Emergent BioSolutions Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; filed August 5, 2016. The financial statements include Aptevo, which was spun off on August 1, 2016. From Q3 2016, Aptevo’s results will be reported as discontinued operations.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $101.5 million | $126.1 million | $212.5 million | $189.7 million |
| Operating income (loss) | $(13.6) million | $21.5 million | $(5.1) million | $(6.9) million |
| Net income (loss) | $(10.9) million | $14.1 million | $(7.0) million | $(7.4) million |
| Diluted EPS | $(0.27) | $0.32 | $(0.17) | $(0.19) |
- Q2 revenue declined 20%, primarily as BioThrax sales fell 45% to $40.0 million amid reduced CDC shipments. Other Biodefense product sales rose, including VIGIV, and Aptevo product sales increased, mainly with IXINITY.
- First-half revenue rose 12%, led by a 37% increase in BioThrax sales versus a weak first half of 2015, when shipments were suspended after foreign particles were found in a limited number of vials. First-half contract manufacturing and grants/collaborations revenue declined 16% and 6%, respectively.
- Q2 operating results included higher product and manufacturing costs, including costs related to rejected BioThrax work-in-process, and higher SG&A, partly offset by lower R&D. SG&A increased 21% to $44.1 million, including spin-off, strategic initiative, IXINITY selling and IT costs. The reported operating margin was approximately negative 13.4%, versus positive 17.0% a year earlier.
- Q2 included a $3.9 million income tax benefit, compared with a $5.5 million provision in Q2 2015. First-half tax benefit was $0.6 million and included a $1.6 million non-cash charge related to tax planning and restructuring.
- Cash and cash equivalents were $333.4 million at June 30, versus $312.8 million at December 31, 2015. Current assets were $528.0 million and current liabilities $103.9 million, a working capital surplus of $424.2 million.
- For the first half, operating cash flow was $35.7 million; investing cash flow was $(39.2) million, primarily capital expenditures; and financing cash flow was $24.0 million. Cash increased $20.6 million. Capital expenditures included investments in facilities and equipment, including a third Baltimore manufacturing suite.
- Long-term indebtedness was $247.4 million on the balance sheet. The company reported total consolidated indebtedness of approximately $253 million, including $250 million principal of 2.875% convertible notes due 2021. A senior secured revolving credit facility had capacity of up to $100 million; borrowings outstanding under it are not clearly stated in the filing text.
Material changes, outlook and risks
- HHS issued a sole-source notification indicating its intent to award Emergent a five-year BioThrax follow-on procurement contract for 29.4 million doses. Price, delivery timing and final contract terms remained under negotiation, and procurement depended on government funding. CDC had indicated it expected to buy less than the remaining quantity available under the existing contract, which was scheduled to expire September 30, 2016.
- Emergent submitted a proposal for HHS development and procurement of a next-generation anthrax vaccine, NuThrax. Selection was uncertain; the solicitation contemplated an initial two million doses and possible additional procurement.
- BARDA declined to exercise the clinical-trial option for PreviThrax; Emergent ceased further development and expected future spending on the candidate to be minimal. Conversely, BARDA awarded a Zika vaccine task order with a 30-month base valued at $17.9 million and options that could raise total value to $21.9 million.
- Aptevo’s August 1 spin-off distributed one Aptevo share for every two Emergent shares held by record-date shareholders. Emergent provided Aptevo $45 million in cash and committed up to an additional $20 million through an unsecured promissory note. The company cautioned that expected spin-off benefits may not be realized and that tax-free treatment is not assured.
- On July 14, the board authorized repurchases of up to $50 million of common stock through December 31, 2017; the program may be suspended or discontinued.
- A putative securities class action filed July 19 alleges misleading statements about BioThrax demand and renewal expectations. Emergent disputes the allegations; potential loss could not be estimated.
- Key risks include dependence on U.S. government BioThrax procurement and appropriations, contract timing and terms, manufacturing and lot-release issues, regulatory approvals and inspections, product development uncertainty, competition, debt servicing and the outcome of litigation. The filing provides no clear full-year financial guidance.
Important facts for investors to verify
- Whether the BioThrax follow-on contract was completed, and its price, annual delivery schedule and funding.
- Actual post-spin cash, debt, operating results and financing provided to Aptevo, including the additional funding commitment.
- Whether rejected BioThrax work-in-process led to further costs, production constraints or customer-delivery effects.
- Progress and regulatory status of Building 55, NuThrax and other funded development programs.
- Developments in the shareholder class action and any change in the company’s ability to estimate potential loss.
- Whether the authorized share repurchase program was used and its effect on liquidity and share count.