Emergent BioSolutions Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016; filed November 8, 2016. Financial statements are unaudited. Unless noted, amounts are in millions of dollars. Prior periods were recast to present Aptevo as discontinued operations.
Business context and reporting changes
Emergent focuses on medical countermeasures for public-health threats, with the U.S. government its primary customer. It completed the spin-off of Aptevo on August 1, 2016; Aptevo’s results are reported as discontinued operations. Emergent now reports one business segment. BioThrax remains a key revenue source, alongside other countermeasure products, government-funded development programs, and contract manufacturing.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $142.9 | $158.4 | $337.1 | $329.5 |
| Operating income | $35.5 | $63.2 | $54.6 | $76.4 |
| Income from continuing operations | $20.4 | $42.1 | $30.2 | $48.9 |
| Net income, including discontinued operations | $21.3 | $36.9 | $14.4 | $29.5 |
| Diluted EPS | $0.45 | $0.79 | $0.36 | $0.69 |
- Q3 revenue fell 10%; product sales declined 18% to $96.7, primarily reflecting the timing of BioThrax and BAT deliveries. Contract manufacturing rose 30% to $14.7, and contracts and grants increased 7% to $31.5.
- Q3 operating margin was approximately 24.8%, versus 39.9% a year earlier. Cost of product sales and contract manufacturing rose to $39.6 from $35.2; SG&A increased to $40.7 from $25.8. R&D declined to $27.2 from $34.2.
- For the first nine months, revenue rose 2%, while operating income fell 29%. Continuing-operations income declined to $30.2 from $48.9. Net income also reflects Aptevo discontinued-operation losses of $15.9, compared with $19.4 in the prior period.
- Operating cash flow was $62.7 for the nine months, compared with $41.4 in 2015; capital expenditures were $56.2 versus $33.6. Approximate operating cash flow less capital expenditures was $6.4. The MD&A reports operating cash flow as $62.8, a small difference from the cash-flow statement.
- Cash and cash equivalents were $298.9 at September 30, down from $308.3 at December 31, 2015. Current assets were $480.0 and current liabilities $110.3, or approximately 4.4 times current-liability coverage.
- Balance-sheet debt comprised $20.0 of current notes payable and $247.8 of long-term indebtedness. The filing separately describes total consolidated indebtedness as approximately $253, including $250 principal amount of convertible notes; the text does not reconcile that figure to balance-sheet carrying amounts. The notes bear 2.875% interest and mature in 2021.
Material changes and unusual items
- The Aptevo spin-off transferred $45.0 of cash and other assets to Aptevo; Emergent also committed to provide a further $20.0 under an unsecured promissory note within six to twelve months after the distribution. The $45.0 distribution was a major financing cash outflow.
- Q3 SG&A included spin-off and Lansing restructuring costs, professional services for growth initiatives, and increased IT investment. A restructuring plan at the Lansing site was completed; costs incurred were $6.9, with total expected costs of $9.7. The company also recorded $1.7 of employee retention payments.
- BioThrax production moved to Building 55, which received FDA approval in August. Lower production yield on doses sold and underutilized Winnipeg capacity increased manufacturing costs. The company invested in facilities and equipment, including a third manufacturing suite at its Baltimore CIADM facility.
- The estimated effective annual tax rate on continuing operations was 37% for the first nine months, versus 29% in 2015, primarily reflecting spin-off-related tax effects, partly offset by a release of Canadian tax-credit valuation allowances.
Outlook, risks, and contingencies
- The CDC exercised an option to procure all remaining doses under the existing 44.75-million-dose BioThrax contract. Approximately 1.0 million doses remained at September 30 and were delivered in October under a no-cost extension.
- HHS issued a sole-source notification for a proposed five-year BioThrax follow-on contract for 29.4 million doses. Price and delivery terms remained under negotiation; the expected average annual procurement is lower than under the expiring contract, and procurement remains subject to government funding.
- A September 30 BARDA contract for NuThrax has a five-year base period valued at approximately $200 million, including development and an initial two million doses conditional on FDA EUA pre-approval. Procurement and study options could bring total contract value to approximately $1.6 billion if exercised. Management anticipated an EUA as early as 2018 and initial deliveries in 2019; it intended to submit an EUA application in 2017. These are contingent expectations, not guaranteed outcomes.
- The company ceased further PreviThrax development after BARDA declined to exercise a clinical-trial option; future spending is expected to be minimal. It also received a BARDA task order for Zika vaccine development and manufacture, with a $17.9 million base period and options that could raise the value to $21.9 million.
- A putative securities class action alleges misleading statements concerning BioThrax demand and renewal expectations for the government procurement contract. Defendants intend to defend the case; the filing says potential loss could not be estimated.
- Key risks include reliance on U.S. government demand, appropriations and contract options; successful BioThrax contract negotiations and use of Building 55 capacity; FDA authorization and development execution for NuThrax; manufacturing quality, yields and single-source supplies; and the potential tax consequences if the Aptevo spin-off fails to qualify as tax-free.
- The board authorized up to $50 million of share repurchases through December 31, 2017, but no plan had been implemented and no shares repurchased by September 30. The filing provides no general financial guidance.
Important facts for investors to verify
- Final terms, funding, annual delivery schedule and pricing of the proposed BioThrax follow-on contract.
- NuThrax FDA EUA timeline and whether BARDA procurement options are exercised and funded.
- BioThrax production yields, Building 55 utilization and the effect of Winnipeg underutilization on margins.
- Cash requirements for the Aptevo funding commitment, capital investment, debt service and any share repurchases.
- Developments in the securities litigation and any material change in the estimated exposure.
- Whether the spin-off satisfies tax-free requirements and whether restructuring costs remain within the estimated total.