Emergent BioSolutions Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; financial statements are unaudited. Emergent operates Biodefense and Biosciences businesses. Biodefense revenue is primarily tied to U.S. government purchases, especially BioThrax. The company announced plans to spin off certain Biosciences operations; contract manufacturing would remain with Emergent.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $164.9 million | $138.0 million | $354.7 million | $302.2 million |
| Operating income | $53.0 million | $31.0 million | $46.1 million | $13.4 million |
| Net income | $36.9 million | $21.8 million | $29.5 million | $6.6 million |
| Diluted EPS | $0.79 | $0.49 | $0.69 | $0.17 |
| Operating margin | 32.1% | 22.5% | 13.0% | 4.4% |
Q3 revenue grew 19.6% year over year, led by BioThrax deliveries. Nine-month revenue increased 17.4%. Product sales were $124.0 million in Q3 and $224.3 million for nine months; contract manufacturing was $11.3 million and $32.4 million, respectively; contracts, grants and collaborations were $29.6 million and $98.0 million.
Cash and cash equivalents were $308.7 million at September 30, 2015, versus $280.5 million at year-end 2014. Current assets were $473.5 million and current liabilities $88.7 million, a current ratio of approximately 5.3. Long-term indebtedness was $253.0 million. The company reported $41.4 million of operating cash flow and $33.6 million of capital expenditures for nine months, implying approximately $7.8 million of operating cash flow after capital expenditures. Cash increased $28.2 million during the period.
Material changes and notable items
- Q3 product sales rose 47% to $124.0 million, primarily as BioThrax sales to the CDC increased to $109.8 million from $65.9 million. Management attributed the change mainly to delivery timing.
- Nine-month product sales rose 13%; contract manufacturing revenue increased 52%, including a full-period contribution from the Cangene-acquired fill/finish facility and Ebola vaccine services. Contracts, grants and collaborations revenue increased 19%, supported by Anthrasil funding and milestone receipts.
- Nine-month R&D expense increased 9% to $121.5 million, with higher Biodefense development spending partly offset by lower Biosciences spending. SG&A increased 13% to $102.5 million, including acquisition-related costs, IXINITY launch costs, and initial spin-off expenses.
- In September, toxicity-related data for GC-072 prompted a $9.8 million non-cash impairment of the EV-035 in-process R&D asset, leaving a $0.7 million carrying value. The company also recorded a $10.9 million reduction in contingent consideration liabilities, a non-cash benefit recognized in expenses.
- The FDA approved IXINITY in April 2015. Anthrasil received FDA approval in March, triggering a $7.0 million U.S. government milestone recorded as product sales revenue.
Outlook, risks and contingencies
- Management expects continued dependence on BioThrax sales to the U.S. government and notes that quarterly results can vary with delivery schedules and the timing of work under contracts and grants. The CDC contract covers up to 44.75 million doses through September 30, 2016 and is subject to funding; approximately $1.1 billion had been committed as of September 30, 2015.
- The company expected to complete the planned tax-free spin-off of certain Biosciences operations by mid-2016, subject to approvals and other conditions. The filing cautions that it may be delayed, completed on different terms, or not completed, and that costs and execution risks could be significant.
- New awards included a two-year, $19.7 million BARDA Ebola monoclonal antibody development and manufacturing contract, and CDC VIGIV contract options valued at $44.0 million over two years.
- Key risks include government appropriations and contract awards, customer concentration, manufacturing and regulatory compliance, product development and approval uncertainty, debt service, and the potential for the spin-off to disrupt operations. The company reported no legal proceedings requiring disclosure and said disclosure controls were effective.
Important facts for investors to verify
- BioThrax delivery timing, remaining CDC contract funding, and prospects for a successor procurement arrangement.
- Whether the Biosciences spin-off meets its stated timing and conditions, and the expected transaction costs and resulting business allocations.
- Further development decisions and impairment risk for EV-035 following the GC-072 toxicity signal.
- Cash generation relative to capital spending, debt obligations, and planned spin-off and manufacturing investments.
- IXINITY commercial uptake and the sustainability of government-funded development and contract manufacturing revenue.