Emergent BioSolutions Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; balance-sheet comparisons are to December 31, 2011. Unless stated otherwise, amounts are in U.S. dollars. Financial statements are unaudited.
Business context
Emergent is a specialty biopharmaceutical company with Biodefense and Biosciences segments. BioThrax, its FDA-approved anthrax vaccine, supplies substantially all product sales and is sold primarily to the U.S. government. Biosciences remains development-stage and loss-making. The company’s results depend heavily on government procurement, funding, and the timing of BioThrax deliveries.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $66.6 million | $58.8 million | $187.3 million | $165.4 million |
| Product sales | $54.0 million | $43.7 million | $141.5 million | $120.7 million |
| Contracts and grants | $12.6 million | $15.1 million | $45.8 million | $44.7 million |
| Operating income (loss) | $9.8 million | $1.4 million | $5.9 million | $(13.9) million |
| Net income (loss) attributable to Emergent | $6.6 million | $1.5 million | $7.4 million | $(5.6) million |
| Diluted EPS | $0.18 | $0.04 | $0.20 | $(0.16) |
Q3 product sales rose 24% year over year, primarily on 37% more BioThrax doses delivered, partly offset by a 10% lower average price per dose. Nine-month product sales rose 17% on 28% more doses, partly offset by a 9% lower price per dose. Delivery timing drove much of the volume increase. Contracts and grants revenue fell in Q3 but edged higher year to date.
Product-sales gross margin, calculated as product sales less cost of product sales, was approximately 81% in Q3 2012 versus 75% in Q3 2011, and 78% for the first nine months versus 77% in 2011. Operating margin was approximately 14.7% in Q3 and 3.2% year to date, compared with 2.4% and (8.4%), respectively, in the prior-year periods.
At September 30, cash and cash equivalents were $197.9 million, accounts receivable $17.1 million, and current assets $252.9 million against current liabilities of $50.6 million. Working capital was approximately $202.4 million and the current ratio approximately 5.0x. Total debt was $63.0 million, including $4.1 million current; cash exceeded debt by approximately $134.9 million. The company reported compliance with all debt covenants.
For the first nine months, operating cash flow was $81.6 million versus cash used of $24.7 million a year earlier. The improvement was principally associated with a $57.0 million reduction in accounts receivable, reflecting collection timing. Investing cash outflow was $27.2 million, including $40.9 million of capital expenditures, partly offset by proceeds from asset sales. Financing cash outflow was $0.4 million. Cash increased $54.0 million; operating cash flow less capital expenditures was approximately $40.7 million.
Material changes and unusual items
- Biodefense generated $66.2 million of Q3 revenue and $20.8 million of segment net income; Biosciences recorded a $12.2 million segment loss. For the first nine months, Biodefense revenue was $181.8 million and segment net income $59.4 million, while Biosciences recorded a $47.0 million loss.
- Research and development expense decreased 6% in Q3 and 12% year to date, mainly reflecting lower Biosciences development activity. SG&A increased 10% in Q3 and 1% year to date.
- Pfizer ended development of SBI-087, and Emergent also chose not to continue the program. The company wrote off the entire $9.6 million IPR&D asset in the first nine months; it recorded no goodwill impairment.
- Other income included a $1.7 million business-interruption insurance recovery related to a Lansing power outage. A $3.0 million reduction in contingent value right obligations reflected Pfizer program discontinuation; the company also made a $1.7 million CVR payment related to Abbott.
- The company sold two Frederick, Maryland buildings for $12.2 million, with no gain or loss. It repurchased 97,600 shares for $1.5 million through September 30; an additional approximately 301,000 shares were repurchased for $4.4 million in October.
- The Abbott collaboration terminated in March 2012 and the Pfizer agreement terminated in September. The company retained specified Pfizer biosimilar royalty rights after termination.
Outlook, commentary, and risks
- The CDC contract covers up to 44.75 million BioThrax doses through September 2016, with total potential value of approximately $1.25 billion subject to funding. In Q3, the government appropriated an incremental $252.3 million for up to 9.3 million doses through September 2014. Emergent expected deliveries to begin late in Q4 2012 and finish in Q1 2014.
- BARDA awarded an eight-year contract to establish a Center for Innovation in Advanced Development and Manufacturing, with funding of up to approximately $160 million. Obligations include facility expansion, securing a pandemic influenza vaccine candidate and related intellectual-property rights, and obtaining facility licensure. The filing gives no consolidated full-year revenue or earnings guidance.
- Management expects ongoing investment in product development and says R&D spending may increase depending on trial progress, collaborators, manufacturing needs, and regulatory activity. Results may fluctuate quarterly with BioThrax delivery timing and contract work.
- Liquidity and funding remain exposed to government appropriations and contract options. Substantially all product sales depend on BioThrax and U.S. government demand; funding availability, dose volumes, delivery schedules, and pricing may change.
- Key operational risks include manufacturing qualification and validation at Building 55 and the Baltimore facility, reliance on the Lansing site and certain single-source suppliers, and the technical and regulatory complexity of biologics manufacturing. Product candidates also face clinical, regulatory, collaboration, and commercialization risks.
- Debt bears variable rates in part; the company does not hedge interest-rate or foreign-exchange exposure. It reported no material change in internal control over financial reporting and concluded disclosure controls were effective. Legal proceedings were reported as not applicable.
Important facts for investors to verify
- CDC appropriations, BioThrax dose deliveries, price per dose, and fulfillment schedule under the procurement contract.
- Progress, costs, funding terms, and required milestones for the BARDA Center contract and the Building 55 and Baltimore facility projects.
- Whether operating cash generation is sustained after the favorable accounts-receivable collection timing, and the level of ongoing capital spending.
- Development priorities and funding for Biosciences programs following the Pfizer and Abbott terminations, including the implications of the SBI-087 impairment.
- Debt balances, variable-rate exposure, covenant compliance, and remaining authorization and subsequent activity under the $35 million share-repurchase program.