Business context and reporting period
Emergent BioSolutions Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2020, with results compared with Q1 2019. The company develops and supplies public-health-threat products and provides contract development and manufacturing services (CDMO). The U.S. government is its largest customer and a major source of development funding.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior balance-sheet date |
|---|---|---|
| Total revenue | $192.5 million | $190.6 million |
| Product sales | $148.2 million | $153.0 million |
| CDMO revenue | $21.7 million | $15.9 million |
| Contracts and grants | $22.6 million | $21.7 million |
| Operating expenses | $204.1 million | $217.8 million |
| Operating loss | $11.6 million | $27.2 million |
| Net loss | $12.5 million; $0.24 per diluted share | $26.0 million; $0.51 per diluted share |
| Operating cash flow | $57.8 million | $104.8 million |
| Cash and cash equivalents | $181.5 million | $167.8 million at Dec. 31, 2019 |
| Total debt | $799.7 million gross | $822.5 million gross at Dec. 31, 2019 |
Cost of product sales and CDMO services was $76.9 million. The resulting combined gross profit was $115.6 million, or approximately 60.1% of revenue, versus $98.8 million, or approximately 51.8%, in Q1 2019 (calculated from reported figures). Interest expense was $8.6 million; the company recorded an $8.8 million income-tax benefit.
At March 31, current assets were $626.6 million and current liabilities were $207.1 million. The company reported $244.8 million of unused revolver capacity, net of outstanding letters of credit, and stated that liquidity was sufficient for operations over the next 12 months. Gross debt included $433.1 million of term loans and $353.0 million drawn on the revolving facility. Cash less gross debt was approximately $618.2 million (calculated).
Material changes versus the prior comparable period
- Revenue increased 1%, while product sales fell 3%. NARCAN sales rose 10% to $72.2 million; anthrax vaccine sales increased to $51.9 million from $11.7 million, reflecting the transition of government deliveries from BioThrax to AV7909. ACAM2000 sales were zero versus $45.6 million, primarily because of delivery timing.
- CDMO revenue increased 36%, with higher activity at Camden and Winnipeg partly offset by lower activity at Bayview. Other product sales declined 20%, principally due to lower raxibacumab, Vaxchora and Vivotif sales, partly offset by BAT.
- Operating expenses declined 6%, mainly as cost of product sales and CDMO services and R&D expenses fell. SG&A increased 7%, attributed primarily to professional services and staffing supporting growth. The operating and net losses narrowed.
- Operating cash flow decreased by $47.0 million. The filing attributes the year-over-year decline primarily to lower cash collections on receivables and increased inventory spending. Investing outflow was $24.2 million, and financing outflow was $20.0 million.
- Receivables fell to $162.5 million from $270.7 million at year-end, while inventories rose to $248.1 million from $222.5 million. Debt declined by $22.8 million from year-end.
Outlook, commentary, risks and unusual items
- No numeric full-year revenue or earnings guidance is provided. Management said it expected adequate liquidity for the next 12 months. It also noted that quarterly results can fluctuate, particularly with the timing of government orders.
- COVID-19 creates risks to manufacturing, suppliers, deliveries, clinical trials, employee availability, travel-health product demand and government funding priorities. Management said the pandemic’s future effects could not be reliably estimated.
- COVID-related activities included development and manufacturing agreements with Novavax and Vaxart and development of investigational COVID-HIG and COVID-EIG therapies. After quarter-end, the company disclosed $14.5 million in HHS support for COVID-HIG and a $135 million agreement to manufacture Johnson & Johnson’s COVID-19 vaccine candidate. The filing cautions that the candidates may not prove safe or effective and that production at scale is uncertain.
- Revenue and future growth remain exposed to U.S. government appropriations, contract options and delivery schedules, particularly for AV7909, BioThrax and ACAM2000. AV7909 was being procured before FDA approval; timely authorization/licensure and continued procurement are uncertain.
- Debt covenants require minimum debt-service coverage and maximum net leverage ratios. The company reported compliance as of the filing date. Interest-rate swaps covered $350 million of variable-rate exposure; a hypothetical one-percentage-point rise in eurocurrency rates was estimated to increase annual interest expense by about $4.5 million.
- Unrealized losses on hedging activities reduced other comprehensive income by $11.2 million net of tax in Q1. The company said $5.0 million of deferred net hedge losses would be reclassified to interest expense over the following 12 months if swap fair values remained unchanged.
- A $10.0 million raxibacumab sales milestone was recognized as an intangible-asset addition and payable; the filing says no further contractual sales-milestone obligations remained. Perrigo litigation over generic NARCAN was settled, with a non-exclusive license expected to take effect January 5, 2033, or earlier under certain conditions. Teva patent litigation remained unresolved; closing arguments had occurred.
Important facts for investors to verify
- Whether AV7909 receives regulatory authorization/licensure and whether government procurement and delivery schedules continue as expected.
- How COVID-19 affects manufacturing capacity, customer demand, supply chains, development timelines and the economics of the announced partnerships.
- Whether operating cash generation improves, given lower year-over-year operating cash flow and higher inventory.
- Debt covenant headroom, interest-rate exposure and the ability to service debt while funding capital investment and development.
- Outcomes and timing of Teva NARCAN litigation, Perrigo settlement approvals and any resulting generic competition.