Emergent BioSolutions Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparatives are for Q1 2015, with prior segment results recast to the company’s new Biodefense and Aptevo structure. Emergent planned to spin off Aptevo as a separate public company.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $111.0 million | $63.6 million; up 74% |
| Operating income (loss) | $8.6 million | $(28.3) million |
| Net income (loss) | $4.0 million | $(21.5) million |
| Operating margin | 7.7% | (44.5)% |
| Diluted EPS | $0.10 | $(0.57) |
| Operating cash flow | $37.8 million provided | $65.9 million used |
| Capital expenditures | $18.2 million | $9.1 million |
| Cash and cash equivalents | $341.0 million at March 31 | $312.8 million at December 31, 2015 |
| Current assets / current liabilities | $528.2 million / $90.5 million | At March 31, 2016 |
| Debt | $247.2 million carrying amount of long-term indebtedness; approximately $253 million total consolidated indebtedness, including $250 million of convertible notes | At March 31, 2016 |
Product sales increased to $71.7 million from $18.3 million, principally because BioThrax shipments to the CDC resumed after shipments had been suspended in Q1 2015 following foreign particles found in a limited number of vials. BioThrax sales were $59.1 million versus $5,000. Contracts, grants and collaborations revenue was $31.7 million, down 4%; contract manufacturing revenue was $7.6 million, down 38%.
Operating expenses included $28.5 million of product-sales and contract-manufacturing costs, $34.2 million of R&D, and $39.8 million of SG&A. R&D fell 12%, while SG&A rose 15%, including anticipated spin-off costs and professional services supporting growth initiatives. The tax provision was $3.3 million and included a $1.2 million one-time non-cash charge related to tax planning and restructuring.
By segment, Biodefense generated $103.0 million of external revenue and $23.0 million of operating income. Aptevo generated $8.0 million of external revenue and recorded a $14.5 million operating loss.
Material changes and cash flow
- Revenue and earnings rebounded from the prior-year quarter, when BioThrax shipments were suspended; Q1 2016 results also reflect product and contract timing.
- Operating cash flow improved to $37.8 million, helped by a $51.2 million reduction in accounts receivable, primarily collections from the CDC. Inventory increased $11.3 million, mainly due to BioThrax delivery timing; accrued compensation declined $8.3 million, mainly due to payment of 2015 bonuses.
- Investing cash outflow was $18.2 million, including infrastructure and equipment spending and construction of a third manufacturing suite at the Baltimore CIADM facility. Financing provided $8.6 million, primarily from stock-option tax benefits and employee equity-plan proceeds.
- Cash increased by $28.2 million during the quarter. The filing reports current assets of $528.2 million and current liabilities of $90.5 million, indicating substantial near-term balance-sheet liquidity.
Outlook, risks and unusual items
- BioThrax contract: The existing CDC procurement contract was scheduled to expire September 30, 2016. In April 2016, the CDC stated its intent to award a follow-on contract on October 1 and anticipated further purchases under the existing contract, but Emergent had not secured the new contract. The CDC also indicated planned remaining purchases would be below the doses still available under the current contract. Future procurement remains subject to government funding.
- Aptevo separation: Emergent expected to complete the spin-off in mid-2016, subject to approvals and other conditions. At separation, Emergent expected to provide Aptevo about $40 million in cash and commit to provide another $20 million by promissory note within six to 12 months. Completion, timing, costs and anticipated benefits were uncertain.
- Program changes: In April 2016, BARDA declined to exercise the clinical-trial option for PreviThrax; Emergent said it would cease further development. The company also expected future PreviThrax spending to decline.
- Product and manufacturing risks: Emergent identified reliance on U.S. government BioThrax purchases, government appropriations, manufacturing compliance and capacity, and sole-source suppliers as significant risks. It disclosed that its IXINITY bulk-drug-substance supplier had released only one of nine lots ordered in 2015 and none in 2016 at the time described, creating a potential supply shortage.
- Development and financing risks: MOR209/ES414’s trial regimen and administration required adjustment; the MorphoSys collaboration was restructured, with reduced cost sharing and potential milestone payments of up to $74 million rather than up to $163 million. Debt service, restrictive credit-facility covenants, and the possibility of additional financing needs were also cited.
- Other items: Management said disclosure controls were effective at a reasonable-assurance level. An ERP implementation was ongoing; management did not expect a material adverse effect on internal controls. The filing reports no applicable legal proceedings.
Investor verification priorities
- Confirm whether and on what terms the CDC awarded the follow-on BioThrax contract, including funding, dose volume, pricing and delivery timing.
- Track the Aptevo spin-off’s completion, costs, final assets and liabilities, and the promised cash and note funding.
- Monitor IXINITY manufacturing recovery, supply availability and any required FDA notification.
- Assess cash conversion and BioThrax delivery timing: operating cash flow benefited materially from receivable collections while inventory rose.
- Reconcile debt disclosures: the balance sheet shows $247.2 million of long-term indebtedness, while the risk discussion cites approximately $253 million total consolidated indebtedness, including $250 million of convertible notes.
- Note that the cash-flow statement reports operating cash flow of $37.795 million, while MD&A cites $37.806 million; the filing text does not explain this small difference.