Emergent BioSolutions Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in millions of dollars unless noted. Comparisons are with the corresponding 2019 periods.
Business context
Emergent is a life-sciences company focused on public-health-threat products and contract development and manufacturing services (CDMO). The U.S. government is its largest customer. The company reported as one operating segment. COVID-19 vaccine manufacturing partnerships drove a significant increase in CDMO activity; travel restrictions weighed on travel-vaccine sales.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $385.2 | $311.8 | $972.4 | $745.7 |
| Operating income | $61.3 | $70.7 | $175.7 | $36.4 |
| Net income | $39.5 | $43.2 | $119.7 | $7.6 |
| Diluted EPS | $0.73 | $0.83 | $2.23 | $0.15 |
| Operating margin | 15.9% | 22.7% | 18.1% | 4.9% |
| Net cash from operating activities | Not separately provided for the quarter | $290.9 | $65.9 |
Operating margins are calculated from reported revenue and operating income. Nine-month operating cash flow included $14.3 of working-capital outflows; investing cash flow was negative $115.0, including $105.0 of property, plant and equipment purchases and other investing outlays. Financing cash flow was positive $71.8. Cash, cash equivalents and restricted cash ended the period at $415.2.
At September 30, 2020, total assets were $2,616.3 and stockholders’ equity was $1,251.5. Debt principal totaled $891.1; the balance-sheet carrying amount was $879.4, including current debt. Debt included $450.0 of 3.875% notes due 2028, a $427.5 term loan, $10.6 of convertible notes due 2021 and other debt; the revolver was undrawn. The company reported $597.1 of unused revolving capacity, after letters of credit.
Changes versus prior comparable periods
- Q3 revenue rose 24%, but operating income fell 13% and net income fell 9%. CDMO revenue increased to $157.1 from $20.0, more than offsetting lower product sales, which declined 21% to $202.2.
- Nine-month revenue grew 30%; CDMO revenue increased to $251.4 from $54.6. Product sales rose 9% to $648.9, while contracts and grants declined 27% to $72.1.
- Nine-month anthrax-vaccine sales rose to $258.1 from $79.9, reflecting AV7909 delivery cadence and pricing. ACAM2000 sales fell to $71.0 from $164.1, primarily due to delivery timing.
- Operating cash flow increased to $290.9 from $65.9. Cash rose from $168.0 at December 31, 2019 to $415.2 at quarter end.
Outlook, commentary, risks and unusual items
- Management said liquidity was sufficient to fund operations for the next 12 months. No specific full-year revenue or earnings guidance is provided in the supplied filing text; management cautioned that quarterly results are variable.
- The company reported approximately $2.2 billion of expected revenue tied to unsatisfied performance obligations and other arrangements, with a majority expected within 24 months. Timing and amount may vary with government appropriations and development outcomes; unexercised contract options are excluded.
- COVID-19 manufacturing agreements included a $628 contract with BARDA for Operation Warp Speed, agreements with Johnson & Johnson and AstraZeneca, and a Johnson & Johnson multi-year arrangement whose first two years were valued at approximately $480. Realization depends on performance, capacity, customer programs and contract terms.
- Q3 included a $13.8 inventory charge for travel-health products not expected to be sold before expiration because of reduced travel. The nine-month results included a $29.0 impairment of the AP004 naloxone prefilled-syringe in-process R&D asset. Contingent-consideration fair-value expense also increased materially.
- Debt refinancing in August included issuing $450.0 of 2028 notes and using most proceeds to repay revolving-credit borrowings. The amended secured credit agreement increased the maximum net-leverage covenant; the company stated it was in compliance with covenants at filing.
- Key risks include reliance on government procurement and appropriations, AV7909 regulatory approval and delivery, COVID-related operational or supply-chain disruption, manufacturing and supplier constraints, and reduced travel-vaccine demand. NARCAN patent litigation also remains significant: the district court ruled against the company in the Teva case, an appeal was filed, and Teva could potentially launch at risk; the PTAB upheld challenged patent claims in three reviews. Perrigo received a nonexclusive license with a stated effective date of January 5, 2033, subject to conditions.
Important facts for investors to verify
- Whether CDMO agreements convert into timely revenue and cash flow, and whether the reported $2.2 billion of remaining performance obligations are funded and performed as expected.
- AV7909 FDA licensure or authorization, government procurement decisions, delivery schedules and the transition from BioThrax.
- Whether travel-health demand recovers and whether further inventory charges are needed.
- Developments in the NARCAN appeal, potential generic entry and the terms or status of the Perrigo settlement.
- Debt service, covenant headroom and liquidity needs alongside planned manufacturing-capacity investments.