EBS

Emergent BioSolutions Inc. - 10-Q Summary (Period Ended Sept 30, 2007)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Emergent BioSolutions Inc. for the period ended September 30, 2007. The company operates in two segments: Biodefense (focused on BioThrax, an FDA-approved anthrax vaccine) and Commercial (development of vaccines for infectious diseases). The company is a non-accelerated filer with 29,750,237 shares of common stock outstanding as of October 26, 2007.

Key Financial Metrics

Margins: The company reported a net loss for the nine-month period. The effective tax rate was 40% for the nine months ended September 30, 2007. Gross margins are not explicitly stated as a percentage but can be derived: Product sales were $89.75M with Cost of Product Sales of $22.77M.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 42% to $93.3 million, driven primarily by a 46% increase in BioThrax product sales ($89.8M vs $61.3M). This was due to a 76% increase in doses delivered, partially offset by a 17% decrease in average sales price per dose due to discounts on doses with limited shelf life.
• Net Loss Expansion: Net loss widened to $4.8 million from $3.3 million. This was driven by a 95% increase in Cost of Product Sales ($22.8M vs $11.6M) and a 43% increase in R&D expenses ($41.7M vs $29.2M).
• Capital Expenditures: Investing cash outflows increased significantly to $41.2 million, primarily due to $36.2 million in purchases of property, plant, and equipment for the new Lansing manufacturing facility.
• Liquidity: Cash and cash equivalents decreased by $52.2 million during the period, despite financing inflows, due to heavy operating and investing cash usage.

Guidance, Outlook, and Risks

• New HHS Contract: On September 25, 2007, the company signed a contract with HHS to supply 18.75 million doses of BioThrax for the Strategic National Stockpile (SNS) at a firm fixed price of $400 million. A potential $34 million price increase is contingent on FDA approval to extend the vaccine's shelf life from three to four years.
• DoD Procurement: The company submitted a response to a DoD sole-source RFP in July 2007. Management anticipates the procurement process may extend beyond the end of 2007 due to a White House Presidential Directive and GAO reports regarding stockpile waste.
• Manufacturing Expansion: The company is constructing a new 50,000 sq. ft. facility in Lansing, Michigan, with an estimated total cost of $75 million. Approximately $58 million has been incurred through September 2007. Large-scale manufacturing is expected to begin in 2008, pending FDA validation.
• Risks: Key risks include dependence on U.S. government contracts (DoD and HHS), potential delays in regulatory approvals for the new facility, and the uncertainty of future government funding. The company also faces litigation regarding product liability and insurance coverage disputes.

Investor Verification Checklist

• Contract Renewals: Verify the status of the DoD sole-source RFP response and the likelihood of securing a follow-on contract given the GAO report on SNS waste.
• Shelf-Life Approval: Monitor the FDA's decision on the application to extend BioThrax shelf life to four years, which impacts the $34 million upside in the new HHS contract.
• Facility Validation: Confirm the timeline for FDA validation and qualification of the new Lansing facility to ensure 2008 production targets are met.
• Cash Burn Rate: Assess the sustainability of the current cash burn ($52M decrease in cash in 9 months) against the $24.3M cash balance and $15M available credit line.
• Legal Proceedings: Review the status of pending product liability lawsuits and the insurance coverage dispute with Evanston Insurance Company.