EBS

Emergent BioSolutions Inc. 10-K Summary (Fiscal Year Ended Dec 31, 2010)

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 2010. Emergent BioSolutions Inc. is a biopharmaceutical company operating in two segments: BioDefense (focused on anthrax countermeasures, primarily the FDA-approved vaccine BioThrax) and BioSciences (focused on vaccines and antibody therapeutics for oncology, autoimmune diseases, and infectious diseases). The company derives substantially all of its product revenue from sales of BioThrax to the U.S. government (HHS and DoD). In October 2010, the company acquired Trubion Pharmaceuticals, Inc., expanding its pipeline in oncology and autoimmune diseases.

Key Financial Metrics

Margins: Gross margin on product sales was approximately 81% in 2010 ($251.4M revenue vs. $47.1M cost of sales). Operating margin was approximately 26% ($73.6M operating income / $286.2M revenue).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 22% year-over-year. Product sales rose 16% due to a 15% increase in BioThrax doses delivered. Contracts and grants revenue nearly doubled (98% increase) driven by new large-scale manufacturing contracts with BARDA and collaboration revenues from Abbott and Pfizer.
• Acquisition Impact: The acquisition of Trubion Pharmaceuticals in October 2010 added significant in-process research and development (IPR&D) assets ($51.4 million) and goodwill ($5.0 million) to the balance sheet. It also increased R&D expenses in the Biosciences segment.
• Profitability: Net income attributable to Emergent increased 66% to $51.7 million, driven by higher revenues and improved operating leverage, despite increased R&D spending.
• Asset Impairment: The company recorded a $1.2 million impairment charge related to facilities in Frederick, Maryland, which are held for sale (compared to $7.3 million in 2009).

Guidance, Outlook, and Risks

Outlook and Management Commentary:

• BioThrax: The company is pursuing a label expansion for post-exposure prophylaxis and a reduced dosing schedule. A BLA supplement for the reduced schedule was not approved in November 2010; management expects to meet with the FDA in early 2011 to establish a new plan.
• Manufacturing: Construction of Building 55 (large-scale manufacturing facility in Lansing, MI) is complete. The company is engaged in a $107 million contract with BARDA to qualify and validate this facility for large-scale BioThrax production.
• Pipeline: Key candidates include PreviThrax (anthrax vaccine), Anthrivig (anthrax immunoglobulin), Thravixa (anthrax monoclonal antibody), and TRU-016 (oncology/autoimmune). The company expects R&D expenses to increase as clinical trials advance.

Risks and Contingencies:

• Government Dependence: The company relies heavily on U.S. government contracts for BioThrax. Revenue is subject to the timing of government appropriations and contract awards. Contracts can be terminated for convenience.
• Regulatory Approval: Many product candidates rely on the FDA "animal rule" for approval, which involves significant uncertainty. Failure to obtain approval for label expansions or new products would limit growth.
• Manufacturing Risks: BioThrax manufacturing is complex and subject to FDA lot release requirements. The company relies on single-source suppliers for certain raw materials (e.g., Alhydrogel adjuvant) and contract fillers.
• Collaboration Risks: Development of key Biosciences products (e.g., SBI-087, TRU-016) depends on partners Pfizer and Abbott. Partners may opt-out or terminate agreements.
• Legal Proceedings: The company settled litigation with Protein Sciences Corporation for $11.5 million. Class-action lawsuits regarding the Trubion acquisition were settled in principle with no monetary payment to plaintiffs other than potential attorney fees.

Investor Verification Checklist

• Contract Renewals: Verify the status of the HHS contract for BioThrax delivery (current contract ends Sept 2011) and the likelihood of securing future procurement contracts.
• Regulatory Milestones: Monitor FDA responses to the BioThrax reduced dosing schedule proposal and the post-exposure prophylaxis BLA supplement.
• Building 55 Qualification: Track progress on the BARDA-funded qualification and validation of the new large-scale manufacturing facility, as this is critical for future capacity.
• Collaboration Terms: Review the terms of the Pfizer and Abbott collaborations, specifically regarding opt-out rights and cost-sharing mechanisms for TRU-016 and SBI-087.
• Debt Covenants: Confirm compliance with debt covenants, particularly the debt coverage ratio and leverage ratios required by HSBC and Fifth Third Bank.
• Trubion Integration: Assess the integration of Trubion's pipeline and the realization of projected synergies.