Emergent BioSolutions Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Amounts are in U.S. dollars unless stated otherwise.
Business context
Emergent develops, manufactures and sells vaccines, antibody therapeutics, drug-device products and contract development and manufacturing services addressing public health threats. The U.S. government (USG) remains its largest customer and a major source of development funding. In October 2018, the company acquired Adapt Pharma, including NARCAN Nasal Spray, and PaxVax, including Vivotif and Vaxchora, expanding its commercial and specialty-vaccine businesses.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $782.4 million | $560.9 million | +39% |
| Product sales | $606.5 million | $421.5 million | +44% |
| Contract manufacturing revenue | $98.9 million | $68.9 million | +44% |
| Contracts and grants revenue | $77.0 million | $70.5 million | +9% |
| Operating income | $89.8 million | $124.3 million | −28% |
| Net income | $62.7 million | $82.6 million | −24% |
| Diluted EPS | $1.22 | $1.71 | −29% |
| Cash from operating activities | $41.8 million | $208.1 million | −80% |
Operating margin was approximately 11.5% in 2018 versus 22.2% in 2017; net margin was approximately 8.0% versus 14.7%. These ratios are calculated from reported figures. The MD&A separately describes 2018 operating cash flow as $41.6 million including foreign currency effects, while the cash-flow statement reports $41.8 million.
Q4 2018: Revenue was $270.7 million versus $193.8 million in Q4 2017. Operating income was $11.2 million versus $53.1 million; net loss was $3.4 million versus net income of $33.9 million. Q4 diluted EPS was a loss of $0.07, compared with income of $0.67 in Q4 2017.
Liquidity, debt and balance sheet
- At December 31, 2018, cash and cash equivalents were $112.2 million, working capital was $420.4 million, and total assets were $2.229 billion.
- Reported long-term indebtedness was $808.8 million, including $447.2 million on the term loan, $348.0 million on the revolver, and $10.6 million of convertible notes. The balance sheet reports $10.1 million as current and $784.5 million as noncurrent, net of debt issuance costs.
- The company drew $450 million under a new term loan and $318 million under an expanded revolver in October to help fund the acquisitions. The debt note’s year-end revolver balance is $348.0 million; the filing text does not reconcile that balance to the stated draw.
- Working capital increased from $385.3 million in 2017, while cash declined from $178.3 million. Management stated it believed liquidity was sufficient for the next 12 months.
- Investing cash outflow was $897.2 million, principally for the Adapt and PaxVax acquisitions. Financing cash inflow was $788.7 million, largely from debt borrowings.
Material changes and notable items
- Revenue growth reflected a full year of ACAM2000 sales, acquired products, and growth in contract manufacturing. BioThrax revenue declined 3% to $278.0 million, primarily due to delivery timing; its price per dose was consistent.
- Operating expenses rose to $692.6 million from $436.6 million. Cost of sales and contract manufacturing increased 72%; R&D increased 47% to $142.8 million; SG&A increased 42% to $202.5 million. Acquisitions, integration and higher development activity contributed to the increases.
- Adapt was acquired for preliminary total consideration of $667.2 million, including cash, stock and estimated contingent consideration; PaxVax was acquired for $273.1 million in cash. Purchase-price allocations were preliminary at filing, making acquired-asset values and goodwill subject to refinement.
- Adoption of ASC 606 reduced opening retained earnings by $32.5 million and increased deferred revenue by $42.4 million. The company reported a nominal difference between 2018 revenue under ASC 606 and the prior guidance.
- The effective tax rate fell to 23% from 30%; 2018 tax expense was $18.8 million. The company recorded a $4.7 million benefit from finalizing Tax Reform Act estimates, partly offset by acquisition transaction costs.
Outlook, risks and contingencies
- No consolidated financial guidance or quantified FY2019 revenue or earnings forecast is provided in the supplied filing text.
- Management anticipated that FDA emergency-use authorization for NuThrax could occur as early as 2019, potentially triggering delivery of an initial three million doses to the SNS. Approval and timing are uncertain; the larger contract value depends on options, approvals and government funding.
- The company expected to complete remaining ACAM2000 deliveries to the SNS in 2019 and was negotiating a new multiyear procurement contract. It also intended to pursue follow-on USG contracts for products including raxibacumab and VIGIV.
- Customer and funding concentration are significant: the USG accounted for more than 76% of 2018 revenue, and BioThrax represented 45% of product sales. Procurement depends on appropriations, contract options, delivery schedules and government priorities.
- Other material risks include integration and realization of benefits from the 2018 acquisitions; NARCAN generic competition and patent litigation; regulatory approvals and manufacturing transfers; reliance on single-source suppliers; manufacturing interruption or quality issues; and floating-rate debt and covenant restrictions. A one-percentage-point increase in the eurocurrency rate was estimated to raise annual interest expense by approximately $8 million.
- Teva and Perrigo filed applications seeking approval for generic NARCAN products; patent infringement proceedings were ongoing. A separate shareholder class-action settlement for $6.5 million was paid by the company’s insurer and received final court approval in January 2019, subject to possible appeal and opt-out claims.
- Management and the auditor reported effective internal control over financial reporting, but the assessment and audit excluded the acquired Adapt and PaxVax operations. The financial-statement audit opinion was unqualified.
Investor verification priorities
- Track USG appropriations, BioThrax delivery timing and renewal terms, and procurement decisions for ACAM2000 and other stockpile products.
- Verify NuThrax regulatory progress, the conditions for initial delivery, and whether government options are funded or exercised.
- Assess post-acquisition NARCAN, PaxVax and contract manufacturing performance against integration costs, purchase-price assumptions and contingent payments.
- Reconcile reported year-end debt balances with acquisition-related borrowings, and monitor leverage, covenants, variable rates and cash conversion.
- Monitor NARCAN generic litigation, manufacturing-transfer approvals, and supply continuity for single-source materials and product components.
- Review the final acquisition accounting and the control environment as Adapt and PaxVax are incorporated into company-wide financial controls.