Emergent BioSolutions Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Financial amounts below are in U.S. dollars. The company develops and manufactures medical countermeasures and provides contract manufacturing services; the U.S. government is its primary customer and a major source of development funding.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $117.8 million | $116.9 million |
| Operating income (loss) | $(9.5) million | $14.9 million |
| Net income (loss) | $(4.9) million | $10.5 million |
| Basic and diluted EPS | $(0.10) | $0.26 basic; $0.23 diluted |
| Cash from operating activities | $(1.0) million | $41.7 million |
- Revenue mix: product sales were $75.8 million, contract manufacturing $26.2 million, and contracts and grants $15.9 million.
- Approximate gross margin on product sales and contract manufacturing, using reported related costs, was 50.7%, compared with 60.4% a year earlier. Operating margin was approximately (8.1)% versus 12.8%; net margin was approximately (4.2)% versus 9.0%.
- At March 31, cash and cash equivalents were $163.6 million; including restricted cash, cash, cash equivalents and restricted cash totaled $164.6 million. Cash declined $14.7 million during the quarter.
- Current assets were $476.6 million and current liabilities $86.9 million. Long-term indebtedness reported on the balance sheet was $13.5 million. The filing also describes a $200 million senior secured revolving credit facility with a $100 million accordion feature; facility borrowings outstanding are not clearly specified in the provided filing text.
- Capital expenditures and other property, plant and equipment purchases were $11.6 million. Management said liquidity was sufficient to support operations for at least the next 12 months.
Changes versus Q1 2017
- Total revenue increased 1%, but operating results shifted from profit to loss as operating expenses rose to $127.3 million from $101.9 million.
- Product sales fell 8% to $75.8 million. BioThrax sales declined 54% to $20.2 million, mainly because of the timing of deliveries to the Strategic National Stockpile (SNS). Other product sales rose 46% to $55.6 million, reflecting acquired ACAM2000 and Raxibacumab sales, Trobigard sales, and international VIGIV sales; timing-related declines in BAT and RSDL partly offset growth.
- Contract manufacturing revenue rose 48% to $26.2 million, primarily from manufacturing-capability work at the Lansing site and services for Aptevo. Contracts and grants revenue decreased 8% to $15.9 million, reflecting completed or reduced government-funded work, partly offset by ACAM2000 and SIAN development funding.
- Research and development expense increased 42% to $29.1 million, and selling, general and administrative expense increased 14% to $40.2 million. Cost of product sales and contract manufacturing rose 25% to $58.0 million, primarily associated with the acquired products.
- Operating cash flow declined from $41.7 million provided to $1.0 million used. The company cited working-capital outflows, including bonus payments, inventory buildup, upfront raw-material payments and reduced deferred revenue.
Outlook, developments and material items
- The company provided no specific full-year revenue or earnings guidance in the supplied filing text. It expects substantial product-sales revenue to continue to come from BioThrax sales to the U.S. government for at least the next two to three years; delivery timing and government appropriations can cause quarterly variability.
- Remaining performance obligations on contracts with terms exceeding one year were approximately $615 million at March 31. Management expected to recognize most within 24 months, but timing and amount depend in part on government appropriations and development progress; unexercised contract options are excluded.
- Adoption of ASC 606 on January 1, 2018 had a material opening-balance-sheet impact for the CIADM contract: deferred revenue increased $42.4 million, deferred tax assets increased $9.9 million, and retained earnings decreased $32.5 million. The company said Q1 revenue was nominally different from revenue under the prior standard.
- Management reported initiation of a Phase 2 FLU-IGIV study and a Phase 1 VLA1601 Zika vaccine study; initial VLA1601 data were expected in late 2018 or early 2019. The company also reported a $26 million, 12-month CDC contract for continued VIGIV supply. It announced successful completion of the BioThrax EU mutual recognition procedure in five countries, with national licenses still expected to issue.
- The ACAM2000 CDC procurement contract expired March 31, 2018, though remaining deliverables were noted. The Raxibacumab BARDA procurement contract was described as expiring in 2019. The company highlighted uncertainty around securing follow-on government procurement contracts.
- The board authorized repurchases of up to $50 million of common stock through December 31, 2019; no repurchases had been made as of March 31.
- A securities class action concerning statements about BioThrax demand and renewal expectations remained in discovery. The company disputes the allegations; the potential loss range could not be determined or estimated.
Key risks and contingencies
- Revenue and development funding depend heavily on government appropriations, contract options, procurement priorities, and delivery schedules, particularly for BioThrax.
- Regulatory approval and manufacturing-transfer risks include NuThrax emergency-use authorization and eventual licensure, Raxibacumab technology transfer to company facilities, and ongoing compliance with manufacturing requirements.
- Manufacturing interruptions, lot-release delays, reliance on certain single-source suppliers, and the ability to meet fixed-price contract costs could affect deliveries, revenue and margins.
- Clinical and preclinical development outcomes, acquisition integration, and the success of acquired products are uncertain. The company expected to cease further UV-4B development as government funding was anticipated to decline.
- The filing identifies litigation, product-liability, financing and debt-covenant risks, among other factors. The company reported disclosure controls and procedures were effective as of March 31, 2018 and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify subsequent BioThrax, ACAM2000 and other government procurement awards, appropriations, and delivery schedules, including follow-on coverage after ACAM2000’s contract expiration.
- Track whether product mix, acquired-product sales and contract manufacturing can offset BioThrax timing fluctuations and higher operating and R&D expenses.
- Review operating cash conversion, inventory levels, receivables collections and the deferred-revenue effects of ASC 606.
- Confirm the status and funding of the $615 million remaining performance obligations, including government options and timing assumptions.
- Monitor regulatory milestones and manufacturing transfers, the securities litigation, and actual use of the $50 million repurchase authorization.