Emergent BioSolutions Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
Emergent is a life sciences company selling medical countermeasures and providing development and manufacturing services. Its portfolio addresses public health threats, including chemical and biological threats, infectious diseases, travelers’ diseases, and opioid overdose. The U.S. government is its largest customer and a major source of development funding. Results include the businesses acquired in October 2018: Adapt Pharma, including NARCAN Nasal Spray, and PaxVax.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $190.6 | $117.8 |
| Product sales | $153.0 | $75.8 |
| Contract manufacturing | $15.9 | $26.1 |
| Contracts and grants | $21.7 | $15.9 |
| Operating loss | $(27.2) | $(9.5) |
| Net loss | $(26.0) | $(4.9) |
| Loss per diluted share | $(0.51) | $(0.10) |
| Cash provided by (used in) operations | $104.8 | $(1.0) |
- Revenue increased 62%. NARCAN contributed $65.5 of product sales, following its acquisition; ACAM2000 sales rose to $45.6 from $21.8. BioThrax sales declined to $11.7 from $20.2.
- Operating expenses rose 71% to $217.8. Increases reflected the acquisitions, higher research and development and selling, general and administrative costs, and greater intangible-asset amortization. Interest expense was $9.6 versus $0.2, primarily reflecting acquisition-related borrowing.
- Operating margin was approximately negative 14.3%, compared with negative 8.1%; net margin was approximately negative 13.6%, compared with negative 4.2%.
- Operating cash flow benefited substantially from working capital, including a $141.6 cash inflow from accounts receivable, primarily due to timing of U.S. government BioThrax collections. It also reflected $21.3 of cash outflow from accrued compensation.
- Cash and cash equivalents were $137.2 at March 31, up from $112.2 at December 31, 2018. Current assets were $528.5 and current liabilities $248.4. Management said liquidity was sufficient to fund operations for the next 12 months.
- Total indebtedness on the balance sheet was $742.5, including $10.1 current and $732.4 long-term. The company reported $444 of term-loan and $298 of revolving-credit borrowings; the revolving facility permits borrowing up to $600.
Material changes and developments
- The October 2018 Adapt and PaxVax acquisitions contributed $74.9 revenue and a $3.8 operating loss in the quarter. Acquired NARCAN sales were a major source of year-over-year revenue growth.
- Product-sales mix shifted: non-U.S. government product sales were $79.7 versus $9.8, while U.S. government product sales were $73.3 versus $66.0. Total revenue from U.S. government sources was $93.7, compared with $80.8.
- ACAM2000 deliveries under the applicable long-term procurement contract were fully satisfied during Q1 2019. BioThrax sales continue to fluctuate with government delivery timing and funding.
- At quarter-end, remaining performance obligations were approximately $510.8; the company expected to recognize most within 24 months. Timing and amounts depend in part on government appropriations and development progress.
- Current contingent consideration was $62.7, up from $5.6 at year-end; total contingent consideration was $72.7. The quarter included a $10.0 milestone associated with the raxibacumab acquisition.
Outlook, risks, and unusual items
- The filing provides no specific consolidated revenue or earnings guidance. Management highlighted a Phase 3 trial begun for AV7909 and reported an interim chikungunya vaccine study result after quarter-end. AV7909 development and potential procurement depend on government funding and regulatory milestones.
- A February 2019 U.S. Department of State contract for Trobigard and RSDL has a five-year base period and five one-year options, with stated total value ranging from approximately $7 to $100.
- Key risks include dependence on U.S. government procurement and appropriations, BioThrax and AV7909 delivery and approval prospects, contract renewals, manufacturing and supplier reliability, acquisition integration, and substantial debt and variable-rate exposure. A one-percentage-point increase in the eurocurrency rate was estimated to increase annual interest expense by approximately $7.
- Generic competition is a material NARCAN risk. The filing reports ongoing Teva and Perrigo patent litigation; it also notes that Teva received FDA approval for a generic NARCAN product in April 2019, after quarter-end. A 30-month stay on Perrigo approval was expected to run until March 2021, absent an earlier unfavorable judgment.
- The shareholder class-action settlement was finally approved in January 2019; the $6.5 settlement was paid by the company’s insurer, with no payment by defendants. Management stated defendants continued to deny liability.
- The company adopted lease accounting in January 2019, recording $13.4 of operating lease liabilities at adoption. Management reported effective disclosure controls, but its controls assessment excluded the acquired Adapt and PaxVax operations.
Important facts for investors to verify
- Whether government funding, delivery schedules, and follow-on procurement contracts support BioThrax and AV7909 expectations.
- Whether NARCAN maintains sales and margins amid generic entry, patent litigation, and potential competing products.
- How much of the reported operating cash flow reflects recurring cash generation versus collection timing and other working-capital movements.
- Debt service, covenant headroom, interest-rate sensitivity, and the final acquisition-related contingent consideration and purchase accounting.
- Progress on integrating Adapt and PaxVax, including manufacturing, regulatory, and internal-control matters.