Emergent BioSolutions Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unless otherwise noted, amounts are in millions of U.S. dollars. The company operates Biodefense and Biosciences divisions; results include Cangene from its February 21, 2014 acquisition and HPPD, acquired in August 2013.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $110.3 | $82.4 | $164.2 | $125.5 |
| Operating income (loss) | $7.9 | $14.7 | ($17.6) | $1.4 |
| Net income (loss) attributable to Emergent | $5.0 | $10.5 | ($15.2) | $2.4 |
| Diluted earnings (loss) per share | $0.13 | $0.29 | ($0.41) | $0.07 |
- Q2 operating margin was approximately 7.1% and net margin approximately 4.6%; first-half operating and net margins were approximately (10.7%) and (9.3%), respectively.
- Q2 product sales were $78.3 million, contract manufacturing revenue $9.2 million, and contracts and grants revenue $22.9 million. First-half amounts were $114.0 million, $11.9 million, and $38.3 million, respectively.
- Research and development expense was $37.4 million in Q2 and $67.7 million in the first half. Selling, general and administrative expense was $30.6 million and $60.6 million, respectively. Q2 cost of product sales and contract manufacturing was $34.5 million; the filing does not provide a single consolidated gross-margin measure.
- For the first half, operating cash flow was negative $18.4 million, investing cash flow negative $187.6 million, and financing cash flow positive $194.8 million. Cash declined $11.2 million to $168.1 million. Investing outflow primarily reflected Cangene acquisition spending of $178.2 million, net of acquired cash, and $9.4 million of capital expenditures.
- At June 30, cash was $168.1 million, accounts receivable $78.3 million, current assets $345.4 million, and current liabilities $76.4 million. The company had $251.0 million of long-term indebtedness, principally $250.0 million of 2.875% convertible notes due 2021; no borrowings were outstanding on its $100 million revolving facility. The revolver is secured and subject to financial covenants, including a $50 million minimum liquidity requirement.
Changes versus comparable periods
- Revenue rose 33.8% in Q2 and 30.8% in the first half. Q2 growth included acquired Cangene and RSDL sales and contract manufacturing, while BioThrax revenue was $67.5 million versus $65.6 million.
- First-half BioThrax revenue fell to $92.0 million from $96.0 million, primarily because doses delivered declined 7% due to delivery timing. The company said BioThrax remains its principal revenue source; its CDC contract is subject to government funding.
- Despite higher revenue, Q2 net income fell to $5.0 million from $10.5 million as costs increased, including acquired-product and manufacturing costs, RSDL costs, higher R&D and SG&A, and interest expense. First-half results moved from $2.4 million net income to a $15.2 million net loss, reflecting higher operating expenses and acquisition-related costs, among other items.
- Biodefense reported net income of $22.4 million for Q2 and $23.8 million for the first half. Biosciences reported losses of $15.0 million and $34.5 million, respectively; All Other reported losses of $2.4 million and $4.5 million.
- Cash from operations shifted from positive $28.2 million in the first half of 2013 to negative $18.4 million in 2014. The prior period benefited substantially from a $41.7 million reduction in accounts receivable.
Outlook, commentary, and material risks
- The filing provides no formal numerical revenue or earnings guidance. Management expects operating results to vary by quarter, mainly with product-delivery schedules and the timing of contract and grant reimbursements. It expects to fund operations, capital spending, and debt service from cash, product sales, government and other development funding, and available credit; additional financing may be sought.
- The CDC contract covers up to 44.75 million BioThrax doses through September 2016, subject to funding. The government had committed approximately $704 million by June 30; approximately 21 million doses, representing about $570 million in recognized revenue, had been delivered and accepted.
- The February 2014 Cangene acquisition had a preliminary purchase-price allocation of $221.8 million, including $40.4 million of acquired intangible assets, $8.5 million of in-process R&D, and $31.8 million of goodwill. The valuation remained subject to change. A $6.2 million inventory step-up is expected to increase cost of sales over about five years.
- On July 29, 2014, after quarter-end, FDA issued a complete response letter for IXINITY, requesting additional study-data analyses and identifying chemistry, manufacturing, and controls deficiencies. The company had not completed its impairment assessment; the potential impairment range for the $8.5 million IXINITY IPR&D asset was zero to its full carrying value.
- Other material exposures include dependence on U.S. government procurement and appropriations, BioThrax delivery timing, acquisition integration, product development and regulatory approval, manufacturing capacity and compliance, sole-source suppliers, and competition. The company also disclosed covenant and debt-servicing risks, possible contingent acquisition and license payments, and risks from foreign-exchange movements.
- The credit facility is secured by substantially all company assets and contains leverage, debt-service, and liquidity covenants. Contractual obligations totaled $254.8 million, including $250.0 million of convertible debt and $3.8 million of operating leases; potential contingent license milestone payments of up to approximately $118 million were excluded because timing and achievement are uncertain.
- Management concluded disclosure controls were effective as of June 30, 2014. Its assessment excluded internal controls over HPPD and Cangene operations. No material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Subsequent CDC funding, BioThrax procurement, and delivery schedules, given the company’s dependence on government demand and appropriations.
- IXINITY’s regulatory remediation path and the final impairment assessment of its $8.5 million IPR&D asset.
- Whether Cangene and HPPD integration delivers expected commercial and operational benefits, and how the acquisition accounting and inventory step-up affect margins.
- Operating cash generation, debt-service capacity, and continued compliance with secured-credit-facility covenants and the minimum liquidity requirement.
- Progress and funding for development programs, manufacturing-facility qualification, and resolution of any regulatory or quality observations.