Emergent BioSolutions Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial amounts below are in U.S. dollars; figures are converted from thousands to millions unless noted. The statements are unaudited.
Business context and reporting period
Emergent operates Biodefense and Biosciences segments. Biodefense revenue is primarily driven by BioThrax sales to the U.S. government; Biosciences includes specialty therapeutics, development programs and contract manufacturing. The company reported a profitable second quarter but a net loss for the first half of 2015.
The CDC contract provides for up to 44.75 million BioThrax doses through September 30, 2016, subject to government funding. By June 30, approximately $911 million had been committed, and about 29 million doses had been delivered and recognized as approximately $794 million in revenue under the contract.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $126.1 million | $110.3 million | $189.7 million | $164.2 million |
| Operating income (loss) | $21.5 million | $7.9 million | $(6.9) million | $(17.6) million |
| Net income (loss) | $14.1 million | $5.0 million | $(7.4) million | $(15.2) million |
| Diluted EPS | $0.32 | $0.13 | $(0.19) | $(0.41) |
- Q2 revenue increased 14% year over year; operating margin was approximately 17.0% and net margin approximately 11.2%. First-half revenue rose 16%, but the company remained loss-making, with an operating margin of approximately (3.6%).
- Q2 revenue comprised product sales of $82.0 million, contract manufacturing of $8.9 million, and contracts, grants and collaborations of $35.2 million. First-half amounts were $100.3 million, $21.1 million and $68.3 million, respectively.
- Q2 product sales and contract manufacturing costs were $27.3 million, down 21%; the company cited improved BioThrax production yield and lower cost per dose. First-half R&D was $79.6 million, up 18%, and SG&A was $70.9 million, up 17%.
- Cash and cash equivalents were $214.8 million at June 30, down from $280.5 million at year-end 2014. Working capital was approximately $348.5 million; current assets were $435.5 million and current liabilities $87.0 million.
- First-half operating cash use was $63.4 million, investing cash use $19.7 million, and financing cash provided $17.4 million. Capital expenditures were $19.7 million. Operating cash use reflected, among other items, higher receivables and inventory and timing of income-tax payments.
- Long-term indebtedness was $253.0 million. The filing identifies $250 million of 2.875% senior convertible notes due 2021 and a revolving credit facility with up to $100 million of capacity; the balance drawn on that facility is not clearly stated in the supplied filing text.
Material changes versus comparable periods
- Q2 revenue growth reflected higher BioThrax sales and increased development funding, particularly for Anthrasil; Q2 contracts, grants and collaborations revenue rose 54%.
- First-half product sales fell 12%, mainly because BioThrax deliveries to the CDC were suspended in Q1 and resumed in Q2. BioThrax sales were $72.2 million versus $92.0 million in the first half of 2014.
- First-half contract manufacturing revenue rose 77%, including a full-period contribution from the Cangene fill/finish facility and services for an MVA Ebola vaccine candidate. Contracts, grants and collaborations revenue increased 78%, including Anthrasil funding and a $5.0 million MorphoSys milestone.
- Biodefense generated $35.4 million of Q2 net income and $24.1 million for the first half. Biosciences reported net losses of $19.3 million in Q2 and $27.3 million for the first half.
- Q2 BioThrax sales were $72.2 million, versus $67.5 million a year earlier. The quarter’s total product sales also included $7.0 million of Biosciences sales.
Outlook, commentary, risks and unusual items
- No numerical full-year revenue or earnings guidance is provided. Management says quarterly revenue and profitability can vary with product-delivery timing and work performed under grants, contracts and collaborations. It expects to fund operations, capital expenditures and debt service with existing cash, revenues, government and partner funding, and credit capacity; additional financing may be sought.
- On August 6, 2015, after quarter-end, the board authorized management to pursue a tax-free spin-off of Biosciences, with completion expected by mid-2016. The transaction remains subject to conditions and may be delayed or not completed; management cautions that costs may exceed expectations and anticipated benefits may not be realized.
- On July 20, 2015, after quarter-end, Emergent announced a $19.7 million BARDA contract to develop and manufacture Ebola monoclonal antibodies.
- The FDA approved Anthrasil on March 25, triggering a $7.0 million government milestone recorded as product-sales revenue. FDA approval of IXINITY on April 29 led to reclassification of its $8.3 million in-process R&D asset to an amortizing intangible asset.
- The Evolva EV-035 acquisition accounting was revised during the measurement period: estimated contingent consideration fell by $6.6 million and estimated acquired IPR&D was reduced by $17.2 million. The purchase-price allocation remained subject to change. The company also paid Evolva a $4.0 million milestone after novation of the DTRA contract.
- Key risks include reliance on U.S. government procurement and appropriations, BioThrax delivery and manufacturing performance, regulatory and clinical-development uncertainty, competition, debt service and the conditional Biosciences spin-off. Management reported disclosure controls were effective; it stated the Cangene controls had been integrated and were being evaluated.
Important facts for investors to verify
- CDC funding, delivery schedules and the remaining BioThrax doses and contract revenue expected before the contract ends in September 2016.
- Whether the Q1 BioThrax shipment suspension has any continuing operational, contractual or cash-flow effects.
- The final EV-035 purchase-price allocation, contingent-consideration assumptions and development milestones.
- Spin-off conditions, expected costs, timing, allocation of debt and cash, and the standalone outlook for each business.
- Actual revolver borrowings, debt covenants and liquidity needs in light of first-half operating cash use and planned investment.
- Progress toward manufacturing and regulatory milestones for key facilities and product candidates, including IXINITY commercialization and government-funded programs.