Emergent BioSolutions Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars and millions, except per-share data.
Business context
Emergent is a life sciences company focused on public health threat products and contract development and manufacturing services (CDMO). The U.S. government is its largest customer. COVID-19-related CDMO work drove much of the revenue growth, while the company’s Baltimore Bayview facility faced manufacturing and quality issues affecting COVID-19 vaccine production.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $397.5 | $394.7 | $740.5 | $587.2 |
| Operating income | $14.5 | $126.0 | $109.9 | $114.4 |
| Net income | $4.6 | $92.7 | $74.3 | $80.2 |
| Diluted EPS | $0.09 | $1.73 | $1.37 | $1.51 |
| Operating cash flow | Not separately stated | Not separately stated | $(24.6) | $185.7 |
| Capital expenditures | Not separately stated | Not separately stated | $123.1 | $59.3 |
- Q2 product sales fell 39% to $181.2, while CDMO revenue rose to $190.9 from $72.6. For the first half, product sales declined 29% to $319.1 and CDMO revenue increased to $374.7 from $94.3.
- Q2 operating expenses rose 43% to $383.0. Cost of product sales and CDMO services included a $41.5 Bayview inventory write-off for raw materials and in-process batches deemed unusable.
- Combined product and CDMO gross margin, calculated from the reported combined cost line, was approximately 39% in Q2 versus 65% in Q2 2020, and 53% for the first half versus 62% in 2020. This is not a separately reported segment margin.
- Cash and cash equivalents were $447.5 at June 30, down from $621.3 at year-end 2020. Working capital was $784.3. The company reported $597.2 of unused revolving-credit capacity.
- Total debt carrying value was $854.0, including $410.6 on the term loan and $450.0 of 3.875% notes due 2028; no revolver borrowings were outstanding. The term loan and revolving facility mature in October 2023. The company said it was in compliance with debt covenants.
Material changes and management commentary
- Q2 revenue was nearly flat year over year, but operating income fell 88% and net income fell 95%. The CDMO revenue increase was largely offset by higher service costs, the Bayview inventory write-off, and higher SG&A.
- First-half revenue increased 26%, chiefly from COVID-19-related CDMO arrangements entered into in 2020. First-half net income declined 7%.
- NARCAN sales increased 46% in Q2, to $106.2, driven by U.S. public-interest and commercial retail channels and Canadian customer channels. Anthrax vaccine and ACAM2000 sales were lower, primarily because of government delivery timing; ACAM2000 sales were zero in both the quarter and first half of 2021.
- First-half operating cash flow turned negative, mainly from working-capital outflows, including inventory accumulation, higher receivables, and lower accrued expenses and compensation. Higher facility investment drove capital expenditures to $123.1, principally for capacity and capability at Rockville and Bayview.
Outlook, risks, and unusual items
- No formal full-year revenue or earnings guidance is stated in the supplied filing text. The company reported approximately $1.4 billion of revenue expected from unsatisfied performance obligations, with most expected within 24 months; timing and amount depend on manufacturing activity, government funding, and development outcomes.
- Management stated that available cash and revolver capacity were sufficient to fund operations for the next 12 months. This assessment is subject to operating, contract, funding, and manufacturing risks.
- The company’s AV7909 BLA submission target was the end of 2021. Government procurement before FDA approval, future BARDA options, and AV7909 licensure remain uncertain.
- The FDA’s April 2021 Bayview inspection resulted in a Form 483 and required remediation; affected material was quarantined and multiple vaccine bulk drug substance batches were disposed of. The filing states that, on July 29, 2021, the company began a plan aligned with the FDA to resume Johnson & Johnson COVID-19 vaccine bulk drug substance production. Further quality issues could disrupt production or require additional disposals.
- Three putative securities class actions and a stockholder derivative action related to COVID-19 vaccine manufacturing were pending. The company said it could not estimate a possible loss. It was also responding to document requests or inquiries from congressional committees, FINRA, DOJ, SEC, and state authorities.
- Competition and litigation concerning NARCAN remain relevant: the company appealed an adverse 2020 Teva patent ruling, with the appeal hearing scheduled for August 2, 2021. Generic entry or other branded competition could pressure NARCAN sales.
- Other key risks include reliance on U.S. government procurement and appropriations, contract performance, manufacturing compliance, single-source suppliers, variable-rate debt, and execution of COVID-19 CDMO commitments.
Most important facts for investors to verify
- Bayview remediation progress, FDA actions, production resumption, and any additional quarantined or discarded batches.
- Whether COVID-19 CDMO revenue and contracted work convert to revenue on expected schedules and at sustainable margins.
- U.S. government procurement volumes, funding, delivery timing, and follow-on contracts for AV7909, anthrax vaccines, and ACAM2000; progress toward AV7909 licensure.
- Working-capital trends, cash generation, capital spending, debt service, and compliance with credit-facility covenants.
- Developments in the securities and derivative litigation, government inquiries, and the NARCAN patent appeal and competitive landscape.