Emergent BioSolutions Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited consolidated results. The company is a life sciences business focused on public health threat products, contract manufacturing, and government-funded development. The U.S. government is its largest customer. Adapt and PaxVax, acquired in October 2018, are included in 2019 results but not the comparable 2018 periods.
Financial performance
| Metric ($ millions, except per-share data) | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | 243.2 | 220.2 | 433.9 | 338.0 |
| Operating income (loss) | (7.0) | 66.8 | (34.4) | 57.3 |
| Net income (loss) | (9.5) | 50.1 | (35.6) | 45.2 |
| Diluted EPS | (0.18) | 0.98 | (0.69) | 0.89 |
| Operating margin | (2.9%) | 30.3% | (7.9%) | 17.0% |
| Net margin | (3.9%) | 22.8% | (8.2%) | 13.4% |
Margins are calculated from reported revenue and earnings. Q2 product sales were $183.5 million, contract manufacturing $18.7 million, and contracts and grants $41.0 million. For the six-month period, these were $336.5 million, $34.6 million, and $62.8 million, respectively.
Six-month operating cash flow was $69.0 million, versus $33.6 million a year earlier; investing cash outflow was $45.5 million, versus $22.6 million; and financing cash inflow was $41.7 million, versus $1.1 million. Cash and restricted cash increased $65.2 million to $177.6 million. Management attributed operating cash generation mainly to working-capital changes, particularly receivables and payables, and noncash charges.
At June 30, cash and cash equivalents were $177.4 million, current assets $692.7 million, and current liabilities $301.2 million. Current debt was $10.1 million. Total debt was $853.2 million before unamortized issuance costs; balance-sheet current and noncurrent debt totaled $840.5 million. The company reported $988.9 million of stockholders’ equity. Management stated liquidity was sufficient for operations over the next 12 months.
Changes and drivers versus prior periods
- Revenue rose 10% in Q2 and 28% for the first half, while earnings shifted from profit to loss. Acquired businesses contributed $88.2 million of Q2 revenue and $163.1 million for the first half; reported acquired-business operating income was $8.2 million and $4.4 million, respectively.
- NARCAN, acquired with Adapt, generated $73.0 million of Q2 sales and $138.5 million for the first half. This partly offset lower BioThrax and ACAM2000 deliveries. BioThrax sales fell to $28.0 million in Q2 from $77.6 million; ACAM2000 fell to $6.5 million from $56.5 million. The company said ACAM2000 delivery obligations under the cited contract were completed in Q1 2019.
- First-half contracts and grants revenue nearly doubled, largely reflecting AV7909 development work. Contract manufacturing revenue declined, mainly because certain 2018 activities did not recur.
- Operating expenses increased 63% in Q2 and 67% for the first half. R&D, SG&A, and acquisition-related amortization rose substantially, reflecting the acquisitions and AV7909 development. SG&A included $21.5 million of acquired-entity operating and integration expense in Q2 and $42.0 million year to date.
- Interest expense rose to $9.5 million in Q2 and $19.0 million year to date, principally due to acquisition-related borrowings. The first-half effective annual tax rate, excluding discrete items, was estimated at 27%; reported tax benefits reflected losses.
Outlook, risks, and notable items
- The filing provides no formal consolidated revenue or earnings guidance. Management said it planned to begin AV7909 deliveries to the Strategic National Stockpile in the second half of 2019, subject to contractual obligations. BARDA had informed the company it would begin procurement. FDA review, regulatory acceptance/licensure, delivery timing, and government funding remain key uncertainties.
- The company announced a VIGIV supply contract valued at approximately $535 million over 10 years. The filing also reports $533.2 million of remaining performance obligations, with a majority expected to be recognized within 24 months; timing and amounts may vary with government appropriations and development outcomes.
- Debt covenants were amended in June 2019. The maximum net leverage ratio was set at 4.95:1 for Q2 and 4.75:1 for Q3 2019, with tighter limits thereafter; restricted payments were capped at $25 million until filing the 2019 Form 10-K. The company reported covenant compliance. A 1 percentage-point increase in the eurocurrency rate was estimated to increase annual interest expense by $4.9 million, after considering debt and swaps.
- Material risks include dependence on U.S. government procurement and appropriations; fluctuating BioThrax demand and the transition to AV7909; integration and realization of benefits from Adapt and PaxVax; manufacturing, supplier, and regulatory risks; and significant acquisition-related debt.
- Generic competition is a specific NARCAN risk: Teva received FDA approval for a generic NARCAN nasal spray in April 2019, while patent litigation remained ongoing; Perrigo litigation was also pending. The filing notes Teva could launch at risk.
- The 2016 shareholder class action settlement was finally approved in January 2019; its $6.5 million payment was made by the company’s insurer, with no payment by defendants. The company adopted lease accounting in 2019, recognizing $13.4 million of right-of-use assets and $14.0 million of operating lease liabilities at adoption.
Most important facts for investors to verify
- Whether AV7909 procurement, regulatory milestones, and planned second-half 2019 deliveries occurred on schedule, and what funding and contract terms applied.
- How government delivery timing and appropriations affect BioThrax, ACAM2000, and other public health threat sales.
- Whether NARCAN patent litigation protects sales against Teva and Perrigo generics, and the commercial effect of generic entry.
- Whether acquired-business revenue and operating contribution develop as expected, including integration costs and NARCAN demand.
- Debt balances, covenant headroom, interest-rate exposure, and cash generation as the company services acquisition-related borrowings.
- The timing and collectability of remaining performance obligations and contingent acquisition consideration.