evaluate cash conversion, inventory growth, continued share repurchases and debt maturities and covenant headroom, especially the 2023 term-loan maturity.
- Follow generic competition and litigation developments affecting NARCAN, as well as the manufacturing-related lawsuits and government inquiries and any potential financial or operational consequences.