Emergent BioSolutions Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 24, 2020. This is an annual report, not a standalone Q4 filing. The quarterly data below are included in the 10-K. Amounts are U.S. dollars.
Business context
Emergent is a life sciences company supplying vaccines, therapeutics, emergency-care products and contract development and manufacturing services (CDMO). The U.S. government (USG) is its largest customer and funds much of its product development. The company reported one operating segment. Its 2019 portfolio included NARCAN Nasal Spray, ACAM2000, BioThrax and AV7909, among other products and product candidates.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $1,106.0 million | $782.4 million |
| Product sales | $903.5 million | $606.5 million |
| CDMO services | $80.0 million | $98.9 million |
| Contracts and grants | $122.5 million | $77.0 million |
| Operating income | $114.1 million | $89.8 million |
| Net income | $54.5 million | $62.7 million |
| Diluted EPS | $1.04 | $1.22 |
| Operating cash flow | $188.0 million | $41.8 million |
Revenue increased 41% and operating income increased 27%; net income declined 13%. The operating margin was approximately 10.3%, versus 11.5% in 2018; net margin was approximately 4.9%, versus 8.0%. Product sales and CDMO revenue together produced an approximately 56.0% gross margin, calculated using the reported $433.5 million cost for those activities.
Key product sales were NARCAN $280.4 million, ACAM2000 $242.6 million, anthrax vaccines $172.8 million and other products $207.7 million. NARCAN sales rose following the 2018 Adapt acquisition; ACAM2000 increased with deliveries under a new USG contract. Anthrax vaccine sales fell as BioThrax deliveries declined during the transition toward AV7909. CDMO revenue decreased because certain prior-year manufacturing-capability and contract-manufacturing work did not recur.
Q4 2019: Revenue was $360.4 million, operating income $77.8 million and net income $46.9 million, compared with $270.7 million, $11.2 million and a $3.4 million net loss, respectively, in Q4 2018. Revenue and earnings were uneven across the year: the first two quarters of 2019 recorded operating and net losses.
At year-end, cash and cash equivalents were $167.8 million; working capital was $469.9 million. Current assets were $686.2 million and current liabilities $216.3 million. Gross debt was $822.5 million, including $435.9 million on the term loan and $373.0 million drawn on the revolver; the company also had $224.8 million of unused revolving capacity. Cash flow from operations was $188.0 million; investing cash outflow was $96.9 million, primarily for infrastructure and equipment. Management said liquidity was sufficient to fund operations for the next 12 months. Total contractual obligations were $912.7 million, including $59.7 million of purchase commitments.
Changes, outlook and material items
- 2019 revenue growth reflected the first full year of contributions from Adapt and PaxVax, both acquired in October 2018, as well as higher ACAM2000 sales and increased contracts-and-grants revenue. Comparisons with 2018 therefore include a partial-year contribution from those acquisitions.
- Operating expenses rose 43%, including higher R&D, SG&A and intangible-asset amortization. R&D included a $12.0 million impairment of acquired in-process research and development. Interest expense rose to $38.4 million from $9.9 million, principally due to acquisition-related borrowing. A $24.8 million change in fair value of contingent consideration was also recorded in earnings.
- Management described a 2020–2024 strategy focused on executing the core business, disciplined acquisitions, strengthening R&D and scaling operations. The company announced 2024 financial and operational goals, but the supplied filing text does not provide their numerical values. No clear numeric FY 2020 guidance is provided in the supplied text.
- Major awards included an approximately $2 billion, 10-year ACAM2000 supply contract, a $535 million, 10-year VIGIV contract, and a BAT contract with a maximum value of $490 million, of which approximately $90 million was agreed at award. BARDA exercised an approximately $261 million AV7909 procurement option; AV7909 remained unapproved by the FDA while being procured under government authorization.
- Principal risks include reliance on USG procurement, appropriations and contract options; timing and success of AV7909 regulatory review and delivery; product and manufacturing compliance; single-source suppliers; and substantial debt and covenant requirements. USG customers accounted for 61% of 2019 revenue, and U.S. customers for 90%.
- NARCAN faces generic competition and patent challenges. Perrigo settled its litigation in February 2020 under a non-exclusive license generally effective January 5, 2033, subject to earlier-effective circumstances and regulatory/court steps. Teva litigation remained unresolved at the filing date. The company reported no material weakness in internal controls; management and the auditor concluded controls were effective.
Important facts for investors to verify
- Delivery schedules, funding and option exercise under the ACAM2000, AV7909, BioThrax, VIGIV and BAT government contracts, including the terms still to be finalized for BAT.
- AV7909 FDA review and licensure timeline, and whether procurement and delivery can proceed as planned.
- Teva litigation developments, the effect and final status of the Perrigo settlement, and implications for NARCAN sales and patent protection.
- Debt repayment, interest-rate exposure, covenant compliance and cash generation; management reported covenant compliance at the filing date.
- Execution and financial returns from the Adapt and PaxVax acquisitions, including NARCAN growth, CDMO performance and acquired-asset assumptions.
- Quarterly volatility and concentration: government procurement timing affects revenue, and product sales may be affected by manufacturing capacity, lot release and supply constraints.