Emergent BioSolutions Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited consolidated financial statements; amounts below are in millions of dollars unless otherwise stated. Emergent is a life sciences company selling public-health-threat products and providing contract development and manufacturing services (CDMO). The U.S. government is its largest customer.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $343.0 | $192.5 |
| Operating income (loss) | $95.4 | $(11.6) |
| Net income (loss) | $69.7 | $(12.5) |
| Diluted EPS | $1.28 | $(0.24) |
| Cash from operating activities | $5.1 | $57.8 |
| Capital expenditures and other PP&E purchases | $56.1 | $24.2 |
| Cash and cash equivalents at period end | $547.8 | $621.3 at Dec. 31, 2020 |
| Total debt carrying amount | $859.1 | $874.8 at Dec. 31, 2020 |
| Working capital | $810.9 | $811.4 at Dec. 31, 2020 |
Revenue grew 78% year over year, and operating and net margins were approximately 27.8% and 20.3%, respectively. Operating cash flow was low relative to earnings: the company attributed this primarily to working-capital changes, including a $99.9 million inventory increase. Cash and restricted cash declined by $73.5 million during the quarter.
Revenue mix: CDMO services were $183.8 million, product sales $137.9 million, and contracts and grants $21.3 million. Product sales and CDMO services together generated $321.7 million of revenue against $99.3 million of reported related cost; the filing does not separately state a CDMO or product gross margin.
Material changes versus the prior comparable period
- CDMO revenue increased $162.1 million, principally from COVID-19-related public-private partnership work with BARDA and arrangements with innovators. The company also recognized $18.7 million of lease revenue within CDMO revenue.
- Product sales fell $10.3 million, or 7%. NARCAN sales rose 3% to $74.2 million, and anthrax vaccine sales rose 6% to $55.0 million. Other product sales declined 64% to $8.7 million, largely from timing of BAT deliveries and weaker travel-health vaccine demand amid reduced international travel.
- Research and development expense increased 23% to $52.5 million, primarily reflecting COVID-HIG development costs; SG&A rose 16% to $80.9 million, mainly from staffing and professional services.
- Operating cash flow decreased from $57.8 million to $5.1 million, while investing outflows increased, largely due to CDMO infrastructure and equipment investments.
Liquidity, debt and outlook
At March 31, 2021, Emergent reported $547.8 million of cash and cash equivalents and $597.1 million of unused capacity on its $600 million revolving credit facility. Management said liquidity was sufficient to fund operations for the next 12 months. Debt included a $416.2 million term loan due 2023 and $450 million of 3.875% senior notes due 2028; the 2.875% convertible notes matured and were paid in full in January 2021. The company reported compliance with credit-facility covenants. A hypothetical 1 percentage-point rise in the eurocurrency rate would increase annual interest expense by approximately $0.7 million.
No specific full-year revenue or earnings guidance is provided in the supplied filing text. The company reported approximately $1.7 billion of expected revenue associated with remaining performance obligations and other arrangements, with a majority expected within 24 months. Timing and amounts depend partly on government funding, development outcomes and contract performance; unexercised contract options are excluded.
Risks, contingencies and unusual items
- Bayview manufacturing and FDA matters: The company disclosed that, at FDA request, it had agreed not to initiate manufacturing of new material at its Bayview facility and to quarantine existing material there pending remediation of inspection findings in an FDA Form 483. The filing cautions that COVID-19 programs may be affected by manufacturing, regulatory and capacity constraints.
- Government dependence: Procurement, funding, option exercises and delivery timing—particularly for AV7909, BioThrax and ACAM2000—are significant revenue risks. AV7909 remained unlicensed; the company planned to submit a BLA during 2021 and noted that FDA review could require further studies or delay licensure.
- COVID-19 and travel: The pandemic may disrupt operations, suppliers, trials and deliveries; travel restrictions continued to weigh on travel-health product sales. COVID-19 product candidates may not prove safe or effective or receive authorization.
- Legal matters: Teva NARCAN 4 mg patent litigation was on appeal after a 2020 district-court ruling in Teva’s favor; the 2 mg case was stayed pending that appeal. On or about April 27, 2021, the company received a securities class-action complaint filed in Maryland and said it believed the allegations were false and intended to defend the matter vigorously.
- Other risks: The filing highlights manufacturing quality and continuity, single-source suppliers, regulatory compliance, NARCAN generic competition, government-contracting and funding uncertainty, and debt and financing risks. Management concluded disclosure controls were effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Progress and FDA status of Bayview remediation, including any effect on quarantined material, production, customer commitments or revenue.
- Whether the unusually high COVID-related CDMO revenue converts into sustained, executable work and cash collections.
- AV7909 licensure and procurement milestones, government funding and contract renewals or option exercises.
- Inventory growth, working-capital cash use, capital spending and the company’s ability to maintain liquidity while servicing debt.
- Developments in the Teva NARCAN patent appeal and the securities class action, including potential business or financial effects.