Emergent BioSolutions Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with the three months ended March 31, 2011. Financial amounts below are in millions of dollars unless stated otherwise.
Business context
Emergent develops and manufactures vaccines and therapeutics in its Biodefense and Biosciences segments. BioThrax, its only marketed product, is an FDA-approved anthrax vaccine, and sales are substantially dependent on the U.S. government. Biosciences remains development-stage and generated no product sales.
On March 8, 2012, the company entered a CDC contract to supply up to 44.75 million BioThrax doses over five years, for a potential maximum value of $1.25 billion subject to funding availability. Deliveries began in December 2011; approximately 2.0 million doses had been delivered and recognized through March 31, 2012.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Total revenue | $50.3 | $18.5 | Up $31.8; BioThrax sales drove most of the increase. |
| Product sales | $34.4 | $5.6 | Up $28.8; BioThrax doses delivered increased 636%. |
| Contracts and grants | $16.0 | $12.9 | Up $3.0, mainly from BARDA-funded BioThrax manufacturing and PreviThrax work. |
| Cost of product sales | $7.5 | $1.1 | Increased with higher BioThrax volume; product gross margin was approximately 78%. |
| Research and development | $26.2 | $34.8 | Down $8.5, including lower Biosciences development spending. |
| Selling, general and administrative | $19.5 | $18.2 | Up $1.3, primarily legal and other professional services. |
| Operating loss | $(12.5) | $(35.5) | Narrowed, despite a $9.6 impairment charge in 2012. |
| Net loss attributable to Emergent | $(6.8) | $(21.4) | Loss per diluted share was $(0.19), versus $(0.61). |
| Operating cash flow | $15.8 | $(22.7) | 2012 cash generation benefited mainly from collections of CDC receivables. |
| Capital expenditures | $22.3 | $8.4 | Primarily Baltimore facility renovation and equipment. |
At March 31, 2012, cash and cash equivalents were $150.4, accounts receivable $43.7, current assets $239.5, and current liabilities $43.0. Total assets were $514.7, down from $546.9 at December 31, 2011. Long-term indebtedness totaled $60.9, including $3.3 current; total liabilities were $102.6. Cash increased $6.5 during the quarter. The statements report operating cash flow of $15.820 million, while MD&A gives $15.852 million; investors should confirm the difference.
Segment results showed Biodefense net income of $14.3 and Biosciences net loss of $19.9; “All Other” recorded a $1.2 loss. The company’s overall loss reflects substantial development and corporate costs despite improved BioThrax sales.
Material changes and unusual items
- SBI-087 impairment: Emergent recorded a $9.6 non-cash charge, writing off the entire carrying value of the in-process research and development asset. Pfizer had indicated in March it would stop one development program; in April it indicated it would stop the second and intended to terminate the agreement. Emergent said it did not plan to continue SBI-087 development. No goodwill impairment was recorded.
- Collaborations: The Abbott collaboration covering TRU-016 and other CD37 therapeutics terminated March 20, 2012, and rights reverted to Emergent. Pfizer also indicated in April its intent to terminate the CD20 agreement; the filing says termination was anticipated, not yet formally noticed. Potential milestone and royalty rights under that agreement would end, while specified low-single-digit royalties on certain Pfizer biosimilar products would survive, subject to conditions.
- Asset sale: Two Frederick, Maryland buildings were sold for $12.2; the company reported no gain or loss. Cash-flow proceeds were $11.8 after costs.
- Other income: Net other income included an $854,000 amount, primarily a business-interruption insurance recovery related to a Lansing power outage.
- Debt and investment: The company repaid the remaining loans tied to the Frederick buildings and received $9.6 of advances under PNC construction and equipment loans. Baltimore facility capital spending remained significant.
Outlook, commentary and risks
The filing provides no specific full-year revenue or earnings guidance. Management expects quarterly results to vary with BioThrax delivery timing and work performed under contracts and grants. It expects research and development spending to increase as programs advance, while the company’s capital needs depend on product sales, external development funding, clinical progress and facility work. Management expects to fund planned needs with cash, BioThrax revenue, collaboration and government funding, and potentially additional financing.
Key risks include dependence on U.S. government BioThrax purchases and annual appropriations; contract funding, delivery and fixed-price performance risks; manufacturing capacity, facility qualification and lot-release requirements; clinical, regulatory and commercialization uncertainty; and reliance on collaborators and third parties. The CDC contract’s maximum value is conditional on funding, and the government may modify or terminate contracts. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Leadership changed on April 1, 2012: Daniel Abdun-Nabi became CEO, while Fuad El-Hibri continued as executive chairman. The company also disclosed a May 3 amendment to consultant Robert Kramer’s agreement, effective January 1, 2012.
Important facts for investors to verify
- CDC contract funding, dose-delivery schedule, pricing and the actual pace of BioThrax collections and revenue recognition.
- Status and effective termination date of the Pfizer agreement, rights reversion, and which milestone or royalty provisions remain available.
- Whether any alternative development or licensing plans emerge for SBI-087 or the returned TRU-016 rights.
- Progress, cost and regulatory qualification of Building 55 and the Baltimore facility, alongside expected capital spending and debt service.
- The operating cash flow difference between the financial statements ($15.820 million) and MD&A ($15.852 million).
- Availability of government and grant funding, and any changes to the company’s cash requirements or financing plans.