Emergent BioSolutions Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
Emergent develops, manufactures and sells medical countermeasures and provides contract manufacturing services. The U.S. government is its primary customer and a major source of development funding. BioThrax sales have historically represented a substantial share of product revenue. The company reported one business segment.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $220.2 | $100.8 | $338.0 | $217.6 |
| Operating income | $66.8 | $8.5 | $57.3 | $23.4 |
| Net income | $50.1 | $4.6 | $45.2 | $15.1 |
| Diluted EPS | $0.98 | $0.11 | $0.89 | $0.35 |
| Operating margin | 30.3% | 8.5% | 17.0% | 10.8% |
| Net margin | 22.8% | 4.6% | 13.4% | 6.9% |
Q2 revenue comprised $180.1 million product sales, $23.6 million contract manufacturing, and $16.5 million contracts and grants. For the first half, the respective figures were $255.8 million, $49.8 million, and $32.4 million.
For the six months, operating cash flow was $33.6 million, investing cash flow was negative $22.6 million, and financing cash flow was positive $1.0 million. Cash, cash equivalents and restricted cash rose $11.9 million to $191.3 million; cash and cash equivalents alone were $190.2 million.
At June 30, current assets were $541.3 million and current liabilities $96.8 million. Long-term indebtedness was $13.5 million. The company also had a $200 million senior secured revolving credit facility, with a $100 million accordion feature subject to conditions; the filing does not state borrowings under the facility. Management said liquidity was sufficient for the next 12 months.
Material changes and notable items
- Q2 revenue rose 118% year over year, primarily reflecting higher “other” product sales—including ACAM2000 and Raxibacumab acquired in 2017—and timing of BioThrax, BAT and other product deliveries. Six-month revenue rose 55%.
- Six-month product sales increased 76% and contract manufacturing revenue increased 47%; contracts and grants revenue declined 15%, reflecting completed or reduced government-funded work and revenue accounting changes.
- Cost of product sales and contract manufacturing increased 158% in Q2 and 82% for the first half, alongside higher sales and activity at Bayview and Canton. Six-month R&D expense rose 16%; SG&A rose 19%.
- Operating cash flow fell from $95.7 million to $33.6 million for the first half. Management attributed the decline mainly to working-capital outflows, including collection timing on receivables and lower accrued compensation.
- ASC 606 adoption on January 1, 2018 increased deferred revenue by $42.4 million and deferred tax assets by $9.9 million, reducing opening retained earnings by $32.5 million. The filing says the new standard had a nominal impact on revenue reported for the current quarter and half-year versus prior guidance.
- The company reported $630 million of expected future revenue associated with unsatisfied performance obligations, with most expected within 24 months. Timing and amount remain subject to government appropriations and development progress; unexercised contract options are excluded.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is provided. Management stated it believed available liquidity could support operations for at least 12 months.
- Management announced a planned $50 million, multi-year expansion of its Camden fill/finish facility, expected to be completed in 2021. The company also reported a CEPI collaboration that may provide up to $25 million to advance a Nipah virus vaccine program.
- NuThrax remains dependent on regulatory review and government procurement. The company said it intended to submit for FDA EUA pre-approval in 2018 and anticipated possible authorization as early as 2019, while emphasizing timing and approval were uncertain.
- Principal risks include dependence on U.S. government procurement and appropriations, BioThrax delivery timing, follow-on contracts, regulatory approvals, manufacturing and supplier reliability, and execution of acquired-product technology transfers. The company expected to cease further UV-4B development work due to anticipated reduced government funding.
- A securities class action concerning statements about BioThrax demand and contract renewal received class certification on June 8, 2018 with a shortened class period. The company disputes the allegations; potential loss could not be estimated.
- The company authorized up to $50 million in share repurchases through December 31, 2019; no repurchases had been made by June 30, 2018. It reported no purchases of equity securities in the quarter.
Important facts for investors to verify
- Whether strong product sales and earnings growth can persist beyond delivery timing and the contribution of products acquired in 2017.
- Collection of the increased accounts receivable balance ($189.5 million versus $143.7 million at year-end) and the resulting effect on operating cash flow.
- Government funding, procurement options, delivery schedules and follow-on contracts for BioThrax and other countermeasures.
- Progress on NuThrax regulatory submissions, Raxibacumab manufacturing transfer, and the announced manufacturing-capacity investments.
- Potential financial exposure from the securities class action; the filing provides no estimable loss range.
- The effects of ASC 606 on future CIADM revenue recognition and the timing of recognition of the $630 million performance-obligation balance.