Emergent BioSolutions Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the same 2012 periods. Amounts below are in millions unless noted.
Business context
Emergent operates in Biodefense and Biosciences. Biodefense revenue is primarily from BioThrax sales to the U.S. government; Biosciences remains loss-making and relies on development funding and collaborations. The CDC contract covers up to 44.75 million BioThrax doses through September 2016, subject to government funding. By June 30, the company had recognized revenue on about 12.4 million doses, representing approximately $330 million under the contract.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Total revenue | $82.4 | $70.4 | $125.5 | $120.7 |
| Product sales | $65.6 | $53.2 | $96.0 | $87.5 |
| Contracts and grants | $16.8 | $17.2 | $29.6 | $33.2 |
| Operating income (loss) | $14.7 | $8.7 | $1.4 | $(3.9) |
| Net income attributable to Emergent | $10.5 | $7.6 | $2.4 | $0.8 |
| Diluted EPS | $0.29 | $0.21 | $0.07 | $0.02 |
- Q2 product-sales gross margin was approximately 74%; operating margin was approximately 18%. H1 operating margin was approximately 1%.
- H1 operating cash flow was $28.2 million, investing cash outflow $14.1 million, and financing cash inflow $0.5 million. Cash increased $14.6 million to $156.2 million.
- At June 30, current assets were $248.2 million and current liabilities $48.8 million. Accounts receivable was $54.4 million; cash plus receivables totaled $210.6 million.
- Debt principal outstanding was $60.5 million, including $4.5 million current and approximately $56.1 million long-term on the balance sheet. The filing identifies balloon payments of $3.5 million due November 2014 and $15.3 million due December 2014.
Material changes and notable items
- Q2 revenue grew 17%, driven by a 21% increase in BioThrax doses delivered and a modest increase in average price. H1 revenue rose 4%; product sales increased 10%, while contracts and grants declined 11%.
- H1 research and development expense increased 7% to $61.0 million, including higher spending on otlertuzumab and other Biosciences programs. SG&A increased 8% to $40.5 million, including $2.8 million of UK restructuring costs.
- H1 2012 included a $9.6 million impairment of the SBI-087 in-process R&D asset; there was no comparable charge in 2013. Prior-year other income also included business-interruption insurance recoveries.
- Following unsuccessful Phase IIb tuberculosis-vaccine results, Emergent ceased development of the candidate and substantially completed restructuring of its UK operations and the related consortium. The company reported $2.8 million of restructuring costs and $0.5 million remaining liability at June 30.
- On August 1, 2013, Emergent acquired substantially all HPPD assets, including RSDL, for approximately $24.2 million cash; it expects to pay about $1.8 million for remaining assets, primarily equipment, in Q4. Purchase-price allocation was incomplete at filing.
Outlook, risks, and contingencies
The filing provides no specific full-year revenue or earnings guidance. Management expects results to fluctuate with BioThrax delivery timing and the pace of government-funded development work. It expects to fund operations, capital expenditures, and debt service with existing cash, product revenue, and contract and grant funding, while noting that additional financing may be sought.
- Revenue and liquidity depend heavily on U.S. government demand and appropriations; the CDC procurement contract is subject to available funding, and government contracts may be modified or terminated.
- Manufacturing and regulatory risks include reliance on Lansing for BioThrax production, lot-release requirements, production yields, and obtaining approval for expanded facilities, including Building 55.
- Development programs carry clinical, regulatory, funding, and collaboration risks. The company also faces product-liability, supplier, acquisition-integration, and intellectual-property risks.
- Commitments and contingencies are disclosed, but no legal proceedings were reported as applicable. Management concluded disclosure controls were effective; no material change in internal control was reported.
Key facts for investors to verify
- CDC funding, order timing, and delivery/acceptance rates for BioThrax, including the remaining committed procurement amounts.
- BioThrax production yields, cost per dose, and progress toward regulatory approval of Building 55 for large-scale manufacturing.
- Cash conversion and receivable collections, alongside capital spending and the timing and terms of the 2014 debt maturities.
- RSDL acquisition integration, remaining acquisition payment, asset valuation, and contribution to revenue and margins.
- Funding and clinical milestones for continuing development programs, particularly whether government and other external support is available.