Emergent BioSolutions Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; amounts below are in millions except per-share data. Emergent is a life sciences company spanning public-health-threat products and contract development and manufacturing services (CDMO). The U.S. government (USG) is its largest customer.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $394.7 | $243.2 | $587.2 | $433.9 |
| Operating income (loss) | $126.0 | $(7.0) | $114.4 | $(34.4) |
| Net income (loss) | $92.7 | $(9.5) | $80.2 | $(35.6) |
| Diluted EPS | $1.73 | $(0.18) | $1.51 | $(0.69) |
| Operating margin | 31.9% | (2.9)% | 19.5% | (7.9)% |
| Net margin | 23.5% | (3.9)% | 13.7% | (8.2)% |
Q2 revenue increased 62%; first-half revenue increased 35%. In Q2, product sales were $298.5 (up 63%), CDMO services $72.6 (up $53.9), and contracts and grants $23.6 (down 42%). First-half USG revenue was $375.4, about 64% of total revenue.
- Cash flow, first half: Operating cash flow $185.7 versus $69.0; capital investment and other investing outflows $69.3 versus $45.5; financing outflows $15.3 versus $41.7. Cash, cash equivalents and restricted cash rose $101.0 to $269.0.
- Liquidity at June 30: Cash and cash equivalents were $268.8; current assets $795.9 and current liabilities $293.7. Unused revolver capacity was $244.3. Management said available liquidity was sufficient for the next 12 months.
- Debt: Total debt was $796.9, including $430.3 under the term loan, $353.0 under the revolver and $10.6 of 2.875% convertible notes due January 2021. The company reported compliance with credit-facility covenants.
Material changes and drivers
- Anthrax vaccine sales rose to $132.3 in Q2 and $184.2 for the first half, principally reflecting the transition of Strategic National Stockpile deliveries from BioThrax to AV7909. AV7909 is not FDA-approved; USG procurement occurs under special circumstances.
- ACAM2000 sales were $70.0 in Q2 versus $6.5 a year earlier, reflecting delivery timing. The USG exercised an annual procurement option valued at $176 million in May.
- CDMO revenue increased substantially with a larger customer and project base, including COVID-19-related work. Contracts and grants revenue declined as AV7909 development activities were completed.
- Other product sales fell 69% in Q2, mainly from lower raxibacumab and travel-vaccine sales. Management attributed travel-vaccine weakness to reduced international travel during the pandemic.
- Operating expenses increased 7% in Q2; cost of product sales and CDMO services rose with higher sales and stock compensation. R&D declined 25%. First-half stock-based compensation was $31.0, including a $14.7 broad-based, fully vested employee award recorded in Q2.
Outlook, risks and unusual items
- The filing provides no formal full-year revenue or earnings guidance. Management expects quarterly results to remain variable due to delivery timing and the nature of government procurement. The company estimated approximately $1.4 billion of revenue associated with unsatisfied performance obligations at June 30, with most expected within 24 months; timing and amount may change with government funding and development outcomes.
- COVID-19 presents both opportunity and risk. The company described manufacturing and development agreements for COVID-19 programs, but cautioned that candidates may not be safe, effective, authorized or manufacturable at scale. The pandemic may disrupt operations, suppliers, deliveries and trials, and further depress travel-vaccine sales.
- Substantial revenue depends on USG procurement, funding appropriations, contract options and delivery schedules. AV7909 licensure timing and ongoing procurement, ACAM2000 options, and follow-on contracts for products including raxibacumab are important uncertainties.
- NARCAN patent litigation is a material risk: a June 5 district-court ruling favored Teva in the 4 mg case; Emergent appealed on July 23. The filing warns of a possible Teva at-risk generic launch during appeal. Perrigo settled and received a license generally effective January 2033, subject to earlier-entry circumstances. Related patent-review proceedings were also pending.
- Other key exposures include manufacturing quality and capacity, reliance on single-source suppliers, regulatory compliance, variable-rate debt and covenant requirements. A 1 percentage-point increase in the eurocurrency rate was estimated to raise annual interest expense by about $4.5. The company does not hedge foreign-currency exposure.
- The company reported no impairment at June 30 despite lower travel-vaccine sales and increased generic-competition risk for NARCAN. It recorded $11.9 of first-half unrealized hedge losses in other comprehensive income; $5.7 of net deferred losses was expected to be reclassified to interest expense over the following 12 months if swap fair values stayed unchanged.
- Subsequent announcements included a July AV7909 procurement option valued at $258 million and additional COVID-19 manufacturing agreements. These are post-quarter developments, not Q2 recognized revenue.
Investor verification priorities
- Check subsequent AV7909 and ACAM2000 deliveries, option exercises, FDA review/licensure developments and government funding.
- Track NARCAN appeal and patent-review outcomes, any generic launch, and the timing and conditions of Perrigo’s license.
- Verify conversion and timing of the $1.4 billion remaining performance obligations, particularly government appropriations and CDMO milestones.
- Assess the scale, economics, execution and capacity requirements of COVID-19 manufacturing commitments, alongside pandemic-related supply and travel-demand effects.
- Monitor debt repayment and refinancing of the 2021 convertible notes, revolver availability, covenant compliance and liquidity after planned capital investment.