Emergent BioSolutions Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in millions of dollars, except per-share data. Emergent is a life sciences company selling public-health-threat products and providing contract development and manufacturing (CDMO) services; the U.S. government is its largest customer.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $329.0 | $385.2 | $1,069.5 | $972.4 |
| Operating income (loss) | $(34.7) | $61.3 | $75.2 | $175.7 |
| Net income (loss) | $(32.7) | $39.5 | $41.6 | $119.7 |
| Diluted EPS | $(0.61) | $0.73 | $0.77 | $2.23 |
| Operating cash flow | Not separately stated for the quarter | $(7.9) | $290.9 |
- Q3 revenue fell 15% year over year; nine-month revenue rose 10%. Q3 operating margin was approximately -10.5%, versus 15.9% a year earlier. Nine-month operating margin was approximately 7.0%, versus 18.1%.
- Q3 product sales increased 34% to $270.5, including NARCAN sales of $133.3 and ACAM2000 sales of $80.7. Anthrax vaccine sales fell to $15.6, primarily reflecting government delivery timing.
- Nine-month CDMO revenue increased to $416.3 from $251.4, while product sales declined 9% to $589.6. Reported Q3 CDMO lease revenue was $(71.0), including an $86.0 reversal related to the BARDA COVID-19 arrangement.
- Cash and cash equivalents were $403.8 at September 30, down from $621.3 at December 31, 2020. Working capital was $746.1. Total debt carrying value was $848.9, comprising $405.0 of term loans and $450.0 of 2028 notes, among other debt. Revolver availability was $597.6; the company reported compliance with debt covenants.
- Nine-month investing cash outflow was $178.3, mainly capital spending, versus $115.0 in 2020. Operating cash use reflected working-capital outflows, particularly receivables, inventory and prepaid expenses. The company said it expected sufficient liquidity for the next 12 months.
Material changes and unusual items
- BARDA had not paid invoices for capacity reservation services received after February 2021. Based on its collectibility assessment, Emergent reversed $86.0 of previously recognized lease revenue in Q3 and said it expected future payments under the arrangement to be recorded on a cash basis.
- On November 1, 2021, after quarter-end, Emergent and BARDA mutually terminated the CIADM contract and related task orders. The COVID-19 partnership contract value was reduced from $650.8 to $470.9, and the base CIADM contract from $163.2 to $140.5. Emergent expected to record about $215.9 of Q4 revenue, including $155.7 of lease revenue upon receipt of cash, and $38.2 of R&D expense for removal of a contract asset. These are post-quarter events and expectations, not Q3 results.
- Emergent recorded $41.5 of Bayview facility inventory write-offs during the first nine months, associated with a cross-contamination event identified in Q2. CDMO costs also included remediation efforts and costs associated with revised revenue accounting.
- The company changed its accounting for certain CDMO manufacturing revenue to recognition over time and reclassified suite reservations meeting lease criteria. It recorded immaterial out-of-period adjustments: $1.4 of Q3 and $7.1 of nine-month pretax income impact. Management said prior-period amendments were not required.
- Q3 product sales benefited from NARCAN growth and an ACAM2000 government purchase option; quarterly government deliveries can create significant revenue variability. Nine-month results also reflected lower anthrax vaccine deliveries and travel-health demand affected by reduced international travel.
Outlook, risks and contingencies
- Emergent disclosed approximately $1.5 billion of revenue allocated to unsatisfied performance obligations at September 30, with a majority expected within 24 months; timing may change with customer needs, manufacturing activity, regulatory compliance and government funding.
- The company planned to submit its AV7909 biologics license application by year-end 2021, while noting timing and FDA approval were uncertain. Government procurement, options and appropriations remain significant revenue dependencies.
- Material manufacturing and regulatory risks include Bayview cross-contamination, the FDA inspection and Form 483, temporary suspension of J&J bulk drug substance production, and the need to maintain current good manufacturing practices. AstraZeneca had instructed Emergent to stop new manufacturing services in Q2; Emergent said it had completed release of previously manufactured batches.
- Disclosure controls were deemed ineffective due to a material weakness in accounting for complex revenue arrangements, particularly lease scoping and revenue recognition. The company began remediation through added training, resources and review controls and said it believed remediation might occur in Q4 2021.
- Shareholder securities and derivative lawsuits related to COVID-19 manufacturing disclosures were pending, alongside government inquiries and subpoenas. The company said it could not reasonably estimate potential losses. The appeal in Teva’s NARCAN 4 mg patent case was pending; a decision was expected before year-end 2021.
- Other material risks include reliance on government contracts, potential changes in COVID-19 CDMO demand, product and manufacturing execution, NARCAN competition, variable-rate debt and interest rates, and litigation and reputational exposure.
Most important facts for investors to verify
- Whether BARDA paid the outstanding amounts and whether the expected Q4 termination-related revenue and expense were recognized as described.
- Progress and effectiveness of remediation for the revenue-accounting material weakness, including whether controls were restored to effective status.
- Bayview’s regulatory status, manufacturing authorization and ability to resume or sustain customer production, including J&J work.
- Actual cash conversion, receivables collection, capital spending and liquidity relative to the company’s 12-month assessment.
- AV7909 regulatory and procurement milestones, government order timing, and outcomes of the NARCAN patent litigation and shareholder-related proceedings.