Emergent BioSolutions Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Emergent is a life sciences company with product and contract development and manufacturing (CDMO) businesses. Amounts below are in U.S. dollars; dollar figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $165.1 | $307.5 |
| Operating income (loss) | $(148.1) | $6.4 |
| Net income (loss) | $(183.0) | $(3.7) |
| Diluted loss per share | $(3.65) | $(0.07) |
| Cash used in operating activities | $(184.0) | $(37.3) |
| Capital expenditures | $15.1 | $32.2 |
- Revenue fell 46%. Product sales declined 40% to $143.4; CDMO revenue declined 75% to $15.2; contracts and grants declined 32% to $6.5.
- NARCAN sales rose 8% to $100.4. Anthrax MCM sales fell 80% to $21.9, and Smallpox MCM sales fell 69% to $7.2, largely reflecting delivery timing. CDMO service revenue decreased to $13.4 from $51.8.
- Consolidated gross margin was $3.5, or about 2%, versus $142.0, or about 48%, in the prior-year quarter. Product gross margin was $40.5 (28%); Services gross margin was negative $37.0.
- Operating expenses totaled $313.2, up 4%. SG&A increased 19% to $100.5; R&D decreased 13% to $40.6. Interest expense more than doubled to $17.9, primarily due to increased borrowings and higher rates.
- Cash and cash equivalents were $430.2 at March 31, down from $642.6 at year-end 2022. Working capital was $5.6. The revolving facility had just $1.1 of unused capacity.
- Total debt was $1,405.4 before unamortized issuance costs; $950.7 was reported as current debt, net. The secured revolving and term facilities mature in October 2023. The company also had $450.0 principal amount of 3.875% notes due 2028.
Material changes and significant events
- The travel health business sale to Bavarian Nordic, agreed in February, covers Vaxchora, Vivotif, the CHIKV VLP candidate, the Bern manufacturing site and certain San Diego development facilities. The stated cash purchase price is $270.0, subject to customary adjustments; potential development and approval milestones are up to $80.0, with sales milestones up to $30.0. Closing was expected in Q2 2023, subject to conditions. Sale proceeds were expected to be placed in a lender-controlled account and, absent agreement otherwise, used to repay the term loan.
- In January, Emergent launched a restructuring that eliminated approximately 5% of its workforce. Q1 charges were $9.7, and substantially all plan activities were completed in the quarter. Management estimated annualized savings of more than $60.0 when fully implemented.
- The company reported $153.9 of long-term assets related to its terminated Janssen manufacturing agreement. The parties dispute amounts owed and allegations of breach; the matter is in arbitration. Emergent recorded no contingent liability for Janssen’s allegations.
- Emergent reported that a material weakness in controls over assessment of pre-launch inventory capitalization, identified in 2022, was remediated during Q1 2023. Management concluded disclosure controls were effective at the reasonable-assurance level.
Outlook, risks and contingencies
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The secured facilities mature in October 2023, and refinancing was not considered probable until completed. The company was not in compliance with financial covenants for Q4 2022 and Q1 2023; lenders’ extended limited waiver was due to expire May 17, 2023, unless an earlier default occurred. Management said it did not expect future covenant compliance without additional liquidity or further amendments.
- The filing gives no quantitative full-year revenue or earnings guidance. Results are expected to remain variable due to product delivery timing, government funding and procurement decisions, and CDMO production levels.
- Manufacturing quality and compliance remain material risks. The filing discusses the FDA warning letter concerning the Camden facility and ongoing corrective actions, as well as the risk that manufacturing disruptions could affect products and CDMO customers.
- Other major risks include dependence on U.S. government procurement and appropriations, competition and generic pressure on NARCAN, the unresolved Janssen contract dispute, shareholder litigation and government inquiries relating to prior COVID-19 vaccine manufacturing issues, and execution and financing risks surrounding the Bavarian Nordic sale.
- Emergent disclosed that, as of the report, it was assessing the potential impact of a cybersecurity incident involving a business partner, of which it became aware in early May 2023.
Key facts for investors to verify
- Whether the Bavarian Nordic transaction closed on schedule, its final proceeds and adjustments, and how proceeds were applied to debt.
- Whether Emergent refinanced or amended the secured facilities before maturity, the resulting terms and liquidity, and its covenant status after the waiver period.
- Subsequent operating cash use, cash balance and ability to fund operations and debt service.
- Whether NARCAN sales and product margins can offset weaker government product deliveries and CDMO utilization.
- Developments in the Janssen arbitration, shareholder litigation and government investigations, including any material financial exposure.
- Progress on Camden quality remediation and any new regulatory findings, and the outcome of the business-partner cybersecurity incident assessment.