Emergent BioSolutions Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Amounts are in U.S. dollars unless noted. Financial statements are unaudited.
Business context
Emergent develops and manufactures vaccines and therapeutics in biodefense and biosciences. BioThrax, its only marketed product, generated substantially all product sales and was sold primarily to the U.S. government. Biosciences remained development-focused and loss-making.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $58.8m | $74.0m | $165.4m | $182.9m |
| Product sales | $43.7m | $67.3m | $120.7m | $162.0m |
| Contracts and grants | $15.1m | $6.7m | $44.7m | $20.9m |
| Operating income (loss) | $1.4m | $20.6m | ($13.9m) | $38.6m |
| Net income (loss) attributable to Emergent | $1.5m | $13.1m | ($5.6m) | $25.5m |
| Diluted earnings (loss) per share | $0.04 | $0.41 | ($0.16) | $0.80 |
Q3 consolidated net loss was $0.1m; the $1.7m loss attributable to noncontrolling interests resulted in $1.5m of income attributable to Emergent. Product-sales gross margin was approximately 75.5% in Q3, versus 82.9% a year earlier, reflecting lower production yields.
Cash flow, balance sheet and debt
- At September 30, cash and cash equivalents were $125.3m and investments were $3.5m, totaling $128.8m; accounts receivable were $49.0m. Current assets were $236.8m and current liabilities $68.9m (current ratio approximately 3.4x).
- Cash flow statement reports nine-month operating cash use of $24.0m, investing cash use of $35.6m, and financing cash provided of $16.7m. Cash declined $43.7m to $125.3m. Capital expenditures were $34.2m, primarily for the Baltimore facility and equipment.
- Total debt was $53.8m, compared with $47.4m at year-end 2010; $4.9m was current. A new PNC construction facility had $21.3m drawn against a $30.0m commitment. A separate $12.0m equipment loan was undrawn. The PNC loans carry financial covenants, including a minimum $50.0m cash and liquid-investments balance.
- Property, plant and equipment rose to $188.2m from $152.7m at year-end. Stockholders’ equity was $384.5m.
Material changes and management commentary
- Q3 revenue fell 21%; product sales declined 35%, as BioThrax doses delivered fell 38%. For the nine months, product sales fell 25%, principally because of lower dose deliveries tied to testing-capacity redeployment and lower production yields.
- Contracts and grants revenue rose 125% in Q3 and 114% for the nine months, reflecting BARDA development work and Abbott and Pfizer collaborations.
- Research and development expense increased 38% in Q3 to $29.2m and 60% for the nine months to $95.5m, including higher biosciences development activity and acquired programs. SG&A fell 16% in Q3, but increased 3% for the nine months, which included UK restructuring costs.
- The September 30 CDC award provides for up to 44.75 million BioThrax doses over five years, with a maximum potential value of $1.25bn. Deliveries were expected to begin in December 2011 after the current contract; procurement remains subject to funding and final contract terms.
- Management expects continued investment in product development and says spending levels will depend on clinical progress, collaborations, manufacturing needs and external funding. No specific full-year financial guidance is provided in the filing.
Risks, contingencies and unusual items
- Dependence on U.S. government BioThrax procurement remains substantial. The CDC award is subject to funding and final documentation; government demand, appropriations, contract terms and delivery timing can affect revenue materially.
- BioThrax deliveries were affected by manufacturing yields and potency-testing capacity. The company also relies on a single Lansing manufacturing location and third parties for vial filling; facility qualification, regulatory compliance, supply continuity and production yields are material risks.
- Operating cash use and capital spending reduced cash during the period. Debt increased, and the PNC facilities carry covenants and secured collateral. Management notes that additional financing may be needed depending on future sales, development spending and facility requirements.
- Contingent value rights were valued at $15.9m, including a $1.3m nine-month fair-value charge based on management’s unobservable milestone assumptions.
- The Trubion acquisition-related class actions were settled and dismissed; Emergent paid $475,000 in attorneys’ fees and costs. The company reported no other litigation it believed would materially affect operations.
- The FDA’s August 2011 inspection produced observations for which corrective action was underway; prior inspection observations had been closed. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether the CDC award was converted into a final contract, appropriated funding was available, and BioThrax deliveries began as expected.
- Subsequent BioThrax dose volumes, manufacturing yields, potency-testing capacity and progress in qualifying Building 55 and the Baltimore facility.
- Cash-flow presentation: the cash flow statement reports operating cash use of $24.0m, while MD&A gives $24.8m and describes its figure as including exchange-rate effects; reconcile the difference against the underlying filing schedules.
- Compliance with PNC financial covenants, remaining construction-loan availability, capital spending and the trajectory of debt and liquidity.
- Clinical and funding progress across biosciences and biodefense programs, including collaborator participation and government contract options; these programs carry development and commercialization uncertainty.