Emergent BioSolutions Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Dollar amounts are in millions unless stated otherwise. Comparative 2022 figures are restated. Emergent sells medical countermeasure and other products and provides contract development and manufacturing (CDMO) services.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $270.5 | $239.9 | $772.7 | $787.3 |
| Gross margin | $87.2 (33%) | $75.3 (33%) | $232.8 (31%) | $280.4 (37%) |
| Operating loss | $(242.1) | $(45.3) | $(682.6) | $(114.7) |
| Net loss | $(263.4) | $(87.1) | $(711.0) | $(144.6) |
| Loss per diluted share | $(5.08) | $(1.75) | $(13.97) | $(2.88) |
| Net cash used in operating activities | Not presented quarterly | $(238.4) | $(126.9) |
Q3 product sales rose 34% to $249.8, led by NARCAN sales of $142.1, up 62%; CDMO revenue fell 61% to $14.2. Nine-month revenue declined 2%: product sales increased 5% to $695.4, while CDMO revenue fell 38% to $57.7 and contracts and grants revenue fell 43% to $19.6. Nine-month product gross margin was $326.8, down 19%; Services gross margin remained negative at $(94.0).
Losses included non-cash impairment charges of $218.2 for Products-segment goodwill in Q3 and $306.7 for CDMO long-lived assets in Q2. The company also recorded a $74.2 gain on the May sale of its travel health business; Q3 included a $0.7 reduction to that gain for a working-capital adjustment. Q3 interest expense was $19.7, versus $8.5 a year earlier; nine-month interest expense was $66.2, versus $24.5.
At September 30, cash and cash equivalents were $87.8, down from $642.6 at year-end 2022. Current assets were $720.8 and current liabilities $664.0, for working capital of $56.8. Gross debt was $866.3, including $450.0 of 3.875% notes due 2028 and $413.3 outstanding under the secured credit facility; the balance-sheet debt carrying amount was $861.8. The company reported $88.3 of unused revolver capacity.
Material changes and management commentary
- Liquidity and going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The May 2023 credit amendment extended secured-facility maturity to May 15, 2025, but requires at least $75.0 of equity and/or unsecured debt by April 30, 2024, minimum monthly EBITDA through February 2024, and quarterly term-loan principal payments of about $3.9. Debt was classified as current in light of these provisions.
- Covenant risk: Emergent reported compliance at September 30, 2023, but anticipated a possible minimum-EBITDA covenant breach as early as the December 2023 measurement period absent a cure or waiver; a later possible breach was also identified for February 2024. A default could trigger acceleration and cross-defaults. The company engaged legal and financial advisers to review capital-structure alternatives.
- Restructuring and CDMO: January and August workforce reductions affected approximately 125 and 400 employees, respectively. The August plan reduces investment in and emphasis on CDMO. Management estimated annualized savings of more than $60 million from the January plan and more than $100 million from the August plan when fully implemented. Nine-month restructuring charges totaled $29.9.
- Portfolio developments: Emergent launched over-the-counter NARCAN in Q3. FDA approved CYFENDUS in July 2023. A 10-year BARDA Ebanga contract has a stated potential value of up to approximately $704 million if all options are exercised; option exercise and procurement are not assured.
- Travel health divestiture: The May sale to Bavarian Nordic generated $270.2 net cash proceeds and a $74.2 pretax gain. Additional payments could include up to $80 million in development and approval milestones and up to $30 million in sales-based earn-outs; these are contingent, not assured proceeds.
- Financial reporting: The company restated 2022 interim results following an error in state deferred-tax calculations and also corrected other adjustments. Disclosure controls were ineffective at September 30 because of a material weakness in tax-control design and valuation-allowance review. Management reported the inventory-accounting weakness had been remediated, while tax-control remediation remained in progress.
Risks, contingencies, and outlook
No clear full-year revenue or earnings guidance is provided in the supplied filing text. Results are expected to remain variable because of the timing of government orders and deliveries, manufacturing activity, and funding decisions. Key risks include the going-concern and covenant conditions, ability to raise required capital, government procurement and appropriations, product delivery and manufacturing quality, CDMO underperformance, NARCAN competition, and execution of cost reductions.
The filing describes securities and derivative litigation related to past CDMO manufacturing capabilities and related government inquiries; possible losses were not reasonably estimable. Emergent disputes Janssen’s termination and breach allegations and reported $153.8 of related long-term assets, including materials and other amounts it believes are recoverable. The filing also notes that the FDA closed its Camden facility inspection in October 2023 with a “Warning Letter close-out letter,” while remaining objectionable conditions still require attention. The company was assessing a cyber incident involving misuse of authorized access by a business partner, identified in October 2023.
Important facts for investors to verify
- Whether Emergent raised the required $75 million by April 30, 2024 and maintained or obtained relief from the EBITDA and other credit covenants.
- Subsequent cash, operating cash use, revolver availability, debt maturities, and any developments affecting the going-concern assessment.
- Actual NARCAN OTC uptake, competitive impact, product margins, and government procurement timing for CYFENDUS and other countermeasures.
- Progress and realized savings from the workforce reductions, and the financial implications of the reduced CDMO focus.
- Updates on tax-control remediation, restated reporting, Janssen arbitration and asset recoverability, shareholder litigation, and the cyber incident.