Emergent BioSolutions Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone Q4 filing; unaudited Q4 figures are included below. Amounts are in U.S. dollars.
Business context
Emergent is a specialty pharmaceutical company with Biodefense and Biosciences segments. BioThrax, its only marketed product, generated nearly all product sales and is sold primarily to the U.S. government. Biosciences had no approved products or product sales. Government development contracts and grants help fund research and development.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $281.9m | $273.4m |
| Product sales | $215.9m | $202.4m |
| Contracts and grants | $66.0m | $71.0m |
| Operating income | $30.0m | $32.1m |
| Net income attributable to Emergent | $23.5m | $23.0m |
| Basic / diluted EPS | $0.65 / $0.65 | $0.65 / $0.64 |
| Operating cash flow | $39.6m | $12.2m |
| Cash and cash equivalents at year-end | $141.7m | $143.9m |
| Working capital | $201.4m | $183.4m |
| Long-term debt, including current portion | $62.8m | $59.5m |
FY 2012 operating margin was approximately 10.6%; net income attributable to Emergent was approximately 8.3% of revenue. Product gross margin, calculated as product sales less cost of product sales, was approximately 78.7%.
Unaudited Q4 2012 revenue was $94.6m, operating income $24.0m, net income $16.1m, and basic/diluted EPS $0.45/$0.44. Quarterly results were uneven: Q1 reported a net loss of $6.8m, while Q4 generated the highest quarterly revenue.
Capital expenditures were $53.8m and operating cash flow was $39.6m, implying approximate operating cash flow less capital expenditures of negative $14.2m. Cash declined $2.2m during the year. Cash plus accounts receivable was $237.7m at year-end; accounts receivable was $96.0m. The company reported $201.4m of working capital and was in compliance with debt covenants, including a $50m minimum cash and liquid investments requirement.
Changes versus prior period
- Total revenue increased 3.1%; BioThrax sales rose 6.7%, as doses delivered increased 15%, partly offset by a 7% decline in average price per dose.
- Contracts and grants revenue fell 7.0%, mainly reflecting lower collaboration revenue and reduced activity on certain BARDA/NIAID programs.
- Operating income decreased 6.6%, despite higher sales, reflecting increased product costs and a $9.6m impairment charge for SBI-087. R&D expense fell 3.7% to $120.2m; SG&A rose 2.3% to $76.0m.
- Operating cash flow increased to $39.6m from $12.2m, although receivables rose $21.9m, primarily due to collection timing on CDC billings.
- Government agencies accounted for 97.9% of revenue in 2012, compared with 91.3% in 2011, underscoring customer concentration.
Outlook, commentary, risks and notable items
- No specific full-year 2013 revenue or earnings guidance is provided. Management says results may fluctuate with BioThrax delivery timing and development-contract activity, and expects to prioritize promising later-stage programs and externally funded development.
- The CDC contract covers up to 44.75m BioThrax doses through September 2016, with a maximum value of approximately $1.25bn subject to funding. About $477m had been committed and approximately $235m of doses delivered by December 31, 2012.
- BioThrax and government-funded development contracts remain central to performance. Congressional appropriations, potential sequestration, changes in stockpile priorities, contract options, and government termination rights could affect demand and revenue.
- In February 2013, Emergent announced that MVA85A did not provide statistically significant protection in a Phase IIb infant TB trial and said it would cease development and expects to close the Oxford-Emergent tuberculosis joint venture.
- Emergent recorded a full $9.6m impairment of SBI-087 after Pfizer ended its development program and Emergent decided not to continue the asset. Abbott’s TRU-016 collaboration ended in March 2012; Emergent continued the program independently.
- Building 55 BioThrax scale-up and regulatory qualification remained in progress; consistency-lot manufacturing began in 2012. A BARDA CIADM contract has an eight-year base period valued at approximately $163m, with option periods. The company also licensed a U.S. pandemic influenza vaccine candidate under the arrangement.
- Subsequent events include a planned $27.5m headquarters-building purchase and a UK/South Africa restructuring expected to cost approximately $3m. These are post-year-end items, not FY 2012 expenses.
- Other risks include manufacturing interruption or lot-release delays, dependence on single-source materials, clinical and regulatory uncertainty, competition, product-liability exposure, and debt maturities including a $23.1m scheduled amount in 2014 and $30.0m after 2016.
- The auditor gave an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting at year-end.
Investor verification priorities
- Track CDC funding, BioThrax dose deliveries, price per dose, receivable collections, and the timing of future procurement awards.
- Review Building 55 qualification and production progress, capacity utilization, FDA lot releases, and remaining capital needs.
- Confirm the cash-flow impact of planned capital spending, the $27.5m building purchase, debt repayments and balloon maturities, and covenant headroom.
- Assess pipeline spending and milestones after the MVA85A discontinuation, SBI-087 impairment, and TRU-016 program transition.
- Monitor the effect of the planned international restructuring and the extent to which development costs remain supported by government contracts and grants.