Emergent BioSolutions Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Amounts below are in millions of dollars unless noted. Emergent is a life sciences company focused on medical countermeasures; the U.S. government is its primary customer and a significant source of development funding. Following the 2016 Aptevo spin-off, the company reports one business segment.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $116.9 | $103.0 |
| Operating income | $14.9 | $21.2 |
| Continuing-operations net income | $10.5 | $11.9 |
| Net income (loss) from discontinued operations | — | ($7.9) |
| Net income | $10.5 | $4.0 |
| Diluted EPS | $0.23 | $0.10 |
| Net cash from operating activities | $41.7 | $42.2 |
Revenue rose 13%. Product sales increased to $82.0 million (up 29%), contract manufacturing to $17.6 million (up 132%), while contracts and grants declined to $17.3 million (down 45%). BioThrax sales fell 26% to $43.8 million, partly offset by higher sales of other products, primarily due to BAT deliveries. The filing attributes changes in revenue substantially to delivery and program timing.
Cost of product sales and contract manufacturing rose 93% to $46.3 million. On this combined cost basis, gross profit was approximately $70.5 million, or 60% of revenue, versus $79.0 million, or 77%, in Q1 2016. Operating margin declined to approximately 13% from 21%. R&D expense decreased 22% to $20.5 million; SG&A increased 11% to $35.2 million, including restructuring costs and strategic-growth professional services. The effective annual tax rate estimate was 31%, versus 34%.
Cash and cash equivalents were $270.2 million at March 31, down $1.3 million from year-end. Current assets were $489.2 million and current liabilities $67.7 million, implying working capital of $421.5 million and a current ratio of about 7.2. Operating cash flow was $41.7 million; capital spending was $20.3 million, mainly for infrastructure and equipment, including a Baltimore manufacturing suite. Financing used $22.7 million, including repayment of a $20.0 million Aptevo note. Long-term indebtedness was $248.4 million; the filing reports total consolidated indebtedness of approximately $253 million, including $250 million principal on 2.875% convertible notes due 2021. The company also had a revolving credit facility with capacity of up to $100 million.
Material changes and business developments
- On March 16, Emergent signed a $100 million BARDA contract to deliver BioThrax to the Strategic National Stockpile over two years. No BioThrax had been delivered under this contract by March 31.
- In connection with that award, the BARDA NuThrax contract was modified: base-period doses increased from two million to three million, with lower initial dose pricing and an option-period discount of up to $100 million. The modified contract value is up to $1.5 billion. A portion of BioThrax contract consideration will be deferred and recognized with qualifying NuThrax deliveries or when the related delivery obligation is extinguished.
- A March 31 BARDA contract modification valued at approximately $53 million supports BAT bulk drug-substance manufacturing and storage over five years, enabling potential future filling and stockpile deliveries.
- A BARDA task order received in February is valued at up to $30.5 million over three years for development and manufacturing work on viral hemorrhagic fever monoclonal antibody therapeutics; the $7.4 million base portion is distinct from optional work.
- Germany’s Paul-Ehrlich-Institut approved the Building 55 manufacturing facility, allowing BioThrax made there to be marketed in Germany.
- Aptevo’s Q1 2016 results are presented as discontinued operations. Accordingly, the higher reported net income in Q1 2017 partly reflects the prior-year Aptevo loss; continuing-operations income decreased.
Outlook, risks and unusual items
The filing provides no specific company-wide financial guidance. Management expects quarterly revenue, operating results and profitability to continue to vary, particularly with BioThrax order fulfillment and the timing of government development work. The company expects to fund operations, capital expenditures and debt service from cash, product sales, government contracts and grants, contract manufacturing, and available credit; it may seek additional financing.
- Government dependence: BioThrax sales and development funding depend heavily on U.S. government demand, annual appropriations, contract options, delivery timing and procurement terms. The CDC contract covers approximately 29.4 million BioThrax doses through September 2021 and has a potential value of about $911 million if options are exercised.
- Development and regulatory risk: NuThrax’s potential value depends on development progress and FDA review. The company anticipated submitting for EUA pre-approval in 2018 and possible emergency-use authorization as early as 2018, with potential stockpile deliveries as early as 2019; these are expectations, not guaranteed milestones.
- Operations and compliance: Manufacturing interruptions, quality or regulatory issues, facility utilization, reliance on single-source suppliers, and the ability to meet fixed-price government contracts could affect supply, costs and revenue.
- Litigation: A putative securities class action alleges misleading statements concerning BioThrax demand and renewal expectations. The company disputes the allegations; potential loss could not be estimated.
- Other financial items: The fair value of the convertible notes was estimated at $299.6 million, above their $250 million principal. The EBOL restructuring was substantially complete; expected total costs were $9.7 million, with $2.3 million of termination benefits remaining at quarter-end.
Important facts for investors to verify
- BioThrax delivery schedules, government appropriations and procurement under the CDC and new BARDA contracts.
- NuThrax development, FDA submission and review milestones, and the effect of the contract modification and deferred revenue accounting.
- Whether higher product and contract-manufacturing sales can support margins as related costs rise.
- Cash generation, capital spending, debt service, revolving-credit availability and any financing or share-repurchase activity.
- Developments in the securities class action and any change in the company’s ability to estimate potential loss.
- Cash-flow disclosure: the cash-flow statement reports Q1 2017 operating cash flow of $41.671 million, while MD&A gives $41.668 million; investors should confirm the intended figure.