Emergent BioSolutions Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; compared with the same periods in 2011. Financial statement amounts below are in millions, except per-share data and percentages. Emergent develops and manufactures vaccines and therapeutics in its Biodefense and Biosciences segments. BioThrax, sold primarily to the U.S. government, is its only marketed product.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $70.4 | $88.1 | $120.7 | $106.7 |
| Product sales | $53.2 | $71.5 | $87.5 | $77.1 |
| Contracts and grants | $17.2 | $16.7 | $33.2 | $29.6 |
| Operating income (loss) | $8.7 | $20.2 | $(3.9) | $(15.3) |
| Net income (loss) attributable to Emergent | $7.6 | $14.2 | $0.8 | $(7.2) |
| Diluted earnings (loss) per share | $0.21 | $0.39 | $0.02 | $(0.20) |
- Q2 product gross margin was approximately 75% of product sales, compared with approximately 78% a year earlier. Six-month product gross margin was approximately 76%, versus approximately 78%.
- At June 30, cash and cash equivalents were $161.8; current assets were $243.2 and current liabilities $44.5. The current ratio was approximately 5.5. Debt was $62.2, implying cash in excess of debt of approximately $99.6.
- For the first six months, operating cash flow was $34.7 in the financial statements, investing cash flow was $(17.2), and financing cash flow was $0.4. Capital expenditures were $30.9. Cash increased $17.9 from year-end 2011.
- Total assets were $527.1 and stockholders’ equity was $422.5 at June 30. Accounts receivable was $46.8.
Material changes versus prior periods
- Q2 revenue declined 20% year over year, chiefly because BioThrax doses delivered fell 20% and the average price per dose fell 7%. Six-month revenue rose 13%, as doses delivered increased 23%, partly offset by an 8% lower price per dose; delivery timing drove the volume changes.
- Q2 operating income fell to $8.7 from $20.2. For the half year, the operating loss narrowed to $3.9 from $15.3, despite a $9.6 impairment charge for SBI-087.
- Six-month R&D expense declined 14% to $56.9, largely reflecting lower Biosciences spending; SG&A declined 3% to $37.4. Cost of product sales rose 21% in the half year as BioThrax volume increased.
- Q2 other income included the benefit of a $1.7 insurance recovery for a Lansing facility power outage. The six-month results also include the $9.6 SBI-087 impairment. The company sold two Frederick buildings for $12.2 million, approximately their carrying value less selling costs, with no gain or loss.
Outlook, management commentary, risks and contingencies
- The CDC contract covers delivery of up to 44.75 million BioThrax doses through September 2016, with a maximum potential value of approximately $1.25 billion, subject to funding availability. About 4.0 million doses had been delivered and recognized through June 30.
- BARDA awarded Emergent an eight-year base-period contract to establish a Center for Innovation in Advanced Development and Manufacturing, with funding up to approximately $160 million. Obligations include securing a pandemic influenza vaccine candidate and related intellectual-property access, expanding facilities, and obtaining Baltimore facility licensure.
- Management expects quarterly revenue and profitability to fluctuate with BioThrax delivery timing and work under contracts and grants. It expects pipeline R&D spending to increase as development advances. No numerical earnings or revenue guidance is provided.
- Pfizer notified Emergent that it would terminate the SBI-087 development collaboration; Emergent decided not to pursue further development and impaired the asset in full. Pfizer’s termination notice was effective September 20, 2012. Abbott’s TRU-016 collaboration ended in March 2012, with rights reverting to Emergent. Pfizer and Abbott terminations reduce partner support and may affect development plans.
- The company reported $62.2 million of debt, largely with variable-rate exposure. It amended PNC loan covenants in June and reported covenant compliance at quarter-end; the equipment-loan drawdown period and maturity were extended in July.
- Key risks include dependence on U.S. government BioThrax purchases and appropriations, contract performance and fixed-price cost exposure, manufacturing qualification and single-site/supplier risks, clinical and regulatory uncertainty, and the possibility that additional financing may be needed. The filing reports an effective shelf registration allowing up to $180 million in securities offerings.
- The board authorized repurchases of up to $35 million of common stock; no shares were repurchased through June 30. Disclosure controls were assessed as effective, and the filing reports no material change in internal control over financial reporting. Legal proceedings were listed as not applicable.
Most important facts for investors to verify
- CDC funding and delivery schedule for the BioThrax procurement contract, including the effect of dose timing and pricing on quarterly results.
- Progress, funding and obligations under the BARDA Center contract, and the schedule and cost of Baltimore and Building 55 facility work.
- Pipeline consequences of the Pfizer and Abbott collaboration terminations, and whether any further impairments or changes to development plans arise.
- Liquidity and debt service needs alongside planned capital spending; reconcile the filing’s operating-cash-flow figures, which differ slightly between the cash-flow statement ($34.732 million) and MD&A ($34.763 million; another MD&A table gives $34.8 million).
- Whether BioThrax’s dependence on government procurement, annual appropriations, manufacturing execution and regulatory approvals changes materially.